Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gray Television Third Quarter 2018 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Hilton Howell, Chairman and CEO. Please go ahead.

Thank you, operator. Good morning, everyone. I'm Hilton Howell, the Chairman and CEO of Gray Television. Thank you all for joining us for our third quarter 2018 earnings call, and happy Election Day to everyone. I'm joined today by our Chief Legal and Development Officer, Kevin Latek; and our Chief Financial Officer, Jim Ryan. We will begin this morning with a disclaimer that Kevin will provide.

Thank you, Hilton, and good morning, everyone. Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results. Those statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those 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 also post an updated investor deck to the website within the next 2 weeks. Included on the call will be a discussion of non-GAAP financial measures and, in particular, broadcast cash flow, broadcast cash flow less corporate -- cash 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 valuation of our company. We include reconciliations of the non-GAAP financial measures to the GAAP measures in our financial statements that are made available on our website. I now return the call to Hilton.

Thank you, Kevin. Gray Television has just completed another record-setting quarter by almost any measure. Our financial results exceeded our expectations, especially with regard to the outstanding political and retransmission revenue we posted this morning. And of course, our team has been exceptionally busy working with the outstanding individuals at Raycom Media to ensure a smooth transaction closing and integration of our companies later this quarter. We very much look forward to adding to our growing corporate family the best assets of Raycom Media, which are, of course, the roughly 4,000 employees at the television stations and the production companies in Raycom Media. Turning to our Gray heritage results. You saw in our earnings release this morning that Gray Television continues to deliver exceptional results. Our third quarter 2018 revenue, net income and broadcast cash flow all set new all-time records. Our third quarter record revenue set a new record of $279.3 million. This figure represents a $60 million and very significant 28% increase from the third quarter of 2017. Our third quarter net income was our all-time best ever, coming in at $61.9 million. This figure represents a $46.6 million or 304% increase from the net income posted in the third quarter of 2017. Similarly, our third quarter broadcast cash flow was our all-time best quarterly result in the company's history. We posted $134.6 million in broadcast cash flow, which was an increase of $54.7 million or 69% from the third quarter of 2017. These results were driven by stronger core business relative to the first half of this year, stronger retransmission revenue than any prior period and exceptionally impressive political revenue. We posted $91.6 million in gross retransmission revenue for the third quarter of 2018, along with retransmission expense of $41.4 million. Therefore, our retransmission revenue, net of…

Great. Thank you, Hilton. In terms of the Raycom transaction, we remain on track to receive regulatory approval and close the transaction and the announced divestitures this quarter. Against the backdrop of all this good news, we also experienced some very difficult days in September and October. That remind all of us why we are so passionate about the local broadcast business. In September, Hurricane Florence came ashore with tremendous force in our market at Greenville and New Bern, North Carolina and Raycom's market of Wilmington, North Carolina before spreading its wrath across a larger area through the Carolinas and the Mid-Atlantic. Shortly thereafter, Hurricane Michael arrived in Panama City, where both Gray and Raycom own television stations. Michael's destruction was acute in parts of the market and our company's adjacent markets of Tallahassee, Dothan and Albany all experienced Michael's force. Broadcasters are journalists first, and we demonstrated that again this fall. No less than 1 dozen news directors plus additional engineers from other Gray markets, who usually work to get WITN in Greenville the resources and crews that our station needed to cover Hurricane Florence. In all, we had 17 Gray employees from markets as distant as Colorado Springs and South Bend travel to Greenville and New Bern to augment our local station team. Together, they ensured that WITN provided the necessary coverage before, during and after Hurricane Florence roared through town despite the personal toll that many of the local stations endured -- station employees had endured. Hurricane Michael arrived with less warning, grew more quickly and created havoc in the Gulf. And again, the great corporate family rallied to help. Over 20 Gray employees throughout the country, including as far away as Fargo, traveled to Panama City before, during and after that hurricane. These additional news directors,…

Thank you, Kevin, and good morning, everyone. Our earnings release and the 10-Q that was filed a little earlier this morning provide a great deal of information, and Hilton and Kevin have addressed all the bigger developments that have occurred this quarter. So just to sum up, we are extremely pleased that full year political will approximate $153 million to $154 million. We even had a few orders coming in as late as yesterday. So it's been a phenomenal political season for us. We're also pleased that we've moved our retransmission guide up again this year to a range of $354 million to $356 million, and our core revenue in Q3 did appear to improve on a relative basis to the first half of the year and we were pleased to see that. And again, our leverage net of all cash on an LAQA basis is 3.51, and it's the lowest that I can recall in the 20 years that I have been with Gray. And finally, just to reiterate what Hilton said, we are very pleased with the financing arrangements relating to the $750 million in notes and the $1.4 billion incremental term loan that we will be using the proceeds of to finance in part the Raycom merger and the related fees and expenses. I'll turn the call back to Hilton.

Thank you, Jim. And now, operator, we will open up the call for any questions that anyone may have.

[Operator Instructions] Your first question comes from the line of Marci Ryvicker from Wolfe Research.

Kevin and Hilton, you mentioned the Raycom deal and you have a lot of confidence that regulatory approval will be received. Are you having conversations with the FCC and the DOJ? Because we have been surprised before, so just want to sort of get more color on that.

We are very confident we will receive the approvals in the next couple of weeks and close the transaction, and that is based on direct conversations with the decision-makers at those agencies.

Wonderful. And then, I know auto had been -- and this is more for Jim. I know had been a category that was pretty choppy for you throughout '18. How are you pacing now? I know there is so much noise because of political. We have heard that auto is actually doing better than people had expected. Just curious if you're seeing that as well? And do you have any idea how auto might trend going into 2019?

Well, first, in Q3, auto did improve a little bit on a relative scale. It was only down about 8%, whereas in the first part of the year, it was down in double-digit territory on a percentage basis. And you have to keep in mind that September is the political start of the ramp-up. And obviously, our political was over the high side of guidance, would have caused some additional displacement because auto and political advertisers love the news and they both can't be in there at the same time. You're right about Q4 auto. October and early November are heavily distorted, which is the fantastic political season we've had. So it's a little hard to read. I think it is still maybe -- again, on a relative scale, a little bit better. As you'd expect, October is down significantly because of the displacement from political. And pacing comments, I'll remind you and everyone else that it's obviously just one day, one point in time. So at this part -- at this stage of the quarter and also with all the political, they are kind of volatile. But I would say, November is looking a little bit better and December is, again, maybe looking a little bit better as well.

Great. And then, I know that you are...

But I would expect auto to be down in the quarter because of the political displacement.

Great, which we would expect as well. I know you're at your lowest leverage that I can remember, which is going to change post-Raycom. Can you just talk about, once you've integrated those stations, your path to deleveraging?

We intend to use free cash flow and obviously continuing growth in our operating cash flow to delever.

Your next question comes from the line of Kyle Evans from Stephens.

Jim, I hate to nitpick, but you said November and December look better. Is that kind of relative to first half and 3Q? Is that year-over-year?

Yes. Yes. It's still -- and it's still early and a little bit is going to depend on -- with a heavy political season, the auto guys will deliberately go to the sidelines. So it's a little bit of how hard they're going to come back in now it's post-election season. And we'll get a feel -- better feel for that over the next couple of weeks after we get past today. But if I look at the pace right now, as of today -- and again, it's volatile and there's a lot of money that would still normally come in after political season. November is -- on a pace is flattish and December is flattish, which I take at least some degree of encouragement from. And October is obviously down significantly because of all the political that dropped in.

Got you. Do -- the 8-K that you put out recently gives us a lot that you own for the Raycom deal. Can you help us think a little bit about taxes post integration or is it too early for that?

Yes. First of all, keep in mind, we are acquiring a fairly substantial NOL with the Raycom deal that will be usable over the next 2, 3 years for us before we probably exhaust it. And so our cash taxes of -- obviously, it will vary on even-odd with the political cycle. But it isn't going to be a full tax -- a full federal rate for the first 2, 3 years. It's more muted. I believe when we announced the deal back in June, we said that our average cash taxes on a 2-year blended basis is in the -- around the mid-tens of millions, call it, $50-ish million or so.

Okay. And you guys rolled -- like most of your peers, rolled digital into core some time ago and the logic for that is sound in my mind. Can you talk about kind of what you're seeing at the tv.com level of the business? How has that grown since that kind of disappeared as a line item in the income statement?

It's growing at a faster rate than the main core business. It's a still very small component of the total core numbers, especially the total local number. It is -- but keep in mind, all of that digital revenue for us is all organic digital advertising within our local markets. And so the digital advertising space in a mid to smaller market is only going to be growing so fast as well, but it is at a higher growth rate than the main core.

Could you update us on sub count for retrans?

Our sub counts have been -- seem to have become more stable this year than we were seeing last year.

Down low singles, down 1? Down, I mean...

We're just saying they have become -- we've seen the sub erosion slow in the last couple of quarters, especially the bigger -- most of the bigger operators.

Got you. And then lastly, anything notable in the political rev? Are we going to have another Alaska-type adjustment 4 years from now for some other kind of bang-up market?

We saw widespread hot races. And when we're asked what's the hot race, it's not -- it's how long do you have? We saw spending in Tennessee that we never expected. We saw spending in Kansas we didn't expect. Florida has always been hot. It was even better this year than we expected. Ohio was the disappointment. We thought that would be more of a hot race. That was for Senate. That was not a governor's race. This was not also as sort of lucrative as we wanted, but those were about the only surprises. Reno has been our top-performing station sort of election after election. They just keep setting new records. Wisconsin was strong. North Dakota, there was -- it's been pretty widespread. So no, we didn't have a "Oh My God" Alaska experience, but we seemed to have a whole bunch of just phenomenal races everywhere we looked -- pretty much everywhere we looked.

Your next question comes from the line of Davis Hebert from Wells Fargo Securities.

On the leverage point, you guys have talked about being at 5x at closing of the deal. I'm not sure if you have any insight on Raycom's political numbers, but yours are obviously very solid. Any chance that leverage point could be below 5x?

It starts getting into the, I guess, the law of large numbers a little bit. I mean, we're comfortable in saying 5 right now. Raycom's political -- Raycom's footprint is not immensely dissimilar to ours. And they are in some definite battleground states. So I think you're -- in general, they have been having a good political year as well. They -- just like we were, they're -- I'm guessing they're probably disappointed in Ohio, but probably very pleased in Tucson and a couple of other places. So I think in the 8-K that we put out a couple of weeks ago that had 6/30 information on Raycom, there is some indication of what they were doing at least the first half of the year. So I think you can kind of extrapolate from that, and I would expect they're having a good political year as well.

Okay. That's helpful. And I appreciate the comments on November and December looking better. If we look out to 2019, I understand visibility might be challenging. But is there any reason to think we shouldn't see a bit of a rebound, especially on the local side of things from a core perspective?

That's certainly my current expectation. I -- admittedly, first half of this year was a tough year for everybody, so I would think going into next year, it's probably a little easier for us.

Your next question comes from the line of Dan Kurnos from Benchmark Company.

Just a couple quick sort of housekeeping-ish questions. Just on KDLT, since it's still pending, I'm assuming that's not included in the forward guide at this point?

That's correct.

Okay. And then, historically, you guys have said on net retrans that next year, even with the NBC step-up, I think you have tiny FOX and some half your CBS as well, that you still expect net retrans growth. You guys continue to exceed upside on your retrans contracts and NBC got done early, which I don't want to read too much into that, but it seems like that doesn't get done unless it's agreeable to both you and them on somewhat favorable terms. So maybe with the upside now, have your expectations for kind of net retrans growth changed at all for '19?

You're right, in that we expect net retrans growth in '19. As we have said for quite a while now, '19 is going to be the lowest net retrans growth year for us just because the timing in the cycle of sub-renewals. So on a Gray legacy basis, we've only got a handful of subs up this year. And so there is not much -- there is not real big uplift in the gross retrans number except for the annual escalators that are in all of our other contracts. And we have characterized that annual escalator as a low double-digit percentage. So that helps the gross number next year, but it's -- we've only got 3%, 4% of the sub base up for repricing. So it will still be a slower growth year in '19, but then on the sub base comes back around in 2021.

Got it. And then, I'm just going to apologize in advance for being that guy. But since you haven't even closed Raycom yet, is there any possible way, Jim, you could flex the balance sheet to absorb Cox with some creative financing, if it came available?

Oh, I don't think we're going to comment on that one way or another.

All right, it was worth a shot, guys.

Dan, I appreciate it very much.

All right. Had to throw it out there.

I got it. I got it.

[Operator Instructions] Your next question comes from the line of Jim Goss from Barrington Research.

Extending the retrans notion, how much more room to run is there? Is this a process that you think can at least grow at least at some inflationary rate over time? Or do you think there is still more share that the networks and the network affiliates can get out of MVPDs and other providers?

Jim, this is Kevin. We think there is a pretty -- there is a long runway. They -- all broadcasters together deliver more than 90 of the top 100 top shows in television, and yet we still get a small fraction of the overall programming pie. And that's got to change. Obviously, it's not changing overnight. And while the broadcast retrans dollars are growing quickly, I'd point you to data from SNL Kagan that shows that the nonbroadcast channel -- all of the nonbroadcast channels are increasing their take of the programming pie faster than we are in absolute dollar. That just seems odd to us. We are the ones who have -- we're not compensated for 20 years and delivered all this great value and are still delivering 90 plus of the top 100 shows on television. I think real numbers were 94, 95 of the top 100 shows on television. We should be seeing not just our percentage increase, but our absolute dollar share of that programming pie increasing. We think there is a long way to go. And as that continues to grow, we all get more revenue. That's good for the broadcast ecosystem because, of course, it allows us to invest in the local stations and the local news. It allows networks to invest in better and better programming in a very competitive programming marketplace. So we don't -- we certainly don't think we've -- there is a ceiling on retrans.

Okay. And with retrans and political relative to Raycom, is there a sense you can provide us as to how they do relative to Gray in terms of maybe per viewer metrics? Should we expect that the combination would have that same sort of percentage impact when the businesses are put together?

Jim, when you put the #1 and the #2 together, you're naturally going to have an average that is not as strong as the #1 station, but still better than everybody else or the #1 and #2 of any category. We have the highest quality portfolio. They have the second highest quality portfolio. Together, our average is still going to be better than everybody else's. Again, #1, #2 TV stations, but it's going to be less than we have today. They are in some bigger markets. They do have some stations that are not necessarily as strong as Gray. They cover about 14% of the U.S. So they are larger than us. We provided a significant amount of their data in an 8-K last week. And we are very constrained in what we can discuss because they are a private company. So we can sort of point you to the historical and you can look at sort of the ratio of our metrics to theirs. Just thinking about political, just to highlight, we -- in the last couple of years, we put out a slide in our investor deck which shows our political revenue versus the industry. It's more than just -- ours is high on a per household basis. In 2016, we had $9.63 of political revenue, and the closest competitor was in the $5 range. In 2018, if I do that same math, our political revenue divided by our TV households according to Nielsen puts us around $13.50. I can't tell you Raycom is going to be that high, but no one is going to be anywhere near that number. So our metrics really do put us at the left side of most every table that compares the industry. Raycom is pretty close to us in a lot of ways, but there is no way that sort of combining us together drives the total -- an average up just by the law of putting #1 and #2 together. Did that help?

Yes, it does very much. And that slide you always put in the chart in your investor presentation I think does say that and speaks to that. The -- and the last thing, the OTT value to you, it was pretty much 0 a few years ago and then seemed to be at least showing up in some sort of chart a little later on. Is it getting to where it -- there may be some meaningful aspect delivered in your participation in CBS All Access or the other things you might have involvement with?

The short answer is it's still a small number. It's still a rounding error. And frankly, as we keep lifting our retrans guidance for the year, even if OTT is growing nicely up with a small numbers, it's still a rounding error. We are not sure that's going to change. Obviously, we could be wrong, but we're really focused on our MVPD relationships. Those are the strong relationships and those are definitely the most lucrative for us.

And there are no further questions at this time. I'll now turn the call back over to Hilton Howell for closing comments.

Thank you all very much for being on the call this morning. We are exceptionally pleased with our results this quarter. And we're really looking forward to having Raycom part of this company at our next call for the fourth quarter next year. Thank you very much, and have a great day.

This concludes today's conference call. You may now disconnect.