Salem Media Group Inc (SALM) 2007 Q3 法說會逐字稿

Good afternoon.

My name is Lucia, and I will be your conference operator today.

At this time I would like to welcome everyone to the Salem Communications earnings release third quarter conference call.

(OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Mr.

Evan Masyr, Senior Vice President and Chief Financial Officer.

Sir, you may begin your conference.

Thank you for joining us today for Salem Communications' third quarter 2007 earnings call.

As a reminder if you get disconnected at any time, you can dial in to 973-935-8511 or listen from our website, www.salim.cc.

I am joined today by our Chief Executive Officer, Edward Atsinger III and our President and Chief Operating Officer, Eric Halvorson.

We will begin in just a moment with opening comments from Ed and Eric.

I will then provide a brief financial overview.

After our prepared remarks our 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.

Actual results may differ materially from those anticipated as a result of certain risks and uncertainties including, but not limited to, market acceptance of Salem's radio formats; competition in the radio broadcast, Internet and publishing industries; and new technologies; adverse economic conditions; and other risks and uncertainties detailed from time to time in Salem's reports on Forms 10-K, 10-Q, 8-K and other filings filed with or furnished to the Securities and Exchange Commission.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Salem undertakes no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances or unanticipated events.

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

In conformity 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 this conference call to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles, is available on the Investor Relations portion of the Company's website, as part of the current report on Form 8-K, and earnings release issued by Salem earlier today.

I would now like to turn the conference call over to Edward Atsinger.

Thank all of you for joining our third quarter 2007 earnings call.

I'm going to approach our prepared remarks a bit differently today.

I will begin the discussion with areas that received a large portion of my focus during the last quarter.

Eric Halvorson, our President and Chief Operating Officer, will discuss operating results.

And Evan Masyr, Senior Vice President and Chief Financial Officer, will conclude our prepared remarks with additional discussion of third quarter results and fourth quarter guidance.

You will recall that when announcing our management reorganization just prior to our last earnings call, I emphasized the importance of my being able to focus creatively on critical strategic issues that will affect value of our Company over the long-term, and short-term for that matter.

I believe that this new management arrangement has accommodated that, and I am pleased with the new capacity that the reorganization has brought to the Salem management team.

I continue to devote much of my time to an ongoing analysis of our radio properties.

We have assembled a large number of valuable assets in major markets.

The ongoing challenge is to determine their highest and best use, consistent with our overall mission and our desire to build value for our shareholders.

We currently have within our portfolio a number of stations which we define as underperforming and early development stage stations.

Our investment in all of these stations, which we include in those categories, was approximately $190 million.

While some of these stations generate income, the group when taken as a whole generate negligible operating income, and did generate negligible operating income for the twelve-month period ending September 30, 2007.

Certainly for stations that have been in their format for some period of time this is not acceptable.

And I continue to evaluate the performance of these stations on an ongoing basis.

Our options are pretty clear.

We will either continue to develop these stations to an acceptable level of probability within their current format or we will consider format changes, if appropriate, or we will consider monetizing these assets through stations sales.

I can tell you that we're currently actively engaged in negotiations for the sale of some of these stations.

I believe that we will make some deals where appropriate, and I am working on this on a daily basis.

On October 29 Salem launched a new strategic format, Spanish-language Christian teaching and talk.

We launched it on KBJD-AM in Denver.

We followed this launch with the launch of the same format on WAFS-AM in Atlanta.

That was done just a couple of days ago on November 5.

In both of these situations we have taken existing stations and implemented a reformat that we believe will enhance profitability and station values, with programming that is consistent with our overall business plan and mission.

We do pre-sell this format, and so I can say that we're quite satisfied and encouraged by the early results.

It is likely also that there will be additional rollouts of this format in coming quarters, so stay tuned for that.

While we have not been in an aggressive acquisition mode for broadcast assets, we have made it clear that we will take advantage of acquisition opportunities where circumstances warrant.

In that regard let me briefly address the reasoning behind our recent acquisition in Miami.

On October 1, 2007 the radio landscape changed for us in a pretty fundamental way in Miami with respect to our foundational Christian teaching and talk format when the owners of WMCU-FM, a station which has aired Christian talk programming, announced that the station was being sold.

WMCU-FM had operated in this format for at least 40 years.

Within a week the format was changed to classical music and all of the programs were terminated.

This created a major vacuum for Christian teaching and talk in South Florida.

And within roughly that timeframe we completed negotiations with Radio One to acquire 1080-AM in Miami for $12.25 million.

And on October 18 we began to operate that station under a LMA.

1080 is a powerful signal covering the Miami market, and this acquisition materially improves our position there.

Let me emphasize again that we are, while not aggressively looking at a lot of radio properties to acquire, we will continue to be alert to attractive situations like this one that has just taken place in Miami.

With that, I will turn the call over to Eric Halvorson for a discussion of third quarter operating results.

And I will be happy to provide additional color on my comments during the Q&A.

In the third quarter we achieved an overall revenue increase of 0.3%.

This is comprised of a 1% decrease in net broadcasting revenue and a 15% increase in non-broadcast revenue.

We have 45 stations currently programmed in our foundational Christian teaching and talk format.

And these stations contributed 46% of our total revenue.

Block programming revenue increased 6%, with the January reformat and relaunch of our Miami station as a Christian teaching and talk station contributing to this growth.

In spite of this block programming revenue growth net broadcasting revenue for stations in this format was flat compared to the prior year, due in large part to a 15% decline in advertising revenue.

The decline is principally due to the loss of revenue from the financial services and related categories.

Block programming contributed 63% of the revenue on our Christian teaching and talk stations, and continues to be a significant contributor to our performance.

Our thirteen contemporary Christian music stations grew revenue 4% for the quarter and contributed 20% of our total revenue.

KLTY in Dallas, our flagship CCM station, had another solid quarter performance with advertising revenue up 10%.

We also continue to be encouraged by our progress at WFSH in Atlanta, which had a 7% growth in advertising revenue.

This year WFSH held its inaugural Celebrate Freedom Concert in September.

Attendance was estimated at 42,000, and that is well above our expectations.

Our 30 news talk stations had a 1% decrease in net broadcasting revenue on a same station basis, and contributed 13% of our total revenue.

The results of these stations were negatively impacted by the performance of KRLA in Los Angeles, which experienced a 13% decline in revenue due to the continuing weak radio advertising environment in the Los Angeles market.

If you exclude KRLA, our news talk stations grew revenue by 4% for the quarter.

Our non-broadcast businesses, comprised of our publishing and Internet operations, delivered yet another strong quarter of organic growth.

For the quarter non-broadcast revenue increased 15% to $6.2 million, or 11% of our total revenue.

And non-broadcast operating income for the quarter increased to $400,000 from $100,000 in the prior year.

Our non-broadcast business continues to perform very well for us, and only was the operating income up for the quarter, on a year-to-date basis the operating income has almost doubled to $1.5 million from $800,000.

Revenue from the publishing division of our non-broadcast business increased 14% to $3.1 million.

Our Internet business division increased revenue 16% and also generated $3.1 million.

Page views associated with our Internet businesses continue to grow.

Townhall.com, conservative our opinion website doubled its page views from the prior year, while our Christian content websites increased their monthly page views by more than 20%.

I will now turn the call over to Evan for additional discussion of our third quarter 2007 results and our fourth quarter 2007 guidance.

Our results for the third quarter of 2007 were issued in a press release earlier today and are available on the Investor Relations portion of our website.

Total revenue for the third quarter increased 0.3% to $58.1 million, and adjusted EBITDA decreased 5% to $15.1 million.

Net broadcasting revenue decreased 1% to $51.9 million, and station operating income decreased 7% to $19.2 million.

Non-broadcast revenue increased 15% to $6.2 million, and non-broadcast operating income increased to $400,000 from $100,000 in the prior year.

On a same station basis, net broadcasting revenue decreased 1% and station operating income decreased 7%.

I would like to provide some additional details by revenue type comparing the results of the third quarter of '07 to the third quarter of '06.

Same station block programming revenue grew 4% to $18.8 million.

Same station local advertising revenue was down 4% at $21.3 million.

Same station national advertising revenue, including spot and network revenue, was down 5% to $7.2 million.

Other revenue, which includes infomercials, increased by 10% on a same station basis to $3.4 million.

Our same station results include broadcasting revenue from 89 of our radio stations in our network.

This represents approximately 98% of our net broadcasting revenue.

Let me now comment on our balance sheet.

As of September 30, 2007 we had net debt outstanding of $353.2 million, including $12 million outstanding on our revolver.

We were in compliance with the covenants of our credit facilities and our bond indenture.

Our leverage ratio was 5.8 versus a compliance covenant of 6.75.

And our bond leverage ratio was 5.0 versus a compliance covenant of 7.

On October 24 we amended our credit facilities to allow greater flexibility with respect to the covenants on total leverage ratio, senior leverage ratio and interest coverage.

These changes go into effect upon the closing of our Miami acquisition that was discussed earlier by Ed.

During the quarter we paid a special cash dividend of $0.42 per share or approximately $10 million in total, and repurchased 187,232 shares of our Class A common stock for approximately $1.8 million, at an average price of $9.55 per share.

For the fourth quarter of 2007 we are projecting total revenue to be between $57.9 million and $58.4 million compared to fourth quarter 2006 total revenue of $59.8 million; adjusted EBITDA to be between $13 million and $13.5 million, compared to fourth quarter 2006 adjusted EBITDA of $15.2 million; and net income per diluted share to be between $0.04 and $0.05 a share.

This outlook reflects the following, the absence of approximately $1.5 million of political revenue that was earned in the fourth quarter of 2006; same station net broadcasting revenue to be between $50.2 million and $50.7 million compared to $52.6 million in the fourth quarter of 2006; non-broadcast revenue increasing to approximately $6.5 million from $6 million in the fourth quarter of 2006; same station SOI declining to between $17.6 million and $18.1 million from $19.8 million in the fourth quarter of the prior year.

non-cash compensation expense of $0.8 million compared to the fourth quarter of '06 of also $0.8 million; continued growth from our core block programming; ongoing softness in the radio advertising market; and the impact of recent acquisitions and divestiture transactions.

This concludes our prepared remarks.

We would now like to open the call for questions.

(OPERATOR INSTRUCTIONS).

Victor Miller, Bear Stearns.

Ed, as you look at the portfolio, how are you going to determine in your mind what you can actually create enough value -- incremental value doing what you're doing, and the stations that you would probably shed, and maybe give us a sense of how you determined particularly the stations you're looking at selling now?

Secondly, in Charlotte you talked a little bit about the potential for markets like in Atlanta, like in Portland and Nashville in terms of the FISH format.

Maybe you could talk a little bit about more -- a little bit more about how those stations are coming along?

Thanks.

With regard to your first question, we look at the entire portfolio.

We have mentioned particularly the category of assets we call underperforming or early development stage stations.

For me to try to articulate with great specificity how I'm going to approach that would probably take more time than we have, and would get into more detail than I probably -- would be prudent to do.

Let me just simply say that first of all we look at particularly those stations which we would determine to be nonstrategic.

They are in a format that is not necessarily one of our strategic formats.

We may look at a station that is in a strategic formats if we can get a particularly attractive price for it.

And there are certain situations where, as we had done in Denver and in Atlanta, where we see an opportunity to move into this new strategic format, which we have been aware of for a long time, but in which we have been refining our business model to a place where we're comfortable today, and moving a little more aggressively in that area.

It would be difficult for me to get into too much detail here, other than we will look first at those that are nonstrategic in terms of format.

We will look at those that are clearly underperforming, where we think that we can get an asset value that exceeds our investment or equals our investment, and where the opportunity in terms of the potential buyers, the buying pool, is the most significant.

With regard to the FISH format, as Eric mentioned, we felt all along that the next major market where we had a great opportunity to really build a major franchise is Atlanta.

That station is coming along nicely.

Revenue growth was up 7% for the quarter.

We launched our Celebrate Freedom Concert, which has been an enormous success for us in Dallas for many, many years.

We regularly attracted crowds of over 200,000 on the Fourth of July weekend for that particular event.

And it has been growing and been a great success.

So we decided to launch it.

We felt the time was right in Atlanta.

For our first year to get 42,000 we probably exceeded our expectations by 15,000 or 20,000 people.

We knew that we would get a good turnout.

20,000 would have been a smashing success.

To get the turnout we did was very, very gratifying.

That format is being accepted.

And as we build audience and continue to have a high profile, we think that we will see the format arrive at a Dallas type of franchise performance going downstream.

Remember, Dallas has been in the format now for about nineteen years.

Atlanta was acquired in the fall -- late fall of 2000.

The other markets that you mentioned, I think you mentioned --.

Sacramento and Portland.

Portland and Sacramento.

Portland, we continue to work there and think that we will make progress.

Sacramento, as we have said all along, the signal is -- we didn't pay a lot for that asset.

The signal is not really in the same category, but we will continue to make progress there.

So I continue to stay the course, and nothing has changed with regard to my belief in the ability of this format to perform very well over the long haul.

Ed, in terms of the first question, is there an amount of dollars that you would like to shed?

Or is it if everything is fine you won't shed anything, or do you want to shed a couple hundred million dollars ultimately?

What is your goal there?

I haven't approached it that way.

I basically outlined three options.

The first one of courses is to stay the course.

If we have a station that we put it in a particular programming direction and it is a strategic format, we want to take it to profitability in that format.

That is the business that we're in.

That continues to be our first goal.

If we think that there is an opportunity to reformat it, we may do that.

And if we think that neither of those options is good and the station continues to underperform then we certainly will try to monetize the asset.

I haven't approached it with that degree of specificity.

That is just a -- I outlined the three major options that exist in each case.

I will mention that with regard to -- and this is a bit off of your question -- with regard to the two stations that we reformatted into the Spanish-language Christian teaching and talk, one of them in Denver is an expanded band station, which frankly was never one that we had put a lot of stock in.

So we feel very good about making that change.

Atlanta was purchased some years ago because we believed that we could do a major upgrade.

And we worked on it for a number of years, and it was one of the few times that we were frustrated and we couldn't get -- finally get the FCC to agree with it.

So our options there then were to either sell it or find a format that made sense.

And both of those options exist, but we believe that the one we have taken is the preferable one.

James Dix, Deutsche Bank.

A couple of questions.

Just on the third quarter, what was L.A.

market revenue?

I think last quarter you gave a comparison as to how KRLA was doing versus the market in Los Angeles.

If you have that, that would be helpful.

Then secondly, for your music stations, how did the growth that they are posting in that third quarter compare to the growth of their markets, for example?

Because it looked like they probably healthfully outpaced the industry, but I was just curious as to whether there is any difference in terms of the market growth that we're going against.

Finally, in terms of our guidance, it looks like for the fourth quarter you're looking for same station operating expense growth basically flat.

Are there any -- are you basically cutting back on marketing, or are you basically just done with the marketing that you need?

I am just trying to get a sense as to what is going on there, and what type of runrate operating expense we should be looking for beyond that.

I can start with answering the last one.

With respect to the expense guidance, the reason why you see very little with respect to an increase is, if you recall, last fourth quarter in '06 is when we really started to spend a lot more money marketing our news talk stations and also on our music stations.

That's where we were starting to spend an extra million and change a quarter on additional marketing.

So fourth quarter sort of anniversary that.

So that is why there's less of an increase in Q4 than you have seen in prior quarters.

Would that start to go away?

Did marketing basically continue for the first three quarters of this year?

And it still continues in the fourth quarter, but there was a large increase throughout the year comparing the comps -- like the second quarter of '06 we didn't have as much marketing as the third quarter.

It really started fourth quarter of '06 where we upped our marketing spend.

So you have a different comp so to speak.

But with regard to the music stations we reported -- as Eric mentioned, the revenues grew 4% on our contemporary Christian music station.

I don't know of any markets where the radio revenues for the entire market exceeded that.

So I'm pretty comfortable -- I don't have it right in front of me, but I'm pretty comfortable saying that rate of growth probably exceeded the growth of the revenues in the market.

There may be some exceptions to that.

With regard to L.A., KRLA has been soft.

It has been a problem for the last several quarters and we hope to see that firm up.

But U.S., I think specifically how the revenues compared with prior quarters, I think it was probably pretty (technical difficulty) to the market.

You want to know what the market revenue.

I think the market revenue --.

I think you gave that information.

Last time like I think second quarter L.A.

was down 3.

I think L.A.

market was down more like mid single digits in the third quarter.

I think it was down more in Q3 than it was in Q2.

But actually KRLA was down less than it was in 2Q.

Correct, I think prior quarter was what down 18.

18.

Correct.

Bishop Cheen, Wachovia.

I have a housekeeping and then kind of a big picture question.

The housekeeping, when you amended the credit facility, I believe you said that was just October to going to affect when you close on Miami?

Correct.

Has there been any change then in the size of the revolver?

I believe the revolver was $75 million, then you have a Term B $75 million and a Term C $165 million?

Nothing change with respect to the capacity of the facility.

The only thing that changed were those three covenants.

And those changes will go into affect once we close WTPS.

Right.

And it gives you a -- I'd remember exactly what it is or even (inaudible), but it is a wider covenant definition, correct in terms of the metrics?

Correct.

What this essentially does is on 12/31 of '07 without the amendment, our senior leverage ratio would be dropping to 6.25.

It is currently at 6.75.

When we close WTPS it will stay at 6.75.

Right.

Okay.

So you just keep the step downs from stepping down.

We did that.

Just so you will know, our banks are quite willing to give that to us, and it didn't cost the Company anything.

We just -- we asked for the additional flexibility with that acquisition.

We thought why not?

And they are very comfortable with where we are, and they readily gave it to us.

So it just maintains the leverage ratio a little higher.

It gives the Company a little more flexibility.

Although we would have been in complete compliance had they not -- we didn't need the covenant.

We didn't need the covenant, but we thought why not ask for it.

And if they give it to us and it doesn't cost us anything, what do we have to lose?

I was just going to add that -- I want to make it clear that it wouldn't have tripped the 6.25 if it ratcheted back down.

But we like to have a nice cushion in case of unforeseen events.

I hear you.

You have some complicated and certainly helpful carve outs in your covenants.

Did any of the -- how do I say this -- meaningful carve outs change so that you can get by definition your leverage to have a crank, a crank and a half, two cranks under the covenant?

Nothing has changed.

Big picture, and we have heard this from a number of companies that they would consider divesting of assets and this, that and the other.

My question is, who is buying?

How are they funding it?

And do you perceive any specific change, even for your unique properties -- which they could always change format but if they stay in format -- your unique properties, any change in the private market value or the ability to fund these properties?

In terms of who is buying, look, that is as diverse as the 13,000, 14,000 radio stations that exist in the country.

They come in all sizes and shapes.

And the city has a thousand stories.

But I can tell you that to the extent that we're going to entertain them, or are entertaining them, they are at values that we are very accountable with in terms of what we have invested.

The situations in some cases -- you're always approached.

There are always people that are calling.

And there are some cases where we say, that asset might be one that is non-strategic and we ought to seriously consider monetizing that.

And we may throw it out there and seek a little bit of -- test the waters and see what the interest level is.

There are buyers out there.

There always buyers out there.

It depends on the city, the asset, the unique circumstances.

Of the ones that I am thinking about each situation is quite unique.

And it makes eminent sense for the party that is on the buy side.

Each one has a story, has a need, and usually those are the conditions that have to come together for sales to take place.

Yes.

I hear what you are saying.

Hopefully you will be the ones to help reaffirm whatever market values are.

Because I have a number of companies, and you are aware of them, you see the public releases, that just seem to be stalled in their ability to divest because they can't fetch a bid that they want to hit, or the buyers can't fetch the funding that they need to give the seller the bid.

(multiple speakers) has a million stories too.

There is no question that with this current credit market it is tougher for certain buyers to get financing.

It is more expensive if they can get it.

I agree with you.

I think that this is not a time to be under pressure, to have to sell assets.

We're not approaching it in that respect at all.

But where we have some that are non-strategic, where we have had people that have approached us, where there is interest, where we can get a price that exceeds our investment and we think is market, we will take advantage of those opportunities.

The situations we're looking at are all in that category.

And by the way, if you will look at what we have done in the last twenty-four months, we have spun off some assets.

Most notably the biggest situation was Nashville -- I mean Jacksonville, and we sold I think four stations total.

And in Cleveland we sold a sports talk station (multiple speakers).

No, I agree.

I have never ever looked at Salem as a crisis seller.

A motivated, an opportunistic seller, yes, and never a crisis seller.

You fetched certainly some nice values.

My only point is, gee whiz, the world has changed since late May.

And we are experiencing exactly what that change is like every day.

We're redefining it.

I agree with you that it is a tougher environment out there.

The way that we're approaching it, we're okay with it.

When we announce asset sales I think -- when and if we announce asset sales, they will be I think at levels that we will feel pretty good about.

(OPERATOR INSTRUCTIONS).

John Klim, Credit Suisse.

Did you see, or have you seen, any discrepancy in advertising performance by region of the country?

And then you did mention that financial advertising was down I think 15% in the quarter in one of your segments, or one of your formats.

I just wanted to see if you were seeing that persist into the fourth quarter?

I really can't answer that.

I mean I am not aware of any particular region that is any more out of sync.

What we have experienced, and I don't think it really is necessarily -- well, it may be some of the other companies are experiencing the same thing.

We have had some challenges in some of the larger markets.

We mentioned L.A.

New York has been a bit of a challenge for us.

These seem to be more specific to some moves that we have made, so it is not necessarily regional.

I might say some of our larger markets are experiencing a little more stress than some of the smaller markets grade.

The financial services area has always been a fairly material area for our Christian teaching and talk format, just simply because the audiences is adult, and there is a higher percentage of homeowners in that category.

And so that has typically been an area where mortgage money is -- has usually been one of the categories that we have been able to consistently profit from.

But I can't really give you a region anymore -- other than more of a large market stress I would say than the smaller markets.

Thinking about Q4, I mean you have a lot of business that disappeared throughout the third quarter and possibly even a little bit late in the second quarter when the financial crisis hit.

Stations are actively trying to replace that business.

They haven't replaced all of it, so I think some of that will persist and that is why you see our guidance where it is for Q4.

There appear to be no questions at this time.

I would now like to turn the floor back to Mr.

Atsinger for any closing remarks.

Thank you, operator.

Again, we thank all of you for joining us for this earnings call.

And we will look forward to seeing you again in three months when we report on our next quarter.

Thank you.

This does conclude today's Salem Communications earnings release third quarter conference call.

You may now disconnect your lines.

Have a wonderful day.