Prepared remarks
Good day, everyone. Welcome to Gray Media's Second Quarter 2026 Earnings Call. I will now turn the call over to Gray's President and CEO, Hilton Howell, Jr. Sir, please go ahead.
This is Alan Gould from Investor Relations. I'm going to lead off. Thank you, Lary, and welcome, everyone. Joining us on today's call are Hilton Howell, our Chairman and CEO; Pat LaPlatney, our President and Co-CEO; Sandy Breland, our Chief Operating Officer; Kevin Latek, our Chief Legal and Development Officer; and Jeff Gignac, our Chief Financial Officer. Today, we filed on Form 8-K our second quarter earnings release and updated investor presentation with the SEC. And later today, we will file our quarterly report on Form 10-Q. These materials are all available on our website, graymedia.com, where we recently updated our Investor Relations section to make this site more comprehensive and easier to navigate. Included on the call may be a discussion of non-GAAP financial measures and in particular, adjusted EBITDA, leverage ratio denominator, net retransmission revenue and certain net leverage ratios. These metrics are not meant to replace GAAP measurements, but are provided as supplements to assist the public in its analysis and valuation of our company. Further discussions and reconciliation of the company's non-GAAP financial measures to comparable GAAP financial measures can be found in our latest investor presentation on the website. All statements and comments made by management during this conference call other than statements of historical fact should be deemed forward-looking statements that 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 factors that are described in our most recent filings with the SEC. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. It is now my pleasure to introduce Gray's Executive Chairman and CEO, Hilton Howell.
Thank you, Alan. Today, we are very pleased to share our results for the second quarter of 2026 that were overall quite favorable to our previously issued guidance. Keep in mind that our second quarter reported results include three acquisitions and the Scripps swap that closed during the quarter. To provide everyone with a more meaningful comparison, our earnings release presents adjusted guidance reflecting the results of the second quarter acquisitions. The second quarter results reflect the benefits that we expected when we signed those transactions now nearly a year ago. Total revenue in the second quarter of 2026 was $839 million. This exceeded the high end of our adjusted guidance range by about $9 million and total revenue increased 9% on a year-over-year basis. Political revenue in the second quarter reached $83 million, well above our guidance range of $60 million to $70 million. Our second quarter acquisitions contributed $3 million to this total. As Pat will detail in a moment, with our third quarter outlook, we are trending ahead of both 2024, a presidential year, and 2022, a nonpresidential year on year-to-date levels with or without the impact of our 2026 acquisitions. Our net retransmission revenue was $150 million for the quarter, landing above our guidance range adjusted for all of our acquisitions. Please remember, our second quarter net retransmission revenue included the very large Gray Media blackout with one of our largest distributors that ended on May 1. I am highly encouraged by the continued progress we have made on our net retransmission revenue. Growth in this recurring revenue stream remains a foundational pillar in our deleveraging plan. Jeff Gignac will provide additional color on the leverage benefits. Also remember that we have no further retransmission negotiations for the remainder of 2026. Broadcast expenses before depreciation, amortization and gain or loss on disposal of assets in the second quarter of 2026 was $569 million, in the middle of our guidance range and increased $6 million compared to the second quarter of last year. This included $30 million of operating expenses from our newly closed 2026 transactions. Net income attributable to our stockholders was $21 million for the quarter, and adjusted EBITDA for the second quarter was $214 million. A few comments now on our operations. I am exceptionally proud of our team for remaining focused on our business. We are well underway integrating all of our closed 2026 acquisitions and swap transactions. At the same time, we continue to invest in our stations, our people and our communities to drive journalistic excellence. I am exceptionally proud that our efforts have been reflected with 93 regional Edward R. Murrow Awards in 2026, up from 81 last year and candidly, well ahead of our peers. Our stations' commitment to local news, local sports and weather is of significant value to the communities we serve and to our investors. I am particularly excited as a long-time season ticket holder about strategically expanding our local professional sports portfolio. Right here in our hometown of Atlanta, we reached a fabulous agreement with the Atlanta Hawks that goes through the 2028-29 season. The deal will bring 70 to 75 Atlanta Hawks regular season games and over 200 hours of program information to WANF, our local affiliate in Atlanta and across our Peachtree sports networks, which really means it will reach every market in Georgia and a number of markets in Alabama, including Birmingham. The team at Raycom Sports will produce the games just like they currently do with BravesVision and the Atlanta Braves. It is a great example of our production expertise supplementing our TV business. And if you have seen the broadcast, it's truly world-class. At Assembly Atlanta, Intense Tennis is wrapping up a three-month road run that has raised Assembly's profile by hosting tennis matches with a live audience. We were able to broadcast some key matches on WANF and Peachtree Sports in Atlanta. Beyond the gates, the CBS soap opera that premiered two years ago was renewed for two additional seasons, and we're exceptionally excited that they will be keeping the studio lot active for years to come. And then also of significance to us, Assembly and Gray will be hosting both the senatorial and the gubernatorial debates at Assembly and carry them across every single market in the state of Georgia. We are thrilled to have these political aspirants in our home. On the M&A front, the second quarter was highly productive. We closed transactions covering seven markets from Allen Media Group, three markets from Block Communications and then our swap with E.W. Scripps and then two further markets from SagamoreHill. All told, for the transactions we closed in the first half of 2026, we added four new markets and added 14 stations in existing markets and swapped three markets to our friends at Scripps. And if that wasn't enough, we completed two transactions immediately after quarter end on July 1. We acquired the non-licensed assets of American Spirit Media, which had been under a shared service agreement for over a decade with our legacy Raycom stations, and we also acquired WHPM, the Fox affiliate in Hattiesburg, Mississippi. We currently expect to close the license assets for each in the fourth quarter of 2026. We have recently taken a number of steps to enhance our balance sheet. We redeemed $50 million of our Series A preferred equity following the close of the quarter, and we repurchased $120 million of our debt in a private transaction. And yesterday, our Board reauthorized the purchase of up to $250 million of debt in the open market. Jeff Gignac will go into more detail on our broader balance sheet strategy shortly, but I'd like to take a moment to emphasize that our top priority for our incremental political cash flows is going to be to further reduce our debt. And despite having substantial political, the substantial majority of that cash comes in Q3 and in Q4. We are making great progress growing our portfolio of top-rated stations, executing our deleveraging strategy and enhancing long-term shareholder value. And I'd also like to take a personal moment to welcome all the hundreds of new people that have joined our company via our recent acquisitions. At this time, I will turn the call over to Pat to dive deeper into our operations.
Thank you, Hilton. Second quarter core advertising revenue came in close to our expectations. Our guidance was for core to be down mid-single digits in the second quarter of 2026 compared to 2025. We reported down 1%, but adjusted for the second quarter acquisitions, we would have been down in the mid-single-digit range. We also estimate that core advertising experienced a one-point decline from political crowd out. On the upside, we saw some tailwind from the FIFA World Cup. Looking at our categories, we saw strength in gaming, a positive trend that is sustained into the third quarter. Communications services, particularly health and insurance and consumer-related categories were soft. The automotive vertical finished the second quarter down just 2% to 3% compared to the second quarter of 2025 on a same-station basis and is pacing up slightly in the third quarter, which is encouraging. Our digital momentum continued in Q2 with a healthy 12% year-over-year growth that remained strong into Q3, complemented by a 5% increase in new local direct business. Despite a highly competitive market, our sales teams continue to deliver outstanding results. While global economic factors and political crowd out introduced near-term caution for core advertising, we are leveraging our newly acquired 2026 stations to project stable Q3 core advertising, flat year-over-year performance on an as-reported basis. We are seeing encouraging gains in some categories with automotive up slightly, as mentioned, and discount and department stores showing nice strength. But some consumer-facing categories such as restaurants, supermarkets as well as services are seeing softer demand. Political advertising was a highlight, significantly exceeding our expectations. Against our second quarter guidance of $60 million to $70 million, we delivered $83 million, which includes $3 million from our 2026 acquisitions. This compares to $47 million and $90 million in second quarters of 2024 and 2022, respectively, the previous on years of the two-year election cycle. Looking ahead, we anticipate third quarter political revenue will be in the $165 million to $185 million range. Third quarter political revenue is backloaded with September historically driving about half the quarter's totals and August generally outperforming July. We are providing our best estimate based on quarter-to-date results and our stations portfolio's positioning against the current political landscape. As detailed in our investor presentation, Gray's footprint has significant exposure to key battlegrounds. We operate in markets covering all 12 competitive U.S. Senate races, all 11 competitive gubernatorial races and 29 competitive House races per the Cook Political Report. We're seeing strong primary spending in Tennessee, Kansas, Florida, Michigan, Arkansas, Wisconsin, Connecticut and Hawaii, alongside heavy early general election spending in Ohio, Iowa, Alaska and Michigan U.S. Senate races. We're also benefiting from early activity in other markets with contested Senate, gubernatorial and House races. As we continue to expand our focus on sports, as Hilton mentioned, we have 19 MLB teams playing on our 16 broadcast sports networks, including Peachtree Sports Network here in Georgia. Raycom Sports is partnering with the Atlanta Braves, as mentioned, to produce all non-national games for the Braves. In the Hawks, Raycom Sports will also be producing the non-national games for Atlanta Hawks under our recently announced three-year deal. Combining our world-class production capabilities with Gray station distribution reach is a material advantage as we explore additional local professional sports deals. On the technology front, our digital team has successfully completed the transition of all of our digital video streams into the Quickplay platform powered by Google Cloud in a remarkably short time frame. Over the next quarter, we'll transition our CTV and mobile applications to the Quickplay platform, creating a personalized streaming experience that will revolutionize how viewers discover, engage with and consume our content across every screen. Finally, a quick note on our more recent acquisitions. The current wave of Gray M&A is a bit different than in years past. We are combining station operations within markets, whereas historically, M&A expanded horizontally into new markets for Gray. Jeff will now address the key financial developments and give us some context around how the transaction activity is showing up in our results.
Thanks, Pat. In the second quarter of 2026, our reported results include the results of the stations we acquired and swapped from the date that each transaction closed. As Hilton described, our earnings release provides both our Q2 reported results and a comparison of those results to our Q2 guidance adjusted for the actual results of the acquisitions closed during the quarter. Our second quarter results were in line with or favorable to the adjusted guidance other than corporate expenses where we once again incurred elevated transaction costs. Our leverage metrics as of June 30, 2026, under our amended senior credit agreement were 2.55x consolidated first lien net leverage ratio, 3.71x consolidated secured net leverage ratio through the second lien, and 5.73x consolidated total net leverage ratio. We initially anticipated approximately 0.25 turn of deleveraging from the announced acquisitions. Our actual result is 0.18x using the first quarter calculation. To put this in perspective for everybody, we reported a first quarter 2026 consolidated total net leverage ratio of 5.94x. Had the acquisitions closed in the first quarter, that leverage ratio would have been 5.76x compared to the 5.73x we're reporting today. None of the ratios just discussed include the additional contribution we expect from American Spirit or WHPM, each of which closed into local management agreements on July 1. Our third quarter guide includes all transactions closed as of today, including American Spirit and WHPM and reflects our expectations for third quarter on an as-reported basis. For second quarter and our third quarter guidance, about one-quarter to one-third of the leverage ratio denominator contribution from the transactions is from actual results. The balance is from synergies, and again, all is calculated under our senior credit agreement. Of the synergies, about half is from net retransmission revenue and the other half is from operating expense rationalization. Several notable things to mention on the balance sheet. We closed all of our 2026 acquisitions without drawing on our revolver. We finished the second quarter with a little over $900 million in liquidity. On June 30, we issued a $70 million add-on to our 7.25% first lien notes due 2033. These notes were issued at par in a privately negotiated transaction. We utilized $30 million of the proceeds to repurchase $50 million of liquidation preference of our Series A preferred equity, a Gray-initiated transaction that reduces our total capital obligations and lowers our fixed charges. The remaining $40 million was used to fund the July 1 acquisition closings. On July 21, subsequent to quarter end, we completed another privately negotiated transaction, whereby we bought $100 million of our 10.5% first lien notes and $20 million of our 5-3/8% unsecured notes at par plus accrued interest. This transaction lowered our interest expense without increasing the quantum of debt. The transaction was favorable from a tax perspective, and it's another example of how we'll be opportunistic and creative as we manage the balance sheet. We used balance sheet cash plus revolver borrowings to complete the transaction, and we expect to fully repay the revolver as we move into the heavier political ad season. Net retransmission was $150 million for the quarter, which includes a $6 million contribution from the second quarter acquisitions; that places us above the high end of our guidance range. This quarter marks a key inflection point in terms of how our net retransmission revenue, that's what we keep, benefits our leverage ratio denominator. So on an eight-quarter rolling basis, our net retransmission revenue grew slightly versus the prior quarter. This happened even with declines in gross retransmission revenue and the blackout. And with all of our contracts in place until 2027, we expect the net retransmission revenue contribution to accelerate into 2027, especially when we factor in the contribution from the newly acquired stations. I'll conclude with a couple of other cash flow-related items. We're lowering our company-wide CapEx estimate to a range of $120 million to $130 million from a prior $140 million estimate for full year 2026. Our full year tax guide also came down a little bit and is now in the range of $80 million to $100 million. And as Hilton mentioned, we expect to use essentially all of the incremental cash flow from political advertising to reduce our debt. I'll now turn the call back over to Hilton.
Thank you, very, very much, Jeff. And now Lacy would love to open up the phone line to any questions that anyone may have.
Questions and answers
Your first question comes from the line of Steven Cahall with Wells Fargo.
So Jeff, thank you for that net retrans outlook. I just wanted to confirm, so that's dollars accelerate into 2027, including the M&A contributions. And I know you went into this a little bit, but the net retrans margin was down a little bit quarter-over-quarter in the third quarter. I was wondering if that was M&A related or lapping some of the renewals you did last year. Just trying to understand what those margins look like.
Yes. So you have seen an overall uplift this year in the margins. And remember, we're lapping into third quarter, we'll be lapping the WANF transition to independent. There's a lot going on below the surface across all the different contracts and everything that changed. So the margin should be holding in the range that we've seen in the first and second quarter, a little above 40%. And when you project that out for the rest of the year and with the additional stations coming online from the acquisitions and as those come into the number, you'll see the total dollars start to ramp. And really, the way to think about it, Steven, is you've got low single-digit growth on an organic basis plus the acquisitions on top of that on the net line.
Yes. Got it. Okay. And then just kind of a related question as we think about 2027. I know it's both early, but also not so far off. At this point, with M&A, would you expect to have more or less EBITDA in 2027 as you had in 2025? And I think the answer is more, but core has been a little soft across the space. You've done a lot of work on cost and you have M&A. So just trying to think about the kind of bigger trends in the business from an EBITDA perspective on the two-year stack.
Yes. I think we will see it up slightly. But when you look out into 2027, we'll have integrated all the acquisitions. We'll be on a run rate there. Trying to predict exactly what will happen on core, as Pat described, is a little bit tricky at the moment. Between some political crowd out and everything right now, there should be more inventory in 2027 than there is in 2026, but I know you're asking about 2027 versus 2025 to think about where leverage and where the trajectory of the business goes. So...
Just sorry to interrupt, but I would just say a lot of it depends on the macro environment.
Fair enough. And then lastly, Chairman Carr has done a lot with broadcast related to the ownership cap. He's also been doing a lot to unlock spectrum and reutilize it. I was wondering how you think about both for Gray Media and for the industry, the spectrum opportunity could be in the medium term?
Steven, I'm glad you asked the medium term because there's no near-term ability for the FCC to auction spectrum. But we're seeing a bit of a repeat from 15 years ago when AT&T was making some very strong pushes to have the FCC reclaim some broadcast spectrum for a reverse auction, so it could be redeployed to mobile. And it seems like the spectrum needs were maybe satiated for a number of years there, and now we're hearing a lot more about spectrum needs again. At the same time, the broadcast industry is, as you know, transitioning to ATSC 3.0. So the stars may align a little bit more easily than last time around when it took about 10 years from the initial push until the time the spectrum actually moved. If we have a strong push in demand for the spectrum, which seems to be increasingly likely, and we have this new technology that allows us to repack more easily, then as the stars come on in the medium term, there could be some spectrum reallocation with another auction for broadcasters. That could allow us to accelerate the ATSC 3.0 transition, get all the stations onto 3.0. That would be a fantastic win for our sales teams, allowing us to do a lot more with less spectrum allocated to our service and provide better use for some of that spectrum. It also would, we believe, provide the federal government with a backup timing system to GPS, which, as you know, we've talked about, our GPS system has no backup unlike the GPS systems in other countries. So from a national security standpoint, a GPS backup is pretty critical, and 3.0 appears to provide a robust and extremely cost-efficient timing solution. So it seems at least at this point that there are a lot of very favorable and complementary pressures to move spectrum monetization forward in the medium term. So we're happy to tackle that challenge with others, the FCC and across our industry and other industries and certainly the Department of Defense.
Your next question comes from the line of Dan Kurnos with StoneX.
Hilton, I'll ask the other boring FCC-related question given the cap repeal. I know you guys have said pretty consistently that you've been open for business. And frankly, you've demonstrated it, right? You've been continuing to add while others may have been stuck. But how do you think this changes the landscape, if at all? And do you think conversations change at this point? Or do we still kind of need to wait to see what happens with the Nexstar tag in the court system?
Well, I will say I really want to compliment Brendan Carr and the FCC for updating the rules that they put out there. I've said this before in this call because I love the quote from one of our lawyers who's terribly eloquent. These things were put together before the Japanese bombed Pearl Harbor. When they don't take into account Google, when they don't take into account everything that's going on that is a massive competitor for us for local ad dollars, it's just crazy. Now that being said, I think what the FCC has done is superb. And so yes, we are open for business. Short term, we made it very clear, I think, that we are trying to get our debt down. And so we're going to be using our political revenue, which I personally believe is going to be robust, to reduce our debt. But we'll look at anything. We all have to remember, though, that we have a very unique and unprecedented third regulatory structure, which is the state attorneys general. And so we are going to have to pay attention to that, and we're going to work very hard as a company, and I'm sure as an industry, to explain to them the benefits of TV station consolidation. I will tell you this: if we had not consolidated over the last 30 years, you wouldn't have the local newsrooms we have today. When I got in this business, which was at birth, it was a mom-and-pop operation. It can't work that way. And so there's a lot of misunderstood commentary about newsrooms dying. Without consolidation, there wouldn't be a newsroom in existence in the United States. Getting that size allows everyone to invest in Gray, and you can see it in our numbers and you can see it in our results. There is not a market, no matter how small, in Gray Media that does not have local news in all 117 markets, period, and I'm very proud of that. But without consolidation, I couldn't make those comments. So other people are going to throw out a bunch of canards, but that is the financial reality of it. So we'll see what the future brings. I'm kind of excited about it.
Okay. That's super helpful. And then I will lean on your verbiage of robust. I mean, you mentioned it in your prepared remarks, you are pacing ahead of 2024. I know nothing is written until it's written, and I know you guys aren't going to give kind of a full year guide. And I think it was maybe Pat that laid out kind of the exposure you guys have on state-by-state and race by race. But is there any way to kind of help us think directionally how optimistic you are?
A couple of things. First, I looked at those numbers and 2022 is the last apples-to-apples nonpresidential year, and we had $90 million in 2022. And I'm like, okay, Hilton, try to remember. Well, geez, guys, the two biggest senatorial spenders were our Senator Warnock here in Georgia, who spent right at $240 million, all in Georgia, and we're in every market in that state. The second largest was Senator Kelly, who spent a ton of money in Arizona. And again, we're in every market in Arizona. So our numbers were higher. And I think that the biggest indication for me to say robust is the sheer amount of money the parties have. We have a unique situation. The Democratic candidates have substantial funds, and they will deploy those funds. There's a lot of talk about the DNC not having that much cash. I promise you, they're going to fix that. The second thing is if you look at the Republicans, I don't know if it's $1 billion, $2 billion or more, but I can assure you they have the money. And I think that's really where you need to look: if the fundraising is robust, the spending is going to be robust. And so I have a high degree of confidence. We've been burned once before by telling you what we think we're going to do, and we don't want to be burned again, but I'm immensely confident about what we're going to have ahead of us.
I would just add, there's a lot of wind at our sails this time around. In 2022, we had some very, very expensive primaries that hit in July or in August. The candidates who won those then had no money for the generals and they didn't get support. And those marquee races that we all expected turned out to be fizzles after the primary. We're really not seeing that this year. There's clearly some high-profile primaries, but it seems the parties are still largely unifying after bruising primaries. We have through redistricting and other factors had a historically large number of members of Congress choosing not to run again. As of today, we have, I believe, a historically high number of incumbents who have lost a primary or chosen not to run for reelection. There are still more primaries to come before we get to the general. So from a political perspective, this is another fairly unusual election year that lines up well for Gray. Our investor deck went out this morning and said we have substantial exposure to 11 of the 11 gubernatorial races that are deemed to be competitive by Cook and 11 of the 11 senatorial races deemed to be competitive by Cook. Then two hours later, Cook moved Kansas to competitive. In Kansas, we have a very good presence. So we now have all 12 competitive Senate races. We definitely can be very well positioned. In 2022 and 2024, we missed out on a lot of money spent in Pennsylvania and Montana because we have no presence in those states. Pennsylvania has certainly some spending this time around. Montana has not as much. It seems the focus is on places where Gray is very strong: Maine, Alaska, Ohio, Texas, Georgia and elsewhere. So we are feeling very good. Again, not going to go out on a limb with a firm number, but we're feeling very good about where we are not just against 2024, but in 2022. So again, knock on wood, but we feel cautiously pretty optimistic about this year wrapping up to be another very good year for us on the political front.
Your next question comes from the line of Aaron Watts with Deutsche Bank.
On core advertising, just a quick hearing check. I wanted to confirm the flat third quarter guide applied to both an as-reported and on a combined basis for the new stations you brought into the portfolio?
We want to be very clear on this, Aaron. The guide is flat on an as-reported basis versus the prior year, including the acquisitions. Essentially, think of the acquisition benefit offsetting some drag on the portfolio from political crowd-out and a bit of softness in the core business.
Okay. Okay. Got it. And then, Jeff, you've been fleet-footed and certainly opportunistic with regards to the cap stack with the Board authorizing $250 million for debt repurchases through the end of the year. How should we think about what you're trying to accomplish near term? And what can that mean for leverage and interest cost for the company going forward?
Some pretty significant benefits is what it means. We've been very creative and thoughtful about what we've done. We didn't come into the year expecting that we would try to go after preferred, we've let the markets guide us and been very opportunistic on it. So as we look for the rest of the year, everybody who has a Bloomberg in front of them can see where bonds are trading relative to our current weighted average interest cost. The shortest bond tranche is fairly expensive compared to what's available in the market. So if the market is there, I think we'd love to extend out some maturities, drive down the cost of debt, which then accrues to the free cash flow going forward for many years to come. Our current full year guide for 2026 is $440 million of interest expense. That could come down by $30-plus million through some refinancing activities. There is a cost to doing it. The call price on the 10.5% is steep. Congratulations to those who supported us in 2024. You've done well. But look, it's a priority to get our interest cost down. It accrues to the long-term health of the company, and it accelerates our deleveraging. If it's there, we'd love to get some of that done. And then as Hilton and I both mentioned, when we look at the hundreds of millions of dollars of political that still aren't in our bank account that we expect for the rest of the year, that can make a pretty big dent in the total dollars outstanding. So driving down the cost and driving down the quantum puts the interest expense on a much better trajectory and lets us accelerate the delevering on the business. And remember, too, Aaron, we're still under a 163(j) interest deductibility limitation. So when you think about how reduced interest expense translates into discretionary free cash flow for the company, for a little while here it's dollar for dollar. So it's very beneficial to us to pay less interest in terms of how that translates into free cash flow.
Your next question comes from the line of Patrick Sholl with Barrington Research.
If I could ask a question about the Q3 guide on operating expenses. You had mentioned on the leverage calculation, including some of the synergies from the acquisition. I guess, is there any sort of lag between recognizing those in the leverage and applying some of the operating expense synergies within your guidance?
Yes, there absolutely is, and you can see that in our earnings release. I'll be very specific. On the last page we lay out in great detail exactly how the leverage ratio is calculated, and you'll see a line on there that puts in adjustments for what's not in our eight quarters. That number is $144 million divided by two. So you have $72 million of add-back that's in the calculation. As we realize that and get it into our actual results, that add-back will come down and the actual results will also benefit. So it will be sort of capitalized into our actual results rather than being an add-back.
Okay. Yes. Sorry for missing that. And then just a follow-up on advertising. Some of the categories that you talked about, auto being recovering in Q3 — being lower in Q2 and recovering in Q3 — is that just within the core station group? Or is that also across the digital as well?
So it's both. Digital actually is attracting money at a faster rate than core. So it affects both categories. But historically over the last three to four years, automotive had been declining for a long time and it's flattened out. If we can somehow keep it flat to positive in third quarter, that would be outstanding. Not sure that will happen because it's close to flat, but anything in the low single digits or anything positive in automotive is a great story.
Your next question comes from the line of Craig Huber with Huber Research Partners.
My first question is, obviously, your outlook for core advertising in the third quarter is flat on a reported basis. Maybe I missed this, but what is it if you adjust for the acquisitions?
If you take out the acquisitions, you're talking about down mid-single digits on core. Some of that is attributable to expected political crowd out, but that's not all of it. So there's some softness in core that is not related to crowd out. When you put that together with the acquisitions, that's where we get to flat on a year-over-year as-reported basis.
Craig, can I add something to that just by way of color? We were talking about this around the table this morning. Think about the last two years, 2025 and so far in 2026. Last year, there were tariffs, and we don't have tariffs this year. We have a situation where ad buyers are confused by macro factors. Now we've got a situation where there is geopolitical uncertainty, and it's the same thing. It's particularly impactful on the automobile segment. One of the things I personally want to stress is that Q3 we're pacing well with automobile, and I'm hoping we'll see a return to more stability in the third and fourth quarter and into 2027. We'll see. But it's been a very unusual macroeconomic time. Most of what we think is happening is due to those macroeconomic issues.
To sum it up, the macro environment is turbulent — a gross understatement. We haven't seen an environment like this; frankly, I've been doing this for over 40 years and I don't think I've ever seen anything quite like this. The ad market against that backdrop is holding up reasonably well, perhaps very well, not just for Gray but across the industry. We don't want to be down mid-single digits; we'd prefer up mid-single digits. But given the environment, that's okay.
Yes. Fair enough. On the cost side of things, some of your peers are being much more aggressive taking costs out of TV station operations. You guys are much steadier to your credit on that. Can you talk about that a little bit, and also the use of AI at your company — how aggressive are you trying to lean into that to help make your company more efficient?
We have found use for AI in a number of areas: on the editorial side of our business, on the sales side, and on the marketing side as well. It's important to keep in mind that anything that we publish has been reviewed by a human being and it will always be that way. There are a lot of things you can do with AI that we're choosing not to do. We're using AI as an efficiency tool and giving our people better tool sets. That's the way we look at it philosophically. There are others who are looking at it differently. But we see benefits from AI, and we're definitely seeing benefits in most disciplines in our business. We're excited about its future, but we will roll it out cautiously and wisely.
Gray historically and today always runs lean. But the most important asset we have in this company is our people. We never lose sight of that because they're the ones who generate our revenue, create our content, and will carry us forward. So we're very judicious and look after our folks as much as we can. We do operate in a very lean capacity across the board 24/7. Every now and then, you have to sit back and see where there's been a little creep and where you need to tighten your belt. But we're doing that all the time.
My last question, if I could. On Assembly Atlanta, do you feel like you're getting any added benefit there? As things move along with companies getting more frustrated with the operating environment in California, are you getting any benefit of people wanting to do work in Atlanta at your facility? Or is there more talk about production moving out of Hollywood to places like Atlanta?
I'd be delighted to address that. Regarding our studios, which is the only thing I can speak to, we're going to be about 90% filled up for the remainder of the year soon. We expect to have a large blockbuster beginning shooting in September. We're very excited about what has been produced there. There has been a slowdown in the production pipeline that stemmed from strikes several years ago, and that is settling out. When you look at franchises like the new major releases, you're talking about multibillion-dollar franchises. It's been a while since the film industry had that kind of success. The production pipeline has slowed due to overexpansion during COVID and then a tightening of belts industry-wide. Georgia's film incentives remain the best single incentive structure, particularly because it is uncapped. Unlike a lot of our state competitors, Georgia is paying and paying rapidly. In other states there are seven- and eight-year wait times to get cash, which is a problem. Georgia has been committed, and we are deeply involved with both gubernatorial campaigns. We see no risk to the film tax credit, and we hope there may be some enhancements because we want Georgia to remain a leader. We're really excited about it.
Your final question comes from Goshi Sri with Singular Research.
Okay. My first question is on the virtual MVPD side: what share of the gross retransmission comes through that channel and the dynamics in net retransmission. Is that similar, or can you give us any color on that between those two channels?
Goshi, we don't break out the different individual contracts and streams, whether it's traditional or virtual MVPD. I don't believe anybody in the industry does. So I'm not going to comment on the mix. I think what matters is what we keep. On the virtual side, it's a fee that we receive. On the traditional side, there is a fee and then a network fee back to the network. So the margin profile on those is different, but we're not going to comment on the mix.
Okay. Sounds good. I know you guys have covered this a lot, but let me frame it another way. In the 2024 cycle, core experienced about an 11% displacement in the fourth quarter. Given the change in mix of the portfolio, what kind of displacement can we expect in Q4?
I think it's going to depend a lot on how political spending evolves later in the year. It's hard to put a specific number on that today. If political, which should have higher margins, goes gangbusters, the net will be better than if it doesn't. The timing of when political ramps up and how aggressive the spending is will drive it. I can't really put a number on it where we sit today.
And my last question: on the $400 million securitization facility fully drawn and political revenue being prepaid, when that revenue steps down and off, is that the first quarter the borrowing base shrinks and forces a paydown? How does that dynamic work?
The borrowing base is made up of our receivables. Our receivables largely track two different revenue streams: retransmission and commercial advertising. Political is prepaid. So when you replace commercial dollars, which have normal payment terms, with dollars coming in before the ad runs, the borrowing base will dip. I can't remember the exact number, but I think the borrowing base went down by over $100 million in a prior example, but it quickly recovered the next month. The heaviest political cash hits are in October and a bit in September. When we add in the new stations, that piece will offset that somewhat, but there will be a dip that is temporary and quickly recovers. By the end of the year, I would expect us to be back to full capacity. Also, the borrowing base today is above the $400 million facility, so we shouldn't lose access to it. I expect us to be back at full capacity by the end of the year even if there is a month-to-month dip in availability.
All right. Thank you, Goshi. I recall that Lacy said that was our last question. I'd like to just say thank you. Thank you for your questions. Thank you for your attendance. We're very happy about our Q2 results, and we expect even better numbers and better results in Q3 and Q4. Thank you for being here, and we'll talk to you next quarter.
This concludes today's conference call. You may disconnect.