Aug 3, 2012
Operator
Good day, everyone, and welcome to the Gray Television's Second Quarter 2012 Earnings Release Conference. As a reminder, today's presentation is being recorded.
For opening remarks and introductions, I would like to turn the call over to Mr. Hilton Howell, Chief Executive Officer and Co-Chairman.
Please go ahead, sir.
Hilton H. Howell
Thank you, operator. Good morning, welcome, everybody.
I am Hilton Howell, as the operator mentioned. I'll be making a few brief comments; followed by Bob Prather, our President and Chief Operating Officer; and then Jim Ryan, our Chief Financial Officer and Senior Vice President, who will both add their own color and comments to this quarter's really outstanding results.
We will then have questions at the conclusion of our comments. It was quite simply an extraordinary quarter, another record.
Revenue for the second quarter was the highest the company has ever reported in its entire history. For the quarter, total revenue increased by 24% to $94.7 million from last year's $76.2 million.
Similarly, the company reported record revenue for the first half of 2012 of $175.4 million, up 20.2% from $145.9 million last year. These truly extraordinary increases led us to report net income of $9.8 million for the quarter compared to a profit of $771,000 last year, and for the first half of the year, we reported net income of $12 million compared to a loss of $4.1 million for the 6 months of 2011.
On a per-share basis, this translated into earnings of $0.17 per share for the quarter, and $0.21 per share for the 6 months of 2012 compared to earnings of $0.01 and a loss of $0.07 per share, respectively, in 2011. Obviously, a record pace of increasing political advertising accounted for the lion's share of this growth, but we also saw an increase in virtually all of our revenue categories as well.
For the quarter, we received $13.1 million of political ad dollars, and year-to-date, we have received $18.1 million. Both numbers are all-time records for Gray.
But just as significantly, of our 5 largest local and national advertising categories: Automotive, restaurants, medical, communications and furniture and appliances, we saw increases in every category save one. For the quarter, automotive increased by 20%; our lone decrease was in restaurants for the quarter, which decreased by 5%; medical increased by 8%; and communications increased by 2%.
Further, furniture and appliances for the quarter increased by 3%. Year-to-date, we saw all increases.
Automotive increased by 14%, restaurants increased by 1%, medical increased by 11%, communications increased by 9% and furniture and appliances increased by 4%. We are also pleased that this quarter we added 3 new CBS affiliations to our existing markets in Panama City, Florida; Harrisonburg, Virginia; and Parkersburg, West Virginia.
We anticipate that these new stations will be on the air by September 1 for Panama City and Parkersburg, and by October 1, in Harrisonburg. Going forward, we will be operating affiliates as CBS, NBC, the CW and MyNetwork in Panama City, Florida; CBS, ABC, FOX and MyNetwork in Harrisonburg; and CBS, NBC, FOX and MyNetwork in Parkersburg, West Virginia.
With the excellent group financial results our television properties are delivering, we have continued our effort to improve our balance sheet. As we discussed last quarter, we prepaid approximately $10 million of our debt, and we announced earlier that this week that we have retired $20 million of our Series D perpetual preferred stock plus accrued dividends.
This repurchase will save our company $2.1 million in dividends on an annual basis. After this transaction, we will have only $22.2 million of preferred and accrued dividends on our balance sheet, and we have confidence that we will have that retired in the relatively near future.
I would also like to use this opportunity to thank Nick Matesi and his entire team at KKTV, our CBS affiliate in Colorado Springs, Colorado, for the superb job they have done in reporting on the recent Colorado fires. Their co-coverage on television, the Internet and on social media was outstanding.
And I want to congratulate everyone at that station for an exemplary job. With that, I will bring my comments to a close and turn it over to Bob Prather.
Bob?
Robert S. Prather
Thanks very much, Hilton. First of all, I want to say that I think our numbers speak for themselves.
We continue to be at the very top of the television industry for the last 12 years, and I think we'll continue to stay there because we're doing the right things to make sure we're operating as efficiently as possible and try to take advantage of new automation in the television world to make sure that we're more efficient going forward. We got 2 priorities at Gray; one of them we've had from day 1, the other one we've had for the last few years.
The first one, #1 priority for us right now is to get our balance sheet in better shape. As Hilton mentioned, we paid down debt, we paid a good chunk of our preferred.
We want to continue to do this. We hope to pay over $50 million down on our senior bank debt before the end of the year.
There was $22 million left on the preferred, we want to pay that off in early January of next year. So we are working hard to get our balance sheet in better shape, and it's our #1 priority as a company.
Our second priority, and this has been our overall #1 priority since the day Mack Robinson and I bought control of Gray, and that is to continue our efforts in local news, to be the #1 source of news in the markets we're in. We're very fortunate we’ve got more #1 news stations than any other group in America.
And we want to continue that. We want all our #1 stations to get better, and we want anybody that's not #1 to strive to be #1.
We're doing this in a lot of ways. And we are -- increasingly have more competition, not only from the local stations in the past, but competition from Google, competition from YouTube, competition from all kind of sources of news that weren't even in the market 5, 10 years ago.
We're trying to continue to develop our Internet products and our mobile products. I think we've done a great job in this area.
We've been profitable from day 1 with our Internet properties. And we want to continue, not only to grow the properties, but to continue to be very profitable.
And this is something very important to us here at corporate and to our GM's. But I want to emphasize, again, our local news is the only thing we own 100% of.
It's the only thing we've got total control of, and it's incumbent upon us to make sure that we are the leader in -- as a news source in all of the markets we're in. And this also ties you mostly to these towns.
The Colorado Springs coverage is a good example. We were on the air for 131 straight hours.
We think that maybe a TV record. And one thing that enabled us to do that was our TVU mobile units we were able to use out in the field in the automation in our building.
We called in people from several other stations to help out, but we probably used half the number of people you'd ordinarily use to stay on the air 131 straight hours of local news coverage. They did a great job.
Our chief photographer's house burned to the ground. And as we was leaving his house with 20 minutes' notice, he was filming what was going on in his neighborhood.
I went to visit the neighborhood afterward and it looked like Tokyo after the firebombing in World War II. There were 350 homes destroyed in his neighborhood.
And I mean burned in the ground. It was one of the worst natural catastrophes I think I've ever seen.
But our coverage out there was outstanding, and I want to thank Nick Matesi and all his team. We couldn't have asked for -- and that's what local TV is really all about.
That's what makes your reputation in a market. That's what ties people to you.
And this is the kind of coverage we want to have everywhere, and we pride ourselves on what goes on in our local news markets. Another thing I want to mention before I turn it over to Jim Ryan -- Bishop Cheen, who's usually the guy with the fastest fingers on these calls, and he's been with Wells Fargo a long time, he's been a long-time personal friend going all the way back to his Kagan days, has just announced his retirement.
He's one of the best I've ever known and the industry will miss him -- and I wish him well in his retirement. But Bishop, we will miss you.
Anyway, at this point, I'll turn it over to Jim Ryan. And Jim will go over some numbers, and then we'll open up for questions.
James C. Ryan
Thanks, Bob. I'm going to keep my comments brief because I think things are pretty well laid out in the release.
I'll focus most of my comments on kind of the balance sheet. But a couple of quick things.
Again, with the record-setting revenue in any second quarter as well as in any first half of the year, our broadcast cash flow and operating cash flow numbers also set new records for a second quarter and for any 6-month period of any first half of any year, and we're very pleased to see that. Naturally, they fall out of the record-setting revenues that's been discussed already.
As far as the balance sheet goes, our senior first lien leverage ratio at the end of the quarter according to the definitions in the senior credit facility was at 3.52 with a trailing 8-quarter average cash flow of 126.5. Our net leverage on a trailing 12-month basis, leverage net of cash, was 6.64.
We had cash on hand at the end of the quarter of $28 million. As -- after making the $20 million payment on the Series D preferred earlier this week, our cash balances are still in the low $20 million range.
Total debt at the end of the quarter was $825.6 million with first lien debt at $460.6 million and the second lien at $365 million. Again, we took -- we paid an aggregate amount of $20 million for the Series D repurchase earlier this week.
After that transaction, we had $13.6 million liquidation value of the Series D still outstanding and approximately $8.6 million of accrued and unpaid dividends for a total obligation this week -- as of this week of about $22.2 million. Our CapEx estimates for the year were increasing to $23 million from the previous estimate of $20 million.
The increase in $3 million is attributable to 2 things: first of all, we will be spending approximately $2 million to build out the transmission facilities and other equipment we need to launch the 3 new CBS affiliates that Hilton discussed a few minutes ago; and we're also closing today on a new building for our Colorado Springs property as well, and we'll be relocating our facility to the new building early part of next year with the intention of selling the current building after we vacate it. So that would probably be some time next year.
Cash taxes for the quarter were $220,000. Still expect cash taxes to be relatively small, probably in the $1 million, maybe a little bit more range if political is extremely strong in Q4.
Q3, to comment briefly on the Olympics. Right now, it looks like we'll have net revenue attributable for our Olympics in Q3 of about $4.8 million, which is significantly higher than any previous Olympics.
It's -- the last Summer Olympics in 2008, we had $3.4 million. So we've been extremely pleased with the Olympics sales this year.
We think it's in part attributable to the venue in London and only a 6-hour time difference. But also, we've seen a very healthy buy out of the political advertisers for Olympics as well.
And I think our NBC stations did a good job of -- especially where political has been highly active, did a good job of holding political back -- or holding some inventory back to be able to charge premium rates to those political advertisers at the last minute. And certainly, that's helping us get to a -- what looks to be a very substantial record-shattering $4.8 million in Olympic sales for this year, which we're very pleased with.
Bob, at this point, I'll turn it back to you for questions.
Robert S. Prather
Thanks, Jim. Operator, we're ready to open up for questions.
Operator?
Operator
[Operator Instructions] And we'll go first to Aaron Watts with Deutsche Bank.
Aaron Watts
So I'm just curious if you kind of strip away auto and political, can you maybe just give us some thoughts on what you're feeling from your markets with the other categories and just kind of -- we heard payrolls weren't so -- were okay today, but unemployment is not coming down and consumer spending is kind of hit or miss. Just kind of a general sense for the underlying currents in the ad environment.
Robert S. Prather
Aaron, I think we're fortunate for 2 things. One, I think most of the markets we're in have not been hit as hard in the recession as some of the -- the only market I would say that was really, really extremely hit hard was the housing market.
We had 2, one was Reno and one was Colorado Springs. And they probably have performed -- they've probably been the toughest 2 markets we've had.
But in general, most of our markets outperformed the economy in general. And I think our focus on being in the college towns and the state capitals have paid off.
And we just haven't seen -- most of our categories are doing -- or as Hilton mentioned, restaurants being down a little bit. And for some reason, wireless has just been tough, both -- all over the country.
I've talked to other TV guys and they say it; I've talked to newspaper guys, they say the same thing. And nobody's really sure what's going on right now in the wireless world.
And I think that AT&T and Verizon and T-Mobile are all just competitive as ever. I just think they're all reassessing their strategies and figuring out how to go after more subscribers and it just seems like they're all planning right now and not spending near as much.
But overall, most of our markets really just continue to be a lot better than the general economy I think. So we're not going to look a gift horse in the mouth right now.
And I think like a said, we want to take in everything we can take while we can get it. So I think the rest of the year is going to be real good even without political.
Next year probably will be a challenge, but they all are challenges at some point. So we'll fight that battle when we come it.
But I frankly think if there's a change in administration, there's going to be a feeling of optimism. Here again, I think there's always that one when a new President comes in.
But I think there'll be a real feeling of optimism in the country that hadn't been around for a while. So that can be good news for 2013.
But I'm not politicking. I'm just stating a fact that you saw it when Obama came in, there was a lot of optimism.
And I bet there'll be if there's a change again. And whether it works or not, that's anybody's guess.
But I think that would, in the short term, be good for the economy, so...
Aaron Watts
Okay. Now that's helpful.
And then a quick one for Jim. Just thinking about your dry powder to go after more preferred, and I think you used your $20 million basket.
Is it now really dependent on leverage the rest of the way before you go after more?
James C. Ryan
No, we used our $20 million basket for this calendar year and we did it basically as soon as we practically could, which was this week. So under the senior and -- or under the senior credit facility, we would have to wait until 2013 to take the next $20 million out.
And as Bob alluded to, given the strength of this year and our expectations for the second half of the year, right now, it's -- that's something we would probably look to do very early next year. If -- and this comes with a big if -- if we were to go to the credit markets for a larger refinancing some time later this year, and I'm not saying we will or we won't, I'm just saying if that were to happen, then we would have an ability to take out the rest of the preferred even sooner.
But right now, we're looking at taking our next $20 million bite as early as we can in 2013.
Aaron Watts
Okay. And then last one for me, I appreciate you taking these, maybe for Hilton or Bob.
Just some thoughts around some of the M&A that's going on in the space, maybe about what the multiples have been and Gray has obviously been on the sidelines here, maybe what it's going to take to have you guys get involved, whether it's getting your leverage down or these weren't the right assets and you're waiting for the right assets, maybe some thoughts around that?
Robert S. Prather
I think we will continue to monitor the market. But I think as I mentioned, our #1 priority is getting our balance sheet better over and frankly, I haven't been really excited about any of the deals that we're asked there in looking at them.
But beyond that, I think the multiples are -- you can hear all kind of numbers, but it'd probably in the 8.5 range, which is I guess in today's world is okay. But I think we can put our money to a lot better use right now, paying down debt and getting rid of this preferred.
I mean, the preferred accrual is 17%. There's no station out there earning 17% growth, no matter where you look, but -- so I think we're going to be a lot better off concentrating on our balance sheet.
And if we get back in the deal market at some point in the future, we'll make sure we do it and keep our balance sheet in good order at the same time.
Hilton H. Howell
Bob, let me follow-up with that for -- Aaron, this is Hilton. I will say I think it's a very good sign for the industry as a whole that a lot of these players are stepping up and purchasing television assets.
And being here in Atlanta, Bob and I have talked about it and Jim and Kevin Latek, our Chief Legal Counsel, as well. It's sort of a bullish sign from our standpoint to see Cox stepping back in and purchasing some assets.
And I think that Bob Prather's comments are right on. We have to continue to increase or improve our balance sheet because our goal here is to get our stock price back up.
And I think that the balance sheet integrity is critical. But we will look at transactions if they're something that we can do that doesn't end up betting the company or leveraging us up too much, with the idea that continuing to improve our balance sheet is the preeminent goal here.
Operator
And we'll go next to Bishop Cheen with Wells Fargo.
Bishop Cheen
Whatever you said about the Colorado, I watched that. You guys set the network, I saw your coverage, it was dramatic.
You can't throw out enough superlatives about what you guys did there.
Robert S. Prather
Amen. I agree with you.
We're very proud of our people out there.
Bishop Cheen
It was really something. I hope -- I mean it -- like you said, it demonstrated the power of local television.
I sure hope we never have to see that again.
Robert S. Prather
Yes, I agree, Bishop.
Bishop Cheen
Thank you Jim for the color on the recap. I think you said it all on what you're looking at and what you're dealing with, and you'll make those decisions when you make them is what I'm guessing.
The -- your Internet performance, that's what Facebook liked and is -- and I'm not talking about the retrench, just as you break out the Internet, do you expect that kind of pace to sustain as we go ahead?
James C. Ryan
Bishop, I think in the next year or so that, all at high-teens, low-20s pace, probably we can -- I would expect to continue for at least another year, maybe a little longer. It might eventually start working down.
But clearly, it's a growth area for us. And if you go back and track our numbers over the last few years, there were a couple of years there where we had kind of leveled off and we're stalling out a little bit to be honest.
And we -- last year, we made it a big push again and we're continuing that push this year. We're kind of getting the full year benefit of a lot of the things we've started last year.
I think it's still got to be a big focus of our planning and our sales efforts in '13. And so, therefore, I would expect some very strong year-over-year growth there in '13 as well.
Bishop Cheen
Okay. And then last, Robert, I know you said you want to focus on the balance sheet, but I know you are a student of M&A.
So just the gap that we see in the public, private market values, do you think that gap is going to change after everybody sees evidence of political? And what does it take to close that gap?
Robert S. Prather
One thing, Bishop, availability of money. If the money is available, the gap will close.
People go out and buy. And if they can borrow more from the banks, then multiples would go up.
It's as simple as that. I've been watching it for 30 years going on...
Bishop Cheen
So M&A would -- the affirmation of values in M&A would motivate public multiples stock values, I think is what you're telling me.
Robert S. Prather
Yes, I think so. Right.
Yes. I think if the markets -- if the finance markets are available and they are willing to loan more and it takes less capital, like I said, you'll see the multiples go up and you'll see more people trying to jump in.
I think the big issue that I think the private equity guys probably have had their fill of TV for a while, and you may not see them around for a while. But I think most people realize that to fight these networks, you probably need to be bigger and stronger, especially -- and the retrans battle is going forward and the affiliation battle is going forward.
Bishop Cheen
Yes, sir. Well, the other way is you've got to say can the strategic operators do it on their own without the private equity groups because purely...
Robert S. Prather
Right. I think they can.
I think...
Bishop Cheen
The front half of the last decade, it was the pegs driving everything.
Robert S. Prather
No, I agree, but I think they can going forward.
Operator
And our next question comes from Marci Ryvicker with Wells Fargo.
Marci Ryvicker
I have a few questions. The first is, have you done reverse comp deals with NBC?
Robert S. Prather
No.
Marci Ryvicker
They were on hold. Are they still on hold or delayed?
James C. Ryan
We're still in negotiation, and we are on a short-term extension, one of several short-term extensions. We expect those negotiations to continue to proceed at pace.
And some time later this year, I'm sure we'll ultimately come to what both sides think is a reasonable deal.
Marci Ryvicker
Okay. CBS mentioned yesterday on their call that they're having conversations with affiliates who may be willing to do their reverse comp agreements sooner and bring them forward.
Are you in that camp?
Robert S. Prather
No. As a matter of fact, we've talked to them and they've not wanted talk to us.
So we're kind of happy to be at December 14, but we have to talk to them soon.
Marci Ryvicker
Okay. And then can you just talk a bit more about the CBS stations that you're launching?
I just want to make sure we understand now you have triopolies of those markets?
Robert S. Prather
Yes. Matter of fact, quadopolies in a couple of them.
We will have a primary NBC or ABC, and then will have a FOX, and we'll have MyNetwork and a CBS. So we will have in some places quadopoly.
And I think the CBS is going to be great. I think we can really bring a local flavor to them.
Those markets have not had local CBS affiliates in the past. And we're going to really get a push on from a proposal stalemate from a promotion standpoint, they really let people know in these markets that they've got local CBS coverage.
And I think, based on CBS being so strong and prime, it's going to really be a boon for us.
Marci Ryvicker
And do you have any sense as to the revenue and expense contribution we could expect?
Robert S. Prather
I think we're hoping to be cash flow positive within the first 12 months as we get -- probably next year, not -- I'd say the first 15 months. We have to go on air, as I mentioned, September and October, and it will be a shake-out period for a while but like I said, we think because of CBS's strength, those stations are going to catch on pretty quick.
And we think the advertisers, local advertisers will jump on the bandwagon pretty quick.
Marci Ryvicker
And the last thing I just have a comment. I want to second everyone else's comments today with regards to Bishop, because Bishop has been someone I've looked up to and I've talked to everyday almost for the past 10 years I've been doing this.
He's been a great friend, and I'm going to miss him.
Robert S. Prather
Yes, we definitely will.
Operator
[Operator Instructions] And our next question comes from Barry Lucas with Gabelli & Company.
Barry L. Lucas
Two areas, Bob. One we keep asking about from quarter-to-quarter and that is mobile and any developments coming up there and expectations for that revenue stream to begin to flow.
Robert S. Prather
Barry, I think live mobile is still in the incubation stage. As I mentioned before, I think the technology is there right now.
I just think it's still -- the NBC is still trying to figure out a model that will work and make everybody happy. As I've mentioned, we've got a lot of miles to feed there, the networks and the syndicators and everybody that provides something to the station wants a piece of the action over mobile.
So I think it just boils down to economics. I think it'll work.
I think I'm not sure when it will be consumer-viable, economically viable, but I'm hoping some time in the next 12 months, it will start picking up and maybe in '14, it will -- mobile is growing so fast in general. More and more people are demanding mobile content from every angle.
All the smartphones are getting smarter and smarter and more technologically updated. So mobile is here to stay and mobile is going to continue to grow.
And if you look at the average young person today -- when I say young, from preteen up to until the 30s, I mean they live on these mobile devices. These are the smartphones or the iPads or similar-type devices, and they're not going to change those habits as they get older, I don't think.
I think you're going to see more and more of that, and I think it's incumbent upon us to put out a product on those devices that people want to watch.
Barry L. Lucas
Okay, great. And next area, maybe you could provide a little observation on what you think about Aereo, the threat, and in particular with relation to as you justifiably pointed out, your strength in local news and what kind of defense that really provides?
Robert S. Prather
Probably the only threat to a company like us on Aereo is if a lot of people went off the cable, we would lose those subscribers as far as getting retrans money. My impression is that Diller is back in this thing.
But Diller is a big market guy, and I would think it would be a long, long time before he got past the top 25 markets, for example. I imagine that's pretty expensive to install in a market.
He's starting out in New York, and I'm sure he'll jump to Los Angeles, Chicago, San Francisco, the big markets. It may be quite a while before he gets down to market 59.
And I think there's still some legal battles and there's a fair number of FCC lawyers who think that even if they win the court battles, that the FCC will go into Congress and try to get some legislation passed to fight this thing. Although, I'm a big believer.
It's hard to fight technology. I think if there's a superior technology out there, it's hard to keep it underground.
And it's happened a few times in history, but it's kind of like the buggy whip manufacturers trying to keep the cars from going up and down the road. It just -- they might do it for a while, but they're not going to do it if there's a superior technology.
So I think it's something we've got to watch, but I don't think it's going to have any effect on markets like ours for a good while.
Operator
And at this time, there are no further questions. I'll turn the call back to our speakers.
Robert S. Prather
Thank you very much, operator. I thank everybody for being on the call.
We look forward to talking to you next quarter. I think political is going to be pouring in pretty strong between now and then.
And as I always say, we answer our own phones, so don't hesitate to call any time. Thank you, everybody.
Operator
And, ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.