Edward Atsinger - CEO Evan Masyr - CFO.

Lisa Springer - Singular Research Barry Lucas - Gabelli & Company David Santrella - President, Broadcast Media Michael Kupinski - Noble Financial.

Welcome to the Salem Media Group Fourth Quarter 2016 Earnings Release and Teleconference. [Operator Instructions]. As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Mr. Evan Masyr, CFO. Thank you, you may begin..

Thank you, Matt. And welcome all of you and thanks for joining us today for Salem Media Group's fourth-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.

Joining me today are Edward Atsinger, Chief Executive Officer; and David Evans, President of Interactive & Publishing. Dave Santrella, President of Broadcast Media, is out of town, but is on the line as well. We will begin in just a moment with our prepared remarks.

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 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 www.SalemMedia.com. With that, I would now like to turn the call over to Ed Atsinger..

Thank you, Evan. And let me thank all of you again for joining us for today's conference call. I have some prepared remarks and I will follow my normal format. I'll comment first on financial performance briefly during the fourth quarter. I will discuss some acquisition activity.

And then I want to focus on what I think is the biggest story of the quarter, our focus on and successful focus on growing free cash flow, in order to pay down debt and to de-lever our balance sheet. I will then turn the call back to Evan and he will give you more detail on Q4 and provide some guidance for first-quarter 2017.

Let me begin by saying that we had a successful quarter. Revenue exceeded the top end of the guidance we provided. Our revenues increased 2.2% in the quarter compared the 1% increase at the top end of the guidance. At the same time, our expenses declined 0.6% compared to the guidance that we provided, on expenses of up 2% to 5%.

We ended the quarter with adjusted EBITDA up 14.1% and adjusted free cash flow up by 33.8%. We're obviously extremely pleased with the strong free cash flow growth. Let me break down results by division. Broadcast revenue improved 1.3%. As I mentioned in our last call, this unique election cycle resulted in the less-than-anticipated political revenue.

While we did have just under $1 million of political revenue in the broadcast division in the fourth quarter of 2016, it was far less than the $1.9 million we had in the fourth quarter of the previous presidential election cycle in 2012. Just for further reference, we did have over $400,000 in Florida revenue in the fourth quarter of 2015.

We had another solid quarter for our network, with revenues up 12.2% which is due in part to the continued increase in prominence of our national hosts. Our syndicated line-up consists of Hugh Hewitt, Mike Gallagher, Dennis Prager, Michael Medved, Larry Elder and Eric Metaxas.

And it is hard to find a day when one of them is not featured on Fox News, CNN and NBC or other network television programs. Block programming continued its consistent and stable revenue growth, increasing 2.7% in the fourth quarter as compared to the prior year.

Block programming makes up 43% of broadcast revenue and 32% of total revenue, so it is an important revenue segment. We consider this component of our business annuity-like in nature and much less dependent than traditional advertising revenue is on the state of the economy.

When we do downturn, the block programming is very stable; it's not going to go away when a lot of our advertisers might. On a same-station basis, revenue was up 0.3% in the quarter.

While this represents a modest increase, it should be noted, in the fourth quarter of 2015, we had two very successful listener trips to Israel that brought about $500,000 in revenue. We did not have an Israel trip in 2016, but we already have plans for another listener trip in 2017.

On a true apples-to-apples basis, excluding the Israel trip, the same-station revenue would been up 1.2%. Broadcast expenses were up 2.7%, driven largely by the cost associated with start-up stations. Remember, in 2015, we had the opportunity to acquire a number of the Disney spin-offs.

And while we're pleased with the progress, these stations are still generating some losses. We expect almost all of it will be profitable by early 2017. On a same-station basis, broadcast expenses were up only 1.1%, again, highlighting our careful focus on expense control.

Revenue for our digital division was up 6.9% in the quarter as compared to the prior year. Two primary drivers of the revenue - first, Townhall Media, our network of conservative news and opinion sites, was up 33% in the fourth quarter.

Again, the election is a big factor, not just political revenue, but also the intensity, excitement and interest that was generated because of the unusual cycle. We did have political revenue in the quarter, $400,000 on the digital side and we certainly had increased page views.

Interestingly, we typically see some post-election fatigue right after the election, with page views declining and revenue to some extent, immediately following the election. Because of this unique Administration and all of the news that seems to be generated on a daily basis, we're seeing a smaller decline than normal.

Second, we're seeing tremendous growth from our Christian mobile apps. Expenses in the digital division increased only 1.9% - again, a focus on expense control. This resulted in digital operating income increasing 24.7% over the fourth quarter of the prior year. Finally, our publishing division had a 1% increase in revenue for the fourth of 2016.

I should point out that this growth was entirely from our Salem Author Services businesses which consists of Xulon Press and Hillcrest Media. We acquired Hillcrest, by the way, in August of 2016. Revenue from Salem Author Services grew by 28.3% over the prior year.

Regnery, our traditional book-publishing company, saw revenue decline 25.5% for the quarter. We did not have any significant releases in the fourth quarter of 2016, but in the fourth quarter of 2015, we released David Limbaugh's The Emmaus Code.

This business is volatile, in that it's very dependent upon when you release titles and, of course, how well they do. David Limbaugh was going to release his next book in the fourth quarter of 2016. However, the date has been moved back to the first quarter of 2017. On the expense side, publishing expenses were down 8.5%.

The decline was due to a one-time large write-off we had to take in Q4 2015, due to advances that would not be earned back by Ed Klein on his book, Unlikeable. This year, we had no such write-off. So that was an extraordinary, unusual event. As a result, publishing operating income improved by $700,000.

Finally, corporate expenses were down 22.2% in the fourth quarter of 2016 compared to the prior year. Our Board decided that they will not be paying cash bonuses for the 2016 performance on a wheel incentive, giving our senior management team restricted stock in lieu of cash. Adjusted free cash flow was up 33.8% for the fourth quarter.

We're happy with this growth, yet we know some of the one-time items I mentioned - the large write-off, the publishing company with the restricted stock in lieu of cash bonuses - had an impact.

But when you factor out the one-time benefits we had in the fourth quarter, normalized adjusted free cash flow would still have increased in the high single-digits. For the full-year 2016, adjusted free cash flow was $27.6 or $1.07 per share. That puts our adjusted free cash flow yield at an attractive 15.5% yield.

With respect to dividends, we paid $1.7 million of quarterly dividends or $0.065 per share on December 31. Earlier today, we announced that we will be paying our first-quarter dividend of $0.065 per share on March 31. At $0.26 per share annually, that represents a 3.8% dividend yield, based upon our current stock price.

Finally, with respect to acquisitions, we've been fairly quiet. We closed on the acquisition of 17 FM translators for approximately $1 million. Additionally, we acquired the website ChristianConcertsAlert.com for $150,000. This slowdown in acquisitions has allowed us to get much more aggressive with our debt repayments.

During the quarter, we were able to reduce our term loan B by $6 million and reduce our leverage ratio from 5.29 at September 30, 2016 to 4.96 at the end of the year, December 31, 2016. This is the first time since 2013 that our leverage ratio has been in the 4s.

We're encouraged by this progress and we expect to reduce both debt and leverage further in 2017. As a matter of fact, since the end of the year, we've repaid an additional $5 million of our term loan.

Our number-one focus continues to be on growing free cash flow through steady revenue growth, careful expense management and using the free cash flow to pay down debt, with acquisitions taking a backseat until our leverage ratio is at least at 4.5.

The fact that we've reduced our leverage ratio from 5.47 to 4.96 over the past 12 months is evidence that we're making strong progress in this area and we look forward to updating you in 2017 as we further de-lever. And with that, I will turn the call back to Evan for more specific information on the quarter and a little guidance for Q1 2017..

Great, thank you, Ed. For the fourth quarter, total revenue decreased 2.2% to $70.7 million. Operating expenses on a recurring basis decreased 0.6% to $55.5 million and adjusted EBITDA increased 14.1% to $15.2 million. Net broadcast revenue increased 1.3% to $52.2 million.

And broadcast operating expenses increased 2.7% to $36.8 million, resulting in a 1.9% decline in station operating income to $15.4 million. On a same-station basis, net broadcast revenue increased 0.3% to $51.7 million and SOI decreased 1.3% to $15.6 million.

These same-station results include broadcast revenue from 110 of our 118 radio stations in our network operations and represents 99% of our net broadcast revenue. For those interested, I'll take a look really quickly at revenue by format. 42 of our radio stations are programmed in our foundational Christian Teaching and Talk format.

These stations contributed 42% of total broadcast revenue and decreased less than 1% for the quarter. Our 33 news talk stations had an increase of 6% in revenue for the quarter. 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 3% for the quarter. The eight stations we have programmed in Spanish-language Christian teaching and talk increased by 5% and this format comprises 2% of total broadcast revenue.

Finally, we have 13 stations in a business talk format and this format contributed 2% of total broadcast revenue and increased 11% for the quarter. Our network revenue increased 12.2% for the quarter and represents 9% of total broadcast revenue. Publishing revenue was up 1.0% to $5.7 million and represents 8% of total revenue.

And finally, revenue from our digital media business increased 6.9% to $12.7 million and represents 18% of our total revenue. During the quarter, we repaid $6 million our term loan B and reduced the revolver balance by $600,000.

At the end of the year December 31, 2016, we had $263 million due in the term loan and had $0.5 million drawn on the revolver. Our leverage ratio decreased from 5.29 last quarter to 4.96 at the end of December, compared to our covenant of 6.

For the first quarter of 2017, we're projecting total revenue to be between flat and an increase of 2% over first-quarter 2016 total revenue of $64.6 million.

We're also projecting operating expenses before gains or losses on the disposal of assets, impairments, depreciation, amortization and stock-based compensation expense to be between flat and an increase of 3% compared to first-quarter 2016 operating expenses of $54.1 million. This concludes our prepared remarks.

We would now like to answer any questions. And with that, I'll turn the call back over to our operator, Matt..

[Operator Instructions]. Our first question comes from Lisa Springer from Singular Research. Please go ahead..

My question concerns the digital media business, could you give us a little more color around the nice pickup in operating income for that business in the fourth quarter and do you anticipate that's going to continue to be fastest growing business in 2017.

Yes the main reason for the growth in operating profit was the robust revenue growth I think the revenue growth in the quarter was 6.9%, expenses were barely up over a year ago, so with the benefit of that operating leverage it obviously drove nice increase in digital operating profits, we do expect those trends to continue, we will have a little bit of headwinds because were coming off a very slight strong political year very conservative opinion websites we're not going to have that wind in our favor in 2017, with '17 being non-election year, but yes digital should continue to be our fastest growing business.

Okay great.

And regarding the publishing business normally in the calls you might give us few titles of what's coming up, I'm assuming there's not much in the first quarter but what you see of new titles in the second quarter and beyond that?.

The big title for Q1 is the next book from David Limbaugh, we will be shipping that book in March, though the official retail sale date is April.

So we'll be getting all of the e-book sales in April as opposed to March so it's kind of combination Q1, Q2 event, later in the year we're looking forward to some books by for example Dinesh D'Souza, Meg Mika [ph] and Ed Klein would be three of, we hope will be our larger titles.

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

Just something you can peel back the political onion a little bit more and given the disappointment at the presidential level, how did do you do in down ballot races?.

Well let me just give you some overall political numbers for the year which I think will help kind of put things in perspective and yes there was not much money spent on the presidential side, in 2016 total political across all of our businesses was $4.6 million, comparing that to '15 which had the benefit of the start of the Republican primaries in late 2015 we had $1.6 million, the last midterm $3.2 million compared to the last presidential election 2012, we had $5.5 million.

So hopefully that gives you some background how political played out for us..

And any color you can provide either geographically or by categories, some of the important categories for the stations [ph]?.

I was going to say if you're on the call why don't you respond..

Yes in Q4 we had some decent revenue coming in from automotive and healthcare, home improvement always seems to be a strong category for us as well, there was nothing beyond that that I can tell you that was particularly outstanding other than I would also say education continues to be a strong category for us..

Education is strong, okay that's interesting, and looking forward given what we're seeing in Congress and the fight over healthcare and importance of that category for your listeners, would you expect to see much in the way of issue advertising coming up..

Yes I think that we will and we're certainly proactive in looking for opportunities for that..

We haven't seen it yet January and February I think people kind of generally watching and waiting to see what legislation was going to get initiated, we're seeing growing interest in people wanting to draw attention to that particular views and opinions on particular pieces of legislation. So we're hoping to see an uptick in the second quarter..

Okay. Last one in that vein [ph] since happening here on my radio on the way to work but in a number of commercials here in the Metro area advocating the listeners pick up the phone and call their elected reps to support the Supreme Court nominee and just wondering if you're seeing the same type of phenomenon.

I have not seen that. That would have likely have occurred in the broadcast division and so David Santrella who is not in the room with us, he's in another location would see that activity and as you said he hasn’t seen much of it yet.

Our next question comes from Michael Kupinski from Noble Financial. Please go ahead..

I was wondering if you can just be touched on the [indiscernible] station but I was wondering sounds like you're performing like-minded expectations just wanted to see if that's true and if you can just give the color on how they are performing.

Overall we're pleased with them, some of them are outperforming significantly outperform, a couple are lagging but I'm confident we will have all of them on track of what we projected. We basically would invite an AM station. We like to project income that represents a five multiple of what we paid. So I mean I will give you a rough idea.

We're fairly pleased with I think probably half of them have achieved that, within the first six or seven months of our operation and all of them have the right trajectory, so we feel pretty good about them.

Okay and the extent were lower across the aboard that specifically for the publishing division, where there any specifics in the quarter that may have shifted some the expenses into the first quarter?.

It's really a 2015 comparison issue and in 2015, we had to take a large write-off for Ed Klein's book on Unlikable because it sales were lower than we had projected. We had to take an inventory write-off, we had to take a royalty advance right-off there was no such write-down necessary on any type in the fourth quarter of 2016.

So it was really the absence of an expense as opposed to anything else..

In terms of your guidance you guys have given a little bit more expense growth guidance is that largely because you anticipate that these books there are going to be promotions behind it and that sort of thing and yet you're not really factoring in big revenue so that there might be some upside.

I'm just trying to gauge how conservative your guidance might be on the expense front given or just on the expense front?.

I think the biggest factor would be just a couple of acquisitions we made in 2016, that are still kind of working their way up there trajectory. So for example the acquisition of Hill Crest that we did in August, we've been busy integrating that into our Xulon press business, we took on all of that extra expense.

We're still in the process of ramping up the marketing and sales, so you're not seeing a full revenue contribution from that business yet, but we do have the expenses there, so it’s the same [indiscernible] expense growth would be obviously lower than the overall expense guidance in our guidance..

Also keep in mind the guidance reflects on the revenue side the fact that '17 is not an election year.

Right and basically it sounds like you're being conservative to, on your revenue for the publishing division even though you had some pretty big books that are coming.

Yes obviously the big book is David Limbaugh, we have projected what we think we will sell in, we think that's pretty accurate number, assuming things go well, we'd like to see robust e-book sales and strong reorders which would Q2..

Do you have a title for that book?.

I do, just a question of whether I had a handy on it, give me a second. The True Jesus..

Okay.

And with the prospect of - what are the capital spending plans for 2017 and then are the investments in the FM translators now behind the company?.

Yes overall we expect to be somewhere in the mid-$8 million range, well probably around $8.5 million for CapEx for 2017 and that's below where it's been the last couple of years partly because in both '16 and '15 we had a few studio relocations and Ed I don’t know if you want to talk about anything on the trend..

In a studio location Michael - again very expensive, we don't do it very often, we normally probably average 10 year at an office location is probably 15 or more years, so when you do have it can be one particular location, it could be $1.5 million or less, I mean we're trying to do it more efficiently all the time and we're getting better at it.

With regard to the translators we've been very aggressively as you know taking advantage of this very favorable situation at the SEC with its revitalization rule, which allowed a very favorable treatment for acquiring translators and moving them into the market so we probably have an excess of I should have the number probably but it's in excess of 30 and some of them are very attractive, the total capital expenses is not behind us yet but most of it is.

We're still have - first you have to buy a translator with a 250 miles of the city you want to move into, that is typically not going to be terrible expensive, I mean that go from $15,000 to $65,000 and $70,000 and the average somewhere between those two, that’s your first cost.

And then you have basically you have to construct you have to negotiate for tower site, or use your tower site, most cases we use outside tower sites.

Normally it's a fairly modest lease because it's translator so site operators are fairly accommodating in that regard but then you got to buy [indiscernible] and a low power transmitter and I think that we budget those around $60,000 or so per station, in some cases it could be a little bit more.

About half that's behind us, they need a little bit more at this point.

And in terms of acquisitions which kind of might be insight given the fact that the leverage is coming down to 4.5 times as you indicated I think by the end of this year based on my model you're getting like the 4.6, 4.7, what are the areas that the company might be interested in terms of acquisitions?.

Well will continue to look for nice tuck in acquisitions in the digital area like the mobile apps that we acquired and like Hill Crest which was a nice tuck in for Xulon.

We will continue to look for - at radio stations that are priced properly in markets that we are already in where we can tuck them in and where we can - where achieved a little bit more scale, you kind of wait to see what develops, you have to wait to see what develops and evaluate it but we're going to be fairly cautious on acquisitions Michael because again the board and management really wants to get leverage down to below the 4.5 and lower - that's been our goal, everybody's kind of joint the party to work aggressively and we really feel good about the progress we have made.

So for a few quarters we're going to put more emphasis on debt reduction than acquisitions, unless when we do acquisitions they have to be leverage neutral or delivering, that's kind of the standard that we've adopted in this particular period and we've done a few and all of the ones that we're working on now do meet that criteria, in most cases they are delevering, but in the very least they are leverage neutral..

So for example the mobile apps that we brought in the last 12 to 18 months, we will pay for themselves within two years..

Okay and in terms of your outlook you have mentioned - I just want to make sure I got this right because in your press release you're talking at the first quarter of 2017, were you talking about full-year 2017 being up as well. I just want to make sure I got what I heard.

We only talked about the first quarter..

Okay. Thanks. My ears must not be listening correctly, sorry about that..

Let me give guidance, we never give guidance other than the upcoming quarter..

Thank you. This does conclude the question-and-answer session. I would like to turn the floor back over to Mr. Edward Atsinger, CEO. Thank you. Please go ahead..

Thank you, Operator. Again thanks to all of you for joining us on the call. We hope to see you in a few months when we do our next earnings call..

Thank you. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time..