Salem Media Group Inc (SALM) 2003 Q2 法說會逐字稿

Ladies and Gentlemen, welcome to the Salem Communications 2003 second quarter teleconference call.

Copies of the earnings release have been sent to you for your information and reference during this call.

We will be conducting a question and answer session later on in the conference.

At this time, I would like to turn the floor over to your host David Evans, CFO.

Sir, please go ahead.

Thank you, operator.

Welcome, everyone, to our second quarter earnings conference call.

Before I turn the call over to Mr. Atsinger, we would like to advice you that this conference call contains forward looking statements within the meaning of the safe-harbor previsions of the Private Securities Litigation Reform Act of 1995.

Any statements made in this conference call that address results or developments that Salem expects or anticipates that will or may occur in the future are forward-looking statements.

These statements regarding the future plans, events, financial results, prospects or performance of Salem are predictions that involve risks and uncertainties, and actual results may vary materially.

We refer you to Salem's public filings made with the SEC and to the company's press-release issued August 4, 2003, for important risk factors you should consider in evaluating this information.

The forward-looking statements made on this call speak only as of the dates hereof and the company undertakes no obligation to update such statements to reflect future events or circumstances.

This conference call also contains non-GAAP financial measures within the meaning of regulation G. Specifically, station operating income and EBITDA.

In conformance with regulation G, information required to accompany the disclosure of non-GAAP financial measures, including a reconciliation of such non-GAAP financial measures included in the conference call to the most directly comparable financial measures prepared in accordance with GAAP, is available on the investor relations portion of the company's web site, at www.Salem.CC, and as part of the current report on form 8K and earnings release issued by Salem earlier today.

I will now turn the conference call over to Mr. Edward Atsinger president and chief executive officer of Salem.

Good afternoon, everyone.

I'm pleased to announce that Salem reported another strong quarter of industry leading growth, which exceeded the guidance we provided on May 5, and reflects the strength of our business model, the success of our strategy, as well as careful cost management.

Specifically, in the second quarter 2003, we generated net broadcasting revenue of $43.4 million, an increase of 8.4% from the same quarter last year.

Station operating income was $15.9 million, up 20.8% from $13.2 million last year.

On a same station basis, net broadcasting revenue for the quarter grew 7.8% to $434.2 million and same station operating income grew 20.2% to $15.8 million.

As you can see, we continued to deliver some of the best growth rates in the radio industry.

These results were driven by the continued growth of our music stations, improved results at our startup and developing properties, and by the consistent and reliable nature our block programming business.

Let me take you through some of our business highlights.

As we reported six months ago, our network business lost approximately 90 affiliates in 2002 due primarily to the competitive rollout of the Hannity and O'Reilly programs.

I'm pleased to report that we have rebuilt our affiliate base back to over 1600 affiliates.

In terms of the financial performance of the network, we have seen steady progress during the second quarter, even though the national advertising market remains soft.

We expect that this progress will continue, and we will return to positive growth at our network operations in the fourth quarter.

In our radio station business, we continue to focus on the growth of our launch and early development stage stations, and the elimination of startup losses associated with some of those stations.

Our 92 station portfolio can be conveniently divided into six categories.

Let me take you through those.

First, there would be pending acquisitions, and there are three stations that we have announced but not yet consummated.

The second category are newly acquired stations, stations that we recently closed on.

There are four stations in that category.

Third category are stations in a startup stage.

We have nine stations in that particular category.

There are 38 stations in an early development stage, 24 stations in a developed stage with up side potential, and 14 stations that we considered to be fully mature.

This means that 60% of our portfolio has significant organic up-side potential, and we continue to make real progress in moving our stations up the development curve.

In second quarter 2003, we had $300,000 of startup losses compared to $1.4 million in the second quarter of 2002 -- and $600,000 in the first quarter of 2003.

So, you can see there's substantial and significant progress.

There's a very helpful chart in the press release we issued earlier today, which illustrates the progress we are making with the development of our broadcasting portfolio.

We have taken these six categories, lined them up and compared them over time.

What's interesting about that particular chart is that it shows the movement of stations from the lower newly acquired status up through the development curve, and you will see over time substantial progress is made in those categories.

Looking specifically at our music stations, we continue to see improved ratings, and revenue and profit growth.

The music stations we acquired since 2000 generated revenue of $8.9 million for the quarter an increase of 14.8% from last year.

These stations generated operating income of $3.1 million in the second quarter of 2003 compared to $1.3 million in the second quarter of 2002.

In addition, in the recent ratings results, almost all of our music stations delivered ratings increases or at least consistent solid ratings performance, with notable improvements in Dallas, Honolulu and Orange County, California.

In summary, we have had a successful first half of 2003, despite an uncertain economic environment.

Salem is well positioned to continue to deliver on the commitment to shareholders to achieve industry-leading growth for the next several years.

Our long-term goals are to develop the radio station clusters in large markets and drive our developing stations to maturity.

With those comments, I'll now turn the call over to David Evans, our CFO for a more detailed discussion of the Q2 results and Q3, 2003 guidance.

Thank you, Ed.

All of you should have received our results for the second quarter of 2003 and the press release issued earlier today.

I will briefly review these results on an actual and same station basis.

In addition, I will provide guidance for the third quarter of 2003.

As Ed mentioned, net broadcast revenue for the second quarter increased 8.4% to $43.4 million, and our station operating income increased 20.8% to $15.9 million.

Station operating income margin increased to 36.7% in the second quarter from 32.9% in the comparable quarter a year ago.

In terms of operating leverage, 8.4% revenue increase was achieved with a 2.3% increase in broadcasting operating expense.

In other words, revenue increased by $3.3 million, broadcast operating costs increased by $0.6 million, and therefore station operating income increased by $2.7 million year over year, and 82% incremental operating margin.

We are focused on continuing to achieve strong operating leverage performance through the continued growth of our launch and early development stage stations as well as careful management of our overall cost structure.

On a same station basis, net broadcasting revenue and station operating income increased 7.8% and 20.2% respectively.

Eighty-two of our radio stations, and 99.5% of our net broadcasting revenue are included in these same station numbers.

As Ed mentioned, our music stations continued to grow at an impressive rate, generating a 14.8% revenue increase over last year.

Our remaining portfolio contributed to the 6.1% same station revenue increase.

Within the same station increase of this remaining portfolio, there was an 8% increase in our block programming revenue, a 7% increase in our local spot revenue, a 17% increase in our national spot revenue, and a 7% decline in our network revenue compared to second quarter last year.

EBITDA increased 70.4%, to $11.9 million in the second quarter of 2003, compared to $7 million in the same quart last year.

EBITDA for the second quarter of last year included a one-time legal settlement of $2.3 million.

Excluding the impact of this write-off, adjusted EBITDA increased 28.3% to $11.9 million from $9.3 million.

Turning to our outlook for the third quarter of 2003, we have achieved same-station revenue growth of 7% for July.

We expect to see high single digit increases in same-station revenue growth for the third quarter, based upon our most recent pacings (ph).

For the third quarter of 2003, we are projecting net broadcasting revenue of between $42.8 million and $43.3 million.

Net income after taxes for third quarter of 2003, is projected to be between 6 and 7 cents per share.

We are projecting station operating income of between $15 million and $15.5 million for the third quarter of 2003.

This guidance reflects a number of factors.

Continued growth as our contemporary Christian music radio stations, continued softness at our network operations, and startup losses of approximately $300,000 associated with the acquisition of radio stations in the Jacksonville, Florida, market, which was completed on July 31st.

Finally, turning to our balance sheet, as of June 30, 2003, we have net debt of $312 million, and were in compliance with all covenants.

We currently have a last 12-month debt to EBITDA leverage ratio of 7.4.

Our bank leverage ratio was 6.7, as of June 30, versus a compliance covenant of 7.

Our bond leverage ratio was 6.1, as of June 30, versus an incurrence covenant of 7.

As you probably know, there has been recent news that S&P is currently reviewing Salem's credit rating.

S&P has indicated that the principle area of their review relates to the status of our current bank facility and the fact that the covenants under that facility begin to tighten at the end of this quarter.

We are currently in the process of entering into a new bank facility, and we hope to report a successful completion within the next few weeks.

Based upon conversations with S&P, we expect that the completion of this new bank facility will allow S&P to confirm our current credit ratings.

That concludes our prepared remarks.

At this time, Ed and I would like to open the floor for questions.

Thank you.

The floor is open for questions.

The first question is coming from Lee Westerfield of Jeffries & Company.

Your line is live.

Thanks very much.

Hi, Ed and David.

It's Jeff Cino in for Lee.

The first question that I have has to do with the leverage ratios,where they stand today.

Pro-forma for the Florida deal.

And also the pending Boston and Colorado Springs.

You talked about addressing the covenant levels, I'm curious where you think the current leverage ratio will compare with where you'd like to get those leverage ratios covenants?

And also in Hawaii, how is the management change shaping up?

Thanks.

Let me address the leverage ratio question and then I think Ed will answer your question on Hawaii.

In terms of the leverage ratio, the purchase price on Jacksonville was approximately $8.5 million.

Half of that amount we can exclude from our bank leverage ratio calculations as it's a startup acquisition.

So, the $4 million impact on the debt line is pretty immaterial.

So, I think it moves us from 6.7 to 6.8 in terms of the bank leverage ratio, the bond leverage ratio from 6.1 to 6.2 - ah, no the bond leverage ratio will probably go from 6.1 to 6.3.

A small impact.

With the continued growth of our cash flows, we expect to see further progress in bringing those leverage ratios firmly down another half turn, full turn over the next six, 12, 18 months.

Jeff, with regard to the Honolulu cluster, management changes we implemented about a year ago, working very well.

We have a solid management team there.

The stations continue to make solid progress.

As you probably recall, we added a country station to the cluster about seven or eight months ago.

That's station -- that station we want to take advantage of the ability to leverage that into the exiting platform.

That station has been cash flow positive for the last three or four months.

And it continues to grow.

So, we're quite pleased with the progress that we're seeing in the Honolulu cluster, and we expect that to continue.

Thank you very much.

Thank you.

The next question is coming from Jonathan Jacoby of Banc of America Securities.

Your line is live.

Good afternoon.

Hi.

Nice results.

Just want to get a sense of -- is there anything that you're doing differently.

You're getting real -- we're starting to see nice expense leverage, expense management.

Are you switching some promotional dollars in terms of how you are spending them at the stations, as they begin their trek to maturity?

And is there anything different in terms of third quarter --back of the envelope it seems there's not as much expense leverage, although obviously there's a dramatic turn in that we have these stations coming on board at a loss?

Then my second question, with where the covenants are, and perhaps your new facility, are you constrained in terms of looking at some future acquisitions in the near term?

Yeah.

In terms of if you look at the Q2 expense increase, compared to last year, and the 2%, 3% range, we -- we are careful about controlling marketing promotional advertising expenditure in the second quarter.

So, that's the principal area of saving.

There are also some cost containment measures in the area of payroll.

That were evident in the second quarter.

As we look at third quarter, we will begin our fall promotions, marketing and promotions efforts for the fall book in September.

And at this time we're planning on running those, which is why you're not seeing the same favorable cost impact in the third quarter as in the second quarter.

That's obviously something that we carefully monitor as we approach the time to commit to that spending.

And at this point, we're comfortable with the guidance we have given as being a good set of numbers.

Full book is very, very important in terms of giving us the right foundation for 2004, and that's important investment spending for us.

I think that should answer your cost question.

In terms of leverage and acquisition capacity, you know, it is fair to say, we have capacity constraints.

As we work on this new bank a facility we do intend to have some capacity available for acquisitions.

But I think that will principally be created and generated by the ongoing growth of our cash flows -- that naturally brings down leverage and our goal is to both be in the acquisition market and deliver simultaneously.

We don't want to be in the either/or situation.

Jonathan, I would add with regard to the cost efficiencies, while there has continued to be acquisition activity, there's been a very distinct downscaling of that activity since the fall of 2001.

That is when we acquired the Portland FM.

We have continued to have some acquisitions, but in terms of the investment, it's been substantially smaller than in past years, particularly the intense period of activity from 1999 through the 2001 period.

So, when you have less energy devoted to acquisitions, and integration, you can spend more time focusing on efficiency, and I think that's what you are seeing reflected in part in the better cost management this last quarter.

We do, as David said, continue to have -- we expect to have with the new facility some acquisition capacity, but we intend and are committed to delevering (ph) while at the same time being able to take advantage of opportunities that are prudent and further our strategy while at the same time still being able to deliver.

Yeah, just one final point on that leverage ratio, if you look back to just six months ago, December 31, 2002, our debt to EBITDA ratio at that time was 8.9, by the end of the first quarter.

That was 7.9, and the end of this quarter, 7.4.

So, making strong progress in terms of the delevering initiative (ph).

That will continue.

One last follow-up question -- the network, it seems like you quickly, you know, found --are you resigning I guess old affiliates, people that left, or are these new affiliates to the network ?

It seems like your numbers are almost at the -- or if not a bit higher from where you started off before the falloff began.

They're a bit higher.

It's all of the above.

For the most part, there's a large universe of stations that are affiliate relations people just have a challenge getting around to.

And once those new rollouts absorbed a certain number of stations, there isn't pressure from them to continue to absorb stations.

We have been able to rebuild that affiliate base.

Thank you.

Thank you.

The next question is coming from Bishop Chen (ph) of Wachovia Securities.

Hi.

Good afternoon, David and Edward.

Apparently, you are making progress as by that very helpful table that breaks it out, the baskets (ph).

Let me ask you a couple of questions on the balance sheet.

I know you're looking for new a new bank facility, but right now the old bank facility, the current bank facility, what is its total capacity?

The bank facility total capacity size right now is $138 million.

We have used as of second quarter $66 million of that $138.

Right, and this is -- this facility matures when?

2007.

Right.

Okay.

The challenge on it is we --we have had the facility at this point for I believe three years, just over three years.

And the leverage ratios are beginning to ratchet down.

Right.

A little bit this year, but primarily next year, and you know, we continue to be in a growth mode, and we just really need to reset those leverage covenants to reflect how the company's operating today.

Right.

And pro-forma with Jacksonville, the 8.5 balance on closing the Jacksonville was drawn on the -- almost all on the facility or totally on the facility?

Yes, on the facility.

Okay.

And then what we have left is Boston?

We have Boston and Colorado Springs that are pending acquisitions.

And then we have a construction permit acquisition in Sacramento.

The first two of those are currently the FCC -- is holding all licensed transfer applications as they work through their new rules.

So, it's unlikely that they will close until the fourth quarter.

Right.

We're obviously in the hands of the FCC, as are a number of other radio companies right now.

So, Colorado Springs and Boston kind of a fourth quarter event?

I would say, yes.

Okay.

And Sacramento -

The payment on Sacramento Q3 or Q4, Ed?

I'm not sure.

It's relatively small amount.

It's small enough.

Let me just -- big picture -- we saw a -- finally, we saw a valuation in the IPO market in radio after -- I don't know after more than a year sitting on deck.

Citadel came and placed at a solid multiple.

I'm not sure there's any change in the sentiments going forward right now to support it, but if there were a window to do a secondary offering, what would your feelings be about shouldering the dilution to gain immediate de-leveraging on your balance sheet?

We have -- we have said fairly consistently that when the stock price gets to a place that we think it's fairly valued we would look at raising some additional capital with a secondary offering.

We have talked about the fact that the underlying asset value of the company, because of this very young portfolio of stations, is really the -- the market is not really reflecting that value.

We're being judged on earnings, which is of course, fine.

We're probably given a slight premium for the underdeveloped stations, but we simply think that the current stock price is too low for us to consider diluting shareholders until that stock price firms up and gets more to a place that reflects, we think, the underlying value of the company.

Okay.

One last housekeeping question, David.

The cash interest expense for the current quarter, would you have that handy?

Cash interest expense, I believe, $5.6 million.

Okay.

And -

And $5.6 million includes the amortization of the up-front fees we paid to originate those bonds and that bank facility.

Those fees out of the $5.6 million off the top of my head are about $300,000.

That's non-cash because we paid them up front.

The cash interest is probably around about $5.3.

But give me a little -- give me a little latitude on that $300,000.

It could be $100,000 up or down either way.

David in my world, fee payers get all of the latitude they want.

Thank you, gentlemen.

Okay.

The next question is coming from Paul Sweeney of CSFB.

Your line is live.

Thanks very much.

Good evening.

Just two questions here.

First, guys, on the network, is the turn taking a little bit longer than you thought, the down 7% revenue is a little bit lower than what we were looking for.

If it is taking longer and seems to be delayed, is it primarily the markets, the national network market, which we know is weak, or there's Salem specific issues there?

And then second on the spot revenue conversely, remains to be, you know, substantially above the industry.

You know, what is your sense that is what continues to drive that?

Clearly, it's the strong ratings growth that you have on your developing stations.

Is there anything about your set of advertisers that makes them increasingly less impacted by some of the local advertising phenomena that's out there that's keeping the other local advertising down?

Thanks.

Well, let me tackle the first question on the network.

I think that the answer to that question is that what we're experiencing in terms of the softness is both generally a problem for the industry, softer national business that's been the case for several quarters.

And then probably a little bit of Salem-specific as well because of the affiliate --the loss of those affiliates that we have talked about and having to rebuild that affiliate base.

We do think that we will see some substantial -- at least measurable growth in the fourth quarter.

We see a firming up and we see a turning around of that business.

But I think it reflects both the general softness nationally across the board, and then the fact that we had the affiliate loss and we had the challenge to rebuild.

I might let David handle the second question.

Just remind us of the second question.

Sure.

It's just the spot revenue again consistently well above the industry.

How much would you say that is ratings driven versus perhaps a more -- a function of the unique set of advertisers that you have?

In terms of the numbers I gave, earlier, the music station growth, which is all advertising revenue, obviously.

There's no block programming revenue in there.

That growth was 14%, 15%.

You know, I think that's very much a function of the continued growth of those radio stations.

They're not mature.

We have seen continued rates development on those stations.

I think we have also seen, you know, our sales effort continue to develop on them.

So, it's ratings development, and station maturation.

For the remaining part of the portfolio, clearly, there are some developing stations in there that's helping our spot sales numbers.

I think, you know, that success is partially driven by that.

It's partially driven by the fact that our advertising categories that we focus on are a little bit different than general market.

We don't have the same exposure to the car dealers and, you know some of the retail categories that are very economically sensitive.

We're strong in areas like health and medical, charitable organizations, financial services, and they are, I think, a little less economically sensitive.

So, I think those are the elements that would, you know, help distinguish Salem's numbers.

Great.

Thanks very much.

The next question is coming from Victor Miller of Bear Stearns.

Your line is live.

Good afternoon.

On the category you have the zero to 29% in the analysis that you've done.

The margin drops obviously from 22.6 to 17.9 because you had so many stations rotate from the less than zero into that category.

That's right.

Do you have any further breakdown?

That's such a wide band there, that 30% worth of margin.

Do you have any breakdown of that category in particular so we can see, you know, kind of just how it seems to us there's a lot of still very immature stations in that group of stations?

I don't know if you have that.

Secondly, could you break out your expense?

I don't know if you do this, but do you have a sense of what your expense growth was broken up between your music stations and your block time?

To answer your first question I do not have anything to hand that would analyze those 38 stations in greater detail.

You know, other than taking a very long time to kind of analyze them.

So I'm not sure that I can provide too much help at this time on the point, but I will take it away and think about it and see if in future quarters we can provide a little bit more information.

You may just want to break that one in half since there's still a lot of real brand new stations in there, basically.

We'll look at that, Victor.

In terms of the music stations, the music stations had revenue growth of 14.8% for Q2, 2003.

I'm sorry.

I meant the expenses.

I'm going to get the expenses.

How much was the expenses?

The expenses declined by 10%.

Whose did?

The music stations.

Down 10?

Down 10, which explains the station operating income for the music stations going from $1.3 million to $3.1 million.

So, combination of strong revenue growth and I guess reduced advertising and promotional spend and a little bit of reduction in pay-role spend.

What about the block a.m. news-talk growth?

Don't have that number handy, I'm afraid.

Okay.

Then just on Paul's question, just to -- when you have 15% growth on your stations, how much of that is -- obviously, that's a lot of acceptance by advertisers.

How much of that is brand new advertisers coming on, accepting the brand?

How much of that is rate driven and how much of that is just increasing the sellout rates or maybe it's a combination of all three?

It's clearly a combination of all three.

I mean, he mentioned some advertising categories that are a little bit unique to Salem.

Those businesses tend to be pretty stable in terms of renewal and we're able to get some rate increase.

We certainly on most of our stations would probably have unsold inventory.

There's some unsold inventory.

We use our network to try to manage that.

It's really all of the above, Victor.

We're getting results for advertisers.

We have kind of focused on the advertisers that we know from market to market that use our stations successfully.

And so, the longer you do it, the more you have been in the business, the more focused you become on what works and what doesn't.

Thank you.

Thank you.

The next question is coming from Drew Marcus of Deutsch Bank.

Your line is live.

Good afternoon, gentlemen.

It's James Dix stepping in for Drew.

I had a couple of questions to drill down more on the fish (ph) stations.

David, I don't know if you had a breakdown as to what the leading ad categories are in the fish stations a opposed to the ad categories on the non-fish, but spot revenue that you get on your other stations?

Just so we could see to what extent there's a different advertiser base on the music formats.

Yeah, I do not have that.

Off the top of my head, the fish stations, their advertisers and their advertising categories, are going to much more closely resemble a general market adult contemporary radio station.

So, you are going to see, number one a lot more agency business as opposed to direct business.

And there's going to be a lot more car dealership, retail, and you know, similar categories that are more important to the general market than they are to our Christian teaching talk stations.

Do you know what your largest category is on the fish stations?

How much -- how much revenue comes from the category?

Is it auto or is it something else?

I would have thought it is auto, but I don't have the numbers in front of me to confirm that.

Okay.

And just in terms of margins, my guess is that KLTY is still your highest margin fish station.

If you could just give some ideas as to where the margins are there, and then outside of Dallas, what is your highest margins fish station?

I just want to see where the drop-off is to and how much room you have to grow in terms of the margins on the fish stations.

KLTY is currently operating at 47% in the second quarter.

The next highest is probably Orange County -- is what I would say off the top of my head.

Which is currently operating at 43%.

And then everything else would be below that.

Do you know what the next one would be, because I gather Orange County is probably the most mature outside of that.

What was the drop-off after Orange County.

Next would probably be Atlanta.

Atlanta is a 48%.

Okay.

That's a negative drop-off.

I guess so.

And then one other thing, what's your timeline as to the progress in terms of ratings at the Chicago fish station?

Just wanted to see if could you give us an update there?

Yeah.

The Chicago ratings, the -- if you look the last four books, we're averaging 0.8 share.

We're -- that's 12-plus.

We're steady at that level.

We do want to see improvement from those numbers.

You know, with some of the changes we made in the first -- fourth quarter of last year, first half of this year, I think we would expect to see some progress in those numbers over the next 12 months.

Are you still shooting for around a two share in that market?

No, Chicago is not a full market.

Okay.

We have a North Chicago signal.

You know, I think in the short to medium term, we would like to at least get to a one share.

And I think if we got to a 1.5, we would be quite satisfied.

Thank you.

Thank you.

The next question is coming from James Marsh of S.G. Cowan.

Your line is live.

Hi, gentlemen.

Two quick questions here.

David, you mentioned the block was up 8%.

It seemed like in the past it's tracked in at 6% to 7% range, at least to my recollection.

I didn't know if 8% was a high number for you guys?

Secondly, if you could drill down a bit more on what's actually contributing to the success of the fish stations in Atlanta and Dallas.

We have seen good numbers out of those stations.

Anything in particular going on there?

Thanks.

The first question, yeah, the block is a little higher than recent quarters.

We have got very nice renewals and increases from the local block programmers.

Our national percentage was nearer the five level.

So, we just did a good job of growing our business with local block programmers.

Ed, do you want to talk about the Dallas/Atlanta success?

First of all, in Dallas, even though we have some major changes that we had to make when we took the station over, you'll recall that when we bought -- we bought The Edge from Clearchannel in the fall of 2000.

That was one of those seven --100.7, we had to flip our teaching talk format from the current KLTY frequency, which was right at Cedar Hill and gave us a better signal.

Even though we had the major change, which was another address change in the Dallas market, nevertheless, that station had a presence in that market for more than 13, 14 years.

So, that it's had an opportunity to develop and mature there, it in terms of -- in terms of figuring out what the audience is looking for and fine tuning the format.

I think we have been able to do that in Atlanta as well.

Atlanta was a trade -- if you will recall, it wasn't related to the Clearchannel acquisitions, but it was a swap with Cox, just prior to that.

So, again, it's been in the format a little bit longer than the other stations.

In the markets where we -- some of the markets that we have, we don't have what we would call a full market signal.

Orange County, for example, is the Los Angeles market.

But it's a six kilowatt class A facility.

So it does a good job in the Orange County and the L.A.

Basin, but it's not going to be competitive in the broader market.

So we have to adjust for those.

We're not going to see the audience share there that we would expect to see in the full market facility like Dallas.

But it does very well versus our -- relative to our investment and does extremely well relative to the area that it serves.

And some of those stations that are in that category like Chicago as Dave mentioned, will not get the kind of audience share that we're getting in the Dallas or Atlanta.

But they'll do fine in terms of our investment and in terms of the return that we need to get.

I'm optimistic, James, that we will see real growth in audience share and markets like Cleveland, Portland and a number of the other markets.

We continue to see the progress.

They're all just a little younger in the format.

They're just going to take a little bit more time.

Understood.

Thanks a lot, Ed.

The next question is coming from Vinton Vickers of J.P. Morgan.

Your line is live.

Good afternoon.

Just a question on your pacings.

You noted that you're up about 7% or so in July.

You can give us a sense of how the business is trending?

Is it getting any better or are you seeing sort of that consistent kind of 7% sigh single digit growth?

Thanks.

I think in terms of our numbers, you know, we have seen a lot of consistency over the first six or seven months of the year.

You know, that's obviously driven by fact that our block programming business is mainly negotiated annually in advance, so those rates get locked down.

Beyond the -- on the advertising front, you know, we are -- we are -- you know, I would say we are a little different than the general market guys.

But, you know, there's certainly an exposure level that we have to, you know, the state of the economy.

And you know, that impacts where the numbers finally end up.

I guess, David, a little bit more specifically, then, if I look at the really strong growth that you had both in local and national spot, and looking at -- looking out I guess as far as you have visibility on both those segment, are you seeing similar kind of trends or are you seeing slowdown with respect to the last -- the local and national spot?

We are not seeing a slowdown.

I think it would be fair to say that there is economic recovery.

But, it's slow and steady.

Not -- not big, strong and fast.

I think that's the way we describe it.

Things still seem to happen pretty late in terms of business getting booked.

And you know, we don't have too much visibility, you know, to --you know, in terms of months ahead.

I would add to that that latter comment, Victor, that's one of the interesting things about the last few quarter, and as we looked at -- as we look at the remaining quarter, the third quarter particularly in the guidance that we have given, there isn't -- it continues to be this limited visibility.

Orders continue to be placed perhaps later than a few years ago.

And even though we see recovery, as David said, it seems to be there.

It seems to be solid.

But it's not -- it's not the all-out robust growth that you might see coming out of a time of recession.

There's still seems to be a lack of clarity in terms of visibility.

Thank you.

Thank you.

As a reminder for any questions, that's one followed by four at this time, please.

The next question is coming from David Bank of RBC Capital Markets.

Your line is live.

Thank you.

Good afternoon, guys.

David.

I have been trying to slice these numbers a couple of different ways during this call, and if I go back and I look at some of the detail you have given in terms of same station growth, I'm basically coming up with same station expense growth of a little over 1% during this quarter.

That's again on the expense side versus about 6% last quarter.

I'm also coming up with, you know, assuming some sort of back of the envelope assumptions, you know, fixed costs growth going from something like 5% last quarter to again more like 1% to 2% this quarter.

So, obviously, you guys have made a dramatic improvement in expense management.

What I'm trying to figure out, though, is I don't -- I don't really -- given there's a really dramatic shift, I am not sure where that leaves us over the next couple of quarters.

I know I'm -- I'm not trying to sort of weasel explicit station operating income guidance, but I really, like, as the going-forward expense growth, again just on the same station basis, is it somewhere between this quarter and last quarter?

Because it's like a 500 basis point swing.

Yeah.

I think if you look at the Q3 guidance, you can calculate pretty exactly, you know, what our guidance is for operating expense increase.

We have told you the revenue numbers.

We have told you the station operating income numbers.

That equates to about 7% operating expense growth in Q3.

Which is similar to the Q1 numbers.

Okay.

Q2 is obviously a lot lower.

You know, the principle reason for that is we decided to either not run or cut back some marketing promotional advertising activities in the second quarter around the spring book.

And you can obviously see the favorable impact of doing that.

Now, you know, we are contemplating -- right now, we are planning to run marketing advertising promotional activities Q3, Q4, they are budgeted.

They're in the guidance.

You know, it's -- you need to have the right balance between maximizing profits today and insuring that we have continued strong profit growth in the future.

So, it's really about carefully measured cost containment activities so that we -- you know, we take care of both the present and the future.

And I -- I think that's the key variance them that see in the second quarter compared to last year.

Why did you decide to cut back on some of those expenses?

I understand the general concept of maximizing profitability, but given that you're going to go back to them, what goes -- what kind of more specifically goes into that decision-making process?

So that we could sort of extrapolate not so much for next quarter, but as we think about how the business grows?

Well, I -- I think that if you look at the Spring Arbitron results, we're very pleased with our stations as a whole.

So, we think that the decisions that we made with regard to promotion, research, related to the second quarter, were fine.

We're in line with our strategy and objectives.

You basically -- it's a judgment that changes with the -- with the developing and maturing aspect of every market that we're in.

I think that there was a constellation of events in the second quarter that suggested that the number that we spent was fine, was the right number.

And it turned out to be lower than we had done in the past, that we had spent in the past for second quarter.

I think that you will see some continued shrinkage in those expenses as these stations continues to mature.

The early on -- the early on when you are doing a rollout, you have got a lot of expenses that you don't have later.

And if you refer to the chart, David, that I mentioned in my comments, that's contained in the press release.

You will see the movement of these stations from the lower categories to the higher categories, there's a changing dynamic in terms of what they need.

I think that's reflected that way and sometimes the numbers work out a little strange.

I don't think that these are that far off the mark, but look at our guidance for the third quarter, compare it, and there will be some step up in promotional activities as we finish out the year.

Got it.

Well, great job on expense management.

Thank you.

Next question, please, operator.

Thank you.

The next question is coming from Jim Goss of Barrington Research.

Your line is live.

Several questions.

One related to the network syndication area.

You think you mentioned earlier your -- you're being successful in rebuilding that affiliate base, you noted continued softness at the network operations.

Could you talk more specifically about the issue that sort of reared its head in the first quarter with Sean Hannity and Bill O'Reilly rollout from a competitive standpoint.

And then separately, in terms of N.P.R. efforts.

You had a press release recently about the second annual fish fest.

I was wondering if that was limited to that market, or that exists in several other markets.

And if you could put any numbers around it in terms of like attendance levels and how important that effort was, and may be in the future.

And then also with the Jacksonville acquisitions you have now closed, could you talk about the format mix in a that market, because I think you have four stations, and you know, just what that is entailing.

Then finally, just detail the tax rate assumption for the balance of the year.

Jim, would you repeat your first question.

The first one was related to the network syndication efforts and the competitive issue related to Sean Hannity and Bill O'Reilly.

It seemed to be a bit of an issue in the first quarter.

I'm wondering where you stand on that.

Well, as we commented, when those -- both those programs rolled out, not exactly at the same time, but fairly close period of time, and I think we lost -- we saw an erosion of affiliates of about 90.

Once those programs were rolled out and got established, we didn't continue to see that erosion from our affiliate base.

In fact, we thought that pretty much the stations that we were likely to lose to those two had been lost.

So, we focused on rebuilding that affiliate base with our mix of products.

And we have been able do that.

We have recovered all of the --we had a net gain in affiliates.

I don't have the exact number, but it's up a few affiliates over the 90 that we saw erode in 2002.

Are some of those in the same markets that may have taken on Hannity and O'Reilly?

Did you get into some of the same stations and work your way back in?

Yeah.

There's so many -- it's such a variety of dynamics at work there.

I mean, with 1,600 affiliates, every kind of situation, I'm sure that we would find some in those categories that we picked up affiliates in the markets that Hannity and O'Reilly have rolled out on.

I don't that the O'Reilly program -- I haven't taken the time recently to review numbers, but I think that generally speaking, there's probably an industry consensus that the O'Reilly program particularly hasn't achieved the kind of rates success that people thought it might.

Because of his -- because of his high profile with the television program.

To a lesser extent, that's probably true with Hannity as well.

So, you get kind of a stabilization of those things after the initial rollout.

That's simply what we have seen and we have been able to rebuild the base for our programs.

Our programs continue to do well.

Our affiliate bases for the programs that we syndicate continue to grow.

Dennis Pregger's (ph) program continues to expand in terms of number of affiliates.

Michael Meddveds (ph) has continued to expand -- after the loss of the affiliates to the other two programs.

So, with the number of affiliates, it's just a -- sort of a dynamic that's going on.

There's -- it's hard to generalize.

There's a little bit of everything going on there.

Okay.

Okay.

In terms of the next question about the fish festivals, this year, we have run fish concerts in Dallas, Hawaii, Orange County and Chicago.

We were also involved in festivals in Boston and New York but those were in non-fish markets.

I described them, you know, kind of first and foremost as marketing and promotional vehicles for our radio stations to attract new and additional listeners.

Secondarily, as revenue and profit opportunities, you know, some of them make money, others of them break even after you've examined them from a financial standpoint, but are very, very helpful in terms of helping increase rates.

You know, the star festival, the home run, if you like, is the festival we have in Dallas.

It's called Celebrate Freedom.

It's an all day festival.

I think we had just shy of 200,000 people there this year.

I mean it, was a huge success.

We have always run that festival for many years, and 14 years?

We have run that festival for 14 year, I guess.

We have last year -- we tested the waters in another market by running fish-fest in Orange County.

I think we had about 10,000 people there last year.

That's up to I think nearer 15,000 this year.

It was a good success.

And we hope to continue to build that festival.

It's quite different than celebrate freedom in Dallas.

Celebrate Freedom in Dallas is a free festival.

All you have to do is pay for your parking.

In Orange County, that is a --where you pay for attendance, so it's a slightly different vehicle in terms of how it operates.

But Orange County was a good success.

It's in its second year.

This year we also for the first time did festivals in Hawaii and Chicago.

I do not have those results to hand.

Although we can mention that in Honolulu we had the best 12-plus numbers in the spring book that we have ever had -- a 3.2 share 12-plus, which is historically the best performance that station has had since our ownership.

And we attribute a good bit of that to the -- to the advance and promotional impact of that particular concert.

Okay.

In terms of Jacksonville, the four stations, there's one FM and three AM's.

The FM is already programmed with a contemporary Christian music format, it has ratings around about a three share.

The other formats, the AM formats, there is a Black gospel format that has approximately a 2.5 rates share.

There is a news talk station, and there is a sports r talk station.

And those will all stay in that current format.

Okay.

Then the tax rate was the last one.

38, 39% -- around that area.

We'll be pretty accurate.

Next question is coming from Bobby Millnick of Terrier Partners.

Your line is live.

I just wanted to reinforce what management said vis-a-vis a question earlier and give one owner's view.

It sounds like a lot of I'm not certain -- I'm not certain whether they're owners or not, but a lot of the previous questions have been sell side analysts, which have their role, but I wanted to reaffirm what you said, Ed, in terms of the secondary issuance.

I mean, you guys have published in the past, considering stick value and if you appraise those at purchase cost, which might be conservative and might be aggressive, and, that -- given our financial leverage it is difficult to calculate with provision, but I think at the time you said that the enterprise value or the equity value, private market value was at least two times market.

And so I think it's very -- you have to be very, diligent and very circumspect about contemplating loosening up the equity when you are selling at 50 cents on the dollar.

Particularly given the fact of the matter is that, you know, your prospectus for the IPO came out in June of 1999 at 22.5, and you're now trading at 21.5.

So, regardless of the job that you have done operationally, Salem Communications hasn't made a lot of money for the shareholders, ever.

It's -- its public shareholders.

It's interesting as an owner hearing you talk about how, you know, when we stopped making acquisitions aggressively and we focus on what we're doing, magically, we start showing, you know, dramatic improvement in our operations.

And when you combine that with the fact of the S&P potential for downgrade and the fact there was a time not that long ago chronologically when you guys were more levered, it begs the question, why don't Salem Communications, like most companies and like most humans on the planet, just sort of live within their means?

Unfortunately, say we're not in a position to make acquisitions.

You know, run what you have, built the sticks into profitable stations and not skating out where the ice is thin?

Well, that's good advice, Bobby.

We'll certainly -- we certainly share a lot of those sentiments.

As I commented, since the fall of 2001, the acquisition activity has been dramatically reduced, in terms of dollar volume.

But there is a place for prudent acquisitions that are consistent with our strategy, and sometimes you have to move when you have the opportunity.

I'll use a small example, take Colorado Springs.

We paid $1.5 million for the radio stations.

I have been trying to acquire a station in that market for five years.

There has been nothing available to do the news talk format, which is a strategic format for us.

We have two class CFM's.

One with contemporary Christian music and one with Christian teaching talk.

We need the conservative talk news facility.

We can run the entire operation for very small amount of money, leveraging our network product in that market, and it will --this station will be accretive almost immediately.

So, when you have an opportunity to acquire a station like that, you need at least a little dry powder to move in the best interests of the shareholders, to maximize those kinds of opportunities.

But, if you look at what we have done since the fall of 2001, you will see that we have been much more circumspect in moving forward, and we are looking at accusations that are either in format and will be accretive acquisitions.

Jacksonville, we picked up a CCF station that's been in the format for a number of years.

It has very solid audience ratings and a good, solid business background.

So, we expect that cluster to be accretive very quickly.

And there is a place for those kinds of acquisitions.

Well, it's good to hear.

I mean, I know that you guys are diligent vis-a-vis the equity, but it's -- you had to be very careful about asking a Barber if you need a haircut when it comes to issuing equity.

We have a very strong focus, Bobby, on operational growth.

You know, we look very carefully at acquisitions to insure that they are good acquisitions for our owners, for our share older, for our investors.

You know, in terms of the stock price, you know, we're -- you know, we work hard to grow the stock price.

We're not as -- we are very much in control of our operational profit.

Except to the extent that the economy has its impact.

You know, we are not so much in control of the stock price that that's more about what investors do.

All I can say is I joined Salem three years ago.

The week I joined Salem, Clearchannel's stock price was $91 a share.

It's now $42.

Salem's stock price was $1.50.

It's now 21.

So, although the stock price is flat compared to three years ago, we have outperformed most every other radio company that's out there with the possible exception of Cumulus.

Why is that?

It's because we worked hard on operations.

We will continue to do that.

And, you know, hopefully we'll get the stock price that we think our assets and profits are worth.

Okay.

Any other questions?

The next question is coming from Jeff Gobarkovitz (ph) of S.G. Cowan.

There were a couple of leverage figures that you mentioned, 7.4, which I assume is total leverage and there was 6.7 and 6.1, which you described as bank and bond.

Are those in fact total leverage figures and what is the difference in calculation, if they are?

Okay.

The first number, the 7.4 is if you like a GAAP measure, take total debt from our June 30 balance sheet, reduce that by cash on hand.

That will give you net debt, and divide net debt by last 12 months EBITDA.

So, that is a straightforward GAAP calculation, 7.4.

The bank leverage ratio allows us to make certain adjustments to the calculation.

We are allowed to reduce net debt by half the purchase price of any startup acquisitions up to a cap of $30 million.

We're also allowed to exclude startup losses for the first 18 months of ownership of a station.

When you make those adjustments, the 7.4 goes to 6.7.

That's our bank leverage ratio.

Our bond leverage ratio.

Our bonds are not issued by our parent company.

They're issued by a subsidiary of parent called Holtco.

There are two parts of the company that do not form part of Holtco and therefore do not form part of those covenants.

The two parts that are outside are the non-broadcast media businesses, and an entity called Acquisitionco (ph) that owns nine startup radio stations.

So, our.

Holdco leverage ratio, which excludes those entities, is a leverage ratio of 6.1.

That's the relevant leverage ratio vis-a-vis high yield bonds.

Okay.

And the stations that are to be acquired Boston, Colorado Springs, and the construction permit in Sacramento, where would they you fall in the organization?

They will be bought by subsidiaries of Holdco.

Okay.

And could you give us some estimation of what the station operating losses would be in Boston and in Colorado, and the startup at Sacramento?

Sacramento is still a while away.

Because it's a construction permit acquisition, so, we need to build the tower before we can go on the air.

I don't think that's going to have an impact until 2004.

Colorado Springs, you know, it may lose 50 or 100,000 in the first quarter of operation.

But it will be very rapidly break-even and very rapidly accretive as a relatively small acquisition of $1.5 million.

In the case of Boston, we will be programming that primarily with our own network content for which because we already have that content, will have no cost to the radio station, so, again, I would expect a small loss in, you know, the first quarter of operation.

I would expect a small profit over the first year.

And to be operating at least a 15 multiple of purchase price after three years.

Okay.

Thank you.

The final question is coming from Bishop Chen of Wachovia Securities.

Your line is live.

I'm not going to ask any question that's going to upset anybody.

I'm just going to ask about potential for signal upgrades.

Certainly Chicago would be a great market if you could do it.

Orange County would be another one where you might reap substantial rewards.

Can you give us any color on that potential?

We are always focused on upgrading facilities.

And we have some of the best engineering talent in the industry that foe kisses on that -- focuses on that very challenge.

We have a number of things that we're pursuing.

I don't think there's much that we can do with Chicago.

It's boxed in pretty tightly.

This is also true of Orange County.

Those stations are probably going to be what they have been.

We don't see significant improvement there.

Nothing with low power boosters or any other translator kind of support?

Well, those kinds of things normally don't really give you much bang for the buck -- at least not in those circumstances.

But I don't -- there's nothing we're relying on in those two markets of that nature.

All right.

Thank you, gentlemen.

There are no further questions at this time.

Okay.

Well, I'd like to thank everyone for joining us for the call today, and we look forward to updating you again shortly.

Thank you very much.

Thank you.

That does conclude today's conference.

You may disconnect your lines at this time and enjoy your evening.