Salem Media Group Inc (SALM) 2002 Q1 法說會逐字稿

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Ladies and gentlemen, welcome to Salem Communications first quarter 2002 teleconference call. Copies of the earnings release have been sent to you for your information and reference during this call. If you have not received the lease, please call Braynard [phonetic] communications at (212)986-6667. At this time all participants are on a listen only mode. We will be conducting a question and answer session later on in the conference. At that time if you have a question, you will need to press the 1 followed by 4 on your push button phone. The conference is being recorded today. At this time I would like to turn the conference over to Amanda Sue Larsen [Phonetic] manager of investment relations. Please go ahead.

Thank you, operator. I'm Amanda Larsen, manager of investment relations for Salem communications and I would welcome you to our first quarter 2002 conference call. Before I turn the all over to Ed Atsinger, I would like to remind thaw this call may contain forward looking statements westbound the meaning of the safe harbor commission of the securities exchange reform act of 1985. Statement made in this conference call that address results or developments that Salem communications expects or anticipates that may or will occur in the future are forward looking statements. These statements regarding the future plans, events, financial results, prospects, or performance of Salem communications are predictions that involve risk and uncertainties, and actual results may vary materially. We will refer you to Salem's public filing made with the S.E.C. and to the company's press release issued May 7, 2002 for important risk factors you should consider in evaluating this information. The forward looking statements made on this call speak only as to the date here of and the company under takes no obligation to update such statements to reflect future events or circumstances. I'd now like to turn the call over to Mr. Edward Atsinger, president and chief executive officer for Salem.

Thank you everyone. Thank you for joining our conference call. As you know, I am joined here by David Evans, our chief financial officer. I'm going to begin with just a brief overview of our same station revenue with the details of our financial results for the first quarter and David will also provide you with an update on our outlook and then we'll take your questions. We're pleased to report the strongest same station revenue and cash flow growth rates in the radio industry. Same station revenues for the quarter grew 14%. With same station broadcast cash flow growing at 26%. These impressive results reflect the strong performance of our contentions which incorporate our unique block programming business model. Salem has continued to deliver the best same station results in the radio industry throughout the last 18 months and throughout the entire recession. Thus, we have been directly perceived as a great hedge against recession. However, in a recovery economy, investors are looking for growth oriented investment opportunities and the fact of the matter is, Salem is uniquely positions to continue to lead the radio industry in growth for the next several years. Of the three primary factors affecting this growth. Let me just discuss each briefly. First and most fundamentally, there is a consolidation story at work here thats a not yet from the radio industry since deregulation. Over the last two and a half years, we have invested over $300 million in radio station acquisitions. With few exceptions, all of these acquisitions have been in markets where we have all various opportunities and enhanced dynamic for revenue generation. The second factor that's driving growth is somewhat unique to Salem. Unlike other radio broadcasters, our acquisitions, particularly these last $300 million of acquisitions, have almost always involved purchases of sticks or radio stations without cash flow, which require our reformatting those stations to reach our targeted audience. Currently we have a large percentage of our station portfolio in launch or early development stages. These launches that have all taken place in the last 18 months and involve considerable startup costs are now largely behind us and we are positioned to drive substantial revenue and cash flow growth for the next several years. Thirdly, we believe our gross strategy is somewhat again unique among radio broadcasters in that we have focused entirely on super searching one niche of the audience segment. The audience interested in religious and family theme programmings. You may not be aware of the fact that polls for several decades now have indicated that the number of Americans that attend church each Sunday hovers right around 30%. The last gallop poll that we saw that surveyed this fact identified 42 percent of Americans indicating that they attend church at least once a week, translated into raw numbers, that's 100 million people and that in broad term is the target audience that we have gone after. Well, by super searching that target audience, we think -- and reaching critical mass with these additional acquisitions in cluster building markets, this opens up significant new revenue opportunities, both locally and particularly nationally. So to conclude, we remain a great hedge against recession, but the more significant story is our unique growth prospects over the next several years. These newly launched radio stations take anywhere from three, four, to five years to mature and consequently we expect to see elevated growth rates over those period of years. Now with that, let me turn the program over to David, who will give you some specific numbers for Q-1, which I think will concretely illustrate these points that I've.

In the press prelease issued earlier today, I will briefly review these results on an actual and same station basis. In addition, I will provide some updated guidance for the second quarter of 2002. On an actual basis, net broadcast revenue for the first quarter increased 18% to 35.5 million and our broadcast cash flow increased 8% to 11 million. Broadcast cash flow as a percentage of revenues decreased slightly to 31% in first quarter from 34% in the comparable period a year ago. On a same station basis, net broadcast revenue and broadcast cash flow increased 14 and 26% respectively. I would like to examine the same station results with you in greater detail. Our same station revenue growth of 14% for the first quarter of 2002 is comprised of two distinct segments. Our core talk stations, which delivered 5% same station revenue growth, and our music stations, which delivered 76.5% same station growth. Our core talk stations with their stable broad programming revenue continued to deliver consistent and predictable growth. The 5% same station growth from these talk stations brought programming revenue growth and a 2% decline in national and net worth [inaudible] revenue. Concurrent to this, we have begun to see substantial revenue and cash flow growth from our music stations, stations at the FISH, which have a contemporary Christian music. With increasing broadcast revenue from broadcast buyers and advertising, Christian music is becoming a popular mainstream format. In 2001, album sales for contemporary Christian music increased 13% compared to a decline of 3% for the overall music industry. As this format continues to rise in popularity, Salem is positioned to capitalize on its growing success. And we believe the same station revenue growth from these music stations at these radio stations still have several years of continued development before reaching maturity. In addition to our music stations, we have a number of additional radio stations that are in a launch or early development stage and that do not yet form part of our same station results.

Our single largest operational focus is to develop these stations to maturity as rapidly and productively as possible. And we expect the increasing success of these stations to continue to fuel our growth. Back to the financial results. EBITDA increased 21%, 7 million in the first quarter of 2002, compared to 5.8 million in the first quarter of 2001. We reported a loss for the first quarter of 2002 of 1.8 million, or 8 cents per share, compared to 4.7 million, or 20 cents per share a year ago. As we discussed on our fourth quarter 2001 earnings call, effective with our first quarter 2002 results, we have adopted F.A.S 142. This requires that good will and intangible assets for lives be tested rather than amortized over time. As previously disclosed, we have assessed each of our reporting units for impairment and together with our ought ought tores, have determined that no adjustment to good will is needed. Looking ahead to our second quarter, Salem achieved same station revenue growth of 12% for April 2002, and as of May 1, 2002, we have achieved same station growth of 7% for May, with four weeks remaining to continue to improve this number. Based on the most recent pacings, we expect same station second quarter revenue growth in the low to mid double digits, representing again what we believe will be the best same station growth in radio. Finally, we are projecting net broadcast revenue of between 38.5 and 39 million. And broadcast cash flow between 12.5 and 13 million for the second quarter. EBITDA is projected to be between 8.8 and 9.3 million in the second quarter and loss per share is projected to be between 1 cent and 2 cents per share. This guidance reflects continued growth as our contemporary music stations are pressed with startup costs in Sacremento, Cleveland, Portland and Milwaukee. Let me finish by ooking at our balance sheet. As of March 31, 2002, we had net debts of $304 million. We're trailing 12 months EBITDA, as of March 31 of 35 million, this results in a leverage ratio of 8.7. In evaluating this ratio, it is important to note that all of our 2001 acquisitions, except one, have been sticks with no cash flow. As a result, our debt includes approximately 150 million of financial for stick acquisitions that made no contributions to EBITDA in 2001. We believe EBITDA in 2002 will increase substantially as a result of these maturing acquisitions, which in turn will reduce this leverage ratio to a more comfortable level. From a bank and bond statement, our leverage ratios are calculated a little differently. Our bank leverage ratio, which allows us to exclude up to 30 million of acquisition costs, and allows us to exclude startup losses from reformatted stations and allows us to exclude any Internet losses were 6.3 as of March 31, 2002, versus a compliance covenant of 6.75. Our bond leverage ratio, which excludes the results of acquisition code and our nonbroadcast media services was 6.6 as of March 31, 2002, versus an in currency covenant of 7.0. That concludes our prepared remarks. At this time we'll open the floor for questions. Operator.

Thank you. The floor is now open for questions. If you have a question, or a comment, you may press 1, followed by 4 on your touch tone phone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions are taken in the order they are received and we ask while you close your question, to pick up the hand set to provide optimum sound quality. Thank you. Our first question is coming from Drew Marcus [phonetic] of Deutsche Bank Alex Brown.

Good morning. Great results, guys. Would you talk a little bit about the contribution on revenue and EBITDA from the FISH FISH stations and also a little more granularity on growth of the programming revenue versus the advertising revenue?

In terms of our contemporary Christian music stations, in the first quarter in total, those stations contributed about $6 million of revenue at approximately a half a million dollars overall loss. That does include our station in Dallas, KLPY, which is relatively mature compared to the other stations. KLPY did approximately 2.5 million of that revenue number, and I believe generated approximately a million dollars in broadcast cash flow. What was your second question?

The components of programming growth versus advertising growth in front of the add categories that you're seeing some strength from.

In terms of the -- I split out the talk stations from the new music stations, so the new music stations on a same station basis delivered 76.5% same station revenue growth and we say that's advertising driven. The core talk stations, they achieved a 5% same station revenue growth. When you split that out, that's made up of 8% local advertising revenue growth, 6% block programming revenue growth, and a 2% decline in national and network advertising compared to a year ago.

Ed, are you seeing more or less acquisition opportunities today than you did, let's say, a year ago in the bowels of the ad recession.

More or less what?

Acquisition opportunities?

Well, there have -- there continue to be opportunities. We, as you might notice, have slowed down our activity as we work to digest the very substantial number of acquisitions that we were in in 2000 and 2001. The last acquisition that we were involved in was last August, with Portland, and these -- we continue to observe and to look for Acreeda [Phonetic] possibilities, particularly to continue our possibility of expanding our clusters, but from our personal perspective and this may not be particularly responsive to your question, we are much more selective right now because our big challenge has been to digest what we have on our plate and -- but we certainly are seeing acquisition opportunities. They haven't gone away.

In the things you're looking at, what would excite you, excite you more than other things, are you looking more for A.M., for the talk format or are you looking for at F.M.'s that you can put your contemporary Christian format on?

Well, I would say that the first thing that we -- the first thing that gets our attention very quickly is if we find an opportunity, A.M. or F.M., in a key market that we're already in with the two or three station cluster, where we can expand that when we have another format opportunity that we believe will work, and if we think the station is priced fairly. Now, I can be just as excited about an A.M. if it expands our news/talk conservative talk format because we're beginning to see some good movement with those formats. We have the ability to roll those out very inexpensively leveraging our own network product, so the cost of rolling that out is much less with than a FISH FISH format. On the other hand, a key market that would give us a contemporary Christian music component at a fairly priced multiple component, is willing that would also excite us if we had the capacity to absorb it, because I think we've demonstrated, if you'll look at the stations that we've picked up, look at some of the ratings we've been able to achieve, look at the revenue that followed, I think you will conclude that it's a pretty sound investment and really a pretty dynamic growth opportunity.

Okay. Thank you very much.

Thank you. Our next question is coming from Paul Sweeney of Credit Suites, First Boston. Go ahead with your question.

Thanks very much. Good afternoon. Three questions, please. First, as we continue to see increased evidence of the success of your FISH FISH format and as a contemporary Christian music format in general, I think gets more and more popular and perhaps mainstream, would you talk about what you think the risk is from competition from the general market operators for this format? Second, any update on any renegotiation of any of your news/talk, your long form news/talk programmers, anything out of the ordinary as it relates to the renegotiation there? And then third, David, just any -- you mentioned where you are on the leverage and where your covenants are. Do you have any imminent stepdowns in your covenants coming up.

Let me take the first question. With regard to competition from general market, of course it's a possibility. There have been a few markets where our general market colleagues or peers have moved into the format, but not very aggressively. Clear channel recently made a move in the Tulsa market. They also exited the national market, so it's a little difficult to read what their intentions are. In terms of competition, equity against the market that we're in, we're not particularly concerned about it, because, as I pointed out, I think without exception, when we have rolled out a FISH FISH format, we have done it as part of a two or three or four station cluster. L.A. is a good case in point. And our other stations in the cluster are targeting some aspect of this same audience, so that we have cross promotional opportunities and we have the close ties with the advertisers and with the large church organizations and parachurch organizations that becomes a means of promoting to these audiences. We have the inherent advantages vis-a-vis any competitor that wants to go head to head with us. I don't know of a single other operator that has anything other than a stand alone contemporary Christian music station, so we've never been particularly concerned about competition from that source. We think the barrier to compete with us directly are pretty high. I'm not quite sure that I understood your second question.

Correct. Yeah.

There are none that are imminent, none that I think are up for renewal in 2002 or even the first part of 2003. I couldn't tell you for sure, but none of that is pending or imminent, and farce we know, the relationship we have with all the talent is very good. We believe that those relationships will remain stable for the not only the near term but also the long term.

Okay.

Now as far as the covenant compliance, I'll throw that one to David.

Yeah, on the bank covenant, we had previously negotiated and agreed an amendment with our bank group that allowed us to step up our leverage ratio on closing at the Portland transaction. We have done that. Portland closed last week, so our leverage ratio for bank purposes is currently 7.25. It will step down as of December 31, 2002 to 7, and then during the course of 2003 by quarter will go 6.75, 6.5, 6.25, and 6.

Okay.

And where we're comfortable, that creates no issues for us.

Great. Thanks very much.

Next question.

Thank you. Our next question is coming from Victor Miller of Baird Stearns. Please go ahead with your question.

Good afternoon. Actually, good morning there. You have $162 million that you put on stations which are essentially break even. In terms of the metrics, could you give us some progress reports on ratings or something we should be watching on that group of stations? Secondly, how long did it take for the group of stations that you consider to be same station in your music side to reach the type of 76% type growth that you're talking about? And lastly, you have used in the past in presentations to get a sense of the upside of the stations that, that the stations would do on oversell ratio of 0.27 [inaudible] to its audience share with revenue share. I wondered why you used such a conservative number and if that's something to do with the format and just being conservative.

The historical experience, for example, in Dallas, which is more mature, is much closer to -- I think it's actually a .97 power ratio, and it's historically whoever hovered around a 1 to 1.4 power ratio. We thought it would be best to error on the side of conservative on that power ratio and also because we have so many launches or have had in the last 18 months, it takes a while for the revenue to catch up with the audience, and so, again, we thought it was better to error on the side of caution. With regard to some of the early ratings success, we think we've done pretty well. Portland is a good case in point. We began to program that radio station on September 5 of last year on an L.M.A. We, as David just mentioned, just closed on the actual acquisition last week, but we've been operating that radio station since September 5 and we rolled it out on that date with a FISH FISH format. The first full Arbitron [Phonetic] book on the station of course would have been the fall of 2001, that's October, November, December, and in spite of 9/11, because we did see some dramatic shifts from music stations to talk stations as people sought more news, particularly in September and October [inaudible] in spite of that, the fall book came out with a 12 plus number of 2.3 -- 2.3 share. We were very pleased with that and that was July 4th or 5th of 2001. Those numbers have -- have been consistently good. I think in 2 -- I think in the fall of 2001, we got a 2.6 share, that was I think the first substantive period, so we were pleased with that. Atlanta has been a very good story. In Atlanta, in the most recent book. The winter 2002, we came out with a 2.7 share, the prior book, the fall of 2001, it was a 2.2, and spring of 2001, it was a 2.3, so we were very excited about the startup. Most of these where we have a full market signal, we cover the whole market, and we follow the formula that we've used of adequate promotion, and solid research and testing music and using all the research tools and promotional tools that we think are necessary, we generally have been very pleased with the success.

The last one was just how long did it take for the group of stations that you consider to be same station to reach the type of 76% growth you're now seeing.

Within the same station music numbers, we currently have four stations. KLTY in Dallas, the FISH in Los Angeles, the FISH in Atlanta, and WYGY in Cincinnati. Dallas, we acquired in format in October of 2000. However, we had to do a signal flip to move the signal directly into the center of Dallas. That took place on December 22, 2000, and we relaunched that station in the first quarter of 2001 and since then, when we acquired the station, the ratings were a 1.7 share and the most recent book, they were a 2.5 share. So we're seeing strong progress at that station since acquisition. The other three, two were acquired from clear channel on August 24th, 2000, that was Los Angeles and Cincinnati, Atlanta was acquired from Cox on September 1, 2000, so those three stations were launched in Q-4 of 2000.

Thank you.

Thank you. Our next question is coming from James Marsh of Robertson Stevens. Please go ahead with your question.

Hi, guys. Fabulous quarter. Just wondering if you could help us out with some of the same station operating expense numbers and maybe if you could dig a little deeper there, maybe what percentage of the FISH station, what percentage are the total expense increases coming from the FISH stations, and if we looked at one of the more mature stations like KLTY, what are the costs look look like there, are they more in line out of what you'd expect out of a music station?

KLTY currently for first quarter 2002 had a 39 percent broadcast low margin. The other three stations generated between about 2-point 5 million of revenue and about 300,000 of operate of broadcast cash flow, so in total, those four stations generated 5 million of revenue in the quarter and about 1.2 million of broadcast cash flow.

Okay.

Did I answer your question?

That's helpful. A second followup here to Ed. Ed, Billy Graham has been kind of snipping around buying full market signals. I just wanted your thoughts on that.

I'm not aware of that. I'm not sure that high seen that report, and Billy Graham, you're talking about the Billy Graham organizations which is now headed by Franklin Graham. Certainly Billy himself is in ill health. I have seen very little of that. I'm not sure what you're referring to, but I really don't think that that's part of -- that's a principal part of their mission. The fact of the matter is, two and a half years ago, maybe a little less than that, the Billy Graham organization sold us their A.M./F.M. combination in Honolulu. We're in format and that was sort of a signal that they were moving away from acquiring an a-- if additional stations. I think they still have the station in black mountain, North Carolina, which is a station that covers the Charlotte market, but I'm not aware of any move to expand that. Now even if there were a move to expand that, as you know, James, our focus has been on major markets and we've got 56 stations in the top 25 markets, we're in nine of the top ten and I think we're if 22 of the top 25. In most of those markets, Los Angeles, Washington, D.C., Chicago, New York, the fact of the matter is that the cost of entry is so high that it doesn't matter what the organization is, I just don't see it as a significant factor, and even if somebody was prepared to pay the cost, tell me where they can find a competitive say F.M. in Los Angeles? We know the Spanish just paid 250 million for the last one and it had no cash flow. It was a religious station, so rather than more people coming into the format to compete, we've seen just the opposite where religious organizations, some of them are saying, let's sell these assets and en do you our other programs because they operate them as noncommercial operations and haven't been particularly successful in generating cash flow.

Right. Thanks a lot.

Next question operator.

Thank you, our next question is coming from Jason Holstein [Phonetic] of CIBC Oppenheimer.

Thank you, three questions, first few for David and then Ed. First on the pacings, you had said April was up 12 and may is currently pacing up 7. What was April pacing, I guess, at that same point? In other words, when you -- at the beginning of April, in other words, April 1, what were the pacing there? Next question, in the total same station number, or in the same station number, what percentage of your reported revenues does that take into account? And then, last question for Ed, you know, to the extent you guys had more buying power, I mean, what percentage over time of the company could you see coming from the music format, and when you take a look, I guess, at targets, women, of a mature FISH station, what kind of is the average rating in women? I don't know what the demos, 35 to 54, 18 to 34 women. Thanks.

Let me kind of approach your question by addressing the last part of it first. Our target demos, 25-54 female. Typically 60% female, 40% male, and in terms of what percentage of our revenues that might contribute, I don't have -- I haven't done that analysis recently. Remember in terms of the total group, music stations still represent I think 13 stations. As opposed to 39 or 50 that are in a talk type of format. We certainly think we will get very substantial [inaudible] -- contribution. In one sense, I don't like to look at, again, in every case that we have rolled out a contemporary Christian music format, we have done it on the solid foundation of a two or three station cluster or a single station that's already been in the market, established a presence, has ties with the community, involved with church organizations, so it's a perfect launch, and they compliment each other so nicely, with cross-promotional opportunities and cost efficiencies that in some sense it's almost difficult to separate them out. We certainly can and do, so I kind of jumped into your question, sort of took the third question that was directed to me first. Left me throw it back to David and talk a little bit about your pacings question and the same station question.

Okay. On your pacing question, as you mentioned, we finished April with a 12% same station revenue growth number. For may, as of may 1, we were up 7% same station, with four weeks to go. I don't have in front of me the number that we entered April with. If I had to guess a range or estimate a range, I would say that we entered it somewhere between zero and 5%. And therefore added somewhere between 7 and 12 throughout the rest of April. That is a little bit of -- I confess, that's an estimate without numbers in front of me. But I would say that it is reasonably accurate range. It will be somewhere in there. On the same station for first quarter [inaudible] we had $25 million of revenue with 10 million of cash flow in our same station numbers.

Okay. Just a quick followup. I mean, clearly with that pacing, it shows the pacings are improving, there's no question. Just to go back to the music question. Ed, when you look at a mature or what you call your most mature station, I mean, what's kind of the average rating there that that station is able to get in the target demo?

Well, again, that would be somewhat dependent upon market size. Smaller market, fewer stations, you generally get a bigger share. If we go to a top 10 or top 15 markets like Dallas, we think that -- we think that a Dallas or Atlanta has perhaps as much as a 3.5 share available. That station, it did it prior to our ownership. We were into the 3.3, 3.2 range with 1 of the books in someone, so in a market like Dallas or Atlanta, we think that there is a solid 3 to 3.5% even 4 share if we execute well. We can do quite well and can be quite successful in most markets with Victor, targeting the same audience, and the way we market, exploit, you know, the success is a little bit different than our general market count counterparts.

Okay. Thank you. That was helpful.

Our next question is coming from ANDY Fenhaughton [Phonetic] of Deutsche bank.

Thank you, I have a question for David. David, what was the cap X for the quarter, and do you have an estimate for the full year, and if do you, how would that obviously contrast with the cap X that was spent last year as you were rolling out your new format.

The cap X estimate for the full year is 15, $16 million, so unchanged from [inaudible] ones we gave during our year end earnings call. I think that compares to last year we spent just under 5 million compared to a budget expense of 5.7 million, so we're slightly under, but at this point, I'm going to leave off a full year cap X number unchanged.

Great. Thank you.

Thank you. As a reminder, the floor is still open for questions. If you have a question, you may press 1 followed by 4 on your touch tone phone at this time. Our next question is coming from [inaudible] Susama [Phonetic] of J.P. Morgan. Please go ahead with your question.

Hi. I had a couple of quick questions. Can you update us on the restricted group for the bonds?

Acquisition-CO [phonetic, if you recall, that station -- that legal entity sold the Denver property that we owned to MS, an therefore recorded a substantial tax gain. We were able defer that over 15 years, that gain, by buying like for like properties within the same legal entity. My plan with that entity is I want to make sure we properly finish all of this year's tax returns, et cetera, so that we are 100 percent satisfied we've complied with all of the legal and tax cons consequences necessary for the then 31 exchange to be acceptable to the I.R.S. I would hope that that, when I would plan to roll Acquisition-CO [phonetic] back into Hold-CO [phonetic] and clean up our structure.

Great. I have one other question. I don't know if you said this already, but how many stations are in the same station results for the first quarter.

Okay. If you'll give me a couple of seconds, let me just calculate that number for you.

48 stations.

And then in the second quarter, the same station size that you gave, is that pretty much the same 48 stations or is there any [inaudible] coming in on the second quarter?

It's for broadly the same group. There may be a couple of additional stations coming in to it, but broadly the same group.

Okay. Thank you.

At this time we are showing no further questions. I would like to turn the floor back over to management for any closing remarks.

Thank you, operator. And thanks to all of you have that joined the call and thank you for your questions. Again, we're delighted with the -- with this continued leading industry results and we will talk to you all again soon with our next conference call. Thank you.