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Belo Corp. (NYSE:BLC)

Q1 2008 Earnings Call

April 29, 2008, 2:00 pm ET

Executives

Paul Fry - Vice President of Investor Relations

Dunia Shive - President and Chief Operating Officer

Dennis Williamson - Executive Vice President and Chief Financial Officer

Perry Anderson - Senior Vice President and Chief Accounting Officer

Analysts

Victor Miller - Bear Stearns

Lee Westerfield - BMO Capital Markets

Peter Salkowski - Goldman Sachs

Edward Atorino - Benchmark

Michael Schecter - Mentor

Operator

Ladies and gentlemen thank you for standing by, and welcome to the 2008 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. (Operator Instructions). Also this conference call will be recorded.

And with that being said, I will now turn the meeting over to our host Mr. Paul Fry, Vice President, Investor Relations. Please go ahead sir.

Paul Fry -Vice President of Investor Relations

Thank you, Laurie and good afternoon. Welcome to Belo's first quarter conference call. We issued a press release today announcing the company's first quarter 2008 earnings. This release has been posted to our website at belo.com.

Today's call will include comments from Dunia Shive, President and Chief Executive Officer, and Dennis Williamson, Executive Vice President and Chief Financial Officer. Also with us today is Perry Anderson, Senior Vice President and Chief Accounting Officer.

Before Dunia makes her opening remarks, let me note that our discussion will include forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements. Additional information about these factors are detailed in the Company's press release, and public filings with the SEC, including the Annual Report on Form 10-K.

Also, reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measure presented in accordance with GAAP, including the reasons we believe are non-GAAP financial measures provide useful supplemental information for investors are posted on Belo's website at belo.com, under Investor Relations.

Now, I am pleased to turn the call over to Dunia.

Dunia Shive - President and Chief Operating Officer

Thank you, Paul. As noted in our earnings release the spin-off of Belo's newspaper businesses and related assets was completed on February 8, 2008. The results of our newspaper group prior to February 8 are included in discontinued operations. If you have questions regarding the newspaper's performance in the first quarter, you can log on to ahbelo.com for information pertaining to their first quarter earnings call, which was held yesterday.

The completion of the spin-offs marks a major transition in Belo's 166 year history. Belo Corp is now one of the largest pure-play publicly-traded television companies in the country. With a leading collection of television assets located in attractive growth markets the company is ideally positioned to capitalize on both short and long-term opportunities.

While Belo's results were highlighted by strong first quarter political revenues and continued impressive growth in its online businesses, soft economic conditions contributed to a 2% decline in first quarter total revenues. In addition, the company cycled against a very strong performance in first quarter of 2007, which included the airing of the Super Bowl on our five CBS affiliates in 2007 versus our one FOX affiliate in 2008.

Belo's web audiences continued to grow in the first quarter with a number of unique users increasing 35% and page views increasing 13%. The time users spent on our website grew as well, increasing 31% in the first quarter of 2008.

Revenue for Belo's website grew 32% in the first quarter of 2008 and represented 4% of total revenue, up from 3% in the first quarter of 2007. Driving the increase in internet revenue was a 42% increase in automotive classified revenue related to our arrangement with cars.com. Also contributing to our internet revenue growth was a 39% increase in banners and sponsorship advertising revenue as website impressions continue to grow at a rapid rate. The revenue associated with video streams served on our websites grew 200% in the first quarter.

In January 2008, Google and Yahoo did announce an agreement whereby 13 of Belo's television stations are the exclusive provider of local news video to Yahoo News in their respective markets.

All Belo markets expect Dallas, Fort Worth and Boise are included in the agreement. Yahoo will now host dozen of local news video clips each day provided by Belo television stations. These clips run within the local news pages of Yahoo News and Belo and Yahoo share advertising revenue from the video clip. This agreement provides Belo with yet another way to distribute its high quality content.

With respect to retransmission revenue, we accept the full year to be between 28 and 29 million in 2008 versus approximately 23 million in 2007. The increase is due to recently completed agreement, contractual growth rates included in existing agreements, the full year impact of negotiations completed last year and continued launch of new TELCO System.

Belo television stations enjoyed strong performance once again in the February ratings career finishing #1 or #2 sign-on to sign-off in 11 of 15 Nielsen rated markets. Our stations have also garnered numerous national awards thus far in 2008. In January, three Belo's station WFAA Television in Dallas/Forth Worth, KHOU Television in Houston and KMOV Television in St. Louis received 2008 Alfred I duPoint Silver Baton Award. These Belo's stations retrieve only five U.S. local television stations to receive this award in 2008.

WFAA Television recently received a George Foster Peabody Award a highest honor for Television, news and entertainment programming for four reports produced by its investigated unit. In addition KTVK in Phoenix and KTTV in Boise were both recently awarded NAB Service to America Award. Service to America Awards recognize outstanding community service by local broadcast.

In summary we are pleased with the comparative positions of our television stations and the strong ratings and recognition may continue to deliver. Our first quarter revenue performance was solid considering the economic environment, we are operating in and the absence of $2 million in Super Bowl revenue. We remained confident in the fundamentals of our business and are prepared to take advantage of the economic recovery when it occurs.

Now I'll turn it over to Dennis to provide further details about our first quarter results.

Dennis Williamson - Executive Vice President and Chief Financial Officer

Thanks Dunia and good afternoon everyone. Belo today reported first quarter earnings per share of $0.10 from continuing operations, before spin-off related charges, compared to $0.15 in the first quarter of 2007.

Spin-off related charges included transaction and financing costs totaling approximately 3.2 million, net of taxes, and the previously disclosed one-time tax charge of 18.2 million related to the transfer of certain intangibles in connection with the spin-off.

The reported loss per share from continuing operations, including the spin-off related charges, was $0.11 in the first quarter of 2008. The loss per share from continuing operations excludes the results of Belo's newspaper businesses and related assets, which were spun off on February 8, 2008. Those results are included in discontinued operations for the period from January 1st to the February 8 spin-off date and total a loss of $0.04 per share.

The reported net loss per share including discontinued operations was $0.15 compared to net earnings per share of $0.15 in the first quarter of 2007. Also earnings per share in the first quarter of 2007 included a credit from the settlement of the Company's Hurricane Katrina-related insurance claim, which total $0.02 per share, net of taxes.

Total revenues decreased to 2% in the first quarter of 2008 versus the prior year. Total spot revenue, including political, was down 5% with local spot down 6.4% and national spot down 10%. First quarter 2008 revenues were affected by our soft advertising environment generally, particularly in the automotive category, which was down 10%.

The Company's revenue results were also impacted by airing the Super Bowl on its single FOX affiliate in the first quarter of 2008 versus its five CBS affiliates in 2007, resulting in a $2 million unfavorable revenue variance as Dunia just mention.

We also noted softness in the health & beauty, grocery, telecom and financial service categories, while the pharmaceutical, insurance and travel categories where all up double-digits. First quarter 2008 political revenues of $5.1 million was up $4.3 million versus the first quarter of 2007. Advertising revenue associated with Belo's websites increased 32% to 6.9 million in the first quarter 2008, representing 4% of Belo's total revenues.

Total station expenses increased 3.8 percent in the first quarter versus the same period last year. The increase is due primarily to higher cost for technology, health benefits and share-based compensation.

Station EBITDA for the first quarter of 2008 was down 11.6% versus the first quarter of 2007. Corporate cost and expenses were 13.3 million in the first quarter of 2008 as compared to 10.6 million in the first quarter of 2007. First quarter 2008 expenses included 4.2 million in spin-off related cost, before taxes. Excluding these costs corporate expenses were 9.1 million, a decrease of 14% from the first quarter of 2007.

Interest expense which included financing cost related to the spin-off decreased 1.4 million or 5.8% in the first quarter of 2008. Other income expense net decreased 4.8 million in the first quarter of 2008 due primarily to a $4 million credit from the aforementioned settlement of the company's Hurricane Katrina-related insurance claim in the first quarter of 2007.

Income tax expense increased 12.9 million in the first quarter of 2008 compared to the first quarter of 2007 due primarily to the one-time 18.2 million tax charge related to the transfer of certain intangible assets in connection with the spin-off. Belo's effective tax rate for the year excluding this charge is expected to be around 39%.

Turning to the balance sheet, total debt was 1.2 billion and our debt to cash flow ratio was 4.3 times as of March 31. The company invested 6.4 million in capital expenditures and repurchased 191,000 shares for a total of 2.2 million in the first quarter of 2008 to offset share issuances under the company's employee benefit plans.

In addition company paid dividends before the spin-off totaling 12.8 million in the first quarter related to the company's dividend declaration announcement in December of last year. Quarterly dividends for the remainder of the year would be approximately 7.8 million reflecting the new post-spin dividend rate.

Now I will turn the call back over to Dunia to briefly discuss the second quarter.

Dunia Shive - President and Chief Operating Officer

Thanks Dennis. Looking to the second quarter, while local and national revenues are currently pacing better than first quarter we can't predict with certainty where the second quarter will finish given the economic conditions continued to be soft.

In addition we had $5.1 million in political revenue in the first quarter, but expect to see less political in the second quarter. As in past election cycles, we expect the majority of political revenues to come in the back half of the year. Operating expense increases for the remainder of the year will continue to be managed to lower levels, if the economic conditions do not improve.

For the balance of the year we have several positive events to look forward to including the Summer Olympics on our four NBC affiliates, which should be a robust political season and the return of a full prime-time network schedule this fall. In addition, we have $350 million and 8% senior notes coming due November 1st, which will be rolled into our revolving credit facility at a significantly lower rate benefiting us in 2009 as well.

This concludes our formal remarks and now we will be glad to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operators Instructions). And our first question from the line of Victor Miller with Bear Stearns. Please go ahead.

Victor Miller

Good afternoon. Thank you for taking the call.

Dunia Shive

Hi Victor.

Victor Miller

Good afternoon. Could you just talk about the order, lets say 4Q, 1Q and 3Q just how you are seeing that either some speculations at GM was finally going to make up its mind in what to do in terms of allocating between corporate and the local dealers. Are you seeing any kind of – is that’s solidifying and do you see any dollars in the market from that. Secondly, as you talk about now that the writer strike has been settled, what impact to 1Q and specifically is media spending coming back, are you seeing that for the February sweeps and the May sweeps? And lastly when you talk about potential making adjustments to costs, could you give us a sense of what you may look to, to the end of the year should the market not improve? Thanks.

Dunia Shive

Okay. Victor back to -- I will tell you with automotive for just a minute. I believe we mentioned in the script that our auto was down about 10% in the first quarter. When I look at our second quarter pacing today automotive is still pacing down, but not pacing down at the same rate. It's actually pacing a little bit better, with local doing better than national. I do think there were some disruption in the market place from the change in GM in the first quarter. Whether or not that is impacting some of the improvements we are seeing in the second quarter, I can't really say for sure, but the second quarter numbers do look better. Our third quarter automotive numbers, if I am not mistaken, I don’t have them with me, but we were up slightly…

Dennis Williamson

1.7.

Dunia Shive

We were up slightly. So we saw the follow up in the first quarter, still down in second, but better than the first. At this point today, the only caution I would give there is most of the cancellations that we saw going through in the first quarter did relate to the auto category.

Victor Miller

So when you are saying that, it's better than minus 10, not that it's actually up?

Dunia Shive

No, I would say it's down, but it's better than minus 10.

Victor Miller

Got you.

Dunia Shive

Okay. With respect to the writers strike, it's very difficult to quantify what impact that had on us while it was going on. Obviously in the revenue we take from the prime daypart as rerun for being shown that had an impact on revenue, I cannot say that it was significant to us, although there were certainly some impact from that. So we believe as we have a fresh line-up of shows coming up in September that that will benefit us going forward.

Victor Miller

What about -- did media spend come back at all like the network spending for a prime time, I mean for the sweeps?

Dunia Shive

I can't say that I have seen a big pick-up in that at this point.

Victor Miller

Okay.

Dunia Shive

Okay. And with respect to cost, if you look at our cost structure, about 50%, actually 55% of our costs are salaries and benefits related. We have 17 to 20% that's programming related that's a fairly fixed when you think about how far our contracts go out then you had everything else.

Victor Miller

Yeah.

Dunia Shive

Our previous guidance was that we would be up for the year mid single-digits. We were not at mid single-digits in the first quarter and while I can't give you a specific number for second and beyond, our plan would be to come off that guidance obviously given the revenue difference that we are seeing from our initial expectation.

Victor Miller

Thank you.

Dunia Shive

Thanks Victor.

Operator

And our next question from the line of Lee Westerfield with BMO Capital Markets. Please go ahead.

Lee Westerfield

Thank you. Three hopefully bullet point questions. The first relates to the refinancing. Can you remind us that's August $350 million, what is your revolver cost at this stage, have you locked in long-term there?

Dennis Williamson

It's November Lee. The 350 million come due in November.

Lee Westerfield

I'm sorry. Thank you.

Dennis Williamson

No, that’s fine. Our credit facility capacity is 600 million and we are only drawing about 20 million on that. So we are in good shape. Our current rate on that is LIBOR plus 87.5.

Lee Westerfield

The second relates to negotiations with various cable providers who you are in discussions with at this stage. Can you update us with regard to those discussions and what timeframe we should look for in terms of [culmination]?

Dunia Shive

What I can update you on is that I think the last time we spoke Lee, we were negotiating Comcast. We have completed our Comcast negotiation. We have Turner coming up at the end of 2008 and then Time Warner I believe goes through the end of 2010.

Dennis Williamson

And then there are -- Lee, there are a number of local, I would call them mom and pop cable systems throughout all of our markets that come due periodically each year.

Dunia Shive

And the telco. So there are lot of activity.

Lee Westerfield

Okay. And the third and final question here relates to political and Olympics to, just refresh and make sure I have got my notes from the past in straight order.

Dunia Shive

Sure.

Lee Westerfield

2004 in the summer you generated as I recall $11 million of revenue from Olympics and political advertising for that year was at $54 million, of course substantially all in the second half of the year. I just want to make sure my notes were right about that because both in my judgment would have slight upsides in the current fiscal year?

Dunia Shive

Lee, the Olympics number I believe and again I don’t have those in front of me. I believe it's about $10 million and historically we have done about 8 to $10 million on our NBC stations with the Olympics. I do think that it's a benefit that we will see some of those important events in prime time at least on the East Coast so live. So that will be a benefit. With respect to political, I have $52 million in my head with what that was in 2004. But if you go back to '00, '02, '04, '06, it's generally in that $50 million range, give or take a million or two.

Lee Westerfield

Let's split the difference, I just found out in my notes, was 52.9.

Dennis Williamson

There you go.

Dunia Shive

We can split it.

Lee Westerfield

Thank you very much for you time.

Dunia Shive

You bet.

Operator

And our next question is from the line of Peter Salkowski with Goldman Sachs. Please go ahead.

Peter Salkowski

Good afternoon everyone. Just a quick question I guess with regards to the advertising revenue growth that you are seeing. If you could talk a little bit about by market are you seeing any markets doing better or worse than others?

Dunia Shive

Peter, are you talking about first quarter?

Peter Salkowski

Correct.

Dunia Shive

When you look at the results in the first quarter, we have previously stated that we are seeing softness in the Seattle market. We’ve also said since then the second quarter that that has turned around. Probably the softest market we have right now is really related to the housing market and that would be in Arizona, looking at Phoenix and Tucson. I think you would hear that from anyone who is doing business in those markets right now that that part of the country is particularly soft at this point. Our larger Texas markets are holding up well. The Northwest seems to be holding up well. Outside of that, I would say St. Louis is probably one of the softer markets.

Peter Salkowski

So relative to the numbers you posted in the first quarter, would you say that Dallas was better or worse than those numbers, the down 5% total ad revenues?

Dunia Shive

Better.

Peter Salkowski

Better, excellent. And then on uses of cash, you bought some shares back in the first quarter. I'm wondering the thoughts for the rest of the year in terms of share repurchase. I know you talked about getting the leverage ratio down about four times by the end of the year. So whether or not you're going to be paying back some debt here along the way, I know debt went up a little bit here in the first quarter. I assume that's related to the tax payment?

Dunia Shive

No, the tax payment has not yet been made. The increase in was actually several things. It relates to going back to some of the amounts we had accrued at the end of the year. So had you working capital adjustments, you had interest payments. We also had some capital during the year. We had a dividend payment from December of ‘07. So when you put all of those together that's the reason we had the increase in debt from year-end to March 2008.

With respect to share repurchase, generally what that has been has been to offset the dilution from share issuances under where the restricted shares or option exercises. And what we did say from the beginning of the time that we announced the spinoff that our focus would be on free cash flow generation and repayment of debt in the short to intermediate term. And I believe that that representation really did affect the rating that we were able to achieve at 4.5 times or so, leverage actually 4.3 at this point and obtaining the favorable bank agreement, the pricing that Dennis talked about. So I think at least for the short to intermediate term, as we've said before, we'll be focused on debt repayment and bringing that leverage down to a number that's below 4. After that time, we can consider whether share repurchase is one of the uses of our free cash flow going forward along with continued debt repayment.

Peter Salkowski

Excellent. And the last question, with regard to programming costs in 2009, if I remember correctly, there's some possibility of that increasing in the next year. Can you give a sense of what you're thinking there? I know it's a little bit early on that but just kind of curious.

Dennis Williamson

In '09, is that what you said?

Peter Salkowski

Yeah, that's correct.

Dennis Williamson

I'm trying to see out '09. I think we're looking at modest increases in '08 and similar in '09 would be, I would say low single digit. I don't think there's anything that I can think of that's going to affect '09 disproportionately from '08.

Dunia Shive

But most of our syndicated programming is going out ’09, '10, from what I recall, it's all pretty low single-digit increases annually.

Peter Salkowski

Okay.

Dunia Shive

There may be -- if there are new programs that come along, [Knock Doctors] is one, we purchased that in several markets. There will be an incremental increase for that, but that's not necessarily related to rate increase as much as a swapout of one program for another.

Peter Salkowski

Got you. Alright, great. Thank you very much.

Operator

And our next question from the line of Edward Atorino with Benchmark. Please go ahead.

Edward Atorino

Hi. Thanks for the last page. I would have saved a lot of work had I looked at the back. Anyway, could you talk about other categories beside auto, packaged goods? I hear people are spending a lot of money like P&G and entertainment, any good trends there? And second, I think you did answer this, if I didn't misunderstand. Your programming costs on syndicated are pretty well set. There's nothing coming up of any significance in the fall?

Dennis Williamson

That’s right

Dunia Shive

That’s right.

Edward Atorino

Okay.

Dunia Shive

Dennis, do you want to?

Edward Atorino

On the ad categories, other than auto?

Dennis Williamson

We did noticed, I think I mentioned the script, Ed, pharmaceutical was up significantly for us, so the drug companies are in and spending. Travel was up.

Edward Atorino

I must have missed that, I am sorry. Okay.

Dennis Williamson

That's fine. Travel was up for us. Insurance was up for us. These were all strong double digits, 20% plus for us. Obviously we had some down. Grocery was down for us. Telecom was down as was auto…

Dunia Shive

Health and beauty.

Dennis Williamson

Health and beauty was also down for us. Those are probably the larger categories and from a dollar volume point of view. But with auto representing about 24% of our spot ads in the first quarter, that has a disproportionate negative effect when it's down 10% or so.

Edward Atorino

Okay. Thanks a lot.

Dennis Williamson

You are welcome.

Operator

(Operator Instructions). And our next question from the line of Michael Schecter with Mentor. Please go ahead.

Michael Schecter

What specifically turned Seattle, is that the market or was it a competitor issue?

Dunia Shive

We said when we talked about Seattle that we had launched LPMs in that market at the end of 2007. We had a rocky start with LPM although that has really turned around. The market was soft in the first quarter as well in Seattle. I think it's getting a little better in the second quarter. Obviously we are only one month into it, but those were the primary factors.

Michael Schecter

Thank you.

Operator

Thank you. And, I'll turn it back to Mr. Fry at this time.

Paul Fry

Okay. Thank you. Dunia, do you have any final comments?

Dunia Shive

Well, I just wanted to thank everyone for joining us this afternoon. While we'd all like to see business conditions improve, we like where we are from a competitive point of view and I think we are poised to do well when the economic recovery does take place. So, with that, that's all, operator.

Operator

Thank you. And as a reminder, ladies and gentlemen, this conference call will be made available for a replay that begins today at 3 pm Central Time. The replay of the conference runs until May, the 6th at midnight central. You may access the AT&T Teleconference Replay System by dialing 1800-475-6701. Please enter the replay access code 917929. International participants may dial 320-365-3844. Those numbers again are 1800-475-6701 and international dial 320-365-3844. Your replay access code is 917929. With that, we'll conclude our conference call for today. I'd like to thank you for your participation and for using AT&T's Executive Teleconference Service. And you may now disconnect.

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