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LIN Media LLC (NYSE:LIN)

Bank of America Merrill Lynch Leveraged Finance Conference Call

December 3, 2013 8:50 AM ET

Executives

Richard J. Schmaeling – Senior Vice President and Chief Financial Officer

Analysts

Stephen W. Weiss – Bank of America Merrill Lynch

Stephen W. Weiss – Bank of America Merrill Lynch

Okay, we’re moving right along here. Yes, I’m Stephen Weiss, the High-Yield Cable and Media Analyst at Bank of America Merrill Lynch and I’m very pleased to welcome back LIN Media to the Firm’s Annual Leverage Finance Conference. And with us from the Company today is Rich Schmaeling, Chief Financial Officer. Rich?

Richard J. Schmaeling

Thanks Steve and good morning everyone. A few slides just to give you an overview of LIN. Okay, so, here is a picture of us. 23 markets, 43 stations, 10.5% of TV households, 14 multi-station markets called us duopolies. And also what’s a little bit different about us is you see in Indianapolis, Springfield, Mass and in mobile Alabama, we have technical operation centers where we consolidate all of the master control and traffic activities associated with our stations to create scale economies. And just recently we opened our new digital headquarters in Austin, Texas and also moved our principle executive officers to Texas. Digital is clearly an increasing part of our business and a key growth driver.

If you look at our strategy, what we’re trying to do is around the core of television, we’re trying to expand to really be the leading multi-media provider in each of our markets, so whether at online, mobile, tablet et cetera. We’re looking now the rate, products and services to meet the evolving needs of our local advertisers.

And I think we’re having some success. If you look at the statistics to the right, a little bit different I think than many of our other broadcast peers, LIN Digital ranks among the top 30 Ad Networks in the country. We’re top 20 Video Network. 87% of our measured websites are ranked number one or number two in terms of engagement with an unduplicated desktop reach of 78 million, that’s 35% of the U.S. Internet audience and recently we launched our own mobile platform and also a social media management system called HYFN8. So we’re really working to build leverage from the strong television foundation, leverage our strong position within our markets to sell our existing advertisers more and to meet their evolving needs.

When we think about our business, we think about four key growth drivers, the first two being core time sales and political. Political has been growing rapidly particularly since the [indiscernible] decision early in 2010. We’re hopeful that the 2014 election cycle is going to be quite robust. I suspect we have a few things to talk about as a country and so look at it, we’re pretty hopeful that we’re going to see continued ongoing strong growth in the political advertising category.

We think about core time sales, local and national spot. We see that as a low single-digit grower and these are estimates provided by Pivotal Research Group, but it makes sense from our perspective that we see core time sales growing kind of in the mid single – low single digits, and perhaps accelerating if GDP starts picking in some momentum. So as we then, where we since the great recession in 2009, the advertising as a percentage of GDP have been in an all time low.

Right now it’s projected to be about 1.1% of GDP in 2013. And at its peak, it was close to 1.8, so it’s really come down quite significantly relative to GDP during this low. And what we could see happening and hope to see happen is that if GDP starts to accelerate, the aggregate demand starts to gain some traction, but advertisers will increase their investment in advertising to capture that demand. We doubt here if it gets back to that peak of close to 1.8, but could it be 1.35 maybe, but it’s clearly quite correlated to the GDP growth.

The next key growth driver from our perspective is net retransmission consent fees. Look at over the last four years, we’ve grown our retransmission consent fee revenue by a 45% CAGR will be over $130 million of retrans revenues in 2013 and net after reverse-retrans back to the networks, we have over $90 million of net retransmission consent fee income in 2013. These statistics you may have seen talks about more of these come from Wells Fargo’s analysis in SNL Kagan.

And I think the key is that 35% of the audience is delivered by the networks, yes we get 7% of the programming fees. That really is and remains today a very significant disparity between audience delivery ratings and carriage fees. And we do think that it takes quite a long time to dissolve this disparity. And so we do think that retransmission consent fees will not grow as rapidly as they’ve grown in the last four years, but will continue to grow strongly. You may have seen SNL Kagan estimates will grow at a 20% CAGR, I believe relative to 2018 that makes sense to us.

We do see strong continued growth assuming there is no disruption from government action or something like that. Clearly what happened this summer, which we and Time Warner Cable and CBS highlighted the power of content, but it also raised the risk that this could get disrupted as people must have their TV.

And if you look at digital, we see digital as a meaningful contributor to our kind of mid-term EBITDA growth. And in longer term, we see digital as really vital to our survival and growth. We think we will slide longer-term as we evolve our products and services to meet the needs of our advertisers who are of course spending an increasing proportion of their total marketing investments in digital media.

And you can see here that in 2013, we’ll have over $100 million of digital revenues and OCF margin in the low-teens. And we do think that by 2016 organically, for the assets we own today, we can grow at a 25% CAGR and be about $200-ish million of revenues in 2016 and generate about $35 million of incremental EBITDA. So by 2016, certainly more meaningful contributor to our growth and to our overall profitability. We do think revenues at that point and it’s about 20% of our total.

We’ll augment this expected organic growth with further acquisitions. We’re looking for other ways to expand our product portfolio to provide the same advertisers more and what’s funded out how digital is evolving for us is that, we’re not confined of course to our existing DMAs. Our sellers are outside the borders of those DMAs looking for the top regional advertisers that we have the right products and services to meet their requirements.

We’re also building pretty capable national sales force selling to the top national digital advertisers. You could think of it as an analogy, our own national network to our digital. And our folks are facing the top agencies like Herald [ph] working with top brands like Pepsi and gaining quite a bit success. So we’re pretty optimistic about digital and we do think that and hope and believe we’ll do more than what you see here likely through the addition of other products and services through acquisition.

And that’s all I have Stephen.

Stephen W. Weiss – Bank of America Merrill Lynch

Okay, thank you Rich. So let’s start off maybe talking about on your last comment about M&A, so now that you are still looking to be an active buyer perhaps. How much inventory is out there? Talk about leverage, I think you said your goal is to maintain this kind of in the four times vicinities kind of through the even odd years or the cycle that’s still kind of hold here and is there a risk that the industry given a little too complacent with leverage at this juncture of this cycle?

Richard J. Schmaeling

Yeah, I think what we’ve said is that longer-term we want to be at about 3.5, 4 even odd. So on a TTM basis even odd 3.5, 4. And we’ll use our free cash flow over the next months to pay down debt, so we’re looking now to really create as much financial capacity as fast as possible to participate in further industry consolidation. We think we’re at an inflection point. We think that maybe Gray who you must spoke to probably did one of the last big asset deals. There is not a lot of other asset deals out there from our perspective.

We’ll sure we’ll be surprised by some books that show up in the spring, but you know when we look at the assets that we cut it, it is primarily that probably owned by other groups many similar size of as LIN. So we think about this consolidation process, we think what’s next is more merger like transaction similar to young media general. We think that is what you’ll likely to see over the next peak in 24 months as kind of the next waive of consolidation.

So when we look back on this year, so where a few assets that came to market that surprised us and those were asset deals. And so having the dry powder to participate in and those opportunities is important. And but otherwise, we think it’s more likely to be stock deals perhaps the combination of cash and stock, but then you can imagine if you look at it today, we kind of take it out, the market is pretty bifurcated right now and you have what we think that as the big three: Sinclair, Tribune and Gannett.

And then after those three, there is a number of groups’ similar size to LIN. But I think we’re all looking at each other saying we all will be better off together versus a part longer term. And – but these are different kind of transactions in that, no one is going to show up with the book, it’s not clean and simple like an asset deal where you know we all know who is going home and who is not. And so these next kinds of mergers – I do think they’re going to have in the next 18 or 24, but there are harder transactions to get done.

And we think about LIN compared to some of these other names, we’re ready. We look at this and think that the thesis for consolidation is quite strong. We think that that increasing scale is quite necessary. And so from our perspective, it’s not a question of if we participate but how and when. And we’re not burdened with some of these other companies that are size range, quality assets. They have other social issues, family ownership but perhaps other issues that make it more difficult for them to transact. For that of course, we’re not burdened with those issues and we’re really focused on how to maximize the value and they’re pleased with best consolidation which we think is pretty important longer-term to gain greater scale.

So we will target being 3.5, 4 even odd longer-term. We will take a off-ramp for some period of time for an attractive accretive deal that I think that we would – we wouldn’t stress too crazy, but I could see that if the timing is right kind of go in the 5.5 time leverage. And but then would you think that was more likely is the merger, and those are likely – more likely be stock deals and perhaps the combination of stock and cash.

Stephen W. Weiss – Bank of America Merrill Lynch

And when you say 5.5, is that using of two year cycle or is that kind of like at a point in time…

Richard J. Schmaeling

Yes, I’m going to think compliance that given our credit facility, so it’s more on a TTM basis. And so that’s I kind of think about the similar transaction which show the size of Allbritton was available and that would be a stretch for us, but if you did it – if you closed on September 1 of this year that would be awesome.

Stephen W. Weiss – Bank of America Merrill Lynch

Right.

Richard J. Schmaeling

And but…

Stephen W. Weiss – Bank of America Merrill Lynch

And then I know you have in the upcoming call on your [indiscernible] how you think about replacing that secured it, unsecured, do you leave yourself dry power for the next phase and kind of trimming out with unsecured or do you kind of go a well cost alternative and you have that while you’re kind of on the bank side? What was your thought?

Richard J. Schmaeling

Yes, I think that how I’m thinking about it is that that we will preserve our senior secured capacity and – for M&A. And perhaps we’re looking at whole range of alternatives, but perhaps you know notes – for notes that maybe in conjunction with that think about freshening up our credit in a – in what we’re paying today.

Stephen W. Weiss – Bank of America Merrill Lynch

Great, maybe from the floor. Okay, one in back, please.

Question-and-Answer Session

Unidentified Analyst

So in the [indiscernible] scenario where aerial gains a meaningful traction and you guys are not getting any retrans. Are you still required to make some kind of minimum guarantee payments to the networks?

Richard J. Schmaeling

Next line which in our affiliation agreements that seems – I appreciate the possibility that from our perspective that’s a remote scenario. And you’ve read a lot about this as I have too and we do think that hopefully this results in the Supreme Court and if it doesn’t, would you think that if Congress to take actions because most recently you saw in both the NFL and – baseball if you look, if a service like area is allowed to exist and exploit our content for free. We’re going to think seriously about whether or not we’re going to provide our content to broadcasters.

So imagine the scenario where – with two biggest major lead franchises take their product off broadcasting. The 30 plus million Americans who still get their television in the old fashion way, over the air aren’t able to get it. And what’s really interesting in that I think is that people who prove well over the air is a relic of the past. Really if you look around the country on average, I’m sure you may know that 10% get their television in the old fashion way. In some markets, it’s close to 20%.

So in Albuquerque, New Mexico, one of our markets, 18% of households get their TV through antennas. And one could say those folks are not the most advantaged amongst us or we really going to take free over the air television away from them. So I don’t know we’ll see how this pans out, it’s good for theater I guess, but it seems to me rather a rationale from a public policy perspective although you haven’t seen a lot of rationality in Washington, so who knows, but it just seems hard.

Unidentified Analyst

Thank you.

Stephen W. Weiss – Bank of America Merrill Lynch

Please go ahead.

Unidentified Analyst

When you look at the opportunity here to marry up or characterize it, is there compelling footprints that make a logical sense that the driver here as well obviously it has a deal come together with the chemistry of the folks and what have you, but I mean what is the operational aspects that really want to drive you towards just thinking about a particular transaction and when you see – it’s duopoly opportunities also part of that consideration?

Richard J. Schmaeling

Absolutely, so the opportunity creates a duopoly or to enter into a GSA accessory relationship in given markets is a meaningful synergy opportunity bringing essentially servicing multiple full power streams through more technical infrastructure, is very helpful. And from a sales perspective, if you could package that inventory together particularly if they’re complementary stations from a demographics perspective is pretty synergistic from a sales perspective.

So that’s always something that we focused on and look at and are interested in creating new duopoly markets. Beyond that from a technical perspective, LIN has infrastructure to support technical operations primarily master control and traffic, which are significant drivers of personnel what I’ll call a traditional TV station. You know we have some pretty sophisticating infrastructure that we can further leverage through combination with another television operator to extract new cost synergies.

And then – we think about these deals that are next, these kinds of larger mergers of equal, there is just like that it as corporate infrastructure that we will get saved as part of our combination. And that’s kind of meaningful. I mean those are chunky dollar amounts that are meaningful. So what LIN has and brings to table that perhaps ever still beyond leveraging our retransmission consent fee contracts, you may seen in SNL Kagan’s recent article we’re number three or four, depending on who you – who does the math in terms of our retransmission consent fee rate.

So often in an acquisition like we did last year with New Vision, we have a pretty significant step up in our retransmission consent fee income upon closing, which is meaningful. And then we also bring to the table, digital capabilities there are much more mature than many of our industry peers and we’re able to more rapidly bring them up to our level of performance, which is increasingly profitable.

So from our perspective, consolidation has a lot of different dimensions to it. People think first and foremost about retransmission consent fees and what increased heft means from a marketing power perspective and that is clearly a key driver. But beyond that, we think about negotiating for syndicated programming, it’s having greater scale matters. We think about negotiating for a whole host of other products and services for scale matters. So to us, there is a lot of different dimensions and a lot of different aspects of what adds up to the whole than a synergy score card and it’s pretty meaningful.

Unidentified Analyst

[Inaudible Question]

Richard J. Schmaeling

Yes, I think that absolutely true that it’s hard to do those, make those kind of investments in producing your own original program and if you don’t have sufficient scale and a platform to monetize that investment over. And so we think about that overtime, over the last three or four years that really ramped up. We now have original program that we produce. And to us it’s pretty important because as we think about our digital strategy or I’ll call it our multi-screen strategy, we’re trying to move and beyond by traditional moves content and adding further lifestyle content, which is often evergreen, does really well online and having more of our own content is attractive from our perspective, it’s hard to do and having scale clearly helps.

Unidentified Analyst

So Rich, I wanted to ask you about some of the higher rates of the same station costs that we’ve been witnessing largely driven I guess by reverse-retrans and some of the variable costs tied to interactive growth. How long does this persist? How do we think about the cost base moving into 2014 and beyond?

Richard J. Schmaeling

Yes, if you take a look at the presentation we did back on October 3 in Austin, we held an Investor Day, you’ll see there is a slide, details are cost growth year-over-year through 630. And when you look at that slide, you’ll see that clearly the key drivers for us besides acquisitions is reverse-retrans and that in 2013 reverse-retrans is somewhat less than a third of our retransmission consent fee revenues. By 2015, we think that our reverse-retrans will be upper 40s as a percentage of our revenues.

We have a pretty significant renewal with CBS. At the end of 2014 and that will cause our reverse-retrans cost prospect change in 2015. So that’s clearly going to be a key driver of cost out into the future. Once we get through 2015, we’ll be paying all with the networks for I think all of our stations. And so the growth will moderate and be more consistent relative to revenue, but right now we’re still kind of going through cycle one with the networks.

And we think about other key cost drivers, clearly digital is a key cost driver. What we – one of our key products in the digital space is what we call custom display advertising campaign, so if you’re the local sporting goods guy in the given market and you buy our station website that’s good, but not good enough. You kind of need all, you want to have all the sports interested traffic in that market will help you to design a campaign for you to get all that traffic. And perhaps for something like [indiscernible] you want to do it nationally, we’ll do it pretty nationally.

And we are buying other publishers’ inventory to satisfy those requirements and those rev shares could be 40:60, you know it depends – but so a significant driver of our cost is purchasing the inventory of other publishers for digital. And that’s going to grow strongly relative to revenue out to the future. And when you look at that chart in our October 3 deck, you’ll see that you’ll isolate what we call same station TV expenses and those were about flat year-over-year through June 30th.

When we think about the planning – our planning horizon, we think those costs will grow low-single digits and we’ve had some success mitigating that cost increase through productivity improvement efforts, so there is a lot of effort ongoing to focus on how can we impact our existing TV expense base and just drive further productivity gains. And so that’s kind of led to the results we talked about that 630 year-over-year growth was flat, but when you think longer-term is – our planning assumption is low-single digits.

Stephen W. Weiss – Bank of America Merrill Lynch

I think we have time for another one from the floor. There is one.

Unidentified Analyst

[Question Inaudible] with reference to the digital, I mean how do you see the opportunities that – you know the push revenues here in terms of getting I would say a higher rates, are you getting a full utilization of the spectrum capability that you have there and exploit in the digital? And how does this – how does this evolved and if you go forward honestly I don’t want to talk about all these featurestic things of selling spectrums as a Verizon or something like that.

But I think is there a real value that we continue to create there in terms of a revenue stream – how that – are you just a exploitation of this – of a full range of the spectrum that utilize your programming capability of – or is it just becomes sort of – it’s just washed out.

Richard J. Schmaeling

Yes, so when we talk digital, we’re talking about online kind of IP versus mobile DTV, but we’re still hopeful that mobile DTV evolves over time. I think a lot of people have concluded that having a new broadcast standard will be a meaningful driver of success with mobile TV. But it is frustrating that when you look at other countries around the world, the mobile digital television is a big deal and then we haven’t had merely the success here as elsewhere around the world. We’re not going to give up on it. We’re working on it with a group of other broadcast companies.

We have a few pilot markets but many broadcasters have a few pilot markets lid up around the country. We have Austin is lid up for us. And for today beyond monetizing our spectrum through another DT channel whether that would be a product like Bounce TV or in some of our markets we have on DT2 I think four affiliates like Fox. And so in Terre Haute, Indiana, we have Fox on our DT2.

So beyond monetizing the spectrum further through a product like that, today there is little other revenue attached to really sweating that spectrum. It’s all in the come and we do think that longer-term and it’s kind of hard to predict when and how, but mobile digital television should be something that gives us success that has and we haven’t got all the pieces to put together well again.

Stephen W. Weiss – Bank of America Merrill Lynch

Okay. And with that I think we are out of time. So I thank you Rich once again for coming out and hope to have you back next year. Thank you so much.

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