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Sinclair Broadcast Group, Inc. (NASDAQ:SBGI)

Q2 2008 Earnings Call

August 6, 2008 8:30 am ET

Executives

David Amy - Chief Financial Officer

Steven Marks - Chief Operating Officer

Lucy Rutishauser - Treasurer

Analysts

Marci Ryvicker - Wachovia Securities

Bishop Cheen - Wachovia Securities

Edward Ontario - Benchmark

Michael Morris - UBS

Andrew Finkelstein - Lehman Brothers

Operator

Welcome to the Sinclair Broadcast Group, Inc. second quarter 2008 earnings release. (Operator Instructions) It is now my pleasure to introduce your host, David Amy.

David Amy

In the room with me today our David Smith, President and CEO; Steve Marks, our Chief Operating Officer of our television group; and Lucy Rutishauser, Vice President, Corporate Finance and Treasurer. Before we begin Lucy will make our forward-looking statement disclaimer.

Lucy Rutishauser

Certain matters discussed on this call may include forward-looking statements regarding among other things, future operating results. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors as set forth in the company’s most recent reports on Forms 10-Q and 10-K as filed with the SEC and included in our second quarter earnings release, which we furnished to the SEC on an 8-K earlier this morning. The company undertakes no obligation to update these forward-looking statements.

In accordance with Reg FD this call is being made available to the public. A webcast replay will be available on our website later today and will remain available until our next quarterly earnings release. Redistribution of this call is prohibited without the express written consent of the company.

Included on the call will be a discussion of non-GAAP metrics, specifically television broadcast cash flow, EBITDA, free cash flow and leverage. These metrics are not meant to replace GAAP measurements, but are provided as supplemental detail to assist the public in their analysis and valuation of our company. A reconciliation of the non-GAAP metrics to the GAAP measures in our financial statement is provided on our website, www.sbgi.net under Investor Information, Reports and Filings.

David Amy

Before reviewing the financial results, I want to share some of our highlights of the second quarter. In June we announced that we enter into an asset purchase agreement with Raycom Media to acquire the CBS affiliate WTVR-TV in Richmond Virginia for $85 million, representing an approximate 11.25 EBITDA multiple.

To be compliance with the SEC ownership rules, we also announced that we would simultaneously sell the license assets of our FOX affiliate WRLH-TV also in Richmond for $4.3 million and the provide sales and non-programming related services through an outsourcing agreement.

After expense efficiencies and revenue enhancements, we expect our pro forma multiple to improve to a 7.5 times. Although our announcement indicated that we expected the transaction to close at the end of the third quarter of this year, we believe that closing will not be any earlier than the first quarter of ’09.

The purchase agreements allow for a 12 month closing, therefore we have not included the transactions in our ‘08 outlook provided this morning in our earnings release. In June we also announced that we extended our Cable carriage agreement with Insight Communications. The agreement covers four stations and three markets and has a term of three-year. While we cannot discuss the economic terms we can say that the advertising component Insight had been receiving under the prior contract was eliminated.

Our FOX affiliate and Des Moines, KDSM-TV entered into a news share arrangement with local TV’s, NBC affiliate WHO-TV which will begin producing a 9:00 pm nightly newscast on KDSM beginning this September. KDSM was receiving a weekday news feed from our CBS affiliate in Cedar Rapids.

We invested $35.5 million through our Keyser Capital and Sinclair Investment Group subsidiaries this quarter of which $19 million relates to Jefferson Technology Park development to land in a suburb of Washington D.C. For the first six months of this year, we have invested a net amount of $80.2 million of which approximately $72.1 million relates to real estate, $2.1 million to operating businesses and $6 million to Patriot Capital, a small business investment company.

Including this $48 million invested in ’07, our cumulative investments net of cash distributions totaled $128.2 million of which $108 million was for 15 real estate transactions, $14.2 million was for three operating businesses and $6 million for Patriot Capital.

Now as we turn to the financial results for the quarter, net broadcast revenues for the second quarter were $163.7 million up 2.8% or $4.5 million over second quarter of ’07. We believe that this is among the best TV revenue results reported by the industry in this quarter. The other performance compared to our peers came from retransmission revenue our Cedar Rapids station transaction, which was a comment flow under a joint sales agreement last year and our sales efforts.

Although our growth performance was about $1 million to $3 million lower than the 3.6% to 4.9% guidance we’ve provided at May, the reason is due to the worsening economic conditions particularly its impact on the automotive sector which is the largest buyer of TV advertising, as well as the economies impact on the retail sector which is driven by disposable income. We expect core advertising spending to continue to show weakness for the remainder of ‘08 and into ‘09 as a result of this struggling economy.

Television operation expenses in the quarter defined as station production and station SG&A expenses before barter were $74.4 million up 3% from the second quarter of last year. A $2.1 million increase was primarily due to the addition of Cedar Rapids and higher cost from our news expansions offset in part by lower promotion and G&A expenses. Our television operating cost however came in $500,000 lower than our prior guidance, as $74.9 million primarily due to lower sales commissions and bonus expenses as well as lower promotion and music license fee expenses.

Corporate overhead in the quarter was $7.5 million flat to second quarter of last year, but $300,000 lower than our guidance due primarily to lower than forecasted health insurance cost. Operating income in the quarter was $43.3 million, an increase of $1.7 million or 4% over the last year’s second quarter result of $41.6 million. The primary drivers were a higher revenue and lower program amortization cost offset in part by the higher TV production cost, and an un-forecasted $1.6 million non-cash goodwill impairment charges related to Acrodyne Communications, our broadcast equipment and transmitter company.

Net interest expense for the quarter decreased 20% or $4.9 million from the last year primarily due to the refinancing of the 8% senior subordinator notes with lower cost convertible bond and a decline in the LIBOR. We had diluted earnings per common share in the second quarter of $0.15, as compared to $0.03 in the second quarter of the last year. Television broadcast cash flow in the quarter was $71 million, $2.4 million or 3.5% higher than the second quarter last year’s broadcast cash flows and inline with our implied guidance of $70 to $71.7 million.

EBITDA was $65.1 million in the quarter, $3 million or 4.7% higher than the same period last year and inline with the $65 million to $66.8 million range implied by our prior guidance. Our other operating divisions had a $700,000 loss in the quarter as compared to a $600,000 loss last year. This was less than the $1.9 million income we forecasted primarily due to delayed transmitter sales at Acrodyne. The broadcast cash flow margin on net broadcast revenues was 43.4% and the EBITDA margin on total revenues was 33.6% in the quarter.

Also during the quarter we generated $39.4 million of free cash flow, $4 million less than second quarter last year due primarily to the current tax provision this quarter versus a benefit last year. Higher CapEx was the result of timing offset in part by lower net interest expense from the refinancings and decline in LIBOR and from higher EBITDA.

We exceeded our implied guidance by $8 million primarily due to a lower than expected current tax provision, lower capital expenditures and $1 million cash received from our equity investees. At quarter end our stock price was $7.60 and our trialing 12 months free cash flow yield on our market GAAP was approximately 24.5% with a 10.5% dividend yield. Lucy will take you through the balance sheet and cash flow highlights.

Lucy Rutishauser

Cash programming payments were $20.5 million in the quarter and capital spending was $8.7 million. In response to the difficult economic conditions we have revised our 2008 capital spending forecast down from $33 million to $27 million. The $6 million savings is coming from news and master-control projects that can be deferred into 2009.

Over the next several months we will be scrubbing through our 2009 capital budgets to review projects, cost estimates and timing. We had $10.9 million of cash on hand at June 30 and $1.386 billion of debt, which includes $51 million of non-recourse and variable interest entity debt that we are required to consolidate on our books.

Leverage at the operating company with 2.61 times at quarter end and if we had a leverage test as a holding company it would be estimated at 5.21 times. That is derived from total debt on the balance sheet, net of cash, less than $51 million of variable interest entity and non-recourse debt and divided by the trailing four quarter EBITDA up $254.1 million. In July, we repurchased $6.4 million of our 8% senior subordinated notes.

Now, Steve Marks will take you through our operating performance.

Steven Marks

As David pointed out we grew our net broadcast revenues by 2.8% this quarter on higher retransmission revenues, political and the Cedar Rapids Stations, which were accounted for under our joint sales agreement last year. When compared to second quarter results posted by other television broadcasters, we believe our performance given these difficult economic times was outstanding and among the best television revenue results reported.

To give you a sense of our performance, the television viewer of advertising reported that the average Local Gross Time Sales, for 42 broadcast groups reporting to them were down 7.2% and National Time sales were down 8.2% in the second quarter versus second quarter of last year. In comparison, our second quarter Local Time sales were up 3.3%, while National revenues declined only 2.9%.

Our performance is also evident in our market shares, with over two markets reporting we grew our total market share by almost a full percentage point going from 18.5% of the revenue to 19.3% of the revenue. Nevertheless even with our growing television revenues and increased shares, we are not immune to the impact of the record level oil prices in the slanting economy. As the quarter progressed, we experienced advertising budget cuts and order cancellations by domestic automotive manufactures and local dealers in response to declining SUV and truck sales.

Categories that were up in the quarter were fast foods, services, pharmacy and cosmetics, home products and media spending, while automotive, retail, movies, schools and medical were down. Auto which represented about 20.6% of our time sales was down 3.7% or $1.1 million. Retail although only 4.4% of our time sales, was down $1 million or 13.5%.

Services, which is our second largest category representing 14.3% of our time sales was up 1.2% or $250,000 while fast food which is 6.6% of our time sales was up 8.6% or $800,000. From an affiliation breakdown our FOX stations were up 2.7%, our MyNetwork TV stations were up seven tenths of a percent and our NBC station was up 1%.

Our ABC stations were down 5.2%, CW stations down fourth tenths and CBS stations on the same station basis were down 1%. Political revenues were $3.6 million in the quarter versus $1.1 million in the same period last year. For the year, we are still expecting record levels of political advertising.

Turning to our outlook for the third quarter we are forecasting net broadcast revenues before border to be up between 2% and 3.4% from the $149.4 million reported in the third quarter last year. This equates to an increase of $3.1 million to $5.1 million. Included in our guidance is approximately $9.7 million for political advertising as compared to $1.1 million in the third quarter last year.

For the third quarter, all station affiliation groups are currently pacing down mid-to-high single-digit percents, excluding political revenues. Only our NBC station is currently pacing up mid-double digit percents due to the Olympics. Most of our advertising categories are expected to finish the quarter down from the third quarter last year, with the largest expected declines coming from automotive, particularly General Motors.

We are expecting order to finish third quarter down about 14% to 15% or about $4 million to $5 million, while we should expect some crowding out of certain categories due to the Summer Olympics and the political election. To put this perspective, the last time we had a Summer Olympics and a Presidential Election, which was 2004, quarter was down 7.7% in the third quarter of that year.

On the expense side, we are forecasting our TV production in SG&A expenses before border expenses to be approximately $72.6 million in the quarter, a 4.5% increase in third quarter of last year, $69.5 million. The $3.1 million increase is due primarily to the addition of the Cedar Rapid Stations and higher news costs. For the year, we were estimating TV operating expenses before border expenses to be $298.1 million up 3.2%.

Third quarter film payments are estimated to be $19.8 million and $82.3 million for the year. Based on guidance as provided in this morning’s earnings release, we expect broadcast cash flows to be between $16.5 million and $62.5 million; EBITDA that’s between $55.9 million and $57.9 million and free cash flow to be about $30.5 million.

Looking to the remainder of 2008 and into 2009, we are not seeing any signs that the economy will improve and are therefore procuring that the advertising spending levels will continue to be soft. In light of that we are reacting accordingly and initially target programs we put in place to help keep our sales force incentivized. Likewise we are reviewing our expanse budgets to look for areas where we can trim or defer costs. Not all these initiatives are included in the guidance we provided this morning.

With that I would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Marci Ryvicker with Wachovia Securities.

Marci Ryvicker – Wachovia Securities

Its sounds like your ABC stations have that worst performance of the group. I just wanted to know if you could elaborate on what happened there and then secondly also you said that closing on the Richmond transaction has been delayed, can you talk about that?

David Amy

In terms of the ABC stations I believe you are correct, but the fact of the matter is the orders that come in were pretty impressive. So, although the revenues are down, our share of the business is extremely competitive on the ABC stations. I think one of the biggest concerns that all broadcasters had was coming off of the writer’s strike and ABC got hurt a little bit more than the other networks at least in the markets where we had ABC stations. So, I don’t think it was that abnormal and again the orders that we’re enjoying in the second quarter, we’ve talked about a nice share increase overall for the company and we had ABC stations that are doing just fine.

Steven Marks

Yes I would just add a little bit to that Marci to say in Ohio; we’ve been talking about the difficulties of Ohio and a couple of our really important ABC affiliates, one in Columbus and other in Dayton are really faced with the toughness that the Ohio economies are continuing to face from last year into this year. So, like Steve says we are gaining share but those markets are having some real tough times.

As far as the Richmond delay, it’s just simply a matter of going through the regulatory process and review. Right now it’s under reviewed by the justice department based on what rate comp had met when they first bought these NBC affiliates there. They have entered into an agreement with justice department as far as their sale of the CBS affiliate and so that is currently being reviewed and these things take time, so we are looking for that to go through that course and our expectations right now would be that we wouldn’t be able to close any sooner than the first quarter of next year.

Operator

Your next question comes from the line of Bishop Cheen with Wachovia Securities.

Bishop Cheen – Wachovia Securities

Given the earnings challenge, David how do you think you can best use your balance sheet to enhance your stock?

David Amy

Bishop, in a sense that when you reflect on what we have done and what we have accomplished in terms of improving our stock in the past, that’s a question that I don’t know that there is a anything answer to.

If you at look valuations and where they’re heading from a public market standpoint, the negative sentiment that exists out there and certainly we have a focus on where the stock price has gone and we scratch our heads in one hand just because the valuations don’t really make a whole lot of sense to us, but then on the other side we appreciate how Wall Street reacts to sort of the economic conditions and the sentiment that becomes sort of prevalent within the market.

So, it does pose in our major an opportunity and we have to consider that and whether or not we’ll be aggressive or not is something that we have to consider and think about in regards to probably the rest of our objectives and our primary objective and I think we’ve been clear on this is really growing our free cash flows; what we do to grow our free cash flow and how do we provide dividend return to our shareholders and we continue to do that and as I mentioned earlier we are seeing now an excess of 10% return on our equity common stock.

So, from that standpoint it could get better or it could go down, but we are going to continue to be focused on those two objectives, growing our free cash flow and providing a dividend yield and return to our shareholders.

Bishop Cheen – Wachovia Securities

Also did you mention how much order was down either in Q2 or the first half?

Steven Marks

Q2 was down less than 4%.

Bishop Cheen – Wachovia Securities

But you expect a bigger slip in Q3?

Steven Marks

Yes, correct.

Operator

Your next question comes from the line of Edward Ontario with Benchmark. .

Edward Ontario – Benchmark

Could you discuss sort of the categories going forward where you see the biggest weakness other than auto which everybody is complaining about and second could you review that was it Acrodyne that lost money instead of making money and sort of review the non broadcasting pieces and how they performed; it’s sort of always a mystery?

David Amy

They were the biggest concern Ed which is obviously the automotive category. The other categories quite frankly are not performing really all that bad and obviously the biggest concern is the automotive; it makes up the biggest share of our revenue and Telecommunication which in the last two or three years has really become a huge category for us continues to show growth. So the biggest concern really is just one category and eventually that category like everything else shows that it will recycle itself and come back to life in the not too distant future; it’s just the question of one.

Steven Marks

Yes you take a look at auto and think about what’s going on in that.

Edward Ontario – Benchmark

Yes, it’s no mystery; the dealers are struggling, General Motors is going out of business, its tuff.

Steven Marks

General Motors is going out of business.

Edward Ontario – Benchmark

I’m being a little fictitious, but you never know…

David Amy

Yes, but it’s the realty of how difficult it is today as they face this whole transition from the type of products they’ve been producing and selling to a whole new product line that they really need to come out with in phase of the higher gasoline costs and you’re seeing the units sales drop significantly. I think we entered the year with about $15 million unit estimate and that has dropped, because some folks are saying it could be close to 12 million units this year. So it’s a significant…

Edward Ontario – Benchmark

That’s a lower number than anything in the drop.

David Amy

I’m not saying that’s the right number. I’ve heard some comments like that, some of the other trades that we try to keep up here in terms of that’s going on in the business. It’s a tough situation for them, but we’ve always had the silver lining that you have to think about and over times that number is going to grow from closer to 20 million units a year because are not going to stop driving, there’re just going to find better ways and more economical ways to get themselves around town, but those units sales will grow and they’ll grow significantly and it’s always been proven time and time again that the best way to improve your auto sales is through television.

So there is no question in any of our minds that as tough as what we’re seeing today it’s just an economic cycle and that we’ll come out of this and a lot of money will be coming back to us in terms of auto advertising in the future, whether that’s middle of ’09 or ’10, I mean who knows the answer to that question, we certainly don’t know.

As far as Acrodyne, you’re familiar with what we do is provide digital transmitters to the industry and in that process we’re giving up our analog signal in February, a lot of transmitter orders needed to be placed and built this year and our expectation was that with the order flow that was coming in we’d probably see more orders closed and shipped in the second quarter and what’s happened is here we have with the toughness in the economic climate, credit markets etc, a number of broadcasters simply had to hold off on taking our orders into the third quarter. So, that’s primarily a timing issue from a standpoint of our forecast.

Edward Ontario – Benchmark

The loss of 700 versus an estimated profit, was it?

David Amy

Yes exactly.

Edward Ontario – Benchmark

And that’s swinging around in the second half?

David Amy

Yes, it should improve significantly for us at Acrodyne in the second half.

Edward Ontario – Benchmark

Anything else in that non-broadcasting area of significance worth noting?

David Amy

Yes there are, but they are a little bit premature to say anything that we’re seeing some real good sings in a number of areas in terms of valuation and growth in that regard. So nothing that we can put numbers to today, but we’re very encouraged by a number of things that we’re seeing.

Certainly the other side is when we talk about real estate and the value that we’re seeing the opportunities continue to be significant in relationship to where the values have gone just in the last 18 months in that regard. So, some impatient money and opportunity is there. You’ll be hearing more and more as they appear, but it just takes time.

Operator

Thank you. Our next question comes from the line of Michael Morris with UBS; please proceed with your question.

Michael Morris - UBS

A lot of focus right now is of course on the cyclical weakness and the economic weakness that you’re facing understandability so, but can you give some inside I guess on how you’re viewing the longer term trends based on your relationships and how you’re seeing the competitive environment for advertisers who are pulling back in this environment; do you feel comfortable that they would return in a better environment and also how are you viewing I guess the competitive dynamic going forward for your national advertising relative to your local advertising? That would be helpful, thanks.

David Amy

Well when you take a look at our performance as we talk the interesting thing about our company over the last year and specifically much more sort of over the last two quarters, we’re growing our share of available dollars. We just reported we grew share by just about four points. We did likewise in the first quarter. So, we’re actually in these tough economic times in a very good position, because if the budgets are reduced regardless of whatever category it maybe we have increased ratings and better shows on the year, so we’re obviously garnering a larger share of those advertising budgets that are available.

So, from a competitive standpoint, history will show that the people that are backing up, they comeback. Clearly there is a track record 50 years long that suggest that people do comeback and spend their money. So, we really not concerned about that. The advertisers eventually will come back once the cycle takes its correction.

The way we’re going about it is very simple, we’re putting bigger shows with bigger ratings on the air and we’re garnering larger shares and that’s why we’re able to put these numbers up that we’re enjoying.

Michael Morris - UBS

Do you see increased competition from other media outside of your broadcast competitors, particularly is there difference in terms of what national advertisers are looking for; perhaps they’re more interested in the internet for example than local advertisers; any thoughts kind of on that dynamic?

David Amy

I think that games been played now for at least three or four, five years and I think it’s pretty much it is what it is. Certainly, categories have gone into the internet. I don’t really sit here today and worry about the internet taking much more than what they are presently taking and it’s obvious to us that the two go hand-in-hand. Most of what we see in terms of the internet, you have to have the television schedule to drive people to the site. So, the two go hand-in-hand for us and as far as national advertisers taking their money and putting into the internet, I think they’ve already addressed that and it’s pretty much leveled itself out.

Operator

Our next question comes from the line of Andrew Finkelstein with Lehman Brothers; please proceed with your question.

Andrew Finkelstein - Lehman Brothers

A couple of questions; first, just looking at your free cash flow and the leverage target maybe for Lucy, after the dividend and the investments and then the Richmond purchase your spending I think even through the free cash flow; can you tell how you’re going to finance all the different things you’re doing and then just further on the investments I think it was $35 million in the quarter, can you give us a feel for what that pipeline looks like for the rest of the year and then sort of wrapping it all up, leveraging the low fives has been pretty conservative relative to some of the other broadcasters that certainly that I look at. Can you give us a feel for where you want to take that leverage ratio? Thanks.

Lucy Rutishauser

Yes Andrew, just a couple of data points for you. We announced that our total leverage at the end of the second quarter through the holding company was 5.21 times and again we do not have a covenant requirement at that level. The covenant is down at the operating company and the covenant requirement was 6.75 times; we were 2.61 times at the operating company. So, from a leverage standpoint there is a lot of capacity there.

As far as the financings we do have $175 million revolver available to us. We had $51 million outstanding at the end of the second quarter. We are going into the back half of the year with political, so that should drive our cash flow. We also have a $500 million incremental term loan facility that’s available to us in our existing credit facility. So with the guidance that we have out there today for the full year expense in the third quarter revenue we would except our year end leverage through the holding company to be down in the low five times.

David Amy

Yes I think we are in real good position here in terms of being able to take advantage of the situation in regards to the credit markets, so we are not faced with having to go out and make deals at some of these really high rates right now. We saw some of the broadcasters that had to do some of the bridge, preferred to what they had to put in place and some of the prices, but we’re not looking at anything like that.

We have plenty of capacity within our Bank Credit Agreement to move forward and finance any of the acquisitions or opportunities that we see coming forward. Certainly in saying that we need to be prudent in regards to the costs that we’ve run into and like you say we’re conservative in that regard, so we’re certainly looking at as we add additional financing, the cost of that additional financing and just little effective returns on any of the acquisitions or investments that we would be making.

Andrew Finkelstein - Lehman Brothers

Should we expect the acquisitions and non-core corporate for that matter on the television side to continue with the pace we’ve kind of seen in the first half?

David Amy

Yes, I think that’s a fair way to look at it. We see this as a real opportunity today where values have come way down and what will happen over the next couple of years -- if history has any indication of what will happen is that the returns that we’ll see will enjoy significant return and other investors that are on the side lines today will come back and say “well look at the returns that you can produce in these areas” and those values will start to go up and so now is a great time to be in as an contrarian to take advantage of that. We’re going to continue to be looking for and making deals where we think it makes a lot of sense.

Andrew Finkelstein - Lehman Brothers

Okay and it sounds like funding would come from incremental bank debt and free cash flow and then you guys just not to put words in your mouth, but you’re viewing the leverage targets to stay; is that where you guys are looking to keep it or your willing to take total leverage higher than the sort of low fives area?

David Amy

You’re right as far as that. We’re not really looking to push the total leverage much beyond that, but we haven’t set a limit where we said “okay, well it can’t go beyond 5.25, it can’t go beyond 5.5” or anything like that. Like you say our personality is a conservative personality, so we’re not going to get aggressive; we’re not going to put ourselves in a position where we would be really jeopardizing a lot of the core activities that we are involved in.

Certainly what drives our view is going to be the televisions performance and we’re right on top of that looking at all the time to make sure that we have that inline in regards to anything we do. So, we don’t find ourselves in an enviable position of saying “How did we get to this point on our balance sheet?” Our balance sheet and the strength of our balance sheet is very important to us and it’s absolutely supported by the performance of our television business.

I think we can just wrap it up then and I just wanted to say in closing, I wanted to leave you with a few thoughts regarding Sinclair. Just to remind you we generate over 10% annual dividend yield, about 10% of our net broadcast revenues through re-trends are currently under contract and unaffected by the economy or advertising cycle and again we have about $125 million of hidden value from our investments that is not reflected at all in our enterprise value or our stock price.

So, I just wanted to remind you of some of the real advantages that Sinclair offers you and as always we thank you for participating on our call this morning. If anyone has any questions just feel free to contact us and we’ll talk to you next time.

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Source: Sinclair Broadcast Group, Inc. Q2 2008 Earnings Call Transcript
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