Earnings Call Transcript - GTN Q2 2020

Hilton Howell, Chairman and CEO

Thank you, Mitaya. Good morning, everyone. As our operator mentioned, I am Hilton Howell, the Chairman and CEO of Gray Television. Thank you for joining our second quarter 2020 earnings call. Today, as is expected this time of the year, we are all virtually present. So during Q&A, if we stumble over a couple of us, please forgive us. On the line with me are our President and Co-CEO, Pat LaPlatney; our Chief Legal and Development Officer, Kevin Latek; our Chief Financial Officer, Jim Ryan; and our Chief Operating Officer, Bob Smith, who has been with us before, but I'm delighted to have with us today to add perhaps some color to what we're seeing in the field to all of our sessions. We will begin this morning with a disclaimer that Kevin will provide.

Kevin Latek, Chief Legal and Development Officer

Good morning, Hilton. Thank you, everyone, and I apologize. Certain matters discussed in 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 described in the forward-looking statements as a result of various important factors. Such factors have been set forth in the company's most recent reports filed with the SEC, including today's earnings release. The company undertakes no obligation to update these forward-looking statements. Gray uses its website as a key source for company information. The website address is www.gray.tv. Included on the call will be a discussion of non-GAAP financial measures, and in particular, broadcast cash flow, broadcast cash flow less corporate expenses, operating cash flow, free cash flow, adjusted EBITDA, and certain leverage ratios. These metrics are not meant to replace GAAP measurements but are provided as supplements to assist the public in their analysis and valuation of our company. Included in our earnings release as well as on our website are reconciliations of non-GAAP financial measures to the GAAP measures reported in our financial statements. I now return the call to Hilton.

Hilton Howell, Chairman and CEO

Thank you, Kevin, and thank you all again for joining us this morning. But first, before we begin, I want to take a moment to wish Gordon Smith, our President and CEO of the National Association of Broadcasters, a swift recovery from the stroke he apparently suffered last night. Our thoughts and our prayers are with him and his family. We understand his prognosis is excellent, and we look forward to his return to the NAB and wish him Godspeed in his imminent recovery and many more years leading the NAB organization. Second, I want to salute the truly amazing men and women of Gray Television for their extraordinary efforts during these extraordinary times. Learning to work from home, often in isolation; learning to cover an ever-changing, life-destroying virus; learning to balance childcare with the unrelenting demands of deadlines our viewers count on; learning to fight through their own fears; and during the process and subsequent riots, learning to take a rubber bullet in the chest; learning how to report clearly through the fog of tear gas; learning to stomach the reporting of the ransacking of their beloved cities, towns, and communities while trying to make sense of it all. As the depth and tragedy of our current situation sank in, the absolute first thing that Gray Television did was assure our associates that their jobs, their salaries, and their benefits were absolutely secure and not to worry about their personal financial security. Their job was to focus on their responsibilities, their journalism, our communities, and our clients, and it has paid off. As the second quarter dawned and with the advent of COVID-19 in early March and then the formal worldwide pandemic, which was declared, and the government-mandated lockdowns were announced, business fell off a cliff. It was deep and unknown. But as the quarter matured, each month got better than the last. In the end, our total revenue declined approximately 11% compared to last year's second quarter. Our total combined local and national broadcast revenue, excluding political revenue, which we call our total core revenue, decreased approximately 30% compared to the second quarter of 2019. In every cloud, there is a silver lining. Our business slowed less than we feared, and it recovered faster than we hoped. In fact, the year-over-year total core revenue improved sequentially throughout the second quarter. April plummeted by 38%, but May improved, with a decrease of 34%. And June declined by only 17%. But most importantly, in many of our markets, our individual stations met or, in some cases, beat their pre-COVID budgets in June. Of course, our total revenue declined even less on a year-over-year basis in the second quarter than these amounts. In particular, our second quarter results were as follows: Total revenue was $451 million. Net loss attributable to common shareholders was $2 million or just $0.02 per share. Broadcast cash flow remained healthy at $128 million. Adjusted EBITDA was positive at $108 million. It is important to keep in mind that this historic health challenge is temporary, though of unknown duration. This great country will not allow itself to remain mired in various stages of stay-at-home, safer-at-home, and similar restrictions on businesses, schools, entertainment, or sports. A more immediate concern is that our political theater of 2020 has never been more dramatic, with no more rallies, no more live conventions, no more bus tours, no more whistle-stop train visits. Television will remain and indeed increase as the dominant form of political reach and impact. We anticipate that our political advertising revenue in 2020 will be between $250 million and $275 million, and maybe more. Importantly, Gray remains on track to be robustly free cash flow positive during each quarter of this year. We remain optimistic about our business. We, therefore, took advantage of what we believe was a significant mismatch between the value of Gray Television and the price at which the company's common stock traded over the past several months by repurchasing 0.5 million shares of common stock in the first quarter and a further 3.3 million shares of common stock in the second quarter. In total, we spent slightly over $49 million in the first half of 2020, purchasing a bit more than 3% of our total outstanding shares at an average price of $12.81 per share, including commissions. Currently, we have approximately 89,740,610 common shares and 7,048,006 Class A common shares outstanding. We have approximately 80 million under our stock repurchase authorization, adopted by our Board of Directors in November of 2019. I am particularly pleased to confirm that Gray's prudent management has enabled us to continue to grow a very strong cash position and a rock-solid balance sheet in these difficult times. Over the first half of the year, we increased our cash on hand by $167 million, beginning at $212 million at year-end 2019 to $379 million at the end of the second quarter, despite spending almost $50 million on stock repurchases. This represents a 78.8% increase in cash on hand in the bank following the worst quarter imaginable. Our total leverage ratio, as defined in our senior credit facility, was 4.4x on a trailing 8-quarter basis, netting all of our cash in the bank. We have not drawn any funding from our $200 million revolving credit facility, and we have no intention to do so. We also have not received any stimulus or recovery funds from any government program and also have no intention to do so. Pat, Kevin, and Jim will now add additional color to today's earnings release. Thereafter, I will open the line for questions.

Patrick LaPlatney, President and Co-CEO

Thank you, Hilton, and good morning, everyone. It’s been roughly 150 days since the outbreak of the coronavirus forced the NBA to cancel the remainder of its season, those games that are being played, and Gray Television adopted a remote work policy along with related COVID-19 policies for all employees. Since then, we have all changed our work and personal lives in many ways to protect ourselves and each other. The coronavirus crisis has lasted longer than we anticipated 150 days ago, and frankly, it will continue to impact us for quite some time. Meanwhile, the country and each of us are confronting not only our strengths but also our shortcomings as a society. We are encouraged by the largely positive, constructive responses to all the historic challenges that stand before us today. The past 150 days have not been easy. We are nevertheless optimistic that these experiences will make us all stronger as a country, as a company, as a society, and as individuals. We simply could not be prouder or more humbled by how our extraordinary group of colleagues has doubled down on covering local news and events, serving our advertising customers, super-serving local communities, and reconfiguring systems, facilities, and routines to allow all of that great work to recur in a new remote, socially distant, and often uncomfortable environment. Unfortunately, some of our journalists have been attacked for their work covering the events of the past 150 days. And not just virtually on social media, which is unacceptable, but also attacked verbally and physically by both police, who are called on to protect the community, and by rioters intent on harming the community. Shooting the messenger has taken on a new eerie meaning this year, and we call on everyone to respect all members of the media as they work tirelessly to cover the news for the benefit of all. Turning to the business environment. We're encouraged by the return of advertisers and our continued success in landing new business as we move past April. Our forecast at this time shows that business will still be off year-over-year but not at the levels we saw in the second quarter. With the number of virus flare-ups occurring randomly around the country, we are simply not able to predict whether — or how closely future advertising revenue will meet our expectations, though we continue to be encouraged by the creativity and ingenuity of our sales teams. One very strong performer, of course, is political revenue. As Hilton noted, we've now altered our full year political guide to $250 million to $275 million. On the presidential front, Biden spending remains on par with the pace that the Clinton campaign had in 2016. The Trump campaign, however, has laid in their base buys through the election. Importantly, the Trump campaign spending is currently on track to be up 57% versus his overall spending in 2016. So far, issuing PAC spending for the presidential race is up only slightly at 2% from 2016 levels. But it is, of course, still relatively early in the cycle for presidential advertising. We're seeing very strong demand in the center races. Gray has five states in the toss-up category, four states in the next most competitive category of lean Democratic or lean Republican. Michigan rates currently are coming in below expectations. We are seeing higher-than-expected spending in the center races in South Carolina, Alaska, and Kansas. In addition, party and PAC spending from the major groups of both parties supporting Senate candidates is up 27% from 2018 levels. Rounding out the races, Gray has eight house races that fall in the toss-up category, with three races shaping up to be more competitive than originally anticipated. We have only four races for governor across our footprint this year, with only one, North Carolina, expected to generate significant revenue for us. We've seen a record number of prebookings in this cycle as campaigns try to commit to their spending early and lock in lower ad rates. To date, we have seen an 8% increase in prebook dollars for nonpresidential races versus the same time in '18. Finally, we learned yesterday that the Trump campaign had roughly $300 million of cash on hand at the end of July, which is essentially the same number as the Biden campaign. We are confident that both campaigns will raise more money over the next three months and will spend every dollar that they raise with most of the spending used to buy effective ads on television. This data point also bodes well for a record year.

Kevin Latek, Chief Legal and Development Officer

Great. Thank you, Pat. Turning now to retransmission. We completed agreements with three of our largest MVPDs as well as a small number of additional operators in the first half of this year. As noted in our prior call, the public health crisis did not impact the outcome of those negotiations, which were conducted, as usual, quietly, respectfully, and in good faith by all parties. We have been pleased with the nature and specific terms of our recent retrans renewals as we continue to push for full value for the content carried by distributors. Our renewing retrans contracts as well as our nonrenewing retrans contracts all include annual escalators that ensure continued growth in retransmission revenue every year. This year, however, we have encountered unexpectedly large declines in subscriber counts. The first quarter of 2020 had 2% fewer MVPD subscribers compared to the fourth quarter of 2019. It appears that the second quarter of 2020 had 3% fewer paid MVPD subscribers than the first quarter of this year. OTT providers, on the other hand, continue to gain subscribers in our market, with perhaps as much as 18% more paid OTT subscribers in the second quarter than we had in the fourth quarter of last year. In total, our paid subscribers declined by nearly 3% between the fourth quarter of last year and the second quarter of this year. For context, this first-half decline roughly equals the subscriber declines that we experienced in all of 2019. Given the rate escalators in our retrans contracts, a stable subscriber environment would have yielded low double-digit growth in retrans revenues over last year's number. The increased subscriber losses, combined with migrations among MVPD and OTT distributors, who all have different rates, muted our gross retransmission growth. In particular, our second-quarter retransmission revenue increased 9% over the second quarter of 2019. Our first-half retransmission revenue increased 7% over the first half of 2019. Looking ahead, if subscriber counts remain stable for the rest of the year, retransmission revenue in the second half of 2020 would be somewhat higher than the first half of 2020 due to a significant renewal that we priced on April 1 of this year. If subscriber losses continue at an accelerated rate, depending on how subscribers migrate among the various distributors, retransmission revenue for the latter half of the year could be somewhat less than the retransmission revenue booked in the first half of the year. We also see in our release today that our network affiliation payments, which we typically refer to as reverse comp, are significantly higher than 2018. I want to remind you that while we've been forecasting a significant increase in reverse comp for some time, in 2014, Gray proactively renewed all of our big 4 network affiliation agreements for roughly five years. Those agreements locked in rates that, in hindsight, appear pretty favorable to us, and those agreements expired at various times in 2019. Throughout last year, as those agreements were replaced with new market rates, our reverse comp payments increased. In 2020, we experienced higher rates with all four networks for the entire year. Rates, of course, alone increased again at the start of 2021, but we also have a large number of MVPD retrans agreements repricing at the same time. Our next set of MVPD renewals will occur in January 2021. In the fourth quarter, we will begin reaching renewal negotiations covering most of our roughly 500 MVPD partners, representing approximately 43% of our total subscribers. We look forward to the next round of retrans renewals, where we can again demonstrate the value of our leading group of television stations and cable and satellite platforms. Thank you for your time. I'll now turn the call over to Jim Ryan.

James Ryan, Chief Financial Officer

Thank you, Kevin. Good morning, everyone. The earnings release and the 10-Q that will be filed later today provide a great deal of information. As a reminder, starting with the first quarter's release and 10-Q, we no longer need to present results on a combined historical basis. This is because the acquisitions and dispositions that occurred late in 2019 were individually and collectively immaterial. We are, therefore, presenting results only on an as-reported basis. Given the dramatic events that began in March, we are pleased with our overall results for Q2. Our total core revenue was a little higher than the comments we made on our previous earnings call, reflecting the sequential improvement in each month of the quarter, as Hilton has already mentioned. Our leverage ratio, net of the $379 million in cash, was 4.4x, and we currently anticipate that it will decline lower into the 4s by the end of this year. During Q2 2020, we increased our cash on hand by $83 million. And as mentioned earlier, we have $379 million of cash on hand plus an undrawn revolver of $200 million. Thus, we are in a very strong liquidity position. Moreover, at this time, we expect that we will continue to generate significant amounts of free cash during each remaining quarter of this year. Given our strong liquidity position, free cash generation, relatively low leverage, and no debt maturities until 2024, we believe we are in a very good position to thrive and emerge just as we are today as one of the strongest local broadcast companies in the country. Given all the uncertainty around COVID-19, we’ve withdrawn our previous full-year guidance and are not issuing formal guidance for Q3 2020. However, we remain bullish on 2020 political ad revenue and still expect full-year political ad revenue to range between $250 million and $275 million. I know all of you want to know more about Q3. Currently, the anticipated increases in political and retransmission revenue should allow our total revenue to grow in a high single-digit to low double-digit range. As with our peers, we are experiencing declines in total core revenue in Q3, and our visibility is understandably limited. As of today, again, cautioning the situation is still fluid and our visibility is limited, we believe that total core revenue for Q3 will decline at least in a range of 10% to 15%. However, as we saw in Q2, total core revenue appears to be sequentially improving each month of Q3. While still a decline, it is a dramatic improvement over Q2. To reiterate, these figures are based on current forecasts in our system and our current pacings. We do not regard internal forecasts in pacing as guidance. We realize that everybody is eager for any kind of predictions on whether and how Q3 will unfold. So we're discussing our current internal forecast as a potential data point, not as formal guidance. We still remain cautiously optimistic about the direction of total core revenue. Naturally, we will do all we can to mitigate these declines as we work through the quarter and work closely with our advertising clients. We currently anticipate our Q3 2020 broadcast expenses will increase over 2019 Q3 in a mid-single-digit range, reflecting exclusively an approximate $20 million increase in reverse compensation to the networks. Our total corporate expenses in Q3 are anticipated to approximate Q3 2019 levels, and the expenses of our production companies in Q3 will aggregate in the upper single millions of dollars, reflecting in part the seasonality of those businesses. Now to update some key liquidity items. Again, cash interest on a full year basis is currently expected to be $175 million. Our original estimate for the year was $194 million, and the decrease reflects the decrease in LIBOR. Capital expenditures on a full year basis will range between $65 million and $75 million. Our original estimate for the year was $80 million. Cash taxes currently are estimated between $55 million and $60 million, and our original estimate for the full year was $80 million. At this point, I'll turn the call back to Hilton.

Hilton Howell, Chairman and CEO

Thank you, Jim. The Gray Television stations, production companies, and employees, like everyone else, have witnessed historic challenges over the last few months. We are proud that we not only kept our heads above water, we managed to maintain full employment for our employees, high morale, and safe working environments. Our stations reestablished the importance and value of local broadcast stations covering important news and information along with exceptional community support. That community support has been demonstrated by the highest ratings our already highly rated stations have seen in decades. As a company, we posted positive free cash flow and grew our sizable cash reserves. The results reported today also confirm the value of owning the highest quality local institution like ours as well as the wisdom of operating a very lean management structure. The day when we return to what we fondly remember as normality seems further away now than what we anticipated on our previous call. Nevertheless, we remain convinced that Gray Television will continue to succeed in the face of these historic challenges and will be even more prepared to serve our audiences and our customers when normality finally returns. Operator, at this time, we ask that you open the line for questions.

Operator, Operator

Your first question is from Dan Kurnos with The Benchmark Company.

Daniel Kurnos, Analyst

Kevin, I'm sure you're already eagerly anticipating the crystal ball question on subscribers. So I guess you might as well start there just in terms of visibility and any thoughts in the back half of the year and how it relates to your net retrans outlook? And then maybe, Jim or whoever wants to take it on core, your Q3 guidance is actually relatively strong, especially in comparison to the peer group and what we've been hearing from Roku and others. So just can you give us a sense of maybe why the outperformance and where you're seeing pockets of strength? And do you anticipate that sequential improvement continuing until we're back to pre-COVID levels early 2021?

Kevin Latek, Chief Legal and Development Officer

Dan, first, on subscriber losses, obviously, down 3% for the first half of the year is not what we were expecting, and its acceleration is also nowhere near what we were seeing the public companies announce over the last two quarters. Looking forward, if the economy is recovering, it seems that in today's headlines that the hotspots across the country are beginning to stabilize as we move a little bit closer to normal. You may see another round of stimulus checks and UI pieces that could help restore confidence, etc. It seems to us that the subscriber declines should certainly mitigate from what we saw in the first half of the year. We also suspect that there are a number of folks who didn't pay their cable bills due to losing their jobs or other changes in circumstances. As the grace periods end, they may end up paying some past bills and showing up as subscribers again, especially as jobs return and stimulus money is provided. So I think we remain optimistic that we're not going to see the subscriber declines in the second half of the year that we saw in the first half of the year, but really, it's anybody's guess. So we were surprised at how much it did decline in the first half for us. We can be surprised. We remain optimistic. It seems, as I sit here today, that the economy and the virus, etc., seem to be pointing in a somewhat more hopeful direction than we saw even just two or three weeks ago. Jim?

James Ryan, Chief Financial Officer

As far as the forecast, I'll let Pat and Bob probably give a little bit more color on that. I think it, first and foremost, goes to the strength and deep penetration we have in our markets is a key factor. The other thing is, especially when we get to September in political, that's a little bit of a wildcard. It could skew the core downward a little bit more. Simply, political is super-strong, and obviously, core is going to get squeezed a little bit. But everybody that's followed us for years realizes we always outperform in political. So that's a high-class problem to have if that indeed happens. I'll let Pat and/or Bob give you a little more color on what we're seeing.

Patrick LaPlatney, President and Co-CEO

Sure. So I'll jump in real quick. It's Pat. Particularly in times like these, it's not only viewers that tend to lean on their trusted number one stations, but advertisers do the same. So as Jim mentioned, our really strong portfolio of stations is a significant benefit right now. I'd also add that our training team has done great work for us over the past five to seven years. It is having a huge impact on our already strong sales force, but particularly over the last 18 months, they've done great work. And also, in general, you'll see a look from our excellent digital and business development groups. So Bob, if you want to add any detail, jump in.

Robert Smith, Chief Operating Officer

Sure, Pat. Certainly, some of our digital efforts are contributing to that, along with some verticals we're doing, as Pat has mentioned. But in addition to that, I can't emphasize enough how our portfolio of stations can make a huge impact in the market. There's often clients' budgets down. But when you have dominant stations, they're going to find money for the dominant station. Number three, four, and five may get nothing, but we're going to get bought. And we're there for those clients year in and year out, and they trust us. So that's certainly a factor as well. Additionally, I would mention that Pat talked about the training program, but I can't oversell that enough. That group has been phenomenal. The resources they provided since March have been significant, creating various selling events and that certainly helped. Lastly, I would say we have a competitive group. The six SVPs who oversee our markets are somewhat evenly divided. For example, this morning, I received an email from one of the groups that run the regions. His region had 20 salespeople who had sold at least $20,000 in new direct business up to $50,000, and one even $60,000 was phenomenal. The point is that we're trying to look under every rock for every dollar that we can find, and we're doing a very good job of it. Now it doesn't make up for all of it, but we are really aggressive on the sales front across the company.

Daniel Kurnos, Analyst

Got it. That's really helpful color, everyone. I appreciate it. Just, Kevin, before I jump off, just quickly, did you get the full benefit of the two major renewals that I know were extended past their expiration dates in Q2? Or might there be some kind of accounting nuance in Q3?

Kevin Latek, Chief Legal and Development Officer

In the time we reported in May, we had two of the three big contracts resolved as to rate. I think one was signed and one was checking schedule. So we posted Q1 numbers with the rates that would be applicable in Q1. When we had the last deal finished after April 1, we knew what those rates would be. Although the check has arrived for sort of the new April, it actually probably has, but we have accrued for the rates. Once the rates are agreed to by the parties, even if the rest of the contract is not nailed down, we reflect the new rates in our accrual. So what you see for Q1 and Q2 would be revenue based on the rates in effect for those periods.

John Janedis, Analyst

Two for me. One, can you remind us how much of your ad revenue comes from prime time? I think it's pretty small on the decline, but I was just curious there. And to what extent you may incrementally lean into investments in programming or digital? And then Kevin, can you talk again about the comments related to the networks? I know you've spoken in the past about expectations that retrans margins will tick lower over time. But is there any incremental message based on what you're seeing in the market?

James Ryan, Chief Financial Officer

Let me start with the prime question.

Kevin Latek, Chief Legal and Development Officer

Yes, go ahead.

James Ryan, Chief Financial Officer

Our normal answer to that question historically has been that roughly 50% of our revenue comes from local news; maybe 20% comes from prime; 20% comes from syndicated programming; and the other 10% is everything else, including sports. We haven't run the specific numbers for prime for Q2, but I would suspect it's probably down a little bit on a relative percentage basis, and our news is probably up offsetting that. But in general, prime has historically run 20% to the high teens.

Kevin Latek, Chief Legal and Development Officer

I'm not sure if I understand the question. What do we pick up in the market on our network rates? I mean, our network contracts are locked in over the next couple of years. We actually renewed those early at this point in 2018 and 2019. So we've taken those endpoints out for a few years. So the rates don't change in the middle of the term. So I'm not sure what the question is, but what we might be seeing out in the market today.

John Janedis, Analyst

So maybe the question is, based on your comments around just what you're seeing and I guess, the $20 million of incremental reverse. I know you've talked about the margins moving lower. Are you messaging that margins will be a little bit lower than you expect going forward? Or is that not the case?

Kevin Latek, Chief Legal and Development Officer

Well, half of our reverse compensation rates are fixed by two networks, while the other two networks do not have fixed fees. As subscriber numbers decline, two of the networks share some of the impact, while the other two do not. If subscriber losses exceed expectations, the compensation is more challenging as the sharing percentage shifts more in favor of the network with declining subscribers. This is simply due to the nature of the fixed fees and the network formulas. Conversely, if subscriber numbers stabilize or increase, we benefit. More importantly, if we negotiate higher-than-usual programming rates, we retain all that upside. It’s a double-edged sword; with fixed fees, we bear the burden of subscriber losses but enjoy the rewards of successful negotiations. If we have a strong station or a group of stations tied to a particular network under a fixed fee and can secure a higher rate from MVPD, we keep that additional revenue. We don’t share it with the network. There are advantages and disadvantages to both network strategies. The bottom line is that an increase in subscriber losses does shift the reverse sharing percentage more favorably towards the network.

Operator, Operator

Your next question is from the line of Kyle Evans with Stephens.

Kyle Evans, Analyst

Hilton, thanks for touching on the human element of your business. It's easy for us number crunchers to forget that, and I appreciate it. Also, thanks for the detail on political. How much of the guide of the kind of 263 midpoint, roughly speaking, is expected to be presidential versus down-market? And then kind of which races should we keep our eyes peeled on for movement off that midpoint?

Kevin Latek, Chief Legal and Development Officer

I'm going to need to check on that. We discussed the presidential percentage before, and I believe it's around 25% to 30%, but I need to confirm that. I’ll have the answer later today. Regarding the actual campaigns, in addition to presidential, we benefit from having strong stations in all four of the early nominating states: Iowa, New Hampshire, Nevada, and South Carolina. The political landscape seems to be shifting every couple of weeks. We observe that the Biden campaign is spending in states we didn’t anticipate, and similarly, the Trump campaign is buying ads in unexpected states. This has broadened the field more than we expected earlier this year. As mentioned, there’s only one gubernatorial race, and I don’t see evidence that other gubernatorial races will become more competitive. However, that could certainly change in the coming weeks, but it was never a strong area for us this calendar year. The Senate races, however, have become much more competitive. We have three states on our radar that we didn’t expect to be very active this year. The states we did expect to be strong, like Maine, Georgia, and North Carolina, are indeed very competitive, and Arizona is also definitely a hot spot. So the Senate field has clearly expanded. I'm watching that field grow further. Kansas is notable, as Rep. Marshall won the Republican primary, and the Democrats launched ads this morning. Remarkably, Kansas has not sent a Democrat to the U.S. Senate since the 1930s. It's one of the states where a Democratic challenger has raised more funds than the Republican campaign. That’s definitely on our radar now, which we wouldn’t have anticipated earlier this year. In South Carolina, the Democratic challenger has raised more money than the well-known incumbent as well. The Senate races are competitive. Additionally, the interest in PAC group spending in the Senate has significantly increased compared to previous years. As for the House, a few races tend to be competitive and this shifts based on primaries and candidate actions. It appears there are more competitive races than before, but it isn't a major factor like the Senate races.

Kyle Evans, Analyst

Great. That's helpful. Hilton, I think you said that some of your stations hit their pre-COVID budgets in June. I guess, first off, did I hear that right? Because I have me scratching my head. If that's true, what conditions were underlying those particularly strong results? And was there any material difference in subscriber counts or core that was driven by market size in the quarter? Then I have one more follow-up.

Kevin Latek, Chief Legal and Development Officer

He said June, Kyle, not Q2.

Kyle Evans, Analyst

Okay. June. Okay. That's helpful. Then the second part of the question, was there a material difference in subscriber count loss numbers that you saw or the core decline numbers that you saw across your different market sizes? You guys have some of the smallest markets that we follow. And then with the addition of Raycom, I'm curious what perspective that gives you.

Patrick LaPlatney, President and Co-CEO

I honestly don't have an answer regarding subscriber loss in large markets compared to small markets. Perhaps Jim or Kevin can provide more insight on that. In terms of advertising, it's not really about the size of the market; it mainly depends on the quality of our portfolio.

Hilton Howell, Chairman and CEO

The difference was only seen in June, and I thought it was a positive sign because people started noticing some improvements. However, the situation varies significantly; some markets were down in June, and our overall numbers have decreased compared to previous periods. Yet, we do have several markets performing well, and the results depend heavily on whether those markets were affected during that time. For example, we had good performance in Georgia in June, but then the situation worsened again in July. Overall, it's quite variable and depends on the specific market and state.

Kyle Evans, Analyst

Great. One last one. Your holders, I'm sure love to see the repurchase activity. How should we think about how you balance your intentions there with M&A as the balance sheet trends down towards 4x by the close to 4x by the end of this year? And just kind of a broader M&A outlook for the back half of this year and for next?

Hilton Howell, Chairman and CEO

I will share a few thoughts and then let others chime in. Gray is focused on continuing to grow. Fluctuating numbers can complicate things, but mergers and acquisitions are still a vital part of our strategy. We currently reach nearly 25% of viewing TV households, indicating that there is still potential for growth. We are keen on pursuing opportunities when the time and price are right. However, it’s essential to remember that cash is critical, and maintaining a strong balance sheet is important. We will prioritize that. I take pride in our company's ability to generate cash, having more than doubled our cash position while also allocating $50 million to repurchase about 3% of our shares. We experienced a drop in trading when the market faced challenges, which many businesses can relate to. If a similar situation arises in the future, we will take similar actions to support our stock price. Nonetheless, we aim to keep enough cash on hand to navigate any potential downturn, no matter how long it lasts.

James Ryan, Chief Financial Officer

Kyle, just to follow-up on your sub count, large versus middle versus small markets. Our data didn't show any significant differences. There's nothing really that's jumping out at us. So it's kind of in a fairly tight range, pretty uniform.

Operator, Operator

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

Aaron Watts, Analyst

Covered a lot of ground in the Q&A here. I really just have one left. As I think about the improvement sequentially you're seeing in core, how has auto participated in that recovery? Or has it lagged a bit and represent some upside still if auto is able to click back in? Just, I guess, curious about the trends you're seeing in the auto category so far.

Hilton Howell, Chairman and CEO

Bob, do you want to handle that?

James Ryan, Chief Financial Officer

Go ahead.

Robert Smith, Chief Operating Officer

It has been somewhat behind, but we are optimistic that once they finally receive product, things will improve. The supply chain was delayed, and nearly every new car dealer will tell you they are struggling to get products. However, they expect the situation to improve later in August and into September. We anticipate not only growth in national advertising but also an increase in that segment of our business. Some of our car dealers are performing exceptionally well despite limited inventory. The dealers with desirable products are selling them at full price without negotiations due to the inventory shortage. Once inventory levels increase, and based on feedback from dealers, this is expected to happen starting this month and continuing through September. This will have a significant positive effect on our business and help maintain values as well.

Aaron Watts, Analyst

Okay. Got it. That's helpful. And one follow-up maybe for Jim. You touched on how local news and syndication really drive the majority of your revenues. I hope this doesn't happen. But to the extent we get a delay in football, college or pro or no football this fall, how do we think about the impact directly on your revenues? Understanding that indirectly, it's not an ideal outcome from an audience perspective?

James Ryan, Chief Financial Officer

All of sports is a single-digit percentage of our total revenue. So we'd love to see it, but if God forbid it doesn't happen and it's delayed further, it's not really going to move the needle.

Operator, Operator

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

James Goss, Analyst

Gray typically aims to have either the number one or at least the number two stations in all its markets to drive political engagement and other benefits. The Raycom acquisition has brought some additional number twos into the equation. I am curious if the current disruptions will overcome the challenges of elevating rankings to number one, as opposed to the usual inertia. Are there more opportunities to enhance your positioning now compared to a more stable period?

Hilton Howell, Chairman and CEO

Do you want to handle that, Bob?

Robert Smith, Chief Operating Officer

Yes, sure. It's an interesting question. So if I understand you correctly, you're asking, given all the sort of the challenges relative to COVID-19 and civil unrest and a lot of other things, does that create an opportunity to move potential #2 to #1? Generally, the default is for viewers to go to that #1. But I would tell you that we've seen some excellent growth in some of our larger markets in the last 18 months. So our stations in New Orleans and Cincinnati made significant moves over the last 18 months. New Orleans is now a solid #1, and Cincinnati has gone from really a #3 to #2/#1. I can’t tell you that's a function of what's happened in the last six months. But I will tell you that we have seen some movement in some of our larger markets, and it's encouraging, very encouraging to see.

Hilton Howell, Chairman and CEO

Let me just add as a way of bragging a little bit because our Louisville station, NBC WAVE has moved up dramatically in that market. Richmond is exceeding our expectations and improving. We really see tremendous upside on all fronts. I will tell you, we couldn't be happier, could not be happier with the overall direction of what we're seeing with all portfolios.

James Goss, Analyst

Has it shown up at all in terms of pricing that might reflect those moves?

Patrick LaPlatney, President and Co-CEO

Sure. As stations grow their audience, they’re able to charge more for their spots. Now to some degree, it's a supply and demand business. But the reality is, if you were doing a 3 rating in the 6:00 news last year and you're doing a 5 this year, you're going to get a higher rate.

James Ryan, Chief Financial Officer

I think our expenses overall, we've always had a tradition of managing them tightly. So I don't think the remote work is going to significantly give us a significant cost savings. Some natural stuff, travel budgets, entertainment not being used really helped us save some of that. We have seen savings in our health plan, although that, I think, is probably a timing difference as people, especially in Q2, just stayed home and didn't access services unless it was needed or absolutely necessary. Some of that will come back around eventually. I don't know exactly when. We continue to manage our costs prudently. As I mentioned, in Q3, the broadcast overall cost increase is really attributable solely to the increase in reverse comp. So we're doing a good job there. Some of the smaller costs we save through remote work are being offset in some cases by more overtime. We're spending not huge amounts of dollars, but we literally have bought in excess of 170,000 individual pieces, whether it was sanitizer, masks, shields, or personal protective equipment. There's some cost there that’s not huge. So it's a little bit of a trade-off there, but I don't think there will be any dramatic cost savings directly because of the remote working situation.

James Goss, Analyst

Okay. One last thing. It seems like there's a continual flow of new entrants into the grouped stream services, Peacock, HBO Max, in addition to Disney+, CBS All Access, and all the Amazon Prime, Netflix, Hulu. As these occurrences happen, is that just a continuing destabilization factor in terms of your subscriber counts? Or do you think there might be a trend to have like a basic cable package to get the networks that might satisfy needs?

Kevin Latek, Chief Legal and Development Officer

Jim, this is Kevin. Jim, that's a good question. I think the answer kind of depends on the offerings of these products. But if you were to buy a handful of the streaming services to try to cobble together your own bundled package of channels you can get from cable, you’d certainly be spending more than you pay the cable company for the same bundle. Plus, you’d pay, of course, for broadband access too, in order to be able to use Disney+, Peacock, Tubi, etc. To some extent, it could help show the value of the cable bundle, which would be good for those of us who get paid as part of the cable bundle. If the OTT providers are providing classic original content not available on broadcast, that could lessen the appeal of it. But as everyone's concerned about whether consumers can afford the cable bundle today, it seems there should be more concern about whether people can afford to subscribe to four, five, or six different OTT bundles to get original content. So I think it needs to shake out, but it's probably a little more in the first scenario where the sponsoring and fragmentation of programming across all these different bundles that have to be subscribed for separately would likely drive people back, hopefully, to the pay TV bundle, which is a better economic package.

James Goss, Analyst

Are you able to identify the proportion of those using a bundle who may access broadcast stations with an antenna compared to those who receive them as part of a bundle or cable subscription? How does that influence the situation?

Kevin Latek, Chief Legal and Development Officer

Yes, I don't know. Our OTT numbers are people who are not our OTT subs; those are people who are paying who are getting a report from a distributor that our signal is being carried in that OTT bundle, and therefore, we're getting paid. So I don't know how we would quantify if people are taking, for example, Disney+ and getting our signal over the air. There won't be a record of that.

Operator, Operator

Your final question is from the line of Steven Cahall with Wells Fargo.

Steven Cahall, Analyst

Maybe first, just a follow-up on reverse comp. Kevin, thanks for that helpful color there. If subscriber declines do maintain their trend in the back half of the year, would you think about moving all four of your reverse comp deals onto more of a subscriber base? Or do you like that mix that you talked about of sub-based and fixed fee agreements?

Kevin Latek, Chief Legal and Development Officer

It's an academic question. We don't have the ability to instruct the network on how to adjust their charging methods for their affiliates or to demand a different pricing formula than what they offer others. Over the past several years, all broadcasters with significant scale have sought a different pricing approach in their network affiliation negotiations, but we've all received the same response: CBS has its pricing for all broadcasters, Fox has its pricing for all broadcasters, and NBC has its pricing, among others. I'm not aware of anyone having a different pricing model. When the networks began charging broadcasters reverse compensation around 2008, they each developed their own systems and have largely stuck with them. I don't think it's worthwhile to speculate on a better system for us given the current subscriber numbers. It's simply not feasible to approach a network and request a different pricing structure.

James Ryan, Chief Financial Officer

I think some place down the road we'll be thoughtful about that. I think right now, probably not or at least not likely, but never say never. Right now, the preferred is not counted in the leverage calculation. If we start taking it out, we would be bringing up our leverage and, of course, our stated goal for the last two years has been to decrease our leverage. So we'll continue to monitor our situation and be thoughtful about that. I hear you on the rate. At some point, it probably will make sense to do something with some or all of it.

Operator, Operator

There are no further questions. I will turn the call back over to the host for any closing remarks.

Hilton Howell, Chairman and CEO

Well, I just want to thank all of you for joining us today. Q2 is going to be the worst quarter of the year for us. I can already tell you, I'm looking forward to Q3 and Q4 for the rest of 2020 for a lot of positive news. I look forward to talking, and all our teams look forward to talking with you next time around. Thank you for your attention.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.