Gray Media, Inc. (GTN) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 earnings call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Hilton Howell. Thank you. Please go ahead.

Thank you, Mitaya. Good morning, everyone. As our operator mentioned, I am Hilton Howell, the Chairman and CEO of Gray Television. Thank you for joining our second quarter 2020 earnings call. Today, as is expected this time of the year, we are all virtually present. So during Q&A, if we stumble over a couple of us, please forgive us. On the line with me are our President and Co-CEO, Pat LaPlatney; our Chief Legal and Development Officer, Kevin Latek; our Chief Financial Officer, Jim Ryan; and our Chief Operating Officer, Bob Smith, who has been with us before, but I'm delighted to have with us today to add perhaps some color to what we're seeing in the field to all of our sessions. We will begin this morning with a disclaimer that Kevin will provide.

Good morning, Hilton. Thank you, everyone -- I'm sorry, thank you, Hilton, and good morning, everyone. Certain matters discussed in this call may include forward-looking statements regarding, among other things, future operating results. Those statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those described in the forward-looking statements as a result of various important factors. Such factors have been set forth in the company's most recent reports filed with the SEC, including today's earnings release. The company undertakes no obligation to update these forward-looking statements. Gray uses its website as a key source company information. That website address is www.gray.tv. Included on the call will be a discussion of non-GAAP financial measures, and in particular, broadcast cash flow, broadcast cash flow less corporate expenses, operating cash flow, free cash flow, adjusted EBITDA 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. Included in our earnings release as well as on our website are reconciliations of non-GAAP financial measures to the GAAP measures reported in our financial statements. I now return the call to Hilton.

Thank you, Kevin, and thank all of you again for joining us this morning. But first, before we begin, I want to take a moment to wish Gordon Smith, our President and CEO of the National Association of Broadcasters, a swift recovery from the stroke he apparently suffered last night. Our thoughts and our prayers are with him and his family. We understand his prognosis is excellent, and we look forward to his return to the NAB and wish him Godspeed in his imminent recovery and many more years leading the NAB organization. Second, I want to salute the truly amazing men and women of Gray Television for their extraordinary efforts during these extraordinary times. Learning to work from home, often in isolation; learning to cover an ever-changing, life-destroying virus; learning to balance the child's care with unrelenting demands on -- of deadlines our viewers count on; learning to fight through their own fears; and during the process and subsequent riots, learning to take a rubber bullet in the chest; learning how to report clearly through the fog of tear gas; learning to stomach the reporting of the ransacking of their beloved cities, towns and communities and trying to make sense of it all. As the depth and tragedy of our current situation sank in, the absolute first thing that Gray Television did was assure our associates that their jobs, their salaries, their benefits were absolutely secure and not worry about their personal financial security. Their job was to focus on their responsibilities, their journalism, our communities and our clients, and it has paid off. As the second quarter dawned and with the advent of COVID-19 in early March and then the formal worldwide pandemic, which was declared, and the government-mandated lockdowns were announced, business fell off a cliff. It was deep and unknown. But as the quarter matured, each month got better than the last. In the end, our total revenue declined approximately 11% compared to last year's second quarter. Our total combined local and national broadcast revenue, excluding political revenue, which we call our total core revenue, decreased approximately 30% compared to the second quarter of 2019. In every cloud, there is a silver lining. Our business slowed less than we feared, and it recovered faster than we hoped. In fact, the year-over-year in total core revenue improved sequentially throughout the second quarter. April plummeted by 38% but May improved, but was still a decrease of 34%. And June declined by only 17%. But most importantly, in many of our markets, our individual stations met or, in some cases, beat their pre-COVID budgets in June. Of course, our total revenue declined even less on a year-over-year basis in the second quarter than these amounts. In particular, our second quarter results were as follows. Total revenue was $451 million. Net loss attributable to common shareholders was $2 million or just $0.02 per share. Broadcast cash flow remained healthy at $128 million. Adjusted EBITDA was positive at $108 million. It is important to keep in mind that through this historic health challenge is temporary, though of unknown duration, that this great country will not allow itself to remain mired in various stages of stay at home, safer at home and similar restrictions on businesses, schools, entertainment or sports. And a more immediate concern, our political theater of 2020 has never been more dramatic, with no more rallies, no more live conventions, no more bus tours, no more whistle stop train visits. Television will remain and indeed increase as the dominant form of political reach and impact. We anticipate that our political advertising revenue in 2020 will be between $250 million and $275 million and maybe more. Importantly, Gray remains on track to be robustly free cash flow positive during each quarter of this year. We remain optimistic about our business. We, therefore, took advantage of what we believe was a significant mismatch between the value of Gray Television and the price at which the company's common stock traded with the past several months by repurchasing 0.5 million shares of common stock in the first quarter and a further 3.3 million shares of common stock in the second quarter. In total, we spent slightly over $49 million in the first half of 2020, purchasing a bit more than 3% of our total outstanding shares at an average price of $12.81 per share, including commissions. Currently, we have approximately 89,740,610 common shares and 7,048,006 Class A common shares outstanding. And we have approximately 80 million under our stock repurchase authorization adopted by our Board of Directors in November of 2019. I am particularly pleased to confirm that Gray's prudent management has enabled us to continue to grow a very strong cash position and a rock-solid balance sheet in these difficult times. Over the first half of the year, we increased our cash on hand by $167 million, beginning at $212 million at year-end 2019 to $379 million at the end of the second quarter despite spending almost $50 million on stock repurchases. This represents a 78.8% increase in cash on hand in the bank following the worst quarter imaginable. Our total leverage ratio as defined in our senior credit facility was 4.4x on a trailing 8-quarter basis, netting all of our cash in the bank. We have not drawn any funding from our $200 million revolving credit facility, and we have no intention to do so. We also have not received any stimulus or recovery funds from any government program and also have no intention to do so. Pat, Kevin and Jim will now add additional color to today's earnings release. Thereafter, I will open the line for questions. Pat?

Thank you, Hilton, and good morning, everyone. It's been roughly 150 days since an outbreak of the coronavirus forced the NBA to cancel the remainder of its season, those games are being played and the Gray Television adopted a remote work policy and related COVID-19 policies for all employees. Since then, we have all changed our work and personal lives in many ways to protect ourselves and others. The coronavirus crisis has surely lasted longer than we anticipated at 150 days ago, and frankly, it will continue to impact us for quite some time. Meanwhile, the country and each of us are confronting not only our strengths but also our shortcomings as a society. We are encouraged at the largely positive constructive responses to all the historic challenges that stand before us today. The past 150 days have not been easy. We are nevertheless optimistic that these experiences will make us all stronger as a country, as a company, as a society and as individuals. We simply could not be more proud or more humbled in how our extraordinary group of colleagues has doubled down on covering local news and events, serving our advertising customers, super serving local communities and reconfiguring systems, facilities and routines to permit all of that other great work to recur in a new remote, socially distant and often uncomfortable environment. Unfortunately, some of our journalists have been attacked for their work covering the events of the past 150 days. And not just virtually on social media, which is unacceptable, but also attacked verbally and physically by both police, who are called on to protect the community, and by rioters intent on harming the community. Shooting the messenger has taken on a new eerie meaning this year, and we call on everyone to respect all members of the media as they work tirelessly to cover the news for the benefit of all. Turning to the business environment. We're encouraged by the return of advertisers and our continued success in landing new business as we move past April. Our forecast at this time showed business still off year-over-year but not at the levels we saw in the second quarter. With the number of virus flare-ups occurring randomly around the country, we are simply not able to predict whether -- or how closely future advertising revenue will meet our expectations, though we continue to be encouraged by the creativity and ingenuity of our sales teams. One very strong performer, of course, is political revenue. As Hilton noted, we've now altered our full year political guide at $250 million to $275 million. On the presidential front, Biden spending remains on par with the pace that the Clinton campaign had in 2016. Trump campaign, however, has laid in their base buys through the election. Importantly, the Trump campaign spending is currently on track to be up 57% versus his overall spending in 2016. So far, issuing PAC spending for the presidential race is up only slightly at 2% from 2016 levels. But it is, of course, still relatively early in the cycle for presidential advertising. We're seeing very strong demand in the center races. Gray has 5 states in the toss-up category, 4 states in the next most competitive category of lean democratic or lean republic. Michigan rates is coming in below expectations currently. And we are seeing higher-than-expected spending in the center races in South Carolina, Alaska, and Kansas. In addition, party and PAC spent from the major groups from both parties supporting Senate candidates is up 27% from 2018 levels. Rounding out the races, Gray has 8 house races that fall in the toss-up category, with 3 races shaping up to be more competitive than originally anticipated. We have only 4 races for governor across our footprint this year with only one, North Carolina, expected to generate significant revenue for us. We've seen a record number of prebookings in this cycle as campaigns try to commit to their spending level early on and lock in lower ad rates. To date, we have seen an 8% increase in prebook dollars for nonpresidential races versus the same time in '18. Finally, we learned yesterday that the Trump campaign had roughly $300 million of cash on hand at the end of July, which is essentially the same number as the Biden campaign. We are confident that both campaigns will raise more money over the next 3 months and will spend every dollar that they raise with most of the spending used to buy effective ads on television. This data point also bodes well for a record year. I'll now turn the call back to Kevin.

Great. Thank you, Pat. Turning now to retransmission. We completed agreements with 3 of our largest MVPDs as well as a small number of additional operators in the first half of this year. As noted in our prior call, the public health crisis did not impact the outcome of those negotiations, which were conducted, as usual, quietly, respectfully and in good faith by all parties. We have been pleased with the nature and specific terms of our recent retrans renewals as we continue to push for full value for the content carried by distributors are renewing retrans contracts as well as our nonrenewing retrans contracts all include annual escalators that ensure continued growth in retransmission revenue every year. This year, however, we have encountered unexpectedly large declines in sub counts. The first quarter of 2020 had 2% fewer MVPD subs in the fourth quarter of 2019. It appears that the second quarter of 2020 had 3% fewer paid MVPD subs in the first quarter of this year. OTT providers, on the other hand, continue to have subs in our market, with perhaps as much as 18% more paid OTT subs in the second quarter than we had in the fourth quarter of last year. In total, our paid subs declined by nearly 3% between the fourth quarter of last year and the second quarter of this year. For context, this first half decline roughly equals to sub declines that we experienced in all of 2019. Given the rate escalators in our retrans contracts, a stable sub environment would have yielded low double-digit growth in retrans revenues over last year's number. The increased sub losses, combined with migrations and subs among MVPD and OTT distributors who all have different rates, muted our gross retransmission growth. In particular, our second quarter retransmission revenue increased 9% over the second quarter of 2019. Our first half retransmission revenue increased 7% over the first half of 2019. Looking ahead, if sub count remains stable for the rest of the year, retransmission revenue in the second half of 2020 would be somewhat higher than the first half of 2020 due to a significant renewal that we priced on April 1 of this year. If sub losses continue at an accelerated rate, depending on how subs migrate among the various distributors, retransmission revenue for the latter half of the year could be somewhat less than the retransmission revenue booked in the first half of the year. We also see in our release today that our network affiliation payments, which we typically refer to as reverse comp, are significantly higher than 2018. I want to remind you that whilst we've been forecasting a significant increase in reverse comp for some time now. In 2014, Gray proactively renewed all of our big 4 network affiliation agreements for roughly 5 years. Those agreements locked in rates that in hindsight appear pretty favorable to us, and those agreements expired at various times in 2019. Throughout last year, as those agreements were replaced with new market rates, our reverse comp payments increased. In 2020, we experienced higher rates with all 4 networks for the entire year. Rates of course alone increased again at the start of 2021, but we also have a large number of MVPD retrans agreements repricing at the same time. Our next set of MVPD renewals occur in January 2021. In the fourth quarter, we will begin reaching renewal negotiations covering most of our roughly 500 MVPD partners, representing approximately 43% of our total subs. We look forward to the next round of retrans renewals, where we can again demonstrate the value of our leading group of television stations and cable and satellite platforms. Thank you for your time. I'll now turn the call over to Jim Ryan.

Thank you, Kevin. Good morning, everyone. The earnings release and the 10-Q that will be filed later today provide a great deal of information. As a reminder, starting with the first quarter's release and 10-Q, we no longer need to present results on a combined historical basis. This is because the acquisitions and dispositions that occurred late in 2019 were individually and collectively immaterial. We are, therefore, generally presenting results only on an as-reported basis. Given the dramatic events that began in March, we are pleased with our overall results for Q2. Our total core revenue was a little higher than the comments we made on our previous earnings call, reflecting the sequential improvement in each month of the quarter as Hilton has already mentioned. Our leverage ratio net of the $379 million in cash was 4.4x and we currently anticipate that it will decline lower into the 4s by the end of this year. During Q2 2020, we increased our cash on hand by $83 million. And as mentioned earlier, we have $379 million of cash on hand plus an undrawn revolver of $200 million. So we are in a very strong liquidity position. Moreover, at this time, we expect that we will continue to generate significant amounts of free cash during each remaining quarter of this year. Given our strong liquidity position, free cash generation and relatively low leverage and no debt maturities until 2024, we believe we are in a very good position to thrive and emerge just as we are today as one of the strongest local broadcast companies in the country. Given all the uncertainty around COVID-19, we've withdrawn our previous full year guidance and are not issuing formal guidance for Q3 2020. However, we remain bullish on 2020 political ad revenue and still expect full year political ad revenue to range between $250 million and $275 million. I know all of you want to know more about Q3. Currently, the anticipated increases in political and retransmission revenue should allow our total revenue to grow in a high single-digit to low double-digit range. As with our peers, we are experiencing declines in total core revenue in Q3, and our visibility is understandably limited. As of today, again, cautioning the situation still is fluid and our visibility is limited, we believe that total core revenue for Q3 will decline at least in a range of 10% to 15%, but as we saw in Q2, total core revenue appears to be sequentially improving each month of Q3. While still a decline, it is a dramatic improvement over Q2. To reiterate, these figures are based on current forecasts in our system and our current pacings. We do not regard internal forecast in pacing as guidance. We realize that everybody is eager for any kind of predictions on whether and how Q3 will unfold. So we're discussing our current internal forecast as a potential data point, not as formal guidance. We still remain cautiously optimistic about the direction of total core revenue. Naturally, we will do all we can to mitigate these declines as we work through the quarter and work closely with our advertising clients. We currently anticipate our Q3 2020 broadcast expenses will increase over 2019 Q3 in a mid-single-digit range, reflecting exclusively an approximate $20 million increase in reverse compensation to the networks. Our total corporate expenses in Q3 are anticipated to approximate Q3 2019 levels, and the expenses of our production companies in Q3 will aggregate in the upper single millions of dollars, reflecting in part the seasonality of those businesses. Now to update some key liquidity items. Again, cash interest on a full year basis is currently expected to be $175 million. Our original estimate for the year was $194 million, and the decrease reflects the decrease in LIBOR. Capital expenditures on a full year basis will range between $65 million and $75 million. Our original estimate for the year was $80 million. Cash taxes currently are estimated between $55 million and $60 million, and our original estimate on the full year was $80 million. At this point, I'll turn the call back to Hilton.

Thank you, Jim. The Gray Television stations, production companies and employees, like everyone else has witnessed historic challenges over the last few months. We are proud that we not only kept our heads above water, we managed to maintain full employment for our employees, high morale and safe working environments. Our stations reestablish the importance and value of local broadcast stations covering important news and information along with exceptional community support. That community support has been demonstrated by the highest ratings our already highly rated stations have seen in decades. As a company, we posted positive free cash flow and grew our sizable cash reserves. The results reported today also confirm the value of owning the highest quality local institution like ours as well as the wisdom of operating a very lean management structure. The day when we return to what we fondly remember as normality seems further away now than what we anticipated on our call previous to this. Nevertheless, we remain convinced that Gray Television will continue to succeed in the face of these historic challenges, and will be even more prepared to serve our audiences and our customers when normality finally returns. Operator, at this time, we ask that you open the line for questions.

[Operator Instructions] Your first question is from the line of Dan Kurnos with The Benchmark Company.

Kevin, I'm sure you're already eagerly anticipating the crystal ball question on subs. So I guess, you might as well start there just in terms of visibility and kind of any thoughts in the back half of the year and how it kind of relates to your net retrans outlook? And then maybe, Jim or whoever wants to take it on core, your Q3 guidance is actually relatively really strong, I think, especially in comparison to the peer group, and obviously, what we've been hearing from Roku and others. So just can you give us a sense of maybe why the outperformance, where you're seeing pockets of strength? And does that -- do you anticipate that sequential improvement continuing until we're back to kind of pre-COVID levels early 2021?

Dan, first, on sub losses, obviously, down 3%, first half of the year is not what we were expecting, and its acceleration is also nowhere near what we were seeing the public companies announce over the last 2 quarters. Looking forward, if the economy is recovering, it seems that in today's headlines that the hotspots or the country is going to be stabilizing as we kind of move a little bit more towards normal. You get another round of stimulus checks and UI pieces solve, confidence returns, et cetera, et cetera. It seems to us that the sub declines should certainly mitigate from what we saw in the first half of the year. We also suspect that there's a number of folks who didn't pay their cable bill, given losing their jobs or otherwise change in circumstances. And when the grace periods end on that, they may end up paying some past bills and showing up as subs again, especially again as jobs return and stimulus money is provided. So I think we remain optimistic that we're not going to see the sub declines the second half of the year that we saw the first half of the year, but really, it's anybody's guess. So we were surprised at how much it did decline the first half for us. So we can be surprised. We remain optimistic. It seems, as I sit here today, that the economy of the virus, et cetera, things seem to be pointing in a bit more hopeful direction than we saw even just 2 or 3 weeks ago. Jim?

As far as the forecast, I'll let Pat and Bob probably give a little bit more color on that. I think it, first and foremost, goes to the strength, the deep penetration we have in our markets is a key factor. The other thing is, obviously, especially when we get to September in political, that's a little bit of a wildcard. It could skew the core downward a little bit more. Simply be -- I mean, political is super strong, and obviously, core is going to get squeezed a little bit. But everybody that's followed us for years realized we always outperform in political. So that's a high-class problem to have if that indeed happens. So I'll let Pat and/or Bob give you a little more color on what we're seeing.

Sure. So I'll jump in real quick. It's Pat. Particularly in times like these, it's not only viewers that tend to lean on their trusted #1 stations, but advertisers do the same. So as Jim mentioned, our really strong portfolio of stations is a significant benefit right now. I'd also add that our training team, they've done great work for us for the past 5 to 7 years. It is having a huge impact on our already strong sales force, but particularly over the last 18 months, they've done great work. And then also, in general, say that you'll see a look from our excellent digital and business development groups. So Bob, if you want to add any detail, jump in.

Sure, Pat. Certainly, some of our digital efforts are contributing to that, along with some verticals we're doing, as Pat has mentioned. But in addition to that, I can't emphasize enough how our portfolio of stations can make a huge impact in the market. There's often clients' budgets are down. But when you have dominant stations, they're going to find money for the dominant station. The number 3, 4 and 5 may get nothing, but we're going to get bought. And we're there for those clients year in and year out, and they trust us. And so that's certainly a factor as well. And the fact is we -- Pat mentioned the training program, but let me -- I can't oversell that enough. That group has been phenomenal. And the resources they provided since March, they jumped right in with a lot of different things, and they've created a lot of different selling events, and that certainly helped. And then lastly, I would say, we have a competitive group. And the 6 SVPs who oversee our markets is somewhat evenly divided. But for example, this morning, I got an e-mail from one of the groups that run the regions. And his region, they had 20 people, salespeople that is, that had sold at least $20,000 in new direct business all the way up to $50,000, $60,000 somebody had sold, which is pretty phenomenal. So the point is that we're trying to look under every rock for every dollar that we can find, and we're doing a pretty good job of it. Now it doesn't make up for all of it, but we are really aggressive on the sales front across the company.

Got it. That's really helpful color, everyone. I appreciate it. Just, Kevin, before I jump off, just quickly, did you get the full benefit of the 2 major renewals that I know were extended past their expiration dates in 2Q? Or might there be some kind of accounting nuance in Q3?

In the time we reported in May, we had 2 of the 3 big contracts resolved as to rate. I think one was signed and one was checking schedule. So we posted Q1 numbers with the rates that would be appliable in Q1. When we had -- the last deal was finished after April 1, and we knew what those rates would be. So although the actual -- I mentioned the check has arrived for sort of the new April or not, it actually probably has, but we have accrued for the rates. Once the rates are agreed to by the parties, even if the rest of the contract is not nailed down, we do reflect the new rates in our accrual. So what you see for Q1 and Q2 would be revenue based on the rates that are in effect for those periods.

Your next question is from the line of John Janedis with Wolfe Research.

Two for me. One, can you remind us how much of your ad revenue comes from prime time? I think it's pretty small on the decline, but I was just curious there. And to what extent you may incrementally lean into investments in programming or digital? And then Kevin, can you talk again to the comments related to the networks? I know you've spoken in the past about expectations that retrans margins will tick lower over time. But is there any incremental message based on what you're seeing in the market?

Let me start with the prime question.

Yes, go ahead.

Our normal answer to that question historically has been that roughly 50% of our revenue comes from local news; maybe 20% comes from prime; 20% comes from syndicated programming; and the other 10% is everything else, including sports, all sports. We haven't run the specific numbers for prime for Q2, but I would suspect it's probably down a little bit on a relative percentage basis, and our news is probably up offsetting that. But in general, prime has historically run 20% to somewhere, call it, high teens anyways.

I'm not sure if I understand the question. What do we pick up in the market on our network rates. I mean our network contracts are locked in over the next couple of years. We renewed those -- actually renewed those early as well at this point in 2018 and 2019. So we've taken those endpoints out a few years. So the rates don't change in the middle of the term. So I'm not sure what the question is, but what we might be seeing out in the market today.

So maybe the question is, based on your comments around just what you're seeing and I guess, the $20 million of incremental reverse -- I know you've talked about the margins moving lower. Are you messaging that margins will be a little bit lower than you expect going forward? Or is that not the case?

Well, margins -- half of our retrans reverse -- half of our network reverse comp rates are fixed, as you know, by 2 networks, and 2 other networks do not have fixed fees. So as subs go down, the -- 2 of the networks are somewhat sharing in the pain, and 2 of the networks and not sharing in the pain. And so if we have -- sub declines are larger than expected, our reverse comp is a little more painful onwards that the sharing percentage switches a little more in favor of the network as the subs go down. I mean that's just a function the fact that those are fixed fees, and 2 of those -- 2 network formulas. And I would say the flip side of that is, if subs go back up or stabilize, we benefit. But more importantly, if we negotiate higher than normal rates for programming, then we keep all that upside, right? So it's a double-edged sword. If it's a fixed fee with the network, we absorb the pain of sub losses but we enjoy all the fruits of superior negotiation. So if you have a really strong station or a set of stations with a particular network as a fixed fee and you can drive a higher rate out of MVPD, we collect that extra money. We don't share it with the network. So there's pluses and minuses with both network approaches. The bottom line to your question is the increase in sub losses does drive the reverse sharing percentage a bit more favorable to the network.

Your next question is from the line of Kyle Evans with Stephens.

Hilton, thanks for touching on the human element of your business. It's easy for us number crunchers to forget that, and appreciate it. Also, thanks for the detail on political. How much of the guide of the kind of 2 63 midpoint, roughly speaking, is expected to be presidential versus down market? And then kind of which races should we keep our eyes peeled on for movement off that midpoint?

Kyle, I'm going to have to check. We've addressed the presidential percentage in the past, and I want to say it's about 25% to 30%, but I need to go back. I'll have that answer later today. On the actual campaigns, obviously, in addition to presidential, we had -- this year, we benefit from having really strong stations in all 4 of the early nominating states, Iowa, New Hampshire, Nevada, South Carolina. Outside of presidential, we have -- the political map seems to be changing every couple of weeks, but we see the Biden campaign is spending money in states we did not expect them to spend in. We see the Trump campaign buying ads in states we did not expect them to spend money in. So that field has gotten wider than we would have -- than we were expecting earlier this year. As Pat mentioned, there's only gubernatorial race. I don't see any indications that any of the other gubernatorial races are going to get more competitive. Obviously, that can change over the next couple of weeks, but that was never sort of a bright spot for us in this -- with this calendar. Senate races -- the Senate races have gotten far more competitive it seems. As Pat mentioned, we have 3 states on the radar that we were not really expecting to be very hot this year. And the ones that we did expect to be particularly strong, such as Maine, such as the 2 in Georgia, North Carolina, those are certainly -- yes, Arizona, absolutely, Arizona. I mean those are absolutely on fire. So the Senate field has certainly expanded. I keep an eye on that field expanding more. Kansas, as you may have seen this morning, Rep. Marshall won Republican primary and the Dems went up this morning with ads. The challenge are there. Remarkably, Kansas as a state is not center of Democrat to the U.S. Senate since 1930s. Actually, it's one of the states where a Democratic challenger has raised more money than the Republican campaign for that state. So that's certainly on the radar screen, which we would not have expected earlier this year. South Carolina's another state where the Democrat challenger has raised more money than the incumbent and a very well-known incumbent. So Senate is in play. Also mentioning today, the interest in PAC group spending in the Senate is way up over prior years. Houses stuff, the house races, there's usually a handful of house races that are competitive and that sort of changes based on primaries and sometimes what candidates say and do. It seems to be kind of more typical, more races are -- seem too competitive than in the past, but it's not as big of a driver as the Senate races.

Great. That's helpful. Hilton, I think you said that some of your stations hit their pre-COVID budgets in 2Q. And I guess, first off, did I hear that right? Because I have me scratching my head. And then if that's true, what conditions were underlying those particularly strong results? And was there any material difference in sub counts or core that was driven by market size in the quarter? Then I have one more follow up.

He said June, Kyle, not Q2.

Okay. June. Okay. That's helpful. Then the second part of the question, was there underlying -- was there a material difference in sub count loss numbers that you saw or the core decline numbers that you saw kind of across your different market sizes? You guys have some of the smallest markets that we follow. And then with the addition of Raycom, added to large, just curious what perspective that gives you.

You want to take that?

In terms of sub loss across large markets relative to small markets, I can't -- candidly, I don't know the answer to that. And perhaps Jim or Kevin might have better input there. In terms of advertising, again, it's not -- advertising revenue, it's really not a function of large market versus small market, it's really more about the quality of portfolio.

Well, and the difference between -- I mean, it was only in June that, that happened, okay? Kyle, it was just in June. And -- but it's an anecdotal thing that I thought was quite positive because people started to see a lot of stuff sort of pick up and -- but it's all over the board. There's some markets that are down in June. Our consolidated numbers are down from where they were. But we do have a lot that have done quite well, and it's all over the board because it depends on markets that were not shut down at that time period. It depends on various things. And some areas, we're doing pretty great, so here in Georgia in June, and then the virus sort of took back off in July. And so -- and may have slowed down some of those things. So it's really anecdotal and by market and by state.

Great. One last one. Your holders, I'm sure love to see the repurchase activity. How should we think about how you balance your intentions there with M&A as the balance sheet kind of trends down towards 4x -- by the close to 4x by the end of this year? And just kind of like a broader M&A outlook for the back half of this year and for next?

Well, I will make a few comments and let Kevin, Jim and Pat or Bob, anybody just weigh in to talk about that. Gray remains intent upon continuing to grow. When your own numbers are moving up and down, it makes some things more difficult. But M&A remains a prime function of this company. We reach net basis right under 25% of the viewing TV households. And so we have room to grow. We are very interested at the right price and at the right time. That being said, I think it's very clear that cash is king and a strong balance sheet is a requisite. And so we're going to keep that sort of first and foremost. I'm very proud of the company and its ability to generate the cash to more than -- or really to double our cash position and still be able to deploy $50 million to buy back about 3% of the company. We were trading at -- when world sort of fell off the cliff at absolutely ridiculous levels. And a lot of businesses can say that. And so it was -- if something like that should happen again, we're going to be doing that again because we want to support our stock price. But never -- under any circumstances, we want to maintain a sufficient cash position to weather the storm, however long it lasts.

Kyle, just to follow-up on your sub count, large versus middle versus small markets. Our data didn't really show any significant differences. There's nothing really that's jumping out at us. So it's kind of in a fairly tight range, pretty uniform.

Your next question is from the line of Aaron Watts with Deutsche Bank.

Covered a lot of ground in the Q&A here. I really just have one left. As I think about the improvement sequentially you're seeing in core, how has auto participated in that recovery? Or has it lagged a bit and represent some upside still if auto is able to click back in? Just, I guess, curious about the trends you're seeing in the auto category so far.

Bob, do you want to handle that?

Go ahead.

Great. Can you repeat that, please?

Yes, sure. Just you're seeing sequential improvement in the core advertising from 2Q into 3Q. And the question was just on the auto category. How much is that participating in that recovery so far? Has that been a laggard and the category you expect to pick up later?

It has been a bit of a laggard, actually. And that's what's somewhat -- while it's been a laggard, we're optimistic when they finally get product on the ground. Obviously, the chain supply got held up. And so almost any new car dealer you talk to, the first thing they'll tell you and they'll tell our sales reps or sales managers that they can't get any product, but they think that's going to loosen up here later in August and through September. And then I think you're going to see not only on the national side of advertising, we'll see certainly -- we have some clients on the air, obviously, but I think you'll see a significant uptick in that part of our business. And really, some of our car dealers are doing remarkably well for the limited inventory they got used as driving it in a lot of cases. I can tell you that the ones that have hot products with a little bit they can get like Ford F150s, for example, if they come -- if they get one on a lot, they sell it at list, and they're really not negotiating right now because of a lack of inventory. But once that inventory spigot opens up, and again, all indications are based on the feedback we're getting from the dealers, is that's going to happen here beginning this month and through September. And that's going to make -- have a huge impact certainly on our business. But certainly, it's going to make those values a lot healthier as well.

Okay. Got it. That's helpful. And one follow-up maybe for Jim. You touched on how local news and syndication really drive the majority of your revenues. I hope this doesn't happen. But to the extent we get a delay in football, college or pro or no football this fall, how do we think about the impact directly on your revenues? Understanding that indirectly, it's not an ideal outcome from an audience perspective?

All of sports is a single-digit percentage of our total revenue. So we'd love to see it, but if God forbid it doesn't happen and it's delayed further, it's not really going to move the needle.

Your next question is from the line of Jim Goss with Barrington Research.

Gray traditionally focuses on having #1 or at least #2 stations in all its markets to help drive political among other things. And moving from -- and the Raycom acquisition is greater match as it was, it did introduce a few more #2s into the mix. And I'm wondering if the current dislocations overcome the inability to move the ranking up to #1 versus the typical inertia? Are there any more opportunities to improve your positioning now than they might have been in a more normal time?

Do you want to handle that, Bob?

Yes, sure. It's an interesting question. So if I understand you correctly, you're asking, given all the sort of the challenges relative to COVID-19 and civil unrest and a lot of other things, does that create an opportunity to move potential #2 to #1. Generally, the default is for viewers to go to that #1. But I would tell you that we've seen some excellent growth in some of our larger markets in the last 18 months. So our stations in New Orleans and Cincinnati have made significant moves over the last 18 months. And New Orleans is now a solid #1. And Cincinnati is -- they've gone from really a #3 to #2/#1. And so I can't tell you that's a function of what's happened in the last 6 months. But I will tell you that we have seen some movement in some of our larger markets, and it's encouraging, very encouraging to see.

Well, let me just add as a way of bragging a little bit because our Louisville station, NBC WAVE has moved up dramatically in that market. Richmond is exceeding our expectations and improving. And so we really see tremendous upside on all fronts. And I will tell you, we couldn't be happier, could not be happier with the overall direction of what we're seeing with all portfolios.

Has it shown up at all in any -- in the second quarter, it typically doesn't go out of political, but are you seeing any movement in terms of pricing that might reflect those moves?

Sure. So as stations grow their audience, they're able to charge more for their spots. Now to some degree, it's a supply and demand business. But the reality is, if you were doing a 3 rating in the 6:00 news last year and you're doing a 5 this year, you're going to get a higher rate.

Okay. And to the extent you've had to, I'm sure, do more remotes that might be a little more awkward, but clumsy, but it could create some cost savings, are you finding any margin benefits from that sort of thing? Maybe this is a Jim question.

I think our expenses overall, we've always had a tradition of manage them tightly. So I don't think the remote work is going to significantly give us a significant cost savings. Some natural stuff, travel budgets, entertainment not being -- really being used. So save some of that. We have seen savings in our health plan, although that, I think, is probably a timing difference as people, especially in Q2, just stayed home and didn't access services unless it was needed or absolutely necessary. I think some of that will come back around eventually. I don't know exactly when. We'll continue to manage our costs prudently. As I mentioned, in Q3, the broadcast overall cost increase is really attributable solely to the increase in reverse comp. So we're doing a good job there. Some of the smaller costs we save by remote work are being offset in some cases by more overtime. We're spending not huge amount of dollars, but we literally have bought in excess, what was it, 170,000, some 160,000 individual pieces of whether it was sanitizer, masks, shields, name your protective equipment. There's some cost there, not huge. So it's a little bit of a trade off there, but I don't think anything dramatic -- there will be any dramatic cost savings directly because of the remote working situation.

Okay. One last thing. It seems like there's a continual flow of new entrants into the grouped stream services, Peacock, HBO Max, in addition to Disney+, CBS All Access, and all the Amazon Prime, Netflix, Hulu. As these sort of things occur, is that just a continuing destabilization factor in terms of your sub counts? Or do you think there might be a trend to have like a basic cable package to get the networks that might satisfy your needs in addition to whatever specific sort of other groups of programming might come along?

Jim, this is Kevin. Jim, that's a good question. I think the answer kind of depends on the offerings of these products. But if you were to buy a handful of the streaming services to try to cobble together your own bundled package of channels you can get from cable, you'd certainly be spending more than you pay the cable company for the same bundle. Plus you'd pay, of course, for broadband access, too, in order to be able to use Disney+, Peacock, Tubi, et cetera. So to some extent, it could help show the value of the cable bundle, which would be good for those of us who get paid as part of the cable bundle. If the OTT providers are providing classic original content not available on broadcast, that could lessen the appeal of it. But as everyone's concerned about whether consumers can afford the cable bundle today, it seems there should be more concern about whether people can afford to be subscribing to 4 and 5 and 6 different OTT bundles to get original content. So I think it kind of needs to shake out, but it's probably a little more on the first scenario where the sponsoring and fragmentation of programming across all these different bundles that have you subscribed for separately will probably drive people back, hopefully, try to go to the pay TV bundle, which was -- which is a better economic package.

Are you able to strip out the share of those taking a bundle who might get broadcast stations with antenna versus part of one of the bundles or one of the cables? And is that -- how is that factor in it?

Yes, I don't know. I don't -- I mean, our OTT numbers are people who are not our OTT subs, those are people who are paying who are getting a report from a distributor that our signals being carried in that OTT bundle, and therefore, we're getting paid. So I don't know how we would quantify if people are taking, for example, Disney+ and getting our signal over the air. There won't be a record of that.

Your final question is from the line of Steven Cahall with Wells Fargo.

Maybe first, just a follow-up on reverse comp. Kevin, thanks for that helpful color there. If sub declines do kind of maintain trend in the back half of the year, would you think about moving all 4 of your reverse comp deals onto more of a subscriber base? Or do you like that mix that you talked about of sub based and fixed fee agreements?

It's an academic question. We don't have the ability to tell the network to change the way that they're charging their affiliates or to say you need to charge us a different formula than you're charging other folks. I think all broadcasters with scale over the last several years have attempted to plead for a different formula in their network affiliation negotiations and everyone that's met with same answer, which is CBS has its formula for all broadcasters, period. Fox has its formula for all broadcaster, period. NBC has its formula, period, et cetera. I'm not aware of anybody having a different formula. The networks have -- when the network started charging broadcasters reverse comp around 2008, 2010, they each came up with their own system, and they have essentially all stuck with it. Fox changed its formula at one point into the cycle, but it's still had a fixed fee. So I don't see that it's really worth imagining what will be a better system for us under current sub counts. It's just -- it's not possible for you to go back to a network and say, charge us differently.

Yes. Okay. And then maybe a couple for Jim. Jim, you focused on the stock buyback with common stock. Is there any interest in looking at the preferred given the coupon that's on that? And then on the expense side, it looks like your broadcast expense, excluding reverse comp, is going to be down a little bit year-on-year. Is that a trend that we should expect to continue to improve? Like have you made a fixed cost reduction? Or as we start to see, particularly ad sales come back, should we start to see some of the nonreverse comp broadcast expenses start to move back up on a dollar basis?

If things ramp back up, there would be a little bit more -- I mean, obviously, the commissions will come up slightly, although our commissions, as Hilton said right at the very beginning, we've been supporting our people so they can focus on getting every dollar they can. The year-over-year decline probably is not perpetual. I mean we've -- we did a lot of work on our cost structure in '19 as part of the integration of both companies. We were very successful with that. We're seeing still some benefit expectation here next year. We've always been talked on our expenses, but to deliver a nonreverse comp year-over-year decline again might be a little challenging. But on the flip side of that is I wouldn't expect it to increase very much either. And I think there was a second part of the question, but I don't recall it.

Yes. Second was on the preferred. If you -- if there's any potential or appetite to reduce the amount of the preferred at any point?

I think some place down -- a little farther down the road we'll be thoughtful about that. I think right now, probably not or at least not likely, but never say never. I mean, right now, the preferred is not counted in the leverage calculation. So if we start taking it out, we would be bringing up our leverage and of course our stated goal for the last 2 years has been to decrease our leverage, so we'll continue to monitor our situation and be thoughtful about that. I hear you on the rate. At some point, it probably will make sense to do something with some or all of it.

There are no further questions. I will turn the call back over to the host for any closing remarks.

Well, I just want to thank all of you for joining us today. Q2 is going to be the -- we all knew this, the worst quarter of the year for us. So I can already tell you, I'm looking forward to Q3 and Q4 for the rest of 2020 for a lot of positive news. And so I look forward to talking, and all our teams look forward to talking with you guys next time around. Thank you for your attention.

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