Salem Media Group Inc (SALM) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Salem Communications fourth-quarter 2011 conference call. One note, that today's call is being recorded and now, I would like to turn the conference over to Evan Masyr, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Welcome and thank you for joining us today for Salem Communications fourth-quarter 2011 earnings call. As a reminder, if you get disconnected at any time, you can dial into 719.325.4746 or listen from our website at www.salem.cc. I am joined today by our Chief Executive Officer, Edward Atsinger; our President of our Radio Division, David Santrella; and our President of our Non-Broadcast Media and that's David Evans. We will begin in just a moment with our prepared remarks. And once we are done the conference call operator will come back online 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 at www.salem.cc 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 call over to Edward Atsinger.

Thanks, Evan and thanks to all of you for joining this conference call. As is our normal custom let me give you a summary and a broader view and then I will turn it back to Evan for more specifics on the performance of Q4 and the total year as well as some guidance for Q1, 2012. We will then entertain further questions, if you have them.

We had another solid quarter in terms of performance with total revenue increasing 6% over the prior year. This is even more significant, if you consider the fact that the radio industry overall was down 4% for Q4 according to Miller/Kaplan. If you take a look at the whole year, we also compared quite favorably into the rest of the industry. Our total revenue was up 6% while according to Miller/Kaplan, the industry was down almost 1%.

Our growth in the fourth quarter was comprised of a 3% increase in broadcast revenue, a 3% decline in our publishing revenue and a 37% increase in Internet revenue. If you break the broadcast piece down further by format, our Christian teaching talk at contemporary Christian music stations and news talk stations and Spanish language Christian teaching talk stations, you will find that we beat the industry on all of these formats. Christian teaching talk increased -- let me mention first our adjusted EBITDA. Adjusted EBITDA grew 4% for the quarter to $15.1 million and we ended the year with adjusted EBITDA being up 2% to $53.7 million. The 3% increase in broadcast revenue can be broken down a little bit further, and the significance can be underscored a little bit further. If you take political revenue out of 2011 last year, and take it also out of 2010 which was a political year, and make it neutral, our broadcast revenues were actually up 5% for 2011. Again, I think it shows the strength of this 2011 year for us.

As already mentioned, our Internet revenue was up 37%. Let me provide some additional detail on this business. Our national Christian websites were up 45%, our national conservative opinion websites were up 17%, and revenue from local radio station websites was up 20%. I think more impressive, at least for us, is 97% growth in operating income from this division from $1.4 million last year to $2.7 million, $1.4 million in 2010 to $2.7 million last year 2011. We continue to be excited about the long-term growth prospects, remain bullish for this segment of our business.

Let's take a look at our recent acquisitions and asset sales activity. On December 21, we finally closed on the acquisition of KTEK-AM in Houston, Texas. Some of you will recall that we sold the station in March of 2008 for $6.25 million in cash with $1.5 million promissory note. We re-acquired the assets of KTEK-AM for $1 million in cash plus forgiveness of the outstanding balance on the note which, because of accrued interest, was about $1.5 million. Additionally, we closed on the acquisition of KTNO-AM in Dallas, Texas along with a 250-watt FM translator which has very good coverage of Dallas proper for $2.2 million on January 13. And then some of you may have also noticed a very small blurb in the trade press, we acquired WKDL-AM in Warrenton, Virginia for $30,000. This was actually a bit of an extension of an earlier transaction with this licensee in which we paid them to modify their operating pattern to accommodate a power increase for our WWRC-AM station in Washington DC. This acquisition will probably facilitate further improvement of that signal but at the same time there were some attractive assets associated with this station in terms of equipment that we wanted to acquire so it was a nice little tuck-in deal for us.

With respect to dispositions on January 5, we entered into an agreement to sell WBZS-AM Pawtucket, Rhode Island, for $750,000 that's the station that we operate in connection with our Boston cluster. Additionally, we mentioned on our last call that one of our businesses, Samaritan fundraising, faced some operational challenges. It was a small acquisition, less than $0.5 million invested, and we were concerned that it was becoming more of a distraction than it was worth so we made the decision, after further analysis, to close that business down, and on December 31, 2011, we closed that business down. Our results have been adjusted to reflect Samaritan as a discontinued operation.

Before I turn the call back to Evan, let me comment briefly about our announcement earlier today about the initiation of quarterly dividend of $0.035 per share. Based on our current stock price, this dividend represents a yield of approximately 5%. As we have continued in our delevering process, we believe that we are at a point where we can prudently return a portion of our free cash flow to our shareholders. This recurring dividend -- quarterly dividend demonstrates our confidence in the resilience of our business model and frankly our ability to maintain strong free cash flow. We truly appreciate the partnership with our shareholders and it's good to be able to start repaying, in addition to what we have done, a cash dividend to them on a consistent basis.

It's also worth discussing and focusing a bit on our free cash flow and we've felt for some time that our equity was undervalued. In 2011 for example, we generated $53.7 million of adjusted EBITDA. Deducting capital expenditures, cash interest and cash taxes, our free cash flow for the year was $19.9 million, so right around $20 million or $0.81 per share. Based on our closing stock price today, $2.68, do the calculation this represents a free cash flow yield of 30%. When you consider this very high free cash flow yield and the fact that our stock is trading two and a half turns below industry average, EBITDA multiple, you can understand why we continue to believe our equity is undervalued.

To some extent we probably bear some responsibility for this in that we have focused intensely since 2008, 2009 on building our business and shoring up our balance sheet and haven't had the opportunity to get out and to talk to the investment community as much as we would have liked. We are going to change that, we mentioned on our last call that we intended to be more proactive in discussing our stock with investors. Since that last call we presented at the LD Micro Conference in December. We will be speaking at the Roth Capital Partners conference next week. Additionally, we have a non-[deal] roadshow scheduled in New York, Boston, and Chicago during the week of March 19. And we'll be reminding the financial community of Salem's investment opportunity. With that, let me turn the call over to Evan for a more detailed discussion of our fourth-quarter results and guidance for Q1.

Thank you, Ed. For the fourth quarter, our total revenue increased 6% to $57.1 million. Operating expenses on a recurring basis increased 6% to $46 million, and adjusted EBITDA increased 4% to $15.1 million. Net broadcast revenue increased 3% to $45.8 million and broadcast operating expenses increased 7% to $29.4 million, resulting in a 4% decline or $16.4 million of station operating income. On a same-station basis, our net broadcast revenue increased 3%, and SOI decreased 3%. The same station results include broadcast revenue from 89 of our radio stations and our network operations representing 99% of our net broadcast revenue.

I will now briefly review our performance by format. We have 39 of our radio stations programmed in our foundational Christian teaching and talk format and these stations contributed 37% of our total revenue. Revenue on this format increased 3% for the quarter. Revenue from our 11 contemporary Christian music stations increased 11% for the quarter, and they contributed 18% of our total revenue. Our 24 news talk stations had a 1% decrease in revenue for the quarter, and these stations contributed 13% of our total revenue. Revenue from our Internet businesses increased 37% to $8.1 million. Our Internet revenue is now 14% of our total revenue. Internet operating income increased 97% to $2.7 million. Our publishing revenue decreased 3% to $3.1 million and represents 5% of our total revenue. Our publishing operating income decreased to $0.2 million.

In December we redeemed $12.5 million of our nine and five eighths senior secured second lien notes due in 2016, for $12.9 million or the price equal to 103% of the face value. So at December 31, we had $235 million of nine and five eighths notes, $9 million of subordinated debt payable to related parties and we had $31 million drawn on our bank revolver. We were in compliance with the covenants of our credit facility and bond indenture. The credit facility ratio was 5.13 versus a compliance covenant of 6.5.

For the first quarter of 2012, Salem is projecting total revenue to increase 4% to 6% over the first quarter of 2011, total revenue of $51.2 million. Salem is also projecting operating expenses to increase 3% to 6% as compared to the first quarter of 2011 operating expenses of $43.8 million. The midpoint of those projections would yield a 5% increase in EBITDA and would put our leverage ratio just under five times. That would be the first time that our leverage ratio has been under five since 2005. Now, this concludes our prepared remarks and we would now like to answer any questions that anyone may have. Operator?

Thank you.

(Operator Instructions)

We will go first to Anil Gupta with Imperial Capital.

Hi, guys, good afternoon and thanks for taking the questions. I have a few for you. First, your leverage ratio like you said, Evan, it's right around five times. You previously mentioned you want to get leverage down to roughly four. Just wanted to see if that's still a target for you? Do you see the Company continuing to redeem debt in the coming quarters and just get your philosophy on where you see your leverage going over the next year or two?

Yes, our goal is still to be at or under four times leverage and the goal that we set for ourselves is December 1 of 2015, basically one year before the bonds are due. It's still a target and it's still something we believe that we will be able to hit and we will continue to redeem our bonds as necessary to hit that goal.

And then for the balance of this year you, guys, have $17.5 remaining is that right?

This year we actually have $30 million, right? We have a June redemption and a December and redemption.

That's right. Sorry about that. And then moving over to politics, can you talk a little about any primary money you guys saw in the fourth quarter? Any color you can provide on, what's happening right now in the first quarter? And then just year political ad dollar outlook for the balance of '12?

We certainly saw some political revenue in fourth quarter. It was pretty robust, actually. But without being able to get particularly definitive, we are all fairly confident that we we're going to have a very good year from politics. It should be -- I mean 2010 was a very good year, it should be as good as 2010 and maybe better.

We would suspect that we will get a good amount of money from candidates well as PACs and Super PACs.

There is more money out there this time than we have seen in any previous cycle with the Super PAC money and we've gotten a good bit of that in the fourth quarter so I suspect it will be certainly as good as it was in 2010 and I think would be fair in estimating that. I mean, we could be wrong but I think would be fair in estimating that and very likely will be better.

Okay. Thanks. Looking at your Internet business, if my math is right, your margins were around 33% on the Internet operating income this quarter. A significant increase from both fourth quarter last year and third quarter of '11. I wanted to get your thoughts, in terms of a normalized margin for this business, do you think 4Q is pretty representative of what this should be going forward now that your acquisitions are kind of fully anniversaried in, or just kind of some thoughts on that business' profitability?

I think Q4 is a good indicator of how things may progress on a forward-looking basis. There is some seasonality. Q4 is certainly a stronger quarter than any other quarter. Thanksgiving and Christmas definitely drive those numbers. So I think that operating margin percentage on a full-year basis is going to be lower than that but there is a beauty to operating leverage.

You know, Evan remarked that we had about 37% revenue growth in our Internet business and 97% operating income growth. You can back into the operating expense growth and I think it's just over 30%. So, it's amazing how a relatively small difference between the revenue growth in expense growth really drives the bottom line, and we like that a lot.

Okay. Thank you. The last question I had on the dividend you obviously exciting news for you guys. I think everybody will be pretty happy. At $0.035, just curious if you could talk a little bit about how you got to that number. What level are you comfortable with? Or, I guess a better question is how do you arrive at $0.035 and do you have any plans going forward as how often you are going to revisit your dividend policy?

The Board had deliberated and made that decision at our Board meeting yesterday. They looked at the free cash flow, we mentioned that in 2011 we had right at $20 million of free cash flow. We were able to take the bond indebtedness down by $35 million last year and our total indebtedness by $30 million, so we had done some significant delevering. We can probably accelerate that in a number of ways with the improving leverage situation, strengthen balance sheet.

We will continue to take it down but we would expect the free cash flow with this delevering. The free cash flow, if nothing else happens, will increase in proportion to the amount of delevering, which was substantial. So, we would the expect free cash flow to grow if everything else remains the same. And with the political year, we would expect that it will. But of course, it's a forward-looking statement, but we would expect that it would.

So with increased free cash flow, I think the Board will look at the dividend and this is going to be a permanent recurring dividend, to the extent that dividends are permanent. And we will review the free cash flow situation. I think the Board will look at it and as a function they certainly will review it annually. They have discussed that, and it will be an annual review, and as a function of free cash flow I think they will then make a decision on what they want to do in terms of looking at increasing the dividend, or maintaining it, or whatever action they take.

But with the free cash flow moving in a positive direction, and it's much easier now your options and flexibility are so much better with the leverage where it is today, with the amount of the major bond. We have taken out $65 million of those bonds and to the extent that we have replaced it with other debt -- our bank debt is 300 basis points above LIBOR.

And as another interesting data point our total debt of $275 million has not been that low since June 2000. And at that point, we had EBITDA of about half of where we are now. So we are feeling a little bit more comfortable about our position, the Board is feeling more comfortable about it, and still looking at how we get to that stated goal of 4, and we believe we are able to include dividends into that mix of use for free cash flow.

Thank you.

Next, we will move on to Bishop Cheen with Wells Fargo.

Hi, everyone. Thank you for the detailed summary. A couple of questions. Let me just start with the redemption. So, you have two more redemptions coming June and December and that would total 30 and would that close out the full capacity for redemption?

We actually have the ability to do $30 million of redemptions in 2012 and $30 million of redemptions in 2013 at which point, December 1 of 2013, the rest of the bonds become callable at six months interest, basically $104.8. So, we actually have two more years worth of redemptions available to use at our discretion.

Right. You guys are like a Swiss train. We can always count on you to do that. Let me hop around, I just want to go back to something said at the beginning when you are talking about Salem versus the industry. Salem all in did, whatever, 6 something-percent of growth in Q4, and I think you said the industry was at plus 4% for Q4? Was that right, Edward?

No, the industry was actually a negative for Q4. It was a minus 4%, if you use Miller/Kaplan numbers.

Right. So that where --

And for the whole year, I think it was minus 0.5% or minus 0.6%, something like that.

Right. I just want to -- apples to apples, same stations, Salem broadcast is plus 3% for Q4, I believe and versus the industry --. (multiple speakers)

But virtually all of our industry peers report their digital income, as well, and a lot of them have substantial investments in those areas. All of the radio now is -- digital is an increasing part of their income stream. So, we think we were pretty much apples to apples in that regard. We have been a little more aggressive (multiple speakers).

The only difference would be your publishing.

In the publishing is a relatively small piece, and that was negative. That was actually down so ---.

That was down.

Yes. That did not help us. If we take the publishing out, we would be up even more.

I am on the same page with you now. I understand. Okay. And then moving to just one thing the 10-K, when do you think that will be filed?

We expect to get that on file tomorrow.

Okay. And then, because I know you give us the weighted average shares, but do you have handy the total shares the dividend is going to be paid on?

Yes. Bear with me one second. In the 8-K that was filed, but let me see me if I have --

If it was in the 8-K, I missed it. I know it said all A and B shares.

I think in the front part of the 8-K, it listed how many A's and B's that we have, but I will tell you in one second. The number of A shares is $18,735,555 and the B shares are $5,553,696.

Okay. Very digital. All right. And then, just to make sure I understood, you were doing a typical, a good analyst view, where you said if we took the midpoint of our guidance, that implies roughly a 5% EBITDA gain in the current Q1.

Correct.

And that would, on a LTM basis, would be tickling right around five times the covenant leverage for total leverage on the covenant definition, correct?

That's correct.

And then last, political. As good as 2010. Would you just remind us again what 2010 political was?

2010 political was $3.7 million.

Great. Hey. Thanks, everyone.

Thank you.

(Operator Instructions)

We will move on to Conrad Chen with Crescent Capital.

Hey. Good afternoon, guys. Just a couple quick questions. One, on the Internet side, I think this is the first quarter we have seen some pretty substantial contribution from this. I know it has been growing over the pace of the year, but I was a little surprised how strong it was. Just curious if you could give us some more color as to what is driving that? Is it ads sales on your sites, or is it something else driven in the business model that is really driving the topline growth?

If you look at each of the elements, the local radio station website revenue, which was up about 20% is almost entirely advertising driven. It is all organic. The national conservative opinion websites that were up also strong double digits, that's all advertising revenue.

The national Christian websites, which were up about 45%, two-thirds of that 45% relate to the acquisition of WorshipHouse Media, which is an e-commerce Business that we acquired last April. So, that business I think contributed about $1 million in revenue in the fourth quarter. It was zero of the year-earlier period, because we did not own that business at the time. The other third of that increase was all advertising revenue on our Christian websites, so it was about 15% organic growth on our Christian websites, and the other 30% was the e-commerce acquisition of WorshipHouse Media. Yes.

Okay. Got it. And then, you mentioned the EBITDA guidance for Q1. I was just wondering if you could maybe give some detail as to the breakdown of that between the Internet and the Broadcasting side? Maybe talk about like Broadcasting revenue and operating expense growth for Q1?

We don't necessarily provide guidance at that detailed level. I can tell you that we expect income on both sides of the business to be growing in the first quarter of 2012.

Okay. That's what I was looking for. Okay. Great. Thank you, guys.

Thank you.

We will move on to Brad Nelson, Private Investor.

Hi, guys. Had a nice quarter. I'm relatively new to your Company, so bear with me. I just have a few questions, actually. Do you have any specific goals for 2012, and I know this has been mentioned before, but on you're deleveraging or on rebalancing the debt towards a lower interest rate, I know you are now paying out the dividend, so I guess that would eat into some your capability, but do you have any specific goals?

With respect to our debt, our goal first of all is to keep driving our leverage lower, so it ended December of 2011 at $5.13 million. We would like to continue to see that go down. Unfortunately the bonds are not callable, and they are trading at $110.5 which is a yield, to call it, at 6%. So, to go ahead and try to tender for those would be cost prohibitive, but once we get to December of 2013, that's one a potential refi event would be available to us.

Great. And just finally, could you explain to me what your -- a normalized tax rate might be? I know it was, obviously, this quarter was heavy, and I guess I saw maybe 2010 where you paid a little over 50% and this year overall it was around 50%. Is that your normal rate?

The way I look at our taxes and the way, Brad, I would recommend you to look at it as well, is you really look at our cash taxes. That's the provision which takes into account a lot of different issues. Our cash taxes this past year were probably were under $0.5 million and they have been routinely down in that level. We don't foresee ourselves becoming a cash tax payer for at least another seven to nine years. So, that's where I focus my attention, is on the cash taxes and far less on the provision.

Thank you for that explanation and also a thanks for the dividend. I appreciate that.

You're welcome. Thank you.

(Operator Instructions)

Gentlemen, there are no further questions at this time.

All right. Well, thanks again --

I'm sorry we do have a follow-up from Bishop.

I'm sorry. I meant to ask this before. The total debt outstanding at year-end was $275 million. Correct?

Correct.

Includes long term and current debt?

That includes what I consider -- it excludes capital leases. It's our what I consider kind of the real debt. So, it's our line of credit.

So your capital lease is, and correct me if I'm wrong, is usually around $1 million?

Correct.

Okay. So $275 million and if care to include that, it's $276 million.

Correct.

Okay. Close enough for government work. Thank you. (laughter)

Thanks, Bishop.

I will turn the conference back over to you.

All right. Thank you all for joining us. If there's no further questions, we will sign off and look forward to chatting with you again in about three months.

Ladies and gentlemen, this does conclude today's conference. Thank you for joining.