Nexstar Media Group Inc (NXST) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nexstar second quarter 2004 earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are on a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. All statements and comments made by management during this conference call other than statement of historical fact may be deemed forward-looking statements within the meaning of Section 21 of the Securities Act of 1933 and Section 21a of the Securities and Exchange Act of 1934. Our future financial conditions and results of operations as well as forward-looking statements are subject to change. The forward-looking statements and comments made during this conference call are made only as of the date of this conference call. We do not have to undertake any obligations to update any forward-looking statements or reflect events or circumstances. I will now turn the conference over to Perry Sook, Nexstar's president and chief executive officer. Please go ahead, sir.

Thank you and good morning, everyone. Thank you for joining us. We're going to report our financial results for the second quarter and six-month period ended June 30, 2004. We'll get right to the numbers and then make time for your questions. Before I start, I want to make mention that Bob Thompson, our executive vice president and chief financial officer is here with me as well.

Net revenue for the quarter ended June 30, 2004, grew 10.8% to $61.2m from $55.2m in the second quarter of 2003. Including political advertising, net revenue for the second quarter increased 6% to $56.9m. For the six months ended June 30, 2004, net revenue increased 12.6% to $115.4m, and that's from $102.4m reported for the first six months of 2003. Including political revenue, net revenue in the first six months was up 7% to $107.7m. In the second quarter of 2004, we had political revenue of $4.3m against $1.5m of political revenue in 2003, and that's primarily due to increases in our markets in Illinois, Pennsylvania, Missouri, Arkansas, and Louisiana during the second quarter of 2004.

Second quarter broadcast cash flow rose 23.2% to $25.2m from the $20.5m in the second quarter of 2003, and our second quarter 2004 adjusted EBITDA gained 27.9% to $23m from $18m in the second quarter of 2003. For the first six months of 2004, our broadcast cash flow was up 26.4% to $42.9m from $33.9m for the first six months of 2003. For the first six months ended June 30, 2004, our adjusted EBITDA was up 32.3% to $38.7m from the $29.2m for the same period of 2003.

Looking at our numbers on a pro forma basis -- on a pro forma basis, our net revenue in the second quarter was $61.8m, that's an increase of 6.6% from the $58m reported in the second quarter of 2003. Operating expenses, selling, and G&A, program payments, total operating expenses on a pro forma basis, declined 5.4% to $31.9m from the $33.8m in the second quarter of 2003. As a result, our broadcast cash flow on a pro forma basis was up 26.5% to $25.3m from the $20m we reported in the second quarter of 2003, and adjusted EBITDA was up 31.7% to $23.1m from $17.6m in last year.

On a pro forma basis for the first six months of the year, net revenue was up 7.2% to $117.2m against $109.3m for the same period in 2003, and our broadcast cash flow rose 29.7% to $43m from the $33.2m recorded in the first six months of 2003. And, finally, adjusted EBITDA rose 36.3% for the first six months of the year to $38.8m from $28.4m in the prior year.

I'll give you a little color on our second quarter revenue performance -- our stations generated approximately $3m in new local direct billing in the quarter, reflecting our continued emphasis on new business development. As for category comparisons, our automotive spending increased almost 10% during the second quarter of 2004. That marks the 9th consecutive quarter of growth for our company in the automotive sector. The growth in 2004 Q2 was led by increased spending from Chrysler, Ford, General Motors, Lincoln-Mercury dealers, Mazda, Mitsubishi, and Toyota.

Other category comparisons are infomercial and paid-programming revenue was up over 11% due to increased time period availability at our recent acquisitions. Furniture was up approximately 5%; medical, 4%; entertainment, a little less than 3%; and that's of our top 10 categories. If you look at our fastest-growing non-top 10 categories on a gross billing basis -- media, insurance, utilities and home electronics.

On the other side of the ledger, we showed a moderated decline in fast food, which I think, you recall, was down a double-digit amount for us in the first quarter. It was down about 5% on a comparative basis, and these are all pro forma numbers, same-station comparisons. Also, attorneys and telcom were each down about 3%, and of the smaller, the non-top 10 categories on a gross billing basis below prior-year -- grocery, ag, and beer and wine.

That's the information I have to report for you on our 2004 Q2 and first-half performance. I'll be back with some additional comments, including third quarter guidance, but I'd like to turn the call now over to Bob Thompson, our chief financial officer, for some additional financial details. Bob.

Thank you, Perry. First of all, I'd like to update you on a new development in our capital structure, and we are currently in the process of amending our senior credit facility for a couple of items -- one, to reduce pricing on our current loan and we will also shift approximately $40m from our revolver into the new term loan. Currently, we have outstanding approximately $194m under our term loan and $50m under our revolver for approximately $244m of total outstandings. The new facility will have $235m under the term loan and approximately $10m outstanding under the revolver. The term loan is currently priced at LIBOR + 225 basis points and the revolver is at LIBOR + 300 basis points. Under the new term loan, the price will be in LIBOR + 175. So that's 50 basis points less, and the revolver will remain at LIBOR + 300 basis points. The repricing of the existing term loan and the shifting of approximately $40m from the revolver into the new term loan will result in annualized interest savings of approximately $1.5m.

Now just touching on a few of the other expense or P&L items -- our corporate overhead costs were approximately $2.2m for the quarter. I would expect that number to increase in Q3 and Q4, and we project corporate overhead will be in the upper $9m range for the full year. As to a few other items on the income statement, our interest expense is approximately $13m for the second quarter of 2004. That number includes approximately $2.2m of expense related to our $125m notes that were issued in December of 2003, which was not included, obviously, in the second quarter comparative numbers for 2003.

The income statement also reflects a loss on extinguishment of debt at $6.8m for the first six months of 2004 and included in that $6.8m are nonrecurring items of $5.9m related to call premiums and accelerated amortization on our 16% senior discount notes which we redeemed in January, and the write-off of previously capitalized debt financing costs associated with those notes.

The weighted average shares outstanding for the second quarter of 2004 were $28m [audio break]. This calculated to a net income per share of approximately 4 cents for the quarter and included in that Q2 estimate -- or their Q2 results -- was a $1.8m settlement in connection with our terminated sale of station WTVW.

As to a few items on the balance sheet, our cash on hand at June 30 was $10.4m, and our debt at June 30 consisted of the following -- term loan of $194.m; revolver, $50m; our 12% notes had accreted to $155.9m, and our 7% notes were $125m, giving us debt through the operating level of approximately $524.9m. Additionally, we had the 11 3/8 notes, which had accreted to $85,850,000 at the end of the quarter and a FAS 133 adjustment of $2.9m, giving us a total debt in the company as $613.7m. Leverage at June 30 was 6.6 times versus a covenant of 7 times, and the last 12 months EBITDA as calculated in accordance with our senior credit facilities was $74.7m at June 30, 2004.

Thank you, Bob. As we look toward the completion of third quarter, the quarter we're currently operating in, we'd like to issue the following guidance. Our 2004 third quarter reported net revenue is projected to increase approximately 18% to 20% from the $52.9m reported in the third quarter of 2003. On a pro forma basis, we anticipate our net revenue to increase approximately 14% to 16%, again, this is on a pro forma basis, from the $55.4m reported in the third quarter of 2003. And that will be driven by a mid- to high-teens percent increase total advertising revenue, which includes local, national, and political.

Operating expenses are projected to be down 3% to 3.5% over 2003 third quarter levels, and I want to remind everyone that our pro forma results for the 2003 third quarter are available on the financial report section of our company website www.nexstar.tv. The primary drivers we see in the third quarter continued strength in the automotive category as well as furniture, infomercials. We project the financial category to be up and the smaller drivers -- the smaller-than-top-10 categories will be insurance, DBS, real estate, and weight loss. Those are the categories we expect in addition to, of course, political being a primary driver of our 2004 third quarter performance.

That's our third quarter perspective, and before I move on, it seems to me, in talking to investors and analysts, that most of the investment community have now turned their attention to 2005 and our focus on the absence of political revenue for television broadcasters. We've just begun our very detailed budget process for next year, and we're not prepared to give you guidance. I would like to give you our companies brief perspective on next year. There is no denying the fact that political revenues will make up a mid-teens percent of our ad revenue this year. In our odd years, our political revenue typically makes up, for Nexstar, 3% to 5% of our ad revenue in an odd-numbered year. So for the sake of relatively round-number comparisons, suppose that this year our political revenue is 15% of our revenue -- ad revenue -- and next year our political revenue would be 5% -- and that's not guidance, just ballpark numbers. If we assume, as we do here at Nexstar, that our political revenue is 50% incremental due to inventory displacement and advertisers that stay on the sidelines and choose not to compete for the finite amount of inventory at higher prices -- if that's the case, we'll start out 2005 approximately 5 revenue points in the hole.

So your question would obviously be what are we doing to fill that gap? Well, first we will continue to roll out our successful sales projects and promotions across our recently acquired stations and new markets. These are the info-lines, viewers' clubs, news and sports ticker sponsorships that are up and running right now in about half of our markets, and we play to aggressively roll these projects out that have been successful for us in additional markets in 2005. It will allow us to capture and create more incremental dollars and gain market share.

The second driver in '05 -- we do see continued growth projected out in our core categories of business, and we don't expect that to stop just by virtue of the fact that we're turning the calendar page from '04 to '05. The third driver -- approximately 60% of our portfolio stations we characterize as immature television stations or recent acquisitions not yet maximizing their top-line performance. These are the stations where we have recently added newscasts, are in the process of adding local salespeople, improving the ratings, and we project this group of stations will grow at a rate faster than the market growth, if we're doing our job right.

Our fourth driver in 2005 will be increased DBS revenues as more of our markets add local into local service, and as our existing markets continue to grow at a substantial double-digit rate in terms of penetration. For example, our DBS revenue in the first quarter of this year was 135,000. For the second quarter, it had increased to 288,000 -- that is subscriber revenue from the DBS service providers for providing local into local service using our signal. We had six markets on the air or launched in Q1, an additional six markets are launching or have launched in Q2, and another half a dozen markets we project or have been committed by the DBS providers for launch before the end of the year. So if that, for us, in 2005 is $1m of incremental revenue, that's 3 cents to 4 cents a share in free cash flow. So those are the things that will positively impact our top line in 2005.

On operating expenses, we will continue to be diligent, as I think we've demonstrated through the first two quarters of this year, and the cost takeouts of our 2004 acquisitions -- those cost takeouts will fully wind their way through the full year of 2005, mitigating operating expense growth next year. And in addition to Bob's repricing on the senior term loan and the full-year impact of that is approximately a nickel a share to free cash flow, we do have the opportunity to call our 12% notes on April 1 of '05. If we were to refinance those at 8% as opposed to the 12%, full-year impact is approximately 20 cents to 22 cents a share of annualized free cash flow increases. Taken together, we feel that these initiatives will give an entirely different perspective to 2005 and what may appear on the surface to folks following the company right now.

Before we open for questions, let me address one other topic that I'm sure is on a lot of minds, and that is the FCC's notice of proposed rulemaking on television station JSA and its impact on our company. The FCC's recent notice of proposed rulemaking, we feel, is the start of a process, and with changes in the commissioner ranks at the FCC, we think regardless of the outcome of the election, we think this process will take a substantial amount of time to play out -- perhaps year. And it's hard to predict the likely outcome from a regulatory body whose very composition may change, meaningfully before the issue is resolved. Our company's perspective is we think this new notice of propose rulemaking is inextricably intertwined with the FCC's current ownership proceeding as well as tied to the proceeding on broadcast localism. As you may know, we have a petition for reconsideration on file at the FCC in the ownership proceeding -- one of many -- and we feel that those petitions and the ownership proceeding and those issues will have to be dealt with before the FCC is going to address the issue of JSA.

Furthermore, we believe that there are substantive differences between TV and radio JSAs, and that in our market there is substantial public benefit created through our JSA and local service agreements, and we will point that out in comments that we will plan to file as part of this proceeding.

If you look out into the future and try and assess the range of potential outcomes in this whole ownership, localism, and JSA proceeding, I'll try to quantify that for you. We think, obviously, the best case is in the ownership proceeding that the ownership proceeding renders this JSA notice of proposal rulemaking moot, and that we and others prevail in our petitions for reconsideration, particularly in the area of the top four exclusion and if we prevail in that, we would then be able to literally buy in our market partner stations. As you know, that can currently be done in the larger markets. This would add about a $1.5m to our EBITDA. So that's probably the best-case scenario.

We see the worst-case scenario being that we would have to peel off the JSA layer from our existing local service agreement structures and separate the existing sales staffs. This would most likely result in increased operating expense for Mission. Our existing local service agreement structures with Sinclair and with Mission Broadcasting do contain multiple aspects and agreements of which the JSA is only one part of those agreements. As you probably know, the bulk of the economics of our virtual duopoly strategy are captured through our SSA agreements. So in between the best and worst-case scenario are a range of outcomes as well on options -- potentially grandfathering, potentially extended sunset rules, potentially case-by-case justification -- just to name a few.

Finally, as it relates to grandfathering, it is our company's opinion that the review of the pre-November 1996 grandfathered LMAs will most certainly be folded into the 2006 quadrennial review and not sooner. We expect that the requirement than, as it is now, will be to show cause and public interest as to why these grandfathered arrangements should be allowed to continue. We are prepared and we will be prepared to make that showing. While our grandfathered LMAs and Billings and in Erie are a very small part of our business, we think that there is minimal risk that these will not be allowed to continue based on the public benefit that we serve by having them.

With those comments, Bob and I -- and Shirley Green has joined us -- the three of us would be happy to entertain any questions that you may have. Moderator?

[operator instructions]

Our first question comes from Victor Miller with Bear Stearns. Please state your question.

Good morning. Thank you for taking the question. Just talk about your revenue guidance a little bit on a pro forma basis of 14% to 16%. Obviously, about 46% of your revenue comes from NBC affiliates. We had projected about $28m in net political for the year that included a $2m estimate, by the way, for second quarter, which you almost more than doubled. But if we just take the 28 as keeping it as that being the number, that would suggest another $20m to go for the rest of the year, that's still almost 20% of what you posted in the second half of 2003. So between the Olympics and the political and what you talked about as what's incremental and what's not -- what does this suggest about the core business growth for your company to give a 14% to 16% number for the quarter? Secondly, on the costs, I noticed on a pro forma basis, the SG&A expenses were down about 10%, direct expenses down about one-half of 1%. Could you talk about why we see such a difference in those cost trends? Thanks.

Sure, Victor, thanks for your question. I'll speak to the guidance issue on the revenue, and I'll let Bob answer your expense question. I think it would be fair to characterize our third quarter guidance as conservative to very conservative at this point in time. You know, we think that your political projections for the balance of the year are on the money, and we also project continued core growth or growth in our core categories. But from my perspective, with our stock and our sector trading where it is, we see -- what possible advantage is there to be gained by putting out aggressive guidance at this point in time? So I think that you can characterize the guidance that we put out as conservative at this point in time. Obviously, July is in the books, and we showed a single-digit -- a high single-digit increase in ad revenue for 2004, and we're projecting same for the balance of the quarter.

Obviously, as you know, political revenue, you know, we're literally booking that by the week, so we can ascertain, and we can project run rates on that. But visibility is literally on a week or two-week out basis, but it has continued to be strong. Our strategy of holding back Olympic revenue -- or -- Olympic inventory in our battleground states, particularly in Pennsylvania, Missouri, Arkansas, Louisiana, is paying off, particularly in Pennsylvania. I know that we have booked substantial political revenue in the Olympics in the last two days. As you know, the Olympics start this next week.

So -- all of which is to say I think our guidance is conservative, and I'll let Bob answer the question on the operating expense.

Perry, before we move on, you said July was high-single-digits -- is that the total business or just the core business? Because you said it was tracking the same way, but your guidance is mid-teens.

Right, well, obviously, you know, August will be the most substantial month of the quarter in terms of performance powered by our 14 NBC affiliates, but July finished with a high single digit and total ad revenue including political, obviously, the Republicans don't advertise during the Democratic Convention, and the Democrats are not anticipated to advertise during the Republican Convention. So we didn't operate necessarily with a full month. But, you know, I can tell you that our August pace and our quarter pace -- revenue pacings at this point are substantially ahead of the July finish.

Okay, thanks. Bob?

Victor, in terms of the cost reductions, when you reflect back on the quarter on cost reductions that we implemented starting last year in the fourth quarter, the very early on and quick cost reductions we did took place on the direct side, and mainly with the termination of unfavorable contracts. The headcount reductions and some of the other things that in the G&A took place, you know, during the fourth quarter or more toward the back end of that fourth quarter as we completed those. One other contributing factor is with respect to WTVW, with the cost takeout that we initiated during the course of Q1 of 2004, most of those cost takeouts were on the G&A side as well. So we're on track with all of our cost takeouts. It's the timing of when those occur -- the direct costs came out faster than the SG&A, which is the difference you see on a line-item basis on the P&L.

Bob, are the declines starting to moderate? Because we had a 5% decline in the second quarter, we're seeing 3% in the third quarter -- give us a sense of how that's going to play out.

Well, some of that, I think we'll see continued trends in that 3% to 3.5% the rest of the year. Obviously, now we also have the new stations -- KLST and KTLM and WTR, where we have cost takeouts that aren't inconsequential, and those cost takeouts are occurring as we speak now and will continue through the rest of the year as well.

Thank you.

Thank you, Victor.

Thank you, our next question comes from Sean Butson with Legg Mason. Please state your question.

Thanks, good morning, guys.

Good morning, Sean.

I suppose, first off, I think there is some confusion out there among investors regarding the second quarter results. In terms of comparing apples and oranges, just to be clear, the 8% to 9% pro forma growth -- revenue growth guidance given three months ago -- that is apples and oranges with the 6.6 reported because of the closing of certain items during the quarter, is that right?

That is correct, Sean. The original guidance, the 8% to 9% does not include KLST, San Angelo, or WUTR, Utica, in the guidance. And on a pro forma basis, those numbers are in there. Obviously, we didn't operate those stations for the entire period of the quarter, so when you compare their actual results that actually brought down our pro forma actuals from the guidance. But the 8% to 9% guidance did not include those most recent acquisitions.

Gotcha, so there's two different pro forma growth numbers out there, okay. And then the second thing -- on the -- in terms of your guidance for the third quarter, I don't think you've included guidance for barter expenses or corporate. What do you think -- I know you talked about corporate for the year will be 9. So that basically means it's going to be up a little in the third and fourth quarter. What about the trade and barter expense?

Right now I'm estimating trade and barter will probably be somewhere in the $4.6m to $4.7m range in Q3.

Actually, I think the corporate overhead number, that 9 is a little low. I think our guidance has been in the mid-to-high 9s, so I would anticipate corporate overhead expenses in the back half of the year, obviously, to get to that number, will be able the first half actual results.

Great, and then lastly -- what is your flexibility in your ability to restructure your JSAs and LSAs based on any sort of FCC move? I know you said you think it's going to be a while, but if they come out, and it is a worst-case scenario, do you have the ability to restructure those agreements with the counter parties?

We certainly do with Mission, and we would anticipate that our one agreement in Peoria with Sinclair -- you know, basically, you know, it all starts with the shared services agreement, and then the JSA is yet another layer on that, which changes the flow of the money. But we certainly would have the ability. I would point out that if a worst-case scenario was that they were not allowed, they had to meet a deficit, you know, as has happened in radio, that was a two-year sunset-type provision. But, again, as I mentioned, the bulk of the economics in our virtual duopoly arrangements are captured by Nexstar through the shared services agreement.

Great, thanks a lot.

Thank you, Sean.

Thank you, our next question comes from Tim Wallace with UBS. Please state your question.

Thanks a lot. I had some questions on the third quarter. What are you expecting to book in terms of political revenue? And then on the Olympics, there has been mixed information on how the Olympics have been doing. So maybe you could tell us how -- you know, what percentage of your Olympics inventory is sold and where you are relative to your budget. And then, I guess, just the core business -- where is that pacing in the third quarter? I'm not sure if you actually gave that or not -- but local and national -- where are they tracking in terms of growth rates for the third quarter? Thanks.

Thanks, Tim. We haven't been specific on that guidance. Let me track it through here. We would project our non-political, core revenue, you know, with a mid-single-digit, you know, and that would obviously have to have a range as the mid -- but a mid-single-digit growth over the prior year. Olympic revenue, for us -- we're about 90% sold overall, and, again, that was a conscious decision to hold back on the amount of inventory that we saved for potential political advertisers and, by the way, Bush is buying Olympics on NBC affiliates in battleground states. As of this point, we have bookings. So we feel that we will deliver our goal, which, I believe we said would be a mid-seven-digit number of total ad revenue, of which we would expect probably half to less than half of that to be incremental because of displacement of news, of regular programming, of syndicated programming during the 17 days in August.

Political revenue, you know, I will tell you that, you know, we have done a workup in here that would take that number anywhere from a high eight-digit number to a not-so-low 9-digit number. But that's a range of probably $4m, and I have a bias as to where I think we'll end up in that range but, again, I don't know that there's any percentage in us quantifying that, given that it literally books on a couple-of-week basis. But as political, I mean, and, you know, as expected, we're seeing substantial political advertising in the states of Pennsylvania, Missouri -- those are kind of the eyes of the hurricane for us at this point. New York, we have had little activity to date despite a September statewide primary. We did have second quarter activity from issue-related advertising. Maryland and West Virginia are contributing to our Hagerstown station. Indiana, we're seeing activity in Evansville and Terre Haute. Weekly schedules from the candidates for governor. We have a contested congressional race that encompasses both of those markets that we expect heavy spending from as we move forward. Illinois -- obviously, the wildcard we did not anticipate there was the lack of the Republicans' ability to field a contender to Barack Obama, the senate race Democrat who appears to be running virtually unopposed at this point.

But, on the other side of that, Springfield, Missouri, is kind of the epicenter of political activity right now, spending on all statewide primary races as well as Bush and Kerry. The icing on the cake there has been a casino ballot issue that has resulted in better-than-forecasted revenue in the state of Missouri. Arkansas and Louisiana -- well, Louisiana specifically decided September primary. We haven't had any bookings to date, but we certainly anticipate those. Texas, we have congressional activity in Lubbock and Abilene, just simply due to redistricting issues. And in Arkansas, we have activity in both Little Rock and Fayetteville from both the Democrats, but more predominantly from the Republicans at this point.

So I hope that is responsive to your question. As it relates to core revenue, again, you know, we see a mid-single-digit growth underneath the political, which obviously third quarter will be substantial. If 2004 is anywhere true to form, we'll book 80% of our political revenue between July 1 and the election in November. So you can extrapolate from our first quarter results what a traditional year would look like. I don't know that I would necessarily consider this traditional, but I do think that, you know, again, our bias is to substantial, continued political activity through the election in November.

Hey, Perry, I just wanted to get clear, because when you gave those digits for political, you know, is it sort of like your range for political for the third quarter is somewhere between high single digits, meaning like $8m or $9m, to low double digits, meaning like $12m or $13m?

That's a pretty good range to put brackets around.

Okay, good, because I thought you had said nine digits. But, anyway, and then the other question I would have related to that is -- does that seem like it's coming in a little less than you were thinking? Does political seem lighter than we all had hoped a while ago?

No, you know, in the second quarter, you know, versus -- for the first half versus our internal forecast, we were approximately 10% ahead of what we had forecasted. In July we came in ahead of our internal forecast and obviously our internal numbers are ahead of the guidance we offer to all of you, but we are currently forecasting, you know, substantial political revenue in August and September, but it's just added to forecast. As you know, the orders literally show up on Thursday and Friday for the next week. But, no, I would not say that it's coming less than expected. You know, if anything, it's to the upside of our internal budget.

Okay, thanks a lot.

Thank you, Tim.

Thank you, our next question comes from David Bank with RBC Capital Markets. Please state your question.

Thank you, good morning.

Good morning, David.

Two questions -- the first is a follow-up on an earlier question about that 6.5% pro form, kind of, apples to oranges. Can you give us, then, the apples-to-apples comparison so if you were guiding up 8 to 9 on an -- excluding KLST and WUTR, where did you actually come in? And the second question would be, I think previously you guys have said you were targeting total pro forma expense reduction for the year of between 5% and 6%. Are you still kind of there?

I'll answer the revenue question and, again, let Bob talk to you about expenses, David. If you exclude WUTR and KLST from our Q2 pro forma 2004 results, our revenue performance would have been in the mid 7s, versus the 8 to 9 guidance. You know, we projected about a half a point higher national spending than we actually harvested in the second quarter, and that's a difference-maker. But with UTR and KLST out, it would have been, you know, mid-7s against 8 to 9 kind of a guidance. Bob, do you want to talk about expenses?

I think we're still tracking along those lines to hit about a 5% reduction in our total expenses on a pro forma basis for the full year.

Yes, I would characterize our operating expense guidance for the third quarter to be conservative, just like I would characterize our revenue guidance to be conservative.

Okay, thank you.

Thank you, David.

Thank you, our next question comes from Paul Sweeney with CSFB. Please state your question.

Thanks very much, good morning.

Good morning, Paul.

Just a couple of questions -- first, on your new local direct business, about $5m in the quarter, you mentioned -- could you just give us a sense of how that business perhaps has ramped up over the last couple of quarters and perhaps how you think it will play out over the next several quarters? Is there any seasonality to it and how should we think about modeling that? And then, second, just given your cautious outlook for the regulatory environment and the uncertainty surrounding that, could you give us your sense of how you think the M&A environment will be in your size market over the next year or so? Do you think you'll have any opportunities to either buy, sell, or swap? Thanks.

Sure, thanks, Paul. Our new direct business was approximately $3m for the second quarter from our current portfolio of 45 operating television stations. Obviously, the newest acquisitions contributed minimal new business activity because we just got our arms around them and our hands on them within the mid-stages of the quarter. You know, it is an area of focus. Duane Lammers, our chief revenue officer and COO was in Evansville, Indiana, today and working on launching the viewers' club in yet another market. There's no seasonality to it, Paul, because our focus is on creating new revenue partnerships and new revenue opportunities that haven't been seen in marketplaces before. So, you know, $3m or the $2,965,000 that we actually delivered in the quarter is an all-time high for the company, and it is the singular focus of our local sales staffs and our local management teams is to continue to build -- use that as a building block not only for 2005 but just to maintain a viable, vibrant, growing business model in our individual markets. It's one of the first things and, many times, one of the only things we talk about on our weekly conference call -- monthly calls with our general managers, our staff meetings, and our internal focus.

So it is a category that if it were a business category for us, would have been our fifth largest -- I'm sorry -- our fourth largest category behind automotive, fast food, and the infomercial category in terms of a source of revenue, and we see it continuing to maintain that type of prominence for us, because it's the focus of the company. It's radio selling with pictures. It's advertising solutions for local marketers, kind of, you know, putting people through the door -- not selling ratings but selling results.

As we speak to M&A activity, you know, we are continually looking to maximize the value of our portfolio, both adding in stations to create additional virtual duopoly markets and also to monetize stations that may not be strategic to our core focus, and all I can say about that is we have continued conversations in either and both directions around a number of markets and a number of properties, and as things come closer to bearing fruit, obviously, we can be a little bit more disclosive but, you know, we know of a number of private equity backed companies that are on the market right now and supposedly attracting substantial activity from both private and public bidders.

So it doesn't appear that -- I think people are going on about doing their business, again, with regulatory uncertainty all you can do and all we can do is continue to stick to our business plan, you know, attempt to make accretive acquisitions, and, if possible, substantially accretive dispositions of stations, execute on our promises of revenue, cash flow, and EBITDA for this year, use our free cash flow to de-lever and that's what we're totally focused on doing. So I've not seen yet -- and maybe it's too soon -- but I don't necessarily expect to see a change in M&A activity in that there is not a lot of supply. There seems to be a lot of demand when there is supply. So we continue to look for things off the beaten path, but we may also look to monetize stations that aren't strategic to our core focus, going forward, and now may be a pretty good time to do that. So I hope that's responsive to your question.

Yes, it is, thanks very much.

Thank you, Paul.

Thank you, our next question comes from Jonathan Jacoby with Banc of America Securities. Please state your question.

Good morning, three questions here. The first is, in terms of guidance for the third quarter, what would be the pro forma guidance, excluding those two stations, because I think that is causing some confusion. The second question -- if you can tell us how the special projects did, sort of, percentage growth in 2Q, what you're looking at for the back of this year so we can maybe break in some absolute numbers as well. That would help us. And then, lastly, on the MPRM issue -- what do you think the worst-case scenario could possibly be? It looks like they're also asking for some comments on SSAs in the rulemaking process. Do you think this has anything to do with the court -- the FCC petition in Duluth that's going on from Harvard Broadcasting?

I'll try and answer those in reverse order here. As it relates to Duluth and other complaints that have been filed. I read one last night -- in another market, I believe it was Rochester, Minnesota -- I don't know that -- I don't think the FCC would be reacting to two petitions. I think this is something that has been on their radar screen. I think the timing is curious and kind of putting the cart before the horse in that you've got an ownership proceeding that is at issue that could render this whole proceeding moot or substantially moot or not moot at all, but it just seems to me that now would not be the time to focus on this. But, in any event, a worst-case scenario, I think, is -- the FCC really doesn't have a standing in SSAs because and SSA is basically, you know, a sharing of facilities and of equipment and perhaps people. And if JSAs, the sales process is at issue, and that is separated, and programming is at issue, because that's currently an attributable factor at 15% of the seven stations that broadcast weak or above, and we do not program any stations of Mission or Sinclair or any operating partner with the exception of our grandfathered LMAs where we are permitted by the statute to do so. You know, there would be no area for the FCC to really look into -- that they would currently have standing, and, you know, have case precedent of agreeing with them. You know, we've got quotes going back to 1998 from FCC people saying that, you know, "We don't mind if stations share buildings or share facilities or resources." And that's basically what an SSA is. I guess I could concoct a worst-case scenario of, you know, all -- I don't even know what it would be, but I don't know that it falls into the realm of anything that would be even hypothetically possible.

So I hope that is an answer to your question. I mean, if we had to remove the JSA layer from our relationships with Mission, there are separate sales staffs already with separate sales management. Mission would most likely -- you know, when they lose our discount on our traffic system in our JSA markets where the second station is 50% of the cost of the first station, Mission would most likely have to add some senior sales management and administrative folks to handle revenue recognition of their television stations and, you know, the dynamic may be that that costs as much as we would say that we would buy them in.

So I don't want to be Pollyanna about it, but that's probably what I would think of as the worst-case scenario, and that assumes that the process is dealt with in the next year or so and that there's a sunset. So, you know, a sunset provision as there was in radio -- all of which I'm not sure is a probable outcome, given the uncertain makeup of the body that will be making these decisions on a going-forward basis. But so if that were the case, I think a worst-case may affect us in 2007. So it's not a -- obviously, we will be aggressive in filing comments as we have been in the ownership proceeding, pointing out the public interest benefits of what we do, and it seems to me that if Comcast is thinking about buying Disney or Viacom is thinking about buying another network, for the FCC to focus on what's going on in Duluth and Rochester, Minnesota, seems to be a mis-allocation of resources, but it's not our position to say or to judge.

I'll let Bob talk a little bit about the first part of your question, which dealt with operating expenses and -- or guidance excluding our most recent acquisitions.

Jonathan, with respect to the acquisitions of UTR and KLST, our guidance would not change in any significant manner. It would just be a different base that you're starting from. The revenues that they achieved in 2003 in Q3 are not terribly different than what we are projecting for 2004 Q3, given that we're just getting our hands around it as well.

Okay, and then on the NTR issue -- the special projects that you guys do?

Jonathan, you'll have to refresh me as to what your question is there, please?

Sure, just if you can give us some color on the percentage growth and perhaps absolute dollars in the second quarter and your expectations for the third quarter in terms of your special project sales.

Okay, special projects, you know, viewers' club, of the new initiatives, both feed into our revenue picture for new business development, because a number of these advertisers are new, but they also feed into our project revenue. I'm looking for that number, Jonathan, and I don't have it right in front of me. It seems to me, from memory, that our project revenue in the quarter was approximately $7m, and that would be up about -- revenue ties special projects or promotions was up $7m, but if that is an incorrect number, I will be sure to let you know and let everyone else know.

I'll follow up on the phone. Okay, thank you.

All right.

Thank you, our next question comes from Bill Meyers with Lehman Brothers. Please state your question.

Hi, thanks. Perry, a quick question. I guess in your introductory comments, you outlined solid revenues for 2005 to try and offset some of the political and Olympic spending in 2004. On the flip side to the revenues, any updates in terms of your plans for leverage, thoughts in terms of monetizing non-core assets or non-strategic assets, and really where you want your target leverage to be by the end of '05?

Sure, Bill. As I mentioned, I don't really want to comment on M&A activity in either direction to create an Evansville-like situation again, but, you know, we are having conversations on -- as I said, in both directions to acquire additional stations as well as to monetize stations that are not strategic to our core focus. As I told our managers on our internal conference call last Monday, we've never sold anything, but, you know, this could be a year where a non-strategic asset is shed to continue to pay down debt and reduce our leverage as well as great capacity for a strategic deal in the future.

So I think in terms of our target leverage, you know, we're looking at a number at the end of the year based on where we stand right now of five times or perhaps even a little less, Bob?

Yes. And as we look toward '05, I wouldn't expect that to increase by more than a turn at an operating company level, Bill.

And that would not contemplate any acquisitions or any additional or station divestitures. That's just steady state from where we are today. We would obviously hope to outperform those numbers on a leverage metric by executing on some of the opportunities that we're being very vague about right now.

And in terms of just guidance for next year, I know you were talking about getting the revenue initiatives -- any thoughts in terms of opex for next year? Would you be able to hold that down or do you think those new initiatives will accelerate the growth in the opex as well?

We think that we have conditioned our stations to expect minimal pool increases in the odd-numbered years. We are at the front-end of our budget process and, as you know, everything we do on the expense side is zero based. It's early for us to give operating expense guidance for next year, but if you look at our history since we've at least had public debt out there in '01 and '03, you saw, on a same-station or a pro-forma basis, virtually no operating expense growth in those odd years. And, you know, that would be our goal. There are mitigating factors of insurance and health costs, things like that, that we have yet to factor in because we don't have our bids yet for next year, but it will be our goal to obviously on top of the cost takeouts from our '04 acquisitions that will help to mitigate expense growth through attrition, through technology, continue to drive operating expenses as low as possible; to continue to drive margins and help to mitigate the odd-even year effect that's become a part of our business. So we'll be very aggressive in that regard. All I can tell you, Bill, and it's too early in our process. We don't have enough data points on the drivers of our operating expenses for next year to be able to offer any intelligent guidance at this point in time.

Great, thanks very much.

Thank you, Bill.

Thank you, our next question comes from [John Cornraich] with [Sayloron Capital]. Please state your question.

A couple of small questions and then a suggestion. I may have missed the capex this year's, what, $9m or $10m?

Yes, John, it will be probably right at $10m, maybe $100,000 or so under.

All right. And the numbers I seem to be pointing to -- and I'd like to get your reaction -- I know you're not going to give guidance on this, but just the reaction -- I see free cash flow of at least $40m this year.

We feel comfortable with that number.

And fully diluted shares right now?

28.4 million.

Okay. As you can see from the questions that you're getting today and from the reaction of the stock today, you have to start issuing same-station numbers and guidance. You don't want these kinds of -- you don't want a third of your conference call consumed by people asking, "Is that station included? Is this station included? What's the difference between that pro forma and this pro forma?" Same-station numbers -- that simplifies everything, and it's the most meaningful number, and you should be prepared to do that every quarter on the conference call and, in fact, if you can do it on the conference call, then you should be doing it in the press release. That's my suggestion. Otherwise, you're going to get more days like this with your stock down 6%.

Okay, John, I appreciate your input. I would, again, remind everybody that the pro forma 2003 numbers on which the guidance is based, can be found on our website. Obviously, when we add stations or if we ever subtract stations, you know, those numbers would be updated, as they are currently, for whatever state and portfolio is in at this point in time, but I appreciate your comments. Thanks.

The last question -- refresh my memory, 28.5 million shares and [AFRI] owns what?

Well, the actual outstanding are 28,367,000, I believe, and, Bob, I don't know if you have an exact share count for [AFRI], but it's approximately 55%, 56% of that.

Okay, thank you.

Thank you, John.

Thank you, our next question comes from [Barry Kaplan] with [Maple Tree Capital]. Please state your question.

Hi, just a quick question so that I can better understand the process as you look at various transactions that you're contemplating now either as a buyer or a seller. How does this ongoing MPRM affect your ability to execute those types of transactions? Is the FCC less likely to prove transactions that would be effectively a JSA embedded in that, whether you're a buyer or a seller or just how are you thinking about that in this interim period, which, as you suggest, could be quite a long period of time.

Sure, Barry. Notice of proposed rule-making -- our philosophy is that is the start of a process. It is not a thought or a rule and, given the substantial uncertainty about how that plays out, who drives that process at the FCC and what their particular view is, we have not changed our thought and philosophy about how we'll growth the business. So not that we will Pollyanna about it, but we don't see it having any material effect on the here and now in terms of our thoughts about our portfolio. Our focus is on where opportunities would lie. Again, obviously, we aren't aware of the FCC, even in the radio process, you know, when transactions were granted, when new rule-makings were being considered during city regulation period and during the whole JSA process, you know, they were granted, subject to the outcome of a particular proceeding. That didn't happen a lot, but it did happen some back in the '90s, and, you know, the FCC has a history of not going back to unbreak the egg in that they have historically grandfathered arrangements when they'd outlawed new ones, or given a substantial sunset period to unwind a relationship that, for whatever reason, they've changed their perspective on.

So we wouldn't anticipate that they would act any different, but what we expect to be a substantially new cast of characters, I really can't speak to that with a degree of authority.

Okay, thanks.

Thanks, Barry.

Thank you, our next question comes from [Paul Carpenter] with [Semaphore Management]. Please state your question.

Good morning. I have a couple of questions to follow up on the balance sheet and some related issues. The first is that when you give your guidance for debt reduction and your ending leverage, it's unclear to me what the actual debt numbers are, because there's a numerator and a denominator. So where it settles depends on a couple of different things. So could you give an estimate for where you think the debt level would be after the next two quarters where you should have some discretionary cash flow and can pay it down?

We expect to generate probably an additional, between Q3 and Q4, probably about close to $30m of free cash flow, and we'll use that to pay down any outstandings at that time available under the revolver.

But you just roll, most, if not all, of the revolver into that new term loan?

Any extra cash that we have or incremental cash left over at year-end, we have another refinancing opportunity, remember, coming up in April of 2005 that we will then apply towards reduction of refinancing the $160m, 12% notes.

Okay, well, that leads to my next question, which is it seems like, to me, that the debt markets and equity markets are valuating your company, really, in different ways. The debt markets, or at least your agent bank, thinks you're doing a good job, they like the increasing interest coverage, they're willing to give you a 50-basis-point reduction on your loan. So if the equity markets really don't care for what you've been able to deliver, and the debt markets do, why not tender for those bonds early? It's not going to be an excessive premium because it's only less than a year away now. Interest rates could go up. You might not get 8%. You could pay higher if you waited until next April, and that way you'll have something to do with this excess cash you're going to be generating between now and November that otherwise would just sit on the balance sheet for six months.

Paul, I could tell you that, first of all, we have two acquisitions on the Nexstar side that have yet to close that would require approximately $19m of cash and, obviously, that's a consideration as we look at free cash flow, to close on those acquisitions. We look at the tender versus call analysis on a regular basis. There are still huge prepayment premiums that were eight months, you know, it's north of $10m of incremental costs. You know, so the [NPV] is still negative, and I don't disagree with you that it may be positively received in the stock price and by the equity market, but I think we have to be good fiduciaries of the company's cash. Those are hard dollars, and we're also in this for the long time, you know, we don't expect to -- nobody's selling. If anything, at these prices, I would think that people would be buying and that we're still going to be here next April and would expect that, absent a cataclysmic rise in interest rate which, quite honestly, our opinion is that we don't forecast that, that, you know, that the opportunities will still be there and will be accretive to us at that point in time as opposed to a negative [NPV] as of right now. But I can tell you, Paul, that we look at it literally every two weeks to make sure that we're still thinking about it the right way.

Okay, well, just to follow up, then, in terms of what you described as leverage reduction, you see that basically as the cash flow growing and the debt also growing, but growing proportionately less, because you're going to be increasing to your debt balance from making payments for these pending acquisitions perhaps reduced by the free cash flow. So it's not so much that that is actually being paid down is that the cash flow of the company is going to be going up?

Well, I think there's that. I also think that I don't know that we'll necessarily have to increase debt to close on these acquisitions. We may well be able to pay out of cash on hand. I mean, we plan to make a substantial seven-figure debt paydown here when our next LIBOR contract expires, which is before the end of this week. So that all happens in the middle of the quarter and, at the end of the quarter, obviously, the results will be announced. But we're making debt reduction from the end of Q2 numbers that we talked about as we speak. So I think there are a number of factors there, and then, again, that wouldn't contemplate any potential proceeds from asset dispositions, which -- you know, that may or may not happen, and it may or may not happen in close in 2004, but, you know, I think we start with, okay, steady state, we do nothing. We have obligations, we have free cash, we can pay down debt. In addition to that, and the cash flow increases, and then, you know, with any additional free cash that we generate, the bulk of that is going to come in October or November the way the political revenue will fall and the fact that our capex for the year will be ostensibly done by then. So you're literally talking about, you know, we get credit for cash in our compliance certificates with, you know, up to about $15m of cash on hand. Anything over that, you are right to assume maybe that's dead money, you know, from a perspective of not being able to count it against your leverage, but it obviously will be used to reduce leverage at some point in time.

Okay, and not to beat a dead horse -- I just was wondering if you could walk me through what happened in terms of net debt between March 31st and June 30th, because cash was down and debt was up. What drove that? It was about a $16m swing.

We paid $7m on acquisitions, there was a final payment on WBAK, also a payment on WUTR, and a down payment on KLST. Additionally, we had interest payments during the quarter, you know, cash interest payments of about $11.6m, and there was a payment to the former CEO of [Quorum] Broadcasting of approximately $7m that was a return of capital for the former CEO.

Part of it was returned capital.

Okay, so that's what I was missing. All right, thank you.

Thank you. Our last question again comes from David Bank of RBC Capital Markets. Please state your question.

Yes, I'm sorry -- I know John is going to love this question, but just to follow up -- I'm not quite sure why it seems that on the sort of apples-to-oranges comparison the difference between the 2Q 6.5% and the 3Q 14% to 16% guidance -- you know, there's a difference. Like, you said it was sort of meaningful in 2Q but it's not really meaningful in 3Q, and I just don't quite understand that.

Well, you know, 3Q revenues -- first of all, you know, from those acquisitions they make up less than 1% of our revenues, and they're going to be flat to up a little bit. But, you know, Q3 revenues should be up, you know, north of $10m above the Q2 finish. So it's a numerator/denominator issue. They are a much smaller piece of the pie in Q3. And, again, we gave you a range, you know. If we'd said 7 to 9 on expenses, or on revenues from Q2, if it was 8 to 9, we wouldn't be having this conversation. So we gave a 14 to 16% range for Q3.

Okay, got it.

Thank you, David.

Thank you. If there are no further questions, I will turn the conference back to Mr. Sook.

Thank you, Moderator, and thank you all for joining us today. A reminder, there will be a replay available of the call, and thank you for your interest in our company and your time this morning.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 366385. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.