Q3 2021 Gray Television Inc Earnings Call
[music].
Good day and thank you for standing by welcome to the third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session chassis question. During the session you will need to press star one on your telephone.
Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Hilton Howell. Please go ahead.
Thank you operator, and good morning, everyone I want to thank everyone on the call. This morning for being here as Mary mentioned, our operator, I'm Hilton Howell the chairman and CEO of Gray television. Thank you for joining our third quarter 2021 earnings call with me today as usual are graves executive officers our president.
Pat La flattening, our chief legal and development Officer, Kevin Latex, our Chief Financial Officer, Jim Ryan and our Chief Operating Officer, Bob Smith will begin this morning, with a disclaimer that Kevin will provide and I. 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, our pending acquisitions and related divestiture.
The impact of the novel Coronavirus disease, or COVID-19 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-K.
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 dot TV.
Included on the call, maybe 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 and now I will turn the call to Hilton.
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 local media group.
We are thrilled.
We're all very focused on getting to closing and integrating the new stations into our high performance television family.
Today. However, we were thrilled to show share with you the strong financial results. We've reported this morning for the third quarter of 2021.
We reported total third quarter revenue of $601 million, which was essentially unchanged from third quarter 2020. When we would then benefitting from an exceptionally strong political revenues season in a presidential election year.
In particular.
We are very pleased with our combined local and national broadcast advertising, a $292 million and our retransmission consent revenue of $266 million.
These figures reflect only modest contributions from the new Quincy stations, which just joined US on August the second.
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 by year political revenue.
10 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 quiet a 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 journalist technologist 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 $5 billion and increased our existing revolving credit facility to 500 million.
In addition, we agreed to issue $1 3 billion unsecured five 375% notes due 2031 at par.
The note offering was upsized by 175 million from an originally planned $1 125 billion as a result of the successful financings. We currently estimate that our average cost of capital for the Meredith transaction at the time of closing will be just for a 0.15.
Per cent.
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.
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 Grey's business is strong.
Our prospects are bright and we are successfully growing great TV and.
And one of the finest media companies.
In the country.
Well go next to a few remarks from my colleagues with additional color to our third quarter earnings release thereafter, I will open the line to questions Pat.
Thanks Bill.
One of our first quarter earnings call I suggested that our total core revenue would return to the nonpolitical pre pandemic 2019 levels quote later this year unquote.
We anticipated that we would see 2019 core levels again in the fourth with an outside shot at the third quarter of this year.
Our second quarter with strength in nearly all advertising categories. Our total core revenue and finished just below Q2 2019.
Today, we are thrilled to report that we finished the third quarter at a level that exceeded our 2019 Q3 total core revenues by 2% to.
To drill down a bit total coal revenue increased 23% in the third quarter of 2021 compared to Q3 of 2020 and total core revenue beat third quarter of 19 results by 7%.
Roughly $23 million of combined core in 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 third quarters of both 2019.
And in 2020 and in the case of 2020 by very wide margin.
Like some of our peers. The gaming category has been incredibly strong for gray in 2020 one.
We believe it has room to run going forward.
Revenues from gaming companies is currently pacing to end the year at more than 250% higher.
<unk> revenues in 2020.
Similarly, the auto category has been challenging due to the wall covered supply chain issues.
The Quincy stations the auto category through the first three quarters of 2021 was down roughly 30% compared to the same period in 2019.
Last night an election here.
However, we do believe the automotive category will come back in 2022.
Perhaps more interesting as a uniform strength across virtually all other categories. In fact for great television revenues in the health category are now in the same ZIP code as automotive.
While the weakness in auto is relative short term pain.
Diversification is a longer term gain.
In short we can today confirm that the worst of the pandemic impact on greatest core business is firmly behind us.
I'll now turn the call to Kevin.
Good morning, again, turning first to M&A and I'm pleased to report that our Meredith transaction remains on track to close 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.
At this time, we anticipate receiving the FTC's concerns at the transaction fairly soon because the transaction did not attract any petition competitions to deny and the transaction does not require any FTC 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 end of 2022.
As you know from our tax in 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 C. B S. On the renewal of all these affiliations and we expect to finalize and execute the new affiliation agreements with CBS very soon.
Our retransmission revenues in the third quarter.
With $266 million, which is roughly 23% ahead of the third quarter of 2020.
This increase is the result of rate increases and recently renewed agreements annual rate escalators stable have counts and the addition to the former Quincy stations in eight mid size markets in August of this year.
Year to date, our retransmission revenues were $755 million, an increase of about $105 million or 16% over the first nine months of 2020.
We currently expect to cross $1 billion in total gross retransmission revenue greater than the fourth quarter, excluding any contribution from Meredith stations.
In terms of subscriber counts now receive nearly all subscribers reports from Mvpds and most of the OTT providers for the second quarter of 2021.
The subscriber reports continue to show declines in N V. P D subscriptions being offset by growth in OTT subscriptions and.
In fact, our total end market big four subscriber count across all paid platforms for the second quarter of 2021, 0.1% higher than the total for the second quarter of 2020, I won't repeat that because we often get asked after the call to repeat that sentence.
However, total in market Big four subscriber count across all paid platforms for the second quarter of 'twenty, one 2021 was 0.1% higher than the total for the second quarter of 2020.
We view our relatively stable sub count is a testament to the value of the live local content the gray stations provide.
Finally, I want to provide some color on political revenue.
The first three quarters of 2021, we reported approximately $24 million.
$400000 net 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 million in political revenue again in the first few days of January 2021.
We had very robust spending in a ballot initiative in main concerning high power electric transmission lines that actually exceeded the revenues that we received from the very competitive race for Virginia Governor.
Keep in mind that one half of our political revenue every year.
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 and are in the political area for US is that we continue to benefit from these 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 first through the third quarter relates to elections that will occur in November 2022, not collections that occurred in November 2021.
Only a few years ago, we remarked when we had one or two races, I started spending with us nine to 12 months before election day.
In 2021 by contrast, we have about a dozen races with ads spend 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 their first or second quarter of this year for elections occurring in November of 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.
Next year than last year, including gubernatorial races. In nearly every state served by the Quincy Meredith stations that we're adding this year.
Moreover, political fundraising records have been shattered with each new set of reports and both parties candidates at all all those interest groups and Super Pacs.
And I'll add that the results in Virginia, and New Jersey This week.
<unk> 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 last divested stations.
<unk> $652 million in total net political revenue in 2020.
We anticipate that next year's revenues will roughly reach 80% of last year's total and a presidential president and the presidential election year.
We are therefore today guiding to total net political revenue for 2022 of approximately $525 million.
I'll now turn the call to Jim Ryan.
Thank you, Kevin and good morning, everyone.
As usual, we will file our quarterly report Form 10-Q later today the release and the 10-Q is 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 highlights of the quarter, including our very successful financing transactions for the pending Meredith acquisition.
A couple of brief comments at 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, 2020, and demonstrating the continuing improvement sequentially in core.
And it also makes us optimistic of continuing improvement as we move into 'twenty two.
As Pat mentioned auto was still lagging due to the while 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 the 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 coupon.
Core pacings for this 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 the recap certain metrics associated with our completed Quincy and pending merits 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 181 markets, which is best of breed portfolio quality.
Hands down the <unk>.
Total purchase price for both Quincy and married it was approximately $3 5 billion prior to the $450 million of divested stations.
Our last eight quarter average Trey.
Trailing combined historical revenues, so that would be fully pro forma for all transactions and all divestitures as of 630 21 was approximately $3 185 billion.
Our late Q combined historical cash flow at $630 21 was approximately 123 1 billion and that would include $78 million of synergies between the Quincy and Meredith acquisitions.
We currently anticipate our 12 31 21 leverage ratio net of all cash is defined in our senior credit facility will approximate 854 times with an estimated total outstanding debt at 12 31, 'twenty one of approximately 683.
5 billion, assuming the closing of the merits transaction in December.
I can switch it make a couple of quick comments on free cash flow with.
With regards to Q3 and year to date Q3 'twenty. One. Please know we have some unusual onetime only items in the quarter in and also rippling through the nine months.
We paid $72 million 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 agree.
I agreed to the purchase price of Quincy.
Also I'll remind everybody that there were no common dividends in 2020 in 2019. So that's another item to take into consideration for comparability to prior periods.
If you adjust for the onetime only items and the.
The difference in timing of dividend, our Q3, 21 free cash would be about $75 million compared to $92 million in 2019, and our year to date Q3 free cash would be approximately $202 million compared with $165 million in 2000.
19.
Turning ahead and thinking forward on free cash and following up on our comments from our second quarter call.
I would remind everybody that our averaged 19 'twenty reported free cash flow was $416 million.
I mentioned after giving effect to both Quincy and Meredith.
Combined historical basis.
<unk> operating cash flow as of 630 21 with one to three 1 billion.
Post Meredith closing, we would be anticipating pension funding requirements on a two year blended average basis of about $4 million per year.
We would.
Have approximately $300 million of cash interest per year.
We are anticipating routine capital expenditures of approximately $125 million per year.
And we're currently estimating cash taxes.
Range somewhere between 125 and $150 million on a blended two year average basis.
Alright.
The preferred stock dividend is $52 million per year.
This provides a blended two year average free cash flow estimate of $600 million to $625 million.
Excluding common dividends.
And it is an approximately 45% to 50% accretive to our historical 19, 'twenty $416 million of free cash flow.
We are very well positioned going into 2020 with the Meredith transaction expected to close in December.
Turn the call back to Hilton Thank.
Thank you John Operator, we'll now open up for any questions.
As a reminder chassis question.
Sorry.
Your telephone.
Okay.
Last year.
Our first question comes from the line of John.
From Wolfe Research your line is open.
Thanks, Good morning, guys.
Good morning, gentlemen, a couple here.
Good morning.
There are little pieces in the fourth quarter guidance you name it.
For Jim, but I think there may be some confusion. So can you give us what the same station growth is for for Q.
'twenty one versus 19, what does that look like in and with the Meredith feel on track what kind of EBITDA contribution.
Should we be expecting for the quarter.
First the Meredith we are not we're not guiding for Meredith.
And as far as our core Q4 pro forma just bear with me a moment I'm looking it up for you.
I don't have the comparisons to 19, but pro forma true Quincy.
Local would be about even with 20, Oh actually up a little bit over 2020, a national also I'd characterize them, both being up local up.
Low to mid single digits and national up high single digits.
'twenty, one to 'twenty and out a fully combined historical basis through the Quincy closing, but that does not include Meredith.
Okay, and then maybe mark rather than on the revenue diversification commentary you guys talked about the gaming category I know in the past you've talked about new to TV advertisers I'm just thinking in the context of supply chain I don't know if you get much crypto or E Commerce services spend but at this point how much of your AD dollars are coming from what I'd call say newer.
Or is your clients.
Of course I would.
Yeah look we this is Pat speaking.
We have a very very strong focus on new local direct.
And.
But to sit here and tell you exactly what our number is from new you're talking about in Q3, we talked about for the year.
I'm just thinking maybe a general maybe maybe a run rate type of number.
Well, we track this Bob Smith, we track new local direct on a monthly basis in Q3, the third quarter, we had over 2000 local direct accounts.
In the quarter and it's growing every month sequentially since January.
Okay.
Okay. Thanks, a lot maybe one last one quickly just given the new political guide does that have any application.
The free cash flow guidance or everything is all baked in there.
That would be baked in.
Okay, Alright, thanks, guys.
Yep.
Our next question comes from the line of John.
From benchmark company your line is open.
Great. Thanks, Good morning, Congratulations Kevin that helped get to that.
CBS all anymore, you get some sleep.
Congratulations.
On the political we heard some other commentary this morning, just around how.
Especially given what's gone on in Virginia, and New Jersey.
I don't know that any of us would have thought what happened.
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 engagements.
That may not have been previously and your top rated stations and certain dnas, where local is really important.
Is that factored in.
Your guide number one and just I guess number two can you remind us.
And then off year, how big of a component issue is of the total.
Yes.
I'll take the first part.
Moshe.
Issue is usually 5% to 10%.
Of total political.
Your question do we bake in additional engagement.
Hey, this way over the last several presidential cycles presidential it's 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 do we are seeing like this much earlier spending the fund raising records.
Engagement.
And so all of that.
Kind of factors into why we came up with a guide of about roughly 80% of 2000 Twenty's 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 forma number includes Atlanta, So we have Atlanta in every single market in the state other than making and our political revenues last year, we had a lot of hotspots buyer.
By election day, and then Georgia was another very significant sound between election day and ended the year.
So that's not likely to repeat to the same level that we saw last year, we had two Senate races.
So competitive in that runoff and then a runoff in Georgia. So.
Push and take that's not there, but we have more engagement more activity than maybe that roughly equals out.
But we're cautiously optimistic that.
We'll be raising the political guide as we go into.
Next year progresses.
At this point, we're feeling like there'll be enough additional races and excitement.
To make up for the lack of the Georgia double runoff.
And if we're right then we'll have to raise the guide at 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.
Got it.
Really helpful. Thanks, Kevin and then just on.
Go ahead, Bob Yes, sorry.
It's usually helpful. Bob Smith as I'm right. So I, just thought I'd pause for that Kevin.
Alright, well, Kevin you've got affirmation.
Right.
And then just on core I guess.
Yes.
Can you quantify it.
Exposure to sports gambling sports gambling kind of where it fits in your category unless because we had started to get that metric now.
And really you know I think you got.
It gave us a pretty optimistic commentary around Q4 can you just be clear.
Auto is indeed actually worsening, but youre more than.
And you're more than offsetting that with incremental services growth off of something.
What's been an incredibly strong category growth all year.
Yeah, I mean again fourth quarter.
As I think Pat said too I mean fourth quarter everything is showing green, but auto so it's nice to see that as far as gaming goes.
<unk>.
Yeah.
Right now I'd say, we're probably looking at something on a full year basis.
The Zip code of $40 million for the full year.
All of which is obviously up we said last.
Last couple of calls that.
Gaming in 2020 for US was basically a single digit number.
So it has had fantastic growth so far this year.
It is as Pat said earlier, we would expect it to continue to grow over the next several years as more states legalize it.
If I could add to that too is that we're seeing.
Quite a bit of spending in Arizona in Louisiana, because Theyre recently activated we also anticipate while we have a couple of small markets in New York, We just spit New York will come live on December one, which will contribute to the.
Fourth quarter revenue.
Got it I appreciate the color guys. Thanks very much.
Thank you Jim.
Our next question comes from the line of Kyle Evans from Stephens. Your line is open hi.
Thanks, Good morning, everybody.
Good morning, good morning.
Could you give us any kind of qualitative or quantitative update on how your partnership with techno on premium honest.
Jim.
Yeah, Kyle it's Pat I would say, it's going very well.
We rolled out we finished our rollout.
Of all of our markets I think in early Q2.
And we I can tell you we're well ahead of our budget for 2021.
It's a high growth area for us.
If I could add also we are already seeing impacting 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.
Carl I'd like to just add to that I really want to congratulate the management team at Turner for putting premium on together.
We were honored and flattered to be allowed to buy into it they did an exceptional job.
So theres been a lot of.
Stuff going on.
And around China, but if premium 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 premium on and it's done.
Done Gray a great positive service financially.
Alright, thanks for that additional color Jim.
You gave us a trailing eight quarter 621.
No.
Yes.
Almost identical to the one that we have.
In 19, and 20 of them that's been in your decks.
Which basically means that the first half of 19 looks like.
First half of 'twenty one.
Basically.
Uh huh.
Yes.
And we're looking at that kind of 12.
What in your mind are the two or three biggest puts and takes going forward. Thanks.
You're saying just to 12 31 'twenty one are you going out into 'twenty two.
I want you to go out.
Yeah.
How did you want to go Jim.
I would think about it this way in a big picture and I will admit I'm being a little conservative here.
But.
Obviously <unk> was a huge political years, we've all of this just as cost and we've said our initial guide is underneath the.
'twenty political.
Hi.
Uh huh.
Good reasonably good sized number.
So is core and net retrans grow in 'twenty two.
That growth, probably offset the delta that we're expecting in political.
And so if you're being conservative 22, probably looks a lot like 'twenty.
And on a total basis and then <unk>.
'twenty one looked a lot like 19, so it.
Puts you back in the same ZIP code probably.
Now on <unk>.
$1 2 billion.
No.
I'm not going to be.
$10 million Smart I don't think anybody else would either but I think it puts you would you're being conservative and kind of put you back in the same ZIP code, which is actually a good place to be in 'twenty two.
Because otherwise you.
And then maybe we'll get lucky and we backfill more in the political that time will tell as we move into 'twenty two on that but I would start by kind of thinking about it that way.
Great. Thank you.
And you got the free cash flow number I gave the 600 million plus in.
Our financing is done so you can I mean, those numbers are pretty reasonably locked in at this point.
Got it.
Big moving around on the conversion.
EBITDA to free cash that we should be thinking about or is that.
Kind of hold steady as well.
No I think it generally hold steady I mean, they shouted out the bigger components of that.
You got the noise in Q3 on that $72 million of taxes.
But 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 million of cash taxes coming up in Q4 on the Flint divestiture.
Which is a one time only thing as we move into next year.
You know and.
Pro forming.
Combined historical basis.
I don't nothing really jumps out at me is gonna be being significant.
Thank you.
Our next question comes from the line of Jim Goss from Barrington Research. Your line is open.
Alright, thank you.
I was curious about the increasing proliferation of secondary mostly rerun oriented networks I was wondering and I know you use some of them and I'm wondering if you have any particular strategy.
Towards using them or increasing usage of them.
Wonder if you might frame any potential economic impact I know you have a lot of digital stations.
You can do with that.
Yes, Jim it's Pat So Ed.
Virtually all of our stations we have.
Primary signal that in some markets, we have a secondary big four network and then we have telemundo, but beyond that we have the network that you are referring to we actually own an equity interest in.
Circle, So thats in the vast majority of gray stations and.
And our strategy really is to have one of those we'll call them Digi nets as a sales vehicle and then we did we do pass through will take cash for the remainder of <unk> and again the way. We're situated today, that's roughly one primary signal and five multi cast signals. So.
Not a huge chunk of revenue, but it's it's a nice chunk of revenue and I think I don't think that strategy is going to change much until we get <unk> three <unk> rollout.
When that happens that will increase the amount of bandwidth we have to potentially add more.
But thats still you know its going to vary by market. That's still a few years off and I hope that answer your question.
Yeah, no that's a good framework.
And then my second question.
It 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 the <unk>.
M&A priorities.
If anything you might do would be focused on the either the modest incremental room, you have on the ownership caps or portfolio of assignment.
Or whether you would be turning more towards ancillary exposures and technologies.
Or elsewhere.
I guess, Jim that's really a question for everybody at the table.
Our priority is to close Meredith and the priority is to pay down debt.
We obviously don't have a lot of room under FCC cap, but we don't have order bandwidth.
On the balance sheet either to be doing large television acquisitions. So I would tell you this year.
We have looked at.
Dozens of investments.
And acquisitions.
I'm not tracking sheet were up to 55 separate NDA through the year.
Strategic works, obviously most of those don't go anywhere.
You know Meredith as one entry and buying.
Uh huh.
Couple hundred thousand dollar low power TV stations, and other and its kind of everything in between.
So we're constantly looking we're not sort of pivoting into new the new area, we're not looking to get out of our our.
Our wheelhouse or skill set.
Some things are complementary nothing because 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 too.
Destroy what we have we know what we know how to run a group.
Really strong television stations and do some things run decide that are ancillary that are helpful. But we're not looking to go.
By a startup media company, that's losing money.
We got to the professionals on Wall Street.
Jim. This is also let me add just a little bit to what Kevin had to say all of which I obviously endorse.
We look at 2022 is being a year of consolidation, we think the timing of this mirrors transaction as sterling because we're gonna roll, we're going to close on it and they were gonna 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 of those operations, but I will tell you.
We've gone 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 going to be consolidating and bringing in Quincy, which really essentially already done and then the new narrative stations and so we're very excited about that.
Alright, well, thank you I'll leave it go with that.
Our next question comes from the line of Steven Cahall.
From Wells Fargo. Your line is open.
Thank you.
Maybe Kevin So you don't have to restated 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 wall some combo.
A year ago.
Second quarter 2020, we had.
We lost a number of subs.
As the recession took took.
Took hold people stop paying their bills.
Big cities.
Even small cities.
And we.
We saw.
A decent resurgence.
You have 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 have been offset by really strong growth in the OTT. So I don't think.
At a high level there is 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, and it's going to be sub declines of some amount.
Great and then.
Jim Thanks for those.
Combined historical pro forma numbers that free cash flow margin looks pretty nice if that's 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.
Yeah, the the the $300 million of estimated cash interest includes the incremental debt on.
The Meredith acquisition and as we said earlier that blended average initial rate of the Meredith that is a 4.15%. So it's it's relatively cheap.
And then they one obviously as we pay down debt will be reduced cash interest as we go along too.
So that $300 million the day, one cash interest.
Great and the $1 2 billion includes the cash interest is that right.
I don't think I understand the question the $1 2 billion is our.
As our operating cash flow as defined in our senior credit agreement so that would be.
At.
Yeah.
In Q2, but not exactly what you probably call adjusted EBITDA.
Great. Okay. That's frankly, a one point to 1.2 would be before deducting interest expense. So it's a.
It's you can see you can look at the release didn't see the non-GAAP bracket as to how we get to it.
We calculated and consistently for years.
Great. Thank you and then Pat.
Pat just on the Quincy station contribution maybe both for Quincy and Meredith do you feel like Theres, an opportunity to bring up AD sales when you sort of put it in a way that you've done business. Historically it gray is there some revenue synergy that we might see over time. Thanks.
Yeah. 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 other Quincy acquisition.
Pretty early in the game, we think there is similar.
Benefits.
Once we close on Meredith.
And.
And so the answer is yes, when we do the math, we kind of report retrans expense synergies, but but realize we do believe there'll be some revenue synergies going forward.
If I could add to that.
We're already seeing some results with Quincy group wheat in our opinion have the best sales training.
Team in the business and so we were very proactive with the Quincy.
<unk> staffs and sales management and right.
A few months ago and put them through.
A very intensive training for a week and we're seeing the results of that in our plan moving forward is to do it as well with the Meredith sales organizations as well.
Thank you.
Yeah.
Our next question comes from the line of Monte Carlo from <unk>. Your line is open.
Thank you for taking my question I appreciate all that great color that you provided on the revenue top line.
Figured I'd just ask a question on the margin it looks like margin was down quite a bit this quarter.
The EBITDA is down about 29% year over year understand most of that is related to political which has higher margins, but just curious if you can help gauge kind of some of the margin difference because it seems quite large on that year over year or even compared to a non political Q3 night keenly.
Thank you.
I think the biggest driver of that would be the increase in net retrans.
Reverse retrans that goes back to the networks.
So you're comparing 'twenty, one to 'twenty or 'twenty.
1% to 19.
For the quarter.
Pro forma for all the all of the.
Acquisitions.
It was.
Well, we commented on the release it was up about.
Year over year.
Bear with me I'm trying to get down to the right report in front of me.
It was up.
$28 million, which is primarily the driver of.
The operating expense increase year over year, we did have some <unk> costs that are that are.
Highlighted in the release as well.
Action related costs.
Deals.
Which probably that would be impacting your.
What youre seeing is the margin as well, but again those are just O T O deal costs.
So it's really 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.
[laughter].
Okay. I think I also looked at yard naturally change revenue as a percentage of gross rate trends that actually seems pretty steady year over year.
From percentage perspective, but I can follow up separately on that just to.
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 barrons or from the supply shortage also about the auto categories going.
Going into Q4, some of the companies in the space.
<unk> commented on their Q3 call that some of the physical PRASM category, such as retail restaurants entertainment interesting some impact larger than expected.
Just curious if you're seeing the same trend from go ahead. Thank you.
It's Pat the short answer is not really.
<unk>.
Im sure Theres isolated incidents market by market.
But overall, we're really not seeing that.
Right now.
Okay, great. Thank you.
There are no further questions at this time.
Oh, I'm, sorry, alright. Thank you 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.
In the new year with Meredith underneath our belt, Thank you and.
Have a great holiday season Bye bye.
That concludes today's conference call. Thank you everyone for participating you may now disconnect.
Okay.
Sure.
Okay.
Okay.
Hi.
Sure.
Yes.
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Yes.
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Yes.
[music].
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[music].
[music].
Good day and thank you for standby welcome to the third quarter 2021 earnings Conference call.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session chassis question. During the session you will need to press star one on your telephone. Please be advised today's conference is being recorded if you require any Ford assistance. Please press star Zero I would now like to have the conference over.
Your speakers today Hilton Howell. Please go ahead.
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'm Hilton Howell the chairman and CEO of Gray television. Thank you for joining our third quarter 2021 earnings call with me today as usual are graves executive officers, our president and co CEO.
Pat La flattening, our chief legal and development Officer, Kevin Latex, our Chief Financial Officer, Jim Ryan and our Chief Operating Officer, Bob Smith will begin this morning, with a disclaimer that Kevin will provide and I. 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 disease, or COVID-19 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-K.
And our most recent earnings release the company undertakes no obligation to update these forward looking statements.
<unk> uses its website as a key source of company information the website address is www great out TV.
Included on the call, maybe 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 and now I'll turn the call to Hilton.
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.
Fantastic television stations from Quincy Media in August.
Right now we are just a few weeks away from closing and.
Another transformative acquisition of Meredith Corporation local media group.
We are thrilled.
We're all very focused on getting to closing and integrating the new stations into our high performance television family.
Today. However, we were thrilled to show share with you the strong financial results that we've reported this morning for the third quarter of 2021, we.
We reported total third quarter revenue of $601 million, which was essentially unchanged from third quarter 2020. When we would then benefitting from an exceptionally strong political revenue season, and a presidential election year.
In particular.
We are very pleased with our combined local and national broadcast advertising at $292 million and our retransmission consent revenue of $266 million.
These figures reflect only modest contributions from the new Quincy stations, which just joined US on August the second.
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 by 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 decline of political revenue, particularly the exceptionally strong political revenue of 2020.
I, therefore want to take a moment to congratulate all of our hard working account executives and sales professionals for their great work this year.
As well as the journalist technologist and everyone throughout our company, who every day.
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 $5 billion and increased our existing revolving credit facility to $500 million.
In addition, we agreed to issue $1 3 billion unsecured five 375% notes due 2031 at par.
The note offering was upsized by $175 million from an originally planned $1 <unk> 5 billion as a result of the successful financings. We currently estimate that our average cost of capital for the mirrors transaction at the time of closing will be just 4.1.
5%.
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.
And 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 <unk> business is strong.
Our prospects are bright and we are successfully growing great TV and.
And to one of the finest media companies.
In the country.
We will next to a few remarks from my colleagues with additional color to our third quarter earnings release thereafter, I will open the line to questions Pat.
Thanks Bill.
Our first quarter earnings call I suggested that our total core revenue would return to the nonpolitical pre pandemic 2019 levels quote later this year unquote.
We anticipated that we would see 2019 core levels again in the fourth with an outside shot at the third quarter of this year.
And our second quarter with strength in nearly all advertising categories. Our total core revenue finished just below Q2 2019.
Today, we are thrilled to report that we finished the third quarter at a level that exceeded our 2019 Q3 total core revenues by 2% to.
To drill down a bit total core revenue increased 23% in the third quarter of 2021 compared to Q3 of 2020.
And total core revenue beat third quarter of 19 results by 7%.
Roughly $23 million of combined core in 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 third quarters of both 2019.
And in 2020 and in the case of 2020 by very wide margin.
Like some of our peers the gaming category has been incredibly strong for great 2021.
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 gaming revenues in 2020.
Similarly, the auto category has been challenging due to the wall covered supply chain issues.
Excluding the Quincy stations, the auto category through the first three quarters of 2021 was down roughly 30% compared to the same period in 2019.
Last night, an election year.
However, we do believe the automotive category will come back in 2022, perhaps more interesting as 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 a longer term gain.
In short we can today confirm that the worst of the pandemic impact on greatest core business is firmly behind us.
I'll now turn the call to Kevin.
Good morning again.
Turning first to M&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 FTC's concern to the transaction fairly soon because the transaction did not attract any petition petitions to deny and the transaction does not require any FCC waivers.
On our 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 end of 2022.
As you know from our decks in 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 of these affiliations and we expect to finalize and execute the new affiliation agreements with CBS very soon.
Our retransmission revenues in the third quarter.
We're $266 million, which is roughly 23% ahead of the third quarter of 2020.
This increase is the result of rate increases and recently renewed agreements annual rate escalators stable sub counts and the addition of the former Quincy stations in eight mid sized markets in August of this year.
Year to date, our retransmission revenues are $755 million, an increase of about $105 million or 16% over the first nine months of 2020.
We currently expect to cross $1 billion in total gross retransmission revenue later in the fourth quarter, excluding any contribution from Meredith stations.
In terms of subscriber counts now received nearly all subscriber reports from Mvpds and most of the OTT providers for the second quarter of 2021.
The subscriber reports continue to show declines in Mvpds subscriptions being offset by growth in OTT subscriptions and.
In fact, our total end market big four subscriber count across all paid platforms for the second quarter of 2021, 0.1% higher than the total for the second quarter of 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 second quarter of 'twenty. One 2021 was 0.1% higher than the total for the second quarter of 2020.
We view our relatively stable sub count is a testament to the value of the live local content the gray stations provide.
Finally, I want to provide some color on political revenue.
The first three quarters of 2021, we reported approximately $24 million.
$400000 net 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 rate has produced about $5 million in political revenue again in the first few days of January 2021.
We had very robust spending in a ballot initiative in main concerning high power electric transmission lines that actually exceeded the revenues that we received in a very competitive race for Virginia Governor.
Keep in mind that one half of our political revenue every year.
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.
Political area for US is that we continue to benefit from these 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 through the third quarter relates to elections that will occur in November 2022, not collections that occurred in November 2021.
Only a few years ago, we remarked when we had one or two races as started spending with us nine to 12 months before election day.
In 2021 by contrast, we have about a dozen races with ads spend 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 their first or second quarter of this year for elections occurring in November of 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 experienced another record breaking non presidential political year next.
Next year control of both houses of Congress.
Congress will be in play.
We also see significantly more races for Governor next.
Next year than last year, including gubernatorial races. In nearly every state served by the Quincy Meredith stations that we're adding this year.
Moreover, political fund raising records have been shattered with each new set of reports from 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.
<unk> expanded the field of competitive races across the country.
Given all of 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 million in total net political revenue in 2020.
We anticipate that next year's revenues will roughly reach 80% of last year's total and a presidential president and the presidential election year.
Therefore today guiding to total net political revenue for 2022 of approximately $525 million.
I'll now turn the call to Jim Ryan.
Thank you, Kevin and good morning, everyone.
As usual, we will file our quarterly report Form 10-Q later today.
The release and the 10-Q, we 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.
A couple of brief comments at 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 2020, demonstrating the continuing improvement sequentially in core and it also makes us optimistic of continuing improvement as we move into 'twenty.
To us.
As Pat mentioned auto was still lagging due to the while 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 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.
Our 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 the recap certain metrics associated with our completed Quincy and pending merits transactions.
At the close of the Meredith transaction I'll remind everybody that we'll be serving 113 TV markets with the number one or number two rated station in 181 markets, which is best of breed portfolio quality.
Hands down.
The total purchase price for both Quincy and Merit is approximately $3 5 billion prior to the $450 million of divested stations.
Our last eight quarter average.
Trailing combined historical revenue, so that would be fully pro forma for all transactions and all divestitures as of $630 21 was approximately three 185 billion.
<unk> late Q combined historical cash flow at $630 21 was approximately 123 1 billion and that would include $78 million of synergies between the Quincy and Meredith acquisitions.
We currently anticipate our 12 31 21 leverage ratio net of all cash as defined in our senior credit facility will approximate five four times with an estimated total outstanding debt at 12, 31, 'twenty one of approximately $6 83.
5 billion, assuming the closing of the merits transaction in December.
I can switch it make a couple of quick comments on free cash flow with.
With regards to Q3 and year to date Q3 'twenty. One. Please know we have some unusual onetime only items in the quarter in and also rippling through the nine months.
We paid $72 million 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 agree.
I 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 onetime only items and.
The difference in timing of dividend, our Q3, 21 free cash would be about $75 million.
Compared to $92 million in 2019, and our year to date Q3 free cash would be approximately $202 million compared with $165 million in 2019.
Yes.
Turning ahead and thinking forward on free cash and following up on our comments from our second quarter call.
I would remind everybody that our averaged 19 'twenty reported free cash flow was $416 million is.
As I mentioned after giving effect to both Quincy and Meredith.
Our combined historical basis late Q operating and cash flow as of $630 21 was 123 1 billion.
<unk> Meredith closing, we would be anticipating pension funding requirements on a two year blended average basis of about $4 million per year.
We would.
Have approximately $300 million of cash interest per year.
We are anticipating routine capital expenditures of approximately $125 million per year.
And we're currently estimating cash taxes.
Range somewhere between $125 and $150 million on a blended two year average basis.
Alright.
The preferred stock dividend is $52 million per year.
This provides a blended two year average free cash flow estimate of $600 million to $625 million.
Excluding common dividends.
And it is an approximately 45% to 50% accretive to our historical 19, 'twenty $416 million of free cash flow.
We are very well positioned going into 2020 with the Meredith transaction expected to close in December I will turn the call back to Hilton.
Thank you Jim Operator, we'll now open up for any questions.
Yes.
As a reminder chassis question.
Thats Star one on your telephone.
To withdraw your question press the pound key.
Please.
Compile the Q&A roster.
Our first question comes from the line of John.
Wolfe Research your line is open.
Thanks, Good morning, guys.
Good morning, gentlemen couple here.
Good morning.
There are little pieces in the fourth quarter guidance and David.
For Jim, but I think there may be some confusion. So can you give us what the same station growth is for <unk>.
'twenty one versus 19, what does that look like in <unk>.
And with the Meredith penalized track, what kind of EBITDA contribution.
Should we be expecting for the quarter.
First the Meredith we are not we're not guiding for Meredith.
And as far as.
Core Q4 pro forma.
Here with me a moment.
It was up for you.
I don't have comparisons to 19, but pro forma true Quincy.
Local would be about even with 20.
I actually up a little bit over 2020.
National also.
I would characterize them both being up local up.
Low to mid single digits and national up high single digits.
21, <unk> and <unk>.
On a fully combined historical basis through the Quincy closing, but that does not include Meredith.
Okay, and then maybe more broadly on the revenue diversification commentary you guys talked about the gaming category I know in the past you've talked about.
New to TV advertisers that just thinking in the context of supply chain I don't know if you get much crypto or E Commerce services spend but at this point how much of your AD dollars are coming from what I'd call say newer categories of clients.
Of course.
Good.
Yeah look we this patch speaking.
We have a very very strong focus on new local direct.
Hi.
But to sit here and tell you exactly what our number is for a new you're talking about in Q3 are you talking about for the year.
I'm just thinking maybe in general maybe maybe a run rate type of number.
We track this Bob Smith, we track new local direct on a monthly basis in Q3, the third quarter, we had over 2000 local direct accounts.
In the quarter and it's growing every month sequentially since January.
Okay. Thanks, a lot maybe one last one for Tim quickly just given the new political guide does that have any implications.
The free cash flow guidance or everything is all baked in there.
That would be baked in.
Okay, Alright, thanks, guys.
Yes.
Our next question comes from the line of John <unk> from Benchmark Company. Your line is open.
Great. Thanks, Good morning, Congratulations Kevin I'll take that.
CBS all anymore, you get some sleep.
Yes.
Congratulations.
On the political we heard some other commentary this morning, just around how.
Especially given what's gone on in Virginia, and New Jersey.
I don't know that we all any of us would've thought what happened.
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 engagements.
That may not have been.
Previously and your top rated stations and certain dnas, where local is really important.
Yeah.
Is that factored in to your guide number one and just I guess number two can you remind us.
And then off year, how big a component issue.
Total.
Yes.
I'll take that first part.
Moshe.
<unk> issue is usually 5% to 10%.
Total political.
Your question do we bake in additional engagement.
I say 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 do.
<unk> seen this much earlier spending the fund raising records.
The engagement.
Okay.
So yes all of that.
Kind of factors into why we came up with a guide of about roughly 80% of 2000 Twenty's revenue would be our guide for next year.
Remember too last year, we had exceptional spending in Georgia.
Have a presence in Georgia.
Again that pro forma number includes Atlanta, So we have Atlanta in every single market in the state other than making.
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 ended the year.
So that's not likely to repeat to the same level that we saw last year, we had two Senate races.
So competitive in that runoff and then a runoff in Georgia.
No.
Push and take that's not there, but we have more engagement more activity than maybe that roughly equals out.
But we're cautiously optimistic that.
We'll be raising the political guide as we go.
As next year progresses.
At this point, we're feeling like there'll be enough additional races and excitement.
To make up for the lack of the Georgia double runoff.
And if we're right then we'll have to raise the guide at this point, we're feeling pretty good that we're going to be able to make up for the largely the loss of some of the presidential and all of the double runoff in Georgia.
Got it that's really helpful. Thanks, Kevin and then just on.
Go ahead Bob.
It's usually helpful. Bob Smith has them right. So I thought I pause for that Kevin.
But.
Alright, well you guys, Kevin you got affirmation.
Right.
And then just on core I guess.
Sure.
Can you quantify it.
Closure to sports gambling sports gambling kind of where it fits in your category unless we are starting to get that metric now.
And really you guys gave some pretty optimistic commentary around Q4 can you just be clear.
Auto is indeed actually worsening, but youre more than you sounded like from your more than offsetting that with incremental services growth office.
What's been incredibly strong category growth all year.
Yeah, I mean again fourth quarter.
As I think Pat said too I mean fourth 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 $48 million for the full year.
Which is obviously up we said last.
Last couple of calls.
Gaming in 2020 for US was basically a single digit number.
So it has had fantastic growth so far this year and is as Pat said earlier, we would expect it to continue to grow over the next several years as more states legalize it.
If I could add to that too is that we're seeing.
Quite a bit of spending in Arizona in Louisiana, because Theyre 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 one, which will contribute to the.
Fourth quarter revenue.
Got it I appreciate the color guys. Thanks very much.
Thank you Jim.
Our next question comes from the line of Kyle Evans from Stephens. Your line is open.
Thanks, Good morning, everybody.
Good morning, good morning.
Hilton.
Could you give us any kind of qualitative or quantitative update on how your partnership with techno on premium is growing and then I've got a follow up question for Jim.
Yeah, Kyle it's Pat I would say, it's going very well.
Yeah.
We've rolled out we finished our rollout.
All of our markets I think in early Q2, and we I can tell you. We're well ahead of our budget for 2021.
It's a high growth area for us.
If I could add also we are 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.
I'd like to just add to that.
I want to congratulate the management team at Turner for putting premium on together.
We were honored and flattered to be allowed to buy into it they did an exceptional job.
No theres been a lot of.
Stuff going on with them around China, but premium on as an example of the kind of talent that they have within that company. They should be proud of what they're doing.
We are very proud to have our small interest in premium on and it's done it's done gray are great.
Positive service financially.
Alright, thanks for that additional color Jim.
You gave us.
Trailing eight quarters 630 21 revenue.
It looks almost identical to the one that we have for the.
The 1920 of them that's been in your decks.
Which basically means that the first half of 19 looks like.
First half of 'twenty one.
Basically.
If I grow the model.
And at that kind of 12 30.
As the CFO what in your mind are the two or three biggest puts and takes going forward. Thanks.
You're saying just to 12 31 'twenty one are you going out into 'twenty two.
I want you to go out.
Yeah.
Do you want to go Jim.
I would think about it this way in a big picture and I will admit I'm being a little conservative here.
But <unk>.
Obviously <unk> was a huge political years, we've aldis just discussed and we've said our initial guide is underneath the.
'twenty political.
Bye.
A good a reasonably good sized number.
So is core and net retrans grow in 'twenty two.
That growth probably offsets the delta that we're expecting in political.
And so if you're being conservative 22, probably looks a lot like 'twenty.
And on a total basis and then <unk>.
'twenty one looked a lot like 19 so.
Puts you back in the same ZIP code probably.
Now on <unk>.
One 2 billion.
No.
I'm not going to be.
$10 million Smart I don't think anybody else would either but I think it puts you you're being conservative and kind of put you back in the same ZIP code, which is actually a good place to be in 'twenty two.
Because otherwise you.
And then maybe we'll get lucky and we backfill more in the political that time will tell as we move into 'twenty two on that but I would start by kind of thinking about it that way.
Great. Thank you.
And you got the free cash flow number I gave the 600 million plus.
Our financing is done so you can I mean, those numbers are pretty reasonably locked in at this point.
Got it.
Big moving around on the conversion.
EBITDA to free cash that we should be thinking about or is that.
Kind of hold steady as well.
I think it generally hold steady shouted out the bigger components of that.
You got the noise in Q3 on that $72 million of taxes.
But 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 million of cash taxes coming up in Q4 on the Flint divestiture.
Which is a one time only thing as we move into next year.
<unk>.
And.
Pro forming.
Combined historical basis.
I don't nothing really jumps out at me is going to be being significant.
Thank you.
Our next question comes from the line of Jim Goss from Barrington Research. Your line is open.
Alright, thank you.
I was curious about the increasing proliferation of secondary mostly rerun oriented networks I was wondering 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.
Wonder if you might frame any potential economic impact I know you have a lot of digital stations.
You can do with that.
Yes, Jim it's Pat So Ed.
Virtually all of our stations we have.
The primary signal and in some markets, we have a secondary big four network and then we have telemundo, but beyond that we have the networks that youre, referring to we actually own an equity interest.
Circle, So thats in the vast majority of gray stations.
And our strategy really is to have.
One of those we'll call them Digi nets as a sales vehicle and then we did we do pass through or take cash for the remainder of <unk> and again the way. We're situated today, that's roughly one primary signal and five multi cast signals. So.
It's not a huge chunk of revenue, but it's.
It's a nice chunk of revenue and I think I don't think that strategy is going to change much until we get <unk> rolled out.
And when that happens that will increase the amount of bandwidth we have to potentially add more.
But thats still you know its going to vary by market that is still a few years off and I hope that answered your question.
Yeah, no that's a good framework.
And then my second question.
Would be.
For Kevin because he's probably left out because he has accomplished everything going into this call, but I was wondering in terms of.
M&A priorities.
If anything you might do would be focused on the either the modest incremental room, you have on the ownership caps or portfolio or assignment or whether you would be turning more towards ancillary exposures and technologies.
Or elsewhere.
I guess, Jim that's really a question for everybody at the table.
Our priority is to close Meredith and the priority is to pay down debt.
We obviously don't have a lot of room in our FCC cap, but we don't have order bandwidth on the.
On the balance sheet either to be doing large television acquisitions. So I would tell you this year.
We have looked at.
Dozens of investments in.
And acquisitions.
I am not.
Tracking sheet were up to 55 separate NDA to the year.
Strategic works, obviously most of those don't go anywhere.
Meredith as one entry and buying.
Yeah.
A couple of hundred thousand dollars will power TV stations, and other and its kind of everything in between.
We're constantly looking we're not sort of pivoting into new the new area, we're not looking to get out of our.
Our wheelhouse or skill set.
Some things are complementary nothing has so far we've been obviously announced a couple of things we've done this year, but we.
We're not looking to change the course of the company.
We're not looking too.
Destroy what we have we know what we know how to run a group.
Really strong television stations and do some things around this.
Either ancillary that are helpful, but we're not looking to go.
By a startup media company, that's losing money.
We got to the professionals on Wall Street.
Jim. This is also let me add just a little bit to what Kevin had to say all of which I obviously endorse.
We look at 2022 is being a year of consolidation, we think the timing of this mirrors transaction as sterling because we're going to roll, we're going to close on it and they're willing to roll right into what we think is going to be one of the largest political years.
That we've seen in this country.
So we're going to try to consolidate all of those operations, but I will tell you.
We've gone 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 going to be consolidating and bringing in both Quincy, which really essentially already done and then the new narrative stations and so we're very excited about that.
Alright, well, thank you I'll leave it go with that.
Our next question comes from the line of Steven Cahall from Wells Fargo. Your line is open.
Thank you.
Maybe Kevin So you don't have to restated 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 as cable gotten better has it been virtual wall some combo.
A year ago.
Second quarter 2020, we had.
We lost a number of subs.
As the recession took took.
Took hold people stop paying their bills.
Big cities.
Even small cities.
And.
We saw.
A decent resurgence.
You have 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.
I have been offset by really strong growth in the OTT. So I don't think.
At a high level there is very much different.
I wouldn't put too much into the small gain here I mean, it was basically flat and you are talking about the number of subs that we have it was essentially flat year over year.
That's a good place to be given the trend over time is going to be sub declines.
Some amount.
Great and then.
Jim Thanks for those.
<unk> historical pro forma numbers that free cash flow margin looks pretty nice is that fully loaded for all the cash interest you will have for the deal and I'm.
Just trying to think about as you deleverage what kind of free cash flow benefit we could see.
Yes.
The $300 million estimated cash interest includes the incremental debt on.
The Meredith acquisition and as we said earlier that blended average initial rate of the Meredith that is.
For one 5% so it's relatively cheap.
And then that stay.
One obviously as we pay down debt will be reduced cash interest as we go along too.
So in the $100 million day one.
Cash interest.
Great and the $1 2 billion includes the cash interest is that right.
I don't think I understand the question the $1 2 billion is our.
As our operating cash flow as defined in our senior credit agreement so that would be.
At.
Yeah.
In Q2, but not exactly what you probably call adjusted EBITDA.
Great. Okay. So that's frankly, a one to 1.2 would be before deducting interest expense. So it's.
It's you can see you can look at the release didn't see the non-GAAP bracket as to how we.
Get to it.
We calculated and consistently for years.
Great. Thank you and then.
Pat just on that Quincy station contribution maybe both for Quincy and Meredith do you feel like Theres, an opportunity to bring up AD sales when you sort of put it in a way that you've done business. Historically it gray is there some revenue synergy that we might see over time. Thanks.
Yeah. 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 other Quincy acquisition.
Pretty early in the game, we think there is similar.
Benefits.
Once we close on Meredith.
And.
And so the answer is yes, when we do the math, we kind of report retrans expense synergies, but but.
Realize we do believe there'll be some revenue synergies going forward.
If I could add to that.
We're already seeing some results with Quincy group.
In our opinion have the best sales training.
Team in the business and so we were very proactive with the Quincy.
Sales staffs in 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 in our plan moving forward is to do it as well with the Meredith sales organizations as well.
Thank you.
Yeah.
Our next question comes from the line of Monika Lewis from <unk>. Your line is open.
Hey, Thank you for taking my question I appreciate all that great color that you provided on the revenue on top line.
Figured I'd just ask a question on the margin it looks like margin was down quite a bit this quarter.
The EBITDA is down about 29% year over year I understand most of that is related to political which has higher margins.
Curious if you can help bridge kind of some of the margin difference because it seems quite large on that year over year.
Or even compared to a non political Q3 night basis. Thank you.
I think the biggest driver of that would be the increase in net retrans alright.
Retrans that goes back to the networks.
What are you comparing 'twenty, one to 'twenty or 'twenty one.
1% to 19.
For the quarter.
Pro forma for all the all of the.
Acquisitions.
It was.
Well, we commented on the release it was up about.
Year over year.
Bear with me I'm trying to get down to the right report in front of me.
It was up.
$28 million, which is primarily the driver of.
The operating expense increase year over year, we did have some <unk> costs that are that are.
Highlighted in the release as well.
Transaction related costs.
Deals.
Which probably that would be impacting your.
What youre seeing is the margin as well, but again those are just OTO deal costs.
So it's really 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.
Hmm.
Okay. I think I also looked at your natural trends revenue as a percentage of growth rate trend that actually seems pretty steady year over year.
From percentage perspective.
Can follow up separately on that just to.
More detailed.
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 Varun tour from the supply shortage also about the auto categories.
Going into Q4, some of the companies in the space.
Commented on their Q3 call that some of the physical presence category, such as retail restaurants entertainment interesting some impact larger than expected.
Just curious if you're seeing the same trend.
Thank you.
It's Pat the short answer is not really.
Im sure Theres isolated incidents market by market, but overall, we're really not seeing that right.
Right now.
Okay, great. Thank you.
There are no further questions at this time.
Oh, sorry, all right. Thank you 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.
In the new year with Meredith underneath our belt. Thank you.
Have a great holiday season.
That concludes today's conference call. Thank you everyone for participating you may now disconnect.