Salem Media Group Inc (SALM) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Salem Communications' First Quarter 2013 Earnings Conference Call. Today's conference is being recorded.

And now I will turn the conference over to Mr. Evan Masyr, SVP and CFO, Please go ahead, sir.

Thank you. And thank you all for joining us today for our First Quarter 2013 Earnings Call. As a reminder, if you get disconnected at any time, you can dial into 913-312-0643, or listen from our website, www.salem.cc.

I am joined today by our Chief Executive Officer Edward Atsinger; David Santrella, President of our Radio Division; 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 the 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 and 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 Form 10K 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 non-GAAP financial measures is available on the Investor Relations portion of the Company's website at www.salem.cc.

I would now like to turn the call over to Edward Atsinger.

Thanks, Evan. I'm going to begin my comments by reporting on our recently-completed financing. I'll talk then a little bit about the financial performance for the quarter and then I'll make a few brief comments about some recent acquisitions and strategic initiatives.

Well the big news, of course, for the quarter for us was our refinancing. Even though our bonds were not callable until December of this year, we were keeping an eye on the capital markets in the event that an earlier opportunity might present itself.

In mid first quarter this year, the Term Loan B market began to heat up and became very attractive in terms of pricing, actually reaching historically low interest rates and risk premium spreads with very accommodating covenants.

We decided to move on this. We moved very quickly to take advantage of the opportunity, realizing that these markets can be very fickle and volatile at times and that windows often close as quickly as they open.

We went to market in late February. We were able to close on a very attractive financial package on March 14. That package consists of $300 million comprised of a seven-year Term Loan B priced at LIBOR plus 3.5% with a 1% LIBOR floor, along with a five-year $25 million revolver with grid pricing, which is currently priced at LIBOR plus 3%. This new structure will save us a significant amount of interest and with the grid pricing on the revolver, pricing improves as we reduce leverage.

Given our total leverage post refinancing, we are pleased to be able to get an all-senior deal done on these terms and conditions. We found it very attractive and couldn't have been happier, frankly.

Based on this successful refinancing, the Board of Directors decided to increase our quarterly dividend by 43% from $0.14 annually to $0.20 per share due to the correlated increase in our free cash flow for the year as a result of the refi.

This dividend represents less than 20%, by the way, of our projected free cash flow for 2013 and represented a 3% dividend yield at the time it was granted. With the market responding favorably, it now represents a 2.2% dividend yield on the current stock price.

Let's talk a little bit about the operations of the Company during Q1. Total revenue grew 2.5%, but that revenue growth was driven primarily by our Internet Division, which was up 31%, while our Broadcast revenue was down 1.6%.

Our results for the first quarter, particularly our Broadcast revenues, were impacted by the lack of first-quarter political activity and revenue this year as compared with the first quarter last year. You'll recall that the Republican primaries were in full swing in Q1 of 2012 and that was a significant revenue driver for our operations, particularly our broadcast operations.

To put it in more specific terms and a more specific perspective regarding political revenue in Q1 of this year, we only I think generated $200,000 compared to more than $900,000 last year. That being said, if we exclude political revenue from both periods, our broadcast revenue was down less than 1%.

So the first quarter for Broadcast was a bit sluggish, frankly there is always a little bit of listener fatigue and advertiser fatigue following a very contested election as we had in fourth quarter of 2012, and we see a little bit of a negative impact typically after a big election in the following quarter.

Our National Block Programming revenue on our Christian teaching talk stations continues to show its strength and resilience. It was up 1.3% for the quarter. We also saw some positive signs with our contemporary Christian music formats which saw total revenue up 5%. Advertising revenue on our talk stations, both news talk and Christian teaching talk as well as our networks, were down principally as I said, because of the absence of political- again a bit of this listener fatigue and advertiser fatigue that always sets in following a big election season. And frankly, the first two months of this quarter were pretty sluggish.

The 31% increase in revenue from our Internet Division was due to the combination of organic growth, for which we're very pleased, also the acquisition of GodVine and SermonSpice, as well as an early Easter, which had a significant impact on first-quarter performance for this division.

Approximately half of this growth, the 31% growth, was due to the acquisition of SermonSpice and GodVine. These acquisitions are proceeding well ahead of our initial projections. The early timing of Easter compared to 2012 drove growth at WorshipHouseMedia, which sells videos to churches. That was up 36% over last year.

Finally, in terms of organic growth, our conservative opinion websites were up 3%. Clearly impacted again by large political revenue last year; and our Christian websites, excluding GodVine, were up 17% and radio station Internet revenue was up 25%. So all in all, we're pleased with that performance.

Our operating expenses, excluding stock-based compensation, which is important in this quarter because it was impacted by some restricted stock grants that were made in the quarter, were up 4%. While this is still ahead of revenue, our expense growth is showing a steady, continual decline. Our expenses were up 8% in 2011, 6% last year; regarding operating leverage we believe we have reached a point where we have anniversaried most of the significant operating investments that we've discussed on previous calls, such that we should expect to see improved operating leverage later this year.

Finally, with respect to acquisitions, during the quarter we closed on the purchase of two radio stations. I think we've announced these pending acquisitions on our last call we made, we may have even closed one by then. But first, we did acquire WGTK FM in Greenville, South Carolina; a very fine property, great signal, full Class C FM, for $1 million cash at closing, a $2 million note at 5% interest and a $3 million advertising credit-- so a very attractive deal for us.

Additionally, we bought WTOH FM in Columbus, Ohio. As we mentioned earlier, we had been operating with a stand-alone station in Columbus since 1982. It's been a good, solid, profitable station featuring Christian teaching and talk. But it's always nice to be able to add to that cluster and get the cost efficiencies that result from economies of scale.

The early results, by the way, from these stations have been very promising. We continue to look for acquisition opportunities like these, both in radio and online, to continue to enhance the dominant position in our space while maintaining our focus, which we won't lose, on de-levering the Company, which we've done pretty aggressively over the last several quarters.

With that, let me turn the call back to Evan for a more-detailed discussion of quarterly results and he will also provide some guidance for second quarter of 2013.

Great, thank you Ed. For the quarter, our total revenue increased 2% to $55.6 million. Operating expenses on a recurring basis increased 4% to $48.2 million and adjusted EBITDA decreased 4% to $11.2 million.

Net Broadcast revenue decreased 2% to $43.2 million and Broadcast operating expenses increased 1% to $29.6 million, which results in a station operating income of $13.7 million or an 8% decline.

On a same-station basis, net Broadcast revenue decreased 2% while SOI was down 7%. These same-station results include Broadcast revenue from 95 of our radio stations and our network operations, which represents a total of 99% of our Broadcast revenue.

I'm going to now take a look at our revenue by format to give you an idea of how each one of our formats performed over the quarter. 39 of our radio stations are programmed in our foundational Christian teaching and talk format. These stations contributed 36% of our total revenue and were down 3% for the quarter.

We have 26 news talk stations. They had a decline of 7% in revenue for the quarter. Overall, these stations represent 10% of our total revenue. And the declines on both of these two formats-- the Christian teaching and talk and the news talk; were principally due to the absence of political revenue that Ed talked about earlier.

Revenue from our 11 contemporary Christian music stations contributed 18% of total revenue and they were up 5% for the quarter. We saw particular strength from the music stations in both Los Angeles and in Atlanta. The seven stations that we have programmed in our Spanish-language Christian teaching and talk stations grew by 13% and this format now represents 2% of our total revenue.

Kind of rounding out our strategic formats in radio; we have 10 stations that are in a business talk format and those stations increased revenue by 4% and that format represents 2% of our total revenue.

Our network revenue was down 10% for the quarter and represents 6% of our total revenue. Again, the decrease here as Ed alluded to earlier, was due to the lack of political revenue in the year.

Publishing revenue went down 8% for the quarter to $2.7 million and represents 5% of our total revenue. As Ed talked about, our Internet business- it was up 31% to $9.7 million and the Internet revenue comprises 17% of our total revenue.

As of March 31, we redeemed all but $903,000 of our 9 and 5/8% notes via tender offer, at a tender price of 110.65, in connection with the refinancing that Ed already discussed. On June 3, the remaining $903,000 will be redeemed. That money is already sitting with the trustee.

We terminated our revolver and the line we had with the local bank here and we repaid the outstanding subordinated debt due to related parties of $15 million. As of March 31, our leverage ratio was 5.64 compared to the new covenant which is 6.75. The increase in leverage is principally due to the increase in debt associated with the tender offer and the refinancing. The increase-- with our new capital structure, we will have significantly lower interest expense and the resulting improved annual free cash flow will certainly allow us to make more progress toward our goal of getting our leverage below four-to-one.

With respect to guidance for the second quarter, we're projecting total revenue to increase 2% to 4% over the second quarter 2012 total revenue of $57.6 million. And we're also projecting operating expenses before gains/losses on disposal of assets, any impairment losses in stock-based comp to increase 2% to 5% compared to second quarter 2012 operating expenses of $47.6 million.

And with that, that concludes our prepared remarks and we'd now like to answer any questions, so Operator, if you could take over.

(Operator Instructions). We'll hear from Aaron Syvertsen with Sidoti.

Hi. Good afternoon, guys. Quick question on the Internet segment; I know in the past you've talked about investing in that segment and doing kind of some more spending-- I guess did that trend continue this past quarter and then maybe if you could expand just a little bit on what the nature of those investments are.

This is David Evans. I head up the Internet division. The two most recent investments on the Internet side were our acquisitions of SermonSpice and GodVine, both of which took place towards the end of the third quarter of last year. SermonSpice was a $3 million acquisition. It looks like we're on track to do $657,000 of cash flow from that business in the first year of operation, so proceeding very well, slightly ahead of the numbers we projected.

We did that acquisition I think September 1. We've owned it now for about six months, and obviously a key focus having made the acquisition, is make sure that we integrate it in an effective, successful manner. We think we've done that.

The other big investment was GodVine. We purchased that website at the end of Q3 last year for $4.2 million, also proceeding well; probably on track for first 12 months cash flow in the $1.1 million to $1.2 million area; so very strong cash flows- again ahead of projection. The integration has gone well, so the integration of those two investments was the principle focus in Q1. We think that is in very good shape and we're looking for further growth areas and additional acquisition opportunities; nothing to report at this time. But we're always looking out for such opportunities.

So, should we maybe expect to see some margin expansion on the Internet side, following those two integrations? Is there any kind of cost synergies you'll be able to realize from that?

There are-- on GodVine there were no cost synergies. All the synergies were marketing and revenue in nature. On SermonSpice there were some cost synergies that we've already put in place, $200,000 to $300,000 a year of cost savings. The operating leverage is absolutely there. As Evan mentioned, there was a 31% increase in revenue on the Internet side of things. Internet operating income was up 90%; so lots of operating leverage.

Sure, great. Thanks. And then just one more, if I could, just your comments on-- you acquired those couple of stations in the first quarter-- kind of just the M&A environment moving forward, just on the multiples you're seeing out there in general and kind of from a high-level, are there any formats that you would like to expand? You saw the growth in the music stations. Is that a possibility of a certain format you'd like to see more of in your portfolio?

Well, in terms of the two acquisitions, in both cases they were what you call stick purchases. We didn't buy them based on a multiple of cash flow because they didn't have any cash flow, because we flipped formats in both cases. So we always do the analysis in terms of what we think we can cash flow with them and with an AM station, if it meets a strategic initiative, we typically will be willing to go to five times what we think we can do with it, pay a price five times what we think our cash flow will be. On FM, we'll go a little bit further. It depends on the size of the market. It depends upon the importance, strategically both in terms of filling out a cluster. So it's a little difficult to give you a specific, but it will be higher than five, we'll probably give six, maybe seven, depending upon the circumstances, as I say.

We do think that there is an opportunity to grow our businesses, both in the contemporary Christian music side- I think there's lots of room for additional facilities there if the price is right in the right markets. And secondly, I do think there are opportunities to grow our news talk format. We can expand those formats very inexpensively. So increasingly, as stations become on the market at more attractive pricing, I think there will be some opportunities where we can acquire properties and achieve the multiples that we're willing to pay. In the case of say- an AM, four or five times; increasingly we're seeing deals that could be done at that level.

In news talk format, ideally you would like to be in all top-fifty markets, but you would begin with the markets where you already have a presence but you don't have that format. And that would kind of be a guiding philosophy as well with our contemporary Christian music stations.

Okay, great. Thanks for the comments there. That's it for me.

(Operator Instructions). And we'll move on to Michael Kupinski with Noble Financial.

Thanks, and thanks for taking the question. I'm just following up on the acquisition strategy there. Are you looking at-- you mentioned AM stations. A number of radio groups are kind of moving even some of their sports tiers which were traditionally AM, and news talk formats that were on AM, onto their FM dial. What are your thoughts about some of the repositioning and reformatting of some of the other operators in your markets and what do you think of their strategies of moving some of the content and even simulcasting on the FM side of the dial?

Well, I think there's an increasing nervousness about AM because of the challenges it faces with increased man-made interference. The Commission has talked about trying to do some things. The industry has looked at several initiatives. The NAB commissioned a comprehensive study to try to figure out some things that can be done to improve AM. And I think in the light of those challenges, people are moving-- are kind of looking to the future and saying- where do we go with this service? Frankly, again there are some valid concerns there and we are very well aware of them and we look at them.

But it becomes a pricing issue if we can find one and we think that we can buy it at the right multiple and we can pay it out over a very short period of time, we'll still make that investment because with the new stock format, in particular, that demographic is still pretty comfortable with AM radio. AM radio in the automobile is still pretty dominant and the demographic that we target is typically adults 35 to 64 and plus. That demographic still uses AM service and will continue to use it for the foreseeable future.

So there are some attractive acquisition opportunities and as people become pessimistic about it, if you can get the right price, I think there's still an opportunity there. But yes, there are some challenges. We're aware of them. We're looking at them. You're going to price those risk factors and those negatives into any acquisition that you do.

Now we like FM as well and the other advantage with FM of course is as HD radio continues to pick up and it's been a long time in coming; maybe as it gets a little more momentum, it gives FM some additional advantages in that you can have a second channel and even a third channel on the digital side.

But we have done the last two acquisitions that we did news talk, we did it on the FM side. So we like FM too. It's a matter of pricing. It's a matter of factoring in those risk factors and if you can get them on the right price, we can roll out the news talk format very inexpensively because we have all the content. We produce 23 hours a day of long-form content; we own it, it doesn't cost us anything. We can format a radio station very inexpensively, and therefore we think we can achieve some good cash flows.

Thanks for that color. And then in terms of if I was to try to look at your results and compare it to some of the other radio broadcasters, and if we were to take out the block programming of your radio stations, and then look at just what national and what local did in your markets, would you be able to kind of give us a framework of what happened in the first quarter? And in terms of ad categories going into the second quarter, have some of those reversed?

I know that some of the radio peers have said that services as a category saw some softness, but it looks like it's come back a little bit more strongly in the second quarter. Can you give us any color on that?

We can. But let me just make this preliminary comment and then I'll let Evan and/or Dave Santrella comment on it. Understand that the block program you see-- if you eliminate block programming, yes we can do that but understand that it's such an integral part of our strategy, not just on Christian teaching and talk but our business format also depends upon block programming. So maybe half of its revenue generates from block programming. So it's a little bit more integral to what we do.

Having said that, we can identify pure advertising categories and Dave Santrella can maybe comment a bit on that. He's President of our Radio Division.

Let me give you a little bit of color. First off, local spot was up about 1.4% for the quarter while as national spot was down about 5%. What we noticed, which is where you see the rise in income on our FM music radio stations, is-- there was a lot more business it seems in Q1, particularly in March, which was probably the first happy month that anybody had in the quarter- was in transactional business.

And of course our music stations play for a lot more of that transactional business than do some of our other radio stations and so that became a driver to success for that format.

In terms of specific ad categories that are up or down. Salem has some tried and true categories. We do well in finance. We do well in medical. We do well in education and we've seen an increased level of interest and participation in educators- in advertisers of educational products and services, in particular.

Thank you for that color. I appreciate it. Then in terms of the level of investment spend; you kind of indicated that it will probably diminish in coming quarters. With the expenses expected to be up 4% in the second quarter, are you anticipating that expense growth will be less than that in the second half?

I think they'll probably moderate in the 3%-4%-5% increase throughout the rest of the year. I'm not sure if I can necessarily give guidance beyond this quarter that I gave which was 2% to 5%. But we certainly expect to see the expenses decline over time as you've seen over the last couple of years.

The reason that the guidance is as high as 4% in Q2 and it's a 2% to 5% range; is it's impacted by the acquisitions and GodVine and SermonSpice and the two radio station acquisitions. We anniversary SermonSpice September 1; we anniversary GodVine October 1; so once you get to Q4 you're going to see numbers that are closer to a kind of same-station view of the world.

Okay, thank you for that color because that's very helpful. All right, thank you very much. That's all I have.

And we have no further questions at this time. Mr. Atsinger, I'll turn the conference back to you for closing or additional remarks.

Okay, thank you Operator. We really have no additional remarks. We're grateful for everybody that joined the call and we look forward to visiting with you again when we report on the next quarter. Thank you.

And again ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.