Evan Masyr - CFO Edward Atsinger - CEO David Santrella - President, Broadcast Media.

Michael Kupinski - Noble Financial Davis Hebert - Wells Fargo Securities.

Greetings, and welcome to Salem Media Group’s 2018 Second Quarter Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Evan Masyr, EVP and CFO..

Great. Thank you. And thank you all for joining us today for Salem Media Group’s second quarter 2018 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.

In the room with me today is David Evans, President of Interactive and Publishing, both Edward Atsinger, our Chief Executive Officer; and David Santrella, President of Broadcast Media are joining the call from Europe where they are currently on a listener trip. 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 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 the company’s website at www.salemmedia.com. I will now turn the call over to Edward Atsinger.

Ed?.

Exodus by Salem Radio Host, Dennis Prager. We’re also looking forward to the financial performance of two books being released during the third quarter, Sean Spicer’s The Briefing, which was released in mid-July and David Limbaugh’s Jesus Is Risen due to be released in early October with print shipments taking place in Q3 2018.

I want to go to M&A, but before I do, let me just mention that -- let me comment briefly on corporate expenses. Corporate expenses were up 5.4%. More than half of that growth is directly related to increased accounting and auditing fees associated with the implementation of the new revenue recognition standards.

This should be a one-off expense, but as I said, half of it is directly related to having implemented those new standards. We were active on the M&A front. During the quarter, we entered into two separate transactions that will result in our exiting the Omaha, Nebraska market.

On May 18, we entered into an agreement to sell to KGBI-FM in Omaha for $3.2 million. This transaction closed on Monday August 6. Again, on July 23, we entered into a separate agreement to sell our two remaining Omaha stations, KCRO-AM and KOTK-AM combined for $1.4 million. We expect the sale of the two AMs to close in early October..

The signal for KDXE covers a significant relaunch of population than did that at KHTE station that under LMA and we were able to purchase it for a $100,000 less. On July 10, we entered into an agreement to acquire KTRB-AM in San Francisco for $5.1 million. We’ve been operating that station under an LMA agreement since July 2016.

We expect that acquisition to close late in the third quarter. On July 17, we entered into an agreement to acquire Hilary Kramer’s Financial Newsletter franchise for $400,000. We expect this transaction to close this month. On July 24, we acquired a website and related business of Childrens-Ministry-Deals.com for $3.7 million.

Childrens-Ministry-Deals sells Digital Sunday School Curriculum to churches and will be of course integrated into our Church Products division.

On July 7, we acquired Just1Word for $300,000 in cash and with up to an addition of $100,000 of contingent earnout consideration to be paid over the next two years based on the achievement of certain revenue benchmarks. Just1Word is a bible reader with fully formatted text in multiple versions and languages available.

Finally, with regard to our dividend activity, we paid $1.7 million of quarterly dividends or $0.065 per share on June 29, a $0.26 per share annually. That represents an attractive 5.1% dividend yield based on the current stock price. And remember it’s not actually a dividend, it’s a return of capital, but best to describe it I guess is a dividend.

With that, I’ll turn the call back to Evan for additional detail on the quarter’s performance and Evan will also provide guidance for the third quarter of 2018. Evan, it’s your turn..

Great. Thank you, Ed. For the second quarter, total revenue increased 0.2% to $66.3 million. Operating expenses on a recurring basis increased 2.4% to $55.1 million. And adjusted EBITDA decreased 9.4% to $11.2 million.

Net broadcast revenue increased 2.7% to $50.6 million and broadcast operating expenses increased 3.7% to $37.2 million, resulting in station operating income of $13.3 million. On a same station basis, net broadcast revenue increased 3% to $49.8 million and SOI increased 1.3% to $13.7 million.

These same station results include broadcast revenue from 111 of our 118 radio stations in our network operations, representing 98.5% of our net broadcast revenue. I’ll briefly review revenue performance of our strategic radio formats. 40 of our radio stations are programmed in our foundational Christian teaching and talk format.

These stations contributed 40% of total broadcast revenue and decreased less than 1% for the quarter. As Ed previously mentioned, our national block programming ministry revenue increased 3.2% in the quarter. Our 34 news talk stations had an increase of 8% in revenue for the quarter. Overall, these stations contributed 19% of total broadcast revenue.

Our third strategic format, contemporary Christian music, we have 13 stations programmed in that format and they contributed 21% of total broadcast revenue and increased 1% for the quarter. Our network revenue increased 16.3% and represented 10% of total broadcast revenue.

Revenues from our Digital Media businesses decreased 5.6% to $10.3 million and represents 15% of our total revenue. Our Publishing revenue decreased 9.1% to $5.4 million and represents 8% of total revenue.

And during the second quarter, we bought back $10 million of our 6.75% notes in the open market at an average price of $95.5, thereby resulting in principal savings of $450,000. And therefore, as of June 30, 2018, we had $245 million outstanding on our bonds and $11.9 million outstanding under the revolver. Our leverage ratio was 5.74%.

And for the third quarter, we are projecting total revenue to be between flat and an increase of 2% from third quarter 2017 total revenue of $65.4 million.

We’re also projecting operating expenses before gains or losses on the sale of disposal of assets, stock-based compensation expense, changes in the estimated fair value of contingent earn-out consideration, impairments, depreciation expense and amortization expense to be between, a decline of 2% and an increase of 1% compared to third quarter 2017 non-GAAP operating expenses of $55.9 million.

And with that that concludes our prepared remarks, and we’d now like to answer any questions anyone has. So, I’ll turn the call back over to the operator..

At this time, we will be conducting a question-and-answer session. [Operator Instruction] Our first question comes from the line of Michael Kupinski from Noble Financial. Please proceed with your question..

Thank you.

The third quarter outlook is, it seems a little wide given that we are in a political election here and one would think that your digital business should be getting a little bit more traffic and maybe you should be getting some political advertising 0:17:54.1 The broadcast business look like, you did pretty well in the second quarter on the broadcast side, it would seem like there must be something, a little bit of change there, maybe.

I was just wondering, if you can give us a little color on what you are seeing -- what you saw in the second quarter in the broadcasting that may not be following through into the third quarter? And it’s -- your variance in terms of the third quarter, your third quarter guidance might be political advertising and just kind of give your thoughts on the tone of the business for the third quarter?.

Michael, it’s Dave Santrella. I have to confess, you’re breaking up a little bit, but I think I got the gist of your question. Yeah, on the broadcast side, political revenue was we were pretty pleased with. It was our sixth largest revenue category from a spot perspective for the quarter.

We have had a strategy in place for many years with people dedicated for that business. So, from a local and on the network and national stock side that typically pays off for us, it paid off for us nicely in Q2.

We see that continuing so much that it really just depends on where the big race is, where is the big pack money coming from and are there specific valid initiatives that are going to impact the race in markets where we have radio stations.

I just can assure you of this, wherever those are, we are and we go after that aggressively and strategically, we usually are successful..

Edward Atsinger:.

The other challenge we’re experiencing is a number of the programmatic head buyers and their agencies have put in place protocols that stop advertising, stop digital advertising from running on politically-charged websites, websites that have lots of President Trump-related content and we’ve seen an impact of that on our programmatic revenue.

And again, we expect that to continue. Yes, we should see more political revenue coming through, more so in Q4 than in Q3. But at this point in time, speaking from a digital standpoint, that’s not sufficient to offset the competitive challenges we are seeing..

Thank you. It seems like a few radio stations are becoming a little bit more aggressive on digital stations as well.

Are you seeing any more competition from other broadcasters on their [ph] HD2 stations, but maybe are they launching Christian channels and things like that?.

No, Michael. We’re really not -- we haven’t seen too many broadcasters moving news in Q2 or Q3 specifically for Christian formatted radio stations. There is a few that have done it, quite frankly, and pretty quickly exited out of it and changed strategies. We’re experimenting with it a little bit in Columbus.

But from a competitive perspective, we really haven’t seen that..

Michael Kupinski:.

0:22:20.0:.

Yeah. Well, we generally don’t think it’s a good idea. We filed comments with the FCC opposing some of their liberalization. Generally, we don’t like regulation, but the need to eliminate sub-caps and when they allow one station to -- one company to own all stations in small market, it doesn’t seem to be a good idea to us.

And we think that sub-caps are rolled out today and they really are not to be changed. From our perspective, they work fine for us.

They are handful of companies that would prefer to see the sub-caps liberalized maybe even eliminated and there are also lot of large companies that oppose it, the iHeart for example has opposed it, Salem’s opposed it and a number of other companies have opposed it.

I mean generally, they won’t have an immediate impact, it might affect the market somewhat, but at this point, we don’t think it’s a good idea. We’ll keep an eye on it and see what the commission does..

Great. Thank you..

Our next question comes from the line of Davis Hebert from Wells Fargo. Please proceed with your question..

Hi, good afternoon, everyone. Thanks for taking the question. I saw you purchased, repurchased $10 million of bonds in the quarter and I heard that in your prepared remarks.

I think that was a smart move, but just curious what sort of bandwidth or RP capacity to you have to do more of that or are you interested in purchasing more bonds?.

Yeah. We have adequate capacity to buy more, it will be a decision based on free cash flow, availability on our revolver and other acquisition opportunities as far as competing uses of capital..

Understood.

And next quarter would be a seasonally light quarter for interest expense, correct? So, you would generate cash in third quarter?.

Interest expense, no, but interest payments, yes..

Interest payments, that’s what I meant, yeah..

Correct. Yeah, we pay the bond payments in June and December..

Right. Okay, got it. And then thank you for the color on the guidance. I just kind of want a more big picture focus.

Would you say that with political coming in Q4 and your guidance for Q3, should we anticipate EBIDTA growth year-over-year in the second half, Q3 and Q4 in aggregate?.

Evan, go ahead and take that..

Yeah. We don’t typically give guidance for adjusted EBIDTA. Certainly, if you take the numbers on the guidance that we gave today, which is flat of up 2 on revenue and expenses, down 2 to up 1. The midpoint gets you a nice growth in adjusted EBITDA. I would assume that Q4 will be somewhere in that same neighborhood..

Okay. That’s helpful. And on M&A, you guys have been fairly busy, just doing my quick math. It look like it was maybe a close to fairly neutral in terms of the cash outflow, maybe a slight outflow.

But could you talk about what the impact on cash flow EBITDA would be for -- the net impact on EBITDA for those acquisitions?.

I don’t have the number in front of me, I can tell you this. The cash flow that we were giving up for the sales versus the cash flow that we expect on the acquisitions, we expect to be net positive with respect to EBITDA when you tally up all of the acquisitions..

Okay, great. Thank you so much..

With respect to digital acquisitions, they’re all tuck-in acquisitions with cash flow. So, all three of those should be immediately accretive..

Got it. Thank you so much..

You’re welcome..

[Operator Instructions] Our next question comes from the line of Lisa Springer from Singular Research. Please proceed with your question. Lisa Springer, your line is live..

Lisa, are you there?.

Okay. Ms. Springer is not responding, so we will take our next question, which comes from the line of Ray Fleeman from EAdvance [ph]. Please proceed with your question..

Hi. Thanks for taking my question.

I was just wondering, could you remind me of your leverage target and what you think the timing might be for reaching that target and if that’s changed recently or if that’s still consistent over the last few quarters?.

Yeah. If you want, Ed, I’ll start. And if you want to add some color afterwards, feel free to do so. Our long range target is to get leverage under four. I would say, we’d like to be there by time when we need to refinance again which we just refinanced a little bit over a year ago. So, that’s where we’d like to be.

Our next target is we really want to get under five, but the long-term goal is to see leverage for the company something that begins with the three..

Okay. And any....

Yeah. And I think….

Go ahead..

I just want to say, we’ve got -- we’ve just refi a year ago in May, it’s a seven year facility. We’re very pleased with the pricing on that issue and we think it’s very manageable and we hope to get close to that goal of under four before this facility has to be refi again, but we certainly hope to make significant progress in that direction.

As Evan said, the first objective is to get below five. Now we were below five, we were moving very quickly in that direction, refi kick things up a little bit more, which we knew it would. But we feel pretty good on terms of progress we’re making and I would expect that we’d get below five in the recent of the near future. .

Thanks very much..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Edward Atsinger for closing remarks..

Thank you, operator, and thanks again to all of you for joining the call. We look forward to visiting with you again as we give -- when we give our third quarter results..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation..