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

Michael Kupinski - Noble Financial Barry Lucas - Gabelli & Company.

Good afternoon, and welcome to the Salem Media Group Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Evan Masyr, Executive Vice President and Chief Financial Officer. Please go ahead..

Thank you, and welcome all of you for joining us today for Salem Media Group's second quarter 2016 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'll 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 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 our website at salemmedia.com. With that, I would now like to turn the call over to Edward Atsinger..

Thank you, Evan. Good afternoon and thank all of you for joining us.

On my prepared remarks I will focus on Q2's financial performance, touch on some discussion of recent acquisition activity, and I'll conclude with a few comments on dividends and free cash flow and then I'll turn the call back to Evan, who will provide additional details on the quarter and provide some guidance for Q3.

So for the quarter, total revenue was up 1%, recurring operating expenses increased 2%, which resulted in a 5% decline in adjusted EBITDA. Included in these results is just under $200,000 of start-up losses from radio stations that we acquired last year, 2015, and have had to reformat.

Last quarter we had $300,000 of start-up losses for those stations. We're pleased that this trend is moving in the right direction and we continue to expect that they will improve and arrive at profitability and positive cash flow soon. Let me break down the numbers a bit more by discussing the results by division and source of revenue.

Broadcast revenue improved 1%. We're a bit disappointed by these results. Early indications showed a stronger Q2, but the overall economy is still weak and has been impacted -- at least, our revenue's been impacted by a lull in political spending.

Political advertising's a little softer than anticipated, with $500,000 in political revenue in the quarter compared to $400,000 in second quarter of last year, a non-political year. By comparison, in the second quarter of the last presidential election cycle we had $700,000 in political revenue.

The Donald Trump campaign and many of the conservative PACs simply are simply not spending a great deal at this point in the campaign. On the positive side, our foundational block programming revenue performed well, up 6%.

This revenue, as most of you know, is more steady and predictable, which is even more important during times of heightened volatility. The increase was primarily due to the addition of some new programs and was also impacted to some extent by the addition of new stations.

Our network revenue was up 14% in the quarter, with -- the revenue component associated with virtually every one of our nationally syndicated hosts was also up. We shuffled the line-up in early April as Bill Bennett retired from his regular show and is now doing short broadcast features.

We moved Hugh Hewitt to the East Coast morning drive spot and we signed Larry Elder to the 6.00 to 9.00 p.m. East Coast slot, 3.00 to 6.00 West Coast -- Hugh's old spot. This change, on top of the momentum we gained from our active participation in the Republican National Committee debates, has certainly bolstered the network revenue.

Advertising revenue from spot at the local station level was down about 4% due to some industry softness. We previously mentioned that, particularly with regard to our music stations. Broadcast expenses were up only 1% as we continue to be aggressive with cost controls. This resulted in a 1% increase in station operating income.

Without the start-up losses previously mentioned, SOI would have been up 2%. Digit revenue declined 2% in the second quarter. The timing of Easter contributed to the decline in part as Easter was in Q2 in 2015 and in Q1 in 2016. Additionally, page views originating from Facebook are still declining.

In July, Facebook announced that it now favors user posts over business posts, but we know that change happened some time sooner than that. To counter the Facebook impact, we've been focusing on mobile apps and have seen nice growth in page use and revenue from that source.

To give you a little more specificity, Facebook traffic was down 46% from a year ago, and mobile app traffic was up 5,000% from a year ago. From a careful focus on expenses, digital expenses were virtually flat for the quarter. Finally, publishing revenue was up slightly, just under 0.5%. Both Q2 of 2015 and Q2 of 2016 had two strong titles.

Last year we had Kirsten Power's The Silencing and Ann Coulter's Adios, America. This year we have Stephen Coonts' Liberty's Last Stand and Dinesh D'Souza's Hillary's America. However, due to the timing of the book releases, eBook sales for Dinesh D'Souza's release will fall into the third quarter of 2016.

Publishing expenses were up 8% as we had to take some reserves against titles from Sarah Palin and Stacey Dash. During the second quarter, we bought Bob Carlson's Retirement Watch newsletter and website for $100,000. Additionally, we signed an LMA to operate KTRV AM in San Francisco beginning in early July.

Not only is it one of the premiere AM signals and the No. 4 market, it fills in the only top 10 market we were not in with our nationally syndicated talk show hosts. Having network talent in the top markets is important to our success. Also, on August 1 we acquired Hillcrest Media for $3.5 million. Hillcrest is a general market self-publishing company.

Revenues over the last 12 months for Hillcrest, it's approximately $5 million. We do this as a tuck-in acquisition which should result in meaningful cost savings and synergies when combined with Xulon Press, our existing Christian content self-publisher.

Some interesting rule-making by the FEC has created a unique opportunity this year for owners of AM stations to acquire valuable FM spectrum in the form of translators. By a special rule-making the commission opened a special window for a class of stations -- Class C stations -- in January, January 29, for Class C and B stations.

The way it works is the first file application -- if nobody files on that date, the first to file gets the grant. We filed in nine of those cities for a total cost of $400,000 the day the window opened, and it appears that we will be getting all nine of those stations. We're pleased about that.

A second window opened up last Friday, July 29, for Class A and B AM stations. We filed for 18 translators on that day for a total cost of $1 million. While it's a bit early to tell, it looks like there are some competing applications for six of those 18. It looks like 12 are home free, that we'll get those grants.

And the six that are MX, as we say in the industry, we expect to work out solutions so that we'll end up with all of those -- or most of them, at the very least. Again, this was an extremely unique opportunity for us to enhance revenue on a number of our stations.

While we have allocated quite a bit of capital for these translators, we were able to acquire them in small markets and move them into major metropolitan areas, thus picking up assets at a fraction of their fair market value once they're moved in.

A final note on the translators and the comments I previously made about future acquisitions -- I said on the last call that we'd been focusing less on station acquisitions due to the nature that we typically reformat a newly acquired station and have start-up losses.

The nice thing about these translators is there will be no format changes or start-up losses. With that, I'll turn the call back to -- let me comment, before I turn it back to Evan, briefly on our balance sheet and the dividend policy.

Turning to our balance sheet, we reduced debt by $2.4 million in the second quarter while leverage increased slightly, from 5.36 to 5.39 due to the decline in adjusted EBITDA. Finally, on June 30 we paid $1.7 million of quarterly dividends, or $0.06.5 per share. Based on the current stock price, this represents a 3.6% dividend yield.

Our current policy is to return approximately 20% of free cash flow to shareholders through the dividend. We have an attractive free cash flow of 13.9% based on the current stock price, and a free cash flow over the last 12 months of $25.4 million.

So with that, I'll turn the call back to Evan for additional detail on the quarter and to provide some guidance for Q3..

Thanks, Ed. For the second quarter, total revenue increased 1% to $67.8 million. Operating expenses on a recurring basis increased 2% to $54.9 million and adjusted EBITDA decreased 5% to $12.9 million.

Net broadcast revenue increased 1% to $49.7 million and broadcast operating expenses increased 1% to $35.7 million, resulting in station operating income of $14 million. On a same-station basis, net broadcast revenue increased slightly to $49 million and SOI increased 1% to $14 million.

These same-station results include broadcast revenue from 107 of our 117 radio stations and our network operations, and it represents 99% of our net broadcast revenue. And for those that are interested, let me take a quick look at revenue on the basis of format.

42 of our radio stations are programmed in our foundational Christian teaching and talk format. These stations contributed 43% of total broadcast revenue and increased 1% for the quarter. Our 33 news talk stations had an increase of 10% in revenue for the quarter, and over all, these stations contributed 18% of total broadcast revenue.

Revenue from our 13 contemporary Christian music stations contributed 21% of total broadcast revenue and decreased 11% for the quarter. And this was driven largely by the overall softness that Ed previously mentioned, particularly in the Dallas market.

The eight stations that we have programmed in Spanish language, Christian teaching, and talk increased by 13% and this format comprises 2% of total broadcast revenue. And finally, by format we have 13 stations in our business talk format. This format contributed 3% of total broadcast revenue and increased 30% for the quarter.

Our network revenue was up 14% for the quarter and represents 8% of total broadcast revenue. Our publishing revenue slightly increased to $6.8 million and represents 10% of total revenue. And finally, revenue from our digital media businesses decreased 2% to $11.3 million, and represents 17% of our total revenue.

During the quarter, we repaid $1.2 million of our term loan B. At June 30, 2016, we had $271.2 million due on the term loan B, and also had $1.8 million drawn on the revolver. Our leverage ratio is 5.39 as of the end of the quarter as compared to a covenant compliance of 6.0.

For the third quarter of 2016, we're projecting total revenue increase between 1% and 3% over third quarter 2015 total revenue of $67.5 million.

We're also projecting operating expenses before gains or losses on disposal of assets, impairment of long-lived assets, depreciation, amortization and stock-based compensation to increase between 2% and 5% compared to the third quarter of 2015 operating expenses of $54.7 million.

And this guidance is impacted by the recent acquisition of Hillcrest Media and contemplates some increased expenses associated with its integration into Xulon Press. And finally, you may have noticed that we filed an S-3 shelf registration earlier today.

While we have no immediate or near-term plans to use the shelf, we think it is a good business practice to have a shelf on file. And this concludes our prepared remarks and we would now like to answer any questions that anyone may have.

Operator?.

[Operator Instructions] The first question comes from Michael Kupinski of Noble Financial. Please go ahead..

Thank you, and thanks for taking the questions.

How quickly is the payback period for the expenses related to the FM translators?.

Well, it's a little difficult to say. They add very little cost in terms of -- as we said, you don't have the problems because you're not reformatting, you're simply translating and extending the impact of an existing AM facility. And it often enhances, particularly the night time coverage, where some of these AM stations are challenged.

But I think the thing that drives our motivation for these is you're able to acquire them at well under their fair market value. You have to translate your AM station for four years; you're required -- that's part of the gift that the government's giving you. After the four years, you can sell these translators.

And in terms of a balance sheet impact, they will significantly enhance the asset side of the balance sheet because I think typically --even with the construction costs, which are fairly modest because these are, for the most part, 250-watt FM stations, non-directional in most cases, or fairly simple construction challenges.

For the most part, they add very little cost to build and in many cases they go on our own towers, in some cases we lease a tower. So the expenses are fairly short, fairly low.

Mike, it'd be difficult to give you a specific answer, but the investment is modest relative to the value and I think we probably, in two or three years, would feel very good about the enhanced cash flow, particularly where we have a real challenged night time signal. For example, Columbus, Ohio, is a pure day timer.

So by adding a significant translator to Columbus, Ohio -- and that, by the way, has been a very profitable station which we've owned since 1982. It's a Christian teaching talk station and it does very well for us. In the wintertime, its effective signal is something like 7.30 until 4.45 or 5.00.

So having that translator, it gives you a 24-hour position even if it's not the same size signal. But it's a 24-hour signal. And it enhances your daytime programming because folks that are more typical -- listen on FM, would have an FM option.

So I can't give you a specific answer, but I can say that these were gifts the government gave us and we moved very quickly on them, and most of the rest of the industries also moved on them..

In the last quarter, you indicated that the Company's free cash flow will disproportionately focus on debt pare-down, versus last year.

And with the acquisition of Hillcrest, the investments in FM translators, I was wondering, is that view changed for this year? And maybe are we shifting more of the debt pare-down toward -- more heavily influenced in 2017?.

Well, we think the -- based on our analysis, the Hillcrest acquisition will be certainly leverage-neutral. It won't exacerbate the leverage.

So from that perspective we don't -- we said last time that we would try to focus on acquisitions more on the digital side and publishing side where we are in format, we don't have to reformat, where there's existing cash flow. And the Hillcrest acquisition is in that category. We don't expect it to exacerbate leverage at all.

It should be completely leverage-neutral, if not a tad positive, but at least neutral. The translators were a one-off unique opportunity. Relatively modest investment, tuck-in acquisitions that didn't require reformatting, simply extended the impact of existing stations and then extended their reach at night in many cases.

So we had no choice -- you had to file on the filing date if you wanted to be successful. It was on a first-come, first-served basis. And because we have good resources, very excellent engineering infrastructure and legal infrastructure, more so than maybe some of our peers, we were able to move very aggressively and take advantage of those.

But no, we haven't moved away from it; we're still focused on a greater percentage of our free cash flow going to debt retirement..

And in terms of the Company's guidance for the third quarter, 1% to 3% revenue growth, can you add a little bit more color on that revenue guidance? It's just a tad lighter than what I was expecting.

For instance, are your just being conservative about political advertising, maybe some of the efforts that's going on in book titles and things like that. Are you being conservative here? Can you give some….

Let me comment on the political side and then I'll let -- I think David Evans can make a comment or two about the publishing side, and Dave Santrella's here, if he has any additional contributions.

I'm simply -- on the political side, I don't know that -- we're probably being conservative in the sense that you cannot predict, with this election cycle, what's going to happen. I mean, the Republican candidate -- it's the Republican side that normally spends a lot of money with us, and in this case all past precedent seems to be off the table.

So we don't really know so we're trying to be fairly conservative in that regard. That's, I suppose, the negative side. The positive side is that there isn't a day where there isn't something happening on the news cycle and we're getting a lot in the -- increased listenership to our syndicated talk show hosts has been way up.

We mentioned that virtually -- not virtually, every one of our talk show hosts, the revenue is up and over budget. And we see that trend continuing. So to the extent that there may be a little bit less on the political side, there is some offsetting benefit with the network syndication side.

But having said that, we're going to -- we're approaching it somewhat cautiously..

And in terms of that political number, are you using internal numbers that are less than, like, $2 million for political in the third quarter?.

Well, just to give you an idea, we're actually a little bit ahead of where we were in 2012. We have, I think, $1.7 million year to date this year. We were about $1.6 million in 2012. 2012 ended up being a $5.5 million political year. I'd love to say that we're going to get that additional $4 million over the next two quarters.

We're just being conservative on that. Like Ed said, we don't know what exactly what is going to come in, where the key races are going to be, where there are going to be big issues and whether or not we'll be participating where those races and key issues are. So we certainly have some conservatism when it comes to political..

The other item that impacts the Q3 guidance is the Regnery book publishing operation has a weaker line-up of books this Q3 compared to last Q3. We had a pretty big title in last year's numbers and we're not contemplating a title of that size in this year's numbers..

Okay, that's all I have; thank you..

The next question comes from Barry Lucas of Gabelli & Company. Please go ahead..

Thanks and good afternoon.

I was wondering, since you spent a fair amount of time talking about the acquired stations in 2015 and start-up losses running down, when do you actually lap the ownership so their comps become a little bit easier?.

We acquired those, most of them, in the back half of 2015. So as we wind down the end of 2016 we'll anniversary all of those..

Okay, that's helpful. And if -- since David's on the phone, if you could talk a little bit more about what's going on at Facebook, and you were kind enough to provide pay cues of users, comps, for mobile versus desktop on Facebook.

What is the absolute change, though? I mean, how much are you losing versus what you're picking up on mobile traffic? And finally, what's the difference in the rates that you can effectively monetize?.

Yes, I don't have the absolute numbers in front of me and I wouldn't want to quote them incorrectly. Over all, traffic is pretty steady. But when you drill underneath it, the components are changing quite dramatically.

The two biggest changes are, as Evan mentioned, a 46% decline in traffic from Facebook and a 5,000% increase in traffic from our mobile apps. Those are two pretty significant changes. As a result of those changes, we're seeing declining traffic on desktop and we're seeing growing traffic on mobile.

The challenge associated with that is -- although it's getting easier, mobile continues to be harder to monetize than desktop. There are far fewer ads per page and the rates that advertisers are prepared to pay continue to be a little bit lower. So you have -- that transition is a little bit of a drag on our digital revenues.

And, yes, we're trying to work through that and figure out how to best monetize mobile and we're making progress in that area. And obviously we're becoming less reliant on Facebook as time goes on..

Thank you for that, David..

[Operator Instructions] Seeing no further questions, I would like to then conclude our question-and-answer session. And I'd like to turn the conference back over to Edward Atsinger, CEO, for any closing remarks..

Thank you, operator, and again, thanks to all of you for joining the call. We'll look forward to visiting with you again when we report on Q3..

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