Evan Masyr - EVP and CFO Edward Atsinger - CEO David Santrella - President of Broadcast Media David Evans - President of Interactive and Publishing.

Michael Kupinski - Noble Financial Robert Maltbie - Singular Research Chris Temple - The National Investor.

Good evening and welcome to the Salem Media Group's Third Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Evan Masyr. Please go ahead..

Welcome and thank you all for joining us today for Salem Media Group's third quarter 2016 earnings call. As a reminder, if you get disconnected at any time -- if you get disconnected at any time, you can dial back in or listen from our website at www.salemmedia.com.

Joining me on the call today are Edward Atsinger, Chief Executive Officer; David Santrella, President of Broadcast Media; and David Evans, President of Interactive and Publishing. And we'll begin in just a moment with our prepared remarks.

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 forecast the 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 or SOI, EBITDA, adjusted EBITDA and adjusted 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'd like to now turn the call over to Edward Atsinger.

Ed?.

Graphic Novel. Hillary's America spent a total of eight weeks on the New York Times Bestseller List, peaking at number one, while Guilty As Sin has been on the list for two weeks, and Clinton Cash was on there for four weeks, peaking in at number one in graphic works.

The fourth quarter will be a fairly quiet quarter with only one noteworthy release currently planned. Paul Batura of Focus on the Family will be releasing Chosen for Greatness, how adoption changes the world. Also David Limbaugh will be releasing his next book in the first quarter of 2017.

For the quarter, publishing posted a profit of $200,000, which includes approximately $300,000 of startup losses associated with the Hill Crest Media acquisition, compared to a loss of $100,000 last year. Let me take a quick look at our acquisition activity during the quarter.

On August 1 we acquired the General Marketing Publishing Company, we just commented on Hill Crest, for $3.5 million. This has been integrated into our existing Christian content self-publisher, gives us some scale and gives us some opportunities that we think will help us grow those businesses.

We also purchased Mike Turner's line of investment products for $500,000, which we will fold into our investment newsletter business.

And finally, on the broadcast side, we purchased three additional translators, bringing the total of our translator purchases up to 30, all of which were acquired during the FCC window that allowed owners of AM stations to buy translators and move them into major markets on very favorable terms.

We expect these translators when fully up and operational to enhance both operating income in the markets that they are located in, but also to represent a significant balance sheet improvement given the favorable basis upon which the FCC rules -- rule change allowed us to acquire those stations. Let's comment a minute on the balance sheet.

We reduced our term loan and revolver debt by $3 million in the third quarter. Leverage improved from -- excuse me -- from 5.39 to 5.29. Let me then conclude my prepared remarks with a brief discussion of our dividend and free cash flow situation.

On September 30 we paid $1.7 million of quarterly dividends, actually a return of capital, it was cash distribution since we are not a taxpayer, and therefore this is return to our shareholders on a tax-free basis. It does reduce the basis but there is no taxable event.

That represents 6.5 cents per share, and that represents a 4.6% yield based on today's closing price. Additionally, we have a free cash flow yield of 17.2% based upon the current stock price and the adjusted free cash flow over the last 12 months which was $25.2 million.

It's a lot of information, but with that, I'll turn the call back to Evan for additional detail on the quarter and to provide guidance for Q4 2016. So, Evan, I'll give it back to you..

Great. Thank you, Ed. For the third quarter, total revenue increased 5.6% to $71.3 million. Operating expenses on a recurring basis increased 7.3% to $58.6 million, and adjusted EBITDA decreased 1.5% to $12.6 million.

But as Ed pointed out, if our healthcare costs for the quarter were normalized to a 10% growth, adjusted EBITDA would have actually increased 3.7%. Net broadcast revenue increased 3.2% to $51.1 million and broadcast operating expenses increased 5.3% to $37.4 million, resulting in a 2.1% decline in station operating income, down to $13.6 million.

On a same-station basis, net broadcast revenue increased 2.1% to $50.5 million and SOI decreased 1.5% to $13.8 million. The same-station results include broadcast revenue from 109 of our 118 stations and our network operations and represents 99% of our net broadcast revenue.

And for those of you that are interested, I'll take a look at the revenue on the basis of our formats. We have 42 of our radio stations that are programmed in our foundational Christian teaching and talk format. These stations contributed 42% of our total broadcast revenue and increased 2% for the quarter.

Our 32 new talk stations have increased 10% in revenue in the quarter, and overall these stations contributed 18% of total broadcast revenue. Revenue from our 13 contemporary Christian music stations contributed 20% of total broadcast revenue and decreased 9% for the quarter.

This was driven largely by the overall softness that Ed previously mentioned, particularly in the Dallas and Atlanta markets. The eight stations we have programmed in Spanish language Christian teaching and talk programming increased by 7%, and this format comprises 2% of our broadcast revenue.

Finally, we have 15 stations doing a business talk format, and that format contributed 3% of total broadcast revenue and experienced a 32% increase in revenue for the quarter. Network revenue increased 29.2% for the quarter and represents 9% of total broadcast revenue.

Publishing revenue was up 18.9% to $8.2 million and represents 11% of total revenue. And revenue from our digital media businesses increased 7.8% to $12 million and represents 17% of our total revenue. During the quarter we repaid $2.25 million of our Term Loan B and reduced the revolver balance by about $700,000.

At the end of the quarter we had $269 million due on the term loan and had an additional $1.1 million drawn on the revolver. Our leverage ratio decreased from 5.39 last quarter to 5.29 at the end of September, compared to a compliance covenant of 6.

And for the fourth quarter of 2016, we're projecting total revenue to be between a decrease of 1% and an increase of 1% over fourth quarter 2015 total revenue of $69.1 million.

And we're also projecting operating expenses before gains or losses on the disposal of assets, impairment of long-lived assets, depreciation, amortization of stock-based compensation expense, to increase between 2% and 5% compared to the fourth quarter of 2015 operating expenses of $55.8 million.

And this concludes our prepared remarks and now we'd like to answer questions that anyone may have, and I will turn it back over to the operator..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Kupinski from Noble Financial. Please go ahead..

Thank you. Thanks for taking the questions. In terms of the expense guidance for the fourth quarter, is that expense guidance factor in at 10% increase in the healthcare costs? And then if you could just talk a little bit about -- a little bit more in detail about what the other factors the 2% to 5% increase might have that may not be recurring..

Yeah, I'll answer that. With respect to what's in there for healthcare, we do have a more normalized 10% or somewhat in that neighborhood increase for healthcare costs for Q4. A couple of other factors that play into that expense increase is some of the acquisitions, in particular Hill Crest which we acquired this year.

We had some duplicate expenses as we are in the process of integrating Hill Crest into Zuwon, so we have things like extra rent and some extra salaries of people that may be -- the traditions may be moving over to Orlando in the future. So that's part of it.

And then other acquisitions that we've had during the year like the station we started [inaudible] in San Francisco. So those things are in Q4 of 2016 that weren't necessarily in Q3 of 2016 -- Q4 of 2015..

And in terms of the political advertising, I understand that you guys really didn't play in the last presidential cycle that much. Aside from Obama I guess spending a lot of money, I don't think that Mitt Romney spent a lot with you guys, might just quantify that.

But as we look into the fourth quarter, typically you guys are used as a get-out-to-vote type of scenario.

Would we -- could we expect that political would kind of give a little bit of -- more of an increase in the fourth -- into your fourth quarter? And do you have any visibility about that? And then also you might chat a little bit about I believe that California has a medicinal, you know, marijuana on the ballot.

I was just wondering how that was impacting political advertising in the fourth quarter as well..

Michael it's Dave Santrella. Let me address those. First off, on the presidential race, there's really relative little money coming in from certainly the Trump campaign, we're not going to get it from the Clinton campaign.

We've had last week, literally, we got a few really late last-minute orders, and they were kind of the first orders that we've seen. But nothing significant to speak of. We are getting some PAC money, but again not to the levels that we've seen in the past. With regards to California and ballot initiatives, we get a little bit of that money.

But just to put things in perspective, in Q3, political was actually the 18th largest advertising category for Salem's radio division. So it really -- it didn't even make the top ten, which it probably would in a political year..

And do you have any viewpoint on what the political number looks like for your broadcast group in the fourth quarter?.

No, we don't have any specific guidance for broadcast in the political -- in the broadcast division, political in the broadcast division for the fourth quarter..

In terms of the growth rate down 1, up 1%, can you just kind of give us a little flavor what issues that you're seeing, whether it's local, national, what are you seeing -- where are you seeing the weakness, what categories maybe? Just a little bit more color there..

Yeah, really the biggest issue there on the local spot side is just transactional business, specifically in Dallas and in Atlanta where -- in Atlanta to a lesser degree. Dallas and Atlanta are both big transactional markets for us.

And we've seen a trend with that business, they've gone a little bit younger, and so, you know, in other words, the buy comes in, adults 18 to 49 or women 18 to 49, and that is not as strong a suit for us as, say, women 25-54. So that's created some challenges that we're addressing..

Okay. I think that's all I have for now, let others ask..

An additional point, Mike, last year, on the book publishing side, we had a much stronger Q for title schedule than this year, in particular we had a David Limbaugh release a year ago, and his next book isn't hitting this Q4, it's hitting Q1 2017.

So that's a pretty big impact in terms of strength of schedule last year compared to this year, and that's reflected in the flat guidance..

In terms of the schedule then, what -- is there any particular book that might have breakout potential into the fourth quarter?.

No. It's a very modest schedule this Q4. The political books that we had all came out Q2, Q3 in advance of the election. So, Q4 this year is quiet compared to Q4 last year..

Got you. Okay. I think that's all I have for now. Thank you..

Thank you..

Our next question comes from Robert Maltbie from Singular Research. Please go ahead..

Hello, Evan, Edward and Dave.

How are you guys?.

Doing well. Thanks..

We're doing well..

All right. Wow. What interesting times we live in, aren't they? Regarding the situation with your healthcare cost.

I know you mentioned early in the call the decision to self-insure and the, I guess, unanticipated or expected shall we call a little blip-up in those costs, would anything inspire or cause you to possibly change your insurance to other types of coverage?.

You know, I will tell you that, Robert, when this -- when we saw the numbers for the quarter and we were seeing the claims coming in, absolutely it was something that we looked and said, are we still saving money? Is it still in our best interest to be self-insured? Because obviously we have to deal with volatility being self-insured.

But we went back through -- starting in 2013, so, 2013, 2014, 2015 and year-to-date 2016, with our broker, and did a very detailed analysis on what did we spend over that time period versus what would we have spent under a fully insured/guaranteed cost type program.

And the numbers in that time period that we saved were quite compelling, north of $5 million. So, while, yes, we do have volatility, it's, at least from what we can see, well worth it to save, you know, $5 million over a four-year period.

So it's something we will address on a periodic basis as we go through renewals and take a look whether it's appropriate to stay self-insured, but at this point we feel that's the most prudent action for the company..

I see.

Regarding the actual political spending that has occurred this election season versus possibly your expectations going into it, how would you say that they have aligned?.

I think it's aligned lower than what our expectations were. I mean, when we did the budgets at the front end of the year, it was hard to predict really, you know, who the candidates would be as we got to November. I think there were, what, 14 Republican candidates in January.

So, you know, I think we anticipated -- we probably didn't anticipate the candidate at that point, you know who it is, and the fact that spending would be done at that point..

So, everything about this year has been a little extraordinary, and in that regard, yeah, we have -- we got less than we budgeted.

I guess we might point to one positive, is of course the extraordinary developments all year in the political season have also driven a much more interest to the news talk format, so we've certainly seen the upticks there that I referred to, both in terms of time spent listening, in terms of advertiser response, and in terms of renewals.

So while it's not direct money, directly linked to campaigns, it certainly has helped us in terms of building those particular formats on a longer-term basis. So for that we're grateful. But now, we've been disappointed that the Trump campaign has spent less money nationally than would have been expected.

And because it was held in April, most of the money we were getting was when it was competitive, when nobody knew who the Republican candidate was going to be..

Plus the popularity of our host, particularly Hugh Hewitt, I think has certainly aided our network revenue scenario..

Okay. And I know in previous calls you've spoken of your initiatives were more digital growth.

Could you all color into that maybe expectations or goals versus actual performance here and so far this year?.

So, as Evan mentioned earlier, our digital revenue did quite well in the quarter, we were up 7.8%. Our traffic did extremely well, up 92%. What's driving the traffic growth is, over the past year, we've acquired five Christian mobile apps. Those apps are performing extremely well, significantly ahead of our original projections.

And they're definitely fueling growth in our digital business. Offsetting that, however, Facebook has been changing its newsfeed algorithms for the past year or two and we've seen a big drop in traffic from Facebook, down about 50%. So, you know, those are two pretty significant shifts in our business.

You know, we expect Facebook to continue to be a challenge and we expect the Christian mobile apps to continue to perform well. So, digital is in good shape, but things are changing, and we've got to keep up with those changes and we think we have with this extra investment in the mobile area..

You bring up the algos. I know someone over there, I think it was Merkel in Germany, had a beef with Google for various reasons about the methodology behind the algos.

Is that just something totally we're all at the mercy, or do you have any insight into that?.

Well, Facebook control their newsfeed algorithm, just as Google control their search algorithm. I think in both cases they're trying to maximize their audience, their revenue opportunity, and their engagement with their users. And in Facebook's case, they just want to keep people on Facebook. That's what's in Facebook best interests.

So the types of posts that they're favoring on the newsfeed are posts that lead people in the Facebook environment rather than having people leave. If I was in Facebook's shoes, I think I'd do that too..

Yeah, no doubt.

Final question is, regarding, I guess, decisions on capital allocation, did I hear 17% as your current free cash flow yield?.

That's correct. That's where we are based on today's stock price..

Yeah.

So, will there be any consideration towards perhaps some type of, I know paying down or deleveraging is also an important objective, but is there at these levels some type of a balance sheet objective where it's perhaps a share buyback might be a better return for the shareholders than paying down debt, or any thoughts on that?.

Well, I think that our priority is going to remain to pay down debt, to get our leverage lower. We're going to refi our current credit facility probably beginning sometime in fourth quarter 2018. So that's, you know, a couple of years from today. And we want our leverage to be at a level that will facilitate a smooth, attractive refi.

And so that's going to be our priority, rather than increasing value -- direct value to shareholders, we think that that's -- that that will drive stock price we think as we get our leverage lower, and if we can get the new facility in a cost of capital that's attractive, again we think that'll be a great benefit to shareholders.

And that's the priority right now that the Board has mandated and management is fully bought into..

Appreciate that.

And just to refresh memory, what is the current cost of debt?.

So, all in including the interest rate swaps we have, we're just north of 5% on our term loan and revolver blended..

Thank you..

Our next question comes from Chris Temple from The National Investor. Please go ahead..

Just to follow up with that last question or series of questions, as far as dividend is concerned, correct me if I've got the figure a little wrong, but I seem to recall that your informal target for the dividend as a percentage of free cash flow is actually 20%. So it's a bit below that now.

And if your fourth quarter projections for give or take flat revenue but it increased in expenses are correct, and especially wanting to hit the balance sheet looking better, is a dividend cut on the table?.

I doubt if there'd be a dividend cut unless there was a very substantial turn in our fortunes. No, we don't see that. These are targets and they're not hard and fast. They're targets that we want to maintain over a longer period of time. But I don't see that happening and I think we'll be able to maintain the targets both for acquisitions.

Probably as mentioned in prior calls, we're going to -- we'll deemphasize the acquisition part to maintain the debt retirement as our top priority and to maintain the dividend. And I guess I should also comment that we referred to it as a dividend but as you know it's not really a dividend, it is a return of capital --.

Right..

-- because we don't pay taxes. So it does reduce our shareholder's basis in the stock slightly, but it is going to represent a taxable advantage, so technically it's not a dividend but it is a return of capital..

Got you. Okay. And one other quick question on the healthcare case.

The self-insuring, obviously it is a great thing, I don't know if I've ever read this before or not, do you guys have anything in the form of a catastrophic or umbrella policy for anything that's really off-the-charts catastrophic?.

We do, Chris, for any claims that are above $150,000, that's all reinsured. Plus we have an aggregate level of insurance, so, if in total medical claims hit above a certain level, regardless of individual large claims, just in total, we also have insurance there. So we're not completely exposed..

Okay, great. Thanks..

Thank you..

This concludes our question-and-answer session. I would 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 us. We look forward to visiting with you again when we give the yearend results and report on Q4. So, looking forward to talking with you then..

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect..