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Executives

Harry Hawks – EVP and CFO

Tom Campo – IR

David Barrett – President and CEO

Analysts

Marci Ryvicker – Wachovia Securities

James Dix – Wedbush Morgan Securities

Jim Goss – Barrington Research

Barry Lucas – Gabelli and Company

John Kornreich – Sandler Capital

Hearst-Argyle Television, Inc. (HTV) Q4 2008 Earnings Call Transcript February 25, 2009 9:30 AM ET

Operator

Welcome to the Hearst-Argyle Television fourth quarter earnings release conference call. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. (Operator instructions) This call is being recorded. If you have any objections, you may disconnect at this time.

Speaking on today’s call are Mr. Harry Hawks, Chief Financial Officer, and Mr. David Barrett, Chief Executive Officer. I will now turn the meeting over to Mr. Harry Hawks. Sir, you may begin.

Harry Hawks

Thank you, operator. Good morning and welcome to the Hearst-Argyle Television fourth quarter and year-end earnings call. This is Harry Hawks, CFO of Hearst-Argyle speaking. This morning you’ll hear from David Barrett, our President and CEO, and me regarding financial results, operational performance, and certain strategic initiatives. Then we’d be pleased to take your questions. Before we get started, I will ask Tom Campo to cover the administrative details. Tom?

Tom Campo

Thank you, Harry. Just to remind all our listeners, we will be discussing forward-looking information. We refer you to the cautionary language that we detail in our Safe Harbor statement in our earnings release, which was released earlier this morning, which is also posted to our corporate website hearstargyle.com or most any finance website.

We will be discussing non-GAAP information during this call. In compliance with Regulation G we provide tables within the press release reconciling non-GAAP information to GAAP measures. Company’s cautionary language is also provided in our SEC filings and also accessible via our website. The company undertakes no obligation to update this information.

Once again, we want to welcome those of you listening to the webcast, which will be archived on our site. With that I’ll pass it over to David Barrett.

David Barrett

Thank you, Tom. Good morning everyone and thank you for being with us for a discussion about our fourth quarter and full year 2008 earnings, which we released a few hours ago. It’s certainly a difficult time for our overall economy, for the public, for our industry, and for our company. The things we are witnessing are severe disruption in credit markets, depressed housing and auto sectors, growing unemployment and job concerns, record low consumer confidence levels and the logical pull back in consumer spending are all having an adverse impact on individuals and on businesses, large and small.

We’ve not been immune to these conditions and circumstances. For the first time in my memory, we did not achieve top and bottom line growth, and in an even numbered political and Olympic year we are faced with a stock price that is unimaginably low at this juncture. And as we advised you on February 12, we recorded a non-cash impairment charge of $926 million, $570 million after tax to reduce the carrying value of our intangible assets. These are indeed challenging times.

First, let me make a few comments about 2008. As noted in our release, Q4 and full year ’08 reflects increased spending for most major ad categories for us, particularly so in the automotive category. And as well as from the various bedrock categories we’ve noted significant pull back. The dynamic of ad sales is this, attrition is higher than usual, some customers are inactive, a small number of customers have failed, and while most other customers recognize the value and the imperative of the local advertising, they still have their feet in the water. We are obviously negotiating hard to preserve and protect our pricing base.

Demand is lessened, but there is without question still a market for our highest rated programming, our blue chip inventory, local news, strong prime, Oprah Winfrey, et cetera.

Political revenues were a high spot for us in 2008; we had $93 million, again affirming the strategic decision that we made that this business – the political business should logically flow to local news leaders. We feel we put our stations in a position to earn this political spending and we’ve harvested that well.

Digital revenues were soft in Q4, but still flat for the full year, and we do anticipate growth for digital revenues in 2009.

Retransmission consent fees grew in ’08 over ’07. I draw your attention to the table in our press release, which charts our progress with retransmission consent over the past few years. Most notably, you will see that we anticipate a significant increase in ’09 retransmission consent fees to a number that we estimated, about $45 million. This reflects the successful negotiations that we have conducted in the latter half of 2008.

On the expense side, we were and are very focused on necessary, albeit difficult cutbacks in 2008. We’ve reduced full-time employment levels, headcount by approximately 200, incurring a restructuring charge, which is referenced in our release. These changes will help us in 2009 and they recognize that we are scaling back our cost, right-sizing our business to fit current and future revenue realities.

For 2009, that expense focus will continue. We’ve taken strong steps in terms of reducing employee contributions to 401(k) package. The 401(k) program, as an example, will significantly reduce capital spending in 2009. Each of our stations are committed to identifying additional operating efficiencies. Additionally, our Board yesterday made the decision to suspend our dividend in order to preserve cash for the purposes of paying down debt. Our past credit standing and our careful and conservative financial stewardship of the balance sheet has been the decided advantage to us over the years. We’ll stay that course with the same measured, careful approach to financial management this year and beyond.

Give uncertain economic conditions and the lack of any meaningful visibility about sales, we will not be providing revenue guidance for 2009. We have, however, provided a limited expense and expenditure outlook that we hope will be useful to you and Harry can comment upon that.

In respect to the digital transition, I can tell you that WPTZ, WNNE are stations in the Plattsburgh, Burlington, Vermont market transitioned last week successfully so. In December, KCWE, our CW affiliate in Kansas City, transitioned on it own due to technical build-out issues mid-December. That was also successful. And in Honolulu, KITV, along with all other Hawaiian stations, transitioned in January for reasons specific to that market.

Our other stations have deferred to the will of Congress and the SEC, and will transition on June 12th. I would observe that the digital transition on February 17th in respect to those that did so, seem to have gone well with minimum disruption to consumers.

Before I hand it Harry, let me offer another perspectives and thoughts on our business. I am a ‘glass-half-full’ guy and I remind myself and you that we’ve had some – have some very strong station assets in 25 local markets across the country. Last year, these stations generated nearly $250 million in cash flows and our company generated $207 million in EBITDA. We generated substantial free cash flow in good measure because we’ve been very careful to (inaudible) our debt build up over the years, and the associated high interest payments that go with high debt.

In ’08, we reduced debt by $136 million. Over the past 24 months, we’ve reduced our debt balance by $210 million. We’ve met all of our financial obligations even as our business has been shaken by macroeconomic conditions the likes of which most of us have never seen. But there will be doubt we are very much a going concern. Yes, we are disappointed how things turned out in ’08. We are troubled by the current state of things in ’09 in respect to consumer confidence, consumer spending and ad spending, but if nothing else, our stations are resilient. They are leaders in their markets through good times and bad, and we are an adaptive company.

You should remember that Hearst has been in media business since 1887. I think it’s hard for anyone to identify other companies still in the media space as Hearst is, in this instance the Hearst-Argyle Television with that kind of legacy history. We’ve weathered plenty of storms over the years, we’ll weather this current storm as long as it may last. Day in and day out, most of our stations are ranked Number One or Number Two in local news time periods.

In November, we achieved that ranking, Number One or Number Two in 74% of all local newscast. And also in November, 18 of 18 network-affiliated stations in Top 50 markets over-indexed their network’s prime time rating for adults 25-54. We’ve got the Top Three rated ABC affiliates in prime time for the 25-54 demo and four of our NBC stations in metered markets rank in the Top Four for the NBC network.

Last night, again, WBAL, KCRA, WCBB [ph] put up numbers that tend to win in terms of local news in the market, which is a testament to the institutional strength of those stations.

This week, Nielsen has provided compelling evidence that video is the medium of choice for Americans. As a society, we are consuming video at a record pace, watching more video than ever on three screens – television, Internet, and Mobile. The average TV viewer watches more than 151 hours of TV per month, an all-time high. And Americas who watch video over the Internet consume an additional three hours monthly of online video. And those who use mobile video watch nearly four hours per month on mobile phones and other devices.

The key here for our company is that in every single one of our markets we are a Top Tier, Must-Have, Must-Watched brand even in the sea of choices. There is lots to watch for sure, but consumers have demonstrated their strong preference for a select group of stations for most of their viewing, and we are typically at the top of that list in every one of our local markets. That is the distinct competitive advantage.

And our brand power extends to the Web. In ’08, our local websites powered by Internet Broadcasting did over two billion page views and we are seeing solid traffic growth for content on mobile devices as well. We are in the ‘three-screen’ business in 25 local markets. And while it is difficult today in those local markets, there should be no doubt that each of these markets will continue to be a real economic hub where people live, work, go to school, buy goods and services, drive cars, and yes, use local media to stay informed about things that matter to them.

That will be the case – that is the case today, and it will be the case tomorrow. And local and regional business and even national products will inevitably want to and need to target local consumers for their advertising and marketing messages on all three screens. And again we are in that ‘three-screen’ business today and tomorrow.

As we’ve said before, that is a very strategic advantage for us. We have a business that has the potential to be enduring. We are facing some reduced profitability on the short term compared to more housing [ph] in years, but there are better days ahead compared to these current days. We will be here for a recovery. I agree with the President’s affirmative and hopeful remarks last night and as that recovery occurs, our stations will stand out as the high value media platform in our distinct local markets, both for viewers and advertisers alike.

We are and will be indispensable relevant local media organizations. And the company is very well positioned for growth notwithstanding the difficult challenges we face on the short term. And I ask Harry to make a few comments and then we’d be happy to take your questions.

Harry Hawks

Thank you, David. Given the detail on the press release and the breadth of David’s remarks, I’d like to use my time to make or add emphasis to four points. The first is talking about 2008 cash flow. Against the backdrop of pressure on revenue, much of the improvements in our free cash flow even as compared to 2006, our last even number year, was a result of a deliberate effort by management to reduce debt, reduce CapEx, effective tax planning, and the like.

Obviously, as a result, we were able to fund a substantial reduction in total debt of $136 million. That includes $56 million of debt reduction in the fourth quarter alone, putting us in a better position at year-end as we enter a challenging 2009.

Second point just as – in the context of an economic recession, the recession has had a significant impact obviously on our financial reporting for the period, including the effect we’ve given to the impairment charge, the various charges and expenses and writedowns as further explained in the press release, almost all of those a response to the recession.

Third, as a further response to the recession, you have seen in our reporting here and David’s comments, the number of defensive reactions by management. So, the defensive response by management has included a number of actions taken to plan for the uncertainty ahead including reduction in force, reduction in operating expenses, reduction in corporate expenses, reduction of CapEx, suspension of dividend, and our ongoing efforts to further improve efficiency.

Fourth and final point, however, is an offensive, positive observation in that we have substantial empirical and anecdotal evidence supporting the fact that our product quality is excellent. We are effectively – very effectively competing for share. We are still doing hard news such as investigative reporting. We are providing value-added contribution to our network partners given the excellent performance of prime time and network news on our stations. We are substantially growing our digital audience, launching new content platform and audience initiatives. Very pleased with the over night participation in some of our online surveys following Obama’s speech last night with substantial responses there.

And already preparing for the 2010 political season, which you know, for us is a significant business undertaking. We are looking at 19 gubernatorial elections, 21 senate seats, many, many state legislative elections, and many mayoral elections.

And then finally, I would like to exercise one bit of speaker’s privilege before we go to questions and give a shout out to my home town television station – New Orleans WDSU, for the live streaming of the Mardi Gras parade last night. As I was working in my office here in New York that was one bit of relief. So, thank you.

On that note, operator, we’d like to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Marci Ryvicker.

Marci Ryvicker – Wachovia Securities

Hi, good morning.

David Barrett

Good morning.

Marci Ryvicker – Wachovia Securities

I have a couple of questions; the first is more of a longer term strategic question. The networks have started talking about potentially going straight to cable, and assuming they bypassing the affiliate stations. Do you really think this will happen, and if so what happens to the affiliate business model? That’s the first question.

The second question is can you touch on Super Bowl revenue in the first quarter and how that compares to the first quarter of political revenue in ’08.

And then the last question is any different trends in bad debt expense due to bankruptcies of any of your customers.

David Barrett

Let me start from the bottom up, Marci. Harry, you want to comment on the bad debt situation?

Harry Hawks

On bad debt, we did record an increase. We have been very much on top of watching all of our customers and if you will evaluating if you will third-party risk here. And we have added to our reserves, but we think we are adequately reserved at this time. But clearly we are getting the right kind of people, completely focused on this legal accounting, professional and otherwise, and we are – so our financial statements reflect a conservative posture on that. But in terms of absolute dollars, it is still fairly modest in terms of provision on the order of $3 million against in excess $700 million revenue base. So, it’s still – it’s growing, but it is still a fairly modest and manageable number for us. But I would underscore that we are all over this particular issue, and that’s our assessments of our risk exposure at this time.

David Barrett

Marci, in respect to your second question, last year, in Q1 our political revenues were approximately $10 million and our Super Bowl revenues this year and our 10 NBCs were about 40% of that.

Marci Ryvicker – Wachovia Securities

Okay.

David Barrett

And then in respect to the network issue, I guess I’ve been around a long time and this is not a new thought, although it’s getting a little bit more attention right now than it has over the past few years, but I remember going to affiliate meeting eight or 10 years when this was a matter of discussion. I believe on the near horizon, Marci, and call that five to six, seven, eight years, I don’t think that there is a likelihood that the networks can successfully migrate their product to cable without taking a larger reduction in ad fees than the carriage fees that they get from the cable operators. So, their ability to generate a $3 billion ad base would be considerably diminished if they were dealing with smaller audiences that they would inevitably deal with on the cable platform. And the fee revenues that they may expect to generate from cable, satellite, and telco providers would not be able to offset that. That is my opinion. It’s one that I hold somewhat strongly.

I would point out that I think we’ve been clear on this in the past that we are this year going to renegotiate new affiliation and agreements with NBC and ABC. And I would expect that those will be multi-year agreements, beginning in the year ’10. And we add significant value to these networks. There is all the data in my file here, but in markets such as Kansas City that’s the highest rated market for World News Tonight with Charlie Gibson. Our station in Des Moines is one of the highest rated – it is the highest rated CBS affiliate across the board in markets 51-100. We tend to dominate the Top Ten of the ABC lineup and the NBC lineup. They derive real value from the inventories, the substantial share of inventories that they have to sell on our stations. So, I take the position that we add real value to the network distribution and any notion that a Grey's Anatomy or Heroes or name your show would be as popular a brand if it was launched on Lifetime or bravo, I strongly disagree with. I think it’s a strong brand because it’s had exhibition distribution in 210 markets around the country on the single most popular video platform in each of those markets.

Harry Hawks

David, I will add a couple of additional empirical data points here. As I made passing reference in my remarks, we do perform very well in both prime time and network news for our network partners, and once again it’s a partnership. And as long as we are delivering value to each other, it’s a win-win and we will expect the relationship to continue.

But to add some additional statistics and data points to what David said, in prime time for ABC, we’ve got the Number One, the Number Two, and the Number Three best-performing stations in the country for ABC in the Top 50 markets. For NBC. We occupied four of the Top Ten spots for NBC in prime time.

And in network news, we have the Number One station of Top 50 market for NBC for the Today Show. David made reference to Kansas City, the Number One station in the country for World News with Charlie Gibson. And also we’ve got the Number One station in the country in the Top 100 markets for Nightline and things like that. So, we are clearly a very good partner for the networks and so we – as long as we continue to deliver value we will be competitive with other distribution models that they may have. Therefore, we are confident of going forward.

Marci Ryvicker – Wachovia Securities

Alright. Thank you so much.

David Barrett

You bet.

Operator

Our next question comes from James Dix of Wedbush Morgan Security.

James Dix – Wedbush Morgan Securities

Good morning, gentlemen.

David Barrett

Good morning.

James Dix – Wedbush Morgan Securities

I’ve got a couple of questions; first, I mean we’ve heard from a number of operators at this point about difficult revenue trends in the first quarter. I know you don’t want to provide any specific revenue guidance for the year, but I was wondering if you could give any color on what you are seeing in terms of just the underlying business, if you will, kind of cancel out political, like how is it looking versus like the fourth quarter without political, just any color you could provide on that.

And then second I guess this is more for Harry, do you have any sense as to what your year-end leverage range might be and how close you are going to get on your cushion, on your bank credit agreement?

And then I guess, finally, following up a little bit on what you said, David, in response to Marci’s question, leading up to the renewal of the affiliation agreements with ABC and NBC, what do you see as the critical issues going into those negotiations, and particularly any thoughts on the possibility of reverse compensation?

David Barrett

Well, let me first comment to a limited extent on the first quarter. You know I think that the condition of our revenues are probably in step with the overall economic condition of the country. There is a broad based slowdown and pullback. It is driven by low consumer confidence levels, which impact consumer spending, and which then impact ad spend. So, most of the categories across the company are very weak. We continue to have a pronounced problem with automotive because we are so reliant on automotive, and in a perverse way it’s percentage of our total advertising is diminishing. That’s nice when we are growing, but the fact is that we are not growing in recent periods. So that percentage is coming down as well. But I think we are probably faced with a number of quarters still in the auto sector where it’s going to be very soft. I think we need some resolution about bail out at the federal level and that’s going to – I think if its – if the auto industry is supported as I got the sense last night that the President is inclined to support it, I think that will open up more spending from the automotive sector in the second half of the year. one of the things I’ve been looking at and an event I am certainly aware of is there are 250 million cars or so registered in the U.S., vehicles, cars, and trucks. The turnover rate on those has typically been in the 5% to 6%. It’s down to about 4% right now. The average car that’s on the road in this country is 9.3 years old. 41% of the cars in this country are 11 years old and over. There is pent up demand growing in the automotive sector and I don’t see a world where the turnover is going to be 16 years in cars. So, I think we are going to have a difficult period over the next 12 to 15 months perhaps in terms of volume of auto sales, but if we get back to a 6% replenishment rate of the American fleet, that implies that there will be 15 million cars sold then that will be good for the economy, it will be good for our business. The automotive industry will obviously restructure itself. I think there will be fewer brands. I think that will be good for those companies and good for consumers, but I have no doubt that if people are going to market cars and this company is not going to – this country is not going to start driving cars, then we are going to still have advertising messages from manufacturers, from dealer groups and from local dealers supporting automotive. It’s a question of how long it will take for their restructuring to work itself out, how effective the bail out will be and then who will be manufacturing cars that American consumers are going to buy. So, I think that’s one way to look at things. And I got to digress a bit from your first quarter question, but your first quarter question I tried to answer in the context kind of broad based weakness at this point in time.

Harry Hawks

James, you asked about, can I give you a year-end leverage ratio? The answer is no, but let me try to be responsive in a different way because I am trying to avoid sort of a back door way of giving guidance for the year. But let me respond this way. The – it should be – no question in any one’s mind that this management and our Board is fully engaged in all of the discussions that you hear and much more. We are completely committed to maintaining covenant compliance. That’s sort of a topic that’s not even open for debate. It’s an absolute. As we report in the press release, we finished the year at 3.7. We – this is the kind of environment where amendments are pretty common and that sort of thing, but at the present time we are not looking at amending any covenants. We are just going straight to working on a refinancing of what we have today. And we are confident of addressing all of these issues and have – continue to have good access to capital and good liquidity in this company and they are – builds on time.

And so we are, over the course of the coming weeks and months, will expect that we’ll be announcing more specifically what the financing – new financing is, but for now, I – it’s best if I just – we are not in a position yet to know the terms of those financing. But we are confident that we will executing a new financing here in the coming months.

David, back to you.

David Barrett

James, in respect to the network questions, I guess I’d say that some of the drivers here in the discussion are program clearance levels, how many hours of programming the network offers in a new world here, and how many hours we are obligated to carry. Inventory allocation, exclusivity or lack thereof. And the networks have made a real point that they think it is advantageous to them to have ubiquitous distribution on many platforms of network content than – contrast that to the days when we were insisting on exclusive content. That may have been the better place to argue that we ought to be paying for the programming if we insisted on having it exclusively, but these are all part of Kabuki dance of sorts that we’re going to have with the networks to try and work this out and find a deal that works for them, and that works for us. I have always been a strong proponent of the notion that what we contribute in terms of audience to the advertiser proposition is an important consideration. Stations that over-index the network and particularly so in key larger markets are adding more value to the network proposition than stations which dramatically under-index the network. And it’s a source of pride to us that regardless of network affiliation we are delivering strong numbers to the network whether they are first, second, or third or fourth, we are over-indexing that network. Certainly, there is going to be an effort on the network’s part to be paid by some affiliates and I think that that will be a broad discussion, but it will be resolved on a station-by-station basis, based on local competition, success of local station, and overall to the whole network proposition.

James Dix – Wedbush Morgan Securities

Okay. Thanks very much. Just one followup. In the fourth quarter, what was your core advertising growth, the way you look at it? If you just kind of strip out political and the non – however much you think is – was incremental, I am just trying to get a sense of what those trends were.

Harry Hawks

Remember though that the month of October, we crowded out a lot of advertising.

David Barrett

Yes, James, I don’t take the call without – over the years you’ve heard us talk about a 50% incremental factor for political and if there were the case the core business it was down 15% to 18%.

James Dix – Wedbush Morgan Securities

Okay.

David Barrett

But, huge crowd out. I mean Manchester, I would tell you, 75%-80% of what we are airing in the month of October was political. We weren’t – if you take that away, we would have sold more than 15% or 20% of our inventory at a decent price. So that’s – it’s a real hard number to get at particularly since October in the best of times and the worst of times is a high demand month.

James Dix – Wedbush Morgan Securities

Okay. Alright. Thanks very much.

David Barrett

Sure.

Operator

Jim Goss, Barrington Research, you may ask your question.

Jim Goss – Barrington Research

Thank you and good morning.

David Barrett

Hi, Jim.

Jim Goss – Barrington Research

The – it seems like we are all in an inflection point that has us thinking long term thoughts. So, I will throw a couple of more like that in the hopper. One is I think we all recognize that local news is the heart of a local station. But how many local news stations do you think are necessary or – and can survive and prosper? And with the concept of maybe a big foreign network, could be cable network, could you make an argument that the same could be true for your stations absent network programming plus your digital and mobile initiatives? And if even if all of this did break down over this five to eight year period, is there some legal unwinding that would need to take place from – for the 10% of Americans who don’t have cable or satellite or phone distribution that might get in the way?

And then finally, David, you’ve been arguing for years that you’d like one of those hours of prime time back and now we have Jay Leno going to be – going into prime time. Is that the first step in getting your way along those lines?

David Barrett

Well, my hope and suggestion had been that Leno come on at 11 O’clock and the affiliates would have gotten 10 O’clock. The networks weren’t ready to do that. I am not sure this is a precursor to the network giving back the 10 O’clock hour although I think from our point of view and from theirs that that would be a better strategic course to travel. So, I can't say what’s on their mind in terms of long term strategy. I think they believe and hope that Leno will work and the affiliates will work hard to see if that’s accomplished. The challenge is going to be a necessary reformatting of the program because Leno has always started out real big, but the last two quarter hours have performed below the first two quarter hours and that if it continues to be the case, would have an adverse impact on local news leading [ph] but—

Jim Goss – Barrington Research

Right.

David Barrett

There is a working committee at NBC and with the number of affiliates that I have a high regard for that are trying to address that challenge, but it’s a meaningful challenge to be addressed. In terms of the notion of whether television in the future will be only received via a wire, that’s an important public policy issue that – as the margins if 10% or 15% of households rely on over the air television, that’s not an insignificant amount of households. It’s 20 plus million television households. Kind of interesting to see about all the hubbub of the digital transition and what was about to happen, how much people were going to disenfranchised that – I admire the aspirations people have to carry broadband and the President has that operation to put broadband in every American home, but there is a lot less hue and cry for that right now than there is for the preservation of broadcast television over the air being available to go into every home, because that’s how people are spending their time to hit [ph] 150 hours a month of viewing.

So, I think it would be a bad public policy outcome if television was only available to homes that had a wire from satellite cable or telco. I think that it is to the country’s advantage to have a ubiquitous broadcast distribution platform, particularly so when we think about mobile video. We are on the cusp, I think, of being able to provide through this Open Mobile Video Coalition and a new mobile standard, television for new devices that will be highly portable. And that is broadcast business model that can't obviously be accomplished if you have to be hooked to a wire. So, I think the notion that we’ve got the ability to broadcast off our towers to reach 100% of U.S. TV households, we’ve go the ability to broadcast, so we can reach mobile devices, which is a better public policy outcome than taking that away. So, I happen to believe that there will be an enlightened conclusion on that.

Your first question was about–

Jim Goss – Barrington Research

Local news.

David Barrett

Local news. I have said, Jim, for a few years, that there will be a contraction of people who can afford the local news providers. There will be a Darwinian outcome here, survival of the fittest, and we are beginning to see signs of that right now in some markets, not necessarily where we are in business. We’ve seen fairly prominent companies say they are going to cut back weekend morning news. They are cutting back early morning news. Now, I think that’s going to happen to the weaker people that are out there. And in a perverse way that’s going to be good for us if we are the survival players in all of this.

I just finished reading a book about Mr. Hearst and foundings of the company and smiled. In 1887 there were 18 plus local newspapers in the City of New York City. So, there has always been more media out there and then there is the settle down when the economics come into play about how people consume these products. But the New York Times was one of those newspapers in 1887 and it was by far not the strongest, but somehow it endured and had a very nice long run. I won't speculate on what’s going to happen with some of these newspapers now, but there was a contraction in the business. There was survival of the fittest, and that was good for those that stayed the course and were the strongest brands in the market.

Ultimately, it’s about strong brand performance and satisfying viewer preferences. Another irony with the pain the newspapers are in now and with the likelihood that some are going to go away, that will provide a positive impetus for the local televisions in the marketplace. And I am in a company and in a building here that houses both newspaper and television, but the reality is that if the newspapers went away in any of our markets that will be a huge opportunity for television stations. And the thing that I think of and a lot of us at the table here have spent in local stations, when there has been a newspaper strike in years gone by, advertising in the market wasn’t classified advertising; it was display advertising. It was converted to broadcast because people needed to have their messages in front of the public. So, I think that we have better legs in the industry and television and print press does. Our adaptation to ‘three screens,’ our ability to openly broadcast on a mobile platform is going to be meaningful and not everyone is going to survive, but the strongest ones will. And they are going to have a solid business, going forward.

Jim Goss – Barrington Research

Thanks very much for your thoughts.

Operator

Barry Lucas of Gabelli and Company, you may ask your question.

Barry Lucas – Gabelli and Company

Thank you, good morning.

David Barrett

Good morning.

Barry Lucas – Gabelli and Company

Got several here, Dave. First of all, on the retransmission side what’s left in the multi-channel video subscriber base, is there any upside to that 45 million as we get into 2010?

Harry Hawks

That’s an outlook for ’09, these are multi-year deals and there are some modest price escalators in there that – all these things are so constrained by a confidentiality agreement that – General Counsel Jon Mintzer is looking at me and shaking his head, so that’s all I have to say.

Barry Lucas – Gabelli and Company

No, Harry, what I was referring to is have you wrapped up all your negotiations with what would be a 100% of the subscriber base, or there still some–

Harry Hawks

We have a couple left to do in the months of – in mid-year this year, but the number that we’ve given you gives effect to our good faith operating assumptions as to how that will be concluded. So, that 45 million that’s in there has an outlook for ’09 contemplates everything being done on a pro forma kind of basis.

Barry Lucas – Gabelli and Company

Okay. And can you just tell us what the – what January revenue – ad revenues were down?

David Barrett

No, we are not – we have not been breaking out the months and now is not the time to start.

Barry Lucas – Gabelli and Company

Okay. And then finally, just on auto, remind us where we are kind of those, if you could, how much order was down, and what percentage of the total was down to? And then maybe pick up on what Jim said, longer term, what do you do to wean yourself away from auto as being the dominant player even assuming we get back to a 15 million (inaudible) rate?

David Barrett

Well, let me first answer that calendar year ’08 auto was down 23% against ’07 as a category, and it represented 21% of the total ad sales for the company, and that’s down from the mid-20s that it’s been in the past. Now, I think a part of what we are trying to accomplish with our sales effort and it’s hard to point to really obvious success in the depth of a recession, but we want to expand our customer base and all of our local sales efforts have been so geared to provide incentives and premiums for new business development for cracking new categories. And we have done that with some degree of success.

In years gone by the furniture and housewares categories was principally a newspaper category. It’s become very significant for broadcasters. The pharmaceutical category wasn’t really a player in local television. It is more meaningful now. We have experienced some contraction on the retail side due to consolidations and things like that, but we are trying to broaden our customer base. We are selling against newspapers, we are selling against Yellow Pages, and part of this whole ‘three screen’ strategy is that we’ve now got a product that we can scale for small business use, whether that’s on our multi-cast channels, whether it’s on our websites, whether it’s on our mobile devices. We are in a position now where we can deal with the lawyers and home service providers and the small business retailers in the market and ultimately to the extent we can broaden our customer base that weans us off a too heavy a reliance on the automotive sector. But, the automotive sector is one of the most significant economic drivers in the country. So, it’s till going to be important to us. And we have the best way to market car products, new car product services, and used car products. So, I expect it’s going to continue to be a very substantial piece of our business.

Barry Lucas – Gabelli and Company

Thank you.

David Barrett

Operator, we have time for one more question.

Operator

The last question comes from John Kornreich of Sandler Capital capital.

John Kornreich – Sandler Capital

Yes, hi. Yes, actually I am – I have to say, I am amazed that your stock price, which is by the way down another 10% today, it’s mind-blowing. I mean usually $1.5 a share is reserved for those TV newspaper companies that have leverage of eight or nine times or seven or eight or nine times, which you are not even near.

David Barrett

We are making money, and we’ve got a manageable level of debt, and we’ve got some of the best station assets in America. It’s not logical to me, John.

John Kornreich – Sandler Capital

Just speaking of those comments, given that you are going to have a big decrease this year obviously in EBITDA, but – in your basic business, but you are also going to, according to projections, have $18 million of new cash flow from retransmission, is it reasonable to think that in very rough terms you can retire another $90 million to $100 million of debt and you suspended the dividend, which was $30 million? Can you get it down near $600 million?

Harry Hawks

John, we are trying very hard not to give any guidance for our 2009 results. I will just say this though, we are expecting that our free cash flow – we will have free cash flow, and we will reduce debt, but I am hesitant to give a number. Clearly, we’ve shown over the years – and I will go back to 2001 when we had a drastic fall-off in revenue in ’01 after the recession and the 09/11 – in that year we still paid off a substantial amount of debt in excess of $90 million.

John Kornreich – Sandler Capital

Right.

Harry Hawks

This year, obviously we are taking a number of the deliberate actions to improve free cash flow by reducing dividend and CapEx and a variety of other things so that we can manage leverage ratios as well as have an absolute reduction in debt. So, yes, we intend to pay down more debt in ’09. I regretfully must beg off from giving you a number, however.

John Kornreich – Sandler Capital

Okay. And between the dividend and the retransmission, though, that’s an incremental $50 million of cash, and I didn’t hear what you said about CapEx, what was it in ’08 and what will it be in ’09?

Harry Hawks

It was $35 million, it will $15 million.

John Kornreich – Sandler Capital

Alright. There is another $20 million, it’s – against the major decline in the ongoing core, this $70 million of new cash coming in also. That’s very predictable, correct?

Harry Hawks

We have – anyway, I think I probably said enough on this—

John Kornreich – Sandler Capital

Okay.

Harry Hawks

So, rather than guide anybody to a revenue or cash flow number in ’09–

John Kornreich – Sandler Capital

What’s the float now of the 93 million shares?

Harry Hawks

I think it’s about 17 million is in the public float, Hearst owning 82% of the shares outstanding.

John Kornreich – Sandler Capital

Okay. Thanks a lot.

David Barrett

Thanks, John.

Harry Hawks

You bet. Thank you. And that concludes the question-and-answer part of our call. Thanks to all of you for participating. Operator, we are now concluded.

Operator

This concludes today’s presentation. Thank you for your participation. You may now disconnect.

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Source: Hearst-Argyle Television, Inc. Q4 2008 Earnings Call Transcript
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