Gray Media Inc (GTN.A) 2007 Q4 法說會逐字稿

Good day everyone and welcome to the Gray Television fourth-quarter earnings release conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Prather. Please go ahead, sir.

Thank you very much. I want to welcome everybody to our year-end 2007 and fourth-quarter call.

First of all, it seems like 2007 was a long time ago. I think we have all been pretty well shocked by what is going on in the financial markets right now as far as sub-prime loans and some of the problems that the banks and lending institutions are having. But I think overall, our business looks like it's going to be good this year. We should have a great year political, we should have a good year local, and I think national will continue to struggle.

As far as last year ago, pretty much the same thing. We had a good year locally overall. Fourth quarter actually was a good quarter, local and national, but national for the year was down a little bit, although I think it was actually less than some of the other people that reported. But still, I think national business is going to continue to be a problem for our industry.

The good news for us is, right now, we are 73% local, 27% national. Frankly, I used to say I wanted to get to 75%, now I say 80%. One of the things that is helping us in the short run and the long run is our Web channels. We are going extremely well with our Web channels. I think they will continue to grow both in page views, unique visitors and revenue and profits. Our Web channels are very profitable and we are very proud of the fact, we think we have the best Web strategy out there.

Just to give an example, our page views are running 53 million a month, our unique visitors are 6.5 million a month, and both of those figures are up over 50% over last year, for example. So, really proud of what's going on there.

Most of you know, we have a lot of retrans coming up later this year, probably about 60% of our total subscribers. We're working on a plan to have a coordinated project to make sure we get paid for retrans. We just recently negotiated a retrans in four of our smaller markets which we are happy with. I think we will get it -- we have an agreement in principle and hopefully will get it done in the next couple of days. But overall, we think retrans will be an important source of revenue in the years ahead, especially next year, obviously. Not a whole lot this year, but next year should be a real good year for us.

I think one of the things we're doing for this year is, we are -- like I said, we're hunkering down just because of the economy, we're watching expenses. We think our overall expenses other than commissions on political, national political, will probably be flatter down by the end of the year. That's one of our goals. Here again, we're going to keep a tight rein on expenses and on capital expenditures just to be safe if the economy continues to slide. The automotive, as you know, is a real challenge, although our automotive has not been down as drastically as some.

One of the areas that has been way down for us is telecommunications. I think AT&T got all of their branding done last year and they're taking a breather right now. But one of the things that we are looking at closely is political. As you know, it's very important. We have the highest political revenues as a percentage of our overall revenues of any group out there, year in, year out. The political was a little bit behind budget first quarter, but not much, but it's pretty much in line with our historical numbers.

To give you an example, we did $42 million of political back in '06 and 60% of it came in the fourth quarter, 25% in the third quarter. We think that will be similar this year. So we're looking for the vast majority of our political to come on the back end. Example -- in '04, it was -- 4% of political was spent in the first quarter. This year, we got 5%. So here again, I think we're looking forward to a huge political year. I think once the candidates get settled on -- the parties get settled on the candidates, we'll know a lot better.

One thing that did hurt us on political in the first quarter was the Michigan and Florida primaries with no Democrats running. Those are normally two of our hottest states for political dollars and I think we had budgeted in the range of 5 or $600,000 and I think we got something like $47,000 from McCain and obviously nothing from the Democrats. So send your cards and letters to the Democratic Party and urge them to have a revote on Florida and Michigan. I think that is the only fair thing to do at this point.

At this point, I'm going to turn it over to Jim Ryan, our Chief Financial Officer, to go through some more detailed numbers, then we will open it up for questions. Jim?

Thanks, Bob, good morning everybody. As Bob said, looking to fourth quarter, both local and national were up; local up about 6%, national up about 4%. The Internet revenues were up significantly. You will note, this is the first time we have broken out Internet, and also we -- following kind of industry standard at this point, also have broken out our line for retransmission, looking to the future on that line. And in the release, you will notice that we have gone back and made all of the reclassifications for both '07 and '06 so you have full comparability.

In the fourth quarter, actually our auto was up along with telco, entertainment, the medical category, restaurants. The other thing that was really weak for us in the fourth quarter on a category basis was the financial sector, which would not be surprising. I think some of the relative strength in the fourth quarter is at least a little bit reflective of the off-year cycle on the political. Certainly, we had a lot of political in fourth quarter '06, especially October of '06, so actually being up in most categories and up in local and national was not surprising to us.

Our expenses came in basically right where we expected for the quarter, down a little bit year-over-year. So all in all, we were pleased with where we came out. As Bob said also for the year, obviously the political swing is the major driver in the revenue line, but going against almost $43 million of political and about $3.5 million of Olympics, at the end of the day for the year our local was up about 4. As Bob mentioned, national struggled for the year a little and ended up being down 2, but we think that's probably better than some.

For the year, our auto was down less than 3%. Financial was down. The restaurant business was down a little bit on a total-year basis, but again a strong performance in telco, entertainment, medical and the other categories that were up in fourth quarter.

Turning -- again, Internet revenue for the year was up substantially too and we're very pleased with that growth. Bob didn't mention, but about two-thirds of the way through the year in '07, we ramped up our Internet efforts from a sales standpoint, have added dedicated Internet AEs in most of our markets to be able to push our local Internet sales forward. So we are expecting, as Bob mentioned, strong growth in that category in 2008 and forward.

Some quick comments on the balance sheet. We ended the year with $15.3 million of cash. Our term loan was at $925 million. We had nothing drawn on our revolving credit facility, so we had a full $100 million line available. CapEx for the total year ended up being $24.8 million with only $2.9 million in the fourth quarter. Cash taxes actually for the full year ended up with a -- basically at zero. We had a $24,000 net refund for the year and we will be filing our K tomorrow. So there will be additional details will be in that.

As far as our guidance goes for Q1, we think local will be essentially even with '07, national down a little bit but strong growth in the Internet area, and the political as well. We expect to have total revenues slightly above last year's levels.

At this point, Bob, I will turn back to you.

Thanks Jim. At this point, operator, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Tracy Young, Bear Stearns.

Two questions for you. What are you expecting for CapEx for 2008? And also, can you update us on your digital channels?

Jim, you want to take the CapEx?

CapEx for 2008 would be 15 to 20. That will be heavily back weighted to the end of the year. Most of the first 15 really involve the final transitions to '09 digital. In many markets, we have the ability to go from the temporary high-band U channels back to the low-band Ds, and we're putting in transmitters to do that. That dramatically reduces our power costs going forward, and in some cases, enhanced our coverage a well. So that is what most of the first 15 is. The rest of it is just routine. Again, a lot of that is back weighted into the end of the year.

Based on your digital question, we have 40 digital channels on the air right now split up between MyNetwork, CW, and we have five FOX digital. We lost a little money in that last year mainly because when the UPN went out, some of the cable guys forced us up on the digital tier. That hurt us in some of our key markets where we lost as much as 40% of our market because of -- that big a percentage of the market sometimes didn't even have digital cable boxes. We think this year we'll make a profit. We think next year when we go full digital and it's 100% coverage, these stations will be as a virtual duopoly in all of these towns and triopoly in several of them. And we feel like we have a real good future there.

One of the things we want to use our digital channels for and we're doing a good job, I hope we can do even a better job in the years they ahead, is doing a lot more local programming around high school, college sports and those kinds of things.

Marci Ryvicker, Wachovia Securities.

The first is -- national has been weak for awhile. Is there anything that's different now than it had been? Is it auto, is it a different ad category? And what can you do to fix this, if anything.

That's a good question, it's something we talk a lot about around here. I'm not sure it can be fixed. I think there is a mantra out in the marketplace from advertisers and from ad agencies to try something different. You see almost weekly articles about major television advertisers. Just recently, Johnson & Johnson announced they were doing a bunch of webisodes on young new mothers. Toyota announced a deal with YouTube to sponsor a YouTube comedy thing. All of those things are taking money away from the traditional advertisers, in a lot of cases TV. A lot of that stuff is not going to work.

I think that big thing that we have going for us is, when full digital comes in and full HD is available next year, that once people start seeing HD commercials I think their product, the advertisers are going to realize that they have all of a sudden got a new product out there that is a lot more dramatic presentation of their product. So I'm hoping that is going to regenerate some interest in national. But we're actually doing all of our budgets and doing all of our planning around the fact that national is going to have little or no growth or decline over the next few years.

And then just a question on your retrans agreements. When where they signed, do they cover both the digital and analog channels, and are they the MS-Os or the satellite guys?

The retrans that I just talked about earlier is one that we have an agreement in principle on, it's with an MSO. It does cover both the digital and we are actually getting the analog coverage on the digital channel which will help us because we're on the digital tier right now. Most of the retrans we are showing right now, Marcy, is coming from satellite. As I said, we have this deal we just did with four small markets for us, and then we have about 60% of our subs coming up December 31. So that will be the big time for us at the end of the year when we're negotiating with most of the big MSOs at that point.

When do you start negotiations?

You know, we would like to start sooner than later. Most of the time, the cable guys won't start real early. I would like to start right now if I could, but they normally just -- they won't talk too early. We'll probably start ideally beginning of fourth quarter. We will start asking for -- start throwing out the proposals to them and see if we can get some dialogue going.

John Kornreich, Sandler Capital.

Bob, 60% of the cable subs are up at the end of '08 and the other 40 I assume is by the end of '09?

Not totally all of it, John; most of them. We've got a couple of outliers that will actually be 10, I think, but the 98% will be '08 and '09.

Going back to the digital stations, what was the total revenue and allocated expenses in '07?

I think the revenue was in the $8 million range and expenses were in the $9 million range.

And that was generated from, what, 30, 35 stations?

That is 40 digital channels total.

Yes, but that's now, but what was it --?

We had 40 on most of the year last year. We may have had some come on during the year, but probably between -- I would say at the beginning of the year last year, we had 30 and we probably added 10 during the year.

Right now, are these stations young enough so that they're on their own cycle, and if the environment is soft for TV stations in general, ex-political, these stations will be soft also?

They could be, John. I think these stations are more a function frankly in most of our markets, the MyNetwork, they've had some fits and starts on programming. They seem to be getting their act together now. They just signed a deal with WWE Wrestling, which, you know, is the top-rated cable program year in and year out. So I think it will help them. They have a good economic model for stations that we should be able to do well with those. The CW, I don't like the economic model as well. They've actually done a little better in their ratings. The FOXes we have are doing very well and we would like to get some more digital FOXes if we can find markets where there is not a FOX actually in our market. But those are hard to find these days.

Of all your markets, what markets do you not have digital stations in?

There is a couple that we don't -- well, even there. Most of them, like there's a couple of those markets where we have gone ahead and even done an independent, just -- in Reno, we don't have -- I think we're working on a deal to have somebody there. Omaha, we have just a news and weather channel there. There is a couple like that where the CW and the MyNetwork just weren't available. We didn't want to overpay for the CW, frankly.

Would you be satisfied to see the eight grow to 10 in '08?

Oh, yes. I think that will be, definitely, do that or better.

And that would be a break-even year?

Yes, or make a little money on that probably, because we're trying to really coordinate on -- one of the things we're doing, John, is trying to coordinate between the stations on our syndicated program and then do a lot more barter stuff and do stuff that's where we can do a deal with 15 or 20 of the digital channels for some of the syndicated stuff.

The other day at the Bear Stearns session, you mentioned to me what the top four generating cash flow stations were. I forgot -- Charleston obviously is one.

Charleston, Huntington, Omaha --.

Say that again -- Charleston, Omaha,

Omaha, Tallahassee and Lexington.

Last thing. Where are we with that -- I keep forgetting the name of it.

[Tarzian]?

Yes.

That's a great question. All of the litigation was settled last year, and we frankly decided to just sit on the sidelines awhile, to let things cool down. I think it was a very emotional issue for Mr. Tarzian. We were not actually involved in litigation directly, but we were a corollary to it, so to speak. So I think at some point this year, we would like to open up some negotiations with him. As a matter of fact, I've talked to your old partner, Barry Lewis, about that thing as a matter of fact a couple months ago. So I think it's something that will be on our radar this year probably.

Just refresh me --.

We own 73% of the equity in a company that has the NBC in Chattanooga, the number one station there and the CBS in Reno, and they have four radio stations.

And the cash flow last year?

Cash flow was in the $8 million range.

And the debt?

Debt I think is around $10 million, maybe 8 to $10 million.

Lastly on that same entity, what is your ownership interest?

We have a 73% interest in the equity if the Company is --.

And 40 (multiple speakers)

-- liquidated. We don't have (indiscernible) 23% voting rights.

23% voting?

Yes, and 73% equity rights. That's on dividends, sale of assets, sale of stock, anything like that -- liquidation.

So in reality, with the 23% voting, obviously you do not control at all (multiple speakers).

No influence over the management at this point, no.

So you're not involved in the management in any way?

No, we're not. We have not spoken to Mr. Tarzian in I would say four years, probably.

Does he have the wherewithal to buy you out?

I don't know, that's a good question. I would not think so, but I don't know. I really couldn't say.

I assume that if he were to buy you out, you would be emphasizing your 23% voting. And if you were to buy him out, you would be emphasizing your 73% ownership.

Right.

Thanks for the help.

Thanks, John.

John, just to clarify on the revenue question and the expense on the digital, the actual numbers for revenue on the digitals for full-year '07 was about 7.4 and the expenses were about 8.3. So as Bob said, it cost us a little, but in '08, we definitely are planning for being in positive territory.

Jim Goss, Barrington Research.

First, I think you have talked about political for the full year being something in the neighborhood of $60 million, which is a little better than I was originally expecting. Are you pretty confident on that score? And this morning, I saw some indication that there -- of a greater hint at a Florida and Michigan mail-in vote, and I am wondering what potential that might have for Q2 in particular (multiple speakers).

Jim, I think that would be huge for us because we have two real strong stations in northern Florida that always get real good political and we have a station in Lansing which always historically has gotten real strong political because of the state capital and it covers that whole part of the state there. But we are -- basically, we did $53 million in '04, and we're -- 60 is a 15% increase over that. I feel very confident in that number. Ideally we try to be conservative when we're budgeting political. I hope it will be better than that.

And the $53 million included WNDU on a pro forma basis, that sort of thing?

Yes.

If financial leverage is viewed by the market and investors as an increasing concern, not just for you, but for everyone. And I know you feel you can handle the debt you have over time. But if that becomes viewed as a pervasive concern, does that alter your thinking about possibly selling a station or two to try to address that issue?

Jim, we're always looking at all the different options. We feel confident that we're going to pay down a big chunk of debt right now. Our goal ideally would be to use our free cash flow this year to pay down debt and be in the low 6's by the end of the year on our ratio. So I think if you look historically over the last I think 10 years, our historical ratio has been a little over 6 to 1. We'd like to get it lower than that going forward, and that is one of the goals over the next few years. I think '09 will be a relatively light capital expenditure year and we should generate some good free cash flow then to pay down some more debt in '09.

I guess the thrust of my question was, it seems as I look down my coverage list that the ones that are getting dinged the most are the ones (multiple speakers).

I think there's -- the market is nervous about leverage on everybody right now. I was just visiting with [Mario Gabelli] yesterday, and he said that from what he sees there is a real pressure especially on anything the market thinks is consumer oriented right now that has leverage. So I think that's just something we have to live with in the short run. I think we're doing the right things on expenses, I think we're doing the right thing on using our free cash flow to pay down debt. And as I said, we're going to keep our capital expenditures this year at basically the digital transition and some emergency expenditures, and next year we will here again have some basic maintenance in emergency but be in position to pay down some more debt in 2009.

Okay, a couple of other things. The digital transition issue, you have indicated will be a plus from you, but there might be somewhat of a near-term glitch as people wake up and find out they're not getting television and that the 10 or 15% that might not have any sort of direct link might include a number of people who are of that nature. How big an issue do you think that can be, and how quickly does it get solved?

I'm nervous about it simply for the fact that you read these polls that say 40% of the country doesn't even realize it's going to happen. I think it's a hard issue to explain to people. I think it's our job as stations in the industry and the SEC to really do an intensive education campaign this year. But it could still be some major disruption. If you have 10% of the country, all of a sudden their TVs go dark and they don't really know what's going on, it could create some real firestorms and it could create some nervousness among advertisers and viewers in the first quarter next year. So it makes me nervous. I think in the long run, it's going to be great for our industry, no question, but getting through that month or so there. One of the things the industry is trying to push Nielsen to move the sweeps from February, because they figure they will just be worthless in that month with the transition going on right in the middle of the month. So that's something I hope they will do also. But we're doing our best to plan for it as much as we can on our end to try to educate our viewers and our local markets, and I think we just have to keep our fingers crossed.

The last thing. Ad pricing potential on your digital channels. If you get a programming grabber like some of the local sports, do you think you have an opportunity to price at more than the token pricing you've been pricing at so far?

We certainly think so, especially on some key high schools in some of the towns, and also some of the key college, the minor sports I would call it, that may have a big audience. I have used the example out in Lincoln, Nebraska. The women's volleyball team there has been national champion and been in the top five teams for the last five years. They've sold out 100 straight games at 10,000 per game virtually and we've added several of their games on our digital channel and have done real well with it. But they became so popular last year, they were number one for most of the year, that ESPNU took a bunch of their games and took them away from us. But those are the kind of things we're looking for and we definitely think we can build a premium audience and a premium advertising with those kind of things.

In the major college towns that you have, and you have quite a few, are you concerned you're going to lose even the minor sports to vehicles like the Big Ten Network and probably clones of that and other major conferences?

I think that is an issue on some of them, yes, I think that's something we have to --. Here again, it may just force us more to the high school, which is not all bad because high school still is very, very powerful in most of our markets and especially in the South and the Midwest with football. So we think there is plenty of programming opportunities on the digital channels.

[Richard Abrams], First Manhattan Company.

My question also is about debt. Do you have any specific number that you expect to reduce debt to in 2008 and 2009?

I will give you a broad number. We expect our free cash flow to be over $1 a share this year and we would use 100% of that to pay down debt.

So that's about $40 million?

It's more than that. We have about 50 million shares out.

And that would apply also, even more so in 2009?

We plan to -- 2009, I don't know if our free cash flow will be quite that high, but we plan to use 95 to 100% of it to pay down debt.

With that resolution and senior stock below five (multiple speakers).

11,500 shares at six and thought I was stealing it, so I'm going to buy some more next week.

But you're not going to be tempted to buy the stock even though it's where it is?

No, I don't think the Company can. I think it's more important for us to get our balance sheet. With the markets worried about leverage and we're also concerned that we want to do the right thing just for the Company, I think it's prudent for us to be paying down debt right now and not buying stock back.

Adam Spielman, PPM America.

I was hoping to first ask a little bit about local ad market. Have you seen any changes? In the last few months, some other, outdoor guys, have said things have actually changed in the last few months. And specifically, Tallahassee, do you see anything there being -- I know it's not a tourist area, but do you see anything there being in that kind of Florida market?

I think the Florida markets seem to be down a little bit. We are actually -- here, again, I guess it's good about being diversified around the country. Some of our markets are obviously stronger than others. Florida markets had a good year last year but this year I think they are a little bit challenged. We had a real strong year in national last year and national seems to be struggling a little bit in Tallahassee. Local overall, it's pretty steady year in and year out. First quarter was a little slower than what we thought, but typically our GMs seem to always over-budget in the first quarter. I jokingly told Jim Ryan, it seems like we always start out under budget in the first quarter, but I think for the year we are expecting reasonable local growth. As you know, the political will push out a lot of that in the third and fourth quarter, which is good news by the way. But, it does tend to dominate when you're getting 60% of your political in the end of the third quarter and beginning of the fourth quarter.

But you have not seen a big change in the last few months?

No, not really, no.

Just to clarify on the political I think. 2006, the pro forma number was 43. And then I'm sorry, there was a number thrown around, kind of around 60, and then I thought I heard it -- you thought it was going to be flat. Is that just a (multiple speakers)?

No, I said we did 43 in '06, we did 53 in '04, and we are thinking 60 in that range in 2008.

Got it. Final one on the retrans, the breakout of revenues is helpful. So when we see that retrans kind of cycling through the quarters, are we kind of at the right run rate by Q4 '07, or how much more?

It will be little bit better than that. Like I said, for this year, but like I said our big hit ought to be in 2009 because 60% of our subs come up at the end of '08, and the new contracts would start January '09. So that is where we really need to make hay at the end of the year.

Just a final one back on the outdoor guys, what they are seen versus what you are saying. Would you just attribute that to just a different -- obviously different mix of advertisers?

Yes and no. I talked to Kevin O'Reilly, who's head of Lamar, he's a friend of mine, and he said that they were seeing some slowdowns in the bigger cities more so and in the cities that were hot real estate areas. We're in the mid size markets, don't -- our biggest market is [DMA 59]. So I don't thank -- and here again, I think a lot of our university towns and state capitals won't feel that kind of crunch as much as some of these real hot real estate markets around the country.

[Linda Carne], Credit Suisse.

I just had a question on the covenants. Can you just tell us where you are at year end in your leverage covenants versus what the covenant is?

Jim, can you answer that?

At year end on the actual calculation in the agreement, we are at 789 against an 825 covenant.

I guess just given the step down in the middle of this year, how comfortable are you guys given that political is going to be so back end weighted that you can meet those step downs?

We're comfortable we will be able to meet them. We think we will be tight, but we'll be in shape to meet them by the end of June.

John Kornreich, Sandler Capital.

A couple of quickies for Jim. The three political numbers you threw out -- 53, 43 and an estimated maybe 60 -- are those gross or net?

Those are all net.

Okay. And what do you calculate as a cumulative investment in your digital stations to date, including any initial bleed, operating bleed? You don't have to be precise, just around.

Jim, let me -- I think, John, on the capital side I would say we have an average of $300,000 per (multiple speakers).

So maybe 12 million?

Pardon?

12 million?

Probably, yes, that sounds about right.

And what have been the operating losses to date?

I think we were profitable, Jim, weren't we, up until this past year?

No, Bob, we were minus 900,000 in '07.

What about '06?

About 650 in '06.

A couple of million.

In '05 when we had much fewer and were ramping some up, we were minus $300,000. So not a big number for the future potential that the 40 channels told.

You know, John, our original plan when we had 11 UPNs on the air I think when UPN announced they were shutting down; I think we had four in the pipeline. And they were, at the time, those stations were becoming profitable after about 90 to 120 days. When that thing shut down and then all of a sudden, they announced the CW and the MyNetwork, and it was kind of like, we figured we had better get the beach front real estate while we can. So we would not have gone this fast. We like to go slower on things normally. We would have probably at this point had 20 UPNs on instead of 40 digital. But it kind of forced our hand. We thought we'd better get them while we could get them.

These stations are all HD ready right now?

Oh, yes.

And you've spent that money?

Oh, yes. The only thing we're spending money on this year, John, is where we are going back from one of the old digital channels back to our old analog that we have to buy a new transmitter, and just taking down all of the old antennas, getting rid of all the old transmitters, those kinds of things. That's about 150,000 stations there to do that. So we're figuring we'll spend about $10 million on the digital transition this year. We have full power HD in all of our stations right now.

So the CapEx then could be up around the high teens, maybe 20 in '08 and then drop again in '09?

Yes, right.

Maybe [it could] drop into the 12 area?

I would think so. That would be my goal, 10 to 12, yes.

Jim, your digital stations average, and then I know averages are gross distortion, but nevertheless, $200,000 per. And we all know it's a fixed cost business and there's a certain number of people you have to have, whether you are in Memphis or you are in Cleveland. I just don't see how this can ever be a real profit generator with your -- let's say in three years, you're at $300,000 of revenue per station. So what? So you make $100,000 per station, that's $4 million. It seems like a lot of effort and management time over nothing.

John, I think we can do a lot better than that, and I think once full digital comes in, we certainly -- we were on track when we had the UPNs to be doing a lot better than that. For example, we had a couple of stations on track to do over $1 million in that year when the UPN shutdown. And I think with 100% coverage and analogs, a good station channel on the cable that we can -- I think those things can do real well for us. FOXes are doing well right now, obviously, and I think the CW and the MyNetwork can do well.

Jim, if you have $200,000 per station average now -- $220,00; $250,000, whatever -- what do you have, like three people in each station?

No, I would say most of them, we probably have one, maybe one-and-a-half.

So this is a guy who says there, he turns on the lights, he does everything?

Our people are already there doing that. We usually have a salesperson, and then maybe a half a person that if you need for engineering or anything, programming, things like that.

Thanks for your help again.

Bishop Sheen, Wachovia.

Hey Robert.

How did you end up on the end of the line, Bishop?

Well, you don't always -- you took out your bonds, so I don't have a business (inaudible), but I love your view. Look, I've got to ask you about public versus private market values. And I know there's a gap and I want your view on the gap and how it tends to change in a political year. And secondly, the degree of difficulty that both public and the private market may have right now in this digital transition [valuing] new digital assets?

Good question. First, the gap seems to always be there. I think right now it's almost an academic question because I think it would be very hard to get financing to get deals done even if you wanted to right now unless you were in really, really strong financial position and could just draw down a line of credit to do a deal or something like that. But in general, I think the financial markets -- although from what we have seen, the deals that have gotten done have gone for real good prices. Here again, obviously, the people that know the business think a lot more of it than the people out in Wall Street who are buying the stocks and selling the stocks. But that's just something we have to live with in the short-term. Instead, I think this market is so unusual from a financing standpoint, it's hard to really judge what that gap is.

On the digital, I told you, as I said earlier, I'm worried about the transition. I just think it could be a difficult time for everybody. I don't think it will last long, but I think it's something that we have to get through and get through in a hurry. And hopefully, as I said, we can do a good enough job educating the public that this is going to happen. And if they have an old analog TV, they need to get a converter box. Or if they are cable, if they have cable, they won't miss a beat. The cable have been mandated by FCC to continue carrying the -- giving them a signal of I think three years. So even if you have an analog TV, you will still be able to get coverage if you have cable. But I just think it's going to be a trying time. I think it's a time that we just have to, like I said, get through and I hope it doesn't last very long.

One other thing, Bishop, I think that I didn't mention earlier that has kind of hurt TV more than I thought after talking to a lot of people, is I think that strike hurt the TV business in the first quarter more than we think, both from an advertiser's point of view and from a viewer's point of view.

Kind of the major league baseball impact.

Yes, you know, people get turned off and start doing other things, and I think advertisers were nervous about who's really watching and do we want to keep paying prime prices for reruns and some of these crazy reality shows that were thrown in there at the last minute. I would hate to be paying prime time prices for some of that stuff.

So, Bob, just so I have your answer, I'm not trying to pin you, obviously the industry hurdles which are always in play, but I think what I heard you say is, this gap, which I think is as deep as I have ever seen it since the last big credit crunch, doesn't have a chance of finding normalcy, let's say, of closing a bit until the credit markets heal themselves.

That's exactly what I said. You said it more succinctly than I did, but that's exactly what I was trying to say.

[Brian Bodben], Highland Capital.

Hi, guys, just a couple of questions. In the past, you have discussed what the impact of NBC ratings, kind of the drag that you have seen versus budget. I'm just wondering if you could provide some color on that.

Brian, I think it's still hurting us. We have good news and bad news I guess. We have five of our biggest and most profitable stations are NBC, with Omaha and South Bend, Lansing, Madison and Huntington and Charleston. They are 45, 46% of our cash flow, or actually higher than our CBS, the total NBC. And they have been a poor fourth most of the year and I think it has hurt our news lead-in into the 10:00 and 11:00 news. I think one thing we're hoping for is a big Olympics. I think China has some real pizzazz to it for an Olympic venue and we're hoping for a big Olympics and with those big towns we have and it should be a good Olympic year. That's not going to come in until August. But it has definitely had some effect on us in the short-term, yes.

And then on the power expense, you talk about the high band to the low band. Can you just give us a sense kind of what your power expense is now and where you see that trending to?

We think, Brian, once the full digital is done next year, we think once we're able to cut off the analog, we're going to save somewhere $2 million plus in electric bills in 2009.

And then, the tower work that you mentioned, is that going to happen in '08, or doesn't that happen in '09?

It depends, Brian, here again on whether we need to do it or not. We're kind of looking at it on a need-to-do basis. For example, if our tower cannot support putting up the new digital antenna and the new digital wiring, we may have to take the old stuff down while we are putting up the new. The same way with transmitters. There may be some cases where we actually have to move the old transmitter out to put the new transmitter in just because of space constraints. So we're taking it on a station by station basis. If we don't have to do it right now, we're not going to do it because it's something we can just gradually do at our own pace over a period of time.

The other thing is, with tower crews, they're going to be so busy over the next 12 months, ideally we would rather be hiring them when they are not near as busy and we can get them at a better price and more on our schedule than on their schedule. So we are taking it on a station by station basis.

And then, do you see any competitive HD launches in any of your markets? And if someone launched HD news in Omaha, are you prepared to match that investment and upgrade?

We are. We have local HD right now in Lexington. We went on the air and then two weeks later the NBC went on with their local HD. Right now, we're looking at five or six of our bigger markets. We've done a lot of planning on local HD expense, we think we can do it a lot cheaper than we originally thought. But we don't want to spend that until we feel like -- where we need to competitively. Ideally, we would like to be the leader in that, but by the same token, we want to be careful with our capital right now. So I would say that Omaha is a good example, that's a real tight and competitive market. And so, we watch that one closely. There are several other big ones that we feel like where we have a real competitive market. We couldn't be too far behind if one of our competitors went local HD.

And are you also hearing kind of just a general talk about people hunkering down on the HD investment, just given where the state of the economy is?

I think so. It seems to be -- I have not really heard of any -- lately any stations doing it. For awhile, there was -- it seemed like one or two a week were announcing it, but I have not heard any in several weeks. So we watch it pretty close. Like I said, we try to keep our managers, keep their ear to the ground. I think frankly that local HD is going to be important in the future, especially in our major markets. But in the short-term, like I said, we're willing to wait awhile and see what the market does.

Can you discuss on your digitals what you expect the total reach of your digitals to expand to in 2009?

Well, they should have 100% coverage in February of next year. They will be available over the air, they will be available on the cable system, satellite. It should be 100% coverage at that point.

Versus today, it's at --?

It's probably 75, 80. As I mentioned, Brian, some of the markets, for example Tallahassee where we got pushed up on the digital tier, at the time last year and it may be up from then, but only 40% of the cable boxes in Tallahassee even had a digital converter. So we literally lost 60% of our market there, and that station was doing extremely well. It was the 19th ranked UPN in the United States, digital or otherwise.

And so I guess your hope would be that 2009, just going back to the numbers that John was throwing out, $200,000 to $300,000, that flipping the switch alone should hopefully get you to there?

We will be better than that, I am sure.

Also, final question on the second digitals. Of your $7.4 million of revenue, how much of that is coming from the repurposing of your news, and where do you see that going forward?

I would say very little. It's mostly just advertising we've sold on rotators during the whole day time. I think that is something we need to do a better job of is promoting the fact that the news is available on the digital channels and working toward getting a better rate on that. As I mentioned, I think the other key area is really doing a better job of identifying local high school especially and some college stuff that we could be promoting on the digital channel. The key to me on our digital channels, and here again I emphasize this to our GMs all the time, is we have the best promotion tool in town with our main station. We just have to make sure we are promoting these digital channels so people will know they are they are.

And are you doing a lot of paid programming on the second digitals?

A little bit, but not a whole lot. That is something that we -- especially late at night, we're looking at doing more of that, from midnight to six o'clock in the morning type thing.

Adam Spielman, PPM America.

Thanks, just a couple of small ones on the balance sheet. How much are you fixed versus floating on the bank debt?

I think we have, Jim, is it 465 is fixed right now, and then the rest is floating? We're looking maybe at fixing some more if these rates continue to drop. We're watching it pretty close on a daily basis. Is that the right number, Jim, 465?

Yes, that's correct.

Your interest expense will be down this year versus last year, right, with the big drop in LIBOR?

Yes.

Okay, and do you have any ability to buy back bank debt in the open market and retire it to capture that discount?

That's a great question. We would like to with the bank debt every year -- we think it's cheap right now. I don't think our current bank line agreement allows that, although Citadel just got an amendment so they can buy theirs back. So it's something we're looking at. If there's a way to do it within the bank agreement or something, I think it's a great opportunity for us frankly if we could do it. But from what you read, I saw some quote from a Goldman guy the other day that basically said 80 is the new floor on bank debts, that's the new cap almost. And even real strong companies with low leverage, their bank debt is at a big discount.

Jim, I missed this. You said due where you are on a covenant basis, or actual net leverage as a percent to covenant. What was that again?

At the end of the year, we were at 7.89 versus an 8.25.

And that 7.9, that's that eight quarters defined [trailing]?

Correct.

And than it steps down from 8.25 to 7.75 at 6/30/08?

Right.

And then, is there another step down at 6/30/09.

It's 7.25 at 12/31.

Gentleman, we have no further questions. I will turn the call back over to you for any additional or closing remarks.

Thanks everybody. We appreciate it very much. We're going to keep watching what we're doing on expenses and capital. We definitely commit that we're going to use our free cash flow to pay down debt this year. I think we're going to have a great year overall with political. It could be a record your for us really. And we're looking forward to, like I said overall having a real good year. I think our Internet is going to continue to grow much faster than we even anticipate and we're very proud of what we have there. So we're looking forward to a good year, and like I said, getting ready for the digital transition for next year.

Jim and I are easy to find, I always say, we answer our own phones. So anybody that needs to call us, don't hesitate and we will talk to you at the end of the first quarter. Thanks, everybody.

That does conclude today's conference call. Thank you for your participation and you may disconnect at this time.