Welcome to the Gray Television Q1 2023 Earnings Call. I will now turn the call over to our Chairman and CEO, Hilton Howell. You may begin.

Thank you, Misty. Good morning, everyone. As our operator mentioned, I am Hilton Howell, the Chairman and CEO of Gray Television. I want to thank all of you for joining our first quarter 2023 earnings call. With me today are our executive officers, our President and Co-CEO, Pat LaPlatney; our Chief Legal and Development Officer, Kevin Latek; and our Chief Financial Officer, Jim Ryan. As you all know, I'm sure since our last earnings call, our Chief Operating Officer, Bob Smith, has retired after a long and distinguished career. We wish him all the best in his next adventures and thank him for some of the extraordinary and bold initiatives that he began and that our company still benefits from. With that, we will begin with the disclaimer that Kevin will provide. Kevin?

Thank you, Hilton. Good morning, everyone. Gray uses its website as a key source of company information. The website address is www.gray.tv. We will file our quarterly report on Form 10-Q with the SEC later today. Included on the call may be a discussion of non-GAAP financial measures, and in particular, broadcast cash flow, operating cash flow, free cash flow 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 on this call may include forward-looking statements regarding, among other things, future operating results. Those statements are subject to a number of risks and uncertainties. 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 annual report on Form 10-K and our most recent earnings release. The company undertakes no obligation to update these forward-looking statements. I now return the call to Hilton.

Thank you, Kevin. Gray Television reported an exceptionally strong start to 2023 despite the rise in interest rates, fears of recession, and the off-year of the political cycle. Our total revenue of $801 million surpassed our guidance, and our core advertising revenue was even with last year's first quarter after adjusting for the impact of the Super Bowl last year and the Winter Olympics broadcasts. Our retransmission revenue was 12% ahead of the last quarter of 2022, also beating our guidance. As noted in the earnings release, Gray's first-quarter results benefited from continued strong advertiser demand from our market-leading television stations and our digital products. Even as many are saying that a recession is just a few months away, businesses, particularly local businesses, are still working hard with a strong demand to find customers to move their products and sell their services. Increasingly, local businesses are rediscovering that in this age of audience fragmentation, broadcast television and its digital channels provide one of the most effective ways to achieve their goals, regardless of the state of the economy and the news cycles. Therefore, we continue to be very bullish on the value proposition that our industry and our company offer to those who want to grow their own businesses. Besides our strong earnings this morning, we are happy to report that by the time of our next earnings call, the Assembly Studios, in conjunction with Third Rail Studios, will be opening and operating. Gray will have welcomed NBCUniversal Studios under our long-term lease and is happy to have that esteemed company join the vibrant Georgia film and television industry. As you will hear more from Pat, we're extremely pleased that people are rediscovering the essential value of broadcast television from local sports teams to local businesses that we are seeing coming to broadcast for the first time. I also want to reiterate an outstanding fact regarding our political advertising. For the first time ever, in the year before a presidential election, we are receiving significant presidential ad buys from all major candidates and parties. This is a great sign for this year and the next. I also want to congratulate all of our stations. They are performing at the top of their games. I'd particularly like to call out some stations that we acquired and have had stewardship over for the last 18 months, particularly some of the Meredith TV stations. We have seen a dramatic improvement across the board, with particular improvements in critical markets to our company in Atlanta, Phoenix, Nashville, and Greenville. Further, the top-performing stations in a portfolio that we purchased have increased their success, particularly in Las Vegas, St. Louis, and Hartford. While we predicted cost synergies from the acquisition, we are now seeing revenue synergy, not just from Meredith, but also from our Quincy acquisitions. While 2023 may be remembered for many challenges, Gray will nevertheless continue producing local content that our audiences want, delivering the value that drives solid advertising and retransmission revenues. However, I believe that 2023 could be the year in which the tremendous reach and efficiency of local broadcast television gets rediscovered by new and existing advertisers, by sports leagues and teams, and perhaps even by Wall Street investors. It should go without saying that we are tremendously unhappy with Gray's stock price and market valuation, both personally and professionally. This company is undervalued for its current operations and its future promise. And yet, with all that we have to report today, we remain very bullish on the industry and especially on Gray's ability to prove the naysayers wrong and return this company's valuation to its appropriate place. I would now like to introduce Pat LaPlatney to provide more color on our operations. Pat?

Thanks, Hilton. Gray's television stations and production companies are executing well and seemingly better than other parts of the advertising ecosystem. Our local advertising continues to demonstrate positive results. National advertising, while softer, is a small portion of our business, and it tends to recover when the economy returns to growth. Overall, the auto category continued its recovery in Q1 and is pacing to continue improving throughout the year. Other strong categories include services and home improvement. Our local direct ad business, which has been a big priority of ours for the past few years, continues to yield new leads and new contracts. In the first quarter, our new local direct broadened over 2,000 new accounts and generated 9% more revenue than the first quarter of 2022. This momentum has continued into the second quarter. In April 2023, our stations brought in nearly $11 million in new business, which is our best monthly number. Our April 2023 new business revenue was 17.5% higher than in April 2022. What this tells us is that year after year, new advertisers are learning how our linear and digital platforms can help them drive their own business success in a brand-safe and cost-efficient manner. In some of our large markets, third-party audits of local television stations revealed that our stations are growing their core spot TV revenue while ad dollars in some of the markets are declining. As Hilton mentioned, we're seeing this result quite clearly in the former Meredith markets, including Atlanta and Phoenix. Between our core revenue performance overall, our new business success and individual market successes like these, we know that Gray has the right people providing the right solutions at the right price for local advertisers who need to grow and maintain their own businesses. The first quarter also included a pleasant surprise of political ad revenue coming in at double the amount of our current television station portfolio posted in the first quarter of the last pre-presidential year in the cycle. This is obviously a good sign. Already in the second quarter, we've received our first presidential political ad buys, as Hilton referenced. I'm pleased to report that we've had not one, but three presidential campaigns already advertising on Gray stations in the early primary states. With the presidential election still 17 months away, the size and scope of these ad buys coming this early is encouraging. Meanwhile, our digital businesses are also excelling. In the first quarter, we set new records for engagement with digital audiences. Importantly, we continue to experience double-digit growth in digital revenue. We continue to launch literally dozens of our fast channels on Samsung TV Plus, Amazon's News by Fire TV, and in the news category on the Roku Channel Live TV. From long-standing advertisers like the auto industry returning to the medium and early season political campaigns to new business development, there is real momentum in our broadcast business. We also see enthusiasm for the medium coming from the sports world that Hilton mentioned. That's really accelerated in the last few weeks. Since last fall, we've had many calls with professional sports teams seeking to explore how our stations could expand their reach and promotional footprint in their home markets and beyond. Last Friday, we announced the new broadcast rights deal with the Phoenix Suns and Phoenix Mercury, which is conditioned on the Suns' existing RSN deal expiring. Assuming the deal proceeds, our Arizona stations will make all of the Suns' and Mercury games available to roughly three times more people than the teams have been reaching with the current RSN model. We know our business faces real challenges, but that's nothing new for us. We've shifted our course repeatedly over the past few decades. Yet right now, we're moving forward in new and creative ways with a growing advertiser base and new partnerships with local professional sports teams. We also expect that our industry's and our company's work on the next-gen TV technology will open even more doors to growth for us in the medium term. In short, it's a very good time for Gray in the broadcast business. Kevin?

Thank you, Pat. Today, we can announce that Gray has successfully completed another retransmission renewal cycle. We have agreements or agreements in principle with three very large MVPDs just since the beginning of this year. Consistent with Gray's three-decade history of retrans negotiations, these important new deals were reached without any consumer disruptions or public rhetoric. Equally important, due to the strength of our local content and operations, we have also managed to secure retransmission rates for our content that met or exceeded our budgets. Our next round of retrans negotiations will occur at the end of this year when we will renew with most of our MVPD partners. In related news, since the first of this year, Gray has entered into the ABC opting agreement for Hulu TV and the CBS opting agreements for Hulu TV, YouTube, and Fubo. As a reminder, the big four networks negotiate these agreements with virtual MVPDs and present agreements for us to accept or reject. We are not permitted to negotiate with big four affiliates with a virtual MVPD directly. We do, however, have breaking news to report in the virtual MVPD space. Just this week, Gray reached an agreement with YouTube TV that secures carriage of six of Gray's independent non-affiliated television stations that provide local news and sports-focused content in our largest markets, including Peachtree TV in Atlanta and Arizona's Family TV3 in Phoenix. This is Gray's first-ever retransmission agreement with a virtual MVPD for the linear distribution of local television stations. Limited in scope, this deal proves that local broadcasters are, in fact, fully capable of negotiating retransmission agreements with a large sophisticated virtual distributor. As such, we are hopeful that deals like this one with YouTube TV open a door for similar deals with Hulu and Fubo TV to bring these independent stations to our customers, their customers, and eventually help lead to the return of our right to negotiate the carriage of our big four affiliated stations with all the MVPDs. The first quarter retransmission results we posted today are better than expected. In particular, retrans revenue as compared to the last quarter of 2022 grew 12% as a basis and 25% on a net basis. These results benefited from higher rates in our distribution contracts with some positive true-ups and adjustments in the quarter that were related to last year's distribution. We continue to forecast low single-digit growth in gross and net retrans for the year. As a reminder, we will renew about 58% of our MVPD sub base in the first quarter of next year, primarily throughout next year. At that time, we expect some improvement in reverse comp rates that, with higher retrans rates, will produce higher net retrans dollars in 2024 as well. This concludes my remarks, and I now turn the call back to Jim Ryan.

Thanks, Kevin, and good morning, everyone. I'll keep my comments brief since Hilton, Pat, and Kevin have already discussed the key points. Regarding our Q2 2023 guidance, we expect our core revenue to be higher than in Q2 last year, which we believe reflects a strong start for the company in 2023. For the full year, total revenue is projected to be around $3.3 billion, with core revenue estimated at approximately $1.55 billion, reflecting low single-digit growth. Retransmission revenue is also expected to be about $1.54 billion, again reflecting low single-digit growth. We anticipate political revenue to reach $50 million, which is an improvement from our previous estimate of $40 million to $50 million, and this includes around $1 million of spending for the 2024 presidential campaign, which is expected to grow in the coming weeks. We forecast total broadcast revenue of about $3.2 billion. Our total operating expenses before depreciation, amortization, and asset gains or losses are around $2.5 billion, with broadcast expenses near $2.3 billion, network reverse compensation at about $940 million, noncash stock compensation around $5 million, and noncash 401(k) expense near $10 million. Corporate expenses are projected at approximately [indiscernible] million, including $17 million in non-cash stock compensation. For the full year 2023, our operating cash flow, as defined in our senior credit agreement, is expected to fall between $800 million and $825 million. Regarding significant cash uses in 2023, cash interest is anticipated to be between $420 million and $430 million. We have a 5% SOFR interest rate cap on $2.6 billion of our floating rate debt, shielding us from any further increases in SOFR. We expect cash taxes to total about $35 million to $45 million, a positive reduction from our previous estimates. Routine capital expenditures are forecasted to be between $105 million and $115 million. The preferred dividend stands at $52 million, and our required amortization on Term Loan D is $15 million. We currently estimate our free cash flow to be in the range of $160 million to $170 million. We are well positioned to start 2023 and look forward to a successful year, contributing to a strong 2024 with the upcoming presidential election. I will now turn the call back to Hilton.

Thank you, Jim. At this point, operator, I would like to open up our call for questions from anyone in our audience.

It looks like our first question will be from Dan Kurnos at Benchmark.

Maybe, I guess, Pat, since you brought this up, I think you guys are the only ones so far that have said services are strong in Q2 and have generated substantial revenue synergies already, I think, from Meredith and Quincy. So I'm just trying to parse out the underlying there. How much of that is sort of underperformance that you've now brought up to market levels versus how much is sort of intrinsic end market just outperformance?

Yes. So services for us have been healthy all along, Dan. I think we have team sales focused on some of these categories. I think that helps us. So that's one of the reasons why I think we could be doing a little better than the other guys. If you just take legal, for instance, that category for us has been on a steady upward arc for years, literally years. And home improvement continues to be. So yes, I like where we are there.

Dan, services in Q1 2023 is about 29% of core. Q1 2022 services were 28% of core.

Okay. Is your Q2 result better than everyone else's so far? That's a positive point to highlight. Kevin, regarding the dynamics you mentioned about the true-up, I'm curious if you can quantify that. We’ve noticed that virtuals have been outperforming, and it seems there was some growth in net subscriptions in Q1 from virtuals. Considering the recent dynamics around virtual negotiations, could you help us understand both the true-up and your perspective on subscriptions and the impact of the virtual mix shift, even though we have the full year guidance?

Dan, we have true-ups and adjustments throughout the year, mostly occurring in Q1. These can sometimes be positive, but there was a year when the true-ups were slightly negative. True-ups are an important aspect, particularly in Q1 each year. Since providing guidance, we have noticed better-than-expected true-ups overall, mainly from what we refer to as OTT providers. We do not differentiate between virtual and direct-to-consumer segments. Currently, our subscription trends are consistent with the industry. We are experiencing significant declines in the traditional segment, while newer distributors continue to show strong growth. We expect ongoing challenges for clients in traditional DPDs and sustained growth among OTT distributors. In the short term, I don't foresee any changes in these trends. Overall, like many others, our mix is increasingly leaning towards virtual and direct-to-consumer providers. We're pleased that our signals are still reaching audiences, and our distribution remains strong. However, the financial outcomes would improve if we negotiated directly instead of receiving a standard rate across the nation. We can command higher rates and should be compensated adequately for the content and value we offer. I hope that addresses your question.

Yes, that's helpful. One last question regarding Hilton. I know you are being very thoughtful about this, and anyone else can chime in as well. Regarding the Assembly Atlanta unlock, I realize it's a tricky situation and there's excitement for the upcoming launch. But how close are you to having something to share with us? Also, what is the process for providing us with more details about the economic situation?

Sure, Dan. We are not able to share the lease terms with NBCU due to a non-disclosure agreement. However, we will be releasing our revenue figures quarterly. The Assembly spending has mostly concluded. I am truly proud of this project and would love to host everyone on this call at the Assembly because experiencing it firsthand will highlight its potential as a significant economic driver. While we won't disclose the lease agreement with NBCUniversal, you can expect to see revenue starting in the third quarter, and more importantly, in the fourth quarter, with a steady increase thereafter. You can deduce any insights from that point, but we believe it may become one of our most valuable assets in the entire portfolio.

Our next question will come from an analyst at Barclays.

Congrats on the quarter. Just really quick one for me. I know a lot of the economics are still being figured out, and you guys are still trying to sort out a lot of the Phoenix Suns deal, and you're probably limited in what you can mention. But how do we think about...

You nailed it.

Yes. How do we think about kind of the longer-term strategy of the company? Is this like inherently a move back towards a more cyclical model? How do we think about that as kind of a hedge on the retrans side? How do we think about the balance?

This is Kevin, Courtney. Let me clarify that broadcasters are generally adding professional sports games to non-big four stations, which means they are being added to independent TV stations. Some of these stations have other displayed content, while others are being developed from scratch. Therefore, there is no impact on the big four operations of any broadcaster regarding the sports we are discussing, which applies to the entire industry. We're focused on bringing sports to independent TV stations, and the industry is optimistic about potential future opportunities. However, the core business remains the big four affiliate TV stations, with Gray focusing on local news. The majority of our revenue comes from local news, and that won't be affected. For instance, when we added Telemundo at several stations last year, adding sports to stations in different regions will not make the business cyclical. In fact, there is unlikely to be much change in the numbers in the coming years since we will continue to prioritize local news for revenue generation. I don't foresee any impact on retransmission from this. We now have our first deal with YouTube, driven by the sports we currently offer. Some stations are equipped to cover sports, which is a significant growth factor, and other sports will be introduced in various markets over time. We constantly strive to find the right content mix to engage local audiences. I'm pleased that YouTube has recognized this, and we look forward to securing more deals like this in the future.

Our next question is going to come from Aaron Watts with Deutsche Bank.

I have a couple of questions. First, a follow-up on advertising. It seems that the core is holding steady. Can you provide more details about the month it came in or what feedback you're receiving from others? Are you noticing any improvements or declines in your confidence regarding your guidance for the core?

Aaron, I hate to tell you, you kind of broke up there, so we missed that. Could you repeat?

Sure. On the advertising side, I'm encouraged to hear that core seems to be holding steady from Q1 into Q2. Can you talk a little bit more about the monthly cadence you're seeing or what you're currently hearing from your reps on The Street? Are you seeing sentiment improve or worsen month-to-month and how that plays into your confidence in full-year guidance you’ve provided?

Yes. I mean, Jim, did you want to take that? Or...

I'd say core in April is up healthy single digits, around 4% plus, and obviously, it’s looking strong as well. I think June is a little too early to call, but June is always tricky depending on the industry cycles from second quarter rates, which are higher than third quarter rates. At some point in June, that third-quarter rate scenario starts kicking in. That’s probably why June might not be quite as strong as April and May, but still looking healthy and in positive territory.

Okay. That's helpful. And then, Jim, I think maybe aiming at you again here, but a question around the margin profile of the business, both in the first quarter, you just report your Q2 guide. Can you talk about some of the factors resulting in margins being a bit below where we've seen them historically?

Two things. One, I think you need to account for the $35 million of one-time charges that hit the production expense line in Q1 for basically things that were out of our control. Secondly, as we've talked about in the Q4 call, our operating expenses are running higher this year than they have been in many, actually longer than I can remember. Inflation has caught up to us. We’ve wrung out all the cost synergies that were available from the acquisitions a couple of years ago. As we've discussed in the last two calls, we are having a hard time recruiting and retaining staffing at the levels we deem adequate at our stations. We are making progress on that, and part of that progress was adjusting wages and benefits. But we are still running significantly understaffed from where our optimum model would be, and we are continuing to address that. I don’t believe the cost increases that you’re seeing this year are necessarily going to continue over the next several years. I think this is a sort of reset year for us, and then we can hold it to lower increases in future years.

Okay. I understand. Jim, I know this is subtle, but are the one-time expenses you've mentioned included in your defined operating metrics as outlined in your credit agreement?

Yes. Unfortunately, yes.

Got it. Okay. And then one last one for me, and I appreciate all the time. If I can wear my credit hat for a moment, just wanted to confirm that Assembly is an unrestricted subsidiary as it relates to your debt? And I ask that in the context of thinking about your deleveraging efforts. As the Assembly platform begins to generate profit and/or if you have monetization events around the project in the future that raise cash proceeds, should we be thinking about those cash flows going towards paying down debt and deleveraging at the restricted group?

First, you are correct. Assembly is an unrestricted subsidiary presently. I must be careful about talking about possible future cash flows and/or monetizations. However, it would be reasonable to assume, as with the rest of the company, that we run a centralized treasury system. Cash comes in from all sources in the company. We have been very clear over the last several calls that our number one priority for capital allocation is to pay down our debt as quickly as possible.

Our next question is going to come from a representative with BNP.

A couple from me. Good to see the bolstered liquidity via the securitization facility. Just to clarify on the prior question, the reduction in broadcast cash flow, the $35 million was a one-time charge. From the high end of guidance, there's another $15 million or so. I just wanted to clarify that piece. What was that related to?

I'm not sure what the $15 you're speaking to is. Is that a total expense?

Sorry, the broadcast cash flow prior guidance, I think, was versus today, I think you're seeing...

Well, yes, obviously, the $35 million is a direct hit in Q1, which we didn't see coming. The rest of it is just a little bit of fine-tuning on full-year estimates. Certainly, not very significant at all. And $15 million and $800-plus million is not a very big delta.

No, totally. I just wanted to make sure I understood the puts and takes. And then separately, you're obviously focused on deleveraging. You see your unsecured bonds trading in the low 60s. Clearly, with the market cap where it is, it seems like it would make sense for you to buy discounted debt as a way to potentially accelerate deleveraging. I just wanted to hear your thoughts on that prospect, especially given the depressed market cap on the equity.

I'll preface my comment by saying never say never. However, at least as of today, I appreciate that the bond tranches are trading at significant discounts. But we view that as a factor of where short-term interest rates are. We look at the longer-term maturities of the bond issues and the absolute coupons we're currently paying. When I compare that to the term loan that is capped now at 8% with our rate cap and the term loan E at an aggregate pricing at 7.5% all-in, I would tend to lean towards paying down the more expensive coupons that have shorter maturities.

Got it. Very helpful. And then finally, in terms of deleveraging potential, are there any other sort of either non-core asset sales, et cetera, that you would consider to potentially accelerate the deleveraging? Because it looks like by my numbers, at least into 2024, even if you generate the full level of cash flow that you expect in prior years, you’d still be levered in the 5s. Any further plans for accelerating deleveraging would be helpful.

There are no core or non-core assets that we plan to dispose of. Quite frankly, anything that's non-core is so small that it would not move the needle.

Our next question comes from Nick Zangler with Stephens Inc.

This is Dean on for Nick. You've been seeing industry peers mentioning some local news programs across various markets. And I think there's been some overlap with the Gray stations. Are you seeing any indication of pressure on coverage within the local segment?

The quick answer is no. We're doing the exact reverse of that. In almost every market, we've been increasing our local news coverage and in some cases quite significantly. This ranges across the board, regardless of market sizes. We are actually moving more aggressively to create our own local news content and are supplanting, in many cases, the syndicated product that others may have. So there is no potential for Gray to eliminate news coverage anywhere. This is a validation of our acquisition strategy over many, many years. We have always focused on news-generating and news-gathering centered TV stations, one or two stations in important markets. So here in Atlanta, for instance, we've gone from the smallest news-producing station to, by far, having the largest number of news hours of anyone in the market within 18 months because viewers want the news when they want it. Therefore, we need to be there to provide it. You will see no pullback on news from us.

Got it. Is there any bottleneck for expanding local news coverage as you become more aggressive in producing more local news content?

It's not a bottleneck, and I'll let Pat follow up on this. I think it's just an indication that many different companies and industries have faced across the country post-COVID. Everybody is trying to find good people, and there's just a lack of qualified applicants.

The labor market is tight, but it hasn’t caused us to reduce our efforts. We are producing more news hours as a company each year. We leverage technology to ensure our processes are efficient and effective. We have also made significant strides in hiring over the past six to eight months, which is a positive development.

Our next question is going to come from Jim Goss with Barrington.

Okay. Kevin, I was if you might comment on reverse comp requests from the networks at this stage, with any programming cost rationalizations that have been ongoing. Have they been any less aggressive than they've typically been in the past?

At a high level, Jim, I think it's fair to say that our peers and I have been indicating that we expect reverse comp rates to grow while compensation will be coming down for a couple of reasons. I think several folks have confirmed that over the last few calls, and it is our expectation. I don't want to talk about specific negotiations at this time because we are in specific negotiations. So I'm just speaking at a fairly high level, but several folks have said across the industry right now.

Okay. I wonder too, some thoughts have been expressed, and I think they seem reasonable, that maybe retrans is leveling off to some extent, and your guidance for the next quarter seems to suggest that a little bit that with the erosion in subs offsetting the increases in prices, even aside from any reverse comp requests. Maybe you've hit somewhat of a ceiling, which isn't necessarily a bad thing, to have a stable base to provide incrementally from in addition to ad sales. But do you think we’ve started to hit somewhat of a limit with net retrans in total?

I would just reiterate, we still expect gross and net to be up low single digits this year. We have a large rate reset next year, and we have new network comp agreements. So we'll have a different reverse comp level next year. I can just reiterate, we expect that we will still see growth in both gross and net.

Okay. Then I wondered about any updates on the Premion and any impact from the deal uncertainties that might be introduced from that relationship?

Really no impact, Jim. Our stations are doing a great job of selling Premion. The product is excellent. It's in high demand in the market, and year-over-year growth there is substantial.

Okay. And maybe finally, as you've emphasized, news is your key driver. Is your broadened platform across, is it big enough to provide any national effort either for a separate business or at least within your own news programs to get a sort of local, national feel?

We're really looking to remain very focused on local markets across the board. One of the things we have done is have the opportunity with our particular footprint to do things on a statewide basis across all markets. The most relevant one is what we've done with Telemundo because we've taken Telemundo statewide so far in Georgia, Alabama, and Tennessee. Susan Oh and her team are working to take it to a total of 42 markets eventually. But we look at that on a local and statewide basis, not on a national scale.

Our next question is going to come from John Kornreich with JK Media.

Jim or Kevin, you reiterated a couple of times that net retrans should be up low single digits this year. Yet the first quarter was down 3.5%, and your guidance for the second quarter is that net retrans will be down 4%. I take it you're expecting about a 10% year-over-year net retrans increase starting in the third quarter.

We're not giving that level of granularity on guidance at this point.

Okay. But you are reiterating net retrans for '23 to be up?

Yes.

And an acceleration of that in 2024 as you do more agreements.

Correct, yes.

Okay. Secondly, just quickly regarding the guidance for free cash flow, that excludes CapEx and reimbursement on the Assembly project.

That would be correct; it excludes the roughly $30 million of common dividend.

Right, right. But...

In the Q, which will be filed a little later today, there is good disclosure around what we see for Assembly as far as finishing off from the cost side to complete Phase 1 as well as reimbursement. So if you look at the liquidity section of MD&A, you'll get some good details.

When do you guys expect to sort of hit your stride on revenue coming in from the Assembly project? Is that early '24 or...

Full year 2024.

2024.

It will come online in June, and then it will take a period to ramp it up. We will see it in 2023, but full year 2024, it will be fully operational, and we'll have the benefits of its revenue in addition to it being what I think will be a remarkable presidential year. The combination of all of these things is similar to how we closed with Raycom, where we're going to bring our debt down rapidly in a 2-year period of time. We're very excited for that.

It's like you should not only buy your stock but buy your bonds too.

I will be buying stock because our current price is outrageous. The Assembly project alone is worth more than our market capitalization.

One last thing. Kevin, can you reiterate or put together again the flow of retrans agreements starting in the first quarter of this year and then go through '24 again?

Bear with me. It's in our deck, and I want to be sure to read it from the deck so I don't miss anything. Let's see. In 2023, we had 22% of the traditional MVPD subscribers renewing in Q1; 18% in Q2. In 2024, it's 38% in Q1, and then 23% in the second half.

Our next question is going to come from Monica Liu from Onex.

Can you provide a little more color on the $17 million special charge taken during the quarter to basically account for the credit allowances related to Diamond Sports bankruptcy? What is the nature of that expense? And what are the assumptions behind that number? Also relatedly, there have been some headlines around Diamond Sports filing a lawsuit to try to stop the Phoenix Suns agreement with Gray. So in addition to the $17 million, is there any potential other liabilities that we should think about?

$17 million related to an accounts receivable with Diamond that we fully reserve due to the bankruptcy. We're not commenting on litigation with any party.

Our next question is going to come from Steven Cahall with Wells Fargo.

So maybe just first kind of, Jim and Hilton, tying a few things you said together. Hilton, you talked about how much you think the stock is undervalued, and Jim, you've been helpful movers on free cash flow. One of your peers today said that they do expect to be probably at a higher level of leverage by the end of the year. We kind of think that leverage is the key to getting the equity value higher. Just wondering if you could comment on where you see leverage trending before you get to 2024. Does it have some upward pressure? Or with the ad market performing as well as it is, do you think you can bring it down between now and the end of the year?

We're currently about 5.3. In the last fourth quarter, we were about 5.4. I think we’re somewhere between 5.25 and 5.5. The variability, I think, will depend on how much pull forward of the presidential cycle we see in '23. Quite frankly, none of us at least on this side of the phone call have any idea what that number is yet, although we've been delighted with what we have seen in May already.

Got it. And then just on sports and vMVPDs, you talked about the YouTube TV deal with the independents. Given that you can negotiate directly with vMVPDs, does that give you a bias to put more sports on those independents? Or do those sports teams or leagues have a preference for the big four? How do you think about balancing where you might look for some of those rights going forward?

Yes, to reiterate what Pat mentioned on the call, I’m not indicating that we have a current agreement. It's important to choose my words carefully. We have been in discussions with several teams over the past few months, similar to what other broadcasting groups are doing. I anticipate that many broadcasters will be announcing multiple sports deals in the coming years. I expect that professional sports will be featured on stations outside the big four, as the networks schedule many hours of programming that coincide with game times. Consequently, professional sports, like the power sports we currently broadcast on our D2 channels, typically do not air on big-four affiliates. Our desire to return sports to broadcast is not a new initiative; we have always been interested in bringing in more high-profile teams and will continue to seek out additional sports. The deal with YouTube is indeed important for us, and we are pleased to have it. We believe there is strong justification for why the sixth station should be included; it offers sports as well as a significant amount of local news, particularly in Phoenix, where it leads in ratings. Therefore, it is logical for that station to be accessible across all platforms. Our focus remains on providing TV stations with content that local audiences find appealing, whether it’s sports, news, local content, or entertainment. I'm glad that YouTube recognizes this, and we look forward to similar agreements in the future.

Our next question is going to come from Alan Gould with Loop Capital.

Hilton, I have a question for you before I move on to a couple for Kevin. I know you can't discuss revenue, but could you share your thoughts on whether the project has exceeded its initial budget expectations? Also, when can we expect to see real estate sales? Will we need to wait until the plant is operational to generate interest in real estate sales?

The real estate sales will primarily occur on the opposite side of the property from the current studios. We own this property outright and have no debt on it. By the end of the year, we were able to utilize tax-deferred bonds due to a community improvement district affecting the property, which closed on December 28, enabling Gray to receive its reimbursements. We raised over $100 million at the end of the year. As the public improvements, such as roads and sewers, are completed, Gray will be reimbursed. I believe the project is on budget and ahead of schedule. I am very proud of our real estate development partner, the Gibson Companies, as the work is stunning. We poured our first slab last March, and the facility is expected to open this June. It is exceptional; we have had six different CEOs from various film divisions tell us it's the best film and television production facility not only in Georgia but potentially in the world. There is significant interest from many people eager to produce their films here. I believe this will be an excellent investment for our company, shareholders, and for the city and state. Revenue from this project will begin to materialize in 2023 and 2024.

The land sales, when there are 4,000 plus people going to work every day in that complex by this fall, there is excitement about that traffic, the movies being produced, television shows happening there, and that, we believe, is the best time to start talking about land sales. Certainly, you could do that now when it’s still dirt, but we’re trying to maximize value here. So we expect those land sales discussions will be taking place when the excitement is visible as people can see the activity around them.

Makes sense. Kevin, can you provide an update on the subscriber trends compared to last year? Additionally, how significant is the difference in primary elections when there is an incumbent versus when there isn't?

On sub-trends, at this point, we are largely mirroring our peers in the industry. We're not seeing anything we can share that would indicate better performance compared to others. The MVPDs are down double digits. The OTT, which is direct-to-consumer and the virtuals, are growing nicely. Sub-trends are really consistent with what we are seeing right now across the board. We’re trying to model a more dire case for the MVPDs than we’ve seen in the past. On the political side, we have had advertisers from one of the leading candidates who happens not to be in a primary at this point, and that is unprecedented for us. If you look back at the last few presidential primaries, typically, there's a lot of money coming in the fourth quarter for the first primary in Iowa. That's been limited to the candidates competing in the primary and not the incumbent. So we’ve got funding from someone not in the primary, which is new, and 17 months before the election. In previous cycles, we wouldn’t see ads coming in this early.

Our next question is going to come from Craig Huber with Huber Research.

You guys mentioned that April for core average was up 4-plus percent. It's quite good, especially given the environment here. You talked earlier about synergies you're getting on the revenue side from Quincy and the Meredith TV stations. Can you maybe parse that out, that 4% plus number? Is it roughly half of it from the revenue synergies? And also, if you could touch on the national piece. Obviously, that sounds like it's down. Could you maybe quantify that a little bit for us?

Yes, I can provide some numbers, but I can't tell you exactly what percentage of the 4% is due to Quincy and Meredith. I can tell you that, as Hilton alluded to, those stations are performing at a very high level. Anecdotally, I can talk about Phoenix for a second. When we acquired those two stations in December 2021, their rankings were 3 and 4. Today, they're 1 and 2. For that reason, they're taking a much larger share of the advertising market in Phoenix, Arizona. That phenomenon is playing out across that group. While I can’t give you an exact number, I’m sure there’s a considerable contribution from the Meredith stations to that increase.

Okay. And then the national piece, can you help us with that? It sounds like it's down.

In the first quarter, national was down. However, as we remarked earlier, it's a relatively small component of overall core. Looking ahead to the second quarter, I think national has potential to improve a little. It’s still likely down, though it might be closer to flattish than down as much as in the first quarter.

Okay. And then on the retrans sub side of things here, three months ago in your last conference call, you said you guys were down about 1.5% retrans subs year-over-year. Now you're talking about it being in line with the market. I mean, your peers are talking on a net basis the virtual and legacy MVPDs down mid-single digits year-over-year. It sounds like now you're sort of in that same range.

Yes. We've been providing some numbers to our total subscribers, which is everyone who pays us a monthly fee for our signal period. We're getting a lot of questions about why we're providing a number that's different from others. We're not going to do that any longer. What matters is the gross revenue and the net revenue. Overall, we believe our performance is generally parallel to what others are experiencing, and that is what being publicly reported.

Okay. And then on leverage, looking at some notes here. In your August conference call last year, you guys set a public goal for the end of 2024 with debt leverage in the low 4s. Do you feel that's still doable?

That was before interest rates went up 450 basis points in a year. Through 2024, our leverage will decrease. Whether it is in the low fives or somewhere in the fours is going to depend on what the '24 election cycle comes out to be. Obviously, we're optimistic about the presidential. We are also strongly positioned in the majority of Senate seats up next year as well. We anticipate strong spending on the Senate side as well.

Has this cycle of higher interest rates and the poor economic backdrop changed your long-term thoughts on where your debt load will be?

We are still committed to bringing down our debt level and overall leverage as quickly as possible. We’ve stated for years how we leverage up to do an acquisition and then leverage down following the acquisition, whether it was Raycom, Quincy, Meredith, and others. We know that large acquisitions have put us in the mid-fives for a little while, and then we’ve come down into the fours. Before we did Quincy, we were in the high threes. We'd like to successfully follow that cycle over the next few years and bring down leverage again.

Let me add something else to that. You've got to realize this company has articulated our intention to grow our portfolio for decades. We are now a national broadcaster, not implying that we're going to be broadcasting nationally. We're in 113 markets, the second-largest broadcast company in the country. We have achieved that. We were barely below the articulated cap without the UHF discount. The two most important factors we will focus on now that we have achieved the necessary scale are reducing our leverage and returning capital to our shareholders through both stock buybacks and dividend increases when the board sees fit and feels comfortable. Our board ratified our dividend yesterday at our board meeting, and that's what we're going to be doing. We have done everything we said we would do. Now we have built what I regard as one of the most remarkable broadcast television companies in the country. We will continue to operate our business and pay down our debt. I don't foresee large acquisitions like we did with Meredith and Quincy in the same year. There's just not enough room on the cap unless the laws change. I expect to see our stock price improve dramatically over the course of this year and next as we delever and continue to prove the quality of the assets that are underlying this company.

My last quick question. I appreciate your time here. Auto, what was that year-over-year percent change in the quarter? Maybe what's your outlook there, please?

Somewhere in the mid-teens.

Auto in Q1 was very healthy. It was around 18%, 18.5% of core in Q1 2023 compared to 15% last year. The auto sector started to get healthy last year, and it's continuing to improve this year.

Our last question is going to come from Michael Kupinski with NOBLE Capital.

There were several great questions. I want to ask about the industry's adoption of next-generation technology and the potential revenue it could generate through the development of core infrastructure, particularly in areas like agriculture and utilities. Some have suggested that data casting could emerge as a $6.5 billion to $15 billion market. How is Gray positioned in terms of its core capabilities to provide data casting? Are you considering opportunities in data casting like others in the industry? If that's the case, do you anticipate generating revenue from data casting in 2024?

To answer your last question first, I don't think 2024 is likely. I think 2025 is a possibility. We continue to build out our 3.0 infrastructure. I can't recall the exact numbers now, but I believe we're covering over 50%, maybe 60% of the population. We see great promise in 3.0. For us, it has been challenging to determine when that revenue starts coming in, but we are active in the data casting world where there are numerous opportunities, whether there's in a single market or networks. We're discussing setting up the necessary infrastructure with peers in the industry. I think it’s starting to come into focus, and I would guess we’ll start seeing money in 2025. To clarify, I don't believe it will be a material number.

Okay. There are no more questions in queue. So I'll turn it back to you for any closing remarks.

Thank you, operator. I would like to say just a few things before we close up and wrap it up. I want you all to know that we're very proud of our results this morning. We candidly don't see current signs of recession looming on the horizon. We have the best television station portfolio in the business. We're the largest local news producer in the television industry. We have presidential money for 2024 coming in the first half of 2023. Assembly comes online next month. Sports and local businesses are returning to the broadcast model. All that said, I must emphasize, we're very comfortable with our liquidity. We have no near-term maturities. We have already converted our variable rate debt from LIBOR to SOFR and we have interest rate caps in place. Our balance sheet and core television station business remain strong enough to weather any macroeconomic pressures we may face before we begin to reap the benefits of substantial political revenue not just later this year but fully in 2024. The future is bright. Thank you for your time. We look forward to talking to you if you need to have individual conversations. Thank you for your time this morning.

This concludes your call. You may now disconnect.