Gray Television (GTN) Q4 2021 Earnings Call Transcript

Gray Television (GTN -2.77%)
Q4 2021 Earnings Call
Feb 25, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Gray Television fourth quarter 2021 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 Hilton Howell. Thank you.

Please go ahead, sir.

Hilton Howell -- Chairman and Chief Executive Officer

Thank you, Rebecca. Good morning, everyone. As our operator mentioned, I am Hilton Howell, the chairman and CEO of Gray Television. Thank you for joining our fourth quarter 2021 earnings call.

With me today are Gray's executive officers, our president, 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. We will begin this morning with a disclaimer that Kevin will provide. 

Kevin Latek -- Chief Legal and Development Officer

Thank you, Hilton, and good morning, everyone. Gray uses its website as a key source of company information. The website address is www.gray.tv. We will file our annual report on Form 10-K with the SEC later today.

We also will file a Form 8-K today furnishing our financial results on a combined historical basis for the years 2018 through 2021, as well as a new investor presentation, which will include our 2021 results and other information. 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, are reconciliations of the non-GAAP financial measures to the GAAP measures reported in our financial statements.

Certain matters discussed in the 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 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 annual report on Form 10-K and our most recent earnings release. The company undertakes no obligation to update these forward-looking statements.

I now return the call to Hilton. 

Hilton Howell -- Chairman and Chief Executive Officer

Thank you, Kevin. We are here today, as usual, to share with you our comments and our views about what has truly been a remarkable year in 2021 and the results of our fourth quarter, and our company's future. Obviously, the Ukraine situation is so new and so fluid that we simply do not know what impacts Russia's actions may have on our businesses, or more importantly, on the businesses that use our advertising and production services and what consequences the new sanctions that have been announced will have. By way of introduction to those of you who are new to us, Gray Television today is a booming multimedia company that includes the second-largest portfolio of local television stations in the nation and has grown from 30 markets to 113 markets in the last eight years.

Significantly, our portfolio includes 80 stations ranked No. 1 in their markets, with virtually all the rest coming in as a close No. 2. Our earnings release this morning also confirms that like our station portfolio, our execution remains best-in-class.

Overall, we today reported excellent fourth quarter results with adjusted EBITDA coming in at $224 million. This was the result of strong numbers for a nonpolitical fourth quarter, including broadcast revenues of $692 million, total revenue of $721 million, broadcast cash flow of $258 million, and free cash flow of $59 million. Transaction-related expenses due to the acquisitions of Quincy and the Meredith Local Media Group, combined with an expected cyclical reduction in political ad revenue, reduced our net income attributable to common stockholders to $16 million, or a still strong $0.17 per fully diluted share in the fourth quarter of 2021. Excluding transaction-related expenses and noncash stock compensation, our net income attributable to common stockholders would have been approximately $60 million or $0.63 per share for the fourth quarter.

As you all know, our earnings release presents financial results according to GAAP, as well as on a combined historical basis, with the latter figures giving effect to both acquisitions and dispositions. On this combined historical basis, our fourth quarter 2021 revenue was $857 million, and our full year 2021 revenue was $3.2 billion. Looking ahead, we are thrilled with the company that Gray has become as we begin a new year firing on all cylinders. You're about to hear more color on the integration of our recently acquired television stations, our very healthy core ad business, and our growing retransmission revenues, and the great promise in both political revenue and with next-gen television.

In terms of guidance, which Jim will address more fully, we're expecting a very good first quarter on our current forecast. Specifically, on a combined historical basis, we anticipate a 4% to 7% increase in total revenue over the first quarter of 2021, and a 6% to 9% increase in total revenue for the first quarter of 2020, a presidential campaign year. Our guidance today also includes a big change to our full year 2022 political ad revenue guidance. Specifically, we are today increasing our 2022 political revenue guide by approximately 10% from the $525 million announced on our November 2021 earnings call to $575 million today.

This new target of $575 million, represents a whopping 55% increase over the $372 million of political revenue that we achieved on a combined historical basis in the last midterm election year of 2018. We, therefore, have much good news and lots of color to share on the quarter behind us and the quarters ahead. So we will begin first with our president and co-CEO, Pat LaPlatney. 

Pat LaPlatney -- President and Co-Chief Executive Officer

Thank you, Hilton. I'd like to begin by acknowledging that the 2022 Broadcasters Foundation of America, Golden Microphone or Golden Mic Award will be presented at our own Hilton Howell at a fundraiser next month to benefit the foundation's mission of helping broadcasters in need. The event will likely mark the first large in-person gathering of radio and television industry executives and celebrities in more than two years. We all very much appreciate the great work that the foundation has long carried out on behalf of our colleagues in the industry.

Just six months after our acquisition of Quincy Media, we've completed nearly all the integration of the Quincy stations into the fabric of Gray. Admittedly, the integration was a relative breeze because Quincy ran its stations with the same local-first, bottoms-up philosophy that Gray espouses. We're already seeing revenue and profitability improvements across these stations, all while adding investment and resources to enable them to expand their reporting and their sales efforts. We are now quite active integrating the Meredith stations systems and personnel into Gray.

We conducted news research in nearly every Meredith market over the summer, identifying key strategies and tactics in determining opportunities for growth and improvement. When we closed Meredith, we immediately began implementing our plans across the markets. In Atlanta, for example, CBS 46 and Peachtree TV, both of which we acquired from Meredith, have a new, very experienced general manager and new managers in news, marketing, and promotion. We're adding more local newscasts and higher-value programming and expanding the talent across the station's news, sales, digital, marketing, and other areas of operation.

One week after the closing, we announced the legendary Atlanta news anchor and journalist Monica Kaufman Pearson, has joined CBS 46 and Peachtree TV to host two new shows, one of which begins this month. Two weeks ago, we announced that we have agreed to acquire the Atlanta market's Telemundo affiliate station. And last week, we began rebranding CBS 46 itself. And this week, we announced the creation of a new station manager position for Peachtree TV that we filled with an excellent internal candidate.

-- We have made all this progress just here in Atlanta, and that we've owned the two former Meredith stations for less than 90 days. There are similar stories in the other former Meredith markets. Now taking a step back, we believe that our size and scale open new doors for us. Certainly, from a news and political coverage standpoint, our presence in nearly every market in nearly every competitive state, provides exciting new opportunities to cover elections to deliver audiences to campaigns.

These statewide regional clusters provide similar new opportunities as we now more easily and efficiently cover news wide state sports and events -- pardon me, statewide news sports and events. We've begun exploring ad sales opportunities that leverage our extensive footprint of very highly rated television stations. While our coverage of U.S. TV homes is a bit limited, we punched far above our weight in audience delivery, and we believe that over time, there are new revenue streams we can tap.

On the programming front, our scale makes us an attractive partner and provides a solid foundation for distribution of our own programming should we decide to do that. On the digital side of our business, we are closing in on 100 million unique visitors per month on our platforms, which is competitive with such national brands as the New York Times, FOX News, and Yahoo! News. We compare favorably to virtually all our local broadcasting competitors in this metric. We will continue to sell this audience from the ground up, but we could see more national opportunities as our digital footprint expands.

Finally, with the acquisition of Meredith television stations, Gray now has a much larger footprint operating on the next-gen TV standard. At the end of 2021, Gray had stations broadcasting in the next-gen TV standard in 10 markets, including Atlanta, Phoenix, Portland, Oregon and Charlotte. This number will increase significantly throughout 2022, and we currently anticipate ending the year with about 35 markets broadcasting the new standard. This group of markets represents a bit more than 25 million television households or about 21% of the total U.S.

TV households, which equates to roughly 60% of the Gray footprint. Meanwhile, efforts across a number of other industries continue to progress on building out the infrastructure and business models that we believe will make next-gen TV the next big revenue driver for the industry. Next up, Bob Smith will address our station operations and sales. 

Bob Smith -- Chief Operating Officer

Thank you, Pat. Our television station operations are probably in the best overall condition that I can remember. On a combined historical basis, which again includes the results of all television stations now owned by Gray, our fourth quarter 2021 core revenue of $422 million was 11% higher in the fourth quarter of 2020, which was depressed by both COVID impacts and substantial political displacement. Interestingly, our fourth quarter 2021 core revenue was precisely equal to our fourth quarter 2019 core revenue.

Overall, the advertising business was solid for us with the notable exception in the auto category. In the fourth quarter, with the exception of the auto category, every other category posted strong gains over the prior-year period. As expected, our entertainment ad category, which included gaming and gambling companies more than doubled over the year and is now our fifth largest category. For perspective, in the fourth quarter of 2020, that category was 12th among the 14 categories we use.

In light of the growth and size of gaming and gambling advertising, Gray has separated those businesses from other entertainment customers in a formal new gaming ad category beginning in 2022. Our core revenue increases overcame a significant decline in the auto category between the fourth quarter of 2020 and the fourth quarter of 2021. Just a couple of years ago, our auto ad revenue was about 25% of total nonpolitical ad revenue. For full year 2021, the auto category comprised about 17% of total nonpolitical ad revenue as those revenues declined, and we successfully diversified our ad base with a particular focus on health, and recently, travel and tourism.

Legal and home improvements have also grown at a healthy pace. While auto is still our top category, it's no longer a runaway No. 1, and as our diversification has shown, that is a good thing. When auto returns, and it will, all the better.

The really big news on the station side is political advertising. As Hilton announced a bit ago, we are increasing our full year political guide for 2022 from $525 million to $575 million. Our decision to raise the guidance by 10% just quickly after our initially aggressive guidance highlights the increasingly competitive political campaigns we are seeing all across our footprint. Fundraising records seem to fall every week and interparty primaries are generating immense interest, engagement, and activity in a number of places.

This activity includes battleground states that have been on everybody's radar for some time, such as Arizona, Nevada, Missouri, Wisconsin, Georgia, where incidentally, Gray is actually the largest media company in the state. It also includes a number of states and races that are surprising us with levels or timing of the advertising spend. For example, in Alabama, the state primers for both government and U.S. Senate, which are not until May 24, saw meaningful ad spending start in December of last year.

As a reminder, Alabama is one of the many states, which Gray owns leading television stations in every market serving the state, including the top-rating television station in Huntsville, Birmingham, Montgomery, and Dauphin. A similar story is playing out in Nebraska, where we own the top-ranked local station in nearly every market that covers the state. Their campaigns began spending in December for the Nebraska primary, which isn't until May 10. Likewise, in Illinois, we began to see significant political advertising in January for the primary that takes place on June 28, as well as spending directed at this November's general election.

These notable experiences and similar developments over the past three months justify our increase in full year political ad revenue guidance to $575 million. That figure represents about 88% of the total political ad revenue of $652 million in the presidential and Georgia Senate runoff year of 2020 on a combined historical basis. Equally impressive and worth repeating from Hilton's opening remarks is that the new target represents a 55% increase over the $372 million of combined historical political revenue in 2018, the last midterm political year. I will now turn the call over to Kevin. 

Kevin Latek -- Chief Legal and Development Officer

Thank you, Bob. We also have good news to report today on retransmission revenues. As you saw in our release this morning, we posted a strong fourth quarter growth in retrans revenue. On a GAAP basis, retrans revenues increased 35% from the year earlier period.

On a combined historical basis, retrans revenues increased 12% from the year-earlier period for both the fourth quarter of 2020 and the full year of 2020. Importantly, we also have continued to grow our net retransmission. On a combined historical basis, our net retrans revenues of $480 million and $218 million grew to $587 million and $221 million, which is an approximate 22% increase over four years. As you know, we disclosed the amount of reverse compensation payments that we paid in networks in our earnings release to provide full transparency on our retransmission metrics.

In the combined historical basis financial data that we provided today, you will see that the growth in network fees over the past five years has slowed. This is because Gray, Meredith, and Quincy previously experienced large step-ups in network fees a few years ago as the networks prepared for their own contract renewals with the NFL. We expect the slowdown in network fee growth to continue as we progress through our new CBS affiliation term in our next affiliation terms with the other networks. Our Big 4 pay-TV subscriber accounts appear to have remained fairly stable over the year.

We compare the total of these accounts in the subscriber reports for the television stations owned by Gray in the third quarter of 2020 to the reports for the same group of stations in the third quarter of 2021. Over that period, these stations experienced a decline of less than 1% of total Big 4 pay-TV subscribers. While we do not have a full set of subscriber reports for our recently acquired stations, we have no reason to believe that the subscriber levels for this mix of large market and small market Meredith and Quincy stations would be significantly different than what our legacy stations experienced over the same time period. Looking ahead, we will next renew and reprice linear MVPD retransmission agreements at the end of this year, and we will renew our FOX affiliation agreements later this year.

Given the timing of these renewals and assuming that our sub counts remain stable, we anticipate that gross retransmission revenues will be in the neighborhood of $1.5 billion in 2022 and that net retransmission revenues in 2022 will increase at a mid-single-digit percentage over 2021's net retransmission figure of $587 million, again, all on a combined historical basis. We began 2023 with new retrans agreements covering about 1/5 of our Big 4 subscribers, which should allow this year's good momentum for net retrans growth to continue rolling forward. This concludes my remarks, and I now turn the call to Jim Ryan. 

Jim Ryan -- Executive Vice President and Chief Financial Officer

Thank you, Kevin. Good morning, everyone. As mentioned earlier, we will be filing our 10-K later today. The release in the 10-K provide a great deal of detailed financial information.

And as also mentioned earlier, we will also be updating our investor deck with our December '21 financial information and presenting both as reported and combined historical basis select operating data by quarter and year to date for 2018 through 2021. I believe by providing this information, we are being the most transparent company in the sector. Beginning in Q1 2022, Gray will no longer segregate local advertising revenue from national advertising revenues in our income statements. The local versus national distinction may be relevant for other broadcast companies who sell national revenue through a sales rep and sell local and regional adds through their own sales force.

Since late 2015, however, Gray's own employees sell virtually all advertising that appears on our television stations and digital platforms, regardless of the physical location of the agency or ad client. The local versus national distinction, at least for Gray, has outlived its usefulness. And today, we will retire that distinction, and we'll simply report core advertising revenue going forward beginning Q1 2022. As you will see in our earnings release, 10-K, and our combined historical information being published later today, we have maintained a local national distinction on all historical results, so you've got a good complete set of data.

Hilton, Pat, Bob, Kevin have all covered the key highlights of the quarter and the full year. As such, I'll keep the rest of my remarks very short. I'll begin with some brief comments on our Q1 guidance. We developed and finalized the guidance based on our internal forecasts and pacings as of Tuesday.

We are not adjusting this guidance in light of the recent events in Ukraine, although we remind you that we are unable to predict what impact, if any, that war in Europe may have on our business in the first quarter or beyond. Total core revenue is anticipated to increase approximately 3% over combined historical Q1 2021 results. This demonstrates the continuing sequential improvement of total core revenue and makes us optimistic of continuing improvement as we move through 2022. The Services Group, which combines financial, legal, and medical, now represents about 29% of our year-to-date full year 2021 core revenue.

In fact, current Q1 pacings for the services group is showing percentage increases in the mid- to upper teens and the dollar volume increase is more than offsetting weakness in auto advertising. I'll remind everyone, though, that pacing data is simply one point in time and may not reflect final results. We currently anticipate the gaming revenue in Q1 will exceed $10 million, and anticipate continuing growth the rest of 2022. The Super Bowl is anticipated to contribute approximately $7 million in Q1 to our revenue, and the Winter Olympics are expected to contribute approximately $10 million to our Q1 2020 to advertising revenue.

Let me recap certain key metrics on a combined historical basis for full year 2021. Our combined historical basis net revenue is $3.15 billion. Our two-year blended average 2021 net revenue is $3.25 billion. Our 2021 combined historical operating cash flow is $1.029 billion.

Our last eight-quarter average combined historical operating cash flow as of 12/31/21 is $1.216 billion. 2021 free cash was $443 million, and our blended 2021 average free cash was $626 million. Our leverage ratio at the end of 2021 was 5.47 times. A few comments on cash uses and free cash for 2022.

We currently expect approximately the following material uses of cash in 2022. Cash interest expense of $295 million, cash taxes of $190 million, routine capital expenditures of $125 million, and our preferred dividends are $52 million, and we have $15 million required amortization on our new term loan D that we placed as part of the Meredith acquisition. At this time, we currently anticipate that our free cash before common dividends, acquisitions, investments, and our assembly construction costs will exceed $800 million in 2022. To state the obvious, if political revenue exceeds our current full year forecast of $575 million, this full year free cash estimate will increase.

We are very well-positioned starting 2022 and look forward to a very successful year. I will now turn the call back to Hilton. 

Hilton Howell -- Chairman and Chief Executive Officer

Thank you, John. Before ending and opening up the line for questions, I would like to take a moment to address our capital allocation strategy. one year ago today, I had the honor of announcing on this call that our board of directors had voted unanimously to resume Gray's regular quarterly cash dividend for our equity shareholders. While we did not realize at that time that Gray would be acquiring Meredith's local media group just nine months later, our board was then and remains today fully committed to our quarterly dividend, as well as returning capital to our equity shareholders through reducing our leverage and pursuing opportunistic stock buybacks.

In that regard, please keep in mind that with the anticipated very strong annual free cash flow north of $600 million and certainly much higher in every two-year political cycle, Gray will naturally delever quickly. With $600 million representing a 1/2 turn on our net leverage ratio, we are in a position to bring our leverage down into the 3s in a fairly short period of time. Of course, as our strong free cash flow drives our leverage lower, this deleveraging automatically and directly transfers to economic value for our equity shareowners. In closing, I remain as optimistic and excited as ever at Gray's prospects for its employees and its stakeholders.

Our business is strong, our prospects are bright. Gray has the people and tools we need to ensure that the nation's second-largest broadcast group is and remains one of the finest media companies in the world. Operator, at this time, we will open the line for questions. 

Questions & Answers:

Operator

[Operator instructions] And your first question comes from the line of Dan Kurnos with Benchmark Company.

Dan Kurnos -- The Benchmark Company -- Analyst

Great. Thanks. Good morning. Just a quick housekeeping for Jim.

What is -- what are the synergy expectations assumed in the Q1 guide?

Jim Ryan -- Executive Vice President and Chief Financial Officer

Our synergies combined for Quincy and Meredith were, let's see, about $70 million, low $70 million. We're still on target for that. Our guidance includes that. We're actively working on those things.

A fair amount of our synergies in both transactions are -- to an extent, have been achieved already. Obviously, the retrans synergy was automatic, and we'll phase it month by month over the first 12 months. Some of the corporate overhead, combined corporate overhead savings have been already achieved as well. And we've already achieved the savings in the national rep firm by canceling both national rep agreements and obviously, that synergy will flow in month by month as well over the course of the first 12 months since the acquisition.

Dan Kurnos -- The Benchmark Company -- Analyst

Got it. That's really helpful, Jim. Thanks. And then, Kevin, a couple on retrans and reverse for me.

Thank you for the additional color, hence, the full year guide, which is fairly impressive, I would argue, given that I think you just did a 30-year footprint with CBS or Paramount now. I guess the question is you gave some commentary that you expect to see the slowing, continued slowing on the network side. Do you anticipate that -- I mean, historically, you've been about 50-50 fixed versus, I guess, floating to subs. Do you anticipate that more and more networks will move toward fixed? And how do you see the growth side? Obviously, you guys still have a long way to go.

And given your increased negotiating leverage and scale, there's probably still some benefits there. How do you see the growth side kind of pacing, given your remarks and where you're at in the marketplace right now?

Kevin Latek -- Chief Legal and Development Officer

Taking them in reverse order, nothing has changed in our view that we are grossly under compensated in terms of the value we deliver to any distributor given the ratings eyeballs we deliver and that we pull into subscription packages. On the first question, we're not aware of any of the four networks planning a change in their method by which they've calculated reverse comp for many, many years now across all their affiliate groups. So if you know something that's changing, I'd love to hear about it, but we've not heard anybody say that any of the networks are changing their approach. 

Dan Kurnos -- The Benchmark Company -- Analyst

And just to be clear, Kevin, I mean, given those dynamics, that would argue that net retrans margins are at least stable, if not maybe better than that going forward now? 

Kevin Latek -- Chief Legal and Development Officer

Do you think the net retrends will continue to grow over the next several years? We have not talked about margins since we went from keeping 100% of $20 million to something less than 100% of $20 million, and we're going to book $1.5 billion this year and put -- last year we had $587 million of net retrans. To us, what matters is how much we put in the bank. As you know from prior conversations, we just -- we don't focus on the margins. Overall, in terms of trends, I think you're right, gross is growing.

Reverse should be -- the growth there should be not as great as the gross increases, which would -- if you're concerned about margins, should result in a higher margin, yes. But that's just not something we're focused on at all.

Dan Kurnos -- The Benchmark Company -- Analyst

Understood, Kevin. It's just helpful to understand the dynamics. Thank you for the -- and thanks, Jim, and thanks, everyone. Appreciate it. 

Jim Ryan -- Executive Vice President and Chief Financial Officer

Thanks, Dan. 

Kevin Latek -- Chief Legal and Development Officer

Thank you, Dan. 

Operator

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

Aaron Watts -- Deutsche Bank -- Analyst

Hey, everyone. Thanks for having me on. A couple of questions for me. On the sports betting side, I hear that it's been a great category for you, as well as others, and it's moved into some of your top -- one of your top categories.

With some of the comments from the gaming companies around pulling back on media spend going forward, how do you think that translates on a local level for you and your stations in terms of the amount being spent going forward?

Bob Smith -- Chief Operating Officer

This is Bob Smith. I can take that. I think on the local level, we're continuing to see pretty big ad budgets in some of the current states we're in, and really big ad budgets on our stations in the new states they're going into. And we expect that to continue for some time, certainly throughout this year.

And obviously, with our dominance among our markets in most of these states, we're getting a big share of the pie in those areas. And so we expect this to continue and be very healthy for quite a bit in the future.

Aaron Watts -- Deutsche Bank -- Analyst

OK, great. And then for Kevin, really more of a sanity check here. I know there's a lot of moving parts anytime you negotiate with your affiliate partners and networks. But just to make sure, on the NFL, with the new contract that's now in place for the next 10 years, give or take, were you saying in your comments that, that -- those big increases that the networks are going to pay for that contract have already largely been baked into your reverse compensation to them? Or should we still expect, as part of your negotiations, there'll be a step-up in payments to your partners because of that?

Kevin Latek -- Chief Legal and Development Officer

I think you can assume that the network reverse comp fees will go up every year until the world stops spinning. And I think that the gross retrans fees will continue as well to go up every single year. My point was we -- our company, Quincy and Meredith included, had big step-ups a couple of years ago from what we have been paying the networks. That was, we believe, in preparation for the NFL deal.

We expect to continue to go up, but those year-over-year increases should be -- should not be as great as we had historically.

Aaron Watts -- Deutsche Bank -- Analyst

OK, OK. Got it. And last one for me. Jim, I think I'll emit you on this one, a follow-up on the capital allocation and leverage reduction goals.

I appreciate that the business is set to grow this year and we'll throw off a material amount of cash. As you think about bringing down leverage following the Meredith acquisition, will gross debt paydown be a significant part of that alongside EBITDA growth? And I ask that with the potential concern of an economic slowdown over the medium-term horizon. So having that lower gross debt balance, obviously, could help from a leverage standpoint? Thank you.

Jim Ryan -- Executive Vice President and Chief Financial Officer

I think it's going to be a combination of both, just as you saw us do post Raycom, organic growth in the operating cash flow number, but also some outright debt -- some degree of outright debt reduction as we go through the year, I would say that more likely than not, the absolute debt reduction is probably back-weighted to the year to dovetail it with the political, because I'll remind everybody that roughly based on historical trends, about half of the entire political number shows up in the fourth quarter. So if that trend holds for 2022 as well, it means we will be very cash-rich in November. So I would think that would be a good time to be reducing absolute debt balances.

Aaron Watts -- Deutsche Bank -- Analyst

OK. Appreciate the time as always. 

Jim Ryan -- Executive Vice President and Chief Financial Officer

Thank you, Aaron. 

Operator

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

Jim Goss -- Barrington Research -- Analyst

Given that you're close to the cap, do you think any existing M&A thrust might more likely involve trading up when possible in existing markets, recognizing that No. 1 and No. 2 positioning narrows such opportunities? Or would you think there might be a couple of other markets you might want to enter?

Kevin Latek -- Chief Legal and Development Officer

Well, Jim, the short answer is that there's really nothing on the -- we think it's been on the market the last year or two. We'll do a couple of things, but some of those deals never happen. And then the other deals, it just -- again, they had to meet our acquisition criteria to go into a new market, and they were No. 1 or strong No.

2 stations. We're not out actively looking or trying to convince people to sell at this point. We've got our mind focused on integrating Meredith and otherwise looking at other things, day-to-day operations, and trying to convince folks to sell. If something comes along, we'll take a look at it.

We don't really anticipate any opportunities to trade up in a market, if you will. We're pretty happy with the stations we have. Happy with the people we have. So we don't really see that as likely.

Overall, with 3%, there's not really a lot we can do, but there's also not really a desire to do very much. As Hilton said on the call, our capital allocation strategy is to pay our debt down, which will transfer value to equity shareholders. We've got a great portfolio. It's the second largest in the country, has the highest portfolio quality.

So we feel we've got enough scale to accomplish what we need. Something great comes along, we'll look at it, but we're just not out actively looking at any kind of M&A stuff right now. 

Jim Goss -- Barrington Research -- Analyst

OK. Thanks. And with the Tegna announcement, I presume that wouldn't change the premium relationship or expectations for that service at all, but would it?

Pat LaPlatney -- President and Co-Chief Executive Officer

Yeah, I don't think it's going to change anything, Jim.

Jim Goss -- Barrington Research -- Analyst

OK. And the last thing I was wondering is with NextGen TV, and I assume it's ATSC 3.0, are there any ideas you've been coming up with so far as to how you might try to create revenue opportunities out of this potential?

Pat LaPlatney -- President and Co-Chief Executive Officer

Yes. Sure. I mean I would tell you, they're still a little longer term, but there have been -- there's been a pretty healthy dialogue with the automotive manufacturers for years now, conversations with CDNs using that spectrum to deliver bits locally. And then as you've heard before, no doubt, I mean, it's a wonderful technology to use for targeted ad sales.

So I would tell you that those conversations that have been going on for some time are progressing. The build-out is accelerating. The set manufacturers are building more and more models with a chip in it. And so there's a lot of momentum there. 

Jim Goss -- Barrington Research -- Analyst

OK. That's interesting. Lastly, Kevin, given the turbulence in the world, did you have any inside information as to when the world might stop spinning?

Kevin Latek -- Chief Legal and Development Officer

Jim, it won't be in my lifetime.

Jim Goss -- Barrington Research -- Analyst

OK. Thanks for that. 

Kevin Latek -- Chief Legal and Development Officer

Sure. 

Operator

Your next question comes from the line of Michael Kupinski with NOBLE Capital Markets.

Michael Kupinski -- NOBLE Capital Markets -- Analyst

Thanks for taking the questions. I want to touch on a couple of issues here. One is, obviously, you had such a strong rebound with advertising without the help of auto. And I was wondering if you can, on a combined basis, tell me where auto advertising is as a percent of 2019 levels.

And then if you could just kind of give us your thoughts about the outlook and how you feel about that category throughout the balance of this year and maybe even to 2023, if you have views about new vehicles and so forth that are going to be launched?

Pat LaPlatney -- President and Co-Chief Executive Officer

Yeah. I could start with that, Mike. So we're -- '19, I --

Jim Ryan -- Executive Vice President and Chief Financial Officer

Yeah, I don't have comparisons to '19 immediately in front of me, Mike. What I could tell you is in 2021, it was -- auto was about 17% of core revenue. And by comparison, '20 was about 21% of core.

Pat LaPlatney -- President and Co-Chief Executive Officer

And then going forward, look, it's been a moving target, right? We thought we'd come back by the end of '21. And then it's -- we think, and I do believe that midyear, toward the end of the year, it's going to get better, but it may not fully -- and I'm not sure how you define fully, but fully come back until '23. With that said, and you pointed out, we've been able to fill that gap with a number of other categories. And candidly, the reason we've been successful in doing this is because we've got initiatives focused on those categories.

And we've had those initiatives around for a few years now, and they're -- it's paying off for us. So but auto will come back. And when auto comes back, we're going to have a very, very solid business. So I can't give you the timing exactly.

I wish I could, but I think it's going to progressively get better beginning in Q3. That would be my best guess.

Michael Kupinski -- NOBLE Capital Markets -- Analyst

Got you. And Jim, you mentioned maintenance capex of $125 million. Does that include the cost upgrade to next-gen TV? And if it does, I was just wondering in terms of -- do you view that then your upgrades of next-gen TV more as a maintenance primarily because that you're just going through replacement of equipment and so forth? Or is there a type of return that you expect on the investment to upgrade to next-gen?

Jim Ryan -- Executive Vice President and Chief Financial Officer

The $125 million would include what we think we need to add the additional next-gen in 2022. So it's just kind of ongoing business operations, how we kind of look at it. It's not necessarily a day one, year one return hurdle, because, obviously, NextGen is really taking us out the next, probably a couple of decades, at least. So I think as Kevin and Pat have already said, we expect some really nice revenue opportunities there.

Probably not in '22. But as we move through the next few years, I definitely think that there is some new and untapped revenue both for us and the entire sector.

Michael Kupinski -- NOBLE Capital Markets -- Analyst

Got you. All right. That's all I have. Thank you, guys. 

Jim Ryan -- Executive Vice President and Chief Financial Officer

Thank you. 

Operator

[Operator instructions] Your next question comes from Steven Cahall with Wells Fargo.

Steven Cahall -- Wells Fargo Securities -- Analyst

Thanks. Pat, maybe just curious how we should think about modeling core in the back half of the year if auto does recover? It sounds like it probably could. So we'll have auto. It will be a sports season and then there's the midterm elections.

Normally, we model those as crowding out some of the core ad inventory. So just curious, yes, how you want us to think about that based on what you're seeing today?

Pat LaPlatney -- President and Co-Chief Executive Officer

Yeah. So you mentioned political displacement is going to be a big factor. It will be. And so look, I wish I could throw numbers out there.

I really don't feel capable of doing that. Maybe Bob could chime in here. But we would expect some recovery in spending probably late Q3 into Q4. The challenge will be in September and October, political is going to be enormous.

And then I think you'd see more of an impact beginning in November. I think that's when -- post-election, obviously. So Bob, you have any thoughts on that?

Bob Smith -- Chief Operating Officer

Yeah. I would agree with that, that I think what Pat said earlier, in the second half of the year, we should see an uptick in auto. I think GM has been spending with us in '21, and they're continuing spending decent money in Q1 of this year. Ford continues to be off a bit.

But we expect Toyota to remain pretty consistent all year. High-end Kia is a smaller piece of business for us, but they're actually increasing their spending. So hopefully, with the new models, in the back half of the year, we'll see that decreased spending. But of course, we'll have to deal with displacement in some of the key states that I mentioned earlier on the call. 

Steven Cahall -- Wells Fargo Securities -- Analyst

Great. And then Jim and Hilton, maybe just a couple of questions on cash and cash usage. So Jim, it sounded like the $800 million, I think that's above kind of where we were before. So is that above the 50% accretion guidance that you gave last year? And if so, is that just mostly driven by the political raise? Or is there more in there? And then Hilton, I just wanted to make sure I understood those comments you made at the end of the prepared section.

I kind of took those to mean that you're pretty confident in deleveraging naturally, and that gives you a little bit of cash that you can use for other things and you bought back a little bit of shares in Q4, which was a surprise. So am I thinking about that right? Or should we be thinking about 100% of free cash flow going to debt at this point? Thank you. 

Hilton Howell -- Chairman and Chief Executive Officer

Thank you. Steven, I'll let Jim start and then I'll pop in.

Jim Ryan -- Executive Vice President and Chief Financial Officer

Again, Steven, just to be clear, that $800 million would be before common dividends and acquisitions, investments, etc., like I said earlier. But to put it in perspective, that $800 million would be comparing to our as-reported 2020 free cash of $559 million.

Steven Cahall -- Wells Fargo Securities -- Analyst

Anything on usages?

Hilton Howell -- Chairman and Chief Executive Officer

Well, yes. The way Gray has typically done it in the past is we have attempted to be conservative in our projections. So we kind of expect to beat them naturally. And then with regard to capital allocations, we also like to be where we kind of do a little bit of all the above.

We were -- we are essentially right where we were when we closed on Raycom in 2019 in terms of our leverage ratios. And within a two-year period of time, our leverage ratio has dropped to 3%. The 2021 year is even, timing-wise, more propitious because we begin a two-year cycle with a political year. And so it's going to be a lot of free cash flow a lot earlier than the deleveraging process that we had post the closing of Raycom.

And so I think by the time that we get to Q4, that we'll have an opportunity for our board to consider all of the above, which would be gross debt reduction plus stock repurchases and perhaps an increase in the dividend. And then Steven, since you asked it, and these guys have covered the sort of precise numbers on automobile, I mean, the answer is we really can't tell. But from where I sit, it's hugely bullish for the broadcast business and for our company in particular. Because back in the day, when automobile sneezed, broadcasters got a cold, all right? Well, that hasn't happened.

And automobile, as we have mentioned, will absolutely come back. And when it does, since we have backfilled -- backfilled that absence and increased our core advertising, I expect an even larger increase because we don't think the new categories are going to dissipate. So I'm very bullish on core. Did that get you what you need, Steven? 

Steven Cahall -- Wells Fargo Securities -- Analyst

It does, yeah. OK.

Operator

[Operator instructions]

Hilton Howell -- Chairman and Chief Executive Officer

All right. Well, operator, let me just make a few closing comments since it doesn't look like we have any other questions. I just really want to thank all of you for your time and your attention and your digging through our numbers. We're very excited about what we were able to accomplish throughout the whole course of 2021.

We're very proud of fourth quarter, which is core operating metrics, and we are terribly excited about the opportunities that we have as a much larger company in 2022. And so we really look forward to speaking to you at the end of our first quarter of that year. Thank you, and we'll talk soon.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Hilton Howell -- Chairman and Chief Executive Officer

Kevin Latek -- Chief Legal and Development Officer

Pat LaPlatney -- President and Co-Chief Executive Officer

Bob Smith -- Chief Operating Officer

Jim Ryan -- Executive Vice President and Chief Financial Officer

Dan Kurnos -- The Benchmark Company -- Analyst

Aaron Watts -- Deutsche Bank -- Analyst

Jim Goss -- Barrington Research -- Analyst

Michael Kupinski -- NOBLE Capital Markets -- Analyst

Steven Cahall -- Wells Fargo Securities -- Analyst

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