Salem Media Group Inc (SALM) 2018 Q2 法說會逐字稿

Greetings, and welcome to Salem Media Group's 2018 Second Quarter Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference to your host, Evan Masyr, EVP and CFO.

Great.

Thank you, and thank you all for joining us today for Salem Media Group's second quarter 2018 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.

Here with me today is David Evans, President of Interactive and Publishing.

Both Edward Atsinger, our Chief Executive Officer; and David Santrella, President of Broadcast Media, are joining the call from Europe, where they are currently on a listener trip.

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 the company's website at www.salemmedia.com.

I will now turn the call over to Edward Atsinger.

Ed?

Thank you, Evan, and thanks to all of you for joining the call today.

We hope we have a good connection.

Dave Santrella and I are actually on a line on a ship in Germany, a boat -- a riverboat in Germany with a listener trip that's been very successful for us here at Salem.

And our participation was a planned part of this.

So with that caveat, let see what we can do.

I have some prepared remarks that will focus on second quarter financial performance, and also will include an update on recent M&A activity.

I'll conclude with a brief comment on our dividend, and then turn the call back to Evan, who will go into more detail on second quarter performance, and also provide guidance for the third quarter 2018.

So with that, let's take a look at second quarter.

Total revenue increased 0.2%.

Expenses increased 2.4%, resulting in an adjusted EBITDA decline of 9.4%.

The division tell an interesting story.

Let's look at those.

Broadcast revenue was up 2.7%.

The expenses were up 3.7%, resulting in a flat station operating income when compared to the second quarter of 2017.

However, on a same station basis, operating income increased 1.3%.

And I might add that this is the second consecutive quarter with growth in same station operating income.

Political revenue made up about half of the revenue increase.

We recorded $1.1 million of political revenue during the quarter as compared to $400,000 in the second quarter of last year.

National Christian ministry block programming revenue increased 2.2% during the quarter, and we also had another strong quarter of network and national spot revenue growth.

On the other hand, well, network revenue was up 16.3%, and national spot revenue on our local stations was up 23.3%.

However, we did experience weakness in local spot revenue and local program revenue.

Combined, these 2 categories were down 3.1%.

We believe that some of this weakness in local spot is a result of a number of our local advertisers shifting ad dollars to global digital.

On at least 2 of our previous calls, we discussed the fact that we have begun to devote significant resources to developing our own robust local digital strategy.

That commitment is now beginning to bear fruit.

Even though the construction of that infrastructure is about half done, local digital revenue for the quarter was up nearly $500,000 or 22.9%.

We are well on our way to completing the infrastructure buildout for this global digital program, and we expect it to see it completely functional -- fully functional by year's end.

Obviously, the biggest problem in the Broadcast division was the increase in Broadcast expenses, which were up 3.7%.

There were at least 2 significant contributors to the increase.

First, our local digital business have higher operating costs and, therefore, lower profit margins.

And that was one of the factors that resulted in higher operating costs.

Secondly, as we mentioned on previous calls, we've been very aggressive in taking advantage of the FCC invitation to allow AM stations the unique opportunity to acquire FM translators.

Today, we've filed applications for 41 translators, 27 of which have been granted, constructed and are now operating.

We've also been granted an additional line, which are under construction.

And finally, we are awaiting on construction permits for an additional 5.

The modest investments -- expense investments, well, the modest expense is usually associated with operating these translators.

We do have some engineering costs as a startup matter, not really ongoing expenses.

But then we would typically have small power lease rents for these translators and also utility bills, again, that are small -- remember most of these translators are limited to 250 watts.

But there's no height limitations, so they can be quite effective in terms of coverage.

We're now absorbing those expenses, and we're in the process of monetizing the new FM signals.

Because the expenses are relatively minor in the total scheme of things, it won't take a lot of revenue to get them to contribute to profitability.

And we expect that to happen over the next several quarters.

And of course, acquiring these valuable assets increases our overall asset value.

So we see it as a very positive thing.

In our national digital division, our revenue declined 5.6% or $600,000.

We may even have to differentiate our digital -- our national digital from our local digital.

Local digital is associated with local radio stations.

The national digital is associated primarily with our websites.

More than $300,000 of this decline can be directly attributed to the timing of Easter.

Easter is the largest revenue-generating holiday for our church products division, bigger than both Thanksgiving and Christmas.

This year, Easter fell on April 1, which meant that the vast majority of our church products division, Easter revenue was in the first quarter.

Last year, Easter was on April 16, with the bulk of the revenue therefore in the second quarter.

Revenue from our conservative news and opinion websites, Townhall media was down 18.9%.

This was due largely to lower CPMs, caused directly by an increase in other digital options that we've discussed in previous calls.

Traffic to our Townhall media websites, by the way, was down only 4% from last year.

Finally, revenue from Salem Web Network was down 8.4% due to the loss of a number of advertisers to Facebook, again, with digital options.

However, traffic to our SWN websites and apps was up 5% over last year.

Expenses in the digital division were only 0.3% that we focused on cost savings, anticipating a softer revenue environment.

Finally, our Publishing revenue declined 9.1% or $550,000.

Our self-publishing business, Salem Author Services, was down 24.3% or $700,000 due to in pipeline of books that really relates back to the fourth quarter of 2016, associated with the again, uncertainty that always seems to takes place when there's a presidential election.

It takes around 9 to 12 months from the time we sign up a new author until we complete the process and record revenue.

Our pipeline of submissions has been down since around that time, fourth quarter 2016.

The good news is that the new book acquisitions is up approximately 10% in the quarter as we continue to work on rebuilding that pipeline.

We also have some good news at Regnery.

Our net traditional book publisher revenue, Regnery, was up 15.5% due to stronger book schedule, and with our biggest title being the Rational Bible: Exodus by Salem radio host, Dennis Prager.

We're also looking forward to the financial performance of 2 books being released during in the third quarter, Sean Spicer's The Briefing, which was released in mid-July, and David Limbaugh's Jesus Is Risen due to be released in early October.

The print shipments are taking place in Q3 2018.

Let me go to M&A.

But before I do, let me just mention that -- let me comment briefly on corporate expenses.

Corporate expenses were up 5.4%.

More than half of that growth is directly related to increased accounting and auditing fees associated with the implementation of the new revenue recognition standards.

This should be a one-off expense.

But as I said, half of it is directly related to having implement those new standards.

We were active on the M&A front during the quarter.

We entered into 2 separate transactions that will result in our exiting the Omaha, Nebraska market.

On May 18, we entered into an agreement to sell KGBI-FM in Omaha for $3.2 million.

This transaction closed on Monday, August 6. Then on July 23, we entered into a separate agreement to sell our 2 remaining Omaha stations, KCRO-AM and KOTK-AM combined for $1.4 million.

We expect the sale of the 2 AMs to close in early October.

On June 25, we closed on the acquisition of KZTS-FM.

We changed the call letters, by the way.

Now they're -- now it's known as KDXE in Little Rock for $1.1 million.

We started operating the station on April 1 under an LMA agreement and are broadcasting our news talk format on that station.

We were previously broadcasting that format on KHTE-FM, another frequency, which we had under a long-term LMA with an option purchase of $1.2 million.

We terminated on April 30 to not exercise our option.

The signal for KDXE covers a significantly larger population than did rather KHTE.

The station went through LMA, and we readily purchased it for $100,000 less.

On July 10, we entered into an agreement to acquire KTRB-AM in San Francisco for $5.1 million.

We've been operating that station under an LMA agreement since July 2016.

We expect that acquisition to close late in the third quarter.

On July 17, we entered into an agreement to acquire Hilary Kramer's Financial Newsletter franchise for $400,000.

We expect this transaction to close this month.

On July 24, we acquired the website and related business of ChildrensMinistryDeals.com for $3.7 million.

ChildrensMinistryDeals sells digital Sunday school curriculum to churches and will be, of course, integrated into our church products division.

On July 7, we acquired Just1Word for $300,000 in cash, and with up to an additional $100,000 of contingent earn-out consideration to be paid over the next 2 years based on the achievement of certain revenue benchmarks.

Just1Word is a bible leader with fully formatted text and multiple versions and languages available.

Finally, with regard to our dividend activity, we paid $1.7 million of quarterly dividends or $0.065 per share on June 29.

At $0.26 per share annually, that represents an attractive 5.1% dividend yield based on the current stock price.

And remember, it's not actually a dividend.

It's sort of burnout capital, but best to describe it, I guess, as a dividend.

With that, I'll turn the call back to Evan for additional detail on the quarter's performance, and Evan will also provide guidance for third quarter 2018.

Evan, it's your turn.

Great.

Thank you, Ed.

For the second quarter, total revenue increased 0.2% to $66.3 million, operating expenses on a recurring basis increased 2.4% to $55.1 million and adjusted EBITDA decreased 9.4% to $11.2 million.

Net Broadcast revenue increased 2.7% to $50.6 million, and Broadcast operating expenses increased 3.7% to $37.2 million, resulting in station operating income of $13.3 million.

On a same station basis, net Broadcast revenue increased 3% to $49.8 million, and SOI increased 1.3% to $13.7 million.

These same station results include Broadcast revenue from 111 of our 118 radio stations in our network operations, representing 98.5% of our net Broadcast revenue.

I'll briefly review revenue performance of our strategic radio formats.

40 of our radio stations are programmed in our foundational Christian teaching and talk format.

These stations contributed 40% of total Broadcast revenue, and decreased less than 1% for the quarter.

As Ed previously mentioned, our national block program ministry revenue increased 3.2% in the quarter.

Our 34 news talk stations had an increase of 8% in revenue for the quarter.

Overall, these stations contributed 19% of total Broadcast revenue.

Our third strategic format, contemporary Christian music, we have 13 stations programmed in that format.

And they contributed 21% of total Broadcast revenue, and increased 1% for the quarter.

Our network revenue increased 16.3%, and represents 10% of total Broadcast revenue.

Revenue from our digital media businesses decreased 5.6% to $10.3 million, and represents 15% of our total revenue.

Our Publishing revenue decreased 9.1% to $5.4 million, and represents 8% of total revenue.

And during the second quarter, we bought back $10 million of our 6.75% notes in the open market at an average price of $95.5, thereby resulting in principal savings of $450,000.

And therefore, as of June 30, 2018, we had $245 million outstanding on our bonds and $11.9 million outstanding under the revolver.

Our leverage ratio was 5.74.

And for the third quarter, we're projecting total revenue to be between flat and an increase of 2% from third quarter 2017 total revenue of $65.4 million.

We're also projecting operating expenses before gains or losses on the sale or disposal of assets, stock-based compensation expense, changes in the estimated fair value of contingent earn-out consideration, impairments, depreciation expense and amortization expense to be between a decline of 2% and an increase of 1% compared to third quarter 2017 non-GAAP operating expenses of $55.9 million.

And with that, that concludes our prepared remarks, and we'd now like to answer any questions anyone has.

So I'll turn the call back over to the operator.

(Operator Instructions) Our first question comes from the line of Michael Kupinski From NOBLE Financial.

The third quarter outlook, it seems a little light, given that we are in a political election year, and one would think that the digital business should be getting a little more traffic.

And maybe you should be getting some political advertising to begin.

And the Broadcast business looked like you did pretty well in the second quarter on the Broadcast side.

It would seem like you -- there must be something, a little bit of a change there maybe?

I was just wondering if you can give us a little color on what you're seeing -- what you saw in the second quarter in the broadcasting that may not be following through into the third quarter, and if your very extensive third quarter guidance might be political advertising.

And just kind of give your thoughts on the tone of the business for the third quarter.

Michael, it's Dave Santrella.

I have to confess, you're breaking up a little bit, so -- but I think I got the gist of your question.

Yes, on the Broadcast side, political revenue was -- we were pretty pleased with it.

It was our sixth largest revenue category from a spot perspective for the quarter.

We've had a strategy in place for many years with people dedicated to that business, both on the local and on the network and national stock side that typically pays off for us.

It paid off for us nicely in Q2.

We see that continuing.

So much of it really just depends on where the big race is, where the big PAC money coming from.

And are there specific valid initiatives that are going to impact the rates in markets where we have radio stations?

I just can assure you this, wherever those are, we are.

And we go after that aggressively and strategically, and usually are successful.

In terms of Q3's guidance, Michael, I think the biggest area of softness continues to be our digital business.

As reported in our Q2 actuals, we are seeing share shift, particularly to Facebook.

A number of our advertisers have reported that they're seeing very strong results on Facebook, and have reallocated budget to Facebook.

And unfortunately, we expect that to continue in Q3.

We have initiated some initiatives to respond to that, but they're work in progress at this point.

So that is a challenge.

The other challenge we're experiencing is a number of the programmatic ad buyers and their agencies have put in place protocols that stopped advertising -- stopped digital advertising from running on politically charged websites, websites that have lots of President Trump-related content.

And we've seen an impact of that on our programmatic revenue.

And again, we expect that to continue.

Yes, we should see more political revenue coming through, more so in Q4 than in Q3.

But at this point in time, just speaking from a digital standpoint, that's not sufficient to offset the competitive challenges we're seeing.

It seems like a few radio stations are becoming a little bit more aggressive on digital stations as well.

Are you seeing any more competition from other broadcasters on their D2, D3 stations?

Like where they, they launch in Christian channels and things like that?

No, Michael.

We're really not -- we haven't seen too many broadcasters using HD2 or 3 specifically for Christian-formatted radio stations.

There's a few that have done it, quite frankly, and pretty quickly exited out of it and changed strategies.

And we're experimenting with it a little bit in Columbus.

But from a competitive perspective, we really haven't seen that.

Has the company supported the NAB initiative to lift radio station ownership limits?

And what are your thoughts on the environment with one owner maybe own all of the stations in smaller markets?

Yes.

Well, we generally don't think it's a good idea.

We filed comments with the FCC opposing some of the localization.

Generally, we don't like regulation.

But the mood to eliminate sub-caps, and then to allow one station -- one company to own all stations in a small market -- doesn't seem to be a good idea to us.

And we think the sub-caps are liberal enough today, and they really ought not to be changed.

From our perspective, they work fine for us.

There are a handful of companies that would prefer to see the sub-caps liberalized and maybe even eliminated.

And then also large companies that oppose it, iHeart, for example, has opposed it, Salem as opposed it, a number of other companies that have opposed.

Generally, it won't have an immediate impact.

It might affect the market somewhat.

But at this point, we don't think it's a good idea.

We'll keep an eye on it and see what the commission does.

Our next question comes from the line of Davis Hebert from Wells Fargo.

I saw that you purchased -- repurchased $10 million of bonds in the quarter, and I heard that in your prepared remarks.

I think that was a smart move.

But just curious, what sort of bandwidth or RP capacity do you have to do more of that?

Or are you interested in purchasing more bonds?

Yes.

We have adequate capacity to buy more.

It will be a decision based on free cash flow availability on our revolver and other acquisition opportunities as far as competing uses of capital.

Understood.

And next quarter would be a seasonally light quarter for interest expense, correct?

So you would generate cash in the third quarter?

Interest expense, no, but interest payments, yes.

Interest payments, that's where I meant, yes.

Correct.

Yes, we pay bond payments in June and December.

Right.

Okay, got it.

And then thank you for the color on the guidance.

I just kind of want a more big picture focus.

Would you say that with political coming in Q4 and your guidance for Q3 that should we anticipate EBITDA growth year-over-year in the second half, the Q3 and Q4 in aggregate?

Evan, go ahead and take that.

Yes.

We don't typically give guidance for adjusted EBITDA.

Certainly, if you take the numbers on the guidance that we gave today, which is flat to up 2% on revenue and expenses, down 2% to up 1%, the midpoint gets you a nice growth in adjusted EBITDA.

I would assume that Q4 will be somewhere in that same neighborhood.

Okay.

That's helpful.

And on M&A, you guys have been fairly busy.

Just doing my quick math, it looked like it was maybe a -- close to fairly neutral in terms of the cash outflow, maybe a slight outflow.

But could you talk about what the impact on cash flow EBITDA would be for the net impact on EBITDA for those acquisitions?

I don't have the number in front of me.

I can tell you this.

The cash flow that we were giving up for the sales versus the cash flow that we expect on the acquisitions, we expect to be net positive with respect to EBITDA when we tally up all of the acquisitions.

And with respect to digital acquisitions, they're all tuck-in acquisitions with cash flow.

So all 3 of those should be immediately accretive.

(Operator Instructions) Our next question comes from the line of Lisa Springer from Singular Research.

Ms. Springer is not responding, so we will take our next question, which comes from the line of [Rafe Lehman] with [E-Invance].

I was just wondering, could you just remind me of your leverage target and what you think the timing might be for reaching that target, and if that's changed recently or if that's still consistent over the last few quarters?

If you want, Ed, I'll start.

And if you want to add some color afterwards, feel free to do so.

Our long-range target is to get leverage under 4. I would say, we'd like to be there by the time we're going to need to refinance again, which we just refinanced a little bit over a year ago.

So that's where we'd like to be.

Our next target is we really want to get under 5, but the long-term goal is to see leverage for the company something that begins with a 3.

Okay.

And any...

I think...

Go ahead.

I was just going to say with the -- we've got -- we just refied a year ago in May.

It's a 7-year facility.

We're very pleased with the pricing on that issue, and we think it's very manageable.

And we hope to get close to that goal of under 4 before this facility has to be refinanced.

But we certainly hope to make significant progress in that direction.

As Evan said, the first objective is to get below 5. Now we were below 5. We were moving very quickly in that direction.

Refi kicked things up a little bit more.

I would share we knew it would.

But we feel pretty good on -- in terms of the progress we're making.

And I would expect that we'd get below 5 in the reasonably near future.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Edward Atsinger for closing remarks.

Thank you, operator, and thanks to -- again to all of you for joining the call.

We look forward to visiting with you again as we get -- when we get the third quarter results.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.