Gray Media Inc (GTN.A) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Gray's Television fourth quarter earnings release conference call. Today's conference is being recorded.

And now, for opening remarks and introductions, I would like to turn the conference over to Mr. Prather, please go ahead, sir.

Thank you very much. I want to welcome everyone to our fourth quarter and year end 2006 conference call. We're real pleased with our year we had in 2006. Second best year in our history, by far the best political revenue we have ever had in a non-presidential year. Just to give an example, our [political] was 43% ahead of the last-- of 2002 in a non-presidential year, and our non-presidential for 2006 was 16% ahead of 2004 non-presidential. So we're real proud that we continue-- I think this continues to say a lot about our No. 1 news stations and the fact they get the lion's share of the political revenue in most of the markets we're in.

We think for the fifth straight year we're right at the top of our industry, in our revenue growth, cash flow growth, our operating margins we think are the best in the business. We think we have the lowest overhead as a percentage of revenue. We have got the most No. 1 stations, most No. 1 news stations and I think we're still right at the top is the highest political revenue as a percentage of overall revenue. So very, very pleased with the year.

We got a lot done. During the year we developed 30 new digital channels, 17 MyNetwork, 9 CW, 5 FOX and then we've got two local weather and news channels. We hope to have by the end of the year 40 digital channels up and going, which we think we will. We think nobody in the industry has got a strategy that matches this and we're very proud, and these stations in most cases are profitable, and we think we're going to have a good year and get big growth ahead of us.

Or internet strategy continues to pay dividends. We had a record year, both in revenue and profits. We're averaging 60% plus profits on our internet business, and we are very careful to count only real internet revenue. We make our managers know they can't count a penny of internet dollar unless it's a bill that says it's for internet revenue. The last two months we have been averaging 35 million plus page views, which I think is fantastic. We have been averaging over a million of marked page views on our cell phones. We've got video streaming and text messaging and our website is available in cell phones in all of our markets and that continues to be a growing part of the business, and I think it's going to continue to grow. We're budgeting to almost double what we call your new media revenue this year.

We completed the acquisition of WNDU, in South Bend, an NBC station. We have doubled the cash flow there and raised our operating a margin from 24% to 42%. We completed the acquisition of WSWG in Moultrie, Georgia, obtained a CBS affiliation to cover Albany and all of Southwest Georgia, and also MyNetwork for our digital second channel there.

We also have begun centralization of traffic and master control. We have got four traffic hubs and four master control hubs in Tallahassee, Waco, Huntington and Lincoln, Nebraska, we think these are going to have considerable savings for us, $1 million plus range over the next couple of years once we get all the installation done, but we're very pleased with the progress we're making in that area.

We're planning to go full local HD at our television station in Lexington, Kentucky. Hope to be on the air sometime soon, later this year, but feel very good about-- about doing-- it will be one of the smallest markets in the count troy to have full HD, but it's a great station, it's a very competitive market, and we feel like-- it's going to be very important to us. We obtained, up in Charlottesville we've got 4 channels there, at our new stations there, and we've got our channel placement moved to 2, 3, 6, and 9 on on the cable, which we think is going to give us a lot of growth opportunities this year.

And we began construction of a new digital channel in Winchester, Virginia, in partnership with Shenandoah University, this is a fast-growing area, it's actually bigger than our Harrisonburg market and they have no local television at all. They're actually in the Washington DMA, so we think we have a real positive growth ahead of us there.

We just announce that we are refinancing our 9.25 bonds and paying them off and also redeeming our 8% convertible preferred, and refinancing all of our bank debt. I'm proud to say we're going to close that deal on Monday. It was basically an interest rate of 1.5 over LIBOR, and we think it's the best bank deal out there right now. We think we're very proud of the fact and we got over $2 billion of initial commitments from lenders, so we feel very good about getting those bonds paid off. That's going save us over 5.5 million a year in interest charges, by the way, so. We purchased 5.6 billion shares of stock, common stock during the year, and we purchased 1.750 million of preferred and during the last year we also repurchased 4.7 million of our subordinated debt. We repaid approximately 29.7 million of our debt since the acquisition of WNDU last year.

One of our things we are working on hard this year is we will continue to pay down debt this year and next year with our free cash flow, in most cases we're going to use the vast majority of it to pay down debt. We have got plenty on our plate with these digital channels and we've got a lot of growth ahead there, and our internet initiatives so we want to concentrate on making what we got better, which we think we're going to be doing.

The other thing, obviously, I think all of us in our industry owe David Smith and Perry [Surrick] and guys like Brian Brady a debt of gratitude for fighting the cable fight. I think the cable retrans thing is coming around faster than I thought it would. CBS, also is a -- announced they've made a deal to get paid by some of their cable systems, and I think CBS is still the key to getting the big guys to really come around and pay us like we ought to be paid. We have got several markets where our station ratings are more than all the cable channels combined in that market. There's no reason in the world we shouldn'e be getting paid. And we're working on a strategy right now, most of ours coming up next year, and we plan to have a strategy to get paid in all of our markets for our cable and rate trans going forward. And, so, I think that's something we're going to be working hard on over the next few months and be ready next year when our agreements start maturing in 2008.

But I think we have overall a very good year. I was very pleased with it. We're starting off 2007, we're almost right on budget. We had a first quarter we got a pretty good hill to climb. We had close to 3 million, I think it is of political, over 1 million -- I mean of Olympic and over 1 million of political that we're not matching in the first quarter, obviously. But, overall, I think things are looking like it's going to be a good year, especially on the local side of things, I think national is going to continue to be a little be it spotty, but in some areas it has been real good, other areas not so good.

At this point I would like to turn it over to Jim Ryan our Chief Financial Officer, and Jim can go through some more detailed numbers, and then we'll open it up for questions, Jim.

Thanks, Bob, good afternoon, everybody. I'm going to keep my comments pretty brief because the main cash flow numbers, while we formally released today, have been out for well over a month, so I think everybody understands where the year came up.

As Bob mentioned we're very pleased with the refinancing that we expect to close very early next week. We'll be-- as soon as it closes, we'll be able to issue a call notice for your 9.25 notes. Later on in second quarter redeem our Series C preferred as well. And as Bob indicated, the interest rate on the new term loan B is priced at LIBOR 150, and we're very, very pleased with that and we think we have a very good structure going forward. And the-- the term loan B will be completely pre-payable, so we think that will fit very well with our goal of reducing debt over the next couple of years.

For the quarter, and I'll keep my comments focused on the pro forma, which gave effect to the WSAZ and WNDU acquisitions. Revenue was up 26% overall. Obviously, political was the big, big story there. Just as everybody has already said who has reported already. Local was down about a percent in the quarter and national was down about 8%. We really attribute that primarily to-- or completely to the displacement on the political. We had-- that was part of 24, 25 million of political-- incremental political fall in October, and the first week of November, so it did squeeze out a lot of baseline business. We were very pleased that broadcast cash flow for the quarter was up 42%.

For the entire year, again, political, helped drive overall revenues up 13%. But we're also pleased to see that even with a-- with the displacement of local business in the fourth quarter due to the political for the year, local was up 3%, national was down 3. But keep in mind that our local revenue-- is about 70% of our total time sales, so we're always very-- driving the local hard and pleased to see it was growing.

Our auto for the year was down about 2%, which I think actually-- given the political displacement isn't too terribly surprising, and also I think it's probably one of the better results for the year based on some other reports I had seen. Communications was up strong, up 23%, medical was up 7, furniture and electronics was also up 7% so strong growth in all of those categories. As we had mentioned in our third quarter call, restaurants were down for the year. Again, political was the big story, almost 43 million for the year. As we've commented before, we probably would have had even more, but we were a little-- ended up being a little disappointed in the Florida senate race and the Texas governor's race which really didn't materialize in any spending.

As Bob mentioned, we're also very pleased with the internet growth. Our internet revenues for the year came in at about 7.6 million. That was up 19% over the previous year. Our cash flow off the internet is about 4.5, 4.6 million, and that was up, upper middle teens as well, and as Bob mentioned, looking ahead to '07 we see continuing very strong growth there. Currently we think it would grow to-- the revenues would grow to 11 to 12 million, the cash flow margins staying somewhere in the lower 60s, so we're hoping to have a BCF off of our internet activities in '07 of 7 to $8 million.

Bob already commented on the guidance for first quarter '07. I think when you-- when you evaluate the 3.4 million of Olympic revenue in first quarter of '06, plus the best part of a $2 million incremental year-over-year decline in political, and look at the high side of our revenue guidance for the quarter, we're actually coming very close to filling in a very big hole quarter over quarter, and we're very pleased with that, as Bob mentioned, we're basically right on track for where we wanted to be for the quarter. The expense growth, as we mentioned in the comments and the guidance, about 1.2 million of the overall expense increase is related to the rapid expansion of all of our digit second channels. I expect for a full year of '07 that those digital channels will cost us, all in, approximately $10 million to operate, and we expect, and as we've said before, to be contributing modestly cash flow positive for '07.

At the end of the year the debt was at 852. If you pro forma for the refinancing that we'll be completing next week, we'll, all in, after call premiums of the bonds and everything else to refinance, plus some seasonal borrowing, just for liquidity, we'll probably have a drawn facility of about 925 million, and a-- an undrawn revolver next week. At the end of the year, our leverage came in at about 6.5 times net cash, which is right about where we thought it would be, and as Bob indicated already, we'll be using a substantial amount of free cash flow over the next-- over this year and next year to reduce the outstanding amount of debt.

CapEx for the year ended up being 41 million. That was higher than we had initially intended, and certainly had anticipated, but really the incremental spend in CapEx was to support the-- the rapid expansion of our digital channels, including the channel, the Winchester station, that Bob mentioned already, that extra spending is behind us and we don't see that moving forward. Total CapEx for '07, we would expect to be $20 million. Couple of other housekeeping items, if anybody is interested, cash taxes was about $720,000 for the year. Our program payments were about 14.8 million.

Bob, I'll turn it back to you.

Thanks, Jim. Operator, at this time, let's open it up for questions.

Thank you. The question and answer session will be conducted electronically today. [OPERATOR INSTRUCTIONS] And we will take our first question from Bishop Cheen with Wachovia.

Hi, Bob, hi, Jim.

Hey, bishop.

Bob, I know why you are looking so stealth and thin these days, you are not standing still.

We're trying not to.

You're all over the place. Okay. I know a lot of people want to tubing about Q1 and the guidance and they will probably do a better job than I, so let me just focus on the balance sheet real quick. Jim, I may have misunderstood you, but, all in, with the recap and everything, you said that pro forma, it looks like you'll have about 925 million of pure debt on the balance sheet?

Yes, but that also includes rolling up the 30-- almost 38 million. [multiple speakers]

Right.

So keep that in mind.

All right. And so-- I'm just trying to do the modeling, which your website really does help with. So, if you start with 925, and you can generate, I don't know, 50 million of free cash flow in '07, it sounds like you get your debt down to kind of like an 875 just by paying it down. So, your leverage is still going to be high, you won't have your flexibility that you normally like to have, and you're going to have to do what you have done twice before, just pay down debt and hunker down and operate for earnings and then get lots of flexibility to expand to whatever for '08? Is that the right kind of scenario I'm talking about here?

Bishop, if you go back and look at, you have been following us for a long time, we made our first real big acquisition in '96, and we levered up then and we didn't make another deal until '99, and we did the Texas deals and the [Bussy] deals in late '98, early '99, and we had the debt way down at that point. We levered up again there and then we didn't do anything until 2002, paid down debt and we bought Benedict, and then from 2002 until 2005 we paid down debt again then bought Huntington and Notre Dame.

Yes.

So we have a history of--

The same company for the debate about should you be buying back stock and using dividends or taking down debt and creating more equity, you, Sinclair, and-- well Sinclair is doing dividends, you, Sinclair and Nexstar are certainly have focused on the balance sheet.

We plan to pay down debt with most of your free cash flow most likely.

Okay. That was really helpful. One last question. On the new media, with 60% margins, 7 to 8 million kind of goal this year, that implies something like high 11s to low 13s in the new media revenue --?

Yes, revenue, our goal would be to come out someplace between 11 and 12 million, which is obviously up a lot from 7.6 this year.

Okay.

And we-- we are constantly-- I mean, I think the growth potential there is-- is very, very large in the future, and we're constantly pushing our stations to explore and experiment and figure out new ways to grow it.

This is pure internet media? It's not retrans or anything else thrown in here.

No. It's pure internet and they have to have an invoice that goes out before-- internet, cell phone or new media in effect, so.

All right.

We don't allow it. We found out, Bishop, if you let them allocate it as part of a television buy they wind up giving the internet away, so we quit doing that about three years ago, and it has really made a difference.

Praise be upsale.

There you go.

All right, thank you, gentlemen.

Thank you, bishop.

[OPERATOR INSTRUCTIONS] Our next question comes from Larry Schumacher with Oppenheimer.

Hi, Bob.

Hi, Larry.

Good quarter.

We think so.

Quick-- quick question, how do you budget expenses this year when business is going to presumably be down due to political and you have had two, three years of basically zero cost increases?

Here again we start out every year that way Larry, especially on our-- what we call our existing stations. And this year our budgets are, once again, for basically 0 or just a small increase in most cases-- the only time we-- we do things for special projects like if we're adding a newscast, things like that, where we might let a station have a little bit of a-- more of an expense increase. But you got to remember, what happens is, at the beginning of the year, we give raises at the beginning of the year to everybody, and then as the year goes along the expenses-- they start out looking higher, and as the year goes along they wind up working back toward 0, on our existing stations.

And then the other thing that you have got to remember is, we pay a lot of commissions on political in a political year, so, we pay out a chunk of money on 43 million in political last year, so those are the kind of things-- we work hard on trying to keep a 0 budget increase on our existing stations. Like Jim said, most of the expense increase this year will be with our new digital channels, which we're still getting some of them actually up and running this year, we'll have 40 at the end of the year, which is, again, I think they will with profitable and we have got big growth plans for them in the future.

Okay. Just one follow-up.

Sure.

Political, seeing that there's-- I don't know, 30, 40 candidates so far, and they are talking about this race has already begun, which, normally, I guess, wouldn't have started til, I guess at least, early '08.

Right.

Do you an anticipate, or are you starting to see yet demand for political spots? And, could that--?

I think so we're actually getting some [romney] orders already in a couple of states and ironically we're getting some [issue] advertising in several states.

Would you see that as-- I guess because the years that there's political that there's an election, we discount the fact that there's big political advertising? You could get a big number this year from that.

Out in the fourth quarter, and we, by the way, we have not budgeted for it, so it will be a nice pop if we get it, but in the fourth quarter, they have moved 20 state primaries up now to early February, so we could start seeing some considerable spending. Also, Larry, we've got two states, Kentucky and Mississippi, which actually have governors races this year. Kentucky could be a real good one. Mississippi has got a real strong incumbent, and they don't expect a whole lot of spending there, but Kentucky has got a weak incumbent and the democrats think they might be able to knock him off, so I think they are looking at-- there's going to be some pretty good spending going on there. I think there's about six candidates on the democrat side. They even got a challenger on the republican side, which is very unusual, so. I think political could be a nice -- nice gravy for us this year.

All right. Good luck and congratulations again.

Thanks very much, Larry.

Marci Ryvicker with Wachovia has our next question.

Thank you. How much revenue did you earn from the Super Bowl in the first quarter? And what percent of this is incremental? And then on the M&E front, if you have had the balance sheet flexibility is there anything in the marketplace right now that you would be interested in?

Jim, you want to catch that one? Jim?

Yes, sorry I was trying to hit the mute button, I apologize. Marci, the Super Bowl was about 750,000 for us. It's not a real big number, and so it really didn't-- doesn't have a lot of impact one way or the other in the quarter. I mean, you get a limited amount of inventory on that afternoon and that's it. So-- while it's certainly nice to have, it's nothing compared to the Winter Olympics on our 10 NBC stations. And Bob, did you want to answer the M&A question?

I'm sorry, I missed that part, Jim.

If you had the balance sheet flexibility is there anything in the marketplace that you would be interested in?

Yes, Marci, that's a real good question. It looks to me like prices are mighty high right now, I would have a hard time paying the kind of prices I have seen being paid. We like to look at everything coming down the pipe, but we don't have anything in our pipeline right now that-- that we want to look at. Our-- and like I said, it doesn't make sense to us right now to be looking at deals when we-- we think we can definitely use our money better to pay down debt, or if our stock dropped back off again, to pick up some stock at cheaper prices. I think it's hard to justify paying 12, 13 plus times cash flow when you're selling at 10 times yourself. I don't see us doing any deals in the next year or so.

Great. Thank you.

Okay.

With Merrill Lynch, Laraine Mancini has our next question.

Thank you two questions for you. First, there are rumors or speculation that Chrysler is up for sale if there's more consolidation in the auto space, what do you think that does for the category? And then second, you did praise your competitors and peers for getting good retransmission payments from the cable operators? What do you think the risk is that at some point the networks turn around in try to extract some of that value from their station groups?

The second question first, Marci. The good news for us is all of our deals are 8 to 10 years out, so it's a long ways before we have to worry about that. I wouldn't put anything past them, but here again, I think the big advantage we have got, in most cases, is that we-- our ratings are about double what the networks are. If you look at our presentations on our website, our-- we have got all three of the major networks and our local ratings are about double what their national ratings are. So the good news is-- it's 8 or 10 years away before we got to think about it. And second, I think we have got a good bargaining position even if they tried something at that point. But-- that's something, like I said, that's so far down the road I'm not going to worry about it right now. And the other part of your question?

The Chrysler-- if Chrysler consolidates?

That's an interesting-- I have been reading where there's two or three private equity groups trying to buy Chrysler. The way I look at it, if they do, they are going to spend more money to advertise and get the thing back on it's feet. Those guys are pretty good at cutting cost and things, but I think one of the things they realize is they got to grow the business at the same time and be competitive in the car business. So if one of those guys gets it, I think it will be beneficial. I don't see General Motors buying it. I know they were talk about it. I don't see that happening. There are not that many candidates out there if you take the private equity guys out of the market, so. I think if Daimer actually does sell it it will probably go in to somebody like Cerberus or one of the guys that's being mentioned on the private equity side of things.

But if GM were a buyer, or were the one--?

I don't know. I think it would depend on what their strategy was going to be. Obviously, it would make sense for them to cut out some car makes and things, they could probably give an excuse to cut some of theirs and some of Chryslers too. That could have some short-term effect, I guess, but in the long term the U.S. guys have still got to battle Toyota and Honda and Hyundai, and the foreign guys are going to keep coming on strong. I just think auto advertising is going to continue to be good in the years ahead.

Thank you.

Okay.

And Lance Vitanza with Concordia has our next question.

Thanks, apologize, guys, for making-- asking you to repeat yourself, but my phone cut out right around when you were talking about CapEx guidance for '07. Could you repeat that?

At 20 million.

20 million. And then, I don't know if you continued to talk more specifically about a free cash flow in '07, but I heard Bishop Cheen mention 50 million of free cash flow in '07, was that your guidance?

That was Bishop's number.

Have you provided any guidance for what you think free cash flow might be in '07?

No, not specifically.

Can I get the most current total shares outstanding?

As of the end of February, it's 40-- 47.8.

47.8. Okay. And that's both the--?

Both the--

A and the B?

And the A that's correct.

Okay. And then, one other thing, you mentioned, I think it was 11 to 12 million of new media revenue up from 7.6 million this year, did I get that correct?

That's correct.

That's right.

Okay. And then, how about on the political side, I mean, obviously, not going to be like you had last year, but there's money coming in that's going to get accelerated from the late, what is your guidance for full year political at '07?

Our investor presentation, it's on the website, actually it's the first time this quarter that we have actually gone out and put '07 and '08 numbers out there, and the '07 number is 3 million, which is the-- to be perfectly candid, was the internal budget number that was set late last fall. As we talked about a little earlier when your phone was out, we think there's a definite opportunity that that will grow significantly-- going to be significantly higher.

You have got the opportunity late this year for early primary money from the January and February primary spilling into late Q4 this year. We have already seen some-- some spending from Romney in Florida, Georgia and Michigan. We have a special house race in Q2 that is sitting representative for the-- I think it's the 10th district in Georgia. But anyways, the Augusta, Georgia area, passed away about a month ago, and there's a special election coming up, we think both sides, both the democrats and republicans will go after that one hard. And that's a windfall. So we think the 3 million number that we're out there publicly on is very conservative. And to give you a rough feel, the guidance has on the high side 700,000 for first quarter and that would be twice as much or better than what we were actually expecting first quarter this year.

Okay. Great. Thanks, guys.

Thank you.

Gordon [Terrimo] with Brigade Capital has our next question.

Yes, hi. I know it's not linear by any means, but given the first quarter guidance, there's going to be some significant erosion overall for '07 on BCF for EBITDA? Or do you expect some significant ramp over Q2, 3 and 4 from your new media, as well as the potential political, but you already kind of said that you didn't budget anything in. I'll just trying to understand-- I don't get to anywhere close to a $50 million free cash number, and I'm not saying you guided to that, but, I'm just really trying to understand the erosion from '06 to '07, some other guys have been coming out talking about how they think they can kind of basically be flat '07 versus '06, because of things like new media and retrans. And I just want to understand your take on that.

Well, as Bob mentioned, our retrans relate-- our ability to negotiate the retrans really doesn't come up until late next year, so that's a-- a further event for us, but a very positive one, when-- that's out there, and I'm sure we'll begin negotiating-- I would suspect probably sometime middle part of next year. Of course, certainly, if opportunities present themselves we would always be happy to negotiate early.

Our new media is going to grow nicely. Certainly if you look at our long-term pattern, there's-- because of the very significant amounts of political we pick up ever yea,r because of the very strong-- or every political season, due to the strong news operations, I mean, it's hard for us to stay flat. I don't think the-- some of the public guidance out there-- some of the estimates that I have seen even suggest that we would necessarily be flat. I certainly think we'll be higher than the last non-political year which would have been '05.

Now is that 120 of BCF and 108 of EBITDA, right?

Yes, the 108, definitely, yes, that sounds right for both numbers?

Okay. And you think there should be modest growth from that?

Yes, I think there still will be growth over that, but it'd be pretty hard to-- unless, I mean, there's always the possibility if political ends up being very strong later this year that we could theoretically come back to close to flat, but that would be the wild card. I think it's going to be good late this year, but it will depend on how good good is.

Did you have any internet revenue in '05? Any internet revenue in cash flow?

Yes, we had-- in '05 we probably had about 6.4 million and about 4 million of cash flow from it.

Okay. So that will be double. Okay. And then with regards to retrans, once you do start renegotiating, I have seen some estimates out there for Gray of about 15 plus or minus million of revenue potential. Do you agree, disagree, with that kind of ballpark figure?

Let me just kind of say that we have got, roughly off-- 5-- I think about 5.5 million households. That's somewhat off the top of my head-- I mean 6.3 million total, now some of that is already with Direct and Echo Star and there will be a few of those households that don't have either satellite or cable, but the vast majority of everything else would have it. We certainly have our primary stations, which are very strong. We also, now, in almost all of our markets, have one or more digital second channels that certainly would have a value as well. So we think-- we think there is a lot of future value there the momentum has shifted over the last-- call it-- six months, shifted significantly. And we think we'll be in a good position to get our fair share starting basically late next year.

So, no comment on the 15? Or do you have some other thought as to what it could be?

I mean I--

Your overall potential?

I don't think I want to put a specific number on it right now. I think it will be significant, and, again, we fully intend to push very hard for our fair share this time around.

Just so I understand the dynamic, I know generally with all these-- in the past you haven't done much retrans, you have been doing more of the swapping or getting the digital station carriage of your stations are the first to cash. Is this going to be a change of attack for you? And then, how will we-- how do you think--?

Yes, we-- our intention would be to-- at the end of the day, end up with new cash that we can deposit at a bank.

Okay. So have you had any preliminary discussions? Just because I imagine you guys might get a little annoyed just from the negotiation standpoint, of in the past you're saying, oh, don't worry about it, we don't need money-- don't want money, because you just wanted carriage and now you are going just go 180 on them.

First of all, we never said that. Okay.

Well, you've never done it in the past, and you basically--

I think virtually nobody has done it up until just recently.

But nobody has all of the digital channels you have.

Right.

So you are getting value from them by them carrying your digital channels, no?

Well, I can argue those digital channels are valuable to them, because they're an audience, in a lot of cases they are already a bigger audience than most of the cable channels they have got, so.

You don't think it's going to be--?

They are not easy to deal with with anybody, I think--

No. I-- that's my point, you don't it's going to be any worse of a negotiation for you than it is for a Nexstar or Sinclair.

I think it's going to be-- I think we have got a great advantage, as I mentioned earlier in the call, we've got several stations where our ratings are higher than all of the cable networks together in that market. So we have got something of extreme value to these guys that I don't think they want to lose.

Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] And we will now hear from John [Thyme] with Chicago Fundamental.

Hi, guys, it's John Kim here.

Hi, John.

How are you doing?

Good.

I have a quick question on the [Tarsian] investment. Can you refresh us just a little bit on our economic interest there and what level of BCF that entity generates?

We have a 73% interest in the equity of the company. I think our year ended June of last year their cash flow was, wasn't it 8 million plus, Jim? I think that's right.

Okay. And what is the rough margin on that?

They are in the mid-20s, I think on their margins.

Mid-20s. Okay. Thanks.

Okay.

[OPERATOR INSTRUCTIONS] And we will now hear from Victor Miller with Bear, Stearns.

Good afternoon it's Chris Ensley. Just a little clarification on the expenses. I understand that the-- the core stations are going to be flattish on the expense side for this year, and you talked about 10 million for the digital channels. I'm wondering what the incremental spending on the digital is, because I'm trying to--?

Yes, Chris, the incremental on the digital on a full-year basis is high 4s or approximately $5 million. So we basically double up to 10 on a full-year basis in '07.

Great. An then, on the leverage side, I mean I like the sounds of what you are doing with the balance sheet, but I think pro forma, rather than mid-6s, you might be closer to 7 going in to '07. I was wondering if you had sort of where you hoped to come out? Or what your target leverage is at year end? And then are there any kind of covenants we need to think about?

You are correct, in a fully pro forma for the recent [inaudible] it's about a 7. We-- we obviously, have clearly said that reduction is No. 1 priority going forward. But we're not-- uncomfortable where that is. I think we see that coming down substantially, and I would look to that as through the basically '08 cycle and when it should be down significantly from both reduction as well as just OCF up.

From a covenant standpoint, actually, we are very pleased with where we came out. We only have a debt maintenance test in the facility. That starts out of the box at 8.25 on a trailing average-- trailing last 8 quarter calculation, which we think better matches the entire business cycle. So there's lots of room on the covenant, we're not-- we'll sleep well at night with the new facility, and again, the beauty of it is it's all-- all of it is immediately pre-payable at no-- at par.

And then, as you think about year end '08, I mean you took about a turn and a half out in '06, so you might be targeting low 6s for year end '08?

It will be [better] than that.

Okay. Great. Thank you very much.

Thank you.

We will now hear-- take a question from Jim Goss with Barrington Research.

Hi, several questions, one, with regard to the fourth quarter expense levels, what was the added commission expense regarding the-- that related to the political spending? And when you mentioned, Jim, I think that local was up 3% despite the squeeze out, what might have been without that-- that effect?

I'll take the second half of that one first, Jim. I mean, I-- it-- exactly how much political displaced and what the growth rate would have been absent the political, as you know is an age-old question in the business. I-- I don't have a precise answer for that. Certainly we think it would have grown more. When you get in to October and November especially, and-- and the politicians are basically soaking up all of the news inventory, all of your bread and butter clients have got-- pretty much got to go to the sideline or to some extent to the sideline. Certainly there was displacement. I don't have a precise answer on that. As far as the incremental rep commission on the political in fourth quarter, we probably paid about 1.3 million of national rep commission on the political.

Okay. And then one other detail, the interest expense for '07, do you expect to be down with the reworking of the interest rates?

Oh, I think the simple answer-- the simple answer on a pro forma basis is absolutely. The new-- the refinancing will allow us to save 5.5 million or more of cash interest per year. Now, as far as this year and the in and out a little be it, I-- I would actually have to think about that a little be it more, but going forward, if you just do-- start out at 9.25, don't even assume $1 of paydown, do LIBOR 150, and then we'll most likely be hedging a significant portion of that for a while, and it's a very favorable hedge market right now. I mean, I think you can lock in a-- a rate that would produce a cash number, probably somewhere in the 61 million and change range.

And Bob, I would be interested in your thoughts on this, do you think auto is being moved somewhat more permanently to internet, or at least enough of a share that as we have seen it being chipped away in a lot of traditional media, that this is a-- just a problem that will be there?

Jim, I clearly think there's-- everybody wants an internet strategy now. I think the automakers realize-- I think I read just recently that there's something like 80% of the people now go to a website. That's the first thing they do when they are thinking about buying a car. I think after that, I think we probably-- the TV probably makes them think about it, and then I think they go to the website, generic, or a lot of different websites or the manufacturers, to look at cars, and then I think from there they probably look in the newspaper for current deals or see our ads on TV, locally especially. And then they wind up going to the dealership.

I think the smart dealers are going to have more and more internet. I think we're trying to do things to tie in our local dealers more and more on our websites. We have got several initiatives going where we actually have our dealer's inventory on our website. The big problem we have had is getting them used to keeping it updated, and keeping it where it is fresh, because people go on there and then find out the car has been sold or not there and it creates some issues. But I think, clearly, the internet is going to continue to grow, and look, we're going to keep growing with it. We're going to get our fair share of it plus some, I hope, because I think we have got real good websites. We're real nimble about changing things we need to change. But the internet is here to stay and we have got to embrace it and make sure we're-- we're growing with it.

Okay. Thanks.

Sure.

Brian [Broadbent] with Highland Capital has our next question.

Hi, guys. Nice quarter. Just a couple of questions. On-- on the internet side to maybe help people get comfortable with the internet and new media growth. What is your-- what is the best performing station doing in regards to internet?

In revenue and profits or in--?

Yes. Yes. Across the entire station group.

Okay.

Actually Brian, you-- you probably to be-- the honest answer there is, while we have several that do pretty well, and maybe Bob will want to comment specifically, I think we have got several that are trying some new ideas or variations on a theme and so some people are doing some experimentation, and then, as we see at work, we try to cross-pollinate as quickly as possible. For instance, several sites this year have launched-- and there's variations on the theme, other people, I think, are trying it, other companies in the business are doing similar things, but, the generic names, the vendor we're working with is called [Cars Too], which is an auto page on the website. And we've got a station in a-- it's a 110 to 120 size market range that launched that this year, and they are expecting to pull in $300,000 of brand new money, so, obviously, we'll see how that goes. And we have got a couple of other stations elsewhere trying the same things. Dollars very a little bit based on market size, but it looks very promising.

So, I think the best performers that we find really have two key elements in it. One is that the-- it starts at the top down. The general manager and the rest of the management of the station embrace the fact that they really have to push new media, and they make that push, whether it's content-- news content to the websites or whatever sells. They integrate that into the day-to-day fabric of this station. It's not a, oh, yes, I got to do this too type attitude, it's just becomes as natural to them as putting on a 6:00 newscast.

I think the other thing we found generally has been on the sales side, where either the station has hired a new media-specific person, or there happened to be somebody on the staff-- a sales staff, again, that embraced it and really took it and ran with it. But in either case, someone in the station, that from a sales perspective, really embraces it and runs with the ball on a day-to-day basis is the other key element in the most successful stations we have.

Thanks. I guess my question put another way, if you kind of took the best of breed elements and put them across all of your station group, not only is $11 million of internet revenues achievable, it could be much higher than that is that the first--?

My goal is for it to be higher than that. I think one of the things that we're all a little bit guilty of in the TV business is not setting our sites high enough on the internet revenue. And I think there's a big pot-- big pie out there, and I think we have got to go after it more aggressively and get more of it.

I recently-- I think I may have told you this before, I recently heard a speech by Jeffrey Schwartz, the CEO of Autobytel, and somebody asked about him auto dealers and the internet, and he said, 'well, about 1/3 of them really get in and are doing great, about 1/3 want to get it but just hadn't got it yet, and about 1/3 don't get it at all.' And I think our managers are probably-- our stations are pretty close to that, we've got 1/3 that really, really are knocking the cover off of the ball, 1/3 that are working hard to get better, and another 1/3 that really are-- hadn't figured out how important it is yet. And I think it's-- but, overall, like I said, I think we have got the best internet strategy out there.

And the other thing that's been very helpful to us we've got 0 invested in the internet. We have-- we outsource everything. We have got 5 people that work out of their homes, so we are-- our investment in the internet is 5 laptop computers. And we've paid for our infrastructure and pay for all of the services we get. But that way we get the most modern, the newest technologies going on, and it gives us a lot of flexibility if we want to do something different. We're not tied down to a big investment in our own infrastructure, and our own people. So, I think that's really helped us be very profitable, number one. I was at panel recently with several other TV groups and not one of them there were making a profit on the internet. And one of them had over $50 million invested in internet infrastructure.

And other question-- kind of switching gears, on the-- on the-- on the retransmission front, a lot of people focus on cable, but how many of the-- in how many of your markets on the satellite are you getting local HD? Is it-- is it none?

Local HD? I think-- boy, that-- only about 1/2 of our markets have local satellite coverage right now, and Jim, I'm not sure if we have got any of them that are doing local HD. Do you know?

Yes, I think we picked up--

Didn't one just start recently--

I think one very recently, and maybe a second, but I can definitely think of one.

I think Direct is doing it somewhere. One of the things we're pushing real hard on, Brian, is to get-- especially Dish, Dish is willing to go in to some of our smaller markets and local. They both claim they want to they just got capacity issues. But, probably, like I said, 1/2 of our markets we don't really have the local satellite presence in there yet. Which, once it comes, everywhere we get it they get a big pickup in subscribers because people can get rid of their cable at that point, and still get the local channels and get the news and the local programming.

Overall, we have got Direct in 19 markets and Echo Star are in 23 markets, and obviously, some of those markets overlap each other, both services will be in the same market. So we-- we still have-- even have upside in the retrans revenue that we are currently getting from the cable-- I mean, the-- the satellite guys because there's obviously more markets they can expand in to.

I guess it just seemed like my question would be, do you think there's another chance to take a bite at the apple on the satellite retrans? Assuming that to stay competitive they need to increase local penetration in your markets, and presumably also need to add their-- also need to add the HD signal, which presumably could be highly valuable to them.

We have done that with Direct already, and we have got a new deal with them, and we're plan to start talking to Dish real soon too.

Okay. And then finally on the digital channels, what percentage of the channels are you repurposing your news on?

Virtually all of them. I think we're repurposing our news in virtually every market where we have got-- a digital channel up, now, some of them where we've got-- we've got triopolies in five markets where we have got a big-three network, a Fox and then a MyNetwork or a CW. There we're repurposing the news at least on one of the digitals, sometimes two of them, so.

Okay. Thanks a lot guys.

Thanks, Brian.

[OPERATOR INSTRUCTIONS] We do have a follow-up question from Bishop Cheen.

Jim, it's an apology, I didn't mean to over manage anyone's expectations on free cash flow, I was looking at your operating free cash flow, which I think is going to be certainly noticeably higher than it was in '05, as shown on your website. And then there's-- I believe you have some possible situations where you can monetize some money, if you chose to. You mentioned one with SARCS, I'm not sure how long that keeps going on.

Bishop that's the $64 question, but we have got a huge upside there one of these days, so.

Right. So you are hanging in there. And then the last thing, I may have misunderstood you, with these 40 digital stations, the law of large numbers suggests that you may not need all of them. Would you consider monetizing some of them if they were considered just absolutely non-essential?

Well, Bishop, I think the question there is since they're actually AP-- I mean, those digitals only exist as a piece of the HD spectrum we're already using. So, actually your question is very interesting, and I have to admit one that I have never considered so far. I-- I don't know, I suppose you could lease that to somebody else if they wanted it.

Right.

Or any other piece of your digital spectrum. If the compression technology allows you to do it, I suppose you could think about it. There may be down the road in certain instances, based on the market dynamics, obviously some of these will probably work a little bit better and be more profitable than others. And I think the simple answer is, we just have to look at that farther down the road and after we have given them some time to develop and grow especially on the revenue side. The cost to run them year in year out, I don't think is going to change very much over the next few years, so it's a just a case of growing that revenue.

That makes sense to me. Jim, fabulous thing about digital, it's a long, and hopefully very valuable learning curve, and with an 8.25 covenant, you're under no pressure to race through it.

We feel that we're in good shape. We're looking forward to-- I think it's a great growth area for us. Going to continue to grow, Bishop, and I think-- we're going to learn as we go, different ways to monetize it, so.

Right. All right. Thank you.

Thank you.

Gentlemen it appears that we have no further questions at this time. Mr. Prather, I would like to turn the conference back to you for any closing or additional comments.

Okay. Thank you very much, Operator.

I want to thank everybody for being with us today. I think we're all feeling good about this year coming up. I think we're all feeling a little better about the TV industry in general. I think the private equity prices has stayed real high, and I think this retrans stuff is a positive step for everybody on the TV side of our station side of the business. So I'm looking forward to this year and next year. And I still think February 17th, 2009 is going to be a red letter day for all of us in this industry, I think full digital and everybody will have an opportunity to have HD at that point is going to be a tremendous boom for all of us. So, I think it's going to be a good business in the meantime, but I think we-- that's -- that's a big day for all of us coming up. I just hope we can make sure Congress doesn't let it slip any.

I want to thank everybody, if anybody who needs to call Jim and I, as you know, we actually own a phone, we're here all the time, so don't hesitate to call if you have got any further questions, and we'll talk to you at the end of the first quarter call. Thank you everybody.

Thank you, everyone. That does conclude today's conference. We do thank you for your participation. On behalf of today's speakers, I would like to wish everyone a great day.