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Gray Television (NYSE:GTN)

Q3 2013 Earnings Call

November 07, 2013 9:00 am ET

Executives

Hilton H. Howell - Vice Chairman, Chief Executive Officer, President and Member of Executive Committee

James C. Ryan - Chief Financial Officer and Senior Vice President of Finance

Kevin P. Latek - Senior Vice President of Business Affairs, General Counsel and Secretary

Analysts

Eric Katz - Wells Fargo Securities, LLC, Research Division

Operator

Good day, and welcome to the Gray Television's Third Quarter 2013 Earnings Release Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Hilton Howell, President and Chief Executive Officer. Please go ahead, sir.

Hilton H. Howell

Thank you so much, Aaron, and good morning, and welcome, everyone. As usual, I will be making a few opening remarks followed by Jim Ryan, our Senior Vice President and our Chief Financial Officer. And then he will be followed by Kevin Latek, our Senior Vice President of Business Affairs. And then also as usual we'll be taking questions at the conclusion of our comments.

It has been a busy and very productive quarter. Since our last earnings call, we completed and fully implemented our new management structure throughout the company. We designed and launched a new logo in corporate identity that is designed to focus on the Gray win as a brand for our broader company to add to the local brand in the communities, as is appropriate for 21st century company looking forward to its future as a television digital and mobile media provider. We launched a new corporate website with fully responsive capacities like all of our station websites that is now up and operating. It has significant investor information and access to download our local mobile applications with RoF-based and android-based. I encourage you to stop by gray.tv and take a look. I think, you'll be impressed. We completed our partnership with Excalibur Broadcasting and together with Excalibur, we closed on the acquisition of KJCT and Grand Junction, Colorado. With affiliations with ABC, CW and the Telemundo Networks. We sold recently $375 million of add-on bonds to our existing bond structure at 102 yielding 6.98% and paid down our senior bank facility with the proceeds.

This past Monday, we announced a definitive agreement to acquire #1 stations in 3 entirely new markets for Gray. Our acquisition of Yellowstone Television brings us the #1 station in Cheyenne, Wyoming, KJWN affiliate with the CBS and the CW Networks and the #1 station in Casper, Wyoming associated with the NBC Network. Our new Casper station also has the NBC in Cheyenne and we will be able to bring both stations together and significantly augment their sales, in particularly their digital sales, which had previously been absent from those markets. Also in this transaction, we acquired the #1 news station in Laredo, Texas. Our fourth station in that rapidly growing state, which brings us the NBC, CW and Telemundo affiliations to the Gray Television business family. Furthermore, yesterday, we announced together with ABC, that Gray would be opening up a first in the market ABC affiliate on our D2 channel. We're very excited to bring ABC programming to Laredo, Texas. On a conservative basis, these acquisitions should add $3.7 million to $4 million in broadcast cash flow over our near-term to our consolidated numbers. And most importantly, all of these transactions were paid for with free cash flow generated this year and will consequently be entirely delevering. I would like to welcome those new stations and all of the professionals working in each of those stations to the Gray Television family.

Kevin Latek, who led our management team visits the last 4 days, he can add more color on our opportunities in these new markets, that he will share with you during his comments. From a financial standpoint, our core revenue has been very solid. As has been typical, both for the quarter and year-to-year to date, our numbers are down because of our political issues. If you look, well lack of political advertising. Our total net revenue decreased $14.6 million or 14% to $88.3 million for the third quarter of 2013 compared to the comparable quarter of 2012. For our year-to-date numbers, it is a similar solid story. Total revenue decreased $27.5 million or 10%, to $250.7 million for the 9 months ended September 30, 2013. Again, this drop is entirely due to political ad elimination. We have frequently spoken in our prior earnings calls and investment meetings about the importance of political revenue to a news and contents in company like Gray Television, and we received a report yesterday from our friends at RBC that, I think, is worth sharing with all of you. So bear with me while I go through some numbers. So often we look at total political revenue and look at our peers in the industry and look at where they come from. But RBC gave us an analysis where it took, look at not only total 2012 political revenue, but it looked at it on a per television household basis. And to give the numbers and have them in the public record, this is what we have. Sinclair reported political revenue of $223 million. Media General, I believe that would be pro forma for the consolidation is $115 million, LIN Media $103 million, Gray came in at $86 million, and Nexstar came in at $46 million. But when you look at those numbers, and look at it on a per television household basis, Gray Television came in at $11.80 per TV household. Our next nearest competitor was LIN Media that came in at $8.29. Media General came in thereafter at $6.97, Sinclair at $4.98 and Nexstar at $4.36 -- $4.37. What that shows is on a per television household, Gray Television have a 42% advantage over our nearest competitor and securing an airing, really important political advertising's during the even-year cycles. I will say with regard to these numbers, that the numbers for Nexstar did not include TV households associated with Newport, CCA Citadel or the Stainless acquisitions, nor did they include any of the Gray Television acquisitions which have been announced over the last week to 10 days. But all of the Sinclair figures are pro forma for all the acquisitions, including the All Britain acquisition. I'm glad to be able to share this, and I want to thank our friends at RBC for sharing this data with you -- with us, because we believe that shows that value of having #1 stations in growing and dynamic markets, where we commit to content, commit to news, commit to carrying the local stories that are so valuable.

In any event, that brings my formal comments to a close. And I'll turn it over to Jim Ryan. Jim?

James C. Ryan

Thank you, Hilton, good morning, everyone. As Hilton mentioned, total revenues was down because of the natural political cycle. But we're very pleased in the quarter that our local revenue was up 4%. Our national was down as expected going against very tough Olympic comps last year, if you recall. We had $4 million of local and national in the Olympics and an additional $1 million of political. If you adjust for the Olympic effect in 2012, we think our combined local and national, after giving effect to the Olympics to last year, would be up year-over-year about 6% on core x Olympics. Internet was up slightly in the quarter. Our retrans track is expected. Our Political, obviously, off-year is only $1.4 million. Our auto was up about 4.5% representing 26% of our total and has been trending well all year. Other categories that were up were in legal, home improvement, communications, entertainment, furniture, restaurant. The only categories that we had down during the quarter were medical, finance, supermarkets and department discount stores were down slightly. Our expenses were up only 3%, basically reflecting a routine compensation cost and are increasing reverse comp that we've talked about before. We are very pleased with the broadcast cash flow for the quarter on a '13 to '11. So it's an off-year to an off-year comparison, we're up 27% in broadcast cash flow and we are very pleased with that. We also had solid results for our year-to-date 9 months as well. Local was up about 4%, national was even, again going against some tough political comps, combined local and national for the 9 months is up 3, our auto for the year, 9 months to date is up a very healthy 8%, and essentially the same categories of the 9 months basis are up and down as in the 3-month numbers. And again, I -- broadcast cash flow basis comparing '13 to the last off-year in '11 on a 9-month basis. We're up 22% and we're very, very pleased with that growth rate.

Starting briefly to guidance for the fourth quarter, we see a very solid core revenue growth, local up approximately 10 and national up high single-digits around 8%. Certainty, that's reflective of strong fund -- strong fundamentals. Also, keep in mind we had a 40 plus million dollars of political in fourth quarter of last year. So, obviously, we would expect healthy growth rates Q4 this year with the displacement of political from last year. We also will have a significant step up in our retransmission revenue in the fourth quarter, up about 28%, reflecting in great part our recently renewed contract that renewed on November 1.

Turning to the balance sheet briefly. Our trailing 8 quarter cash flow as defined in our senior credit facility with $143.5 million, which places our total leverage at 5.68 at the end of the quarter against a 7.75 covenant. Our first lien leverage was at about 3.6 at the end of the quarter. And as Hilton mentioned, if you gave this effect to the bond repayment, sorry the bond add-on and the repayment of the term loan, our senior leverage would be about 1x on a trailing 8 quarter basis. CapEx for the quarter was $6 million, $18.4 million year-to-date. We're tracking for our CapEx number in the lower middle 20s for the year as we continue to finish off our local HD at many of our markets. Cash taxes were less than $100,000 and only about $500,000 for year-to-date. Programming payments were $2.8 million and $8.5 million year-to-date, and that's the amortization numbers are the same. And as we've talked before, our network reverse comp for the quarter was $1.8 million, $5.5 million for year-to-date, and we're tracking to about $7.6 million for the year.

At this point, I'll turn it over to Kevin, for his comments.

Kevin P. Latek

Thank you, Jim, and thank you, Hilton, earlier. I'm happy to follow Jim's comments especially when he tells us that our cash flow is up 27% over 2011. So it's a great lead in and I hope that all those footsteps with more good news.

Last night, Bob Smith, the Senior Vice President for Midwest and West. Jason, I think, who's our Senior Vice President for media technology and myself returned from a few days out in Wyoming and Laredo we rollout on Sunday and then spend the next several days visiting on newer stations with Yellowstone. So I thought, I would just spend a quick moment talking about these stations. As you saw in the press release, each of these stations is the highest rank television stations in its markets according to be BIA revenue data and while that was one thing that attracted us to these stations, the most attractive feature of these stations was that we felt from what we could -- what we knew of these stations that they had, the commitment to local news and community involvement that distinguishes Gray Television. We believe from what we could tell before we acquired the stations, that they were able to exceed in the local markets without the resources that our Gray stations have. And we figured that a combination of those stations with a Gray workflow, Gray resources, Gray technology and the other indicators of our company and leaders within our company would allow these stations to really excel.

So just briefly, let me tell folks because I have gotten a lot of questions about the transaction. So this transaction with Yellowstone literally began with a phone call on a Thursday evening and over the next literally several days, we were able to start and complete negotiation on an investment in Yellowstone and an acquisition of Yellowstone. Start and complete our due diligence, received board approval and complete the wire. From the first phone call, to the moment that we sent the wire to Yellowstone place about 6 days. I think, that is a great reflection of the new management structure at Gray and our commitment to moving quickly when opportunities present themselves. With Yellowstone, we have acquired, as Hilton mentioned, the top and then as I mentioned in the press release, CBS, 2 NBC's and Wyoming and additional NBC in Texas. We also announced yesterday, as Hilton mentioned, something we're very excited about which is the addition of ABC to KGNS in Laredo. That will be yet another new Big 4 affiliation that we'll be adding to a small market. The Yellowstone stations have done very well, as I mentioned before, despite not having a large company behind them. And we give great credit to the wonderful folks at those stations. These stations all pass high-definition in high-definition programming from the networks, but none of these stations have a local HD newscast. Two of the stations did not have the capability to do local commercials in high-definition and one of the stations could not even put out a viable remote shot during the local newscast. Now these stations have their own app and their digital presence is negligible. We view all of these as upsides. Within Gray, we have 2 dozen markets, stations that are end-to-end HD. We're already looking at ways that we can enhance their digital products, certainly, the news products, their sales products and otherwise, allow these stations again to really excel. With the addition of Yellowstone, Gray Television now owns and/or operates television stations in 34 markets. We have the #1 and #2 ranked station in 32 of 34 markets. We have #1 news stations in 26 markets. We operate stations in 9 state capitals. With the Yellow -- addition of the Yellowstone stations and KJCT in Grand Junction, which Hilton mentioned, those transaction closed by Thursday. Gray now owns and/or operates TV stations that broadcast a total of 97 channels. If we do not add an additional channel between now and the launch of ABC in Laredo, we will have 98 channels. And we're very, very proud of that. Gray Television is a company, that as we've mentioned many times, makes great use of our spectrum in all of our markets from the largest to the smallest. With the addition of Yellowstone, we now cover 6.5% of the country. That is a segue briefly to 2 points, I want to make on the regulatory front. There's been obviously a lot of concern and discussion about the FCC's efforts to redefine the national ownership cap by changing the UHF discount. This move, while interesting to us, we do not believe will have any impact on Gray whether we -- the FCC changes the UHF discount formula or not, Gray's coverage is well below the cap. As I mentioned we're at 6.5% of the U.S. The cap is at 39%. We have a long way to go before that becomes an issue. The other regulatory point I'd like to mention is on spectrum. Spectrum continues to be an important issue for all broadcasters and we have been following with great interest, the efforts of Sinclair and other broadcasters to explore the possibility of changing platforms. Most recently, Gray has weigh in that FFC and frankly a new one, I think novel idea, that Sinclair has submitted that it had gained traction and further support from broadcasters. And that is -- that we suggested it and supported, the FCC's -- I'm sorry, Sinclair's proposal, but the FCC at least considered allowing TV stations to make flexible use of their spectrum, if they waive their right to reimbursement of the [indiscernible] We're not taking a position on whether Gray would waive reimbursement expenses from a repacking or not, but we believe it's worthwhile for the FCC to at least consider this proposal.

And those -- that concludes my remarks today.

Hilton H. Howell

Operator, we'll open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to Marci Ryvicker of Wells Fargo.

Eric Katz - Wells Fargo Securities, LLC, Research Division

Eric for Marcy. So we've seen you make a nice tuck-in acquisition with Yellowstone and also launching ABC station. Does that sort of sum up the M&A strategy going forward? A lot of singles and doubles. Or do you think you can make a more sizable acquisition? Are there any larger groups that interest you?

Hilton H. Howell

This is Hilton. I think candidly, Eric, the answer is yes. There's nothing that we have that we're ready to talk about. But we are looking at larger transactions and we're also looking at smaller transactions and tuck-in acquisitions that would -- our markets and would add into our portfolio. Stations similar to what the Yellowstone stations are there.

Eric Katz - Wells Fargo Securities, LLC, Research Division

Okay. And also, you have quite a bit of your retrans footprint coming up for negotiation over the next year or so. Does the strategy change or you think you can do bigger deals once you mark your retrans rates up to market?

Hilton H. Howell

Well, I think the answer, is yes. And I actually think, I'd like to take a moment to kind of brought in Kevin Latek, because we finished without going off the air and got very successful terms with DISH and made that announcement. We had very little thoughts and we hope that we can follow-up. We have one more large provider this year and then everything else with our current portfolio comes up at the end of 2014. And we're hoping that we end at similar productive and positive negotiations so that, they get what they need and we get what we need. And I think, that does help us a great deal. I think, regardless of whatever we have, we're picking up repricing on over 2 million subscribers in the fourth quarter. And then everyone else will reprice by the end of next year. And then we anticipate through 2014 that we're going to have an extremely strong political year. That will give us a great deal of added cash flow. One of the things that we're very pleased about is that Gray is, today, a significant contributor of free cash flow during the political years and in nonpolitical years. And one of the things that we like about this Yellowstone transaction, about the transaction with Grand Junction, is that we are able to acquire all of it without tapping any financial resources. It all came from cash on hand and cash, candidly, that came into the course of the year. And so those stations and the assets and the cash flow that they represent, are going to be able to allow us to continue to delever and continue to have operations to expand our footprint at the same time.

Eric Katz - Wells Fargo Securities, LLC, Research Division

Great. I just have one more question. This maybe more for Jim. How is Q4 core pacing x political? And can you talk to the monthly pacing throughout Q3 and into November?

James C. Ryan

Q4 x political currently is pacing up about 10%. So we're pleased with the trend there. And, obviously, October, if you look at it sequentially during the quarter, October is up very significantly because of the political displacement. But November and December are -- they're currently pacing at healthy mid to mid-single or better digits as well. So the trend for the quarter looks good. Third quarter trend line was slower, first part of the quarter, I think, September picked up. And, again, we're liking the initial trends we're seeing for fourth quarter.

Hilton H. Howell

Eric, let me follow-up on one other things that I just like to mention with regards to these acquisitions because we kind of glossed over it. But within the Gray management structure, we're really excited about picking up these 2 Telemundo affiliations in Grand Junction and then in Laredo. Obviously, the television viewing population in Laredo is very heavily Hispanic. And the Telemundo there has a -- we think a tremendous amount of upside that has not been a pushed as well as perhaps it could be. And we're very excited to be part of that network now because these will be our first 2 stations. So hopefully that won't be our last.

Operator

[Operator Instructions] And it appears there are no further questions at this time.

Hilton H. Howell

All right. Well, thank all of you, for joining us on our conference call today and please feel free to reach out to us at any time if you have questions. We'll answer what we can. I hope that means, that we covered a great deal already with you guys and you don't need to have questions to answer, we'll have answered. But if not, let us know. Thank you for attending and thank you so much for your support and interest in our company.

Operator

This does conclude today's conference. We thank you for your participation.

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