Greetings, and welcome to the Salem Media Group Second Quarter 2019 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, Jesse, and thank you, everyone, for joining us today for Salem Media Group's Second Quarter 2019 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.

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. With that, I would now like to turn the call over to Edward Atsinger.

Ed?.

Donald Trump, the Left's Assault on America, and How We Take Back Our Country. It's worth discussing corporate expenses, which increased 7.5% during the quarter. I should point out, however, the entire increase is relating to a noncash stock-based compensation.

In May, the Compensation Committee of the Board of Directors issued restricted stock to senior management in lieu of cash bonuses for the 2018 performance. Excluding the stock-based compensation, corporate expenses were actually down 3.1%. During the quarter, we made one small acquisition of an investment newsletter, Investment House, for $550,000.

We also closed on the sale of WSPZ-AM in Washington, D.C. for $750,000. And we recently entered into two agreements to sell noncore radio stations. On July 10, we entered into an agreement to sell WORL-AM in Orlando for $900,000.

And additionally, in – on July 25, we entered into agreement to sell four radio stations, two in Miami, two in Tampa, for $8.2 million. We will continue to actively look for ways to rightsize our portfolio, and we will keep you informed and updated as things develop. Let me conclude with just a brief comment on our cash distribution.

As I have mentioned before, these quarterly distributions are currently characterized as returns of capital and, therefore, they have a more favorable tax treatment. We paid $1.7 million in quarterly dividends or $0.065 per share on June 28, 2019.

At $0.26 per share annually, this represents an attractive 12.4% dividend yield based on the current stock price. And with that, I'll turn the call back to Evan for additional details on the quarter's performance and, of course, to provide guidance for the third quarter 2019..

Thank you, Ed. For the second quarter, total revenue decreased 2.4% to $64.7 million. Operating expenses on a recurring basis decreased 1.0% to $54.5 million, which resulted in a 9.4% decrease in adjusted EBITDA to $10.2 million.

Net Broadcast revenue decreased 2.9% to $49.1 million, and Broadcast operating expenses increased 1.2% to $37.7 million resulting in station operating income of $11.4 million. On a same-station basis, net Broadcast revenue decreased 1.9% to $48.9 million, and SOI decreased 13.8% to $11.5 million.

These same-station results include Broadcast revenue from 111 of our 115 radio stations in our network operations representing 99.6% of net Broadcast revenue. I'll now briefly review revenue performance of our strategic formats. 38 of our radio stations are programmed in, what we call, our foundational Christian-teaching and talk format.

These stations contributed 40% of total Broadcast revenue and decreased 5.2% for the quarter. Our 33 news talk stations had a decrease of 12.8% in revenue for the quarter, and some of this decrease was due to the lack of political revenue that Ed mentioned earlier. 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 8.3% for the quarter.

We are continuing to see price per share tactics from other broadcasters with strong ratings related assets in the market that they are using for leverage, thereby keeping us off some local and national transactional business. And we're trying to offset this by going after more local direct business.

Our network revenue decreased 0.7% for the quarter and represents 10% of total Broadcast revenue. Revenue from our Digital Media businesses decreased 2.9% to $10 million and represents 15% of our total revenue. And finally, Publishing revenue increased 3.5% to $5.6 million and represents 9% of our total revenue.

As of June 30, 2019, we had $231.9 million outstanding on our bonds and $22.4 million drawn under the revolver. Our leverage ratio was 6.27. For the third quarter of 2019, we're projecting total revenue to decrease between 4% and 6% from third quarter 2018 total revenue of $65.5 million.

Excluding the impact of political and recent acquisitions and dispositions, we're projecting total revenue to decrease between 2% and 4%.

We're also projecting operating expenses before gains or losses on disposition of assets, stock-based compensation expense, changes in estimated fair value of contingent earn-out consideration, impairment, depreciation expense and amortization expense to be between flat and a decrease of 3% compared to third quarter 2018 non-GAAP operating expenses of $55.2 million.

And that concludes our prepared remarks. And we'd now like to answer any questions anyone has. And with that, I'll turn it back over to our operator, Jesse..

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question from the line of Michael Kupinski with NOBLE Financial. Please proceed with your question..

Thank you so much. A couple of questions.

Can you just quantify in the third quarter what would be the impact of the station sales that you have identified? What was the dollar amount that you're anticipating?.

Are you talking about the stations that we've just recently sold?.

Yes..

That we've announced the sale of. I don't have the revenue numbers in front of me for those stations. So let me see if I can pick it up here real quick. No, I don't have that..

And Evan, do you have an annual number on those? And what do comps....

What I do have is I can tell – I was going to say what I can tell you is more kind of an idea of a multiple of cash flow on those stations. The Orlando station is about a 20 multiple. And the four Florida stations that are in a separate transaction, the two in Miami and Tampa, equate to about an 11 multiple..

Okay. All right. Got you. And then....

To put it another way, Michael, they weren't growing off a lot of cash flow. Right. And for the most part, they were not core mission formats for us..

Got you. Okay. That was my next question. Would any of those station sales have any effect on the block programming business? I guess not then..

No..

Correct..

No. In fact, the result of at least the sale in Orlando will enhance the block program because we were able – by spending this noncritical format off, we were able to move our block program into a more powerful station in the market.

So it's now on a 50,000 watt station with an enhanced coverage, and that will enhance block programming through spot certainly in Orlando, which was already very solid..

Right. Got you. And then on the Digital Media revenues – the Digital Media segment. I know that you were talking about Google and Facebook having some issues there.

And have things kind of like cycled against that? Or where do you feel as you look into the second half of the year how things are shaping up for that segment?.

I think we continue to see pressure on that front. I think that advertisers are buying more programmatically. And when they buy programmatically, they're able to utilize big data to target their advertising very effectively. And Facebook and Google have the biggest – big data assets, a much bigger, more scalable – much more scaled asset than we have.

So that disadvantage that we have on data is what's weighing us down. And I expect that to continue to be a factor in Q3 and Q4..

Got you. And then some broadcasters have indicated that they're already seeing some presidential money even being booked and also kind of a little bit more visibility on political. Are you seeing that as well? Because it seems like your second quarter certainly didn't have a huge drop off as you would have in off-election years.

But are you starting to see political being booked into the second half?.

Yes. No, we're really not seeing that. If you think about where some of the big political spend right now is from the 20 or so Democratic candidates running for president. And we're not seeing any money from them, given the formats of our stations..

Right. And would there be any reason why you wouldn't see a nice pickup in political next year? I mean I know that Trump didn't really spend in the last election cycle, but he's raised a lot of money this time.

I mean are you optimistic about the political dollars you might get in 2020?.

Well, it's been pretty consistent, even in midterm elections. This is a presidential election. So now there won't be a republic and primary, which we don't think there'll be a primary. So that would be a negative in terms of spend. On the other hand, the Trump organization campaign has raised records amounts of money.

So we expect that there'll be a pretty aggressive spend. And then you've got a number of – there's going to be a big contest on for both the House and the Senate. And you've got a lot of local elections. And we play in a lot of those as well. So we think that there'll be revenue there.

It's not coming as early as it did when we had the big Republican field prior to 2016. So I think in 2014, we actually had revenue that was a little out of proportion than what you would normally get because of all the candidates running for the Republican primary.

But we're optimistically – cautiously optimistic that we'll get revenue typically how it's showing up..

We go aggressively after the pack money, Michael..

Got you. Yes. And then in terms of just the Publishing book sales and that cycle. You have identified a couple of books that are coming out. They look like they should sell well. And I know that you cycle into next year. That's when these conservative books sell even better it sounds like.

Could you just kind of give us an idea of the – maybe the number of titles, some of the – as you head into next year how that versus some of the previous election cycles? Are they similar? Or you think that there's the potential for bigger blockbuster books, that sort of thing? Can you have any color on that, that you can talk about?.

At this point, we have very little color on 2020. We'll probably publish in total around 50 books. I don't have specifics at this point on 2020. It's a little too early for that. But yes, we've always seen even numbered years with elections outperform odd numbered years. I see no reason why 2020 shouldn't be any different.

Just don't quite have that business visibility yet on specific cycles..

The Kavanaugh book. It's been on the bestseller list. It's doing quite well, and it's quite a good read..

I plan to do that. Thank you for the suggestion. That’s all I have – all the questions I have. Thank you..

Okay, thanks, Michael..

Thank you. The next question comes from the line of Robert Maltbie with Singular Research. Please proceed with your questions. .

Hi, guys.

How is beautiful Camarilloi these days?.

Fantastic..

Well, strawberries, I guess the [indiscernible] they still come to Oxnard for their training or are they gone?.

They do..

They still do that..

They still do that.

Great. Yes. I'm in for Lisa. So she gave me a few questions here to run by you. Some are already covered, but here's what remains.

Regarding the rollout of Salem Surround, how many markets has Salem Surround been rolled into? And what is a sequential quarterly growth? And is it profitable in Q2?.

So it's been rolled out in virtually every market where we own a cluster of radio stations or even just one radio station. So everywhere from Oxnard, where we have a stand-alone to Dallas, where we have – or Hawaii, where we have seven radio stations. It's in every one of those markets, total 34, and it is profitable.

It's been profitable, I think, now, Evan, for two quarters in a row..

Yes. It was profitable for the first time last quarter, and the profit grew in Q2 as compared to Q1..

And we continue to invest in that..

Terrific. Second question and final question that we have is regarding the M&A pipeline. It looks as if it was a light, at least on the acquisition side.

And would you judge this as an intentional slowdown to focus on internal projects and debt reduction? Or if you are looking still acquisitively, are you finding the acquisition climate or rather the valuations – are they too pricey now?.

Well, we're clearly focused on improving the balance sheet. And we've got – as I commented, we want to rightsize our portfolio. We still have a number of stations that are not in core formats.

We've acquired them for a variety of reasons, sometimes as part of a package and sometimes because there were other valuable asset associated with them such as real estate. They're nonstrategic. And so we're spinning those – some of those off, and they're not contributing – they weren't contributing to cash flow.

We have a few more in that category we're looking at. And so we're going to continue to rightsize our portfolio stations, continue to focus on improving the balance sheet, and we're deemphasizing acquisitions at this point. If there's something that comes along that is delevering and doesn't exacerbate our leverage, then we would take a look at that.

And more typically, we find that to be in the digital assets. Typically, we buy assets there in format. And so they have existing cash flow. And normally, we will make offers that are delevering. So that would be the area we'd look at.

But things happen, opportunities arise, and there's always the possibility that if there's an acquisition that makes sense that we can acquire that actually enhances our leverage, we certainly would take advantage of that..

All right, thank you very much..

Thanks, Robert..

Thank you. [Operator Instructions] Our next question comes from the line of Davis Hebert with Wells Fargo. Please proceed with your question..

Good afternoon everyone. Thanks for taking the questions. I wanted to go back to the Q3 guidance. I think excluding the divestitures and political you're pacing or looking to be down 2% to 4%.

Can you give a little bit more color on what's driving that weakness?.

Well, we're seeing some kind of continued weakness that we saw in this quarter. I mean weakness in spots and challenges in digital publishing looks pretty good as David mentioned with – or Ed mentioned with those new titles coming out. That's kind of some of the same continued challenges and weakness..

Okay. And you mentioned – you outlined these asset sales. So when I look at this, I should expect to see $9 million of cash coming in the door in the third quarter.

Is that accurate?.

Our expectation is that we should be able to close both these transactions sometime in the latter part of – actually in Q4 is when we expect to close..

Q4..

Okay. Excellent.

And you would pay down, I guess, the ABL debt first? And then – or would you potentially look to repurchase bonds in the open market?.

David, I think it would depend on what the market looks like at the time and where our revolver balance is at that point. But regardless, we're certainly going to be keeping an eye on the market and see what opportunities are there with respect to bond buybacks..

Okay. Excellent. And it seem like the tone changed a little bit on block programming this quarter. Ed, you mentioned some national ministries canceling? Are we starting to see some more financial strain in that part of the industry? And then, secondly, on local, you mentioned podcasts potentially having an impact.

Is this something that's going to be impacting the next few quarters on that front?.

Well, I think what – with regard to your first question, no, I don't think we're seeing some new trend. What happened is – I cited three specific organizations. One was the James MacDonald organization out of Chicago.

And if you follow that story, basically a long time organization that just came apart, and he resigned, and there's disputes and financial issues. And essentially, the ministry just shut down, very unusual, rarely happens.

I don't think I've ever seen anything happen like that in all my years I've been in it where they just had a split with church that was the organization that was supported and disputes that weren't resolved, and it resulted in just shutting it down.

With regard to the other 2, those are both start-up organizations – in both cases start-up organizations that were trying to launch a new ministry. And they just simply weren't able to get it off the ground. In some cases, very inadequate resources, thin resources.

And that will happen from time to time where new organization will try to launch a ministry, and they'll be very ambitious and not able to really sustain it with enough capital to get it to success. And that was the case. One of them completely, I think, shut down after, I think, trying to launch a new program on a dozen stations or so.

They tried to do it. And I think they were there less than 1.5 years, two years. The other one didn't – the other one was also a start-up, and they just had to cut back. They're still there, and they're still growing, but they reduced their footprint a bit for a while.

And then as they get a little more momentum, I'm confident they will be a long-term player. They've got a very good organization and very good products. So no, I'm not particularly concerned. I don't see there's any reverse trend, a unique one-off situation in Chicago. And you can read about that, if you just Google on that.

I don't remember the name of the church organization..

Walk in the World..

Yes. Walk in the Word was the name of the program. With regard to the podcast, we're seeing – I don't – I'm not quite sure how I would even reflect that. I think perhaps some of the pressure on spot business. There's been some additional competition for audio. And Dave, you might actually....

Yes. I mean, we have a number of paid local programs, particularly on the weekend. And some of those clients have decided that they want to move exclusively into the podcast space. We don't think that that's a great idea because they're in there with a whole lot of other podcasts.

Unless they're really popular, they're going to have a lot of trouble being found there. And so we have put some strategies in place and some new packages in place to help them be found. If they're married to just going podcast only, then we can help them and help ourselves to some revenue at the same time, while providing them with a service.

And so we do have some strategies in place for that. And also, I think – and we're wading into the podcast waters in other ways as well, but we're wading in slowly because a lot of broadcasters are in podcasting now. I don't know a ton of them that are making a lot of money with it. So we're kind of wading into that water a little more slowly.

Although you should know, we – Salem has been in the podcast business for a long time, but are network host for the past 10 years. We've been profitable since day one with podcasting with our network host. And David, you could certainly speak to....

Yes. We've had a Christian on demand podcasting and streaming business actually since 2000. It's a site called OnePlace.com. You can go there and listen on demand to 200 different Christian teaching talk radio programs. It's a very, very good website for us..

Right. I mean podcasting has, I guess, been a bit of a craze for your radio peers, and you've been in a longer period of time. That's certainly good to hear you already have a toehold there. And then, lastly, in terms of debt reduction and deleveraging, it seems like the third quarter you're going to see another slight increase in leverage.

What sort of levers do you feel like you have to accelerate that deleveraging? Ed, you mentioned maybe looking at other noncore stations. Could you reallocate the dividend toward debt reduction? Maybe just go through some ideas you're thinking about as you head into 2020 around the balance sheet..

Well, we clearly have additional noncore asset – nonstrategic formats – formatted stations. We picked up a lot of stations from Disney. We did package deals for blocks of stations on very attractive terms. They weren't always immediately profitable, but they had assets that we liked, and not the least of which was some very valuable real estate.

And so we're working on harvesting some of those real estate assets. We're also – we still have some stations that we think that we could – if we can get an attractive price for them that we would spend them off.

And we've got – there's some opportunities there that will generate some revenue we're fairly confident between now and the end of the year, fairly confident that there'll be additional revenue generate that way. We always have the option of the dividend. Our quarterly dividend is decided every quarter by our Board.

And they'll take a look at our leverage, our total debt – our leverage and look at the – they will look at our projections and budgets going forward and every quarter decide. And it's always an option that's theirs to make, if they want to reduce the dividend or eliminate the dividend or increase the dividend or do what they want to do.

But all of the above will be certainly looked at and utilized as they're available to rightsize that balance sheet, and we're working on that..

Great, thank you for taking my questions..

Thank you. Our next question comes from Steve Bassett with Calamos. Please proceed with your question..

Davis actually just asked my question..

Okay..

Thank you. In that case, we have no further questions at this time. So I'd like to pass the floor back over to Mr. Atsinger for any additional concluding comments..

All right. Thank you, operator. And again, thanks to all of you for joining us. Look forward to visiting with you again when we give third quarter results..

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..