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Gray Television, Inc. (NYSE:GTN)

Q1 2010 Earnings Call

May 10, 2010 11:00 am ET

Executives

Robert Prather – President & COO

James Ryan – SVP & CFO

Hilton Howell - CEO

Analysts

Larry [Schnurmacher] – Oppenheimer

Marci Ryvicker - Wells Fargo

Harry [Dumont] – Unspecified Company

Bishop Cheen – Wells Fargo Securities

Matt Slope - Broadpoint Capital

Operator

Welcome to the Gray Television’s first quarter 2010 earnings release conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn things over to our moderator, Hilton Howell, CEO and Vice Chairman. Please go ahead.

Hilton Howell

Thank you Operator. Good morning everyone and welcome to the Gray Television first quarter 2010 conference call. I will begin with a brief overview of the highlights of the quarter and our activities year-to-date and then Robert Prather, our President and Chief Operating Officer, will update you on our operations and James Ryan, our Chief Financial Officer, will review our financial results. We will also have a question and answer session right at the completion of our brief remarks.

I am happy to report that it has been a very busy and productive quarter and year-to-date. Last quarter I said it was beginning to be fun to be a broadcaster again and I am happy to repeat that this quarter has been the same. Operationally, our net revenues have increased to $70.5 million from $61.4 million for the quarter previously and approximate 15% increase which has really been driven by increases in each and every of our advertising categories.

We have seen some of our competition that have had bigger percentage increases during the quarter but we feel that our operations are doing very well and are on plan and that in terms of comparisons from quarter-to-quarter we had sort of a smaller drop in the previous year than perhaps some of our other competitors have but we are very pleased with the results so far in this quarter and the uniform improvement we are seeing in the advertising environment.

Many of you if not most of you may have met with or been in the meeting with Bob and Jim because we have completed a lot of transactions I would like to summarize this quarter and year-to-date. As I am sure all of you know on March 31 at the end of the quarter we amended our senior credit facility which in and of itself gave us a great deal more flexibility. But then 12 days ago on April 29th we issued $365 million of second lien notes due in 2015. We used the majority of the funds to reduce our senior credit facility we had just amended at the end of March. Also on the 29th we repurchased $60.7 million of our Series D, base amount preferred stock and $14.9 million in approved dividends thereon.

At the same time, we issued approximately 8.5 million new common shares. All of these transactions taken together we feel have helped to tremendously improved the balance sheet and has moved us substantially towards our stated goal of de-leveraging Gray Television in the immediate present and for the next several years.

With that let me turn it over to Bob Prather.

Robert Prather

Thanks very much Hilton. Welcome everybody. As Hilton mentioned the television business is definitely looking better. I think everybody in the industry can quote Mark Twain that the reports of our death were greatly exaggerated. I think a year ago everybody was predicting gloom and doom for TV and we have definitely come back strong.

As Hilton mentioned we had a good quarter. We did get our debt refinancing done which I am very proud of. I think we hit it just at the right time and probably would have a lot tougher time doing it today than we did a couple of weeks ago. I am glad we got it done. One other thing he mentioned that is interesting regarding our comparison to our peer group last year first quarter we were down 13.6%. These are the public companies that reported during that quarter. I won’t give you their names but their percentages were down 23.6%, 27%, 18.9%, 19.8%, 20%, 19.1%, 22.9%, 31%, 20.5%, 18.4% and the Television Bureau Survey of 600 stations was down 27.9% first quarter of last year.

I think once again this validates our strategy of buying university towns and state capitals as many TV stations as we can because we think these markets fared better in this rough economy over the last couple of years and I think they will continue to grow and prosper in the future as the economy gets a lot better. I think we are in real good shape there.

Everybody is asking about Young Broadcasting. The judge in the Young Broadcasting bankruptcy ruled in favor of the first lien banks. We hope the confirmation will be sometime in the next 15-25 days. At that point we will be able to actively be involved in managing the Young properties again and we think we have a real strong future ahead of us with the Young stations. They have been performing better and we think there is still a lot of upside to go in the young market they are in.

We did do a new deal with DirectTV for retrans. We signed a five-year deal we are very proud of that we think is going to be very good for us over the next five years with considerably higher rates than they were paying in the past. So we feel very good about that.

Then the main thing I think we feel the best about is in general advertising is up. It is up across the board. It is basically only three categories that were down of our major categories. One of those that is kind of unique to us is Telco because we had a lot of Alltel markets and Alltel was bought by Verizon last year and they just cut off all advertising in those markets until they get those Alltel markets assimilated. So that was a big blow for us last year and going into this year.

Restaurants are still down and furniture, appliances and electronics are all still down. Virtually all of our other major categories are up, mostly a lot of them double digits. Auto was up 43% for us which we feel very good about and we think will continue. We feel very good about the year. The political climate continues to look very strong. I think both Republicans and Democrats are raising record amounts of money and there are some major fights going on out there in battleground states. There are 16 Senate races in our states that we have TV stations with six open seats and I think 15 governor races with 10 open seats. So there is going to be plenty of political money spent. We are looking for potentially a record year there. So I think this year is going to turn out to be a good year. As Hilton mentioned one of our primary goals is we hope we can pay down a good bit of our debt by the end of the year based on having a very strong year.

At this point I will turn it over to James Ryan, our Chief Financial Officer, and let Jim go into more detailed numbers. Jim?

James Ryan

Thanks Bob. Good morning everybody and let me keep my comments relatively brief because I think things are laid out pretty well in the release that is already published as well as the 10-Q that will be, if it isn’t filed yet it will be filed a little later today.

As Bob said we were very pleased with the way the quarter came out. Of course we talked about this a little bit in our call about a month ago discussing fourth quarter. Overall the numbers came in just a little bit better than we had anticipated and we were pleased with that. Local is up 11% excluding political. National is up 8%. As we commented the quarter built from about mid-February through the end of March and improved steadily. Again we were very pleased to see that.

Bob already covered pretty much the categories being up and the couple that were down. Olympic revenue for the quarter was about $6.8 million. Super Bowl revenue was about $860,000. We were pleased with where we came out in both of those. Those if I had been asked what the relative split would be locally and nationally on those numbers, and we don’t have exact figures for that but by and large I would say the proportion to local and national is pretty much the same as our normal split between local and national in those two categories.

One thing to note I think that is a very encouraging sign is that both our broadcast cash flow and operating cash flow certainly as we expected it is up very, very significantly over first quarter 2009 but we are also pleased to say it is up over first quarter 2008 and we think that is a good sign. Our BCF is up about 6% over 2008 levels and actually our operating cash flow is up closer to 10%. So again we are pleased to see that.

Guidance for second quarter I think is again very solid. We are very pleased with what we are seeing so far for second quarter. Our expectations for the year is that the year will be building as we went along. Bob already commented our down last year might not be quite as much as others so our percentage up might not look quite as high either but it will be a relative comparison all year long.

In second quarter we are currently basically right on top of plan and we are pleased to see that. Of course we were ahead of plan as we commented before in the first quarter so on a six month basis we are running about $4 million up in revenue from where we actually anticipated we would be for the year. So again, we are pleased to see that and pleased with where we are seeing second quarter develop.

Turning briefly to the balance sheet, obviously again we are very pleased with the refinancing transactions. The total debt number at 03/31 was 814. Our leverage on our senior facility was at 843 which is the trailing 8-quarter basis and of course with the amendments to the senior facility we now have ample covenant cushion out through our maturity dates of 2014. The programming payments for the quarter were $3.9 million. Amortization was basically the same. We had really no cash taxes in the quarter and would only expect approximately $100,000 in cash taxes for the year. So we are in very good shape from a free cash flow position as the year progresses and especially as political comes in at the back end of the year to put us in a position to be paying down debt from free cash flow.

CapEx for the quarter was about $2.9 million and we still think that $15 million for the year is a reasonable number for us. At this point I will turn it back to Bob.

Robert Prather

At this point we would like to open it up for questions please.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Larry [Schnurmacher] – Oppenheimer.

Larry [Schnurmacher] – Oppenheimer

What year and amount was the highest EBITDA the company has shown and how close will the current year be to that?

Robert Prather

2004 we had right at $132 million of cash flow and that was also a record political year. We had $53 million of political that year. I can’t give any definitive numbers for the year but I think some estimates out there from some of the other people that cover us in the high 110-120 level. Depending on political it could always go above that. I don’t know for sure. The political we are thinking could be $50 million. I think we originally budgeted $43 million so we are looking for a very strong political year. So far it is looking like it is going to be that based on some of the way the races are shaping up in a lot of our key markets. Our all-time record is right at $132 million.

Operator

The next question comes from the line of Marci Ryvicker - Wells Fargo.

Marci Ryvicker - Wells Fargo

Going into your Q2 guidance with local and national both up 6% it definitely looks like a slowdown from the first quarter of 11% for local and 8% for national both excluding political but your peers all seem to be at the same level in the core business or accelerating. Is this comp related or is there something else?

James Ryan

Again, I think we feel very good about what we are seeing for second quarter. We are right on our plan. It is a little difficult to comment on what other people are seeing. There may be a little bit of mix and market size as well. Traditionally in prior recoveries larger markets tend to come back a little bit quicker and a little bit stronger I think than the mid to smaller size. People with exposure to that may be seeing that a little bit more in advance than we are but that would be in my mind something very normal. If that is part of it, I would be very glad to be seeing that and hearing that because it would bode well for us a little farther down the road.

Marci Ryvicker - Wells Fargo

The retransmission consent revenue it looks like there is a slight slowdown from Q1 to Q2 in terms of your guidance. Is this just a timing issue or is there something else?

James Ryan

No it is just a little timing issue. For the year, you can kind of extrapolate from Q1 to Q2 and we are right around $18 million for a year number for a full-year basis.

Marci Ryvicker - Wells Fargo

Does that include DirectTV?

James Ryan

Yes.

Operator

The next question comes from the line of Harry [Dumont] – Unspecified Company.

Harry [Dumont] – Unspecified Company

It seems like talking to most of the broadcast guys I think everyone says on the revenue line you had hoped to kind of get back to 2008 levels and then on the EBITDA line or the BCF line you would generally hope to exceed that. It looks like you are kind of on track to exceed it. The question is, do you think you can get back to the close to $330 million of revenue you did in 2008? I think it was $327 million. That would be my first one. Then I have a couple of detailed follow-ups.

James Ryan

I think, and we have said this a couple of times kind of big picture, with a strong political I think you could be in a zip code looking like 2008 from a cash flow standpoint. I think you are again looking at a zip code of 2008 levels which obviously would make us feel pretty good. As far as a run rate on TV expenses we are probably tracking at or below the 2006 level of call it around 193.

Harry [Dumont] – Unspecified Company

Can you remind us what the political was in the fourth quarter of 2008? [Obviously] there is a big delta here for this year.

James Ryan

Fourth quarter political 2008 was $27 million and change which was about 56% of the total. We had over 50% in basically every quarter every political cycle. It will vary a little bit but anywhere from 50-60% of the political ramp in the fourth quarter.

Harry [Dumont] – Unspecified Company

One other topic, you have provided some guidance or some numbers here in terms of your internet. It is at 649 million in ad impressions, etc., etc. 230 million page views for the quarter. Could you talk about how many you consider unique users came to your websites? Also, I would love to be able to correlate that to the actual number of viewers that you have for all of your stations across the board. Just try to get a sense of what kind of conversion you are getting on viewers that have actually been following up and going to the website to catch more news, sports, weather, traffic, etc. If you have any numbers on engagements; how long do they stay there?

Robert Prather

I don’t know if we have those right in front of us but we can get them for you and we can get them out to everybody. That is a good question and that is a reasonable question. We think our websites are doing extremely well and are very popular with our viewers but that is a good question to answer. We will try to get back to you with an answer on that.

Operator

The next question comes from the line of Bishop Cheen – Wells Fargo Securities.

Bishop Cheen – Wells Fargo Securities

So you have certainly done a lot of work on the balance sheet. We don’t need to focus on that. I know you have done this before, earned your way down to a more moderate debt leverage metric.

Robert Prather

We are going to do it again.

Bishop Cheen – Wells Fargo Securities

And it takes a year or two or whatever. That is because one growth value that has seemingly been closed to everybody and that is M&A or [inaudible] you have done too. Can you give us your sense of where we are in the M&A cycle and what you foresee? You have been a buyer and seller. Any prospects you might think going forward where you could [event] your way down to lower leverage?

Robert Prather

Until the banks open their checkbooks again I don’t see much M&A happening. I think it is hard to do stock deals these days. Not many people want to take stock even if you have a good company. You just don’t see much of that anymore. The only thing that might push some deals getting going is if people are worried about the capital gains rate going back up again which the democratic administration is signaling they want to raise dividends and capital gains rates. I just don’t see. Hell, merger and acquisitions is kind of like real estate construction. It feeds on financing and when financing is available a lot of deals get done and when financing is not available very few deals get done. I think that is the situation we are in right now.

Also I think last year valuations got down so low I don’t think anybody that knew the business wanted to sell at the kind of valuations that looked like stations were being valued at. I think now that valuations have moved back up people are more interested but I will be surprised if any major deals get done. There may be some one-off deals done later this year but I think it is still going to take for the banks to actually be loaning money. Also as you well know virtually all of the major public broadcasters have done a refinancing in the last six months; Sinclair and [Below] and Nexstar and us have all done refinancing in the last 60 days.

So there again I think the banks and the lenders are liking their paper a lot and the rates they are getting a very good yield but I just don’t see M&A financings, maybe later in the year but not right now I don’t think.

Operator

The next question comes from the line of Matt Slope - Broadpoint Capital.

Matt Slope - Broadpoint Capital

Building on Bishop’s question, taking a longer view you do have a lot of leverage. You used to have your $925 million term loan and you did the preferred to help get that down some and now the debt is back up pretty high again. Would you consider when the M&A market is better selling a few stations to reduce leverage?

Robert Prather

I don’t want to say never to anything. We are very happy with all of our stations. All of our stations are profitable. I think here again we have to make sure we get high enough multiples to justify giving up the cash flow and paying down the debt to where it makes sense. We have some very attractive markets. Like I said I would never say never to anything. I think that would obviously be a major decision for our board and our senior management if something like that came along. In the short-term I just don’t see anything like that happening.

Matt Slope - Broadpoint Capital

On the Young deal, can you remind us how the accounting works with this? You are accruing towards the $2.2 million for the full-year but then if you were to achieve any incentive how does that work and when does that flow into revenue?

James Ryan

The first chance of an incentive would be at the end of 2010. So it would really be a case of getting I think well down into this year and most likely at the end of the year to know what the final results are to know what, if anything, may be there. So it is one of those that is certainly out there and certainly a distinct possibility but it would be a ways down the road before the numbers and the results are clear enough to know what we could be accruing for our year-end.

Matt Slope - Broadpoint Capital

So we wouldn’t expect to see anything before fourth or maybe third quarter at the earliest?

James Ryan

I would probably say fourth but to be conservative if there is something showing up in third it will be good for everybody.

Matt Slope - Broadpoint Capital

For what you have already recognized there has the cash come for the 2009 components?

James Ryan

We have been paid very promptly according to the terms of the agreement consistently since we started the agreement.

Matt Slope - Broadpoint Capital

But you have not actually been in there yet, is that right?

Robert Prather

We have initially. We were very actively involved, we had our regional vice president’s in almost daily contact. They have visited all of the stations several times. Then when the competing offer came in we were advised by counsel and consultants for the banks to just wait until that decision was rendered by the judge which was rendered about three weeks ago. Currently we are waiting for the final confirmation order at which point and the actual asset exchange, at that point we think we will be able to get back in there and actually get involved and helping manage the stations.

Matt Slope - Broadpoint Capital

On CapEx you mentioned the $15 million number again. Is that still the max allowed under the credit agreement?

James Ryan

With the springing events tied to the pay down of the $300 million actually there is no CapEx limitation going forward. We are subject to both on the senior credit facility subject to a first lien leverage maintenance test, which again you have ample cushion in as well as a fixed charge test with ample cushion. But no flat out CapEx requirement although again I think right now the $15 million we view that as a reasonable number for this year.

Matt Slope - Broadpoint Capital

Thinking a couple of years ahead is that the kind of number we should be using for the next couple of years too?

James Ryan

Yes, I think it is a good number to use for the next couple of years.

Operator

At this time we have no further questions. I would like to turn things back over to Mr. Robert Prather for closing remarks.

Robert Prather

Thank you operator. I want to thank everybody for joining us today. We appreciate your support very much. Especially we appreciate your support, a lot of you have been with us through the rough times of 2008 and 2009. Now things are picking up and we hope we can all enjoy greener pastures ahead in our business and it looks like things are going to be good in the future. Thanks again everybody. As we always tell you, you can reach us anytime. We answer our phone and would be glad to answer any other questions. We will definitely get back some information on the Internet and get that out to everybody as soon as we can. Thank you everybody and we look forward to talking to you on our second quarter call. Thank you operator.

Operator

Ladies and gentlemen that concludes our conference. We appreciate your participation.

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