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Gray Television, Inc. (NYSE:GTN)

Q4 2008 Earnings Call

March 16, 2009 11:00 AM ET

Executives

Robert S. Prather, Jr. - President, Chief Operating Officer and Director

Hilton H. Howell, Jr. - Vice Chairman, Chief Executive Officer and Director

James C. Ryan - Senior Vice President and Chief Financial Officer

Analysts

Marci Ryvicker - Wachovia Capital Markets

Ethan McAfee - Ramsey Asset Management

Barry L. Lucas - Gabelli & Company

Operator

Good day, everyone and welcome to the Gray Television's Fourth Quarter Fiscal Year 2008 Earnings Release Conference Call. Today's call is being recorded. Today's presenters will be Hilton Howell, Bob Prather and Jim Ryan.

For opening remarks and introductions, I would like to turn the call over to Mr. Bob Prather. Please go ahead, sir.

Robert S. Prather, Jr.

Thank you very much operator. I want to welcome everybody to our year-end conference call.

And I'll turn it over at this point to Hilton Howell for some opening remarks. Hilton?

Hilton H. Howell, Jr.

Thank you very much, Bob. And I want to thank everyone that is here on this conference call for taking the time to listen to us. And to what I think is some fairly good news in a difficult environment. A difficult environment for the broadcast business, for the advertising market, and as everybody knows for the U.S. economy as a whole.

And we wanted to apprise all of you of some of the decisions that we have made in light of that difficult environment. Our company is not a chicken little company and we don't have chicken little management team. But considering the difficult environment that is in place in 2009, we're going to be focusing on job number one, which is operating our television stations, delivering the news to our markets, to improving our income statement, and then very importantly to solidifying our balance sheet. And so that of an abundance of caution, we've made a lot of tough decisions that we want to bring you guys up to-date on.

The first issue that I would like to touch base on is that our Board of Directors in the fourth quarter and for '09 has suspended our common stock dividend, and that leads to a savings of about $5.8 million in cash during this upcoming year. Second, the executive team of great television has voluntarily eliminated executive bonuses for 2008 and we have frozen the salaries of virtually all of our senior management team.

The third issue that we need to discus and this was a particularly difficult decision for everyone in the company. But we've made decision with the Board's backing to sustain the 401(k) match in the fourth quarter for our employees, both in terms of common stock matching because of where our stock is currently trading or in cash. And I do want to say that in that regard in particular, our hope personally very, very much that the company will be able to make that up to our employees as soon as this environment has improved a bit.

And then I'd kind of like to brag a little bit on Bob Prather and Jim Ryan, because not just on them our whole management team, because I think that the company has actually been ahead of the curve. We are not in a situation looking into 2009. We're looking to make great numbers of salary cuts in terms of our total number of employees and what we can do to kind of skinny down in the difficult environment.

We were ahead of the curve. And in to 2008, we run about $15 million of expenses out of the operating cost of the company. And the company is down about a 170 full-time employees as we begin 2009. And so we will have the benefits of those cost savings for the entire year. We also have some pretty positive news in terms of top-line growth. Bob will cover this and give more detail and questions I'm sure will come out about it.

But our retransmission consent is going to generate revenue between 15 million and 16 million in 2009, which by my recollection is more money than the company ever got on a consolidated basis from network compensation at any point. And we're very excited about that.

And most importantly, Gray was fully incompliance with all of the SEC regulations. But after checking with all of our markets and making certain that the public was served appropriately, we have completed the conversion to high-definition television in 26 of our stations, which has gone absolutely beautifully. And Bob can cover that with great deal... more detail and color. But all of us here at Gray Television feel that after literally years and decades, expenditures in tens of millions of dollars of those investments, we're finally beginning to usher in what we think is going to be a new golden age of television. And it's being grieved by our view in public and our markets in a very, very positive way.

And so, I just wanted to bring my brief comments to a close. Thank you for attending this conference. And I turn it back over to Bob.

Robert S. Prather, Jr.

Thanks Hilton. I appreciate it. First of all, I would like to concentrate on good news today. I know all of you've been... all you have to do is pick up a newspaper or watch any of the new shows on TV to hear a lot of bad news.

I actually think we've got a relative bit of good news. First of all, we've wound up with the best numbers for the year of anybody in the business, which I think is a strength of two things: it's a strength of our management GM is out there in the field that really have done a great job; and two is the strength of the markets and our strategy of being in... we're in 17 major university towns and major state capital, which I think probably a fair and better than most of the communities in this kind of economic swap we are in right now. But being down is no fun and then bragging about it is no fun.

I've told my friend Mario, the better the last time I said this back in 2001 we were down that year when all the broadcast were down. And I told Mario, we look like the best numbers ended by in the business. So, yes we like bragging about being the tall as mid-June Time. So but we are proud that our strategy of picking good markets and picking number one stations in most cases we, as you remember, we've got 24 number one stations out of our total of 36. And all the others are number two, and some of them were close to number one. So, I think that's the first bit of good news.

Number two, as Hilton mentioned, we've fed over $15 million of our expenses. Really last year we went into the budget cycle early and decided that we really need to make some cuts. Our manager did a great job of identifying where they could cut without really cutting into the need of our business, which is our local news operations. And we've not touched any newscast anywhere and continued to provide the best news in our market of any new group out there I believe.

We also were very proud. By the end of the year, we had made deals, agreements successful with all of our cable operators. And we are bringing in over $13 million of new retrans money effective January, 1. All the contracts aren't totally signed yet, but all we do have is written agreements and impressed with all these operators, both big and small and we hope to have the contracts left open in the next couple of weeks.

But the retrans money, as you know, we'll continue as we have a total amount of over 16 million a year. That will grow to over 18 million by the end of third year. And then we hope to be able to re-open and we think there should be a continuing solution to build the revenue in the future for us and we're very proud of that. And here again, I think the strength of our stations allowed us to really come out with a very strong per subscriber number in our market. So I feel very good about that. I think we will continue to grow.

But third year, we think we're continuing grow as our new media strategy, our websites continued to grow and they continued to be very profitable. They are actually on a margin basis more profitable and most of our TV stations. Our mobile strategy especially is paying off. We've got a million, I think 1.5 million plus of mobile revenue now. We're doing about 7 million page view to more than 1.5 million unique visitors on land phone on mobile phones. And I think the big thing coming for next year is live mobile TV. As most of you know we are in the NBC correlation of a lot broadcast groups and a lot of TV is right around the corner. Over 20 million people have live TV available in Japan right now free.

I think you'll be seeing this coming in America to say next year. The technology is here now. It just getting through all the various that go through on the legal side of things to make sure that we can provide this to our customers. But I here again I think this is going to be a big benefit for us.

As Hilton mentioned we converted 26 of our stations on February 17th or as soon after that to digital. I am very happy to say it's going extremely smooth, much smooth than we thought. And we decided upfront that what we were going to do is, is use the phrase one customer at a time and we literally set our phone banks in every stations. We had all our management team committed to take all of the calls that came in and literally deal one customer at a time. We spent from as little as a minute to as much as 45 minutes for people walking them through what they need to do, and even offer to come their home if they really had a problem.

I would say we've got a total of less than 5,000 calls for all 26 stations over a 50 day period. 90% of those calls were just how do I turn this box on. Most people have gotten out, got a converted box and we walk them through how to set up, how they stand for the channels and get it working right and say we've been extremely successful there.

The instrument bank we came out of those calls, we have Channel 6 in Tallahassee. And most of you may not know this but Channel 6 is the only TV channel where you can also get on 87.7 on your radio. Now you can get our TV broadcast on radio. We've probably had a total of 2,000 colors and people are saying what happened to my radio on your TV station and we're working on a way where we can replace that. We're not sure technically if we are working hopefully because those people obviously have been listing our news and other programs and either going to work or coming almost likely. And then we would like to continue that if we can, but Channel 6 is not a good channel for digital and we've made the choice to move to digital channel. So we're right now, we're not able to provide that radio broadcast for people. But it's something we are all working on it.

I am very excited about digitals. I mentioned I have been saying that for I guess five years of evolution and willingness. I think that digital is going to be a big boom for television going forward, both for viewers, for us as broadcasters and for advertisers. I think total HDTV is going to be a huge product improvement of what we've had in the past. And I think once people are really exposed to it, they are going to agree and it's going to become even stronger as we go ahead.

I want to mention one thing, another piece of good news; business seems to be getting better. We watch our numbers very closely week-by-week and for four weeks in a row we've actually had to up our forecast on Friday afternoon based on what our managers see coming in the pipeline in the weeks ahead. And we feel very good about that. And I also have thought our national reaffirm and basically the same thing on the management side.

Telecom is really doing good right now. Although, it is actually picking up little bit, although that's still the key for everything. GM is down 80%, and they have been the biggest advertisers in the county for years as far as auto. And basically two-thirds of the auto advertisers nationally is domestic and those are the ones been hurt the most that you. That financials obviously a way down and that's been a bad sector, but fast food is a... and packaged goods, desert been real way out. So those are areas that seem to be and if auto turned around a little bit, it's going to have a big boost for all of us in the TV business and the auto or the dealers that their needs bad too. So I think we're going to see a pickup later on the year, especially once the domestic GM and Chrysler figure out what they are going to do going-forward, whether it's going to be bankruptcy with the government financing or continued government financing.

I think obviously the government is committed to keep these companies and business. I'm not sure if that's the right thing, but that's what looks like going ahead. But, General Motors especially is important to our economy and obviously important to all of us in TV business. So hope that we'll continue.

I heard a talk last week by Mike Jackson, who is President of AutoNation. And he said right now that transmitter is running about an 8 million a year, auto clip down from 16 million clearly last year. And he said you can literally see the drop-off passing on September 15th, right after the Lehman bankruptcy, said literally the banks we shifted doors the next day. He said the big problem they have got is that they normally used to get 90% of people qualify for a loan, they now get 50%.

And I'm hearing that from local dealers also. The big problem is not traffic but financing. But look, we are determined as you have to mention to watch out Ps and Qs around here. We're watching every expense. We're looking at ways to continue to get more efficient, looking for more automation ideas that will help us going-forward more creative ways to make sure we're being as efficient we can. This is something we're constantly working. And I'm constantly looking at new equipment, new ways that we can run this business more efficiently going forward.

At this point, I'd like to turn it over to Jim Ryan. And Jim can go through some details number. And we will open it up for questions. So Jim, take it away?

James C. Ryan

Thanks Bob. Good morning everyone. I'll keep my comments relatively brief, because I think a lot of a detail is already in the release itself.

Our fourth quarter total net revenues, we're very pleased that we are up 12% year-over-year that was certainly done on the strength of political. And as you know we tend to be a very strong political performer and for the total year political ended up being the second best year on record for the company.

Our local in fourth quarter, core local excluding political was down 17% and national was down 24. The debt is better than the national averages I've seen TV news reporting that local was down 25 and national down 27.

The auto category in fourth quarter was down significantly, is just is literally everyone else has reported was down... a 34% and about 14% of our total revenues. Now there would be some natural displacements with the political and auto, but certainly auto has been challenged. We are pleased that our broadcast operating expenses came in 2% under last year and fourth quarter. And again that reflects the expense reductions that we had started to put into place as 2008 went along. And I have another comment or two on that in a moment.

Similarly, for the full year, again up 6% in total net revenue which we are pleased with on the strength of our political. Political came at 48.5 million, local was down 7% and national was down 12%. But again well ahead of the national averages reported by TVP, with local being down 12% and national being down 15%.

In the '08 full year numbers, as we mentioned before we did have the benefit of about 3.4 million of Summer Olympics. The Super Bowl for 2008 early in the year was only about 130,000 for us because it was only on our six Fox channels. In comparisons, you've both '07 and '09 Super Bowl each coming in at about 750,000. Of course '07 was under CBS channels, and '09 was on our ten NBCs.

Auto was down about 17% for the year, about 19% of our total revenues. Again, we're very pleased looking at the expense lines that we're able to bring in. Our total '08 operating expense is flat to '07. During the course of '08, we've reduced our staffing by approximately 172 persons or about 7%. That translates into as we roll into 2009 that will translate into 4, $5 million worth of savings in payroll and related expenses for the company during 2009.

Moving ahead to guidance for a minute. We put the high range of guidance at 60 million. I will say that if the numbers that we saw on Friday holds for the rest of this month, we would expect to be at the high end of the guidance range. And again, as Bob had indicated, over the last few weeks we have seen the numbers, each week pick up a little bit, which is been encouraging.

For the full year of 2009 in operating expenses we expect a $50 million reduction at least against '08. We are going to continue to evaluate our operating expenses as we continued to go through 2009. We think there is probably some more selective staff reductions that we can achieve without hurting operations. And will as Bob said be continuing to look very hard at any other operating efficiencies, again trying to position ourselves to be as efficient as possible.

A couple of quick comments on operating cash flow for the quarter. Again, with the strength of political, our operating cash flow was up 33% year-over-year and for the full year, it was up 22%.

Operating cash flow on a 12 months basis is coming in at 118.1. If you were to use the definition of our senior credit facility, which is on average left eight quarter basis that calculated number comes in at about 108.6. Under the credit agreement, our net leverage test would compute to be approximately 7.15 at the end of the year. Debt outstanding at the end of the year was 800.4 million. We had 30.6 million of cash on hand. And we were within covenant for end of the year.

So at this point, Bob I'll turn it back over to you.

Robert S. Prather, Jr.

Thanks Jim. One thing I wanted to mention that Jim pointed out at in, we obviously know that our balance sheet is very important to all of us and all you investors. We are keeping a very close eye on our balance sheet issues. We want to pay down our debt as quick as we can. With our free cash flow we are limiting our capital expenditures to just absolute emergency and expenditures related to digital or conversion, which we've been mandated to, which we have done already. But we plan to keep those expenses as low as we can and continue to operate our business. But our balance sheet is extremely important to us as far as getting that debt to cash flow ratio down. And hopefully like I said as the year goes on and business gets better, we'll generate extra cash flow we will be sure to being using the same amount of debt.

And operator at this time I would like to turn it over to you for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen the question-and-answer session will be conducted electronically. (Operator Instructions). And we go to Marci Ryvicker with Wachovia Wells Fargo first. Please go ahead.

Marci Ryvicker - Wachovia Capital Markets

Thank you. Good morning.

Robert Prather, Jr.

Hey Marci.

Marci Ryvicker - Wachovia Capital Markets

I have a couple of questions. The first you mentioned CapEx, do you have a formal outlook for 2009?

Robert Prather, Jr.

Our outlook Marci is, like I said, we planned to spend basically no new money except for digital conversion expenses which satellite has done last year and we're paying this year, and emergency where we... it would image our own air product, things like that.

We've got a couple of projects in progress that are here against our last year regarding automation, but that again we think it will enable us to actually operate more efficiently with less people going forward. But we are not plan to let anybody have any real capital expenditure budget well in emergency right now.

Marci Ryvicker - Wachovia Capital Markets

Do you have a target number?

James Ryan

Zero.

Robert Prather, Jr.

Because like I said I don't know what the emergency is going to be. But --

Marci Ryvicker - Wachovia Capital Markets

Okay, okay. And then can you just talk about the expense savings that occurred when you transitioned from analog to digital?

Robert Prather, Jr.

Yeah. I think the main thing obviously is power. We think Jim, I'd like to be aggressive on these things, but I think it's going to be a total, $2 dollars a year of savings both from power and from having, not having two transmitters go and other maintenance expenses, engineering costs, things like that. I think it should be 2 million a year plus or it's probably overall.

Marci Ryvicker - Wachovia Capital Markets

And then the last question. There has been a lot of talk on the networks, potentially bypassing the affiliate stations and going straight to the Telco satellite and cable distributors. Just wanted to know what your thoughts are there.

Robert Prather, Jr.

Marci, I'm not sure, I hear that all the time. I talk to networks frequently. They don't have to say that to me, and of course they might not want to say that to me either. But I would tell you this, the networks have a great deals. The affiliates operations market is now, they are not really paid any comp anymore. They are getting a lot of key including primetime program and for most free basically and they are getting the commercial managed during the hour to sell for themselves. And they are covering 100% of the currency. And I don't care what they go to; they go manage 8 to 10% of the currency. If they don't get all of the cable guys and all of the satellite and all of the phone company got and all of the broadband, whatever they want to signed up and there is no guarantee that any of those are going to let them have the flee either for that matters.

So, I think they have got a great deal with affiliate. So situation like it is now, we're not being paid and developing anymore basically. And I think it would be very sure side of them to try to go around the affiliates.

The other things, in our case I mean you've seen our numbers filling our presentation with ABC, NBC and CBS. We out index them 30% to 50% in most of our markets. So, we're bringing viewers to them not vice versa. And I think here again their news, their management news is important to them. Their primetime is important to them. Their morning show or evening show, we bring viewers to them and not the other way around. So, here again in our case specifically I think it will be very short sighted.

The third thing is I think most of our agreements are NBC is going end of our level 1 (ph). I think our CBS is clear over 13 now for four more years to go that really no change is going to be made between them in anyway. But I think as an industry we broadcast network relationship has worked great for a longtime. And I don't see any reason why it shouldn't became great in the future.

Marci Ryvicker - Wachovia Capital Markets

Okay. Thank you.

Robert Prather, Jr.

Thanks, Marci.

Operator

We'll take our next question from Larry (inaudible) with Camco (ph).

Unidentified Analyst

Yeah Bob, hi.

Robert Prather, Jr.

How are you doing?

Unidentified Analyst

I was good. I was just curious as to whether you affect... you are expecting your auto business any improvement once this Telf securitization think it's underway, which I gather is Thursday.

Robert Prather, Jr.

I think we will Larry. And I talked, as I said I talked to our national reaffirm earlier to-date and he definitely thinks that's going to happen. And we are actually seeing to pick up an auto right now for the rest of this month and into next month.

So, I think these guys, at inventory stacks we have pretty fast when they are making cars and maybe get rid of some how. And the best way in the world to let people know that they have got cars for sale is they advertise on TV. And once again I think the strength, diversity and strong awards made their markets that certain back any way, I think to turn back anywhere I think turn back on the weaker stage in the market and trying to get as many eyeballs they can. So, obviously we're better know as picking up just because I think it's going to good for them as well as for us. But everything I hear and what I am seeing like a said in the last three or four weeks is it seems to be we're actually picking up. Now it's not blooming but, and I think they still got to a get financing inline somehow.

Unidentified Analyst

Well that's what this does?

Robert Prather, Jr.

Yeah. I know when to turn out just the tap really works, I think that will a tremendous boom for the auto guys. I think you'll see I've talked Larry a good friend of mine here. Larry has got six dealerships and he said his volume of people coming through is only down 215%, but his sales volume is down 60% because he said they can't get anybody here to offer.

Unidentified Analyst

Hopefully this helps things.

Robert Prather, Jr.

I agree. Hopefully it will.

Unidentified Analyst

Okay. Thanks Bob.

Robert Prather, Jr.

Thanks Larry.

Operator

We'll take the next question from Jim Harris with Good Life Partners (ph).

Unidentified Analyst

Hi. Good morning.

Robert Prather, Jr.

Hey Jim.

Unidentified Analyst

You referenced, couple of questions just about the date. You referenced in the in the comments on the senior credit facility, speaking wavers or amendments for certain periods for the debt beginning March 31 of '09. And I was under the impression that the covenants, the main covenants to be concerned with was the 12/31/09 step down to seven times on that defined basis. Can you say what you are referring to there?

Robert Prather, Jr.

Yeah. Jim you want to take that one?

James Ryan

Jim, we have initiated some preliminary discussions as we indicated in the release regarding seeking some covenant release as we go forward. I would prefer not to get into a lot of detail right now simply because the conversations are at initial stages. And we would like to be able to come back later and speak more qualitatively with everyone.

Given we were at 7.15 at the end of the year against a 7.25 covenants, and given that even from our own guidance, the year-over-year as Q1, '09 is... but we certainly think we are showing among the best results for Q1 or indicating the best, some of the best results for Q1, it certainly would be under '07 levels. And because the covenant calculation is done on a trailing eight quarter basis, certainly that creates some degree of pressure and uncertainty as we head towards the end of first quarter, led alone the rest of the year. So we are trying to be prudent and opening up a dialogue now to address the issues as necessary.

Unidentified Analyst

Okay, thanks. And then, the second the question, do you have some thoughts on what the depreciation and amortization charge is going to be for 2009?

James Ryan

Yes, just a minute. I can... approximately 30 million of depreciation and about a 0.5 million of amortization.

Unidentified Analyst

Okay, thanks. And then, would you say your capital spending would be over $5 million for the year?

Robert Prather, Jr.

Jim, probably but I'd say 80% of that is going to be what we're paying for from last year from the digital. We got to deal with our vendors to basically pay 12 months after installation, so most of that money we spent last year regarding the power, digital conversion issues.

Unidentified Analyst

Okay, thanks.

Robert Prather, Jr.

Thank you very much, Jim.

Operator

The next question will come from Larry Schumacher (ph) with Oppenheimer.

Unidentified Analyst

Hi, guys. Just on a decline in national, local. Could you give some color on the Q4 and full-year decline relative to peers?

Robert Prather, Jr.

Jim, do you want to take that one?

James Ryan

Based on what I've seen from other public reporters, I certainly think a that our... unfortunately, we are talking about declines, but fortunately I think our declines are among the lowest in the industry and put us at the very top of the performance levels for the peer group. And we were down seven in local. I... again most of the reporters were down more than that. And same with national, we were down in full year about 11, 12%, and again there were quarters I've seen we're indicating more than that as well.

So, certainly on a relative basis we think, both fourth quarter and full year '08, plus what little limited commentary anybody had for first quarter '09. Again, we think while it's a challenging environment overall, we think we are holding up at the very top of the industry on a relative basis.

Robert Prather, Jr.

Larry, any other questions? He must have hung it up I guess.

Operator

We'll move on to John Rubis (ph) BNP Paribas.

Robert Prather, Jr.

Hi.

Unidentified Analyst

Hi, Bob. Hi, Jim. My question is regarding your preferred stock. You mentioned in the press release that the January 15th, cash interest payment was unfunded. I just want to confirm whether or not that was the first... that was the only interest, cash interest payment that was unfunded?

James Ryan

Yes, it was. It was. And as a function of the preferred, if... yes we did not fund the fourth quarter during January and that was the first non-funding.

Unidentified Analyst

Thank you.

Operator

We'll take the next question from Ethan McAfee with Ramsey Asset Management.

Ethan McAfee - Ramsey Asset Management

Hi, guys. I just had two quick questions. Just for clarification, you said the operating expenses for 2009 were going to be down 15 million or 50 million?

Robert Prather, Jr.

15 million

James Ryan

One five.

Ethan McAfee - Ramsey Asset Management

One five, okay perfect. And then second just on the calculation for the covenant, you said that as of last quarter it was about 7.15. And I just want to make sure I was doing the maths right. Using your guidance for the next quarter, it comes up somewhere around 7.4, is that correct?

James Ryan

And since some pay down of the debt balance by the end of the quarter that would probably be not unreasonable math.

Ethan McAfee - Ramsey Asset Management

And the covenant, steps that I think it was misquoted to 7.25, is that correct by December 2009?

James Ryan

No, especially to at 7 the end of '07.

Ethan McAfee - Ramsey Asset Management

7 at the end of quarter. So, based on --

James Ryan

I'm sorry. Let me be clear. It's 7.25, the first three quarters of '09. It steps to 7 at the last quarter of '09, I may have misunderstood what you asked.

Ethan McAfee - Ramsey Asset Management

Okay. Got you. And so that's the reasons why you would kind of go back and redo the covenants because based on your guidance you would be in the violation of those covenants?

James Ryan

Yes, that maybe the case again. It would depend on if you could somehow reduce the debt balance prior to the end of the quarter.

Ethan McAfee - Ramsey Asset Management

Okay, got you. By doing something like more preferred stock or some type of equity raise or something along those lines?

James Ryan

I mean, again I, if the debt balance doesn't come down, I... you are correct that it looks problematic.

Ethan McAfee - Ramsey Asset Management

Got you. Well, thanks so much.

Operator

Next question will come from Barry Lucas with Gabelli & Company.

Barry Lucas - Gabelli & Company

Thank you. Good morning, Bob.

Robert Prather, Jr.

Hey Barry.

Barry Lucas - Gabelli & Company

I would like you to play a little bit of devil's advocate here. If you're generating on the order of $15 million of re-tranche fees in '09, why wouldn't your wireless fees be worth any... why would they be worth any less to mobile providers?

Robert Prather, Jr.

Yeah. I'm not sure I understand what you mean Barry. What can we charge mobile devices?

Barry Lucas - Gabelli & Company

No, I know the business model isn't formed yet, but the economic value of the mobile signal, why should the value of the mobile signal be worse any less than it is to multi channel video providers?

Robert Prather, Jr.

That's a good question. I think Barry that here is the problem and that's what the whole NBC is facing right now. If there is a charge model, there is a bunch of fingers trying to get in that path. First of all you've got phone carriers themselves; second, you've got the networks; third, you've got the syndicators; fourth, you've got people like CNN, AT News. All those guys go on piece the action and nobody is quite figured out yet if it's a paid model, how you get all that divided up, especially all around the country.

Japan as I mentioned is been very successful where they free model, where they basically charge advertising. One of things I found out is because of the mobile is so measurable, they know exactly how many people had been watching, how long or so forth. So there is an easy measure there with some one like Nielsen or anybody in the management business could pick up very quick and say okay, we've got 200,000 mobile devices in this market and X-number of our own, X-number of hours a day.

Watching is a pretty measurable thing for an advertiser to see. And I think it's an audience that they are looking for. I think most of mobile customer, the younger and in that demographic and all the advertisers are going after these days. So I think, it appears from advertising medium if there is a way to work or pay medium on it and I think that's something we are all looking at, nobody would turn that down. And I can assure you in... where is the cost of traffic conversation with every OE, NBC meeting.

Barry Lucas - Gabelli & Company

Great. Thank you, Bob.

Robert Prather, Jr.

Thanks Barry.

Operator

Next question will come from Matt Fuller with Collette's Capital Management (ph).

Unidentified Analyst

Thank you. It's Matt from Kalos Capital (ph). Good morning. And, can you just state whether you see any movement in share in any of your markets for your stations?

Robert Prather, Jr.

Based on our ratings in November, I'd say we had probably one of the best rating periods we've ever had overall, which I guess means we're picking up share in lot cases. I think in a tough economic climate like this being a number station has its advantages. I think our news continues to attract better viewing. The rating has been real good off-late. I mean they are always good but they have been any better in the last couple of rating periods. So that's one of my goals.

On the advertiser side is to sell is to sell our strength. I mean I'm thinking... I'm an optimist by nature and I want our managers and our sales people to be optimistic. And one other things that I've have been encouraging and is to go out in these markets and to sell the strength of our savings, another strength of... we've got 16 stations in number one 50 straight years or more. Those are campaign that the people can kind of hold on to in a economy where they are steered by everything else. We want to be a constant in those people eyes and be there in order to represent their interest in the community they live in. And I think we do an excellent job over there.

We've been very fortunate to have longer term GMs in most of our markets and we've got 10 GMs that were born and raise in the markets where the GMs, they really know those markets and what they were looking for in those markets. So, I think building from a position of strength is a great place to be in an economic climate like this.

Unidentified Analyst

Got you, got you. And in terms of the network programming, some sounds the paper is the face of reporting of people skipping, watching it on live, going to the internet on who, who or what have you. Are you seeing that?

Robert Prather, Jr.

I'll think that hail system do not hurt us. And I'll tell you why. I think most of those people would now have seen that show any way. So say DVR or TiVo and watch it later. I think they get adjust to their commercials in most cases they want to skip and through, they skip through. And I think especially for this series they won't go and stories to. And I think if people miss two or three weeks in a row, they lose interest in the series whereas they can go back and watch them on the Hulu or TV.com or anywhere else on TiVo or DVR or they did home. I think it keeps them interested in our program.

And so I don't think it's been a threat to U.S. going forward at all. And I think it's up to us to make sure we led advertisers know and I think the advertisers are steady and pretty carefully that while there is some edge dip... the basic business is not hurt by this in the long rum. And I think it actually like it says, more people are probably watching TV because of this.

Unidentified Analyst

And to the extent you have some people who might go to the internet to watch TV. Does that impact your news viewership at all?

Robert Prather, Jr.

Here again I don't... so we don't... I don't think so. I mean I think our news and we are actually streaming our news on some of our websites. And I've encouraged managers to look at doing that eventually all our websites. It's get expensive, but I think in the longer run we're... we should be proud to streaming most of our major newscast on our own websites, and making sure that people... that's what you know. I mean we've got... it's the thing, where they perish on their bids, so our revenue come from our local news. And it's very profitable for us and we want to make sure that that's... we retain that leadership in these markets. That's our number one goal, day-in and day-out to make sure we maintain the news leadership in the markets we're in.

Unidentified Analyst

Excellent. Thank you.

Robert Prather, Jr.

Thank you.

Operator

Our next question will come from Sean Pharaoh (ph) with Deutsche Bank.

Unidentified Analyst

Hey guys. Thanks for the call. Just had a kind of a broader base question, I think that my questions on the credit facility were answered. I mean how you guys are approaching that but just had a bigger picture question about how you guys are thinking about managing this company, given that cash flow after interest is probably going to be pretty low this year.

And potentially in years going forward, a lot lower than obviously you guys have generated in the past just given the environment. How you guys are thinking about dealing with clearly a potential covenant defaults here? And if you think that working through a covenant or covenant re-negotiation with the banks is going to be a more fulsome solution, or and you think you guys can manage the company going forward the way that you want to with just a covenant waver, or if you guys are looking for something a little bit more flexibility going forward?

Robert Prather, Jr.

Well, I think all us assume that broadcast world today are faced with leverage issues when you got a declining economy that is affecting everybody out there and broadcast is historically have had higher leverage in most of the business because we've been very, very profitable business and a very growing business for a long time. And when you, as you well know, when these covenants started gradually come down and you're not growing, it catches out with everybody pretty quick.

But we think if we do work out and remember it would be, give us plenty of room to operate in the next year ahead. We think, I think 2010 is going to be a good year, political be back number one, the Olympics, Winter Olympics would be back. We've got some good things going. And I think the economy; they have got to solve these issues with the bank from the finances. I mean the whole country cannot continue to go without banks being able to lend money and that people have been able to have had decent credit, being able to buy cars.

I'll give you an example. We've got a furniture dealer in one of our small markets has been a great customer for 50 years. And he tell that management issues that his domestic selling force that say he cannot sell, they won't take any paper driven by less than 720 credit goal. Well, that's 90% of the country basically and he said that he can't survive on that kind of, so he is out looking for else for financing. But they have all overreacted. Banks and financial institutions have created all these problems for themselves. But regardless they are overreacted, they are demanding unreasonable churns for credit some people for buy cars, houses, furniture, just about say anything. And as I mentioned, Mike Jackson of AutoNation said, they are only qualifying, saying the people are walking the doors now to buy a car even would seem.

And the leasing business is virtually going for the car business. So, I think we... we're going to operate our company as high as we can from the expense side. I am proud of fact that we've always hit the highest margins in the industry. We've got the lowest overhead as a percentage of our revenue and we will continue to do that. And I think we're going to be one of the survivors coming out of this on the other hand.

Going forward, I think we've got to reinvent the way we operate our businesses. Like we've got to be much more automated, we've got to be much more efficient using equipment. I think we've got to figure ways with new technology with the internet, with smaller cameras, all these things where we actually operate and gather needs much more efficiently, much cheaper than we do now.

We generated video which we're doing some more. And I think we'll do more and more, both on the internet and even on TV and there are a lot of people out there that have cameras and have video that come across great stories and they like to hand them to you for free and we like to take them if it's good, good video. So, I think you're going to see more and more there. And I think we've got to be very agile and very... we'll have to change the way we do things to keep up with the technology changes going on. And I think we're going to be the beneficiary of huge technology improvements in all broadcast equipment.

Everything is going more digital. Digital equipment is cheaper. It's easier to maintain. There is less moving parts. It takes less engineering, all the things that we spend a lot money in the pay us, I think it's smaller, so you don't need a bigger building. All those things are going accrue to our benefit going forward.

Unidentified Analyst

Yeah. Do you think I mean understanding that the shift that would likely occur and you guys will probably be, going to be leading a lot of those for the industry? Do you think you can shift... make those shifts with the current balance sheet, I mean clear the balance sheet --

Robert Prather, Jr.

Well, I mean I think we've got to generate free cash flow to pay down debt. I mean I think we all are in net position. And I think we will. I think next year is fifth political year and let the year we should generate some real good free cash flow next year. And we will be using virtually every penny I mean we pay down debt.

Unidentified Analyst

Okay. Thanks guys.

Robert Prather, Jr.

Thank you.

Operator

At this time we have one question remaining in the queue. (Operator Instructions). We will now move to Sig Carboni (ph) with GE Capital. Please go ahead.

Unidentified Analyst

Hi guys. Just a couple of questions on mobile TV, when and how long do you think that this becomes robust or viable kind of business for the industry and do you foresee if... is there any additional CapEx spend around that? And also what kind of content do you see yourselves sending. Is it just your news cast or would it become some of the station content?

The way it's worked in Japan is they virtually use this Live TV, just like you watch for whatever time of day, you turn to one our channels it would be whatever's own at that time during the day and has worked very successfully in Japan. There is some capital to be done, but it's not that big penalty. There is some antenna type thing that you've got to make some adjustments on. It's not very big. And I think live mobile would be a factor of pretty strong. I would say within the next 24 months in America.

One thing there is also, there are few people realize that the auto manufacturers and this was confirmed by Mike Dixon, the President of AutoNation, said last week that he think that virtually every car in America over the next couple of years is going to have a screen built into the car and especially in the back where both DVDs can be played and live TV can be accessed. So, I think you just don't see tremendous exposure as you well know, all the devices coming out now the new Blackberry, iPhone, whatever you want to get, there is a hundred different devices at there.

They are all realized that they need to make these things where they can receive live mobile TV. So, I think it's going to be a big growth area. And more and more people are doing mobile. There is less land lines everyday. People are not even... young people especially aren't getting landline phones anymore. It's a mobile society that we live in. And I think you just... people want to be able to and they are willing to watch on a little three or four inch screen as you know. And I think especially young people are used to that right now with YouTube will be in a best growing area for our business in the next few years. And I would like to mention, I think it's not very manageable that we can sell the advertisers.

Unidentified Analyst

Got you. I guess one of the follow-up question is, your agreements would be with the content providers now, will that cover mobile TV or are there new agreements?

Robert Prather, Jr.

We think it does as long as we are not charging for it. I think once you start charging you're getting to therefore area, and I think that's where as I mentioned earlier, there is lot of fingers want to get in the path at that point virtually everybody that provides program into us with one piece of the action. I mean deserve this, so I'm not saying they shouldn't get it.

Unidentified Analyst

Right.

Robert Prather, Jr.

But I'm saying that we've been historically free entertainment and here on advertising base medium, and I find to thank we've done a good job, over there. As I said I think the measurement of mobile TV and so accurate, I think it's something that we can serve as an additional. We can show the advertisers, hey, we've got X number of people watching X minutes a day on mobile devices in this market. You are the big get known, making sure you're being part of that.

Unidentified Analyst

Okay, okay. Thank you.

Robert Prather, Jr.

Thanks a lot.

Operator

And at this time we have no further questions in the queue. I'll now turn the things over to Mr. Prather for any additional or closing remarks.

Robert Prather, Jr.

Thanks very much. I want to appreciate everybody's attendance today. We, as I told you before, we're committed to make sure we operate this company as efficiently and as... out of climate. We do that each anytime, but I think in this climate we're even more carefully we do about it. As always there have been in every call, we're easier to find, we answer own phones. So you can call us any time to if you get any further questions or comments. And we look forward to talking to you at the end of the first quarter call. Thank you everybody.

Operator

And once again this does conclude today's conference call. Thank you for joining us. And have a great day.

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Source: Gray Television Q4 2008 Earnings Call Transcript
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