Gray Television, Inc.

Good day and thank you for standing by and welcome to the Quarter 2 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to speaker today, Hilton Howell, Chairman and CEO. Please go ahead.

Thank you, Operator, and good morning, everyone. As the Operator indicated, I'm Hilton Howell, the Chairman and CEO of Gray Television. Thank you all for your time this morning and for joining our second quarter 2021 earnings call. With me in person here at Gray's corporate offices are our President and Co-CEO, Pat LaPlatene, our Chief Legal and Development Officer, Kevin Latech, our Chief Financial Officer, Jim Ryan, and joining us remotely is our Chief Operating Officer, Bob Smith. We begin this morning with a disclaimer that Kevin will provide. Kevin?

Thank you, Hilton, and good morning, everyone. Certain matters discussed on this call may include forward-looking statements regarding, among other things, future operating results, pending acquisitions and related divestiture, and the impact of the novel coronavirus and its disease, or COVID-19, on our future operating results. Those statements are subject to a number of risks and uncertainties. Actual results in the future could differ from those expressed or implied in any forward-looking statements as a result of various important factors that have been set forth in the company's most recent reports filed with the SEC, including our most recent annual report on Form 10-K and our most recent 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. Included on the call may 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, our reconciliations of the non-GAAP financial measures to the GAAP measures reported in our financial statements. And now I return the call to Hilton.

Thank you, Kevin. Well, as you all know, on Monday, we completed our acquisition of Quincy Media and our divestiture of the Quincy stations and the overlap markets to Byron Allen's Allen Media Broadcasting. I therefore want to open this call by formally welcoming all of the new employees and associates who joined us from Quincy Media on Monday. Welcome to Graying. We are honored to be the new stewards of the fine Quincy television stations across eight new markets that Ralph Oakley, his family, and his team carefully built over many decades. At the same time, we are thrilled to play a part in the near doubling of Allen Media's television portfolio. I and the Gray Board extend our gratitude and appreciation to all those who made these transactions a reality, including our colleagues at Gray as well as the professional at Quincy Media and Allen Media and all of the bankers, lawyers, and accounting firms involved in this transaction. Today, we announced our financial results for the second quarter, and I am extremely proud of them. Our results prior to the Quincy acquisition once again proved that we see continually improving ad trends and revenues resulting from the improving economic climate, our own prudent cost management, and a variety of strategic initiatives that we will address this morning. To summarize, we reported total second quarter revenue of $547 million, an increase of $96 million. or 21% from the second quarter of 2020. Net income attributable to common stockholders was $26 million, or 27 cents per diluted share. In the second quarter of 2021, our combined local and national broadcast revenue, excluding political advertising revenue, which we call total core revenue, nearly matched our total core revenue from 2019, which is obviously prior to the pandemic. Specifically, total core revenue increased by $81 million, or 41%, compared to the second quarter of 2020. Total core revenue nearly matched our total core revenue from 2019, again, prior to the pandemic. We reported $785 million of cash on hand at the end of the quarter, with a total leverage ratio as defined in our senior credit facility, of 3.92 times on a trailing eight-quarter basis after netting our cash on hand and giving effect to all transaction-related expenses. Our broadcast cash flow of $183 million was 60 million or 49% higher than the second quarter of 2020. Our adjusted EBITDA for the second quarter of 2021 was 170 million, increasing $62 million or 57% compared to the second quarter of 2020. We were able to produce these very positive results through the hard work of our many thousands of employees, now literally from coast to coast in our television stations and production companies. We also successfully managed the business in the second quarter and really throughout this year, while also devoting countless hours to new strategic sales initiatives, technology improvements, and of course, a great deal of M&A work, including the major deals involving Quincy and Allen Media, as well as our pending acquisition of Meredith Corporation. Among all these challenges and opportunities, Gray Television is also closely monitoring the evolution of the pandemic among our workforce, our customers, and our communities. We maintain our strong optimism in a quickly recovering economy that, with some exceptions, will continue to drive increased consumer spending and increased advertising, in nearly all of our markets. We believe that our core revenues and retransmission revenues will end the year in a very strong position just as we enter another year with undoubtedly strong political revenues. We also remain confident that we will close the Meredith transaction in the fourth quarter of this year. For these reasons, and as exemplified by our return to paying quarterly cash dividends, Gray's board and senior management agree that our business is stable, our prospects are bright, and we remain on track to grow television into one of the finest television and media companies in this country. We will next hear a few remarks from my colleagues with additional color to our second quarter earnings release. Thereafter, I will open the line for questions. Pat?

Thank you, Helton. On a previous call, I said that we were optimistic that our combined local and national broadcast revenue, excluding political advertising revenue, which we call total core revenue, would return to 2019 levels later this year. With strength in nearly all advertising categories, we finished the second quarter of 21 within a point or so of the second quarter of 2019 in terms of total core revenue as Hilton mentioned. The outlier, relative to 19, remains the auto category, which was down and continues to face chip shortages and supply constraints that are depressing auto advertising. In fact, if the auto category in the second quarter of 21 was simply flat with 19, then our total core revenue would have been 6.5% higher in the quarter versus the second quarter of 2019. Similarly, total core revenue would have been 4.3% higher in the first half of this year compared to the first half of 19 if the auto category is flat with 19. The fact that other categories, especially legal, home improvement, financial health, and gambling, effectively backfill the big holes left by the challenge auto advertisers, illustrates the underlying strength of our local television stations and the revenue diversification that's taken place over the last few years. And if the automobile supply chain stabilizes relatively soon, We would expect to see that category rebound in the fourth quarter of this year and into 2022. Our training team and the health and auto teams continue to provide tremendous benefits to the gray sales effort. Our investment in these areas is helping build the best, most effective sales organization in the industry. The health and auto teams have a particularly strong focus on digital, and they've helped to grow digital revenue dramatically over the last few years. Our partnership with Premion is paying dividends as money continues to pour into digital video, and our sellers are now fully trained in picking up new clients and revenue every day. And our digital programming team and national hub continue to do great work in growing our digital audience. Our sports and entertainment groups are rebounding nicely, and Raycom Sports has recently launched Origin Sports, an OTT platform that has a unique take on their expansive archive and look at the up-and-comers in the sports world. We expect record results at RTM as well as Swirl this year. In addition, Tupelo Honey has a tremendous new business pipeline and an amazing partnership with World Chase Tag, which will pay dividends going forward. We're really proud of the work of our National Investigative Unit and the impact of their journalistic efforts. In a recent series, Collision Division, Lee Zurich, John Decker, and our investigative team highlighted how federal crash standards only require crash test dummies designed around the male body from the early 1970s, despite women being at higher risk for injury and death behind the wheel. In fact, John Decker raised a question on this previously unknown issue at a recent White House press briefing, thereby raising the issue among the executive policy folks as well as the National Press Corps. Thereafter, members of Congress began to address this important safety and equity issue, and we are pleased to see that there is now language in the $1.2 trillion bipartisan Senate infrastructure bill that would authorize crash test dummies modeled on females as well as children. We're also very proud of our Great Health Divide initiative, focusing on health disparities in the Appalachia and Mississippi Delta regions of the country. Thirty-two of our stations and our investigative team were involved in producing a one-hour investigative documentary that's airing across all great stations this month. Our shining a light on these areas that have far worse health outcomes than other parts of the country has already resulted in positive action. One story by WXIX, our Cincinnati station, showed how Robertson County, Kentucky, did not have a single doctor in the county. Following their story, a primary care practice out of Cincinnati informed Robertson County that it wants to open a primary care clinic there. Finally, we want to salute our Director of Investigations, Lee Zurich, for another amazing honor that he can add to his shelf. Lee recently was nominated for a National Emmy for a series of reports on the collapse of a hotel that was under construction in New Orleans. Congratulations to all of our news professionals, as well as our very busy investigative teams. And with that, I turn the call to Kevin.

All right, good morning again. Turning first to M&A, I'm pleased to report that our merit of transaction remains on track to close in the fourth quarter. We received no objections to the transaction of the FCC, and the transaction does not require any FCC waivers or special accommodations. We anticipate closing the sale of our Flint television station a few weeks prior to the merit of closing. In the second quarter, we completed the last of our major retransmission consent negotiations for this three-year cycle. Across more than 400 separate MVPDs, we achieved favorable renewal prices in other terms with virtually no disruptions in service for our viewers and their customers. Looking forward, our MVPD renewal cycle resumes with the next set of contract expirations at year-end 2022. In other words, we will have essentially no retransmission renewals for the next 18 months. Our retransmission revenues in the second quarter were $242 million. This amount is roughly $2 million or so less than our guidance for the quarter, which is the same amount by which our first quarter retransmission revenue exceeded our first quarter guidance. These fluctuations are the result of basic timing issues with subscriber reports and payments, primarily from two of our very large retrans customers. For the third quarter, we currently anticipate retrends revenue of approximately $255 million, reflecting the impact of our recently renewed retransmission agreements over the last few months. For the full calendar year, we expect total gross retransmission revenue of approximately $1 billion, excluding the Quincy and Merida stations. We continue to see wide variations in subscriber levels among our various cable, satellite, and OTT distributors. We have now received nearly all subscriber reports from the MVPDs and from most OTT providers for the first quarter of 2021 due to the natural lag in payments and reports from distributors and unexpected delays with those reports. At this point, it appears that our total in-market Big Four subscriber count across all paid platforms for the first quarter of 2021 was approximately 1% lower than the count for the first quarter of 2020. We are encouraged that we continue to see a much lower rate of sub-erosion than many of the pay TV providers and pay TV channels, which we believe is a testament to the value of the live local content that our stations provide. Finally, I wanted to briefly address an issue that has been largely misunderstood and misreported over the last month. Our transaction last year in Alaska in the FCC's proposed forfeiture. To be clear, last month's FCC decision was a proposed forfeiture, not a final finding. Gray now has the opportunity to respond to the FCC's proposed fine, and we intend to do so. Later this week, we will submit our response to the FCC's decision, and I invite everyone to read that response once it is filed. Until then, however, Gray cannot and will not comment further on the still pending proceeding. With that, I turn the call to Jim Ryan.

Thank you, Kevin. Good morning, everyone. The 10-Q will be filed a little later today, and obviously the earnings release contains a great deal of information that you have either read already or certainly can read today. Dovetailing on Hilton's Q2 remarks, again, we're very pleased that total core revenue came in very close to 2019 levels. We recently acquired approximately $80 million of land in metro Atlanta. this investment is treated as a capital expenditure for GAAP purposes. However, internally, we view that acquisition as an investment and accordingly have excluded that $80 million from our free cash flow calculations for Q2 and year-to-date Q2. Now, some brief comments on our Q3 guidance. And as you will see in our release, we've separated our baseline Q3 guidance and then provided additional incremental revenue expenses and broadcast cash flow for the Quincy stations. So with our baseline guidance on Legacy Gray, combined local and national revenue, or what we call total core revenue, is anticipated to exceed the third quarter of 2019 in the low single-digit percentage increase range. This demonstrates the continuing sequential improvement of total core revenue and makes us optimistic of continuing improvements later this year. As Pat said, while auto is still lagging, it is continuing to improve, and it's only about 19% of our year-to-date core revenue. Following up on Pat's comments about the diversification of our core revenue, our services group, which comprises financial, legal, and medical, in the first six months of this year represents about 28% of our total core revenue, and the services group has been performing well on a relative basis all year. We currently are anticipating approximately $14 to $15 million of net revenue in the third quarter relating to the Olympic broadcasts. Turning specifically to the incremental impact of the Quincy acquisition for the third quarter, which would mean August and September, we expect Quincy to add an additional $22 to $24 million of net revenue, approximately $14 to $15 million of incremental expense, resulting in approximately $8 to $9 million of incremental broadcast cash flow. For your help in adjusting your full-year models for the fourth quarter of 2021, we expect Quincy will provide incremental broadcast revenues of $32 to $35 million, broadcast operating expenses of $22 to $24 million, resulting in a cash flow of $10 to $11 million, and that would be before synergies. Our corporate expenses are not materially impacted by the Quincy acquisition. Let me now recap certain metrics associated with the completed Quincy transaction and the pending Meredith transaction that we currently expect to close in the fourth quarter of 2021. The total combined purchase price before divestitures of these two transactions is $3.75 billion. The total purchase multiple on a 19-20 blended cash flow average is 7.9 times. Total gross divestiture proceeds pre-tax are $450 million. Our 19-20 combined historical basis operating cash flow is $1.23 billion, and that would include 78 million of expected synergies. And I would remind everybody in the RACOM transaction that was closed in early 2019, which was a slightly larger transaction, we achieved $85 million of synergies within the first year. We currently anticipate our 12-31-21 leverage ratio net of cash as defined in our senior credit facility pro forma for both the Quincy and Meredith transactions closing to be approximately 5.4 times, with an estimated total debt outstanding at $1231.21 on a pro forma basis of $6.96 billion. Some comments on free cash flow and free cash flow per share. As of today, we have approximately 95.8 million shares outstanding. In 2020, as published in our current investor presentation, we generated full-year free cash of $559 million, or approximately $5.84 per share. As we look to 2021, which is a nonpolitical year, and as we said on our Q1 call, we currently anticipate total year free cash flow free cash, I should say, will be in a range of $300 million to $325 million. That excludes any incremental free cash generated by Quincy or Meredith and also excludes the $31 million of dividends we expect to pay this year. Our average 19-20 cash flow is expected to be $458 million was 458 million or 4.78 per share. So let me repeat that because I did kind of mess up that sentence. Our average 19-20 free cash flow was 458 million or 4.78 per share. We anticipate our average 20-21 free cash flow, excluding Quincy and excluding Meredith, and excluding the $31 million of common dividends would be in a range of $430 to $442 million, which equates to $449 per share to $461 per share. While we are not providing a formal guide for 2021 operating cash flow, nor a formal guide for our 2021 21-22 operating cash flow nor a formal guide for 22 political because that would be premature. We are very confident that our 2021-2022 blended free cash flow per share would be approximately 45 to 50% accretive when we include the impact of the Quincy and Meredith transactions. We are very well positioned going into 2022 with the Meredith transaction expected to close late 2021. A brief comment on political just to remind everyone on a combined historical basis for Quincy and Meredith, net political in 2018 was 397 million and net political in 2020 was 692 million. It's anyone's guess what our 22 net political revenue will be, but it is safe to say it will be large and that it will help us delever relatively quickly from an expected 5.4 times leverage ratio at close to something in the low fives by the end of 22. And I'll turn the call back to Hilton.

Thank you, Jim. So, Operator, at this point we'd like to open up for questions that anyone may have.

Thank you, sir. As a reminder to ask a question, you'll need to press star 1 on your telephone. To answer a question, press the pound key. Please stand by while you compile the Q&A roster. Your first question is from John Janidis from Wolf Research. Your line is open.

Thanks. Good morning, guys. I had a couple. One is, good morning. Can you talk about the trajectory of your non-retrans expenses Are there expenses that come back into the business that we should be thinking about? And then, separately, Hilton, on the land acquisition, I'm sure you've seen there's been a lot in the press the last few weeks about demand for sound stages. So, can you give some more color on what that's going to look like? What's the cost to build out? And is there potential for meaningful cash flow generation there? And then, finally, Jim, you mentioned the cash flow frequency was pre-synergy. Do you expect to have the after-acquired clauses or cost savings, etc.? ? prior to your end, or is that more of a 22 event?

The after-acquired clauses for retrans will take effect immediately. The rest of the synergies is, just like in RACOM, I think you should think about it more as a month-to-month phase-in. It won't be perfectly linear, but it's not all going to happen day one, nor will it all happen on day 364 either.

And then, John, let me ask or answer your questions on the assembly purchase. Candidly, we use the funds from the Georgia Senate runoff, so it's sort of a little long yap that we have. It's a wonderful piece of property, and with the studios that are coming up, we expect, upon completion of them, that they will generate a quite large free cash flow in a very short period of time. And so we believe within... 12 to 13 months, you will see significant free cash flow from those studios. As you know, the business in production is massive, and it's the fastest-growing section of the Georgia economy right now, and we're very bullish on what we see ahead.

Thanks. Maybe, Jim, just back to the other question on expenses away from retrans for the, I call it, legacy gray.

those going to be called a flattish or are those going to tick higher just kind of thinking about the third quarter guidance and maybe beyond so in third quarter again go to the guidance there is 10 to 13 million total of deal related costs flowing through third quarter at least and there might be some more that trickles in a little bit later but at least that much we know of so that's popping it a little bit, but those were both for broadcast and corporate were shouted out in the guidance section of the release. We also gave to almost all of the employees in the company modest mid-year increases in base compensation. I'll remind everybody that when we started this year, we held everybody's compensation flat to 2020 levels. As things have been improving, we felt it was only right to come back around and do something mid-year, which is very unusual for us, but do something mid-year for our employees since we had held them flat for the first six months of the year. And that's increasing payroll expenses by, it's in the single millions of dollars range each quarter for Q3, Q4. And obviously, your reverse comp is one of the biggest drivers of expense increases, Q3, Q4. And that will pick up a little bit for both of those quarters from the levels of Q1, Q2, just because of the repricing that was done kind of mid-year. And again, a lot of our A good deal of our retrans is based on a percentage basis for reverse comp, so there will be a modest increase there for Q3, Q4. And I think the guidance, if I recall, we singled that out for Q3, what that number is expected to be.

Thanks a lot.

Your next question is from the line of Dan Krunitz from the Benchmark. Your line is open.

Great, thanks. Good morning. Maybe, Kevin, a quick one for you, and I'm expecting a somewhat relatively quick answer here. Any update on the CBS negotiations currently?

You're right. It's a short answer. No. That's what I figured. Okay.

I had to try. Then maybe just a better question just around retrans. You know, obviously you called up some timing issues. You don't have anything until the end of the year. Maybe, you know, I think I've asked this before, but just how you're thinking about in the marketplace, both the runway of gross versus net. And then, you know, as you approach the market with these deals, there's obviously a wide variance of, you know, outcomes where you ask for more upfront versus higher escalators. Just, you know, I'm sure everybody wants as much as they can get upfront, but just how you're kind of thinking about, you know, how that, those conversations might evolve over, you know, the balance of this year and into the next year.

I have no idea how negotiations will evolve the balance of this year and next year because we have no negotiations to balance of this year or next year. Our contracts are, are, are, virtually all three-year terms, and the cycle ended on June 30 when we renewed our last two contracts in this cycle, so there's nothing up. So I won't have any feel for where the market is over the next 18 months. We're just not in that market. In terms of what we've just completed, we pushed through 400 contracts over the course of about 18 months or so. And we are very happy with the way that they came out, both in the sense that they were done, I think, without what we used to see some years ago with sort of more aggressive posturing, both publicly and privately. I think they were constructive conversations. We always take a look at the whole three-year relationship, not just what the first-year rate is going to be. We want to find something that's going to work for both parties. And I think we were able, actually we clearly were able to do that in virtually every one of the negotiations. So we're certainly happy with the way they came out. Going forward, I don't see any reason to change our view that we remain grotesquely undervalued in terms of retrends, and over time we will close the gap between the value we deliver and the value we receive. So there's nothing that has changed our view on that. We continue to deliver, and certainly last year, had tremendous ratings. People who hadn't watched local TV their whole life were tuning into local TV. And while we obviously didn't keep all those folks, we sort of demonstrated our value. And we demonstrated our value, unfortunately, every day, whether it's an investigative piece or it's weather emergencies or a crisis in the community. So somewhere there's always a critical moment happening now across our footprint, and people are turning to local TV. They're not turning to newspapers anymore. or other media, and we feel very good about being, in many cases, one of the last reliable sources of local news.

Super helpful. Maybe just one last quick one, just on political understanding. You guys don't want to talk about 22, so maybe we can just get a sense of how you're thinking about maybe even some of that creeping into Q4. You guys mentioned it, I think, last call. You know, obviously the environment is incredibly, you know, toxic. Pick your descriptor there. But just how do we think about maybe going into this year, spending your C, a ton of ballot issues, just help us kind of frame the narrative as we think about political going into next year.

And I would start by saying I think, you know, very substantial, I think somewhat similar to what Jim said, even this year we're seeing political advertising for races, for elections that don't happen until next year. That's a phenomenon we started to see roughly a little bit in 2017, certainly in 2019, and the calendar just keeps getting extended out for political advertising. As you all know, I live in D.C., so I read the D.C. stuff a lot more perhaps than you guys do, and it seems every couple of days there's another headline of another record-breaking campaign fundraising haul by one of the congressional committees, one of the Senate committees, one of the parties, the super PACs and new super PACs and super super PACs. The money being raised now is certainly dwarfing anything that's been seen in prior off-year political elections. Trump alone has $100 million of unspent cash raised in the last several months. But the Democrats are still highly motivated. There has not been this drop-off of Trump's guns, therefore the Democrats aren't going to donate money. That's actually not been the case at all. And on the other side, the Republicans are both large and small dollar donations are breaking records for both individual candidates and campaign committees. So we definitely don't see a kumbaya moment coming in this country where political elections are going to go back to being smaller, quieter affairs as we maybe somewhat remember from the 70s, it seems that we are on a continual upward trajectory. We can't put a dollar figure on it because the folks who are closer to it than we are can't put any reasonable estimates on what political has either been to say, you know, pick your adjective, very substantial next year.

And can I follow up just briefly on what Kevin said? Everything that we have seen is that the people in the know, but, you know, who knows if they know it or not, think that 2022 will meet or exceed the spending from 2020 in a presidential election year, which is an amazing sum. And one of the great rationales for the Meredith acquisition is that the way it has positioned the company when they are part of our operations, and they will be for all of 2022, we are in a very significant position in almost every political battleground And out of the 10 most competitive and consequently most expensive Senate races in the country, Gray has almost the entirety of nine out of the 10 states that are up for grabs. And so I think that we will, upon the closing of the Meredith acquisition, receive an extremely strong and very significant political ad spend in 2022. And so we look at it with a great deal of confidence and optimism, but an inability to tell you exactly what it's going to be, but we know it's going to be big.

Got it. That's super helpful. And I think Meredith is only 15% presidential historically, so you have that going for you too. Thanks, guys. Thank you.

Your next question is from Carl Evans from Stephens. Your line is open.

All right. Thanks. Good morning. Kevin, congrats on getting through the retrans negotiations now that you've got 400 of them behind you. Are the OTT and the cable satellite subs still at parity on a net basis?

You guys keep asking us that question, and I'm going to kind of keep giving the same answer, which is we are happy to get paid. By a subscriber, an OTT customer is not necessarily the same value to us as a cable customer. And we certainly go into that in depth. It's important that we get paid. We get paid a lot by some OTT and less by other OTT. We get paid a lot by some MVPDs and a lot less by other MVPDs. When it all shakes out, I don't have a strong view whether I wish someone was coming from Comcast versus mom-and-pop cable versus Hulu TV. I want them in the bundle. And when I've got folks who are cutting the cord, I want people back in the bundle, and sometimes that means we need to take a different view on the value of that customer coming back in the bundle or staying in the bundle, even if it's not the traditional cable or satellite. So we are indifferent to where the customer comes from so long as they are paying a fee that gets back to us.

Got it. And I guess pro forma for the deals, you guys are maxed out on U.S. TV households. You partner with Tegno and Premion.

Could you update us on... Actually, this is Hilton. Let me just stop you there. We have roughly a 3% opening, so we're not completely capped out, and we're certainly not above the national cap. And so While we can't do something maybe the size of a Meredith acquisition right now, we have a lot of other possibilities to come. I just wanted to make sure you understood that, but thank you.

So you still have three points to work with?

More or less. Yeah, we'll be about 36%, and the cap is at 39%. Okay. Thank you for that clarification.

But X large-scale deals, we're not going to see anything else like the two that you're in the process of here. So can you just update us on the digital solution set, where that sits today, speak to some areas where you expect to grow, and then whether or not we should look for more partnerships? Is that M&A? Is it both? Just kind of a high-level view of digital going forward. Thanks.

Yeah, so Kyle, it's Pat. So we highlighted our partnership with Premion, and I mentioned there's a a whole lot of money chasing digital video right now. So I think that's one area that we're focusing on at the stations. If the question is, you know, are we going to go out and try to find sort of digital pure plays or other investments in that area, we're not focused on that right now. As opportunities arise, we'll take a look at them. There's some pretty healthy valuations certainly in the digital video world right now, but not, again, not something that we're squarely focused on. What we are focused on is executing at a very high level at all the stations. And I'm happy to tell you that we're really doing that right now. And so there's a significant amount of upside we feel with our current footprint. But look, as Jim and Kevin and Hilton have told you over the years, we look at pretty much everything that comes in, and we'll continue to do that.

Thank you. Your next question is from Aaron Watts from Deutsche Bank. Your line is open.

Thanks for having me on. Two questions for me. One on the auto side, it sounds like there's some optimism. You think you could see that category maybe turn a corner in the fourth quarter. Curious if you kind of look in your crystal ball, given the growth you've seen in some other categories like services or sports betting, do you think auto ever gets back to being the clear and out front? category leader again, or do you think you'll see a little bit more even dispersion across your ad categories?

Yeah, it's Pat again. I think the latter. I think, you know, you're looking at a much more sort of even split. I mean, as you guys know, auto used to be a huge category, and I think that, you know, the diversification is a huge benefit to the industry and to Gray, and I don't see auto ever being, you know, back to really probably not back to 20% even, although we'll see, but certainly not 25 or 30.

And Pat, I think I'm hearing that you believe that that's due to growth in other categories. Is it fair to say that's not being driven by some of the former auto spend going to other mediums, whether it's digital or otherwise?

No, auto is moving into other mediums, but we can catch some of those digital dollars with our television stations. So it's both, but to be clear, it's not like when they go to digital, they're going outside our house. We still have products that address their needs on the digital side.

Okay, perfect. And then my second question, I see the healthy guidance you've provided. on advertising, and maybe that answers this question, but as there's some increased concerns around the Delta variant, are you seeing any reaction from your advertising partners to those headlines, or is it sort of a wait-and-see approach at this point and the spending continues?

Yes, I would say not as of this point. The Delta variant is a concern, but as we sit here today, we haven't seen any any type of slowdown because it really, any of our markets because of the Delta variant. But, you know, we obviously are watching it closely as our clients. And so, you know, it's a concern. But I, you know, hopefully what happens in this country is what happened in Britain. It could, you know, we move through it quickly and, you know, onward and upward.

Okay, great. Thank you for taking my question. Sure.

You're next. Your next question is from Jim Goss from Barrington Research. Your line is open.

Hi. So earlier, I think you were referring to this Doraville, Georgia, studio production facility you were acquiring, or the property anyway. And I'm wondering, it sounded like you were referring more to being a host or a landlord to other producers, but I wondered if you had any intent to create more of your own programming, given your ownership of such a facility, and what the nature of the program possibilities might be, and whether you might even have some opportunity with the RACOM properties, or perhaps rights issues get in the way of that.

Well, it's not a direct avenue. As you know, we own majority control of Swole Films, which is a remarkable organization. film producer based here in Atlanta. They will be using those facilities as well as the facilities that they already have here in Atlanta, and we anticipate using it for them, perhaps other of the production companies within the company, but that decision has not been made at this time. And then to the extent that we are able to reach an agreement with other folks that may be interested in it, We're very open to that, but we don't have anything in hand that we can talk about at this moment.

Okay. I was wondering, too, it seemed like you'd been doing more or having more involvement with Allen Media. I'm wondering if you have some continuing relationship with them along either a programming line or digital ad sales or anything else that you might think of. as a partner?

No, we don't have any continuing formal relationship with them. They've been a very solid broadcast operator, operating at a distance from us, that has acquired the stations in both divestitures that we had to do as a result of the Quincy and the Meredith acquisitions. But there's no partnership or anything else involved.

Okay. And lastly, I might just ask Kevin, since you mentioned your attention to the news and being in Washington, are there any Washington priorities right now that you would point out that might be running under the surface?

I mean, in terms of regulation?

Yeah, regulation or anything that might affect the operations in the industry.

You know, I think, as I mentioned, I think on a prior call, I think the FCC's main priorities are going to be net neutrality, broadband build-out, and those don't really impact us at all. There surely will be a closer look at broadcast ownership rules, and I'm unsure where that's going. Those would be the big issues. Outside of that, Congress is pretty focused on much, much bigger issues than media and broadcasting. The conversations around big tech could be helpful depending on how they play out, but again, they no direct impact on us. Jim, you mentioned Washington. To amend my prior comments on political, I think Aaron may have raised. In 2019, we had three governor's races, Kentucky, Louisiana, and Mississippi. In the first half of 2019, we had $9 million of political revenue. In 2021, we have one governor's race, Virginia. It's a hot, You may have seen a House runoff in Cleveland. It took place two days ago. And then there's some, as I mentioned, early spending for next year. The first half of this year's political revenue was $15 million. So with one governor's race instead of three, we're very big in Mississippi, Louisiana, and Kentucky. In 19, just like in Virginia, we're very big in Virginia. So one governor's race versus three and yet our political revenue in the first half of this year was nearly double what it was in 2019. So I definitely think we're on the right track to expect a very strong next year. We've got both the House and the Senate are very close, and so fundraisers on both sides can tell their potential donors that literally the control of the House and the control of the Senate could be at stake with this particular race. So it bodes very well for political next year. But I just want to put into context our 2019 first half versus our 2021 first half results with, frankly, one-third of the number of governor's races. I think that's quite an omen.

Okay. Thanks very much. Appreciate it.

Your next question is from Stephen Cahill from Wells Fargo. Your line is open.

Hi, thanks for taking the questions. Maybe first on the net retrend side, thanks for that color on your gross timing. Could you update us on the timing of your upcoming affiliate agreements? And is there any as-acquired benefit on the reverse compensation side as you move through those acquisitions in the months ahead? And then historically, I think you've had a great chart in your investor deck about political spending per household in your footprint, and it was pretty much just as good after RACOM. I was wondering if you've run those numbers yet on a combined historical basis and have an idea historically whether the addition of these station groups changes that picture much. Thank you.

Yeah. Hi, Stephen. Our cadence for the network contracts is our CBS deal we did about four years ago, if I remember correctly, is up at the end of this year. Our ABC and NBC are up at the end of 2022. Our FOX is up at the end of 2023. In terms of the per household, I've not rerun the numbers. If you look back at our decks when we have done the dollars per household, In 2018, we were at $8.72. Meredith was right behind us, $8.68, and that was in the 2018 election. There were very significant Senate races in Missouri, Arizona, Nevada, where they have, as you know, very big exposure. Quincy was, frankly, right on top of those numbers. In 2020, Gray was, again, the top of the public companies. Meredith was, again, number two, and Quincy was, again, kind of on top of where we were at. So I've not rerun the numbers, but I have every confidence that a combined gray Meredith-Quincy will continue to be, if we go back and restate 18, 19, 20, 21, and as we go into 22, I have no doubt that our political footprint and our number one stations will keep us as the highest political revenue per TV household. Again, those numbers have been in our deck for some time. There's really, outside of great, Meredith got close to us in 2018. Outside of that, folks are pretty far behind us, so I don't see any reason that would change. Our news remains on top, and our political footprint is actually even better now with Meredith and Quincy, the two closest competitors to our number one ranking. Thank you.

Your next question is from the line of John Cornridge from JK Media. Your line is open.

Good morning, Jim. On cash taxes, can you give us a rough estimate what they might be this year and just some rough guidance for next year, like could they double next year or be up 50%? That's the first question.

John, we had 38 million year-to-date so far in cash taxes. And I'd remind everybody that that will look large in relation to 2020. But last year, the IRS suspended normally quarterly payments due to the pandemic. And people could catch up those payments late 2020. So some of the six-month comparisons are going to be skewed because of timing differences. But for the full year, we'd be expecting cash taxes of about $50 million. Next year, obviously, that's going to go back up again. Could it double? Significantly because of just the natural political hit, or, I mean, the influence of political is a better way to say it, which, again, we don't know how big is big, but we expect big. So... Yeah, it wouldn't surprise me if it did.

Okay. Second question, on your guidance on free cash flow for 2021, that did include all of the $73 million cost synergies. Is that correct?

No. Our guidance on free cash for 2021 was before... Meredith and Quincy and before the expected $31 million of common dividends.

I know, but then you gave pro forma guidance by saying 430 to 440 and then add 50%. No, no. Well, okay. The 430 to 440 would be legacy gray. Okay. Okay.

What we said was 21-22. Oh, okay. When we add in the Meredith impact, the Quincy impact, and the Synergy impact.

Full Synergy.

Okay. Full Synergy, we would expect 21-22 on a fully proformed basis with everything closed in full synergies. We think it would be 45% to 50% accretive. to free cash flow per share.

And that assumes, I guess, no more share repurchase?

Correct. That's based on the current shares outstanding of $95.8 million.

Last question, Kevin. When you said that your subs were down roughly 1%, that was through the first quarter, not through the second quarter, correct? Correct.

Right. That's right, John. You know, we do lots of estimates because lots of reports come in two and three, sometimes five and six months after the end of the month. And so I gave Q1 to Q1 because we have nearly all of the reports from the MVPDs at this point for Q1, and we have some of the reports for Q1 on OTT.

Right. Actually, one last one for you, John. Kevin, the simple arithmetic of your net margin, you're the only one that gives this, was that your net margin on retrans was 40.5% in the second quarter and about that for the first half. Are we starting to near a bottom on that 40% level or are we still going lower?

It would certainly be our hope that we are at the bottom. I don't, I mean, it's hard for me to gauge. We still have a big negotiation to do with CBS, which is a third of our subs.

Okay, thanks for all your help. Really appreciate it.

Sure thing.

Yep, thank you.

Thanks, John.

There are no questions over the phone. Let me now turn the call over to our Chairman and CEO, Shelton Howell.

Well, thank you all so very much for joining us this morning. We're very excited about our results this quarter and even more optimistic about now that we've closed on Quincy and soon to close on Meredith, that we're going to be reporting remarkable results as we go forward. So thank you again. Bye-bye.

This concludes today's conference call. Thank you for participating.