Gray Media, Inc. ($GTN)

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gray Media, Inc., First Quarter Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Alan Gould, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Tina, and welcome, everybody. Joining us today on Gray's call are Hilton Howell, our Chairman and CEO; Pat LaPlatney, our President and Co-CEO; Sandy Breland, our Chief Operating Officer; Kevin Latek, our Chief Legal and Development Officer; and Jeff Gignac, our Chief Financial Officer. Today, we filed with the SEC on Form 8-K our first quarter earnings release and updated investor presentation. And later today, we will file with the SEC our quarterly report on Form 10-Q. These materials are all available on our website, www.graymedia.com. Included on the call may be a discussion of non-GAAP financial measures and, in particular, adjusted EBITDA, leverage ratio denominator, net retransmission revenue and certain net leverage ratios. These metrics are not meant to replace GAAP measurements, but are provided as supplements to assist the public in its analysis and valuation of our company. Further discussions and reconciliations of the company's non-GAAP financial measures to comparable GAAP financial measures can be found in the latest investor presentation on our website. All statements and comments made by management during this conference call other than statements of historical facts should be deemed forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors that are contained in our most recent filings with the SEC. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is now my pleasure to introduce Gray's Executive Chairman and CEO, Hilton Howell.

Thank you, Alan. Today, we are very pleased to announce solid results for our first quarter of 2026 with core advertising above our previously issued guidance, political revenue at the high end of our guidance range and total revenue at the high end of our guidance even factoring in a recently resolved dispute with one of our MVPDs. Total revenue in the first quarter of 2026 was $768 million, at the high end of our guidance for the quarter. Total operating expenses before depreciation, amortization, impairment and gain or loss on disposal of assets in the first quarter of 2026 were $622 million, which was $7 million below the comparable period last year. Notably, within these results, our broadcasting expenses continued to decline and were down by $22 million in Q1 2026 as compared to Q1 2025. Net loss attributable to common stockholders was $33 million for the first quarter of 2026. Adjusted EBITDA was $154 million in Q1 2026. Political advertising revenue was $30 million at the high end of our guidance and compares to $26 million in the first quarter of 2022, the last midterm cycle. As you all hopefully saw by now on Friday, Gray and DISH, resolved the first extended distribution blackout amazingly in our company's history. It was a rough negotiation for both sides, and we very much regret how local viewers and advertisers were impacted by the impasse. In the end, we reached a new multiyear agreement that was consistent with our internal expectations. We thank our viewers, our advertisers and our team for their patience, as we navigated that uncharted territory for Gray Media. Since the beginning of the year, we have successfully negotiated retransmission consent agreement renewals with 3 of our largest traditional MVPDs, representing approximately 39% of our traditional MVPD footprint. We also expanded important agreements with 2 of our virtual MVPDs involving a number of our independent stations that carry professional sports. We have no further retransmission negotiations for the remainder of 2026. In addition to these operating results in the first quarter, we acquired WBBJ in Jackson, Tennessee from Bahakel. We recently completed the acquisition of TV stations in 10 markets from Allen Media Group. And just yesterday evening, we closed on our acquisition of stations in 3 markets from Block Communications. We currently anticipate closing our remaining transactions with E.W. Scripps and Sagamore Hill in the next few weeks. Finally, turning to Assembly. We were delighted to learn that CBS renewed its successful daytime soap, Beyond the Gates, for 2 additional seasons. Seasons 1 and 2 will film at Assembly. And we anticipate leasing additional studio production space. In February, tennis league INTENNSE Tennis announced that it will host all 52 tennis matches for its 2026 season in our 30,000-square-foot sound stage within Assembly Studios. This setup will also have a live audience of up to 500 people, and we will broadcast some of the key matches on WANF and Peachtree Sports in Atlanta, Georgia. Meanwhile, discussions and design work are continuing to make further progress on future development at Assembly. Looking forward, we are excited to have the upcoming FIFA World Cup games on both our 33 Fox channels and our 47 Telemundo affiliates. We are optimistic that as the largest owner of top-rated local television stations and a footprint covering most of the competitive races that we will again capitalize on a strong midterm political cycle. At this time, I'll turn the call over to Pat to address our operations.

Thank you, Hilton. First quarter core advertising revenue was stronger than initial -- our guidance was reported to be approximately flat in the first quarter 2026 compared to 2025. We finished the quarter up 2% with the boost from the Winter Olympics. As we move into the second quarter, we're seeing some softness in core advertising. It appears that the situation in the Middle East and resulting volatility in oil prices is having an effect, causing advertisers to delay their commitments, which limits our visibility. Some of the softness in core is due to NCAA Final Four rotating away from CBS. Recall last year, we earned $5 million of revenue in April as the largest CBS affiliate group. Let's talk about categories for a minute. We saw strength in gaming, a trend that continued into Q2. Within services, legal, insurance and financial were strong. Automotive finished the first quarter down just slightly compared to the first quarter of '25, which is encouraging. Some of the consumer-focused categories experienced weakness, consumer goods and discount and department stores in particular. Digital continued its healthy growth in first quarter, up high teens versus first quarter of '25 and our new local direct business growth rate accelerated to 15% over the same period in 2025. Our sales teams continue to perform well against stiff competition for local advertising in a challenging market. Political ad revenue exceeded our expectations in the first quarter of '26. Our guide for first quarter '26 was $25 million to $30 million, and our actual results came in at the high end right at $30 million. This compares to $26 million in the first quarter of 2022, which is the most recent midterm cycle. We saw strong spending in Texas, Maine, Virginia, Georgia and Michigan. We currently anticipate political revenue for Q2 will be in the range of $60 million to $70 million. As I mentioned earlier, we're seeing some softness caused by economic uncertainty, as we progress through the second quarter. Our second quarter 2026 guidance is for core ad revenue to be down mid-single digits versus second quarter of '25. Some of the consumer-focused categories are the most affected. We continue to expand our focus on sports programming. This year, 19 Major League Baseball teams will play in our 16 broadcast sports networks in addition to 13 NBA teams, 8 NHL teams, 6 WNBA teams and numerous NCAA and Minor League Baseball teams. I'm also proud to note that our Raycom Sports division has partnered with the Atlanta Braves as their live production team for BravesVision producing all non-national games, including 25 games in WANF here in Atlanta and across the Southeast on our broadcast sports networks. Our digital team has completed the transition of all of our digital apps and websites to the Quickplay platform in a remarkably short window. This personalized streaming platform will revolutionize how our viewers find and connect with our content. We believe that we have now built an incredibly strong foundation for continued digital audience and advertising growth. Jeff will now address the key financial developments.

Thanks, Pat. In the first quarter of 2026, our broadcasting station operating expenses excluding network affiliation fees were up 4% compared to first quarter of 2025. This was partially due to timing of certain expenses, as was noted in last quarter's call, along with normal inflationary increases. We're continuing our focus on smart cost management, and we are investing in our team and making sure they have the best tools available to efficiently and effectively compete in the marketplace. You will also notice that we are guiding Q2 '26 broadcasting expenses to be down 3% at the midpoint versus the second quarter of 2025. Corporate expenses were above our guidance range due primarily to legal costs associated with completing our M&A regulatory approvals. And as you can see from our guide, corporate is expected to normalize as we complete the additional transactions. Net retrans revenue was down $4 million in first quarter '26 versus first quarter of '25. We didn't anticipate the now-resolved distribution dispute when we provided our first quarter guide. I want to focus on that for a second. There are 2 things to point out in the Q2 '26 net retransmission guide: first, now that we've negotiated all MVPD renewals scheduled for 2026 and we know the impact of the blackout on second quarter, those elements are reflected. Secondly, we now incorporate the 4 stations acquired in first quarter, but none of the stations that we have acquired since the end of first quarter into our guide. We currently expect 2026 net retransmission revenue to be in the same ZIP code as the quarter that just ended, implying low single-digit growth in net retransmission revenue. Remember that the blackout impacted the full month of April versus only 21 days in the March quarter. And importantly, with all of our renewals now negotiated, we have clear line of sight to growth in net retransmission revenue for full year 2026 even before adjusting for the impact of any of the acquisitions. Turning to the balance sheet for a minute, we finished first quarter with over $1 billion in liquidity. Our leverage metrics at March 31, 2026, were 2.56x consolidated first lien net leverage ratio, 3.79x consolidated secured net leverage ratio and 5.94x consolidated total net leverage ratio, each using the calculation in our amended senior credit agreement. These ratios include the pro forma impact of the 4 station acquisitions we completed as of March 31, 2026. With the closing of the Allen 7 market transaction and yesterday's closing on the Block Communications transaction, we will begin to see the estimated quarter turn of delevering flow into our ratios. It's also worth noting that after we closed the Block acquisition yesterday, our revolver was undrawn. There was approximately a $50 million working capital swing during first quarter related to the payment of accrued interest. On March 31, we completed an amendment to our senior credit agreement to align the document with the covenants under our secured notes and to incorporate current market standards. We pursued this to give us better access to the market, as we evaluate potential refinancing opportunities. Immediately after we closed that on April 2, we fully repaid the $10 million balance on the Term Loan F that was scheduled to mature in 2029. As we progress through 2026, we're gaining visibility on deleveraging during the year. We're closing, and we will begin integrating our M&A transactions. Our net retrans revenue is set to grow compared to 2025. Political advertising is ramping, and finally, refinancing to reduce interest expense could further improve our cash flow during 2026. A couple of housekeeping items. First quarter 2026 CapEx was $19 million versus $15 million in the first quarter of 2025. Both periods now include Assembly Atlanta. We're maintaining our $140 million company-wide CapEx estimate for 2026, although we expect that to be back-end weighted as we align the spending with the expected cash inflow from political advertising. Our full year tax guide came down by $25 million to a range of $90 million to $110 million. That concludes my remarks, and I'll now turn the call back over to Hilton.

Thank you, Jeff. In closing, first quarter was very busy, and we have already accomplished numerous objectives in Q2, which will have long-term benefits for Gray Media. We will continue to take actions to enhance value for our advertisers, our investors and for the communities we serve. We thank everyone for joining the call today. So Tina, at this time, we would like to ask that you open up the line for questions.

[Operator Instructions] Our first question comes from the line of Steven Cahall with Wells Fargo.

First, just a question on your regulatory outlook. I think the last time we spoke, you were encouraged by generally what was happening in Washington, but maybe things were moving a bit slowly in terms of getting transactions approved, like the Scripps swaps and some of the Allen Media stations. It looks like post Nexstar, TEGNA getting approved, the wheels are turning much faster. So I'm wondering if you now feel like that the regulatory process is something that you understand under this administration, if it's moving at a pace that's conducive to additional transactions. And as you think about potential strategic transactions, I was wondering just how you factor in state AG regulatory risk and if that's different from prior. And then, Jeff, thank you for the retrans outlook for '26. Any sense of what that might have looked like had you not had the blackout? Is that a point or two addition? Or is it not so big now that reverse maybe is a bit more variable than it used to be? And also, as we think about retrans pro forma for the deals you've done, would that have added -- or could that still add a point or two as well?

Steven, it's Kevin. We announced, as you alluded to 5 deals last summer over the course of a couple of weeks and promptly filed those with the SEC and the DOJ, and those transactions are only now coming out of the regulatory agencies. We had to file them with DOJ as well. And our DOJ process pushed our transactions behind the Nexstar transaction and necessitated a very intensive document production and review, I'd say, a far more intense DOJ review of those transactions than anything we saw in Meredith, Quincy, Schurz or Hoak under prior administrations. And the Department of Justice cleared those transactions just in the last, I think, roughly 2 or 3 weeks or so. The FCC, consistent with past practice, has waited for DOJ to resolve its reviews before it acted. So that's why we're seeing these now. It would appear to us on the outside that the FCC and DOJ, in particular, have received a number of broadcast transactions since last summer from us, from, obviously, other broadcasters, some large, some small, some gaining headlines, some not. And through those reviews, especially of the mega deal and then our little deals, they've really come to understand the competitive situation that we face. And as a result, I think they're more comfortable with the transactions probably than they were a year ago. So we are encouraged that we're now seeing the DOJ after submitting millions of documents at great expense to us really seems to understand our industry far better than it has probably ever and that's supportive. So we do think that it facilitates the industry, not just us in the industry, continuing to do M&A for Gray. Well, again, as we've said many times, we're looking at strategic deleveraging transactions. And there are some things we're looking at and some things maybe we look at it at a different time. And your last question on that is, we have not previously considered state AG theories on antitrust. And without commenting on current litigation, we are definitely mindful of what's happening, and we are evaluating our opportunities through the lens of potential additional uncertainty under new and novel theories being advanced by some attorneys generals in various states. So we're looking through it, but obviously, we've not announced any other transactions in a number of months. And as we evaluate the new FCC and DOJ understanding of our industries and this new uncertainty, we'll make decisions accordingly on what might be actionable in this environment versus what might not have been as actionable a year ago. Does that answer the question?

That does, Kevin.

Yes. And I guess let me comment, Steven, on the net retrans question. So I won't comment about the specific impact of what it would have been from any individual contract. We always think about it as a portfolio on both sides. So think about for the full year, though, we're thinking of inflationary type organic growth in net retrans, even with the blackout, which is really a continuation of the trend that started in the fourth quarter, where we were getting back to growing net retrans. But on top of that, there is net retrans that is acquired that will start to flow in on top of that.

And our next question comes from the line of Dan Kurnos with StoneX.

Jeff, just to put a finer point on that response to Steve's question, notwithstanding the blackout, which we all knew was coming, so it shouldn't be surprise to folks, I mean other than that it happened, it seems like the net retrans guide has actually raised, and that's before the transactions, given the commentary you gave us last quarter. So is that an assumption on better underlying subs, better underlying terms? Just any thoughts you can give us there? And then one for Hilton, one of my favorite subjects, political, and I know they're going to tell you to be careful with what you say Hilton because it's too early, and it never benefits until you really get over there pretty clear. But your 2Q guide is very, very strong. So I just -- any way, Hilton, you can help us think through how you're thinking about this political season would be fantastic.

Let me just address the retrans since we're on that topic, so that in the transcript, it's all together. The short answer to your question, Dan, is yes, it is better sub trends, it is us achieving our objectives on market and getting to market rates as we renew contracts. It's everything together. Look, the blackout is unfortunate, but that's part of the business. And we reached something, as Hilton said, that was mutually beneficial and a long-term agreement there. So I'll kick it over on the political question to Kevin or Hilton.

Yes. I'll refrain from using adjectives to describe this. We've said a couple of times, we're pretty encouraged, and we have exposure to almost every -- all but one of the competitive governor and senate races this year. One thing I'd mention is, a couple of years ago, in 2022, we had a number of interparty very expensive conflict -- or contest that brought a lot of primary money to us. And what we discovered at the end of the year is that a lot of the money raised and then spent in '22 was essentially pulled forward to these primaries. And once those primaries were over, we talked about this a bunch, obviously, in early '22, the candidates who didn't have any money and the super PACs were kind of tired of spending on those races. And those campaigns kind of died after the primary, and that was something we hadn't seen before. This time around, obviously, there's 2 or 3 pretty high-profile Senate primaries, one of which just essentially ended the other day in Maine. So we're down to 2 pretty expensive Senate primaries: Texas, where we have a number of stations, but definitely not a huge presence relative to the 45 media markets there, and then, Michigan, where we have a decent presence, but we're not in 2 or 3 of the markets there. So we have some exposure to those. The money -- the impression is that while a lot of money is being spent in those competitive primaries. It's -- the map is just different from '22, where we spent -- so much money was pulled into second quarter for those primaries. You've seen all the articles on the hundreds of millions of dollars that the super PACs are sitting on, the candidates have raised, and frankly, haven't even been allocated yet. One of the Senate party's super PACs has started reserving time. The other has barely started reserving time. So it seems this is going to be a cycle where the money is going to be -- is being deployed more towards the general elections and not second quarter primary. So we still feel very good about this year. I'd say recent events in fundraising numbers and successes are pointing to a very engaged electorate. And as we've said many times a year ago, the house might have been a potential jump ball for the Dems, but not the Senate, and now, the house is very much in play. And even the headline in the Washington Post this morning says Dems are feeling they have a real shot now at taking the Senate. Didn't -- never would have seen that 6 months ago. And obviously, that may change with the more people are engaged and think there's a potential change of control, the more motivated they are to raise money and campaign and work the doors and work the phones and vote. And so we think this is going to be a very, very engaged campaign season, and we happily have a very good portfolio of #1 TV stations in the right markets to capitalize on that.

Does that answer your question, Dan? Or you're looking for an adjective?

I'll take an adjective Hilton if I can get one. That was the safe answer, but very helpful from Kevin.

But suffice it to say I'll give you one, Dan, though. It's just going to be extraordinarily strong. What those numbers are going to be? We've learned our lesson. We don't know. And -- but I think it's easy to check our markets, our position and where the races are. And we do think that we are exceptionally well positioned the way Kevin so wisely articulated our market sort of operations.

[Operator Instructions] Our next question comes from the line of Aaron Watts with Deutsche Bank.

Apologies in advance, but one more on retrans. You had described an unprecedented new demand as being at the core of the programming dispute you recently resolved. Is it safe to say you were able to back that demand down? And what risk do you see that other distributors bring that type of a demand to the table in the future?

Aaron, it's Kevin. You've understandably asked what was the detail. We don't comment on specifics in our negotiations. I would say I started doing retrans in 1997. Did it pretty much full time for 1.5 decades before coming here. And obviously, Gray has a few retrans negotiations over the last 14 years I've been here. I did retrans on for Comcast and some cable companies in a prior job and a whole bunch of broadcasters. And we've seen a ton of retrans contracts through our 60-some-odd transaction since I came to Gray. I've never seen a provision like the one that was thrown at us as a nonnegotiable line in the sand, take it or leave it, as we saw here. It is not something that we are prepared then or ever to do. I don't expect other MVPDs will expect to exert control over a broadcast company anymore than we would expect to do a deal where we would try to control the operations of another company. So the bottom line is it was bizarre, it was incredibly unprecedented in a lot of very deep professional experience. And we're willing to take the extraordinary step of Gray, breaking its long history of never having a major retrans dispute. It clearly was pretty existential for us. So we resolved -- when this was resolved, it was resolved in terms that we felt comfortable with. And that's unfortunately all I really can say on terms that are subject to confidentiality that we expect DISH to respect, and we will respect. So I think it was a one-off. I'm not expecting other people on either side to ask for a level of control or another company that neither -- I think no entity is willing to -- will be willing to give. So let's just leave it at that.

Okay. That's helpful. I appreciate your kind of view on that. And then just one for Jeff. We can see your continued work on the expense side in the first half of this year. How should we be thinking about costs in the second half? Are you lapping any initiatives that will flatten things out? Or is the first half expense base a fair baseline for the remainder of the year? Any help would be appreciated.

Yes. We talked about this a little bit on our first quarter call, Aaron. We did align company-wide raised dates for all non-union employees to January 1 so that we can manage things better and budget better. Everybody had their own individual anniversary date prior to this. So you can imagine when you've got 5,000 employees, it's a lot just to keep track of, and it was fair to everybody. So it's that pull forward some of the increases in what's our largest expense item that will average out throughout the year to get back to it, so the back half. I wouldn't say the first half is necessarily a perfect proxy for the back half. The back half should be -- on a comparable basis, the year-to-date should start to get to a more normalized inflationary type, right? We also will have in the back half of the year, too. Remember, as we report, we'll have all the acquired station expenses rolling into. So that's the other piece of it here. But they come in normal SEC reporting, they come in as they close.

Your next question comes from the line of Patrick Sholl with Barrington Research.

Just on your advertising guidance, is there any amount of crowd out from the World Cup just being on -- just not based on the station that it's a part of?

No. There's -- World Cup is a benefit, net benefit. There's no question. But if you mean preemptions of other programming by World Cup, there's really no sort of net negative. It's -- World Cup is a positive.

Okay. Yes. Just that as in respect of like drawing advertiser interest to different stations, but okay. And then just with the MVPDs, including access to the network streaming services, have you seen that have any sort of impact on like local programming viewership?

Yes. Modestly, if any.

Our local programming viewership is still extremely strong, especially when you look at our local newscasts. What we're doing on the linear side, and frankly, the streaming side as well, our local newscast continue to perform very well.

The streaming is totally additive. And if you go back and look at the net viewership between all the different platforms are on now, that's grown over the last few years, hasn't diminished.

Pat, this is Hilton. Pat mentioned that FIFA was a positive, but not a negative. And I really think that our sort of unique degree in NBC exposure to the Telemundo portfolio, we have 47 affiliates with the largest affiliate group outside of the major markets that NBC has. And we think it's going to be really, really strong in the Spanish language. And we're also very excited about FIFA on our 33 FOX stations in English, obviously. But it's going to have a big impact on us, we believe.

And having stations in 2 host cities in Atlanta and Kansas City.

Yes, it's very beneficial for us.

Your next question comes from the line of Shanna Qiu with Barclays.

I just had a clarification on the guidance for the net retrans distribution. Is there any true-up catch-up payments that we should think about that was negotiated as part of the resolution?

So Shanna, everything is factored into the guide. Again, I don't want to comment about any specific aspect of the contract's portal really. There are multiple contracts that were negotiated during the quarter.

And then just on your comments on organic low single-digit growth in the net retrans, does that take into account for the full year? Does that take into account any kind of changes from the pending closing of Charter and Cox.

So we've factored in our own estimate of when that closes into the guide. So I'm not going to handicap exactly when that closes, but we're aware of that, and it is factored into what we've put out and the comments about inflationary type growth for the full year.

Your next question comes from the line of Craig Huber with Huber Research Partners.

Can you just comment if you would, where you think the FCC is right now on this 39% TV station ownership cap? I mean, they obviously did the TEGNA deal. They approved it underneath the waiver as opposed to first doing the -- getting rid of the 39% ownership cap or lifting it. Where do you think we are on the timing of maybe getting rid of that? It's been long overdue, obviously.

Yes. This is Kevin Latek. To be honest, we have no idea, and it's just not something we follow. Gray is at 25% under the cap. There's nothing that we could imagine doing in the near or medium term that would require the cap to be raised for Gray. So it's just not, frankly, an issue that we follow. I point you to one of the broadcasters who's closer to the cap and lobbying on that issue. We are not. It's just not -- again, it's irrelevant to Gray.

Okay. And my other question I want to ask you, the use of AI at your company, your TV stations, can you just quickly go through with us the benefits in terms of just enhancing your services, but also just on the efficiency side of things at your station level, the use of AI?

It's really been a multiplier of sorts for our teams, primarily time saving, increasing productivity on both the sales and the news side, it kind of allows us to free up our people on the content side to create more original sticky content. And on the sales side, it allows us to spend more time on client relationships and growing businesses with using AI for things like accelerated pipeline for new business and things such as that. It's really -- and prospecting. So it's really a multiplier amplifying -- giving our people more time to focus on the things that we really need them to focus on.

[Operator Instructions] And with no further questions in queue, I will now turn the call back over to Mr. Hilton Howell, Jr., for closing remarks.

Well, thank you very much, operator. And I want to thank everyone for joining us this morning. We're very pleased with our results that we've reported, and I really look forward to talking to you guys at the conclusion of next quarter. Thank you.

Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.