Salem Media Group Inc (SALM) 2007 Q4 法說會逐字稿

Good evening.

My name is Mary, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Salem Communications fourth quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS).

Thank you.

It is now my pleasure to turn the floor over to your host, Chief Financial Officer, Evan Masyr.

Sir, you may begin.

Welcome and thank you for joining us today for Salem Communications fourth quarter 2007 earnings call.

As a reminder, if you get disconnected at any time, you can dial into 973-582-2717, or listen from our website at www.salem.cc.

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

We will begin in just a moment with opening comments from Edward 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 Form 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 results.

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 at www.salem.cc, as part of the current report on Form 8-K and the earnings release issued by Salem earlier today.

I will now turn the conference call over to Ed Atsinger.

Thank you Evan, and thank all of you for joining us for the fourth quarter 2007 earnings call.

Before we get into the specifics of our 4Q financial performance, I want to comment on a few broader issues.

On our last call, I mentioned that I have been spending a good bit of my time analyzing our radio properties.

Our portfolio consists of a large number of assets in major markets and we obviously have the ongoing challenge to determine how to best monetize these assets, consistent with our business strategy.

In some cases, we have determined that selling the assets best serves shareholder value.

Consistent with that conclusion, since we last spoke, we announced the sale of the following stations: WHKZ AM in Warren, Ohio for $600,000, KTEK AM in Houston for $7.8 million, WFZH FM and WRRD AM in Milwaukee for $11.8 million.

We feel good about these prices.

Our Milwaukee cluster generated approximately 500,000 in annual cash flow, and while it was growing, this sale price represents a 24 multiple of cash flow.

We will continue to monitor the performance of our broadcast stations generally and we are actively engaged in negotiations, I can say at this time, for the sale of some additional properties.

On our last call I reported on the development of a four strategic format, Spanish language, Christian teaching, and talk.

With the addition of stations in Boston and Sacramento, which we launched last month, we now have four stations in this format.

And while we are still in a startup stage, the early results are encouraging both in terms of revenue and station operating income.

I expect that we will launch additional stations in this format in coming months.

At this point I'll turn the call over to Eric Halvorson for a specific direction of our fourth quarter operating results.

Eric?

Thanks Ed.

For the fourth quarter, our total revenue decreased slightly by 2/10 of 1%.

This was comprised of a 2% decrease in net broadcasting revenue and a 14% increase in non-broadcast revenue.

Impacting these results is political revenue.

We had $100,000 of political revenue in the fourth quarter of 2007, compared with $1.5 million of political revenue in the fourth quarter of 2006.

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

These stations contributed 44% of our total revenue.

A key component to this format is our block programming revenue, which increased 6%.

Despite this growth, net broadcasting revenue for these stations was up only 3/10 of 1% over the prior year, principally due to an 11% decline in advertising revenue.

This decline is primarily due to softness in local spot revenue in a few key markets, most notably New York and Los Angeles, and the loss of revenue from the financial services and related categories.

Block programming contributed 62% of the revenue on our Christian teaching and talk stations.

At the conclusion of every year we negotiate renewal rates with our national block program partners that purchase time on our Christian teaching and talk stations.

The new rates are effective for the upcoming year.

We stated in a press release issued earlier today that the average increase in rates for 2008 is 4%, and approximately 90% of our block programming contracts were successfully renewed.

Revenue on our 12 contemporary Christian music stations decreased 1% for the quarter and contributed 12% of our total revenue.

KLTY in Dallas, our flagship CCM station, had another solid quarter of performance with revenue up 5%.

Additionally, we continue to be encouraged by our progress at WFSH, our CCM station in Atlanta, which had an 11% growth for the quarter.

We had a 3% decrease in same station revenue on our 30 news talk stations and these stations contributed 14% of our total revenue.

The results of these stations were negatively impacted by the performance of KRLA in Los Angeles, which experienced a 6% decline in revenue due to a continuing weak radio advertising environment in the Los Angeles market.

We would point out however that the revenue declines in the prior two quarters were 13% and 18%.

While we are obviously not satisfied with the current situation, we do believe that this improving trend should continue.

Excluding KRLA, same station revenue on our new stock stations declined by 2% for the quarter.

Our non-broadcast business, comprised of our publishing and our Internet operations, continues to show strong organic growth.

For the quarter, non-broadcast revenue increased 14% to $6.9 million, or 12% of total revenue.

And non-broadcast operating income for the quarter increased to $500,000 from $400,000 in the prior year.

For the full year operating income for our non-broadcast business reached $2 million, compared to $1.2 million in 2006.

Revenue from the publishing division of our non-broadcast business increased 11% to $3.4 million, our Internet business increased revenue 18% to $3.5 million.

Page views associated with our Internet business has continued to grow substantially.

I'll now turn the call over to Evan for additional discussion of our fourth quarter results for 2007 and our guidance for the first quarter of 2008.

Thank you Eric.

Our results for the fourth quarter of 2007 were issued in a press release earlier today and are available on the investor relations portion of our website.

I will now briefly comment on our results.

Total revenue for the fourth quarter decreased 0.2% to $59.1 million, and adjusted EBITDA decreased 9% to $13.8 million.

Net broadcasting revenue decreased 2% to $52.2 million and station operating income decreased 8% to $18 million.

Non-broadcast revenue increased 14% to $6.9 million and non-broadcast operating income increased to $0.5 million from $0.4 million in the prior year.

On a same station basis, net broadcasting revenue decreased 2% and SOI decreased 7%.

Let me provide some additional details by revenue type, comparing the results of the fourth quarter of 2007 to the fourth quarter of 2006.

Same station block programming revenue grew 3% to $18.8 million.

Same station local advertising revenue was down 6%, at $20.6 million.

Same station national advertising revenue, including spot and network revenue, was down 11% to $8.3 million.

Other revenue, which includes infomercials, increased by 30% on a same station basis to $3.1 million.

Our same station results include broadcasting revenue from 85 of our radio stations in our network.

This represents 97% of our net broadcasting revenue.

Let me now comment on our balance sheet.

As of December 31, 2007, we had net debt outstanding of $353.8 million, including $13 million outstanding on our revolver.

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

Our lever ratio was 5.98 versus a compliance covenant of 6.25, and our bond leverage ratio was 5.05 versus a compliance covenant of 7.

We have elected to discontinue the practice of providing specifically quarterly revenue, SOI and earnings per share guidance.

Going forward we will provide a quarterly revenue range for our total revenue and operating expenses.

Accordingly for the first quarter of 2008, Salem is projecting total revenue to decrease in the low single digit range over first quarter 2007 total revenue of $55.2 million.

Salem is also projecting operating expenses, before gain or loss on disposal of assets, to increase in the low to mid single digit range over the first quarter of 2007 operating expenses of $46.7 million.

This increase is primarily the result of increased investment in our non broadcast space.

And before we finish the call, I would like to turn the call back over to Ed Atsinger for some additional commentary.

Thank you Evan.

I just want to conclude our prepared remarks with a few comments on the current state of the radio industry in general and Salem in particular.

We are fully aware of the challenges facing the radio industry.

Salem clearly faces these same challenges.

The fallout from the subprime melt down and the overall state of the economy has caused a decline in industry revenue.

We are particularly exposed to the subprime problem because of our target demographics attracting a substantial number of advertisers from the mortgage and home improvement industries.

Many of these advertisers are gone.

We believe that they'll come back but we expect that this particular challenge will remain with us for some period of time.

We have legitimate reasons however, I think, to remain somewhat optimistic and confident in our long term future.

As we discussed, the 4% rate increase in our national block programming area with 90% renewal rate in this current environment underscores the continued resilience of this particular aspect of our business model.

The revenue growth at our contemporary music stations in Dallas and Atlanta is very encouraging, as is the rating improvements in our Portland Christian contemporary music station last year.

Additionally our diversification strategy is working.

We are experiencing substantial growth in our non broadcast businesses, particularly our web platforms.

Salem along with the rest of the radio industry has a lot of hard work to do.

We need to find more creative ways to attract and retain advertisers.

We need to expand and improve our content.

We need to be relentless in finding and eliminating excess and unnecessary costs.

And we need to continue to evaluate our portfolio to consider how best to monetize our assets.

I am confident that our management team is up to these challenges and we all remain confident in our business model and in the long term success of this company.

With that, we'll now open the call for questions.

Operator?

Certainly, sir.

(OPERATOR INSTRUCTIONS).

The first question comes from Victor Miller from Bear Stearns.

Please go ahead, sir.

Good morning.

Good afternoon I should say.

A couple of questions.

One, can you talk about the infomercial revenue being up 30%?

Is this a sign that some of the block players are walking away and you have decided to fill the time with that instead?

Secondly, when do you think we'll start to see expenses kind of grow at the same level as revenues?

Do you not have much flexibility too with the expenses?

And then I have two financial follow ups, thanks.

Victor, clarify your last question.

I didn't get it all.

Mr.

Miller, please restate your question.

Hi, this is Tracy filling in for Victor.

I'm not sure --

Hello?

Victor, I just missed the last part of the question.

Okay.

He's asking when expenses are going to, basically aligned with revenues.

It seems like there's not a lot of ability to control the expense line.

Okay.

Did you hear the first question?

Can you hear me again?

We can hear you now.

Sorry, I don't know what happened with my cell phone.

The first question was on the infomercial side, with it being up 30%, is this a sign of block players walking away and you've decided to go the infomercial route?

And the second one was, do you have much flexibility on the expense side because it does seem like that is an item that continues to go up at a low single to mid single digit rate, despite the revenue line.

And then I have two follow ups that are balance sheet related, thanks.

Just give a little bit of clarity on your first question, Victor, the 30% increase in other revenue, that includes infomercials.

It's our other revenue grouped together, so it's infomercial, it's event revenue, it's kind of everything else that doesn't fall in the other buckets.

So infomercial revenue has increased some but a lot of that increase is, we have a few stations that had events during the fourth quarter that they didn't have in the fourth quarter in the prior year.

So you see an increase in event revenue helping to drive that as well.

I think Victor, we don't have a situation where we see the block programmers walking away, to answer that part of your question.

You always have a few changes and a bit of turnover, but what typically happens is when the spot business declines and we've been hit hard with these mortgage, a lot of the mortgage brokers and a lot of the home improvement businesses, when they decline, these managers sort of turn to the infomercial area which they can integrate fairly readily into our block programming formats because they are all long form talk programming.

So they have a bit of an ability to always turn to that source and expand it a bit.

So there's probably a little bit of that at work but I think for the most part, most of that 30% represents events that we conducted in the fourth quarter of '07 that we are not conducting in Q4 of '06.

With regard to the other two questions, Eric or Evan, maybe you are better equipped to opine on it.

Let me address the expense side a bit Victor.

I've been focused mostly, the first eight months that I've been back with the company at the corporate level, although certainly to some extent also at the station level, but we have affected on an annualized basis, some pretty material reductions on the cost side.

We annualized right now just north of about a $1.5 million.

We've done this, not through broad general layoffs, but more of a focused approach.

Examples, we've eliminated our communications and public relations department.

We eliminated a Vice President of Finance position along with the assistant for that person.

We've done some reductions in IT and engineering personnel.

We have eliminated one operations Vice President, not replaced that person.

And we've also done a major restructuring of HR and the legal department, basically combining those two functions at the VP level into one and also reducing head count there.

So those savings on an annualized basis should start to work their way through as we go further into the year and also we -- middle of last year made changes in our CPA firm.

Evan, that savings is what?

It will be in our proxy, but it's pretty sizable.

In terms of free cash flow this year, can you help us with what you think we should expect in Cap Ex, how we look at the taxes and the interest level you would expect to pay?

And then obviously for one, less than one turn of debt, and take this thing, your company, private, any thoughts about the frustration of the public market and the $3.22 stock price.

Looking at-- let me start with taxes and interest and Eric, you might want to talk about Cap Ex.

But I don't expect that we will have any significant cash taxes being paid in '08.

There are a few states that have eliminated or are phasing out NOLs, so there are a few states where we have some tax challenges but nothing really significant or material.

We still have fair amount of NOLs obviously depending on, as Ed has mentioned, we have some asset sales.

Those might generate tax payments but from operations we should have pretty minimal taxes.

Interest, you know, I guess the good thing with what's been happening in the environment with respect to the economy, we've seen a reduction in interest rates.

So I would expect that interest, for this year was, for the year of '07, was about $25 million, all things being equal I would expect that to come down a few million dollars in '08.

With respect to Cap Ex, that's something that we've been very focused on.

Eric and I have spent a lot of time looking at the budget for Cap Ex.

Our budget for the year is in the $15 million range, which is sizably less than what it has been in prior years, and we hope to do even better than that but that's what the initial budget calls for at this point.

We are looking to make sure we spend wisely and where it's really necessary.

And Eric -- Victor, I can comment briefly on your query about looking at the current situation, stock prices, public valuations of radio companies.

There's no question that part of this -- part of the challenging times are reflected in the stock prices of all of the radio companies.

Our Board certainly has the-- is aware of their responsibility to continue to evaluate what is the best business model for this company to function as, and they will weigh all of those options and are weighing those options as conditions change.

There's a lot of turmoil in the credit markets right now and hopefully when there's a little more stability, there may be some recovery in the way that market and the street is valuing our kinds of companies.

But we'll look at all options and consider all options on an ongoing basis as we go forward, weighing the benefits of being a public company with other options, and at some point I'm sure our Board will either affirm our continued course of action or look at those options.

But at this point there is nothing that we certainly would announce or that we are contemplating.

Thanks Ed.

Thank you Eric.

Thank you Evan.

Our next question comes from Lee Westerfield from BMO Capital Markets.

Please go ahead.

Thank you gentlemen, good evening.

I just wanted to focus and get a little more insight on one particular area, on the bank leverage.

At the end of -- you are suggesting that you are at 6.0 times versus 6.25 times covenant on the bank test.

I wonder if you can remind us how far out the 6.25 test remains in place versus a step down if there is any.

Secondly, what possible remedies, if one is required, would be available to you should you get even closer to the 6.25?

And that would be the nature of this question.

Sure Lee.

Let me give you a little background on that.

Our leverage did step down to 6.25 on December 31.

We have an amendment or we put an amendment in place back in October that steps that back up to 6.75 once we close the Miami acquisition of, WMCU are the call letters now.

We are thinking that should close sometime either this quarter or early second quarter.

So we would have some kind of covenant breathing room once that closes back up to 6.75.

That amendment calls for it to stay at 6.75 through March of 2009, and at that point our leverage ratio will step back down to 5.75.

March of 2009?

March of 2009.

Thank you very much.

Our next question comes from Bishop Cheen from Wachovia.

Please go ahead.

Hi guys.

Thank you for taking the question.

Let me follow up on Lee's question.

I was well aware of the WTP amendment and certainly it does give you breathing room, but here is how I look at it, kind of looking at '08.

As you promised, you did identify stations and you came up with roughly 20 million in change worth of stations to sell that are waiting to close.

And then you have 16, almost 17 million of stations that you bought.

So if there is something like 3 million net difference of -- that you can pay down some debt.

As you try and develop your non-broadcast assets and as the broadcast stuff struggle against all the things that you so well articulated, Ed, there is certainly a good shot that we are going to see leverage creep.

So what looks like 6 times now goes to 6.2 in Q1 and goes to 6.5 in Q2 and if things are as tough and recessionary--.

The point is, by the time we get toward the end of the year, you can well be knocking on that -- on that new breathable 6.75 times covenant unless Ed, you have -- you are able to identify some other assets that you are able to sell at very robust multiples and take down debt.

Can you give us a little color around how you avoid bumping up against covenant so you don't have to go hat in hand back to the banks?

Well, first of all, with regard to the differential between what we bought and what we sold, we've actually bought and will close on the Miami acquisition and that's $12.25 million.

The other acquisition that you referred to is actually under an LMA and we do not expect that to close, certainly it won't close this year under the terms of the agreement and probably not next year.

So it is on a long-term LMA at a fee that we consider to be below the cost of funds and we are comfortable with that.

That is below what we would pay in interest if we closed on it.

We expect that there is some technical contingencies that have to be satisfied by the seller before we close, and those contingencies are very likely to take a couple of years.

So that $4 million that you are referring to is not likely to be a factor this year and more than likely not a factor next year.

So that improves it a bit.

We will kick the leverage ratio back up to 6.75 just as soon as we close in Miami.

That is pending before the commission and we expect approval very shortly, and I think our best guess is it probably closes sometime this month but if not it will be first week or two of April but we suspect it will be this month.

We have -- we are very sensitive to the things that you've raised, and we have never knocked on the door of our leverage ratios too closely.

We've always been prudent in that regard and throughout the history of our company we continue to be very aware of it.

We continue to monitor our worse case scenario and what our free cash flow will be and our ability to control expenses and free cash flow so that we are sure that we don't bump up too close to those, Bishop.

And furthermore, as I said, we are actively in negotiations for some other assets that we -- and we have a number that we've identified that we think probably makes sense to monetize them through an asset sale.

And if we turn one of those, two of those, it's going to give us an additional amount of head room on top of the cushion that we already have.

So I am very confident we'll manage it even if this thing tightens up a bit more.

That's very helpful.

Can I ask a bonus question?

Those answers are great.

In the operating expense that you gave us, the bogey for Q2, what is in that operating expense?

Is that strictly the cash operations, or is there some DNA in there as well?

You've got your appreciation and amortization in there as well.

It's excluding any gains or losses on sales or disposal of assets.

It's also restated for discontinued operations, the prior year number that we gave you for '07 has been restated for Milwaukee being a discontinued operation.

In terms of big chunks, as we try and model and come up with our own would have, could have, should have's here, the big chunk here is the DNA in that, when we use the bogey of whatever it was -- I can't find it.

46 something or other of operating -- 46.7 of operating expense for Q1 of '07.

How should we think about the DNA for Q1, '08?

I would expect that depreciation and amortization are going to be about the same as what they were for Q4.

I don't see a big change there.

As we mentioned, one of the places where you'll see an increase and we brought notice to on the expenses was an increased investment in our non-broadcast businesses, in particular we have a couple of things driving that.

One we launched recently a new periodical called "Town Hall" magazine.

And so we have some investment there in Q1.

Additionally we are making sure we kind of stay in the leader position on the Christian content Internet websites by doing some additional advertising and promotion expenses.

And there's a little bit mixed in there also for this new format launch of Christian teaching talk which we are very encouraged with.

There's been some Cap Ex expenditures and some start up expenditures.

Those are formats that start up real fast and are almost cash flow positive from the day you begin the operation.

Normally within 60 days you are cash flow positive.

So there's been a bit of investment there and some of that is reflected also in that estimate.

Great.

I'll move on.

One housekeeping thing.

You mentioned the political, I think it was Q4, '06 was 1.5 and I missed the political that you mentioned for Q4, '07.

It was $100,000.

And that's gross you are talking about.

Right?

That's net revenue.

That's net.

And then you said you already closed on the -- on one aspect of Miami.

Did, the 12.3 million acquisition is not going to close until late Q1 --

No, no.

It should close this month.

But it may be in the first week or two of April.

Okay.

So we are in the zone for that closing.

And by the way, the political, just to comment further on that question about political, normally in an off year, we wouldn't have had any political advertising, but this primary season is completely out of kilter, most of the political advertising we would expect to get would be more in '08 rather than '07.

So the fact that we had any at all is a bit unusual.

That does reflect these early primaries.

If it was up to me they will keep going to the -- it would never stop.

Thank you very much for your time.

Thanks, Bishop.

(OPERATOR INSTRUCTIONS).

Our next question comes from Jack Hain from Barrington Research.

Please go ahead.

Good evening gentlemen, I am sitting in for Jim Goss this evening.

My first question sort of piggy backs off the closing remarks regarding some of the macro economic weakness you guys are seeing.

Traditionally you've been able to increase your block programming rates for Christian teaching and talk stations at about a mid single digit annual rate.

Is that capability in any way threatened by the continuing economic weakness that has hurt advertising pricing across the board?

We haven't seen it yet.

It may put a little downward pressure on it as we go into '09, rate increases for national block programming revenue.

So far it looks pretty stable and when we scrub the audience numbers, when you look at changes in the industry, it seems as though there certainly is the perception if not the reality that technological changes are impacting the audiences and readership of a lot of media.

Certainly newspapers are experiencing decline in circulation and the question is, how is that impacting electronic media, particularly radio.

In terms of our target demographics, we don't see any significant decline.

On the contrary we see, in terms of coms, an actual slight gain but that is primarily driven by population growth on a per capita basis that may be a very minor decrease.

We do see in some formats, some young formats, music intensive young formats.

I'm talking about 18 to 34 demographics.

You are seeing a fall off in time spent listening.

But for the Christian teaching talk format, the block format, that target demographic is very solid and seems to be showing up consuming that kind of radio at levels that are consistent with what we've seen in the past.

And the block programmers, when we went through renewal, we didn't see any significant signs of weakness.

So apart from a few anomalies, you had Dee James Kennedy who passed away last year.

He had a program that was primarily television, but he also had some radio and there undoubtedly will be some changes there and you may have a few avails that you will deal with but I don't see a trend that is negative at all.

Well, to the extent that it hasn't been an issue so far, maybe you can give some color.

Would an economic downturn of any certain duration make this more of an issue, maybe six, eight months, or do you think it's just solid across the board regardless of the --

We had similar questions when we did our first public debt offering back in '97.

There were a lot of questions about how we fared in the last serious recession.

Well 2001 but prior to that even the '90, '91 recession, and the thing about the block programming that you have to remember, Jack, is that these folks can't simply take a hiatus if they want.

If they are there for the long haul, they can't decide just to cut back for a while like an auto dealer.

They've invested in that time slot on that particular station.

In some cases for five years, ten years, 15, 20 years.

The longer they are there, the better they tend to do.

They do these programs because they're listener supported and the longer they're there and the more they can develop that core set of donor supporters typically the better they do.

So it has a bit of an annuity like characteristic to it.

If they were to cancel their time and say well, we are going to go away for a year and they wanted to come back six months later or a year later, that time wouldn't be available and all of that equity that they had built in that particular slot for that particular program would have -- they would have to more or less begin again.

We don't see that kind of dislocation when you have economic downturn.

I suppose if it were very, very prolonged and went on years and there was a real strain, but we haven't seen that in the time that I've been in the business.

Great.

Thanks a lot.

Ladies and gentlemen, there appear to be no more questions at this time.

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

Atsinger for any closing comments.

Thank you operator and again thanks to all of you for joining us.

We'll look forward to visiting with you again in a few months as we report on Q1, '08.

Thank you everyone.

This does conclude today's conference call.

You may disconnect your lines at this time, and please have a wonderful day.