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Edited Transcript of GTN earnings conference call or presentation 1-Mar-17 6:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Gray Television Inc Earnings Call

ATLANTA Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Gray Television Inc earnings conference call or presentation Wednesday, March 1, 2017 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hilton Howell

Gray Television Inc - Vice Chairman, President, CEO

* Kevin Latek

Gray Television Inc - SVP of Business Affairs

* Jim Ryan

Gray Television Inc - SVP, CFO

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Conference Call Participants

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* Aaron Watts

Deutsche Bank - Analyst

* Dan Kurnos

The Benchmark Company - Analyst

* Kyle Evans

Stephens Inc - Analyst

* Jim Goss

Barrington Research - Analyst

* Leo Kulp

RBC Capital Markets - Analyst

* Davis Hebert

Wells Fargo - Analyst

* Barry Lucas

Gabelli & Co. - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Gray Television's fourth-quarter 2016 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Hilton Howell, Chairman, President and Chief Executive Officer. Please go ahead.

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Hilton Howell, Gray Television Inc - Vice Chairman, President, CEO [2]

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Thank you, operator. As she mentioned, I am Hilton Howell, the Chairman and CEO of Gray Television. Thank you so much for joining us this afternoon for our fourth-quarter and year-end 2016 earnings call. As usual, I am joined today by our Chief Legal and Development Officer, Kevin Latek, and our Chief Financial Officer, Jim Ryan. We will begin this afternoon with a disclaimer that Kevin will provide.

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [3]

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Thank you, Hilton. Good afternoon, everyone. 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 and included in today's earnings release. The Company undertakes no obligation to update these forward-looking statements.

Gray uses its website as a key source of Company information. The website address is www.gray.tv. We will post both an audio recording and a transcript of this call on our website. We also will post an updated investor deck to the website in the next few days. 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 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 evaluation of our Company. We include reconciliations of the non-GAAP financial measures to the GAAP measures in our financial statements that are available on our website and I will turn the microphone to Hilton.

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Hilton Howell, Gray Television Inc - Vice Chairman, President, CEO [4]

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Thank you, Kevin. We are extremely happy with the exciting and record fourth-quarter and entire 2016 results that Gray reported this morning. The breaking of $800 million in total revenue with $1 billion clearly in sight and $338 million in broadcast cash flow is a very significant milestone for our Company. As you may recall, we issued updated fourth-quarter results in January when we announced the refinancing of our senior credit facilities.

Today's earnings release confirms that our results met this previously issued guidance on both revenue and expense lines. Gray turned in another quarter as we continue to build a larger, more diversified pure play broadcast Company. In particular, Gray posted its highest ever totals for revenue, net income and broadcast cash flow for both the fourth-quarter and full-year 2016.

As the year ended, we enter the market to begin our first stock repurchases in several years. Specifically, we purchased 192,183 common shares in the fourth quarter at an average price of $10.38 for a total cost of $2 million. We closed 2016 with total leverage ratio, net of all cash, at 5.06 times our trailing 8 quarter operating cash flow. This next leverage ratio, when adjusted for the closing of the January station acquisitions, was 5.5 times, which is lower than 5.7 times pro forma ratio that we had previously projected for the year-end 2016.

At the end of 2011, Gray had a trailing 8 quarter cash flow of a mere $117 million. Today, we have tripled the Company's size, tripled the Company's operating cash flows and significantly reduced our net leverage ratio. We're very pleased with the progress we have made to date and we are committed to continuing these trends of growing our broadcasting scale, growing cash flow, reducing leverage and growing our shareholder returns over time. By now you know that Gray is not a Company that moves slowly at any level, and accordingly, we have begun 2017 working strongly and feverishly on an ever larger number of fronts.

First, in January we completed the acquisitions of two number one ranked television stations from the former Media General. As you know, WBAY and KWQC are located within a cluster of similarly strong stations that we own in the Midwest and Great Lakes area from Iowa, Illinois and Wisconsin to Michigan, Indiana and Ohio. We also closed the previously announced acquisition of three stations in the Fairbanks, Alaska market and these stations already are integrating nicely with our Anchorage television station KTUU, which is the dominant television provider for nearly the entire state of Alaska.

Second, earlier this month we completed the refinancing of our revolving credit facility and term loan. This refinancing extended the maturities for the revolver and term loan to 2022 and 2024, respectively without increasing our total indebtedness. In conjunction with last summer's and last fall's notes offerings, our balance sheet is now much stronger than it was just one year ago. In addition, our term loan, as amended, carries an annual interest rate of LIBOR plus 2.50% currently. However, when and if our total leverage ratio equals 5.25 or less, the annual interest rate will decrease to LIBOR plus 2.25%.

Third, we announced we anticipate receiving proceeds from the FCC spectrum auction of nearly $91 million. Kevin will address this accomplishment in his remarks later this afternoon. Fourth, we very recently announced that we have reached an agreement with Diversified Communications to acquire its two flamethrowers television stations for $85 million. We could not be happier with this acquisition because WABI in Bangor and WCJB in Gainesville are precisely the type of local stations that fit perfectly with the portfolio of top-ranked television stations that Gray makes so special.

Each of WABI and WCJB consistently achieves number one ratings in all major dayparts in their respective markets. In both households and all key demos. Like many Gray stations, each of these new stations can also boast that it has been the most watched television station in its respective markets throughout all of its weekday local news timeslots. We are very eager to welcome the employees and communities to the Gray corporate family and we are also grateful to the Hildreth family for entrusting to us these wonderful institutions.

Just as we remain as busy as ever at the corporate trying to build a larger, more efficient and more profitable Company, I can assure you that the managers, talent, sales staff and technology experts throughout our 54 markets are working equally hard. Last week we held our annual meeting of general managers and key corporate leaders. The tone across-the-board is one of real optimism. The mood in many of our markets, especially those in energy dependent areas, seems much improved as we begin a new year with the potential for big changes in regulations, taxes and government policy. This enthusiasm is very encouraging.

In closing, I want to recognize that great work of our Washington, DC, News Bureau which we launched just two years ago. Last year, the Bureau covered every presidential primary and general debate, every important state primary, both conventions, countless events and down ticket races and, of course, election night. This year has been just as busy with the inauguration, party retreats, special elections, executive orders, hearings and confirmations and, last night, the State of the Union address.

Across it all, our Bureau covers local angles requested by the news directors at our local stations rather than simply duplicating packages with a national or a generic focus that our stations can and do get from their networks. This approach has paid dividends many times over. As lawmakers understand that they can speak directly with their local constituents by talking with our reporters right there in Washington, DC.

On Monday night our Washington bureau chief and anchors from WKYT in Lexington and WTBG in Toledo joined a small group of 15 other local television reporters for a private dinner at the White House with President Trump and his Chief of Staff and his press team ahead of his speech to Congress. We're told that Gray was selected to join this first ever dinner of its kind at the White House because of our Company's commitment to local news.

Yesterday, our Washington bureau showed our deep local reach through coverage on Capitol Hill. The Bureau provided nearly 100 local interviews with House and Senate lawmakers delivering our viewers both previews and reactions to the President's first joint address to Congress. Several of those interviews were conducted with heavy hitters like Texas Senator, Ted Cruz; Kentucky Senator, Rand Paul, and Virginia Senator, Tim Kaine.

We are very proud of the all of our talented and all of our professionals, not only in Washington but across the country in each of our markets. This commitment to putting on the best local news products at the end of every day is the real key behind Gray's success. At this point I will turn the call over to Kevin and Jim and after their remarks, we will open the line for questions. Kevin?

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [5]

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Good afternoon. With 2016 behind us, we now look forward to many new opportunities. First, as you know, we announced recently that we anticipate receiving $90,824,000 in proceeds from the FCC's reverse auction for broadcast spectrum. Those of you who have been asking us over the past couple years what the auction could mean for us had heard repeatedly that we did not expect to receive any meaningful proceeds.

Nevertheless, out of a true abundance of caution, we structured the acquisition of the former Media General stations in Green Bay and Davenport that we announced last summer and closed last month with the possibility of receiving significant auction proceeds. Specifically, we acquired the stations as replacement properties for the spectrum that will be relinquished through the auction which in tax parlance means that we anticipate qualifying that acquisition and the auction proceeds as a reverse like-kind exchange.

In this manner we anticipate that we will be able to defer on a long-term basis any income taxes associated with spectrum surrendered through the auction. The end of the reverse auction and the quiet rule have led to more than a few new opportunities for Gray to acquire additional television stations. As you know, we decided to acquire the Diversified stations using the auction proceeds which makes the acquisition of these very strong stations and their cash flows essentially leverage neutral. We continue to evaluate other acquisition opportunities, consistent with our previous commitment to consider prudent M&A and growth without taking our eyes off the goal of deleveraging the balance sheet.

Like all of our peers, we expect the FCC will relax broadcast ownership restrictions over the next 12 to 18 months at both the national level and local level. We are supportive of any effort to reform antiquated regulatory rules that no longer serve the public interest. We welcome the FCC's new openness to consider how dramatically the news and media marketplaces have changed since the FCC last relaxed ownership rules 17 years ago. As we have said many times before, we're believe it is important for Gray to continue to grow the size and scale of our portfolio of high quality assets in a prudent manner that permits us to achieve greater economies of scale, higher returns for our shareholders and a more conservative balance sheet.

In other news we have renewed several retransmission consent agreements that expired at year end and, most notably, Dish Network. We have one re-trans negotiations to complete and we anticipate that it will be renewed in due course and privately. When that final deal is complete we will have repriced roughly 4.6 million in-market big four subscribers which represents roughly 40% of the 11.9 million in-market big four subscribers across all of our stations.

We have the majority of our retransmission consent agreements expiring at the end of 2017. These contracts cover approximately $7 million in-market big four subscribers or 58% of the 11.0 million total. We will reprice the remaining 3% of subscribers at the end of 2018. Again, note these figures include all completed acquisitions including specifically Green Bay, Davenport and Fairbanks. The figures do not include the pending acquisition of new stations in Bangor and Gainesville.

On a combined historical basis, which again includes the results of all recently acquired television stations, we posted $221 million of gross revenue in 2016 and $113 million of net re-trans revenue. As you know from our investor decks and prior calls we have been estimating that 2017 would show growth over 2016 in both gross and net re-trans revenues of about 17%. In part to our conservative bias in estimating 2017 re-trans revenues, and in light of our success in the past few weeks with renewing a few large and important re-trans contracts, we can now raise these re-trans estimates for 2017.

In particular, we anticipate that gross retransmission revenue will grow by 24% in 2017 over2016 to $275 million. We expect net re-trans revenue will grow by almost 26% year-over-year to $142 million. For those of you doing the math, our re-trans margin in 2016 was 51%. We estimate that that margin will be the same in 2017. We have not refined our estimates for 2018 retransmission revenues at this time and therefore are not providing 2018 re-trans guidance today. Thank you for the time and I turn the call over to Jim Ryan.

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Jim Ryan, Gray Television Inc - SVP, CFO [6]

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Thank you, Kevin. Good afternoon, everybody. I'm going to keep my comments relatively brief because, obviously, the earnings release as well as the 10-K that was filed a little bit earlier today has got a wealth of information in it that's available for you to read.

Following up on Hilton's comments about the refinancing in February, we were very pleased with that. That refinancing in the senior facility will save us approximately $4 million of interest per year and, as Hilton already mentioned, the revolver is now $100 million, up from $60 million previously, with an expiration date of 2022. The term loan is due in 2024 and our notes issues from last year are 2024 and 2026. So we have a very strong, very favorable debt structure in place.

Our total cash interest at current LIBOR rates is $85.6 million, which gives us a pretax blended interest rate of 4.8%. Thinking ahead to other large cash uses this year, in 2017 we expect our capital expenditures to be $30 million to -- on the high side maybe on the high side maybe $35 million. As we have said previously in 2017 we expect to pay no material amount of state or federal income tax. We will have about $5.5 million of required amortization on the term loan. But, other than not, that's our cash uses prior to any voluntary debt repayment or other strategic uses of cash.

Turning to the guidance for Q1 and my comments are on a combined historical basis that will incorporate Green Bay, Davenport and Fairbanks as if we had closed on them January 1. There's a couple of main drivers in the guidance. First of all, we've made some comments during the quarter that January got off to a slow start. The buy-side seemed to take an extended Christmas break and not really come back to business until a couple of weeks -- well into January.

We knew all along we were going to have very tough comps in February with the Super Bowl. Last year was on our CBS stations; this year it was on our FOX stations. The CBS stations last year accounted for --

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Unidentified Company Representative [7]

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400,000.

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Jim Ryan, Gray Television Inc - SVP, CFO [8]

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CBS last year accounted for almost 4 million households. The FOX stations this year accounted for a little over 400,000 households, so we saw our Super Bowl revenues decline by $1.5 million. That is split roughly 1.1 million on the local side and 400,000 on the national side. We also saw and you're seeing in Q1 so far what I would describe as a couple of key accounts that are reducing spending or changing spending habits a little bit, which are driving our outlook for the quarter.

First of all in auto, we know Ford has taken some of their Tier 2 incentive money, dealer money or co-op money and moved what looks to be about $450,000 back to the national network or other uses. In communications on the local side, we're seeing about $825,000 from a handful of midsized telco and/or MVPD accounts that have reduced spending. That looks to us like a lot of M&A induced activity. We're also seeing on the national side another $400,000 in communications from a couple accounts, just not being spent in our markets in Q1.

Continuing on, as we talked about several times last year in the financial sector, American Home Family, that had been a very heavy spender with us in 2015 and then significantly reduced and has basically eliminated spending in our market sizes. In 2016, we've got some lag effect on that as well and seen another $300,000 on the national side that was around first quarter last year that just doesn't exist this year as they have completely changed their marketing strategy.

And finally, in the food category again we're seeing a couple of accounts that are shifting their dollars at least for the time being, either back to national network and/or national cable networks and that's creating about a $475,000 swing for us in Q1 and about a similar pattern on the local side of about $275,000. So, while we would like to see Q1 a little bit better, especially in core given the very hard comp we had with Super Bowl, and the current outlook being driven by just a handful of accounts, we're still remaining generally optimistic as we move through the rest of the year.

Turning very briefly to leverage. As we said earlier on netting all cash on hand at the end of the year, our trailing 8 quarter leverage ratio was 5.06. When we adjust that for the Green Bay, Davenport, Fairbanks acquisitions, that would be on an L8 basis at the end of 2016, about 5.5. And if you recall on our third-quarter call we said that might -- that adjusted ratio reflecting the acquisitions might be closer to 5.75. So we're very pleased with where we've ended up 2016 from a leverage standpoint and, again, with the very strong free cash flow generation of the Company in 2017, we look to continue to delever. As we've said before, we would expect to be in the lower 5s by the end of this year on an L8 basis and well, well into the 4s at the end of 2018 on an L8 basis.

At this point I'll turn it back over to Hilton.

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Hilton Howell, Gray Television Inc - Vice Chairman, President, CEO [9]

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Thank you, Jim. At this time, operator, we will open up the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Marci Ryvicker, Wells Fargo.

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Unidentified Participant [2]

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ood afternoon. This is [Sai] filling in for Marci. I had a quick uestion on the current pace of the business. I know you guys provided some color on Q1. Just wondering if you had a pace number and what your thoughts are on core and local and national for the year.

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Hilton Howell, Gray Television Inc - Vice Chairman, President, CEO [3]

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Well, again, as we said, we're generally optimistic for the whole year. I think national is, speaking for the whole year, is probably flattish. Local, we would still expect on a full year basis to be up low single digits, even though we're off to a little bit slower start from Q1. Specific to Q2 business, that business is breaking very late. A lot of key accounts are only now just beginning to be negotiated, so we really don't have enough hard data points to make any comments on Q2.

We certainly don't see in the latebreaking business any negatives that all but it's just coming in later -- it's actually the same thing we saw in January. It started late for the quarter. So, -- and you've got our guidance in the release already for Q1, what we expect local and national to do.

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Unidentified Participant [4]

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Got it. And in terms of leverage, where is your ideal leverage level considering the M&A talk and where do you think you guys will end up at the end of 2017?

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Jim Ryan, Gray Television Inc - SVP, CFO [5]

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Again, at the end of 2017, we would expect on an L8 to basis that our total leverage net of all cash, will be in the low 5s and we are comfortable with that and we would expect it to be very far into the 4s by the end of 2018 given the free cash flow generation of the Company this year and next year. We ended this year on an adjusted basis for -- ended 2016 on an adjusted basis for Green Bay, Davenport and Fairbanks at 5.5 which was actually a little lower than we had thought at our Q3 call and we are pleased with that.

We have always deliberately not set out a definitive range for leverage. We have said consistently for years that we want to prudently grow the Company over time while still watching leverage and over time delevering. So we are -- we have not set out a specific range. We understand the -- at 5.5 to low 5s going into the 4s, we think we're in a good zone. And we -- because we want to continue to grow prudently over time, we are now like some of our peers that have been capped out recently and had been able to significantly reduce leverage because they weren't able to grow.

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Unidentified Participant [6]

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Got it. Well thank you very much.

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Operator [7]

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Aaron Watts, Deutsche Bank.

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Aaron Watts, Deutsche Bank - Analyst [8]

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Hi, guys. Thanks. Jim, what -- I know you were just touching on the leverage but what was the main driver of you being able to finish off at a little less leverage than you had initially thought at the end of 2016?

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Jim Ryan, Gray Television Inc - SVP, CFO [9]

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I think it was really just the cash that we were able to accumulate a little bit was part of it. And then on an adjusted basis, a little bit was probably the two stations, the Green Bay and Davenport stations ended up with a little bit stronger political. As you remember, that Wisconsin race turned hot in the last few -- couple of weeks of the election cycle and Davenport had done extremely well during the entire cycle. So there was a little bit of uplift from that as well.

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Aaron Watts, Deutsche Bank - Analyst [10]

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Got it, okay. And as you kind of move along, those thoughts you provided on deleveraging over the next couple of years, do you see in that process some actual principal debt pay down or is that mainly through growth in the business?

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Jim Ryan, Gray Television Inc - SVP, CFO [11]

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That leverage assumes that we take the vast majority of our free cash flow and pay down debt over this year and next year.

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Aaron Watts, Deutsche Bank - Analyst [12]

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Okay, got it. Shifting gears, just a couple questions on -- thinking about the growing number of OTT and virtual MVPD offerings out there, how many of these new services at this point are you negotiating carriage with directly versus the affiliate group or your network partner acting as a proxy? And I guess also, can you give us your latest thoughts around the economics of a streaming sub versus a traditional MVPD sub?

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [13]

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Hi, Aaron; this is Kevin. We previously signed -- in 2016, we signed a few streaming agreements or agreements with the virtual MVPDs for some of our channels. We have yet to see them launch our markets because we are, as you know, in midsized and smaller markets so the effort thus far has been concentrated in a larger markets. Over all, we've spoken with most of the folks who are reported to be interested and/or have launched their mobile or their virtual MVPD product directly.

I know networks are also talking with those folks. I would say that as you have heard from other broadcasters, there is a very strong desire not just by consumers but by the folks who are doing these deals to get local affiliates and especially strong local affiliates. I don't think anybody forgets what happened to DIRECT and DISH when they got local affiliates added to their platforms. We are very interested in being there.

We've done a couple deals. We're not doing deals that don't make economic sense. We, I would say, our conversations have become more encouraging the last couple weeks, at least with some providers and some networks. We will be able to get those deals done in the near term. We will not -- we're not likely to be on every single OTT platform with every single one of our channels because we are not prepared to be giving our signals away or subsidizing companies that are 10 or 20 times larger than us.

We have a product that is an extremely high demand. I think our re-trans numbers that we announced today, again, confirm that. People will not have a business in most of our markets so they don't have their station on there, so if the economics turn out to be appropriate, we will do the deal. If they intend to look for Gray Television to subsidize them, then we will not do that deal.

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Aaron Watts, Deutsche Bank - Analyst [14]

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Okay. No, that's helpful, and I apologize if this is a bit mundane, but just to clarify, as things -- as your deals are struck, if I am going to subscribe to a new OTT service and I live in a Gray market where you are the CBS affiliate, if you don't have a deal with that new provider, am I able to stream CBS content even if it is not local or am I totally cut off from that?

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [15]

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If you live in a Gray market and have signed out for an OTT provider that we do not have a deal with, you do not have the ability to watch a CBS TV station owned by anybody. You either get our local signal or you get no CBS TV station.

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Aaron Watts, Deutsche Bank - Analyst [16]

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Perfect. Thank you very much.

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Operator [17]

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Dan Kurnos, The Benchmark Company.

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Dan Kurnos, The Benchmark Company - Analyst [18]

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Yes, thanks. Good afternoon. Obviously, M&A being at the forefront today with some of the news items out there, you guys obviously have had a pretty consistent strategy on the net buyer side and it doesn't sound like that's changing even with a lot of the commentary around UHF discounts, so -- and maybe even cap rates later this year. So as your peers come down and start to scale back up can you just maybe give us your thoughts on either potentials station swaps? I know you guys are in smaller markets. Maybe it's harder and since the JSA Rule also seems to have been rescinded, any thoughts on pressing that channel?

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [19]

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Dan, the JSA rule is not rescinded. The FCC rescinded a public notice that the FCC issued in March 2014 that said that if you are selling a TV station -- sorry if you are intending to buy a TV station that has a JSA and you have any financial component between the JSA station and the broker station, the application would be subject to additional scrutiny, whatever that happened to mean.

So if you have a JSA, we cannot go out and create a new JSA. That rule was not -- has -- the JSA ban is still on the books. It is still enforced. It is simply a question of processing guidelines, how much scrutiny does your application get if you have a JSA and a financial component in a deal. The first -- the larger question is, what where are we with the M&A in light of today's headlines, I'd say the same thing I said in the remarks that we've said consistently. We have been generally opportunistic and generally patient with growing the Company, although I guess in the last couple years, we've moved pretty quickly in that regard. We're going to continue to look to grow the Company in ways that make sense for our shareholders.

Station swaps don't really seem to make any sense for us. We're very, very happy with the stations that we have in the portfolio that we've built. I would expect that if some of the other folks, pretty much anybody else gets together, any large transaction there will be market overlaps that regardless of FCC rule changes will require divestitures. And those divestitures may create opportunities for us, so while we may not participate in two large companies getting together to form a super company, we may well be there to pick up some good assets or great assets out of that just as we did when Nexstar and Media General got together and we were able to pick up really great stations in Green Bay and Davenport.

So I think it means that what this new round of consolidation post auction and new FCC outlook creates opportunities for us in a lot of ways, but there is not -- we're not looking to start swapping with folks to create a different kind of portfolio.

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Dan Kurnos, The Benchmark Company - Analyst [20]

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Got it. That's helpful. And then just in terms of 3.0, obviously, you guys can start rolling that out. Our understanding is that in the re-pack you may be able to get reimbursed from shift from 1.02 to 3.0. Just can you think of -- can you tell us how you are (technical difficulty) thinking about investment in 3.0 and timing of that as it gets rolled out and eventually finally approved by FCC.

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [21]

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Sure, as it -- it's our understanding that we will not be able to buy broadcast transmission equipment without the equipment being 3.0 compatible. So, whether we believed it or not, as we go through the re-pack at a number of stations we will be getting new transmission equipment that will, by default, have 3.0 capability, which is, I think, a very good thing for all of us in the industry.

Overall, we have been big supporters of 3.0 and the work that Sinclair and the ATSC has been doing. We are, at this point, not expecting to roll out or convert any station to 3.0 this year. We are expecting that a business case will be developed first in a larger markets. It justifies the roll out in the largest markets and as we saw with DTV and HDTV and HDTV for news gear, etc., the cost will come down as the time goes on and more and more markets transition.

So, 3.0 presents some really interesting opportunities for us, especially the bandwidth throughput, but the -- again, we need to see a little bit more of a business case and I don't think anybody at Gray is expecting that we're going to have any transitions in 2017. And it's too early to say whether there might be some markets that would be ready and can justify the cost of transitioning in early 2018. So we're going to continue to be close to it and we try to attend and participate in all the conversations around ATSC 3.0 that we can be as smart as we can but given the size of our markets, and the initial costs, there is not going to be a 3.0 rollout at Gray Television this year.

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Dan Kurnos, The Benchmark Company - Analyst [22]

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Great. That's super helpful, Kevin. And just one last one. I'm not really sure how to ask this so I will try to dance around a little bit. Just on the re-trans front, I know you guys haven't been overly aggressive historically. You still got blacked out on Dish and still had upside to your re-trans. So people are trying to gauge -- as we try to gauge 2018, I guess, any way -- any incremental color, sort of just general optimism that we can glean as we head into 2018 with the majority of your footprint coming out would be helpful. Thanks.

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [23]

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Sure, I guess I'm delighted to hear that anybody thinks that we are not aggressive in re-trans because it seems that every MVPD declares us to be Darth Vader. In terms of our price expectations. We have, and frankly are proud of the fact that we've only really come off -- we came off one little operator for less than 24 hours two years ago, a larger operator in three markets for about six days. And that's it.

There are no other blackouts in Gray's history, and part of it is because we are patient as we've said a couple times. While we had a bunch of deals that reprice on January 1, we have -- we don't believe in set deadlines and we will continue to grant extensions if we think the conversations are going the right way with the prices being retroactive to January 1.

In terms of whether we are asking for enough or not, I can't answer that question. What I have seen from the third-party research and you can probably do the math yourself, our per-sub rate is at the high end of this industry and I don't think we would be able to boast that if we did not have high-quality stations and we were not being aggressive.

We, if you look at the chart of our re-trans, starting about five years ago, we got much more aggressive on re-trans because we had to. And, for some other reasons, mainly that I was doing them, we got -- we just pushed a lot harder. So I think looking into 2018, you should certainly assume that we will post higher numbers in 2018 than 2017. As I said, we just -- we did 40% of our sub base. We have almost 58% up next year and that's a large number of providers and, obviously, a large group of our subs that have to get repriced in January one, so we can't give a guess yet as to what those numbers look like, but it's certainly going to be higher on the gross and net side than and is in 2017. Just, one because of the escalators in the contracts that we just signed, and secondly, because there is just so many contracts that are up next year.

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Dan Kurnos, The Benchmark Company - Analyst [24]

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Thanks, Kevin. And just a quick follow-up on that. Do we think that given the large number of providers that are coming up that we could see a pattern to what we saw this year where some of -- as you just said, some of those might get extended past January 1 and retroactive, so it might not be even keel once we start the year.

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [25]

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Prices are always going to be retroactive to January 1. Just out of the fact that there are so few people here at Gray to do these re-trans negotiations and there are several hundred of them that happened to come due on December 31 of this year. There will absolutely be deals that will not get done until January and maybe even a couple that roll into February, and that's not unusual for broadcasters; it's not unusual for us.

Some broadcasters are -- might start a little earlier than us so they could finish up by December 31. We tend not to start all that early. We'd rather have more people go out before us than and we again are just -- we've got basically two people, in the Company negotiating most of these big deals and have a lot of other things to do at the year and the beginning of the year and sometimes we even go away for New Year's Eve. So there will certainly be stuff that rolls into January and February, but the prices will be retroactive January 1.

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Dan Kurnos, The Benchmark Company - Analyst [26]

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Perfect. Thanks, Kevin, for all the color. Appreciate it.

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Operator [27]

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Kyle Evans, Stephens.

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Kyle Evans, Stephens Inc - Analyst [28]

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Hi, thanks. Jim, I know we've kind of beat the leverage horse. I'm going to hit it again, though. What is the upper limit of your covenants as they stand today and how much dry powder do you have in the event that something irresistible and maybe even a little bit larger than Diversified comes along?

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Jim Ryan, Gray Television Inc - SVP, CFO [29]

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The senior credit facility and both of our notes issues have a seven times incurrence test on an L8 -- seven times incurrence test on an L8 basis for all in debt. Our senior facility also has a 4.25 times maintenance test on first lien only and only when and if the revolver is drawn. And then there is a general first lien basket, or I should say, secured debt basket, whether it is first or any other kind of secured debt that's more flexible than the revolver test.

So it would be fair to say that the theoretical capacity of our debt agreements, it gives us a tremendous amount of capacity and without putting a number on anything, probably certainly probably more capacity than we could prudently use.

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Kyle Evans, Stephens Inc - Analyst [30]

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Okay, I'm going to let you get away without putting a dollar sign on it. What is the auto assumption that you have built into your 1Q in your 2017 outlook?

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Jim Ryan, Gray Television Inc - SVP, CFO [31]

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Auto was down a little bit in Q1. Again, we know we've got $450,000 or so of Ford money that's shifted away from -- they just took it out of the Tier 2 spend and the factory took it back to do whatever with it. Also, auto would be down a little bit year-to-year, too. I don't have the specific breakdown but in that 1.1 million local side Olympic dip there would have been a reasonable amount of auto guys in there. I'm sorry, Super Bowl, there would've been a reasonable number of guides in that Super Bowl number as well.

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Kyle Evans, Stephens Inc - Analyst [32]

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Okay, and, Kevin, I know that the OTT question has been asked but I was biting my fingernails over the YouTube launch. They launched and basically aren't going to sell it in markets where they don't have linear network. Do you view that as a -- was that as expected? Better than expected? Immaterial? What's your high-level thinking on the YouTube product?

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [33]

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I mean, in our conversations with the folks at YouTube, they could not be more clear that they want the affiliates. Again, we have a real world example with DIRECTV and DISH 15 years ago. they are targeting a millennial audience, for the most part. A millennial audience tends to dovetail with places where you have lots of colleges and universities which tends to, frankly, not be O&O markets outside of maybe Boston and San Francisco. Those are markets in which the affiliates have the local stations. They had been very, very clear to us that they want to have us.

They have been very open to working with us and I believe other broadcast groups to come to terms that make sense for everybody and we hope that we will be able to get our stations on YouTube in the near term, but there is nothing that is going to be announced in the next two weeks, that's for sure. But we're working on it.

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Kyle Evans, Stephens Inc - Analyst [34]

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Is there a mechanism that you can see where YouTube or any other of the OTT players can apply pressure to the networks to make them do what's right by their affiliates or is this just a wait-and-see game?

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [35]

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We were not in the room when the networks negotiated their deals with the OTT providers last year. We were not in the room with them now, so we can only assume as affiliates that the OTT providers that really want something and have not been able to get it from the networks have made it clear to the networks that their desire for the affiliates that they have made abundantly clear last year is even stronger now that they are trying to get to market. So we would assume that they have conveyed the message that you've said but we are, obviously, not -- I am not privy to any of those conversations.

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Kyle Evans, Stephens Inc - Analyst [36]

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Okay, thank you.

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Operator [37]

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Jim Goss, Barrington Research.

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Jim Goss, Barrington Research - Analyst [38]

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Thanks. A couple of others on M&A. Would you have any interest in sliding either up or down in terms of market size in any of the additional M&A as you've filled out the dance card on the markets you are in? With the availability of maybe some of the OTT options make the slightly larger markets somewhat more interesting? And I've got a couple of others.

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Hilton Howell, Gray Television Inc - Vice Chairman, President, CEO [39]

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Jim, I'll start and I'll let Kevin follow-up with that. The answer is yes. I think our group of TV stations and the professionals that run our group and our stations know how to run a TV station, know how to run it well and there is not a tremendous amount of difference between our largest market which under the current DMA is Knoxville and a lot of markets that are a lot larger than what we currently are.

Grady has not looked at market size per se. We have looked at market dominance and profitability of television stations as a key guidance of where we were going to go, but we are not -- we would never say that we would not go into markets larger than we are now. We have accumulated a great number in the mid-and smaller market areas and we would be interested in getting into larger markets if and when they become available. And if and when they fit our generally, universally new center of universe of stations.

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [40]

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I would just echo what Hilton said. We have a lot of small-market stations. Midmarket stations are certainly more interesting to us financially. They are generally better for us, and we seem to have a fair amount of success with midmarket stations and would like to have more of those. But we don't think that just because we've done well with a bunch of midmarket stations that there aren't markets larger than Knoxville which is currently a larger market that would not also be good stations for us in terms of margins, in terms of what they can do for the overall portfolio. I'm not sure I understand the OTT piece, because that -- there.

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Jim Goss, Barrington Research - Analyst [41]

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Well, just to the extent that there might be some additional business. You just alluded to the fact that they don't tend to be in the -- introduced in the very smallest markets, so maybe some of that might give more relevance to that companion piece of business.

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [42]

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Look, in the best case scenario, to the OTT, subs across every provider, across every market, currently it is less than 1 million out of 100 million homes. That's not very exciting. It's not -- I mean it's not even a rounding error. They could double their success or triple their success and they are still at a ridiculously small number and they are still going to be concentrated in the top 10 DMAs. So at some point OTT's will roll into smaller markets, especially if the technology for both the broadcasters and the OTT allow them to scale smaller markets without additional costs, without exceptionally additional costs. But it's never -- it won't for several years be -- OTT revenues will not be meaningful to, I think, to anybody potentially out -- maybe the guys in the largest markets, but there is just -- there are not --.

If you look at the households drop off quickly when you get outside the top few markets; it drops like a stone. So if we have a OTT penetration in urban markets should be higher than nonurban markets, you are going to expect the bigger markets are going to have most of the OTT subs. So us simply getting into DMAs for the 30 to 50 is not going to put any real OTT dollars on our bottom line.

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Jim Goss, Barrington Research - Analyst [43]

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Okay, maybe I'll just concentrate on one other. Sort of a postmortem on the presidential race. In the wake of Trump and Clinton and what that did to some of the national election, was he unique due to his public profile or given that Clinton also spent less, does this become more of the trend? Have the national committees decided maybe there are social media ways to and advertising ways to reach audiences? And, at the very least, 2020 is likely to be impacted but is -- does this have any impact, do you think, on some of the way you look at presidential spending in the future?

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Hilton Howell, Gray Television Inc - Vice Chairman, President, CEO [44]

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We do not. Candidly, Jim, we think that 2016 was a very unusual aberration. Gray accumulated a tremendous amount of political through the course of the year, not as much as we had in previous presidential elections on a pro forma basis but if you just look at the Hillary Clinton campaign and the markets that we are so heavily in the Midwest and the Great Lakes area, for instance, she basically felt like she owned and had those markets and, consequently, lack of her spending. I don't think any Democratic nominee will ever take those states for granted again.

I think the Trump campaign is a unique and special black swan event. He began with name notoriety that was essentially 100% throughout the country due to being on television for 13 or 14 years in a top-rated television show, and so he had a unique ability to communicate and did so. And I think that it is highly unlikely that we will see presidential candidates in the future with his level of notoriety and name recognition. We actually are looking at 2018 as being a really huge political year, not only at the senatorial and gubernatorial but also the congressional level across-the-board, so we are very optimistic about political.

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [45]

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Jim, if I just add briefly, part of why, is to me, the Clinton campaign did not compete as much on air or otherwise was because of who the opponent was. I can't recall when Saturday Night Live had done such a thorough job of mocking a candidate and just the mere assumption that he might win was a punch line in and of itself. Trump gathered enormous free media not because he was a celebrity who was on television for 13 years with a reality show; he gained public media because, one, he had been a celebrity going back to the 1980s. To my knowledge, he was the only guy I've ever seen do a cameo in the Home Alone series and I was a kid when that was on TV -- I mean that was in theaters.

There was nobody who was a celebrity in the 1980s who is in the tabloid pages that I can think of really besides maybe Madonna who hasn't already passed away and it's sad commentary -- I don't mean to be cryptic here -- but there just aren't that many celebrities from the 1980s who were celebrities throughout the 90s, throughout the 2000s, still around. And on top of that, the fact that the media coverage he got was not because he was a high profile media person or a well-known person running for office.

It was because he said things that were shocking to the media and the coverage was generally not positive at all, but they were all over him because every day or so there would be something that generated a lot of media coverage, so we could take the most famous person in the world, whoever that is right now, and I don't think they would get as much press as Donald Trump did because they wouldn't say the kinds of things that he said or tweet the kind of things that he did.

You really -- it was a shock and aw campaign that he led that provided so much free media. It's hard to imagine that there is anybody out there who would be as shocking and is also has decades of being famous. So it is -- it led to him not spending and it led to Clinton not thinking she needed to spend and certainly our conversations with the media buyers, I'm not sure anybody in the media buying business thinks that Facebook can change a vote.

TV ads change votes. Facebook is good at name recognition, getting calls to action from people who already believe in your cause. They do not change votes. And that's what we're selling. We are selling an ad medium that creates demand for cars and Pampers and vacations and insurance products and political votes. So we're in the right business and 2018 and 2020 we don't think are going to be as subdued as we had seen in 2016.

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Jim Goss, Barrington Research - Analyst [46]

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So he might've been right about the liberal bias in the media, but it came to accrue to his benefit because they tortured him. Anyway, thank you.

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Operator [47]

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Leo Kulp, RBC Capital Markets.

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Leo Kulp, RBC Capital Markets - Analyst [48]

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Hi, thanks for taking the questions. I just had two. First, on your broadcast expenses for 2017, I think your combined historical level was $490 million in 2016. You gave some guidance around reverse comp, how should we think about growth in expenses ex-reverse comp in 2017?

And then second question is, what is your position on Gray potentially being a seller? What sort of price would you think would be reasonable? Is there anything you can tell us to help us figure out how you guys are thinking about a sale of Gray if another group were to be (multiple speakers) --?

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Hilton Howell, Gray Television Inc - Vice Chairman, President, CEO [49]

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Well, Leo, we're not looking to sell Gray. I am sure somewhere there is a price that our Board would consider, but it would be an awfully high price. We think we have a unique and special broadcasting property and a unique and special business, and so we are looking to buy, not to sell.

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Jim Ryan, Gray Television Inc - SVP, CFO [50]

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Leo, going into the 2017 expense numbers, as you can tell in our Q1 guidance, I mean if you take out the reverse comp, it is up about, what, $6.5 million, give or take. Really the expense line is basically flat on a combined historical basis, and as we run out for a full year, it's probably not a whole lot different than that. Our -- you can back into the -- the reverse comp is going up, but that's going to explain the vast majority of any expense increases and absent the reverse comp, you are talking in what could very well be in the single millions of dollars of overall increase which is going to be a pretty small percentage.

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Leo Kulp, RBC Capital Markets - Analyst [51]

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Got it. Thank you, both.

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Operator [52]

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Davis Hebert.

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Davis Hebert, Wells Fargo - Analyst [53]

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Good afternoon. Thanks for taking the questions and fitting me in. I appreciate it. Jim, just a housekeeping, what is LTM pro forma EBITDA so we can calc leverage from that perspective?

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Jim Ryan, Gray Television Inc - SVP, CFO [54]

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Give me half a second and I can look that up for you.

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Davis Hebert, Wells Fargo - Analyst [55]

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Thanks. And while you are looking that up, I just wanted to confirm that the leverage metrics you gave does include the impact of Diversified?

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Jim Ryan, Gray Television Inc - SVP, CFO [56]

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That is correct. It does not include Diversified.

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Unidentified Company Representative [57]

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Or the auction proceeds.

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Jim Ryan, Gray Television Inc - SVP, CFO [58]

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Or the auction proceeds, but that's -- we recycle the auction proceeds for all intents and purposes for Diversified so that's kind of, as Kevin said, it's basically neutral. On a 12 basis, operating cash flow, as would be defined in the credit agreements, was at 12 2016 was 312.6.

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Davis Hebert, Wells Fargo - Analyst [59]

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Okay, thank you. And I'll just ask one more in the interest of time, and sorry it's another M&A question. But I know there is still a lot of fragmentation at the lower end of the TV household reach spectrum, more Diversified kind of companies out there. I am just curious, after the auction, now that that has sunset, is there, a higher motivation for them to look to sell? And if so, how would you compare Gray's re-trans rates to some of the smaller groups? Is there still a meaningful re-trans synergy opportunity?

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [60]

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This is Kevin. I think the auction has certainly unfrozen some transactions. It's primarily not people that would have stations that we would want to buy. Those are typically not the people that expected to sell in the auction, so it is a lot of second stations or secondary stations, not the number one ranked stations and, as a general rule, that filed and auction application.

What really has helped things up, more so, we believe, was the election. We typically buy from multigenerational owned -- family-owned stations and they tend -- those folks tend to sell in odd-numbered years, not even number of years. So, it's kind of the confluence of both of those that we think is going to lead to -- or is leading to more folks thinking about selling. Then as more people sell or more possible deals get announced it starts to focus the mind on owners that maybe it's time to sell because there is so much activity happening around them and they don't want to get left behind.

The FCC relaxing the ownership rules is sort of another spur, so we've gone from several wilderness last year where Gray announced -- we announced Fairbanks, we announced Clarksburg, we announced Media General and that seems like almost a whole universe of deals that were announced last year, to this year being the opposite of that, 180 degrees opposite of that. So there is certainly going to be a lot more stations and groups offered for sale.

We think big market, small market, great stations, not so great stations, things we would love to buy, things we probably -- Gray itself wouldn't look at. So it's going to be very interesting next 12, 18 months. To your second question, the re-trans that we have seen in diligence suggests that we have a significant advantage in re-trans because we are not just negotiating for a really dominant station in a midsized market that DISH network couldn't care less if they lost subscribers in a market with a couple hundred thousand homes, and it's just a fraction of being their subscribers.

When we can talk to an MVPD about having 13 dominant stations or 20 dominant stations or 54 number one stations, it changes the calculus for them. So we think we have been able, despite the fact we cover only 10% of the country, not 39% of the country, to obtain re-trans rates that are at the leading edge of the business. There is still a great deal of ways for us to go. We're still -- think we're getting only a fraction of the value that we actually provide to folks who are selling video packages and, over time that we will continue to close that gap.

At this point in time, I would say that the bigger broadcast groups, and I would include us in that, have done -- have been able to achieve re-trans rates that are meaningfully higher than folks who are only operating in one, two, three, four or 10 markets. Even if they have got very, very good stations and they are very, very smart people, it's just a difference of leverage. And for us it's, frankly -- it's very different and what we can tolerate versus what other folks can.

For example, there was a station, dominant station that we have acquired in the not too distant past, had a dominate cable operator in the market, who had, frankly, gotten some pretty good rates out of that broadcaster because that broadcaster was only in that market, and relied on that cable operator to deliver three quarters or more of their eyeballs and could not afford to be off for an extended period of time. When you flip the tables around for us that is less than 1% of our eyeballs. So if worst came to worst and we were off a cable operator for two or three months, it wouldn't matter to the Gray Television, Inc.

So in that negotiating conversation is completely different when Gray is negotiating on behalf of that dominant station, than the former owner, even though they were again good people who knew what they were doing. They just could not suffer the idea of being off of that cable system for more than a couple of weeks, whereas we certainly can.

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Davis Hebert, Wells Fargo - Analyst [61]

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Right, very interesting.

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [62]

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Does that help?

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Davis Hebert, Wells Fargo - Analyst [63]

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Yes, it does. Thanks, Kevin. Thanks, Jim. Thanks, Hilton.

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Operator [64]

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Barry Lucas, Gabelli & Company.

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Barry Lucas, Gabelli & Co. - Analyst [65]

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Thanks very much for getting me in, so I'll keep it to one. Hilton, I really appreciate the comments on share repurchases, and was hoping maybe you could provide a little bit of color on the calculus that goes into the decision when you're in the market or not, and where does that fit in versus M&A or other things you could do with the cash?

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Hilton Howell, Gray Television Inc - Vice Chairman, President, CEO [66]

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You know, it's relatively an opportunistic sort of situation. We dropped down a little bit in the fourth quarter. Wanted to step out and support our stock price and when we see weaknesses we will take a look and we will weigh that against the use of our proceeds. And so we just look at it day to day.

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Barry Lucas, Gabelli & Co. - Analyst [67]

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Great. Thank you for that.

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Operator [68]

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Brian Hirschfeld, Bain Capital Credit

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Unidentified Participant [69]

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Hey, guys. Thanks for taking the questions. This is David on for Brian. Just circling back to your answer to Aaron's question on OTT, did you mean that in your CBS markets where you don't have a deal with virtual MVPDs that subscribers can't get another CBS station? Or is it that they can't get CBS Network content at all like prime time and NFL?

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [70]

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I said NFL aside because they have different restrictions based on different screen sizes and providers and what not. Our exclusivity is against other CBS TV stations including the network O&Os, so if our Knoxville station is not carried by an OTT provider in Knoxville, that provider cannot bring in another CBS TV station and give that to customers in our markets.

CBS, however, does have other programming delivery mechanisms, and one of them is the OD. So they can play generally network entertainment content 20 -- I think it is 24 or so hours after its live broadcast. So if you want to watch a CBS station, especially if you have other TV channels -- linear TV channels available on your lineup and you are flipping through, there will be a black screen or no screen at all for CBS.

If you then click over to VOD boxer window or drop-down or however you access it, you can find a CBS program and pull it up, and you can see past episodes and it depends on -- CBS is a different deal about what VOD is available to whom and when and after how much time it's held back. So you can certainly get the content but not in a user-friendly way and certainly not a good user experience.

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Unidentified Participant [71]

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Okay, thanks.

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Operator [72]

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There are no further telephone questions. I'd like to turn the call back over to Mr. Howell.

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Kevin Latek, Gray Television Inc - SVP of Business Affairs [73]

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Before Hilton says anything, I just want to say we appreciate -- we know there is a lot of questions and commentary on OTT and re-trans. It seems that they are increasing with every call. We frankly think that's -- it's a sign of your sophistication with this complex area and the answers are going to continue to be different, so in the OTT space every quarter. So appreciate your patients with us and understand we're not trying to be too glib in dismissing OTT. They have no subs in our markets. There will be a business there, it's just it's not there today and we're not going to rush quickly into doing bad economic deals. So again just appreciate everyone's patience with us on OTT deals and I'll again turn the call to Hilton.

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Hilton Howell, Gray Television Inc - Vice Chairman, President, CEO [74]

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Thank all of you for all of your questions. We thank you for joining us today and we look forward to speaking with each of you next quarter. Thank you.

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Operator [75]

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