Salem Media Group Inc (SALM) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Salem Communications fourth quarter 2009 earnings call. As a reminder, today's conference is being recorded. At this time, I would like to call over to Mr. Evan Masyr, Senior Vice President and Chief Financial Officer. Please go ahead.

Welcome and thank you for joining us today at Salem Communications' fourth quarter 2009 earnings call. As a reminder, if you get disconnected at any time, you can dial back in at 719-325-2249, or listen from our website at Salem.cc. I am joined today by our Chief Executive Officer, Edward Atsinger, and our Division President of Non-Broadcast Media, David Evans. We will begin in just a moment with our prepared remarks. 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 in our 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 Reg 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 Salem.cc. As part of the current report on Form 8-K and the earnings release issued by Salem earlier today. I would now like to turn the call over to Edward Atsinger, our CEO.

Thanks, Evan. And thank you for joining our fourth quarter 2009 earnings call. It has been about a year since we last hosted a conference call to discuss our results, and a great amount of activity has taken place since then that impacts Salem in a very material way. So before I turn the call over to Evan to get into the specifics of our fourth quarter results, I would like to give you an update on some of the key developments that have occurred since we last spoke. To say the least, 2009 was a challenging year for the radio industry, but Salem managed to accomplish quite a bit. While our revenues were down 10% for the year along with the trends in the economy, the industry was off 18% according to the Radio Advertising Bureau.

More importantly through careful cost controls our EBITDA was down only 2% versus the industry, which was down more than 30%. This outperformance underscores again the difference in our business model. First the resiliency of our block programming has always provided stability. This is what makes Salem unique, and it represents approximately 35% of our total revenue. Additionally 14% of our total revenue comes from non-broadcast sources, namely internet and publishing. As you will recall , we were facing the effective maturity of $321 million of debt in 2010. which would have begun March31st, with a $71 million maturity with our term loan B. With the mark as the credit mark, it is effectively shut down, and the risk of being unable to effectively refinance our debt becoming a growing concern.

Consequently we spent much of 2008 exploring every possible avenue that might lead to a realistic and cost effective debt restructuring. Most of those avenues for much of the year ultimately lead to a dead end. But as the capital markets began to fall and move closer to historical ranges, we began to focus our attention on the high yield market, and by late October those opportunities began to look quite attractive, and we moved very aggressively to take advantage of that opening. The net result was that on December 1st, 2009 we were successful in a $300 million offering of senior secured notes, with a coupon of 9.625% interest. Simultaneously in order to give us maximum flexibility, we secured a $30 million revolving line of credit at an interest rate of LIBOR plus 350 basis points. So with the successful restructuring of our debt, and we pushed maturities out for 7 years. It allows us once again to focus most of our energies on where they ought to be, namely running our businesses and continuing to systematically delever our balance sheet.

No one else in the radio industry, I think it is interesting to note has been able to duplicate our results in 2009, or has been able to refinance its debt structure, and that market is not nearly as attractive as it was, so our timing was very, very fortuitous. While this new capital structure does represent a sizable increase in our cost of capital compared to the very favorable bank deal that we were able to put together a few years ago, we gave ourselves the ability to delever during the 4-year non-call period using the optional 103 redemption provision. If you would like to take advantage of this redemption option in a manner that is consistent with our investment strategy. We intend to continue growing our non-broadcast businesses by making some modest investments, and we will talk about one here in a minute, and we will also be making investments in our radio properties, to enhance the existing properties, and if the situation is right, maybe occasionally in a way that is very accretive for us, look at some modest expansion.

One example is that on January 11th we launched a new morning show in New York on our New York talk station WNYM. Curtis Sliwa, founder of the Guardian Angels, who is a radio veteran and has been on the air for almost 20 years, and an icon in New York City began broadcasting for us, and entered into a multi-year agreement. It is beneficial to have a live, local morning show, and we are pleased to have Curtis Sliwa on our team. We are optimistic as his exposure on the station will lead to increasing ratings and revenue in the future, and we have already seen signs that that is happening. Additionally effective January 1st , we made some significant management changes to make us more responsive to this rapidly changing media environment. Our previous President of the Radio Division, Joe Davis, is now working to develop new national content for our Christian teaching and talk stations, and working with existing ministry partners to improve the yield from their media ministries.

I don't know anybody that is more qualified than Joe Davis to take on this role. He has a great resume in this area having been an Executive Director of the 501c3 organization himself before we hired him in the '80s to run our New York City stations, where he wrote the book on block programming in that market. In addition we promoted David Santrella to the President of our Radio Division. David will bring fresh perspective and a high level of creativity to this position. He was previously our Operational VP and General Manager in Chicago. We also promoted Allen Power to Senior Vice President, and have given him the oversight of our largest markets, New York, Chicago, and Los Angeles.

And finally we promoted three of our General Managers to Operational VP's Mike Moran, Russ Whitnah, and Brian Taylor. Our pattern is to allow these successful managers to continue to oversee their cluster, and take on additional markets, anywhere from three to four to five, depending on the challenges presented. This has been a successful structure for us in the past. And with this expansion we think that we are in a very strong position to resume building our businesses, now that we can focus on that and not have to look over our shoulder at the looming debt maturities.

You may have read recently in some of our trade journals that our sale of a standalone AM in Columbus, Ohio, WRFD, for $4 million will not occur. The buyer was willing, we were willing, but the buyer's ability to close on that acquisition required them to close on a pending real estate transaction, and apparently that did not take place, and that deal came apart. The transaction didn't happen and the buyer of WRFD subsequently walked away from the deal. Columbus is a consolidation opportunity, but frankly we looked at buying, the buyer that was going to buy our station, has a station that specializes in music in that market, and we were going to buy their station a few years ago, because we felt it was a great consolidation for us or for them. We weren't able to put it together at that time.

They then came and approached us about buying, and then because their resources didn't materialize with the sale of their real estate, they weren't able to close. We are not terribly disappointed, because it is a solid performer for us. We have owned that radio station since1982, and it has always been pretty consistent. And while it may have taken a slight dip as a result of the pending sale, although the format would have remained the same, it is still doing quite well, and we are happy it is in our core strategic area. It is just standalone. It probably would have been more effective if we could have consolidated it, liquidated it by consolidating with their station.

Finally, I would like to briefly mention our recent acquisition of HotAir.com. David Evans is with us, who runs our interactive and non-broadcast division, and he can comment more specifically during the Q&A period. HotAir.com, the most popular conservative blog on the internet was a good acquisition for us. We acquired Hot Air for $2 million, and it currently has approximately 20 million monthly page views. We believe that with our marketing platform, we can grow the number of page views and drive revenue, and build uniques. We are encouraged by the prospect of combining the number one conservative opinion and news site, with the number one conservative news and commentary blog site.

We generally feel good about our prospects. Our performance is stabilizing, as we continue to see smaller monthly revenue declines. Our radio revenues were down 3% in January, and February was down 2%. We are now able to focus on things other than capital structure, and we are optimistic about 2010. So with those comments, I will turn the call over to Evan Masyr, for a discussion of the specifics of our fourth quarter results and first quarter guidance. Evan?

Thank you, Ed. For the fourth quarter our total revenue decreased 8% to $50.8 million, recurring operating expenses decreased 7% to $40.1 million, and adjusted EBITDA increased 8% to $14.7 million. Net broadcast revenue decreased 9% to $43.3 million, and broadcast operating expenses decreased 10% to $26.2 million, which results in a decrease in our station operating income of 7% to $17.1 million. On a same station basis, net broadcast revenue decreased 9%, and SOI decreased 7%. These same station results include broadcast revenue from 91 of our radio stations and our network operations, which represents 99% of our net broadcast revenue.

I will briefly now give you some station numbers by format. We have 42 of our radio stations programmed in our foundational Christian teaching and talk format. These stations contributed 47% of our broadcast revenue. Same station revenue in this format was down 12% for the quarter, and block programming was down 6%. Revenue from our 11 contemporary Christian music stations decreased 12% for the quarter on a same station basis, and that format contributed 17% of our broadcast revenue. Our 24 news talk stations had a 3% decrease in revenue on a same station basis, and overall these stations represented 18% of our broadcast revenue. We operate 7 stations in our Spanish-Christian teaching and talk format. The revenues on these stations were down 4%. They represent 1% of our broadcast revenue.

Looking at our non-broadcast business, revenue on that side of our business dropped 2% for the quarter to $7.5 million, and now represents 15% of our total overall revenue. Our internet business revenue remained constant at $4.5 million, while our publishing business declined 5% to $3.0 million. Our non-broadcast business operating income decreased 1% to $1.3 million. As Ed mentioned, we refinanced our balance sheet in December. We now have two debt securities, a $30 million revolving credit facility and a $300 million of senior secured notes at 9.625% interest rate. As of December 31st 2009, we had net debt outstanding of $305.1 million.

We were in compliance with all of the covenants with our credit facility and our bond indenture. The credit facility leverage was 5.83 versus a compliance covenant of 7, and our bonds only require an incurrence based test. For the first quarter of 2010, we are projecting total revenue to decrease 1 to 3% over first quarter of 2009 total revenue of $48.7 million. We are also projecting operating expenses to increase 1 to 4% as compared to the first quarter of 2009 operating expenses of $39.7 million. This concludes our prepared remarks, and we would now like to open the call for questions. Operator?

Thank you very much. (Operator Instructions). We will pause for a moment to assemble our roster. We will take our first question from Stephen Weiss from Bank of America/Merrill Lynch.

Hi, Good afternoon.

Hi, Stephen.

A couple of questions. First, I just wanted to get a sense of what kind of sequential improvement you are seeing maybe in some of your revenue base, your block format. I know you mentioned down 6, and some of the general advertising trends that are happening away from block. And then I know on your recent road show you talked about some of the costs that you took out in '09 that you thought were not necessarily sustainable, that there may be some may creep back in this year. I guess maybe we are seeing some of that in 1Q. Can you just remind us what you expect to come back this year on the cost side, and at what point during the year do you think you will see EBITDA turn positive?

Let me start with the costs with respect to 2009. The costs that we took out, and what you are seeing with respect to that projected increase in expenses are a couple of things. Yes, there may be some creep back of some of the costs with respect to things like compensation that we scaled back in 2009. At some point we will get back into giving raises . So some costs may come back, but what you are really seeing there is a few things. First of all the roll-out of the Curtis Sliwa program in New York, and some marketing associated with that program, so you are seeing some increase in expenses there. Also as we are continuing to invest in our non-broadcast properties, there are some marketing and search engine optimization-type costs also in Q1, and that is driving most of the expense growth that you are seeing in the first quarter of 2010.

Okay. So away from those special items in 1Q, what should we anticipate core expense, employee costs, et cetera, for the year? Percentage wise?

I think you will see small increases throughout the year, pretty low single-digit-type expense increases during the year. Don't know exactly what it will be, or when we will start seeing some of those expenses come back, but it won't be that significant.

Okay. That is the 401k, mats, restoration, things like that?

Right, correct.

So then if that is the case, low single-digit expense growth presumably the revenue trend should continue to improve. You said January, that was a radio number you gave, the down 3 versus down 2 in February?

Correct. That is correct. We are seeing sequential improvement month-over-month as far as smaller declines than previous months.

Okay. So at some point all being equal, revenues should turn positive I would think, and then you would be in a position where I know the EBITDA year-over-year declines are pretty mitigated at this point, but at some point in the next couple of quarters that would slip?

Yes, we only give guidance one quarter at a time, partly because the visibility in the radio industry has been much less visibility than we have had in the past. So stay tuned on future quarters and earnings calls to see how that is trending.

Any notables to report in terms of kind of what I know we heard from you a few months ago on the bond deal, but anything notable with your block customers in terms of renewals or pricing?

There are a lot of positive developments in the block area. There has been a bit of a shuffle that we have been able to accommodate where we had a major account that got in trouble last year, that was able to get caught up completely, and then relaunch on our stations. That will be a positive impact. We have got several new block programmers that are emerging. Some right away at fairly large commitments. So I suspect we will see some, we are very optimistic about the block area. You are going to see solid growth. We don't give guidance on the year. I did say that I thought we would see, I certainly don't think there will be a decline in that department this year, let me put it that way. I suspect we will see some very modest growth there, but it will be growth.

Okay. That is helpful. And then I guess lastly, and I will get back in queue if need be, just remind us aside from your new pro forma interest and your CapEx, are there any other uses of cash in 2010 we should be reminded of, and if you intend to avail yourself of that special redemption provision you mentioned over the course of 2010?

Yes, as far as when you are thinking about free cash flow, the two pieces you mentioned interest and CapEx will be the two biggest changes 2009 versus 2010. There aren't necessarily any other material cash uses to think about. Obviously we have the Hot Air acquisition. As Ed alluded to, there may be unique radio opportunities, or other non-broadcast opportunities with respect to acquisitions that we will continue to evaluate. And as far as the 103 redemption, we certainly would like to use that. We are not in a position where we can commit or looking to call any of that, but certainly we negotiated that in the deal with the intention of wanting to use that to help delever this Company.

Okay. Thank you very much.

Thank you. (Operator Instructions). We will move on to Bishop Cheen with Wells Fargo.

Hi, everyone. Hi, Edward, David, Evan. It has been a year.

It has.

What a year. So the world does feel like a better place, certainly you have made your balance sheet a lot stronger, and removed all of that uncertainty so you can get back to focusing on your operations. Everything you said Edward makes sense, it usually does. What I am scratching my head about though is your Q1 guidance. I realize Wall Street tends to straight line everything up, or straight line everything down, but all of the comp feelings and the tribal drums seem to be signaling kind of a strong fee in Q1 from your first cousin, full commercial spot brethren, and I know you have a unique model, but it seems like your guidance is lacking what others are telling us. So if you can give us a little color on that, that would be helpful?

Well, I think that you have had a few people that have maybe whose voice has been amplified a little bit above what they ought to be. Miller Kaplan showed flat in January in our markets, the markets that we are in. So I don't know if there are that many that are saying up. We just want to be very cautious on this thing. I don't think as we said we only give quarter-to-quarter guidance because the visibility hasn't been real good. I tend to be an optimist. I hope for the best and try to plan for the worst.

I think in fairness it would be accurate to say that when you have the recoveries we will do well, but we may not move up as aggressively as some of the general market, some of our general market peers. But as you well know when it starts going down, we don't move down nearly as they do. There is the stability that is there, but it is a stability both ways. So we are optimistic though that it will get better, but the visibility and the guidance we want to give right now we think is prudent, and we think it is guidance that at this point I don't think we want to commit anything more, until we get a little more data. I think we will know a lot more when we do our next call. I think things will be a little bit clearer.

And I think the other thing to consider is our performance in 2009 was better than their comps are down significantly more than ours. So they have a weaker comp number to compare to than we do for 2010.

Yes, look, for those of us who have known you guys for well over a decade now, you are not known for overguiding. You are not known for having volatile spikes, even on the run up. Even when it was the go go, maybe you ran up less than the other go go guys, but you were steady and stable. So I wasn't trying to infer more into my question than it was, and certainly you gave a fair answer. So we will wait and see.

Yes, I think if you stay tuned I think the next quarter it will be a bit clearer. At this point two or three weeks of patterns are dangers to predict on, and we might see a good week, but I think we want to see a little more here, as we get into the period where some people think the recovery is fully set in and we are moving off those real bad comps, so that we are moving up. I think we are just a little reluctant at this point to go much beyond what we said, Bishop.

Okay. And I know that on your non-broadcasts which is still a teenage percentage of your revenue, say 14% or 15%, but growing, do you get a different feel off of that in the way that the non-broadcast side of the business is trying to respond to any stronger macro economy to recover?

Yes, in terms of our Internet advertising revenues, we returned to growth in January. We continue to see that growth in February, and the Internet side of the advertising picture from my perspective has turned earlier and stronger than radio.

Yes, that would sort of jive with what we are hearing as well. But again it depends on the assets. You have some assets that strategically seem to fit very well together.

Yes, our Internet business is driven by display advertising, as opposed to someone like Google, which is much more search advertising driven, and I think you obviously do see differing trends between search and display. I am not in a position to comment on the search marketplace. Our display advertising is niche focused, as opposed to general market focused. So I can really only comment on trends in the Christian conservative display appetizing arena. And as I said, they turned positive.

Right. And then just one last topic, let's go back and just revisit that unique provision for the special redemption in 2010. I don't have the indenture in front of me, but that is strictly a calendar 2010 timeframe, or does that go into 2011?

It is in each of the years that the bond are non-callable. I would have to look back to see how the dates are defined. I think it might be from mid-December, because that is the maturity date, is a December 15th date. So in any 12-month period, we can redeem up to 10%, or $30 million in principal at 103. So theoretically we could take out $30 million in the first year, $30 million in the second year, up to four years.

Okay. Right, so it is 30 per, let's say at the existing, for up to $30 million per year?

Correct, for the 4-year no-call period.

Right, for the non-call 4.

And there is flexibility, by the way. We have flexibility in each calendar year. We don't have to do it in one shot. We have two opportunities, so we can do it in installments if we like.

And they are at out, there are not like two dates, certain dates that they have to be. We can do two different calls within a 12-month period.

Right, two calls per 12, per any 12-month period.

That is correct. So it is 10%, the way the language is essentially is 10% of the issue in any of the four non-callable years, so essentially that is $30 million per year for four years.

Right.

And then they are callable on specified terms thereafter.

Right, this it is the usual bond market call?

That is correct.

Okay. Yes. So as you characterize it , that is your de levering strategy when and if you choose to use it.

That is correct.

Okay, Yes, so as you characterize it that is your delevering strategy, is when and if you choose to use it?

That is correct.

Okay. I think that we pretty well covered it. Maybe Stephen will pile on, and I will come back if I think of anything. Thanks, guys. It was good talking to you.

Good talking to you, Bishop.

Thank you. (Operator Instructions). We have a question with Andrew Finkelstein with Barclays Capital.

Hey, guys this is actually Mike Sanchez for Andrew. Just one question on your Christian teaching and talk format over the fourth quarter. I thought you guys said that it was down 12% in the quarter, and the block programming was down 6, does that sound right?

Yes, the entire format itself, so including spot on the Christian teaching and talk stations were down 12%. The block portion of it was down 6.

Right. So I guess I was wondering what happened in the rest of the format outside of the block program?

Advertising acted kind of similar to what the whole industry was seeing, high teens in the way of declines on the spot advertising side on that format.

You also have to remember that the comps were not good. The fourth quarter, you didn't have political last year, and you had political the prior year. So that exacerbated the revenue, that advertising revenue decline.

Do you know approximately how much political that you had for 4Q '08?

I would have to look at the split between the quarters, but we had somewhere between $1 million and $1.5 million in all of 2008, most of it being in the fourth quarter.

And do how your market sits on that, just the general market comparable?

On what, on political?

No, not on political, just for the general advertising?

Oh, you are talking about traditional radio advertising declines in general market, versus our decline?

Yes.

I don't have that number.

I don't have it.

We don't have it with us. I think the RAD would have some information on that. We could get it for you.

Thank you. That was it.

Okay. Thanks, Mike.

Thank you. (Operator Instructions). There are no further questions at this time. I would like to turn the conference back over to Mr. Atsinger for any additional or closing remarks.

I think that does it for us. We are glad to resume these calls, and we will look forward to one in three months when we report on Q1 2010, and I think things will be a little clearer, and we are looking forward to meeting with you then. So thank you, operator. Thank all of you for joining us.

Thank you very much. Ladies and gentlemen, that does conclude today's call.