Good day, everyone and welcome to the Gray Television’s Second Quarter 2015 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Hilton Howell, President and Chief Executive Officer. Please go ahead.

Thank you so much, operator. Welcome to the second quarter earnings call for Gray Television. On the call with me as usual is Jim Ryan, our Chief Financial Officer. Kevin Latek, who is usually on these calls, is unavailable today. We will each have a few brief comments and then answer any questions that you may have. First, we were thrilled with Gray’s performance this quarter and year-to-date. We achieved record revenue for the quarter and year of $143.5 million and $276.8 million respectively, a 34% increase for the quarter and a 39% increase year-to-date. These gains led to record broadcast cash flow of $57.2 million and $104 million for the quarter and year. This is an historic high for Gray Television. Likewise, we achieved record net income of $12.1 million and $17.7 million for both periods, which represents again an all-time high. We achieved record retransmission consent revenue of $36.9 million and $73.2 million, the highest of any periods in our history. And following our successful secondary offering at the end of March of this year and a strong free cash flow generation our stations and company delivers, we had $222.2 million of cash on hand on our balance sheet at the end of the second quarter, reducing our net leverage ratio to 4.8 times. We have made good use of the proceeds of our secondary and of the cash that our company has generated. On July 1, we announced five individual acquisitions, all of which that we closed at the beginning of the third quarter. First, we announced the acquisition of KMVT, the CBS affiliate and KSVT, the FOX affiliate in Twin Falls, Idaho. Second, we announced the acquisition of WAGM, the CBS and FOX affiliate in Presque Isle, Maine. Third, we announced the acquisition of KOSA, the…

Thank you, Hilton. Good afternoon, everybody. I am going to first pre-apologize for a bad summer cold I have, so pardon me for my voice and maybe some occasional coughing. I am going to focus my comments specifically on the combined historical results for both the second quarter and year-to-date, because I think that’s most meaningful to everyone as we are comparing our ‘15 results to and giving effect to all of the acquisitions we have been doing through 2014. For the quarter, our core local was up 6% on a combined historical basis. National was up 4, right in line with our expectations for the quarter. The local and national core together was up 6%, which we feel very, very good about. Our retransmission revenue came in at $36.9 million, which is what we expected. Our political at $2.2 million was a little bit better than we had anticipated and that’s I think the best reference point is that the second quarter at $2.2 million is about $1.3 million over 2013 results. So, we are comparing off-year to off-year and again we feel good about that. Our operating expenses for television were up as we – up $6.1 million. Most importantly, and as we have talked about this on the last several calls that expense increase quarter-over-quarter is really being driven by the increased reverse comp, especially with our pay in CBS for the first time ever this year. A reverse comp was up in the quarter, $11.1 million. So, actually our core expenses, including reverse comp are down about $5 million and we are extremely pleased with that. Year-to-date, again, we are pleased with where we are so far. It’s tracking to expectation. As we said in our Q1 call, we had some tough comps in Q1 of…

Great. Thank you, Jim. Operator, let’s open up for questions.

Thank you. [Operator Instructions] We will take our first question from Aaron Watts with Deutsche Bank.

Hey, guys. Thanks for taking the call and Jim, I will try to take it easy on you today. Hi. First question just on kind of your performance moving from second quarter to the third quarter. I think you mentioned that national might be ramping up a little bit because of the political displacement factor. Anything notable on the local side that is helping kind of boost your performance there?

I characterized that more on locals, a little bit more broad-based. We certainly have are going against a reasonable amount of political from last year in Q3. It was about $23 million. So, that’s a part of it. I don’t want to point to any one single thing, I think I described it as just a lot of base hits and doubles and nothing really kind of homerun-ish just a good solid off year Q3.

Okay. And on the auto category, it looks like it was down slightly, how do you kind of reconcile SAAR being very strong right now, yet the auto category not really showing growth, is it just the cars are flying off the lots and the local dealers…?

I think that’s part of it. And with the SAAR going up, I mean certainty they are earning credits at the local level. And I don’t know exactly how long they have window, they have to use those credits, but I would think with the cars moving so fast, they are probably savings – they could all be saving some of those credits they are earnings now for down the road when they needed more.

Okay. And then one last one for me just on M&A, you guys have obviously been more active than others recently and what I would characterize is kind of a smaller acquisitions, what do you think is kind of holding back larger scale M&A right now, both for Gray or the sector as a whole and what do you think kind of jolts everyone back into considering larger M&A?

Well, let me – Aaron, let me start with that. This is Hilton. The answer for Gray, which is the only thing that I can speak to, is it’s not holding – nothing is holding us back. With regard to the industry, every company in our industry has different issues and different opportunities and they would look at things differently. There has been a lot of controversy out. The impact of the repacking and everything that’s happening with the FCC, I think that’s very company specific. That is something that we have publicly said that it is extremely unlikely that Gray will participate in, because our stations make a lot of money. They have got tremendous cash flow. And they have an enormously important role in their individual communities. And so Gray looks for stations and groups, but it’s just hard to find them that we can add to our portfolio. So absolutely nothing that thing is holding us back. Every other company will have to answer that for themselves. So that’s about all I can really speak to.

Do you feel that a material type of transformative transaction for Gray would be beneficial just given the kind of changing landscapes throughout television right now?

Well, I mean I don’t know exactly what a transformational merger means. I actually, I will probably do. And the answer is that it actually Aaron depends on who the partner would be. I think that Gray is now a sufficient vertical scale in its markets to stand on its own for the duration. And I think that horizontal scale is something that we should continue to work on. And I think net with of all of our transactions that we announced the 1 July, we are in 47 markets out of 204, 205, 206 something like that in the country. And out of those 47 markets, we are not the dominant provider, we are [indiscernible] near it and we think that gives a tremendous amount of staying power and gravitas. And I think that our retransmission concerned negotiations this prior year prove that. And so we feel good about where we are. There’s a lot of assets that are in this business and people may be deciding whether or not they want to continue to have them and run them or not. And the one that I will say is that Gray is a permanent player in this space. And we are interested in talking with anyone, but I think that they have a sterling team, we have sterling assets and we know how to run a TV station. And so I would be remiss if I said that we weren’t in discussions, they occur all the time. There are a few obstacles to things happening in the next two or three quarters. For other companies, there is zero standing in the way for Gray television because the thing that makes us the ones that have a broadcast operating business that coins money and serves its community. And those are television stations that are not going to be turned back to the FCC. So we are ready and able to move, we have demonstrated our ability to move quickly and we have the capital and the assets and the access to capital to make those potentialities a reality.

Understood. Helpful insights, Hilton. Thank you.

Thank you, Aaron.

Thank you. We will take our next question from Lance Vitanza from CRT Capital Group.

Hi, I have a couple of questions, the first is on the core national guidance, I understand reverse crowding out, but if you compare that guidance to what you actually achieved in 3Q of ‘13, this is much stronger, it’s really on the same ballpark, so my question is what’s driving that, is this a stronger ad recovery than we saw back in 2013 or is it more a question of better execution on the...?

Well, our ‘15 guidance for national includes all the acquisitions completed to-date, I am not sure what you are looking at for Q3 ‘13, but if it’s our historic as reported and it’s obviously doesn’t have all the impact of acquisitions in it.

Just so I am clear though, I thought when you said that the growth and rates in the guidance, that includes you are comping off of it on a combined basis, are you not?

Yes. And so that combined basis in Q – I thought you said Q3 ’13 maybe you said Q3 ’14, I misunderstood you.

No, I did. What I am saying is you are growing more quickly than the old legacy business was growing in Q3 ‘13. The last time that you had reverse crowding out as a benefit. So I am making the point, I guess I am trying to understand, it’s not just – I mean it occurs to me that you are doing something better than you were doing in 3Q ’15, because the growth rates are higher. And if I am hearing you right, it sounds like you are saying that there is something – you are outperforming on basically on the properties that you have acquired?

There is some of that. And I think that goes to the properties that we have acquired and we felt – and then as we acquired them we thought there was some potential there. I think it could be also depending on the market on sort of the relative performance scale we may be picking up a little bit more share in some markets as well, that’s helping boost the overall number.

Okay, thank you. So on the reverse comp side, if I heard you earlier in the comments, $17 million of reverse comp in 2Q, is that a flat fee or does that number vary with your retrans and in either case, how long should we expect that $17 million to remain the run rate?

It depends on the network, how the fee is worked. A couple of networks have a fixed fee. A couple of other networks have a hybrid where there is a “fixed fee” component, but then the fee agreement has a variable component as well. So but in our case, as you can clearly see in the existing investor deck where we laid those numbers out for the next – ‘15, ‘16, ‘17 regardless of the network and how they choose to do their individual fee, we think our run rate on a net basis is roughly 50-50 over the next several years. Now the $17 million will – that you mentioned will step up a little bit in Q3 and Q4 because, obviously, the additional acquisitions we have made, but like I said earlier, on a full year basis, we originally had expected about $78 million of net at the end of the day and that’s with the additional acquisitions, they were relatively small markets, but that will boost the number a little bit higher to about $80 million.

Okay, that’s helpful. And then for Hilton, just regarding transformational M&A, I gather you get a lot of questions about that and there is perhaps some interest in that. But I wanted to make a comment that in Q1, you were the top TV performer in terms of core revenue growth and so forth. And with the numbers you reported today, I would be surprised if you weren’t the top performer in 2Q and the guidance for 3Q suggests you are doing well again. So, I would just say that literally the last thing I would want to see is for you to be involved in a transformational transaction, because you are already where we would want you to be and so I don’t know what you would be transforming into. It’s hard to imagine that you would be transforming into something better?

That’s the nicest comment I have ever gotten in one of these calls. I will tell you, yesterday, I was in South Bend, Indiana and I talked to all of our employees at WNDU, our station there that we purchased a number of years ago from Notre Dame University and I think the team that we have in place, the management that we have in place are truly extraordinary. I am so proud of what they are doing on an individual market-by-market basis, because no matter how much, Jim and I have been working, everybody else at that level to individual stations and their performance and what they do on a local basis, that leads to what we have and what we reported. And I am enormously proud of the corporate culture that we have created that’s in Gray Television, because we invest a great deal into our stations, we invest a great deal in technology, and we invest a great deal into content. And I am very happy to be able to consistently report that those investments pay off for our shareholders. And when we did our secondary at the end of March, we showed our numbers and despite being an invest and build broadcaster or maybe because invest and build broadcaster, likely because, we have the highest EBITDA of any publicly traded comp in the country. And we would like to keep it that way as best as we can. However, our industry is changing and we have to stay cognizant and confident of what’s happening and what’s moving and every one of our guys works 24/7, 365 and a lot of people say that but ours really do and they have path and they are going to pay attention to how the industry shifts and changes, but we will never lose sight of what we owe and are obligated to do for our shareholders of this company. And I thank you for your comments.

Thanks a lot.

Thank you. We will go next to Marci Ryvicker with Wells Fargo Securities.

Thanks for anyone looking at their screen as I am sure you can see that media stocks are down big today. It’s dragging Gray down. And I think it’s coming off the commentary from Disney on pay-TV subs. And so one of the questions I am getting is in terms of reverse comp on the affiliate side, if you are paying a fixed fee by market, what happens if your pay-TV subs go down as well that you are getting less retrans revenue but still paying the same amount or is it the case that given your broadcast, you are a little bit safer, because you will be included in all the skinny bundles, so your pay-TV subs may not go down as much as something like cable?

Marci, I completely agree with the second half of that comment that yes, given that we are operating in Big Four affiliates in strong new stations that we will be in skinny bundles. So, we are not distressed by that. Will there be over time a little bit of cord cutting? It is certainly, but again, we think given the size market we operate in and the high-quality news operations, we don’t – we think we are probably a little more insulated on that than maybe a major metro market might be. So, again, we are not overly concerned. And certainly, the retrans agreements themselves are generally 3 years long. So, there are definitely opportunities to reprice and adjust not all that infrequently. So, we are pretty comfortable with that landscape over the next several years.

Okay. And then can you remind us how many stations or what percent of your markets you have number one or number two ranked new stations? And then on top of that I believe that the number one or number two ranked new station usually gets over 50% of the political revenue in a market?

It can, yes. And Hilton is right, in the 40, 47 markets, we are in currently, it will – it’s all but two that we operate a number one or a number two station.

Okay, great. Thank you.

Marci let me give you one example though on that number three station, because I think even that exaggerates it. One of them is Albany, Georgia where we have operating out of our Tallahassee station, the CBS. I think the FOX and the CW and I apologize we are not being able to put that out there correctly. Within that DMA, we ranked as number three, but we used to own the number one, WLD, which is now a Raycom station. And the FCC forced us to relinquish that market, but we were able to bring service to that community out of our station in Tallahassee that keeps our cost down that is dramatically profitable. And so with regard to market ranks, another thing to keep in mind about the quality of what we do, a lot of the places where we report a number three, it’s really not a number three, I mean, it’s a unique opportunity where we can make outsized profits and actually deliver outsized public returns to the viewers in those communities that didn’t used to have that. And so I would argue that we are number one, number two everywhere but that’s because of some of the unique issues that accompany our number three stations.

Got it. Thank you both very much.

Thank you. We will take our next question from Jim Goss with Barrington Research.

Thanks. I have got a couple of questions. First, as you have gotten somewhat bigger and your platform has gotten more extensive, is there any shift in the appropriate size of markets as your scale higher?

Let me answer that, Jim and then I will let you come back around to that. I think there is a lot of discussions about market size by companies. There are some companies that come in and say, we only want to operate in X market and above. My personal opinion about the way we operate if we are able to make the profit margins, the EBITDA margins and yet deliver the service that we deliver in our smaller markets. When we get into a bigger market where there is a lot more cash flow and we operate in the same way, we are going to be very successful. Sometimes, I think it’s harder for a big market group to come into smaller markets, but I think Gray has the potential to do that. Now, let me say that, that is not the strategic vision of our company, but by the same token, I would never preclude that. Gray has the capacity to grow into one of the, if not, the dominant television broadcaster in this country and by that I mean also in larger markets but by quality. We are passionate about this business. We believe in it and we believe that we are in the period of really a new golden era of what we are doing. And technology is helping us. And we make more money now on our digital platforms than we ever got in the old days of reverse comp. And so not reverse comp, but compensation from the networks. And we just see so many different silver linings to apparent clouds. So, Gray does not limit itself by market size. We do limit ourselves by quality, but there is also an issue of competition. If you just go through the market stats, as markets…

You have always had an affinity to or an inclination to look at capital cities and college towns and there used to be a company called Capital Cities Communications has eventually bought ABC that seem to have a pretty good record along those lines, I am wondering if – are you proactively going after some of those markets in a sort of initiate or try to initiate discussions where you can, what sort of process do you go through?

I will say this. We have a strong management team and we go through the inventory stations that are out there. And I hate to call it anything other than it is, but it’s really a shopping list. And it’s some of the best stations in the country. Some of them are goods, some of them are individual stations, but all of them calm with a great deal of pride of ownership, respect for the business we are in and candidly allow for the business that they are in. It is a delicate process, it’s a cording process for Gray. And we look at ourselves with regard to the existing markets we have and I will refer to those in every one of our videos as being stewards of those stations because that’s how I view it, and that’s how we view it. Now, we create a ton of free cash flow which is what our investors really care about. But at the end of the day, it’s the substance that people put out on the individual markets that creates that free cash flow. And so we have a strong and very articulated shopping list and we work it everyday. And we are sometimes successful and sometimes we fail. I think, we have demonstrated to the market that we are discipline in our pricing because when we started this round of acquisitions, we have actually been able to do it and everyone has been accretive it will continue to be, because that allows us to continue to build broader scale of this operation. And I am really proud of what our team has accomplished. So we do have a very strong identification process and a great shopping list. I just wish we can get all of it.

Alright. Well, one risk factor I would like to bring up. Over the years, broadcasting – television broadcasting, in particular, combination broadcasting cable has been able to maintain its share of total domestic ad spending pretty well. The latest encroachments have been Internet and now digital. Now I am wondering if there is some risk with streaming and over the top that there might be some potential shift in your ability to maintain that the industry, in particular, an ability to its share of total ad dollars since they can’t really grow too much out of the line of GDP?

Well, let me start with that and I will let Jim follow-up with me when I am finished. I have – I have grown up in this business and it’s the biggest chicken, little business I have ever studied. I mean, whether it is the remote control or cable or anyone of the other different technological challenges, all of the people that were predecessors of mine in any company whether is it capital cities A, B, C or have to deal with question just exactly like that. It is not to make light of that question because we have seen the power of technology and how it’s changing our world everyday. But something I mentioned two quarters ago, we commissioned SmithGeiger to study what we are doing. And they looked at all of our stations by regions and then interviewed literally thousands of people per region in terms of their view of our stations and what we did. And their results were presented at our General Manager’s meeting at the end of February of this year. And the results were really quite stunning. Our individual websites, our digital presence, our apps, great digital media that’s out there, are the single most viewed local digital or mobile product in any of our markets by region. And in fact, the only thing that beats them are Facebook, Google, YouTube and what I really don’t understand, but this is what the results showed, was weather.com. Those four and in every one of those regions, we were the dominant number one ahead of newspaper, ahead of our competition, of everything. And I think that a lot of that is due to the talented team that we have that made us first. We were the first broadcast company in the country to have an Apple…

Thanks. Your passion is showing through.

Thank you.

Thank you. We will take our next question from Barry Lucas with Gabelli & Company.

Hi, Barry.

Thanks. Good afternoon, Hilton. Good to talk to you. A couple of quick odds and ends. On auto could we talk a bit about how that’s actually pacing in Q3 given the strength in national?

I think, Barry, right now it’s a little bit better how it will translate for the whole quarter, I think it’s just a little too early to tell. But we don’t – it doesn’t seem to be going in the wrong direction for us in general. Our pacing for Q3 again we are encouraged and it’s reflective in the local and national growth rates on a combined historical basis, but where July appears right now I am it’s pacing in healthy upper single-digits. August is similar. September, local and it’s still pretty early for September remember it’s only the first week of August. But local is up pacing right now, a nice solid mid single-digit range and national is doing a little bit better. And again, it’s given the relatively earliness in the quarter that local in September is what we would expect and we think it will – and obviously, it will pick up a little bit as we get closer to really selling September. So, we are pleased with what we are seeing.

Okay. So, you are saying what it was up in all three months?

It felt like it picked up a little bit in July where it will end up for the whole quarter. I think it’s a little too early, but it doesn’t – right now it doesn’t feel like it’s – right now it’s kind of flattish year-to-date or thereabouts. And it doesn’t seem to us like it’s I am trying to think of, eroding. It’s not going south. If anything, third quarter will look a lot like the first part of the year, but it has to potentially get a little better.

Great. Jim, as long as you are I don’t want to keep you on with your cold here, but you did outperform on the expense side when you strip out reverse comps. So, where are those savings coming from?

It’s a little bit across the board. We did have a reasonably good quarter in our health and welfare plan we are self-funded so that there is some volatility there. And so, Q3 was relatively good. We have seen some – I am sorry, Q2. Our payroll was down a little bit year-over-year, that’s partly reflective of a one-time charge we took last year, our non-cash charge when we changed our vacation policy to a paid time off policy. So, that’s certainly helping a little bit, but also base payroll is done, I think that’s just again partly reflective of working the opportunities we have seen – we saw in the acquisitions that we were making in ‘14. We are saving a little bit in national rep commission, because we are not, obviously, without the political, you don’t have to pay. Most of political comes through the national rep. And we are not going to go pay those commissions on the political this year, so that’s certainly helpful as well, but Barry, really it’s – as I described it, I think it’s on the revenue – in answering a revenue question earlier, it’s a lot of playing old-fashioned singles and doubles and grinding it out, nothing – not any one single company-wide initiative that’s really driving it, it’s just everybody at the stations working hard to try to be as cost efficient as they can.

Great. Last time for me and Hilton I don’t want to reign on the parade at all here, especially given internet up 4.9%, but shouldn’t that number be a little bit stronger?

Well, we would certainly like it to be and I think the answer is yes. But I think it’s going to come. We had a few flat falls that we have fixed. And I think as you will see that number growing as we go for quarter-to-quarter, but we are still very proud about this.

And Barry as we said before this year for that line item is kind of the regrouping year for us. We had the last few years some very, very strong growth. And we are just – we are as Hilton said just kind of redoubling the efforts to take it now again to the next level and push it forward. And we have had, if you track it back far enough, I think you will see a couple of other times where it’s had a growth spurt, leveled a little and then sprinted again. So, we are gearing up to push it forward again.

Great, thanks very much. Feel better, Jim.

Thank you, Barry.

Thank you. We will go next to Leo Kulp with RBC Capital Markets.

Hi, good afternoon. Thanks for taking the questions. I just have two quick ones. First, can you provide an update on your Big Four subscriber count I think the last one I saw was 9.6 million?

Of the five acquisitions, we will increase that a little bit. To be honest, I don’t have that immediately handy, but given the size of the markets, it’s not going to change that dramatically. And I will get this wrong, I know I will, but it’s like Presque Isle, Maine has 15,000 subscribers or something. It’s just indicative of the market. So, it will move it a little bit, but not certainly nothing at a material level.

But you are not seeing an erosion on your sort of underlying base?

No. We are really not seeing anything significant as I said earlier. Occasionally there is some what appears to be cord cutting or some times it’s more of just changing between one provider and other, but again, given our size markets and our very strong news operations, we think we are probably a little bit more insulated than maybe a big metro market.

Okay. And then, any thoughts on how the DIRECTV AT&T merger will impact your retrans fees?

The simple answer is we kind of worst case we don’t think it will really impact things. There is the possibility that it might actually be helpful to us. It’s still a little unclear to us exactly how that’s going to – how they are structuring that and at the end of the day, which set of contracts will apply or is it any more status quo of the AT&T side as that static and the TW side is static. It’s a little unclear to us, but we certainly are not expecting a negative out of it.

Got it. Thank you.

Thank you. We will go next to – we have a follow-up from Marci Ryvicker with Wells Fargo Securities. Marci, your line is open. Please check your mute function. Hearing no response, we will go to John Huh with Wells Fargo Securities.

Hey, guys. Sorry, I think that was me on Marci’s line actually. I just had a couple of follow-ups. Jim, given that you closed a bunch of deals on July 1 are there any one-time deal costs embedded into your Q3 expense guide?

There is a little bit, but really some of that, I mean, given the actual size of those deals, and it’s not going to be a lot. They tended to proceed actually quickly and without – and very cordially I would phrase it as and so unlike maybe a big deal that takes a lot of legal time to get it put together, these were pretty straightforward deals. And so there is a little bit, but it’s baked into the number we put out there.

Okay, perfect. And then just on your Q3 political guide, it seems like it implies a sequential decline from Q2. I know you said you are staying on the conservative side there, but it’s little bit surprising given the way that political usually tends to trend and given the stations you are adding in the quarter, so like any color there would be helpful?

Yes, I mean, really I mean the number of – the range we put out certainly we would hope we were at the high end or a little bit above it. And obviously, there is certainly the opportunity for political to skew further up. I can’t really cite anything, in particular, John, I would say well it was X thing in Q2 that boosted the number up. I think this is kind of is what it is right now, but certainly we are not bashful in taking political orders. So if the opportunities are there, we will always try to get more than our fair share.

Got it, that’s it for me. Thank you so much.

Well, let me just add one other thing just as an issue of reinforcement. We really get the highest political revenue per household of any station group in the country and it’s because of what we put on the field and back in that. I am also proud of what Jim does because it’s hard to predict political, but it’s not impossible because it changes all the time depending upon polls, leads and contested races. So it’s a little hard for anyone sitting in Jim’s position to project political. But I think it is fair to say that we think this whole process is going to be extremely bullish for us and for industry. I think on a percentage basis we are going to get more than our fair share of it because of what we do. And so I think it’s going to be a huge upside and I think that it’s going to expand dramatically. And I expect that we will start seeing increases in the third and fourth quarters just based upon what we have got going on and that’s more than the presidential election here. I mean, we have got competitive senate races, competitive governors races, and they just simply have to be our stations to get elected in their communities. So we are very bullish about that for the next six quarters.

Great, I appreciate the color.

Thank you. [Operator Instructions] We have no further questions in the queue. I would like to turn the program back over to Mr. Howell for any additional or closing comments.

Thank you very much, operator and thanks all of you for being here this afternoon. Thank you for your interest in our company. And thank you for your interest in our industry. We are excited about where we are and excited about where we are going. So we look to talking to you next quarter or if you have any questions you know how to reach us, give us a ring. Have a great afternoon. Thank you.

That does conclude today’s call. Thank you for your participation.