Gray Media, Inc. (GTN) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Avi Steiner, and it is my pleasure to welcome Gray Television to this year's JPMorgan TMC Conference. Joining us from Gray Television today are Kevin Latek, Gray's Chief Legal and Development Officer; Jim Ryan, Gray's Chief Financial Officer. Though Gray needs no introduction, it's worth briefly noting that pro forma for the company's recently announced but not yet closed acquisitions of Quincy and Meredith and related divestitures, Gray will be the second largest TV station affiliate group owner in the U.S., serving 113 local markets, reaching 36% of U.S. households with combined revenue of $3.1 billion and OCF of $1.2 billion. Before we get started on today's fireside chat, I want to remind everyone that if you have any questions, please click on the blue Ask A Question button under the video player, and we will endeavor to get to them as time permits. And with that, welcome, Kevin and Jim, and I'm going to hop right into it. Thank you both.

So let's start, if we can, on the ad environment on the company's Q1 call. I think Gray had noted that Q2 pacings were quite strong. I think that's a verbatim quote. If you could update us on the ad environment as you see it across Gray's footprint today, particularly as the economy continues to re-open here on the back of the recent CDC relaxation.

So as we commented on the call, Q2 is pacing strongly. Certainly, the change in guidance from the CDC, well, I guess that was 1.5 weeks, 2 weeks ago, is helpful and could bode well for the latter -- very late part of Q2. We like the trajectory of what we're seeing, both Q1 and Q2, and we've made comments on the full year as well. I think we haven't seen anything on the local side, really any significant regional differences. Obviously, there's some variation on what states had opened maybe a little earlier than others, but not any really distinct trends. My personal opinion is -- well, as we commented on our Q2 call as well, national on a relative scale is coming back quicker, but that made sense to us as the national advertisers are trying to get in front of the demand curve and the local advertisers are tailoring their bounce back to the local conditions and the various reopening cycles in the communities or states we're talking about. I think change in CDC guidance is very helpful. I think it may take a little while yet at the local level for people become a little bit more comfortable after 14, 15 months of being careful. And certainly, as vaccination levels, especially the second shot numbers continue to increase daily, I think that will be boding well for late Q2, Q3, Q4.

Yes. It's wonderfully optimistic. And then if I could touch on maybe on the category side, automotive. I think everybody is focused on the chip shortage there and perhaps limited inventory on dealer lots. So can you remind us how big the auto category is for Gray, number one? And number two, maybe what you're seeing out of that category, whether you can break it out dealer, OEM? Any channel would be great.

Yes. Auto is probably in the low 20s percent of our core business. It used to be our largest category. It kind of is going back and forth these days as far as the largest category with services, which would be financial, medical and legal bundled together, which is good to see those other -- that the services category grow. We agree with you that it appears to us, and it's been, I think, well commented, both from our industry and other industries, including the auto industry, that their biggest problem right now is their chip issues on the supply chain. And we think as that normalizes itself, we're assuming later this year that, that will bode well for increased auto spend as product gets to the lots.

Great. And then if I could touch on another category that's certainly topical among most of our ad dependent credits and that's sports gambling. Obviously, an important category. Can you remind us how many Gray TV markets overlap with states in which sports gambling has been legalized? And is it maybe too early or if you could size the category for us?

I'll start with the size. And first, we have commented publicly that last year, it was a handful of states, and it was a single million dollar category for us. This year, we would expect more states have opened. Some states are talking about opening, that grows into something in the tens of millions. Exactly how many tens is nearly impossible to tell because we don't know yet exactly the time lines of the states opening. When states have opened, just like many other start-up situations, the gaming advertisers come in with very heavy schedules to buy customer share, audience loyalty. As they achieve their business goals, they take those heavy schedules and bring them back to a very nice sustainable maintenance level, which is perfectly fine with us. So it's definitely going to be a category that grows in '21, continuing to grow in '22. And Kevin, off the top of my head, I'm not sure the number of states. I know it's still single digits. I want to say 7.

I don't recall at this point. There's -- it seems like there is more bills than there are -- to legalize than there are states in the country. So I'm not sure what the current count is at this point. I mean, some states have legalized it, but then they haven't promulgated regulations yet. Some are probably regulations that are not in effect yet. So it's a moving target. I'd stick with what Jim said, which is we know it's really dynamic and it's growing, and it's going to continue to grow. We're just not sure exactly where the next -- where the next pieces are going to come from.

Okay. Fair enough. And maybe last one, and for completing the spot here a little bit. Recognizing that business is still being booked late. And Jim, some of your earlier comments on the ad environment. But is there any sense sitting here today whether core ad spend for the industry can get back to 2019 levels?

We commented on our Q2 call that we think it is a possibility. We are not going to promise it. You can see that our Q2 guidance that we are just a little shy of the '19 number in Q2. We have said both in the Q1 -- Q4 call and the Q1 call that if we don't hit '19 levels in core in '21, we don't think we're going to be terribly far away from the '19 levels at the end of the year. And we're -- for all the right reasons, we're cautiously optimistic that the things will continue to pick up at the back half of the year and get us over that goal line. But again, we're -- that's a -- it's a cautiously optimistic statement and not a promise.

I'll take it. Okay. Let's -- if we can move on to kind of the pro forma bigger behemoth that you guys are becoming. That's my word, obviously, but 36% of the country, as I mentioned in my introductory remarks. And beyond the synergies from the transactions and the obvious benefits you're getting from moving into outer political markets, I'm curious if you can talk to us about opportunities that this new found scale provides for the company relative to what Gray look like as a smaller broadcaster, should we expect you to roll out a new programming. How should investors think about the bigger, better Gray?

Yes. The easy one is programming. We are -- we don't think that we are suddenly somewhat larger and phenomenally smarter that we can create new syndicated hit shows. We've never -- as you know from Gray, we've not believed in creating programming to syndicate out other than one political show with Greta Van Susteren, which is a -- like that's an easy [ election ]. But we watch -- other broadcast groups have launched syndicated shows. Some success, most have not worked out. We just think that's an area that is, better luck, people that have spent a lot of time in that area. So we don't see new programming ventures across company, certainly not things we syndicated out. What we get from both acquisitions is certainly more exposure to political, but also this generic core benefits. We're not just the biggest broadcaster in states that aren't particularly big like North Dakota, South Dakota, Kansas, Nebraska. But now we're going to have a very sizable presence and can really offer all advertisers a solution to reach everybody in Nevada, everybody in Arizona, everyone in Alabama or everyone along the Florida, Alabama, Mississippi Gulf Coast, almost all of Missouri. So we're getting some real critical heft in certain places that we think will be additive. Obviously, there's a lot of content on a local basis or sort of statewide basis in terms of using our state bureaus, covering state athletics, being a better venue and more attractive any politicians in terms of, again, not just their ads, but thinking through things like their debates, like interviews. So we think it makes us strong in the states in which we're currently operating than we are today. In terms of how we quantify that, I'll tell you, we have a lot of high expectations, but none of that -- no revenue synergies whatsoever are incorporated into any of the guidance we provided for any acquisition other than retrans and that's because retrans is subject to specific contracts. So we talk about improvements we think we can make in terms of news gathering, ad sales, political sales, digital sales across more unified footprint. Those are all things that we think are certainly possible, doable. And I don't even say likely, but not recorded in any of the financial numbers that we provided and either of these deals or that matter any other deal in the past.

Perfect. And then if I can just stick on the M&A front for 1 second. You have had a pretty unique approach to the TV consolidation landscape in the last few months. You've been a buyer and a seller. So you've seen both sides of it. And I'm wondering if you could talk about what you've been seeing on the station trading front. Have there been many participants in these auctions? Would you view the market as robust still? And then do you think under current FCC rules, it is likely that we are close to the end of, call it, this phase of industry consolidation?

Yes. So we participated in an auction for Quincy and an auction for Meredith, and we conducted an auction to divest the stations in the overlap markets of Quincy and currently an auction to invest the one market we have overlap with Meredith. We're pleased with the turnout in both of our auctions and wish there were fewer participants in the auctions in which we participate as a buyer. I think there's so clearly interest in the broadcast base from lots of parties. We saw a pretty diverse group of folks in our own processes of people who want to get into the business, people who own a few things, who want to get bigger, people who want to opt in, some bigger broadcasters who want to add it to some actually tuck-ins. So it was a pretty big cross-section of interest that we've seen. Again, we've seen sort of 2 parts of the elephant. There really haven't been other transactions this year. So I don't know if we can extrapolate from our data points as to what the market is because the market still is very, very few transactions in the last couple -- last, call it, 2 years or so. In terms of the FCC, the -- I think the FCC's priorities are going to be net neutrality, broadband access and eliminating the UHF discount. None of those 3 policy areas have any impact on Gray Television whatsoever. With the last piece, which at discount almost certainly, that is a practical matter. I just don't see any appetite from the current FCC commissioners or those who might get added to change the national cap. There may be good policy reasons why that should happen. But there's a view that should be left to Congress. There's a view in Congress that should be left to the FCC, and that's often the way Washington works. So we don't -- I don't now we'd say that 39% is going to be the forever cap, but 39% is certainly going to be the cap for at least the foreseeable future. We're kind of okay with that right now. We -- our priority is to close these transactions, integrate stations, pay our debt down. We're not out looking for the next big deal. We're seriously focused sometimes 7 days a week on integration of these companies and their people, their systems, et cetera, and that's going to be a pretty full-time job for us. Once we close, our cash, obviously, generation is going to be even better, and that's going to -- can be focused on paying the debt down. So -- and we're not disappointed that there's other things in our plate. There doesn't seem to be anything else in the market, but there was -- other than probably a small acquisition here that'll be immaterial, I don't see us really expending much effort on acquisitions for a little while.

That was great. And a lot of what you said is certainly music to my ears. Before I ask my next regulatory question, I shouldn't remind the audience if they'd like to ask a question, there's the blue ask a question button on the bottom of your screen, please feel free. Just maybe rounding out the regulatory side. Just -- I don't think should be a problem just given where you are under the cap. But there are 4 ceded commissioners at the FCC at this point. I don't know if you have a view on when that gets resolved. And then the obvious question, is there any risk on a timing basis to your transactions closing and getting approved?

Yes. I have no insight on where the Presidents are with naming a fifth commissioner. He seems to have his hands full with his own priorities, and then other things pop up like recent conflict in the Middle East. Seemed to take up even more time that they didn't plan. So I just don't know where FCC staffing lands in terms of priorities, clearly not something that hits the first 100 days. Our transactions with both Quincy and Meredith are clean in the sense they don't create new duopolies, new sharing arrangements with parties. They're -- neither transaction requires waivers, they comply with all FCC rules, they comply with DOJ guidelines, helping to us spinning off the stations that we said we're going to spin off. So both of these acquisitions and divestitures to the fully qualified buyers can be handled at the staff level. These are not commissioner level decisions that require commissioners to get involved, but alone, raise political issues that are new or novel or complex issues. These are about as boring, straightforward routine acquisitions. There's a lot of money involved. There's a lot of employees and stations involved, but this is -- there's nothing -- these are a lot less complicated than other transactions back to the FCC. And again, they're not -- we're not seeking waivers either. So there's nothing -- there's nothing new here. And therefore, it's a bureau level or staff decision.

Terrific. I want to switch gears maybe to the network relationship side of the house. I think Gray has long way maintained very good relationships with the network partners. How does the recent Meredith transaction, albeit it's not closed yet, but in particular, and a broader scale, maybe shape some of those conversations upcoming. I think you have CBS at the end of the year. Meredith brings in a bunch of CBS stations, including in some large markets. So any thoughts there would be...

No, I don't think it makes much of an impact. All of our CBS affiliations are up at the end of this year. Meredith has some affiliations up with CBS a little bit after that. Our hope would be as we have -- have prior negotiation with CBS and since I've come with the company some many years ago now, as we renew our current group, we'd like to add some years on to the others, so we get everybody in the same exploration schedule. Getting bigger with CBS and for that matter with FOX and with Quincy, with NBC and ABC makes them even more important to us and makes us more important to them. So I don't think it changes the dynamic. Just as when we went through Raycom and doubled our size, picked up a lot of strong CBS stations as well as strong stations for the networks. Now the networks see us as a partner who invests in local programming, invest in the local brands, trying to be a good network. Obviously, not -- we can't do everything that they want, but we try to be as accommodating as possible and keep our eye on the big picture. So I've been in the CBS Board for a long time. The Head of Meredith is the Head of the CBS Affiliate Board. So obviously, we work with the network quite a bit. I don't -- I mean I don't see things getting tougher. I think we're just more -- we're more codependent than -- with CBS than we were before these transactions.

Great. And if I could kind of dig in a little bit more. I think many of your network partners, as you well know, have increasingly focused on supporting their own streaming offerings, whether it's Peacock, whether it's Paramount, kind of putting differentiated programming there. And that has included some sports as many of my investors -- investors overall are focused on. How do you think about that? How do you think about that as it impacts your conversations with the networks going forward? And I'll let you take...

Yes. Look, the affiliate boards are, say, actively engaged in talking to networks, weekly calls with networks on a range of issues. There's a call on sports, call on technology, call on news, call on entertainment programming, call on marketing. And that's not just the CBS board, but all of us. We're all actively engaged with the networks and where programming winds up has been frankly a topic for us for 30 years. Now we're -- now we've added in Peacock and Tubi and all these other streaming platforms. But remember, we've been having the same conversation with the networks about where content goes since NBC created Bravo in order to solve the retrans issue back in 1993. And FOX created FX at the same time for the same reason. And there have been some pretty significant network affiliate arguments over Bravo. And what shows up on MSNBC versus the broadcast network. To run all of it, the broadcast networks have remained the biggest most important part of each of those companies, each of those companies, and certainly, CBS and NBC have very significant local television ownership. CBS owned and operated stations make up about 1/3 of the country. Within our own company, we've got a good deal of CBS affiliates, would be about 1/3 of our portfolio. Our CBS affiliates are in support to us as their CBS-owned stations are to them. So I think we're going to continue to disagree with the network on whether a particular show is too strong for network and should have been streaming or was, frankly, really good on streaming and should have been in the broadcast network. I just don't see that changing, frankly. I think we're going to continue to have these same conversations like we have. Again, just those are the conversations we have with NBC and ABC and CBS and Fox over their cable channels for the last several years -- actually a couple of decades, not just years, no.

Okay. And then maybe if I could turn it on the other side of the equation. On your sub base, retrans revenue side specifically, can you remind us the percentage of Gray's sub base that renews this year and next year?

Yes, sure. So we have our MVPD subscribers, MVPD contracts are all 3-year contracts. So our schedule is basically 55% and 25% to 20%. The way it breaks down is 55% of our MVPD subs renewed in 2020, 25% in 2021. We've got 20% in 2022. And again, because they're 3-year contracts, that just repeats. So it's the same cycle in 2023, 2024 or 2025, 55%, 25%, 20%. As for this year, we have 2 negotiations financially both timed for the summer. One is nearly done at this point. The other will start soon. I think they'll both get done like ships passing the night, no one will know that we did those deals, which would be consistent with the way that we did virtually all of our 460-some-odd contracts that were up at the end of this -- end of 2020. The next year, we have really nothing up during the year until the end of the year, this 20% of subs to be renewed of small negotiations or a small number of operators up at the end of 2022.

Perfect. And then I believe your pay-TV subtrends were on a relative basis certainly pretty healthy relative to what we were looking at. Just remind us what drove that? And I don't know if you have views or thoughts on how that plays out rest of the year? And maybe you want to tie it into any of the other questions I've already asked, certainly what the networks are doing, that would be helpful.

Yes. So it's great. We saw our subs continue to grow, and other broadcast groups and larger markets saw there's subs flat line. When there's some sort of a fall or sub numbers kind of flat lined. What we have -- over the last year or so, we've been running a really modest declines overall, 1.5%, 2%, which is definitely better than the MVPD industry because we're benefiting from OTT pickups. And it's better than our peers, likely the same reason OTT pickup. So the OTT providers and primarily the big guys, Hulu TV and MeTV have rolled out our markets much later than they rolled out Atlanta, New York, Minneapolis, et cetera. So they were not -- so they weren't there to pick up customers. And then we also had a big structural change in folks signing up for broadband Internet over the last few years and speeds have increased dramatically outside of the major markets. And so in a lot of our markets and portions of our markets, the only real opportunity for pay-TV has been MVPDs or satellites. In the last 2 years because of the rapid rollout of high-speed Internet and faster internet, the VMPDs have become an actual real competitor to the existing pay-TV ecosystem. So we're seeing much bigger pickup. I should say, historically, we've seen in the last 2 or 3 years very robust growth in the OTT, virtual MVPD platforms that is -- well, my presumption is much better than our peers in bigger markets, just again because of those more rural mid-sized market factors that can't continue forever. As we all know, everything slows down over time. So we are certainly anticipating that OTT and VMPD growth is going to slow a lot this year. What it means for a sub is that, overall, our total subs are probably going to decline this year more than they have in years past, just -- again, it's the OTT piece just kind of slows down and sort of -- and gets a pretty stable footing in some of our markets, is not growing from very, very small numbers, but growing from larger numbers.

Okay. Perfect. [Operator Instructions] Jim, I don't want to ignore you too much here, so maybe I'd throw one your way.

Please. Please.

Kevin, that's no disrespect, by the way. So just going back to the ad revenue front, there were some headlines recently just around travel to Japan. And maybe you can remind us, number one, the company's exposure to NBC. And two, how meaningful the Olympics have been historically for the company, and any thoughts around that would be great.

About 1/3 of our stations are NBC. Historically, Summer Olympics has been a -- I'd characterize it as upper single millions to maybe lower double digit millions. It's nice, but it's not anything huge. Keep in mind, we don't get a tremendous amount of inventory, and it tends to blow away a lot of newscasts in -- they're in the broadcast window of the Olympics. So we're glad to see that finally the 2020 gains are going to move forward. It will be a nice business for us in July, but it's -- given the size of the company today, it's not going to move the needle a whole lot for us.

Okay. And I just had a question coming in also on the ad category side. If you -- and I'm assuming this, but if you could discuss COVID-related categories, particularly events, movies, outdoor dining and what that may add or what that has comprised historically of your ad revenue base?

The entertainment sector, which would include movies, but includes other things as well is a single digit, upper single-digit percentage of historical core. Restaurants, about the same level as you would expect. Travel, we don't track that separately as a category. So it's just even smaller. I'd say that not unexpectedly, entertainment and restaurants have well improved dramatically, especially this year. Are still lagging some of the other categories that are -- also have improved dramatically, but that just kind of makes sense, right? Really, things didn't start to significantly open up across the country until CDC changed their guidance a couple of weeks ago. So I think that will ripple through, especially local going forward. I think it's just going to take a little time for that ripple to go through the pond.

Okay. Thank you, and thank you for that question. On my end, it feels a little too soon to be asking about political in 2022. I feel like they just survived 2020. But Meredith and Quincy acquisitions certainly enhances your footprint. I think Kevin touched on that earlier. Maybe talk about how investors should be thinking about the political opportunity, number one. And I don't know if you have it, but a comparable spend number for the same platform of stations back in '18 pro forma, if possible?

I'll start on that. We actually -- we posted a deck to our website and furnished under an 8-K with some good numbers. And then on political, in particular, there's a slide combined company snapshot puts us -- it does include the revenue. So in 2018, combined historical political revenue for Gray and Quincy was $262 million. Meredith local media group was $135 million. So the new combined number would be $397 million of political revenue in 2018. And for 2020 you take ours, Quincy's and Meredith went up $692 million. So put that in context, '18 was a great year, especially compared to '16. Frankly, we've been seen a trajectory up in political revenue in many, many years other than 2016 when we had a number of factors, including not just presidential falling apart, but also a bunch of senate races that firmed up really quickly, and that drove folks to the dollar somewhere else. After Trump was elected, I'd say, and I'm here in Washington, there's been really great success by both parties and their supporters in raising money not just from the big, what's called the dark money groups, but also individual donors. And again, it's not just the down centrist Republicans, but there's been a -- there are a lot of motivation on both sides for people to give their $5 or groups to give significantly more money than that. So the fundraising has gotten much more sophisticated. The ability to drive around those financing rules, getting financial assistance, has gotten just unbelievably more sophisticated in just the last couple of years. And I think the electorate is as split today as it was in '18 or 6 months ago. What we saw in Georgia was particularly good for Gray because we had -- the control of the U.S. Senate was down to 2 races and the state where we own TV stations in every market but Atlanta, Macon and what -- the Meredith deal will now, of course, be in headline as well. I mentioned that because there was a tremendous amount of motivation, financial support and obviously, a tremendous amount of spending. When people believe the Senate was -- control of the Senate was in play. And what we have coming up in 2022 is a little of the same thing. We've got a house that's down to an absolute sliver of control for the Democrats. And obviously, a Senate that's split 50-50. So in some ways, 2022 is Georgia all over again, but all -- spread all over the country. We don't think we're going to see Georgia's spending levels in every race. But a lot of races that would be otherwise considered competitive and important, we'll take on probably a real measure of criticalness. I think we're going to hear a lot of -- this is the race that will decide control of the U.S. and this is the race that will decide control of house. This is the race that decides whether Biden gets anything done in the next 2 years, those are fighting words for people who are engaged, and there's a lot more people are seemingly engaged today. So I think the fundraising is going to be very robust in 2022. One thing I can tell you being around this for a long time now and living here in D.C. is absolutely no political campaign hack will want to end a campaign with money in the bank. If they raise it, they spend it. In fact, we often that lots of campaigns spend it before they raise it. And this is -- these are high stakes, obviously, campaigns. These are not like losing out on 5% of your total paper sales, you either win or you lose, winner take all. So the money and attention spend on broadcast is, we think, is going to continue to grow over time. But 2022 does not seem like we had suddenly turned in the corner despite going through pandemic together as a country and are now singing Kumbaya on the other side of 2020. It seems the noise has probably lessened a bit these days here in Washington. There's still great division among people, great motivation, support or oppose candidates. And 2022, we think, will be another very good year. Like I will tell you right now, Gray does not think that 2022 is going to be 2020. And that's because despite everything I just said, [ they're on a ] very expensive Georgia set of races. And presidential is about 25% to 30% of our spending. So just given the makeup of 2022, 25% to 30% of that spending is from presidential. It's just not going to be there. But it's still going to be a very healthy number. And I'll just close your initial question, which is what's the historical number on 2018, it was $397 million.

Perfect. Super comprehensive. Thank you. A couple more here and a couple more minutes. So we're close to wrapping up. Pro forma leverage, LAQ basis, I believe, at the end of '21, pro forma is expected to be 5.3x. Jim, you'll correct my math. What do you guys view as the right leverage level for Gray? I mean you've clearly taken up in the past, have been able to bring it down. But what is the right leverage -- comfort leverage level for you?

We're very comfortable at that 5.3% end of the year pro forma net cash LAQ. It's not dissimilar to where we closed Raycom. I'd have to go back and look. But off the top of my head, it says probably not dissimilar to where we closed shores and probably not terribly dissimilar to where we closed hope 5, 6, 7 years ago. So we just see this as another chapter in our playbook. We will be bringing leverage down over the next couple of years. We've never said what our leverage low point is. We've always kept a little bit of a range. But if you look at the last couple of transactions we've done, start in the low 5s, start moving into the 4s, moving to the 3s, that's a very comfortable pattern for us. And it's something we will be executing on one more time as we close the pending transactions this year and start moving forward into 2022, 2023 and 2024.

Terrific. And maybe I can end it on the last one. You've been very clear -- well, the combined company is going to generate a healthy amount of free cash flow. You've been very clear that your capital allocation decisions aren't changing. Maybe just talk about your free cash flow uses going forward as you get close to that -- to lowering your leverage?

Yes. Real quick, we are not changing our capital, free cash flow, capital allocations. Hilton commented on one of the calls this year that even with these transactions, we were going to walk and chew gum, which means obviously free cash flow out of the box, a good portion of it would go towards delevering the company, just like in the last several transactions we've done. The dividend is in place, and there's no change there. We reserve the right to be somewhat opportunistic in purchase -- repurchases of stock based on price and market conditions. We wouldn't roll out some relatively small tuck ins. We still got a few percentage points left in the cap, but we don't see anything large in our future anytime soon. So it's going to be a little bit of everything, but the primary focus will be on bringing leverage down and paying down the debt.

Kevin, Jim, we are out of time. Appreciate you joining us at the conference this year, and look forward to talking to you both soon. Thank you.

Thank you.

Thank you.