Gray Media - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter twenty twenty Earnings Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Would now like to hand the conference over to your speaker, Mr.

Hilton Howell. Thank you. Please go ahead.

Speaker 1

Thank you, Natalia. Good morning, everyone. As, our operator mentioned, I am Hilton Howell, the Chairman and CEO of Gray Television. Thank you for joining our second quarter twenty twenty earnings call. Today, as is expected this time of the year, we are all virtually present.

During Q and A, if we stumble over a couple of us, please forgive us. On the line with me are our president and co CEO, Pat LaPlatney our chief legal and development officer, Kevin Lajc our chief financial officer, Jim Ryan and our chief operating officer, Bob Smith, who has been with us before, but I'm delighted to have with us today, to add, perhaps some color to what we're seeing in the field to all of our stations. We will begin this morning with a disclaimer that Kevin will provide.

Speaker 2

Good morning, Hilton. Thank you, everyone. I'm sorry. Thank you, Hilton, and good morning, everyone. Certain matters discussed in 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 differ from those described in the forward looking statements as a result of various important factors. Such factors have been set forth in the company's most recent reports filed with the SEC, including today's earnings release. The company undertakes no obligation to update these forward looking statements. Gray uses its website as a key source of company information.

That website address is www.gray.tv. Included on the call will be a discussion of non GAAP financial measures and in particular, broadcast cash flow, broadcast cash flow less corporate expenses, operating cash flow, free cash flow, adjusted EBITDA 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 evaluation of our company. Included in our earnings release as well as on our website are reconciliations of non GAAP financial measures to the GAAP measures reported in our financial statements. And I'll return the call to Hilton.

Speaker 1

Thank you, Kevin, and thank all of you again for joining us this morning. But first, before we begin, I want to take a moment to wish Gordon Smith, our president and CEO of the National Association of Broadcasters, a swift recovery from a stroke he apparently suffered last night. Our thoughts and our prayers are with him and his family. We understand his prognosis is excellent, and we look forward to his return to the NAB and wish him godspeed in his imminent recovery and many more years leading the NAB organization. Second, I want to salute the truly amazing men and women of great television for their extraordinary efforts during these extraordinary times.

Learning to work from home often in isolation, learning to cover an ever changing life destroying virus, learning to balance a child's care with unrelenting demands on deadlines our viewers count on, learning to fight through their own fears. And during the protests and subsequent riots, learning to take a rubber bullet in the chest, learning how to report clearly through a fog of tear gas, learning to stomach the reporting of the ransacking of their beloved cities, towns, and communities and trying to make sense of it all. As the depth and the and and tragedy of our current situation sank in, the absolute first thing that Gray Television did was assure our associates that their jobs, their salaries, their benefits were absolutely secure and not worry about their personal financial security. Their job is to focus on their responsibilities, their journalism, our communities, and our clients, and it has paid off. As the second quarter dawned and with the advent of COVID nineteen in early March and then the formal worldwide pandemic, which was declared and the government mandated lockdowns were announced, business fell off a cliff.

It was deep and unknown. But as the quarter matured, each month got better than the last. In the end, our total revenue declined approximately 11% compared to last year's second quarter. Our total combined local and national broadcast revenue, excluding political revenue, which we call our total core revenue, decreased approximately 30% compared to the 2019. In every cloud, there is a silver lining.

Our business slowed less than we feared, and it recovered faster than we hoped. In fact, the year over year and total core revenue improved sequentially throughout the second quarter. April plummeted by 38%, but May improved but was still a decrease of 34%, and June declined by only 17%. But most importantly, in many of our markets, our individual stations met or in some cases beat their pre COVID budgets in June. Of course, our total revenue declined even less on a year over year basis in the second quarter than these amounts.

In particular, our second quarter results were solid. Total revenue was $451,000,000 Net loss attributable to common shareholders was 2,000,000 or just 2¢ per share. Broadcast cash flow remained healthy at $128,000,000. Adjusted EBITDA was positive at 108,000,000. It is important to keep in mind that through this historic health challenge is temporary, though of unknown duration, that this great country will not allow itself to remain mired in various stages of stay at home, safer at home, and similar restrictions on businesses, schools, entertainment, or sports.

And of more immediate concern, our political theater of 2020 has never been more dramatic with no more rallies, no more live conventions, no more bus tours, no more whistle stop train visits, television will remain and indeed increase as the dominant form of political reach and impact. We anticipate that our political advertising revenue in 2020 will be between 250,000,000 and 275,000,000 and maybe more. Importantly, Gray remains on track to be robustly free cash flow positive during each quarter of this year. We remain optimistic about our business. We therefore took advantage of what we believe was a significant mismatch between the value of Gray Television and the price at which the company's common stock traded for the past several months by repurchasing a half million shares of common stock in the first quarter and a further 3,300,000 shares of common stock in the second quarter.

In total, we spent slightly over $49,000,000 in the 2020 purchasing a bit more than 3% of our total outstanding shares at an average price of $12.81 per share including commissions. Currently, we have approximately 89,740,610 common shares and 7,048,006 class a common shares outstanding. And we have approximately 80,000,000 under our stock repurchase authorization adopted by our board of directors in November 2019. I am particularly pleased to confirm that Gray's prudent management has enabled us to continue to grow a very strong cash position and rock solid balance sheet in these difficult times. Over the first half of the year, we increased our cash on hand by $167,000,000.

Beginning at 212,000,000 at year end 2019 to 379,000,000 at the end of the second quarter despite spending almost 15,000,000 on stock repurchases. This represents a 78.8 percent increase in cash on hand in the bank following the work worst quarter imaginable. Our total leverage ratio is defined in our senior credit facility was 4.4 times on a trailing eight quarter basis netting all of our cash in the bank. We have not drawn any funding from our $200,000,000 revolving credit facility, and we have no intention to do so. We also have not received any stimulus or recovery funds from any government program and also have no intention to do so.

Pat, Kevin and Jim will now add additional color to today's earnings release. Thereafter, I will open the line for questions.

Speaker 3

You, Martin, and good morning, everyone. It's been roughly a hundred and fifty days since an outbreak of the coronavirus forced the NBA to cancel the remainder of its season as games are being played, and the Gray Television adopted a remote work policy and related COVID nineteen policies for all employees. Since then, we have all changed our work and personal lives in many ways to protect ourselves and others. The coronavirus crisis has surely lasted longer than we anticipated a hundred and fifty days ago, and frankly, it'll continue to impact us for quite some time. Meanwhile, the country and each of us are confronting not only our strengths, but also our shortcomings as a society.

We are encouraged that the largely positive constructive responses to all the historic challenges that stand before us today. The past a hundred and fifty days have not been easy. We are nevertheless optimistic that these experiences will make us all stronger as a country, as a company, as a society, and as individuals. We simply could not be more proud or more humbled in how our extraordinary group of colleagues has doubled down on covering local news and events, serving our advertising customers, super serving local communities, and reconfiguring systems, facilities, routines to permit all of that other great work to recur in a new, remote, socially distant, and often uncomfortable environment. Unfortunately, some of our journalists have been attacked for their work, covering the events of the past a hundred and fifty days and not just virtually on social media, which is unacceptable, but also attacked verbally and physically by both police who are called on to protect the community and by rioters intent on harming the community.

Shooting the messenger has taken on a new eerie meeting this year, and we call on everyone to respect all members of the media as they work tirelessly to cover the news for the benefit of all. Turning to the business environment, we're encouraged by the return of advertisers and our continued success in landing new business as we move past April. Our forecast at this time show business still off year over year, but not at the levels we saw in the second quarter. With the number of virus flare ups occurring randomly around the country, we are simply not able to predict whether or how closely future advertising revenue will meet our expectations, though we continue to be encouraged by the creativity and ingenuity of our sales teams. One very strong performer, of course, is political revenue.

As Hilton noted, we've not altered our full year political guide of $2.50 to $275,000,000. On the presidential front, Biden spending remains on par with the pace that the Clinton campaign had in 02/2016. Trump campaign, however, has laid in their base buys through the election. Importantly, the Trump campaign spending is currently on track to be up 57% versus his overall spending in 02/2016. So far, issue and PAC spending for the presidential race is up only slightly 2% from 2016 levels, but it is, of course, still relatively early in the cycle for presidential advertising.

We're seeing very strong demand in the center races. Gray has five states in the toss-up category, four states in the next most competitive category of lean Democratic or lean Republican. Michigan race is coming in below expectations currently, but we're seeing higher than expected spending in the center races in South Carolina, Alaska, Kansas. In addition, party impact spending from the major groups from both parties supporting senate candidates is up 27% from 2,018 levels. Rounding out the races, Gray has eight house races that fall in the toss-up category with three races shaping to be shaping up to be more competitive than originally anticipated.

We have only four races for governor across our footprint this year, with only one, North Carolina, expected to generate significant revenue for us. We've seen a record number of prebookings this cycle as campaigns try to commit to their spending while we're early on and lock in lower ad rates. To date, we have seen an 8% increase in prebooked dollars for non presidential races versus the same time in 18. Finally, we learned yesterday that the Trump campaign had roughly 300,000,000 of cash on hand at the July, which is essentially the same number as the Biden campaign. We are confident that both campaigns will raise more money over the next three months and will spend every dollar that they raise with most of the spending used to buy effective ads on television.

This data point also bodes well for a record year. I'll now turn the call back to Kevin.

Speaker 2

Great. Thank you, Pat. Turning now to retransmission. We completed agreements with three of our largest MVPDs as well as a small number of additional operators in the first half of this year. As noted in our prior call, this public health crisis did not impact the outcome of those negotiations, which were conducted as usual quietly, respectfully, and in good faith by all parties.

We've been pleased with the nature and specific terms of our recent retrans renewals. As we continue to push for full value for the content carried by distributors, our renewing retrans contracts, as well as our non renewing retrans contracts all include annual escalators that ensure continued growth in retransmission revenue every year. This year, however, we have encountered unexpectedly large declines in sub counts. The 2020 had 2% fewer MVPD subs in the 2019. It appears that the 2020 had 3% fewer paid MVPD subs in the first quarter of this year.

OTT providers, on the other hand, continue to have subs in our market with perhaps as much as 18% more paid OTT subs in the second quarter than we had in the fourth quarter of last year. In total, our paid subs declined by nearly 3% between the fourth quarter of last year and the second quarter of this year. For context, this first half decline roughly equals the sub declines that we experienced in all of 2019. Given the rate escalators in our retrans contracts, a stable sub environment would have yielded low double digit growth in retrans revenues over the last, over last year's number. The increased sub losses combined with migrations and subs among MVPD and OTT distributors who all have different rates muted our gross retransmission growth.

In particular, our second quarter retransmission revenue increased 9% over the 2019. Our first half retransmission revenue increased 7% over the 2019. Looking ahead, if sub counts remain stable for the rest of the year, retransmission revenue in the 2020 would be somewhat higher than the 2020 due to a significant renewal that we priced in April 1. If sub losses continue at accelerated rate, depending on how subs migrate among the various distributors, retransmission revenue for the latter half of the year could be somewhat less than the retransmission revenue booked in the first half of the year. You'll also see in our release today that our network affiliation payments, which we typically refer to as reverse comp, are significantly higher than 2018.

I wanna remind you that we've been forecasting this significant increase in reverse comp for some time now. In 2014, Gray proactively renewed all of our big four network affiliation agreements for roughly five years. Those agreements locked in rates that in hindsight appear pretty favorable to us. If those agreements expired at various times in 2019, throughout last year as those agreements were replaced with new market rates, our reverse comp payments increased. In 2020, we experienced higher rates with all four networks for the entire year.

Rates, of course, will increase again at the start of 2021, but we also have a large number of MVPD retrans agreements repricing at the same time. Our next set of MVPD renewals occur in January 2021. In the fourth quarter, we will begin renewal negotiations covering most of our roughly 500 MVPD partners, representing approximately 43% of our total subs. We look forward to the next round of retrans renewals where we can again demonstrate the value of our leading group of television stations and cable and satellite platforms. Thank you for your time.

I'll now turn the call over to Jim Ryan.

Speaker 4

Thank you, Kevin. Good morning, everyone. The earnings release and the 10 Q that will be filed later today provide a great deal of information. As a reminder, starting with the first quarter's release and 10 Q, we no longer need to present results on a combined historical basis. This is because the acquisitions and dispositions that occurred late in 2019 were individually and collectively immaterial.

We are therefore generally presenting results only on an as reported basis. Given the dramatic events that began in March, we are pleased with our overall results for Q2. Our total core revenue was a little higher than the comments we made on our previous earnings call reflecting the sequential improvement in each month of the quarter as Hilton has already mentioned. Our leverage ratio net of the $379,000,000 in cash was 4.4 times, And we currently anticipate that it will decline lower into the fours by the end of this year. During Q2 twenty twenty, we increased our cash on hand by 83,000,000 And as mentioned earlier, we have $379,000,000 of cash on hand plus an undrawn revolver of 200,000,000.

So we are in a very strong liquidity position. Moreover, at this time, we expect that we will continue to generate significant amounts of free cash during each remaining quarter of this year. Given our strong liquidity position, free cash generation, and relatively low leverage, and no debt maturities until 2024, we believe we are in a very good position to thrive and emerge just as we are today as one of the strongest local broadcast companies in the country. Given all the uncertainty around COVID-nineteen, we've withdrawn our previous full year guidance and are not issuing formal guidance for Q3 twenty twenty. However, we remain bullish on 2020 political ad revenue and still expect full year political ad revenue to range between $250,000,000 and $275,000,000 I know all of you want to know more about Q3.

Currently the anticipated increases in political and retransmission revenue should allow our total revenue to grow in a high single digit to low double digit range. As with our peers, we are experiencing declines in total core revenue in Q3, and our visibility is understandably limited. As of today, again cautioning the situation still is fluid and our visibility is limited, we believe that total core revenue for Q3 will decline at least in a range of 10% to 15%. But as we saw in Q2, total core revenue appears to be sequentially improving each month of Q3. While still in decline, it is a dramatic improvement over Q2.

To reiterate, these figures are based on current forecasts in our system and our current pacings. We do not regard internal forecasts and pacing as guidance. We realize that everybody is eager for any kind of predictions on whether and how Q3 will unfold. So we're discussing our current internal forecast as a potential data point, not as formal guidance. We still remain cautiously optimistic about the direction of total core revenue.

Naturally, we will do all we can to mitigate these declines as we work through the quarter and work closely with our advertising clients. We currently anticipate our Q3 twenty twenty broadcast expenses will increase over twenty nineteen Q3 in a mid single digit range reflecting exclusively an approximate $20,000,000 increase in reverse compensation to the networks. Our total corporate expenses in Q3 are anticipated to approximate Q3 twenty nineteen levels, and the expenses of our production companies in Q3 will aggregate in the upper single millions of dollars reflecting in part the seasonality of those businesses. Now to update some key liquidity items again, cash interest on a full year basis is currently expected to be 175,000,000. Our original estimate for the year was 194,000,000, and the decrease reflects the decrease in LIBOR.

Capital expenditures on a full year basis will range between $65,000,000 and $75,000,000 Our original estimate for the year was 80,000,000 Cash taxes currently are estimated between 55,000,000 and 60,000,000, and our original estimate on the full year was 80,000,000. At this point, I'll turn the call back to Hilton.

Speaker 1

Thank you, Jim. The great television stations, production companies, and employees like everyone else has witnessed historic challenges over the last few months. We are proud that we not only kept our heads above water, we managed to maintain full employment for our employees, high morale, and safe working environments. Our stations reestablish the importance and value of local broadcast stations covering important news and information along with exceptional community support. That community support has been demonstrated by the highest ratings.

Our already highly rated stations have seen in decades. As a company, we posted positive free cash flow and grew our sizable cash reserves. Results reported today also confirmed the value of owning the highest quality local institution like ours as well as the wisdom of operating a very lean management structure. The day when we return to what we fondly remember as normality seems further away now than what we anticipated on our call previous to this. Nevertheless, we remain convinced that Gray Television will continue to succeed in the face of these historic challenges and will be even more prepared to serve our audiences and our customers when normality finally returns.

Operator, at this time, we ask that you open the line for questions.

Speaker 0

Your first question is from the line of Dan Kurnos with The Benchmark Company.

Speaker 5

Great. Thanks. Good morning and appreciate all the color. Kevin, you know, I'm sure you're already eagerly anticipating the crystal ball question on subs. So I guess you might as well start there just in terms of visibility and kind of any thoughts in the back half of the year and how it kind of relates to your net retrans outlook.

And then maybe, Jim, whoever wants to take it on core, your Q3 guidance is actually relatively really strong, I think, especially in comparison to the peer group and obviously what we've been hearing from Roku and others. So just can you give us a sense of maybe why the outperformance, where you're seeing pockets of strength? And you know, does that do you anticipate that sequential improvement continuing until we're back to kind of pre COVID levels, you know, early twenty twenty one? Thanks.

Speaker 2

Hi, Dan. First, on sub losses, obviously, down three percent first half of the year is not what not what we were expecting, and its acceleration is also nowhere near what we were seeing the public companies announced over the last two quarters. Looking forward, if the economy is recovering, it it seems that in today's headlines that the hotspots for the country seem to

Speaker 3

be

Speaker 2

stabilizing. We're we're kind of moved a little bit more towards normal. We get another round of stimulus checks and UI pieces all confidence returns, etcetera, etcetera. It seems to us that sub declines should certainly mitigate what we saw in the first half of the year. We also suspect there's a number of folks who didn't pay their cable bill, you know, given losing their jobs or otherwise, you know, changing circumstances.

And when the grace periods end on that, they may end up paying some pass bills and showing up as subs again, especially again, if jobs return and stimulus money is provided. So I think we remain optimistic that we're not gonna see the sub declines the second half of the year that we saw the first half of the year, but, well, it's anybody's guess. So we were surprised at how much it did decline the first half for us. So, you know, we we can be surprised, but we're we remain optimistic. It seems, as we say here today, that the economy, the virus, etcetera, things seem to be pointing in a bit more hopeful direction than we saw even just two or three weeks

Speaker 1

ago. Jim?

Speaker 4

Far as the the forecast, I'll I'll let Pat and Bob probably give a little bit more color on that. I think it first and foremost goes to the strength, the deep penetration we have in our markets is a key factor. The other thing is obviously, especially when we get to September in political, that's a little bit of a wild card. It could skew the core downward a little bit more It's simply because I mean, if political is super strong, then obviously core is gonna get squeezed a little bit. But everybody that's followed us for years realized we always outperform in political, so that's a high class problem to have if that indeed happens.

So I'll let Pat and or, Bob give you a little more color on on what we're seeing.

Speaker 3

Sure. So I'll I'll jump in real quick. It's Pat. You know, particularly in times like these, it's not only viewers that tend to lean on their trusted number one stations, but advertisers do the same. So our our as Jim mentioned, our really strong portfolio stations is a significant benefit right now.

I'd also add that our our training team that's done great work for us for the past the past five to seven years, is having a huge impact, on our already strong sales force, but particularly over the last eighteen months, they've done great work. And then also, in general, say that we've seen a lift from our excellent digital and business development groups. So Bob, if you want to add any detail, jump in.

Speaker 6

Sure, Pat. Certainly,

Speaker 2

of

Speaker 6

our digital efforts are contributing to that along with some verticals we're doing, as Pat has mentioned. But in addition to that, I can't emphasize enough how our portfolio station can make a huge impact in the market. Often clients' budgets are down. But when you have dominant stations, they're gonna find money for the dominant station. The number three, four, and five may get nothing, but we're gonna get bought.

And and we're we're there for those clients, you know, year in and year out, and and they trust us. And so, you know, that's certainly a factor as well. And the fact is, Pat mentioned the training program, but let me, I can't oversell that enough. That group has been phenomenal. And the resources they provided since March, they jumped right in with a lot of different things and they've created a lot of different selling events and that certainly helped.

And then lastly, I would say, have a competitive group and there are six SVPs who oversee our markets somewhat evenly divided. For example, this morning, I got an email from one of the groups that run the regions and his region, they had 20 people, salespeople that is, that had sold at least $20 in new direct business all the way up to $50.60 grand somebody had sold, which is pretty phenomenal. So the point is that we're trying to look under every rock for every dollar that we can find, and we're doing a pretty good job of it. Now it doesn't make up for all of it, but we are really aggressive on the sales front across the company.

Speaker 5

Got it. That's really helpful color, everyone. I appreciate it. Just, Kevin, before I jump off, quickly, did you get the full benefit of the two major renewals that I know were extended past their expiration dates in 2Q, or might there be some kind of accounting nuance in q three?

Speaker 2

By the time we reported in May, we had two of the three big contracts resolved as to rate. I think one was signed and one was checking schedule. So we we posted q one numbers with the rates that would be applicable in q one. When we had the the last deal was finished after April 1, and we knew what those rates would be. So although the actual I'm not sure the check has arrived for sort of the new April or not.

That should probably has, but we have accrued for the rates. Once the rates are are agreed to by the parties, even if the rest of the contract is not nailed nailed down, we do reflect the new rates in our accrual. So what you see for q one and q two would be revenue based on the rates that are in effect for those periods.

Speaker 5

Perfect. Thanks very much. Appreciate it.

Speaker 1

Sure. Mhmm.

Speaker 0

Your next question is from the line of John Janitas with Wolfe Research.

Speaker 7

Thanks, guys. Two for me. One, can you remind us how much of your ad revenue comes from prime time? I think it's pretty small on the decline, but I was just curious, Sarah, and to what extent you may incrementally lean into investments in programming or digital? And then, Kevin, can you talk again to the comments related to the networks?

Because I know you've spoken in the past about expectations that retrans margins will tick lower over time. But is there any incremental message based on what you're seeing in the market?

Speaker 4

Let's start with the prime question. Our normal answer to that question historically has been that roughly 50% of our revenue comes from local news, maybe 20% comes from prime, 20% comes from syndicated programming, and the other 10% is everything else including sports, all sports. We haven't run the specific numbers for prime for Q2, but I would suspect it's probably down a little bit on a relative percentage basis, and our news is probably up, offsetting that. But but in general, prime is, you know, historically run 20% to somewhere, call it high teens anyway.

Speaker 2

Yeah. I'm not sure if I understand the question. What do we pick up from the market on our our network rates? And our our network contracts are locked in over the next couple years. Renewed We those actually, we renewed those early as well.

Various points in 2018 and 2019. So we've taken those, endpoints out a few years, so the the rates don't change in the middle of the term. I so I'm not sure what the question is about what we might be seeing up in the market today.

Speaker 7

Seth, may maybe the question is, you know, based on your comments around just what you're seeing and, I guess, the 20,000,000 of incremental reverse, And I know you've talked about the margins moving lower. Just are you messaging that margins are will be a little bit lower than you expect going forward, or is or is that not the case?

Speaker 2

Well, margins half of our retrans reverse half of our network reverse comp rates are fixed, as you know, by two networks, and two other networks do not have fixed fees. So as subs go down, the two of the networks are somewhat sharing in the pain and two of networks are not sharing in pain. And so if we have if sub declines are are larger than expected, our reverse, comp is a little more painful. In other words, the sharing percentage switches a little more in favor of the network as the subs go down. I mean, that's just that's just a function of the fact that those those are fixed fees in two of those two network, formulas.

I would say is, you know, the flip side of that is if subs go back up, or stabilize, that that we benefit. But more importantly, if we negotiate higher than normal rates, for programming, that we keep all that upside. Right? So it's a double edged sword. If if it's a fixed fee with a network, we absorb the pain of sub losses, but we enjoy all the proofs of superior negotiation.

So if you have a really strong station or a set of stations with a particular network as a fixed fee, and you can drive a higher rate out of the MVPD, we collect that extra money. We don't share it with the network. So there's pluses and minuses with with both network approaches. The bottom line to your question is the increase in subwatches does drive the, the reverse sharing percentage a bit more favorable to the network.

Speaker 8

Thank you.

Speaker 0

Your next question is from the line of Kyle Evans with Stephens.

Speaker 9

Hi, thanks. Hilton, thanks for touching on the human element of your business. It's easy for us number crunchers to forget that and appreciate it. Also, thanks for the detail on political. How much of the guide of the kind of two sixty three midpoint roughly speaking is expected to be presidential versus down market?

And then kind of which races should we keep our eyes peeled on for movement off that midpoint?

Speaker 2

Kyle, I'm gonna have to check. I we've we've addressed the the presidential percentage in the past, and I I wanna say it's about 25 to 30%, but I need to go back. I'll I'll have that answer later today. On the actual campaigns, obviously, in addition to presidential, we and we had remember, this year, we benefit from having really strong stations in all four of the early nominating states, Iowa and Hampshire, Nevada, South Carolina. Outside of presidential, we have the the political map seems to be changing every every couple weeks, but we see the Biden campaign is spending money in states we did not expect them to spend in.

We see the Trump campaign buying ads in states we did not expect them to spend money in. So that field has gotten wider than we would've than we were expecting earlier this year. As Pat mentioned, there's only one gubernatorial race. I don't see any indications that any of the other gubernatorial races are gonna get more competitive. Obviously, that can change over the next couple weeks, but that that was never sort of a bright spot for us in this with this calendar.

Senate races the senate races have gotten far more competitive. Seems, as Pat mentioned, we have three states on the radar that we were not really expecting to be very, very hot this year. And the ones that we did expect to be particularly, strong such as Maine, such as the two in Georgia, North Carolina, those are are certainly yeah. Arizona, absolutely Arizona. I mean, those are absolutely on fire.

So the senate the senate field has certainly expanded. I keep an eye on on that field expanding more. Kansas, as you may have seen this morning, representative Marshall on the Republican primary and the Dems, went up this morning with with ads. The challenger there, Kansas State does not send a a democrat, to the US senate since nineteen thirties. Actually, it's, one of the states where a democratic challenger has raised more money than the republican, campaign for that state.

So that's certainly on the radar screen, which we would not have expected earlier this year. South Carolina is another state, where the Democratic challenger has raised more money than the incumbent, and a very well known incumbent. So the senate senate is senate is in play. Also mentioning that today, the interest in a pack group spending in the senate is way up, over prior years. House is tough.

The house races there's usually a handful of house races that are competitive, and that's the changes based on on primaries and sometimes what candidates say and do. It seems to be kind of more more typical more races are seem to be competitive than in the past, but it's not as big of a driver as the senate races.

Speaker 9

Great. That's helpful. Hilton, I I think you said that some of your stations hit their pre COVID budgets in February. And I guess, first off, did I hear that right? Because I have me scratching my head.

And then if that's true, what conditions were underlying those particularly strong results? And was there any material difference in sub counts or core that was driven by market size in the quarter? And then I have one more

Speaker 2

He said he said June caught up, not q two. Okay.

Speaker 3

Sorry.

Speaker 9

That's helpful. Then the second part of the question, was there underlying, was there a material difference in sub count, loss numbers that you saw or the core decline numbers that you saw kind of across your different market sizes? You guys have some of the smallest markets that we follow and then with the addition of Raycom added to large. I'm just curious what perspective that gives you.

Speaker 2

You want to talk just like that?

Speaker 3

In terms of sub loss across large markets relative to small markets, I, you know, I I I can't candidly, I don't know the answer to that. And and perhaps Jim or Kevin might have better input there. In terms of in terms of advertising, again, it's it's it's not a, you know, advertising revenue. It's it's really not a a function of large market versus small market. It's really more about the quality of the portfolio.

Speaker 1

Well and the difference between, I mean, it it was only in June that that happened. Okay? Mhmm. Kyle, it was just in June. And, but it's an anecdotal thing that I thought was quite positive because people started to see, you know, a lot of stuff sort of pick up, and it but it's all over the board.

There's some markets that are down in June. Our consolidated numbers are down from where they were, but we do have a lot that have done quite well. And it's all over the board because it depends on markets that, were were not shut down at that time period. It depends on, you know, various things. And, you know, some areas were going doing pretty great, say, here in Georgia in June, and then, you know, the virus sort of took back off in July.

And so and may have slowed down some of those things. So it's it's really anecdotal and and by market and by state.

Speaker 9

Great. One last one. Your holders, I'm sure, love to see the repurchase activity. How should we how should we think about how you balance your intentions there with M and A as the balance sheet kind of trends down towards 4x by the close to 4x by the end of this year? And just kind of like a broader M and A outlook for the back half of this year and for next?

Speaker 1

Well, I I will make a few comments. I'll let Kevin, Jim, and Pat or Bob, anybody just weigh in to talk about that. You know, Gray remains intent upon continuing to grow. When you get when your own numbers are moving up and down, it makes some things even more difficult. Mhmm.

But M and A remains a a prime function of this company. We reach on a net basis, you know, right under 25% of the popular of the viewing TV households. And so we have room to grow. We are very interested at the right price and at the right time. That being said, I think it's very clear that cash is king and a strong balance sheet is a requisite.

And and so we're going to keep that sort of first and foremost. I'm very proud of the company and its ability to generate the cash to, more than a cent well, really, to double our cash position and still be able to deploy 50,000,000 to buy back about 3% of the company. You know, we were trading at at, you know, when world sort of fell off the cliff, you know, at absolutely ridiculous levels. And a lot of businesses can say that. And so it was you know, if if something like that should happen again, we're gonna be doing that again, because we wanna support our stock price.

But, never under any circumstances, we wanna maintain a sufficient cash position, you know, to weather the storm however long it it lasts.

Speaker 9

Great. Thank you.

Speaker 4

Hey, Kyle. Just to follow-up on your sub count, large versus middle versus small markets. Our our data Our data didn't really show any significant differences. There's nothing really that's jumping out at us. It's it's kinda in a fairly tight range, pretty uniform.

Speaker 9

Thanks, Jim.

Speaker 0

Your next question is from the line of Aaron Watts with Deutsche

Speaker 8

Thanks for having me on. Covered a lot of ground in the q and a here. I I really just have one left. As I think about the improvement sequentially you're seeing in core, how has auto participated in that recovery, or has it lagged a bit and represents some upside still if if if auto is able to click back in? Just, I guess, curious about the trends you're seeing in the auto category so far.

Speaker 1

Hey. Bob, you're gonna handle that?

Speaker 4

Go ahead.

Speaker 6

Go ahead. Could you repeat that, please?

Speaker 8

Yes, sure. Just you're seeing sequential improvement in the core advertising from 2Q into 3Q. And the question was just on the auto category. How much is that participating in that recovery so far? Or has that been a laggard in the category that

Speaker 6

Yes. You expect Well, to pick up has been a bit of a laggard actually. And that's what's somewhat while it's been a laggard, we're optimistic when they finally get product on the ground. They you know, they're obviously the chain supply got held up. And so almost any new car dealer you talk to, the first thing they'll tell you, and they'll tell our sales reps or sales managers that they can't get any product, but they think that's gonna loosen up here later in August and and through September.

And and then I think you're gonna see not only on the national side of advertising, we'll see certainly we have some clients on the air obviously, but I think you'll see a significant uptick in that part of our business. And really, some of our car dealers are doing remarkably well for the limited inventory they got. Used is driving it in a lot of cases. I can tell you that the ones that have hot products with the little bit they can get, like Ford F-one 150, for example, if they come up if they get one on the lot, they sell it at list. They're really not negotiating right now because of lack of inventory.

But once that inventory spigot opens up, and again, all indications are based on the feedback we're getting from the dealers is that's going to happen here beginning this month and through September. And that's going to make have a huge impact certainly on our business, But certainly, it's going to make those guys a lot healthier as well.

Speaker 8

Okay. Got it. That's helpful. And one follow-up maybe for Jim. You touched on how local news and syndication really drive the majority of your revenues.

I hope this doesn't happen, but to the extent we get a delay in football, college or pro, or no football this fall, how do we think about the impact directly on your revenues, understanding that indirectly, it's not an ideal outcome for from an audience perspective?

Speaker 4

All of sports is a single digit percentage of our total revenue.

Speaker 8

Okay. Alright.

Speaker 4

So we'd we'd love to see it, but it it, you know, it god forbid, it doesn't happen and it's delayed further, it's not really gonna move the needle.

Speaker 8

Okay. Thank you for the time, guys.

Speaker 0

Your next question is from the line of Jim Goss with Barrington Research.

Speaker 10

Thank you. Gray traditionally focuses on having number one or at least number two stations in all its markets, to help drive political, among other things. And moving from and the Raycom acquisition, as great a match as it was, did introduce a few more number twos into the mix. And I'm wondering if the, the current dislocations overcome the inability to move the or move the ranking up to number one, versus the typical inertia. Are there any more opportunities to, you know, improve your positioning now than they might have been in a more normal time?

Speaker 1

You wanna handle that, Todd?

Speaker 3

Yeah. Sure. So I you know, interesting question. So if I understand you correctly, you're you're asking, given all the, the the sort of, the the challenges, you know, relative to COVID nineteen and and civil unrest and and one of the things is that create an opportunity to move potential number two to a number one. Yeah.

You know, generally, the default is for viewers to go to that number one. But I would tell you that we've seen some excellent growth in some of our larger markets in the last eighteen months. So, our stations, in New Orleans and Cincinnati have made significant moves over the last eighteen months. And New Orleans is now a solid number one, and Cincinnati has gone from really a number three to a number number two slash number one. And so, you know, I can't tell you that's a function of what's happened in the last six months, but I will tell you that, you know, we have seen some movement in some of our large markets, and it's encouraging very encouraging to see.

Speaker 1

Well, let me let me just add just as a way of bragging a little bit because, our Louisville station, NBC Wave, has moved up dramatically in that market. Richmond is, you know, exceeding our expectations and improving. And so we we really see, a tremendous upside on on all fronts. And, I I I will tell you, we couldn't be happier, could not be happier with the, the overall direction, of what we're seeing with all portfolios.

Speaker 10

Has it, has it shown up at all in any and in the second quarter, it typically doesn't go out of political, but are you seeing any movement in terms of pricing that might reflect those moves?

Speaker 3

Sure. So so, you know, as stations, grow their audience, they're able to charge more for their spots. Now, you know, to some degree, it's a supply and demand business. But the reality is if you were doing a three rating in the 06:00 news last year and you're doing a five this year, you're gonna get a higher rate.

Speaker 10

Okay. And to the extent you've had to, I'm sure, do more remotes that might be a little more awkward, but and clumsy, but could create some cost savings. Are you finding any any margin benefits from that sort of thing? Maybe this is a general question.

Speaker 4

I I think our expenses overall, we've always had a tradition of managing them, tightly. So I don't think the remote work is going to significantly give us a significant cost savings. Be some natural stuff, you know, travel budgets, entertainment, you know, not really being used. So save some of that. We have seen savings in our health plan, although that I think is probably a timing difference as people, especially in Q2, just stayed home and didn't access services unless it was needed or absolutely necessary.

I think some of that will come back around eventually. I don't know exactly when. We'll continue to manage our costs prudently. As I mentioned in Q3, the broadcast overall cost increase is really attributable solely to the increase in reverse comp. So we're doing a good job there.

You know, some of the smaller costs we save by remote work are being offset in some cases by more overtime. We're spending not huge amount of dollars, but we literally have bought and accessed, what was it, 170 some, 160 some thousand individual pieces of whether it was sanitizer, masks, shields, protective equipment. There's some costs there, not huge. So it's a little bit of a trade off there.

Speaker 2

But I don't

Speaker 4

think there was any dramatic cost savings directly because of the remote working situation.

Speaker 10

Okay, Thank you for for that. One one last thing. It it seems like there's a continual flow of new entrants into the, group stream services, Peacock, HBO Max, in addition to Disney Plus, CBS All Access, and all the Amazon Prime, Netflix, Hulu. As these sort of things occur, is that just a continuing destabilization factor in terms of your subconcer? Do you do you think there might be a trend to have, like, a basic cable package to get the networks that might satisfy your needs in addition to whatever specific sort of other groups of programming might come along?

Speaker 2

Hey, Jim. This is Kevin. Jim, that's that's a good question. I think the answer kinda depends on on the offerings of these products. But if, if you were to buy a handful of the streaming services to try to cobble together your own bundle package of channels you can get from cable, you'd certainly be spending more than you'd pay the cable company for the same bundle.

Speaker 1

Mhmm.

Speaker 2

Plus, you'd pay, of course, for broadband access to, you know, to be able to use Disney plus Peacock, TV, etcetera. So it it to some extent, it could help, show the value of the cable bundle, which will be good for those of us who get paid as part of the cable bundle.

Speaker 10

If

Speaker 2

the OTT providers are providing lots of commercial content not available on broadcast, that that could lessen the appeal of it. But, you know, as everyone's concerned about whether consumers can afford, the cable bundle today, it seems there should be more concern about whether people can afford to subscribing to four and five and six different OTT bundles to get original content. So I think it kinda needs to shake out, but it's probably a little more on the, the first scenario where the splintering and fragmentation of programming across all these different, bundles that have you subscribed for separately will probably drive people back hopefully, drive people back to the PayTV bundle, which was which is a better economic package.

Speaker 10

And are are you able to strip out, the share of, those taking a bundle who might get broadcast stations with, antenna versus part of one of the bundles or one of the cables? And is that how how does that factor in?

Speaker 2

Yeah. I don't know. I don't I don't I mean, our our OTT numbers are people who are not talking OTT subs. Those are people who are paying. We're getting a report from a distributor that our signal is being carried, in that OTT bundle, and therefore we're getting paid.

So I don't know how we would quantify if people are taking, for example, Disney Plus and getting our signal over the air. There won't be a record of that.

Speaker 10

All right. Thanks, Kevin.

Speaker 0

final question is from the line of Steven Cahall with Wells Fargo.

Speaker 11

Thanks. Maybe first just a follow-up on reverse comp, Kevin. Thanks for that helpful color there. If some declines do kind of maintain trend in the back half of the year, would you think about moving all four of your reverse comp deals onto more of a subscriber base? Or do you like that mix that you talked about of sub based and fixed fee agreements?

Speaker 2

It's an academic question. We don't have the ability to tell the network to change the way that they're charging their affiliates, or to say you need to charge us a different formula than you're charging other folks. I think I think all broadcasters with scale over the last several years have attempted to plead for a different formula, in their network affiliation negotiations, and everyone has met the same answer, which is CBS has its formula for all broadcasters, period. Fox has its formula for all broadcasters, period. NBC has its its formula, period, etcetera.

I'm not aware of anybody having a different formula. The networks have you know, when the networks started charging broadcasters versus comp around 02/2008, 02/2010. They each came up with their own system, and they have essentially all stuck with the Fox, change its formula at one point, into the cycle. But it's, you know, it's still at a fixed fee. So, I don't see that it's really worth imagining what will be a better system for us under current sub counts.

It's just it's not it's not possible for you to go back to network and say charge us differently.

Speaker 11

Yes. Okay. And then maybe a couple for Jim. Jim, you focused on the stock buyback with common stock. Is there any interest in looking at the preferred given the coupon that's on that?

And then on the expense side, it looks like your broadcast expense excluding reverse comp is going to be down a little bit year on year. Is that a trend that we should expect to continue to improve like if you made a fixed cost reduction? Or as we start to see particularly ad sales come back, should we start to see some of the non reverse comp broadcast expenses start to move back up on a dollar basis?

Speaker 4

As things ramp back up, there would be a little bit more. I mean, the commissions will come up slightly, although our commissions, Hilton said right at the very beginning, we've been supporting our people so they can focus on getting every dollar they can. The year over year decline probably is not perpetual. I mean, we've did a lot of work on our cost structure in 2019 as part of the integration of both companies. We were very successful with that.

We're seeing still some benefits this year. Next year, we've always been tough on our expenses, but to deliver a non reverse comp year over year decline again might be a little challenging. But on flip side of that is I wouldn't expect it to increase very much either. I think there was a second part of the question, but

Speaker 11

Yes, second was on the preferred, if there was any potential or appetite to reduce the amount of the preferred at any point.

Speaker 4

I think some place down a little farther down the road, we'll be thoughtful about that. I think right now, probably not, or at least not likely, but, you you know, never say never. I mean, now the preferred is not counted in the leverage calculation. So if we start taking it out, we would be bringing up our leverage. And of course, our stated goal for the last two years has been to decrease our leverage.

So we'll continue to monitor our situation and be thoughtful about that. I hear you on the rate. At some point, you know, it probably will make sense do something with some or all of it.

Speaker 11

Thank you.

Speaker 0

There are no further questions. I will turn the call back over to the host for any closing remarks.

Speaker 1

Well, I just wanna thank, all of you for joining us today. Q two is gonna be the, we all knew this, the worst quarter of the year for us. So, I can already tell you, I'm looking forward to q three and q four for the rest of 2020, for a lot of positive news. And so I look forward to talking, and all of our teams look forward to talking with you guys next time around. Thank you for your attention.

Speaker 0

This concludes today's conference call. Thank you for your participation. You may now disconnect.