Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

LIN TV Corporation, (TVL)

Q3 2008 Earnings Call

October 30, 2008 9:30 a.m. ET

Executives

Vincent L. Sadusky – President and Chief Executive Officer

Scott M. Blumenthal – Executive Vice President Television

Richard Schmaeling - Chief Financial Officer, Senior Vice President

Analysts

Marci Ryvicker – Wachovia Securities

Aaron Watts – Deutsche Bank

Avi Steiner – JP Morgan

Barry Lucas – Gabelli & Co.

Bishop Cheen – Wachovia Securities

Edward Atorino – The Benchmark Company

Michael McCaffrey – Shankman Capital

[Melissa Velvick] – Credit Suisse

Michael Meltz – JP Morgan

Kit Spring – Stifel Nicolaus & Company, Inc.

[Linda Carne] – Credit Suisse

Scott Duba – Lehman Brothers

Operator

Good morning, ladies and gentlemen. And welcome to Lin TV Corp's earnings call for the third quarter that ended September 30, 2008. Today's call is being recorded. Before we introduce today's speakers I will read a brief legal statement from the Company. This conference call may include statements that constitute forward-looking statements, particularly in the area described as business outlook, but also including any other statements of future business prospects or financial results including but not limited to the use of words like: believe, expect, estimate, project or other similar expressions.

Forward-looking statements inherently involve risks and uncertainties, including among other factors: general economic conditions, demand for advertising, competition for audience and programming, government regulations and new technologies that could cause our actual results to differ materially from the forward-looking statements.

Factors that could contribute to such differences include the risks detailed in the company's annual report on 10K and other filings made with the securities and exchange commission, which are available on the Company's website, www.lintv.com in the Investor Relations section or at www.sec.gov which discussions are incorporated in this release by reference. Lin TV undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise unless otherwise required to by applicable law.

At this time I will turn the call over to Lin TV's president and Chief Executive Officer, Mr. Vince Sadusky. Please go ahead, sir.

Vincent L. Sadusky

Thank you. Good morning and welcome to Lin TV's third quarter 2008 conference call. I'll start with an overview of our third quarter results and share with you some digital and interactive highlights. In addition I will discuss our recent efforts to strategically evolve Lin into a new media company. Scott Blumenthal, our Executive Vice President of Television, will update you on station ratings and operations, and finally, Richard Schmaeling, our Senior Vice President and Chief Financial Officer will provide third quarter financial information and close with our current 2008 business outlook.

I am pleased to introduce you to Rich, who joins us from Dow Jones, where he played an instrumental role in the transformation of Dow Jones into a more diversified multimedia company. After our quarterly financial update, we'll be happy to take your questions.

The third quarter overview, the strength of our local and new media business model helped Lin deliver strong results during the third quarter of 2008. despite economic factors affecting nearly all sectors of the market, we were pleased to grow net revenues by 5% in the third quarter of 2008, and grow operating income by 39% from Q3 last year.

Strong political advertising sales in several of our markets, including Albuquerque, Norfolk, Buffalo and Green Bay helped fuel net revenue growth. During the third quarter of 2008 politician revenues were 11.4 million compared to 1.3 million for the prior year period. As Scott will provide specific examples of how our market-leading stations maximized political revenues.

Our digital revenues, which include Internet advertising revenues and retransmission consent fees, continued to grow, increasing 88% to 8.1 million, compared to 4.3 million in the same period last year. Internet advertising and other interactive revenues increased 81% for the third quarter of 2008, compared to the same quarter last year.

I want to take a moment to share some great personnel news with you. Rob Richter has been promoted to Senior Vice President, New Media. Under the innovative leadership of Rob, we have a robust plan to build our new media business. We are fostering relationships with new media technology companies that are on the cutting edge of new product developments, and we are carefully evaluating every new business opportunity that complements Lin's core assets.

We believe our new media business will continue to fuel growth and opportunity for Lin. The Lin Interactive brand continues to be a driving force for our company's success. Total page views for the company's websites were 135 million in the third quarter of 2008, compared to 99 million in the third quarter of 2007, representing a 35% increase. Unique visitors for the company's websites were 16 million in the third quarter of 2008, compared to 12 million in the third quarter of 2007, representing a 38% increase.

We attribute this terrific growth to our talented interactive team and their ability to populate our websites with local relevant content across multiple platforms 24/7. During this contentious election year and especially in swing states like New Mexico, our politics.tv websites have been a source for key election issues, debates, blogging, and voter registration information. In addition, we've built great partnerships to help expand the reach of our content. For instance, in the past four months, CNN has picked up 81 of our local news stories for publishing on their home page.

Looking ahead, we plan to deliver the best local media experience to viewers in our local markets. Over the past few weeks, we've announced several exciting initiatives and partnerships. Rob and his new media team are in the process of launching new websites, of which we are developing on top of the FOX interactive media platform, which we believe will further differentiate our stations from the competition.

We also announced a partnership for interactive TV with Backchannel Media, and for real-time online video clip creation with Critical Media. I encourage you to visit wpri.com, whichtv.com or kxan.com to better understand our plans to be the most comprehensive source for local news information and user engagement.

In addition, we remained focused on securing retransmission fees, which increased 91% in the third quarter of 2008, compared to the same quarter last year. During the third quarter of 2008, the Company reached new transmission consent agreement for both its analog and high-definition channels with Charter Communications.

As a result of the announced agreement with Time Warner Cable yesterday, I am pleased to announce that we have reached deals with every major cable satellite and telecommunications company for retransmission consent of our highly-rated local stations.

Lin's total advertising revenue increased 3% in the third quarter of 2008, which again compares well to the industry average decline of 3% as reported in the TVB's monthly group Time Sales Survey results. Our stations are in great competitive shape and even during this economic downturn; our sales teams have been doing a terrific job of selling our value proposition. And advertisers know our highly-rated local TV stations get them results.

The economic downturn has caused us to accelerate our efficiency efforts. As a result, general operating expenses during the third quarter of 2008 decreased 1.3 million, or 2%, compared with the same quarter in 2007. The decrease was primarily due to lower corporate and compensation costs.

In addition to our revenue and digital successes, we also continue to generate free cash flow and reduce our debt. In anticipation of the difficult advertising environment, we amended the Company's bank credit agreement during the quarter, providing additional covenant flexibility. We reduced debt by 23 million in the third quarter of 2008, further strengthening our balance sheet. As a result, our total debt net of cash on September 30th was 744.5 million, which is 89.2 million less than the 833.7 million balance at September 30th, 2007.

The Company's outstanding revolving credit facility balance was 85 million at September 30th, 2008, with 140 million available for borrowing under that facility. Despite our ability to deliver revenue increases in the third quarter of 2008, core advertising revenues, which include local and national advertising, but excludes political advertising, were down 8%.

Quite simply we're seeing that advertisers are reducing expenditures to alleviate pressure in their own businesses. Clearly we are operating in a recessive U.S. economy that is negatively impacting advertising budgets and as a result our fourth quarter outlook has become increasingly negative, which Rich will discuss in a few moments. Our current perspective is to accelerate our plans to converge our traditional TV and new media businesses and create a more efficient infrastructure.

We are currently working on our 2009 plans, which will include a pessimistic view of 2009 advertising revenue, but we will have increased efficiencies and digital revenue growth to counter the decline. Lin has experienced several recessions in its 47 years as a leading broadcast company. Know that we are making the decisions necessary to be fiscally responsible during these challenging times, while continuing to work new media initiatives that we expect will continue providing high-revenue growth in the future. Now I'd like to hand it over to Scott to talk about operations.

Scott M. Blumenthal

Thank you, Vince, and good morning, everyone. As Vince mentioned, we are operating in a very difficult marketplace right now. However, I want to stress that Lin has successfully competed in just about every imaginable business climate. Advertisers continue to utilize the services of high-quality and proven media outlets and our strong local television stations compete very effectively for viewers and advertisers in their respective markets.

Notwithstanding the strength of our local TV franchises and the infusion of political spending in this election year, we were not able to fully overcome the ongoing softness in numerous categories. These included automotive, restaurants, media telecommunications, financial services and entertainment. The automotive category, which represented 25% of our core advertising sales for the third quarter, decreased 20% compared to the same quarter last year.

Our core local and national advertising sales combined, which excludes political, decreased 8% for the third quarter of 2008. Local advertising sales also excluding political, decreased 3% for the third quarter of 2008. Our local ad revenues represented just over 60% of total advertising revenues for the third quarter. National advertising, again excluding political, decreased 15% for the third quarter of 2008. National advertising sales represents 29% of our total advertising sales.

A few categories were up, however, in the third quarter, including health and beauty, medical, food and grocery, education and of course political. And I can assure that we were fully maximized each and every political opportunity. For example, our duopoly in Albuquerque, New Mexico, which includes the local CBS station, KRQE, and our FOX station, KASA, actually exceeded its political projections.

KRQE produced a live senatorial debate, as well as candidate and party profiles, which aired frequently on both stations.

In addition, KRQE played an integral role during the investigations of both the acorn voter registration abuse and Republican voter intimidation. Due to our station's significant involvement in nonstop election coverage, we captured 42% of all political spending in that market. Looking ahead to election night, we believe KRQE will provide a market first when it unveils its brand-new election software.

We are excited about this new election software and its ability to automatically and simultaneously display voter totals on air and online. This is an effort that previously required multiple steps by our newsroom staff. It's also a good example of how we're creating efficiencies in our newsrooms throughout the company.

While we're focused on efficiency, we are also committed to investing in local programming that matters most to the communities we serve. Recently we launched Miranda Where You Live, on all three of our West Michigan television stations. Miranda was hired to be the children and family services manager at Wood TV, WOTV, and WXSP, and she oversees the development of on-air and online projects related to kids and families to help the relationships between our stations and to benefit the communities.

During just its first rating book, Miranda's weekly half-hour program earned an 11 share in the market. This is an excellent example of the value of local programming and the differences our stations make in our markets. In addition to Miranda we have also launched several new local sports and entertainment programming initiatives. We believe our commitment to localism will continue to help differentiate us from our competition.

I'm also pleased to report that ratings continue to be strong. According to Neilson's most recent July ratings reports, 67% of Lin TV stations gained audience with adults 25 to 54 in at least one time period compared to the same time period in 2007.

In addition, 70% of our CBS, NBC, ABC and FOX stations were once again ranked number one or number two in the primetime day part in the households. The Neilson data also shoed that our stations outperformed a national networks in the category of household share by an average of 44%.

To illustrate a few key examples from that last look, in Indianapolis WICH TV's Daybreak from 5 to 6 am increased 71%. In Hartford and New Haven, WTMH News Channel 8 at 11 pm increased 34%. In Providence, WINC Eyewitness News at 10 pm increased 30%, and in Austin, KXAN Austin News at 5 increased 27%.

Again these are just a few examples of the growth we are showing in all of our markets and we attribute this growth to investments in the local community and our true multi-platform strategy. Finally, I want to mention the tremendous efforts our stations continue to make as we near the federally- mandated digital transition date of February 19th, 2009. from speaker's bureaus to community affairs events, to allocating inventory for PSAs in online help sections we are doing our part to insure timely and smooth digital transition. Now I'd like to hand it over to Rich who will discuss our third quarter financial performance.

Richard Schmaeling

Thank you, Scott and good morning everyone. Our 3Q '08 net revenues were up 5.1 million or 5% to 98.7 million from last year's 93.7 million. The major driver of this increase was higher gross political advertising, which was up 10.1 million to 11.4 million, compared to 1.3 million for the same period last year.

And higher digital revenues, including Internet advertising revenues and retransmission consent, which increased 3.8 million or 88% to 8.1 million. These increases were partially offset by lower gross core advertising sales. National advertising revenues were down 15% or 5.4 million and local advertising revenues were down 3% or 2 million.

The automotive category, which is our largest, was down 20% and accounts for the majority of the decline in both national and local. Our total station operating expenses for 3Q '08 which includes direct operating, SG&A, and program payment costs, but excludes stock-based compensation, increased by 1% or $0.7 million to 63.3 million.

Increases for employee compensation, legal fees and the Company's investment in its Internet business were largely offset by lower program and sales variable expenses and savings from various cost management initiatives.

As a result of our net revenues and station operating expense performance, BCF for 3Q '08 was up 4.2 million or 14% to 35.5 million compared to 31.2 million in the prior year.

Our corporate expenses excluding stock-based compensation, decreased by 1.6 million or 35% to 3 million for 3Q '08 compared to 4.6 million in the prior year. this decrease was largely due to reduction in deferred compensation expense, resulting from the declines in the stock market and other cost reduction actions. As a result of these BCF and corporate expense variances, adjusted EBITDA for 3Q '08 was up 5.9 million or 22% to 32.5 million compared to 26.6 million in the prior year.

And finally, free-cash-flow after debt service was 9.5 million in 3Q '08, compared to 10 million in the prior year. The benefit of the 5.9 million or 22% increase in adjusted EBITDA for the quarter was offset by 5.5 million in quarterly principle amortization under our credit facility which began in the fourth quarter of 2007 and by higher capital expenditures, which were 8.1 million for 3Q '08, compared to 3.9 million in the prior year.

Once again for those unfamiliar, we made available reconciliations of our operating income, a GAAP measure to BCF, adjusted EBITDA and free-cash-flow on our website at lintv.com in the supplemental financial data link.

Moving along to our debt and key credit metrics, during 3Q '08, as Vince mentioned earlier, we entered into the amendment to our credit agreement. The amendment permanently reduces the aggregate revolving credit commitment from 275 million to 225 million and revises certain key financial covenants. In particular, our consolidated leverage ratio for the period October 1, 2008 through December 31, 2009, was increased from 6 to 7 times and our consolidated interest coverage ratio for the same period was rescued from 2.25 to 2 times.

At quarter end, we had 140 million available under our revolving credit facility, and our cash balances were 16.3 million. Our total debt at September 30th, 2008 was 760.8 million, with 21.6 million of this balance classified as short-term based on our projected quarterly principle amortization. We repaid 7.5 million of our term loans and 15 million of our revolving loans under our credit facility during the third quarter using excess cash balances.

Our average cash interest rate on our debt at 9/30/08 was about 6.1%. Consolidated leverage at 9/30/08 as defined under our senior credit facility was 5.7 times compared to 6.5 times at December 31, 2007. Our covenant at September 30th was 7.75 times and as mentioned earlier, this stepped down to 7 times on October 1st and stays at that level till the end of 2009.

Cash interest coverage at September 30th, was 2.6 compared to our covenant of 2 times, and our consolidated senior leverage ratio at September 30th was 1.45 compared to our covenant of 4.5 times. Lastly at September 30th, 2008, the Company had approximately 248 million of federal net operating loss tax carry-forwards.

Turning to our business outlook for 4Q '08, based on current sales order pacings, which have been significantly impacted by the repercussions of the financial crisis on the economy and on demand for advertising, the Company currently expects that 4Q '08 net revenues will decrease in the range of 6% to 9% or 6.5 to 9.8 million compared to reported net revenues of 108.6 million for 4Q '07.

Core advertising pacings are currently down in the high 20s and gross political advertising is expected to approximate 25 million for the fourth quarter as compared to 3.2 million in the fourth quarter of 2007. In addition, due largely to sales variable costs, the Company expects that its direct station operating and SG&A expenses will decrease in the range of 1 to 2% or 0.6 million to 1.2 million for the fourth quarter compared to reported expenses of 60.8 million for 4Q '07.

As a result, we provided the expected ranges of revenue expense and cash flow items for 4Q '08 and full year 2008 all excluding special items that you saw on our press release earlier this morning.

In light of the impact of the financial crisis on the economy and on the band for advertising, in our transition to digital and new media, the company is currently reevaluating its cost structure as part of an overall strategic business review and anticipates taking a restructuring charge in the fourth quarter of 2008.

Further, we are required under the accounting rules to test our indefinitive live intangible assets on an annual basis or whenever events or changes in circumstances so called "trigger events" indicate that these assets might be impaired. The Company performed an interim test at June 30th, 2008 and reported an impairment charge of 297 million during the second quarter.

We determined that there were no trigger events in the third quarter that would require us to test our intangible assets for further impairment. As a result of the current economic environment, we could have a further impairment charge in the fourth quarter as a result of our annual impairment testing.

I will now hand it back to the operator to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will take our first question from Marci Ryvicker, Wachovia.

Marci Ryvicker – Wachovia Securities

Thank you. Good morning. I have a couple of questions, the first on retrans. I guess is there anything specific that prompted the solution of the dispute with Time-Warner and does your full year digital rescue guidance include Time-Warner? Secondly, can you give us the net Olympic revenue for Q3? And then the last question is going from Q3 to Q4, there’s a pretty significant drop-off in core revenue, I don’t know if you can give us anymore color and I would assume and you can correct me if I’m wrong, that you have never had a revenue decline in the fourth quarter of an even numbered year before.

Vincent L. Sadusky

Sure thing, Marci, I’ll get started. I’ll try to remember all those questions. I may ask you to repeat the last couple of ones again but first of all with regard to Time-Warner, the bottom line is we received the compensation that we set out to receive from Time-Warner and there is not much more to say than that. It’s not been our philosophy to come off cable systems. It’s a bad result for the cable operators as they lose a significant amount of viewers when, in our case, our most highly rated television station in many of these markets comes off the air, it’s not good for us.

We lose temporarily advertising revenue but you can just read into when we do come off, it’s because we have not been able to receive the compensation that we’ve set out to receive. And, as we have said all along, we are not unreasonable in our compensation requests in that we’ve got the benefit of having a very significant data base of retransmission fees, having cut deals with every other significant paid television operator out there. This one was, as all of them have been, incredibly challenging but we are excited.

We are excited to put this behind us and now for several years have virtually 100% clarity into our retransmission fee projections, so we ended it because we received what we got and I will spare you all of the drama that went into getting to our final result but we got to the place where we wanted to be.

With regard to the forecast, yes, the projections for digital include our Time-Warner retransmission fee agreement. With regard to, I’ll skip Olympics and hand that over to Rich, just the only color comment on the Olympics is that we have a handful of NBC stations so we have a lot more stations that don’t receive Olympic revenue and actually are negatively impacted on a share basis by competing against NBC Olympic stations in August than we do stations that have Olympic revenue so when Rich gives you the number, the net impact of the company on the positive is not significant at all.

With regard to the fourth quarter core revenue decline, yes I have never in my history of television not seen a situation where the industry in general, not just LIN Television, is essentially forecasting a decline in revenue despite the fact that there is the political revenue that’s received in the fourth quarter so it does show you how challenging the core revenue situation is at the moment.

Marci Ryvicker – Wachovia Securities

How much of the core revenue declines in the fourth quarter is coming from the fact that you’ve pulled stations off of Time-Warner?

Vincent L. Sadusky

You know, it’s really challenging to determine. We lost Time-Warner revenue. They are a significant advertiser, but they are back now so we lost at least a month’s worth of Time-Warner revenue and then with regard to how much advertising actually did we lose over that month long period, it’s very challenging to quantify. In certain markets like Indianapolis where Time-Warner is not the majority of the market, we actually saw, we get overnight ratings in a market like Indianapolis that’s metered. We actually saw ratings go up during the time period that we were off Time-Warner.

Now, you say intuitively we would have gone up more but the point is the impact wasn’t all that significant. In markets like Dayton and Austin where they have a very large footprint, the ratings impact was more significant. We saw advertisers really stay with us for the early part of the campaign. In the last couple of weeks, it definitely started to have more of an impact but again it’s very challenging to quantify it, so with regard to the numbers that Rich quoted for, in our guidance, being down 10% overall and being down close to 30% ex-political, clearly a part of that 30% is Time-Warner, part of that as well has to do with political displacement, since there was so much political placed, it did crowd out core advertisers which is a typical trend, but clearly the lion share of that large core decrease has to do with the economic conditions.

Richard Schmaeling

Marci, following up on the Olympic advertising, our records show about 2.6 million incremental.

Marci Ryvicker – Wachovia Securities

Thank you.

Operator

And we will go next to Avi Steiner, JP Morgan.

Avi Steiner – JP Morgan

Hello. A couple of questions for you. Number one, when you entered into your bank amendments, I believe your baskets were reduced to $150 million and I’d like to know a couple of things. One, is that fully available? Two, can you use that to buy back your bonds if you so choose? And three, how do you feel about using some cash and availability just in general in terms of your capital structure and maybe what opportunities you see out there and then I have one follow-up. Thank you.

Vincent L. Sadusky

I’ll let Rich go ahead and answer that.

Richard Schmaeling

The basket is 150 and all that’s available to us. We do have the ability to use our revolving credit facility to buy back the bonds and this is a decision about the use of our capital that we are evaluating and conferring with our board about so no decision yet.

Avi Steiner – JP Morgan

And do you guys have a thought just on what’s going on in terms of valuation within the space and if you see any opportunities out there?

Vincent L. Sadusky

There are definitely I believe going to be opportunities as the value, at least the public values of these television stations are at historical lows. You’ve got projections of cash for current year and projections are now for next year, but you can certainly extrapolate that next year’s cash flow projections will be low and then on top of that you’ve got historically low multiples so very low values right now in the space, clearly the challenge is resting those assets from people holding them, because even folks that are likely to have coveted issues, there’s kind of widespread belief that there will be quite a bit of restructuring of debt, just given the overall crisis that’s impacting the debt structure of so many industries. And we are not seeing much the deal flow right now.

We are not seeing fire sales and people rushing to get rid of their properties. It’s just if they are not forced to do it, this is not a good time to have to sell theirs. There are some isolated circumstances, for example in Richmond, Raycomm is under court order from the GOJ (ph 00:34:07) to divest of their property there, so you will see some circumstances like that. You’ll see Pappas broadcasting for example is in reorganization and a trustee is looking to liquidate those assets, but those are not all that attractive assets so you are starting to see some of this take place but I think at the moment there’s not a lot of quality assets that are out there for incredibly low prices.

For the moment our focus is really to use this time period to focus 100% internally on ourselves with kind of the discipline of a negative economic forecast to focus on our internal operations, our efficiencies, growing our digital business, so when we emerge from this we are in very good shape to take advantage of the inevitable growth that will return at some point to television advertising and media advertising in general, so we are not looking, we are not actively looking at stuff right now but I think as the landscape continues to be negative for more and more quarters, we may see attractive valuations on folks that for one reason or another are forced to sell.

Avi Steiner – JP Morgan

Okay I appreciate that and one last question while I have you, on the write downs that you are looking at potentially taking, the impairments, does that involve your joint venture at all with GE, NBC, and maybe you can just update on that, thank you.

Richard Schmaeling

Hi Avi, it’s Rich. It could. As Vince mentioned earlier, we have not yet received from NBC their budget for 2009, so it depends and we won’t really have the information we need to complete this testing until the end of this year so it could include the joint venture, it also could include further impairment of LIN’s intangibles.

Avi Steiner – JP Morgan

Okay and distributions year to date, could you remind me from the joint venture?

Richard Schmaeling

$2.6 million, Avi.

Avi Steiner – JP Morgan

Okay thanks a lot guys.

Operator

And we will now go to Kit Spring, Stifel Nicolaus.

Kit Spring – Stifel Nicolaus & Company, Inc.

Okay I’m just trying to back into the retrans for PVL and Time-Warner and I’ll keep the number to myself, but is it two months or three months of fees coming from Time-Warner in the quarter? The agreement happened at the end of October but was it retroactive from the beginning or that makes a difference as to how much per month per sub it is? And then maybe also, is there anything else sequentially that is in the increase? You have 8.1 in digital revenues in 3Q, the mid point of the guidance for 4Q is about 9, incremental 900,000, excluding the retrans, is there any change? Just trying to back into the incremental fee from Time-Warner.

Vincent L. Sadusky

Yeah I mean unfortunately Kit we can’t, you know the confidentiality provisions around these retransmission agreements are incredibly strict so we can’t talk to term. We did mention in the guidance for our digital revenue is our Time-Warner deal and with regard to your second question around our other interactive revenue outside of retrans, yes there is a projected, in those digital revenues is another increase in our interactive revenues.

Kit Spring – Stifel Nicolaus & Company, Inc.

Okay, but you can’t comment as to how many months are included?

Vincent L. Sadusky

No.

Kit Spring – Stifel Nicolaus & Company, Inc.

Okay, thank you.

Operator

And now we will go to Barry Lucas, Gabelli & Co.

Barry Lucas – Gabelli & Co.

Good morning, thanks for taking the call. Just a couple of items. I don’t want to beat the Time-Warner deal to death, but you talked about the compensation being consistent with what you have in your database, qualitatively can you speak to stuff that’s been shared from other broadcasters, is it in line with what other broadcasters to the best of your knowledge are getting?

Vincent L. Sadusky

Yeah I don’t know. I don’t know what other broadcasters are getting. I know that the larger the operator, it’s been our experience that it’s been a more challenging negotiation. Our assets we believe lined us up very well for getting the maximum value out of this deal, meaning we have got very highly rated television stations across a very good percentage of Time-Warner’s footprint, so we felt as if relative to others perhaps we are in very good shape. But, I don’t know what others have received. I just simply read analysts’ reports the same as everybody else on this phone line and I have not seen anything that talks to how much others have gotten from large MSOs like Time-Warner.

Barry Lucas – Gabelli & Co.

Okay I appreciate that, can you talk a little about we are looking at potentially two separate charges in 4Q, a non-cash write out of intangibles, and the second piece would be a cash charge for severance and similar items?

Richard Schmaeling

Yes, that is correct.

Barry Lucas – Gabelli & Co.

And any way to A) size it, and B) talk about how long it might take to recoup the charge over what period of time by we see the benefit?

Richard Schmaeling

Barry right now we are four weeks into this financial crisis and it’s causing us to work double time to really reevaluate our cost structure and think how to do smart things that position the business for more rapid growth when this economy turns and we are right in the midst of it and at this point really don’t have a good handle on what it will come to until –

Vincent L. Sadusky

Yeah and I will just add some color commentary to that, the folks who have been associated with us for awhile understand that fiscally we have been very responsible historically. We will do what we need to do to meet this challenge but having said that, we are doing things like right now we have got a new media/old media news efficiency council meeting taking place in Indianapolis with our larger and smaller stations to work on accelerating our efficiency plans. Now, we had identified from beta testing a bunch of new technology over the last year or so in the areas of news gathering, new media, getting stories up on the web more efficiently, etc.

So these are things that we will be quantifying and including in our 2009 plan but our point is to not just simply slash costs because we have seen our competitors do that in some markets where they just simply say I’ve got to get X-million dollars in costs out so I am going to fire my three highest paid anchors and I’m going to reduce my news reporters from nine down to four and that has resulted in multiple returns for us by us being able to grow share, by having a much better news product against our competitors so we are being as smart, we are working on this thing very methodically to be as smart as possible, but we are running around very quickly to ensure that we have those plans quantified so we can include those into a fourth quarter restructuring and start to realize the efficiencies from January 1st of ’09.

Barry Lucas – Gabelli & Co.

Right, I appreciate it. Thank you and welcome aboard, Rich.

Richard Schmaeling

Thank you very much, Barry.

Operator

Next question comes from Bishop Cheen, Wachovia.

Bishop Cheen – Wachovia Securities

Hi Vincent, and welcome Rich, and hi Scott, thanks for taking the questions. You were timely in amending your credit facility back in July. You’ve got now a seven times cap, what looks to be lots more flexibility, and yet it is difficult to keep up with how depressing it looks out there for the whole ad media space, not just TV and certainly not just LIN, so as you look out at your new flexibility, how tight does it appear to you, how challenging will it be to meet that covenant? And then I have one follow-up.

Vincent Sadusky

Yeah, I think as Rich described a little bit earlier, Bishop, it’s really impossible for us to give any guidance towards that right now as our landscape has changed pretty dramatically over the last four to five weeks. All I can say is that as we are working on these plans right now for 2009, we are hoping things get better sooner but we are not planning on that. We are taking it and I mentioned it as kind of a one-liner in my script but we are, it’s worth repeating, we are taking a very pessimistic view towards 2009, and then we are essentially rebuilding our cost structure accordingly and nobody knows when this thing will turn.

So, our perspective is going to be, you know, it’s going to be negative for the next year. But again, it’s just, it’s very challenging for us to really comment on our feeling on the covenant at this moment without you know, without having our plans, our projections, our forecast anywhere near completed at this point.

Bishop Cheen – Wachovia Securities

Right. Can you remind me again in the amended facility, did you also amend any existing senior debt or secured debt covenant? In other words, the bank debt covenant in terms of leverage? I think with – it used to be four and a half times and I thought it went down to three and a half times.

Vincent L. Sadusky

That’s correct, Bishop.

Bishop Cheen – Wachovia Securities

Okay. So, that is great. And last, on digital, Vincent, you guys have been the poster child for a leader who in TV Digital and not just retrans, although you seem to have you know mission accomplished there. But the way your digital has grown and now you’ve got most of your re-trans done so it’s up to escalators, when you look at how much digital can contribute in terms of ebonoch.

In other words, you know, going forward, how high a margin can it be? How much, if you can give us any sense of a percentage of revenue, percentage of the cash flow, of broadcast cash flow, do you think you’re growing but based in digital platform?

Vincent L. Sadusky

Our digital for 2009, again, without having provided guidance, it’s hard to really talk to specifics and you’ll see this when we do provide guidance next year. But you know, our digital revenues will be a significant grower in 2009 as well, for two reasons. We’ve said all along the interactive piece of the digital revenue line is a smaller amount than the re-transmission revenue in terms of absolute numbers. But the growth in both has been very similar every quarter.

In 2009 you will see continued growth in the retransmission portion of our digital media revenue as a result of the receiving a full years impact, right from January 1, all of these pay TV retransmission agreements that we’ve entered into. Whereas these other agreements we’ve been entering into, most of them during the course of 2008. So, you’ll get a full year impact of these retransmission consent agreements in 2009. and with regard to the interactive piece, as impressive as our percentage growth has been on the revenue side, we still have a long way to go before we declare that we’re satisfied with the revenue we’re receiving, just simply based upon our traffic.

You know, our traffic has grown so dramatically through the good work of Rob and his interactive team over the last year and a half or so, that you know, we’re playing catch up. we are you know, we focus very much on the content, on building the consumption, you know, having the top ranked websites in terms of minutes on site. You know, we’ve done a great job there, we’re never totally satisfied. Fox interactive media platform that we’ve redesigned our sites on top of we think will further allow us to increase our consumption. But our revenue, as we’ve certainly been working very hard to build out our interactive sales force and monetize that, that revenue.

And again, you’ve seen, you know the numbers have been very good growth. You know, we still, we have a long way to go in terms of monetizing all that traffic. And the good news is that you know, the infrastructure for the web, it’s kind of like the television business. You know, once it’s in place, in terms of you know, having your content management system bought and paid for, you know, the operating costs, incremental consumption and sales are very, very low. It’s sales commissions, you get to a certain inflection point and perhaps you need some incremental sales people. But it’s not a dramatic increase at that point.

And with regards to the cost structure, you know, incremental server capacity or buying incremental storage, those are all very, very small costs once you’ve incurred the sum cost of the interactive infrastructure. So, you know, we do feel very good about that business. But we’re far from satisfied and we think we’ve got a lot of runway ahead of us as the percentage is still relatively small to our core television business. And it needs to get much larger.

Bishop Cheen – Wachovia Securities

Understood. And just one last question. I, as you look at that, you know, where you would like to be, do you think just the digital part of it, you extending your platform, not the retrans, but the digital up sell for lack of a better term, can that be some sort of double digit contributor to your revenues? Because you know, as you described it, it’s going, once you get it up to full steam, it’s gonna be high margin revenue.

Vincent L. Sadusky

Right.

Bishop Cheen – Wachovia Securities

So, it’s a question of you know, how good can it go? In radio, it’s you know, clearly a very small percentage. In newspapers it got, the up sell got to be what, seven and a half, 8% of revenue. And I’m just wondering how far you think you can take the non retrans of the digital up sell portion of your business.

Vincent L. Sadusky

Yes, again it’s challenging to say. We’re in the midst of revising our strategic plan and we call for significant digital revenue growth over the next three years. But I do think, you know, I do think the growth will be very good and it will be a lot of the incremental revenue will be dropping to the bottom line which will be very helpful. But I think you get into the double, the area of kind of double digit percentage of our total, relative to our total core advertising revenue.

You know, it will take doing more than just simply television station websites. And that’s why we’ve been pretty active in developing political, you know, politics.tv and you know a host of other things that we’re currently working on including interactive TV with back channel and some other stuff that we haven’t talked about. But, you know, I think to get it to be really significant, up into double digits plus, it’s going to need to be more than just simply you know, primary television station local websites.

Bishop Cheen – Wachovia Securities

Got enough. All right, thank you, Vince.

Vincent L. Sadusky

Sure thing. Thanks, Bishop.

Operator

We’ll now go to Edward Adarino with Benchmark.

Edward Adarino – Benchmark

Hi, I was wondering, I think that some of the cutbacks in the ad business and spending may be due to the credit crisis, people just hanging onto cash. Wondering if you had any thoughts about that and is there any possibility that there’s a little bit of pent up demand that might get a little bit better if you know, the knish environment gets better. What, do you think advertisers might start to show up again?

Vincent L. Sadusky

Yes, with regard to the credit crisis impacting the ad environments and pent up demand, I’ll defer to Scott. I’ll let Scott talk to that.

Scott M. Blumenthal

Yes, Vince. Clearly we’ve heard that from advertisers. Many of people just delayed expenditures in fourth quarter to wait and see how their fourth quarter sales go. So, yes, I would suggest that you are correct. That that is part of the depressed market place that we’re seeing. When that’s going to come back, yes that’s why as indicated we are taking somewhat of a pessimistic view for the future. But clearly, they’re gonna wait to see how fourth quarter sales turn out and then see what they can do in terms of re-establishing their advertising base as they go into first quarter.

Edward Adarino – Benchmark

Thanks much. And welcome aboard to your new CFO.

Vincent L. Sadusky

Thank you, Edward.

Operator

We’ll now go to Michael McCaffrey, Shankman Capital.

Michael McCaffrey – Shankman Capital

Thanks for taking the question. Just following up on the question earlier that was asked regarding your ability to buy back bonds under your current credit agreement. I'm just curious, you know, given this past quarter where you retired some of the revolver and some of the term loan B. Is there a particular reason why you didn’t choose to take out some of the bonds instead, given that they’re trading at 55 cents on the dollar at this point?

And then, just following up on I think Bishop’s question regarding the step down that you guys have from seven times or six and a half times starting in Jan 1 of 2010. You know, given the outlook is very bleak at this point and given the fourth quarter big political push isn’t gonna come through as we were all looking for, are you already starting to talk to your lenders now about potentially an additional amendment that would give you more flexibility? Because it looks like it’s going to be if next year turns out to be as bad as everyone thinks or it appears, it’s going to be very tough to make that step down in the first of January.

And if the credit markets continue to be as bad as they are, you know, I would assume it may be you know, beneficial to start those discussions now. And then just finally along those, along that point. Is there a point at which you’ve had discussion with Hicks Muse as far as their interest in stepping in to you know, provide some additional equity and or warrants or something to the affect to give you know, give folks some cushion and some comfort that you know, that you guys are going to remain a going concern beyond the current storm.

Vincent L. Sadusky

Well, with regard first off to the bond buy back. When we did our amendment to our credit facility, although it was not all that long ago, it was a very, very different outlook, I think. And at that point, the bonds were not trading off nearly what they’re trading off right now.

So, you know, the arbitrage opportunity was not nearly as great and so trading off liquidity for, you know, what would amount to a relatively insignificant interest arbitrage didn’t seem smart. Giving up some revolver capacity as a trade off for essentially a no cost amendment, seemed awfully smart. Especially given other than trading debt for debt, you know, the ability to actually utilize all of that unused revolver was unlikely.

And just you know, seemed to us to be excessive in terms of our needs for the business and are actually, our actual ability to use it based upon leverage covenants and a cushion. So, you know, so we certainly feel as if the decision we made at that time was the right decision.

As far as not, as far as speaking to lenders about yet another amendment, we are not speaking to lenders about another amendment at the moment. As Rich mentioned, we’ve got some work to do to get through our projections and our thoughts for 2009, I think before we can have an intelligent conversation with anybody. And as far as Hicks Muse goes, we have not had any conversations with Hicks Muse about any equity or any other capital investment in LIN.

Michael McCaffrey – Shankman Capital

All right, thanks.

Operator

We’ll go to Melissa Velvick, Credit Suisse.

[Melissa Velvick] – Credit Suisse

Hi, guys. I think all my questions have been answered. Thank you.

Vincent L. Sadusky

Thank you.

Operator

And we’ll go now to Michael Meltz, J P Morgan.

Michael Meltz – JP Morgan

Thank you. I have two questions. On the fourth quarter outlook, when you’re saying core down 20, mid to high twenties, what do, what are the pacing’s by month and then related to that, how is auto looking into the fourth quarter?

Vincent L. Sadusky

Okay, while Rich is getting the pacing information, just qualitatively the pacing has really gotten worse as the quarter goes along. And with regard to auto, the auto outlook is as bearish as it’s been all year. I, we mentioned that auto for the third quarter was down 20%. And you know, the outlook for the fourth quarter is every bit as bad as it was for the third quarter.

Richard Schmaeling

And Michael, in terms of the pacing trend, we do see some improvement on the local and national late in the quarter.

Michael Meltz – JP Morgan

Okay. Can you quantify the months or you’re not prepared to do that?

Richard Schmaeling

Yes, we’re not prepared to do that.

Michael Meltz – JP Morgan

Okay.

Richard Schmaeling

Later in the quarter.

Michael Meltz – JP Morgan

Okay, in the 20% drop in auto in the third quarter, is it a multiple of that in the fourth quarter? I mean I think that yesterday Meredith said they were basing it on 40. Are you close to that number?

Richard Schmaeling

We’re pacing down more than upper twenties.

Michael Meltz – JP Morgan

Okay, thank you for your time.

Operator

And we’ll go to Linda Carne (ph 00:59:45), Credit Suisse.

[Linda Carne] – Credit Suisse

Hi, thank you. I just had a follow up question I guess on the outlook as we go into 2009. Is it fair that the political displacement is just like a couple hundred basis points of that like high twenties percent negative core growth? I guess that was my first question. And I have a follow up on CapEx.

Vincent L. Sadusky

Yes, well we’ve went, historically the political displacement has accounted for about 5% or so of the (inaudible 01:00:22) in core advertising. Again, it’s difficult to quantify this year with all of the moving pieces. But that’s been the historical average.

[Linda Carne] – Credit Suisse

Okay, and I guess in terms of CapEx, how many of your news operations are broadcasting in high definition right now?

Vincent L. Sadusky

Scott, why don’t you go ahead and take that.

Scott M. Blumenthal

We’ve got three of them that are up and running right now and as you know, we have these technology centers that we call hubs that control the operations for multiple stations within each center. And those hubs will be able to transfer all of the digital broadcast for commercials and all of our advertisers for a total of 17 stations within the next 30 days.

[Linda Carne] – Credit Suisse

Okay, so as we go into 2009, I mean, is your maintenance CapEx something like eight to ten million a year for those total port folio stations? Is that right?

Vincent L. Sadusky

Yes, we’ve always said that our maintenance CapEx is in the ten million dollar range.

[Linda Carne] – Credit Suisse

Okay, so I guess from an incremental, digital and high definition spent what would you guy expect to do in 2009?

Vincent L. Sadusky

Again, we’ll you know, when we give our guidance, we’ll also give our CapEx guidance as well. But you know, we’re certainly cognizant of you know; of discretionary capital spend as well as we’re taking a look at our financial performance and our covenants for 2009.

[Linda Carne] – Credit Suisse

Okay, thank you.

Operator

And we have a follow up from Kit Spring, Stifel Nicolaus.

Kit Spring – Stifel Nicolaus & Company, Inc.

With respect to your 4Q core guidance, how much of that impacted by you being off the air in half your markets?

Vincent L. Sadusky

Yes, we answered that question earlier.

Kit Spring – Stifel Nicolaus & Company, Inc.

Okay, I’ll check the transcript, I’m sorry about that.

Vincent L. Sadusky

Yes, we basically said it’s very challenging to, other than the specific advertising that Time Warner pulled; it’s very difficult, very challenging to quantify it. It had a very insignificant impact in some markets ratings and a more significant impact in others. Tough to quantify.

Kit Spring – Stifel Nicolaus & Company, Inc.

Okay, thank you.

Operator

We’ll go to Scott Duba, Lehman Brothers.

Scott Duba – Lehman Brothers

Morning guys, just a couple follow ups in the auto category. Could you talk a little bit about trends, differentiating between domestic and foreign audience. And then on top of that, I guess the dealer spend versus the OEM spend. And then finally, you know, when these domestic OEM’s start to take down their ad budgets for next year, should we think about that as a good proxy for how they spent TV dollars? Or does the TV spend allocation tend to be better or worse. And I guess in that is how important is the TV spend for them to actually move cars? Thank you.

Vincent L. Sadusky

Yes, I mean, I’ll kind of go in reverse order. We think that TV spend is critical and they believe it’s critical as well. This is you know, kind of an unprecedented situation for several of the auto makers. This is merely cost triage. You know, when we’ve had our conversations with them, there’s not too many places for them to go in terms of you know, historical pension benefits. And they kind of go through their list of what’s actually controllable.

Unfortunately for our business, advertising is one of those things. They absolutely recognize the value and I think for the auto manufacturers that are in better fiscal shape, you know, like Toyota for example who announced, I believe, a $250 million dollar advertising campaign in 2009. You know, I think you will see significant share gain from the folks that don’t have to do triage because their financial situation is not dire. Unfortunately for the big three that have historically spent more on a per car basis than the foreign manufacturers, that’s not the case.

With regard to domestic and foreign, domestic ad spend in auto for the third quarter of ’08 versus third quarter of ’07 was -31%. Foreign was -16% and most of that was manufacturer reductions. As the local dealers were down about 8%.

Operator

And we have one last question from Melissa Velvick (ph 01:05:08), Credit Suisse.

[Melissa Velvick] – Credit Suisse

Hi guys, I know that there are confidentiality agreements with these retrans, but could you confirm that there will be cash payments with the Time Warner contract?

Vincent L. Sadusky

Yes.

[Melissa Velvick] – Credit Suisse

Okay. Great. And also, maybe you could talk a little bit about the characterizing nature of the Time Warner agreement versus the agreements you guys have reached with the other cable operators.

Vincent L. Sadusky

Well, you know we talked a little bit earlier about it. In terms of you know, the economics, we really can’t.

[Melissa Velvick] – Credit Suisse

Right. Okay, all right, very good, thanks guys.

Operator

With no further questions I’d like to turn it back to management for closing remarks.

Vincent L. Sadusky

Okay, well thank you all for your interest in LIN Television. We look forward to giving you an update next quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s conference. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: LIN TV Corporation Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts