Earnings Call Transcript - GTN Q4 2024

Operator, Operator

Good morning, and welcome, ladies and gentlemen, to the Gray Media 2024 Q4 Earnings Call. (Operator Instructions) And without further ado, I will now turn the program over to Chairman and Chief Executive Officer, Mr. Hilton Howell.

Hilton Howell, Chairman and Chief Executive Officer

Thank you so much, operator, and good morning, everyone. As the operator mentioned, I'm Hilton Howell, the Chairman and CEO of Gray Media. Thank you all for joining our fourth quarter 2024 earnings call. With me here as usual in Atlanta are all of our Executive Officers: Pat LaPlatney, our President and Co-CEO; Sandy Breland, our Chief Operating Officer; Kevin Latek, our Chief Legal and Development Officer; and Jeff Gignac, our Chief Financial Officer. As usual, we will begin with a riveting disclaimer that Kevin will provide.

Kevin Latek, Chief Legal and Development Officer

Thank you, Hilton. Great introduction. Good morning, everyone. Today, we filed on Form 8-K our earnings release and investor presentation. Later today, we will file with the SEC our annual report on Form 10-K. These materials are all available on our website, www.graymedia.com. Included on the call may be a discussion of non-GAAP financial measures, in particular adjusted EBITDA, leverage ratio denominator, and certain leverage ratios. These metrics are not meant to replace GAAP measurements but are provided as supplements to assist the public in its analysis and valuation of our company. Further discussions and reconciliations of the company's non-GAAP financial measures to comparable GAAP measures can be found on our website. All statements and comments made by management during this conference call other than statements of historical facts should be deemed forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors that are contained in our most recent filings with the SEC. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I now turn the call to Hilton.

Hilton Howell, Chairman and Chief Executive Officer

Thank you, Kevin. You do that particularly well. Good morning again, everyone. For many reasons today is a great day to discuss with you the state of our company and its direction. This past Sunday on NBC and obviously on all of our NBC-affiliated stations, Grosse Pointe Garden Society, the first of the broadcast shows produced at our own Assembly Studios, premiered at 10:00 p.m. Eastern Time. Next, this Monday, on CBS, the first new soap opera in over 30 years, Beyond the Gates, also shot at Assembly, premiered at 3:00 p.m. Eastern Time, and then every day so far this week on all of our stations and across the country. Significantly, Beyond the Gates is a coproduction between CBS and the NAACP that focuses on a very successful African-American family in Maryland, the Dupree family, a milestone show in broadcast history, and we are exceptionally proud to help get it on the air out of Assembly Studios here in Atlanta. And tonight, we are thrilled to reinforce the news that across 24 Gray Television markets, the Atlanta Braves' America's Team, will debut on live television from spring training in Florida. Tonight's game against the Washington Nationals will be the first of 10 preseason games produced by Gray that will air across Braves Nation, and we will follow up with 15 regular season games simulcast across the same footprint. These are accomplishments that we are truly proud of. Now let's turn to our financials. We are very happy to announce that our results for the fourth quarter finished better than our guidance on both revenues and expenses. Total revenue in the fourth quarter of 2024 was $1 billion, an increase of 21% from the fourth quarter of 2023. Total operating expenses in the fourth quarter of 2024 were 2% below the low end of our previously announced guidance. Net income attributable to common stockholders was $156 million in the fourth quarter of 2024, compared to a net loss attributable to common stockholders of $22 million in Q4 2023. Adjusted EBITDA was $402 million in the fourth quarter of 2024, an increase of 86% from the fourth quarter of 2023, due primarily to political advertising revenue. In addition to these operating results, we're proud of the progress we made on our balance sheet during the fourth quarter. Just two weeks after our third quarter earnings call, we announced that we had completed a series of transactions that collectively reduced the company's principal amount of debt outstanding by $278 million since October 1. During the full year of 2024, we reduced the company's total principal debt by $520 million, exceeding our $0.5 billion goal. That November announcement was a fitting way to complete the year in which we executed on our pledge to concentrate our free cash on reducing our debt and improving our balance sheet. In addition to reducing our total debt during the year, we also refinanced our debt to extend our maturities, increased our revolving loans available, and greatly lowered our capital spending as we completed numerous projects. In the end, we finished the year with a lower leverage ratio than we began the year. Operationally, we continue to enhance our local content offerings in 2024. We devoted tremendous efforts to reaching new local sports back to our television stations. Last year's milestones included a historic deal, as I had mentioned earlier, bringing Atlanta Braves games back to broadcast on Gray's TV stations in our hometown of Atlanta and throughout most of the Southeast this spring. We also renewed our affiliation agreement with ABC network for four additional years. In 2024, our InvestigateTV and local news live franchises both continued their momentum with viewers and both also significantly expanded their distribution across broadcast, digital and mobile platforms. The success of NBCU and CBS at Assembly Studios provides wind in our sales as we continue discussion about leasing our remaining studio facilities with other production companies. We expect to have more announcements about Assembly Atlanta throughout this year. That will include progress on the buildup of other parts of our mixed-use campus on the land that we own, importantly utilizing financial resources of our future business partners at the site. With our significant capital investments now largely behind us, future projects at Assembly Studios and Assembly Atlanta should enable the development to expand its financial contributions to our entire company. We are also encouraged by signs from Washington pointing to a long overdue reform of the regulatory constraints that have harmed local broadcasters. Every day we compete for local ad dollars with tech giants that are free from constraining rules that we are shackled with; these rules were enacted decades ago. It remains a fundamentally wrong and harmful policy for the government to burden our local news sales employees with these decades-old restraints while imposing essentially no restraints on much larger companies who compete vigorously with us for the attention of viewers and advertising budgets. We are optimistic that the federal government, as well as our upcoming negotiations with our network partners, CBS, FOX and NBC, will recognize the reality of today's media marketplace in 2025. Such actions will enable us and our peers to operate more efficiently, compete better against the tech giants, and deliver better services for our viewers, our advertisers and, indeed, our shareholders. At this time, I would like to turn it over to Pat LaPlatney.

Pat LaPlatney, President and Co-CEO

Thank you, Hilton. Last year, our business was remembered primarily for political ad revenues. Broadcasters overall took in record revenue from political ad spending, and a lot of new dollars that entered the space were used to buy ads on Connected TV. Gray also sells ads on Connected TV platforms and has a dedicated team focusing on ways to better leverage our strong digital audiences and local connections in the political ad space, as we expect that sector to grow going forward. Overall in 2024, we saw increases in each category of political ad revenues other than Senate, which is our largest category. Despite the Senate map not favoring Gray's footprint in 2024, we still believe that our political advertising revenues for the year exceeded our peers in total dollars and on a per-television-household basis, based on the results announced by our peers right after the election. The $250 million of political ad revenue in the fourth quarter had the expected effect of displacing a large amount of core advertising revenue through election day, as happens every election year. As we mentioned on the Q3 call, we also heard from our commercial advertising clients in the third and fourth quarter about some hesitancy around advertising during the election given the tone of some of the political campaigns. We did, however, exceed our Q4 core guidance. The hesitancy and caution around advertising we saw during last fall's election season persisted into January; we think this resulted from economic uncertainty due to potential government policy changes. This caution is most evident among our automobile advertising customers. We hear that some dealers and manufacturers are pausing or reducing their advertising campaigns as they evaluate how tariffs and continued high interest rates may impact near-term demand for new and used cars. Our January core ad revenues were down from last year, our February core ad revenues were about the same as last year's excluding Super Bowl bookings and Leap Day, and March pacings are currently showing improvement and tracking roughly flat to last year's actual core ad revenues. Overall, for the first quarter of 2025, we currently expect that core advertising revenue will be down 7% to 8% compared to the first quarter of 2024. Again, there are three primary factors causing this decline. First is the political or economic uncertainty that I just discussed. The second impact on core results was from the Super Bowl airing on our 33 FOX channels in 2025, compared to our 54 CBS stations in 2024. Our FOX stations did very well, increasing their Super Bowl advertising revenue by about 50% from the last time the big game aired on FOX in 2023. This, however, was still only about half of what we sold during last year's Super Bowl, which aired across our much larger CBS footprint, including our CBS station in the Chiefs' hometown of Kansas City, as well as St. Louis, Topeka and Wichita. Finally, our first quarter of 2025 will be negatively impacted by one less billing day due to Leap Day, which we estimate impacted our core revenue by $3.5 million to $4 million. Excluding Super Bowl and Leap Day impact, our core advertising revenue guide for the first quarter 2025 is down 3.3% to 4.6% from the first quarter of 2024. We are encouraged by our success in acquiring pro sports rights Hilton mentioned the Braves, which will impact 24 Gray markets. We announced our Memphis Grizzlies deal this morning and expect to announce a couple more agreements in the next few weeks. We anticipate having local sports product in 75 to 80 Gray markets by the end of the first quarter. With that, I'll turn it over to Jeff.

Jeff Gignac, Chief Financial Officer

Thank you, Pat. As Hilton mentioned earlier, reducing debt and leverage remains our top capital allocation priority, and we made significant progress again in the fourth quarter. As everyone saw in our release, we finished the year at 2.97x first-lien leverage and 5.49x total leverage. As a side note, our leverage ratio as defined in our senior credit agreement does not allow us to take immediate credit for cost containment initiatives, and that may not be comparable to what is indicated by publicly available documents for others out there. To be clear, we've not retroactively included the benefits from the $60 million of cost initiatives we announced last quarter in our December 31, 2024 calculations. We are, however, on pace to be at the full $60 million run rate by the end of this quarter. We've been very transparent and opportunistic on our debt reduction efforts and are proud that we reduced our principal balance by $520 million during 2024. Through use of open market repurchases, we captured $46 million in debt discounts during 2024. We continue to have our $250 million Board authorization available for further open market repurchases. As we've demonstrated, we'll continue to be thoughtful and nimble in deploying our liquidity to further delever the company. We entered 2025 in a very strong liquidity position. As of December 31, 2024, we had $135 million in cash, plus $680 million revolving credit facility available. We expect that the next political cycle in 2026 will provide significant cash that, together with the liquidity I just mentioned, will be more than sufficient to address our remaining $528 million 2027 bond maturity. While repaying debt is our number one capital allocation priority, we could also access the debt markets if attractive terms and pricing are available. A couple of other items to mention: our cash taxes were a little above our Q4 guidance, primarily due to taxes on cancellation of indebtedness income. Our CapEx came in slightly below our fourth quarter guide at $96 million, and we expect slightly lower CapEx again in 2025. Yesterday, our Board of Directors declared our regular quarterly common dividend of $0.08 per share and the cash payment of our quarterly preferred dividend. As a reminder, the common dividend is a small use of cash for the year that helps the company on the equity side of the balance sheet. Going forward, the Board will continue to evaluate our dividends in light of our financial position, capital needs and other appropriate factors on a quarterly basis. Before I turn the call back to Hilton, a couple of comments on what we're seeing on retransmission consent. Over the last two years, our traditional MVPD subscriber base has declined essentially at the same year-over-year overall rate. We're encouraged, however, by recent subscriber reports from major cable companies showing a modest improvement in their rate of sub declines, which we attribute to a number of factors discussed on many of our prior calls, including better consumer value proposition by staying with cable. As you know, we entered into a four-year affiliation agreement with ABC at the end of last year. That agreement and the upcoming renewals this year with the other broadcast networks provide opportunities for us to rebalance the economics of those deals in light of the MVPD subscriber erosion and loss of exclusivity that have occurred since our last renewal cycle. It's worth noting that our network affiliation fees increased for many years at double-digit rates. Over the past few years, those network affiliation fees have flattened out. Even better, we booked the first ever year-over-year decrease in network affiliation fees in 2024, which we anticipate will continue and even accelerate. This concludes my remarks, and I'll now turn the call back to Hilton.

Hilton Howell, Chairman and Chief Executive Officer

Thank you very much, Jeff. And now operator, I'd like to open up the call to any questions that anyone may have.

Operator, Operator

(Operator Instructions) We'll take the first one, Mr. Aaron Watts of Deutsche Bank. Your line is now open.

Aaron Watts, Analyst, Deutsche Bank

All right, thanks for having me on. I have two questions; maybe I'll just cover one at a time. The first is around core advertising. Your comments on the softness at the end of 2024 and into 2025 seem to echo your peers. Given the modest firming up you saw as the first quarter played out, as you look ahead, do you think core ads can move to growth on a full year basis? And if so, what might drive that?

Pat LaPlatney, President and Co-CEO

Yes, Aaron, it's Pat. I think the answer is yes. It's early, but we are encouraged by current second quarter pacing. Some of those categories that have been challenged over the last four to six quarters are showing improvement at this point. Based on the data we have today, I would answer yes to your question and say that as we look out a little bit, things are more encouraging.

Hilton Howell, Chairman and Chief Executive Officer

And Aaron, this is Hilton. Can I add just a little bit of something to that? We discussed this at length in our Board meeting yesterday. A lot of our weakness is in the automobile department. For the first time since the end of World War II, automobile producers don't know what their cost of goods sold are going to be. Many parts come from Mexico and Canada and other places around the world. As we discussed, tariffs are putting a natural chilling effect upon advertising in the automobile sector. That will settle out. As President Trump has said, there may be some initial pain. This too will pass. When they know exactly what prices they need to sell their products profitably, I think you're going to see the automobile sector returning to advertising.

Aaron Watts, Analyst, Deutsche Bank

Okay. That's helpful commentary. My second question is around expenses in the first quarter. Can you parse out your guide, which looks relatively flat year-over-year, how much of the cost efficiencies you've highlighted flowed through in the first quarter? And what other factors are at play there, including any incremental sports rights? How should we think about expenses overall as the year unfolds?

Jeff Gignac, Chief Financial Officer

Yes, Aaron, I'll kick off and others can weigh in. As we think about the flow-through of the initiatives we've announced, there's probably, if I had to handicap it, about two-thirds to 75% of it flowing through in Q1, and then it will build from there. It also doesn't mean that we're necessarily done. We look at everything every day and try to be really smart about where we're spending. For the full year, our hope is that we'll be able to, as we've said before, keep the overall rate of growth on the expense side below inflation and potentially even get it to turn negative during the year.

Pat LaPlatney, President and Co-CEO

Aaron, just to amplify what Jeff is saying: we look at these numbers every day and are trying to find ways to rein in costs. I can think of a few initiatives over the last three or four weeks that may not have been part of the big project we announced in the fourth quarter, but—like Jeff said—we're looking at it every day.

Aaron Watts, Analyst, Deutsche Bank

And so offsetting some of those costs you're taking out, what were some of the offsetting ups in costs that are playing into the flat overall guidance in Q1?

Jeff Gignac, Chief Financial Officer

We still have to run very strong local businesses, and we have to attract and retain the talent across the firm. We did give raises that are ordinary course of business. With roughly 9,700 employees, that produces some uplift. There's some normal increases in other things that are contractual, but other than that, it's really—as Pat said—looking for the most efficient way to continue to deliver a very high-quality product in the markets that we serve.

Aaron Watts, Analyst, Deutsche Bank

Okay. Appreciate the time. Thank you.

Operator, Operator

All right. Next up we have Daniel Kurnos of The Benchmark Company. Your line is now open.

Daniel Kurnos, Analyst, The Benchmark Company

Great. Thanks. Good morning. Hilton or Pat, since you talked about the Braves, I have a question. With the somewhat public breakup between Major League Baseball and ESPN, RSNs have picked up a bunch of local games and other sports. Do you view that as an opportunity? Separately, Hilton, you've talked a lot about expanding the mixed-use zones with regards to Assembly. It seems like that's starting to move forward. I'd love to get a sense on TAM, timing, monetization, and how we should think about contribution this year or next year.

Hilton Howell, Chairman and Chief Executive Officer

Well, you heard this in Pat's discussions. Let me start with sports first. It's a remarkable opportunity. I think by the end of this quarter, as Pat articulated, we will have live professional local sports in 75 to 80 markets across our 113-market footprint. That's amazing. We have been working assiduously. A year ago, we had Arizona and the Suns, and now we have stations across our footprint. If you take a look at our investor deck, you can see the Gray regional sports networks that we created on our own, all in broadcast, and we are immensely proud of what we're able to do, not just with the professional sports, but with local sports teams down to the high school level across these networks. I think that's going to be hugely additive in terms of viewership and profits because it creates a halo around the stations and attracts viewers. A year ago we didn't have that. It's a great addition to our portfolio. Now Assembly: the studios are finished. They are making shows. As I mentioned, I am immensely proud of what Grosse Pointe Garden Society on NBC did Sunday night and proud of Beyond the Gates. From a business standpoint, I couldn't be happier with Assembly Studios and the Georgia film production that we have in the state. In terms of Phase 2, I'm not in a position to prudently announce anything yet, but we are looking at growing other assets, largely in partnership with other companies. We've had a lot of interest. We do not have a large capital expenditure budget for Assembly. We will contribute our land and our partners will put in capital as they decide. We expect to add profitable operations to it, not materially using our balance sheet. The remaining 80-some acres can begin adding profits to the broader company, which we're very excited about. We will take deals step by step and we delayed some of this because the market wasn't right. Banks weren't lending in the same way. We're seeing more activity now. We're very bullish about opportunities and partnerships going forward. I hope that answers your question, Daniel.

Pat LaPlatney, President and Co-CEO

Dan, I'll touch on the ESPN and baseball point. I'm not sure that's a huge opportunity for broadcast necessarily. That particular change—if the Sunday Night package ends up in syndication, I kind of doubt it. But the reality is, if you look at our investor deck and the sports section, there's a lot of baseball that's going to land in small packages on broadcast television this year, and we're involved in many of those. The halo impact of having sports on your stations is very real.

Sandy Breland, Chief Operating Officer

Dan, these relationships not only bring viewers to the games, but there's an overall halo effect. We're seeing that. Phoenix is a perfect case study: we're in our second full season with the Suns and have seen advertisers who came to us for the games now rediscover the power of broadcast and local broadcast reach, and they are now advertising in other dayparts. We've seen that halo effect across the board.

Daniel Kurnos, Analyst, The Benchmark Company

It is very comprehensive, guys. Pat, we'll see how they end up carving it up—maybe they'll follow NBA and NHL.

Operator, Operator

All right. Moving right along, next up we have Craig Huber of Huber Research. Your line is now open.

Craig Huber, Analyst, Huber Research

Thank you. On Assembly Atlanta, could you give us the updated figure for what the total cost is for the project, gross and net cost? Let me start there, please.

Hilton Howell, Chairman and Chief Executive Officer

Land cost, acquisition cost, and building costs is roughly $500 million, more or less.

Jeff Gignac, Chief Financial Officer

Specific numbers are in the 10-K, which we are filing later this afternoon.

Craig Huber, Analyst, Huber Research

Roughly $500 million net, is that what you're saying?

Hilton Howell, Chairman and Chief Executive Officer

Yes, net or gross—I didn't look at it that way in the moment.

Craig Huber, Analyst, Huber Research

Very good. You mentioned $27 million to $28 million of production company revenue in the first quarter—that'll be up, I guess, $5 million to $6 million over a two-year basis. Do you expect that number to ramp up significantly as the year progresses? I'm trying to get a sense of the ROI you're getting off that $500 million.

Hilton Howell, Chairman and Chief Executive Officer

The answer is yes, but a couple of things to keep in mind. The immediate impact will be added revenue as more productions build. Hollywood has had a lot of issues, including strikes that slowed everything in 2024, which were not under our control. But productions continue, and I'm excited about what we have in place. For the first time in Georgia, we actually got a broadcast TV show before streaming or cable. We have Grosse Pointe and Beyond the Gates on our stations. We're probably about 70% occupied in the stages, so there's about a 30% upside in booking, and we have quotes out for every stage not currently filled. We're seeing more robust activity in film and television production. I can't talk about individual projects many times because deals come under code names, and they keep publicity controlled. Immediately you'll see returns from the studios. We have another 80 acres not currently adding value, and as I mentioned, we're not going to spend a lot more capital but will enter into partnerships for a variety of assets. It's comparable to developments like the Battery for the Braves—adding immense value to the franchise and audiences. We'll take it deal by deal and step by step.

Craig Huber, Analyst, Huber Research

My second question: on potential deregulation, do you feel that you will be a significant participant if deregulation happens or if assets become available? Or does your debt load preclude you from participating much? How are you thinking about that?

Hilton Howell, Chairman and Chief Executive Officer

If we do a deal, it will be a smart deal. There are many things we'd be interested in doing. If deregulation occurs as indicated, there are opportunities for swaps and acquisitions. We've been in this position before and have done acquisitions that delevered the company. We'll look at each deal and each opportunity as it comes. One of the strengths of our company is that there's no must-have deal. We have the finest footprint in broadcast. There's no peer that could have delivered what we delivered to the Braves in Braves Nation across 24 markets. Look at our investor deck for more detail. We hope to replicate successes we've had, like in the Gulf Coast with the Pelicans, in other places.

Craig Huber, Analyst, Huber Research

My last question: you talked about the potential for retransmission consent subscriber declines to moderate. How are you budgeting sub declines in your financials for this year? Are you expecting it to materially get better, say, in the back half of the year on a year-over-year basis?

Kevin Latek, Chief Legal and Development Officer

We do expect the rate of sub declines to slow, as we saw some encouraging signs late last year similar to what others in the media industry have expressed. Our internal numbers assume things stay the same. We're not giving full-year guidance on retransmission consent, so that's an internal assumption. We're not projecting a material increase or decrease; the easiest baseline to budget is that the rate of decline remains the same.

Craig Huber, Analyst, Huber Research

Okay. Thank you.

Operator, Operator

All right. Next up, we have Avi Steiner of JPMorgan Chase & Company. Your line is now open.

Avi Steiner, Analyst, JPMorgan Chase & Co.

Thank you. Good morning. On reverse compensation trends, you mentioned an opportunity to rebalance economics and noted decreases in fees in 2024. Could you provide more context on what you expect for 2025? Also, you were opportunistic late last year across the debt stack. As we move into 2025 with the open market repurchase authorization and some other cash coming in, how do you view the trade-off between buying discounted longer-dated debt with higher coupons versus addressing front-end needs in the coming years?

Jeff Gignac, Chief Financial Officer

Avi, our two larger contracts, CBS and FOX, are up this summer, and NBC is at the end of the year. I don't want to comment on specifics around where those contracts are going to come out. We're not providing full-year guidance until we have more clarity on negotiations.

Hilton Howell, Chairman and Chief Executive Officer

Suffice it to say, Avi, we're very optimistic and proud of our new relationship with ABC. I think it properly balances their affiliation value with the value of our local TV stations. As I mentioned earlier, it's the first time we've started seeing a decrease in our network-like payments, and that's an important recognition of reality in the media broadcast space in 2025.

Avi Steiner, Analyst, JPMorgan Chase & Co.

Perfect. Thank you. One last question: regarding debt, what will guide your decisions between buying discounted longer-dated debt versus addressing upcoming maturities?

Jeff Gignac, Chief Financial Officer

I think the best guide is what we did last year and where the market guides us. I wanted to finish the year with a manageable 2027 maturity. At $528 million, that's manageable either via the revolver or a well-sized offering if we returned to the debt market. We'll see where things trade at any point in time and let that be our guide when excess cash is available to deploy.

Avi Steiner, Analyst, JPMorgan Chase & Co.

Appreciate the time. Thank you.

Hilton Howell, Chairman and Chief Executive Officer

Just one piece of color on CapEx. Our company did a lot of acquisitions over a substantial period of time, and we inherited significant capital needs. We announced we're cutting back on CapEx because much of the necessary work is complete—we've upgraded transmitters and facilities and ensured stations are secure. We're not leaving stations short; they're fully prepared to compete and win in their markets. We're excited about lower ongoing CapEx requirements.

Jeff Gignac, Chief Financial Officer

Appreciate the time. Thank you, everyone.

Operator, Operator

(Operator Instructions) Next up, we have Steven Cahall of Wells Fargo. Your line is now open.

Steven Cahall, Analyst, Wells Fargo

Thank you. Hilton, could you touch a little more on some of your comments around the M&A opportunity? It could be an exciting next few years with regulatory changes. You mentioned swaps as potentially attractive. How should we think about the financial benefits of those? Also, would you ever consider monetizing some of the unused acreage at Assembly to give yourself more dry powder for station M&A since leverage is a bit higher now? Second, on political advertising: some things stayed the same and some changed last cycle. Looking to 2026 and competition from Connected TV for political dollars, what can you do this year and next year to be ready to maintain share?

Hilton Howell, Chairman and Chief Executive Officer

On monetizing Assembly acreage: we don't foreclose any profitable and appropriate transaction. So yes, we're willing to listen to all kinds of proposals. That doesn't mean we will do all of them, but we won't rule things out. We have considered a variety of options that could add value to the company and shareholders. I encourage investors and analysts to come see the studios; seeing them will give you a positive view of what we've created and the value it has. Regarding political advertising and Connected TV, Sandy, would you like to address that?

Sandy Breland, Chief Operating Officer

I'll echo what Pat said. With the strength of our stations, we have strong local reach on linear broadcast and across our digital platforms. We have strong digital audiences and strong community connections. We now have a dedicated team focusing on ways to better leverage our digital audiences going forward. We're focused on 2026 opportunities in all of our markets and expect political to be a high-growth focus for Gray.

Hilton Howell, Chairman and Chief Executive Officer

On M&A: we'll be looking at swaps particularly if the FCC and DOJ allow them, because in smaller markets it's sometimes difficult to cover the expense of local news. One of Gray's long-standing strengths is that we typically buy number-one stations, and we've been able to improve those assets. Adding duopolies in smaller markets, which was previously restricted, can be very helpful for maintaining strong local news content. If the rules change dramatically, broader combinations could be possible, and Gray is interested in all the above.

Steven Cahall, Analyst, Wells Fargo

Thank you.

Operator, Operator

Our final question will come from Alan Gould of Loop Capital. Your line is now open.

Alan Gould, Analyst, Loop Capital

Thank you. First, Jeff, your investor deck shows a leverage goal of 4x. You're about 5.5x today and typically leverage rises in political years. How long until you get to 4x? Second, Kevin, on your Washington slide about deregulation, besides M&A and station swaps, what other deregulation opportunities are there? You mentioned network-affiliate relationships—what else would benefit from deregulation?

Kevin Latek, Chief Legal and Development Officer

I'll go first. Our big goals from Washington are: 1) relaxing the local ownership rules adopted decades ago, including the one-station-per-market limits; 2) addressing network-affiliate relationships, primarily around the networks' control of our distribution on virtual MVPDs, which are a sizable part of the distribution industry now; and 3) advancing NEXTGEN TV, which is a huge growth opportunity for the industry. We've seen some progress from regulators, but we need them to step forward and remove some of the shackles on our business regarding NEXTGEN. Those are the three big pillars.

Jeff Gignac, Chief Financial Officer

On the 4x leverage goal: it's going to take a few years to get there. Political years produce heavy cash flow, and even in off years we are cash flow positive, just to a lesser extent. It will take a few years, but there's a clear line of sight after what we did in 2024—capturing discounts that accelerated principal reduction, which then drives lower interest expense and improves cash flow, enabling further principal reduction over time.

Hilton Howell, Chairman and Chief Executive Officer

A bit of history: when we closed the Raycom transaction—a great deal—we got up to 5.5x and within 18 months got down to 3.5x. That was at a time of much lower interest rates. Over the last couple of years, interest rates rose significantly; the Fed eased some in late 2024 but paused in early 2025. I believe we are entering an interest-rate-diminishing area prospectively, which will help us because Gray is a strong free cash flow generator. We look forward to delevering further in the coming years.

Alan Gould, Analyst, Loop Capital

Okay, thank you.

Operator, Operator

And with that, we will now turn the program back over to Mr. Hilton Howell for closing remarks.

Hilton Howell, Chairman and Chief Executive Officer

Thank you so much, operator, and everyone on this call. Gray is an exceptional company with an exciting future that will continue to evolve and invest to meet the opportunities in our ever-changing and exciting industry. Our revenues and cash flow are solid. We have walked the talk on reducing our debt. Our expenses have slowed significantly. Our investment in NEXTGEN TV and Assembly Atlanta are poised to deliver. We are reaching new audiences with local sports, and we expect that the government will finally level the playing field for companies like Gray. These are the main reasons why I personally remain buoyed and excited by our long-term prospects. We thank everyone for joining the call today. Operator, at this time, we ask that you close the line, and thank you all for being with us.

Operator, Operator

And with that, ladies and gentlemen, this does conclude your call. You may now disconnect your lines, and thank you again for joining us today.