Gray Media - Earnings Call - Q3 2021
November 4, 2021
Transcript
Speaker 0
Good day, and thank you for standing by. Welcome to the Third Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Hilton Howell.
Please go ahead.
Speaker 1
Thank you, operator. Good morning, everyone. I want to thank everyone on the call this morning for being here. As Mary mentioned, our operator, I am Hilton Howell, the Chairman and CEO of Gray Television. Thank you for joining our third quarter twenty twenty one earnings call.
With me today, as usual, are Gray's Executive Officers, our President and Co CEO, Pat Laplatney our Chief Legal and Development Officer, Kevin Latek our Chief Financial Officer, Jim Ryan and our Chief Operating Officer, Bob Smith. We will begin this morning with a disclaimer that Kevin will provide.
Speaker 2
All right. Thank you, Hilton, and good morning, everyone. Certain matters discussed on this call may include forward looking statements regarding, among other things, future operating results, our pending acquisitions and related divestiture, the impact of the novel coronavirus and its disease or COVID-nineteen on our future operating results. 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 report on Form 10 ks and our most recent earnings release.
The company undertakes no obligation to update these forward looking statements. Gray uses its website as a key source of company information. The website address is www.gray.tv. Included on the call may 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 valuation of our company.
Included in our earnings release as well as on our website are reconciliations of the non GAAP financial measures to the GAAP measures reported in our financial statements. I now return the call to Hilton.
Speaker 1
Thank you, Kevin. As we approach the end of 2021 and it's still hard for me to believe that we actually are, this year has moved so quickly. Gray Television has strong momentum behind it from a very good year and the addition of eight markets and 10 fantastic television stations from Quincy Media in August. Right now, we are just a few weeks away from closing another transformative acquisition of Meredith Corporation's Local Media Group. We are thrilled.
We are all very focused on getting to closing and integrating the news stations into our high performance television family. Today, however, we are thrilled to share with you the strong financial results that we have reported this morning for the 2021. We reported total third quarter revenue of $6.00 $1,000,000 which was essentially unchanged from third quarter twenty twenty when we were then benefiting from an exceptionally strong political revenue season in a presidential election year. In particular, we are very pleased with our combined local and national broadcast advertising of $292,000,000 and our retransmission consent revenue of $266,000,000 These figures reflect only modest contributions from the new Quincy stations, which just joined us on August 2. These are really remarkable achievements that have exceeded our highest and most hopeful expectations at the start of this year.
We have in essence, grown core advertising revenue and retransmission revenue to back fill the dramatic seasonal decline that we typically experience due to the bi year political revenue in years such as this. I personally don't think that anyone who follows Gray Television or this sector generally would have expected us to grow non political revenue quickly enough to make up for the seasonal climb of political revenue, particularly the exceptionally strong political revenue of 2020. I therefore want to take a moment to congratulate all of our hardworking account executives and sales professionals for their great work this year, as well as the journalists, technologists and everyone throughout our company who every day create the content, products and services that local advertisers need and want. Subsequent to the end of the third quarter, we entered the capital markets with two financing transactions in connection with the Meredith acquisition. Quite simply, both financings were exceptionally successful.
We agreed to issue an incremental term loan under our senior credit facility of $1,500,000,000 and increased our existing revolving credit facility to $500,000,000 In addition, we agreed to issue $1,300,000,000 in unsecured 5.375% notes due 2,031 at par. The note offering was upsized by $175,000,000 from an originally planned $1,125,000,000 As a result of these successful financings, we currently estimate that our average cost of capital for the Mirrorless transaction at the time of closing will be just 4.15%. Our advertising customers, our distribution partners and our credit and equity investors all now recognize together that Gray Television delivers exceptional value on their investments in our people, products and services. We are gratified by this trust and we are grateful that nearly all of us have come through the pandemic stronger and better and maybe even a bit more unified. In short, Gray's business is strong, our prospects are bright and we are successfully growing Gray Television into one of the finest media companies in the country.
We will next hear a few remarks from my colleagues with additional color to our third quarter earnings release. Thereafter, I will open the line to questions.
Speaker 3
Pat? Thanks, Hilton. On our first quarter earnings call, I suggested that our total core revenue would return to the non political pre pandemic twenty nineteen levels later this year. We anticipated that we would see 2019 core levels again in the fourth with an outside shot at the third quarter of this year. In our second quarter, with strength in nearly all advertising categories, our total core revenue finished just below Q2 twenty nineteen.
Today, we are thrilled to report that we finished the third quarter at a level that exceeded our twenty nineteen Q3 total core revenues by 2%. To drill down a bit, total core revenue increased to 23% in the 2021 compared to 2020. And total core revenue beat 2019 results by 7%. Roughly $23,000,000 of combined core and retrans revenue in the third quarter in this year's third quarter was contributed by the new Quincy stations. Still, even without that contribution, our total core revenue for this quarter exceeded the levels reached in the 2019 and 2020, and in the case of 2020, by a very wide margin.
Like some of our peers, the gaming category has been incredibly strong for Gray in 2021, and we believe it has room to run going forward. Advertising revenues from gaming companies is currently pacing to end the year at more than 250% higher than gaming revenues in 2020. Similarly, the auto category has been challenging due to the well covered supply chain issues. Excluding the Quincy stations, the auto category through the 2021 was down roughly 30% compared to the same period in 2019, the last non election year. However, we do believe the automotive category will come back in 2022.
Perhaps more interesting is a uniform strength across virtually all other categories. In fact, for Gray Television, revenues in the health category are now in the same zip code as automotive. And while the weakness in auto is relative short term pain, revenue diversification is the longer term gain. In short, we can today confirm that the worst of the pandemic impact on Gray's core business is firmly behind us. I'll turn the call to Kevin.
Speaker 2
Good morning, again. Turning first to M and A, I'm pleased to report that our Meredith transaction remains on track to close this next month. We closed the sale of our only station in a Gray Meredith overlap market in late September, and the Antitrust Division of the U. S. Department of Justice granted early termination to the Gray Meredith transaction in early October.
At this time, we anticipate receiving the FCC's consent to the transaction fairly soon because the transaction did not attract any petitions to deny and the transaction does not require any SEC waivers. On the previous earnings call, I reported that we had completed the last of our major retrans negotiations for this three year cycle in the second quarter. This means we do not have any material retransmission negotiations until the 2022. As you know from our decks and prior calls, all of our CBS affiliation agreements expire at the end of this year. I'm happy to report that today, we have reached an agreement in principle with CBS on the renewal of all these affiliations.
We expect to finalize and execute the new affiliation agreements with CBS very soon. Our retransmission revenues in the third quarter were $266,000,000 which is roughly 23% ahead of the 2020. This increase is a result of rate increases in recently renewed agreements, annual rate escalators, stable sub counts and the addition of the former Quincy stations in eight mid sized markets in August. Year to date, our retransmission revenues are seven fifty five million dollars an increase of $105,000,000 or 16% over the 2020. We currently expect across $1,000,000,000 in total gross retransmission revenue later in the fourth quarter, excluding any contribution from the Merida stations.
In terms of subscriber counts, now received nearly all subscriber reports from MVPDs and most of the OTT providers for the 2021. Subscriber reports continue to show declines in MVPD subscriptions being offset by growth in OTT subscriptions. In fact, our total end market Big four subscriber count across all paid platforms for the 2021 was 0.1% higher than the total for the 2020. I'm going to repeat that because we often get asked after the call to repeat that sentence. Our total in market Big four subscriber count across all paid platforms for the 2021 was 0.1% higher than the total for the 2020.
We view our relatively stable sub counts as a testament to the value of the live local content that Gray stations provide. Finally, I want to provide some color on political revenue. In the 2021, we reported approximately $24,000,000 less than $400,000 of revenue was attributable to the new Quincy stations. This year's first nine months results significantly beat the results from the corresponding period in 2017, the most recent post presidential year, due to a handful of easily identifiable issues. First, we had a few days in early January when the two Georgia Senate runoff races produced about $5,000,000 in political revenue, again, in the first few days of January 2021.
We had very robust spending on a ballot initiative in Maine concerning high power electric transmission lines that actually exceeded the revenues that we received from the very competitive race for Virginia's governor. Keep in mind that one half our political revenue every year comes in the fourth quarter, so these numbers will be altered by the time we get to the end of this year. The most noteworthy development in the political area for us is that we continue to benefit from the strong trend to begin campaigns much earlier with each new cycle. In fact, roughly one third of this year's total net political revenue through the third quarter relates to elections that will occur in November 2022, not elections that occurred in November 2021. Only a few years ago, we remarked when we had one or two races that started spending with us nine to twelve months before Election Day.
In 2021, by contrast, we have about a dozen races with ad spending in the third quarter, more than one year before Election Day. We even have a handful of races where the spending started in the first or second quarter of this year for elections occurring in November 2022. Clearly, earlier and earlier advertising is here to stay. Looking ahead to 2022, we now expect that our combined post Quincy, post Meredith company will experience another record breaking non presidential political year. Next year, control of both houses of Congress will be in play.
We also see significantly more races for governor next year than last year, including gubernatorial races in nearly every state served by the Quincy emeritus stations that we are adding this year. Moreover, political fundraising records have been shattered with each new set of reports in both parties, candidates at all levels, interest groups and super PACs. And I'll add that the results in Virginia and New Jersey this week likely expanded the field of competitive races across the country. Given all these encouraging signs, we today issue our first political guide for 2022. As a reminder, the combined Gray Quincy Meredith portfolio less divested stations recorded $652,000,000 in total net political revenue in 2020.
We anticipate that next year's revenues will roughly reach 80% of last year's total in a presidential election year. We are therefore today guiding to total net political revenue for 2022 of approximately $525,000,000 I'll now turn the call to Jim Ryan.
Speaker 4
Thank you, Kevin. Good morning, everyone. As usual, we'll file our quarterly report Form 10 Q later today. The release and the 10 Q have a great deal of financial information in it, and I'll keep my remarks short because of that. Hilton covered earlier our very strong Q3 results and the highlights of the quarter, including our very successful financing transactions for the pending Meredith acquisition.
I'll make a couple of brief comments on our Q4 guidance and remind everybody that our Q4 guidance does not include the Meredith stations. We're very pleased that combined local and national revenue or what we call total core revenue are anticipated to increase 8% to 10% over Q4 twenty twenty, demonstrating the continuing improvement sequentially in core and it also makes us optimistic of continuing improvement as we move into 2022. As Pat mentioned, auto is still lagging due to well reported supply chain issues. But I would remind everybody that it's only currently about 18% of our year to date total core revenue. In comparison, in speaking to the revenue diversification that Pat mentioned, our services group, which is a combination of financial, legal and medical, represents about 28% of total core revenue.
In fact, current Q4 pacings for the Services group is showing percentage increases in the low teens over 2020. And the dollar volume increase is more than offsetting the weakness in auto. Like to recap certain metrics associated with our completed Quincy and pending Meredith transactions. At the close of the Meredith transaction, I'll remind everybody that we'll be serving 113 television markets with the number one or number two rated station in 101 markets, which is best of breed portfolio quality hands down. The total purchase price for both Quincy and Meredith is approximately 3,500,000,000.0 prior to the $450,000,000 of divested stations.
Our last eight quarter average trailing combined historical revenues, so that would be fully pro form a for all transactions and all divestitures as of sixthirtytwenty twenty one was approximately 3,185,000,000 Our LAQ combined historical cash flow at sixthirtytwenty twenty one was approximately $1,231,000,000 and that would include $78,000,000 of synergies between the Quincy and Meredith acquisitions. We currently anticipate our twelvethirty onetwenty one leverage ratio net of all cash is defined in our senior credit facility will approximate 5.4x with an estimated total outstanding debt at twelvethirty onetwenty one of approximately $6,835,000,000 assuming the closing of the Meredith transaction in December. I'd to switch and make a couple of quick comments on free cash flow. With regards to Q3 and year to date Q3 twenty twenty one, please note we have some unusual one time only items in the quarter and then also rippling through the nine months. We paid $72,000,000 of taxes on the Quincy divestitures in Q3.
That was anticipated, it was planned for, and it was in the calculus we did when we agreed to the purchase price of Quincy. Also I'll remind everybody that there were no common dividends in 2020 and 2019. So that's another item to take into consideration for comparability to prior periods. If you adjust for the one time only items and the difference in timing of dividends, our Q3 'twenty one free cash would be about 75,000,000 compared to $92,000,000 in 2019. And our year to date Q3 free cash would be approximately $2.00 $2,000,000 compared to $165,000,000 in 2019.
Turning ahead and thinking forward on free cash and following up on our comments from our second quarter call, I will remind everybody that our average twenty nineteentwenty twenty reported free cash flow was $416,000,000 As I mentioned, after giving effect to both Quincy and Meredith, our combined historical basis, LAQ operating cash flow as of sixthirtytwenty one was $1,231,000,000 Post Meredith closing, we would be anticipating pension funding requirements on a two year blended average basis of about $4,000,000 per year. We would have approximately $300,000,000 of cash interest per year. We are anticipating routine capital expenditures of approximately $125,000,000 per year. And we're currently estimating cash taxes would range somewhere between $125,000,000 and $150,000,000 on a blended two year average basis. And the preferred stock dividend is $52,000,000 per year.
This provides a blended two year average free cash flow estimate of $600,000,000 to $625,000,000 excluding common dividends and it is approximately 45% to 50% accretive to our historical twenty nineteentwenty $20.04 16,000,000 of free cash flow. We are very well positioned going into 2020 with the Meredith transaction expected to close in December. I'll turn the call back to Hilton.
Speaker 1
Thank you, Joan. Operator, we'll now open up for any questions.
Speaker 0
Our first question comes from the line of John James from Wolfe Research. Your line is open.
Speaker 5
Thanks. Good morning, Just Good morning, a couple here. Morning, There are a couple of moving pieces in the fourth quarter guidance, and maybe this is for Jim, but I think there may be some confusion. So can you give us what the same station growth is for 4Q twenty twenty one versus 2019? What does that look like?
And with the Meredith deal on track, what kind of EBITDA contribution should we be expecting for the quarter?
Speaker 4
First, Meredith, we are not guiding for Meredith. And as far as core Q4 pro form a, just bear with me a moment. I'm looking it up for you. I don't have comparisons to 2019, but pro form a through Quincy, local would be about even with 20 actually up a little bit over 2020. National also up I characterize them both being up local up low to mid single digits and national up high single digits, 21% to 20 on a fully combined historical basis through the Quincy closing.
But that does not include Meredith.
Speaker 5
Okay. And then yes, maybe more broadly then. On the revenue diversification commentary, you guys talked about the gaming category. I know in the past you talked about new to TV advertisers. And I'm just thinking in the context of supply chain, I don't know if you get much crypto or e com services spend.
But at at this point, how much of your ad dollars are coming from what I'd call, say, newer categories or clients?
Speaker 3
Tough question. I would look, we this is Pat speaking. We have a very, very strong focus on new local direct. I'd like to sit here and tell you exactly what our number is from new are you talking about in Q3? Are you talking about for the year?
Speaker 5
I'm just thinking maybe in general, a run rate type of number, Tad.
Speaker 6
Well, we track new this is Bob Smith. We track new local direct on a monthly basis. In the third quarter, we had over 2,000 local direct accounts in the quarter, and it's grown every month sequentially since January.
Speaker 5
Maybe one last one for Jim quickly. Just given the new political guide, has that been the implications on the free cash flow guidance or everything is all baked in there?
Speaker 4
That would be baked in. Our
Speaker 0
next question comes from the line of Dan Kurnos from Benchmark Company. Your line is open.
Speaker 7
Great. Thanks. Good morning. Congratulations, Kevin. I don't get to hound you about the CBS deal anymore.
You get some sleep. So, congratulations. On the political, we we heard some other commentary this morning just around how, especially given what's going on in Virginia and New Jersey and the I don't know that we all any of us would have thought what happened in Maine would occur around issue spend. So maybe just kind of a two part question, which is, one, given your footprint and given what seems to be an increasing amount of local engagement that may not have been present previously in your top rated stations in certain DMAs where local is really important, Is that factored into your guide, number one? And just, I guess, number two, can you remind us in an off year, how big a component issue is of the total?
Speaker 2
I'll take the first part. Issue is usually 5% to 10% of total political. Your question, do we bake in additional engagement? I'd say it this way, over the last several presidential cycles, presidential has been running around 25%, sometimes a little more, sometimes a little less of the total political. We are looking at 33 governors' races next year instead of seven last year.
We're seeing this much earlier spending, the fundraising records, the engagement And so all that of factors into why we came up with a guide of about roughly 80% of 20 revenue would be our guide for next year. Remember too, last year we had exceptional spending in Georgia. We have a presence in Georgia, again that pro form a number includes Atlanta. So we have Atlanta in every single market in the state other than Macon and our political revenues last year, we had a lot of hotspots by Election Day and then Georgia was another very significant sum between Election Day and end of the year. So that's not likely to repeat to the same level that we saw last year.
Had two Senate races, so competitive and then runoff in Georgia. So push and take, that's not there but we have more engagement, more activity than maybe that roughly equals out. We're cautiously optimistic that we'll be raising the political guide as next year progresses. At this point, we're feeling like there will be enough additional races and excitement to make up for the lock of the Georgia double run off. And if we're right, then we'll have to raise the guide.
This point, we're feeling pretty good that we're going to be able to make up for the loss of some of the presidential and all of the double runoff in Georgia.
Speaker 7
Got it. That's really helpful. Thanks, Kevin. And then just on
Speaker 8
Go ahead, Bob, if
Speaker 7
you have some more.
Speaker 2
It's usually helpful when Bob Smith says I'm right. So I just thought I'd pause for that.
Speaker 7
Kevin is right. All right. Well, there you go, Kevin. You've got affirmations. You are right.
And then just on core, I guess, can you quantify, exposure to sports gambling? Sports gambling kind of where it sits in your category list because we've started to get that metric now. And really, I think you guys gave some pretty optimistic commentary around Q4. Can you just be clear if auto is indeed actually worsening, but you're more than but it sounded like, Tim, you're more than offsetting that with incremental services growth off of some what's been an incredibly strong category growth all year?
Speaker 4
Yes. I mean, again, quarter is I think Pat said too. I mean, quarter, everything is showing green but auto. So it's nice to see that. As far as gaming goes, right now I'd say we're probably looking at something on a full year basis in the ZIP code of $40,000,000 for the full year, which is obviously up.
We said last couple of calls that gaming in 2020 for us was basically a single digit number. So it's had fantastic growth so far this year. And as Pat said earlier, we would expect it to continue to grow over the next several years as more states legalize it.
Speaker 6
If I could add to that too is that we're seeing quite a bit of spending in Arizona and Louisiana because they're recently activated. We also anticipate while we have a couple of small markets in New York, we anticipate New York will come live on December 1, which will contribute to that fourth quarter revenue.
Speaker 7
Got it. Appreciate the color guys. Thanks very much.
Speaker 5
Thank you.
Speaker 0
Our next question comes from the line of Kyle Evans from Stephens. Your line is open.
Speaker 8
Hi, thanks. Good morning, everybody.
Speaker 4
Good morning.
Speaker 8
Hilton. Could you give us any kind of a qualitative or quantitative update on how your partnership with TEGNA on Premion is going? And then I've got a follow-up or two for Jim.
Speaker 3
Kyle, it's Pat. I would say it's going very well. We rolled out we finished our rollout of all of our markets, think, in early Q2. And we are I can tell you, we're well ahead of our budget for 2021. And it's a high growth area for us.
Speaker 6
If I could add also, we're already seeing an impact in the Quincy stations already. It was very quickly that was rolled out to those stations in August and September, and we're seeing the results of it now.
Speaker 1
Kyle, I'd like to just add to that. I really want to congratulate the management team at TEGNA for putting Premion together. We were honored and flattered to be allowed to buy into it. They did an exceptional job. I know there's been a lot of stuff going on with and around TEGNA.
But if Premion is an example of the kind of talent that they have within that company, they should be proud of what they're doing. Because we are very proud to have our small interest in Premion and it's done Gray a great positive service financially.
Speaker 8
Great. Thanks for that additional color. Jim, you gave us a trailing 08/2001 revenue in OCF that looks almost identical to the one that we have for the twenty nineteen-twenty that's been in your decks. And so it's which basically just means that the 2019 looks like the '21, right?
Speaker 7
If Yes,
Speaker 8
I'm going to grow the model forward looking at that kind of twelvethirty as the OCF floor, what in your mind are the two or three biggest puts and takes going forward? Thanks.
Speaker 4
You're saying just a twelvethirty onetwenty one
Speaker 0
or
Speaker 4
are you going out into 2022, Kyle?
Speaker 8
Well, of course, want you to go out.
Speaker 9
But the 12 I
Speaker 0
would I
Speaker 8
about it far out as you want to go, Jim.
Speaker 4
I would think about it this way in a big picture. And I will admit I'm being a little conservative here. But obviously 'twenty was a huge political year as all just discussed. And we've said our initial guide is underneath the 'twenty political by a reasonably good sized number. So as core and net retrans grow in 2022, that growth probably offsets the delta that we're expecting in political.
And so if you're being conservative, 'twenty two probably looks a lot like 'twenty and on a total basis. And then '21 looked a lot like '19. So it puts you back in the same zip code probably. Now on $1,200,000,000 I'm not going to be $10,000,000 smart. I don't think anybody else would either.
But I think it puts you to be conservative, it kind of puts you back in the same zip code, which is actually a good place to be in 'twenty two. Because otherwise, maybe we get lucky and we backfill more in the political, but time will tell as we move into 'twenty two on that. But I'd start by kind of thinking about it that way.
Speaker 7
Great. Thank you. And
Speaker 4
you got the free cash flow number I gave of $600,000,000 plus. Our financing is done. So you can I mean, numbers are pretty reasonably locked in at this point?
Speaker 8
Got it. And anything big moving around on the conversion of EBITDA to free cash that we should be thinking about? Or is that kind of hold steady as well?
Speaker 4
I think it generally holds steady. I mean, I shouted out the bigger components of that. You got the noise in Q3 on that $72,000,000 of taxes. But that like I said, we baked that into our math when we decided what we're going to pay for Quincy. We've got about another $17,000,000 of cash taxes coming up in Q4 on the Flint divestiture, which is a one time only thing.
But as we move into next year you know, on a pro form a combined historical basis, I don't nothing really jumps out at me as going to be being significant.
Speaker 7
Thank you.
Speaker 0
Our next question comes from the line of Jim Goss from Barrington Research. Your line is open.
Speaker 9
All right, thank you. I was curious about the increasing proliferation of secondary mostly rerun oriented networks. And I was wondering, and I know you use some of them and I'm wondering if you have any particular strategy toward using them or increasing usage of them. I wonder if you might frame any potential economic impact. I know you have a lot of digital stations you can do with that.
Speaker 3
Yes, Jim, it's Pat. So at virtually all of our stations, we have primary signal and then in some markets we have a secondary big four network and then we have Telemundo's. But beyond that, we have the networks that you're referring to. We actually own an equity interest in Circle. So that's in the vast majority of Gray stations.
And our strategy really is to have one of those, we'll call them DigiNets as a sales vehicle and then we do pass through or take cash for the remainders. And again, the way we're situated today, that's roughly one primary signal and five multicast signals. So it's not a huge chunk of revenue, but it's a nice chunk of revenue. And I think I don't think that strategy is going to change much until we get ATSC three point zero rolled out. And when that happens, that'll increase the amount of bandwidth we have to potentially add more.
But that's still it's going to vary by market, but that's still a few years off. And I hope that answers your question.
Speaker 9
Yes. No, that's a good framework. And then my second question would be for Kevin because he's probably left out because he's accomplished everything going into this call. But I was wondering in terms of M and A priorities, if anything you might do would be focused on either the modest incremental room you have under the ownership caps or portfolio refinement or whether you'd be turning more toward ancillary exposures and technologies or elsewhere?
Speaker 2
Guess, Jim, that's really a question for everybody at the table. Our priority is to close Meredith and then the priority is to pay down debt. We obviously don't have a lot of room under our FCC cap, but we don't have a lot of bandwidth on the balance sheet either to be doing large TV acquisitions. So I would tell you this year, we have looked at really dozens of investments and acquisitions. On our tracking sheet, we're up to 55 separate NDAs for the year, strategic looks.
Obviously, most of those don't go anywhere. But Meredith is one entry and buying couple of $100,000 low power TV stations and other and it's kind of everything in between. So we're constantly looking. We're not sort of pivoting into a new area. We're not looking to get out of our wheelhouse or skill set.
We're looking at some things that are complementary. Nothing has so far we've been obviously announced a couple of things we've done this year, but we're not looking to change the course of the company. We're not looking to destroy what we have. We know how to run a group of really strong TV stations and do some things around the side that are ancillary that are helpful but we're not looking to go buy a startup media company that's losing money. We'll leave that to the professionals on Wall Street.
Speaker 1
Jim, this is Hilton. Let me add just a little bit to what Kevin had to say, all of which I obviously endorse. We look at 2022 as being a year of consolidation. We think the timing of this Myra transaction is sterling because we're going to roll we're going to close on it and then we're going to roll right into what we think is going to be one of the largest political years that we've seen in this country. And so we're going to try to consolidate all those operations.
But I will tell you, we've been running at lightning speed for eight years and have gone from 30 markets eight years ago to 113 when this year closes out in 2021. And our new scale and size will give us lots of opportunities in the future to do really remarkable things. But right now, we're gonna be consolidating and bringing in both Quincy, which we've really essentially already done, and then the new narrative stations. And so we're very excited about that.
Speaker 9
All right. Well, thank you. I'll leave a go at that.
Speaker 0
Our next question comes from the line of Steven Cahall from Wells Fargo. Your line is open.
Speaker 10
Thank you. Maybe Kevin, so you don't have to restate it as much after the call, just to be clear, your subscribers were up year on year. And could you give us any color as to what's changed the most over the last year? Has satellite gotten less bad? Has cable gotten better?
Has it been virtual, some combo?
Speaker 2
A year ago second quarter twenty twenty, we lost a number of subs as the recession took hold, people stopped paying their bills. People left big cities, even small cities. And we saw a decent resurgence. You've heard in prior calls, the year over year trend is pretty much the same as it has been. We've had some declines in the MVPDs.
They've been offset by really strong growth in the OTTs. So I don't think at its high level, there's very much different. I wouldn't put too much into the small gain here. I mean, it was basically flat when you're talking about the number of subs that we have. It was essentially flat year over year.
That's a good place to be given that the trend over time is going to be sub declines of some amount.
Speaker 10
Great. And then Jim, thanks for those combined historical pro form a numbers. That free cash flow margin looks pretty nice. Is that fully loaded for all the cash interest you'll have for the deal? And just trying to think about as you deleverage, what kind of free cash flow benefit we could see?
Speaker 4
Yes. The $300,000,000 of estimated cash interest includes the incremental debt on the Meredith acquisition. And as we said earlier, that blended average initial rate on the Meredith debt is 4.15%. So it's relatively cheap. And that's day one, obviously, we pay down debt, we'll be reducing cash interest as we go along too.
$300,000,000 is the day one cash interest.
Speaker 10
Great. And the $1,200,000,000 includes the cash interest. Is that right?
Speaker 4
I don't think I understand the question. The $1,200,000,000 is our operating cash flow as defined in the senior credit agreement. So that would be akin to but not exactly what you probably call adjusted EBITDA.
Speaker 10
Great. Okay. Yes, that's very clear.
Speaker 4
The 1,200,000,000.0 would be before deducting interest expense. So it's you can see you can look at the release and see the non GAAP brackets to how we get to it. We've been calculating it consistently for years.
Speaker 10
Great. Thank you. And then, Pat, just on the Quincy station contributions, maybe both for Quincy and Meredith, do you feel like there's an opportunity to bring up ad sales when you sort of put in the way that you've done business historically at Gray? Is there some revenue synergy that we might see over time? Yes.
Speaker 3
Good question. I think the answer is yes. Can't quantify it. But as Bob mentioned, just the premium part of our approach is already paying dividends on the Quincy acquisition and pretty early in the game. We think there's similar benefits once we close on Meredith.
So the answer is yes. When we do the math, we just kind of report retrans and expense synergies. But realize we do believe there'll be some revenue synergies going forward.
Speaker 6
If I could add to that, we're already seeing some results with the Quincy Group. We, in our opinion, have the best sales training team in the business. And so we were very proactive with the Quincy sales staffs and sales management and a few months ago put them through a very intensive training for a week and we're seeing the results of that and our plan moving forward is to do it as well with the Meredith sales organizations as well.
Speaker 10
Thank you. Our
Speaker 0
next question comes from the line of Monica Lu from Onyx. Your line is open.
Speaker 11
Thank you for taking my question. Appreciate all the great color that you provided on the revenue and top line. Figured I'd just ask a question on the margin. It looks like margin was down quite a bit this quarter and EBITDA is down about 29% year over year. I understand most of that is related to political, which has higher margin, but just curious if you can help bridge kind of some of the margin difference because it seems quite large on the year over year or even compared to a nonpolitical Q3 twenty nineteen basis?
Thank you.
Speaker 4
I think the biggest driver of that would be the increase in net retrans or I mean, reverse retrans that goes back to the networks, where you're comparing 2021 to 2020 or 2021 to 2019. For the quarter pro form a for all the acquisitions, it was what we commented on the release, it was up about
Speaker 10
year over year
Speaker 4
bear with me, I'm trying to get down to the right report in front of me. It was up $28,000,000 which is primarily the driver of the operating expense increase year over year. We did have some OTO costs that are highlighted in the release as well, transaction related costs on the deals, which probably would be impacting your what you're seeing as the margin as well. But again, those are just OTO deal costs. So it's really the what's really driving it is the year over year change in reverse comp.
Everything else has been holding relatively steady.
Speaker 11
Okay. I think I also looked at your net retrans revenue as a percentage of grocery trends. That actually seems pretty steady year over year from percentage perspective. But I can follow-up separately on that just to get more details. One more question for me.
In terms of the performance by category, I think auto has been well understood as a weak category. Just curious if you are seeing some impact either from the Delta variant or from the supply shortage of some of the other categories going into Q4. Some of the companies in the space commented on their Q3 call that some of the physical presence categories such as retail, restaurant, entertainment are seeing some impact larger than expected. Just curious if you're seeing the same trend from your end. Thank you.
Speaker 3
It's Pat. The short answer is not really. I'm sure there's isolated incidents market by market, but overall, we're really not seeing that right now.
Speaker 11
Okay, great. Thank you.
Speaker 0
There are no further questions at this time. I'm sorry.
Speaker 1
All right. Thank so much, operator. And I want to thank everyone who has joined us this morning. We're very proud of our Q3 results. And we can't wait to close this transaction and talk to you in the New Year with Meredith underneath our belt.
Thank you and have a great holiday season. Bye bye.
Speaker 0
That concludes today's conference call. Thank you everyone for participating. You may now disconnect.