Salem Media Group Inc (SALM) 2012 Q1 法說會逐字稿

Hello, and welcome to the Salem Communications' First Quarter 2012 Earnings Conference. Today's call is being recorded. At this time, I would like to turn things over to Mr. Evan Masyr, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Welcome and thank you for joining us today for Salem Communications' first quarter 2012 earnings call. As a reminder, if you get disconnected at any time, you can dial into our area code 719-325-2289 or listen from our website at www.salem.cc. I am joined today by our Chief Executive Officer, Edward Atsinger; our President of Radio, David Santrella, and our 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 Salem's reports on Form's 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 disclosures 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.

Thanks, Evan. And thanks to all of you for joining us for our first quarter 2012 conference call. As is our normal practice, I will begin the call with some comments related to first quarter performance and then comment on a few other developments.

We had another good quarter, beating the industry in top line revenue performance. Our total revenue was up 6%, while the industry's was just barely up according to Miller/Kaplan. Political revenue contributed to this growth with $900,000 in political revenue this quarter this year compared to $400,000 last year.

Our total revenue growth breaks down like this. Broadcast revenue was up 3%, publishing revenue was up 2% and Internet revenue was up 33%. Four of our five core formats grew revenue during the quarter with the exception that our News Talk formatted stations declined just a bit. Our fastest-growing format was our Spanish language Christian Teaching and Talk programming, which was up 22%. This still represents one of the smaller segments of our business however. Evan will review growth by format in more detail in his segment of the call.

We did see some softness in local spot and that revenue declined 3%. From reading various industry reports, it appears as though our peers experienced similar challenges. This softness has continued for us and for the industry into April. And while May and June are pacing better, because of April's softness, and the consistent lack of visibility, we have -- it has impacted our second quarter guidance, which was included in our press release earlier today, and Evan will comment further on it in a moment.

As I mentioned earlier, our Internet revenue was up 33% for the quarter and it continues to provide significant growth for Salem. Internet revenue grew from $5.6 million to $7.4 million and our Internet operating income increased 95% from $800,000 to $1.5 million. This growth is driven by a combination of organic growth from our existing Christian and conservative websites and our acquisition of WorshipHouse Media. Approximately 25% of this growth was from WorshipHouse Media and about 75% was from organic growth of our existing web properties. That is a nice balance and shows good progress in both fronts.

This organic growth of our Christian and conservative web properties is due to an increase in unique visitors and page views and in improvement in our RPM. Analyzing this growth further by segment, our national Christian websites were up 45%, our national conservative websites were up 34%, while our local radio station websites saw a growth of 67%, which is consistent with our multi-platform convergence strategy.

Let's consider EBITDA, EBITDA performance. While our revenue grew 6%, our expenses also grew 6%, which resulted in an EBITDA growth of 3%. I think it might be helpful to provide little detail on the expense side as the economy has improved for us and with our balance sheet stronger and an increase in our free cash flow. We determined the middle of last year that it was a good time to make some investment in certain areas of our business.

One of the most important areas was in personnel, specifically we created five new positions, which are already beginning to bear fruit. They were done beginning in July of last year and ending -- the last hire was in February of this year. We are fortunate to hire Phil Boyce as Vice President of Spoken Word programming. Phil is well known in the industry. He served for 14 years as Program Director of WABC overseeing all of their talk formats. He is well respected in the industry and we were fortunate to hire him.

We hired Darrel Goodin to oversee and grow our Business Talk platform, which we now offer on 10 of our stations and some of our websites. Darrel has a background in broadcasting and is well suited for this position. We hired Rodney Whitaker who has a strong resume in radio station web monetization, to be responsible and to provide leadership for those important assets.

We created a new position, Senior Vice President of Church Relations to expand our outreach to the Church community, both by impacting its leadership and the congregations in those large and smaller Churches in the communities that we serve. Marketing and promoting to this segment is very important for us. These communities make up a big part of the audience that we serve. Finally, we promoted Tony Calatayud to Director of Salem Espanol, which is our Christian Teaching and Talk in Spanish formatted stations. Tony will bring a more intensive leadership to this growing segment of our business.

As always, we don't want to lose sight of the long-term growth goals of Salem while we attend to the quarterly demands and these investments will help us to build long-term value for shareholders. I am confident these investments will produce good solid results and they are already beginning to.

Before I turn the call back to Evan, I would like to share with you some of the things that we discussed and were of interest to investors that we met over the last several weeks. We've been out and we've talked to a number of groups and investors, individual investors. One of the main areas of discussion has been our free cash flow.

Last year, we generated $19.9 million of free cash flow. We are quite confident we can improve on that in 2012. First, as a result of our 2011 deleveraging, we expect to see a reduction in cash, cash interest of approximately $2 million. Second, 2012 being the political year, just based upon our most recent experience, including our historical experience, longer historical experience, but particularly based on 2008, 2010 history.

It's reasonable to expect an additional $2 million or so of political revenue over last year. These two items alone would yield a nice increase in our free cash flow and would provide enough free cash flow to bring it up to about $1 per share based upon our current stock price of around $5.50 or so. This would have been attracted 18% free cash flow yield. It's also worth mentioning the opportunity that should present itself in about 20 months.

Our 9.625% bonds are callable starting December 15, 2013. Assuming that markets stay relatively stable and we continue reducing our overall debt, our leverage ratio will be at a point where we should be able to successfully refinance our debt at significantly lower interest rates. This will result in a substantial increase in free cash flow post refinancing. Compared to the prior year, our total debt decreased, by the way, from $289 million to $271.3 million and our leverage ratio decreased from 5.55 in March 2011 to 5.02 in March of 2012. On May 1, we gave the required notice to redeem an additional $17.5 million of our 9.625% bonds for June 1 redemption date.

Finally, there has been quite a bit of interest in our recently launched regular dividend and questions about plans that may be in place to increase it. Our Board of Directors has indicated they will review the dividend amount on an annual basis and will view it largely the dividend in terms of a function of free cash flow. So accordingly, continue delevering and successful refinancing should position the Company to consider healthy dividend increases in coming years.

With that, I will turn the call over to Evan for a more detailed discussion of first quarter results and for guidance for second quarter.

Thank you, Ed. For the first quarter, our total revenue increased 6% to $54.3 million, operating expenses on a recurring basis increased 6% to $46.5 million and adjusted EBITDA increased 3% to $11.7 million. Even excluding the political revenue outlined earlier by Ed, our revenue growth was 5%, well ahead of the industry. Net broadcast revenue increased 3% to $44 million and broadcast operating expenses increased 5% to $29.1 million, resulting in $14.8 million or a 1% decline in station operating Income. This decline in SOI is largely due to increased salaries, marketing expenses and programming and production costs.

On a same-station basis, net broadcast revenue increased 3%, while SOI increased 1%. These same-station results include broadcast revenue from 91 of our radio stations and our network operations, representing 99% of our net broadcast revenue.

Let's review our revenue by format. 39 of our radio stations are programmed in our foundational Christian Teaching and Talk format and these stations contributed 38% of total revenue. Block programming increased 6% and total revenue on this format increased 3% for the quarter. Revenue from our 11 contemporary Christian music stations increased 3% for the quarter and contributed 17% of total revenue.

Our 24 News Talk stations had a decrease of less than 1% for the quarter and overall these stations contributed 13% of our total revenue. We now have six stations programmed in Spanish-language Christian Teaching and Talk. Revenue for the quarter on these stations was up 22% and this format now comprises 2% of our total revenue. We also have 10 stations in a Business Talk format and revenue from these stations was up 3%. This format also contributed 2% of our total revenue.

Our network revenue increased 11% for the quarter and represents 7% of our total revenue. Publishing revenue increased 2% to $2.9 million and represents 5% of our total revenue. Revenue from our Internet businesses increased 33% to $7.4 million and it now represents 14% of our total revenue. As Ed mentioned just a moment ago, that we recently gave notice to our administrative agent that on June 1 we'll be redeeming another $17.5 million of our 9.625% senior secured second lien notes at a price of 103%. With this redemption, our total bond debt will be reduced to $217.5 million. Some of the money used for this redemption will come from a $10 million loan that was committed by another financial institution. This two-year fully amortizable loan will be behind the bank and bond debt and will carry an interest rate of Prime plus 1%.

We estimate that we will save approximately $750,000 in interest over the two-year period with this loan. We continue to be aggressive in our deleveraging efforts and our hope is to redeem more of our bond debt at our next opportunity in December, but we will know more as we get closer. As of March 31, 2012, we had $235 million of 9.625% senior secured second lien notes and $36.3 million drawn on our bank revolver.

During the quarter, we completely repaid the $9 million in loans due to our two Founders. The total debt of $271.3 million represents the lowest debt level we've had since June of 2000. We were in compliance with the covenants of our credit facility and bond indenture and our credit facility leverage ratio was 5.02 compared to a compliance covenant of 6.25.

And for the second quarter of 2012, we are projecting total revenue to increase 1% to 3% over the first quarter of 2011 total revenue of $55.4 million. We are also projecting operating expenses to increase 2% to 5% as compared to the second quarter of 2011 operating expenses of $45.4 million.

And this concludes our prepared remarks. Now we would like to answer any questions. Operator?

(Operator Instructions) Anil Gupta , Imperial Capital.

Yes, thanks. Just two quick questions for you. One, you suggested about $3.7 million of political revenue, which is a $2 million increase of last year's levels. That would indicate kind of flat levels versus the 2010 political season for you guys. I was wondering, at this point, since we're only in May and there is still many months ahead for political revenue to come in. Do you feel that's more of a floor or is that kind of what you think you're going to generate in the year? Just kind of wanted to get a better grasp as to how big that opportunity is for you?

It's a conservative figure. We're confident of that level. I'd view it more as a floor than a ceiling. But I think we have to approach it cautiously. With political, you never know, but based upon history of dozen years or so, it's right there. I mean it's below, certainly below what we did in 2010. So I think your comment about a floor is probably a more accurate description.

Okay, thanks. And then, could you comment at all just on what you are seeing in 2Q so far in terms of the market and kind of where you are seeing the business pace May, June? Is there's any sort of bookings or pacings you could provide commentary on? And the reason I ask is because it seems like -- at least what I was looking for your guidance a little bit late on 2Q. I just wanted to get a little bit more color on what you're seeing out there?

Well, April was soft and May and June are pacing better. So, I think, again, we want to be conservative. I think the economy generally seems to have slowed a little bit at least from our vantage point.

One fact that's impacting our numbers in April, that's perhaps a little different than elsewhere in the industry is last year in April, there were a couple of pretty good family movies, one specifically in the Christian area [sold so far]. So that was a very nice source of revenue for us in April 2011. In comparison, April 2012 is very little in terms of family movie business. So that is definitely a fact that impacted April that we don't expect to continue in May and June.

Okay. Thanks. And then, just a point of clarification. Ed, you mentioned the Board will look at the dividend every year. Is it fair to assume that the -- I don't know, I guess, the announcements on the dividend is going to be on the anniversary of when you guys announced it. Is it a -- just trying to get a sense as the timing on an annual basis?

Yes, I think so. I think that they will review it again. So we did this in the first quarter in March, I think, in the March meeting. And I think it'll be on the agenda to review it after four quarters of the current dividend. And I think it will be, as I said, the review will largely depend upon where free cash flow is. I think this represented -- this dividend represented somewhere between 15% and 17% of our free cash flow.

If they stick with that same percentage, and I can't put words in the Board's mouth, but if they stick with that same percentage with an increased free cash flow, I mean that would argue that you could increase it somewhat. If they, I would say, want to raise the percentage, depends upon how we want to use capital, but the Board, that's one of -- usually one of the more engaged discussions that they will have as we weigh the factors between continue delevering, which is still a very high priority as you can tell from the actions we've taken and this most recent move to take out another $17.5 million of those bonds. So delevering is still very important, we want to able to delever, we want to be able to maintain or increase the dividend. We want to be able to have some dry powder for investment in the Company to grow the business both through internal growth and through acquisitions.

Great. And then last question, Evan. Could you just talk a little bit about the logistics with the $10 million loan you are getting in terms of when it is being funded and I was kind of in and out. But I think you said that you'll redeem the notes on June 1. Is that right?

Correct. We'll redeem the notes on June 1. Our current plans are to have that loan fund May 31. It's a two-year fully amortizable loan. So we'll be paying back $1.250 million a quarter. But we'll get the benefit of the reduced interest upfront.

Great, thank you.

Sure.

Bishop Cheen, Wells Fargo.

Hi, everyone. Thanks for all the update. So let me go back to the loan funds that you were talking about in June of this year, in a couple of months. Balance sheet for dummies, tell me again why you're bringing in the Prime plus 1% loan fund?

So we're going to be borrowing money from this bank at 4.25%. We're going to take that money and redeem our bond debt that's at 9.625%.

Right. So but you're going to do that this year?

Correct. We're going to do it this June 1.

Well, what we have -- Bishop, I mean, we've discussed this on prior calls, when we did current bond indebtedness, we negotiated the right to retire $30 million a year of that bond indebtedness at a slight premium, 103% premium, during the four year no call period. These are seven-year bonds. We are now in the third year. We redeemed -- we've redeemed $65 million of them so far by taking advantage of this 103% redemption provision. So we are simply acting upon that and the earliest date that we can take any more out is June 1 and the maximum amount we can take out on June 1 under the terms of the redemption provision is $17.5 million. So we're taking the maximum we can out.

Okay. But you're not taking up the whole bond?

No.

No.

But that's where -- I'm sorry. But that's where was a little confusing. (multiple speakers) and you will have about $217.5 million after this next redemption?

That's correct. That's exactly what we will have at outstanding.

So it benefits us in two significant ways. One we get an immediate interest reduction from 9.625%. We have to pay the slight premium, but 9.625% to 4.25%. So the math is pretty simple there. But the other advantage is if we are able to refi the entire debt on December 15 of 2013, which is the earliest date that we can call them. If we do redeem them on that date, we'll have to redeem them at a premium, at higher premium, a premium of six months interest or I think 104.8%.

104.8% is what we'll be redeeming it at.

And even if we redeem them a year later, it still would be a higher premium. So, it behooves us to take advantage of the 103% opportunity and get out as much of it as we can.

Absolutely. So that -- will that now leave for the last year. Would you do full $30 million redemption in this last year?

Well, we will see. I mean this isn't the last year, we have one more year after this.

You have one more year, okay.

We have the remaining part of this year. So what's still available to redeem would be $12.5 million in December and then $30 million in 2013.

Right. Where your leverage could be down so low, you might not have to do the last part?

We will see.

Okay.

I mean, it does put us in a very good position to refi with attractive interest rates. We can probably do an all-bank deal at a very attractive rate with stepped down pricing as our leverage continues to decline even after we put the new provision, the new facility into place. So it gives us maximum flexibility and our Board's high priority is to delever, get your balance sheet to the place where you are never going to be worried about refi-ing your debt in the future.

All right. Let's talk just a little bit of pacings because we are officially starting to get kind of the taste of what's going on in radio, and it sounds like Rip Van Winkle, it just woke up. And I know your radio is different somewhat from mainstream radio, but still sell spots. We know that (inaudible) has got decent pacings, [while Radio One] just -- it's double-digit pacings. We have yet to hear from all the other radio companies, but we are smelling that it is a much better Q2. So how does that stack up with what you are feeling?

You know, we have Dave Santrella could give you color on our radio side. I mean, roughly we are not seeing that robust of an up-tick. We are seeing softness in second quarter at least so far. May is pacing probably up 2% to 3% and hence we gave conservative guidance for second quarter. I'm not seeing that same robust expansion, but then we outperformed on revenue in first quarter when the rest of the industry was just almost flat. So that's all I can tell you.

Yes. It sounds like radio is very much in individual market and company story, which is not unusual?

Dave Santrella is joining us by phone. Dave, if you want to try to take a shot at that?

Yes. And I apologize for being remotely, but I had a business trip come up that I needed to take folks. Yes, Bishop, April was a tough month. We do see the pacing in May and June a little bit better. But as you said, it is a very individual business. I think the good news for us is always [listeners] we've become very, very worst at selling non-traditional forms of revenue like events and other things like that and that helps us. All local revenue on our station was up nicely in Q1 because of things like that. And so that will be our strong -- and that's what [we'll lean] into in the second quarter if we see a softness in local spot.

Let me add one other element for you, Bishop. Comparing Q1 actuals to our Q2 guidance, you are seeing a sequential slowdown from Q1 to Q2 between the actuals and the guidance. There are couple of factors that are impacting that. First, we had a very strong political first quarter that ran through about April 3, but with essentially Romney now being the candidate, spending by the other candidates effectively stopped at the end of first quarter.

So that is an important reason why there is a slowdown from Q1 to Q2. Second, we anniversaried the acquisition of WorshipHouse Media on March the 29. So we now are -- you're now seeing organic growth from that particular piece of the business in Q2, whereas in Q1 there were no numbers to report last year. So those are a couple of factors that as you examine what's changed between Q1 and Q2, those are important factors to bear in mind.

That all make sense. Thank you for the color.

(Operator Instructions) Michael Tanzer, DG Capital Management.

Hi. It's Dov Gertzulin.

Hi, Dov.

Hey, how are you guys doing?

Good.

Could you talk for a minute about where you're seeing capital expenditures are going to come in for the year? And also could you take a minute to talk about the opportunity in your Internet business? You seem to have a really good quarter. But where do you think that could go over time and what type of drivers are you seeing there?

Let me -- I will quickly answer the CapEx question, then turn it over to David Evans to talk about the Internet opportunities. We expect capital should be somewhere between $7 million to $8 million for the year, kind of consistent with what you've seen in 2010 and 2011. So similar levels.

In terms of our Internet revenue, the foundation that drives growth in that revenue line is what's happening to unique visitors and to page views. The good news in that area is that if you compare Q1 2012 to Q1 2011, we have a nice growth in both of those metrics. We've been putting a lot of emphasis on marketing, particularly in terms of social media marketing.

We continue to see improvement in traffic from the search engines. We worked real hard to ensure that we have quality, unique content, which is obviously what's important to the search engines. There was a lot of discussion last year of various algorithm changes by Google to penalize low quality content. Fortunately, none of our websites were hit by that.

All of our major websites saw growth in unique visitors and page views and we continue to be very focused on that important area. That gives our salespeople more inventory to sell and every year, every quarter, we are looking to make better use of that inventory. So we also in Q1 saw an improvement in our revenue per 1,000 pages or RPM. So, it's a combination of site growth and very strong work by our sales team to bring on board advertisers who will benefit from the marketing and promotion utilizing that inventory.

Could you perhaps give a little more -- some more details on, for example, the number of page views or some traffic statistics to sort of get a better sense of the growth that you guys seem to be generating?

Yes. I would say page views are probably up low-double digits, it'll probably around 100 million monthly page views. Those would be approximate metrics.

Great, thank you. And a good quarter.

Thank you.

Thanks.

And we appear to have no further questions at this time. Mr. Atsinger, I will turn things back to you for closing remarks.

All right. Thank you operator and thanks to all of you for joining us. We'll look forward to visiting with you again in about three months.

That concludes today's conference. Thank you all for joining us.