Salem Media Group Inc (SALM) 2016 Q4 法說會逐字稿

Greetings, and welcome to the Salem Media Group fourth-quarter 2016 earnings release and teleconference.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Mr. Evan Masyr, CFO. Thank you, you may begin.

Thank you, Matt. And welcome all of you, and thanks for joining us today for Salem Media Group's fourth-quarter 2016 earnings call. As a reminder, if you get disconnected at any time, you can dial back in or listen from our website at www.SalemMedia.com.

Joining me today are Edward Atsinger, Chief Executive Officer; and David Evans, President of Interactive & Publishing. Dave Santrella, President of Broadcast Media, is out of town, but is on the line as well. We will begin in just a moment with our prepared remarks. Once we are done, the conference call operator will come back on the line to instruct you on how to submit questions.

Please be advised that statements made on this call that relate to future plans, events, financial results, prospects or performance, are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available information. Actual results may differ materially from those anticipated, and reported results should not be considered an indication of future performance.

We do not intend and undertake no obligation to update our forward-looking statements, including forecasts of future performance, the potential for growth of existing markets, the opening of new markets or the potential growth from future acquisitions. More information on risks and uncertainties that may affect our business and financial results are included in our annual report on Form 10-K, and other public filings we have made with the Securities and Exchange Commission.

This conference call also contains non-GAAP financial measures within the meaning of Regulation G, specifically, station operating income or SOI, EBITDA, adjusted EBITDA and adjusted free cash flow. In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures is available on the investor relations portion of our website at www.SalemMedia.com. With that, I would now like to turn the call over to Ed Atsinger.

Thank you, Evan. And let me thank all of you again for joining us for today's conference call. I have some prepared remarks, and I will follow my normal format. I'll comment first on financial performance briefly during the fourth quarter. I will discuss some acquisition activity. And then I want to focus on what I think is the biggest story of the quarter, our focus on and successful focus on growing free cash flow, in order to pay down debt and to de-lever our balance sheet. I will then turn the call back to Evan, and he will give you more detail on Q4, and provide some guidance for first-quarter 2017.

Let me begin by saying that we had a successful quarter. Revenue exceeded the top end of the guidance we provided. Our revenues increased 2.2% in the quarter compared the 1% increase at the top end of the guidance. At the same time, our expenses declined 0.6% compared to the guidance that we provided, on expenses of up 2% to 5%. We ended the quarter with adjusted EBITDA up 14.1%, and adjusted free cash flow up by 33.8%. We are obviously extremely pleased with the strong free cash flow growth.

Let me break down results by division. Broadcast revenue improved 1.3%. As I mentioned in our last call, this unique election cycle resulted in the less-than-anticipated political revenue. While we did have just under $1 million of political revenue in the broadcast division in the fourth quarter of 2016, it was far less than the $1.9 million we had in the fourth quarter of the previous presidential election cycle in 2012. Just for further reference, we did have over $400,000 in political revenue in the fourth quarter of 2015.

We had another solid quarter for our network, with revenues up 12.2%, which is due in part to the continued increase in prominence of our national hosts. Our syndicated line-up consists of Hugh Hewitt, Mike Gallagher, Dennis Prager, Michael Medved, Larry Elder and Eric Metaxas. And it is hard to find a day when one of them is not featured on Fox News, CNN and NBC, or other network television programs.

Block programming continued its consistent and stable revenue growth, increasing 2.7% in the fourth quarter as compared to the prior year. Block programming makes up 43% of broadcast revenue and 32% of total revenue, so it is an important revenue segment. We consider this component of our business annuity-like in nature, and much less dependent than traditional advertising revenue is on the state of the economy. When we get an economic downturn, the block programming is very stable; it's not going to go away when a lot of our advertisers might.

On a same-station basis, revenue was up 0.3% in the quarter. While this represents a modest increase, it should be noted, in the fourth quarter of 2015, we had two very successful listener trips to Israel that brought about $500,000 in revenue. We did not have an Israel trip in 2016, but we already have plans for another listener trip in 2017. On a true apples-to-apples basis, excluding the Israel trip, the same-station revenue would been up 1.2%.

Broadcast expenses were up 2.7%, driven largely by the cost associated with start-up stations. Remember, in 2015, we had the opportunity to acquire a number of the Disney spin-offs. And while we are pleased with the progress, these stations are still generating some losses. We expect almost all of it will be profitable by early 2017. On a same-station basis, broadcast expenses were up only 1.1%, again, highlighting our careful focus on expense control.

Revenue for our digital division was up 6.9% in the quarter as compared to the prior year. Two primary drivers of the revenue -- first, Townhall Media, our network of conservative news and opinion sites, was up 33% in the fourth quarter. Again, the election was a big factor, not just political revenue, but also the intensity, excitement and interest that was generated because of the unusual cycle. We did have political revenue in the quarter, $400,000 on the digital side, and we certainly had increased page views.

Interestingly, we typically see some post-election fatigue right after the election, with page views declining, and revenue to some extent, immediately following the election. Because of this unique Administration and all of the news that seems to be generated on a daily basis, we're seeing a smaller decline than normal.

Second, we are seeing tremendous growth from our Christian mobile apps. Expenses in the digital division increased only 1.9% -- again, a focus on expense control. This resulted in digital operating income increasing 24.7% over the fourth quarter of the prior year.

Finally, our publishing division had a 1% increase in revenue for the fourth quarter of 2016. I should point out that this growth was entirely from our Salem Author Services businesses, which consists of Xulon Press and Hillcrest Media. We acquired Hillcrest, by the way, in August of 2016. Revenue from Salem Author Services grew by 28.3% over the prior year.

Regnery, our traditional book-publishing company, saw revenue decline 25.5% for the quarter. We did not have any significant releases in the fourth quarter of 2016, but in the fourth quarter of 2015, we released David Limbaugh's The Emmaus Code. This business is volatile, in that it's very dependent upon when you release titles and, of course, how well they do. David Limbaugh was going to release his next book in the fourth quarter of 2016. However, the date has been moved back to late in the first quarter of 2017.

On the expense side, publishing expenses were down 8.5%. The decline was due to a one-time large write-off we had to take in Q4 2015, due to advances that would not be earned back by Ed Klein on his book, Unlikeable. This year, we had no such write-off. So that was an extraordinary, unusual event. As a result, publishing operating income improved by $700,000.

Finally, corporate expenses were down 22.2% in the fourth quarter of 2016 compared to the prior year. Our Board decided that they will not be paying cash bonuses for the 2016 performance on [a wheel] incentive, giving our senior management team restricted stock in lieu of cash.

Adjusted free cash flow was up 33.8% in the fourth quarter. We are happy with this growth, yet we know some of the one-time items I mentioned -- the large write-off at the publishing company with the restricted stock in lieu of cash bonuses -- had an impact. But when you factor out the one-time benefits we had in the fourth quarter, normalized adjusted free cash flow would still have increased in the high single-digits. For the full-year 2016, adjusted free cash flow was $27.6 million or $1.07 per share. That puts our adjusted free cash flow yield at an attractive 15.5% yield.

With respect to dividends, we paid $1.7 million of quarterly dividends or $0.065 per share on December 31. Earlier today, we announced that we will be paying our first-quarter dividend of $0.065 per share on March 31. At $0.26 per share annually, that represents a 3.8% dividend yield, based upon our current stock price.

Finally, with respect to acquisitions, we've been fairly quiet. We closed on the acquisition of 17 FM translators for approximately $1 million. Additionally, we acquired the website ChristianConcertsAlert.com for $150,000. This slowdown in acquisitions has allowed us to get much more aggressive with our debt repayments.

During the quarter, we were able to reduce our term loan B by $6 million, and reduce our leverage ratio from 5.29 at September 30, 2016 to 4.96 at the end of the year, December 31, 2016. This is the first time since 2013 that our leverage ratio has been in the 4s. We are encouraged by this progress, and we expect to reduce both debt and leverage further in 2017. As a matter of fact, since the end of the year, we've repaid an additional $5 million of our term loan.

Our number-one focus continues to be on growing free cash flow through steady revenue growth, careful expense management, and using the free cash flow to pay down debt, with acquisitions taking a backseat until our leverage ratio is at least at 4.5. The fact that we've reduced our leverage ratio from 5.47 to 4.96 over the past 12 months is evidence that we're making strong progress in this area, and we look forward to updating you in 2017 as we further de-lever. And with that, I will turn the call back to Evan for more specific information on the quarter and a little guidance for Q1 2017.

Great, thank you, Ed. For the fourth quarter, total revenue increased 2.2% to $70.7 million. Operating expenses on a recurring basis decreased 0.6% to $55.5 million, And adjusted EBITDA increased 14.1% to $15.2 million. Net broadcast revenue increased 1.3% to $52.2 million. And broadcast operating expenses increased 2.7% to $36.8 million, resulting in a 1.9% decline in station operating income to $15.4 million.

On a same-station basis, net broadcast revenue increased 0.3% to $51.7 million, and SOI decreased 1.3% to $15.6 million. These same-station results include broadcast revenue from 110 of our 118 radio stations in our network operations, and represents 99% of our net broadcast revenue.

For those interested, I'll take a look really quickly at revenue by format. 42 of our radio stations are programmed in our foundational Christian Teaching and Talk format. These stations contributed 42% of total broadcast revenue, and decreased less than 1% for the quarter. Our 33 news talk stations had an increase of 6% in revenue for the quarter. Overall, these stations contributed 18% of total broadcast revenue.

Revenue from our 13 contemporary Christian music stations contributed 20% of total broadcast revenue, and decreased 3% for the quarter. The eight stations we have programmed in Spanish-language Christian teaching and talk increased by 5%, and this format comprises 2% of total broadcast revenue. Finally, we have 13 stations in a business talk format, and this format contributed 2% of total broadcast revenue, and increased 11% for the quarter.

Our network revenue increased 12.2% for the quarter, and represents 9% of total broadcast revenue. Publishing revenue was up 1.0% to $5.7 million, and represents 8% of total revenue. And finally, revenue from our digital media business increased 6.9% to $12.7 million, and represents 18% of our total revenue.

During the quarter, we repaid $6 million our term loan B, and reduced the revolver balance by $600,000. At the end of the year December 31, 2016, we had $263 million due on the term loan, and had $0.5 million drawn on the revolver. Our leverage ratio decreased from 5.29 last quarter to 4.96 at the end of December, compared to our covenant of 6.

For the first quarter of 2017, we are projecting total revenue to be between flat and an increase of 2% over first-quarter 2016 total revenue of $64.6 million. We are also projecting operating expenses before gains or losses on the disposal of assets, impairments, depreciation, amortization and stock-based compensation expense to be between flat and an increase of 3% compared to first-quarter 2016 operating expenses of $54.1 million.

This concludes our prepared remarks. We would now like to answer any questions. And with that, I'll turn the call back over to our operator, Matt.

Thank you.

(Operator Instructions)

Lisa Springer, Singular Research.

Thank you, good afternoon. My question concerns the digital media business. Could you give us a little more color around the nice pick-up in operating income for that business in the fourth quarter? And do you anticipate that's going to continue to be your fastest growing business in 2017?

Yes, the main reason for the growth in operating profit was the robust revenue growth. I think the revenue growth in the quarter was 6.9%. Expenses were barely up over a year ago. So with the benefit of the operating leverage, it obviously drove a very nice increase in digital operating profits.

We do expect those trends to continue. We will have a little bit of headwind, because were coming off a very slight strong political year for our conservative opinion websites. We're not going to have that wind in our favor in 2017, with 2017 being a non-election year. But yes, digital should continue to be our fastest growing business.

Okay, great. And regarding the publishing business, normally in the past, you might give us a few titles of what's coming up. I'm assuming there's not much in the first quarter. But what do you see of new titles in the second quarter and beyond that?

The big title for Q1 is the next book from David Limbaugh. We will be shipping that book in March, though the official retail sale date is April. We'll be getting all of the e-book sales in April, as opposed to March, so it's kind of combination Q1, Q2 event. Later in the year, we're looking forward to some books by, for example, Dinesh D'Souza, Meg Meeker and Ed Klein, will be three of what we hope will be our larger titles

Okay, great. Thank you.

Barry Lucas, Gabelli & Company.

Thanks, and good afternoon. Just hoping you could peel back the political onion a little bit more. Given the disappointment at the presidential level, how did you do in down-ballot races?

Well, let me just give you some overall political numbers for the year, which I think will help kind of put things in perspective. And yes, there was not much money spent on the presidential side. In 2016, total political across all of our businesses was $4.6 million.

Comparing that to 2015, which had the benefit of the start of the Republican primaries in late 2015, we had $1.6 million. The last mid-term was $3.2 million. However, the last presidential election, 2012, we had $5.5 million. So hopefully, that gives you some background and idea of how political played out for us.

Okay, thanks Evan. And any color you can provide either geographically or by ad categories, some of the important categories for the stations?

Yes, go ahead, Ed.

No, Dave, you're there. I was going to say, if you're on the call, why don't you respond?

Yes, in Q4, we had some decent revenue coming in from automotive and healthcare. Home improvement always seems to be a strong category for us as well. There was nothing beyond that, that I can tell you that was particularly outstanding, other than, I would also say, education continues to be a strong category for us.

Education is strong, okay. That's interesting. And looking forward, given what we're seeing in Congress and the fight over healthcare, and the importance of that category for your listeners, would you expect to see much in the way of issue advertising coming up?

Yes, I think that we will, and we are certainly proactive in looking for opportunities for that.

We haven't seen it yet. January and February, I think people kind of generally watching and waiting to see what legislation was going to get initiated. We are seeing growing interest in people wanting to draw attention to their particular views and their opinions on particular pieces of legislation. So we're hoping to see an uptick in the second quarter.

Okay, thanks. Last one in that vein, since I happened to hear it on my radio on the way to work. There have been a number of commercials here in the metro area advocating that listeners pick up the phone and call their elected reps to support the Supreme Court nominee. And just wondering if you're seeing the same type of phenomenon?

I have not seen that, no.

All right, thanks.

That would have likely occurred in the broadcast division. And so Dave Santrella -- who is not in the room with us, he's in another location -- would see that activity. And as he said, he hasn't seen much of it yet

All right. Thanks very much.

Michael Kupinski, Noble Financial.

Thank you, and congratulations on your quarter. I was wondering if you can just -- you touched on the Disney stations. And I was wondering, it sounds like you're performing right in line with expectations. I just wanted to see if that's true? And if you could just give us a little color on how their performing?

Overall, we're all pleased with them. Some of them are significantly outperforming. A couple are lagging, but I'm confident we will have all of them on track for what we projected. Basically, when we buy an AM station, we like to project income that represents a five-multiple of what we paid, to give you a rough idea. We are fairly pleased with -- I think probably half of them have achieved that within the first six or seven months of our operation. And all of them have the right trajectory, so we feel pretty good about them.

Okay. And the expenses were lower across the board, but specifically, for the publishing division, were there any specifics in the quarter that may have shifted some of the expenses into the first quarter?

No, it's really a 2015 comparison issue. In 2015, we had to take a large write-off for Ed Klein's book, Unlikeable, because its sales were lower than we had projected. We had to take an inventory write-off, and we had to take a royalty advance write-off. There was no such write-down necessary on any title in the fourth quarter of 2016. So it was really the absence of an expense as opposed to anything else.

In terms of your guidance, you guys have given a little bit more expense growth guidance. Is that largely because you anticipate these books, there are going to be some promotions behind it, and that sort of thing? And yet you're not really factoring in big revenue, so that there might be some upside? I'm just trying to gauge how conservative your guidance might be on the expense front, given -- yes, just on the expense front?

I think the biggest factor would be, there's a couple of acquisitions we made in 2016 that are still kind of working their way up their trajectory. So for example, the acquisition of Hillcrest that we did in August, we've been busy integrating that into our Xulon Press business.

We took on all of that extra expense. We're still in the process of ramping up the marketing and sales. So you're not seeing a full revenue contribution from that business yet, but we do have the expenses there. So the same-station expense growth would be obviously lower than the overall expense growth in our guidance.

Yes, And also keep in mind that the guidance reflects, on the revenue side, the fact that 2017 is not an election year.

Right. And basically, it sounds like you're being conservative, too, on your revenue for the publishing division, even though you have some pretty big books that are coming?

Yes, obviously the big book is David Limbaugh. We've projected what we think we will sell in. We think that's a pretty accurate number. Assuming things go well, we'd like to see robust e-book sales and strong re-orders, which would help Q2.

Do you have a title for that book?

I do, it's just a question of whether I have it handy or not, give me a sec. The True Jesus.

Okay. And with the prospect of -- oh, what are the capital spending plans for 2017? And then are the investments in the FM translators now behind the Company?

Yes, overall, we expect to be somewhere in the mid-$8 million range, probably around $8.5 million for CapEx for 2017. And that's below where it's been the last couple of years, partly because in both 2016 and 2015, you had a few studio relocations. And Ed, I don't know if you want to talk about anything on the trends yet?

And the studio re-location, Michael, could get very expensive. We don't do it very often. We normally -- probably the average tenure at an office location is probably 15 or more years. So when you do have to move, it can be -- one particular location is $1.5 million or less. We're trying to do it more efficiently all the time, and we're getting better at it.

With regard to the translators, we've been very aggressive, as you know, taking advantage of this very favorable situation that the FCC created with its AM revitalization rule, which allowed very favorable treatment for acquiring translators and moving them into your market. So we probably have in excess of -- I don't have the -- I should have the number in front of me, but it's in excess of 30. And some of them are very attractive.

The total capital expense is not behind us yet, but most of it is. We still have -- first of all, you have to buy a translator within 250 miles of the city you want to move it to. That has typically been not been a terribly expensive -- I mean, that can go from $15,000 to $65,000, $70,000. And the average is somewhere between those two. That's your first cost.

And then you have to -- basically, you have to construct -- you have to negotiate for a tower site, or use your own tower site. In most cases, we will use outside tower sites. Normally, it's a fairly modest lease because it's translator. So site operators are fairly accommodating in that regard.

But then you've got to buy an antenna coax and a low-power transmitter. And I think that we budget those at around $60,000 or so per station. In some cases, it can be a little bit more. About half of that is behind us, maybe even a little bit more at this point.

And in terms of acquisitions, which might be in sight, given the fact that the leverage is coming down at 4.5 times, as you indicated, I think by the end of this year? Based on my model, you're getting like 4.6, 4.7. What are the areas that the Company might be interested in terms of acquisitions?

Well, we will continue to look for nice tuck-in acquisitions in the digital area, like the mobile apps that we acquired, and like Hillcrest, which was a nice tuck-in for Xulon. We will continue to look at radio stations that are priced properly in markets that we are already in, where we can tuck them in, and where it achieves a little bit more scale. You wait to see what develops. You have to wait to see what develops, and evaluate it.

But are going to be fairly cautious on acquisitions, Michael. Because again, the Board and management really wants to get leverage down to below the 4.5 and lower. That's been our goal. Everybody is joining the party to work aggressively, and we feel good about the progress we've made. So for a few quarters, we're going to put more emphasis on debt reduction than acquisitions.

When we do acquisitions, they have to be leverage-neutral or de-levering. That's the standard that we've adopted in this particular period. And we've done a few. And all of the ones that we're working on now do meet that criteria. In most cases, they are de-levering, but at the very least, they are leverage-neutral.

So for example, the mobile apps that we bought in the last 12 to 18 months will pay for themselves within two years.

Okay. And in terms of your outlook, you mentioned -- I just want to make sure I got this right. Because in your press release, you are talking about the first-quarter 2017. Were you talking about full-year 2017 being up as well? I just want to make sure I got what I heard, right.

We only talked about the first quarter

Got you, okay. I just wanted to make sure. Okay, thanks. My ears must be not listening correctly. Sorry about that.

Well, when we give guidance, we never give guidance for any other than the upcoming quarter. That's our [policy].

Right. Yes, I know, and that's the reason I had to catch myself. So thanks for the clarification. Appreciate it.

Thank you. This does conclude the question-and-answer session. I would like to turn the floor back over to Mr. Edward Atsinger, CEO. Thank you, please go ahead.

Thank you, operator. And again, thanks to all for joining us on the call. We hope to see you in a few months, when we do our next earnings call

Thank you. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.