Q4 2021 Gray Television Inc Earnings Call

February 25, 2022

Welcome to the Gray Television's fourth quarter 2021 earnings 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 to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require any further assistance please press star zero.

I'd now like to hand, the conference over to your Speaker Hilton Howell. Thank you. Please go ahead sir thank.

Thank you Rebecca good morning, everyone.

As our operator mentioned I'm Hilton Howell, the chairman and CEO of Gray television. Thank you for joining our fourth quarter 2021 earnings call.

With me today are great as executive officers, our president and co CEO Pat in the platinum 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 thank you Hilton and good morning.

Gray uses its website as a key source of company information. The website address is www G. R. A y dot TV.

We will file our annual report on Form 10-K with the SEC later today.

We also will file a form 8-K today furnishing our financial result on a combined historical basis for the years 2018 through 2020 , one as well as a new investor presentation, which will include our 2021 results and other information.

Included on the call may be 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 a reconciliation to the non-GAAP financial measures to the GAAP GAAP measures reported in our financial statements.

Certain matters discussed in the call may include forward looking statements regarding among other things future operating results. Those statements are subject to a number of risks and uncertainties actual results in the future could differ from those expressed or implied in any forward looking statements. As a result of various important factors have been set forth in the company's most recent reports filed with the SEC.

Coding our annual report on Form 10-K , and our most recent earnings release.

Company undertakes no obligation to update these forward looking statements.

And now I will turn the call to Hilton. Thank.

Thank you Kevin.

We're here today as usual to share with you our comments on our views about what has truly been a remarkable year in 2021 and the results of our fourth quarter in our company's future.

Obviously, the Ukraine situation is so new and so fluid that we simply do not know what impacts Russia's actions may have on our businesses.

Or more importantly on the businesses that use our advertising and production services.

And what consequences, the new sanctions that have been announced will have.

By way of introduction to those of you who are new to US Gray television today is a booming multimedia company that includes the second largest portfolio of local television stations in the nation and has grown from 30 markets to 113 markets in the lab.

Last eight years significantly.

Our portfolio includes 80 stations ranked number one in their markets with virtually all the rest coming out as a close number two.

Our earnings release. This morning also confirms that like our station portfolio, our execution remains best in class.

Overall, we today reported excellent fourth quarter results with adjusted EBITDA coming in at $224 million. This was the result of strong numbers for a nonpolitical four quarter, including broadcast revenues of 692 million total revenue of 721.

1 million broadcast cash flow of $258 million and free cash flow of 59 million.

Transaction related expenses due to the acquisitions of Quincy and the Meredith local media group combined with an expected cyclical reduction in political AD revenue reduced our net income attributable to common stockholders to $16 million or a still strong seven.

<unk> per fully diluted share in the fourth quarter of 2021.

Excluding transaction related expenses and noncash stock compensation.

Our net income attributable to common stockholders would have been approximately $16 million or <unk> 63 per share for the fourth quarter.

As you all know our earnings release presents financial results. According to GAAP as well as on a combined historical basis with the latter figures, giving effect to both acquisitions and dispositions.

On this combined historical basis, our fourth quarter 2021 revenue was $857 million and our full year 2021 revenue was $3.2 billion.

Looking ahead, we are thrilled with the company that gray has.

Has become as we begin a new year firing on all cylinders.

You're about to hear more color on the integration of our recently acquired TV stations are very healthy core AD business and our growing retransmission revenues and the great promise in both political revenue and with Nextgen TV.

In terms of guidance, which Jim will address more fully we're expecting a very good first quarter on our current forecast.

Specifically.

On a combined historical basis, we anticipate a 4% to 7% increase in total revenue over the first quarter of 2021, and a 6% to 9% increase in total revenue for the first quarter of 2020, a presidential campaign year.

Our guidance today also includes a big change to our full year 2022, political AD revenue guidance specifically.

We are today, increasing our 2022 political revenue guide by approximately 10% from the $525 million announced on our November 2021 earnings call to $575 million today.

This new target of 507 million represents a whopping, 55% increase over the $372 million of political revenue that we achieved on a combined historical basis in the last midterm election year of 2018.

We therefore have much good news in lots of color to share on a quarter behind us in the quarters ahead. So we will begin first with our president and co CEO Pat with platinum.

Thank you Hilton.

I'd like to begin by acknowledging that the 2022 broadcasters Foundation of America Golden microphone are Golden Mike Award.

Be presented or one Hilton how what a fund raiser next month to benefit the foundation's mission of helping broadcasters in need.

The event will likely mark the first large in person gathering of radio and television industry executives and celebrities and more than two years.

Very much appreciate the great work that the foundation's long carried out on behalf of our colleagues in the industry.

Just six months after our acquisition Quincy media.

We've completed nearly all the integration of the Quincy stations into the fabric of Gray admittedly the integration was a relative breeze, because it couldn't because quincy rented stations with the same local first bottoms up philosophy the greatest spouses.

We're already seeing revenue and profitability improvements across these stations.

All while adding investment in resources to enable them to expand their reporting and their sales efforts.

We're now quite active integrating the mayor the stations it systems and personnel into great.

We conducted news research nearly every meredith market over the summer identifying key strategies and tactics and determining opportunities for growth and improvement.

When we closed Meredith, we immediately began implementing our plans across the markets.

In Atlanta for example, CBS 46 in Peachtree TV.

Both of which we acquired premiere of a new very experienced general manager and new managers and news marketing and promotion.

Adding more local newscasts and higher value programming and expanding the talent across the stations' news.

Sales digital marketing and other areas of operation.

One week after the closing we announced the legendary Atlanta news anchor and journalists Monica Kaufmann Pearson has joined C. B S. Forty-six in Peachtree TV to host two new shows which begins this month two weeks ago, we announced that we've agreed to acquire the Atlanta markets Telemundo affiliated station.

Last week, we began rebranding CBS forty-six itself and this week, we announced the creation of a new station manager position for Peachtree TV that we filled with an excellent internal candidates.

You've made all this progress just here in Atlanta that we've owned the two former mayor of the stations for less than 90 days.

Similar stories and the other former Meredith markets.

Taking a step back we believe that our size and scale open new doors for us certainly from a news and political coverage standpoint, our presence in nearly every market in nearly every competitive state provides exciting new opportunities to cover elections to deliver audiences to campaigns. These.

These statewide regional clusters to provide similar new opportunities as we know more easily and efficiently cover news wide state sports and events.

Pardon me statewide news sports and events, we'd be unexplored AD sales opportunities that leverage our extensive footprint a very highly rated TV stations, while our coverage of U S. TV homes is a bit limited, we punch far above our weight and audience delivery and we believe that overtime. There are new revenue streams, we can tap on programming front.

Our scale makes us an attractive partner and provides a solid foundation for distribution of our own programming should we decided to do that.

On the digital side of our business. We are closing in on 100 million unique visitors per month on our platforms.

Which is competitive with such national brands as the New York Times, Fox News and Yahoo News.

We compare favorably to virtually all our local broadcasting competitors in this metric.

We will continue to sell this audience from the ground up but we could see more national opportunities as our digital footprint expands.

Finally, with the acquisition of Meritage television stations right now is a much larger footprint operating on the Nextgen TV standard.

At the end of 2021 Gray had stations broadcasting in the Nextgen TV standard 10 markets, including Atlanta, Phoenix, Portland, Oregon and Charlotte.

Number will increase significantly throughout 2022, and we currently anticipate ending the year with about 35 markets broadcasting of the new standard.

This group of markets represents a bit more than 25 million TV households, or about 21% of the total U S TV households, which equates to roughly 60% of the great footprint. Meanwhile, efforts across a number of other industries continue to progress on building out the infrastructure and business models that we believe will make next gen TV.

The next big revenue driver for the industry.

Next up Bob Smith will address our station operations and sales.

Thank you Pat.

Television station operations will probably in the best overall condition that I can remember on a combined historical basis, which again includes the results of all television television stations now owned by Great. Our fourth quarter 2021 core revenue of $422 million was 11% higher than the fourth quarter of 2020, which depressed by both.

Covid impacts and substantial political displacement interestingly, our fourth quarter 2021 core revenue was precisely equal to our fourth quarter 2019, Colorado overall.

Overall, the advertising business was solid for us.

Notable exception of the auto category in the fourth quarter with the exception of the auto category every other category posted strong gains over the prior year period as expected our entertainment AD category, which included gaming and gambling companies more than doubled over the year and is now our fifth largest category for perspective in the fourth quarter of 2010.

And that category was 12 per month to 14 categories. We use in light of the growth and size of gaming and gambling advertising separated those businesses from other entertainment customers and a formal new gaming AD category beginning of 2022.

Our core revenue overcame some significant decline in the auto category between the fourth quarter of 2020, and the fourth quarter of 2021.

A couple of years ago.

About 25% of total non political ad revenue.

All year 2021 water category comprised about 17% of total nonpolitical AD revenue as those revenues declined and we successfully diversified our AD base with particular focus on health and recently travel and tourism legal and home improvement are also growing at a healthy pace, while auto is still our top category.

It's no longer a runaway number one and is arguing diversification has shown that as a good thing what auto returns and it will all the better really.

The really big news on the station side as political advertising as Hilton and also a bit ago, we are increasing our full year political guide for 2020.

$525 billion to $575 million, our decision to raise the guidance by 10%. This quickly after our initially aggressive buyers highlights the increasingly competitive political campaigns, we're seeing all across our footprint fundraising record seem to fall every week answer part already partners are generating immense interest engagement and activity.

Number of places.

This activity includes battleground states that have been on everybody's radar for some time, such as Arizona, Nevada, Missouri, Wisconsin.

Georgia Winter Incidentally raised actually the largest media company in the state, but also includes a number of states and regions that are surprising us with levels or timing of the advertising expense for example in Alabama State primaries for both Buffalo, New York Summit, which are not until May 24 saw meaningful AD spending start in December of last year.

A reminder, Alabama is one of the many states in which gray owns leading TV stations in every market serving the state, including the top rated television stations in Huntsville, Birmingham Montgomery and Dalton.

Similar story is playing out in Nebraska, where we owned the top ranked local station in nearly every market that covers a state their campaigns began spending in December for the Nebraska primary which isn't until May 10.

Likewise in Illinois, we begin to see significant political advertising in January for the primary that takes place on June 28, as well as spending directed at this november's general election.

These notable experiences and similar developments over the past three months justify our increase in full year political AD revenue guide is the 575 billion that figure represents about 88% of the total political AD revenue of $652 million and the presidential in Georgia Senate one off year of 2020 on a combined historical.

In all cases.

Equally impressive and worth repeating from Hilton opening remarks is that the new target represents a 55% increase over the $372 million of combined historical political revenue in 2018, the last midterm political year I will now turn the call over to Kevin.

Thank you Bob.

I also have good news to report today on retransmission revenues.

As you saw in our release this morning, we posted a strong fourth quarter growth in Retrans revenue.

On a GAAP basis, Retrans revenues increased 35% from the year earlier period.

On a combined historical basis Retrans revenues increased 12% from here from the year earlier period for both the fourth quarter of 2020, and the full year of 2020.

Importantly, we also have continued to grow our net retransmission on a combined historical basis, our net retrans revenues of $480 million and 218 grew to $587 million and 221, which is an approximately 22% increase over four years.

As you know, we disclose the amount of reverse reverse compensation payments and we paid a network in our earnings release to provide full transparency on our retransmission metrics.

And the combined historical basis financial data that we provided today.

You will see that the growth in network fees over the past five years has slowed this.

This is because gray merit I think Quincy previously experienced large step ups and network fees, a few years ago as a networks prepared for their own contract renewals with the NFL.

We expect this slowdown in network fee growth to continue as we progress through our new CBS affiliation term and our next affiliation terms with the other networks.

Our big for pay TV subscriber counts appear to have remained fairly stable over the year.

We compare the total of these counts in the subscriber reports for the television stations owned by Gray in the third quarter of 2022 to the reports for the same group of stations in the third quarter of 2021.

Over that period these patients experienced a decline of less than 1% of total big for pay TV subscribers.

While we do not have a full set of subscriber report for our recently acquired stations. We have no reason to believe that the subscriber levels for this mix of large market and small market Meredith and Quincy stations would be significantly different than what our legacy stations experienced over the same time period.

Looking ahead, we will next renewable and reprice linear M. B PD retransmission agreements at the end of this year and we will renew our Fox affiliation agreements later this year.

Given the timing of these renewals and assuming that our sub counts remained stable.

We anticipate that gross retransmission revenues will be in the neighborhood of $1 5 billion in 2022.

And then net retransmission revenues in 2022 will increase at a mid single digit percentage over 2021, net retransmission figure of $587 million.

Again, all on a combined historical basis.

We began 2023 with new Retrans agreements covering about one fifth of our big four subscribers, which should.

Which should allow this year's good momentum for net retrans growth to continue rolling forward.

This concludes my remarks, and I'll now turn the call to Jim Ryan.

Thank you Kevin good morning, everyone.

As mentioned earlier, we will be filing our 10-K later today the release and the 10-K provide a great deal of detailed financial the financial information and its <unk>.

Also mentioned earlier, we will also be updating our investor deck with our December 'twenty, one financial information and presenting both as reported and combined historical basis select operating data by quarter and year to date for 2018 through 2021.

I believe by providing this information we are being the most transparent company in the sector.

Beginning in Q1, 2022, Gray will no longer segregate local advertising revenue from national advertising revenues in our income statements.

<unk> versus national distinction may be relevant for other broadcast companies, who sell national revenue through a sales rep and sell local and regional ads to their own sales force since.

Since late 2015 however.

<unk> own employees sell virtually all advertising that appears on our television stations and digital platforms, regardless of the physical location of the agency or add client.

The local versus national distinction at least for Gray has outlived its usefulness and today, we will retire that distinction and will be simple simply report core advertising revenue going forward, beginning Q1, 2022, and you will see in our earnings release 10-K and our.

Combined historical information being published later today, we have maintained the local national distinction on all historical results.

So you've got a good complete set of data.

Hilton Pat Bob Kevin.

Have all cover the key highlights of the quarter and the full year as such I'll keep the rest of my remarks very short.

I'll begin with some brief comments on our Q1 guidance, we developed and finalized the guidance based on our internal forecast and pasting at paces as of Tuesday.

We are not adjusting this guidance in light of the recent events in Ukraine, Although we remind you that we are unable to predict what impact if any that war in Europe may have on our business in the first quarter or beyond.

Total core revenue is anticipated to increase approximately 3% over combined historical Q1 2021 results.

This demonstrates the continuing sequential improvement of total core revenue and makes us optimistic of continuing improvement as we move through 2022.

The services group, which combines financial legal and medical now represents about 29% of our year to date full year 2021 core revenue.

In fact current Q1 pacings for this services group is showing percentage increases in the mid to upper teens and the dollar volume increase is more than offsetting weakness in auto advertising.

I'll remind everyone, though that pacing data is simply one point in time and may not reflect final results.

We encourage currently anticipate the gaming revenue in Q1, we will exceed $10 million and anticipate continuing growth the rest of 2022.

The Super Bowl is anticipated to contribute approximately $7 million in Q1 to our revenue and the Winter Olympics are expected to contribute approximately $10 million to our Q1 2022 advertising revenue.

Let me recap certain.

Key metrics on a combined historical basis for full year 2021 are.

Our combined historical basis net revenue is 315 billion or two year blended average 'twenty 'twenty. One net revenue is 325 billion.

Our 2021 combined historical operating cash flow is $1 billion and $29 million.

Our last eight quarter average combined historical.

Historical operating cash flow as of 12 31, 21 is one to $1 6 billion.

2021, free cash was $443 million and our blended 2021 average free cash with 626 million our leverage ratio at the end of.

2021 was 547 times.

A few comments on cash uses in free cash for 2022.

We currently expect approximately the following material uses of cash in 2022.

Cash interest expense of $295 million.

Cash taxes of $190 million.

Routine capital expenditures of $125 million and our preferred dividends are $52 million and we have $15 million required amortization on our new term loan D that we placed as part of the Meredith acquisition.

At this time, we currently anticipate that our free cash before common dividends acquisitions investments and our assembly construction costs will exceed $800 million in 2022.

State the obvious if political revenues exceed our current full year forecast of $575 million full year free cash estimate will increase.

We are very well positioned starting 2022 and look forward to a very successful year I will now turn the call back to Hilton.

Thank you Jim before ending in opening up the line for questions I would like to take a moment to address our capital allocation strategy one year ago. Today I had the honor of announcing on this call that our board of directors had voted unanimously to resume Grays regular quarterly cash dividend for our equity.

<unk>, while we did not realize at that time that gray would be acquiring mirror. This local media group just nine months later.

Our board was done and remains today fully committed to our quarterly dividend as well as returning capital to our equity shareholders through reducing our leverage and pursuing opportunistic stock buybacks.

In that regard.

Please keep in mind that with the anticipated very strong annual free cash flow north of $600 million and certainly much higher than every two year political cycle.

Ray will naturally delever quickly with 600 million, representing a one half turn on our net leverage ratio. We are in a position to bring our leverage down into the threes in a fairly short period of time.

Worse as our strong free cash flow drives our leverage lower.

Deleveraging automatically.

And directly transfers to economic value for our equity share owners.

In closing I remain as optimistic and excited as ever at gross prospects for its employees and its stakeholders. Our business is strong our prospects are bright.

<unk> has the people and tools, we need to ensure that the nation's second largest broadcast group.

Is and remains one of the finest media companies in the world Operator at this time, we will open the line for questions.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

And your first question comes from the line of Dan Carnose with benchmark company.

Great. Thanks, good morning.

Just quick housekeeping for Jim what is what are the synergy expectations assumed in the Q1 guidance.

Our synergies combined for Quincy and Meredith.

We're.

Let's see.

70, low $70 million.

We're still on target for that.

Our guidance.

Includes that.

We're actively.

Working on those things.

A fair amount of our synergies.

In bulk transactions.

Our.

To what extent had been achieved already obviously, the retrans synergy was automatic and will phase in month by month over the first 12 months.

Some of the corporate overhead combined corporate overhead savings have been already achieved as well and we.

We've already achieved the.

Savings in the National Rep firm.

By canceling both national Rep agreements.

And obviously that that synergy will will flow and month by month as well over the course of the first 12 months since acquisition.

Got it that's really helpful. Jim Thanks, and then Kevin couple.

Couple on Retrans and reverse or me. Thank you for the additional color and the full year guide, which is fairly impressive I would argue given what you think you just hit a 30 or footprint.

CBS .

Al.

I guess the question is.

You gave some commentary that you expect to see a slowing continued slowing on the network side do you anticipate that I mean, historically, you've been about 50 50 fixed.

Versus floating to.

Do you anticipate that more and more networks and look towards fixed and how do you see the growth side, obviously, you guys still have a.

Long way to go and given your increased negotiating leverage and scale theres, probably still some benefits there how do you see the growth side kind of pacing and given your remarks, and where youre at in the marketplace right now.

I'll take them in reverse order nothing has changed our view that we are grossly under compensated.

In terms of the value we deliver to any distributor.

Given the.

The ratings.

As we deliver and then we pull in to.

Subscription packages.

On the first question, we're not aware of.

And the other four networks planning a.

A change in their method by which they are calculated.

Reverse comp for many many years now across all of their affiliate group. So.

If you know something that is changing I'd love to hear about it but we've not heard anybody say that any of the networks are changing their approach.

And just to be clear, Kevin I mean, given those dynamics.

That would argue that net retrans margins are at least stable if not maybe better than that going forward now.

We do think the net Retrans will continue to grow over the next several years.

We have not talked about margins since we went from keeping 100% of $20 million to something less than 100% of $20 million and we're going to book $1 5 billion. This year.

And last year, we had $587 million of net retrans to us what matters is how much you put in the bank because you know.

Higher conversations.

Don't focus on the on the margins.

Overall in terms of trends I think youre right grosses growing reverse should be growth there should be.

Not as great as the gross increases which would if you're concerned about margins should result in a higher margin yes.

But that's just not something we're focused on at all.

Understood, Kevin, but just help us understand the dynamics. Thank you for the clarity and thanks, Jim and thanks, everyone. Appreciate it.

Thanks, Dan.

Your next question comes from the line of Aaron Watts with Deutsche Bank.

Hey, everyone. Thanks for having me on.

Couple of questions for me.

On the sports betting side.

Here that it's been a great category for you as well as others and it's moved into some of your one of your top category.

With some of the comments from the gaming companies around pulling back on media spend going forward. How do you think that translates on a local level for you on your stations in terms of the amount being spent going forward.

It's Bob Smith, I can take that.

I think on the local level where.

We're continuing to see pretty big Ad budgets.

Some of the current states we're in.

Really big AD budgets on our stations in the.

New states, they're going into and we expect that to continue for some time certainly throughout this year and obviously with our dominance of one of our markets and most of these states that we're getting a bigger share of the pie.

Those areas and so we expect this to continue it would be very healthy for quite a bit of.

In the future.

Okay, Great and then.

For Kevin really more of a sanity check here I know, there's a lot of moving parts anytime you negotiate with your affiliate partner networks.

But just to make sure on the NFL with the new contract.

Now in place for the next 10 years give or take.

Or are you, saying in your comments that that.

Those big increases that networks are going to pay for that contract have already largely been baked into your reverse compensation to them or should we still expect as part of your negotiations there'll be a step up in payments to your partners because of that.

I think you can assume that the net network reverse comp fees will go up every year until the world stopped spending.

And I think that the gross retrans fees will continue as well to go up every single year.

What my point was we.

Our company Quincy and Meredith included had big step ups, a couple years ago from what we have in payment networks that was we believe in preparation for the NFL deal. We expect to continue to go up but those year over year increases should be should not be as great as we had historically.

Okay. Okay got it thank you and last one for me Jim I think the aim at you on this one.

Follow up on the capital allocation and leverage reduction goals I appreciate that the business is set to grow this year and will throw off a material amount of cash as you think about bringing down leverage following the Meredith acquisition, while gross debt pay down and be a significant part of that alongside EBITDA growth and I ask that with the potential.

Concern of an economic slowdown over the medium term horizon, so having that lower gross debt balance obviously.

Good help from a leverage standpoint.

Yes.

I think it's going to be a combination of both just as you saw us do post rate com.

Organic growth in the operating cash flow number but also.

Some outright debt is some degree of outright debt reduction.

As we go through the year I would say that more likely than not that the absolute debt reduction is probably back weighted to the year to dovetail it with the political I'll remind everybody that.

Roughly based on historical trends about half of the entire political number shows up in the fourth quarter. So if that trend holds for 2022 as well that means we will be.

Very cash rich and November .

In November so.

I would think that would be a good time to be reducing absolute debt balances.

Okay I appreciate the time as always.

Thank you Erin.

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

Yeah.

Given that you are close to the cap do you think any existing M&A trust more likely involve.

Trading up when possible and existing markets recognizing that number one to positioning narrow such opportunities or would you think there might be a couple of other markets you might want to enter.

Well, Jim the short answer is that there's really nothing on the we think it's been in the market the last.

I don't know a year or two.

We've looked at we wanted a couple of things.

Some of those deals never happen and then the other deals.

And again, they had to meet our acquisition criteria to go into a new market and they were number one or strong number two stations we're.

We're not out actively looking or trying to convince people to sell at this point. We've got are our main focus on integrating merit Meredith.

Otherwise.

Looking at other things.

Day to day operations and trying to convince folks to sell.

If something comes along we'll take a look at it.

Don't really anticipate any opportunities to trade up in a market. If you will we're pretty happy with the stations we have had.

With the people we have so we don't see that as likely.

Overall with 3%, there's not really a lot we can do but there's also not really a desire to do very much as Hilton said on the call are.

Our capital allocation strategy is to pay our debt down which will transfer value to equity shareholders that we've got a great portfolio with the second largest in the country.

As the highest portfolio quality. So we feel we've got enough scale to accomplish what we need.

Something great comes along we'll look at it but we're just not out actively looking at.

Any kind of M&A stuff right now.

Okay, Thanks and.

With.

The <unk> announcement.

I presume.

<unk> not changed the premium relationship for expectations for that.

Service at all.

But what it.

Yes, I don't think its going to change anything Jim.

Okay.

And the last thing I was wondering is with Nextgen TV you assume it is a phase III or are there any ideas have been coming up with so far as to how you might.

Try to create revenue opportunities out of this.

<unk> potential.

Yeah sure I mean, I would tell you there's still a little longer term, but there have been theres been pretty healthy dialogue with the.

Automotive manufacturers for years now conversations with CMS.

Using that spectrum to deliver bits.

Locally.

And then as you've heard before no doubt.

Yeah.

Wonderful technology to use for targeted AD sales so.

So I would tell you that those conversations that have been going on for some time are progressing.

The build out is accelerating.

Set manufacturers are building more and more models with the chip in it and so there is that theres a lot of momentum there.

Okay that's interesting.

Let's say, Kevin given the turbulence in the World. If you have any inside information most around the world, but that's spreading.

[laughter], Jim I won't be in my lifetime.

Yes.

Okay.

Thanks for that company.

Your next question comes from the line of Michal Krupinski with noble capital markets.

Thank you for taking the questions I wanted to touch on a couple of quotes.

Issues here. One is obviously you had such a strong rebound with advertising without the help of auto and I was wondering if you can on a combined basis tell me where auto advertising is as a percent of 2019 levels and then if you can just kind of give us your thoughts about.

The outlook and how you feel about that category is throughout the balance of this year, maybe even two.

2023, if you have views about.

New vehicles, and so forth that are going to be launched.

Yes, I can I can start with that Mike So.

19.

Yes, I don't have comparisons to 19 immediately in front of me Mike.

I can tell you is.

In 2021, it was Nevada was about 17% of core revenue.

And by comparison 'twenty was about 21%.

Okay.

And then.

And then going forward look we.

It's been a moving target right, we thought we'd come back by the end of 'twenty, One and then it's.

We take.

And I do believe that.

Mid year towards the end of year, it is going to get better, but it may not may not fully and I am not sure how you define fully but.

Fully come back until 'twenty, three with that said and you pointed out we've been able to fill that gap with a number of other categories.

And candidly the reason we've been successful in doing that is because we've got initiatives focused on those categories and we've had it we've had those initiatives around for a few years now in there.

It's paying off for us so.

But auto will come back when oil comes back.

We're going to have a very very solid business. So I can't give you the timing exactly I wish I could but I think it's going to progressively get better beginning in Q3 that would be my best guess.

Gotcha, and Jim you mentioned maintenance Capex of $125 million does that include the cost upgrade to next Gen TV and if it does I was just wondering in terms of do you view that then youre upgrades of Nextgen TV more as a maintenance primarily because it you're just going.

The replacement of equipment, and so forth or is there a type of return you expect on the investment to upgrade the nexgen.

125 would include what we think we need to.

And the additional nexgen.

In 2022, so it just kind of ongoing business operations, how we kind of look at it.

It's.

Not necessarily at day, one year, one return hurdle. These obviously nexgen is.

It really taking us out the next.

Probably couple of decades at least.

So.

I think as Kevin and Pat has already said, we expect some really nice revenue opportunities there.

Probably not in 'twenty, two but as we move through the next few years definitely think that there is some on some new and untapped revenue both for us and the entire sector.

Gotcha, Alright, that's all I have thank you guys.

Thank you Jim.

And once again, if he would like to ask a question. Please press star one on your telephone keypad.

Your next question comes from Steven Cahall with Wells Fargo.

Thanks, Pat maybe just curious how we should think about modeling core in the back half of the year, if auto does recover it sounds like it it probably could so we'll have auto sports season, and then theres the midterm elections.

We model those is crowding out some of the core AD inventory. So just curious how you want us to think about that based on what youre seeing today.

Yeah. So you mentioned political displacement is going to be a big factor it will be.

And so.

Right.

I wish I could throw numbers out so I really don't feel capable of doing that and maybe Bob maybe Bob could chime in here, but.

We would expect some.

Recovery.

In spending.

Probably late Q3 into Q4, the challenge will be.

In September and October political is going to be enormous and then I think you'd see more of an impact beginning in November I think thats fine.

Post election, obviously.

So Bob any thoughts on that yes, I would agree with that but I think what Pat said earlier.

The second half of the year, we should see an uptick in auto I think.

<unk> has been spending with us in 'twenty one.

And they're continuing.

But a decent money in Q1 of this year Ford is continues to be.

Off a bit.

But we expect it's Toyota remained pretty consistent all year.

Hi, Andrew.

Is a smaller piece of business for us, but they are actually increasing their spending so hopefully with the new models.

In the back half of the year.

We will see the decreased spending but of course, we'll have to deal with displacement and some of the key states that I mentioned earlier on the call.

Great and then.

Jim and Hilton, maybe just a couple of questions on cash and cash you should so Jim it sounded like the 800 million.

That's above kind of where we were before so is that above the 50% accretion guidance that you gave last year and if so is that just mostly driven by the political race or is there more in there and then Hilton I just wanted to make sure I understood. Those comments you made at the end of the prepared section I kind of took those to mean that you are pretty confident and deleverage.

<unk> naturally and that gives you a little bit of cash that you can use for other things and you bought back a little bit of shares in Q4, which was a surprise. So am I thinking about that right or should we be thinking about 100% of free cash flow going to debt at this point. Thank you.

Thank you, Steve and I'll, let Jim start and then I'll then I'll pop in.

Again, Steve and just to be clear that 800 would be before common dividend.

And acquisitions investments et cetera, like I said earlier, but to put it in perspective that $800 million would be comparing to our as reported 2020 free cash of $559 million.

Alright.

On usages.

Well, yes.

Wade Gray has typically done it in the past as we have attempted to be conservative in our projections. So we kind of expect to beat them naturally.

And then with regard to capital allocations, we also like to be.

Or are we kind of do a little bit of all of the above.

We were we are essentially right, where we were when we closed on <unk> com and.

In 2019 in terms of our leverage ratios and within a two year period of time.

Our leverage ratio has dropped to 3%.

The 2021 year is even timing was more propitious, because we began a two year cycle with a political year.

So it's going to be a lot of free cash flow a lot earlier than the deleveraging process that we had post the closing of Ray column and so I think by the time that we get to Q4 that will have an opportunity for our board to consider all of the above.

Which would be gross debt reduction plus.

No stock repurchases and perhaps an increase in the dividend and then Stephen since you ask these guys who have covered the sort of precise numbers on automobile.

The answer is we really can't tell but from where I said, it's hugely bullish for the broadcast business and for our company in particular because back in the day when automobile Sneezed broadcasters got a cold alright.

That hasnt happened.

<unk>.

Automobile as we have mentioned, we will absolutely come back and when it does since we have backfill backfill that.

That absence and increased our core advertising.

I expect.

An even larger increase because we don't think the new categories are going to dissipate. So I'm very bullish on core.

That's great. Thank you what you need Steven.

Yes, okay.

Yeah.

And once again, if you would like to ask a question. Please press star one on your telephone keypad.

Alright, well operator.

Let me just make a few closing comments since it doesn't look like we have any other questions I just really want to thank all of you for your time and your attention.

And.

Youre digging through our numbers, we're very excited about what we were able to accomplish throughout the whole course of 2021, we're very proud of fourth quarter core operating metrics and we're terribly excited about the opportunities that we have.

As a much larger company in 2022, and so we really look forward to speaking to you at the end of our first quarter of that year. Thank you and we'll talk soon.

Thank you for participating this concludes today's conference call you may now disconnect.

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Ladies and gentlemen, thank you for standing by and welcome to the Gray Television's fourth quarter 2021 earnings 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 to ask a question. During this session you will need to press star one on your telephone. Please be advised that 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 Hilton Howell. Thank you. Please go ahead Sir.

Thank you Rebecca good morning, everyone.

As our operator mentioned I'm Hilton Howell, the chairman and CEO of Gray television. Thank you for joining our fourth quarter 2021 earnings call with me today are greatest executive officers are President <unk>, Inc. Our chief legal and development Officer, Kevin Latex, our Chief Financial Officer, Jim Ryan.

<unk> and our Chief operating Officer, Bob Smith.

We will begin this morning with a disclaimer that Kevin will provide.

Thank you Hilton and good morning, everyone.

Great uses its website as a key source of company information. The website address is www <unk> <unk> dot TV.

We will file our annual report on Form 10-K with the SEC later today.

We also will file a form 8-K today furnishing our financial results on a combined historical basis for the years 2018 to 2021 as well as a new investor presentation, which will include our 2021 results and other information.

Included on the call may be 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.

Certain matters discussed in the call may include forward looking statements regarding among other things future operating results those.

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 have been set forth in the company's most recent reports filed with the SEC, including our annual report on Form 10-K , and our most recent earnings release.

The company undertakes no obligation to update these forward looking statements.

And now I will turn the call to Hilton.

Thank you Kevin we are here today as usual to share with you our comments on our views about what has truly been a remarkable year in 2021 and the results of our fourth quarter in our company's future.

Obviously, the Ukraine situation is so new and so fluid that we simply do not know what impacts Russia's actions may have on our businesses.

Or more importantly on the businesses that use our advertising and production services.

And what consequences, the new sanctions that have been announced will have.

Last eight years Cigna.

Significantly our.

Our portfolio includes 80 stations ranked number one in their markets.

With virtually all the rest coming in as a close number two.

Our earnings release. This morning also confirms that like our station portfolio, our execution remains best in class.

1 million <unk>.

Broadcast cash flow of $258 million and free cash flow of $59 million.

Transaction related expenses due to the acquisitions of Quincy and the Meredith local media group combined with an expected cyclical reduction in political AD revenue.

<unk>, our net income attributable to common stockholders to $16 million or a still strong 17 per fully diluted share in the fourth quarter of 2021.

Excluding transaction related expenses and noncash stock compensation.

Our net income attributable to common stockholders would have been approximately $16 million or <unk> 63 per share for the fourth quarter.

On this combined historical basis, our fourth quarter 2021 revenue was $857 million and our full year 2021 revenue was $3 $2 billion.

Looking ahead, we are thrilled with the company that Gray has has.

<unk> has become as we begin a new year firing on all cylinders.

Youre about to hear more color on the integration of our recently acquired TV stations are very healthy core AD business and our growing retransmission revenues and the great promise in both political revenue and with Nextgen TV.

In terms of guidance, which Jim will address more fully we're expecting a very good first quarter on our current forecast.

Specifically.

Our guidance today also includes a big change to our full year 2022 political AD revenue guidance.

Specifically.

We are today, increasing our 2022 political revenue guide by approximately 10% from the $525 million announced on our November 2021 earnings call to $575 million today.

This new target of $575 million represents a whopping, 55% increase over the $372 million of political revenue that we achieved on a combined historical basis in the last midterm election year of 2000.

18.

We therefore have much good news in lots of color to share on the quarter behind us in the quarters ahead. So we will begin first with our president and co CEO Pat <unk>.

Thank you Hilton.

I'd like to begin by acknowledging that the 2022 broadcasters Foundation of America, Golden microphone or Golden Mike Award.

We presented our own Hilton Hal let a fund raiser next month to benefit the Foundation's mission.

Broadcasters in need.

The event will likely mark the first large in person gathering of radio and television industry executives and celebrities and more than two years.

Very much appreciate the great work that the foundation's long carried out on behalf of our colleagues in the industry.

Just six months after our acquisition Quincy media.

We've completed nearly all the integration of the Quincy stations into the fabric of Gray admittedly the integration was a relative breeze, because because quincy ranted stations with the same local first bottoms up philosophy the greatest spouses.

We're already seeing revenue and profitability improvements across these stations.

All while adding investment in resources to enable them to expand their reporting and their sales efforts.

We're now quite active integrating the mayor of the stations it systems and personnel and to Greg.

We conducted news research nearly every meredith market over the summer identifying key strategies and tactics and determining opportunities for growth and improvement.

When we closed Meredith, we immediately began implementing our plans across the markets.

In Atlanta for example, CBS 46 in Peachtree TV.

Both of which we acquired from <unk> have a new very experienced general manager and new managers and news marketing and promotion.

Adding more local newscast and higher value programming and expanding the talent across the stations' news.

Sales digital marketing and other areas of operation.

One week after the closing we announced the legendary Atlanta news anchor and journalists Monica Kofman Pearson has joined CBS 46 in Peachtree TV to host two new shows which begins this month two weeks ago, we announced that we've agreed to acquire the Atlanta markets Telemundo affiliated station.

Last week, we began rebranding CBS 46 itself and this week, we announced the creation of a new station manager positioned for Peachtree TV that we feel it's an excellent internal candidates.

We have made all this progress just here in Atlanta that we've owned the two former mayor of the stations for less than 90 days.

Similar stories and the other former Meredith markets.

These statewide regional clusters to provide similar new opportunities as we know more easily and efficiently cover news wide state sports and events.

Pardon me statewide news sports and events, we've been unexplored AD sales opportunities to leverage our extensive footprint a very highly rated TV stations, while our coverage of U S. TV homes is a bit limited, we punch far above our weight and audience delivery and we believe that overtime. There are new revenue streams, we can tap on the programming front.

Our scale makes us an attractive partner and provides a solid foundation for distribution of our own programming should we decided to do that.

On the digital side of our business. We are closing in on 100 million unique visitors per month on our platforms.

Which is competitive with such national brands as the New York Times, Fox News and Yahoo News.

We compare favorably to virtually all our local broadcasting competitors in this metric.

We will continue to sell this audience from the ground up we could see more national opportunities as our digital footprint expanse.

Finally, with the acquisition of Meritage television stations right now is a much larger footprint operating on the Nextgen TV standard.

At the end of 2021 Grad stations broadcasting in the Nextgen TV standard 10 markets, including Atlanta, Phoenix, Portland, Oregon and Charlotte.

<unk> will increase significantly throughout 2022, and we currently anticipate ending the year with about 35 markets broadcasting of the new standard.

The next big revenue driver for the industry.

Next up Bob Smith will address our station operations and sales.

Thank you Pat.

Television station operations are probably in the best overall condition that I can remember on a combined historical basis, which again includes the results of all television television stations now owned by Great. Our fourth quarter 2021 core revenue of $422 million was 11% higher than the fourth quarter of 2020, which depressed by both.

Covid impacts and substantial political displacement interestingly, our fourth quarter 2021 core revenue was precisely equal to our fourth quarter 2019 core revenue overall.

Overall, the advertising business was solid for us.

Our core revenue increases overcame some significant decline in the auto category between the fourth quarter of 2020, and the fourth quarter of 2021.

A couple of years ago, our auto AD revenue was about 25% of total non political AD revenue for full year 2021 water category comprised about 17% of total nonpolitical AD revenue as those revenues declined and we successfully diversified our AD base with particular focus on health and recently travel and.

Legal and home improvement are also growing at a healthy pace, while auto is still our top category is no longer a runaway number one and is arguing diversification will show that as a good thing.

What are the returns and it will all the better really.

A really big news on the station side as political advertising as Hilton and also a bit ago, we are increasing our full year political guide to 2025.

$525 billion to $575 million.

Our decision to raise the guidance by 10%. This quickly after our initially aggressive guidance highlights the increasingly competitive political campaigns, we're seeing all across our footprint fundraising record seemed to fall every week enterprise product partners are generating immense interest engagement and activity in a number of places.

This activity includes battleground states that have been on everybody's radar for some time, such as Arizona, Nevada, Missouri, Wisconsin.

Georgia, which incidentally is actually the largest media company in the state. But also includes a number of states and regions that are surprising us with levels or timing of the advertising expense for example in Alabama State primaries for both Buffalo, New York, which are not until May 24 saw meaningful AD spending start in December of last year.

A reminder, Alabama is one of the many states in which gray owns leading TV stations in every market serving the state, including a top rated television stations in Huntsville, Birmingham Montgomery and Dalton.

Similar stories pointed out Nebraska, where we owned the top ranked local station in nearly every market that covers a state their campaigns began spending in December so that Nebraska primary which isn't until may 10.

Likewise in Illinois, we begin to see significant political advertising of January for the primary thing that takes place on June 28, as well as spending directed additional numbers general election.

These notable experiences similar developments over the past three months justify our increase in full year political AD revenue guide is the 575 billion that figure represents about 88% of the total political AD revenue of $652 million and the presidential in Georgia Senate one off year of 2020 on a combined historical.

Nicole cases.

Equally impressive and worth repeating some hilton opening remarks is that the <unk> target represents a 55% increase over the $372 million of combined historical political revenues in 2018, the last midterm political year I will now turn the call over to Kevin.

Thank you Bob.

I also have good news to report today on retransmission revenues.

As you saw in our release this morning, we posted a strong fourth quarter growth in Retrans revenue.

On a GAAP basis, Retrans revenues increased 35% from the year earlier period.

On a combined historical basis Retrans revenues increased 12% from here from the year earlier period for both the fourth quarter of 2020 and the full year 2020.

As you know, we disclose the amount of reverse reverse compensation payments that we paid a network in our earnings release to provide full transparency on our retransmission metrics.

And the combined historical basis financial data that we provided today.

You will see that the growth in network fees over the past five years has slowed this.

This is because great Merit I think Quincy previously experienced large step ups and network fees, a few years ago as a networks prepared for their own contract renewals with the NFL.

We expect a slowdown in network fee growth to continue as we progress through our new CBS affiliation term.

Our next affiliation terms with the other networks.

Our big for pay TV subscriber counts appear to have remained fairly stable over the year.

Over that period these patients experienced a decline of less than 1% of total big for pay TV subscribers.

Looking ahead, we will renew and reprice linear mvpds retransmission agreements at the end of this year and we will renew our Fox affiliation agreements later this year.

Given the timing of these renewals and assuming that our sub counts remained stable.

We anticipate that gross retransmission revenues will be in the neighborhood of $1 5 billion in 2022.

And then net retransmission revenues in 2022 will increase at a mid single digit percentage over 2021, net retransmission figure of $587 million.

Again, all on a combined historical basis.

We began 2023 with new Retrans agreements covering about one fifth of our big four subscribers, which should we.

Which should allow this year has good momentum for net retrans growth to continue rolling forward.

This concludes my remarks, and I'll now turn the call to Jim Ryan.

Thank you Kevin good morning, everyone.

As mentioned earlier, we will be filing our 10-K later today the release and the 10-K provide a great deal of detailed financial <unk>.

<unk> information.

I believe by providing this information we are being the most transparent company in the sector.

Beginning in Q1, 2022, Gray will no longer segregate local advertising revenue from national advertising revenues in our income statements.

Local versus national distinction may be relevant for other broadcast companies, who sell national revenue through a sales rep and sell local and regional ads to their own sales force since.

Since late 2015 however.

<unk> own employees sell virtually all advertising that appears on our television stations and digital platforms, regardless of the physical location of the agency or add client.

The local versus national distinction at least for Gray has outlived its usefulness and today, we will retire that distinction and will be simple simply report core advertising revenue going forward beginning in Q1, 2022, and you will see in our earnings release 10-K and our.

Combined historical information being published later today, we have maintained the local national distinction on all historical results.

<unk> got a good complete set of data.

Hilton Pat Bob Kevin.

Have all cover the key highlights of the quarter and the full year as such I'll keep the rest of my remarks very short.

I'll begin with some brief comments on our Q1 guidance, we developed and finalized the guidance based on our internal forecast and pacings at paces as of Tuesday.

Total core revenue is anticipated to increase approximately 3% over combined historical Q1 2021 results.

This demonstrates the continuing sequential improvement of total core revenue and makes us optimistic of continuing improvement as we move through 2022.

The services group, which combines financial legal and medical now represents about 29% of our year to date full year 2021 core revenue.

In fact current Q1 pacings for this services group is showing percentage increases in the mid to upper teens and the dollar volume increase is more than offsetting weakness in auto advertising.

I'll remind everyone, though that pacing data is simply one point in time and may not reflect the final results.

We encourage currently anticipate the gaming revenue in Q1 will exceed $10 million and anticipate continuing growth the rest of 2022.

Let me recap certain.

Key metrics on a combined historical basis for full year 2021 or.

Our combined historical basis net revenue is 315 billion or two year blended average 2021 net revenue is 325 billion.

Our 2021 combined historical operating cash flow is $1 billion $29 million.

Our last eight quarter average combined historical.

Historical operating cash flow as of 12 31, 21 is one to $1 6 billion.

2021, free cash was $443 million and our blended 2021 average free cash with 626 million our leverage ratio at the end of 'twenty.

2021 was 547 times.

A few comments on cash uses in free cash for 2022.

We currently expect approximately the following material uses of cash in 2022.

Cash interest expense of $295 million.

Cash taxes of $190 million.

At this time, we currently anticipate that our free cash before common dividends acquisitions investments and our assembly construction costs will exceed $800 million in 2022.

State the obvious if political revenues exceed our current full year forecast of $575 million. This full year free cash estimate will increase.

We are very well positioned starting 2022 and look forward to a very successful year I will now turn the call back to Hilton.

<unk>, while we did not realize at that time that gray would be acquiring mirror. This local media group just nine months later.

In that regard.

Please keep in mind that with the anticipated very strong annual free cash flow north of $600 million and certainly much higher than every two year political cycle.

Ray will naturally delever quickly.

With 600 million, representing a one five turn on our net leverage ratio. We are in a position to bring our leverage down into the threes in a fairly short period of time.

<unk> is our strong free cash flow drives our leverage lower this deleveraging automatically.

And directly transfers to economic value for our equity share owners.

In closing I remain as optimistic and excited as ever at gross prospects for its employees and its stakeholders. Our business is strong our prospects are bright.

<unk> has the people and tools, we need to ensure that the nation's second largest broadcast group.

Is and remains one of the finest media companies in the world.

Operator at this time, we will open the line for questions.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

And your first question comes from the line of Dan <unk> with benchmark company.

Great. Thanks, Good morning, just a quick housekeeping for Jim what is what are the synergy expectations assumed in the Q1 guide.

Our synergies combined for Quincy and Meredith.

We're.

Let's see.

About 70 low $70 million.

We're still on target for that.

Our guidance.

Includes that.

We are actively.

Working on those things.

A fair amount of our synergies.

In bulk transactions.

Our.

To what extent have been achieved already obviously, the retrans synergy was automatic and will phase in month by month over the first 12 months.

Some of the corporate overhead combined corporate overhead savings have been already achieved as well and we.

We've already achieved the.

Savings in the National Rep firm.

By canceling both national Rep agreements.

And obviously that that synergy will will flow and month by month as well over the course of the first 12 months since acquisition.

Got it that's really helpful. Jim Thanks, and then Kevin couple.

Couple on Retrans and reverse for me. Thank you for the additional color and the full year guide, which is fairly impressive I would argue given what you think you just hit a 30 or footprint.

CBS .

Al.

I guess the question is.

You gave some commentary that you expect to see slowing continued slowing on the network side do you anticipate that I mean, historically, it's been about 50 50 fixed.

Versus floating to subs.

Anticipate that more and more networks look towards fixed and how do you see the growth side. Obviously, you guys still have a long way to go and given your increased negotiating leverage and scale theres, probably still some benefits there how do you see the growth side kind of pacing and given your remarks.

And where you're at in the marketplace right now.

I'll take them in reverse order nothing has changed our view that we are grossly under compensated.

In terms of the value we deliver to any distributor.

Given the.

The ratings eyeballs, we deliver and then we pull in to subscription.

Packages.

On the first question, we're not aware of.

Any other four networks planning a.

A change in their method by which they are calculated.

Reverse comp for many many years now across all of their affiliate group. So.

If you know something that is changing I'd love to hear about it but we've not heard anybody say that any of the networks are changing their approach.

And just to be clear, Kevin I mean, given those dynamics.

That would argue that net retrans margins are at least stable if not maybe better than that going forward now.

We do think the net Retrans will continue to grow over the next several years.

We have not talked about margins since we went from keeping 100% of $20 million to something less than 100% of $20 million and we're going to book $1 5 billion. This year.

And last year, we had $587 million of net retrans to us what matters is how much you put in the bank as you noted.

Prior conversations.

Don't focus on the on the margins.

<unk>.

Overall in terms of trends I think youre right growth is growing reverse should be growth there should be.

Not as great as the gross increases which would if you're concerned about margins should result in a higher margin yes.

But thats just not something we're focused on at all.

Understood, Kevin, but just help us understand the dynamics. Thank you for the clarity and thanks, Jim and thanks, everyone. Appreciate it.

Thanks Danzy Dan.

Your next question comes from the line of Aaron Watts with Deutsche Bank.

Hey, everyone. Thanks for having me on.

Couple of questions for me.

On the sports betting side.

Here that it's been a great category for you as well as others and it's moved into some of your one of your top category.

With some of the comments from the gaming companies around pulling back on media spend going forward. How do you think that translates on a local level for you in your stations in terms of the amount being spent going forward.

It's Bob Smith, I can take that.

I think on the local level where.

We're continuing to see pretty big Ad budgets.

Some of the current states we're in.

Really big AD budgets on our stations in the new states that are going into and we expect that to continue for some time certainly throughout this year and.

Obviously with our dominance of one of our markets and most of these states that we're getting a bigger share of the pie and those areas and so we expect this to continue it would be very healthy for quite a bit of the future.

Okay, Great and then.

For Kevin really more of a sanity check here.

There's a lot of moving parts anytime you negotiate with your affiliate partner networks.

But just to make sure on the NFL with the new contract.

Now in place for the next 10 years give or take.

Or are you, saying in your comments that that.

I think you can assume that the net network reverse comp fees will go up every year until the world stopped spending.

And I think that the gross retrans fees will continue as well to go up every single year.

What my point was we.

Our company Quincy and Meredith included had big step ups, a couple years ago from what we have in payment networks.

We believe in preparation for the NFL deal, we expect to continue to go up but those year over year increases should be should not be as great as we had historically.

Okay. Okay got it thank you and last one for me Jim I think you on this one.

Concern of an economic slowdown over the medium term horizon, so having that lower gross debt balance obviously.

Good help from a leverage standpoint.

Yes.

I think it's going to be a combination of both just as you saw us do post rate com.

Organic growth in the operating cash flow number but also.

Some outright debt is some degree of outright debt reduction.

As we go through the year I would say that more likely than not that the absolute debt reduction is probably back weighted to the year to dovetail it with the political I'll remind everybody that.

Roughly based on historical trends about half of the entire political number shows up in the fourth quarter. So if that trend holds for 2022 as well that means we will be.

Very cash rich in November .

In November so I would think that would be a good time to be reducing absolute debt balances.

Okay I appreciate the time as always.

Thank you Erin.

Our next question comes from the line of Jim Goss with Barrington Research.

Yeah.

Given that you are close to the cap do you think any existing M&A trust more likely involve.

Trading up when possible and existing markets recognizing that number one to positioning narrow such opportunities or would you think there might be a couple of other markets you might want to enter.

Well, Jim and the short answer is that there's really nothing on the we think it's been in the market the last.

A year or two.

We've looked at we looked at a couple of things.

Some of those deals never happen and then the other deals.

And again, they had to meet our acquisition criteria to go into a new market.

We're number one or strong number two stations we're.

We're not out actively looking or trying to convince people to sell at this point. We've got are our main focus on integrating merit Meredith.

Otherwise.

Looking at other things.

Day to day operations and trying to convince folks are so if something comes along we'll take a look at it.

Don't really anticipate any opportunities to trade up in a market. If you will we're pretty happy with the stations we have had.

With the people we have so we don't see that as likely.

Overall with 3%, there's not really a lot we can do but there's also not really a desire to do very much as Hilton said on the call are.

Our capital allocation strategy is to pay our debt down which will transfer value to equity shareholders that we've got a great portfolio with the second largest in the country.

As the highest portfolio quality. So we feel we've got enough scale to accomplish what we need.

Something great comes along we'll look at it but we're just not out actively looking at that.

Any kind of M&A stuff right now.

Okay. Thanks.

With.

The second announcement.

I presume.

<unk> changed the premium relationship for expectations for that.

Uh huh.

Service at all.

Got it.

Yeah, I don't think its going to change anything Jim.

Okay.

And the last thing I was wondering is with Nextgen TV SMA, a phase III or are there any ideas of then coming up with so far as to how you might.

Try to create revenue opportunities.

<unk> potential.

Yes, sure I mean, I would tell you there's still a little longer term, but there have been theres been pretty healthy dialogue with the <unk>.

<unk> manufactures for years now conversations with <unk>.

Using that spectrum to deliver bits.

Locally.

And then as you've heard before no doubt I mean, it's.

Wonderful technology to use for targeted AD sales so.

So I would tell you that those conversations that have been going on for some time are progressing.

Build out is accelerating.

The set manufacturers are building more and more models with the chip in it and so there's a lot of momentum there.

Okay that's interesting.

Lastly, Kevin.

Given the turbulence in the world to do you have any inside information as to when the world stops spreading.

[laughter], Jim I won't be in my lifetime.

Okay.

Thanks for that company.

Company.

Your next question comes from the line of Michal Krupinski with noble capital markets.

Thank you for taking the questions I want to touch on a couple of quite.

The outlook and how you feel about that category is throughout the balance of this year, maybe even two.

2023, if you have views about.

New vehicles, and so forth that are going to be launched.

Yes, I can I can start with that Mike So.

19.

Yes, I don't have comparisons to 19 immediately in front of me, Mike What I can tell you is.

In 2021, it was Nevada was about 17% of core revenue.

And by comparison 'twenty was about 21%.

Okay.

And then.

And then going forward look.

It's been a moving target right, we thought we'd come back by the end of 'twenty, One and then it's.

We take.

And I do believe that.

Mid year towards the end of year, it is going to get better, but it may not may not fully and I am not sure how you define fully but.

Fully come back until 'twenty, three with that said and you pointed out we've been able to fill that gap with a number of other categories.

And candidly the reason we've been successful in doing that is because we've got initiatives focused on those categories and we've had we've had those initiatives around for a few years now and they are.

It's paying off for us so.

But auto will come back to it when oil comes back.

We're going to have a very very solid business. So I can't give you the timing exactly I wish I could but I think it's going to progressively get better beginning in Q3 that would be my best guess.

Gotcha, and Jim you mentioned maintenance Capex of $125 million does that include the cost upgrades to next Gen TV and if it does I was just wondering in terms of do you view that then youre upgrades of Nextgen TV more as a maintenance primarily because it you're just going.

The replacement of equipment, and so forth or is there a type of return you expect on the investment to upgrade to nexgen.

125 would include what we think we need to.

Abbvie additional nexgen.

In 2022, so just kind of ongoing business operations, how we kind of look at it.

It's.

Not necessarily day, one year, one return hurdle. These obviously nexgen is.

It really taking us out the next.

Probably couple of decades at least.

So.

I think as Kevin and Pat has already said, we expect some really nice revenue opportunities there.

Probably not in 'twenty, two but as we move through the next few years definitely think that there is some on some new and untapped revenue both for us and the entire sector.

Gotcha, Alright, that's all I have thank you guys.

Thank you Jim.

And once again, if you would like to ask a question. Please press star one on your telephone keypad.

Your next question comes from Stephen Cahill with Wells Fargo.

Thanks, Pat maybe just curious how we should think about modeling core in the back half of the year, if auto does recover it sounds like it it probably could so we will have auto it would be a sports season, and then theres the midterm elections.

We model those is crowding out some of the core AD inventory. So just curious how you want us to think about that based on what youre seeing today.

Yes. So you mentioned political displacement is going to be a big factor it will be.

And so.

Right.

I wish I could throw numbers out there I really don't feel capable of doing that and maybe Bob maybe Bob could chime in here, but.

We would expect some.

Recovery.

In spending.

Probably late Q3 into Q4, the challenge will be.

In September and October political is going to be enormous and then I think you'd see more of an impact beginning in November I think thats one.

Post election, obviously.

So Bob any thoughts on that yes, I would.

Agree with that but I think what Pat said earlier.

Half of the year.

Should see an uptick in auto I think GM has been spending with us in 'twenty one.

And they're continuing.

But a decent money in Q1 of this year Ford is continues to be.

A bit.

But we expect it's Toyota remained pretty consistent all year.

High end it.

Is a smaller piece of business for us, but they are actually increasing their spending so hopefully with the new models.

In the back half of the year, we will see the decreased spending but of course, we'll have to deal with displacement and some of the key states that I mentioned earlier on the call.

Great and then.

Jim and Hilton, maybe just a couple of questions on cash and cash you should so Jim it sounded like the 800 million.

That's above kind of where we were before so is that above the 50% accretion guidance that you gave last year and if so is that just mostly driven by the political raise or is there more in there and then Hilton I just wanted to make sure I understood. Those comments you made at the end of the prepared section I kind of took those to mean that you are pretty confident and deleverage.

Naturally and that gives you a little bit of cash that you can use for other things and you bought back a little bit of shares in Q4, which was a surprise. So am I thinking about that right or should we be thinking about 100% of free cash flow going to debt at this point. Thank you.

Thank you, Steve and I'll, let Jim start and then I'll then I'll pop in.

Again, Steve and just to be clear that 800 would be before common dividends.

In acquisitions investments et cetera, like I said earlier, but to put it in perspective that $800 million would be comparing to our as reported 2020 free cash of $559 million.

Okay.

Alright.

On usages.

Well, yes.

Wade Gray has typically done it in the past as we have attempted to be conservative in our projections. So we kind of expect to beat them naturally.

And then with regard to capital allocations, we also like to be.

Or are we kind of do a little bit of all of the above.

We were we are essentially right, where we were when we closed on <unk> com and.

In 2019 in terms of our leverage ratios and within a two year period of time.

Our leverage ratio has dropped to 3%.

The 2021 year is even timing was more propitious, because we began a two year cycle with a political year.

So it's going to be a lot of free cash flow a lot earlier than the deleveraging process that we had post the closing of Ray cone and <unk>.

So I think by the time that we get to Q4 that will have an opportunity for our board to consider all of the above which would be gross debt reduction plus.

Stock.

<unk> and perhaps an increase in the dividend and then Stephen since you ask these guys who have covered the sort of precise numbers on automobile.

And.

Automobile as we have mentioned, we will absolutely come back and when it does since we have backfill backfill that.

That absence and increased our core advertising.

I expect.

An even larger increase because we don't think the new categories are going to dissipate. So I'm very bullish on core.

That's great. Thank you what you need Steven.

Yes, okay.

Yeah.

And once again, if you would like to ask a question. Please press star one on your telephone keypad.

Alright, well operator.

Let me just make a few closing comments since it doesn't look like we have any other questions I just really want to thank all of you for your time and your attention.

And.

Youre digging through our numbers, we're very excited about what we were able to accomplish throughout the full course of 2021, we're very proud of fourth quarter, just core operating metrics and we're terribly excited about the opportunities that we have.

As a much larger company in 2022, and so we really look forward to speaking to you at the end of our first quarter of that year. Thank you and we'll talk soon.

Thank you for participating this concludes today's conference call you may now disconnect.

Q4 2021 Gray Television Inc Earnings Call

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