Evan Masyr - EVP & CFO Edward Atsinger - CEO & Director David Evans - President, Interactive & Publishing.

Michael Kupinski - Noble Financial.

Welcome to the Salem Media Group First Quarter 2015 Earnings Release and Teleconference. [Operator Instructions]. I would now like to turn the conference over to Evan Masyr. Please go ahead..

Welcome. And thank you for joining us today for Salem Media Group's first quarter 2015 earnings call. As a reminder, if you get disconnected at any time, you can dial back in or listen from our website at www.salemmedia.com.

I'm joined today by Edward Atsinger, Chief Executive Officer; David Santrella, President of Broadcast Media; and David Evans, President of Interactive and Publishing. We will begin in just a moment with our prepared remarks and once we're 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 10-K 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, adjusted EBITDA and free cash flow.

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.salemmedia.com. With that, I'd like to now turn the call over to Edward Atsinger..

Thank you, Evan; thanks to all of you for joining us for today's call.

Follow my normal protocol, give you an overview of Q1 performance and focus on some of the things that I think are the more important takeaways and then I'll comment briefly on our dividend policy and then turn it back to Evan for a more detailed exposition of our Q1 performance with some guidance about Q2.

All in all, we were pleased with Q1 performance. For the quarter, total revenue declined 0.8%, but in the non-political year, we're pretty pleased with that result.

More significantly, our recurring operating expenses declined by 1.1%, resulting in an increase in adjusted EBITDA of 0.4% and probably more significantly, a 17.5% increase in free cash flow.

One of the important takeaways, I think, from the performance in Q1 which we also hope will helping us in Q2 is a better effort at cost containment, the key focus for us during the first quarter and it will continue to be a focus for us as we go on through the year.

With the radio industry continuing to be soft, we've had to take a hard look at our expenses and both capital and operating and put in place a number of cost savings to try to increase our overall efficiency and we feel that we've made some progress in that regard. I expect that to benefit us throughout the rest of the year.

In terms of revenue, this quarter was another challenging quarter for the radio industry in the markets where we operate, Miller Kaplan which shows industry results, demonstrated the industry was down 3.6%, while our total broadcast revenue was down 0.5%.

And again, it's worth mentioning the impact of political revenue which was $200,000 in Q1, 2015 as compared to $700,000 in Q1 of last year. If you exclude the impact of political revenue, our broadcast revenue would have increased 0.5%.

We outperformed the industry generally in terms of local spot which for sale, it was down 1.3% whereas according to Miller Kaplan the industry as a whole was down 5% in the market that we reported. Additionally, non-traditional revenue was up 21% as we placed a greater emphasis on events and other non-traditional revenue opportunities.

A block programming also perform well for us in this environment, it was up 1.3% for the quarter. And in general Salem continues to outperform the radio industry in the markets and which we operate.

And I would say, as much as any factor this is to a large extent attributable to the fact that we're not as dependent upon transactional business in most of our markets, in fact in all but a few of our markets. Expenses in the broadcast division were up only 1.7% which is a reflection again of our continued emphasis on cost control.

We expect expenses to continue showing moderation on a go-forward basis. As a result of the elimination of a number of positions which took place in March and which we commented on during our last call and that impact will be felt of course in the subsequent quarters. Our digital division had a weak first quarter with revenue declining 4.6%.

Again, this decline was largely due to the lack of political revenue. The first quarter following any election is always slow for our conservative opinion websites and this quarter was certainly no exception.

Post-election fatigue that kicks in after elections that impacts both revenue with the lack of political ads and also page views due to less audience interest. Additionally, we continue to be impacted by the shift from desktop usage to mobile usage of our websites. Digital expenses were also well contained, up only 1.7%.

The layoffs we implemented again in late March also included some personnel in this division. Our Publishing division was a bright spot for us this quarter, posting an increase in revenue of 6.2%. This increase would again be even more if you factor in that we shut down one of our magazine titles Town Hall magazine on December 31.

The growth we had was from both our traditional book publisher, Regnery Publishing; and our self-publisher Xulon Press. Xulon had a 6.9% revenue increase and Regnery had an increase of 21%. Regnery's best-performing title by the way in the quarter. A couple of titles had performed well.

One was Trust Betrayed by ex-Navy's SEAL sniper Scott Taylor and ISIS Exposed by Erick Stakelbeck. We have a few big titles scheduled to be released in the second quarter. Got Christian Powers book, The Silencing, how the Left is killing free speech is due to be released on May 11; and Ann Coulter's book, Adios, America on June 1.

Based upon the subject matter focus of each of these books and the popularity of both of these authors, we think that both books have the potential for very strong performance. So we'll keep you informed and we look with anticipation upon these releases.

The expenses on our Publishing division declined 10.2% in Q1, resulting in a slight profit in this division compared to a $700,000 loss in the first quarter of last year. The expense declines are a result of lower author royalty expenses and again the closing of Town Hall Magazine.

It's worth discussing the decline in our corporate overhead which was down 21.2% for the quarter. One of the factors driving this decline is related to reduced payroll. As we previously reported, our former President and Chief Operating Officer resigned December 31.

Additionally, we restructured the Spanish-language Christian Teaching and Talk stations such as they now report to a Vice President, rather than to a separate division President, as was previously the case. This has resulted in some of increased efficiencies. Again, the takeaway is that we're focused on cost containment.

We continue to find attractive opportunities for radio station acquisitions. During the quarter, we closed on the acquisition of WDYZ-AM in Orlando, Florida for $1.3 million. We have three other acquisitions in front of the FCC right now.

In Pittsburgh, we're buying WDDZ-AM for $1 million, in Atlanta, we're buying WDWD-AM for $2.75 million; and in Little Rock, Arkansas, we're buying KKSP-FM for $1.5 million. We began operating KKSP on April 1 under an LMA agreement. additionally, we're also offering KHTE-FM in Little Rock in under a long-term LMA.

We continue to look for radio station additions that make sense to us and new media opportunities that make sense for us and of course, we'll keep you updated on any progress as things develop there. Finally, a brief comment on the growth of our free cash flow on our quarterly cash dividend.

As I mentioned in my opening comments, free cash flow increased 17.5% to $5.2 million, despite only a modest growth in adjusted EBITDA, we were able to accomplish, this largely grow a 13.5% reduction in capital expenditures. On March 31, we made a cash distribution of $1.6 million or $0.065 per share.

As a reminder, our policy is to distribute to shareholders approximately 20% of our expected free cash flow. Our Board will be meeting in about two weeks to discuss the second quarter dividend and once they make a decision, we will make an announcement about that decision.

So with that, I'll hand the call back to Evan some additional detail on the quarter and guidance for second quarter of 2015..

Thank you, Ed. And for the first quarter, as Edward mentioned, our total revenue increased 0.8% to $61.9 million.

Operating expenses on a recurring basis decreased 1.1% to $51.1 million and adjusted EBITDA increased 0.4% to $10.8 million net broadcast revenue increase 0.50% to 46.0 decrease 0.50% to $46.5 million in broadcast operating expenses increased 1.7% to $33.9 million, resulting in station operating income of $12.6 million for a 6% decrease.

On a same-station basis, net broadcast revenue decreased 1.6% and SOI decreased 6.3%. These same station results include broadcast revenue from 99 of our radio stations in our network operations which represents 99% of our net broadcast revenue. I'll now break down our broadcast revenue by format.

41 of our radio stations are programmed in our foundational Christian Teaching and Talk format. These stations contributed 44% of total broadcast revenue and decreased 1% for the quarter. Our 27 news talk stations had an increase of 2% in revenue for the quarter overall, these stations contributed 17% of total broadcast revenue.

Revenue from our 12 contemporary Christian music stations contributed 22% of total broadcast revenue and increased 4% for the quarter. The 9 stations that we have programmed in Spanish language Christian Teaching and Talk decreased by 2% and this format comprises 2% of total broadcast revenue.

And finally, with respect to our main formats, we have 10 stations in a business talk format and this format contributed 2% of total broadcast revenue and had a 5% decrease in the quarter, our network revenue decreased 9% for the quarter and represent 8% of total broadcast revenue, publishing revenue increased 6.2% to $4.5 million and represent 7% of total revenue and finally revenue from our digital media businesses increased 4.6% to $10.8 million and represented 17% of total revenue.

During the quarter, we repaid $2 million on our term loan, leaving a balance of $274 million outstanding as of March 31. We also had $0.5 million drawn in our revolver. Our leverage ratio decreased from 5.45 as of last quarter to 5.35 compared with compliance covenant of 6.25.

For the second quarter of 2015, we're projecting total revenue should decrease between 2% and 4% over the second quarter 2014 total revenue of $68.6 million.

The second quarter of 2014 was benefited by both political revenue in the sales of 2 best-selling books, excluding impact of these items will be projecting total revenue to be between flat and down 2%.

We're also projecting operating expenses before gains or losses on the disposal of assets, impairment losses, depreciation, amortization and stock-based compensation expense to be between flat and up 3% compared to the second quarter of 2014 operating expenses of $55.5 million.

And with that concludes our prepared remarks and we would like to now answer any questions that any of you may have.

Operator?.

[Operator Instructions]. Our first question comes from Michael Kupinski at Noble Financial..

You did a great job in corporate expenses in the first quarter.

I was wondering, are we able to use the first quarter G&A as the run rate for the balance of the year or there are some other things that are going to be moving around on a quarterly basis going forward?.

I don't think we'll see that significant level of decline in subsequent quarters. There were some expenses that we had in Q1 of last year that didn't repeat in Q1 of this year that aren't necessarily there the rest of the year. So I'm not sure you can use that.

We'll still see certainly much better than what we've seen in the past but I expect that we'll see declines, but not likely in the 20% range..

Yes. And I was just wondering in terms of the guidance for the second quarter for expenses to be flat to up 3%.

Where is the pressure on expenses coming from? Is it in any particular [indiscernible] obviously the guidance there, I think is going to pull total company guidance? Is there particular segment that you're seeing pressure on expenses or can you just kind of give us a little bit more color on where you're seeing the pressure?.

I don't think we're seeing pressure in any particular division. Obviously, one of our biggest expenses that we have as a company is salaries and you'll see increases in salaries, just in general year-over-year. Certainly, we took some action and had some layoffs, but I'd say there is some pressure there, but that's kind of across the company.

There is not any particular division where we see expenses increasing or giving us more pressure than others..

And Evan, I know that you restated operating divisions.

Can you provide the pro forma second quarter 2014 segment revenue for Radio, Digital and Publishing?.

Let me get that, I don't have it in front of me right now. Let me, whilst on the call, see if I can grab that..

Okay. And then, in terms of the revenue guidance, can you kind of give us some thoughts on how the different divisions are shaping up? Instead, you gave us the total company revenue expectation for Q2. Is there any nuances outside of the political and the publishing and the two books that you had a year earlier that were very strong.

Can you kind of give us any thoughts on the individual segments?.

Yes, let me get back to your other question first and I did just pick up these numbers. So to give you an idea of broadcast revenue in the second quarter of last year under the new kind of way of reporting was $49.1 million, Internet $12.3 million and Digital $12.3 million and Publishing $7.2 million..

And then, in terms of your thoughts on the Q2 guidance, I guess what can you break that down by division or kind of give us some thoughts on how that falls between the divisions?.

We've got David Evans, our New Media Division President here and Dave Santrella. So let me just let them comment briefly on that..

Let me explain. This is David Evans and let me start off, I think the weakest division in the second quarter compared to last year is going to be Book Publishing and specifically Regnery. Last year, we had two best-selling titles, Dinesh D'Souza and Ed Cline. We do have two strong titles coming this quarter.

Christian Power and Ann Coulter, but at this point in time, there is no guarantee of a best seller. So we're not projecting those titles to perform at the same level as the two titles last year. So Book Publishing would be the segment where our numbers would be weakest.

Internet, you're going to continue to see some softness, that continues from Q1, mainly because of political. Our conservative websites aren't going to have the same level of traffic or page views as last year.

And we continue to kind of work our way through the challenges associated with desktop website businesses migrating to mobile and figuring out how to fully monetize that change. And I guess in terms of color commentary, we expect the strongest division in second quarter to be radio..

Okay. Yes, Mike, no pressure there. Thanks, Dave..

Yes. Radio for Q2 is looking okay. And I guess I would just really stress that it's okay. April finished kind of flattish. We're seeing from our more transactional markets right now like Atlanta and Dallas, those two markets in particular, we're seeing a little more activity there than we have in the past.

They both kind of have taken their numbers up in the last couple of weeks for the next couple of months. That's always a positive sign. But it remains pretty tepid..

I guess do you think that you're starting to -- some radio operators are saying that looking out to June is starting to show a little bit of better pacing information. I mean you get the sense that maybe as you go into the second half, you might get better.

I mean, any sense of what's driving the kind of lackluster results at this point?.

Well, first off, yes, May is looking right now better than April, June looks to be right now the best month of the quarter. In terms of what's driving that, a couple of things will drive that; of course, as we get into the second quarter and more favorable weather, there is more opportunity for that revenue which is always great.

We can move from solely indoor events to both indoor and outdoor events that helps us a lot. The movie business seems to have a little bit of an uptick right now for us. So those are a couple of categories, both movies and events, that seem to be picking up.

Another good thing on the broadcast side is Michael Medved has been out, he's been out ill for all of Q1 and he has returned fully to today's network broadcast every day. So we're seeing some advertisers that kind of went away when Michael had a prolonged illness, they're starting to come back. And so all of that is bearing favorably in the quarter..

But nevertheless, he's still tepid. I mean we're still left, that's not gangbusters and we remain optimistic, but his color is about as accurate as we can give you..

And then, in terms of the publishing outlook, interestingly, it sounds like two pretty powerful books that could likely be on the top 10 best seller list.

I guess I'm just trying to understand what potential upside we might have if or how much you're factoring in in terms of revenues for these? Are you just assuming that they're just going to be an okay seller. And if they do make the top 10 list, we can have positive upside surprise potential.

I guess, I'm just trying to figure out how you're coming up with your outlook for publishing?.

We have projected, what we think a realistic outcome is? Is there some downside risk? Yes, probably. Is there upside potential? Certainly. If the titles can get on to the New York Times Bestseller List and stay there for a few weeks, that would certainly represent upside..

Okay.

But it's probably more likely that we'll see it in the third quarter than the second quarter? Is that fair?.

Yes. If they do well, you'll see some of that in the second quarter with reorders and some of it could go into third quarter..

[Operator Instructions]. At this time, there are no further questions and I would like to turn the conference back over to Edward Atsinger for closing remarks..

Well, thanks again for joining us and we look forward to visiting with all of you again, when we report on Q2 earnings. So thanks, operator. We'll talk to you then..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..