Welcome to the Gray Television Second Quarter 2023 Earnings Call. I will now turn the call over to Hilton Howell. You may begin.

Thank you, operator. Good morning, everyone. As Misty mentioned, my name is Hilton Howell, I'm the Chairman and CEO of Gray Television. And thank you all for joining us for our second quarter 2023 earnings call. I am absolutely delighted that today, we also have with us on this call, Sandy Breland, our long-time Senior Managing Vice President, who recently became Gray's Chief Operating Officer. Welcome, Sandy. In addition, and as usual, I'm joined by Pat LaPlatney, our President, Co-CEO; Kevin Latek, our Chief Legal and Development Officer; and Jim Ryan, our Chief Financial Officer. And we will begin with a disclaimer that Kevin will provide.

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, is a reconciliation 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. Actual results in the future could differ from those expressed or implied in any forward-looking statements as a result of various important factors that have been set forth in the company's most recent reports filed with the SEC, including our most recent 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 return the call to Hilton.

Thank you, Kevin. Gray Television's strong start in the first quarter of 2023 continued through our second quarter. Today, we beat guidance and consensus estimates on all five key metrics. We beat on core advertising revenue. We beat on retransmission revenue. We beat on political advertising revenue. We beat on EBITDA, and we beat on free cash flow. In particular, our total revenues of $813 million for the quarter exceeded the high end of our revenue guidance. In addition, our total operating expenses of $593 million were below the low end of our expense guidance for the quarter. We are especially pleased at the performance of our television stations during the quarter. Our core advertising revenue increased 4% on a year-over-year basis, with both local and national core up in low single digits on a year-over-year basis. And significantly, as we had predicted, the auto category continues to recover strongly for Gray. Meanwhile, political was particularly strong for a second quarter, preceding a presidential election year. Our strong footprint of number one ranked television stations has and will continue to allow us to over-index on political advertising dollars. As such, we are very much looking forward to the '24 presidential election cycle. The second quarter of 2023 compares quite well to last year's second quarter in which we set all-time records for political revenue. The continued strength in Gray's revenue despite that tough comp confirms that our television station portfolio is delivering the trusted content that our viewers want. It also shows that the strong content and deep reach that we have will continue to produce real value for our advertising clients. Since the end of the first quarter, Gray's leadership team has been actively engaged in several initiatives. We have promoted Sandy Breland to Chief Operating Officer, Matt Jacklin to Chief Revenue Officer, Mike King to Chief Marketing Officer, and Matt Moran to Senior Managing Vice President. Moreover, Gray has renewed and extended our CBS affiliation agreement for all former Meredith markets and our legacy Gray Television markets, which we're pleased with. We have achieved significant agreements, which Pat LaPlatney will elaborate on, to bring the Phoenix Suns and Mercury games back to broadcast television and to increase the teams' market reach in Arizona threefold. We also reached an agreement with the CW network for a package of ACC sports rights that helps offset the losses from the Diamond Sports bankruptcy. Additionally, we are glad to report that Phase 1 of the Assembly Atlanta Studio project is nearly complete. This phase includes the public infrastructure build-out and the construction of Assembly Studios, featuring 19 new stages, most of which are under a long-term lease with NBCUniversal. Currently, NBCUniversal is moving into its new sound stages, mill spaces, and offices. Despite the ongoing writers and actors strike, we expect production to commence in the next few months, at both NBCU facilities and in the newly constructed studios that Gray plans to use and lease to other production companies. Our plans remain unchanged, and we hope the strike will be resolved amicably soon for the benefit of all parties involved in our industry. The investments in Assembly Atlanta over the past few years, particularly in the first half of 2023, are now largely complete. We expect the remaining construction costs for the Assembly Studios portion of the overall project to be between $25 million and $30 million, after expected governmental incentives and reimbursements, with the entire Atlanta Assembly development to be completed over the next five to seven years through various mixed-use projects across the remaining two-thirds of the site. I will now turn it over to Pat LaPlatney for further insights on our operations. Pat?

Thanks, Hilton. During the second quarter of 2023, Gray Television stations and production companies continued executing well. It's seemingly better than other parts of the advertising ecosystem. Once again, our advertising revenue continues to demonstrate positive results, and we expect to see continuing positive trends for the rest of the year. We read with some dismay stories reporting softness in auto advertising, particularly on the national side. Those stories are not reflective of Gray's experience at all. To the contrary, Gray Television stations posted a 20% year-over-year increase in auto. In the second quarter, this increase was led by the larger increases year-over-year in national auto advertising. Meanwhile, our stations continue to excel at developing new business from local customers who previously did not advertise on our platforms. In the first quarter, we are pleased to report that our new local direct business brought in 9% more revenue than the first quarter of '22. We improved upon that result in the second quarter when we brought in 15% additional revenue from new local direct business over the second quarter of last year. Political advertising is also strong as Hilton mentioned. Now in both the first quarter and the second quarter of '23, we have literally doubled the amount of political ad revenue that our current station portfolio received in '19, the last year that preceded a presidential election year. Political advertising revenue has been particularly strong in Arizona, Louisiana, Virginia, and Iowa. We're not prepared to make any full year political ad estimates at this time given the wide range of uncertainties as far out. But still, we're encouraged by the doubling of political revenue over 2019 levels that we've experienced in the first half of 2023. In addition to these sales successes, Sandy and I with assistance from many others, are actively engaged in discussions with professional sports teams and leagues. Recall that in early May, the Phoenix Suns and Phoenix Mercury announced an innovative deal that returned their games to television stations in Arizona owned by Gray. At that time, our deal was conditioned on the expiration of an arrangement between Diamond Sports and the Suns and Mercury. In July, the Diamond deal for the Suns expired and the Suns Mercury deal with Gray became effective. We're all very excited to be able to present these great teams to all the people of Arizona. Our discussions with other teams and leagues indicate that the new sports rights deal we have in Arizona can work in other markets as well. Whether we replicate that structure or find new ways to partner with professional franchises, we see a growing recognition in the market that returning professional sports to local broadcast stations will increase marketing value, advertising sales revenues, fan engagement, as well as team value. We're spending a lot of time analyzing these professional sports opportunities. In the coming months, we hope to have more innovative sports rights partnerships that will return local teams to our broadcast stations and to local fans.

Thank you, Pat. I'm Sandy Breland, and I'm very happy to join my colleagues on this earnings call, especially when we have so many positive developments and successes. Personally, I focus a good amount of my time over the last few years on Gray's local news resources, including our Investigate TV and Washington, D.C. operations. I'm, therefore, very honored to join this call when Gray has so much great news to report about its own news efforts. In June, Gray received recognition from the NAB Leadership Foundation, 2023 Celebration of Service to America Awards, which honors excellence in community service by local radio and television stations. This year, Gray received the TV Ownership Group Award in recognition of the outstanding work by Gray's Investigate TV unit and its series, The Six, which exposed a critical shortage of public defenders across the country. The foundation also selected Gray's K-TTC in Rochester, Minnesota, as its small market television station winner for its fifth district Eagle cancer telethon, while KWCH in Wichita, Kansas, and WTBI in Doakville, Alabama, were named finalists for their exemplary community service. Also during the second quarter, the Radio Television Digital News Association awarded a combined 78 regional Edward R. Murrow Awards for excellence in journalism to 31 of Gray's local stations. The awards roster was led by 10 separate awards to Hawaii News Now in Honolulu, Hawaii, and seven separate awards to WVUE in New Orleans, Louisiana. This September, Gray will launch across the stations a new weekday news magazine program, called Investigate TVs. The news magazine will showcase groundbreaking investigations featuring Gray's award-winning Investigate TV unit plus consumer health and original content curated from Gray's 113 local markets. While we have no plans to become a new syndicated programming house, we have been pleasantly surprised by the tremendous audience reaction to our Investigate TV weekend show that airs primarily on Gray's own stations. Despite not airing at a consistent time period or having national promotion behind it, the current Investigate TV weekend program has been posting ratings that surpass many well-known broadcast and cable programs that, unlike our weekend program, are cleared in 100% of the country. This tells us that there is an audience for good quality news programming, particularly in deep-sighted pieces that highlight otherwise unknown issues and consistently produce results. Gray will make the new weekday Investigate TV+ programs available to local television stations owned by other broadcasters as well. Thanks for your time, and thanks for your interest. I now turn the call to Kevin.

Thank you, Sandy. In the second quarter, on a year-over-year basis, our retransmission revenue grew 3% as a result of contract repricing at the beginning of 2023. Our subscriber trends are down low single digits on a year-over-year basis and therefore, essentially matching or slightly beating the industry as a whole. Our network reverse compensation expenses increased by less than our gross retransmission revenue during the second quarter. As a result, our net retrans revenues grew slightly to $159 million in the second quarter. Consistent with prior years, we expect retransmission revenues to decline somewhat between the second and third quarters as subscriber churn routinely increases when spring turns into summer. Net retransmission revenues, therefore, continue to generate substantial cash flow that helps support the company during off years in the political cycle as we have this year. We have discussed many times that part of the reduction in broadcast affiliate retransmission revenues are the result of the networks exploiting the FCC streaming loophole to control the distribution of their affiliate signals on virtual distributors. Recently, the four affiliate boards organized the Coalition for Local News. This coalition is an important step forward in the long battle by affiliates to regain control of the distribution of our content, and to keep for ourselves the value that the virtual MVPDs are already paying the networks for affiliate signals. Finally, I'd like to highlight just how strong Gray's portfolio of high-quality television stations really is. We recently compared comScore's total average audience impressions during prime time for all of Gray's television stations to the broadcast and cable networks. In the month of May 2023, the ratings data indicate that Gray Television stations easily surpassed one of the big four networks' audience, and we're only a bit less than a total impressions log by the other big three networks. This is a particularly impressive feat because, unlike the big four broadcast networks, our stations are only available in 36% of U.S. television households. In addition, in May 2023, Gray's stations' total average audience impressions exceeded the combined audiences of FOX News, MSNBC, and CNN during prime time hours and during late news hours. It bears repeating that the audience across Gray's television stations exceeded all three news networks combined when our stations are available in just 36% of the country. This concludes my remarks. I'll now turn the call to Jim Ryan.

Thank you, Kevin. Good morning, everyone. Hilton, Pat, Sandy, and Kevin have shared the key highlights of the quarter and year-to-date. My comments will be brief. We are very pleased with our Q2 results, particularly with core revenue increasing by 4% in the second quarter. Regarding our Q3 guidance, we are pleased to maintain our expectation for core local revenue to rise in the low single-digit range, based on the strong performance of our 113 television stations. I would like to remind everyone that the anticipated $33 million to $43 million impairment charge related to the Diamond Chapter 11 rejection of our ACC contract is a pre-tax noncash charge. Additionally, we have a new agreement with the CW to air certain ACC games, which helps offset the loss from the former Diamond contract. Overall, the impact of these changes is not significant to our company. Our full-year outlook has not changed since we provided guidance on our fourth-quarter call two quarters ago. We continue to expect our core revenue to be around $1.5 billion, with a low single-digit increase. Our retransmission revenue is also expected to be around $1.5 billion, again with a low single-digit rise. We currently anticipate our political revenue to be approximately $60 million, which is an improvement from the $50 million range estimated on our last call, thanks to solid political revenues from the first half and substantial early presidential spending we have been recording. We expect broadcast revenue for 2023 to be around $3.2 billion. Our operating expenses before depreciation, amortization, and asset disposal gains or losses will be approximately $2.5 billion, excluding the noncash impairment charges I mentioned. Broadcast operating expenses are expected to be around $2.3 billion, with reverse network compensation at approximately $936 million. Our noncash stock compensation is expected to be about $20 million, and our noncash 401(k) expense will be around $10 million for the year. Corporate expenses are estimated at about $120 million. Cash uses for the year have not changed significantly since our initial estimates at the beginning of the year. We expect cash interest to be about $435 million. With the 5% SOFR interest rate caps applied to $6.2 billion of our floating rate debt in the first quarter, we are well protected against further interest rate increases. With these caps in place, approximately 95% of all our debt is at fixed rates. Cash taxes are expected to be in the range of $38 million to $46 million for the year, which includes a pending refund of about $21 million. Our routine capital expenditures remain around $110 million. Our preferred dividends are consistently $52 million per year, and the required annual amortization for the term loan B is $15 million. Consistent with previous statements, we expect our free cash flow for the year to be approximately $115 million. I want to reiterate that we are well positioned halfway through 2023 and look forward to a successful remainder of the year. I'll now turn the call back to Hilton.

Thank you, Jim. Well, to summarize, Gray generated free cash flow in the second quarter, and the company continues to have a strong liquidity profile with no near-term maturities. As Jim noted, we have an interest rate cap in place to protect us from further interest rate increases on our bank debt, but we envision no changes in our dividend policy. We continue to focus on deleveraging our balance sheet. Finally, while we have no term needs to refinance any of our debt tranches, we are encouraged that the trading levels of our securities continue to recover as macroeconomic recession concerns seem to be abating. With half of the year behind us now, it is clear that Gray has begun 2023 in a strong fashion and will finish the year strongly. Our efforts to deliver the content audiences want and advertisers need are evident in our solid ratings, our core advertising results, and our successful strategic initiatives. With the capital investments in Phase 1 of the Assembly Atlanta Studios development essentially complete, Gray's Board of Directors continues to direct free cash flow to paying down our debt and improving our balance sheet as we progress through the next 18 months of what we expect will be another very strong political advertising cycle. Operator, at this time, I would like to open up the line for questions from anyone.

Okay. Our first question is going to come from Aaron Watts with Deutsche Bank. Aaron, your line is open.

Hi, everyone. Thanks for having me on today. A couple of questions for me. I'll start with one on core advertising. You grew 4% in 2Q. You're guiding a lot to up in 3Q. What are the gives and takes in there sequentially? Just some general softening around the edges, and maybe you could parse out national and local for us and how they're trending relative to the low single-digit growth each had in 2Q?

Yes, I'll begin and then let Jim contribute. I believe one factor influencing this is the automotive sector, which has seen significant growth and will continue to grow in Q3. We're experiencing positive comparisons for the first time in nearly a decade since Q2 of 2022. That contributes to the overall positive outlook. In Q3, we are also observing growth in home improvement and legal sectors. While we mentioned the automotive growth, there are a few other areas, such as communications and the lottery, that are slightly down. However, we anticipate a strong overall performance in Q3.

Yes, Aaron, as we've mentioned in previous calls, local is performing slightly better than national on a relative basis. However, we noted earlier that National Auto in Q2 showed significant improvement compared to overall local. Looking ahead to Q3, the relative performance between local and national remains stable, with both up. It's not surprising that the local side is performing better, and I would highlight, as both Pat and Sandy pointed out, the strong results and focus on generating new local direct business consistently each month.

Okay. That's helpful. And maybe I'm parsing too thin here, but we've heard from some others that maybe national, which had obviously been choppy the last several quarters, perhaps turning a corner. Is that anything you'd call out? Or just it's sort of holding steady as you kind of just said?

I think you just said it.

Yes, you said it. I think from our standpoint, since our local has been exemplary for several quarters, that relative split, we think is holding fairly consistent, but we're very, very pleased with what they're both doing.

Okay. All right. Great. And then if I could...

Aaron, one other quick add to that is, remember, we've said this many, many times over the years. Our proportion of local to core is probably much higher than everybody else's. So other people, when national tweaks up or down, they may see it faster or see it proportionately more, but because of our local, we just don't see it as much.

No. It's good to hear that your local is hanging in there. So understood. On the re-trans side, it sounds like your underlying subscriber erosion landed down low single digits. Related to how you're tracking versus the industry overall, I would think the general trend we've seen since the pandemic that of job and population growth over indexing in the Southeast relative to many other areas of the country would play to your benefit. Do you think Gray over time can be a net benefactor of that theme, one that may allow you to do a little better on the gross re-trans side, given that population and job shift to an area I consider a sweet spot for you?

Hi, Aaron, this is Kevin. I think you make a good point. We certainly have a strong presence in the Southeast. I agree that as more people move to the Southeast, it leads to additional homes, households, pay-TV subscriptions, and audience growth. If the Southeast grows significantly better than other regions, it will likely provide us with an advantage. It's a valid observation.

Okay. Okay. All right. Last one for me, and again, I appreciate the time. I heard the comments around security prices rebounding as perhaps some concerns dampen around the macro picture. Jim, last quarter, you got asked about your bond prices being traded at a discount. I think that relationship still exists today. Any updated thoughts on perhaps using that as a lever to help use cash to deleverage the balance sheet, which I know is a stated goal of yours?

So Aaron, my answer to this quarter, just like the last couple of quarters is pretty consistent. I will place it under the banner of I can never say never. But consistent with what we've been saying for a while, I would say the probability of focusing on our 2026 term loan maturities versus being opportunistic on bond pricing is probably where we will continue to put our focus again on the '26 term loan maturities.

Thanks, Aaron.

Our next question is going to come from Dan Kurnos from Benchmark. Dan, your line is open.

Great. Thanks. Good morning. Hilton, can I just go back to some of the comments around Assembly? I just want to make sure that we understand that the writer's strike is not causing any necessary delays in revenue recognition. It sounds like NBC is still moving in. And separately, in the release, there's $90 million in additional cash proceeds from a quasi-governmental authority or limited land sales later in 2023. I don't know if that's part of the value on model that's incremental. Can you guys just kind of talk to that and sort of thoughts on future value unlock there for the real estate?

In terms of revenue, Dan, the majority of our income will come from rental agreements with NBCU as they take possession. Recently, we saw many 18-wheeler trucks arriving from across the country, delivering equipment and other necessities. This process will kick off soon, and we also have conversations with potential clients interested in leasing the studios we’ve retained. I am confident we will begin to see revenue, specifically in the fourth quarter of this year. Regarding reimbursements, there’s a community improvement district that encompasses the entire project. Both Pat and I serve on that Board, which has over $100 million in liquidity. This enables us to address public issues like streets and utilities. As these projects are completed and taken over by local municipalities, Gray will receive reimbursements from the CID in proportion to our expenses. So far this year, we have received around $39 million, and we expect to gain more as projects progress and finalize.

Got it. So that's just incremental reimbursement. That has nothing to do with additional elements or sale leasebacks or any other incremental value unlock you could achieve with the real estate, correct?

Correct. That is purely a balance sheet activity. It is not a P&L activity.

Okay. Got it. And then just going back to the guide for a second. Jim, I just also want to double click on maybe lapping the Meredith Station acquisitions. I know you said we expect the goodness as it's been, you guys have outperformed the broader industry by a few points now on core. Is that something else that we should be factoring into kind of the Q3 guide that sort of goodness starts to fade a little bit?

We closed two years ago, not one year ago.

So yes, I mean we closed on Meredith two years ago. We said consistently starting sometime last year through every call since then that we had thought that there was revenue upside in especially in certain Meredith markets. We have consistently said for several quarters that we are reaping the benefit of that assumption that assumption was never into the synergies of the deal we announced. We see continuing benefit from the Meredith markets. They are making tremendous progress that's in part why we outperformed, I think, the industry in Q2, but not by a few points, but what I'm reading is by probably close to eight to ten points. So please give us credit for that. And that will continue for the reasonably foreseeable future in garnering benefit. We've commented that, that's both on the local side and on the digital side, also, to some extent, on the national side. But also the entire rest of the portfolio is performing very strongly. So part of it's the Meredith revenue upside story that we've been talking about for a while, but the rest of the portfolio is doing very well, too.

Certainly wasn't a negative comment. I'm just trying to understand any lapping elements going into Q3. So that...

I didn't take it as a negative. I just want to get some credit.

Fair enough. Last one for Mr. Kevin, obviously, just a question on re-trans. I just want to make sure that the Q2 number, is that mostly because sub-churn came in below what you expected? Or was there any kind of true-up noise? I know most of your trips happened in Q1, so just to make sure?

Our growth came in $1 million higher than we anticipated because sales did not decline as much as we had projected. We have been trying to be particularly conservative in all our guides over the past year since we were somewhat surprised by political developments last fall. Therefore, we are trying to model things conservatively to avoid any negative surprises. As a result, our subscriber numbers came in a bit better than expected.

Got it. All right. Cool. Thanks, everybody. Appreciate it.

Thank you, Dan.

Our next question is going to come from John Dickson with Artemis Investment. Your line is open.

Good morning, Hilton and your team.

Good morning.

I just wanted to tell you as an investor in your company, I'm very impressed with your portfolio and the leadership of your team. One of my questions, one of my concerns from a long-term picture is your debt load. I just wanted to question you guys, can you give some more insight into what you're going to pay that debt load down?

Well, let me begin, and then I'll let Jim follow up with all that. We have had a pretty direct communication with The Street and all of our investors about what our intentions were to do, and that was to grow the size of our portfolio. And we have allowed our debt ratio to grow into the five range. And then we have quickly paid it down. That happened after the acquisition of Shores. It happened after the acquisition of Raycom. And we're in the same situation now. Our percentage ratio in my judgment is really not totally accurately reflected because we have such a high-quality portfolio of television stations. During a political year, we have a very strong proven record of over-delivering on political. So as you measure the ratio, the quarters that we have a lot of big political roles. And so we have paid down about $600 million in absolute debt over the last several quarters. And that is our intention to do that going forward. So I think that you will see us continuing to reduce our ratios and our absolute debt as well.

Well, thank you, Hilton. And that's really the only question I had. I'd just like to leave it as I really appreciate the leadership of your team. I think you're doing well. And I'm very impressed with the quality of your portfolio. Thank you very much.

You're awfully nice. I certainly appreciate it. Everybody does.

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

Yes. Maybe first, just to pick up on the last question. So it would be great, Jim, if maybe you could just walk through some of the puts and takes to get the free cash flow available for debt paydown this year. I know you talked to a free cash flow number, but between maybe some of the dividends and the CapEx. How much cash do you think you'll be able to use for debt reduction this year? And then I assume that's going to be a big number next year. So any kind of look on the amount of debt you might be able to bring down with the big political year coming next year?

Our free cash flow, as we define it, is projected to be around $150 million. This figure is calculated before accounting for our common dividend, which currently amounts to about $28 million annually, and before the anticipated net investment in the assembly project for the full year of 2023, which is expected to be roughly $55 million on a net basis. We plan to pay down some debt by the end of this year. Historically, political years have been very favorable for us, as we've consistently outperformed our peers in terms of political revenues on a per capita basis. We believe 2024 will be no different. Political contributions provide cash in advance, directly benefiting our cash flow. Therefore, we should be in a strong position to make significant debt repayments, especially in the latter half of next year. Typically, with the exception of 2022, about half of our political revenue is realized in the fourth quarter, which will support our debt paydown efforts in 2024. You can refer to our investor deck for insights on our past performance in political years; while I can't assure that historical results will repeat, our previous free cash flow during such periods should be informative for everyone.

Thanks, Jim. And maybe to follow-up on that political theme, this could be for Jim or for Pat. I think your guidance for Q3 in political is lower than what you did pro forma in 2019. Is that just some conservatism after some of the more dynamic nature of political spending? And maybe related to that, Pat, how many political impressions do you pick up in core in the back half of the year? Because I imagine that's a pretty big tailwind given the level of crowd out you had last year?

It will definitely be impactful in September and October in terms of crowd out. We are being conservative for clear reasons. The former President is a significant wildcard, and his situation influences this conservatism. Therefore, it could turn out much better or fall within a wide range. Particularly in October of last year, there was a notable crowd out factor in both September and October.

Yes, when comparing to 2019, we are likely a bit more cautious. As Pat mentioned, there are valid reasons for that. We've had an exceptionally strong performance in the first half of the year, starting with a political guide that I believe was around $40 million compared to the current $60 million guide. Our expectations have certainly improved over time. It's important to remember that aside from the early Presidential money for 2024, this year is a typical off-year. The off-year is progressing as we anticipated, and so far, we haven't encountered any significant concerns. Additionally, the key factor in politics for the third and fourth quarters will be the developments in early 2024, particularly in the early primary states. We expect to see increased funding in those states as the year progresses since we are well-positioned there. Ultimately, for this non-political year, we've noted the unprecedented political spending as we approach the 2024 Presidential cycle. We believe that the political climate for 2023, which is generally an off-year, will ultimately stabilize.

Thank you. And then maybe just the last one for Kevin. We do our own sub counts and forecast as well in your low single-digit number certainly sounds better than ours. I think some of the delta may be Paramount Plus and Peacock, which I know you do get paid on for your stations as well. So number one, is that correct in terms of the way you're doing your sub counts? And is there any way to think about the impact of Paramount Plus and Peacock within that low single-digit rate that trend now?

Steven, we have always, always included every distributor who pays us a fee for the linear distribution of our signals as a distributor when we do subscriber counts, and we have always counted a subscriber with Paramount Plus before that CBS Access when we count subscribers. We are getting paid a monthly fee for subscription for the 24x7 distribution of our signal. So we have never excluded them, and I don't see a reason to exclude them otherwise. In terms of magnitude of Paramount Plus and Peacock, I'm concerned about giving that percentage out. We've been asked, I think, every call for that. We're not supposed to be disclosing the sub numbers for any distributor, and we provide the combined number. I think it provides a fairly easy roadmap for people to figure out what Paramount Plus numbers are, and we're not prepared to do that. We are the biggest CBS affiliate. And so you can presume that between Peacock and Paramount Plus, it's Paramount Plus is a very large part of that, and Peacock is a fairly small part of that.

Great, thank you.

Thanks, Steven.

Our next question is going to come from Nick Zangler with Stephens Inc. Nick, your line is open.

Hey, everyone. Thanks. First off, I really wish I received compliments like the last analyst did. It's always nice to hear and kind of them to do so. Now, regarding the question, if you exclude the contribution from Autos to growth this quarter, which I suspect is quite significant—assuming Autos makes up about 20% of the mix and is growing at 20%—I'm curious how you assess local performance this quarter and the outlook without considering Autos. Are there any other sectors that are noteworthy for contributing to the growth outlook and comments?

We have consistently stated for several quarters that home improvement remains very strong, and Q2 is no exception. Our expectations for Q3 are equally positive based on our long track record. Additionally, as we have mentioned for at least a year, the legal sector has performed exceedingly well. You are correct that part of our growth story relates to the recovery in the auto sector, which we anticipated would occur, and it indeed has. However, there are other positive areas as well, although some categories, such as fast food, continue to face challenges that have persisted for quite some time.

Got it. That's helpful. And then I did want to talk on the sports rates because you guys kind of brought it up. But basically, I'm wondering if you're able to provide really any details on the structure that you've got with the Phoenix Suns and Mercury. And perhaps alternatively, you spoke to just many different types of structures these sports deals can take. I'm wondering if you could just actually just walk us through that. Like what types of structures do you see, just like whether or not there's typically fixed payments, potential advertising rev share agreements, just anything to kind of help us understand what these structures look like as potentially more are to be announced as we push forward?

I'll start. It's Pat. There are countless ways to structure these deals. Variations include distribution methods like all over the air, some over the air, some cable, some direct-to-consumer, and combinations of these. There are many factors that influence how inventory is sold. For instance, does the rights acquirer sell the inventory or does the team do it? Who handles the production? Are there pre and post elements? There are numerous variables that affect these discussions. We're at a stage where many of these issues are being addressed, but the situation remains quite fluid. The same goes for the Diamond situation, and we are tracking the areas we need to, taking action when necessary. We believe there will be opportunities in this space.

Got it. And then, all right. Last one for me here, just on political, given I think some estimates are coming out maybe $11 billion in this cycle, maybe $12 billion for the cycle. And obviously, the potential for there to be some pull forward, I guess, into 2023. As you look across your markets, are there any maybe worth highlighting where you are seeing political ad spend at this point in time significantly above or just different from what you would have seen at this point in time in the last presidential election that might be a leading indicator of just how large the spend might be as we think about the whole cycle? Thanks.

Short answer is, no. People aren't really advertising outside of the early primary states to any noticeable extent. I mean, look, getting any money now for the Presidential primary is still a big deal. That's why Iowa is doing really well, along with some other states that are generally performing well. Our Governor's race in two states, the State House race in Virginia, and then there are some issues that have come up from time to time, but Presidential primary money has historically been a fourth quarter event. It's now happening a little early, but it's primarily taking place in Iowa for us.

Got it. Thanks, guys. Appreciate it.

Thanks, Nick.

Our next question comes from Alan Gould with Loop Capital. Your line is open.

Thank you. First question, Kevin, can you provide more details about what the affiliate boards will negotiate to secure virtual distribution? Are there any benchmarks we should anticipate? Are you attempting to change laws? Can you give us further insights on this?

The coalition aims to encourage the FCC to reopen comments on a 2014 rule-making that examined whether the FCC should update its rules to consider the potential emergence of virtual MVPDs. The comments made in 2014 are clearly outdated in 2023. At this point, we are requesting that the FCC reopen the proceeding to allow people to inform them about the developments in the industry over the past nine years since these questions were first posed about a sector that essentially did not exist at that time. There has been bipartisan support in the Senate for the FCC to open the window and listen to what has changed.

Any time frame when we should hear whether the FCC chooses to open that window again?

It's entirely up to the Chairwoman. So I don't know. So it's entirely up to Chairwoman.

Thanks. And Jim, two questions for you. Easy one. Is that free cash flow estimate $115 million or $150 million? And on Diamond Sports, is that all behind us now? Or is there any potential liability remaining?

So free cash is approximately $150 million. The issues with the Diamond bankruptcy and its impact on our historic agreement are behind us. While technically a Q3 event, the numbers are available and we have moved past it. As a result of the Diamond contract rejection, we have secured a new contract with the CW for ACC games. The net impact on the company as we move forward will be a significantly immaterial number.

Okay, thank you very much.

Thanks, Alan.

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

Thank you. I wanted to ask, first off, obviously, your core advertising numbers are much, much better than your peers out there. I wanted to give you a chance to just explain why you think you guys are outperforming their peers so much out there? I mean we all have our thoughts on, but like to hear your bullet points on why you think you're outperforming so much on core, please.

Well, this is Jim. I'll start, and then Pat and Sandy will join in. I won't comment on our peers except to acknowledge that our results today clearly lead the peer group in core advertising, both for the quarter and year-to-date. It's best to direct those questions to them; I can't and won't speak on their behalf. As for Gray, I think it's the same message we've shared for decades. The Q2 results, like many in the past, demonstrate our strong position. We have an exceptional portfolio and asset quality in the television broadcast business, which has been consistent for decades. We've always emphasized strong local operations with a keen focus on local news. When you have a solid local news operation integrated with a larger television operation in most of the 113 markets we serve, it allows us to perform consistently well and often outperform our peers. What we're expressing this quarter isn't different from what we've said in many other quarters.

I would add on that, it's Pat. I would add at the risk of being a little bit repetitive. We talked about our new local direct efforts. We're packing on north of $30 million a quarter in new business every quarter, and that's growing. We talked a little bit about the Meredith impact, which we telegraphed back when we closed on Meredith. We thought there was revenue upside there, and there is, and you're seeing the impact of that. Finally, and again, something I've talked about quite a bit on previous calls, our training efforts in our category-focused approach that's paying great dividends. We have a really well-trained sales staff, and we invest in category experts to move our business forward. And I think you're seeing the result of all that right now.

And my second question, if I could. Your comments earlier about the Phoenix Suns arrangement for games on your stations there. Just discuss if you would, what percent of the games or number of games you're anticipating showing in your television stations in the season?

We estimate that the number is flexible based on how many games are aired on the networks, but historically, it has been around 70 games.

That's a lot. Okay. Obviously, you're trying to do more of these in other markets if the opportunity arises, I assume, because economics must be quite favorable to you.

Yes.

Okay. And then also, on your local news ratings, early morning news and maybe late night, can you give us a sense on how those ratings trends are going to get separate the two, early and late day?

Yes, we have several strong television stations. I can't say there's a significant change in the numbers. They remain substantial. There was a slight fluctuation in morning news ratings due to COVID, but we've recovered. Do you have any insights on that, Sandy?

Yes, our audience levels in the morning news have significantly increased, especially in some of our larger markets and former Meredith markets. We are very pleased with this growth. The same can be said for late news, as we are also seeing positive trends in several of those markets.

Sorry. So you suggest maybe versus pre-pandemic 2019 levels, the ratings are, say, flat or up?

No. We're just saying there's been a bit of a normalization. And we're also saying that in the Meredith markets, which are the larger markets we have, we're seeing audience growth in a number of those markets.

Okay. My last question, if I could, this ongoing Hollywood strike. If this thing continues here, do you anticipate any negative ramifications for your TV stations here?

This is Jim. I'll begin, and Pat or Sandy can chime in as well, but we don’t see this as a major challenge either way. It will certainly have some modest impact on primetime as we go through the fall, depending on how quickly the strikes get resolved. We hope they are settled amicably for everyone involved sooner rather than later, but ultimately, all strikes do get resolved. Given the limited inventory we have available for primetime, any impact as we progress through September and the fourth quarter will not be significant. We have experienced this before, and it’s not a big concern for us, considering the local broadcast niche we serve. We are not a network, so it’s not a significant issue for us.

Great, thank you.

And our last question is going to come from Jim Goss with Barrington Research. Your line is open.

Thank you. I have one more question regarding sports programming. You've mentioned your involvement with Phoenix and the ACC, and you’re making a strong case for getting engaged. They recognize that this is still in the early stages of development. However, I’d like to know how far you intend to pursue this and how extensive your efforts will be. I assume there is substantial local competition for those rights, and I would appreciate your thoughts on that. Additionally, a significant concern seems to be how this impacts network scheduling, especially considering that in many instances, it could disrupt primetime programming. I'm curious about how you see it fitting into that context.

Yes, I'll start. We have several independent television stations in larger markets, and Phoenix is one of those. In markets with these independencies, we see it as a great opportunity. You'll notice that affiliated stations are utilizing subchannels to broadcast these games. This means that beyond just the CBS affiliate, there are other channels available for airing professional sports games without any issues. The situation will differ by market, but especially in larger areas where we have independents, like Phoenix, Atlanta, Portland, and two signals in Cleveland, we see significant opportunities in those markets.

Okay. And one last thing. After years of scaling up your platform and developing Assembly Studio and a variety of other things. Do you have any further growth ambitions beyond focusing on your high-quality expanded platform, say, for the other 3% and get into the cap limit? Or are you sitting still for a while and just evaluating what you've been undertaking?

Jim, regarding the last three points of the cap, we've consistently stated that we believe there are no must-have stations left over time. I emphasize "over time" because there is nothing available today. However, if the right opportunity arises at the right time and when we feel comfortable with our leverage, we might consider transactions to acquire the last three percentage points. This would definitely depend on the specific circumstances, our company's outlook, the price, and our leverage since we do not see any must-haves remaining. We have been very clear that the Phase 1 studio project at Assembly is essentially complete and will finish in the coming months. We've also mentioned that there remains acreage to be developed, which Hilton referred to—this is a long-term project for us that we will approach thoughtfully. Beyond that, we've long viewed Assembly Studios as a complementary business to our core operations. We're open to further acquisitions that make sense for our company, whether in our core TV business—though such opportunities will be quite limited—or other complementary areas. However, any move must align with our objectives, and we are not looking to drastically change our long-standing core business and philosophies.

Okay, thank you very much.

All right, thank you, Jim.

This concludes your call. You may now disconnect.