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Executives

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

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

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

Analysts

Barry L. Lucas - Gabelli & Company, Inc.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Gray Television (GTN) Q3 2011 Earnings Call November 4, 2011 11:00 AM ET

Operator

Good day, everyone, and welcome to the Gray Television Third Quarter 2011 Earnings Release Conference Call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to CEO and Co-Chairman, Mr. Hilton Howell. Please go ahead, sir.

Hilton H. Howell

Thank you, operator. I thank all of you for joining us for this teleconference this morning. I will begin as usual with the brief overview of our results followed by Bob Prather, our President and Chief Operating Officer, who will add his thoughts concerning our performance so far this year; and then our Chief Financial Officer, Jim Ryan will follow with a brief discussion of our income statement, balance sheet and more detailed financial data. And as usual, we will have questions at the conclusion of our comments.

We are pleased with our results this quarter. As expected, we have come up against tough comparables due to large amount of political advertising we received a year ago. Political advertising, which in 2010 set a record for our company in a non-presidential election cycle.

For the quarter, our total revenue decreased by 10% to $76.5 million from $85.3 million this quarter last year. This decrease is entirely due to the expected drop in political advertising of $10.8 million in quarter-to-quarter comparisons.

Significantly, of our 5 largest advertising categories: Automotive, restaurants, medical, communications and furniture and appliances, all increased this quarter. Automotive increased by 5%; restaurants increased by 3%; medical increased by 7% communications increased by 7% and furniture and appliances increased by 9%. Last quarter, our automobile-related category decreased by about 1% which at that time we attributed it to the effects of the Japanese tsunami. And as we expected, it has reversed itself this quarter.

For the 9 months, total revenue decreased by 4% or $9 million to $222.5 million from $231.4 million year-to-date 2010.

Once again, the main issue here is the political revenue declining, as I have mentioned before. But we also suffer in comparison from collecting no Olympic-related advertising this year. Whereas in 2010, we received approximately $2.8 million Olympic advertising revenue from our NBC-affiliated stations. Additionally, the Super Bowl was broadcast on FOX this year and our one primary FOX affiliate station and 4 FOX-affiliated secondary digital channels generated only $200,000 of revenue this year compared to 2010, when the Super Bowl was broadcast on CBS and our 17 CBS-affiliated primary stations generated close to $1 million of Super Bowl revenue.

All of the issues that can account for our decreases in advertising were expected and planned for. We are very happy with the resiliency and vigor of our local TV properties and expect them to bring 2011 to be a very successful close.

On a final note, this quarter, the company has continued to purchase in more shares of its outstanding preferred stock. We purchased in the shares in private transactions from internally generated funds. We consider these purchases to be part of our broader effort to deleverage the company. With that, I will bring my comments to a close and hand it over to Bob Prather for his thoughts. Bob?

Robert S. Prather

Thanks, Hilton. I want to welcome everybody. As Hilton mentioned, we feel good about the quarter. I think the TV business in general has been a better year than most people thought for most of the well-run broadcasters out there.

Political has been stronger this year than we thought. Wisconsin union and recall we have a $3 million come in there. Ohio is getting some of the same thing now and we've got a strong Governor's race in West Virginia that we didn't anticipate. So we think there's going to be some, rose very well for next year on political especially.

The main thing we're working on right now I mention every time we are fast getting all our stations up with local HD news and automation. I think we basically are -- at the end of the year have 3/4 of our stations up and running with local HD views. And we just got most of our small markets are left to finish up next year. But I think this is critical for our competition. I think we'd like to be the leader. We'd like to be the first in the markets to do go-local. We haven't been that in every case, but I think most of the cases we have. So it's something that we want to continue our leadership and continue to use our tradition of owning strong number one stations in our markets.

We also are very busy right now negotiating our retransfer our cable operators. We've got 45% of our subs up this year. Most of the big operators we're negotiating with currently, except for Comcast and they're not up this year. But we feel very good about the negotiations in early stages, but we think we're going to get some good increases and some well-deserved increases.

I think TV has long been undervalued by cable operators and I think they're now realizing the value of, especially TV stations with strong local news franchises like we have. So this is something we hope we'll have these negotiations concluded by the end of the year and going into next year with new round of retransmission revenues coming in.

I know you all like to know what's going on at the other side of the coin with the networks. Fortunately, none of our affiliation agreements are up until next year. NBC, we have had eliminated talks to them. Nothing definitive. They told us they'll get back to us sometime by the end of the month to start talking about our NBC stations for 2012. Our ABC are December 13 and our CBS, which is the 17 CBS stations are December 14. So the good news is we've got some time. The bad news is that most of the market will be set by the end of -- what the people are paying the networks. So we're keeping a very, very close eye on this, monitor closely with friends of ours in the business and something we obviously is going to be very important to us going forward that we are able to maintain our retransmissions growth on the cable side to more than offset our payments to the networks. But I think this is something that'd be one of our number one priorities in the years ahead.

As Hilton mentioned, we want to continue paying down debt. Our goal next year will be to pay down $50 million plus in our debt which I think we'll be able to do. So we're looking forward to continuing the rest of the year being a good year.

I just talked to our international rep firm. They said auto and international looking strong for the rest of the year, which we're seeing in our local markets, so I think the year end is going to finish up good. And as I said next year, we are very excited about having the presidential election cycle, having the Olympics back. So it ought to be a great year for us. At this point, I'll turn it over to Jim Ryan, our Chief Financial Officer, and let Jim mention some numbers to you. Jim?

James C. Ryan

Thanks, Bob. Good morning, everyone. I'm going to keep my comments relatively brief. I think a lot of the information has laid out pretty well in the release and our 10-Q will be filed later today as well.

Again, total revenue was down for the quarter because of the $8.8 million year-over-year change in the political which is obviously expected. Our local was up 1%. National was down about 4%, but actually came out a little better than we had expected. It seemed to improve sequentially and definitely improved in September.

Our Internet, as you know, has been a focus of growth for us this year. We had strong growth in the first half of the year. Third quarter continued at up 57% and we are very, very pleased to see that.

And our political for the quarter came in at $5.2 million. Our all-time, off-year record for political was $10 million and we expect that in 2007.

As of our October 31 closing, we've already broken that record. And as you can see from our guidance, we'll be well north of $10 million by the time we get to the end of the year. And political is each week seemed to be creeping up a little bit as we go.

I think Hilton covered the categories that are up in his comments. The only 3 categories we saw decline aside from political was financial, supermarkets and entertainment. And those same 3 categories have been down consistently all year, so that really didn't surprise us.

Our operating expenses were about 2% under on TV and we are pleased with that. For 9 months again, local, national and Internet combined is up above 3%, which given the overall state of the economy is, and an off-year of political is not all that bad. Again, total political for 9 months was just shy of $9 million. And as I said, as of our October 31 close, we've already broken our $10 million previous all-time record for a year, so we are very pleased.

Operating expenses were up just slightly on a 9-month basis and within our expectations.

Turning quickly to our balance sheet at the end of the quarter, total debt was $829.2 million. Our senior facility was at $464.2 million. We had $9.1 million in cash. Our trailing 8-quarter cash flow is used in our firstly leverage ratio and our senior credit facility was $114.3 million which put our first lien leverage ratio that's defined in the credit facility at $3.98 million which is well below the covenant. We, as Hilton and Bob mentioned, we had redeemed a little bit of our Series D preferred during the quarter.

CapEx for the quarter was $4.7 million. Our program payments were $3.8 million, amortization was $3.3 million. We paid about $47,000 in cash taxes for the quarter and will be a de minimis taxpayer for the full year. We've paid so far about a little over $400,000 and it won't be much higher than that on a full-year basis.

A couple of quick comments on our guidance for fourth quarter. Certainly, auto had been very strong in October and November. We're pleased to see that rebound. We've also seen, I would describe it as relatively small, but sequential week-to-week improvement in our internal forecast. And if that trend continues, we would expect that it, when we get to December 31, our current revenue guidance may be looking a little conservative. But we certainly would rather be sharing good news with everybody at the end of the year rather than bad news.

Most of the improvement we're seeing, national is definitely each week improving a little bit. I think that's primarily auto-driven. We're also seeing again improvement in the political numbers. As Bob mentioned, we've had a good governor's race in Kentucky, where we have 2 stations. We have a governor's race in Mississippi as well. Bob already mentioned about the special off-year elections in Ohio and Nevada. We have not yet seen though any early presidential money at our 2 stations in Florida, nor have we seen any in Nevada. So that certainly leaves potential upside in political, as we get into the very late part of the year. There is also I think a possibility, although certainly it's hard to predict, but I think there could be a possibility of issuing money that comes out, not only for us, but other people in the industry as the budget super committee reports at the end of this month and then Congress enters its debates over all those recommendations in December. It could set the ground for special interest money coming out, similar to what we saw a couple of years ago during the healthcare debate. We'll just have to wait and see how that develops.

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

Robert S. Prather

Thanks, Jim. Operator, we're ready for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I'm actually going to cheat because I'm going to ask 2 questions for me and then 2 questions for Bishop because Bishop couldn't dial in. But I'll ask them a lot more brief, so I won't take up as much time. The first question is for you, Bob. Just in terms of the advertising environment, is anyone talking about 2012 yet? And if so, what's the general tone?

Robert S. Prather

I've heard very little, Marcy. I think everybody's happy with what's going on in '11. The visibility as you know, continue to shrink, it seems like in the industry. But right now, actually I'm feeling good about '12 because the political, because of the Olympics coming back. And the economy seems to be if not getting better, it seems have kind of stabilized where we are. And I think the people that I know there's still a lot of unemployment and a lot of uncertainty, especially in the real estate area. But I think the companies that are reporting good earnings. I think companies are very cautious. It's sitting on a lot of cash, paying down debt like we're doing. So in general, I think people are anxious probably is the right word. But at the same time, I think people, the consumers seems to be spending more than people thought they were. And advertising is clearly been better, I think and anybody thought was going to be. Car sales seem to be going stronger. I think now the Japanese are back in the market, the car sales have picked up even more. The Japanese obviously make good cars and no other settlement no other advertise. So I think you're going to see that continue. I was told that the national car sales are about 128% of plan for the fourth quarter, as far as advertising sales goes. So I think you're going to see '12 being a good year for advertising in general and I think it's going to be a real good year for us.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. And I'll stick with you, Bob. In terms of M&A, there have been a lot of transactions. Are you guys a net buyer? A net seller? Any thoughts on M&A?

Robert S. Prather

I'd say we are in net status quo-er. We're happy with the stations we got. We want to continue to improve our balance sheet and pay down debt. So I think that right now we would probably be status quo-er. I'd say we've got great stations, strong stations in most of our markets, and we're happy where we are. I just want to keep getting better on what we're doing.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

And a few housekeeping questions for Jim. Any thoughts on operating expenses and CapEx for next year? I don't know if you've had your budget meeting up, but anything you're thinking? And then also, any game plan for redeeming the preferreds? Any timing you can put on that?

James C. Ryan

Let me, we're still on the early end working 2012 budget. I think in the broad sense, Marci as you know, with the large influx of political we'll have next year, we do have to face our national rep commission on that of about, it averages about 7%, so that's a couple of million dollars, $2 million to $3 million probably $3 million actually that tick up at any major political year. We've done well this year controlling the cost. So I wouldn't expect a significant increase in cost going into next year with the one caveat, there's probably something that will end up being paid to NBC, as we renew the affiliation agreement. That seems to be the set trend. Now how many, I wouldn't expect it to be a lot of money next year. But at this point, I have no idea exactly how much that is. But excluding the impact of that, I would not expect a significant increase. And we'll try hard to keep it closer to flat than anything. On the, on the preferred, we have said we'd like to be opportunistic there if we can. We obviously picked up almost $10 million between par and accrued dividend because our first lien ratio is now below 4x under our senior facility. This year, we have a technical capacity for an additional 10. I think it will, whether we do anything sooner or a little farther down the road, is really going to depend on our cash position and how well we feel. We certainly would like to do something with that. But I don't think we necessarily want to be extensively borrowing on the revolver for any protracted amount of time to do anything either. So it will be a little bit of a balancing act. The other rest of this year comes out maybe and take it as we come. Certainly next year, our cash position will be much, much stronger with the political. We'll also be paying down debt. And we've also said if the larger credit markets give us a good opportunity, we certainly would be willing to be thoughtful about the potential refinancing transactions as well. So if obviously we're doing a larger refinancing transaction, we would want to be taking up the preferred at the same time.

Hilton H. Howell

Marci, I want to thank you personally for the job you do for the whole industry. We appreciate it. I know first of all, you shoot straight, but also you're kind of a beacon of light out there in an industry where we've seen a shrinkage with people following us. So we all appreciate the job you do and you do a great job. I want to thank you.

Operator

[Operator Instructions] I will now go to Barry Lucas with Gabelli & Company.

Barry L. Lucas - Gabelli & Company, Inc.

I'll just get back to Marcy's final question which in here was any flex on CapEx for '12 as you wind done a lot of the HD investment. So can that go down from current levels and how far down?

James C. Ryan

Barry, thanks for reminding. I forgot to answer that part of the question. I think as we try to round out and finish out next year, gut through all of our markets. There's some what I would call cleanup-type of work from what we've been doing this year. We want to get done too. I would say right now, it's still probably in the $20 million range for next year. Then I think it drops off significantly after that because it will pretty much been over the hump. And in 24 months or so, we would have gone through and basically redone most of our stations. So next year, especially with a very strong political and a very, very strong cash position that political creates for us next year. It's a good year to make a final push and get it done. That's why I think it will be about the same number as this year.

Barry L. Lucas - Gabelli & Company, Inc.

On the affiliation agreement during the comments, Bob, when you talk about NBC, what has ever happened to the negotiation or the proxy solicitation where they would do the negotiating for you and there'd be some sort of split and everybody would be happy campers?

Robert S. Prather

Barry, we've been told by the affiliate relations people at NBC that they have not been able to come up with a plan yet. They're still working on it. They've asked us for patience I guess is the right word. We want to go ahead and start negotiating our affiliate agreements and they asked us to give them a little bit more time, that they're trying to come up with a plan that they can present to the affiliate board and get their sign off that they would then present to the individual groups of stations. So far, they are not there yet. I personally think it's just such an extremely difficult thing to take all the complex factors into account. I think they'll have a hard time coming up with something that would work for the vast majority of stations. But I'm wishing them luck. If they come up with something, we'll take a hard look at it and make a decision of the -- what we think is best for Gray Television. But right now, there is nothing on the table.

Barry L. Lucas - Gabelli & Company, Inc.

Last item, I don't mean to throw cold water on this. But when we look out to 2Q and 3Q of '12. You've got December Olympics back on your bigger NBCs and an influx of political and relatively easy comps on the auto side, hopefully with Toyota and the other Japanese nameplates, spending a lot at the middle part of next year. What's your sense, in terms of displacement? I mean, you're going to be running out of inventory and I know that's a high-class problem...

Robert S. Prather

That's a problem we always like to worry about, okay. It's like owing too much taxes. It's usually a good problem to have. So we, I would say that we do a really good job in our markets of talking to our strong local advertisers and a lot of them pretty much sit on the sidelines doing the real heavy September, October first week of November tough time periods. They know the rates are higher then. They know that they're going to be fighting for the best time. And we do a good job of communicating to them that, "Hey, we'll make it up to you. Don't worry." And a lot of them like I said literally sit on the sidelines. And so, while there's a lot of people want to get in there, they know it's going to be an expensive and very crowded and do you want to be stuck in a car commercial inside of 10 political commercials? So I think there's a -- the good news is we get a political and the bad news is it does affect our -- overall, some of our good local advertisers.

Operator

At this time, it appears there are no further questions so I will turn the conference back over to our speakers for any additional or closing remarks.

Robert S. Prather

Thank you, operator. I want to thank everybody today. We're real happy the way the business is going right now. We look forward to a strong fourth quarter and end of the year and we look forward to talking to you guys in early part of 2012. I'm going to wish everybody a great Christmas holiday season and happy new year between now and then. Thank you, everybody.

Operator

And ladies and gentlemen, that does conclude today's conference, and we thank you for your participation.

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