Evan Masyr - Executive VP & CFO Edward Atsinger - Founder, CEO & Director David Santrella - President, Broadcast Media.

Michael Kupinski - NOBLE Capital Markets Lisa Springer - Singular Research.

Greetings and welcome to the Salem Media Group Second Quarter 2017 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Evan Masyr. Thank you, sir. You may begin..

Thank you and thank you all for joining us today for Salem Media Group's Second Quarter 2017 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 on the call today are at 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.

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 and adjusted EBITDA.

In conformity with Regulation G, information required to accompany the disclosures of non-GAAP financial measures is available on the Investor Relations portion of the company's website at www.salemmedia.com. With that, I will now turn the call over to Edward Atsinger.

Ed?.

Thank you, Evan. Thanks to all of you again for joining us on today's call. I want to begin my remarks by providing some background and context for our recent refinancing. Then I'll give you a quick overview of the quarter in terms of financial performance, mention a minor M&A activity and then reaffirm our dividend policy.

I'll then give the call back to Evan, who can give you more detailed explanation of the Q2 performance and provide guidance for Q3.

So with that, let me begin by pointing out that from management's perspective, the biggest news of the quarter and that is that we were able to refinance all of our debt on May 19, on terms of which we're extremely pleased.

We replaced our Term Loan B and our revolver with $255 million of 7-year senior secured notes due in 2024 and a 30 year -- a $30 million senior secured asset-based revolving credit facility. We decided to do this in May rather than waiting until we were closer to the maturity of the Term Loan B for a number of reasons.

First, that we were able to take advantage of what we deemed to be a very attractive high-yield market and we were able to secure a coupon on the new notes for 6 3/4%, fixed.

Second, because all the indications are that we're in a rising interest rate environment, securing the new notes by refinancing early with a fixed-rate instrument takes interest rate risk off the table for the duration of these bonds.

Third, we were able to push out maturity for another 7 years, eliminating the execution risk and market risk which will facilitate our continued goal of delevering our balance sheet. Fourth and finally, as part of the step structure, neither the bonds nor the asset-based revolver require maintenance covenants.

This gives us additional flexibility even while we continue to strategically pay down debt and delever our balance sheet.

Those of you who follow the company know that we have already made significant progress in reducing leverage which was noted by the credit rating agencies with S&P acknowledging our progress by upgrading our credit rating as part of the refinancing process. And speaking of leverage, our leverage ratio at the end of the second quarter was 5.16.

Had we not incurred the costs associated with the refinancing transactions, our leverage would have been 5.04, just up 6 or 7 basis points above where it was at the end of Q1.

From our perspective, this was a great outcome and this new capital structure positions us well for the coming years as we continue to focus on our capital structure and making it optimal. As you know and as our peers have reported, our industry is currently in a challenging environment.

First, we're facing a tough comparison from last year which was an election year with this year and a lack of political revenue. Second, we're in a new advertising marketplace year-to-date has proven to be extremely challenging as a result of the ongoing competition from new digital media products.

So within this context of the macroenvironment in our industry, let me discuss our financial performance. For the second quarter, total revenue was down 2.5%. Expenses declined 2.1%, resulting in a 3.9% decrease in adjusted EBITDA. These results were expected in line, if not, a touch better than the guidance that we provided 3 months ago.

We said revenue would be -- would decline between 1% to 3% while expenses would be between a decline of 1% and an increase of 2%. So let me go through the results by division so you can see what drove this performance. Broadcast revenue was down 1.4% during the second quarter. There're some factors that should be noted that impact this decline.

By far the largest factor impacting revenue in Q2 was the continued softness of KLTY FM in Dallas. Revenue was down more than 20% in the quarter as compared to the prior year. We've mentioned on our previous calls that new management was put in place at KLTY in the fourth quarter of 2016 and progress has been made since that time.

We've been focusing on -- particularly on increasing our audience share. And KLTY has been a consistent leader in audience share for many years, always ranked in the top 5 for our target demographic of females 25-54.

The weakness in ratings and revenue began in late 2015 and for much of 2016 and early 2017, KLTY fell out of the -- of that top 5 ranking. The good news is that KLTY is returning to its previous rating success. Some of the fruits of the new management team are beginning to be manifest.

In June, the station was ranked #3 in women 25-54 and #5 for all persons 6 years and older. It was our first time in almost 2 years that KLTY enjoyed this level of ranking, so we're encouraged by that. We expect continued improvement in KLTY operation and believe that KLTY will increase revenue growth in the fourth quarter.

A second notable factor contributing to the decline in Q2 related to block programming which is off 3.4% for the quarter year-over-year. This decline needs to be put into perspective, however.

Much of the decline in block is due to the fact that we have LMAed or leased our legal Kentucky Cluster [ph] to an end market broadcaster and we now receive only an LMA payment. I might add that they've continued with our programming for the most part.

The LMA, that is the lease payment, is much less than the revenue we recorded in Q2 of last year, but then, of course, the difference is it is essentially profit and not revenue. So the comparison distorts the picture just a bit.

We also had 1 large mobile program that was actually in more than 1 market -- a couple of markets that canceled during the quarter. And that had some impact. A third factor that should be noted, although of less significance, was a slight decline of $100,000 in political revenue in Q2 of this year compared to last year.

Normally, the decline in political revenue in a nonpolitical year would be much greater, but in Q2 2017, we got a fair amount of political revenue driven largely as a result of the one-off election for the 6th Congressional District in Georgia and we have a significant cluster stations in Atlanta.

It's worth pointing out also that our syndicated network program had another outstanding performance in Q2. Network revenue improved 8.8% in the second quarter. So as our network host continued to grow in prominence and in reach, we were able to keep broadcast expenses flat as we continued to focus on effective cost controls.

In our Digital division, revenue was down 1.6%. The decline in revenue for the quarter was principally driven by two factors, first, political advertising revenue was down, as would be expected. Additionally, Facebook continues to lag in terms of generating traffic and revenue for our sites.

Page views from Facebook declined 18.6% in the quarter compared to the second quarter of last year. Similar to the Broadcast division, we our focused on expense control which resulted in an expense decline of 2.9%. In terms of operating income, the digital division increased its operating income 2.8% over the second quarter of last year.

Net revenue from our publishing division. It was down 11.3% compared to the prior year's decline. However, that's almost exclusively due to the timing of the release of 2 books by Dinesh D'Souza. Last year, we released Hilary's America, a title that hit #1 on the New York Times Best Seller list in the second quarter.

This year, the newest release by Dinesh, The Big Lie, is released in Q3. However, the growth in our Author Services component of our Publishing business as is our on-demand book publisher had a revenue increase of 9.8% which offset part of the decline from the timing of the Dinesh releases.

Expenses in the publishing division were down 18.8% due to careful expense control but also reduced loyalty expenses due to a more favorable mix of titles. For the quarter, operating income in the publishing division was a $300,000 compared to a loss last year of $200,000. Finally, unallocated corporate expenses were up $260,000 or 7.2%.

The biggest factor here was an increase in accounting and audit-related expenses that resulted -- that were primarily a factor with the newer outside accounting firm that we retained and some parameters that they were interested in that resulted our having to invest a little bit more money to satisfy those requests.

Without that increase, corporate expenses were up by less than 3% for the quarter. We made 1 small acquisition this quarter, acquiring a Portuguese language Bible app for $65,000. We disposed of 4 loss-making magazines during the quarter.

Two were sold for a total of $10,000, but the buyer took over the deferred subscription liability which is substantial. The other 2 were shut down. We now have only 1 print magazine, Singing News which focuses on the southern gospel genre and this is a profitable magazine. On June 30, we paid a $1.7 million of quarterly dividend or $6.05 per share.

At $0.26 per share annually that represents a 3.7% dividend base, the yield based upon our current stock price. That concludes my prepared remarks. Let me turn the call back to Evan for additional detail on the quarter and to give you some guidance for the third quarter of 2017.

Evan?.

Thank you, Ed. For the second quarter, total revenue decreased 2.5% to $66.1 million. Operating expenses on a recurring basis decreased 2.1% to $53.8 million and adjusted EBITDA decreased 3.9% to $12.4 million.

Net broadcast revenue decreased 1.4% to $49.3 million and broadcast operating expenses remained consistent at $35.9 million, resulting in a 5.5% decline in station operating income for $13.3 million. On a same-station basis, net broadcast revenue decreased 1.2% to $49.0 million and SOI decreased 5.3% to $13.4 million.

These same-station results include broadcast revenue from 112 of our radio stations in our network operations and represents 99% of our net broadcast revenue. I'll now briefly review our performance of our strategic formats. Forty of our radio stations are programs in our foundational Christian teaching and talk format.

These stations contributed 42% of total broadcast revenue and decreased 3% for the quarter. Our 32 news talk stations had an increase of 3% in revenue for the quarter. Overall, these stations contributed 18% of total broadcast revenue.

Revenue from our 13 contemporary Christian music stations contributed 21% of total broadcast revenue and decreased 1% for the quarter. Our network revenue increased 8.8% for the quarter and represents 9% of total broadcast revenue. Revenue from our digital media businesses decreased 1.6% to $10.9 million and represents 16% of our total revenue.

Our publishing revenue decreased 11.3% to $6.0 million and represents 9% of our total revenue. And as Ed mentioned, on May 19, we closed on a private offering of $255 million in senior secured notes due 2024 and a $30 million asset-based revolving credit facility due in 2022.

The net proceeds of the offering were used to repay $258 million in principal on the Term Loan B and $4.1 million on our previous revolver. We recorded a pretax loss on the early retirement of long term debt of $2.7 million related to this refinancing, including the early termination of an interest rate swap.

As of June 30, we had $255 million outstanding on the new notes and $10 million outstanding under the revolver. Our leverage ratio was 5.16. For the third quarter of 2017, we're projecting total revenue to decline 6% to 8% from the third quarter of 2016 total revenue of $71.3 million.

Much of this revenue decline is due to the lack of political-related revenue, the elimination of 4 loss-making magazines, some continued softness in Dallas and the reduced book release scheduled in the third quarter of 2017.

Excluding the impact of these items, we'd be projecting revenue declines of 1% to 3% which we believe is in line with the pacings provided by others in the industry.

We're also projecting operating expenses before gains or losses on the sale or disposal of assets, stock-based compensation expense, changes in estimated fair value of continued earn-out consideration, impairments, depreciation expense and amortization expense, to decline between 2% and 5% compared to third quarter of 2016 non-GAAP operating expenses of $58.6 million.

And this now concludes our prepared remarks and we would like to answer any questions that anyone has. And I will turn the call back over to the operator..

[Operator Instructions]. Our first question comes from Michael Kupinski of NOBLE Financial..

Related to your guidance in the third quarter, I was wondering if you can just shed a little bit more color on -- you're saying excluding the impact of all those variables, you would've been down 1% to 3%. Would that -- that I assume, includes your block programming.

And is that -- the LMA that you had last year, is that a factor into this quarter as -- into the third quarter as well? And how much of an impact are we talking about from that?.

Yes. First of all, the guidance does include block programming. So what number you see does include the impact of any declines that we could potentially have in block programming which would include the LMA in Louisville, where we had actual revenue in Q3 of last year. This year, we'll only have LMA revenue..

And I think we put that LMA in place in the fourth quarter of '16. So we won't anniversary it until we get into next year..

Okay. Got you.

And then have you already determined what your -- what the increase in block programming might be for next year? Have you thought out that far yet?.

We're working on that right now, Michael. Typically, our increase is around 3%..

Right. And then, can you describe the current M&A environment particularly for broadcast and digital? I know that there's some stations out there on the market now. Was just trying to figure out what your appetite for stations.

Or are you finding more opportunities on the digital side? Or are you -- still I know your effort is to reduce debt and so what is your appetite at this point?.

Well, we're -- first of all, if we start with the premise that we're going to try to find acquisitions that will not exacerbate leverage, that will either be leverage-neutral or improved leverage. And the big challenge there, of course, is to buy companies or assets that are in format, whether it be digital or whether it be broadcast.

Typically with broadcast, they're almost always not in format. We have to reformat. In digital, they are always in format. In fact, I don't think there's been an exception there. So with regard to the broadcast area, they'd be primarily tuck-in acquisitions.

We've done a lot of work with the translators and we're bringing those online and we expect those to help over the next 24 months or so. If they come online, we've got about -- I think we've got about a dozen of them online and we have another 15 or so in the works.

One of the interesting things is, if you look at most of the markets that we're in, most of the large markets that we're in, if you wanted to acquire a great full market facility, particularly, an FM facility. Frankly, they're none on the market. Very few on the market in the markets we're in.

So these assets are still highly sought after and if you do have an opportunity to buy them, you usually have to pay a very high multiple, one that's a little higher than we'd be comfortable with right now.

So unless it's a nice tuck-in acquisition that we can work in and it will have a -- it will not exacerbate leverage, we probably won't focus on it. I don't know, in terms of we're always looking for digital opportunities. David, you may -- you might want to comment on that..

Yes, so our digital pace of acquisition is definitely slower compared to a year ago. If you look back a year, our key focus then when we were trying to expand our Mobile business and we acquired, I think in total, 5 pretty large mobile apps, all in the Christian space. We continue to look for other apps to acquire like that.

But we were actually quite successful in acquiring all the big ones back in 2015, 2016. So despite looking, we really haven't found anything this year that met our criteria, other than a pretty small Portuguese language Bible app that we bought for $65,000. So yes, the environment is definitely slower in terms of digital acquisitions for us..

And in terms of Facebook, I know that this has been an ongoing issue for you guys. But it seems like the likes of Google and Facebook are increasingly under scrutiny over practices exemplified by Europe placing fines on them and so forth.

And I was just wondering, are you starting to see any effort by Facebook to work with you a little bit more? Or that maybe that their practices may reduce kind of like a shying away because of the scrutiny they might be getting and pressure they may have been seeing from starting to build in Congress and so forth?.

I think they're seeing pressure in Europe. I don't necessarily think that same pressure in the U.S. Facebook are trying to keep their viewers in the Facebook environment. So they're favoring content that leads people onto Facebook, rather than content that causes people to click away. Why are they doing that? To generate more ad revenue.

They're just operating a good business. We understand that. We accept that. I don't think in my mind, they're doing anything that I would take kind of legal issue with. We have a good working relationship with them on multiple levels. And the fact is, that the digital environment changes very rapidly. And this is a change that we've got to adjust to.

Yes, we're seeing declines in Facebook traffic compared to a year ago. So that is a problem, but that decline seems to have leveled off. So looking ahead, we hope that we're through that challenge and we'll see progress over the next few quarters..

Our next question comes from Lisa Springer, Singular Research..

In the broadcast segment, could you give us a little more color about the nice gain you had in network revenues and whether you think that's something that's likely to continue?.

We're pleased with what we see on the network side. We're pleased with the pacings that we see, Lisa. In general, that has been a very good business for us since, quite frankly, Q3 of 2015..

Yes, I mean, I think the prominence of our host and we continue to add affiliates, we continue to get momentum. And, of course, the Trump phenomena has driven news talk and made it just generally -- it has certainly -- typically, when we get into a nonelection or after a big presidential election year, you'll see an election fatigue.

The numbers drop off pretty sharply. They dropped off a bit but not nearly what they normally would. So there continues to be strength there. But we think that we're on a roll with our folks. They continue to gain prominence and the profile was raised. We're gaining affiliates. We're building audience share.

And those numbers are all available at Nielsen too. You can basically confirm a lot of this. It's a momentum. That -- it takes time and you build momentum and we have momentum with this business right now..

Seems that there's also been some greater attention given to Salem or acceptance in the marketplace. For instance, we just broadcast live from the White House. All of our network hosts and I think a dozen of our local news talk hosts were broadcasting live from the White House on that Tuesday, the Tuesday of what was the skinny repeal and everything.

And so there's just a lot of attention being paid to our networking in the marketplace these days..

And that White House broadcast, by the way, gave us access to all of the top administration officials, cabinet secretaries and we had Tom Price. We had Ben Carson, we had Steve Mnuchin. We literally had a really great full day. We started 6:00 in the morning and we were there until 9:00 at night.

So there's momentum there and increased recognition for the -- quality of our talkers and the -- the increasing audience interest..

Okay. Very good.

Also, could you comment on the -- what's in the pipeline for the Publishing business in the second half of '17?.

Yes, so this quarter Q3, our big title is Dinesh D'Souza's latest book that launched last Monday. It's doing very well [indiscernible] results are looking good. So we're pleased with that launch. In Q4, we have an Ed Klein title coming. Ed Klein is a multiple New York Times Best Seller list author. So excited about that title.

That's the big title for Q4..

There are no further questions. I would like to turn the call back over to Edward Atsinger, Chief Executive Officer, for closing comments..

Let me thank you all again for joining us and we look forward to meeting with you on our next report three months from today. Thank you..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..