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Executives

Bob Prather - President and Chief Operating Officer

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

Analysts

Tracy Young - Bear Stearns

Marci Ryvicker - Wachovia

John Kornreich - Sandler Capital

Jim Goss - Barrington Research

Richard Avrens - First Manhattan Company

Adam Spielman - PPM America

Jordan Teramo - Brigade Capital

Linda Karn - Credit Suisse

Vincent Flanagan - Seix Advisors

Bishop Cheen - Wachovia

Brian Broadbent - Highland Capital

Gray Television, Inc. (GTN) Q4 2007 Earnings Call March 13, 2008 10:00 AM ET

Operator

Good day, everyone, and welcome to the Gray Television fourth quarter earnings release conference call. Today’s call is being recorded. For opening remarks and introductions, I’d like to turn the call over to Mr. Prather. Please go ahead, sir.

Bob Prather

Thank you very much. I want to welcome everybody to our year-end 2007 and fourth quarter call. First of all, it seems like 2007 was a long time ago. I think we’ve all been pretty well shocked by what’s going on in the financial markets right now as far as sub-prime loans and some of the problems that the banks and lending institutions are having but I think overall, our business looks like it’s going to be good this year. We should have a great year political, we should have a good year local, and I think national will continue to struggle.

As far as last year goes, pretty much the same thing. We had a good year locally overall. Fourth quarter actually was a good quarter, local and national but national for the year was down a little bit. I think it was actually less than some other people have reported but still I think national business is going to continue to be a problem for our industry.

The good news for us is right now, we’re at 73% local, 27% national. Frankly, I used to say I wanted to get to 75%. Now I say 80%. One of the things that’s helping us in the short run and the long run is our web channels. We are doing extremely well with our web channels. I think they will continue to grow both in page views, unique visitors, and revenue and profits. Our web channels are very profitable and we are very proud of the fact we think we’ve got the best web strategy out there.

Just to give an example, our page views are running 53 million a month, our unique visitors are 6.5 million a month, and both of those figures are up over 50% over last year, for example, so really proud of what’s going on there.

Most of you know we’ve got a lot of retrans coming up later this year, probably about 60% of our total subscribers. We are working on a plan to have a coordinated project to make sure we get paid for retrans. We just recently negotiated a retrans in four of our smaller markets, which we are happy with. I think we’ll get it -- we’ve got an agreement-in-principal and hopefully will get it done in the next couple of days but overall we think retrans will be an important source of revenue in the years ahead, especially next year. Obviously not a whole lot this year but next year should be a real good year for us.

I think one of the things we’re doing for this year is like I said, we’re hunkering down just because of the economy. We’re watching expenses. We think our overall expenses other than commissions on political, national political will probably be flat or down by the end of the year. That’s one of our goals and here again, we’re going to keep a tight rein on expenses and on capital expenditures, just to be safe if the economy continues to slide. The automotive, as you know, is a real challenge, although our automotive has not been down as drastically as some. One of the areas that has been way down for us is telecommunications. I think AT&T got all their branding done last year and they are taking a breather right now.

But one of the things that we are looking at closely is political. As you know, it’s very important. We have the highest political revenues as a percentage of our overall revenues of any group out there year-in, year-out. And the political was a little bit behind budget first quarter but not much, but it’s pretty much in line with our historical numbers. To give you an example, we did $42 million of political back in ’06 and 60% of it came in the fourth quarter, 25% in the third quarter. We think that will be similar this year so we are looking for the vast majority of our political to come on the back-end. For example, in ’04 it was 4% of political was spent in the first quarter. This year we got 5%, so here again I think we are looking forward to a huge political year. I think once the candidates get settled on who -- the parties get settled on the candidates, we’ll know a lot better.

One thing that did hurt us on political in the first quarter was the Michigan and Florida primaries with no democrats running. Those are normally two of our hottest states for political dollars and I think we had boasted in the range of $500,000, $600,000. I think we got something like $47,000 from McCain and obviously nothing from the democrats. So we are all -- send your cards and letters to the Democratic Party and urge them to have a revote on Florida and Michigan. I think that’s the only fair thing to do at this point.

At this point, I’m going to turn it over to Jim Ryan, our Chief Financial Officer, to go through some more detailed numbers and then we’ll open it up for questions. Jim.

James C. Ryan

Thanks, Bob. Good morning, everybody. As Bob said, looking to the fourth quarter, both local and national were up. Local up about 6%, national up about 4%. The Internet revenues were up significantly. You’ll note this is the first time we’ve broken out Internet and also we’ve -- following kind of industry standard at this point, also broken out a line for retransmission, looking to the future on that line. And we’ve -- in the release, you’ll notice that we’ve gone back and made all the reclassifications for both ’07 and ’06, so you’ll have full comparability.

In the fourth quarter, actually our auto was up along with telco, entertainment, the medical category, restaurants. The only thing that was really weak for us on fourth quarter on a category basis was the financial sector, which wouldn’t be surprising. I think some of the relative strength in fourth quarter is at least a little bit reflective of the off-year cycle on the political. Certainly we had a lot of political in fourth quarter ’06, especially October of ’06, so actually being up in most categories and up in local and national was not surprising to us.

Our expenses came in basically right where we expected for the quarter, down a little bit year over year, so all in all we were pleased with where we came out. As Bob said, also for the year obviously the political swing is the major driver in the revenue line but going against almost $43 million of political and about $3.5 million of Olympics, at the end of the day for the year our local was up about 4. As Bob mentioned, national struggled for the year a little and ended up being down 2, but we think that’s probably better than some.

For the year, our auto was down less than 3%, financial was down, the restaurant business was down a little bit on a total year basis, but again a strong performance in telco, entertainment, medical and the other categories that were up in fourth quarter.

And again, Internet revenue for the year was up substantially too and we are very pleased with that growth. Bob didn’t mention but about two-thirds of the way through the year in ’07, we ramped up our Internet efforts from a sales standpoint, have added dedicated Internet AEs in most of our markets to be able to push our local Internet sales forward, so we are expecting as Bob mentioned strong growth in that category in 2008 and forward.

Some quick comments on the balance sheet for -- we ended the year with $15.3 million of cash. Our term loan was at $925 million. We had nothing drawn on our revolving credit facility, so we had a full $100 million line available. CapEx for the total year ended up being 24.8, with only 2.9 in the fourth quarter. Cash taxes actually for the full year ended up with a -- basically at zero. We had a $24,000 net refund for the year and we’ll be filing our K tomorrow, so there will be additional details in that.

As far as our guidance goes for Q1, we think local will be essentially even with ’07, national down a little bit but strong growth in the Internet area, and the political as well. We expect to have total revenue slightly above last year’s levels.

At this point, Bob, I’ll turn it back to you.

Bob Prather

Thanks, Jim. At this point, Operator, I’d like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first today to Tracy Young with Bear Stearns.

Tracy Young - Bear Stearns

Two questions for you; what are you expecting for CapEx for 2008? And also, can you update us on your digital channels? Thanks.

Bob Prather

Jim, do you want to take the CapEx?

James C. Ryan

CapEx for 2008 would be 15 to 20. That will be heavily back-weighted to the end of the year. Most of the first 15 really involves the final transitions to ’09 digital. In many markets, we have the ability to go from the temporary high band U channels back to the low band Vs, and we are putting in transmitters to do that. That dramatically reduces our power cost going forward and in some cases enhanced our coverage as well, so that’s what most of the first 15 is. The rest of it is just routine and again, a lot of that is back-weighted into the end of the year.

Bob Prather

On your digital question, we’ve got 40 digital channels on the air right now, split up between My Network, CW, and we’ve got five Fox digital. We lost a little money on that last year mainly because when the UPN went out, some of the cable guys forced us up on the digital tier. That hurt us in some of our key markets where we lost as much as 40% of our market because of that bigger percentage of the market sometime didn’t even have digital cable boxes.

We think this year we’ll make a profit. We think next year when we go full digital and it’s 100% coverage, these stations will be -- it’s a virtual duopoly in all these towns and triopoly in several of them and we feel like we’ve got a real good future there.

One of the things we want to use our digital channels for, and we’re doing a good job, I hope we can do even a better job in the years ahead, is doing a lot more local programming around high school, college sports, and those kinds of things.

Tracy Young - Bear Stearns

Thank you.

Operator

We’ll take our next question from Marci Ryvicker of Wachovia Securities.

Marci Ryvicker - Wachovia

The first is national has been weak for a while. Is there anything that’s different now than it had been? Is it auto, is it a different ad category? And what can you do to fix this, if anything?

Bob Prather

That’s a good question. It’s something we talk about a lot around here. I’m not sure it can be fixed. I think there is a mantra out in the marketplace from advertisers and from ad agencies to try something different. You see almost weekly articles about major television advertisers. Just recently Johnson & Johnson announced they were doing a bunch of webisodes on new mothers. Toyota announced a deal with YouTube to sponsor a YouTube comedy thing.

All those things are taking money away from the traditional advertiser, in a lot of cases, TV. A lot of that stuff is not going to work. I think the big thing that we’ve got going for us is when full digital comes in and full HD is available next year, that once people start seeing HD commercials, I think the advertiser is going to realize that they all of a sudden have a new product out there that does a lot more dramatic presentation of their product, so I’m hoping that’s going to regenerate some interest in national.

We are actually doing all of our budget and doing all of our planning around the fact that national is going to have little or no growth or decline over the next few years.

Marci Ryvicker - Wachovia

And then just a question on your retrans agreement; when were they signed, do they cover both the digital and analog channels, and are they the MSOs or the satellite guys?

Bob Prather

The retrans that we just -- I talked about earlier is one that we’ve got an agreement in principle on. It’s with an MSO. It does cover both the digital and the -- and we’re actually getting analog coverage on the digital channel, which will help us because we are on the digital tier right now. But most of the retrans we’re showing right now, Marci, is coming from satellite. As I said, we’ve got this deal we just did with four small markets for us and then we’ve got about 60% of our subs coming up December 31, so that will be the big -- that will be the big time for us at the end of the year. We’re negotiating with most of the big MSOs at that point.

Marci Ryvicker - Wachovia

When do you start negotiations? Would it be --

Bob Prather

You know, we’d like to start sooner than later. Most of the time, the cable guys won’t start real early. I’d like to start right now, if I could. But they normally just -- they won’t talk too early. We’ll probably start ideally beginning of fourth quarter. We’ll start asking for -- start throwing out the proposals to them and see if we can get some dialog going.

Marci Ryvicker - Wachovia

Thank you.

Operator

We’ll take our next question comes from John Kornreich of Sandler Capital.

John Kornreich - Sandler Capital

Bob, 60% of the cable subs are up at the end of ’08 and the other 40 I assume is by the end of ’09?

Bob Prather

Not totally all of it, John. Most of them. We’ve got a couple of outliers that will actually be 10, I think, but 98% will be ’08 and ’09, yeah.

John Kornreich - Sandler Capital

Okay. Going back to the digital stations, what was the total revenue and allocated expenses in ’07?

Bob Prather

Well, I think the revenue was in the $8 million range and expenses were in the $9 million range.

John Kornreich - Sandler Capital

Okay, and that was generated from what, 30, 35 stations?

Bob Prather

That’s 40 digital channels total.

John Kornreich - Sandler Capital

Yeah but that’s now. What was it --

Bob Prather

We had 40 in most of the year last year. We may have had some come on during the year but probably between I would say at the beginning of the year last year, we had 30 and we probably added 10 during the year.

John Kornreich - Sandler Capital

Will these stations -- I mean, right now are these stations young enough so that they are on their own cycle and if the environment is soft for TV stations in general, you know, ex political, these stations will be soft also?

Bob Prather

They could be, John. I think these stations are more a function frankly in most of our markets, the My Network, they’ve had some fits and starts on programming and they seem to be getting their act together now. They just signed a deal with the WWE Wrestling, which is the top-rated cable program year-in and year-out. So I think that will help them. And they’ve got a good economic model for stations that we should be able to do well with those.

The CW, I don’t like the economic model as well. They’ve actually done a little better in the ratings. The Foxes we’ve got are doing very well and we’d like to get some more digital Foxes if we can find markets where we -- where there’s not a Fox actually in our market, but those are hard to find these days.

John Kornreich - Sandler Capital

Well, what markets -- of all your markets, what markets do you not have digital stations in?

Bob Prather

There’s a couple that we don’t -- well, even then, most of them -- there’s a couple of those markets where we’ve gone ahead and even done an independent. In Reno, we don’t have a -- I think we are working on deal to have somebody there. Omaha, we’ve got just a news and weather channel there. There’s a couple like that where the CW and the My Network just weren’t available. We didn’t want to overpay for the CW, frankly.

John Kornreich - Sandler Capital

Would you be satisfied to see the eight grow to 10 in ’08?

Bob Prather

Oh, yeah. I think that will be definite, to do that or better, yeah.

John Kornreich - Sandler Capital

Okay, and that would be a break-even year?

Bob Prather

Yeah, or make a little money on that, probably, because we are trying to really coordinate on -- one of the things we’re doing, John, is try to coordinate between the stations on our syndicated programming and do a lot more barter stuff and do stuff that’s -- where we can do a deal with 15 or 20 of the digital channels for some of the syndicated stuff.

John Kornreich - Sandler Capital

The other day at the [Bestern’s] session, you mentioned to me what the top four generating cash flow stations were. I forgot. Charleston obviously is one.

Bob Prather

Charleston, Huntington, Omaha --

John Kornreich - Sandler Capital

Say that again -- Charleston, Omaha --

Bob Prather

Omaha, Tallahassee, and Lexington.

John Kornreich - Sandler Capital

Lexington, okay. Last thing -- where are we with that -- I keep forgetting the name of it.

Bob Prather

Tarzian?

John Kornreich - Sandler Capital

Yeah.

Bob Prather

That’s a great question. All the litigation was settled last year and we frankly decided to just sit on the sidelines a while to let things cool down. I think it was a very emotional issue for Mr. Tarzian. We weren’t actually involved in the litigation directly but we were a corollary to it, so to speak.

I think at some point this year, we would like to open some negotiations with him. As a matter of fact, I talked to your old partner, Barry Lewis, about that as a matter of fact a couple of months ago, so I think it’s something that will be on our radar this year, probably.

John Kornreich - Sandler Capital

Just refresh me; the --

Bob Prather

We own 73% of the equity in a company that’s got the NBC in Chattanooga, the number one station there, and the CBS in Reno, and they’ve got four radio stations.

John Kornreich - Sandler Capital

And the cash flow last year?

Bob Prather

Cash flow was in the $8 million range.

John Kornreich - Sandler Capital

And the debt?

Bob Prather

Debt I think is around $10 million maybe -- $8 million to $10 million.

John Kornreich - Sandler Capital

Okay, and lastly, on that same entity, what is your ownership interest?

Bob Prather

We have a 73% interest in the equity, if the company is --

John Kornreich - Sandler Capital

And 40-something percent of --

Bob Prather

-- we don’t have but a 23% voting right, so --

John Kornreich - Sandler Capital

23% voting?

Bob Prather

Yeah, and 73% equity rights. That’s on dividends, sale of assets, sale of stock, anything like that. Liquidation.

John Kornreich - Sandler Capital

So in reality, with the 23% voting, obviously you do not control at all the --

Bob Prather

No influence over the management at this point, no.

John Kornreich - Sandler Capital

So you’re not involved in the management in any way?

Bob Prather

No, we’re not. We haven’t spoken to Mr. Tarzian in I would say four years, probably.

John Kornreich - Sandler Capital

Does he have the wherewithal to buy you out?

Bob Prather

I don’t know. That’s a good question. I wouldn’t think so but I don’t know. I really can’t say.

John Kornreich - Sandler Capital

I assume that if he were to buy you out, you’d be emphasizing your 23% voting and if you were to buy him out, you’d be emphasizing your 73% ownership?

Bob Prather

Right.

John Kornreich - Sandler Capital

Okay. Thanks for the help.

James C. Ryan

John, just to clarify on the revenue question and the expense on the digital, the actual numbers for revenue on the digitals for full year ’07 was about 7.4 and the expenses were about 8.3, so as Bob said, it cost us a little but in ’08, we definitely are planning for being in positive territory.

Operator

We’ll take our next question from Jim Goss of Barrington Research.

Jim Goss - Barrington Research

Good morning. Let’s see -- first, I think you’ve talked about political for the full year being something in the neighborhood of $60 million, which is a little better than I was originally expecting. Are you pretty confident on that score? And this morning, I saw some indication that there -- of a greater hint that a Florida and Michigan mail-in vote and I’m wondering what potential that might have for Q2 in particular and full year?

Bob Prather

Jim, I think that would be huge for us because we’ve got two real strong stations in Northern Florida that always get real good political and we’ve got a station in Lansing which always historically has gotten real strong political because the state capital covers that whole part of the state there.

You know, basically we did $53 million in ’04 and we are -- you know, 60 is a 15% increase over that. I feel very confident in that number. Ideally, we try to be conservative when we are budgeting political. I hope it will be better than that.

Jim Goss - Barrington Research

Okay, and the $53 million included NWDU on a pro forma basis, that sort of thing?

Bob Prather

Yes.

Jim Goss - Barrington Research

Okay. You know, if financial leverage is viewed by the market and investors as an increasing concern, and not just for your but for everyone, and I know you feel you can handle the debt you have over time but if that becomes viewed as a pervasive concern, does that alter your thinking about possibly selling a station or two to try to address that issue?

Bob Prather

Jim, we’re always looking at all different options. We feel confident that we are going to pay down a big chunk of debt. Right now, our goal ideally would be to use all our free cash flow this year to pay down debt and be in the low sixes by the end of the year on our ratio, so -- I think if you look historically over the last I think 10 years, our historic ratio has been a little over 6-to-1. We’d like to get it lower than that going forward and that’s one of the goals over the next few years. I think ’09 will be a relatively light capital expenditure year and we should generate some good free cash flow then to pay down some more debt in ’09.

Jim Goss - Barrington Research

And I guess the thrust of my question was it seems as I look down my coverage list that the ones that are getting dinged the most are the ones with higher leverage.

Bob Prather

I think the market is nervous about leverage on everybody right now. I was just visiting with [Mayo Gibelli] yesterday and he said that from what he sees, there’s a real pressure on especially anything that the market thinks is consumer oriented right now that has leverage. So I think that’s just something we’ve got to live with in the short run. I think we’re doing the right things on expenses. I think we’re doing the right thing on using our free cash flow to pay down debt and as I said, we’re going to keep our capital expenditures this year basically the digital transition and some emergency expenditures and next year, we will hear again have some basic maintenance in emergency, but be in position to pay down some more debt in 2009.

Jim Goss - Barrington Research

Okay, a couple of other thing; the digital transition issue you’ve indicated will be a plus for you but there might be somewhat of a near-term glitch as people wake up and find out they are not getting television, and the 10% or 15% that might not have any sort of direct link might include a number of people who are of that nature. How big an issue do you think that can be and how quickly does it get solved?

Bob Prather

I’m nervous about it simply for the fact that if you read these polls that say 40% of the country doesn’t even realize it’s going to happen. I think it’s a hard issue to explain to people. I think it’s our job as stations and the industry and the FCC to really do an intensive education campaign this year. But there could still be some major disruption. If you’ve got 10% of the country, all of a sudden their TVs go dark and they don’t really know what’s going on, it could create some real firestorms and it could create some nervousness among advertisers and viewers in the first quarter next year. So it makes me nervous.

I think in the long run it’s going to be great for our industry, no question, but getting through that month or so there -- you know, one of the things that the industry is trying to push Nielsen to move the sweeps from February because they figure they’ll just be worthless in that month with the transition going on right in the middle of the month, so that’s something I hope they’ll do also.

But we’re doing our best to plan for it as much as we can on our end to try to educate our viewers and our local markets and I think we just have to keep our fingers crossed.

Jim Goss - Barrington Research

Okay, the last thing -- ad pricing potential on your digital channels; if you’ve got a programming grabber like some of the local sports, do you think you have an opportunity to price at more than the token pricing you’ve been pricing at so far?

Bob Prather

We certainly think so, especially on some key high schools and some of the towns and also some of the key college, you know, the minor sports, I would call it, that may have a big audience. I’ve used the example out in Lincoln, Nebraska, the women’s volleyball team there has been national champion and been in the top five teams for the last five years. They’ve sold out 100 straight games at 10,000 per game virtually, and we’ve aired several of their games on our digital channel and done real well with it. But they became so popular, last year they were number one for most of the year that ESPNU took a bunch of their games and took them away from us.

But those are the kinds of things we’re looking for and we definitely think we can build a premium audience and a premium advertiser with those kinds of things.

Jim Goss - Barrington Research

The major college towns that you have, and you have quite a few, are you concerned you are going to lose even the minor sports to vehicles like the Big 10 network and probably clones of that in other major conferences?

Bob Prather

I think that is an issue on some of them, yes. I think that’s something we’ve got to -- and here again, it may just force us more to the high school, which is not all bad because high school still is very, very powerful in most of our markets, and especially in the south and the Midwest with football. We think there are plenty of programming opportunities on the digital channels.

Jim Goss - Barrington Research

All right. Thanks very much.

Operator

We’ll take our next question from Richard [Avrens] of First Manhattan Company.

Richard Avrens - First Manhattan Company

My question also is about debt. Do you have any specific number that you expect to reduce debt to in 2008 and 2009?

Bob Prather

I’ll give you a broad number. We expect our free cash flow to be over $1 a share this year and we would use 100% of that to pay down debt, so --

Richard Avrens - First Manhattan Company

So that’s about $40 million.

Bob Prather

No, it’s more than that. We’ve got about 50 million shares out, so --

Richard Avrens - First Manhattan Company

And that would apply also even more so in 2009?

Bob Prather

We plan to -- 2009 the -- I don’t know if our free cash flow will be quite that high but we plan to use 95% to 100% of it to pay down debt, yes.

Richard Avrens - First Manhattan Company

Okay, now is there -- with that resolution and seeing your stock below 5, does that cause kind of a --

Bob Prather

I bought shares -- I bought 11,500 shares at 6 and thought I was stealing it, so I won’t buy some more next week.

Richard Avrens - First Manhattan Company

But you’re not going to be tempted to buy the stock, even though it’s where it is?

Bob Prather

Well, no, I don’t think the company can. I think it’s more important for us to get our balance sheet -- you know, with the markets worried about leverage and we’re also concerned that we want to do the right thing, just for the company, I think it’s prudent for us to be paying down debt right now and not buying stock back.

Richard Avrens - First Manhattan Company

Thank you.

Operator

We’ll go next to Adam [Spielman] of PPM America.

Adam Spielman - PPM America

Thank you. I was hoping to first ask a little bit about political ad market. Have you seen any changes in the last few months? Some other guys have said things have actually changed in the last few months and specifically Tallahassee, do you see anything there being -- I know it’s not of a -- do you see anything there being in that kind of Florida market?

Bob Prather

I think the Florida market seemed to be down a little bit. We’re actually -- here again I guess what’s good about being diversified around the country. Some of our markets are obviously stronger than others. The Florida markets had a good year last year but this year I think they are a little bit challenged. We had a real strong year in national last year and national seems to be struggling a little bit in Tallahassee.

Local overall, it’s pretty steady year-in and year-out. First quarter was a little slower than what we thought but typically our GMs seem to always over budget in the first quarter. I jokingly told Jim Rice it seems like we always start out under budget in the first quarter but I think for the year, we’re expecting reasonable local growth. As you know, the political will push out a lot of that in the third and fourth quarter, which is good news, by the way, but it does tend to dominate when you are getting 60% of your political in the end of the third quarter, beginning of the fourth quarter.

Adam Spielman - PPM America

But you haven’t seen a big change in the last few months from --

Bob Prather

No, not really, no.

Adam Spielman - PPM America

Okay, and then just to clarify on the political, 2006 the pro forma number was 43.

Bob Prather

Right, yes.

Adam Spielman - PPM America

And then I’m sorry, there was a number thrown around, kind of around 60 and then I thought I heard it -- you thought it was going to be flat. Is that just a pro forma --

Bob Prather

No, no, I said we did 43 in ’06, we did 53 in ’04, and we’re thinking 60, in that range, in 2008.

Adam Spielman - PPM America

Got it. And then just a final one on the retrans, the breakout of revenues is helpful. So when we see that retrans kind of cycling through the quarters, are we kind of at the right run-rate by Q407 or how much more --

Bob Prather

It should be a little better than that like I said for this year, but like I said, our big hit ought to be in 2009 because 60% of our subs come up at the end of ’08, so -- and the new contracts would start in January ’09, so that’s where we really need to make hay at the end of the year.

Adam Spielman - PPM America

Okay, and then just a final one back on the outdoor guys, what they are seeing versus what you are seeing, you just attribute that to just a different -- obviously different mix of advertisers?

Bob Prather

Well, yes and no. I talked to Kevin O’Riley who’s head of [Lamar]. He’s a friend of mine and he’s said that they were seeing some slow downs in the bigger cities more so and in the cities that were hot real estate areas. We’re in the mid-sized markets don’t -- our biggest markets is DMA59, so I don’t think -- and here again, I think a lot of our university towns and state capitals won’t feel that kind of crunch as much as some of these real hot real estate markets around the country.

Adam Spielman - PPM America

Thank you.

Operator

We’ll take our next question from Jordan [Teramo] of Brigade Capital.

Jordan Teramo - Brigade Capital

Asked and answered, thank you.

Operator

We’ll go next to Linda Karn of Credit Suisse.

Linda Karn - Credit Suisse

Thank you. I just had a question on the covenants. Can you just tell us where you are at year-end in your leverage covenant versus what the covenant is?

Bob Prather

Jim, can you answer that?

James C. Ryan

At year-end, on the actual calculation in the agreement, we are at 789 against an 825 covenant.

Linda Karn - Credit Suisse

Okay, and I guess just given the step-down in the middle of this year, how comfortable are you guys, given that political is going to be so back-end weighted that you can meet those step-downs?

Bob Prather

We’re comfortable we’ll be able to meet them. It will be -- we think we’ll be tight but we think we’ll be in shape to meet them by the end of June.

Linda Karn - Credit Suisse

Okay. Thank you.

Operator

(Operator Instructions) We’ll go next to Vincent Flanagan of Seix.

Vincent Flanagan - Seix Advisors

My question was answered. It was the leverage question.

Operator

We have a follow-up question from John Kornreich of Sandler Capital.

John Kornreich - Sandler Capital

A couple of quickies for Jim; the three political numbers you threw out, 53, 43, and estimated maybe 60 -- is that gross or net?

James C. Ryan

Those are all net.

John Kornreich - Sandler Capital

Okay. And what do you calculate as accumulative investment in your digital stations to date, including any initial bleed, operating bleed? You don’t have to be precise, just a round.

James C. Ryan

As far as --

Bob Prather

Jim, let me. I think John, on the capital side, I would say we get an average of $300,000 per digital channel.

John Kornreich - Sandler Capital

So maybe $12 million?

Bob Prather

Pardon?

John Kornreich - Sandler Capital

$12 million?

Bob Prather

Probably, yeah, that sounds about right.

John Kornreich - Sandler Capital

And what have been the operating losses to date?

Bob Prather

I think we were profitable, Jim, weren’t we, up until this past year?

James C. Ryan

No, Bob, we were -- I mean, we were minus $900,000 in ’07 --

Bob Prather

What about ’06?

James C. Ryan

About 650 in ’06.

John Kornreich - Sandler Capital

Okay, a couple million.

James C. Ryan

And ’05, when we had much fewer and were ramping some up, we were minus $300,000, so the -- not a big number for the future potential that the 40 channels hold.

Bob Prather

You know, John, our original plan when we had 11 UPNs on the air I think when UPN announced they were shutting down. I think we had four in the pipeline and they were at the time, those stations were becoming profitable after about 90, 120 days. And when that thing shut down and all of a sudden they announced the CW and the My Network, and it was kind of like we figured we better get the beachfront real estate while we can, so we wouldn’t have gone this fast. We’d like to go slower on things normally. We would have probably at this point had 20 UPNs on instead of 40 digital, but it kind of forced our hand on -- we thought we better get them while we can get them, so I --

John Kornreich - Sandler Capital

These stations are HD ready right now?

Bob Prather

Oh, yeah.

John Kornreich - Sandler Capital

And you’ve spent that money?

Bob Prather

Oh, yeah. The only thing we’re spending money on this year, John, is where we are going back from one of the old digital channels back to our old analog that we’ve got to buy a new transmitter and just taking down all the old antennas, getting rid of all the old transmitters, those kinds of things. That’s about $150,000 a station there to do that, so we’re figuring we’ll spend about $10 million on the digital transition this year. But we’ve got full power HD in all our stations right now.

John Kornreich - Sandler Capital

So the CapEx then could be up around the high teens, maybe 20 in ’08 and then drop again in ’09?

Bob Prather

Yeah, right.

John Kornreich - Sandler Capital

Maybe it could drop into the 12 area?

Bob Prather

I would think so. That would be my goal, 10 to 12, yeah.

John Kornreich - Sandler Capital

Jim, your digital stations average, and I know averages are a gross distortion but nevertheless, $200,000 per. And we all know it’s a fixed cost business and there’s a certain number of people you have to have, whether you are in Memphis or you’re in Cleveland. I just don’t see how this can ever be a real profit generator. Let’s say in three years you’re at $300,000 revenue per station -- I mean, so what? So you make $100,000 per station. That’s $4 million. I mean, it seems like a lot of effort and management time over nothing.

Bob Prather

John, I think we can do a lot better than that and I think once full digital comes in, we certainly -- we were on track when we had the UPNs to be doing a lot better than that. For example, we had a couple of stations on track to do over $1 million in that year when the UPN shut down. And I think with 100% coverage and analog, a good station channel on the cable that we can -- I think those things can do real well for us.

John Kornreich - Sandler Capital

If you have --

Bob Prather

The Foxes are all doing well right now, obviously and I think the CW and the My Network can do well.

John Kornreich - Sandler Capital

Jim, if you have $200,000 per station average now, 220, 250, whatever, what do you have, like three people in each station?

Bob Prather

No, I would say most of them, we’ve probably got one, maybe one-and-a-half.

John Kornreich - Sandler Capital

Okay, so this is a guy who sits there, he turns on the lights, he does everything?

Bob Prather

Well, our people that are already there are doing that. We’ve usually got a sales person and then maybe a half-a-person if you need for engineering or anything, programming, things like that.

John Kornreich - Sandler Capital

Okay. Thanks for your help again.

Operator

We’ll go next to Bishop Cheen of Wachovia.

Bishop Cheen - Wachovia

Robert, I just couldn’t --

Bob Prather

How’d you wind up on the end of the line, Bishop?

Bishop Cheen - Wachovia

Well, I -- you took out your bonds, so I don’t have a business axe, but I love your view. Look, I’ve got to ask you about public versus private market values, and I know there’s a gap and I want your view on the gap and how it tends to change in a political year.

And secondly, the degree of difficulty that both the public and the private market may have right now in this digital transition valuing new digital assets.

Bob Prather

Good question. First, the gap seems to always be there. I think right now it’s almost an academic question because I think it would be very hard to get financing to get deals done, even if you wanted to right now, unless you are in a really, really strong financial position and could just draw down a line of credit to do a deal or something like that. But in general, I think the financial markets -- although from what we’ve seen, the deals that have gotten done have gone for real good prices. Here again obviously the people that know the business think a lot more of it than the people out in Wall Street who are buying the stocks and selling the stocks, but that’s just something we’ve got to live with in the short-term. Instead, I think this market is so unusual from a financing standpoint, it’s hard to really judge what that gap is.

On the digital, I told you, as I said earlier, I’m worried about the transition. I just think it could be a difficult time for everybody. I think it will -- I don’t think it will last long but I think it’s something that we’ve got to get through and get through in a hurry and hopefully, as I said, we can do a good enough job educating the public that this is going to happen and if they’ve got an old analog TV, they need to get a converter box or if they -- if they are cable, you know, if they’ve got cable, they won’t miss a beat. The cable have been mandated by FCC to continue carrying the -- you know, giving them a signal of I think three years, so even if you’ve got an analog TV, you’ll still be able to get coverage if you’ve got cable. But I just think it’s going to be a -- it will be a trying time. I think it’s a time that we’ve just got to, like I said, get through and hope it doesn’t last very long.

One of the things, Bishop, I think that I didn’t mention earlier that has kind of hurt TV more than I thought after talking to a lot of people is I think that strike hurt the TV business in the first quarter more than we think, both from an advertiser’s point of view and from a viewer’s point of view.

Bishop Cheen - Wachovia

Kind of the Major League Baseball impact --

Bob Prather

Yeah, you know, people get turned off and start doing other things and I think advertisers were nervous about who’s really watching and do we want to keep paying prime prices for reruns and some of these crazy reality shows that were thrown in there at the last minute. I’d hate to be paying primetime prices for some of that stuff.

Bishop Cheen - Wachovia

All right, so Bob, just so I have your answer -- I’m not trying to pin you -- obviously the industry hurdles, which are always in play, but I think what I heard you say is this gap, which I think is as deep as I’ve ever seen it since the last big credit crunch, doesn’t have a chance of finding normalcy, let’s say, of closing a bit until the credit markets heal themselves.

Bob Prather

That’s exactly what I said. You said it more succinctly than I did but that’s exactly what I was trying to say.

Bishop Cheen - Wachovia

Thank you, Robert.

Operator

We’ll go next to Brian Broadbent of Highland Capital.

Brian Broadbent - Highland Capital

Just a couple of questions; in the past, you’ve discussed what the impact of NBC ratings, the kind of drag that you’ve seen versus budget. Just wondering if you could provide some color on that.

Bob Prather

Well, I think it’s still hurting us. We’ve got good news and bad news, I guess. We’ve got five of our biggest, most profitable stations are NBC with Omaha, South Bend, Lansing, Madison, and Huntington and Charleston. And you know, they are 45%, 46% of our cash flow, actually higher than our CBS, the total NBC. And they have been a poor fourth most of the year and it’s hurt our -- I think it’s hurt our news lead-in into the 10 o’clock, 11 o’clock news. And I think one thing we’re hoping for is a big Olympics. I think China has got some real pizzazz to it for an Olympic venue and we’re hoping for a big Olympics and with those big towns we’ve got there, it should be a good Olympic year but that’s not going to come in until August.

But it’s definitely had some effect on us in the short-term, yeah.

Brian Broadbent - Highland Capital

And then on the power expense, you talked about the high band to the low band. Can you just give us a sense kind of what your power expense is now and where you see that trending to?

Bob Prather

We think once the full digital is done next year, we think once we’re able to cut off the analog, we’re going to save somewhere, $2 million plus in electric bills in 2009.

Brian Broadbent - Highland Capital

And then the tower work that you mentioned, that’s going to -- is that going to happen in ’08 or doesn’t that happen in ’09?

Bob Prather

It depends, Brian, here again on whether we need to do it or not. We’re kind of looking at it on a need-to-do basis. For example, if our tower can’t support putting up the new digital antenna and the new digital wiring, we may have to take the old stuff down while we’re putting up a new -- same way with transmitters, is there may be some cases where we actually have to move the old transmitter out to put the new transmitter in, just because of space constraints. So we’re taking it on a station-by-station basis. If we don’t have to do it right now, we’re not going to do it because it’s something we can just gradually do at our own pace over a period of time.

The other thing is with tower crews are going to be so busy over the next 12 months, ideally we’d rather be hiring them when they’re not near as busy and we can get them at a better price and more on our schedule than on their schedule. So we’re taking it on a station-by-station basis.

Brian Broadbent - Highland Capital

And then do you see any competitive HD launches in any of your markets and if someone launched HD news in Omaha, are you prepared to match that investment and upgrade?

Bob Prather

We are. You know, we’ve got local HD right now in Lexington. We went on the air and then two weeks later, the NBC went on with their local HD. Right now, that’s -- we’re looking at five or six of our bigger markets. We’ve done a lot of planning on local HD expense. We think we can do it a lot cheaper than we originally thought.

But we don’t want to spend that until we feel like, you know, where we need to competitively. Ideally we’d like to be the leader in that but by the same token, we want to be careful with our capital right now and so I would say that Omaha is a good example. That’s a real tight competitive market and so we watch that one closely. There are several other big ones that we feel like where we’ve got a real competitive market, if it -- we couldn’t be too far behind if one of our competitors went local HD.

Brian Broadbent - Highland Capital

And are you also hearing kind of just a general talk about people hunkering down on the HD investment, just given where the state of the economy is?

Bob Prather

I think so. It seems to be -- I haven’t really heard of any lately, any stations doing it. For a while, there was a -- it seemed like one or two a week were announcing it but I haven’t heard any now in several weeks. We watch it pretty closely. Like I said, we try to keep our managers keep their ear to the ground and I think frankly that local HD is going to be important in the future, especially in our major markets. But in the short-term, like I said we’re willing to wait a while and see what the market does.

Brian Broadbent - Highland Capital

And can you discuss on your digitals what you expect the total reach of your digitals to expand to in 2009?

Bob Prather

-- in February of next year, they’ll be available over the air, they’ll be available on the cable systems, satellite, it should be 100% coverage at that point.

Brian Broadbent - Highland Capital

Versus today it’s at --

Bob Prather

It’s probably 75%, 80%. And as I mentioned, Brian, some of the markets -- for example, Tallahassee, where we got pushed up on the digital tier, at the time last year and it may be up from then but only 40% of the cable boxes in Tallahassee even had a digital converter, so we literally lost 60% of our market there and that was a -- that station was doing extremely well. It was the 19th ranked UPN in the United States, digital or otherwise.

Brian Broadbent - Highland Capital

And so I guess your hope would be that 2009, just going back to the numbers that John was throwing out, $200,000 to $300,000, that flipping the switch alone should hopefully get you to there?

Bob Prather

No, we’ll be better than that, I’m sure.

Brian Broadbent - Highland Capital

And then also, final question on the second digitals; of your $7.4 million of revenue, how much of that is coming from the repurposing of your news and where do you see that going forward?

Bob Prather

I would say very little. It’s mostly just advertising we’ve sold on rotators during the whole daytime and I think that’s something we need to do a better job of, is promoting the fact that the news is available on the digital channel and working toward getting a better rate on that.

As I mentioned, I think the other key area is really doing a better job of identifying local high school especially, and some college stuff that we could be promoting on the digital channel. The key to me on our digital channels, and here again I emphasize this to our GMs all the time, is we’ve got the best promotion tool in town with our main station. We’ve just got to make sure we’re promoting these digital channels so people know they are there.

Brian Broadbent - Highland Capital

And are you doing a lot of paid programming on the second digitals?

Bob Prather

A little bit but not a whole lot, but that’s something that we’re -- especially late at night, we’re looking at doing more of that, from midnight until six in the morning type of thing.

Brian Broadbent - Highland Capital

Thanks a lot.

Operator

And we have a follow-up from Adam Spielman of PPM America.

Adam Spielman - PPM America

Thanks. Just a couple of small ones on the balance sheet. How much are you fixed versus floating on the bank debt?

Bob Prather

We’re about -- I think we’ve got -- Jim, is it 465 is fixed right now and then the rest is floating? And we’re looking maybe at fixing some more if these rates continue to drop. We’re watching it pretty close on a daily basis but I -- is that the right number, Jim, 465?

James C. Ryan

Yes, that’s correct.

Adam Spielman - PPM America

Your interest expense will be down this year versus last year, right, with the big drop in LIBOR?

James C. Ryan

Yes.

Adam Spielman - PPM America

And do you have any ability to buy back bank debt in the open market and retire it to capture that discount?

Bob Prather

That’s a great question. We’d like to with a bank debt every -- we think it’s cheap right now. I don’t think our current bank agreement allows that although Citadel just got an amendment so they can buy theirs back, so it’s something we’re looking at. If there’s a way to do it within the bank agreement or something, I think it’s a great opportunity for us, frankly, if we can do it.

But you know, from what you read, I saw some quote from a Goldman guy the other day that basically said 80 is the new floor of bank debts. I mean, that’s the new cap almost. I mean, even real strong companies with low leverage, their bank debt is at a big discount, so --

Adam Spielman - PPM America

And then Jim, I missed this; you said the -- where you are on a covenant basis, or actual net leverage versus the covenant, what was that again?

James C. Ryan

At the end of the year, we were at 7.89 versus an 8.25.

Adam Spielman - PPM America

Okay, and that 7.9, that’s that eight quarters defined?

James C. Ryan

Correct.

Adam Spielman - PPM America

Okay, and then it steps down from 8.25 to 7.75 at 6/30/’08?

Bob Prather

Right.

Adam Spielman - PPM America

And then is there another step-down at 6/30/09?

James C. Ryan

It’s 7.25 at 12/31.

Adam Spielman - PPM America

Thanks very much.

Operator

Gentlemen, we have no further questions. I’ll turn the call back over to you for any additional or closing remarks.

Bob Prather

Thank you. Thanks, everybody. We appreciate it very much. We’re going to keep watching what we are doing on expenses and capital. We definitely commit that we are going to use our free cash flow to pay down debt this year. I think we are going to have a great year overall with the political. It could be a record year for us, really and we are looking forward to, like I said overall having a real good year. I think our Internet is going to continue to grow much faster than we even anticipate and we are very proud of what we’ve got there, so we are looking forward to a good year. And like I said, getting ready for the digital transition for next year.

Jim and I are easy to find. I always say we answer our own phones, so anybody who needs to call us, don’t hesitate. And we’ll talk to you at the end of the first quarter. Thanks, everybody.

Operator

That does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

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