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..

Thank you, operator. As you 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 Financial 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..

Thank you, Hilton. Good afternoon 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 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 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 and their analysis and evaluation of our company. We include reconciliations in the non-GAAP to the GAAP measures in our financial statements that our available on our website. And I will turn the microphone to Hilton..

Thank you, Kevin. We were 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 continued 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 entered the market to begin our first stock repurchases in several years.

Specifically, we purchased 192,000 183 common shares in the fourth quarter at an average price of $10.38 per total cost of $2 million. We closed 2016 with total leverage ratio net of all cash in part 0.6 times our trailing eight-quarter operating cash flow.

This net leverage ratio when adjusted for the closing of the January station acquisitions was 5.5 times which is lower than the 5.7 times pro forma ratio that we had previously projected for yearend 2016. At the end of 2011, Gray had a trailing eight-quarter cash flow or the near $117 million.

Today, we had tripled the company size, tripled the company’s operating cash flows and significantly reduced our net leverage ratio.

We are 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 overtime. By now, you know that Gray is not a company that moves slowly at any level.

And accordingly we had begun 2017 working strongly and feverishly on an ever larger number of funds. First In January, we completed the acquisitions of two number one ranked television stations from the former media general.

As you know WB Iowa 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 a 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 in term loan.

This refinancing extended 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 offering, 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, -- if our total leverage ratio equals 5.25 or less the annual interest rate will decrease to LIBOR plus 2.25%. Third, we announced that we anticipate receiving proceeds from the FCCs spectrum auction that is 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 or precisely the top 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 it has been the most watched television station in its respective market 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 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 began 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 the great work of our Washington DC new 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 downticket 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 generic focus that our stations cannot do that from their networks. This approach has paid dividends many times over.

As lawmakers understand that they can speak directly what the local constituents are talking with our reporters right there in Washington DC.

On Monday night, our Washington Bureau Chief and anchors from WKYT in Lexington, and WTVG 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 were told that Gray was selected to join this first ever dinner with 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 capital result.

The bureau provided nearly 100 local interviews with how house and senate law makers delivering our views, both previews and reactions to the President’s first joint address to Congress. Several of those interviews were conducted with heavy hitters [ph] like Texas Senator, Ted Cruz, Kentucky Senator Rand Paul and Virginia Senator Tim Kaine.

We are very proud of the work of all of our talent 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 product 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?.

Good afternoon. With 2016 behind us, we now afford many new opportunities. First, as you know, we announced recently that we anticipate receiving $90,824,000 in proceeds from the FCCs reverse auction for broadcast spectrum.

Those of you who have been asking us over the past couple of years what the auction can mean for us, had heard repeatedly that we did not expect to receive any meaningful proceeds.

Nevertheless, a true abundance of caution, we structure the acquisition of the former media general stations in Green Bay and Devonport that we announced last summer and closed last month with the possibility of receiving significant auction proceeds.

Specifically we acquired those stations as a replacement property for the spectrum that will be relinquished to the auction which attacks Poland 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 to run it through the auction. The end of the reverse auction and acquired role have led to more than a few new opportunities for Gray to acquire additional television stations.

As you know, we decided to quite a 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 of 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 month at both the national level and local level. We are supportive of any effort to reform and equate a 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 believe it is important for Gray to continue to grow the size and scale our portfolio with high-quality assets in a prudent manner that permits us to achieve greater economies of scale, higher returns for shareholders and a more conservative balance sheet.

In other news, we have renewed several re-transmission consent agreements that expired at year end and most notably dish network. We have one retrans negotiation 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 for subscribers across all of our stations. We have the majority of our re-transmission consent agreements expiring at the end of 2017.

These contracts cover approximately 7 million in market big four subscribers or 58% of the 11 point 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 Fair Banks.

The figures did not include the pending acquisition on new stations in Bangor and Gainesville. On a combined historic basis, which again includes the result of all recently acquired television stations, we posted $221 million of gross revenues in 2016 and 113 million of net retreads revenue.

As you know from our investor decks in prior calls, we have been -- will grow by almost 26% year-over-year to $142 million. For those of you doing the math, our net returns margin in 2016 was 51% and 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 now providing 2018 re-trans guidance today. Thank you for the time and I’ll turn the call over to Jim Ryan..

Thank you, Kevin. Good afternoon everybody. I’m going to keep my comments relatively brief because obviously the earnings release as well 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 a 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 the other large cash uses this year in 2017 we expect our capital expenditures to be 32 on a high side may be 35 million. As we’ve 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 that, that’s our cash uses prior to any voluntary debt repayments 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 down on January 1. There is a couple of main drivers in the guidance. First of all, we’ve made some comments during the quarter.

The January got off to a slow start, the buy side seem to take an extended Christmas break in and not really come back to business until a couple of weeks well into January. We knew well along, we are going to have very tough comps in February with the Super Bowl last year which is on our CBS station, this year’s on our Fox station.

The CBS station last year accounted for, CBS last year accounted for almost 4 million households. The Fox station this year accounted for a little over 400,000 households so we saw our Super Bowl revenues decline by 1.5 million, that’s split roughly 1.1 million on the local side and 400,000 on the national side.

We also saw in – seen 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 order we know Ford has taken some of their Tier 2 incentive money dealer, money that co-op money, and move them, what looks to be about $450,000 back to the national network or other uses.

In communications, on the local side, we’ve seen about $825,000 from a handful of I would call midsized telco and/or MVPD accounts positive reduced spending. That looks to us like a lot of M&A induced activity.

We are also seeing on the national side another 400,000 in communications from a couple of accounts just not being spent in our markets are 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 seeing another 300,000 on the national side that was around first quarter last year that just doesn’t exist this year, they have completely changed their marketing strategy.

And finally in the food category, again, we are 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 core give us the very hard comp we had with super bowl and the current outlook being driven by just a handful of accounts.

We are 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 are trailing a quarter leverage ratio was 5.06 when we adjust that for the Green Bay Davenport Fairbanks acquisitions, that would be on an LA basis at the end of the 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 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 said before, we would expect to be in the lower fives by the end of this year, on an L8 basis in well, well into the fours at the end of 2018 on an L8 basis.

At this point, I’ll turn it back over Hilton..

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

Thank you very much. [Operator Instructions] We’ll take our question from Marci Ryvicker from Wells Fargo. Please go ahead. Your line is open..

Good afternoon. This is [Indiscernible] filing in for Marci. I had a quick question 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?.

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-digit 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 that make any comments on Q2. We certainly don't see in a late breaking business any negatives at all, but it's just coming in later, it's actually the same thing we saw in January, it’s kind of 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..

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?.

Again at the end of 2017, we would expect on an L8 basis that our total leverage net of all cash will be in the low fives and we are comfortable with that and we would expect it would to be very far into the fours 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 end of 2016 on 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’re 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 fives going into the fours, we think we’re in a good zone and because we want to continue to grow prudently over time we’re not 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..

Got it. Well, thank you very much..

Thank you..

Well take our next question from Aaron Watts from Deutsche Bank. Please go ahead..

Hi, guys. Thanks.

Jim, I know you’re 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?.

I think it was really just the cash that we were able to accumulate a little bit, it was part of it.

And then on 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 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..

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 that process, some actual principal debt paydown or is that mainly through growth in the business?.

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

Okay. Got it.

Shifting gears, just a couple questions on, thinking about the growing number of OTT in virtual and 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 the streaming versus the traditional MVPD sub?.

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 midsize and smaller markets so the effort thus far has been concentrated in the larger markets.

Overall, we've spoken with most of the folks who are reported to be interested and/or have launched their mobile -- their virtual MVPD product directly. I know networks are also talking with those folks.

I would say that as you 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. I would say our conversations have become more encouraging in last couple weeks at least with some providers and some networks. We’ll be able to get those deals done in the near-term.

We will not -- we are 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 in extremely high demand. I think a re-trans numbers that we announce today again confirmed that.

People will not have a business in most of our market so they don't have our station on there. So if the economics turn out to be appropriate we will do the deal. If they intend to look for great television to subsidize them, then we will not do that deal..

Okay. 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'm going to subscribe to a new OTT service and I live in a great 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's not local or am I totally cut off from that?.

If you live in Gray market and have signed our for an OTT provided 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 nor get no local, or you get no CBS TV station..

Perfect. Thank you very much..

Certainly..

We’ll take our next question from Dan Kurnos from The Benchmark Company. Please go ahead..

Yes. Thanks. Good afternoon. Obviously M&A being at the kind of 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 commentary around UHF discounts, so and maybe even cap rates later this year.

So as your peers come down and starts to scale backup, can you maybe give us your thoughts on either potential station swaps, I know you guys are in the smaller markets maybe it harder and since that the JSA Rule seems to been rescinded, any thoughts on pressing that channel?.

Dan, the JSA role is not rescinded.

The SEC rescinded a public notice that the FCC issued in March of 2014, and said that if you are selling a TV station -- if you are intending to buy a TV station that has a JSA, and you have any finance component between the JSA station and the broker station then 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 book, it is still enforced, it simply a question of processing guidelines, how much scrutiny does your application get if you have a JSA in the financial component in a deal.

The first -- the larger question is kind of 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 said consistently. We have been generally opportunistic and generally patient with growing the company, although I guess in the last couple years we moved pretty quickly in that regard.

We’re going to continue to look to grow the company in ways that makes sense for our shareholders. Station swap, they don't really seem to make any sense for us. We’re very, very happy with these stations that we have and the portfolio that we built.

I would expect that if some of the other folks, pretty much anybody else get together in a large transaction that will be market overlaps that regardless of FCC rule changes will require divestitures and those divestitures may create opportunities for us.

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 Devonport.

So I think it means, I think 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..

Got it. That’s helpful. And then just in terms of 3.0, obviously you guys start rolling that out.

Our understanding is that in the repack you may be able to get reimbursed from shift from 1.0 to 3.0, just can you tell us how you thinking about investment in 3.0 and timing of that as it gets rolled out and eventually finally approved by FCC?.

Our understanding that we will not be able to buy broadcast transmission equipment without the equipment being 3.0 compatible.

So, whether we believe it or not as we go to the repack 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 ATC has been has been doing.

We are at this point not expecting to rollout or convert any station to 3.0 this year. We are expecting that a business case will be developed first in the larger market that justifies the rollout in the largest market.

And as we saw with the DTV and then HDTV and HDTV for news gear et cetera, the cost will come down as time goes on and more and more markets transition. So, 3.0 present some really interesting opportunities for us especially the bandwidth throughput.

but again we need to see little more of a business case and I don't think anybody at Gray is expecting that we’re going to have any transition in 2017 and it's too early to say whether it might be some markets that would be ready and can justify the cost of transitioning in early 2018, so we’re going to be continue to be close to it and we try to attend and participate in all the conversations around ATC 3.0 that we can, to be as smart as we can, but given the size of our markets and initial cost there is not going to be a 3.0 rollout a great television this year..

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..

Sure. I guess I'm delighted to hear that anybody think that we’re 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 – I mean, we are frankly proud if I believe we've only really come off with 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 great history. And part of that is because were patient.

As we’ve said a couple times, while we have a bunch of deals that reprice at January 1st. We don't believe in set deadlines and we will continue to grant extensions and we think the conversations 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 aggressively.

If you look at the chart of our re-trans starting about five years ago, we got much more aggressive and re-trans because we had to. And for some other reasons namely that I was doing them, we got -- we just pushed a lot harder. So I think looking at the 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 50% up next year.

That a large number of providers and obviously large group of our subs that have to get repriced at January 1st so we can give a guess yet as what those numbers look like, but it certainly going to be higher on the gross and the net side that it is in 2017 just one because of the escalators and the contracts we just signed and secondly because there's just so many contracts that are up next year..

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 kind of 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?.

Our 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 to happen to come due in December 31st of this year.

There will absolutely be deal that will not get done until January and maybe even a couple that roll into February, and that's not unusual for broadcasters, not unusual for us. Some broadcasters are might start a little earlier than us, so they can 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 I 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-end and beginning of the year and sometimes we even go away for New Year's Eve.

So there will certainly be stuff that rolls in the January and February, but the prices will be retroactive January 1st..

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

Certainly..

Our next question comes from Kyle Evans from Stephens. Please go ahead..

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?.

The senior credit facility and both of our notes issues have a 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's first or any other kind of secured debt that's the more flexible than the revolver test.

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

Okay, I'm going to let you get away without putting a dollar sign on it..

Thank you..

What is the auto assumption that you have built into your 1Q in your 2017 outlook?.

Auto is down a little bit in Q1, again we know we've got 450,000 or so of Ford money that shifted away from and 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 a year to year to, 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 have been a reasonable number of guides in that Super Bowl number as well..

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?.

Our conversations with the folks at YouTube, they could not be more clear that they want the affiliate. Yes, again, we have a real world example of DirecTV and Dish 15 years ago. They’re targeting a millennial audience for the most part.

Millennial audience tends to dovetail with places we have lots of colleges and universities which tends to frankly not be O&O markets outside of maybe Boston, San Francisco. Those are markets in which the affiliates have the local station.

They've been very clear to us that they want to have us, they've 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's nothing that is going to be announced in the next two weeks that’s for sure.

We’re working on it..

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 the affiliates, just kind of wait and see game?.

We’re not – we were not when networks negotiated the deals with the OTT providers last year.

We’re 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’ve made abundantly clear last year is even stronger now that they're trying to get to market.

Though we would assume that they have conveyed the message that you’ve said, but we’re obviously not – I’m not privy to any of those conversations..

Okay. Thank you..

Sure..

We’ll take our next question from Jim Goss from Barrington Research. Please go ahead..

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 sort of 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..

Jim, I’ll start and I’ll let Kevin follow-up with that. The answer is yes.

I think our group's at TV stations in the professional that run our group and our stations, they’ll had to run a TV station, they’ll had 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 lot of markets that are larger than what we currently are.

Gray has not looked at market size per se. We’ve looked at market dominance and profitability of television stations is a key guidance of where we were going to go. But were 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 small market areas and we would be interested in getting into larger markets if and when they become available, and if and when they put our generally universally new center of universe of stations..

I would echo with what Hilton said, we have a lot of small market stations. The mid market stations are certainly more interesting to us. Financially they’re generally better for us. And we seem to have a fair amount of success with mid-market stations and would like to have more of those.

But we don't think that just because we’ve done well with some mid-with – bunch of mid-market stations that there aren’t markets larger than Knoxville which is currently 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 am not sure I understand the OTT piece….

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.?.

Look, in the best case scenario to the OTT subs, across every provider, across every market currently is less than 1 million out of 100 million homes. That's not very exciting.

It's not – I mean, it’s not even around – something that even rounding or they could double their success or triple their success and they are still at a ridiculously Small number and they still going to be concentrated top 10 DMA.

So at some point OTT will roll into smaller markets, especially if the technology for both the broadcaster 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 the OTT revenues will not be a meaningful to – I think to anybody potentially out --maybe the guys in the largest markets, but there's 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 OTT penetration and urban markets should be higher than non-urban markets you’re going to expect the bigger markets are going to have most of the OTT subs.

So us simply getting into DMA's sort of 30 to 50 is not going to put any real OTT dollars on our bottom line..

Okay, maybe I'll just concentrate on one other. Sort of a post-mortem 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?.

We do not. Candidly, Jim, we think that 2016 was a very unusual aberration.

Gray accumulated a tremendous amount of political to 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 Hillary Clinton campaign in the markets that we’re so heavily in and the Midwest and the Great Lakes area for instance.

She basically felt like she owned and have those markets and consequently, lack of here spending. I don't think any Democratic nominee will ever take the states for granted again. I think the Trump ampaign is a unique and special black swan event.

He began with name notoriety that was essentially a 100% throughout the country due to being on television for 13 to 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’re very optimistic about political..

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 with the punch line in and of itself.

And Trump gathered enormous free media not because he was a celebrity. He was on television for 13 years with the reality show.

He gain public media because when he been a celebrity going back to the 80s, to my knowledge I think he is 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 is nobody who is a celebrity in the 80s who is in the tabloid pages that I can think of really beside maybe Madonna who hasn’t already passed away and its sad commentary, I don’t mean to be cryptic here, but there just aren’t that many celebrities from the 80s who were celebrities throughout the 90s, throughout the 2000, 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, a well know 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 kind of things that he said or tweet the kind of things that he did.

You really – it was a shock in our campaign 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 led to him not spending and it led to Clinton not thinking she needed to spend and certainly in our conversations 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 and actions from people who have already believe in your cause, they do not change votes. And that’s what we are selling. We are selling an ad medium that creates demand for cars, and pampers and vacations and insurance products and political votes.

So we are in the right business and 2018 and 2020 we don’t think are going to be as subdued as we had seen in 2016. So he might have been right about the liberal bias of the media that it came to accrued his benefit. Because of this he can torture them. Anyway, thank you..

Thank you, Jim..

We’ll take our next question from Leo Kulp from RBC Capital Markets.

Hi, thanks for taking the questions. I just had two.

First when your broadcast expenses for 2017, I think your combined historical level was $490 million for 2016, I mean you gave us some guidance around reverse comp, how should we think about growth in expenses ex-reverse comps in 2017? 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 sort of figure out how you guys are thinking about a sale of freight, it’s another group word....

Well Leo, we are not looking to sell Gray. I’m sure someone who is apprised that our board would consider but it would be awfully high price. We think we have the unique and special broadcasting property and a unique and special business. And so, we are looking to buy and not to sell..

Leo, going into the 17 expense numbers, the – is in telling our Q1 guidance. I mean if you take out the reverse comp, that’s 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, you know our – you can back into the – the reverse comp is going up but you know that’s going to explain the vast majority of any expense increases in absent the reverse comps.

You know you are talking in the what could be very well be in the single millions of dollars of overall increase which is going to be a pretty small percentage..

Got it. Thank you both..

Thank you Leo..

Our next question comes from Davis Herbert [ph]. Please go ahead..

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 you can cap leverage from that perspective..

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

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

That is correct. It does not include diversified....

The auction proceeds..

Or the auction proceeds, but that’s you know – but we recycle the auction proceeds for all intents and purposes for diversified, so that’s kind of a, as Kevin said it’s basically neutral. On a T-12 [ph] basis operating cash flow is would be defined in the credit agreements at 12.16 with 312.6..

Okay, thank you. And I just wanted to ask one more in the interest of time and sorry that’s another M&A question, but I know there’s still a lot of fragmentation at the lower end of the TV household reach spectrum, you know more diversified kind of companies out there.

I’m just curious after the auction now that that is sunset, is there higher motivation for them to look to sell and if so, how would you compare Gray or re-trans rates to some of the smaller groups, is there still a meaningful re-trans synergy opportunity?.

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 the auction applications really has held things that more so we believe it was the election and we typically buy from multi generational owned, family owned stations and they those folks tend to sell in odd number years, not even number 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 possibilities of those get announced its’ also focused to 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 ownership rules is sort of another spur, so you know we’ve gone from sort of a wilderness last year where Gray announced -- we announced Fairbanks, we announced Clarksburg, we announced Media General and that seems like almost the whole universe deals that were announced last year to this year being up in the opposite of that, about 180 degrees opposite of that.

So there is certainly going to be a lot more of stations and groups offered for sale. We think big markets, 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 a very – going to be a very interesting next 12 to 18 months.

To your second question, the re-trans that we have seen in diligence suggest that we have a significant advantage in re-trans because we are not just negotiating for a really dominant station in the midsized market that DISH network couldn’t care less if they lost subscribers in one market with a couple of hundred thousand homes.

And it’s a fraction of being their subscribers. When we can talk to 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’ve 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 still think we are getting only a fraction of the value that we actually provide to folks who are selling video packages and overtime 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 that’s 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 or four or ten markets.

Even if they have got very very good stations and a very very smart people, it’s a difference of leverage. And for us, its frankly its 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 and a dominant cable operator in their market who had frankly gotten some pretty good rates out of that broadcast, because that broadcast was only in that market and relied on that cable operator to deliver three quarters and more of their eyeball, and could not afford to be off for an extended period of time.

You booked the tables around for us that’s less than 1% of our eyeballs. So if worse came to worse than we were off the cable operator for two or three months, it won’t matter to the Gray television Inc.

So in that negotiating conversation is completely when Gray is negotiating on behalf of that dominant station then 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..

Right. Very interesting..

Did that help?.

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

We’ll take our next question from Barry Lucas from Gabelli & Company. Please go ahead..

Thanks very much for letting me in. So I’ll keep it to one.

Hilton, I really appreciate the comments on share repurchases and there’s something maybe you could provide a little bit color on the calculus that goes into the decision when you are in the market or not and where does that fit in versus M&A or other things you can do with the cash?.

You know it’s relatively an opportunistic sort of situation. You know we drop down a little bit in the fourth quarter. I wanted to step out and support the stock price and when we see weaknesses we’ll take a look and we’ll weigh that against you know the use of our proceeds and so we just look at it day to day..

Great. Thank you for that..

All right. Thank you Barry..

Our next question comes from Brian Hirschfeld from Bain Capital Credit. Please go ahead..

Hi guys, thanks for taking my 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 and all like primetime and NFL?.

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 owner.

So if our Knoxville station is not carried by an OTT provider and Knoxville that provider cannot bring in another CBS TV station and give that to customers in our markets. CBS however does have other programming delivering mechanisms and one of them is the OD.

So they can’t play generally network entertainment content I think its 24 so hours after it’s live broadcast. So if you want to watch a CBS station especially if you have other TV channels one year TV channels available on your line up and you are hoping through there will be a black screen or no screen at all for CBS.

If you then click over to the VOD box or 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 is held back.

So you can fill and get the content but not in a user friendly way and certainly not a good user experience..

Okay, thanks..

Sure..

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

Before Hilton has – says anything, I just want to say we appreciate, we know there’s a lot of questions and commentary on OTT and re-trans. It seems they are increasing with every call.

We frankly think that its’ a sign of your specification with this complex area and the answers are going to continue to be different sort of on the OTT space probably every quarter. So appreciate your patience with us and understand we are not trying to be too glib in dismissing OTT and that they have no subs in our market.

There will be a business there, it’s not there today and we are not going to rush quickly into doing bad economics deal. So I appreciate everyone’s patience with us on OTT deals and I’ll again turn the call to Hilton..

I 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..

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