Salem Media Group Inc (SALM) 2012 Q2 法說會逐字稿

Hello, and welcome to the Salem Communications' Second Quarter 2012 Earnings Conference Call. This call is being recorded.

I would now like to turn the call 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' second quarter 2012 earnings call. As a reminder, if you get disconnected at any time, you can dial into area code 719-325-4933 or listen from our website at www.salem.cc.

I am joined today by our Chief Executive Officer, Edward Atsinger and our President of our Radio Division, David Santrella. Our President of our Internet Division, David Evans, is travelling today and will likely not be able to participate in the Q&A session.

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. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. 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 is available on the Investor Relations portion of the Company's website at www.salem.cc.

I will now turn the call over to Edward Atsinger.

Well, thanks to all of you for joining us for our second quarter 2012 earnings conference call. Let me begin with a few overview comments related to our financial performance in the quarter and a few comments on some strategic initiatives we've undertaken before I turn the call back to Evan for more detailed look at the quarter.

For the second quarter, our total revenues increased 4% year-over-year. If we break it out by segment, Broadcast was up 2% and Publishing revenues were up 2% respectively, while Internet revenue was up about 17%. We're pleased with this topline growth, particularly given the context of a fairly soft economic climate during the quarter.

Again, I do think it underscores our ability to produce stable revenue with consistent growth related to the nature of our programming, the diversification of our revenue sources, our block programming and our lack of dependence on any one particular segment.

With the election season in full swing, we posted another solid quarter of political revenue producing $700,000 in the quarter compared to $200,000 in second quarter last year. It's also worth noting that political revenue on a year-to-date basis is up $1.6 million compared to $1.3 million in the same quarter last year -- or actually compared to the last political year 2010. While we don't provide formal guidance on political revenue, consistent with past experience during election years, we anticipate that political advertising will remain a strong source of revenue for us over the next two quarters, especially given the fact that we have a presence in many of the key battleground states, including Florida, Ohio, Pennsylvania, Colorado and Minnesota.

The Internet segment continues to be a strong source of revenue growth for us. During the quarter, Internet revenue grew to $8 million from $6.9 million during the same quarter last year, a 17% increase, while operating income grew to $1.9 million from $1.3 million, a 43% increase. More importantly, this quarter marks the first period in sometime that our Internet revenue numbers weren't impacted by any meaningful acquisitions. The results highlight that we not only have the ability to grow this segment of our business organically, while still pursuing and having the ability to make strategic acquisitions and integrate those properties in a way that generates value for shareholders.

We will continue to pursue acquisitions that are accretive in this space, looking for ways to further leverage our existing assets. Our growth was driven by a strong quarter from our national conservative websites which saw revenues up 25%, our national Christian websites which saw revenues up 6%. We were especially pleased with the fact that the digital revenue growth of our radio stations were up 50%. We continue to focus on improving synergies between our different platforms and there are good opportunities to do that, we feel, going forward.

Turning to our radio broadcast business, each of our primary radio formats, Christian Teaching and Talk, Contemporary Christian Music, and News Talk, increased revenues 2% for the quarter. We were encouraged by the continued growth of our block programming, which is up more than 3% for the quarter and almost 4% year-to-date. We're seeing some new ministries expand and coming into the space making commitments both to Salem and to radio in general.

Our expenses were up 6% for the quarter, as we continue to make long-term investments in our business. On our last call, I outlined a number of key positions that we added to our staff. While their salaries contributed some to the expense growth this quarter, we also made some additional investments. We increased our marketing and promotion in a few key markets. Additionally, we launched two new local morning shows in the number one radio market Los Angeles and also in Dallas.

And we're, by the way, very bullish on these new shows. We particularly are delighted to have been able to get Mark Davis under contract, who is now our local morning host in Dallas, longtime icon in that market and we are already seeing some very positive response to his presence on KSKY in Dallas. While these moves do result in increased upfront costs, we believe they will benefit Salem in the long term.

The current environment has resulted in some interesting M&A opportunities. In May, we entered into an agreement to acquire WLCC-AM in Tampa, Florida for $1.15 million. We expect the transaction to close next month. The station has been operating in a general market, Spanish language format for many, many years. Upon closing, we intend to launch our Spanish language Christian Teaching and Talk format, which will bring our total number of stations in this format to seven.

Additionally, during the quarter, we acquired an FM translator in Detroit, which will provide some very good supplemental coverage for $250,000. While we're still very much focused on reducing our debt and our leverage ratio, we also want to be in a position to act when strategic opportunities present themselves and I think we can do both and continue to de-lever, while finding some reasonable accretive acquisitions. Our strong free cash flow lends itself to the strategy, which Evan will comment on in a little more detail in his segment.

Finally, before I turn the call back to Evan, I want to mention that we paid our second quarterly dividend of $0.035 per share on June 29. The dividend paid in 2012 should equal approximately 15% of our free cash flow for the year. Our Board of Directors is planning to revisit the dividend in March of next year. We expect the Board to keep the dividend around that percentage of free cash flow. So as free cash flow increases, the dividend should increase proportionately.

We also expect the Board to revisit the percentage of free cash flow devoted to dividends, once we refinance our bond debt and accordingly significantly increase our free cash flow. And just as a reminder of comments we've made in the recent past, our bonds are callable starting in December 2013 and we believe that there is a potential to reduce our interest burden in a very meaningful way through a refinancing at that time.

With those preliminary comments, let me turn the call over to Evan for a little more detailed discussion of our second quarter results and also guidance for the third quarter. Evan?

Thank you, Ed. For the second quarter, our total revenue increased 4% to $57.6 million, operating expenses on a recurring basis increased 6% to $48.0 million, and adjusted EBITDA decreased 3% to $13.6 million. If we were to exclude the growth from political revenue, our overall revenue increased 3%. Net broadcast revenue increased 2% to $46.4 million and broadcast operating expenses increased 5% to $30.5 million, resulting in $15.9 million or a 3% decline in station operating income. This decline in SOI is largely due to increased salaries, marketing expenses, and programming and production expenses highlighted earlier by Ed.

On a same station basis, net broadcast revenue increased 2% and SOI declined 3%. These same station results include broadcast revenue from 94 of our radio stations and our network operations, representing 99% of our net broadcast revenue.

I'll now review our revenue by format. 39 of our radio stations are programmed in our foundational Christian Teaching and Talk format. These stations contributed 35% of our total revenue. Block programming increased 3% and total revenue on this format increased 2% for the quarter. Revenue from our 11 contemporary Christian Music stations increased 2% for the quarter and contributed 19% of total revenue. Our 24 News Talk stations had an increase of 2% in revenue for the quarter and, overall, these stations contributed 10% of our total revenue.

The six stations that we currently have programmed in Spanish language Christian Teaching and Talk grew revenue by 28% and this format is now 1% of total revenue. And finally, we have 10 stations in a business talk format and revenue from these stations was down 6%, and this format contributed 2% of our total revenue. Our network revenue decreased less than 1% for the quarter and represents 7% of total revenue. Our publishing revenue increased 2% to $3.2 million and represents 6% of our total revenue. And revenue from our Internet businesses increased 17% to $8 million, and this now represents 14% of our total revenue.

On May 31, we drew down on our $10 million line with First California Bank, which is subordinate to both our bank and bond debt. That line carries an interest rate of prime plus 1%. The following day on June 1, we redeemed $17.5 million of our 9.625% senior secured second lien notes at a price of 103%. Our total bond debt is now $217.5 million compared to the $300 million it was at the time we issued them back in December of 2009.

In addition, at June 30, we had $36.6 million drawn in our bank revolver and $9 million due in loans from two of our Directors. This brings our total debt to $273.1 million. We were in compliance with the covenants of our credit facility and our bond indenture. The credit facility leverage ratio was 5.1 versus a compliance covenant of 6.25.

Lastly, as Ed mentioned earlier, I would like to briefly comment on our free cash flow and our strategy going forward. Our current dividend payment is approximately 15%, or $3.4 million per year. This leaves 85% of our free cash flow or more than $20 million utilized for reducing our leverage and for acquisitions. By focusing on Internet-based acquisitions and tuck-in radio acquisitions, until we have an opportunity to refinance in December of 2013, we expect to continue to use our free cash flow in this manner and believe this strategy is the best way to maximize Salem's value.

And now looking at the -- for the third quarter of 2012, we're projecting total revenue to increase 3% to 5% over the third quarter of 2011 total revenue of $54.5 million. Salem is also projecting operating expenses to increase 2% to 5% as compared to third quarter 2011 operating expenses of $45.2 million.

This concludes our prepared remarks and we would now like to answer any questions. Operator?

Thank you. (Operator Instructions) Anil Gupta, Imperial Capital.

Good afternoon. Thanks for taking the questions. Wanted to start off with a couple on guidance. Evan, 3% to 5% revenue guidance, can you talk a little bit about what portion of that you think is attributable to political or what your expectations are for the quarter? Just trying to get a handle on what we can think about core revenue growth being in the quarter versus what political is going to add?

It's a hard question [to be] very specific with. There is no question that a political (technical difficulty) will be a significant part of the driver of the growth. If it hit the high end of the range, I'm sure the political will kick in a little bit more. We've left that range there because we (technical difficulty) quite know for sure. The biggest political typically comes in fourth quarter. So we really don't know. We'll just have to see how that plays out. I wish I could be more specific, but --

Yes, I would just add this, Anil. I mean, when we're going through analyzing the numbers when coming up with guidance, we expect some political -- I don't want to put in there the full high range of what it could be because you just never know how it's going to play out. Just because we're ahead of where we were in 2010 political, which was our strongest political year ever, it doesn't mean 2012 will end up that way. So it's a fairly conservative amount of political put into that guidance.

Okay, thanks a lot. So I guess it's fair to assume that there is a little bit of political baked into your guidance, but not potentially a huge amount because it's difficult to forecast at this time?

Early in the year we had a bit of a pop in political because you had the contested Republican primary and some of that spilled over into the early quarter. So that's why the year-to-date is a little stronger. That is over. So that segment is not going to come back in. So it just depends on how soon the two major candidates start spending money and it also depends on how much of the super PAC money comes our way. We're seeing some good indication that we're going to get a pretty good spend, we think, from both sources, but the timing is always the unknown.

Okay, great. That's really helpful. And then second question is the transactions that you've announced today. Can you give us a sense as to what percent of your OpEx growth is coming from those acquisitions? Is there a lot of expense associated with the new stations and transactions that you've talked about?

Very little, none really. I mean, of -- maybe a few legal expenses, but no, very little, most of that would be just a capital investment.

And going forward, when Tampa closes, it's not a expense-intensive radio station, the Spanish language Christian Teaching and Talk. We don't have a whole lot of marketing built into the numbers there. So it's not a big number.

Okay, thanks. And then the last question real quick. Obviously, we're very far away from your refinancing event next winter. But just based on any sort of discussions you guys are having with banks or lenders, do you have any sort of ballpark rates or a ballpark range that we could think about in terms of where you think you could refinance that debt at?

Yes, Anil, the last conversations I've had with some banks and that's probably a month ago, we feel that if today's market holds up and it stays kind of where it is today, with our leverage down closer to 4.5 next December, we could get pretty much an all bank deal done, maybe some institutions in there. But it would be something at like LIBOR plus 450 basis points with a LIBOR floor of 125 basis points to 150 basis points. So that gets you all in at, call it 6%. We'd probably fix some of that debt rather than be exposed to all floating rate debt, but still a pretty significant savings compared to our 9.625% bonds.

Okay, great. Thanks a lot.

Barry Lucas, Gabelli & Company.

Great, thanks so much, and good afternoon. Ed, I don't want to beat this political thing to death too much, but couple of items. Could you provide the comp for 2010 for the full year, what political was?

Yes, 2010 political was $3.7 million.

Okay. And you did see money in Texas from the primary and Cruz's election there, I would guess.

I don't know if we saw it from that specific contest or not. We could get back to you and let you know. I wouldn't be surprised if we didn't see some, but I don't know specifically.

Right, okay. Last one in this area then. With the acceleration or increase in funds coming from the super PACs, a number of other broadcasts, at least, television broadcasters have started to see some money from the campaign organizations at the presidential level, once Romney was the putative nominee. So have you seen any commitments at the presidential level yet?

We haven't seen any commitment to the presidential level yet, no.

Okay. Let me just switch gears quickly to Internet. As we've ramped up and you're at this new higher level of Internet revenues, is the incremental profit contribution, is that what we should expect going forward that we're now more able to leverage that revenue base?

Yes, I think so. Barry, I think that's a good way to look at it. You can see over the last eight quarters or so, you've seen that profit margin increase and we still think there is room for that increasing even more as it gets larger.

Last one for me, and that is when I think about the investments, whether it's people or marketing, they've been in an elevated level on the radio side for a bit. When should those expenses really begin to normalize?

Most of the expenses you'll see normalize towards the back half of this year with the exception of the launch of a couple of those new shows that Ed talked about, which really both of them launched during the second quarter of this year, the quarter that we're reporting on. So we should see expenses start to decline in the latter half of this year or as far as -- show smaller growth, I shouldn't say decline. And then that will continue through next year as we anniversary the costs associated with these new shows.

I would hope to see that stabilization -- normalization to come in, begin to be evident, as Evan says, in the last few months of this year and then going into 2013.

Okay. I lied, I'll try one more, if I can throw one in and that is any -- you mentioned that you've started to see some new ministries begin to become interested in the block programming area. So what does that say or how are you thinking about renewals for 2012, as well as pricing?

A little early, it's just a little really before we get into it, but there has been pretty good solid demand and we'll probably be able to get closer to knowing where that will be in the latter part of the third quarter.

We also, Barry, are -- this year, in particular, be the year going back into those ministries and having more detailed conversations with them earlier than we have in the past. And so far the response has been pretty favorable.

Great. Thanks so much.

(Operator Instructions) Michael Needleman, Preservation Asset Management.

Good afternoon, gentlemen. A couple of questions. In a previous call, you mentioned that you somewhat felt comfortable with approximately $1 of free cash flow for this year. Are you still comfortable with that figure?

Yes, we still are. We think that should be about the right number on mid-20s in free cash flow. We have about 24.5 million shares outstanding.

Okay, that's the first question. The second question, not to just dwell on the political side of the equation, but I just want to come back. The last -- 2010, would you just remind us what your political advertising contribution was for the year, if you don't mind, please?

Yes. Political in 2010 was $3.7 million and that actually compares pretty favorably compared to 2008, which was about $2.5 million.

And can you talk a little bit about what the current pacing looks like as far as what you're seeing? And in addition to that, what verticals are you seeing, if there are verticals that you're seeing some strength in that -- can you just talk a little bit about that as well, please?

Pacing?

Pacing is probably kind of low single digits right now, low to mid single digits, I'd say. July looks like it ended up pretty good, still little early on August and September right now to know for sure. In terms of verticals, are you talking about from a platform perspective or from a PAC versus super PAC versus --?

Just in general, for instance, auto or what are you seeing just in general as far as what the advertising, what you're seeing?

Okay. Unrelated to political then?

Yes, sir.

Okay, thank you. That was confusing me a little bit. Right now, again, we continue to see financial category and medical category as strong categories for us. Legal is a strong category for us as well. And we've continued to go down, as Ed mentioned earlier, down the road of integrating both digital with our terrestrial advertising into more and more of what we do and we're doing that with a great deal of success.

And my last question is just in concerning the overall operation expenses, recognizing that you're still growing out and spending where you think it's opportunistic from the standpoint of overall growth. Last quarter, it was the hiring of people and this quarter you seemingly are spending on new developments with new programming. What's normalized expenses look like if we are continuing to kind of see these expenses ramp up. What is a normalized expense rate?

I'd say normalized expense rate is something in the low single digits, 3%, 4% probably.

Thank you very much, gentlemen.

And as we have no further questions in queue, I would like to turn the call back over to Mr. Atsinger for any further or closing remarks.

Well, my thanks again to all of you for joining us, and we look forward to visiting with you when we report on the third quarter.

And that does conclude today's presentation. We thank you again for your participation.