Good day, ladies and gentlemen, and welcome to the Gray Television's Second 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, sir.

Thank you, operator. Good morning. I am Hilton Howell, the Chairman and CEO of Gray Television. I want to thank all of you for joining our second quarter 2016 earnings call. I am joined today by our Chief Financial Officer, Jim Ryan, and our Chief Legal and Development Officer, Kevin Latek. Before we get started, I want to take a point of personal congratulations to officially welcome, Luis Garcia, who joined our Board of Directors at the end of June. Luis is President and the Lead Strategist at San Antonio based MarketVision, which is a marketing firm focused on diverse audiences and cultural relevant communications from clients ranging from Fortune 500 companies to leading non-profit institutions. We are very gratified by his decision to join our board and we will benefit greatly from his considerable experience as an entrepreneur, a marketer and a leader in the dynamic media world in which Gray operates. Turning now to our results. We are quite simply very pleased with today's print. Let me again, with our last call last quarter, we reported very solid numbers for Q1. We reported on that call that we had experienced a slowdown in April's core revenue that led to the first month in quite some time that we had experienced some contraction on a year-over-year basis. We also explained that April appeared to be an aberration and we expected May and June to be much better. Well, as you saw from our 10-Q and our press release this morning, the second quarter came out as we had expected. In particular, our revenue was a $196.6 million, up 37% on a year-over-year basis. Our broadcast cash flow was $79.3 million, up 38%. And our net income was $17.7 million up 46%. Each of these figures set new records for…

Good morning, and thank you, Hilton. As Hilton said, I am Kevin Latek, and I will touch briefly on M&A and the regulatory environment before discussing in more detail where Gray stands today on political ad revenue. First, as you all know, Gray has been very acquisitive since the fourth quarter of 2013, adding a net total a 41 televisions stations in 28 markets to our operations including 19 new television stations. During the second quarter we continued these efforts albeit at a much slower pace. In May, we agreed to acquire the CBS and Fox television stations in the Clarksburg, West Virginia television market from Withers Broadcasting Company for a maximum total purchase price of $26.5 million. On June 1, we began to operate these stations under a standard pre-closing LMA subject to the ultimate control of Withers. Although a small transaction was about $4 million of two year average BCF, this new duopoly gives us our 51st market, our 24th duopoly market and a perfect fit with a cluster of strong television stations that we own and operate in Virginia, Tennessee, Kentucky and West Virginia. In June, we agreed to acquire two Media General owned television stations that Nexstar will divest upon into merger with Media General; WBAY the ABC in Green Bay, and KWQC the NBC in Davenport, Iowa, for a total of $270 million in cash. Both of these television stations rank first in viewership and first in market share in their respective markets. Both also cement the cluster of strong television stations that we own in Iowa, Illinois, Wisconsin and Michigan. Including Clarksburg, our new total retrans sub-universe is 11.6 million households. We will renegotiate and reprice 4.2 of this universe at the end of 2016, that's 36%. Between December 2016 and the end of…

Thanks Kevin. Good morning, everybody. I'll focus real briefly on Q2 results, focusing on the combined historical data, because that gives effect to all the acquisitions including Clarksburg. As Kevin mentioned earlier, we did commenced a pre-closing LMA in Clarksburg on June 1. So accordingly we have adjusted all of our combined historical information to reflect Clarksburg consistent with what we've done with either other LMA commencements or completed acquisitions. As Kevin said, Clarksburg is not a very big market, but it was a nice tuck-in for us. And on second quarter basis, it had about $2 million of revenue, $1 million or a little over $1 million of broadcast cash flow, and on a six month basis, it would be about $4 million of revenue and about $3 million of or -- I'm sorry, $4 million of revenue and about $2 million of cash flow. As we mentioned before, our second quarter results were mixed with a soft April. It was down and core about 3.5% followed by improvements in May and June. Our national revenue for the quarter was down 3% and half of that 3% both on a three month basis and six month basis is attributable to two insurance accounts we have, Aflac and American Family, they have either not spent money in our markets this year compared to last year or significantly reduced their budgets. From time to time we see that happen with any large national advertiser, but in second quarter that accounted for about a 1.5 of the decline and on a year-to-date basis it was closer to 2 points of the overall decline. We expect that trend in national with those accounts to continue for the rest of the year. We continue to receive positive feedback from the national agencies with our…

Well, thank you, John. Jim, Kevin, hopefully have provided a great deal of perspective and visibility into our results and our operations. Before we open the call to your questions, I want to address how our Board of Directors currently views our capital allocation options over the next several months. As Kevin said, there are no active conversations about station acquisitions at this time. Between the election and the spectrum auction, the typical owners who are likely to seek to solve the type of assets that Gray is interested in buying, all seemed to be waiting until these historic events end to explore sale. That timing is perfect for Gray. When those events near their conclusion we will know more about how the election and/or the spectrum auction proceeds will impact our future strategic opportunities. Meanwhile as Jim explained, we closed the second quarter with a net leverage ratio of 5.25x, and we anticipate ending the year in low 4s. But we have reduced our leverage drastically over the past several years. We remain ever mindful of our debt level both in absolute terms and relative to our peers. As the year ends with much more knowledge about our cash position, more insight for the overall direction of the economy in the near term and post spectrum auction opportunities as well as the elimination of elect poll uncertainties, our Board will fully consider the best allocation on the capital in hand. The options may include, in no particular order, resuming our efforts to grow the efforts to prudent and opportunistic acquisitions, a market leading television stations; a return to our long history of paying regular dividends, the restarting of our stock buyback program and/or continuing our periodic pay downs of our outstanding debt. None of these options is mutually exclusive…

Certainly. [Operator Instructions] And our first question does come from the line of Marci Ryvicker with Wells Fargo Securities.

Thank you. And thank you so much for the penning comments. They are very appreciated especially for holders of the stock, I know. And a lot of my questions have been answered through opening comments, but I do have a couple of clarification. The first Jim, can you talk about what drove the expense in the second quarter? And then the second question would be, it sounds very much like the weakness in national, is specific to the insurance category, and it really has nothing to do with the fact that you've moved away from tax?

Let me take the second part of the question first, Marci, and that, no, our switch to the direct rep model has had no impact on our national results during 2016. We think we are doing as good or perhaps even better than had we've been still working with our rep firm. What we're seeing in the softness in national again, and in insurance, it was a couple of a large accounts that just for their own marketing purposes had been very -- spending a lot very heavy last year, cut back this year, we see that happened from time to time. But we are getting very good feedback from the national agencies. We're dealing directly with the person that is heading our national sales liaisons. As a matter of fact I was in Denver yesterday and met with two very large influential agencies and the feedback was extremely positive, so national comes and goes, people make buying decisions. Large national customers will shift money around the market sizes et cetera. We had a very strong national last year, in part because of things like the insurance spending that I mentioned that was up because of marketing efforts and then you sometime see the flip side. But we are very confident that the direct rep approach is actually building for us better relationships with those large national agencies than we've had before. As a complete aside, I mean, dollars are tiny, but in one market, last week because of the direct relationship we had and an agency was having trouble with the competing station in the market, they within the scope of a two-minute phone call flipped $20,000 to us. Now, that's tiny in the overall scheme of things, but it's indicative of what we're beginning to see as far as the relationships that we're building on a direct basis. Switching to the expense beat, we were pleased; it’s a couple of things. First of all payroll came in year-over-year in a combined historical better than we've had initially anticipated. Part of that is probably in our guidance -- and when I do expense guidance, Marci, as you know, I tend to be a little conservative. We are being conservative again in the third quarter. Hopefully better time we report third quarter, again, we'll slip into the low side or maybe than a little bit better than that. We are making progress with the staffing efficiencies. We saw going into our most recent acquisitions earlier this year and late last year. We're beginning to work through that. And so whether that hits Q3, Q4 is harder to tell, but we're beginning to realize the efficiencies, we always known were within those stations we were acquiring.

Great. Thank you so much.

And our next question does come from line of Leo Kulp with RBC Capital Markets.

Good morning, guys. Thanks for taking the question. I have a couple. First is, you very clearly laid out how your footprint by market compares pretty favorably to 2012, so what do you see is the key factors that would cause political to come in, ahead of where you are in '12 versus flat is, really just around the presidential or is there other things we should be keeping an eye on?

Leo, this is Kevin. Presidential, as I mentioned, tends to be a quarter to a third of our political revenue. I guess, if we had handicap out with a caveat that we're not political experts, the antidote seem to be that the Presidential dollars are moving down ticket, it's not just Koch Brothers, but a lot of folks who would typically have donated to political or to presidential are focusing their dollars on senate races, some house races and the senate is obviously more important this time around since the senate is clearly in play this year. The difference between whether we meet or beat is probably going to be on the back for the lower ticket, down ticket candidacies in races like senate, like governor. As with any cycle things come and go, we could not say we did not expect much in Indiana this year, now we have Evan Bayh putting his hat in the ring making that senate race very competitive, and of course, the governor is not running for the election, running for a different office, so it’s a whole new race we had not accepted. On the flip side, we thought Colorado would be very competitive this year and the Republican nominees is already 15 points behind become a Democrat. So that Colorado has quiet it down. So we're going to see continually that we will be wrong on individual market predications. What we can really do is try to look for big trends and in overall results, and so since we don't have the good clarity into what's going to happen in any particular race, we've just shied away from any thoughts or expectations about an increase in political revenue. A $144 million being our record in 2012 on a pro forma basis would be a tremendous amount of money for us. And from everything we've seen we do expect to get there.

Got it. Thanks, Kevin. That's very helpful. And then second question. How are you thinking about the crowd out impact of Olympics? I mean, really just trying to get a sense for better understanding of how underlying core is pacing, if you could just back out the impact of the Olympics?

Ryan, on Olympics?

I think the way to look at that is to kind of think of the quarter as a whole and how it's pacing and for the whole quarter, as we said in our guidance, we core local to be up 2 to 4. And so obviously, the Olympics overall are driving a lot of that up. As we've said we've got 7.3 million so far booked. We are still selling the Olympics, which is perfectly normal on the local side for markets of our size. We often find some local advertisers will jump in after they see the opening ceremony, so that 7.3 million could move up a little bit. Clearly there has been some dollars that shifted out of July into August, which we expected. And in September that's a little trickier to read because there is probably will be a little muting effect on core level because of political displacement, because as you know, political advertisers love local news first and foremost and so do our local advertisers, but that being said, I think up to 2% to 4% in core local for the quarter is very healthy. And admittedly I'm attributing a reasonable amount of that to, not all of it, but a reasonable amount to the Olympics.

Got it, okay. Thank you. That's helpful. And then just to try to squeeze one more. In your press release for the Green Bay, Davenport acquisition, there is a mention of some NOLs there. Can you quantify the impact of the NOLs?

No didn’t do any NOLs there, but we did -- that will be asset purchase, so we'll get a step up in basis and we'll be able to take forward tax deductions for most of that $270 million. Some of it will come off a little bit quicker over the first five years and then your goodwill and FCC licenses for tax purposes, you get straight line deductions over a 15 year, so there is definitely, as we're switching into being a federal tax payer finally, having that step up in those future deductions, do help mute some of the tax bill we would otherwise had, had it been a stock purchase.

Do you have any estimate of what the pricing value of that benefit could be?

That's a little bit in the eyes of beholder, and I try to dodge that question a lot, but a lot would impact what your discount rate assumptions would be, but we think it’s probably worth to us about one turn of multiple that acquisition, as you know, we announced it was about an eight times multiple straight up and we think the tax benefit is at least a term multiple, it’s not actually more than that.

Thank you very much.

And our next question does come from the line of Jim Goss with Barrington Research.

Thanks. Jim this you might have touched on this a little bit indirectly, but as I am thinking about your Olympic value, to the extent that you have a pretty good concentration of NBC, but you have all of the networks representing your platform. Is Olympics a net benefit or a net negative for you in an overall basis as you think about it?

We definitely think it’s a net benefit, but clearly, and as we see, every Summer Olympics period, we're not unaccustomed to it. Our dollars will switch, again, where we CBS, ABCs and Fox's, dollars in the marketplace especially at the local level will switch from our stations to the incumbent NBC in August of in Olympic year and then comeback towards in September, so it’s a normal cycle.

And to the extent that there is a crowding out, do you capture some of it on your regular stations as the Olympics have a higher concentration on automotive as you said and some other things.

Yes, again, we view it all as a net positive to us, and again, if you take the entire quarter in context, we still think our local will be up 2% to 4% for the entire quarter, so we think that's -- obviously we're very pleased with the having the Olympics at our NBC stations over the next few weeks.

And I have often thought that there is, to some extent, Gray is somewhat of a victim of its own success in terms of garnering so many political dollars out of your markets and then once political is gone then you have a couple of years before you get that impact again. Do you feel any pressures or have any strategy as to ever think about trying to fill in the gap, either from some of the efforts you've made in digital or some of the other things to maybe offset some of this cyclicality that you tend to get because of your success in political?

Well, so cycle we've seen every two years for as long as we could remember and we've always said we're very comfortable with that. And in our minds its some very high class problem they have, which is why you've heard us say this many, many times in the past, we look at the business and manage our business on a two year, we don't necessarily think about it year-to-year or on-political, off-political up down. We think of it over a two year full cycle, so we're always striving, whether it’s a political year or a non-political year, we always grow our core business, especially the core local business in each of our markets and that hasn’t changed or nor will it change. Our station management is compensative on -- their incentive compensation is tied to a two year average growth metric in their core and that's we constantly focus on a core regardless of what is it, a calendar year is odd or even.

Okay. Maybe one last one, it could be for any of you. There has been more discussion about a return to some of the advertising to TV from digital because television has shown, and broadcast has shown more resilience in terms of delivering customers. Do you have any thoughts on that benefit to your business?

This is Kevin. I guess, we're a little gratified to see some of those stories hit the media, because it’s been certainly our experience on an anecdotal basis and talking to advertisers and move from dollars to digital. And then found that that dollar didn't work for various reasons and dollars have been coming back to broadcast. So on a local basis, while we have obviously some digital, resell digital products and we have lots of conversations with clients who want to sell on another digital platforms I think we've been finding that locally folks have moving dollars, keeping some dollars in digital where it makes sense, but not writing television off. And then the narrative, and the sort of general financial process has been very different from our experience, and it does seem that we're starting to hear more and more stories of other national process are catching up what we were seeing locally, which is that digital serves a role and broadcast serves perhaps a distinct role, but certainly not a role to be discounted in the way that sort of the narrative has been over the last couple of years. So I don't know if I can say, sort of its contributing, or it’s a recent phenomenon, it really just seems to make narrative standpoint that people are catching up to what we have been seeing now for couple of years locally.

And are you seeing the numbers do you think to the extent what just mentioned 2% to 4% increase is it starting to provide a little bit more of an upper bias to your add the sales tends?

I don't think it would be unfair to say that. And we will certainly expect that our local sales folks are making every effort to bring every dollar away from digital newspaper and the other medium out there to our stations. We remain sort of pleased by our continued success of reporting, continue core growth when we sometimes hear from folks that TV is dead and dying and this is going away of the pager business of I mean it's absolutely not the case. And we will continue to show core growth quarter end quarter out. So I think it's helpful for folks to start stop believing the narrative of -- on television and actually look at the result of us and our peers and the most part our peers over the last couple of years have been showing the same result as we which is folks are on local basis and in some extend international basis are moving are advertising in us, the rates are increasing, demand is going up and we are out really comfortable and confident in our business.

Thanks for your thoughts.

[Operator Instructions] And our next question does come from the line of Kyle Evans with Stephens.

Hi, thanks for taking my question. I am looking at the re-trance revenue guidance from your last investor deck 205 million for the year your actual for 2Q and the midpoint of your guide for 3Q. It appears to imply $3 million bump in 4Q re-trance, I just want to make sure that I am reading that correctly?

At the investor deck Kyle, that includes the re-trance of 4KSPR and Springfield that we are operating under SSA. So the investor deck is designed to give a complete representation of what kind of what it looks like in the overall universe. Now with respect to the SSA stationed that is not a consolidated entity by Gray. We are driving our benefit of that station through the SSAC that we earn. So the net cash flow impact of the re-trance for that SSA station is actually flowing through as well as the rest of the stations benefit to us is actually flowing through our other revenue lines because that's what GAAP says we have to do with it. And the investor deck is design more to show what the whole entire universe looks like.

Okay. Fair.

I know it's kind of a long explanation. Does that make sense?

I think I get it. If I look at the 2% to 4% pro forma guide for local growth in 3Q just take the midpoint of 3 and then I back out I think what you said was you have 7.3 book for Olympics and three quarters of that is local if I back that out if it looks and is it safe for me to adjust local that way and look at it and conclude that local would be down without the impact of the Olympics?

No, I don't think so because again if there were no Olympics then some of the natural shift of spending in August to anybody's NBC station won't be taking place. So, we have proportionally stronger CBS and ABCs in August. So I don't think it necessarily is linear as you are suggesting.

Okay and maybe I can ask that question a different way because I guess I am still focused on that 5.4 of local Olympics. Is that what you are saying is that there is some pretty significant displacement attached to that and that's it's not a dollar for dollar ad.

That's correct.

Okay. Alright I think that's it's from me. Thanks.

Thank you.

And our next question does come from line of David Atterbury with Whetstone Capital.

Hey guys thanks for taking my question. And thank you for the color you provided earlier on the call on capital allocation. I think that was really helpful for investors. I wanted to revisit the re-trance comments you made earlier about 97% -98% of the subs coming up for renewal between now and 2017. Could you provide any more color or refresh our memories on the vintage of those contracts that are being renewed and maybe compare and contract that against where what you are observing in the market in terms of where subs are pricing today?

Sure this is Kevin. We virtually all of our re-trance contracts are three year contracts. There is one exception we have one two year contract and that coming up end of this year. So the tenure of our re-trance contract is if they are coming out this year we did in three years ago. If they are coming up in the 2017 and they were negotiated at the end of 14 beginning of 15, we have for better or for worse and worse from personal standpoint our contracts come up at the end of the year. We have not done a great job spreading them out throughout the year and so from an experience standpoint we did a whole bunch of contracts as you know end of 14 early 15 and then we had another group of a handful contracts we did at the beginning of this year and really those were all finished up in January, I should put a press release out announcing the conclude it with some big folks with no disruption. And those contracts gave us some insight into where things were but that was in January so sort of the 7-8 months since I can't tell you that we have any particular experiences to where things are going we have the expectation, every expectation that re-trance is continuing to move toward the position of more equilibrium given the value that the broadcast programming provides vis-à-vis the cable channel. We have no reason to think it's not that the rates are not going to continue to increase overtime and increase even over the course of several months but I can't tell you definitively because we’ve not done a deal with NBPD now in eight months. So I think our peers would have much more insight and kind of work things out as of today. I think we were certainly happy to see things very pleased with the comp cast renewal of yesterday. I am sure there won't be very pleased unless they were truly very pleased. So we will – we have said that our re-trance guidance in the deck for 2017 is based on the rates that we had negotiated a couple of years earlier so there is potential for upside on whatever trance numbers would actually be in 2017 depending on how successful we are at the end of this year and how the market has moved by the time we get up to the contracts that are up at the end of this year.

That's great Kevin. I appreciate all that information. That's it from me. Thanks.

And our next question does come from line of [Tracy Young] with Evercore ISI.

Yes hi. You may have spoken a bit about this before I apologize if I missed it, but in terms of auto obviously we are moving to peak, is there anything that you can say that I guess comfort in terms of like two or three spending or in terms of foreign versus domestic brands? Thank you.

Tracy, our Q2 was up about 5% on a combined historical basis in auto. We saw strength in Chevy and to some end Nissan and Toyota were also up and up notably but Chevy was the big leader in Q2 we have seen some softness in Ford and expect that as well because we understand – as we understand they have made a decision to pull some dollars out of national spot across the country and reallocate for a while and you have seen the auto makers do that time and again and go and come back and go and come back. Q3 auto is pacing right now around 3% up zip code, which we were pleased at I don't have a break down for Q3 as far as carriage or domestic or foreign but we are pleased with an over – with plus 3 booking to-date for Q3. We are actually pleased with that.

Okay. Thank you very much.

And at this time there are no further questions. I would like to turn the call back over to management for any closing comments.

Thank you very much operator and I just want to thank you each and every one of you for your interest in Gray and the company that we are building and we look towards bringing up-to-date a quarter from now but as always if anyone has any questions we are right here. Give us a ring. Thanks.

Thank you very much. Ladies and gentlemen that will conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.