Salem Media Group Inc (SALM) 2012 Q4 法說會逐字稿

Hello and welcome to the Salem Communications' fourth quarter 2012 earnings conference. Today's conference is being recorded. I would now like to turn things over to Mr. Evan Masyr, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Great, thank you, and thank you for joining us today for Salem Communications' fourth quarter 2012 earnings call. As a reminder, if you get disconnected at any time, you can dial into 719-325-4804, or listen from our website at www.salem.cc. I'm joined today by Edward Atsinger, our Chief Executive Officer David Santrella, President of Radio; and David Evans, President of Interactive and Publishing. 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 Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available information. Actual results may differ materially from those anticipated and reported results should not be considered an indication of future performance. We do not intend or undertake no obligation to update our forward-looking statements including forecasts of future performance, the potential for growth of existing markets, the opening of new markets or the potential growth from future acquisitions. More information on risks and uncertainties that may affect our business and financial results are included in our annual report on report on form 10-K for the year ended December 31, 2012, and other public filings we have made with the Securities and Exchange Commission.

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 any non-GAAP financial measures is available on the investor relations portion of the Company's website at Salem.cc. I would now like to turn the call over to Edward Atsinger.

Thanks, Evan, and thanks to all of you for joining us for our fourth quarter 2012 earnings conference call. Let me begin with a review of our financial performance for the quarter and discuss some of our strategic initiatives. Also, about an hour ago, we issued a press release announcing a plan to refinance our capital structure. I will discuss that in a little more detail before I turn the call back over to Evan, who can review them with you in more detail the fourth quarter and discuss guidance for the first quarter.

Let's begin with a brief review of fourth quarter. Total revenue was up 6%. This growth was a result of a 25% increase in internet revenue, a 9% increase in publishing revenue, and a 3% increase in broadcast revenue. Currently, as we continue to diversify our revenue streams, 23% of our income comes from internet and -- revenue comes from internet and publishing, and we continue to see that diversification. Our results during the quarter were aided by strong political revenue. We recorded $2.4 million in political for the quarter compared to $700,000 in the fourth quarter of 2011.

This represents the biggest political year in Salem's history with political revenue in 2012 totaling $5.5 million. Our previous high water mark for political was $3.7 million in 2010. I think that this trend -- this positive trend in political is being driven in part by a stronger group of assets that target political opinion. And while we are pleased with the fact that these -- those in the political arena recognize the value of our of our listeners and our focused audience, it will pose particular tough comp for us in 2013. So while we are projecting top line growth in our Q1 2013 guidance -- which Evan will discuss in a minute -- the impact of the Republican primaries in Q1 2012 will be noticed in the first year-over-year comparison.

If we turn our attention to our internet division, revenue increased by 25%, as I mentioned a minute ago, in the fourth quarter, compared to Q4 in the prior year. This was a result of both the impact of acquisitions and organic growth. The recent acquisitions of SermonSpice and GodVine are progressing right at or a bit better than we projected. If we exclude the impact of these two acquisitions, however, the organic growth produced a 13% increase on its own. Our national conservative news talk websites saw the biggest growth, posting at 23% increase in revenue. Clearly political played a role here. The election cycle also produced a significant increase in monthly page use of these sites. While we have seen some falling off of traffic since the election, visits are still up nicely compared to pre-election levels. I mentioned earlier our publishing revenue was up 9% for the quarter. We achieved a significant growth in revenue of 21% from our digital on-demand book publisher, Xulon Press. We've learned over time that Xulon Press is a business that can grow cost-effectively with increased marketing. Accordingly beginning in late 2011, and continuing into 2012 and through 2012, we increased our marketing budget. We are now starting to see in our fourth-quarter numbers the positive impact of this increased marketing.

Our expenses for the fourth quarter were up 8%, slightly outpacing revenue growth. There are two primary reasons for this. First, our medical costs for the quarter increased by approximately $0.5 million over the prior year. This is due to the fact that we are self-insured for medical, and there was an increased claims activity, principally driven by the flu epidemic. We believe this to be a one-time increase and not a trend, and first quarter early pacing would confirm that. Second, as to -- as we reported in prior quarters, we have invested in several new local talk shows, as well as key management personnel for our digital business talk and news talk formats. These investments are proceeding well. For example, Q4 -- in Q4, KSKY, our Dallas news talk station, had local spot revenue, excluding political, up by 36% as a result of our hiring of Mark Davis earlier in 2012. Finally, I might comment that we closed on the acquisition of WTOH FM in Columbus, Ohio, and WGTK FM in Greenville, South Carolina. We discussed those earlier and had been operating them under an LMA. They both closed a few weeks ago.

Before I turn the call back to Evan, I would like to comment on our press release issued about an hour ago, regarding the tender offer on our existing bonds and our proposed new financing. We've been closely monitoring the capital markets for some time and have been trying to determine an appropriate course of action based upon the movements in that market. While our current bond issue is not callable until December 2013, we feel it is in Salem's best interest to take advantage of historically low interest rates and risk premium spreads. So our plan is to issue $300 million in new institutional term loan B debt in addition to a new $25 million revolver. Given the low rates, this transaction is net present value positive and secures Salem a substantially lower interest rate which will allow us to more rapidly pay down debt. We will keep everybody informed as appropriate. With that, let me turn the call over to Evan Masyr for more detailed discussion of the quarterly results, and to provide some guidance for the first quarter of 2013. Evan?

Thank you, Ed. For the fourth quarter, our total revenue increased 6% to $60.6 million. Operating expenses on a recurring basis increased 8% to $49.6 million, and adjusted EBITDA increased 1% to $15.2 million. If we were to exclude the growth from political revenue, our overall revenue increased 3%. Net broadcast revenue increased 3% to $47 million, and broadcast operating expenses increased 4% to $30.5 million, resulting in $16.5 million, or a 1% increase in station operating income. On a same-station basis, net broadcast revenue increased 2% and SOI increased 0.3%. 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 briefly 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 total revenue. Total revenue on this format was flat while block programming increased 1%. Revenue from our 11 contemporary Christian music stations contributed 17% of total revenue, and increased 1% for the quarter. Our 27 news talk stations had an increase of 5% in revenue for the quarter, and these stations contributed 11% of our total revenue. The seven stations we have programmed in Spanish language Christian teaching and talk grew revenue by 17% and this format now comprises 2% of total revenue. Finally, we have 11 stations in a business talk format and revenue from these stations was down 7%. This format contributed to 2% of total revenue. Our network revenue increased 10% for the quarter and now represents 7% of total revenue. Our publishing revenue increased 9% to $3.4 million and represents 6% of our total revenue. Revenue from our internet business increased 25% to $10.2 million. Our internet revenue is 17% of total revenue.

As of December 31, our total bond debt was $213.5 million. In addition, we had $33 million drawn on our bank revolver and $15 million due in loans from two of our directors. We also had $7.5 million in subordinated debt. This brings our total debt to $269.0 million. As of December 31, our leverage ratio was 4.87 compared to a compliance covenant of 6.25, which is our lowest level since June of 2000. This is further evidence that our strategy of selective acquisitions along with a commitment to reducing our debt is working. We will continue to work on getting our leverage down as we would ultimately like to have our leverage ratio under 4 times. The increased free cash flow to be generated under the proposed new capital structure will assist us in reaching that goal even sooner.

For the first quarter of 2013, we are projecting total revenue to increase 1% to 3% over the first quarter of 2012 total revenue of $54.3 million, which as Ed touched on earlier, includes a tough comparison due to the Republican primary political revenue that we received. We are also projecting operating expenses to increase 2% to 5% as compared to the first quarter of 2012 operating expenses of $46.5 million. This concludes our prepared remarks and we would now like to answer any questions. Operator?

(Operator Instructions)

Barry Lucas, Gabelli & Company.

Evan, maybe you could just -- and I know since the tender has just gone out, but maybe could roughly guesstimate what the overall interest cost reduction might be if everything were concluded today?

Pretty difficult to guess exactly what that is going to be. Obviously, it depends on what the market gives us in the term of a new institutional term loan market. I can say tell you that it will be significant compared to the 9.625% interest we are paying now such that this really makes it a net present value positive for us and we're very optimistic about what this will do for the Company's free cash flow.

Okay, and just second area of -- maybe just refresh my memory in terms of anything else that is in the acquisition or divestiture pipeline and if there is nothing else in there, what you think is on the horizon?

Well, there is nothing in the pipeline that we would discuss today. There is nothing significant that we would want to discuss today or that we have to discuss today. We continue -- we will continue to look for tuck-in acquisitions, that is, acquisitions that we can roll into an established cluster where we already have a presence. Most of the acquisitions we did last year conformed to that pattern, whether it be on the internet or be on the broadcast side. But, our priorities are to continue to de-lever, to make acquisitions that make sense strategically and in terms of the bottom line. We are looking for acquisitions with a multiple -- with what we can do with it, is attractive to us and as I say, works a tuck-in acquisition. So I -- based upon what has happened in each of the last several years, I suspect some things will come along that will make sense for us but we don't have any in the pipeline at this time.

Okay, last item for me, Ed, is you think about how we are starting off the first quarter and your capital needs. Any further color or thoughts you'd care to share on dividend or other forms of returning cash to shareholders?

Well, we have a board meeting in a week or so. The Board typically at the end of the year will review it. I think the dividend level that we declared last time was somewhere between 15% and 17% of free cash flow. If the Board elects to keep it at that level, there should be some increase -- the Board may elect to leave it where it is. If they elect to just keep the percentage at the same level, there would be an increase and they may modestly agree to go beyond that. It is really a board decision. At this point, we will have to wait and see with the Board does.

The one thing to consider if the Board does keep it at this 15% to 17% of free cash flow, post transaction that free cash flow number is going to be significantly different and higher such that if the Board keeps it at that same level, the dividend would increase as well.

Great, thanks for expanding on that.

Michael Kupinski, Noble Financial.

I just need to -- just some clarification on how you mentioned about obviously the first half of the year is going to be tough given the Republican primary. Could you remind me what the political was the first quarter of last year and then I'm sorry if you mentioned this, but -- I know with the quarter like two-thirds of the way over, what are we pacing in terms of core advertising ex-political at this point.

I can give you the Q1 political number was about $940,000 in the first quarter of last year -- first quarter of 2012.

Okay. And do you guys give any color in terms of the revenue on the ex-political for the first quarter?

Ex-political?

Without political on the broadcast side.

We are seeing -- pacing is up slightly. We are seeing more transactional business and we're seeing more business on the national transactional front than we've seen in a while. National transaction business is up pretty significantly. On the local side, it has been a little -- a little more sluggish, Michael. But we are still in positive territory. And if you think about the $900,000 or $940,000 of political, that is a 1%, 1.5% of -- compared to the total revenue for the quarter. So while we gave guidance of up 1%, up 3%, it would've probably been about 1.5% higher if you took out political.

And you mentioned that now that you have some new venues and opportunities to capture more political and some companies -- some radio companies have suggested that they think that political advertising is actually going to be a core advertising category for them even in off election years. You mentioned that you did $700,000 in political in 2011 I think. Do you have any thoughts whether or not that is going to build for -- in 2013? Obviously, it is an off election year but still politically charged year if you want to look at it in terms of narrow races and a whole host of advocacy type of advertising and that sort of thing. Any thoughts on that?

Well, I think that the -- I mentioned that the asset mix we have now is a little more accommodating to political, for example, our conservative opinion websites saw a significant growth in this election cycle and I mentioned particularly the Townhall/HotAir websites. But we've expanded our news talk footprint as well and those stations will likely be able to accommodate more political and political seems to gravitate toward them. We are doing more political at the network level. We are at a record number of affiliates now. I think we are at something like over 2,000 affiliates that take content from us. And we are finding on issue advocacy particularly that more political dollars are going to network buys, national buys.

You get some -- you don't get a lot of -- obviously you're not going to get local -- you're not going to get much local political advertising on the network level. You do get national but you do get advocacy and we saw quite a bit with part of what drove I think the 2010 cycle was ObamaCare and the debate that was going on while it was being -- while the legislation was being passed and the conversations that followed it. So I just think generally our asset mix is better situated today to accommodate political advertising and on the network level, were seeing new opportunities, for example, there is quite a bit of controversy now around the Second Amendment and gun control. That kind of political advertising will take place at the network level, the national level. So I think, yes, we will see -- I think the trend is positive. It just keeps building in that direction and I think it does reflect the stronger asset base that we have to accommodate it.

Perfect. Thanks so much.

Gentlemen, there are no further questions I will turn the conference back to you.

I thank you, operator, and thanks to all of you for joining us and we look forward to visiting with you again on our next earnings call.

And ladies and gentlemen, that does conclude today's conference. Again thank you all for joining us.