Gray Television, Inc. (NYSE:GTN) Q2 2023 Earnings Call Transcript

Gray Television, Inc. (NYSE:GTN) Q2 2023 Earnings Call Transcript August 4, 2023

Gray Television, Inc. beats earnings expectations. Reported EPS is $-0.1, expectations were $-0.23.

Operator: Welcome to the Gray Television Second Quarter 2023 Earnings Call. I will now turn the call over to Hilton Howell. You may begin.

Hilton Howell: Thank you, operator. Good morning, everyone. As Misty mentioned, my name is Hilton Howell, I’m the Chairman and CEO of Gray Television. And thank you all for joining us for our second quarter 2023 earnings call. I am absolutely delighted that today, we also have with us on this call, Sandy Breland, our long-time Senior Managing Vice President, who recently became Gray’s Chief Operating Officer. Welcome, Sandy. In addition, and as usual, I’m joined by Pat LaPlatney, our President, Co-CEO; Kevin Latek, our Chief Legal and Development Officer; and Jim Ryan, our Chief Financial Officer. And we will begin with a disclaimer that Kevin will provide.

Kevin Latek: Thank you, Hilton. Good morning, everyone. Gray uses its website as a key source of company information. The website address is www.gray.tv. We will file our quarterly report on Form 10-Q with the SEC later today. Included on the call may be a discussion of non-GAAP financial measures, and in particular, broadcast cash flow, operating cash flow, free cash flow, and certain leverage ratios. These metrics are not meant to replace GAAP measurements, but are provided as supplements to assist the public in their analysis and valuation of our company. Included in our earnings release as well as on our website a reconciliation of the non-GAAP financial measures to the GAAP measures reported in our financial statements.

Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Those statements are subject to a number of risks and uncertainties. Actual results in the future could from those expressed or implied in any forward-looking statements as a result of various important factors that have been set forth in the company’s most recent reports filed with the SEC, including our most recent annual report on Form 10-K and our most recent earnings release. The company undertakes no obligation to update these forward-looking statements. And now I return the call to Hilton.

Hilton Howell: Thank you, Kevin. Gray Television’s strong start in the first quarter of 2023 continued through our second quarter. Today, we beat guidance and consensus estimates on all five key metrics. We beat on core advertising revenue. We beat on retransmission revenue. We beat on political advertising revenue. We beat on EBITDA, and we beat on free cash flow. In particular, our total revenues of $813 million from — for the quarter exceeded the high end of our revenue guidance. In addition, our total operating expenses of $593 million were below the low end of our expense guidance for the quarter. We are especially pleased at the performance of our television stations during the quarter. Our core advertising revenue increased 4% on a year-over-year basis with both local and national core up in low single-digits on a year-over-year basis.

And significantly, and as we had predicted, the auto category also continues to recover strongly for grain. Meanwhile, political was particularly strong also for a second quarter, preceding a presidential election year. Our strong footprint of number one ranked television stations has and will continue to allow us to over-index on political advertising dollars. As such, we are very much looking forward to the ’24 presidential election cycle. The second quarter of 2023 compares quite well to last year’s second quarter in which we set all-time records for political revenue. The continued strength in Gray’s revenue despite that tough comp confirms that our television station portfolio is delivering the trusted content that our viewers want. It also shows that the strong content and deep reach that we have will continue to produce real value for our advertising clients.

Since the end of the first quarter, Gray’s leadership team has remained very busy on a number of fronts. First, as we mentioned, we promoted Sandy Breland from Senior Managing Vice President to the role of our Chief Operating Officer. Second, we promoted Matt Jacklin to Chief Revenue Officer; Mike King, to Chief Marketing Officer; and Matt Moran to Senior Managing Vice President. Importantly, Gray renewed and extended our CBS affiliation agreement for all the former Meredith markets as well as all of our legacy Gray Television markets. We’re very pleased with this extension and renewal. We reached a historic set of agreements that Pat LaPlatney will cover in more detail, with the Phoenix Suns and the Mercury to return their games to broadcast television and to expand the team’s reach within its market in Arizona by threefold.

We also struck a deal with the CW network covering a package of ACC sports rights that partially mitigated the losses from the unfortunate disruption caused by the Diamond Sports bankruptcy. We are happy to report also that Phase 1 of our Assembly Atlanta Studio project is now largely complete. Phase 1 covers the public infrastructure build-out for the entire Assembly Atlanta project and the construction of the Assembly Studios, which encompasses 19 new stages, most of which are under a long-term lease with NBCUniversal. In fact, as we speak with you today, NBCUniversal is moving into its new sound stages, mill spaces and offices. Despite the current writers and actor strike, we anticipate that production will begin in the next few months, not only at least NBCU facilities, but also in the newly constructed studios that Gray retained for our own use and then for lease to other third-party production houses.

We have not yet altered our plans and do not intend to — and do not anticipate to do so in light of the writers and actors strike, which we sincerely hope will be resolved amicably in the near term for the good of all parties in our industry. The investment in Assembly Atlanta over the last few years and particularly during the first half of 2023 is now largely complete. We anticipate the remaining construction costs to wrap up and finish the assembly studios portion of the overall project in the second half of this year will be in a range of between $25 million and $30 million, net of expected governmental incentives than reimbursements. Over the next five to seven years, the Atlanta Assembly development will be completed with various mixed-use projects across the remaining roughly two-third of the site’s total acreage.

I will now introduce Pat LaPlatney to provide more color on our operations. Pat?

Pat LaPlatney: Thanks, Hilton. During the second quarter of 2023, Gray Television stations and production companies continued executing well. It’s seemingly better than other parts of the advertising ecosystem. Once again, our advertising revenue continues to demonstrate positive results, and we expect to see continuing positive trends for the rest of the year. We read with some dismay stores reporting softness in auto advertising, particularly on the national side. Those stories are not reflective of Gray’s experience at all. To the contrary, Gray Television stations posted a 20% year-over-year increase in auto. In the second quarter, this increase was led by the larger increases year-over-year in national auto advertising.

Meanwhile, our stations continue to excel at developing new business from local customers who previously did not advertise on our platforms. In the first quarter, we are pleased to report that our new local direct business brought in 9% more revenue than the first quarter of ’22. We improved upon that result in second quarter when we brought in 15% additional revenue from new local direct business over the second quarter of last year. Political advertising is also in as Hilton mentioned. Now in both the first quarter and the second quarter of ’23, we have literally doubled the amount of political ad revenue that our current station portfolio received in ’19, the last year that preceded a presidential election year. Political advertising revenue has been particularly strong in Arizona, Louisiana, Virginia and Iowa.

We’re not prepared to make it — we’re not prepared to make any full year political ad estimates at this time given the wide range of uncertainties as far out. But still, we’re encouraged by the doubling of political revenue over 2019 levels that we’ve experienced in the first half of 2023. In addition to these sales successes, Sandy and I with assistance from many others, are actively engaged in discussions with professional sports teams and leagues. Recall that in early May, the Phoenix Suns and Phoenix Mercury announced an innovative deal that returned their games to television stations in Arizona owned by Gray. At that time, our deal was conditioned on the expiration of an arrangement between Diamond Sports and the Suns and Mercury. In July, the Diamond deal for the Suns expired and the Sunset Mercury deal with Gray became effective.

We’re all very excited to be able to present these great teams to all the people of Arizona. Our discussions with other teams and leagues indicate that the new sports rights deal we have in Arizona can work in other markets as well. Whether we replicate that structure or find new ways to partner with professional franchises, we see a growing recognition in the market at returning professional sports to local broadcast stations will increase marketing value, advertising sales revenues, fan engagement as well as team value. We’re spending a lot of time analyzing these professional sports opportunities. In the coming months, we hope to have more innovative sports rights, partnerships to a that will return local teams to our broadcast stations into local fans.

I’ll now turn the call to Sandy.

Sandy Breland: Thank you, Pat. I’m Sandy Breland, and I’m very happy to join my colleagues on this earnings call, especially when we have so many positive developments and successes. Personally, my Caribbean Television’s newsroom. And I focused a good amount of my time the last few years on Gray’s local news resources, including our Investigate TV and Washington, D.C. operations. I’m, therefore, very honored to join this call when Gray has so much great news report about its own news efforts. In June, with the greatest sense of humility, Gray received recognition from the NAB leadership foundation, 2023 celebration of Service to America Awards, which on our excellence in community service by local radio and television stations.

This year, Gray received the TV Ownership Group Award in recognition of the outstanding work by Gray’s Investigate TV unit and it series, the six, which exposed a critical shortage of public defenders across the country. The foundation also selected Gray’s K TTC in Rochester, Minnesota, as its small market television station winner for its fifth district Eagle cancer telephone. While KWCH in Wichita, Kansas, and WTBI and Dokan, Alabama were named finalists for their exemplary community service. Also during the second quarter, the Radio Television Digital News Association awarded a combined 78 regional Edward R. Morrow Awards for excellence in journalism to 31 of Gray’s local stations. The awards roster was led by 10 separate awards to Hawaii News Now in Honolulu, Hawaii, and seven separate awards to WVUE in New Orleans, Louisiana.

This September, Gray will launch across the stations, a new weekday News magazine program, called Investigate TVs. The news magazine will showcase groundbreaking investigations featuring Gray’s award-winning investigate TV unit plus consumer, health and original content curated from Gray’s 113 local markets. While we have no plans to become a new syndicated programming house, we have been pleasantly surprised by tremendous audience reaction to our Investigate TV weekend show that airs primarily on Gray’s own stations. Despite not airing at a consistent time period or having national promotion behind it, the current Investigate TV weekend program has been posting ratings that surpassed many well-known broadcast and cable programs that unlike our weekend program are cleared in 100% of the country.

This tells us that there is an audience for good quality news programming, particularly in seated pieces that highlight otherwise unknown issues and that consistently produce results. Gray will make the new weekday investigate TV+ programs to local television stations owned by other broadcasters as well. Thanks for your time, and thanks for your interest. I now turn the call to Kevin.

Kevin Latek: Thank you, Sandy. In the second quarter, on a year-over-year basis, our retransmission revenue grew 3% as a result of contract repricing at the beginning of 2023. Our subscriber trends are down low single digits on a year over basis and therefore, essentially matching or slightly beating the industry as a whole. Our network reverse compensation expenses increased by less than our gross retransmission revenue during the second quarter. As a result, our net re-trans revenues grew slightly to $159 million in the second quarter. Consistent with prior years, we expect retransmission revenues to decline somewhat between the second and third quarters as subscriber churn routinely increases when spring turns into summer.

Net retransmission revenues, therefore, continue to generate substantial cash flow that helps support the company during off years in the political cycle as we have this year. We have discussed many times part of the reduction in broadcast affiliate retransmission revenues are the result of the networks exploiting the FCC streaming loophole to control the distribution of their affiliate signals on virtual distributors. Recently, the four affiliate boards organized the coalition for local news. This coalition is an important step forward in the long battle by affiliates to regain control of the distribution of our content, and to keep for ourselves the value that the virtual MVPs are already paying the networks for affiliate signals. Finally, I’d like to highlight just how strong Gray’s portfolio of high-quality television stations really is.

We recently decided to compare comScore’s total average audience impressions during prime time for all of Gray’s television stations to the broadcast and cable networks. In the month of May 2023, the ratings data indicate that Gray Television stations easily surpassed one of the big Ford Networks audience, and we’re only a bit less than a total impressions log by the other big three networks. This is particularly impressive feat because unlike the big four broadcast networks, our stations are only available in 36% of U.S. television households. In addition, in May 2023, Gray’s stations total average audience impressions exceeded the combined audiences of FOX News, MSNBC and CNN during Prime Time hours and during late local hours — late news hours.

It bears repeating that the audience across Gray’s television stations exceeded all three news networks combined when our stations are available in just 36% of the country. This concludes my remarks. I’ll now turn the call to Jim Ryan.

James Ryan: Thank you, Kevin. Good morning, everyone. Hilton, Pat, Sandy and Kevin have covered the key highlights of the quarter and the year-to-date. So my remarks are going to be really very short. Again, on our Q2 results, we are very pleased, and we are exceptionally pleased with the core revenue up 4% in the second quarter. Turning to our guidance for Q3. Again, we are extremely pleased that we are saying based on the strength of our strong operating performance of our 113 television stations that we continue to expect core local revenue to be up in the low single-digit range. I will remind everyone again, as mentioned in both the release and that will be filed shortly that the anticipated $33 million to $43 million impairment charge relating to the Diamond Chapter 11 rejection of our ACC contract is a pre-tax noncash, and I repeat, noncash charge.

And we have a new agreement with the CW to air certain ACC games, which mitigate the loss of the former Diamond contract. All in all, the in and out of all of this is immaterial to this company. Our full year commentary really has not changed since we first gave full year guidance on our fourth quarter call two quarters ago. We continue to expect our core revenue will be somewhere around $1.5 billion, up low single digits. We continue to expect our retransmission revenue of approximately $1.5 billion, again, will be up low single digits. We expect currently our political revenue to be approximately $60 million, which is an improvement of the approximate $50 million range we provided on our last call. And our increase to $60 million is given because of the solid first half political revenues that we just reported and in light of the record early presidential spending that we have been booking.

We expect Broadcast revenue in ’23 to be somewhere in the range of $3.2 billion. Our operating expenses before depreciation, amortization, gain and loss on disposal of assets will be approximately $2.5 billion. And that would exclude any noncash impairment charges that I just discussed. Broadcast operating expenses, we continue to expect to be in the $2.3 billion range. Our reverse network comp, we expect to be approximating $936 million. Our noncash stock comp will be approximately $5 million — I’m sorry, that’s incorrect. Non-cash stock comp of about $20 million, and our noncash 401(k) expense will be about $10 million for the year. Our corporate expenses will be around $120 million. Cash uses for the year, again, have not changed significantly since we first gave you estimates at the beginning of this year.

We expect cash interest of about $435 million. I’ll remind everybody that with the 5% SOFR interest rate caps that we put on $6.2 billion of our floating rate debt in the first quarter that we are well insulated from further interest rate increase. And with the interest rate caps in place, we are currently at about 95% fixed rates on all of our debt. Cash, cash taxes, again, we expect to be in the range of $38 million to $46 million for the year. That is including the benefit of a pending refund of approximately $21 million. Our routine CapEx is still in the range of about $110 million. As you know, our preferred dividends are consistently $52 million a year. And again, our required term loan amortization on the term loan B is an annual $15 million.

Consistent with — generally consistent with what we’ve said before, we expect our free cash for the year to be in the range of approximately $115 million. At this point, again, I reiterate that we are well positioned midway through 2023 and look forward to a successful conclusion of the rest of the year. I’ll turn the call back to Hilton.

Hilton Howell: Thank you, Jim. Well, to summarize, Gray generated free cash flow in the second quarter, and the company continues to have a strong liquidity profile with no near-term maturities. As Jim noted, we have an interest rate cap in place to protect us from further interest rate increases on our bank debt, but we envision no changes in our dividend policy. We continue to focus on deleveraging our balance sheet. Finally, while we have no term needs to refinance any of our debt tranches, we are encouraged that the trading levels of our securities continues to recover as macroeconomic recession concerns seem to be abating. With half of the year behind us now, it is clear that Gray has begun in 2023 in a strong fashion and will finish the year strongly.

Our efforts to deliver the content audiences want and advertisers need are evident in our solid ratings, our core advertising results, and our successful strategic initiatives. With the capital investments in Phase 1 of the Assembly Atlanta Studios development essentially complete, Gray’s Board of Directors continue to direct free cash flow to paying down our debt and improving our balance sheet as we progress through the next 18 months of what we expect will be another very strong political advertising cycle. Operator, at this time, I would like to open up the line for questions from anyone.

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Q&A Session

Operator: Okay. [Operator Instructions]. Our first question is going to come from Aaron Watts with Deutsche Bank. Aaron your line is open.

Aaron Watts: Hi, everyone. Thanks for having me on today. A couple of questions for me. I’ll start with one on core advertising. You grew 4% in 2Q. You’re guiding a lot to up in 3Q. What are the gives and takes in there sequentially? Just some general softening around the edges and maybe you could parse out national and local for us and how they’re trending relative to the low single-digit growth each had in 2Q?

Pat LaPlatney: Yes. So I’ll start and let Jim, it’s Pat here. So look, I think one factor there is automotive. Automotive is up, as you heard substantially, and it will be up substantially in Q3. Work is a positive comp on the first positive comps we’ve seen in the better part of 10 years from Q2 ’22 — pardon me, Q3 ’22. So that’s part of it. But it’s overall a very, very positive story. In Q3, we continue to see positive growth from home improvement and legal. Obviously, automotive we talked about, and there’s a few other categories including communications and the lottery that are down a bit. But all in all, we expect to see a pretty solid performance in Q3.

James Ryan: Yes, Aaron, as we’ve commented last many calls, on a relative performance basis, local is performing a little bit better than national. But we already said earlier in the call that National Auto in Q2 was significantly better than overall local. I think looking into Q3 that relative performance between local and national is not changing directly, they’re both up. And no surprise to anybody that the local side is doing better. And in part, I’d point to, as Sandy mentioned — that Pat and Sandy mentioned that very strong results and emphasis on the — creating new local direct business month-after-month.

Aaron Watts: Okay. That’s helpful. And maybe I’m parsing too thin here, but we’ve heard from some others that maybe national, which had obviously been choppy the last several quarters, perhaps turning a corner. Is that anything you’d call out? Or just it’s sort of holding steady as you kind of just said?

Pat LaPlatney: I think you just said it.

James Ryan: Yes, you said it. I think from our standpoint, since our local has been exemplary for several quarters that relative split, we think is holding fairly consistent, but we’re very, very pleased with what they’re both doing.

Aaron Watts: Okay. All right. Great. And then if I could…

James Ryan: Aaron, one other quick add to that is, remember, we’ve said this many, many times over the years. Our proportion of local to core is probably much higher than everybody else’s. So other people, when national tweaks up or down, they may see it faster or see it proportionately more, but because of our local, we just don’t see it as much.

Aaron Watts: No. It’s good to hear that your local is hanging in there. So understood. On the re-trans side, it sounds like your underlying subscriber erosion landed down low single-digits. Related to how you’re tracking versus the industry overall, I would think the general trend we’ve seen since the pandemic that of job and population growth over indexing in the Southeast relative to many other areas of the country would play to your benefit. Do you think Gray over time can be a net benefactor of that theme, one that may allow you to do a little better on the gross re-trans side, given that population and job shift to an area I consider a sweet spot for you?

Kevin Latek: Hi, Aaron, this is Kevin, obviously. I think that’s a good observation. We don’t really — we certainly have a very strong presence in the Southeast. And I agree as we see population moving to the Southeast, that’s more homes, it’s more households, that’s more pay-TV subscriptions and more audience. So the Southeast grows disproportionately better than the rest of the country, that’s probably going to benefit a little bit more than others. It’s a fair observation.

Aaron Watts: Okay. Okay. All right. Last one for me, and again, I appreciate the time. I heard the comments around security prices rebounding as perhaps some concerns dampen around the macro picture. Jim, last quarter, you got asked about your bond prices being trading at a discount. I think that relationship still exist today. Any updated thoughts on perhaps using that as a lever to help use cash to deleverage the balance sheet, which I know is a stated goal of yours?

James Ryan: So Aaron, my answer to this quarter, just like the last couple of quarters is pretty consistent. I will place it under the banner of I can never say never. But consistent with what we’ve been saying for a while, I would say the probability of focusing on our 2026 term loan maturities versus being opportunistic on bond pricing is probably where we will continue to put our focus again on the ’26 term loan maturities.

Aaron Watts: Understood. Thanks again guys.