Salem Media Group Inc (SALM) 2008 Q2 法說會逐字稿

Good evening, ladies and gentlemen.

My name is Myleka Sinkler and I will be your conference operator today.

At this time, I would like to welcome everyone to the Salem Communications Second Quarter 2008 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

Thank you.

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

Sir, you may begin your conference.

Welcome, and thank you for joining us today for Salem Communications' Second Quarter 2008 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.

As usual, I am 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 our prepared remarks, and once we are done, the conference call operator will come back on the line to instruct you on how to submit questions.

Please be advised that statements made on this call that relate to future plans, events, financial results, prospects, or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

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 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 GAAP, 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 earnings release issued by Salem earlier today.

I will now turn the call over to Edward Atsinger.

Thank you, Evan.

I'm going to the call in a moment over to Eric Halvorson and then back to Evan to get into the specifics of the quarter's performance.

I'd like to just review with you some of the material developments that have taken place in recent days that impact our company, and we think largely in a positive way.

Some of you may have learned this morning of the format change that took place in New York City.

We changed the format of one of the two AM stations that we operate in New York City, WWDJ to our news talk format that we offer on a number of other cities throughout the country.

We changed the call letters of that station to WNYM.

We long recognized a franchise opportunity in New York for news talk.

Relative to other comparable large markets, New York is always, we felt, been underserved by this format, particularly the brand of news talk that we employ that focuses specifically on public policy, political talk, and cultural critique, that very specific focus.

We really could not take advantage of that opportunity as we perceived it, until recently because WWDJ was a 5,000 watt station.

The FCC about a year ago granted an application to increase power to 50,000 watts, which is the maximum allowable for AM stations, and we implemented that about six weeks ago.

So we've been operating now for some time with a maximum power 50,000 watt station, which significantly increases our reach within the New York Metro, adding several millions of people to the coverage area.

But it also intensifies the signal.

It makes it much more penetrating, which is important in New York given the large urban buildup and the need to have a very strong signal to penetrate in densely populated areas with large construction and edifices.

So we were happy to make that change this morning.

We're quite pleased with the rollout, the reports that we've gotten today as things have developed.

This change, by the way, was facilitated by our acquisition of radio station WAMD-AM in the Maryland area.

It's suburban Baltimore for $2.7 million in July.

We weren't in a position to get too specific at that time as to why we made that acquisition.

We did have some questions on prior calls about it and we answered in a general way, but essentially it was designed to facilitate this upgrade, and it adds far more value, in our opinion, to the 970 frequency in New York City than existed when it was a 5,000 watt station.

So we're pleased with that change and it also benefits Salem in that it facilitates our national business, Salem Radio Network.

As you know, or most of you probably are aware, we syndicate 18 hours a day of long form talk programming.

This move ensures access for our national -- for our talent that we syndicate nationally in the nation's number one population center, and it provides us, also, with that connection with a very cost effective way of launching this format since we control all of the product, or essentially all of the product, about 70% of the product that we will offer over the air.

Last week, we signed an agreement to sell the assets of WRFD-AM in Columbus, Ohio for $4 billion to the Christian Voice of Central Ohio.

Christian Voice operates a contemporary Christian music station in that same market, WCVO-FM.

WCVO has been there for many, many decades, as have we.

We have all long been convinced that consolidating these two stations under one ownership would strengthen the position of both stations.

We attempted a couple of years ago to acquire WCVO and those discussions progressed for some time.

Ultimately, they were not successful for a variety of reasons, not the least of which is that the Christian Voice of Central Ohio really has as their home base, Columbus, and for them to dispose of that particular asset would to some extent mean a fundamental change in their mission.

On the other hand, in our case WRFP was a standalone station, one of only two that we continued to operate in the Untied States, and it was not only standalone, but it was a daytime only AM station.

Very successful.

It's been there since 1982 with the current format, but it didn't make a lot of sense to continue to operate it as an independent standalone entity if we could find consolidation.

So since we couldn't consolidate it, we took a look at it from the other perspective and decided that a discussion with them about acquiring the station was appropriate.

They felt it was.

That has led to this current situation, and we're pleased with the deal.

It works for both of us.

We've been very vocal from the very beginning of our stint as a public company about our commitment to providing a reliable, consistent platform for our block programming partners, ministry partners.

And nothing about this transaction changes that, but we're very protective of continuing to be available with that platform if these partners need it.

In this case, Christian Voice of Central Ohio has a similar commitment, and their only interest in the station was to continue to operate it as it has been operated by us.

Fortunately, they will be able to operate it more efficiently and we're confident, and they are confident that it will be strengthened as a result of this particular consolidation.

The sale price that we got, if we look at the cash flow for the last 12 months, the multiple price for this sale is about nine times.

So we're pleased with it and we will continue to actively look at opportunities to sell additional assets in our portfolio where it makes sense, as this one clearly did.

In June, we launched our fifth station formatted with Christian teaching talk in Spanish, in Seattle.

Our revenue on these stations for the quarter was well above the prior year and we continue to be quite encouraged by the progress we're marking.

We're still evaluating our portfolio stations to see if there might be additional opportunities for this format and we may have some announcements about that in the coming days.

There's no question that radio continues to struggle with its ability to grow revenues.

According to RAB, total industry spot revenue was down 10% in May and June, and we're not immune to these current industry trends.

Overall, our advertising revenue was up 9% for the quarter.

The mortgage business and home improvement categories have historically been important segments for Salem, and because of the nature of this current economic challenge, those sectors have been particularly hard it, and it has had an impact on our advertising revenues.

In addition, we have also experienced larger than normal cancellations from some of our block programming partners.

Most of these cancellations, based on our analysis, relate to unique circumstances.

But it does appear that the economic slowdown is having some effect on our ministry partners.

Efforts are underway to replace these programs and I am confident that we will be able to back fill much of this inventory in the third and fourth quarter of this year.

We've taken steps to release our cost structure, and this may be one of the most significant things that's taken place in the last several months.

At our corporate office, in the past year we've reduced annual payroll costs by $1.8 million through layoffs.

Additionally, through June, we've reduced our advertising and promotional expense by about $2.4 million from last year and we've eliminated many budgeted positions in local markets.

We've also reduced our spending on capital expenditures.

On a previous call, we had identified that we had expected to spend about $15 million on capital expenditures.

We now anticipate that spending for 2008 to be in the realm of about $12 million.

Our focus on prudent, achievable cost cutting will certainly continue and we think that we can make additional progress in those areas.

With that overview of some of the macro developments that are significant.

I will now turn the call over to Eric Halvorson who will zero in on some of the specific second quarter operating results.

Eric?

Thanks, Ed.

For the second quarter, our total revenue decreased by 2%.

This was comprised of a 5% decrease in net broadcast revenue and a 22% increase in non-broadcast revenue.

We have 42 of our stations programmed in our foundational Christian teaching and talk format, and these stations contributed 43% of our total revenue.

Our block programming revenue decreased 4% due to the cancellations that Ed discussed.

Block programming revenue accounted for 62% of the revenue on these stations.

Overall, net broadcast revenue for these stations was down 8% as advertising revenue decreased 19%.

We continue to see weakness in national spot advertising and continued softness in local spot, in a few key markets, most notably New York, Los Angeles, and Washington D.C.

Additionally, as Ed highlighted, the loss of revenue from the financial services and related categories has continued to contribute to this decline.

Revenue on our 12 contemporary Christian music stations decreased 10% for the quarter and contributed 20% of our total revenue.

Weakness in national spot business continued, with a decline of 28%.

Our flagship CCM station, KLTY in Dallas has been challenged trying to make up for a 46% short fall in national spot revenue, and by attempting to replace that business with local spot, which is up 6%.

We had a 1% decrease in same station revenue for our 26 news talk stations.

Overall, these stations contributed 13% of our total revenue.

In recent calls, we've been providing specific information about the performance of KRLA in Los Angeles.

And as you may recall, the revenue declines have been shrinking over the past few quarters.

In the second quarter of 2007, KRLA had an 18% decline in revenue followed by a 13% decline in the third quarter.

In the fourth quarter of last year, the decline was only 6% and that was followed by a similar 5% decline in Q1 of this year.

We continue to see improvement and KRLA delivered a 5% increase in revenue in the second quarter.

Ed briefly mentioned the performance at our recently launched Spanish language Christian teaching and talk stations.

Our five stations in this format generated revenue of over $400,000.

Approximately 80% of the revenue on these stations is derived from local block programming.

Our publishing and internet operations once again delivered strong growth.

For the quarter, non-broadcast revenue increased 22% to $7.5 million, or 13% of our total revenue.

Revenue from our internet business grew 34% while our publishing business grew 10%.

Our non-broadcast business generated operating income of $700,000 for the quarter as compared to operating income of $800,000 in the prior year.

The operating income of our non-broadcast business continues to be impacted by investments we are making in the form of increased advertising and the recent launch of our Town Hall magazine.

With that, I'll now turn the call over to Evan for additional discussion of second quarter results and our guidance for the third quarter of 2008.

Thanks, Eric.

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

I'll now briefly comment on our results.

Total revenue for the second quarter decreased 2% to $57.5 million and invested EBITDA decreased 9% to $14.7 million.

Net broadcast revenue decreased 5% to $49.9 million and station operating income decreased 9% to $18 million.

Non-broadcast revenue increased 22% to $7.5 million in our non-broadcast business.

Operating income decreased from $800,000 to $700,000.

On a same station basis, net broadcast revenue decreased 5% and SOI decreased 8%.

Same station block programming revenue declined 4% to $17.3 million.

Same station local advertising revenue was down 8% to $19.7 million.

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

Other revenue, which includes infomercials increased 5% on a same station basis to $4.2 million.

Our same station results include broadcast revenue from 83 of our radio stations in our network, representing about 97% of our net broadcast revenue.

As of June 30, we had net debt outstanding of $343.6 million.

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

Our credit facility leverage ratio was 5.99 versus a compliance covenant of 6.75 and our bond leverage ratio was 6.03 versus a compliance covenant of 7.

For the third quarter of 2008, we are projecting total revenue to decrease in the low single digit range over the third quarter of 2007, total revenue of $56.9 million.

And we're also projecting operating expenses before gain or loss on disposal of assets to be flat as compared to the third quarter of 2007 operating expenses of $46.6 million.

Now, this concludes our prepared remarks and we'd now like to open the call up for questions.

Operator?

(OPERATOR INSTRUCTIONS) Our first question comes from Bishop Cheen from Wachovia.

Thanks, Evan and Eric.

Thank you for (inaudible) question.

I want to focus on two things.

It looks like on the leverage ratio, they are more aligned than I've ever seen them on the technicals between the credit facilities and the bond.

And you've got three-quarters of a turn, roughly, in the credit facility with no step downs coming for, I think on your revised facility you moved the step downs in April now to right through March of '09.

Is that correct?

That's correct.

March of '09 we have the step down, Bishop.

Right, to a full term 5.75 times April 1?

Okay, so it appears that you have certainly more Christian (inaudible) and I wanted your thoughts about that, and how you can keep that Christian fare, so you have something (inaudible).

And secondly, I wanted your thoughts about a long form advertising, which we've seen in other media.

Far more than yours has, it's been certainly devastated TV so much that its gone to the Web.

And I was wondering if you can talk about anything you're seeing or feeling cannibalizing long form.

Bishop, let me start with your first question, which was why the bond leverage and the bank leverage ratios are closer than they have been in the past.

On June 30, we affected a reorganization from a tax legal entity perspective, whereby we folded in what was previously an unrestricted subsidiary under our indenture, back under Salem Holding Company.

So now those two numbers should stay pretty close in line going forward.

That makes it a little easier to track.

Correct.

How do you feel about the Christian you have?

Well, it's a challenge and we'll continue to deal with it, both in terms of focusing on improving adjusted EBITDA each quarter, of getting costs down as we have announced earlier that we're doing.

Generally improving efficiency, continuing to identify some assets that are non-strategic, or even if they're strategic, if their purpose will continue such as this WRFD situation, continue to spin off a few things to get to that point where we can hit it with a comfortable margin.

And that's our goal, and we're very focused on it, and we'll continue to report on that.

I think one of the things that, to be as candid as we can be, one of the things that you have to face as you go forward is that this economy has been about as opaque as any that we've seen.

So as we try to do our own internal analysis, looking at trends and looking at pacing, it just seems to be a little different because of the softness in the economy.

So that we have to be very conservative in our approach, but optimist -- we want to hope for the best, and we want to prepare for the worst, so to speak.

And it's difficult to project with great specificity what the fourth quarter and first quarter of next year will look like.

Got a pretty good handle on going forward on third quarter, but, Bishop, we're focused on it, but we want to get there with a reasonable cushion in mind, in place.

And long form, or infomercial?

We actually had an uptick in our infomercial revenue.

We haven't seen a whole lot of impact from things going to the internet, as far as we're concerned.

That business is also related to direct response that it's really, if they can get the response using our facilities, it's not a zero sum game, meaning that they'll then -- that they can't do both radio and internet.

They'll do both media.

They'll do TV too as long as they continue to get response at the rate they're paying, and so far we haven't seen that erosion.

Thank you.

Your next question comes from Jim Goss from The Barrington Research Company.

The New York Station you alluded to earlier, what was the cost of upgrading the signal from 5,000 to 50,000 watts?

And I presume it's mostly your own network programming, and therefore it could provide a good opportunity for fairly immediate payback, especially as once person from another company mentioned, the PPM made it easier to get something saleable quickly than waiting for a year to have a book to sell.

So I just wondered if you might comment on the dynamics a little bit more of that station.

Well, as I mentioned, we paid $2.7 million to acquire WAMD, which really downgraded, in effect, so that it would accommodate our increase.

And that asset is not particularly valuable.

The value was in the improvement we could make in 970 in New York.

In addition to that, the actual cost of the upgrade, I don't have the number.

Evan might have it.

I'm going to probably say, be probably $1.5 million involved in that project.

While it did not involve any -- we didn't have to erect any new towers, we did have to go through a complicated entitlement process and we did have to, of course, purchase 50 kilowatt transmitters are expensive.

It may not have been that high.

There was a lot of engineering, a lot of technical, a lot of legal expense involved.

So we can get you a more specific figure.

We got a budget on that.

I just didn't bring it with me, and I'll give that to you.

I'm going to guess not more than $1.5 million, but maybe something less than that.

We will utilize our own talent, and yes, it will help the bottom line in ways that would not otherwise be the case were it not the fact that the programming is available to us.

It guarantees access, number one, and number two, it doesn't really cost us anything to put it in.

We do give our national organization the inventory, but obviously you'll have lots of inventory when you start up.

So that really isn't a disadvantage and the improvement, the cost benefit of doing this will be manifest more at our national businesses level than it will be on the 970 operation in New York.

So my point being that the revenue that comes in can be monetized -- the inventory will be monetized more rapidly at the national level, perhaps than locally.

But it certainly will manifest itself both locally and nationally, and so in the future as you track this, be sure and ask us about how we're doing with national network revenue because that's where it'll begin to show up.

I mean, just to put one small bit of it in perspective, there is one particular program that we're offering in New York that we analyzed.

Just to make this one 3-hour program available should generate about $0.5 million a year for us, just simply by adding New York, which of course is the number one population center in the country.

By adding New York to that network, on the analysis we've done we think it's a $500,000 upside for one of the programs, just one of the programs.

And we will feature about four of our syndicated products.

Let's see, one, two, three, four, five, actually, five of our programs will be offered there starting with Bill Bennett's Morning in America.

Bill is a New Yorker, from New York.

Then we will have Mike Gallagher who was on WABC for several years before we acquired him.

And that will be followed by Dennis Prager who is fro Brooklyn originally, and has strong New York ties, is well known because of his extensive writings and publications.

His books on Judaism are some of the most widely utilized on that subject in the world.

And then followed by Michael Medved, and finally Hugh Hewitt.

So Medved has ties from Philadelphia.

He certainly is a Yale Law graduate and no stranger to that part of the country.

He speaks there frequently.

So our talent have high profiles there.

They have ties to the city.

We're quite optimistic that we're going to be able to exploit an opportunity that we've been looking at, that we've identified for a long time, but were not able to take advantage of because of the fact that the facility really wasn't ready.

Does the talent usually look at this as an opportunity to ask you for a better contract?

Or do they look at it as an opportunity for that much more visibility that, in turn, they can use in other ways?

Well, it's win-win for everybody.

The latter is more the case.

They're just all thrilled to -- folks that make a living talking on the radio and that's their gift, and that's their talent, and they enjoy it, and they love interacting and impacting people, and engaging ideas.

To be in New York, of course, is everybody's dream.

So to add New York is a very positive thing from their point of view, and they'll pick up additional endorsements.

They'll have a number of local advertisers that will walk them to voice spots, and so it's more the latter, but everybody will do better.

It's win-win for everybody.

By the way, I just pulled up this figure.

On the upgrade, it was $2.3 million to do the upgrade, complete the upgrade in addition to the investment we made in WAMD.

The one other issue I wanted to raise was block programming.

This is an unusual situation, I think, relative to your past experience and actually having declines for any reason.

And I was wondering if you might address that situation, how that might reverse itself, if there are any options you have to deal with that situation.

Well, as I commented when I reported on that decline, that we think that most of them are related to sort of unique circumstances.

There was, without getting into the specific organizations, because I don't think that would be appropriate for me, anybody that wants to can look at our program schedules at most of our stations and there's much continuity between market to market.

There's some, obviously, uniqueness in every city.

But the major national ministries are represented in most of our stations, and you can go on their websites and you can figure out what's going on.

In one case, for example, a ministry leader died.

This was a program, this was D.

James Kennedy and it was a program that was very topical and very focused on public policy.

It was primarily a TV ministry so that most of these programs, if they're viable exposition, frankly they have long shelf life long after the founder and featured speaker leaves the scene.

In this case, because it was so topical, and so current event driven, and more TV oriented than radio, it just didn't survive.

It really wasn't designed to survive.

We had a case where an organization relocated from the West Coast to the East Coast.

In the process, just much dislocation, getting reestablished, their backroom set up resulted in some dislocations for them that forced them to tighten their belt and cut back.

We think that's a temporary move as they get their situation stabilized.

We had another one where they changed vendors, backroom vendors in terms of accounting, which for these block program ministries is critical.

And if you don't know -- if you don't have your database under control so that you can mange your donor base and make sure that your correspondence is going out, you can have some dislocations.

We had that situation arise.

So it's been a number of things like that affecting maybe four or five key ministries that I think has driven a lot of it.

In terms of our ability to address it, in some cases we expect these ministries to recover and to expand again.

And in other cases, we'll find replacements.

One of the things that is nice about this format, it just takes a bit of time, is that there are always local opportunities.

We tend to gravitate toward the national because we generally -- their organization is more focused on the radio.

That's what they do.

That's their principal ministry and therefore the product, and the backroom, and the services they offer that are related to their radio program are stronger and have generally broader audience acceptance.

But there are many large organizations in these cities that are big enough that will want that time, and we're going after them, and we'll find them, and we'll replace them.

It's just that it's not something you can do necessarily in a week or two.

Sometimes you have to help them get their own programming launched.

And so those efforts are underway.

Well, and a lot of that work has to be done by the local GM to identify some of the likely candidates for adding local programs, and we've been involved since late last year in a pretty extensive training program for our GMs, in terms of helping to identify and nurture local talent.

But this may be a process that takes the entire year to anniversary, I'm gathering, because I think you discussed a lot of the same sort of issues in the first quarter.

Is that fair?

Well, some of them will be quickly replaced.

Some of them will take longer.

It varies market by market.

I don't think that it's necessarily a problem that will be solved very quickly.

Yes, some of it will linger on.

It's the nature of the block programming.

It's very resilient and it doesn't change very often for the negative, but when you try to turn it around for the positive it also takes time.

And once you get it launched, it generally is fairly stable.

Thank you.

(OPERATOR INSTRUCTIONS) There appears to be no questions at this time.

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

Thank you, operator, and we again appreciate all of you that joined the call.

We appreciate the questions.

We'll continue to be available if we can provide additional information and we'll look forward to visiting with you again with our next earnings report.

Thank you.

This concludes today's Salem Communications Second Quarter 2008 Earnings Conference Call.

You may now disconnect and have a great day.