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

It is now my pleasure to introduce your host, Evan Masyr, Executive Vice President and Chief Financial Officer. Thank you, sir. You may begin..

Thank you, and thank all of you today for joining us on Salem Media Group’s fourth 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; and David Evans, President of Interactive and Publishing.

David Santrella, President of Broadcast Media is out of town, but is on the line as well joining us remotely. 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 and 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.

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. I will now turn the conference call over to Edward Atsinger.

Ed?.

Thank you, Evan, and thanks to all of you for joining us for this quarterly report. Let me begin, as I normally do, with an overall review of fourth quarter financial performance. I’ll then bring you an update on M&A activity. I’ll make a few brief remark upon our – about our dividend or cash distribution policy.

And then I’ll turn the call back to Evan, who’ll drill down a little more deeply into the details of fourth quarter financial performance and will provide guidance for Q1 2019. So with that, let me begin. For the fourth quarter of 2018, total revenue is flat, expenses increased 3.1%, leading to a 12.8% decline in adjusted EBITDA.

Let’s look a little further and review it by division. Broadcast revenue was up 0.7% for the quarter. And on a same-station basis, excluding the impact of recent acquisitions and dispositions, broadcast revenue was up 1.9%. We had a strong quarter of political revenue, leading up to the election day in early November.

During the fourth quarter of 2018, we recorded $1.7 million of political revenue, compared to only $500,000 in the fourth quarter of 2017. In fact, for the entire year, on midterm election year, we received $4.8 million of political revenue, making 2018 our biggest midterm election cycle in terms of revenue.

To put it in perspective by comparison, political revenue in 2014, the last midterm election was only $3.2 million. So political was strong.

Our national business, including network revenue and national spot was up 3.8%, fueled primarily by the political, but national block programming revenue continues to perform well growing at 2.9% during the fourth quarter.

Local digital revenue increased 10.6%, in response in part to the continued investment that we’ve made in and the roll out of Salem Surround, our new local multimedia advertising agency. Local spot was soft in Q4 declining 2.7%.

The momentum, which we’ve observed over the last number of quarters of local and ad budgets shifting dollars away from traditional media to digital, particularly Facebook and Google, is undoubtedly the principal factor underlying the decline in traditional local spot business. And the fourth quarter was no exception to that.

And we expect this trend to slow, however, and stabilize as pricing equilibriums and efficiencies begin to narrow. Broadcast operating expenses increased 4.8%, primarily due to two areas of investment spending.

We recently started buying Nielsen rating services in Cleveland and also in Nashville because of the strong audience growth on our contemporary Christian music stations in both of those cities. And that expense kicked in, in the fourth quarter.

More importantly, we had increased expenses in the quarter of approximately $1.5 million directly related to our investment in the roll out of Salem Surround. Such expenses associated with the infrastructure build-out, which certainly included the hiring of digital audience specialists in a majority of our media markets.

And it’s probably important to point out that as a digital buying service or agency, the cost of goods sold is higher, particularly as it relates to the purchase of media, which will produce some margin compression. So those are – those relate to some of the reasons for the increase in expenses.

2018, remember, has been the principal roll out year for Salem Surround. Consequently, it’s not surprising that cost through the fourth quarter outpaced revenue. However, we believe that we have a basis for optimism that we will see meaningful local digital growth from Salem Surround in 2019 and beyond. We feel very good about the roll out.

In our national digital division, revenue was up 4% in the fourth quarter of 2018, driven by the acquisitions of Childrens-Minsitry-Deals.com and Hilary Kramer’s Financial Newsletters, both of which were acquired in the third quarter of 2018. If you exclude the impact of those acquisitions, digital revenue would have been down 2.7% for the quarter.

Ironically, the continued weakness in our digital revenue is caused by the fact that even digital media platforms are losing business to Facebook and Google’s digital programmatic products that harness the full power of big data just as it impacted our traditional radio business.

But again, we expect to see this trend slow as Google and Facebook’s prices increase – or have been increasing and approach and maybe even approaching a competitive equilibrium with our own products. Expenses in the digital division were up only 0.8%, reflecting our continued efforts to control costs.

If the two acquisitions I discussed earlier, Childrens-Minsitry-Deals and Hilary Kramer’s Financial Newsletters are excluded, digital operating expenses would have been down 1.7%. Finally, publishing revenue declined 15.3% in the fourth quarter. This decline was principally due to a 19.9% revenue decline at Regnery Publishing.

Again, this is not surprising. This was caused by a light book publishing schedule in Q4, which is very typical in any election year, because the goal is to accelerate book losses well before the election, and Regnery’s books are almost primarily public policy and politics.

And so those books are always in any election year designed to get out well before the election. To put that in further perspective, the only big title we released in Q4 2018 was Donald Drains the Swamp by Eric Metaxas. Comparatively, in the fourth quarter of 2017, Regnery released books by Ed Klein, Keith Koffler and Stephen Coonts.

Corporate expenses were up 22%, but it’s principally due to the large reversal of a bonus accrual last year and increases in stock-based compensation. If you exclude those two items, corporate expenses were up only 2.7%.

And while I’m on the subject of expense – expenses, let me just comment briefly on the fact that within recent days, we focused on a reduction in our workforce. Two weeks ago, across the company, we identified and eliminated about 35 positions.

And we also identified some other expense savings that in the aggregate with the reduction of workforce will provide savings of approximately $2.8 million in annualized savings. And we just simply believe that in the current environment, this is necessary to be more efficient, given the challenges in the marketplace today.

Well, with respect to M&A, we didn’t acquire anything during the fourth quarter. But we did close on the sale of KCRO-AM and KOTK-AM in Omaha, Nebraska for $1.4 million on October 31. And also since the end of the year, we sold a website, Human Events, for $330,000.

During the fourth quarter, I might add, we used the cash proceeds from the asset sales, along with free cash flow to repurchase $6.4 million of our bonds in the open market for $5.9 million, or at an average price of $91.07 on the dollar.

And if you look at the entire year, all of 2018, we repurchased $16.4 million of our bonds for $15.4 million for an average price of $0.94 on the dollar. And we intend to continue to focus on paying down and paring down debt during 2019. Let me make a final comment about our dividend or more appropriately, our cash distribution.

Our quarterly distributions are characterized as returns of capital in that we’re not a federal taxpayer. And there at least not materially, and therefore, have a more favorable tax treatment. We paid $1.7 million of quarterly dividends, or $0.065 a share on December 21, 2018.

Last week, we announced that we were making another distribution of $0.065 per share on March 29. At $0.26 per share annually, this represents an attractive 8.3% dividend yield, I’ll characterize it that way based upon the current stock price.

And with that, I’ll turn the call back to Evan for additional details on the quarter’s performance and also to provide guidance for the first quarter of 2019.

Evan?.

Thank you, Ed. For the fourth quarter, total revenue remain consistent at $67.2 million. Operating expenses on a recurring basis increased 3.1% to $55.6 million, which resulted in a 12.8% decrease in adjusted EBITDA to $11.6 million.

Net broadcast revenue increased 0.7% to $51.1 million and broadcast operating expenses increased 4.8% to $38.5 million, resulting in station operating income of $12.6 million. On a same-station basis, net broadcast revenue increased 1.9% to $50.3 million and SOI decreased 9.1% to $13 million.

These same-station results include broadcast revenue from 107 of our 116 radio stations in our network operations and represents 98.4% of our net broadcast revenue. I’ll briefly review revenue performance of our strategic formats. 39 of our radio stations are programmed in our Christian Teaching and Talk format, we call it our foundational format.

These stations contributed 40% of total broadcast revenue and decreased 0.3% for the quarter. Our 33 news talk stations had an increase of 5.3% revenue for the quarter. Overall, these stations contributed 20% of total broadcast revenue.

Revenue from our 13 contemporary Christian music stations contributed 20% of total broadcast revenue and decreased 1.6% in the quarter. Our network revenue decreased 2.5% for the quarter and represents 9% of total broadcast revenue. Revenue from our digital media businesses increased 4.0% to $11.5 million and represents 17% of our total revenue.

Our publishing revenue decreased 15.3% to $4.6 million and represents 7% of our total revenue. At December 31, 2018, we had $238.6 million outstanding on our bonds and $19.7 million outstanding under the revolver. Our leverage ratio was 5.80.

And for the first quarter, we’re projecting total revenue to decline between 3% to 5% from first quarter 2018 total revenue of $63.8 million.

We are also projecting operating expenses before gains or losses on the 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 1% and an increase of 2%, compared to the first quarter 2018 non-GAAP operating expenses of $53.6 million.

And this concludes our prepared remarks. And we’d like to turn the call back to the operator to answer any questions that you may have.

Jessy?.

Thank you. [Operator Instructions] Our first question is from the line of Michael Kupinski with Noble Financial. Please proceed with your question..

Thank you. I have just a few here. I know that the company’s focus is to pare down debt in 2019.

Have you identified additional assets that you plan to sell in 2019 and the amount of proceeds that you are kind of hoping to receive from those perspective asset sales?.

Yes. We have identified – we’ve gone through our entire list of assets and we’ve identified those that are less strategic that we would be willing to sell. Question is at what price the ones that we’ve identified, we’ve identified prices that would make sense for us.

And if those properties can attract those kinds of prices, it’s very likely that we will do some sales. We’ve got – we always have discussions underway and there’s always a few things in the works.

I couldn’t quantify it for you specifically in terms of how much, but I think there’s a substantial opportunity to raise some capital that would be more strategically employed taking down debt. If we can get the prices for those assets that we think that they should command and we’re going to pursue that aggressively..

And the plan would be to use proceeds from the asset sales to continue, as you were saying, to pare down debt and take advantage of the opportunity with our bonds trading at a discount..

Gotcha. And in terms of the Disney stations that were acquired, can you give me some color on where those stations are in terms of the swing towards profitability? I know that you identified that it takes a while three years before we could start to see contributions from the stations.

And I was just trying to frame it for us what percentage terms, where we are in that process?.

As I sit here today, I don’t have that at the tip of my fingers. I could try to do it – shoot from the hip. But Michael, I’d be happy to try to get you something and get you some more specifics. I can tell you that we’re making progress with some, to the extent that we haven’t. For example, in Boston, we were unhappy.

We sold it for more than we bought it from Disney. And so we’ve been fairly strategic. And – but most of them have made progress, not all of them. St. Louis is still a bit of a drag. Although we’ve made some substantial progress there with the announcement recently about – the addition to our lineup. We’ve added talent that has brought some new business.

But I can get very specific for you and get back to you in a day or two and kind of give you a more specific report. Pittsburgh is doing well. I think, Denver is doing reasonably well..

When we had last looked at it, it’s about two-thirds of the stations that we acquired from Disney were progressing at about plan. And there were a few, as Ed mentioned, that weren’t – there still works in progress, in particular Boston we sold. So there’s still some work to do on a few of them.

But generally, we’ve been pleased more than we haven’t been with the stations..

Yes. And Michael, we’ve also acquired probably two-thirds of those acquisitions, some very valuable real estate. And those create additional opportunities to spin that off, in some cases, for more than we paid for the total asset package. So, there’s some other advantages, mostly, Disney acquisitions..

Gotcha. And then can you give me some color on the rate increases for block programming this year? And after that I only have one more question, I promise..

I don’t have that. Dave Santrella, Mike, he is on the call. He is remote in – on the East Coast.

But Dave, do you have anything on that?.

Yes. Michael, I apologize, you cut out there.

The rate increases on what?.

The block program?.

National block, our national block?.

National block?.

About – yes, for 2019, roughly 3%..

Gotcha.

And in terms of the headcount reductions that you highlighted, is that reflected in the Q1 guidance, or will those more fully reflected into the Q2?.

Yes, Mike, you’ll see that in Q2, those layoffs took place late February. So really not going to have much of an impact in the fourth – in the first quarter between only one month of savings, also there’ll be some severance that was paid as well. So you really start to see that Q2 and beyond..

Gotcha. That’s all I have. Thank you, guys..

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

Hi, good afternoon. Thanks for taking the questions. I did want to ask a little bit more on the first quarter guidance, particularly revenue being down 3% to 5%. Can you walk us through some of the puts and takes there a little bit below our expectations? Thank you..

Yes. Why don’t we have each division President talk about things that are impacting them. So I don’t know who wants to start. Dave or David talk about what they’re seeing in revenue.

Why don’t you start Dave?.

I can start on the broadcast side. I think, probably one of the biggest issues is competitive price per share traffic. So, a lot of our local spot business, in particular, comes from our Christian type of news radio stations, which are usually the markets where we have more highly-rated radio stations.

And in those markets, a fair number of our competitors are doing price per share. So, they’ll meet or beat across the point goal for an agency in exchange for some or most of the money that’s up from that particular client.

And because Salem typically has only one station in that market that’s driving ratings, we have a tough time competing against price per share traffics. And so, it drives us to go and to go after a lot more direct business, which is where the majority of our local spot revenue comes from.

And some of those mom-and-pop businesses right now will just work. It’s hard to replace a lot of big agency business with – that have larger budgets towards a smaller mom-and-pop businesses that don’t have those big budgets..

The three biggest areas of softness overall, obviously, number one, political. Last year was a mid-term election year, so there were pretty solid political revenues Q1 2018. Q1 2019, you’re looking at virtually zero. Dave has already commented on the weakness on local spot revenues. The final area is book publishing, which is a little bit of an anomaly.

Last year, in March, we shipped and published Dennis Prager’s book, Exodus, that was a Amazon number one bestseller. We have the sequel to that book coming this year, Genesis, but it’s shipping in April, not March. So you’ve got a timing difference between Q1 and Q2 in relation to that book.

And we expect this year’s book to be just as successful as last year’s book just in a different quarter..

I see. Thank you. And back to the broadcast side of things.

Is that softness due to certain competitive reasons? Do you anticipate that to be an issue throughout the year, or is this more of a short-term impact?.

Well, we always break that issue. I think part of what we’re doing with Salem Surround is to compensate for that. So we fight this issue year in, year out. There’s just times when it seems to be more prevalent. And some of our pivot to our digital advertising agency is to be able to compete against that revenue from a different stream..

Okay. And Davis, again, remember, it’s a nonpolitical year versus a political year and that will impact the whole year. We just pointed out that we had record midterm election revenues in 2018 and we will have that now. Some of those primaries, some of the political activity will stir up with the – on the Democrat side.

We may get less of that business than – given the nature of our content, we may get less of that business than we would benefit the other way around. But in any event, the political is certainly going to be a factor throughout the year..

And that’s understood. Okay, makes sense. And then on the leverage trajectory, I mean, your guidance implies the tick up in the first quarter.

Evan, I wonder if you could talk about the leverage trajectory for the full-year, when do you expect that to peak?.

Yes. So our modeling as we go through our – went through our budgeting process, we do see it pick up a little bit in the first-half of 2019, but reducing by the back-half of the year. So you should see it probably peak in Q2 and then steadily work its way down..

Okay, that’s helpful. Then last question for me, it’s encouraging to see buyback bonds, I think, that’s the right move.

But what is your availability on your ABL to do further bond buybacks? And how will you – what do you plan to pay down the ABL over time?.

Yes. So we have a $30 million ABL and usually availability is kind of mid-20s on a monthly basis. At the end of the year, we’re close to $20 million drawn, but we would expect the end of December and into June to have higher balances on the ABL, because that’s when we pay bond interest payments every December 1 and June 1.

So what you would likely see throughout the year is the balance on the revolver will work its way down. In addition, as we’ll be looking for opportunities to buy back bonds, but you’ll see it kind of peak up in Q2 and Q4..

Okay. Thank you, guys. I appreciate it..

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

Thank you. You mentioned build-out costs for Salem Surround has been a factor in the rise in fourth quarter expenses.

Are the build-out costs essential complete, or are we going to see more of that in 2019 for that business?.

You’ll see some more of that in terms of hiring additional people as we grow out of the business. I would anticipate that you’ll see more people moving into Salem Surround. But right – for right now, we want revenue to catch up and exceed the expenses that we have, then we’ll add more people as revenue allows..

Okay And does the business already operating at all 33 markets?.

It is..

Okay..

It is. The last market was rule out on November 29..

Okay, great. Thank you..

Thank you. Our next question is from the line of Steve Bassett with Calamos. Please proceed with your question..

To follow-up on Davis’ question regarding the leverage profile and trends.

Could you just talk a little bit about the dividend? And at what point you think it makes more sense to use the cash being used to pay the dividend to buyback bonds instead?.

Well, if I go back a little bit, we did the refi. We made a decision in 2017 to refi all of our debt, and we went with fixed rate. Fixed rate bonds gave us a seven-year trajectory and we mapped out very carefully what we – how we want to proceed.

And our goal would be at the – when we have to refi that debt, our goal would be to get leverage, and our goal would be to approach somewhere between four and five and ideally, even lower than that if we get there. We think we have the timeframe to do that.

So once we get the refi and we reorder priorities, we – the emphasis on delevering has always been there, but it has not been as aggressive a priority and where there have been other demands we kind of – we’ve been less sensitive to it, but we’re focused on it now.

Part of the reason that we – we’ve tightened up on operating expenses to create a little more free cash flow. So that we can be aggressive in getting that leverage down. And with one option that’s always on the table, we’ll see how it goes.

If we get to the place where we can’t accomplish the trajectory we set out when we did the refi, so that we can get to probably with 2023-ish, latter part of 2023 if we’re beginning to approach that on a trajectory where we don’t have the leverage where we needed to be to refi whatever debt remains that point.

Obviously, we’ll have to recalculate and we’re quite open to that and we will keep an open mind on that. But at this point, we don’t think the time is right to reduce the dividend. And so for now, the Board has continued with the policy of keeping in place..

Okay. Thank you..

Thank you. It appears there are no further questions at this time. So I would like to pass the floor back over to Mr. Atsinger for any additional concluding comments..

All right. Thank you, operator, and thanks again to all of you for joining us. We’ll look forward to meeting with you again when we report on Q1..

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time..