Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Gray Television, Inc. (NYSE:GTN)

Q2 2008 Earnings Call

August 7, 2008 11:00 am ET

Executives

Robert S. Prather, Jr. – President and Chief Operating Officer

James C. Ryan – Chief Financial Officer

Analysts

Marci Ryvicker – Wachovia Capital Markets, LLC

Richard [Tolough] - RT Asset Management

Jim Harris - Inaudible Company

Steve Pfeiffer - Wells Capital Management

Jim Goss - Barrington Research

Tracy Young - J.P. Morgan

Scott Bandenbosh – Unidentified Company

Brian Broadbent - Island Capital

Linda Karn - Credit Suisse

Operator

Welcome to the Gray Television second quarter earnings release conference call. (Operator Instructions) For opening remarks and introductions, I would like to turn the call over to Mr. Prather.

Robert S. Prather, Jr.

I want to welcome everybody to our second quarter conference call. I know a lot of you know I like quotes of different kinds. I think the quote that fits us these days is the old Chinese proverb, “May you live in interesting times.” I think we definitely are in interesting times.

I think we’re on the cusp of the new golden age of television but its painful getting there, it looks like. I think the economy has definitely affected everybody and around the country, not just TV and radio, newspaper but most other industries are. Obviously our biggest advertiser is the auto industry; it’s been hit hard by the current economic crisis and $4+ gas.

I was just reading today that Toyota profits are down 28% and they are expecting about that much decline for the year so it’s really hard for them as you know. General Motors announced a $15 billion loss for the quarter. National auto advertising according to reports I read is down on TV around 26% overall. Fortunately, we’re not down near that much. Here again I think that goes to the strength of our local franchise.

As most of you noticed, we’re basically even with the last six months of revenue. I think this is attributed to the strength of the markets that we’re in and the strength of the political revenues that are coming in. Our new media and Internet strategy continues to have great growth and growing profits and we think this will continue in the future. I think it will become more of an important part of our business as we go forward.

One of the things that I am looking forward to is more interactive TV. You’re going to see and we’re experimenting with it now, you will be able to watch TV programs and you see an ad you really like, click a button on your remote and it will automatically DVR whatever you are watching and switch you right to a website so you can look at the product whether it is a new car or whatever it might be that you’re interested in. You then can go back and pick up where you left off on your TV program.

Also to give you an example of the strength of our websites, we’re averaging over 50 million page views a month now. Even on our mobile, we had over 4 million page views in the month for May of our mobile, a million new visitors. I think this is a strength, we got mobile strength in all of our markets. We are making a profit on mobile and I think that will continue in the future.

Among the things that are going on right now, I think we got a huge opportunity for retrans in the fourth quarter and for the beginning of next year. We got about 4.5 million subscribers, I think total that we pass and about 60% of those are up for retrans negotiation Dec. 31. We’re going to be very aggressive, very active in trying to maximize what we feel is the rightful compensation we should be getting from cable operators and satellite operators.

We recently made a deal with AT&T. They’re coming in eight of our markets with TV services this year and next. We made a very favorable deal with them for retrans payments. We’re very pleased with it.

We made one deal earlier in the year with Cox Cable in one of our smaller markets which we think is favorable for both sides, we are pleased with it. We think this is a big opportunity for us going forward in the next year. We are going to be working very hard on it.

We are continuing to watch our expenses very carefully. Our expenses right now are basically flat with last year. They are down actually if you take out the commission on political that we paid so far. They should be down for the year, other than commissions on political.

Political is coming in good. It was slower than 2004 but looking back, you probably expected that because in ’04, we had an incumbent President and the nominee for the Democrats was picked very early so they started advertising a lot earlier. We feel very confident that we’ll hit our political numbers that most people projected at for the year.

We’re continuing to work hard on getting ready for the digital transition in February of next year. I think this is going to be great for the whole industry. I think the sooner it happens the better. Basically most of our capital this year has been spent on finalizing things for the digital transition which, as I said, we will be ready for in February of next year.

We’re continuing to work on trying to do more hovering. We are hovering all of our traffic now. We are hovering master control for many stations and trying to increase that as fast as we can. We’re hovering business management and accounting functions much better now and we are continuing to increase that. We think it is more efficient #1, and we think in the long run we will be actually giving a better service to our stations as we go forward.

I would be remiss if I didn’t mention the stock. I want to cry every time I look at it. I don’t look very often frankly because it doesn’t do me any good. I told you before and I’ll tell you again, most of my net worth is in the stock of this company, not only in personal shares but my 401K and my IRA that I self-direct is virtually all Gray stock. So I’m drinking my own Kool-Aid and in the long run, I think it’s going to pay off. Right now, it is very painful for all of us in the business. I think all of the TV stocks are down over 50% plus from where they were a year ago. I think we’ve been painted with the “old media brush.” There’s not much we can do about it except try to show Wall Street that they’re wrong about future projections for growth in the television industry. I’m confident that the next few years are going to be very good for us. I think it’s going to be painful as the economy continues to struggle. I wouldn’t dare to predict how long that’s going to last but I do think that when the economy picks back up, we’ll pick right back up with it and have some good growth ahead of us in the years ahead.

At this point, I’ll turn it over to Jim Ryan who will go into more detail on the financials and then we’ll open up for questions after Jim. Jim, go ahead please.

James C. Ryan

As Bob mentioned, overall for the quarter, our revenues were just down slightly, 1%. Local was down 5% and national was down 7%. Similar to the trends, many people have reported low for the quarter. Political though was stronger than we had anticipated, ending at $5 million. We were pleased to see the strength and an increase late in June.

Our Internet growth as Bob had mentioned was up 34% as well and we were pleased with that. As far as commenting on categories, clearly as the rest of the industry as I already mentioned, our auto was down. It was down about 8%. It still represents about 22%-23% of our total business. Other categories that were down in the quarter were telco, furniture, appliance/electronics stores, the big department discount stores. Our retro business for second quarter was basically flat. On the positive side, entertainment was up a little bit. We’ve continued to show good growth in medical and other services. Financial services, actually for us were up slightly. The supermarket category has actually done very well for us this year after several years of poor performance.

On the expense side, as Bob mentioned, we were pleased that overall expenses were actually down 1% quarter-over-quarter and we actually did a little bit better than we had thought we would on the expense side. The stations have been working very hard, as Bob indicated, on managing expenses and keeping things as tight as possible.

Turning to the six months numbers, again the trends are very similar. We were basically flat on the six months, actually up ever so slightly, a few hundred thousand dollars in revenue. On a six month basis, our auto was down 6% and our political for six months is at $8 million. Obviously, we expect good growth in political in Q3 and Q4.

Turning to some balance sheet items, total debt at the end of the quarter was at $855.5 million and I am pleased to recall also that we made an additional $23 million voluntary pre-payment on the debt on July 15. So if you wanted to do a pro forma to GAAP number, you could reduce it to $832.5 million. Our back late quarter was trailing operating cash flow defined by our credit facility, it was at $111.9 million which gave us a leverage ratio under our credit facility of 7.45. If you profroma for the additional $23 million payment, it would bring it down to about 7.24.

At the end of the quarter, we had 75 million of the newly issued Series D preferred stock outstanding and again with the add-on issue that we did earlier in July that would bring the total issue up to $100 million. CapEx for the quarter was $3.3 million and for the total year, sorry for the six months, about $6.2 million. Again, we think the total CapEx for the entire year will be somewhere between $15-$20 million. We’ve been trying to backload some of the CapEx this year to better mesh the political dollars as they come in the second half of the year.

Cash taxes for the quarter were about $156,000 and at a six month basis, we had about $200,000 in cash in taxes. I don’t see any significant amount of cash taxes for the entire year. We’ll end up paying less than $1 million for the entire year.

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

Robert S. Prather, Jr.

We’ll take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take the first question from Marci Ryvicker of Wachovia.

Marci Ryvicker – Wachovia Capital Markets, LLC

Just wanted to know if you could comment on your digital stations. I don’t know if you said that at the beginning of the call. It was hard to get on so I apologize.

Robert S. Prather, Jr.

I can’t but I will. Our FOX digital station is doing extremely well as you can imagine. FOX has had a very strong year overall. The FOX station is doing well. CW and MyNetwork, not as good, mainly as we talked about before. Probably more than any reason is just the channel placement. One of the things we are going to be working hard on in our retrans discussions is getting better channel placement for our digital channels. If you get put way up on a digital tier by the cable guys, it’s just hard to get a lot of people to find your station. I think if we get good channel placement like we’re hoping to, and we did good general placement with Cox based in Topeka and it has already helped our revenue. That’s something we will be working toward.

Marci Ryvicker – Wachovia Capital Markets, LLC

In terms of your deletion agreements, when are they up with each of the networks and do you anticipate when you go to discuss the new contracts that they are going to ask for reverse compensation in terms of retransmission consent?

Robert S. Prather, Jr.

We’ve only got one station up for renewal at the end of the year, that’s our Huntington-Charleston, which is a NBC, one of the strongest NBCs in the country. We’ve had initial discussions with them. They are talking about trying to get some retrans. If we get it, we’re going to fight that pretty hard. We have no intention of giving any retrans the further we get from the networks. Most of our others are out about four years, aren’t they Jim?

James C. Ryan

The CBSs are out to 2014, the ABCs are out to 2013 and most of the NBCs are in 2012. There is another one that goes out actually as far as 2015.

Marci Ryvicker – Wachovia Capital Markets, LLC

On the NBC station, can you talk about how it’s been in terms of the Olympics? We heard from at least one of your peers that it’s been a little bit difficult to sell.

Robert S. Prather, Jr.

Ours is actually coming in pretty good, Marci. We’re right now $3.5 million plus which is a little bit better than last Olympics in ’04. So we’re pleased with the Olympics. It’s actually done better than we thought it would. We are in some good markets for the Olympics. I think there’s a lot of controversy with China and all that may have veered off some people but we’re pleased with it.

Operator

We’ll move to a question from Richard Tolough of RT Asset Management.

Richard Tolough - RT Asset Management

I look at your results compared to some of the other operators out there and your guys are obviously doing the right things, and putting a lot of thought and creativity behind your salespeople. Those guys should be congratulated as well.

Robert S. Prather, Jr.

Thank you very much. We work pretty hard at it.

Richard Tolough - RT Asset Management

One question I have in regards to retransmission. Do you have any estimates in regards to first sub, what the weight is going to be?

Robert S. Prather, Jr.

That’s a tough one, obviously we have to sign confidentiality. I would be disappointed if we’re not, let me put it this way, I think the guys have done a good job out there, Sinclair, Nextstar, some of these guys. I think most of their deals from what I’m hearing, I haven’t talked to anyone specifically but just piecing together, it will be in the mid-20s. I think that is what we should be all working toward.

Richard Tolough - RT Asset Management

Another question, in regards to the, a couple of months ago, you made some comments in regards to the cellular initiative and mobile broadcasting.

Robert S. Prather, Jr.

We are a member of the Mobile Coalition. They’re doing testing right now on the actual technological side of things. I think it’s going real good. I think they will have some standards in place by February of next year. I think the key thing that I mentioned before is what is the economic model going to be there at the end of the day? Is it going to be a subscription model? Is it going to be a model like in Japan where they got 21 million plus people that can watch live TV but it’s an advertising model. I personally think it’s going to wind up an advertising model. The key questions are going to be how the networks get compensated, how does CNN, how does AP, how do all of the syndicators tell you when you’re showing their pictures, it’s local stuff, it’s everybody. I think there’s a fair amount of economic technical questions that need to be answered. I think there is a big future ahead of it. In other countries, it is working extremely well. People have shown if it’s available, they like it. I think in Japan you have to buy a special device, they got over 20 million people watching live TV in Japan. I think this is something that can be a big growth area for us in the years ahead.

Richard Tolough - RT Asset Management

Especially given the local content, you would think they would be pretty popular.

Robert S. Prather, Jr.

I agree 100%.

Richard Tolough - RT Asset Management

One last question in regards to that, actually in regards to NBC. Have other broadcasters run into renewal problems?

Robert S. Prather, Jr.

I’m sure they’re not picking on us so I’m sure that other people have stations up for affiliation renewal that are doing the same thing that we heard. I think they’re being very unrealistic in their demands and I think fortunately, our Huntington-Charleston station is one of the strongest NBCs in the country. We just don’t feel like it is warranted. We feel like we bring more to them than they bring to us, frankly. We got a huge local audience and our ratings are much, much higher than their overall ratings. They should be happy to be with us.

Richard Tolough - RT Asset Management

I am almost wondering why would they, given the fact that the execution on their broadcast network is pitiful.

Robert S. Prather, Jr.

They have a word to describe this. It’s called arrogance.

Richard Tolough - RT Asset Management

Well, I didn’t want to say that.

Robert S. Prather, Jr.

I hate to say it but that’s been my impression.

Richard Tolough - RT Asset Management

I am an owner too of the stock and I’m not selling it any time soon.

Robert S. Prather, Jr.

I appreciate that and I think it’s a great buy right now. My partner and I have continued to buy stock and we will continue to buy. Like I said, our whole industry’s been hammered much more than it has deserved.

Richard Tolough - RT Asset Management

It’s definitely a diamond in the rough.

Operator

We’ll move on to Jim Harris of Inaudible Company.

Jim Harris - Inaudible Company

Two questions if I may. I think Nextstar has talked about 2009 capital spending for them $10 million or less. I was wondering why your cap spending would be any different than that in ’09.

Robert S. Prather, Jr.

In ’09, I don’t think it will. I think we will be in that range or lower.

Jim Harris - Inaudible Company

Does that imply that in 2010 you would be higher?

Robert S. Prather, Jr.

Not necessarily. I think we need to take it one year at a time, Jim, especially with these economic conditions. I think the main thing we need to be looking at is we recently hired a vice-president of technology and my charge to him was figure out a way for us to spend capital more efficiently, to make sure that when we are spending money on capital that it’s also labor-saving ways to do things more efficiently. The work flow, especially, in most TV stations is pretty poor. It causes a lot of inefficiencies. This guy’s a proven commodity. He designs stations that are fully digital, very modern, very automated, very network-oriented, very file-based. I think we’ve got to move toward that. We’re going to be watching our capital spending very closely. I think local HD is important for us in a lot of our very competitive markets. More and more people are going there. We even had local HD in a couple of our smallest markets which has surprised me for our competitors. We’re going to be watching the capital very closely over the next couple of years.

Jim Harris - Inaudible Company

Can you fit the HD that you have to do to remain competitive into the $10 million budget or would that push it up too much?

Robert S. Prather, Jr.

We definitely can, yes.

Jim Harris - Inaudible Company

Second question, I noticed that the Robinsons that are on the Board of Directors of the life insurance company that is public, I think they reduced their compensation to zero. It’s not a ton of money but they’re making probably a million dollars a year. At Gray, have they considered reducing their compensation from Gray in the same way that they have from their public insurance company?

Robert S. Prather, Jr.

That has not been discussed, Jim, no. I’m not sure what the total is but Mac has been a great counsel to me over the years. He is one of the most successful, smartest businessmen in America. Frankly, his overall counsel has been very valuable to Gray and me over the years. I think he earns whatever we pay him.

Operator

We’ll next go to Oscar Lipkis with Wells Capital Management.

Steve Pfeiffer - Wells Capital Management

My question for you, two of them, one is how are you in compliance with your debt covenants on your bank loan?

James C. Ryan

At the end of the quarter, we were at $745 million against a covenant threshold of $775 million. As I mentioned, if you profroma for the additional voluntary payment we made in July on the term loan, it would pro forma to 7.24.

Steve Pfeiffer - Wells Capital Management

So pro forma for the debt paydown, you’re at 7.24?

James C. Ryan

Yes.

Steve Pfeiffer - Wells Capital Management

Does that covenant step down?

James C. Ryan

Yes, it steps down to 7.25 at December 31. Given the paydowns we’re made to date plus our expectations for the balance of the year in operations and political, we’re very confident with the cushions we see going forward on the covenant.

Steve Pfeiffer - Wells Capital Management

Can you give me a general idea of how much EBITDA you would need to have in order to stay in compliance with the 7.25 step?

James C. Ryan

To be honest, I haven’t reverse-engineered that number –

Steve Pfeiffer - Wells Capital Management

I can’t remember how you test those, is it on an 8-quarter rolling number or is it on a 4-quarter number?

James C. Ryan

It’s a trailing 8-quarter number. We see substantial room between covenant and the actuals by the end of the year. Without trying to get into specifics, I think on a trailing 8-quarter basis, we would be well into the 6s, which would equate in a T12 type calculation to be someplace well into the 5.

Steve Pfeiffer - Wells Capital Management

Can you give me an idea as to further stepdowns beyond December 31, because if you are correct, you will be in compliance at the end of the year, but I assume that they will continue stepping down?

James C. Ryan

It steps down at the end of ’09 and at the end of 2010, it steps down to 6.5 and that’s the last step. Again, all of that is on a trailing 8-quarter basis and we’re one of the few TV companies out there that has the 8-quarter calculation. You just need to keep that in mind.

Steve Pfeiffer - Wells Capital Management

The second question I had for you is on the retrans agreements. Can you tell me approximately how many subs are up for retrans agreements and over what time frames?

Robert S. Prather, Jr.

As I mentioned, we got roughly 4.5 million subs total. We got about 60% of them covered as of December 31 of this year and about another 30% at the end of next year.

James C. Ryan

I also have to add on to Bob’s comment on cable subs. We also have our agreement with Echostar coming up for renewal at the end of this year as well. We’re already in discussions with them on a renewal.

Steve Pfeiffer - Wells Capital Management

The Echostar dish, that was not in the 60% of subs. You were talking about cable numbers, correct?

James C. Ryan

That is correct.

Steve Pfeiffer - Wells Capital Management

The Echostar dish on some of the other subscribers we’ve seen on there, we’re trying to get a guidance, are people generally seeing increases or decreases in the retrans they are getting from an Echostar dish?

Robert S. Prather, Jr.

My example is anecdotal but most of what I’m hearing is we’re getting increases. Most people are getting increases overall.

Operator

We’ll move on to Jim Goss with Barrington Research.

Jim Goss - Barrington Research

One note first off. For the Olympics, you mentioned something like $3.5 million for a revenue figure. Where are you plugging that into your revenue contribution breakdown? Is that in local and national or are you putting it in programming and other?

James C. Ryan

No, Jim, it would be a mix between the local and the national depending on what client ordered it.

Jim Goss - Barrington Research

That might affect those in the third quarter too then.

Robert S. Prather, Jr.

Right.

Jim Goss - Barrington Research

Secondly, with the pending switch to digital. Are you seeing any movement on the part of the TV viewers in your area who sign up for cable or some other form of delivery in anticipation of the digital switch and will this make a difference for you from your standpoint with your digital stations?

Robert S. Prather, Jr.

I have not heard any comments from any of our GMs regarding that. In all of the national numbers, we don’t see any, if anything you see cable subscribers going down. I’m not sure that, I think the people that don’t have cable or satellite are probably looking toward getting a box especially if they can qualify to go the government assistance on it. Most of those people are probably going to spend the $40 or $50 to buy the converter box to sign up for cable if they aren’t already signed up with it. I think there’s still a big battle going on between cable, satellite and the phone companies with the Verizons, FiOS, and AT&T coming in. Right now, we don’t have FiOS in any of our markets. We have AT&T coming in eight of our markets this year and next year. It will be interesting to see what kind of penetration against the cable and the satellite over the next year or so.

Jim Goss - Barrington Research

They are in smaller to mid-size markets, do you see a larger proportion of individuals not taking cable or satellite or something else?

Robert S. Prather, Jr.

I think our markets pretty much meet the national average. The national average for cable is around 67%-68%. I think our average is pretty much the same thing. I think satellite’s in the 15%-20%-25% range and again, I think ours is pretty much, we mirror the national overall ratios.

Jim Goss - Barrington Research

Have you been revising the programming on your digital stations as you gain more experience with this, perhaps introducing more traffic and weather type reports or something else that you might not have been doing originally?

Robert S. Prather, Jr.

I think the main thing we’re pushing and I encourage all of our managers as more local content comes. I think we’re doing a better job on the high school level and the college level on the non-traditional. We try to look for sports that the colleges have good audiences in that may not be a sport that would be normally on TV. I think we’re seeing more of that. As I mentioned before, a class example is the women’s volleyball team out of the University of Nebraska at our Lincoln station, we were televising most of their matches. They were #1 in the country and doing great. They became so popular, they wound up on ESPN and BSTV stole a bunch of the games. So we wound up only getting a couple of games by the end of the year. On that kind of thing, we are looking for more like that where it is really popular. Just to give you an example, the women’s volleyball had sold out a 10,000-seat arena over a hundred straight times in Lincoln. So it is very, very popular for us in that area and it’s something we are looking for in these other university towns that we are in.

Jim Goss - Barrington Research

Finally, on political trends. I know it was a little bit of a late start because of the long running Democratic primary. What have you noticed about trends lately that might give you encouragement that you’ll get more of that back in the third and fourth quarters?

Robert S. Prather, Jr.

We’re seen it pick up a lot since Obama looks like the nominee obviously. I think both sides now are concentrating on the battleground states. We’re seeing it real good in Colorado, Nevada, and Wisconsin. Florida is still a little bit of an enigma. We’re seeing Obama money there but still not much McCain money which has kind of surprised us. Virginia is another state which traditionally we had gotten no money in. We’re seeing both Obama and McCain money there. It’s going to come down, Jim, to the old battleground states plus the new battleground states. I think Virginia is going to be one. I think Colorado probably even more so than it has been in the past. Maybe a couple others may pop along there. The one thing that I have noticed about political though they are a lot smarter about moving money around at the last minute especially as you get closer to the election. Another thing that’s interesting on the 527s, is they had that court ruling where they used to not be able to advertise within 30 days of the election. That was thrown out and I think we’re seeing that money coming in later. I think they’re going to be advertising; they used to advertise because we had a lot of MoveOn.org and Swift Boat money in February and March of ’04 and we’re virtually seeing none of that yet. I think they’re all going to wait and throw in their money in the last 30 days, a lot more than they were able to in the past.

Operator

We’ll next move to J.P. Morgan’s Tracy Young.

Tracy Young - J.P. Morgan

First question and I may have missed it. Did you mention how much of your retrans is cash?

Robert S. Prather, Jr.

Well, we want it all to be cash. That’s our goal.

Tracy Young - J.P. Morgan

In this quarter?

James C. Ryan

Tracy, anything that we report on the retrans lines, anything to date that we have reported on the retrans lines is pure cash and I would expect that to continue going into the future. Whatever number we are showing in our breakout that we started at the first of the year, that’s a real cash number.

Tracy Young - J.P. Morgan

Are your digital stations profitable now?

James C. Ryan

Yes, in the quarter and in the six months, they were profitable a little bit, not significant. It was certainly a definite improvement from the modest losses we were running last year. So we’re very encouraged that even in a fairly tough economic climate, we’ve actually moved into profitability.

Tracy Young - J.P. Morgan

Finally, Bob you mentioned the hovering of the stations. Have you seen any expense reductions or is this anything that you are expecting to see?

Robert S. Prather, Jr.

I think if you look at our traffic for example, we centralized all of our traffic over last year in four hubs and based on our old numbers, we think we’re saving a million dollars a year. I think the other one’s, master control, we only got about a 6, 7, 8 stations where we monitor master control. We want to get that going as fast as we can and we got a relatively inexpensive way to do that. It takes a little bit longer to implement so we’re moving forward. I think we’ll save a good bit of money there. We’re clearly going to save some money, we basically are reducing our number of business managers from 30 down to 8. 8 or 9, I guess it is. We’re going to see savings in all those areas.

Operator

We’ll move to Scott Bandenbosh.

Scott Bandenbosh – Unidentified Company

Previously, you had mentioned that $50 million in EBITDA for the year and you were going to use that to repay debt. I was wondering in light of the prudence, if you still plan

to do that?

Robert S. Prather, Jr.

You have the wrong number. We should be in the neighborhood of $150 million. You said $50 million.

Scott Bandenbosh – Unidentified Company

Oh, I think you mentioned it in the past. Maybe I had that wrong.

Robert S. Prather, Jr.

I think that we definitely want to reduce debt by the end of the year.

James C. Ryan

Let me clarify. I think the $50 million number was –

Robert S. Prather, Jr.

Pre-cash flow?

James C. Ryan

An approximate pre-cash flow number.

Robert S. Prather, Jr.

We want to use all of that money to either pay down debt or redeem preferred. One or the other. So whatever free cash flow we get, we’re going to use the vast majority of it to improve our balance sheet.

Scott Bandenbosh – Unidentified Company

That will likely happen at the end of the year?

Robert S. Prather, Jr.

Right.

Operator

We’ll next go to Brian Broadbent, Island Capital.

Brian Broadbent - Island Capital

First, you talked about the new head of technology. I am just curious as to how long you think it’s going to take you to get a 100% file base and how much CapEx is going to be required for that?

Robert S. Prather, Jr.

As for how long, I wouldn’t venture to guess. As I mentioned, I think we’re going to be slower over the next couple of years as we see how this economy is going. I do think though that there are some things that we can be doing and Jim Okon, our technology guy is looking into some ways even where we are doing some automation type of stuff, if we can go five-based a little quicker than we thought and actually cheaper than we thought. He’s going around visiting all of our stations right now. I think he’s been to 18 so far so he’s got about 12 more to go and when he gets through with that, he’s going to sit down and write up a report on where he thinks we stand as far as the technology dishes in each station, where we ought to look at prioritizing our expenses going forward and where we need to be. We want to be much more efficient how we spend capital going forward. I think we’ve done a good job in the past but we can do better. That’s what his goal is going to be, figure out a way of how to do better.

As far as the financing of it, ideally in a normal real estate market which we’re not in right now, we’ve got some pretty valuable real estate with some really old buildings on it. Ideally, if we can sell that real estate for much more than the cost of building a new building and new equipment, that would be the way to go. That’s what we would concentrate on first. We’ve got probably at least 12, maybe 15 stations where the real estate is much more valuable than what you ought to be sitting with a TV station on. Here again, all of that is going to depend on how the economy’s looking and how our overall balance sheet’s looking. Our first priority is going to make sure that we get our debt down and make sure we going forward are in a much better position if we have another slowdown.

Brian Broadbent - Island Capital

Second question, on AT&T coming into your market, curious, what is total TV households and total percentage of the footprint that covers?

Robert S. Prather, Jr.

They’re coming in some of our bigger markets, Brian, I haven’t figured that out. That’s something we probably ought to do. They’re coming into Wichita, they’re coming to Knoxville, Reno, I’m trying to think, I believe Madison, Lansing. There are seven of them; they’re coming in this year and one next year. They’re going full blast. They’ve been very aggressive getting the retrans deals done and wanting to get started. I think Reno, I think they’re supposed to be up and running this month as a matter of fact.

James C. Ryan

Brian, the list is Reno, Wichita, South Bend, Madison, Topeka, Lansing and Knoxville.

Brian Broadbent - Island Capital

Do they typically put a good advertising budget behind that?

Robert S. Prather, Jr.

I don’t know, Brian, but they better. That’s the only way they’re going to get subscribers.

Brian Broadbent - Island Capital

I don’t know if you get paid by it or if you give them some barter.

Robert S. Prather, Jr.

We didn’t do any barter at all. We’ve made a deal with them for retrans, cash and anything they want to buy would be on top of that as far as advertising. If they’re smart, they need to advertise, especially with us. I think all of the markets that they’re coming in; we have very strong stations there. My only concern with the telephone guys is how good merchandizing guys are they? I think they had a monopoly situation for so long and you wonder if they really know how to market against competition. I guess we’re going to find out. I think FiOS and Verizon have done a good job. AT&T’s a little bit behind that. Maybe they will want to catch up, hopefully and starting in our markets. They seem to be very aggressive, wanting to get started.

Brian Broadbent - Island Capital

Then on your political guidance, through the third quarter, you have $22 million total kind of based on the mid-point of your guidance. You’ve thrown out a number of $60 million before. Are you still comfortable with the $60 million number?

Robert S. Prather, Jr.

Based on past history, Brian, if you go back in ’06 and ’04, we were at 55%-60% for us in the fourth quarter. As I said, I think we started out a little slower this time because of the fact that it was the first time in 40-50 years that we had a primary season go with the Democrats as long as it did and no clear-cut candidate. I think we’re very comfortable with that number through the end of the year.

James C. Ryan

Also, Brian, I commented the political numbers that we put in the guidance, we hopefully are being a little cautious in the numbers we gave out and at the end of the day, similar to second quarter, the actual numbers that come in would end up being a little bit better. We wanted to be a little cautious and not overpromise too much.

Brian Broadbent - Island Capital

Just so I understand correctly. When I go back and look at ’06, the new soft money rules, so there’s very little soft money looking back historically in the fourth quarter because of the 30-day cutoff.

Robert S. Prather, Jr.

Exactly. It was done.

James C. Ryan

To give a little more color on the soft money, we saw, it was kind of interesting in Colorado a couple of weeks ago, soft money did come in. The interesting thing is, it was kind of surprising that they scheduled out a reasonable amount of the order in the fourth quarter. That kind of leads us to what Bob said is the thought that the soft money may be targeting later in the cycle this time around because they have the ability to.

Operator

We’ll move on to Linda Karn of Credit Suisse.

Linda Karn - Credit Suisse

Sorry if I missed this at the beginning of the call. Can you talk a little bit more about your third quarter guidance for local? Like flat year over year, is that because of the Olympics revenue coming in? So fourth quarter local, given the economy, we could see some weakness?

James C. Ryan

Certainly, the Olympics is helping our third quarter both locally and a little bit nationally as well on the NBCs anyways. Overall, I think it is helping our view of where local will be in third quarter. Fourth quarter, I think it’s a little too early to have a strong view on how things are going to look although I think it’s probably fair to say that the overall economic conditions probably won’t have changed a lot between now and fourth quarter.

Linda Karn - Credit Suisse

Did you say how many households were in the eight markets, the eight AT&T markets?

James C. Ryan

Unfortunately, I don’t have it right now but if we keep going through, I’ll quick try to add them up and pass out a number.

Linda Karn - Credit Suisse

Just one other question on the retrans. The 60% that are up for renewal at the end of the year, which cable companies are those primarily that you are negotiating?

Robert S. Prather, Jr.

Everybody. We’re dealing with most of the big guys, Comcast, Time-Warner, Charter, those guys and some, Mediacomm, we’ll beat most of the big MSOs and then several hundred small local-types

Linda Karn - Credit Suisse

I didn’t know if there was one that made up a bigger percentage.

Robert S. Prather, Jr.

You know Comcast being the biggest one has the bigger percentage but I think it’s about a million subs, Jim, does that sound right?

James C. Ryan

For Comcast?

Robert S. Prather, Jr.

Yes.

James C. Ryan

That on the top of my head, sounds about right but to be honest, I don’t have that number in front of me. I’m just going by recollection.

Linda Karn - Credit Suisse

That’s alright. If you don’t have that AT&T number, we can do it offline.

Operator

We’ll go back to Richard Tolough of RT Asset Management.

Richard Tolough - RT Asset Management

Just one quick question on the auto. Did it go down 8%?

Robert S. Prather, Jr.

Yes, that was the number on auto.

James C. Ryan

It was down about 8% in the quarter and on a year-to-date basis, it was down about 6.5%-7%.

Richard Tolough - RT Asset Management

Were the U.S. dealers weaker than the foreign dealers or just weak across the board?

Robert S. Prather, Jr.

I think the U.S. is probably a little weaker but it is weak across the board. As I mentioned, even Toyota’s been down which is very unusual. I just saw some instant things. The Manheim Index which is an index that follows the truck industry is down 4.4% in the month and it is the ninth consecutive month in year-to-year declines. SUVs is down 26% and large pick-ups down 24%. Compact cars up 16%. I think that’s all directly related to $4+ gas. One of the things that I think is a positive that is going to come out of all this, the carmakers have got to advertize if they want to sell these new compact cars with gas mileage, they have to advertize what kind of mileage you can get. They’re busy trying to retool and trying to change some of these plants around from some of the bigger SUVs and pick-ups. For smaller cars, they have to advertize to show people what they’ve got. I feel like they will be coming back into the market with pretty strong advertising. They’re all in a bad situation. You saw GM announce today, they are asking for all their ad agencies to take a discount on what they charge for their business. We don’t plan to give any discounts and I think local dealers continue to spend more money than the national guys do. I think that’s why we’ve been fortunate, we have a strong local position in most of our markets. We haven’t seen the kind of declines as I mentioned national auto spend on TV is down 26% overall, I think. You can see we are only down about 7%-8%. I feel pretty good about it. I think that’s going to bounce back between now and the end of the year.

Richard Tolough - RT Asset Management

Would you say that the weak dealers that their deficits to zero will be sent out of the market?

Robert S. Prather, Jr.

I think you will see some shake-out of dealers. I think it’s going on right now. I think that will continue. Both Chrysler and Ford have announced they want to cut the number of dealers. I think they’re in the process of doing that around the country. For the strong dealers, we got a lot of card dealers that have been on our air every single week since the day we went on the air in a lot of our markets. I think those kind of guys, they know the value of TV advertisements. They may have sold a lot of cars over the years and they’re not going to quit advertising. If weaker dealers go out of business, the strong guys will be able to spend more to get more business.

Operator

There are no further questions in the queue at this point.

Robert S. Prather, Jr.

I want to thank everybody for joining us today. We’re going to be working hard to make third quarter hopefully better than the first two. I think the political is definitely going to help that. Also, with the Olympic money coming in starting at the end of this week, I think we’re looking forward to a lot better third quarter. I think that the economy may actually be improving a little bit going forward. So we’re looking forward to having a better third quarter and better fourth quarter. As always, Jim and I can answer the phone if you have any other questions. We’re easy to find for comments. Don’t hesitate to call us anytime. We’ll look forward talking to you again at the end of the third quarter.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Gray Television, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts