Gray Television Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 15 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Gray Television Q1 2024 Earnings Call. And with that review, I will now turn the program over to Executive Chairman and CEO, Hilton Howell Jr.

Speaker 1

Thank you, operator. Good morning, everyone. Thank you for joining our Q1 2024 earnings call. With me here in Atlanta are all of our executive officers Pat LaPlatney, our President and Co CEO Sandy Breeland, our Chief Operating Officer Kevin Latek, our Chief Legal and Development Officer Jim Ryan, our Chief Financial Officer and for the first time as an officer of this company, Jeff Jinyak, currently our Executive Vice President of Finance. And as you all know, on July 1, Jeff will succeed Jim as the Chief Financial Officer of Gray Television after Jim serving 26 years in that chair and by my count over 100 public earnings calls.

Speaker 1

As usual, we will begin with the disclaimer that Kevin will provide.

Speaker 2

Thank you, Hilton. Good morning, everyone. Gray uses its website as a key source of company information. The website address is www.gray. Tv.

Speaker 2

We filed our quarterly report on Form 10 Q with the SEC today. Included on the call may be a discussion of non GAAP financial measures and in particular, adjusted EBITDA, leverage ratio denominator and certain leverage ratios. These metrics are not meant to replace GAAP measurements, but are provided as supplements to assist the public in its analysis and evaluation of our company. Included in our earnings release as well as on our website are reconciliations of these financial measures to the GAAP measures reported in our financial statements. Certain matters discussed in this call may include forward looking statements regarding, among other things, future operating results.

Speaker 2

Those statements are subject to a number of risks and uncertainties. Actual results in the future could differ 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 quarterly report on Form 10 Q and our most recent earnings release. The company undertakes no obligation to update these forward looking statements. Now I return the call to Hilton.

Speaker 1

Thank you, Kevin. Once again, Gray Television has begun a new year in an excellent and strong position. It's a testament to the power of our high quality local news operations that our television stations grew core advertising revenues by 4% over the Q1 of 2023. We're extremely pleased with these superb results from our fantastic in house sales and business development teams. Throughout our markets, we are leveraging our intensive sales training and development efforts with our high quality advertising platforms to deliver results for our advertisers.

Speaker 1

Our first quarter core advertising results reflect growth in categories including automobile and national that have been challenging in the past. We appear to be growing not only revenues, but also growing our share of advertising budgets. For the Q1, the net income attributable to common shareholders was 75,000,000 dollars or $0.79 per diluted share. Our adjusted EBITDA was $197,000,000 an increase of 21% from the Q1 of 2023. Meanwhile, we continue to focus on debt reduction and on April 1, we used $50,000,000 of our cash on hand to prepay portions of our term loans as debt reduction deleveraging remains a top priority for our company.

Speaker 1

In the Q1 of 2024, our TV stations core advertising business was higher on a pro form a basis than the Q1 of 2019. Importantly, we are guiding to 2024's full year core advertising revenues to beat 20 nineteen's full year core revenue on a pro form a basis, despite what we expect to be a large amount of displacement caused by a very strong political advertising revenue later this year. Speaking of political revenue, we believe that Gray will undoubtedly as it always has again earn more than its fair share of political advertising revenue this year. Number 1 and number 2 stations that are hyper local news focused have historically over indexed on political revenue within their markets because these stations deliver the audience that matters to campaigns and no one delivers that better than Gray Television. In the Q1, our political advertising revenue was slightly lower than our political advertising revenue in the Q1 of 2020 on a pro form a basis.

Speaker 1

This should not be a surprise to anyone because 2024 did not feature the same highly competitive presidential primary contest as the country experienced 4 years ago. We still expect political advertising revenues for the full year to be strong and will materialize later in the year as well. In fact, consistent with the expectation, we are currently guiding for political advertising revenue in the Q2 of 2024 to range between 55% and 72% higher than the Q2 of 2020 on a pro form a basis. Overall, of the 7 most competitive presidential swing states, Grays Station covers all the markets in 3 big states, Arizona, Georgia and Nevada. And it has and we have a very strong presence in 3 of the 4 remaining states, North Carolina, Michigan and Wisconsin.

Speaker 1

In addition, Gray has leading local news stations in 9 of the 11 states with governors races and 26 of the 34 Senate races, including many of the most competitive governor and Senate races in the country. Finally,

Speaker 2

all of

Speaker 1

our markets have House of Representatives and many markets involve competitive primaries or general elections triggered by historic wave of House resignations. All of our markets also have down ballot races and some appear likely to have very contentious referendums on the ballot this year as well. There is no given this unparalleled exposure to competitive races, we expect that our political Finally, I'm thrilled to Finally, I'm thrilled to confirm that Gray has essentially completed the construction of Assembly Studios and the larger infrastructure work for Assembly Atlanta. We began this project as many of you know a few years ago when interest rates were low and demand for studio space in Georgia was white hot. We saw then and still see today immense value for Gray in owning a multi use development close to Buckhead that is anchored by world class studio production facilities and a premier tenant under a long term lease.

Speaker 1

By last spring, as the capital markets began to become more challenging and Hollywood strikes came into focus, we determined that it would be prudent to pause capital expenditures at the assembly site after completion of the studios portion, and that's exactly what we did. As of the end of Q1 of 2024, approximately 95% of our projected total of capital expenditures for assembly studios and Assembly Atlanta net of reimbursements are now behind us. As you all know, late last year, NBCU commenced its long term lease for 2 thirds of the Assembly Studios portion and the studios are now contributing revenues to the totality of Gray Television. Today, we are still in the early innings of what we believe will be a decades long valuable cash flow contributor to our company. We will continue to carefully evaluate strategic opportunities to unlock the immense value that the investments we have created for our stakeholders, including through collaborations with outside partners for additional development at assembling.

Speaker 1

There is no question that the tremendous reach and efficiency of our local broadcast television industry is still getting rediscovered and reaffirmed by audiences, advertisers, sports leagues and sports teams. Wall Street, however, seems to be missing this universal message. We therefore remain personally and professionally very disappointed that this company remains so undervalued given our operational success and near term and long term opportunities. We will continue to focus on executing and delivering for our viewers, our employees and our investors. Pat will now provide some more color around our successful start to 2024.

Speaker 3

Thank you, Hilton. Looking at our Q1 financial results, it should be clear that Grace stations are continuing to find and attract strong advertiser demand for our market leading local television stations and premium brand safe digital products. Throughout our markets, local businesses are doing generally well. We believe local businesses are tuning out the political and geopolitical noise to focus on finding customers, moving their products and selling their services. In fact, during the Q1, our new local direct business, which is our local sales force finding a customer that's new to Gray, continue to break records set just a year earlier.

Speaker 3

In the Q1 of 2024, our new local direct business brought in 18% more revenue than the Q1 of 2020, which itself was 8% higher than the Q1 of 2022. These strong results continued at April 24 just last month, which delivered 14% higher new local direct business than April of 2023. Meanwhile, our digital businesses are also very healthy. In the Q1, we set new records for engagement with digital audiences as well as double digit growth in digital revenue. As we continue to expand our connected TV and fast channel offerings and as consumers increasingly find our content on those platforms, we are seeing significant growth in this space.

Speaker 3

In fact, our station CTV fast revenue more than tripled over the same period last year. Our Q1 results also benefited from our successful efforts to bring professional sports back to our broadcast stations. In addition to broadcasting the full season of games for the Phoenix Suns across Arizona, our unched coverage in Georgia and Louisiana allowed us to bring the NBA's Atlanta Hawks and New Orleans Pelicans games to their local fans at all of the markets located in those states and some adjacent markets. In total, we partnered with 8 NBA and 3 WNBA teams this season to expand their reach while also bringing new viewers and new advertisers to our local stations. The impressive ratings that Gray's broadcast of basketball games have generated as well as those of our peers confirms the reach of local broadcast television for professional sports fans, teams and leagues.

Speaker 3

And looking ahead, we are upbeat about our core advertising guidance for the Q2 despite a range that shows modest growth against a strong comp to 2023 Q2. It's important to remember that we're facing tough comps because Q2 of 2023 was very good. In last year's Q2, we posted 4% growth in core advertising revenue on a year over year basis compared to an average 4% decline across our publicly traded broadcast peer group. We excelled last year in part on having the NCAA Final 4 and a couple of one time only advertising campaigns that will not recur on our broadcast channels in the Q2 of 2024. Thinking ahead to the summer, we're excited about the summer Olympic broadcast from Paris on our NBC affiliates that cover about 11% of U.

Speaker 3

S. TV households. We currently anticipate generating $15,000,000 to $20,000,000 of advertising revenue related to those broadcasts in the Q3 of this year. We already have approximately $6,000,000 of advertising revenue booked for the Olympics. Our core advertising revenue consistently performs above average because we have the largest and most watched news teams in the majority of the markets and we intend to maintain that leadership.

Speaker 3

Our content attracts audiences on linear television, on connected television and on virtually every other platform that exists. We are a content first company. And for a few high profile examples of our recent successes in this area, I turn the call over to Sandy Brielin.

Speaker 4

Thanks, Pat. Beyond the numbers, Gray has continued to deliver exceptionally well from an operational perspective. Late in March, we announced that CBS had retained Gray's in house news research and consulting group, which we call our strategy to provide market research and news consulting services to all 14 of CBS' owned and operated television stations. This first of its kind partnership between a network and an affiliate group's news research division began on April 1. We are thrilled to partner with CBS stations on this news research venture.

Speaker 4

In the past few weeks, we've also made other important announcements that I would like to highlight briefly. On January 26, the Columbia Journalism School honored Gray's TV's investigate TV unit and WANF, our CBS station here in Atlanta, among the 15 winners of the 2024 DuPont Columbia Awards for their joint multipart investigative series, The 6th, which exposed a critical shortage of public defenders in Georgia and many other states, where defendants can languish in jail for months, even years awaiting trial. On April 8, Gray's Local News Live, a streaming news network that provides live news coverage from Gray's television markets and our DC Bureau, streams continuous and frankly excellent coverage of the total solar eclipse from Gray's DC Bureau and local reports from more than 20 markets along the path of totality from KG excuse me, from KGNS in Eagle Pass, Texas to WAGM in Presque Isle, Maine. It was pretty cool. Last September, we launched a new daily 30 minute news magazine, Investigate TV Plus.

Speaker 4

Since then, the show built audience throughout its 1st season with an average of 25% growth in adults 18 plus across all gray markets. This kind of ratings growth for any new syndicated program is rare in today's world. Moreover, the show is drawing higher audiences than nearly all primetime cable news and cable entertainment programs as well as many syndicated programs on broadcast television, even though it only reaches 36% of U. S. Households at this time.

Speaker 4

The program clearly has found an audience, so no surprise we're thrilled to renew Investigate TV plus for a second season. We also recently launched a Spanish language version of this highly successful show in 26 of Grey's Telemundo markets. 202024 has begun very well due in large part to the great work of our content professionals. Earlier, Hilton talked about how important it is for us to own and operate highly rated television stations. The selected accomplishments I've highlighted here this morning are evidence that our employees are doing what it takes for us to maintain our stations high rankings and put us in a position to continue to over index in this year's political advertising relative to other stations and platforms in our markets.

Speaker 4

I now turn the call to Evan.

Speaker 2

Thank you, Sandy. Our retransmission revenues and network affiliation fees were largely stable despite headwinds in subscriber trends in the pay TV industry. Indeed, we recently announced that we have completed the renewals of retransmission consent agreements with cable, satellite and telco operators who collectively represent more than 70% of the big 4 traditional MVPD subscriber base in the 3 year renewal cycle that began in the second half of twenty twenty two. For a number of reasons and strong and loyal viewership of our new station, we completed all of those negotiations covering roughly 400 operators without a single blackout. We remain comfortable with the guidance provided on the February earnings call for stable retransmission revenues and network affiliation fees for full year 2024.

Speaker 2

The other topic I want to highlight is increasing litany of positive developments involving the new transmission standard for broadcast signals called NextGen TV. It was less than 7 years ago that the FCC approved this first advancement in broadcast technology since the 1990s. Importantly, next gen TV deployment is already well ahead of HDTV and the DTV transition at the same 7 year mark. The first next gen TV did not go on sale until 2020. Yet by 2026, the Consumer Technology Association projects that next gen set sales in the U.

Speaker 2

S. Will exceed smartphone sales in the U. S. At the same 6 year mark in the product lifecycle. To date, just 4 years after the first set was more than 10,300,000 next gen TV sets have been sold in the U.

Speaker 2

S. And there will be more next gen channels available in 2024 than DTV channels in 2,004. Back by 2026, fully 65 percent of TV set shipments in the U. S. Are projected to include next gen TV receiver chips.

Speaker 2

In addition to the successes with receiver rollout, station transmitter build outs continue and the industry now delivers a next gen signal reaching 75% of U. S. TV households. This milestone brings Gray and the industry much closer to being able to deliver the vastly improved picture and features for viewers as well as new monetization opportunities for broadcasters. Indeed just this past Saturday, our NBC affiliate in Louisville, Kentucky, W AVE, aired the Kentucky Derby, broadcast made history as the 1st major sporting event broadcast in the United States using Dolby Vision's HDR as part of next gen technology.

Speaker 2

The progress in next gen TV across broadcasters and technology companies is tangible and important. We expect there will be many more impressive achievements and milestones announced over the next few months in this area. This concludes my remarks. I now turn the call to Jim Ryan.

Speaker 5

Thanks, Kevin. Hilton Pat covered the key highlights of the quarter. As such, my remarks today will be very short. You will see a few changes in the definitions and metrics in our earnings release and 10 Q today. These changes and potentially a few other changes next quarter result from comments that we received from the SEC recently as part of the agency's routine review and comment process that all public companies undergo every few years.

Speaker 5

Turning to our Q1, twenty twenty four results. Again, we're very pleased with our results, especially our plus 4% growth in core ad revenue. While the Super Bowl on our 50 TBS channels allowed us to generate $18,000,000 of core ad revenue compared to $6,000,000 on our then 27 FOX channels in 2023, the quarter benefited from broad based advertising demand with most categories being up including services and auto. Our operating expenses excluding depreciation, amortization, impairment and gainloss and disposal of assets were better than our initial expectations and we'll continue to monitor our expenses for additional efficiencies as we proceed through 2024. Demonstrating our commitment to debt reduction, we paid $50,000,000 of revolver borrowings in February and prepaid an additional $1,000,000 of term loan debt on April 1.

Speaker 5

These amounts are in addition to the routine quarterly term loan amortization of $3,750,000 that we made in the Q1. As of March 31, 'twenty four, our leverage ratio was 5.63 times. And more importantly our 1st lien leverage ratio was a very modest 2.34 times on a trailing 8 quarter basis netting our total cash balance of $134,000,000 and excluding the results of our unrestricted subsidiaries and our $110,000,000 gain on sale of our BMI shares. And again, all of that's calculated in accordance with our senior credit agreement. Turning to our full year guide, we are reaffirming the guidance of approximately $1,600,000,000 in core ad revenue for the year and again reaffirming our $1,500,000,000 of retransmission revenue for the year.

Speaker 5

We are reducing our broadcast operating expense guide for the full year to approximately $2,300,000,000 from the previous guide of $2,400,000,000 We look forward to a very successful full year 2024 including strong political ad spending later in the year. It's now time for me to introduce my successor as CFO. Jeff is the ideal person for this role given he is very close working relationship with Gray as a key banking partner for almost 20 years. And therefore, very happy to turn the call over to Jeff.

Speaker 6

Thank you, Jim. As Jim mentioned with my prior firm, I was the lead debt banker for virtually all of Gray's market activity for a very long time. Including the recent acquisitions of Raycom, Quincy and Meredith. Incidentally, I was also the lead debt banker to Raycom and Quincy among others. From that long history, I've learned the business and come to know the talented and dedicated management team at Gray.

Speaker 6

What attracted me to Gray is the exceptional set of assets and scale of the company. As you all know, the portfolio has number 1 and number 2 ranked local news stations in 102 out of 100 and 14 markets. At this time Gray's large scale M and A for Foot Pension is complete and the assets key functions and people are fully integrated. Today you're seeing those results in our core business. When I first discussed the opportunity of joining Gray with Hilton, it was clear that deleveraging was his top priority, which align with my view.

Speaker 6

Delevering is good for our shareholders, for our debt holders and for our employees. It's also how we position the company to capitalize on changes in the media landscape and the most straightforward way to increase our equity value. In that light earlier this week, our board authorized spending up to $250,000,000 of liquidity for debt repurchases giving us another tool to implement our delevering plan in an efficient way. In late January, Gray took advantage of strong market conditions to launch a refinancing of the revolver in 2026 term loan. We successfully completed an amendment upsizing and extending the duration of our revolver with the banks who know us best and we again thank them for their support.

Speaker 6

Obviously, the term loan marketing process became more challenging with news from 3 other media companies regarding their plans to bundle their sports rights into a new virtual MVPD, which was completely misunderstood by the investment community in the 1st several days after its announcement. In the end, Gray made the decision to close the revolver postpone the term loan refi process until the new cycle quieted down and we can capitalize on our positive outlook for 2024. Going forward, you should expect to see us act quickly when necessary, but always in a smart way to manage our capital structure. The company has been and will continue to be very thoughtful about the cost of capital as being measured over a period of time rather than at any specific point in time. And that's extremely important.

Speaker 6

Our current low secured leverage at 2.34 times allows us access to multiple pockets of capital in the public and private markets. We also expect significant cash from political advertising this year that will allow us to further reduce total indebtedness and extend our maturity profile. We believe that we can do all this in a way that is positive for all stakeholders. And lastly, as a new shareholder myself, I look forward to engaging further with all of our investors to maximize value for all of our stakeholders. And with that, I'll turn the call back to Hilton for some closing remarks.

Speaker 1

Thank you, Jeff, and welcome on board. I'll leave all of you with this perspective. There are challenges in the media business, most of which are not of our making, but many of which provide opportunities for us. What we can control, our leading local franchises, expansion of digital ad sales, our retrans rates, expansion of sports content partnerships, implementing next gen TV and probably most importantly in the short term where we deploy capital. All of those things are going exceptionally well.

Speaker 1

So operator, at this time, we ask that you open the line for any questions of me or anyone here at the table.

Operator

But first up, it looks like we have Daniel Kurnos. Your line is now open.

Speaker 7

Great. Thanks. Good morning. Nice start to the year guys. Kevin, just a quick housekeeping.

Speaker 7

What's left this year either by quarter, however you want to put it in terms of distribution renewals?

Speaker 2

Good morning, Dan. We have a very small number of contracts with cable companies that cover about 30% of the big four traditional MVPD subs. Those will be in the come up in the second of the

Speaker 7

year. Perfect. And then look, the core you guys have been harping on this for a while. I don't think any of us years ago would have thought you guys would have beaten 2019 at this point. Pat spent a good time a good amount of time detailing it.

Speaker 7

But I mean, is this sustainable? How do you guys think this trends from here? And what are you guys doing differently to get such massive outperformance?

Speaker 3

Hey, Dan, it's Pat. I'll start. Look, at a private company from 2010 through 2019, we watched core deteriorate slowly, but steadily, mostly with the auto category for a long time. And to be ahead of 2019 now is in my mind pretty remarkable. Do I think it's sustainable?

Speaker 3

Yes. I think we can continue to grow. I think that we now have a much more diverse basket of advertisers. If you go back to 2018 or 2019, auto was probably 25% or 30%. Today, it's mid to high teens and services are a huge part of our revenue.

Speaker 3

And so I think we're in much better shape. I think the reasons for that, at least for Gray, it's our investment in training, it's our investment in going after or having a team that focuses on certain categories, verticals. We've had that team in place now for years and the training in place probably 8 years now. So it's paying dividends for us. And I think we absolutely have the capacity to continue to grow.

Speaker 4

Yes. And this is Sandy, Dan. The other thing I would add to that, we talk a lot about our laser focus on new local direct and Pat talked about the increase over last year. But I will tell you, we challenge our stations and they deliver month after month after month continuing to set records there and that's something we can control. And just one other point, we talked about the importance of strong content and strong rank stations that also gives us an advantage and a competitive edge there.

Speaker 7

All right. Thanks so much. Appreciate it, guys.

Operator

Thanks, Ann. Next up, we have Aaron Watts. Your line is now open.

Speaker 8

Hey, everyone. Thanks for having me on. I've got a couple of questions. 1 on core advertising, heard your comments around core and the tough comp you're up against in 2Q. Anything more you can kind of tell us on the underlying theme, areas of strength and softness looking forward?

Speaker 8

And any reason for optimism ad trends can improve from here despite some of the macro uncertainties that seem to still be weighing on advertiser decision making?

Speaker 3

Yes. Again, so we're a sort of the Main Street company as opposed to a Wall Street company. I think early in our comments, what we're seeing is local businesses doing well and advertising with us at the end of the day. So looking at the categories, auto was auto again had this long steady decline into COVID, then it came out of COVID pretty strong, start to level off a little bit. But the services sector for us is extremely strong.

Speaker 3

We had a bump with the gambling category and now that's a little sort of lumpy. Some quarters it's up, some quarters it's down. But all in, if you look at the broad set of key categories for us, it's a good story. So again, I think we're a better sales organization than we were a few years ago. And we've invested heavily in that area, and I think we can continue to grow.

Speaker 3

Sandy, do you want to comment on that?

Speaker 4

No, I agree. I mean, and the nice thing too is we're seeing growth among categories, not just auto, but legal in particularly. We've done very well and we continue to see that grow, furniture, restaurants as well. So we're seeing it spread across multiple categories that grows.

Speaker 3

I think our scale also adds to as a significant benefit. You go back and look at the company 5 years ago, very different company than it is today.

Speaker 1

Aaron, this is helpful. That's helpful. I want to just add one other thing. And to the extent that they're on this telephone line right now, it's our people, Aaron. I mean, we give them the tools to do their job and they execute.

Speaker 1

And one of the things I'm very, very proud of this company is we execute across the board and in every moment we do the right thing and carry it out and it all comes down to the people that we have in our TV stations in all of our 114 markets.

Speaker 8

Okay. Yes. Thanks, Hilton. On the debt repurchase program, to date, I believe your focus has been on addressing that front end term loan maturity, but you do also have debt trading at discounts to par value. How are you thinking about balancing attacking the nearest maturities with perhaps capturing greater discounts to further your deleveraging aspirations?

Speaker 8

Is this authorization a sign of maybe being more open to repurchasing discounted debt securities than you've opened to previously?

Speaker 6

Yes. Aaron, I think you nailed it. I mean, it's a balanced approach with the front end, the short maturities, we'll have to address those in due course here, but we're not oblivious to the fact that we've got debt trading in the 60s and it would be nice to capitalize on some of that to accelerate the deleveraging. Again, not sacrificing our liquidity position or the need in the near term maybe reapproach the markets for the refi.

Operator

All right. Next up, we have Stephen Cahill of Wells Fargo. Your line is now open.

Speaker 7

Yes, thanks.

Speaker 9

I've got a few. So Kevin, I was wondering if you could just talk about the structure of reverse comp on a medium term basis. It's something we've talked about before, but I think you're looking to potentially convert fixed programming fees to something that's more variable. Just wondering if you're having any early conversations around those, and how you think those conversations may trend over time? And then Pat, just to pick up on some of the advertising commentary, I think you're the 1st media company I've heard in about 18 months talk about national advertising being better.

Speaker 9

So I'd love to know what's going on underneath the surface there for Gray. And then lastly, Hilton, so you've talked about how Wall Street is kind of missing the point about the business fundamentals. I know we can have a myopic view. I think a lot of the debate is just when there's going to be free cash flow that's available to the equity holder and how you can deleverage. So I'm wondering what you think about is potentially helping with deleveraging, whether you would look at asset sales, whether you would look at changes to the dividend or whether you think you can get there purely organically?

Speaker 9

Thank you.

Speaker 1

Thank you, Stephen. All right. Kevin, you want to start?

Speaker 2

Yes, Stephen, our network affiliation agreements are up in the following schedule. We have ABC up at the end of this year. We have CBS and Fox up in the second half of twenty twenty five and we have NBC up at the very end of twenty twenty five. There's not really not aware of any precedent where a network and an affiliate group have opened a negotiation early and changed the terms early. We've done at Gray, we've done countless negotiations with the networks.

Speaker 2

Typically, we buy something with an earlier expiration date and we'll add years to other markets so that they all have a coterminous end. So we don't reopen the existing contract. We live with whatever contracts exist until they expire. And then we roll into where has been negotiated either recently or sometimes 2 or 3 years in advance. Where we are now is we are not acquiring anything.

Speaker 2

All of our stations are on the same schedule with all four networks. We will likely talk with CBS and Fox a year from now. So I think there'll be a lot of other broadcasters who will be talking to all the networks before we will. And we would expect that all broadcasters, including those who own the networks are very aware of what's happening with cord cutting and we'll be adjusting the programming fees to reflect where retrans is at and the exclusivity of the content we're receiving. But we are not I don't anticipate us other than ABC at the end of this year having any conversations on any changes to our existing contracts until those contracts are over.

Speaker 2

And again, that's not until the second half of twenty twenty five. Pat?

Speaker 3

Yes. So Steve, to your question around national, we had a good quarter in Q1 for national. There were a number of categories that I think contributed to that. One that I'd point out would be consumer goods for us, which was up high single digits. Look, national for us is a much smaller piece than local, which we have more control over.

Speaker 3

But at the end of the day, you're going to see national, it's going to be a little bit lumpy, but this quarter was a very good one. And I think it's due in large part just to sort of a broad number of categories that happen to be up in Q1.

Speaker 1

All right. And Stephen, I guess on the last one here. So let me say that I read everything that you write and I appreciate every comment that you have, some of which I greatly differ with, but I appreciate every word you write. That being said, we're going to do it the way great as everything else, we execute. And it's really simple.

Speaker 1

We don't intend to sell any assets. We see no panic. We are not concerned. We will operate our TV station, our other assets and we are generating a huge amount of free cash flow. And we will use that to deleverage the company.

Speaker 1

We have no intentions, our board has not even considered cutting the dividend nor picking anything. Some of our competitors may have chosen to do so. Each company is their own best guide in that regard. Gray, as this quarter's results, I think demonstrate is a stunning company. We have spent 30 years assembling some of the finest assets and the people around this table and talking to you today represent 1 of the greatest, in my judgment, media companies currently operating.

Speaker 1

And I think our results demonstrate that. So what we're going to do is go to work every day. We're not going to sell things. We're not going to blank and we're not going to panic. And we're just going to reduce our debt just like we've done for the last 30 years.

Speaker 1

We moved our debt ratio up to what we considered to be as high as we would ever like it to be due to the opportunities to acquire both Quincy and Meredith. And that completed a remarkable footprint for our company. And now we are enjoying the fruits of those efforts. And so we're just going to carry on and that's all there is to it.

Operator

The next up we have Craig Huber. Your line is now open.

Speaker 10

Great. Thank you. I wanted to ask about the Assembly Atlanta project here. I mean, I think last call you guys talked about how the revenues are starting to generate off that got delayed because of the Hollywood strikes and stuff. Maybe just update us on your thoughts on when you think the full revenues will start coming through?

Speaker 10

It sounds like a 2025 event. That's my first question and then I'll take a second one after that if I could.

Speaker 1

Sure, Craig. This is Hilton. Let me see if I can answer that for you. Obviously, we have a long term lease with the Universal Production Services division of Comcast, NBCU. And what that effectively create a financial 70% occupancy rate for all of our studios.

Speaker 1

The other 30% of not only assembly, but 3rd rail studios, which are 2 separate businesses, but all operated together, have always been producing, but we have had a lag in commitments. And what everyone has told me, it is because of the lack of actually getting green lit due to a potential iAOTC strike. By the end of the month of May, it is my understanding that that issue will either fully matriculate or it will go away. And I think once that happens, I think we're going to have a great boom in terms of what we're doing because the only issue that we have is getting TV productions that are getting quotes left and right, getting green lit from Hollywood. And so I think that green light is going to come and I think it's just a matter of time.

Speaker 1

In the meantime, we're in a remarkable position. We've got I think about 4 production shooting currently and our reviews from people using our studios have been superb. And so I anticipate that we will see a more fully leased out 100 percent sometime during the course of 2024 and then it will carry for obviously in future years.

Speaker 10

Great. I appreciate that. And my other question, if I could ask, just longer term here, you guys have plenty of broadcast spectrum, of course, and with the continued rollout of ATSC 3.0, just curious, when do you think you might start being able to monetize that to some degree? When can we start seeing somewhat of some material revenues off that? And I assume the whole thing maybe late this decade, but just maybe talk about what you're kind of doing on that front, the extra spectrum you have?

Speaker 10

Thank you.

Speaker 3

Yes, it's Pat. So I would say that we'll start seeing revenues probably Q1 of next year. In terms of material revenues, it's a little bit difficult to forecast. It will be a matter of years. I'm not certain it will be the end of the decade though.

Speaker 3

I think it will be sooner than that. So although I can't give you a hard and fast number there, but we'll start seeing money next year. And I think in a few years, the money will be meaningful.

Operator

All right. Next up, we have James Goss. James, your line is now open.

Speaker 11

Okay. Just one thing following up on what you just said. What sort of monetization efforts do you think can be made with NextGen TV? How will it come into play do you expect?

Speaker 3

Yes. So there's a number of different areas. One of the sort of primary is digital data delivery. So getting data into automobiles, taking data that gets offloaded from the cellular networks, there's a number of conversations that have been going on in that area for years. I think that'll probably be the first.

Speaker 3

But a little longer term, the new three point zero standard gives us the ability to target ads, which can be a game changer if all of our current impressions on linear television were targetable, that really changes the paradigm for local TV. And ultimately, that's where 3.0 leads us. It's going to take a little bit of time, but we'll get there.

Speaker 11

Okay. And there was also a discussion earlier about fast channels and connected TV offerings. What sort of economic model are you pursuing along those lines?

Speaker 3

It's an ad sales Jim. And while it's a small number today, we expect it to grow dramatically as we roll out more of our stations on the fast platforms. So we're in the early stages of rollout right now. And as you might guess, the more stations you roll out, the higher the rollout period is going to grow quicker than it would in a sort of a static period. So we'd expect that again small number today to grow significantly over the next few years.

Speaker 11

Okay. One last one. Jeff mentioned and welcome, Jeff, that Wall Street sort of misunderstood the sports JV impact. And I wonder if you might expand on that a little bit. What do you think was the nature of the misunderstanding?

Speaker 11

And please clarify what we should understand about it.

Speaker 2

Do you want me to take that? Either one of us can.

Speaker 6

I mean, I'll start and Kevin can direct me. But look, the sports JV when it was first announced, there were very few details about what it meant as it relates to the existing distribution channels and who it was targeting, etcetera. And so the if we are if it is another avenue for us and another MVPD, virtual MVPD using our programming that should be a positive for us. So that I think is the crux of why I use the term misunderstanding on it because it was declared as the latest way that we're going to

Speaker 2

get disintermediated and in fact it should help us to be part of the plan going forward. Just to echo that, I think we probably feel that 4 dozen phone calls on the JV in 2 days. And a fair number of questions seem to stem from the idea that this sports JV was going at 14 linear channels, 12 cable and then the reference to the 2 broadcast channels, FOX and ABC, somehow meant a national ABC network and a national FOX network that don't exist. Disappointed, a lot of people did not understand that the way that broadcast networks work is that there are local TV stations that carry certain number of hours a day of content, 2 hours a day for Fox Sports and about 15 hours a day for ABC Plus Sports content. So for example, if you're in Cedar Rapids and you want to watch Fox, you don't turn on the Fox Network, you turn on the Fox affiliate owned by another broadcaster.

Speaker 2

If you're in Cedar Rapids and you want to watch ABC, you don't turn on ABC network, you turn on the ABC station, that's ABC affiliated TV station in Cedar Rapids, it's owned by Gray Television. People just seem to have completely missed that. I think the comments from the networks to us privately and the comments publicly return people see the understanding that broadcast is different than a cable channel that's distributed to all homes at essentially the same time, with the same content. And as that sunk in, people I think started to appreciate what really we said in the statement we issued that day, which was a virtual MVPD that carries local affiliates will compensate the local affiliates for their signals. And therefore, as we've learned many times many subsequent conversations, the target audience here is not to destroy the linear the traditional MVPD sub base that is contributes a significant amount of money in distribution for the cable channels that are distributed there as well as the 2 broadcast networks.

Speaker 2

But it is going to target the core never crowd. So to the extent they're bringing in people from that do not currently pay for television, that's incremental revenue for all of us. So if it's successful, it's incremental revenue and that's a good thing. There are a couple there are 3 or 4 virtual MVPDs today. One's already gone out of business.

Speaker 2

So this is another new virtual MVPD. There may be more in the future. It's a dynamic business and the industry does not end every time somebody announces a new virtual MVPD, but that seems like that's what happened for that 1st week. So I think, we are at the point where people understand now what a virtual MVPD is and how slim these offerings will be and that a virtual MVPD that carries Fox and ABC affiliates is a benefit to Fox and ABC affiliates.

Operator

All right. Next up, we have John Kornreich. Your line is now open.

Speaker 12

Two questions, I guess, for Jim. 1, should we expect leverage to get a little bit under 5 by the end of this year? And secondly, can we be hopeful that net retrans, which by your forecast will, I guess, decline by about 3% this year could resume some small growth in 2025 and 2026?

Speaker 6

Yes, John, it's Jeff. I'll take your first one. In terms of leverage towards the end of the year, I don't think we quite get below 5, but we should be getting into the low 4s by the end of the year.

Operator

Low 5%

Speaker 6

Sorry, low 5% by the end of the year.

Speaker 1

Sorry about that, yes, low 5%.

Speaker 12

You had me excited for a minute.

Speaker 1

Yes. My apologies.

Speaker 12

And the other question is anybody can take it, I guess.

Speaker 5

So this is Jim. I'll leave and Kevin can provide a little bit more color. Given the pace of our sub renewals after we finish the remaining roughly 30% this year rate renewals, I mean, we have about 18 months where we don't have any retrans agreements up for renewal. So I think the retrans is going to be more stable in 2025. And then I think as you get past 25 and into 26, 27, if we have an opportunity again to grow.

Speaker 5

Kevin, you can feel free to add more color.

Speaker 2

Yes. I think that's correct. The fixed fee network contracts were set at a time when we all anticipated that retrends would be in a different position or I should say the traditional MVPD sub and numbers will be higher than they are today. And we fully expect that we will be resetting those prices when we renew in 2025 and that should allow us to return to net retrans growth going forward.

Speaker 12

After 2025?

Speaker 2

I would say after 2025 that whether it occurs in 2025 will depend on a couple of puts and takes with our renewals this year and sub losses and also sub migrations, subs that move from traditional to the virtuals, just how that flows. So

Speaker 1

I

Speaker 2

think this year we're looking at we talked about stable to maybe low single digit decline on that next year. There's still some puts and takes. I'd say as we look over a number of years, we should see net retrans returning to a growth trajectory.

Speaker 12

Kevin, what is the your calculated sub decline of late?

Speaker 2

Gray's experience is fairly consistent with the overall industry. Our TV households break down to about 40 5 percent roughly in large markets, 45% in midsized markets and the balance in small markets and that skews a little bit more towards midsize markets than the overall U. S. Population distribution. But our experience with the MVPDs is, I'd say, pretty similar to what you read overall and estimates for the overall industry.

Speaker 2

Okay.

Speaker 12

Thank you very much for your answers.

Speaker 2

Thank you, sir.

Operator

All right. Next up, we have David Hebert. Your line is now open.

Speaker 13

Hi, everybody. Thanks for taking the questions. I wanted to ask a follow-up on the retrans because I think your guidance shows a mid single digit decline in the second quarter and you could just give some data on cord cutting. But are you able to sort of segment out what the pressure is between cord cutting versus mix shift of linear subs moving to virtual because I know YouTube has had some nice growth over the past couple of quarters, Sunday ticket. So just wanted to ask for a comment there.

Speaker 2

Yes. I haven't really thought through philosophically what's the bigger driver or what the relative breakdown is. The traditional MVPD subs are declining double digits. That's fairly well known. And the virtuals and the DTCs are growing at a pretty healthy clip, that's also fairly well known.

Speaker 2

So we're not immune to that at all and we're exposed to it at kind of the same level as everybody else. We probably are a bit more exposed than others in terms of the price difference. The revenue difference we get from a traditional sub versus a virtual sub because our traditional rates are at the high end of the industry. There are some broadcasters who probably are still looking at kind of parity between traditional rates and what we receive from the networks for the virtuals. I think that the large groups have more success in driving their traditional retrans rates.

Speaker 2

And so those who have higher rates are obviously going to have a bigger delta when they move to essentially the same fee that's paid to all affiliates in all markets of all quality levels. So we probably do are a bit more exposed in that area. On the flip side, sooner we can as those fees on the virtual side, can move closer to a market rate, Gray would benefit more than others. So we are all rolling in the same direction as an industry, meaning broadcast affiliates to return our rights to us, that is our ability to negotiate for the distribution of our signals on all platforms, not just all platforms minus 3 or 4. And when we succeed there, which I unfortunately will not be quick because it's a Washington solution, we will see good benefits for Gray as well as the whole industry.

Speaker 2

But your following questions, when is that going to happen? And I can't tell you when anything is going to happen in Washington.

Speaker 13

Yes, it makes sense. Thank you for that. If I could just follow-up one kind of all encompassing sports question. I think broadcast is clearly offers an incredible reach medium, But you have NBC doing exclusive NFL games on Peacock. And so there seems to be some experimentation with doing exclusive sports on streaming.

Speaker 13

What sort of commitments do you get from your broadcast partners in terms of keeping sports on the broadcast medium and limiting sort of that leakage to streaming services? And then my second question is on sports is, what sort of feedback have you gotten on your sort of early innings distribution of local games, NBA, etcetera? What's been the feedback, I guess, from either fans or the teams themselves? Thank you.

Speaker 3

Yes. Sure. To answer your second question first, I mean, the feedback has been extraordinary from the fans, from the teams. And there's a really good reason for that. I mean, the numbers, the audience that we're generating for these teams is significantly above their former levels or what they're currently doing, right?

Speaker 3

So in Phoenix, we were up 70%, 80%. In some of the other markets where we did smaller packages, we did some 5 10 game packages. In some markets, the numbers were double or triple what they were on the current carrier. So obviously, the teams are going to be excited about that. But the fans, who many of which have been sort of disenfranchised over the last few years, are able to see their team and it's a really exciting moment.

Speaker 3

And so the feedback has been extraordinary and not only from the fans, but also from the advertisers. They're really excited to have those games reach the types of audiences that they're now reaching. As far as the networks and sports, they're dabbling in direct to consumer with a small number of games. And a lot of the games are the case of NBC, the vast majority of the sports they do is simulcast. So we're not some of the audiences, there's a little bit of audience leakage there, but not a lot.

Speaker 3

And so we continue to be very, very effective in selling those high profile sports properties. So I can't as far as commitments go, I can't get into that. But I think you're going to see some experimentation in that area. I think you'll see that with a number of the leagues, but I think that broadcast television has clearly illustrated its value over the last 6 months.

Speaker 4

Yes. Dave, just one additional point to that is that Phoenix, the funds where we have the full commitment, the full season commitment and side by side games where games are carried on national cable, our local broadcast and our station just absolutely significantly higher ratings. People are turning to us to see the game and the feedback has been fantastic from both the team and the fans. And Pat mentioned the small package of games that we had, just to give you one example. So in New Orleans with the Pelicans, their ratings were up over 200% and over 300% in adults 25% to 54%.

Speaker 4

So as you probably no surprise, we're getting great feedback from both the teams and the fans.

Speaker 3

I think one other sort of interesting point there is that in Phoenix, where we have an independent station, KTVK, it's the number one billing station in that market. And for some context, if you go back 10 quarters, if you go back when we made the Meredith acquisition, our CBS station and our KTV, KV independent were the number 34 stations in that market from a revenue perspective. They're now the number 1 and number 2 stations in the market. Now in fairness, KPHO, the CBS had the Super Bowl in Q1, but KTBK is the number one station in Phoenix. I think that tells you a little bit about the value and the impact of local sports and where that can head.

Speaker 3

So we're excited about that.

Speaker 9

We can

Speaker 4

certainly show that to the team there. Absolutely. And our team, AC Family.

Speaker 1

Yes. David, this is Hilton. You asked for some anecdotes. Let me give you a couple just real quick. We took our Board to Phoenix because we are really proud of what we're doing with the Suns and the Mercury and took them to a game on 1 Sunday afternoon held our board meeting out there and I walked in because the hotel we were staying in didn't have our independent on the television.

Speaker 1

And I asked them if they could program it. And the guy that was sitting there behind the thing goes, are you part of the company that brought the sons to Live Free TV? I said, yeah, actually, I am. And he goes, oh my God, I'm a college student. I can't afford to like pay X, Y, Z.

Speaker 1

The fact that you brought it back to free TV, it's unbelievable. That night, we go up and we had all our board at a dinner and we were just talking about what we had done with the Suns and where we're going to go to the game, etcetera, etcetera. And then we freaking got 3 of our folks that were serving us our dinner applauding because we brought the sons back to the market. Now, if that doesn't tell you something, I don't know what does. Those are great anecdotes and we are thrilled with our experience with the SUNS and I think everybody in Arizona is too.

Operator

All right. And it looks like we have time for just one more question. So Michael Kupinski, you'll be our final question.

Speaker 14

Thank you. Most of my questions have been already addressed, but a quick one here. You've always prided yourself on local direct business, which has been just an incredible success for you. The agency business looked like it ticked up in the last quarter, 48% of your revenue. I assume that's because of the pickup in national, but I was wondering if you could maybe provide a little color there if that was maybe a little political.

Speaker 14

Do you anticipate that the agency business will be a greater percent of total revenues as national recovers? And then maybe because of some of your initiatives like sports or targeting advertisers that have a broader geographic reach, I was just some thoughts of what you think agency business will be in terms of the norm, local, direct versus agency?

Speaker 3

Yes. So because we skew to midsize and smaller markets, we have a lower percentage of agency business than most groups. So I think that I don't I wouldn't say that we think our revenue the agency share of our revenue is going to grow significantly going forward. Again, I think the area that we control the most is local direct. So our control better is local direct.

Speaker 3

And Sandy may

Speaker 4

have some comments Hopefully political plays a part in that as well.

Speaker 3

Yes, that's true, right, for Q1, yes. So you'll see a lot of political you're obviously agency business goes up. The national strong

Speaker 5

and it will be agency side business too.

Speaker 4

Yes, absolutely.

Speaker 14

Yes. So we should just look for that to go up this year, but maybe kind of go back to more of a normalized in the 43%, 44% range going forward?

Speaker 3

Yes. We'd go back to a more normalized range going forward.

Speaker 2

Okay. All right. Thank you.

Operator

And with that, we'll now turn the program back over to Chairman Howell for closing remarks.

Speaker 1

Thank you, operator. Before we close out this morning, I just want to take a moment to thank Jim Ryan for his time with our company. I don't know if he's feeling a sense of great elation that this is his last earnings call. I know that he'll have other phone calls to talk to with you guys, but for what 26 years. And as I mentioned at the beginning, over 100 of these calls, he has been there steady and true.

Speaker 1

And I greatly thank him for his time and service. And I will say we still have him around to help us out for the next year. And I also want to welcome Jeff Geniak to our company. I could not be more proud of that individual and the succession that we have accomplished. Jeff knows our company.

Speaker 1

He may know some parts of it better than the rest of us around this table. Now he's getting to know the people and the assets that create the financial numbers that all of you look at. And so thank you, Jim, and welcome, Jeff. With that, we'll sign off for Q1 and we'll see you next quarter. Thank you.

Operator

All right, ladies and gentlemen, this does conclude your call. You may now disconnect your lines and thank you very much again for joining us today.

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Key Takeaways

  • Gray’s stations delivered 4% growth in core advertising revenues year-over-year in Q1 and reported a 21% increase in adjusted EBITDA to $197 million.
  • Management reaffirmed full-year core ad revenue guidance targeting a beat vs. 2019 pro forma levels and expects Q2 political ad revenues 55–72% above Q2 2020 despite a strong political election cycle.
  • The company used $50 million of cash to prepay term loans, driving its leverage ratio to 5.63×, and the board authorized up to $250 million in debt repurchases to accelerate deleveraging.
  • Construction of Assembly Studios in Atlanta is now ~95% complete, with NBCU anchoring two-thirds of the space under a long-term lease, positioning the project as a multi-decade cash-flow generator.
  • Digital and Connected TV initiatives are scaling rapidly, as Q1 saw record digital audience engagement, double-digit digital revenue growth, and CTV fast channel revenues more than triple year-over-year.
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Earnings Conference Call
Gray Television Q1 2024
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