Greetings. Welcome to the Salem Media Group Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Evan Masyr, CFO. Thank you.

You may begin..

Thank you. And thank you for joining us today for Salem Media Group's fourth quarter 2021 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 David Santrella, Chief Executive Officer; David Evans, Chief Operating Officer.

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 our website at www.salemmedia.com. At this point, I would now like to turn the conference call over to Dave Santrella..

Thanks Evan and thanks all for being on today's earnings call. I'll start my prepared remarks with a review of some of our positive developments for the fourth quarter, including our growth in digital revenue. I'll then discuss our financial results and conclude with an update on land sales.

After that, I'll turn the call back over to Evan, who will provide more detail on fourth quarter financial performance and provide guidance for the first quarter of 2022. We had three positive developments in the fourth quarter that are worth highlighting at the beginning of this call.

First is our continued growth in digital revenue as we continue to evolve into a multimedia company.

In the fourth quarter of 2021, our total combined digital revenue, that is digital revenue within the broadcast division, plus the revenue from the National Digital division, was $20.2 million, an increase of 11.9% compared to the fourth quarter of 2020.

That represents 29.2% of our total revenue in the quarter and we expect faster growth in this segment of our business. By way of comparison, only12.5% of our total revenue was digital just10 years ago, and 19.6% of our revenue was digital five years ago.

When you factor in book publishing revenue, which is 9.5% of total revenue in the fourth quarter, traditional radio revenue is just over 60% of our total revenue, and 40% is from digital and publishing. The second piece of good news is the closing of a couple of real estate sales.

On November 30, we sold 77 acres of land in Tampa, Florida for $13.5million. Also, we sold 4.5 acres of land in Phoenix, Arizona for $2 million on January 10. In both cases, we're moving our Transmar locations to on other Salem radio stations in the market. The final significant development is our debt and leverage.

During the fourth quarter, we repurchased$38.6 million of our 2024 bonds using cash from our balance sheet. On December 31, 2021, we had $60.2million of 2024 notes remaining and a total debt of $174.9 million. This reduced debt burden, coupled with the growth in adjusted EBITDA, resulted in a leverage ratio of 4.46.

This is the lowest our debt and leverage have been since 2000. Now let me review our financial performance. Compared to the fourth quarter of 2020, total revenue increased 7.2%. Expenses increased 6.8%, resulting in adjusted EBITDA increasing 9.3%.

The fourth quarter of 2020 was still a bit soft due to the pandemic, but we did have a significant amount of political revenue, which impacts2021 comps. For comparative purposes, we had $3.5 million of political revenue in Q4 of 2020 as compared to just $0.5 million in Q4 of 2021. Despite that headwind, we still had a 7.2% growth in total revenue.

We remain focused internally on comparisons to 2019 to take out the effect of the pandemic despite the fact that almost two years later, the economy is still not completely open. Compared to the fourth quarter of 2019, total revenue increased 7%. Expenses increased 7.1%, resulting in an adjusted EBITDA increase of 6%.

In addition to performing better in the fourth quarter of 2021 compared to2019, I'm also pleased to report that full year 2021 revenue is 1.7%higher than 2019, and full year adjusted EBITDA is 3.6% or $1.3 million higher than 2019. It's rewarding to see that for the full year, we've eclipsed the pre-pandemic numbers of 2019.

Now, let's look at how each division performed in the fourth quarter. In the Broadcast division compared to Q4 2020, Broadcast revenue increased 6.1%. When comparing to Q4 2019 pre-pandemic numbers, total Broadcast revenue was up 1.1%.

Thelargest component of growth in the Broadcast division continues to be digital with revenue increasing 26.8% compared to fourth quarter of 2020. This was also impacted by political as we had $800,000 less in digital spending in Q4 2021 as compared to Q4 2020. When comparing to 2019, Broadcast digital revenue improved 85.8%.

This growth is being driven by some of our more recent digital initiatives, including Salem Surround and the Salem Podcast Network, which was launched on January 1, 2021. In Q4 alone, the Salem Podcast Network generated revenue of $1.6million and in its first year of operation, we hadrevenueof$6.4 million.

Local spot advertising revenue increased 7.2%, while national spot decreased 27% compared to Q4 2020.Combined, spot revenue decreased 3.8%in the quarter but was impacted by a meaningful amount of political revenue last year. Excluding political, mobile advertising revenue would have increased 12.8%, and national advertising would have declined 8.6%.

Excluding political, total advertising revenue was up 6.8% compared to the fourth quarter of 2020. Advertising, however, is still not back to its pre-pandemic levels due to the economy. Comparing toQ4 2019, total spot advertising decreased 13.9% in the quarter.

In total, block programming increased 11.6%in the fourth quarter of 2021 compared to the prior year. Nationally, block programming increased 12.3% and locally, it increased 10.4%. We just concluded our annual rate renewal process with the National Christian Ministries. Overall, we were able to increase rates 2.6%.

More importantly, as I mentioned on our last call, we're seeing an increase in demand for our very limited block programming airtime. With the rate increases, expansion from some existing ministries and the launch of some new programs, we expect National Christian Ministry block programming to increase more than 8% in 2022.

Now this is important given that this business generally has a 95% renewal rate. We look at this growth as having a long-term positive impact on our broadcast revenues. Network revenue in the quarter was down 13.7% when compared to fourth quarter of 2020. This was impacted by political revenue as well.

The network had a strong political quarter last year. Excluding political, network revenue was down 6.2% when comparing Q4 2019, network revenue was down only 1.8%. Expenses in the broadcast division increased 6.9%, resulting in increased station operating income of 3.6% compared to the fourth quarter of 2020.

The increase in expenses was largely due to the restoration of salary reductions taken in 2020, expenses associated with the Salem Podcast Network and increased sales commissions. When compared to the fourth quarter of 2019, expenses were up 2.1%, and SOI was down 1.9%.

At our national digital division, revenue increased 2.9% compared to the fourth quarter of 2020. Excluding the impact of our political websites, which had a strong performance last year due to the election, revenue in the division increased 6%. This is due to some of the acquisitions we made last year and a growth in programmatic advertising rates.

Expenses in the national digital division decreased 1% in the quarter compared to Q4 2020. This decline is due to ongoing cost containment efforts. Finally, our publishing division increased -- had a revenue increase of 27.1% compared to the fourth quarter of 2020.

This growth was driven primarily by our traditional publishing business, Regnery Publishing and Salem Books. The top-performing titles included Pandemia by Alex Berenson, Rigged by Mollie Hemingway. Is Atheism Dead by Eric Metaxas and the Babylon Bee Guide to Wokeness.

We already have a few authors under contract for 2022, including books from Dinesh D'Souza, David Limbach, Dennis Prager, Voddie Baucham, and Greg Laurie. Publishing expenses were up 15.8% in the quarter compared to Q42020, directly related to the increase in book sales. Now I want to provide some updates on our M&A activity during the quarter.

We had no acquisitions during the quarter and have nothing pending at this point. I already mentioned the land sales in Tampa and in Phoenix. We still have one sale pending, 9 acres in the Denver area for $8.2 million. We expect to close on this in the second quarter of 2022.

We'll continue broadcasting both KRKS-AM and KBJD-AM from this transmitter site after closing. And with that, I'll turn the call back to Evan for additional details on the quarter's performance and guidance for Q1 2022..

Thank you, Dave. For the fourth quarter, total revenue increased 7.2% to $69.1 million.

Operating expenses on a recurring basis increased 6.8% to $58.3 million, which resulted in a 9.3% increase in adjusted EBITDA to $10.8 million.Net Broadcast revenue increased 6.1% to $51 million, and Broadcast operating expenses increased 6.9% to $38.8 million resulting in station operating income of $12.3 million, an increase of 3.6%.

On a same-station basis, net Broadcast revenue increased 5.7% to $50.6 million, and SOI increased 0.8% to $12.2 million. These same-station results include Broadcast revenue from 94 of our 100 radio stations in our network operations, representing 99.1% of our net Broadcast revenue.

Now I'll briefly look at revenue performance of our strategic formats. 38 of our radio stations are programmed in our foundational Christian teaching and talk format. These stations contributed 37% of total Broadcast revenue and increased to 9.7% for the quarter. Our 31 news talk stations had an increase of 2.4% in revenue for the quarter.

Overall, these stations contributed 18% of total Broadcast revenue. Revenue from our 12 contemporary Christian music stations contributed 17% of total Broadcast revenue and increased 2.1% for the quarter. Our Broadcast digital revenue increased 26.8% to $8.7 million and represents 17% of our total broadcast revenue.

Our network revenue decreased 13.7% for the quarter and represents 10% of total Broadcast revenue, and this decrease was primarily due to political revenue compared to the same quarter of the prior year. Revenue from our National Digital Media division increased 2.9% to $11.6 million and represents 17% of our total revenue.

Our Publishing revenue increased 27.1% to $6.5 million and represents 9% of our total revenue. Dave already mentioned that we are at our lowest debt and leverage levels since 2000. I'll provide a little bit more detail on our debt.

As of December 31, 2001, total debt was $174.9 million, made up of $114.7 million of our 7.125%, 2028 notes and $60.2 million of our 6.750%, 2024 notes. We had nothing drawn on our $30 million ABL revolver. Our leverage ratio was 4.46 as defined by our credit agreement. But net of cash, our leverage ratio would have been 4.41.

With the extra cash generated from the sale of our Phoenix land, we repurchased an additional $2.5million of bonds subsequent to year-end. This brings the balance of the 2024 notes to $57.7 million as of today.

Looking forward, for the first quarter of 2022, we're projecting total revenue to increase between 3%and 5% from the first quarter of 2021 total revenue of $59.4 million.

We are also projecting operating expenses before gains or losses on the sale or disposal of assets, stock-based compensation expense, changes in the estimated fair value of contingent earn-out consideration, impairments, and depreciation expense and amortization expense to increase between 6% and 9% compared to the first quarter of 2021 non-GAAP operating expenses of $51.4 million.

And this now concludes our prepared remarks, and we would like to answer any questions. I'll turn it back over to you, Hillary..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Michael Kupinski of Noble Capital Markets. Please proceed with your question..

Thank you. And first off – first of all, congratulations on beating expectations. A great job. A couple of questions. So the proceeds from the land sales are a nice surprise. And I was just wondering, you mentioned that – and maybe just a little clarification.

Are you still broadcasting in those stations on the AM Dow, or are you just working off your FM transponders? I'm just trying to understand how you're moving the signal?.

No, we're still – Mike, thanks for the question. We're still broadcasting on the AM band and in fact, that's the same frequency in those cases, but we're diplexing the radio stations. In other words, we use another transmitter tower in the area and basically have our signal diplexing off of that transmitter tower..

Got you.

Because I know that AM stations typically require a lot of – the towers require a lot of land, right? And I was just wondering in terms of other real estate sales prospects outside of Denver, are you still – do you still have other real estate projects out there that you're still thinking about?.

Yeah. We're—it's an ongoing process for us and land that maybe is not valuable today a year from now will suddenly become valuable. And so it's –the sales that we're making right now seem to be kind of the top of the lowest-hanging fruit for us. But we'll continue to look at additional land sale opportunities and literally do so every couple of weeks..

Got you. And the interesting thing is that, the book sales last quarter were much stronger than I was looking for. And I guess, is that just due to the political environment, or because typically, you do better, I believe, in election years.

And I'm just kind of curious how you're gearing up for this season election year? And are you kind of holding back some firepower for 2024? If you can just give me a sense on how you look at the book publishing division?.

So we're not holding back firepower. We've got good titles. They have to be released timely with the new cycle. So we released books when they're ready to go. We did have a very good Q4. That was a function of four strong titles. Typically, we're not going to have that many strong titles in a quarter.

So very pleased with Q4 that it wasn't just successful a single title. It was multiple titles having good results. And we're pretty excited about 2022. It's a mid-term election, that's usually good for our book publishing business.

We've got titles lined up from folks like Dinesh D'Souza, our own radio host, Dennis Prager, on the Christian side, Body Bakken [ph] and Greg Laurie. So we feel pretty good about the way 2022 is lining up. Too early to talk about 2024.We literally have no books under contract for 2024 at this point, just too early..

Got you. On the radio side, I just have a couple of quick questions. On the radio side, obviously, we had the passing of Ruslan Bone.

I was just wondering, how have some of your conservative talk formats performed? Have you been able to successfully pick up time slots where Rush had been? And if you could just give me your thoughts about the radio network business overall?.

Yes. We offer two different hosts, network costs that are in the same day part as Rush Limbaugh, so Dennis Prager, which has been there forever, and then Charlie Kirk, who we launched just about two years ago.

And so between the two of them, we have picked up some affiliates from Rush Limbaugh, Michael, if I would be guessing right now, if I gave you a number. But a couple -- at least a couple of dozen affiliates since Rush Limbaugh's passing. And they've really gone to a number of different people.

We've picked up some -- Cumulus picked up some other syndicators have picked up some. I don't think anybody can claim that they got kind of the lion's share of Rush Limbaugh's affiliate departure, so to speak. So -- and the network business continues to be, for us, very, very strong. It's -- we're in apolitically charged environment.

And our host are really kind of scratching the itching ears of listeners right now. .

Got you. And Evan, debt reduction has been significant. Obviously, we talked a little bit about real estate sales that have accelerated your debt reduction.

Are there targets in terms of your debt leverage? Where do you like -- where do you anticipate this -- where would you like to see this company in terms of leverage? And then what are your thoughts in terms of -- you're going to be generating here some nice free cash flow.

What are your thoughts in terms of allocation of capital?.

Yes. As far as a target, really, I would say our target right now, as we've said for a wireless to get leverage under four. When we get to that point, we can maybe think about different allocations of capital.

But right now, our number one use of capital is debt retirement and will continue to be so untilled get that leverage under four, then we can look at other things. Obviously, acquisitions will play into it if there are some good acquisitions. But all else being equal, you'll see us continue to focus on paring down the debt. .

And just one final question. On the national digital front, can you talk a little bit about the competition there? I know that we had issues with Facebook and so forth.

Are you starting to see things kind of ease a little bit where competition is not as fierce or the ability for you to grow that business is gotten a little bit easier? What are your thoughts there?.

Yes, I wouldn't necessarily call it competition. We are reliant upon traffic from Facebook, and we're reliant upon traffic from Google. In the case of Facebook, it's social media traffic from our Facebook communities. In the case of Google, it's organic search engine traffic. And those two organizations are constantly changing their algorithms.

And in some quarters, the algorithm seems to work in our favor. In other quarters, the algorithm works against us. And we're constantly having to kind of adjust how we approach those two platforms based upon the algorithm changes we see.

To reduce our reliance on that, we're putting a big effort into growing our e-mail newsletter subscribers, where people subscribe to receive content delivered to their e-mail in to their e-mail inbox and then people pick on these news letters. And the advantage of that strategy is less reliant on the likes of Facebook and Google.

I would hope -- I'd like to be able to say the big volatility is over. We saw massive volatility from Facebook between 2016 and 2017. It does seem to have calmed down somewhat since then. But the word of social media is constantly changing. So I expect there to be continued changes and we're going to have to respond and react to that..

Thanks for the color and the clarification, Dave. That’s all have, Thank you..

Thank you..

Thanks..

Our next question is from Lisa Springer of Singular Research. Please proceed with your question..

Congratulations on a very nice quarter..

Thank you..

Thank you. .

My question is with the digital media operating margins, there was a nice bump up both sequentially and year-over-year. I was wondering if you can comment what drove that improvement in margin..

Well, on the broadcast side, and David, you might be-- you and I both answer this. On the broadcast side, we've taken more of that in-house. So our margins are reduced when we have to use a third-party to fulfill that. Every time we sell something digitally, that is either something that we can fulfill ourselves, we don't need a third-party to do it.

Or if it's simply owned and operated, in other words, buying a display ad on one of our own owned and operated assets, we keep a lot more of that money. And so there was a lot more owned and operated sales, aggressive and stream -- ad-injected sales and streams, and all of that is higher-margin business for us. .

But probably more importantly, revenue growth drives improved operating margins. We have a very solid incremental profit margin in our digital business. So if we're able to grow revenue faster than expenses, there's good operating leverage in that business. So revenue growth combined with revenue mix, but revenue growth is probably the big driver..

Okay. Well, thank you for the color. .

Thank you..

Our next question is from Barry Sine of Spartan Capital. Please proceed with your question..

Hello. Good afternoon. A couple of questions. First of all, on the first quarter guidance, 3% to 5% revenue growth, could you give us the normalized number? I don't know how much that would be impacted by M&A transactions.

What's the underlying normalized growth rate? Is that a material difference between that and the 3 to 5?.

Yes. Barry, we haven't done much in the way of acquisitions that would change it materially from 3 to 5, so I think 3 to 5 is a reasonable kind of same station type or same-store approach number. .

Okay. That was an easy answer. In terms of the M&A strategy, I wonder if you could kind of step back and give us a sense of what your overall strategy is. On the sales side, it looks like you're always looking to monetize excess assets, land and so on that you have on the books.

On the purchase side, is there -- are there any types of assets that you're looking to acquire, looking to add to? And how does the market look out there? Should we be surprised if we see additional acquisitions this year, or are you pretty much happy where you are?.

Probably the best indicator is to actually look back at 2021. I think we did three acquisitions in 2021, a couple of radio stations in San Francisco. That was $600,000 and then two digital media assets, Shift Worship and Center Line who both producers of video content and other digital resources that we sell to churches.

So we are looking for acquisitions in the digital media space that complement our existing assets. And if we can find radio stations, tuck-in radio stations that easily fit into the portfolio, those are the two areas of focus. What all of those acquisitions have in common is they're immediately delevering.

We've got what we think are very attractive multiples. So they were either leverage neutral or delevering. So I'd say those are kind of current criteria that we're focused on tying back to Evan's comment about our goal of getting leverage below four, we're going to be pretty disciplined about acquisitions. .

Okay. And my last question is on the political advertising spending environment for both broadcast and digital. Could you kind of give us maybe a bit of a history? I think if I recall correctly, the last midterms were actually higher than the prior presidential election. So I don't know if we're going to see that again this midterm.

And what are the trends for investors that they should be looking at? And then are you seeing any early indications when we were still in primary elections for most of these offices? So maybe it's still early, but are you seeing any early indications that may be investors can start thinking about for political ad spend for the rest of the year?.

Yes. Barry, let me give you some historical numbers that may help. So the last presidential, we had $6.6 million. The last midterms were about $4.8 million. If I go back to the previous midterms in 2014, it was $3.2 million. And by the way, the previous presidential cycle was $4.6 million.

So right now, it seems like every cycle seems to be getting a little bit stronger. But I'll let Dave and David maybe comment on political. .

Yes. On the broadcast side, we are starting to see some digital dollars come our way. It's not yet at a fever pitch, but it's increasing a little bit more almost weekly at this point. David, on the digital side? I mean... .

Very little political activity at this point in terms of political spending. .

Thank you for taking my questions..

Thank you. .

Thank you. .

[Operator Instructions] Our next question is from Eddie Riley of [indiscernible] Please proceed with your question..

Hi, guys. Just for guidance in the Q1, could you give us some insight into what segments you think are going to be strongest in driving that 3% to 5% growth you’re expecting over Q1 2021.

Yes, Eddie, there's a few. And if Q4 is any indication of it, and I think it is, you're going to see a continuation of – from these ad categories. Home improvement is very big right now. Events are back, right? The news of not having to wear a mask some of the vaccination requirements being lessened, People are more comfortable gathering.

So we're seeing events, concerts, things like that comeback. Recruitment advertising is at an all-time high right now. Real estate is very big. And education is very good.

People are rethinking where they're sending their kids to school based on what's happened over the last couple of years, and that's creating opportunities for some institutions, and we're seeing that result in ad schedules, both broadcast and digital. .

And let me just give a slightly different perspective on that vis-à-vis kind of our business segments. Our weakest segment is going to be book publishing. We have a lighter schedule of releases this year than last year. So I would expect book publishing to be down. And our strongest segment, no surprise, is going to be digital.

I expect digital to be leading the way, but we also expect to have a very solid quarter in terms of block programming revenue. So that would be the kind of color commentary in terms of our kind of revenue segments. .

Got it. Got it.

And so the home improvement, events, recruitment advertising, so all these will really --I guess what I'm trying to say is you're expecting to see a rebound in spot advertising a little bit?.

Well, we expect to see spot advertising continue to kind of crawl out of the COVID hole, so to speak. And the fact that so many of these ad categories were for a longtime not spending money and now are spending money or spending money at a greater level, I think, yes, it leads to our opportunity to see improved local ad spending. Yes. .

Obviously, there are still some ad categories where those particular industries are facing supply chain issues, and those supply chain issues are causing them to kind of hold back on marketing spend. So there is an ongoing challenge because of that. .

Got it. And last question for me.

Could you guys just elaborate a little bit more on the sequential jump in unallocated corporate expenses?.

You're comparing -- from Q3 to Q4?.

Yes. .

Yes. One of the bigger issues that you'll see is bonuses -- senior management bonuses. We weren't planning on paying bonuses until we kind of saw as the results were improving throughout the year, we started to accrue for that. So that's one of the big things you'll see. .

Okay. Got it. Thank you, guys..

Thank you..

We have reached the end of the question-and-answer session. I will now turn the call back over to David Santrella for closing remarks. .

Well, thanks, everybody, for being part of the call, and we'll see you in a few more months. Thanks. .

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