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Gray Television (NYSE:GTN)

Q3 2012 Earnings Call

October 31, 2012 1:00 pm ET

Executives

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

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

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

Analysts

Aaron Watts - Deutsche Bank AG, Research Division

Matthew Swope - Gleacher & Company Securities, Inc.

Barry L. Lucas - Gabelli & Company, Inc.

Operator

Good day, everyone, and welcome to the Gray Television Third Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Mr. Hilton Howell, please go ahead.

Hilton H. Howell

Thank you, operator, and good afternoon, everyone. Welcome to the third quarter and 9 months 2012 review of Gray Television's financial performance. Happy Halloween. And for all of you impacted by Hurricane Sandy, our thoughts and prayers are with you, your family and friends. And we want to thank all of you for the effort you took to join us on this call.

As usual, I will begin with a brief overview of our results followed by Bob Prather, our Chief Operating Officer, who will add his thoughts concerning our performance; and then Jim Ryan, our Chief Financial Officer, will follow with more detailed financial data and questions will be answered at the conclusion of our group comments.

We are very pleased to be reporting another terrific quarter today. In fact, we didn't just break records for the third quarter, we delivered record results that were better than any other quarter in Gray Television's operating history.

Record revenue for the third quarter 2012 was $102.9 million, against a previous record, not against a prior succeeding quarter or preceding quarter, but a previous record quarter of $85.3 million, a 21% increase.

For the 9 months, record revenue was $278.2 million against a previous record of $232.4 million, a 20% increase. With regard to broadcasting cash flow less corporate expenses, for the third quarter 2012, broadcasting cash flow less corporate was $46.8 million against a previous record of $31.9 million, a 47% increase.

For the 9 months, broadcasting cash flow less corporate expenses was $111.5 million versus our previous record of $85.2 million, a 31% increase.

Furthermore, record third quarter broadcasting cash flow was $50.7 million against a previous record of $35.2 million, a 44% increase. And for the 9 months, our broadcasting cash flow increased by 29% to $122.1 million, compared to our previous record of $94.8 million.

These terrific results led to net income for the quarter of $14.7 million against $27,000 last year, and net income of $27 million for the year to date against a loss of $4 million. On a per share basis for the quarter, we reported $0.26 per share and for the year, $0.47 per share, respectively.

Obviously, political advertising was a huge contributor accounting for $24.5 million for the third quarter and $42.6 million for the 9 months.

These records were set against the backdrop of the complete refinancing and recasting of our balance sheet, which was initiated in the third quarter and will be finalized on November 13 of this year. Many of you on this call or your firms participated in this refinancing, and we thank you for your support and confidence in our company.

At closing, we anticipate long-term debt at face value of $855 million comprised of $300 million of 2020 notes at 7.5% and $555 million of a new senior credit facility with a weighted average interest rate of 5.7%. Significantly, all of the company's preferred stock was retired during this transaction.

At this point, I want to personally take an opportunity to thank Jim Ryan, our Chief Financial Officer, and Jake Howard, our Chief Accounting Officer, and our entire financial team in Albany, Georgia for the extraordinary job they did in a very short period of time. Every single shareholder in Gray Television, owes them a sincere thank you for a job well done. I also want to thank our underwriters at Bank of America Merrill Lynch and at Wells Fargo. All of who did a fantastic job in this transaction.

With that, I will bring my comments to a close and turn it over to Bob.

Robert S. Prather

If you're still out there, we were very fortunate to have a lot #1 stations which traditionally, on political years, dipped around 2/3 of political TV dollars spent in the market and our managers did a great job of managing the inventory and making sure we have the time available to sell to the politicians and this has been an incredible year as they predicted way back that if the politician raised record amounts, they spend record amounts. We're clearly on track for an all-time record political year and we were once again, I'm sure, have the highest percentage of political dollars than any other TV group out there that reported publicly.

Last cycle, we’re considerably ahead of any other group but I think we will be again. And here again, that's a tribute to the markets we're in and to the strength of the stations in these markets. The other thing, Hilton mentioned our refinancing, I think, is extremely important for the company. I want to reiterate my pledge again and that to all the stakeholders that we will continue to pay down our debt, that's our #1 priority in this company and this year's extra cash flow will all go to pay -- prepay to get the debt down some more. We're very proud of this and we will continue to get our balance sheet in better shape.

We continue to get more efficient in our company. We're doing more automation and more and more digital. This is very important for the future of the company and we are constantly working on ways to improve our efficiency and improve our newsgathering without improving our -- without increasing our expense. As I mentioned, we're very proud of the fact that our overall expenses were lower than they were in 2007 and even though we had record revenues and we want to continue this trend and we want to continue to have the highest profit margins in the industry.

So we got a lot of work to do. 2013 is a new year, a new challenge. Obviously, there will be a lot less political. We don't know what the economic parameters can be. I think we're all kind of way to see what happens in the election, what the attitude of the country will be. And I think, overall, our managers are optimistic, because our core business has been so good this year led by automotive and that continues to be the #1 driver for the television business. And I think there's still plenty of pent-up demand for all those in the American economy. And I think the financing is available, I think the banks and all the financial institution have realized car loans are really resilient. They've had a very low default rate. And I think you'll see continued lending for cars. And I think anytime the money is available, people are -- like I said, there's a 3 or 4-year pent-up demand to catch up for those 3 years they have been way under in currency of the United States. I think it's going to continue to be good for us.

We're looking forward to 2013. 2014, like I said, can be hard to beat, but 2013 I think will mostly continue growth in core business with -- policy is very important.

At this point, I'll turn it over to Jim Ryan for some more financial details. Jim?

James C. Ryan

Thanks, Bob. Good afternoon, everybody. I'll keep my comments rather brief. I think most of the information's been well laid out in the release, as well as the 10-Q has also been filed today as well and is available.

Turning a little bit for the guidance for fourth quarter. Obviously, again, we're looking for very strong political results again at record levels, driving us to a very successful year. Local and national is feeling the displacement effect of the political, especially in October, but actually, once we get past the political window, the core nonpolitical business seems to be doing well. If you look into pacing for December, for instance, core business is actually up mid-single digits, which appears healthy at this point. And local is actually even up mid-single digits on a pace basis, November postal -- the first week of November after the election. Auto for November and December appears to be pacing very strong at this point, so not only with the political, but we think basic core business will end the year well. Obviously, down a little bit for the entire quarter, but we've seen that before when we had very large political in Q4.

Hilton already commented on the refinancing, as well as Bob. Again, we will complete the redemption of our currently outstanding 10.5% notes on November, is expected to be completed on November 13, which is the expiration of our call period. At the end, we will again have $555 million of the term loan outstanding and $300 million of our 7.5% notes due 2020, with a weighted average cost of capital of 5.7%, we're very pleased with. The senior credit facility comes with a standard set of covenants. There is one debt maintenance covenant, the ratio is calculated on a trailing 8 quarter basis and it's set at 7.75 initially. We are currently looking to be on a total average basis at about 6.30 at 9/30 and probably a little lower than that by 12/31 so there's ample cushion under the senior facility. Everything else in the senior facility is just, again, fairly standard maintenance package for that type of agreement.

The bonds have a standard 7x incurrence test, so both instruments put us in very good shape from a covenant and flexibility standpoint going forward. And as Bob said, near-term focus will be continuing to use free cash flow to pay down balances and de-lever the company.

A couple of quick side points on balance sheet-type issues. CapEx for the quarter was $6.1 million, tracking at $17.7 million for the year -- $17.7 million year-to-date still coming in at about $23 million for the year net of the $700,000 of insurance proceeds that we talked about last quarter. Program expenses in the quarter, $2.8 million, $8.4 million year-to-date, and we're expecting for about a mid-'12 number for program costs. We also extended our NBC affiliation again on a short-term basis as our negotiations proceed at pace. And we expect that by the next time we have a call, we'll be -- we'll have wrapped up our renewal negotiations with NBC.

With that, Bob, I'll turn it back to you.

Robert S. Prather

Thanks, Jim. Operator, at this point, we'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll move first to the site of Aaron Watts.

Aaron Watts - Deutsche Bank AG, Research Division

I know it must be nice to be able to focus exclusively on the business now rather than the balance sheet. But one question for you, Bob, just looking out towards the end of December and into next year. We're hearing about primetime viewership pressure at the network level and not exactly robust scatter market, potential fiscal cliff giving some advertisers pause on setting ad budgets, things of that nature. But it still sounds like you're not feeling too much negative impact from any of that. Can you maybe just talk about why that might be? Is it local auto that's driving that? Just curious what gives you some comfort looking into next year?

Robert S. Prather

Well, Aaron, I think the big thing is we're basically 72% local, 28% national to begin with and a big chunk of that is auto. And as I told you, I think because of being all the university town and state capitals, I think most of our economies are better than -- I think they're better, they did go down as far in the recession and they picked up better in coming out. We still get term account in Reno and semi term account at Colorado Springs, but Reno has had a great political year that will sooth a lot of those in the short run. But in Colorado Springs also. But I think just -- as I mentioned before, I think everybody's kind of waiting to see what's going to happen in the election. I think a lot of attitudes will be decided one way or another once we know the results next week, but I just feel good, we're just starting the budget process. We always like to wait late so we can get it better out there. But mostly, I feel pretty good about core business next year. So unless something in the fiscal cliff could change all of that, but I've got to think that the guys in Congress and whoever's on the White House got better sense to let that happen. But if it happens, I guess we'll all recalibrate our numbers. But right now, we feel pretty good about going into 2013.

Aaron Watts - Deutsche Bank AG, Research Division

That's good to hear. And then just one follow-up on sort of the categories. With telecom or communications, I saw it was down again for you in the quarter. Any turnaround yet on that in November, December. Is that category still kind of dragging along?

Robert S. Prather

It's still dragging and I'm not sure what's going on there. It's -- I think, when the T-Mobile deal got turned down, AT&T and they kind of started licking their wounds, decide what they want to do and I just -- you kind of got Sprint up in the air right now with the new ownership potentially coming in from Japan. I just think there's a lot of uncertainty. Verizon seems to most stable one out there. They continue to grow. And the only thing essential to me about telecom is that the huge explosion of the smartphones and the app ads and all, that I think these guys almost automatically think, well, they're going to get the business no matter what because you've got to have -- especially for the app ads, you've got to make a phone connection or you've got to have the data connection. So maybe don't think they need to advertise as much. I don't know what the dynamic is going on right now. I've told a lot of people about it, nobody seems to have the magic bullet.

Aaron Watts - Deutsche Bank AG, Research Division

All right. And last one for me, curious if you can put some brackets around this one. So it's on retrans. And obviously, I think what started off as being a great 100% or close to 100% margin business, or source of income for you is maybe little lower today. And then maybe just to comment on where you see margins on retrans going in the next 3 or 4 years based on some of the network agreements you signed and what we can kind of expect or model in for that revenue stream?

Robert S. Prather

Aaron, right now, the only agreement we've set is one that for small FOX markets which really is not indicative. We're negotiating, as Jim mentioned, with NBC right now. And then we got next year, down next year, ABC. And then into '14, we got CBS. So we still got some time. You hear all kind of numbers out there. I think the network's goal is to get the 50% station retrans. We feel very strongly that they don't deserve that number and we think we've got good evidence that we bring viewers to them and not vice versa. And so we're still going to negotiate hard on it. I mean, we've got a good relationship with all the networks. We want to keep a good relationship. They're valuable to us and we're valuable to them. And at the end of the day, 50% of our revenue and over 50% of our profits come of our local dealers which is, at the end of the day, our most important asset. So I think their goal is to get 50%, whether they all get there this cycle, I'm not sure. I think it's something going that's definitely where their goals are. And it might take another 3 or 5 years, but I think ultimately that'll be what they're going forward for sure and will be pressed pretty hard to get to it.

Aaron Watts - Deutsche Bank AG, Research Division

But ultimately, you think you stay ahead of it with...

Robert S. Prather

We certainly hope so. Yes, we certainly hope so, yes.

Operator

We'll move next to the site of David Herbert [ph].

Unknown Analyst

So I just wanted to ask, have you guys given a cash position after the -- all this refinancing activity?

Robert S. Prather

Jim, you've got that number, don't you? Jim?

James C. Ryan

We haven't given out a specific number. It's still somewhat of a moving target. We ended the quarter at a very strong cash position. We are still in a very strong cash position even after having used some cash in the first 2 stages of the refinancing transaction. So I think, at the end of the year, the way I look at it is a normal cash position for us would probably be $10 million of cash is a pretty reasonable liquid number for us, especially if the revolver's completely undrawn, which should be and I would expect it not to be drawn. So I think if we're roughly at $45 million of cash now, we've got room to definitely pay down some between now and December 31, but exactly how much remains to be seen. One in political and two just how cash from core business comes up over the next 6, 8 weeks or so.

Unknown Analyst

Okay. So to the extent you guys generate free cash flow in Q4 and 2013, I mean, is the idea just to simply prepay the term loan?

Robert S. Prather

Yes.

James C. Ryan

Yes. And I should say that with -- on November 13, when we settle the 10.5%. I do expect to use a reasonably large amount of cash on hand to close that transaction as well. So if we have $45 million, $46 million at the end of the quarter, a reasonable piece of that will be used in addition than drawing the $135 million that remains on the term loan to call out the $143 million of 10.5% plus the related fees and expenses.

Unknown Analyst

Okay, that makes sense. And then on Internet, you guys have seen really impressive growth, 22%, I believe, for Q3. Expecting double-digit growth for Q4. I just wanted to get a sense for how you look at that business going forward. Do you feel like this is a sustainable growth rate and where are you seeing the most growth? Is it banner ads or I guess maybe if you could me through some of the drivers there?

James C. Ryan

We definitely see as a growth area for us for a number of years into the future. Now whether we'll be able to be growing at a mid-20s rate next year, I think that's a little too early to tell. But I would certainly expect a very, very strong growth rate well into the teens or maybe 20. Obviously, if we can match that another year at 25% growth, we'd be delighted. A lot of the growth we're seeing over the last year or 2 has really been in what I would characterize more as verticals. We've talked about before a Moms site, Moms issue, family issue vertical within our website that we've branded as Moms Everyday, and we've seen very, very good growth in across all of our markets. And that was a homegrown idea that we deployed over the last 2 years or so. So that certainly provided us a growth opportunity. Also we've been seeing growth in medical verticals, as well as home improvement and some other type of verticals. But also the general advertising certainly is being pushed and we're trying to also push our way into a more of a mobile presence as well.

Unknown Analyst

And then in looking at the categories, you went through telecom. Do you feel like any of the categories are seeing any secular pressure, whether it's restaurants maybe spending more on other local media? Is that a trend you're seeing at all with any categories?

Robert S. Prather

No, no we haven't.

Unknown Analyst

Okay. All right. And the last one for me is just a housekeeping question. Can you provide cash taxes for the quarter?

James C. Ryan

Oh yes. Cash taxes were $251,000, so it brings the 9-month number to $476,000. And we'll be well under $1 million for the entire year.

Operator

We'll move next to the side of Larry Schnurmacher [ph].

Unknown Analyst

I guess we should all hope for I don't know, more elections, more frequently?

Robert S. Prather

Yes, yes, Larry. We always -- early in the year. And like I said, we always encourage red seagull maniacs to run for office.

Unknown Analyst

Okay, craziness as it is. Anyway, I'm just with all the refinancings and so on, what do you expect the run rate on interest expense to be this year?

James C. Ryan

At post refinancing, with the new structure out of the box, annual interest cost would be about $49 million.

Unknown Analyst

And that compared to?

James C. Ryan

That compares to a run rate prior to doing the refi of about $58 million, $59 million.

Operator

We'll move next to the site of Matt Swope.

Matthew Swope - Gleacher & Company Securities, Inc.

On the liquid capital structure kind of under control at this point, Bob, do you think M&A could be back on the table or is it too early still?

Robert S. Prather

I think it's too early. And like I said, we've committed to lower the shareholders' -- all our stakeholders to -- #1 priority, continue to pay down debt. And generally, I talk about a lot and I think it's going to be a help to all of us, committed to making sure we continue to get our balance sheet in better shape and so the fact -- we have a lot of extra cash for this year, it allows to pay down more debt than we thought. Then hopefully, we can continue to do that. We've been -- we're trying to be very careful with our capital expenditures and do things that help us technologically, but at the same time, we want to continue to, #1 priority, use cash, free cash flow to pay down debt.

Matthew Swope - Gleacher & Company Securities, Inc.

Yes, that makes a lot of sense. And do you guys have, to that end, Jim or Bob, a target for where you'd like that 8.25 leverage number to be before you felt comfortable doing stuff like that?

Robert S. Prather

Sure. I think if we look at acquisitions and we probably -- we've been very careful with our acquisitions over the years. We'd like to buy strong stations either #1 or strong #2 in good growing markets, University towns, state capital or so. Our universe is limited to what really we want to go after. I think we may be doing some M&As and things like that, that makes sense where we can do some duopolies, relatively inexpensively. I know we can put the 2 together and see some quick accretive cash flow. But I would say I would like to be in the 4s, mid-to-high 4s before we even try to look at anything as far as acquisition. One of the things you got to be careful about things doing merger and acquisitions virtually all my business career is, you got to be careful with small deals because sometimes they could cause you a lot of trouble, a lot of pain and they barely move the needle. I mean, we own a -- ideally, we could sign the right property that we could buy at the right price somewhere down the road, it would be accretive, it would be great, but I don't see that happening in the near future. So I think paying down the debt is going to be continuously our #1 priority.

Matthew Swope - Gleacher & Company Securities, Inc.

And Bob, on a different front, the FCC has started the NPRM on the broadcast spectrum. Can you comment on how you guys look at that? And is that an asset we should be starting to value in some way other than you using it for TV?

Robert S. Prather

Well, what we use now is very profitable. We've got over about 40, I think we have 43 digital channels on air now. We did -- by the way, I did mention our free Digital CBS that we mentioned last quarter, they're up and running and on the air. We think those are going to be real good growth as far as the next few years. And we use all that. We're the poster child for using the spectrum. I think this spectrum is still a good ways off. One way, if you get a new administration, all that stuff could change. The FCC has a hard time. They're not like the Congress these days. They're pretty much gridlocked, they can't seem to make a decision. Spectrum is just too far in the future for me to think much about frankly.

Matthew Swope - Gleacher & Company Securities, Inc.

So you can't see a scenario where you'd be selling some of your stuff into an auction?

Robert S. Prather

I never say never, but I really can't see that, no.

Operator

[Operator Instructions] We'll move next to the site of Lucas Barry.

Barry L. Lucas - Gabelli & Company, Inc.

A couple of small areas, Bob, maybe if -- just kind of thinking about the guidance, just wondering what kind of disparity or variance you see as you look into the markets that were -- that are hot politically, so the Nevadas, Wisconsins of the world versus the non-battleground states. I'm thinking your bigger markets, Tennessee, Kentucky or stuff like that?

Robert S. Prather

Like I said, core growth has been pretty strong across the board. Obviously, some of it gets squeezed out in these real strong political areas, but we're seeing, like I said, pretty much across the board and told the managers about what is being processed, they all feel, right now, pretty optimistic about core growth for next year. And they're -- I should say, they seem to always be optimistic, most back in '09 and '10, they weren't as optimistic, but right now, I think, they're pretty optimistic and I think -- I don't know, of any -- being specific, when I was in Reno, because Reno has had such a strong political year and that economy has been so tough, that might be one that falls back pretty quick. But other than that, I think most of our market has been pretty steady.

Barry L. Lucas - Gabelli & Company, Inc.

Great, okay. Just somewhat separate topic, Bob, you touched on spectrum use and the Internet, but we keep waiting to hear something more positive or more formal, formative about the mobile opportunities. So maybe touch base a little bit about the mobile opportunities in your markets, when they evolve and when they actually hit the income statement?

Robert S. Prather

Are you talking around live mobile or just mobile?

Barry L. Lucas - Gabelli & Company, Inc.

Yes, live mobile. Live mobile.

Robert S. Prather

I think they're still a ways away, we're still testing for about 3 markets now, technologically is great. I'm still not sure anybody's got the following for how to make it work from an economic standpoint. We're on this OMBC board and we follow it but I'm not overly confident it is going to happen soon where we can actually show real dollars coming in, in 2013, I won't go any far out than that, but I still -- I think it's a ways away. I hate to say it because I have big hopes for it a few years ago and it's just -- it seems it bogged down. The usual suspects. Who's going to get paid when and how the networks get paid, how the syndicators get paid, how the other piece and anybody has got their hands out wanting to get a piece of the pie and it's -- nobody is coming up with following that seems to work here, I don't think.

Operator

And we'll move next to the side of Brandon Davis [ph].

Unknown Analyst

You mentioned getting down to high 4s leverage before looking at M&A. If you get down to that level and don't see any opportunities would the next bucket, the returning capital to shareholders, certainly been a lot of announcements about...

Robert S. Prather

I think we'll look at all our alternative at that point. I mean, I think we're going to continue to have strong free cash flow. And we've been, I think, good stewards in the past. If it makes sense to do something for the shareholders, I think we'd look at that. I wouldn't want to feel very comfortable. One of the things that I learned from the recession in '09 and '10 is that you can never have too much equity and you can never have -- you can always just pay your debt down, it's not a bad idea most of the time. So I don't think we can look at all angles, but right now, our priority will continue to be paying down debt.

Operator

There are no further questions in queue at this time.

Robert S. Prather

Okay, thank you, operator. Operator, we'll -- I want to thank everybody for being on the call today. If you all I'm sure recognize, we're very proud of the record year we've had so far. I think it will continue on in the fourth quarter. Look forward to the election next week to see what happens, I think we're all waiting with bated breath to see what happens there one way or another, but it's been a great year both election-wise, political-wise, and just core business and we look forward to going into 2013 with an optimistic outlook on our business. So thanks, everybody, for your support. We always say you can call us anytime. We answer our own phones. So thank you again. Talk to you again after the 1st of the year. Thank you, operator.

Operator

Thank you. This concludes today's conference. You may disconnect at this time and enjoy the rest of your day.

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