Evan Masyr – Chief Financial Officer Edward Atsinger – Chief Executive Officer David Santrella – President-Broadcast Media.

Davis Hebert – Wells Fargo Raphael Leeman – Eaton Vance Steve Bassett – Calamos Christopher Carson – Private Investor.

[Call Started Abruptly] Thank you, Adam, and thanks all of you for joining us today for Salem Media Group’s Third 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.

With me today are 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 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 our website at www.salemmedia.com. With that, I now would like to turn the call over to Edward Atsinger.

Ed?.

Thank you, Evan, and thanks to all of you for joining us for the call today. Let me begin with an overall discussion of third quarter financial performance. I’ll include an update on recent M&A activity and then a brief remark on dividend policy – or cash distribution, I guess, would be more appropriate to call it.

And then I’ll turn the call back to Evan who will provide more detailed information on Q3 and also provide guidance for the last quarter of 2018. Well, overall, for third quarter 2018, total revenue increased 0.1%. Expenses were down 1.2%, which resulted in adjusted EBITDA growing 8%.

If we drill down a little further and look at performance by division. Our Broadcast revenue was up 0.8% for the quarter. However, on a same station basis, excluding the impact of recent acquisitions and dispositions, Broadcast revenue was up 1.9%. Broadcast expenses were limited to an increase of only 0.3%.

This resulted in a 2.4% increase in station operating income and marks the third consecutive quarter of increases in station operating income. And we had a nice quarter from a political revenue perspective. We recorded $1.2 million of revenue in the quarter compared to only $100,000 in the third quarter of last year.

In fact, through nine months, we’ve had $3 million in political revenue, which is 28% higher than what we had through nine months during the last midterm elections. Our network continues to perform very well for us, with revenues up 7.5% in the quarter, including political revenue.

We’ve been able to steadily grow our number of affiliates as our slate of personalities become increasingly more popular. We now have, in fact, over 3,200 affiliates, and the affiliate count of Hugh Hewitt, for example, our largest syndicated show recently crossed the 400 affiliate mark.

We also saw some nice growth in our National Christian ministry block programming revenue, which was up 4.9% for the quarter. On a combined basis, if we look at local spot and local block programming, revenue is down 5.2%. This is fairly consistent with much of the radio industry based upon our review of reports from Miller Kaplan.

We continue to lose customers to digital, including Facebook. We’ve recognized this, and we’re focusing on growing local digital revenue with a fairly extensive strategic rollout in January. For example, we hired a VP of Local Digital, and we’re growing our capability as a digital advertising agency.

We can now offer a variety of digital products and services to local customers. This – the result so far has been promising with local digital revenue up 35.5% for the quarter. On our national digital position, revenue declined 0.5%.

Similar to what we are facing in our Broadcast division, we’ve been losing customers to Facebook in this division as well. Additionally, changes to Facebook’s News Feed algorithm has caused some further declines in revenue.

These declines were largely offset, however, by the results of our recent acquisitions of Intelligence Report, Hilary Kramer’s investment newsletters and Childrens-Ministry-Deals.com.

These acquisitions represent a greater emphasis on e-commerce revenue opportunities in an effort to reduce our reliance on Facebook and on advertising-related revenue at the national digital division. Digital expenses were down 1.8% despite increased expenses from the recent acquisitions I just mentioned.

Even with the decline in revenue, we were able to manage a 4.3% increase in digital operating income for the quarter. Finally, Publishing revenue declined 3.7%. The decline is entirely related to our self-publishing business, Salem Author Services, which was down 10.4% for the quarter.

Looking forward, our pipeline continues to build, which is the key to increase revenues in this division. So we expect that the trend of declining revenues to turn around soon. The decline was partially offset by our revenue growth at Regnery Publishing, our traditional book publisher, due to a stronger book release schedule.

Our best-selling authors during this quarter were Sean Spicer, The Briefing; and David Limbaugh, Jesus Is Risen, both which began shipping in late September. Again, despite the decline in revenue, the Publishing division made a small profit in the quarter as compared to a small loss a year ago.

And then with respect to M&A activity, we closed on several previously announced transactions during the quarter. On July 25, we closed on the acquisition of KZTS-AM, formerly KDXE in the Little Rock, Arkansas market. And along with that, two companion translators, one on 103.3 and the other on 105.5.

And I think the total we paid for those assets were $200,000 in cash. In September 11, we closed on the acquisition of KTRB-AM in San Francisco for $5.1 million.

We have been operating that station under an LMA agreement since July of 2016, and we’re also broadcasting our news talk format on the station, and that was the principal motivation for the acquisition. On July 24, we acquired the website and related businesses of Childrens-Ministry-Deals.com for $3.7 million.

Our Childrens-Ministry-Deals sells digital Sunday school curriculum to churches. On August 7, we acquired Just1Word for $300,000 cash, with up to an additional $100,000 of contingent earnout consideration to be paid over the next two years based upon the achievement of certain revenue benchmarks.

Just1Word is a bible reader with fully formatted text and multiple versions and languages available. On August 9, we acquired Hilary Kramer’s Financial Newsletter franchise for $400,000, with up to an additional $100,000 of contingent earnout consideration to be paid over the next two years based on the achievement of certain revenue benchmarks.

Finally, we exited the Omaha market. On August 6, we closed on the sale of KGBI in Omaha for $3.2 million. On October 31, we closed on the sale of KCRO-AM and KOTK-AM for $1.4 million. So essentially now, there were some translators that were also conveyed in those transactions.

But essentially, we’ve now exited the Omaha market with all of our operations. Let me just make a final comment about our dividend, or as I said, more appropriately, our cash distribution. Our quarterly distributions are characterized as a return of capital, and therefore, have a more favorable tax treatment.

We paid $1.7 million of quarterly dividend or $0.065 per share on September 28, $0.26 per share annually. This represents an attractive 8.4% dividend yield or return of capital yield, however you want to characterize it, based upon the current stock price.

And with that, I’ll turn the call back to Evan for additional details on the quarter to provide some guidance for the fourth quarter of 2018.

Evan?.

Thank you, Ed. For the third quarter, total revenue increased 0.1% to $65.5 million, operating expenses on a recurring basis decreased 1.2% to $55.2 million and adjusted EBITDA increased 8.0% to $10.3 million.

Net broadcasting revenue increased 0.8% to $48.8 million, and Broadcast operating expenses increased 0.3% to $37.2 million, resulting in station operating income of $11.7 million, an increase of 2.4%. On a same station basis, net Broadcast revenue increased 1.9% to $47.8 million, and SOI increased 2.3% to $12.1 million.

These same station results include Broadcast revenue from 108 of our 118 radio stations in our network operations and represents 98% of our net Broadcast revenue. I will briefly review revenue performance of our strategic formats. 40 of our radio stations are programmed in our foundational Christian teaching and talk format.

These stations contributed 40% of our Broadcast revenue and increased 1% for the quarter. As Ed previously mentioned, national block programming ministry revenue increased 4.9% in the quarter. Our 34 news talk stations had an increase of 5% in revenue for the quarter, and these stations contributed 19% of total Broadcast revenue.

Revenue from our 12 contemporary Christian music stations contributed 19% of total Broadcast revenue and decreased 6% for the quarter. Our network revenue increased 7.5% for the quarter and represents 10% of total Broadcast revenue. Revenue from our Digital Media businesses decreased 0.5% to $10.4 million and represents 16% of our total revenue.

Our Publishing revenue decreased 3.7% to $6.3 million and represents 10% of our total revenue. As of September 30, 2018, we had $245 million outstanding on our bonds and $10.2 million outstanding under the revolver. Our leverage ratio was 5.56.

And for the fourth quarter of 2018, we’re projecting total revenue to be between flat and a decrease of 2% from fourth quarter 2017 total revenue of $67.2 million. This guidance, however, reflects the sale of our Omaha cluster and the sale of radio stations WBIX-AM in Boston and WKAT-AM in Miami.

Excluding the impact of these sales, we would be projecting Broadcast revenue to increase between 1% and 3%. The overall revenue weakness reflects a lighter book publishing schedule and ongoing competition from digital for advertising dollars.

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 earnout considerations, impairments, depreciation expense and amortization expense to increase between 1% and 4% compared to the fourth quarter of 2017 non-GAAP operating expenses of $53.9 million.

And this now concludes our prepared remarks, and we’d like to answer any questions that anyone has. So I will turn the call back over to Adam to poll for questions.

Adam?.

[Operator Instructions] Our first question comes from the line of Davis Hebert from Wells Fargo. Please go ahead..

Hi, everyone. Thanks for taking the questions. I wanted to ask first on the guidance for the fourth quarter on the operating expense increase of plus 1% to plus 4%.

Can you give us a little bit more color on that trajectory?.

Yes. Certainly, as you’ve seen, our expenses have been better than that throughout the year. One of the challenges that we have in the fourth quarter is we’re running into a difficult comp. Last fourth quarter, we reversed our bonus accrual for senior management based on performance. And so this year, we, at this point, still have an accrual in there.

And so that creates a couple of percentage point variance in and of itself..

Okay. And then it seems like there’s a lot of moving parts. You said that without – I’m sorry, with the station sales, you’re plus 1% to plus 3% on just Broadcast.

Correct?.

That’s correct..

Okay.

And then so how should we think about – with the proceeds coming in from those assets sales, how should we think about leverage in the fourth quarter, especially if we’re looking at a decline in EBITDA?.

That’s a great question. Leverage will probably go up a little bit, partly because of the decline in adjusted EBITDA. But more importantly, we have bond interest payments that we make only twice a year in Q2 and Q4. So Q3 and Q1 tend to have, just by themselves, lower leverage ratios because we don’t have to make that interest payment.

However, we will get the benefit from some cash from these asset sales that we’ve had, and we will be working to reduce – that revolver was $10.2 million at the end of the quarter. We’re going to focus on getting that paid off..

Okay. And then how did political end up – I imagine you have the numbers in hand now the election day’s through.

How did political end up versus your expectations for the year?.

Well, yes, I think political ended up – as Ed had mentioned, through nine months, we were quite a bit ahead of where we were the last midterms. We were at a little over $3 million through nine months this year. Through nine months of 2014, we were at like $2.4 million. And I don’t have final numbers on Q4.

I have a pretty good handle on it, but it’s certainly north of $1 million of political revenue. So this will be our biggest midterm as far as political revenue that we’ve had. So I would say from an expectation standpoint, we were quite pleased..

Okay. And as we look to 2019, you’re going to be looking at block programming renewals.

Is there any concern that renewals will be any different from prior years? Should it be fairly straightforward? Any comment on that?.

This is Dave Santrella. So far, that’s going well. We’re well into the renewal process right now. And so far, we haven’t seen any unpleasant surprises..

Okay. Okay, great. Thanks for taking the questions..

Thank you. [Operator Instructions] Our next question comes from the line of Raphael Leeman from Eaton Vance. You are now live..

Hi. Thanks for taking my questions. So that was helpful on the expenses kind of a onetime 1% to 2% reversal of the accrual last year, et cetera. Anything else in there that’s noteworthy and/or that you might highlight as kind of a onetime expense? I know you mentioned previously the conversion from AM to FM, and there’s some expenses there.

Is that factored in, in Q4? Or is that coming down the road?.

Yes, that certainly has impacted us this year. And as we put more FM translators on the air, we’ll have some incremental rent expenses. But clearly, the biggest impact driving the Q4 expense we forecasted is that onetime bonus accrual change..

Okay. And then can you be any more specific about the cash proceeds that you haven’t seen yet that are due in the current quarter as opposed to having been reported in the third quarter? The size – the total size, I guess..

Yes. The cash proceeds, we had one sale closed in October for the two AMs in Omaha. And that was just under $1.4 million. The other sales had happened prior to the end of the quarter..

Okay.

And so the cash was already in for those?.

Correct..

Okay. And then you mentioned working to get the revolver down. Is that something – I couldn’t tell if you were basically saying by the end of the year you think that revolver will be at zero or if you were just saying you’ve got a general goal of moving lower..

Yes. I was not commenting on what that balance will be at the end of the year but just that we’re going to be focusing on paying down debt with any excess cash we have, including the asset sale that we closed on October 31..

Got you.

And I guess, too soon – again, as David says a little bit about 2019 renewals, but I mean, too soon to see anything about demand into next year?.

Well, I mean, right now, we’re in the – like all media companies, we’re in the process of renewing also annual business for our annual spot business across our markets. And it is a little bit early in that process. Right now I would say that that’s promising.

I’ve heard some good things, although anecdotally, from our markets in terms of levels of interest even from some advertisers that we have not seen in a while that seem to be coming back to radio..

Okay. Do you feel like – this is my last question – but I think the expectation was first half was kind of weak and that you’d be seeing better numbers in the second half. The third quarter looks better but the fourth quarter looks worse.

Is this a little bit less of a second half improvement than what you were expecting?.

While we were very encouraged by the amount of political revenue for this midterm election, but there’s no question about it that there’s a – the whole industry is adjusting to digital competition, primarily from Facebook.

The new digital platforms with the pricing and the specificity of their ability to target is a challenge, and it has been for the last several quarters. So to the extent that we’ve seen a little erosion in our traditional spot business, it’s probably related there and not just to Broadcast, but it’s also affected our national digital divisions.

This is why we’ve got a major emphasis on developing a full capability in every city that we’re in of a local digital advertising agency in effect. And we’ve taken several steps this last year to implement that strategy, and it’s coming along very nicely.

And we think it will be – we think it’s a very appropriate response, but we also think that these advertisers tried the new media for a while, and I think then they tend to come back because radio remains the least disruptive of all of the traditional media. Its reach continues to be about 93% of the American population every week.

It’s a tremendous reach medium. It’s a powerful medium in terms of spoken word audio. So I think we’re seeing advertisers beginning to come back to us. We’re in an adjustment period.

And had it not been for that impact in Q3 and probably continuing into Q4, we likely – with the nice balance in political revenue, we would have been a little further along than we are.

Now again, remove the stations that we’ve sold, and we’ve sold quite a few stations, the station in Miami, the three stations in Omaha, the station in Boston and adjust for those revenues, and the picture looks a little bit better in terms of comparisons.

But there’s no question that the competition from particularly Facebook’s digital platform is something the industry is adjusting to..

That’s helpful. Thank you..

Thank you. Our next question comes from the line of Steve Bassett from Calamos..

Thank you.

Along those lines, as you think about expectations for next year, do you anticipate that the company is as acquisitive next year as you were this year?.

Well, I didn’t think we were particularly acquisitive this year, but we probably disposed of more assets than we acquired. So on a net balance, we’re probably fairly flat, but you never know. I don’t think so. We might – we always have our eyes open for nice tuck-in acquisitions.

Our focus is really on delevering, so that we’re not going to make acquisitions that will exacerbate our leverage. If we can find an asset that we’re convinced the cash flow is such that it would actually enhance, improve our leverage, those would be acquisitions that we give attention to. But it’s hard to plan those in advance.

You just have to – as things progress, opportunities arise, if they meet our criteria, we take a look at them. So a little difficult always to predict in advance, but I think we’re going to be a little more focused. There’s no question we’ll be a little more focused on improving the balance sheet.

And as Evan mentioned, I think the target – we’ve got the $10 million on the revolver, and that will be our first target to attack that. And we’ll just have to see how it plays out..

Okay.

And just one other final question along those lines and not looking for specific numbers, but do you have a feel for the profitability of the businesses sold versus the profitability of the businesses acquired this year? Should we just think about it as roughly flat?.

No. I mean, I think the businesses that we sold – for example, Boston was not making money. It had been a Disney acquisition. We hadn’t owned it very long. We sold it for more than we paid for it, then it just made sense to dispose of.

We thought it was a very attractive purchase the time we got it, and we’re able to – I think that proved out in terms of the proceeds we’ve got from the sale. We were – we had at – in Miami, we sold 1360, an AM station, for $3.5 million, a very good sale for us.

We were able to preserve the format and the revenue on another station that we own that has been underperforming. So from that point of view, we didn’t miss a beat there. It was a very good move for us.

And the party that bought it also moved to a transmitter site that we own and so generating additional long-term revenue for the company on the transmitter site, which was not the case before. So all in all, we think that was positive in terms of improving cash flow with that transaction. And then in Omaha, we like the price that we got.

Omaha is a smaller market than we normally operate in. We’ve had those properties for a long time. The party that bought – two different buyers, one for the FM and one for the two AMs with the translators that were associated with them. They’re preserving all the formats.

So they’re staying in the format, and that means that, particularly the news talk station in Omaha, will continue to feature our syndicated content. And in fact, we’ve licensed the buyer there to use our trademark names, The Answer, which is the way we describe one format; and The Word, the way that we describe the other format.

So they will continue to be positive for us in terms that we maintain affiliates in the market even though we’ve exited the market. And on balance, the price that we got in terms of today’s multiples, we thought, was attractive and made a lot of sense..

And with respect to the acquisitions, a focus on some of the acquisitions this year has been on digital. And one of the challenges we have when we buy a radio station is we reformat it, and it takes – depending on what format we put it in, it could take a year to 18 months to get profitable.

But what we’re buying, like Childrens-Ministry-Deals and others, have profitability from the get-go. So we feel very positive about the exchange of the businesses we sold for the money we got versus what we brought in through acquisitions..

Okay, great. That’s helpful. Thank you..

Thank you. [Operator Instructions] Our next question comes from the line of Christopher Carson, a Private Investor. You are now live..

Thanks for taking my call gentlemen, really appreciate it. Relatively new to the story. I just wanted to ask if you can kind of give me a high-level overview on the cash management strategy and how that may relate to the dividend or your cash bound or whatever you’re calling it..

Well, our cash management strategy is – we’ve been paying this dividend for a while, actually since March of 2013. We think it’s a good use of our free cash flow from a shareholder perspective and certainly increase the volume and the recognition of Salem in the marketplace.

After the dividend, the rest of our free cash flow, we really want to focus on either very opportunistic acquisitions or to pay down debt. As Ed mentioned earlier, we want to really deleverage this company, and that’s where you’ll see a good focus of us on 2019..

Thank you..

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I’d like to turn the floor back over to Mr. Edward Atsinger for closing comments..

Thank you, operator. And again, thanks to all of you for joining us for the call. We’ll look forward to visiting with you as we report on Q4..

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation, and have a wonderful day..