Belo Corp. Q2 2008 Earnings Conference Call

Sep.15.08 | About: Belo Corp. (BLC)

Belo Corp. (NYSE:BLC)

Q2 2008 Earnings Call

July 25, 2008 2:00 pm ET

Executives

R. Paul Fry - Vice President, Investor Relations and Corporate Communications

Dunia A. Shive - President, Chief Executive Officer, and Director

Dennis A. Williamson - Chief Financial Officer and Executive Vice President

Analysts

Edward Atorino - The Benchmark company

Lee Westerfield - BMO Capital Markets

Peter Salkowski - Goldman Sachs

Steve Shapiro - GoldenTree Asset Management

Harry Demot - King Street Capital

Hale Holden - Barclays Capital

George Smith - Davenport

Grange Johnson - LaGrange Capital

Jim Ramel - Ramel Asset Management

John Passios - Pinnacle

Operator

Welcome to Belo’s 2008 second quarter earnings conference call. (Operator Instructions) I’ll now turn the conference over to our host, Paul Fry, Vice President, Investor Relations and Corporate Communications.

R. Paul Fry

Welcome to Belo’s Second Quarter Conference Call. We issued two press releases today; one announcing the company’s second quarter 2008 earnings and another announcing the declaration of the quarterly cash dividend. These releases have been posted to our website at www.belo.com.

Today’s call will include comments from Dunia Shive, Belo’s President and Chief Executive Officer, and Dennis Williamson, Executive Vice President and Chief Financial 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, without directly comparable financial measures presented in the course of the GAAP, including that we believe that non-GAAP financial measures provide equal supplemental information for investors are posted on Belo’s website at www.belo.com under Investor Relations.

Now, I’m pleased to turn the call over to Dunia.

Dunia A. Shive

Belo’s second quarter results were highlighted by excellent expense management and soft advertising conditions reflected a continuing weak economic environment. Combined local and national spot revenue declines from the second quarter improved marginally when compared to the first quarter of this year.

Total revenues were down 4.7% in the second quarter and are indicative of a continuing nationwide slowdown in advertising revenue. We cannot predict the duration of the current economic downturn and are responding with intense focus on cost reductions while considering the overall quality and competitive positions of our operating company.

Recent steps taken include a freezing of open positions companywide, staff reductions in certain markets, and other cost-saving measures. As a result, corporate station expenses for the second quarter of 2008 are significantly less than our previous guidance.

We remain focused on investing in strategic technologies and Internet businesses that fit Belo’s profile. This month, we announced a minority equity investment in ResponseLogix, which provide advanced technology solutions to automotive dealers to better manage Internet leads. This investment gives Belo the opportunity to provide automotive dealers the ability to more effectively manage Internet generated inquiries on our television market.

We also entered into a relationship with Live Cast Media, a provider of mobile broadcasting solutions that enables users to easily stream live video direct from mobile devices to the web. Coupled with today's 3-G mobile devices, Live Cast provides an end-to-end solution for live broadcasting of social events, amateur sports, breaking news and emergencies in the field. These strategic relationships will help build and expand our mobile and Internet businesses.

Belo's Internet audiences continue to grow in the second quarter with the number of unique users increasing 22%. Page views increased 11% and video stream requests grew 20% in the second quarter of 2008. Second quarter Internet advertising revenue for Belo's website grew 7.3% and represented 4% of total revenue, up from 3.5% in the second quarter of 2007.

Internet revenue growth was impacted in the second quarter by a significant non-recurring promotion in the second quarter of 2007. Not withstanding this item, automotive classifieds revenue associated with our arrangement with Cars.Com was up 28% in the second quarter. Banners and sponsorship advertising revenue was up 22% and revenue associated with video stream served on our site grew 102% in the second quarter. Importantly, third quarter Internet revenues were pacing at growth levels consistent with what we experienced in the first quarter of the year.

Retransmission revenues totaled $7.6 million in the second quarter of 2008, a 36% increase compared to the prior year. This increase is due to recently completed agreements, contractual growth rates included in existing agreements, the full year impact of negotiations completed last year, and the continued growth in subscribers across cable, satellite and Telco distribution systems. The company expects to generate approximately $30 million in retransmission revenue for full year 2008, up from approximately $23 million in 2007, and slightly higher than our previous guidance of $28-29 million.

Belo television stations enjoyed strong performances once again in the May ratings period, finishing number one or number two sign on to sign off in 12 of 15 Nielsen rated markets. Belo stations also continued to be recognized for their outstanding journalism. Four of our television stations were honored with national Edward R. Murrow awards last month, including WUSA television in Dallas for its website, KGWTV in Portland for continuing coverage, WCNCTV in Charlotte for sports reporting, and KVUETV in Austin for videography. These Murrow's add to an impressive list of awards our stations have received this year including three DuPont Columbia awards, one Peabody award and two Service to America awards.

In summary we're pleased with the diligent expense initiatives we have undertaken and the related positive impact they have had on second quarter earnings. We're also pleased with the competitive positions of our television stations and the strong ratings and recognition they continue to deliver. As all market conditions remain soft we continue to remain very positive about the longer term prospects of the markets in which we operate.

On the last point the U.S. Census Bureau recently released data that confirms the solid growth characteristics of the markets in which we do business. Seven Belo markets were ranked in the surveys Top 10 cities for numerical population growth in 2007. In fact, Houston, Phoenix, San Antonio, Fort Worth and New Orleans were ranked 1 through 5, Austin and Charlotte were ranked 8 and 9 respectively. This information further supports my belief that we are well positioned to take advantage of the economic recovery when it occurs.

Before I turn it over to Dennis I do want to comment on our recent stock price performance. We're very disappointed in the current price and we do not think it reflects an appropriate value for the great assets that we operate and we're obviously being impacted by a weak economy and some nervousness about the long term aspects of the television sector. We think concerns about the television sector are overstated and do not give appropriate weight to the long-term opportunities of our industry. Economic issues will work themselves out overtime but until then we're going to continue to operate these businesses as efficiently and aggressively as possible to maximize our competitive advantages. Now, Dennis will provide further details about our second quarter results.

Dennis A. Williamson

Belo today reported second quarter earnings per share from continuing operations of $0.26 compared to $0.23 in the second quarter of 2007. Earnings per share from continuing operations for the second quarter of 2007 exclude the results of Belo's newspaper businesses and related assets which were spun off on February 8, 2008. The second quarter of 2008 included a non-cash expense reduction of $4.7 million or $0.03 per share as a result of third-party funding of certain news gathering equipment. This expense reduction relates to a 2005 FCC decision that allowed a major wireless provider to finance the replacement of analog news gathering equipment with digital equipment at television stations across the country in exchange for those stations vacating the analog spectrum earlier than required. Five Belo markets received such new digital news gathering equipment in the second quarter. As future Belo stations are converted, further expense reductions will be realized. These amounts are reflected as reductions to station programming and other operating costs in Belo's financial statements.

Belo's total revenues were $189 million in the second quarter and represented a 4.7% decrease versus the second quarter of 2007. Total spot revenue including political was down 6.4% with local spot down 5.9% and national spot down 10%. Second quarter 2008 revenues were affected by a weak advertising environment particularly in the automotive category, which was down 10%. We also noted softness in the telecom, entertainment, media, and retail furniture categories. The pharmaceutical, healthcare and consumer services categories were all up significantly.

Second quarter 2008 political revenue of $3.6 million was up $1.4 million versus the second quarter of 2007. Total station expenses decreased 7.4% in the second quarter versus the same period last year, due primarily to the freezing of open positions companywide, staff reductions in certain markets, the aforementioned non-cash expense reduction, and other cost saving measures. Excluding the non-cash expense reduction, station expenses decreased 3.3%. As of June 30th, the number of full-time equivalent employees at our television stations was 3% lower than the number at December 31, 2007.

Station EBITDA for the second quarter of 2008 was down 0.8% versus the second quarter of 2007, and down 6.5% when excluding the effects of the non-cash expense reduction. Corporate operating costs were $6.6 million in the second quarter of 2008 as compared to $10.1 million in the second quarter of 2007, a decrease of 34%. The decrease in corporate costs and expenses was due primarily to lower share-based compensation expense, lower bonus expense, and other cost saving measures. Second quarter 2008 combined station and corporate operating costs declined 9.6% or 5.8% when excluding the effects of the non-cash expense reduction. Depreciation and amortization expense totaled $10.3 million in the second quarter of 2008, a 6.4% decrease from the second quarter of 2007.

Interest expense decreased $2.8 million or 11% in the second quarter of 2008. Income tax expense increased $4.1 million in the second quarter of 2008, compared to the second quarter of 2007, due primarily to higher 2008 pre-tax earnings and a credit related to Texas state tax reforms in 2007. Belo’s effective tax rate for full-year 2008 is expected to be around 39%, excluding the one-time tax charge of $18.2 million recorded in the first quarter of 2008 related to the transfer of certain intangibles in connection with the spin-off.

Turning to the balance sheet, total debt was $1.18 billion and our debt-to-cash flow ratio was 4.3 times as of June 30. From July 1 through the close of business yesterday, the company reduced its debt by an additional $24 million. The company invested $9.8 million in capital expenditures in the second quarter and expects to spend a total of $25 million for the year, down from our previous guidance of $30 million.

And now, I’ll turn the call back over to Dunia to comment on the third quarter.

Dunia A. Shive

Current economic conditions with difficulty of predicting political revenues make it extremely difficult to provide specific guidance for the third quarter or the balance of the year at this time. However, third quarter total revenue comparison should improve from the second quarter or year-over-year comparison due to political revenue and Olympics revenue in August and our four NBC affiliated stations.

While the company continues to manage operating expenses aggressively, third quarter station expense comparisons to the prior year are not expected to be as favorable in the second quarter comparison due primarily to $1.7 million credit in the third quarter of 2007 related to the conversion of an operating lease to a capital lease and increased programming costs at our Phoenix stations in the third quarter of 2008. Because of the significant reductions in share-based compensation, bonus expense, and other cost-saving measures, full-year corporate operating costs, exclusive of spin-off charges, are projected to be under $36 million, down from our previous full-year guidance of $40 million

Finally, I want to remind everyone that 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 the fourth quarter of this year and in 2009. And in August, we’ll be filing an 8-K that would include pro forma full-year statement of earnings for Belo for 2005, 2006 and 2007, and pro forma quarterly statements of earnings for Belo for 2006 and 2007.

This concludes our formal remarks and we’ll be glad to take your questions.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from Edward Atorino - Benchmark.

Edward Atorino - The Benchmark Company

First of all, what was political in the second quarter of ‘07? Number one. Number two: And looking at the cost space going forward, you said it’s not going to be quite as low as the second quarter but we would be down from last year, I would guess, the 111 in the third and 122 in the fourth; and then third, with the refinancing would your run rate on interest expense be around $18-20 million a quarter going forward or maybe less?

Dunia A. Shive

On the political, I believe, in the second quarter 2007 was $2.2 million.

Edward Atorino - The Benchmark Company

On the new cost space in operating expense. If you look at the second quarter, you said it may not be quite that low but would it be somewhere down from last year, 111, 122 by a few million dollars and 110, 115 a quarter?

Dennis A. Williamson

Well, we haven’t given any guidance on that, Ed, but we did have a $1.7 million credit in the third quarter of ‘07, which will not repeat obviously. We really reduced expenses in almost all categories but we’re reluctant to just say exactly where they’re going to come out and we’re not providing guidance for third quarter. We had a good second quarter. We just don’t know where the third quarter’s going to end up.

On the refinancing, it’s a cash savings annually of $14.5 million. We’re roughly around $84 million. So, I think the run rate would be about $70 million for the year.

Edward Atorino - The Benchmark Company

That’s $10 million savings?

Dennis A. Williamson

After tax it’s about $8 million savings, after tax. We’re going from 8% down to about 3.2--

Edward Atorino - The Benchmark Company

And that would kick in, in the fourth quarter?

Dennis A. Williamson

In November. So, we’ll have two months.

Edward Atorino - The Benchmark Company

So, next year interest expense in the $70 million range?

Dennis A. Williamson

We have 10 months of that savings from this year.

Edward Atorino - The Benchmark Company

Yes, so $70 millionish.

Dennis A. Williamson

Well, wait a minute. No, not $70 million. It’ll be more like about $82 million. We’re about $94 million now, $95 million now. So, it’ll be about $80 million, not $70 million. I’ve misspoken.

Edward Atorino - The Benchmark Company

If you look at the second quarter, interest expense was $21.5 million, right? Am I looking at the right number here? Yes, $21.5 million, which if I multiply by four is $84 million.

Dennis A. Williamson

Yes.

Edward Atorino - The Benchmark Company

So that’s going to come down a few million bucks.

Dennis A. Williamson

It will. It should come down roughly, if interest rates stay the same, about $3.5-4 million a quarter.

Edward Atorino - The Benchmark Company

A quarter?

Dennis A. Williamson

Yes, a quarter.

Edward Atorino - The Benchmark Company

So, you have it down to around $70 million at an annual rate.

Dennis A. Williamson

Right. I’m looking at ‘06 at $95 million, ‘07 about $84. Yes, it should be closer to $70 million.

Edward Atorino - The Benchmark Company

Yes, for ‘09.

Dennis A. Williamson

For ‘09.

Edward Atorino - The Benchmark Company

Yes, that’s a pretty good number.

Dunia A. Shiva

And that’s dependent on where LIBOR rates are at.

Edward Atorino - The Benchmark Company

Obviously. And you said the tax rate’s 39%, right?

Dennis A. Williamson

39%.

Dunia A. Shive

That excludes the $18 million.

Operator

Your next question comes from Lee Westerfield - BMO Capital.

Lee Westerfield - BMO Capital Markets

By network, how did you fare for CBS, ABC, NBC and others? Yes, how did your affiliates, broken out by network, perform during the second quarter? Secondly, as you look into the Olympics compared to the 2004 Olympics when I think you did $9.7 million, if I remember my notes, from the Summer Olympics in 2004, how are you faring going into this coming August? And thirdly on retransmission, this is a slight step up to your expectations of $30 million for this year. What further negotiations take place this year? What might be the variance, if any, for the remainder of this year in retransmission fees?

Dunia A. Shive

Let me start with the Olympics. I think the Olympics are going to be relatively flat to what it was from the last Olympics cycle because what we’re looking at on the current time period versus where we were at the same time period a couple of years ago. With respect to retransmission agreements, as I mentioned in my prepared remarks, we have several different agreements going on at any one point in time. We completed the Comcast agreement, which was one of our larger agreements, earlier this year. We are currently working on the charter agreement with [inaudible] at the end of 2008. And so wherever we come out with that, we’ll provide us some incremental retrans revenue for 2009 and beyond. And as I mentioned, there are several other smaller providers and Telco distributors that we are negotiating with at any point in time.

Lee Westerfield - BMO Capital Markets

Yes, Dunia, I was thinking more specific than that. What variance there might be for the remainder of 2008, and it sounds like little at this point.

Dunia A. Shive

Yes, the remainder of 2008, we gave a number for 2008. We said we thought it’ll be approximately $30 million for full year.

Operator

Your next question comes from Peter Salkowski - Goldman Sachs.

Peter Salkowski - Goldman Sachs

First of all, just a clarification on the Olympics schedule. Are you talking about the $9.7 million in 2004 or what you did in 2006 Winter Olympics?

Dunia A. Shive

We’re using about a $9 million number.

Peter Salkowski - Goldman Sachs

In the press release, you mentioned SG&A’s down about 3% from year-end. What was it year-over-year from second quarter ‘07?

Dunia A. Shive

Peter, I don’t have that information. Let’s see if Dennis or someone has it. I looked at it basically from the end of the year and that’s where the 3% came from. We’ll see if we have that data here with us.

Peter Salkowski - Goldman Sachs

Okay, well while you’re looking up that, the CapEx guidance, the $4-5 million, can you give a little bit of it, a little additional information on what you’re doing there? Is that something that’s going to roll into 2009 or is it just stuff that you decided to not to spend on?

Dunia A. Shive

What it will really do is reallocate some of the projects into 2009 but will not increase 2009. What we’ll then do is things that we would have done in the latter half of 2009 and we’ll push into 2010. So, we will take the $30 million, add it to this year, reduce it to $25 million, and could be somewhere in the $25-30 million range next year but would not increase next year.

And I don’t think we answered Lee Westerfield’s question on network affiliations performance. I would say that with respect to how the networks performed, ABC performed better than our CBS affiliated station. And NBC station were up a little bit but I think you have to think about the market that all those stations are in and what’s happening in the economic climate with respect to having CBS affiliates in our Texas market which is being disproportionately impacted, if you will, by some of the automotive cutback. A lot of those are specifically tied as much of that to network performance [inaudible]. I think we have to put the other factors in as well.

Dennis A. Williamson

And the net cap difference full-time equivalents from the end of last second quarter’s about $170.

Peter Salkowski - Goldman Sachs

What would that be on percentage range, do you know?

Dunia A. Shive

We’ll get that for you.

Peter Salkowski - Goldman Sachs

And then lastly just on the corporate expense line, I think your guidance for the full year was $36 million. To give a pro forma for ‘07, that would be appreciated. And then the other thing is it appears the trending about $60 million for the first half of ‘08. Just wondering, it seems like it’s going to jump back up here in the third and fourth quarter. The second quarter seems to be a bit of an anomaly because it was $9 million in the first and then $6.5 million in the second. Is there something in that second quarter that made it be so much lower or if you could kind of give some color on that?

Dunia A. Shive

There were a couple of things that played there. Two things. One is true up of bonus accruals. We obviously reduced, based on the financial performance, we reduced bonus accruals pretty significantly and that hit us in the second quarter. The same was with the true up for share based compensation. So both of those hit in the second quarter. So they were crediting out expenses that were taken in the first half of the year. So, that’s why the second quarter would appear lower. But the run rate we gave you for the year, we think we will achieve that number with respect to the $36 million.

Peter Salkowski - Goldman Sachs

And then lastly on advertising rates going forward and how it plays out with the Olympics as we go into the second half of the year, are you seeing any sort of pushback on rates we’re able to charge? Are you selling out a lot of inventory with regards to your market? How is that all playing out?

Dunia A. Shive

I want to say one thing about the Olympics because you know we had four NBC affiliates and typically this is the highest rating in terms of Olympics coverage and we talked about the $9 million range but I don’t think I would look at that as being all incremental in this market environment. And in a low demand environment it’s more of a replacement of stock and incremental money. So, I wouldn’t call it a rate driver in that regard. In other words, advertisers are not really increasing budgets but they’re allocating existing budgets to the Olympics. [Inaudible] to NBC stations but it’s a detriment for the non-NBC stations in the market.

So, I wouldn’t call those rate levers at this time. Depending on if you have that going on in a marketplace at the same time you have strong political going on at the same time, if that increases demand, that would then certainly have an impact or put some pressure on the rate to go up.

Dennis A. Williamson

And the total decrease in headcount from last second quarter is about 6%.

Operator

Your next question comes from Steve Shapiro - GoldenTree Asset Management.

Steve Shapiro - GoldenTree Asset Management

My question is if you don’t believe that the current stock price reflects the value of the business as it currently stands or reflects the prospects of the business, why is the Board paying down debt? Why are you choosing to pay down debt? You have LIBOR plus, I believe, 87 bank debt, less than LIBOR plus one, which is absolutely not replicable in today’s market. I still don’t understand why you would choose that less than four times leverage to pay down bank debt when you could, if you really do believe the stock is undervalued here, you could be allocating some of that capital towards repurchasing stock. It would appear to be significantly depressed levels.

Dunia A. Shive

Steve, let me take that in a couple of forms. So, the reason we don’t feel like we’re in a position to buy shares today, there are certainly some things to do but not to a meaningful degree. If you look at our current leverage right now at 4.3 times, we can’t buy shares in our existing credit facility, which we all agree, is an asset if those repurchases would take us over 5 times. And our maximum leverage in our bank agreement goes to 5 times on January 1st. So, certainly there is some room between the 4.3 we’re at today and the 5 times that has been [inaudible]. We just believe some cushion in that leverage ratio is prudent, given where the max is on January 1.

Again, we do consider that agreement to be an asset. Now, having said all that we do have some room. If you’re up for 3 and you have a max of 5, but I think that limit’s on to some very small opportunistic purchases that we may be able to consider when the window opens. But the main focus here forward remains on debt pay down because of where the perpetration currently is and what the maximums are in the economic environment.

Steve Shapiro - GoldenTree Asset Management

Relative to the market cap of the company, that’s still…I was looking at your leverage on expected numbers for ‘08, you should be below 4. That’s still a fair amount of fire power. Certainly in this environment, the last thing you want to do is lose that bank deal but I think there’s room between where we are today and anywhere near the covenant.

Dunia A. Shive

Well, I believe that we have to see where the third and fourth quarter shake out from an operating point of view because the way these calculations are. They’re done on a quarterly basis and you’re rolling off the quarter. What we have been doing in the first five years is rolling off a quarter with more cash flow in that calculation and putting on the quarter with less cash flow. And that continues to have an impact on that leverage calculation.

Earlier on in the year before some of these downturns had hit us, we had talked about being about to dip below 4 but I couldn’t make that statement today, by the end of the year.

Operator

Your next question comes from Harry Demot - King Street Capital.

Harry Demot - King Street Capital

I know you’re not effectively giving third quarter guidance. You just don’t know where political and everything else will fall but could you tell us as of now how you’re shaping up relative to your national and local advertising, X political, that’s going on there? Obviously, those were down 5% and 10% respectively in the second quarter. Having listened to some of the other calls, you get a sense for what’s going on these days. Just wondering if you’re seeing the same sort of trends, which is it seems to have gotten as bad or a little worse in July? How’s that with political?

Dunia A. Shive

I would answer that like saying that local and national spot, and this is a general statement, but looks a lot like second quarter at this point. So, I would agree with that statement in terms of trending and with July being the weaker month of what I’ve seen so far for the quarter. Again, we do have Olympics in four stations, you have other broadcasters that have more NBC affiliates, and then we do have political that’s very hard to predict. And that will impact the underlying national and spot to the extent that comes in strongly because you’d have allocated some of that inventory in political advertising which could affect your local and national spots.

Harry Demot - King Street Capital

The other question is around politics. Do you have the concentration of your market? You obviously have a lot of Texas markets, you have Arizona…I guess I don’t need to tell you where you have stations. You look at a political map and you say, well, from the presidential election standpoint, I don’t think a lot of money will be spent in Arizona necessarily and Texas has gone Republican pretty consistently. I’ve sort of wondered, in those markets as you look at the race and then do the analysis, do you have other races, Senate races, House races, issue sort of races, that you feel comfortable about? Because when I looked at it, I sort of looked and said, oh boy, so get their politics. But even if the blow out in the presidential election is probably not going to be a huge blow out for these guys but they have some of the other issues. Just wondering what you feel on it.

Dunia A. Shive

There’s a couple of things. We do still feel like political will be strong for us in certain of our markets as we are in some of the important presidential states like Oregon, Missouri, and maybe to a lesser extent, Virginia, North Carolina and Washington. But there are some other significant races in our markets. There are Senate races in Oregon and North Carolina, Virginia, New Orleans, and Kentucky. Those are all expected to be strong from a political point of view. From the House point of view, there the state of Texas; there’s one in Washington, again in Oregon, and I believe North Carolina as well. And there are a couple of big [inventorial] races that are going on in our marketplace as well. Look for them in Washington, Missouri, and North Carolina.

While historically, if you go back several election cycles, we’ve done about 50 million, give or take a few million, depending on what was going on in ‘00, ‘02, ‘04, ‘06, it’s generally come from different races and different markets. So, while we would love to see strong presidential spending in Texas, it’s hard to anticipate that right now but we do have some other markets where we’ll see some strong spending. We didn’t expect to see the Primary dollars in Texas that we saw in the first quarter but did very well there. So, we do have other significant races that we’re up against in the ballot that would produce some revenue for us in the back half of the year. Did that answer your question?

Operator

Your next question comes from Hale Holden - Barclays Capital.

Hale Holden - Barclays Capital

I just had two real quick ones, sort of a follow up to the buyback question. I was wondering how you feel about using your balance sheet to make acquisitions? It looks to me like some of the private multiple transactions for televisions base has recently come down quite a bit and you’ve been buyers in the past.

Second question was on auto advertising. The 10% decline this quarter is bigger than I remember seeing for some time. I was wondering if you could sort of frame out how much of that you thought was permanent dollars, leaving the medium due to production decreases that were going to take several years to play out?

Dunia A. Shive

Our automotive confines was also about 10% in the first quarter so it was pretty consistent. There wasn’t much difference at all between the two quarters in terms of percentage decline. There’s really no way in this environment to try to predict how much of that is tied to the cycle and how much of it is tied to some of the other underlying issues of the automotive industry. Certainly, there is some of that but one thing that I would think about is well, as we make this transition because of fuel prices from the larger trucks and SUVs into other smaller vehicles and the auto manufacturers put more into production there, that we’ll need to brand and advertise those products as well. And traditionally, that’s where the television need has been very strong and very successful in that regard.

With respect to the first part of your question, I would answer it in much the same way. I would have a hard time going out and buying a television station today and not partition my own shares at the multiple in trading yesterday. So for me, if I had the fire power under the facility to go and spend money it would be on repurchasing shares as opposed to making an acquisition.

Hale Holden - Barclays Capital

Is auto advertising still sort of ranked 20-25% of that typical stations revenue?

Dunia A. Shive

I would say for a group, it is. We have some markets where it’s higher than that and some markets, we’re obviously a little but lower than that. But as a group, we’re under 25%. I think it’s around 23% for our television group.

Operator

Your next question comes from George Smith - Davenport.

George Smith - Davenport

Could you give a comment on the longer term opportunity for retrans fees? I know we’ve made some good progress but it would still appears as though, and maybe on absolute basis, end of the percent of total revenue there’s a ground to be caught up. Do you think that $30 million is enough for this to double over three or four years?

Dennis A. Williamson

No, it would be hard, George, to really put a number to that. I mean we have all of the major MSOs and satellite providers and phone distributors paying us retrans now. And we’ve received retransmission fees through our regional news channels for years. So, what we’re really seeing here in the most recent couple of years is the recognition on the part of not only the major MSOs but others that retrans is now a part of the landscape. So, whether it’s going to go up at this rate, it definitely increase somewhat or slow down, it’s really hard for us to predict. I guess I would say these dollars are meaningful. There is a recognition on the part of our partners across the table when we’re negotiating these agreements that these are going to be a part of them. And we’re looking for a win-win with these partners and I think you’ll see it increase over time as we built in escalators in our annual years inside longer term contracts but I think would take us a long time to see these numbers double.

George Smith - Davenport

Do you feel like you’re going to the table with a little more negotiating leverage as Verizon and others continue to penetrate a lot of these markets?

Dennis A. Williamson

Well, I think that we didn’t have very much leverage at all in the years past and I would say our negotiations, we try and play it very respectful. I think with the quality of the assets that Dunia described of our standing in each of our markets, our position in each of our markets, I think there’s a recognition that we have quality assets and viewers want to see our signals. And so, there’s really, I guess I would characterize our negotiations as being very businesslike on understanding them both sides. And frankly, we’ve approached it in a similar way to the cable systems and like providers. It’s how can we create something that’s a win-win for both of us? And I think we’ve been able to do that in almost all cases. So, it’s not adversarial. Close to their business decisions that both companies are trying to reach for the benefit of their own shareholders but at the end of the day, we’ve always been able to rise an agreement that satisfies both parties.

George Smith - Davenport

And on a different topic, how do we think about the dividend? It’s obviously more than well covered by free cash fall. I’m wondering if we should expect some annual growth rate going forward?

Dunia A. Shive

What we said since the spin off, which was about six months ago, the increases in dividend, if any, would be minimal in the short to intermediate term as we have our focus on our debt pay down. And I think I would say that exact same statement today.

George Smith - Davenport

But when we think about monetizing a spectrum that’s going to be freed up and opportunities such as mobile video. Could you elaborate on potential opportunities? You mentioned an investment in Live Cast. I’m just wondering how you feel of this unfolding? How much money we’re spending as we explore new alternatives?

Dunia A. Shive

The money that’s being spent is for new alternatives is really being done at the industry level through the Open Mobile Video Coalition with respect to mobile digital television. And we are obviously a member of the Open Mobile Video Coalition and support that.

The opportunities there would be to provide digital mobile video over sector instead of using the cell networks. And the industry has come together and is working towards a solution such that we all have the same standards to implement a mobile solution. The business models are yet to be determined. I think it’s how I would answer that but I would certainly put it in the plus category or the opportunity category for broadcasters. And as you know, there are other opportunities once we do have the digital transition through multicast and otherwise but I think there’s a lot of people that put a lot of value against delivering this video over to spectrum. And we think it’ll be a good opportunity but I can’t put a number on that for you today, George.

George Smith - Davenport

I assume it’s pretty difficult forecast when this type of business model could come to fruition?

Dunia A. Shive

I think it’s difficult but I think that there’s a lot of progress being made with respect to the standards and I don’t have the exact timing of it but I think as we get closer to the transition, you’re going to hear more and more about where all this is. I don’t think that this is a 5-year out kind of deal.

Operator

Your next question comes from Grange Johnson - LaGrange Capital.

Grange Johnson - LaGrange Capital

Just wanted to echo the earlier comments on buybacks and maybe get a little more granular. You mentioned you might see some modest action on dividends. Is that something we could expect near-term? That’s part one.

Dunia A. Shive

Grange, did you mean share repurchase? You said dividends.

Grange Johnson - LaGrange Capital

Oh, I’m sorry. Share repurchase. I misspoke. Dividend increase as well. I’d echo both earlier on the call. And then the other is since you started this call talking about how inexpensive the stock is, should we expect to see additional insider purchases? I know you bought earlier in the year higher prices but should we expect that to continue? And then I guess finally and this is also a big picture macro, how would you address the sort of fears concerns over television broadcast that had taken multiples, not just for you but for your competitors down? What would you respond to it since some actions speak louder than words and you don’t seem to be addressing it with share repurchase?

Dunia A. Shiva

Grange, I’ll try to explain it. I know there are different points of views about share repurchase and I tried to explain our position with respect to where the leverage is and the bank agreement and our feeling about the bank agreement. I also mentioned that if we did make any purchases, they’d be small; they’d be opportunistic that we really want to, especially in this environment, be very mindful of where our leverage is.

And the answer on dividend, I think we’re paying a $0.30 dividend right now. It’s a nice yield. I know that, that has a lot to do, in some respect, to when the stock prices that even before that declined. It was a yield that was at least in line with the others that are paying dividends on stock in the broadcast space.

As far as insider purchase, as you know, I bought 10,000 shares at close to $10 and my fear’s here at the table, bought shares as well, and beyond that I really can’t comment on what other inside purchases may be following the next couple of days when the window opens.

Grange Johnson - LaGrange Capital

More just how would you address it? There’s clearly fear across the whole sector of the business; there’ll be newspapers part two; there’s interrogations. I mean these are macro questions but I mean that the stock is cheap on current numbers is sort of statistically not arguable. The fear’s obviously over what the future is, that this will be radio; this will be newspapers. And how would you address that? How do you think about those questions?

Dunia A. Shive

Sure, and I think you’re using that example about using newspapers as for example and what’s happened to that space, newspapers have very, very lucrative classified franchises for years so a television company could not have those. And much of what you see from a secular point of view on a newspaper business is the fact that, that business is going online and migrating quickly online. And that has had a much more detrimental and quick effect on the newspaper business than it could ever have on television obviously because we never had the classified franchises to begin with. So, I view those as very different. It’s not today as if everyone is taking everything they’re doing on television today and moving online and saying, “I’m going to do everything online.” In fact, whether they’re watching local television stations, cable, etc., television viewing is at an all-time high today according to Nielsen’s Research report.

So, I think they’re different because you do have the newspaper unfortunately had to experience that on the loss of subscribers from more people getting news and information online. I‘m going to use, as an example, the viewing on network programming online that CBS put out a report earlier this week that said that their research would say that, that would provide incremental viewing to television. So, I’m just trying to draw the analogy between what’s happening to the two. I think they’re different and I think they’re different time barrages.

I’m not at all discounting things that are out there that are had went for the television companies, including fragmentation, including increased penetration of DBR. Then again, that too has brought incremental viewing and the question is whether that penetration goes and what percentage of commercials were skipped longer term. So, I believe there are still things that are yet to be seen and not definitive answers where there are some that take a more negative view with respect to what the longer term impact on television is.

Grange Johnson - LaGrange Capital

And I guess, just with regards why we call murkier on certain guidance. Are there any other levers, expense or revenue side, that you think you can push, that you could expand on should things get worse or get harder in advertising?

Dunia A. Shive

You know on the expense side, we’re still pushing as hard on all the items as we did in the second quarter. Our Generals Managers are totally on board and are responding very appropriately to the revenue challenges they have by some of the actions that we’ve taken on the expense side. And I think you can expect to see that same level of intensity through the rest of the year or until this advertisement bond that gets better, we can have some things going opposite directions from last year that Dennis tried to explain that make it harder for the comparisons to look the same. And we do have some additional programming expenses intentionally as a result of programming and a lineup in our Phoenix market. So, there are some of those things we’re going against. But the underlying items that we’ve been pushing against, we will continue to push against.

With respect to the revenue environment when you think about the third quarter, I mentioned the Olympics on four stations. Its great for us on the four stations but it does from the standpoint of another market that aren’t NBC affiliated and a low demand in market, NBC affiliates are soaking up a lot of that inventory of these Olympic dollars. So, that’s one of the items that’s kind of hard to put a figure on for right now in terms of what that effect might be.

I also mentioned that in Texas with the exception of Dallas, our Texas markets are being disproportionably impacted on automotive because of 1) because of the great shares of that business we had, which in some cases was greater than 25%. Obviously then when that business falls as dramatically as it has in trucks and SUVs that’s had a more dramatic impact on us in certain markets. So, those are the reasons why it makes it difficult for us to kind of pinpoint where the reports are coupled with the fact that we are anticipating a nice amount of political in the third quarter but it will depend what happens with all those races we talked about earlier and how aggressive presidential spending really is in those states that may be swing states for us.

Dunia A. Shive

And I would add that if you take out some of these autos I talked about, we have several larger ones that look very good on a well to basis with our reporter.

Operator

Your next question comes from Jim Ramel - Ramel Asset Management.

Jim Ramel - Ramel Asset Management

One just going back to the excess spectrum issue for just a second. In talking to people in the industry, would you agree that the idea of creating multi-channels, if you think about it, would probably not be best used in the sense that you’re taking those eyeballs from somewhere and so your points may drop on same channel 8 and you’re picking them up on 8.1. So that the value of that spectrum is most likely in other venues other than multi-channel options. Would you agree with that or not?

Dunia A. Shive

I think it’s an interesting way to look at it. I don’t think that any kind of multicast channel which I think will be used in a lot of ways for niche programming with necessarily to track from whatever the main programming may be on the margin channels.

Dennis A. Williamson

Jim, we have five markets where we operate only the duopolies and two others where we have sort of synthetic duopolies. So, we operate two stations in seven markets and if that were the case then we would see loss or erosion or cannibalization of the mother station but in fact, the way we programmed our two stations in each market are distinct and unique relative to the audiences they’re targeting so that we generate a larger revenue pool that we would have with just a single station. And I would say that the multicast example would be much more similar to that than a simple cannibalization of the original station.

Dunia A. Shive

Yes, I think it depends on what you’re programming and having a counter programming strategy so that you don’t cannibalize your remaining stations.

Dennis A. Williamson

In fact, most of our markets were able to go after a 25-54 demographic with the traditional network affiliate and then a much younger 18-24 or 18-34 demographic with our second station.

Jim Ramel - Ramel Asset Management

Next question on retrans, how unique is it do you think that in your, or at least as I understand it so far, retrans agreements that you are receiving cash only and that there are other broadcasters perhaps with weaker stations that are kind of doing, a cable company agrees to buy a certain number of ads, etc. and as I understand it, at least thus far, you’ve only done retrans views for actual cash. Do you expect that to continue and can you comment on just whether you think that, that is resolved of the place of your stations within their respective markets (i.e. typically #1 and #2)?

Dennis A. Williamson

Well Jim, I would say that our contracts aren’t just for cash. There are other elements and terms that we have been in all of our contracts. What we have distinguished though is when we report the $30 million, that is only cash payment. We’re not trying to value some of the other terms or exchanges within the contracts and add some artificial value to that. What we’re trying to report so that shareholders can understand their models better in putting the cash that, that $30 million is just cash. But there are other terms that benefits both sides, frankly, in almost all of our agreements.

Jim Ramel - Ramel Asset Management

On the Olympic revenue there, you indicated that in ‘04 it was roughly system wide, about $10 million and in ‘08 it’ll be more like $9 million. And I’m curious as to whether you think that has more to do with just inventory availability for the Olympics because of political, is that pricing down, is demand down. What is underneath that?

Dunia A. Shive

Let me clarify. I think that we said is in both of those periods was $9 million before and our expectation here was just under $9 million. Right around there so, I don’t know if that changes your--

Jim Ramel - Ramel Asset Management

Does that indicate, Dunia, that pricing is basically the same or that pricing is lifted but demand in terms of actual spots are down? I don’t know if this is a thicker political year and so the inventory for Olympics is not as great but I guess then the question is why is it flat?

Dunia A. Shive

I think the reason it’s flat is again thinking about economic conditions. It’s not a high demand environment right now. If it was a situation where you were selling Olympics in a high demand environment, you’d be getting different rates than you’re getting today. I can’t speak to what the rates are today versus what they were two years ago but when you’re in a lower demand environment in a supply-demand market, it’s going to have some impact on the overall demand for them to keep inventory.

Jim Ramel - Ramel Asset Management

And lastly, and this is a kind of bigger question. I just wanted to know if there’s even any thought to possibilities but Amazon and TiVo announced this week a basically merging interactive advertising technology and this has been talked about in the past. And it seems that it’s kind of getting closer to basically interactive TV advertising. Is that something you’re thinking about? Is that something that seems to be within shooting distance where I might push the button and pull up a kind of super ad for the new Toyota or to get a free box of cereal or something like that? Is that something within range in your minds?

Dunia A. Shive

I think it’s awfully early on. I don’t think I can comment specifically and I’m not as up to speed on the TiVo/Amazon opportunities. Although, I did see the headline for that but to the extent that there are ways that we can participate in different technologies that can give us another opportunity to go to an advertiser with and increase advertising revenue increase and opportunities for an advertiser to deliver his or her message in a different way. We certainly want to participate in those. But whether or not that, that’s going to be, it gets back to what we’re talking about earlier. There are a lot of these technologies out there and technologies we’re now buying and selling inventory that are very early stage and is yet to be seen. I mean they’re not even rolled out in beta, so to speak, and in so many ways yet to be seen what the ultimate impact will be and what consumer adoption will be, will be a big part of ultimately where these products end up. But we’ll continue to keep our eyes and ears open to any of these ideas that gives us an opportunity to grow the top line.

Operator

Your next question is a follow-up from Edward Atorino - Benchmark.

Edward Atorino - The Benchmark company

Hi, remind us, political in ‘04 was $51 million, I think, and do you have any major programming deals coming through in ‘09?

Dunia A. Shive

I think $53 million in ‘04.

Dennis A. Williamson

No, I don’t think there’s any major programming deals that are coming up. We renewed out on most of our major products.

Dunia A. Shive

But we did buy the Dr. Phil programs. There’s new programs like that.

Dennis A. Williamson

Well, there’s no further coming online but none of our existing major--And Ed, while you’re on the phone, let me just make sure that we are clear on the interest payments because I did pick up the number from the wrong column. We are projecting about $84.5 million in this year because we’re going to roll those November bonds into our credit facility. That will save us about $14.5 million if LIBOR existed today all the way through ’09. So, it should be somewhere between $70 and $72 million in ’09.

Operator

Your next question comes from John Passios - Pinnacle.

John Passios - Pinnacle

Just a clarification on the covenant. It appears in your bank agreement that you have an interest coverage covenant at three times?

Dennis A. Williamson

No, the interest coverage is 2.25 and it goes to 2.50 in January.

John Passios - Pinnacle

Correct, but then you guys are clear on that now?

Dennis A. Williamson

Yes, we’re fine on that.

John Passios - Pinnacle

I have a quick question on strategy. On the retrans, I think you mentioned on the call that all of your subscribers are under current retrans agreements. Is that correct or is this after charter that will be the case?

Dennis A. Williamson

Well, I said the intention was not to take all subscribers because there are some small systems where we have historically had much carry just because they’re very small systems. But what I was suggesting was this retrans is not a new phenomenon to Belo. We have had retransmission fees since the late 90’s but we’ve taken them in on our regional news channels. And what is now somewhat unique and new is that we’re receiving fees for our television stations but we’re receiving them from the same people that the cable system, the satellite providers, new interest in the phone companies entrants. We’re receiving those on our stations. But it’s not like we’re starting from zero and going up. We’re starting from a pretty good number and we’re incrementally adding to it.

John Passios - Pinnacle

Do you have a sense as to where the major subs are currently covered?

Dennis A. Williamson

How much of the major subs are currently covered?

John Passios - Pinnacle

Yes.

Dennis A. Williamson

Almost all of the major subs are covered even though Time Warner’s contract doesn’t expire until ‘10, we are receiving sub fees through our regional news channels from them right now. Same is true with Charter, Cox, Comcast--all the major MSOs. So it’s again we’re not starting from zero with any of the major providers, although there may be some very small distributors that we might want to look at for retransmission except they’re really small where we’ve historically had much carry.

John Passios - Pinnacle

Final follow up is on the Internet. You said that in this quarter was up 7.3%. Was that above, below or inline with your expectations and could you comment on your kind of overall strategy? Are you on target and how you think the rest of the year will look?

Dennis A. Williamson

It was about inline with where we thought it was going to be. We did have a major promotion again in the second quarter of last year that did not repeat itself. That was a WFAA. It was a pretty sizable single promotion by a very major advertiser that did not repeat. We expect in third quarter, as we’re looking at the pace in third quarter, for that to more reflect the growth rate in the first quarter. I would say the second quarter growth rate was an anomaly and slightly lower than first or third. Maybe more than slightly, frankly.

John Passios - Pinnacle

Do you have any targets in mind in terms of percentage of total revenue or EBITDA going forward on your Internet or digital strategies at all?

Dunia A. Shive

It is about 4% now in terms of Internet revenue as a percentage of our total revenue. We do expect that to grow but I wouldn’t assume that it’s point of double in a year or two. I think it’ll continue to grow incrementally over time. I think we mentioned earlier on the call. We’re affiliated with Cars.Com in several markets; we’re rolling out more video, more video products. We’re constantly looking for new opportunities to give advertisers to advertise online in conjunction with their advertising campaigns on television. So, I do expect to continue to see that percentage grow but I don’t expect to see a doubling of that in the next year or two, in terms of the percentage it represents of our total advertising revenue.

Operator

Thank you and I’ll turn it back to our presenters for closing remarks.

Dunia A. Shive

Well, thanks everyone. I’ll be very brief given that we went up against about an hour here. We do appreciate your time this afternoon. We will be at a conference in September of this year and probably going to have the ability to give a brief update again before the end of the third quarter. So again, thanks for your time today.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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