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Executives

Denise Parent – SVP and CLO

Vince Sadusky – President and CEO

Scott Blumenthal – EVP, Television

Rich Schmaeling – SVP and CFO

Analysts

Marci Ryvicker – Wells Fargo

Barry Lucas – Gabelli & Company

Aaron Watts – Deutsche Bank

Brian Warner – Value Advisory

LIN TV Corporation (TVL) Q1 2013 Earnings Call May 9, 2013 9:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to LIN TV Corp’s Earnings Call for the First Quarter ended March 31, 2013. Today’s call is being recorded. Now, the company will read a brief legal statement.

Denise Parent

This conference call may include forward-looking statements that involve risks and uncertainties. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, those described in the company’s press release and filings made with the SEC, all of which are available in the Investor Relations section on the company’s website at linmedia.com and on the SEC’s website at sec.gov. Many of these factors are beyond the company’s control and the company undertakes no obligation to publicly update or revise any forward-looking statements unless required by applicable law.

Stockholders are urged to read the proxy statement perspective, the registration statement and other documents related to the proposed merger of the company when they become available because they will contain important information. Investors will be able to obtain these documents in the company’s website and the SEC’s website or by contacting the company directly.

Please also note that the company and its directors and executive officers may be deemed to be participants in solicitation of proxies when those proxies are solicited with respect to the proposed merger transactions. However, this communication is not a solicitation of a proxy from any security holder of the company. Investors may obtain information regarding the names, affiliations, and interests of such individuals in the company’s filings.

And now I will turn the call over to the company’s President and CEO, Vince Sadusky.

Vince Sadusky

Thank you, Denise, and welcome to our first quarter 2013 earnings call. I will begin with a review of our results and achievements, and Scott Blumenthal, our Executive Vice President of Television, will update you on station operations; and Rich Schmaeling, our Chief Financial Officer, will provide financial results and guidance.

LIN Media increased net revenues 37% to $141 million in the first quarter of 2013 compared to $103.2 million in the first quarter of 2012. Most of that top line growth was driven by our television station acquisitions in 2012. On a same-station basis, net revenues increased 4.1%, compared to the prior year. Advertising sales got off to a slow start in 2013, especially automotive, our largest advertising category, which decreased 2% year-over-year.

However, retransmission use and the continued growth and contribution of our digital business more than offset the decline in same-station ad sales. During the first quarter, we made good progress, integrating our new television stations into LIN. To-date, we have transitioned all stations to our new sales and digital platforms, hired digital sales directors in six of our new markets and are in the process of outfitting our teams with the training and tools they need to offer advertisers more ways to effectively market their products. All of our new stations are now selling LIN Digital advertising solutions, and we are already seeing results.

For example, our sales team in Youngstown, Ohio recently closed on $200,000 synergy sale. As part of our M&A strategy, we will continue to evaluate both station and digital opportunities. The LIN team has been committed to its strategy for years now. And as a result, revenue is more diverse than ever. We are excited about the two new majority ownership acquisitions in the digital space.

The first, HYFN provides award-winning social media marketing campaigns to some of the world’s largest brands and is a member of Facebook’s elite Preferred Marketing Developer program. In fact, they are only of 12 developers worldwide that have been awarded three out of Facebook’s four badges, designated to developers who have built value-added products in the categories of pages, ads, apps, and insights.

The second, Dedicated Media, also differentiates our digital marketing portfolio and enhances our ability to provide best in class advertising solutions to our clients. They are true innovative and performance-based marketing, data targeting, and analytics. To put it simply, they have the ability to deliver the right ads to the right users at the right times. As a result of this acquisition, we have the ability to further optimize our clients’ cross-channel marketing campaigns and deliver even greater ROI.

Building our digital business continues to be a major focus for the LIN team. During the first quarter, RMM was rebranded to LIN Digital as part of our strategy to align our digital offerings under unified brand platform. As a result of ongoing efforts, interactive revenues which include revenues generated by LIN Digital and Nami Media increased 29% to $9 million compared to $7 million in the first quarter of 2012.

Our TV station websites continue to generate significant traffic and sales as a result of our relentless focus on engagement and developing new products that make it more convenient for users to access our local content on the most popular electronic devices.

According to comp scores March 2013 media and mobile metrics report, every local website and mobile app in our legacy markets has ranked either number one or number two in their market for unique visitors versus our measured local broadcast competitors. Also during the first quarter of 2013, we delivered 27 million total video impressions and our commitment to providing extended news coverage on major stories that impact our communities resulted in nearly 10 million minutes of live streaming video.

Looking ahead to the second quarter, pacing is down low single digits, but improving as we cycle against the political year. Advertisers committed earlier last year in preparation for the political surge and this year, they are placing ads later. While some markets have experienced good core ad sales, the economy is still fragile in other of our markets.

Finally, one of our biggest priorities this year is to resolve the remaining overhang from our exit of the NBC joint venture. On May 2, 2013, we completed an important step when LIN Media LLC filed with the SEC in preparation for its merger with LIN TV Corp.

Now, Scott will provide some color on the local markets.

Scott Blumenthal

Thank you, Vince, and good afternoon, everyone. Local revenues, which include net local advertising revenues, retransmission consent fees, and television station website revenues, increased 47% to $99.4 million, compared to $67.7 million in the first quarter of 2012.

Net national revenues increased 28% to $29.5 million, compared to $23.1 million in the first quarter of 2012. Net political revenues were $0.5 million, compared to $2.9 million in the prior year. Most of our 2012 political dollars were generated in the second half of the year. So, the absence of political was not a significant factor in this quarter’s comparisons.

Core local and national advertising sales combined, which exclude political advertising sales, increased 30% in the first quarter of 2013 compared to the prior year. But if you factor out sales from our newly acquired TV stations, core local and national advertising sales combined decreased 2.4% compared to the prior year. Our decline in core time sales was largely driven by slower than expected results in automotive category advertising. As Vince mentioned, our largest category decreased 2% on a same station basis, compared to the prior year.

Based on our analysis, LIN’s market in between DMA number 50 and DMA number 100 were impacted the most by the decline in automotive advertising. It is no coincidence that many of those markets are facing ongoing economic challenges. We also concluded that our FOX stations were impacted the most as declines in their prime time ratings slowed down demand for advertising.

Looking more closely at the automotive category, domestic was flat, foreign was up 9% and local dealer advertising decreased by 15% compared to the first quarter of 2012. Significant categories beyond auto had mixed results. Retail, media communications, and the financial services experienced gains, while restaurant, services, medical, education, paid programming, and entertainment declined year-over-year.

Even though demand was not as strong as we had hoped for as we kicked off the New Year, advertisers still value our high rated programming, blue-chip inventory, local news, proprietary local programming, and multi-screen marketing opportunities. To help drive new business, our stations held their annual internal sales competition during the first quarter. Each of our markets developed a well thought-out local multi-platform sales strategy and the results were terrific as we secured $4.3 million in new sales, which is an increase of $1 million more than last year’s internal sales competition.

Our accelerated sales strategy also continues to create more cross-selling multi-platform opportunities, improved synergies, and standardized all sales operations, particularly at our new TV stations. Throughout 2013, we will continue to provide comprehensive training in order to create a fully engaged and effective sales force that has all the tools and needs to sell a vast array of targeted multi-platform marketing campaigns.

Before I hand it off to Rich, I want to commend our stations for recently earning some of the industry’s top awards. WIAT in our new station in Birmingham won two regional awards for the RTNDA. WAVY-TV in Norfolk also won a Regional Murrow Award in the Breaking News category for its comprehensive coverage of Hurricane Sandy and WLUK-TV in Green Bay was awarded eight first place awards including News Operation of the Year for media markets by the Wisconsin Broadcasters Association. These awards are just a few of the many our stations received, which exemplify our commitment to news excellence.

For the rest of 2013, the economy is yet to make a full recovery, but advertising is getting stronger as we move through the quarter. All of our stations are getting momentum and finding creative ways to offset any weaknesses in demand. We look forward to updating you on the progress throughout the year.

And now, Rich will discuss our financial performance.

Rich Schmaeling

Thanks, Scott, and good afternoon, everyone. During the first quarter, our net revenues came in at $141 million, up 37% compared to $103.2 million during the same quarter last year. And we are at the high end of our guidance range. On a same-station basis, net revenues increased 4.1%, driven by growth in retransmission consent fees and interactive revenues.

Our interactive revenues, which include revenues from LIN Digital and Nami Media, increased 29% to $9 million for the first quarter. Going forward, the results of Dedicated Media and HYFN which we acquired a majority ownership interest in during April, were also included within our interactive revenues caption. Our total operating expenses for the quarter excluding stock-based compensation and depreciation and amortization increased 44% or $30.4 million to $99.1 million, about $25 million of that growth was attributable to stations acquired during the fourth quarter of 2012.

The remainder of the growth in operating expenses was driven largely by increases in programming fees paid to networks, cost of sales tied to interactive revenue growth and compensation and benefits. BCF for the quarter was up 22% to $41.9 million compared to $34.5 million in the prior year. Corporate expenses, excluding stock-based compensation, and non-recurring charges associated with JV transactions and acquisitions were $5.7 million compared to $5.1 million in the prior year. Most of this increase is from added expenses related to the management of the former New Vision stations.

Adjusted EBITDA for the quarter was $36.1 million, up 23% and $6.8 million compared to 1Q 2012. And free cash flow for the quarter was $12.9 million, down 30% compared to $18.5 million reported in 1Q 2012 due primarily to increases in cash interest, capital expenditures, and mandatory term loan amortization payments.

Turning to LIN’s debt and key credit metrics, at March 31, we had unrestricted cash on hand of $23.5 million and $70 million available under our revolving credit facility. Our net debt was $929 million, up $85.1 million from the end of last year due to the issuance of a $60 million incremental term loan and the use of cash and revolver borrowings to fund the $100 million payment made in February in connection with LIN’s release from the guarantee related to the NBC JV.

Our consolidated leverage at March 31, as defined under our senior credit facility was 3.6 times compared to 3.3 times at the end of 2012 and our covenants of 7 times. Our consolidated senior secured leverage ratio was 1.7 times compared to our covenant of 3.75 times. Focusing on the outlook for the second quarter, we expect that net revenues will be up 36% to 39% compared to net revenues of $121 million in 2Q 2012. On a same station basis, we expect that net revenues will be flat to up 1% compared to the prior year and up 4% to 6% ex-political.

For expenses, we expect that direct operating and SG&A will increase in the range of 61% to 64% for the second quarter compared to expenses of $65.3 million for 2Q 2012, driven largely by operating expenses of the acquired TV stations as well as growth in programming fees paid to networks, and increased publisher costs associated with the growth of interactive revenues. On a same-station basis, we expect that direct operating and SG&A expenses will increase in the range of 13% to 15% compared to the prior year driven primarily by increases in network programming fees, cost of sales tied to interactive revenue growth, and compensation and benefits.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll go first to Marci Ryvicker with Wells Fargo.

Marci Ryvicker – Wells Fargo

Thanks. Rich, I want to just ask you a follow-up on the expenses. Can you talk about how much of that expense growth is due to interactive?

Rich Schmaeling

Yeah. I think it’s – interactive is a key contributor, but it’s primarily of course the acquired stations’ reverse retrans, hence compensation and benefits growth. In fact, Marci, if you look at our kind of cash expenses and you exclude the growth in reverse retrans – well on a same-station basis, if you exclude reverse retrans and exclude cost of goods sold from digital revenue growth, our expenses are flat. You’re right. Cost of goods sold is a key driver of our expense growth along with reverse retrans.

Marci Ryvicker – Wells Fargo

I guess, over time, how do you see digital contributing to your company? Like if you think about, couple of years from now, what percent would be advertising retrans and then digital, do you have a view?

Rich Schmaeling

Yeah, we do. We think that, we’re on track to be over $100 million revenue on a run rate basis. And we see our operating margin for our digital businesses expanding over time. It’s growing nicely now. And we do think that in several years’ time, Digital is going to be close to 20% of total revenue, and a key contributor to our operating cash flow.

Marci Ryvicker – Wells Fargo

Okay. And then I want to ask one question on the conversion. Just can you update us on the timing? Is the first question. And then secondly, we’re getting asked, if you don’t convert, what the tax liability is, is it that $164 million or $210 million?

Rich Schmaeling

Yeah. So, I’ll answer the second first, so you see on our balance sheet in our K and what we’ll file on our Q tomorrow that we’ve recognized in income taxes payable of $163 million. That is a liability that LIN will have to fund and settle if we don’t complete the conversion and are able to shield some of the capital gain recognized in the JV unwind transaction with capital losses generated from the merger transaction.

In terms of timing, we expect the conversion to be completed by the end of the third quarter and the actual timing is largely dependent upon how long it takes us to get through the SEC review process and for our S-4 to go to effective. So, you saw that we filed our S-4 just a couple of days ago and we just commenced the process with the SEC.

We do expect that it will be a full review and it could take a couple of months. It could take three months, it depends, what’s clear is that I think the agency recognizes that it is a somewhat novel transaction and they are appropriately scrutinizing our filings. So when we first announced back in February, we said four to six months that would have been at the outside – middle of August. I think it might go little past that, it could – we do think it gets done before the end of September, but it’d be surprised if it’s before the end of August.

Marci Ryvicker – Wells Fargo

Got it. Thank you very much.

Operator

We’ll move next to Barry Lucas of Gabelli & Company.

Barry Lucas – Gabelli & Company

Thanks and good morning, just a couple of housekeeping questions. One, any change in CapEx for the full year and where might that go once all the stations are integrated and moved up to where you’d like to see them?

Rich Schmaeling

No. We’re still on track with the same full year guidance we gave in our quarter earnings release. And by the end of this year, Barry, all of our stations will be full HD including the....

Barry Lucas – Gabelli & Company

Right. So going forward, Rich, what would you think your kind of maintenance capital run rate is 2014, 2015 kind of number?

Rich Schmaeling

Yeah. We do start seeing it come down a little bit relative to revenue and we – for planning purposes, we think about it as about 4% relative to net revenue out into the future.

Barry Lucas – Gabelli & Company

Okay, helpful, Rich.

Rich Schmaeling

We are a little bit higher than that now.

Barry Lucas – Gabelli & Company

In – and just maybe in broader terms, you’re at the commission and moving through the transition to an LLC, how do you feel positioned with regard to what maybe up to $3 billion of deals that are in the pipeline? I mean, what would be your appetite be?

Rich Schmaeling

Yeah. Well, I think you might have seen reporting that suggested that LIN was at the finish line along with Sinclair for Fisher and we’re – as we said all along, we’re interested in looking at evaluating all the assets that are coming to market. We do believe the market is – the industry is going to consolidate further over the next 18 to 24 months. And what we look – evaluating many of those opportunities.

Barry Lucas – Gabelli & Company

Okay.

Rich Schmaeling

And we don’t think that the LLC conversion in anyway impedes our ability to participate in those processes.

Barry Lucas – Gabelli & Company

Great. And the last one from me, Rich any – whether it’s the timing or of the LLC conversion or anything like that, but just looking at financial markets, any other opportunities, any milestones you’d think about in terms of additional refinancing?

Rich Schmaeling

Yeah. We are looking at our 8.375% notes, in the not so distant future will be a callable without premium and an opportunity for us to refinance those. And we’re probably close to, kind of NPV positive right now and we’ll keep looking at it and looking for the right opportunity to refinance those notes.

Barry Lucas – Gabelli & Company

Great. Thanks very much.

Operator

We will go next to Aaron Watts with Deutsche Bank.

Aaron Watts – Deutsche Bank

Hey, guys. Few questions from me, just a couple of housekeeping, I think you gave that same-station core revenues in the first quarter were down 2.5% give or take. Rich, do you have that for expenses as well?

Rich Schmaeling

Same-station, change in expenses, is that what you are asking?

Aaron Watts – Deutsche Bank

Yeah. That would compare to kind of the 13% to 15% that you’re giving for second quarter?

Rich Schmaeling

Yeah. We will look that up and get back to you.

Aaron Watts – Deutsche Bank

Okay. And then, I guess, as we’ve kind of heard the report from some of your peers, it just feels like, you came in a little lighter on the core revenues in the first quarter and also what you are talking about for the second quarter. You think that really owes to your specific markets or is there something else going on?

Vince Sadusky

Yeah. I think, we do a fairly detailed job every quarter of benchmarking ourselves against the competition, quarterly business reviews that last almost a week long where we kind of break down each piece of the business for all of our markets.

And what we’ve – look our view is, it is primarily market-driven. These mid-size markets that Scott described were the ones that were most challenged, especially in the area of auto. And I think, a couple of points on that, most of that came from the dealer side and LIN’s mix of revenue we’ve had this heavy focus on business direct and on the local revenues, such that our – I think national revenue as a percentage of our total ad revenue is as lower or lower than our peers, and that’s been very successful for us.

I think the first half of the year what we’re finding is still a pretty healthy auto industry. Certainly, the car sales are doing just fine, new model launches and what have you. So, the regional money and the factory money was up. But what was down quite a bit was the local dealership dollars where we take a nice share of that typically.

And I think some of that was just simply driven by – economy is a little – still a little spotty in those markets, also coupled with just in certain cases not a lot of inventory available to be sold on kind of a weekly basis. And then kind of the last thing that we kind of determine was our comps are a little difficult as well. Last year, there was a lot of unprecedented amount of political displacement for the industry. And so a lot of available inventory coming back online as we move through throughout the year into the second, third and then early fourth quarter.

For us, if you recall, we had a year that was just record setting, kind of, across the board in all revenue categories including for the first time, I can recall the core – our core revenue being up, despite the political displacement.

And I think a lot of that is related to our strategy of having multiple stations in a market where by we were able to satisfy politicians’ demand, especially around our new products and still find a place to run effective advertising in other day parts and other stations in our market, as we’re, as you know, very, very heavily skewed towards multi-stations in our markets.

So, not to make any excuse, but I think our comps were – are perhaps a little bit more difficult than normal, the positive for us really is around the revenue diversity, we’ve talked about that for a long time.

We think the core is something we’ll continue to get our fair share of given our multi-station strategy going forward, but we’re also excited about the growth opportunities from our other revenue sources and not being by holding 90% plus or so to kind of the ups and downs of the local television station ad marketplace. So, still I think despite kind of a soft core and softer than most others in the industry reported, to have ourselves kind of up in the range we were up, I think is definitely, I think indication that revenue diversity strategy we’ve worked on for a number of years now has been very helpful. And that – that’s...

Rich Schmaeling

Going back to – sorry, going back to your question about same-station operating expenses up a little bit shy of 9% in the first quarter. And if you look at it, you look at our total cash expenses including corporate, they were up about 8% on a same-station basis. And if you exclude the growth in reverse retrans, and you exclude the growth in cost of sales tied to digital revenue growth, our same-station expenses were flat, and our cost of sales for digital was about $4.3 million increase year-over-year in the quarter.

Aaron Watts – Deutsche Bank

Got it. Okay. And one quick follow-up, Vince, on your auto comments, have you seen any kind of pick-up in the second quarter versus what you were seeing in the first quarter from those local dealers?

Vince Sadusky

Yes. Yeah. Things have picked up a bit in the second quarter. Our auto pacing has improved over the first quarter.

Rich Schmaeling

And June in particular is starting to show signs of life, and national is stronger than local. But if you look at our auto category, for the month of June, national, it’s pacing up close to 14%, and while local in June, still slightly negative.

Aaron Watts – Deutsche Bank

Okay, great. Thank you very much.

Operator

(Operator Instructions). We’ll go next to Howard Rosencrans of Value Advisory.

Brian Warner – Value Advisory

Hi. It’s actually Brian Warner. Hey, I’m a little confused. I have a clarification question, and then another question. But what is your guidance for the second quarter core revenue ex-political?

Rich Schmaeling

Well, I don’t think we gave our core revenue; well total net revenue is flat to up slightly net revenue.

Vince Sadusky

Right. And total revenue ex-political, 4% to 6%.

Brian Warner – Value Advisory

Okay. May be I’m not listening, but that sort of sounds actually in line with your peers. So, I’m just a little confused about the sort of lagging comments. I mean, I recognize your auto was – seemed a little light in the first quarter. But – well, that’s not necessary. Okay, so 4% to 6% is the answer to that. And then my other question is, just some people are talking about ObamaCare creating a little bit of a windfall for the industry in terms of educating consumers via television. I’m just wondering if you have any view on that.

Scott Blumenthal

Well, we do see and anticipate some dollars being spent as insurance companies go after private insurance individuals, but at this point in time because of what we’re seeing on the Hill, we are not factoring those dollars into our projections. However, as I’ve indicated, we do in talking to some advertisers expect to see dollars if ObamaCare doesn’t change its plans right now.

Brian Warner – Value Advisory

Thanks very much.

Operator

And that does conclude today’s question and answer season. I’ll turn the conference back over to management for any closing remarks.

Vince Sadusky

Okay. Well, thank you all for participation. We look forward to updating you next quarter.

Operator

And that does conclude today’s conference. Again, thank you for your participation.

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