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Gray Television (NYSE:GTN)

Q1 2011 Earnings Call

May 09, 2011 11:00 am ET

Executives

Robert Prather - President, Chief Operating Officer, Director and Member of Executive Committee

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

James Ryan - Chief Financial Officer and Senior Vice President

Analysts

Barry Lucas - Gabelli & Co.

Aaron Watts - Deutsche Bank

Marci Ryvicker - Wells Fargo Securities, LLC

Bishop Cheen - Wachovia

Operator

Good day, everyone, and welcome to the Gray Television First Quarter 2011 Earnings Release Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Hilton Howell. Please go ahead, sir.

Hilton Howell

Thank you very much, operator, and good morning, everyone. As the operator mentioned, my name is Hilton Howell and I will make a few brief comments followed by Bob Prather, our Chief Operating Officer and then Jim Ryan, our Chief Financial Officer. All-in-all, we were very pleased with our results this quarter. Although our revenue is essentially flat, decreasing about 1% or $740,000, this is primarily due to 3 factors.

First, reduced political advertising this quarter compared to last year. In first quarter 2011, we reported $1.4 million in political advertising. This compares to first quarter last year at $2.7 million, a $1.3 million drop. Second, we received no political-related advertising this quarter. And in 2009, we received approximately $2.8 million Olympic advertising revenue on our NBC-affiliated stations. Finally, the Super Bowl was broadcast on FOX this year and our one primary FOX-affiliated station and 4 FOX affiliated secondary digital channels generated approximately $200,000 in ad revenue this quarter, compared to last year when the Super Bowl was broadcast on CBS and our 17 CBS-affiliated primary channels generated approximately $900,000 of Super Bowl revenue.

Even with these fairly large items this quarter, our core local, national and Internet sales, excluding political advertising actually increased this quarter over 2010 by approximately 1%. We believe these are quite strong results, especially given the overall uncertainty surrounding the health of the economy as a whole. We are also particularly proud this quarter that our Internet advertising revenue has increased by 38% to $4.2 million. We are very happy with this robust growth in our Internet sales and expect it to continue for the foreseeable future. With that, I will bring my brief comments to a close and turn it over to Bob Prather for more color on this quarter and then to Jim Ryan for more on our financials. Bob?

Robert Prather

Thanks, Hilton. Welcome, everybody. As Hilton mentioned here, we got a really good quarter this time. Frankly, last year, was an all-time record year for us, and we were a little concerned going this year. But I think I've talked a virtually all our GMs in the last 2 or 3 weeks and they all feel like business is better than they thought it was going to be this year. I think the only cloud on the horizon right now besides gas prices, which nobody's happy with, but I think the Toyota, Honda, the various Japanese car dealers are all having some serious problems with inventory because of the tsunami in Japan. We've seen some cancellations of some pretty sizable orders by Toyota especially. I think this is temporary. We all think, obviously, they will be back strong. Hopefully, sooner than later although I'm hearing it may be literally most of this year where they're going to be pretty strapped.

I think where reaching with one of our dealers, this is a pretty large dealer, sales of over 100 cars a month, they've got 9 cars for his the inventory for May. You can see that they're not going to be advertising a lot but I think the domestic guys are probably going to be jumping in. As they say, kick a man when he's down, they'll probably start advertising even stronger. But we'll get by. Now most of our other categories have been performing real well overall but our first quarter is better than we thought, second quarter is looking good. Our third quarter, we don't have as much visibility than we used to, but we feel pretty good about how it's looking for the second and third quarter.

We spent a lot of time and mentioned on our last call with local HD. We're fast getting that installed and we'll have it in 20 over 20 of our stations by the end of this year. It's getting great reception everywhere we put it in. As I mentioned, we're also doing automations, studio automations the same time in all of these operations which we think is going to make us operate more efficiently and frankly, operate better in most cases. The computers are very reliable and they're very good about making sure the right program is on the right time.

One thing we're doing in the new media area, we're really trying to integrate Twitter and Facebook into our newscast, both through our anchor people and through our own news directors making sure that we use these social media to make sure we're getting the word out. I think most of you know, Twitter was the first news source to getting information out on the Osama bin Laden killing, even, I think it was 5 or 6 hours before it was actually announced by the administration. I think this is something especially young people are more and more going to for their news sources and we got to be there and got to be in the front of their mind and our local news to make sure that we capture these people.

Just interestingly enough, I was talking recently to a lawyer friend of mine up in Nashville and he's early -- late 40s, early 50s and he says he gets most of his news on Twitter now. So it's something we going to be very aware of and something we got make sure that we're staying on top of in all our newscast.

One little note we had during the quarter that was not good news, we had 2000-foot tower in Eau Claire, Wisconsin got blown with an ice storm and heavy 70-mile hour winds. Luckily, no one was hurt. There were no real property damage of any kind. We are cleaning up the mess right now. We are taking bids on building a new tower. Our insurance is covering it 100% other than the deductibles. And we've been -- our neighbors in that area and the other affiliated stations have been very helpful, allowing us to be on their big towers and we literally missed, virtually, no service. And I want to thank all of our competitors, our friendly competitors as they were -- they've been very, very helpful to us and we appreciate the fact that the broadcasters out here jumped in and were good citizens. But I think it will probably take us about a year to actually get the tower rebuilt but we have, like I said, haven't missed any service for the meantime.

A couple of initiatives we're doing in the new media -- we doing a thing that we own 100% of -- one-car coupon rover which is mobile coupons that we have got going in 5 or 6 stations right now, hope to have it in 15 stations before the end of the year. And then we have a saying that one of our general managers developed, it's called Moms Everyday that's been very successful and we're rolling that out to all the Gray stations with a website related strictly to mothers and their issues and things that they want to know about on a daily basis. So we feel very good about both of these issues.

One thing you probably heard a lot about and I'll go ahead and mention upfront, FOX network has been pretty aggressive in getting compensation from their affiliates. We recently made a deal with them. We feel very good about it. It's a 3-year -- 4-year deal, excuse me, and well, it's not something we initiated obviously, I think it's something that we're going to see more of in the future and obviously, we've got to make sure when we're doing our cable negotiations with the cable operators that we take this into account going forward. But overall I think '11 is going to be a better year than anybody thought it was going to be. As I mentioned, I think that the only thing that really worries me on the rise is gas prices. Nobody knows what $5 gas will do, I don't think we've ever seen it before, and if it comes in and stays for a length of time, I think it could have a significant effect on the economy. But right now, overall, we feel pretty optimistic.

At this point, I'll turn it over to Jim Ryan, our Chief Financial Officer to go into more detail on the numbers then we'll open up for questions. Jim?

James Ryan

Thanks, Bob. Good morning, everybody. I think Hilton kind of covered the highlights from the revenue standpoint, Bob certainly talking about the operations. So I'm making my comments very brief. We're also very pleased that the broadcast expenses for the quarter came in at 48.2% which is less than we thought. So we're in good shape there. A couple of quick comments on the balance sheet. The leverage ratio under our senior credit facility which is tested on a trailing 8-quarter basis was 4.26 at the end of the quarter. We had debt of $831.6 million. Senior debt of $466.6 million. Cash was $9.8 million. The CapEx spend for the quarter was $9.2 million and that does reflect the deployment as fast as reasonable possible of the local news HD that Bob was commenting on, and we're going to continue this year to go as quickly as possible. We have quite a few markets that are in process that we'll finish up this year. And we have 4 markets that actually completed their install late third quarter -- or I'm sorry, late first quarter.

Cash taxes for the quarter was $200,000 just out of some states for the year, our cash taxes may be around $600,000, and again, because of a very large federal loss carryforwards we have. There's no federal taxes in our foreseeable future. Program payments were $3.8 million consistent with the amortization number.

As Bob mentioned, looking ahead to the second quarter. We are pleased with what we've been seeing so far. The guidance is in the release. We are expecting growth in the local -- composite local, national and Internet, excluding political. We've been somewhat fortunate so far this year with the unexpected political in Wisconsin over the budget issues there. Later in the year, we also will be the beneficiary of the special congressional election in Nevada, which is actually a local Reno district, and that was triggered by the resignation of Senator Ensign and an appointment of the city congressman to fill the Senate seat. So we're looking forward to a little bit of windfall later this year in the Reno political market as well.

At this point, Bob, I'll turn it back to you.

Robert Prather

Thanks, Jim. Operator, at this point, we'd like to open to questions from our listeners.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll now take our first question from Aaron Watts with Deutsche Bank.

Aaron Watts - Deutsche Bank

One question for me on local versus national. Can you maybe talk about -- I know national was last year faster to come back, but can you give us your thoughts on, do you expect local to continue outpacing national? And maybe what you're hearing category-wise in your local markets and how apt people are to kind of rejuvenate and bring back spending levels?

Robert Prather

Aaron, I think, first of all, I think local will actually going to be stronger this year than national. National had such a big bounce back from '09 and '10 but it'd be obviously hard to continue that pace. I think national is going to probably be low single-digit growth this year compared to last year. Obviously the car thing with Toyota may affected the -- we don't know yet exactly how that's going to affect things. But I think overall, we expect in local, to continue to be strong. And we're hearing from most of our general managers that they feel really good about the Local business. I mentioned, the only thing that would bother me right now is the issue of gas. If these gas prices do stay where they are and continue to rise, I think it could -- one thing that local, if people start to quit driving much, quick going to stores, you'll see it pretty quick in those local markets especially the size towns we're in where there's very little mass transit or public transit where most everybody just driving is in the car that's out and about. So I think that will be a factor on how local does. But right now, our paces look real good, and we haven't seen the effects of it yet and I just think it's something we got to keep our eyes on.

Aaron Watts - Deutsche Bank

Okay. And in those local markets, hopefully gas prices don't keep going on the up and up. But you feel that, if you lose some of the auto spending from your dealers, can you replace that with other advertisers on the local level or is that going to be tough to do?

Robert Prather

It's not easy, that is always such a big category. We found out in '09 when the auto really got cut way back, it obviously hurt everybody in the Broadcast business, I do think as I said I mentioned with the Japanese car dealers, we're seeing big pickups from the Korean, Kia and Hyundai, are advertising heavier. And I think the domestic guys may jump in there at some point to take advantage of this lull in the market with Toyota and Honda and the other -- this and the other Japanese car. If they do stay with low inventories and not much supply, I think they will all jump in try to take advantage of that.

Operator

And we'll now take our next question from Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC

It sounds like your guidance is taking into account the potential slowdown in auto from what you just said, in terms of your last answer. Is that the right way that I should be taking it, meaning, are you are peaking higher than your guidance?

James Ryan

Marci, it certainly reflects everything we know of today. Now certainly things could still happen before the end of the quarter, but we've kind of tried to factor in everything we've known so far. But kind of a big picture comment on second quarter, is even with the slowdown, some slowdown was seen in auto because of the disaster in Japan. We're still actually tracking a little bit ahead of our baseline expectation and so we're really pleased with that. Part of that above is again the strength in local which is a little bit better than we had anticipated. And that does seem to be holding up so far. And then certainly the overall numbers helped by a little bit with political being a little stronger than we anticipated as well. And a lot of that political is really April money where the Wisconsin issues spilled into the judge rates within April. So all in all, I think, we feel, right now, pretty good about second quarter even knowing that the Japanese automakers are probably going to be slower than anybody -- a little softer than anybody had anticipated.

Marci Ryvicker - Wells Fargo Securities, LLC

And I think you mentioned you signed your reverse comp agreement with FOX. Did you say that?

James Ryan

We have an agreement in principle and we're working on a long-term agreement with them now.

Marci Ryvicker - Wells Fargo Securities, LLC

Okay. Can you tell us if it was a percent of retrans or a set fee?

James Ryan

FOX is very sensitive to public disclosures. So I guess I just say that we, kind of like Bob said, we, at the end of the day feel it's a livable situation, workable situation and we're just going to move forward.

Marci Ryvicker - Wells Fargo Securities, LLC

Is this in your guidance for the second quarter and for full year expenses?

James Ryan

It really wouldn't be hitting anything in full of -- anything of any significance until next year and even then, not so great extent at all.

Marci Ryvicker - Wells Fargo Securities, LLC

Okay. And then my last question, you seem very excited about local news in HD. So can you just tell us what benefits you see, and I guess the positive reaction you're seeing in your markets from those that are up and running right now?

Robert Prather

Yes, Marcy, I think the main thing is, as you well know -- I mean, the HD penetration in the country now is way over 50% probably heading into 80% in the next -- probably end of this year or next year. And people are used to watching HD all day long now with the network programming, the sports, especially. And you know now when those bar show up on the side of the screen that it's not HD and they don't like those bars. And we heard about it pretty quickly and I think I mentioned that we had a market where we were not the first one to go local HD and our station have been a perennial number 3, and the market went HD before anybody else. So their next book, it's jumped to number one, is just because people, if they got a choice, they want to watch high-definition. It's just a better product as I've been saying for several years now and people want it. And the advertisers are really pushing even all your local advertisers for HD commercials because here again, it probably looks better in HD. And I just think we're very fortunate with the news leader in virtually all of the towns we're in or most of them and a strong number 2 in the ones that we're not number one. I think it's incumbent upon us, as news leaders to make sure that we are providing the very best product that we can to our viewers and our advertisers. And I think people expect that of us and I do, too, frankly. And I think there's something that we've been forcing it to be -- a leader mostly in the market for a long time. I want to brag our comps, we've got 16 stations that have been number one for 50 straight years or more. We know that's a -- that's a long period of doing the right thing by these markets and we want to make sure we continue to do that and HD is here to stay, and we want to be leaders in it.

Operator

[Operator Instructions] And we'll now move on to Bishop Cheen with Wells Fargo.

Bishop Cheen - Wachovia

Let me focus on some balance sheet stuff. You guys have done a great job in obviously producing the balance sheet and bringing normalcy out of chaos. But that pesky preferred is still there and I'm sure it drives you crazy. Is there any color you can give us on a preferred solution, what you can do, what you might want to do in calendar 2011?

James Ryan

Bishop, as you know, our senior credit facility restricts us to not more than $10 million per calendar year of restricted payments. So that's a very simple answer I think at this point. I think it would be fair to say that we do think about the preferred a little bit. We would like to be opportunistic, but in a reasoned approach. There is the restriction currently in the senior agreement, so if we were to do anything beyond that, certainly, we would have to go to the senior holders and get a consent, which does -- it's not impossible but certainly that raises issues as to what it takes to get something like that. So I think we'd like to be opportunistic there at the right time and in the right set of circumstances and it's just something that we will continue to think about.

Bishop Cheen - Wachovia

Sure, understood. And you just, within the last 30, 40 days, I think you -- maybe it was longer, you've already amended the credit facility recently, correct?

James Ryan

No, we haven't. No, there's been no change to the credit facility since last year. What you may be referring to is we did trick -- trigger the -- on April 1, the senior facility moved to a pricing grid and we actually were able to reduce our spread down to an L3 50 [ph] because of the leverage cast in the price...

Bishop Cheen - Wachovia

And that was something that was already designed in that?

James Ryan

Yes, that was already built from a year ago and we couldn't use the grid for one year. But on April 1, we became eligible for the grid.

Bishop Cheen - Wachovia

Okay. Alright. And so moving on. Yes, we're very thankful that if the tower fall was not worse, and all of that and plus. So these things are, they take a while, can you give us a little color on what the deductible is and then how we might think about the timing? Usually, there's some outflows and some special insurance payments.

James Ryan

Yes, Bishop. Of the top -- My recollection is the deductible is $50,000, so it's really not inconsequential to us. Actually, the insurance company has been very good working with us so far and have actually advanced us some funds towards the beginning of the rebuild process and I would expect that to be continuing at appropriate points in time as we look forward. So there won't be a big liquidity issue for us front -- running it and settling up later. From a business interruption standpoint, as Bob said, it's been negligible and so we really don't -- within less than 48 hours for all intents and purposes, we were back to full market coverage. And a combination of hardwiring into the large cable company, as well as the, both the Quincy station and the FOX station each allowing us to piggyback on their digital second channels to get our signal out. And that allowed us to establish once again on the D2s, got us reconnected with the satellite guys as well. So it's other than putting 2,000 seat of steel back of the year over the course of the next year, it's really a non-event fortunately.

Bishop Cheen - Wachovia

And just from a pure earnings and rhythm standpoint, it sounds like you don't expect to have any meaningful impact on the way the accounting works on your earnings or on how you need to guide us through things.

James Ryan

Well, there will be eventually when we have a better ability to estimate the entire rebuild cost. There will be, technically, a gain on the insurance proceeds. I would think of it really as a non-cash gain simply because the insurance money, the cash is going to come in and then come right back out to rebuild the towers. So the towers -- the rebuild finance is from the insurance proceeds, but there will be an accounting gain eventually when we -- if we take the money, the amount that we will get from the insurance company. And deduct the basis we had in the old tower which was about $100,000 and the differences is going to be a paper gain that will ripple through. But again, that's yet to be determined what that number will be until we get to a point where we can reasonably estimate it. We're just not in a position to book it nor guess at it.

Bishop Cheen - Wachovia

Okay, well look, knowing you, you'll guide us through whatever we need to know for the resolution for earnings, I have complete faith in you, James. And then, the last question is the favorite, it's a balance sheet and debt pay downs. So if we can measure it either by leverage where you'd like it to be as you head into the 2012 political cycle or we can measure it by how much more debt you think you would be able to take down in the 3 quarters of 2011?

James Ryan

Well, let me start first, Bishop. We do have some incremental debt capacity in theory because we are below 7x on our second lien note indenture right now and we are allowed to incur debt up to 7x. And obviously, the natural cycle of the off year are maximum debt. Theoretic, that number is higher earlier in the year and slowly works its way down and by the end of the third quarter, we'll be back above 7x on a trailing 12-month basis. And other than revolver borrowing, we really have no incremental debt ability. So that's going to follow a natural cycle over the course of this year and obviously in a political year, that cycle reverses itself and goes the other way. I think at the end of the quarter, on a trailing 12-basis, total leverage was at about $6.1 million, and again, senior leverage was about $426 million. As the year goes away, we certainly think it will and hope it will so far. I think your senior leverage is going to continue to fall probably into the very lower 4s and that's on a trailing 8-quarter basis. Obviously, the leverage level will tick up on a T12 basis simply because of the on-off year effect of the cash flow. But we think we'll be in good shape at the end of the year, either at or a little bit better than where we would have thought we would be this time last year and well-positioned for the 2012 cycle.

Bishop Cheen - Wachovia

Fair enough. Sounds right to me.

Operator

[Operator Instructions] And we'll now take our next question from Barry Lucas with Gabelli and Company.

Barry Lucas - Gabelli & Co.

A couple of quick items. Maybe could you remind us what CapEx will be this year, higher than normal for the HD deployment? And then where that falls off to next year?

Robert Prather

We're shooting for $20 million this year, Barry, and then next year, I'd say -- Jim, correct me but we'd probably would be more in the $15 million -- $12 million to $15 million range next year.

James Ryan

I would agree with that, Bob. And also just to be clear on the $20 million for this year, that would exclude any CapEx off the tower rebuild that's funded through the insurance proceeds. And again we're not sure what that number is going to be but that's covered by insurance. That's not part of the $20 million number were talking about.

Barry Lucas - Gabelli & Co.

Okay. Helpful, and I'd like to think that, as you said, Bob, that the domestic automakers will take advantage of the Japanese misfortunes. But have you seen the domestic name plates ramp up their spending in 2Q pacings to take advantage?

Robert Prather

We have not seen that, Barry with the domestic. As I said, it looks like the Korean, Kia and Hyundai seem to be picking up those. So they're not exactly friends with the Japanese anyway, so maybe they're jumping on quicker than our guys over here. And evidently General Motors and Ford seem to be doing well and maybe they figure they're just doing fine doing what they're doing. I don't think anybody knows how long this part shortage and car shortage is going to last. So it may be a 90-day thing, a 6-month thing or a year thing, I don't think anybody knows at this point. The Japanese are pretty resourceful and I wouldn't count on that on getting cars built quicker than we think they can. So I'm surprised domestic hasn't jumped up more, but like I said, we've seen it with Korean manufacturers but haven't really seen much on the domestic side yet.

Barry Lucas - Gabelli & Co.

Helpful. I understand the sensitivity of FOX in these discussions on reverse retrends, but is there any sense that you can provide that FOX gives something and doesn't just get it -- it's not just a call back?

Robert Prather

I'll let Jim answer that. I get in trouble sometimes when I answer a thing like that.

James Ryan

Well, Barry, keep in mind, we've got our FOX -- there's one low power and then 4 digital secondary channels. So, first of all, our FOX would bring a tiny -- and in our case, getting the cable space, the MSO space for those digital especially the FOX main and programming, both in sports and primetime. It certainly -- what got us that very valuable shelf space. So they're certainly continuing to provide all of that going forward and that does give us a strong -- a stronger position in order to have those channels up and active in those markets.

Barry Lucas - Gabelli & Co.

That's helpful, Jim. Last item, as you look at the bank credit agreement, I know it goes out to '14 but we still got some pretty attractive interest rates right now that are only likely to go in one direction. So how do you think about credit? What are you think about going back to the banks and maybe amending and extending further or is it too early? How do you think about that, Jim?

James Ryan

I think it's something -- we understand first of all that the credit markets are very strong right now. And that certainly rates are at what appear to be, at least from what I've been hearing, pretty attractive levels. I think in very general terms, Barry, that's something to think about and consider. Right now, we do have a pretty well-priced agreement and it's LIBOR 350. There's no LIBOR floor. So there's a little bit of -- if you thought about it, I agree in a long -- over time, rates are probably going to go up. So it is something to, I think, be thoughtful about as to whether there might be something to -- an opportunity to do something that is opportunistic, but at the same time, it doesn't necessarily drive up, in a very, very short term, meaning this year and into the early part of next year, wouldn't excessively drive up our short-term costs as well because we do have a very attractive deal right now. So it's something to think about hard.

Operator

And gentlemen, it appears there are no further questions.

Robert Prather

Operator, I want to thank everybody for joining the call. As always, I tell you, we answer our own phones, so call anytime if you need any other information. And we look forward to hearing, talking to you at the end of the second quarter. So thank you, everybody.

Operator

And once again, that does conclude today's conference. We thank you for your participation.

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