Greetings, and welcome to the Salem Media Group, Inc Q1 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Evan Masyr, CFO. Please go ahead, sir..

Thank you, and thank you all for joining us today for Salem Media Group's First Quarter 2022 Earnings Call. As a reminder, if you get disconnected at any time, you can dial back in or listen from our website at www.salemmedia.com. In the room with me today is David Santrella, Chief Executive Officer.

David Evans, Chief Operating Officer, is traveling this week but is on the phone as well. 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 salemmedia.com. And I would now like to turn the call over to David Santrella.

Dave?.

The Rational Passover Haggadah by Dennis Prager; Lost Airmen by Charles Stanley; Rigged by Mollie Hemingway; and Zelensky by Andrew Urban. Book publishing expenses were down 14.2% due to the reduced level of books sold.

The book publishing division had an operating loss of $0.6 million in the quarter compared to operating income of $0.5 million in the first quarter of last year. Corporate expenses increased 12.2% due to the 401(k) match and an accrual for senior management bonuses in the quarter, which did not occur in the first quarter of last year.

I'll now turn the discussion to M&A activity. There is continued work on some land sales. On January 10, we sold 4.5 acres in Phoenix for $2 million. The site was used to transmit KXXT-AM. The station is now in the process of being relocated in diplex on our KPXQ-AM site. This will actually result in an improved signal for KXXT.

Closing the sale of 9 acres in the Denver area for $8.2 million is also still in progress, with a close expected in June. The stations will continue broadcasting both KRKS-AM and KBJD-AM from this transmitter site after closing.

Salem did make one small acquisition during the quarter on May 2, Eagle Financial acquired Retirement Media, which owns 6 retirement websites for $190,000. Now before I turn the call back to Evan, I want to share some very exciting news. Salem is the executive producer and sole investor of $4.5 million in the film 2000 Mules.

The movie is a documentary, display in video and mobile phone evidence of voting fraud in the 2020 presidential election. The movie was released in a special 2-night event at almost 300 theaters and sold out 94% of the available seats.

The red carpet premiere was last Wednesday at Mar-a-Lago hosted by President Donald Trump, and included many prominent conservative media personalities, and congressional representatives.

It's too early in the movie release window to properly estimate where Q2 revenue for this film will end up, but we are pleased with the results to date and certainly expect to make a solid profit from Salem's investment in this movie. This is another great example of Salem's multimedia approach in generating both impact and revenue.

And with that, I will turn the call back to Evan for additional details on the quarter's performance and guidance for Q2..

Thank you, Dave. For the first quarter, total revenue increased 5.5% to $62.6 million. Operating expenses on a recurring basis increased 8.4% to $55.8 million, which resulted in a 13.6% decrease in adjusted EBITDA to $6.8 million.

It's worth noting that many of our broadcast peers are mentioning on their earnings calls how they are closing in on 2019 revenue levels. For Salem, this is the third consecutive quarter with revenue ahead of the corresponding quarter in 2019. As Dave mentioned, comparing Q1 2022 to Q1 2019, total revenue increased 3.5%.

Compared to last year, net broadcast revenue increased 10% to $48.4 million, and broadcast operating expenses increased 14.3% to $38.1 million resulting in station operating income of $10.3 million, a decrease of 3.7%. On a same-station basis, net broadcast revenue increased 9.4% to $48.1 million and SOI decreased 5.0% to $10.3 million.

These same-station results include broadcast revenue from 96 of our 101 radio stations and the network operations and represents 99.3% of our net broadcast revenue. I will briefly review revenue performance of our strategic formats. 39 of Salem's radio stations are programmed in our foundational Christian teaching and talk format.

These stations contributed 39% of total broadcast revenue and increased 11.6% for the quarter. Salem's 32 news talk stations had an increase of 17.5% in revenue for the quarter. Overall, these stations contributed 19% of total broadcast revenue.

Revenue from the 12 contemporary Christian music stations contributed 15% of total broadcast revenue and decreased 0.1% for the quarter. Broadcast digital revenue increased 16.1% to $8.2 million and represents 17% of our total broadcast revenue. Our network revenue decreased 0.8% for the quarter and represents 10% of total broadcast revenue.

Revenue from the national digital division increased 7.1% to $10.3 million and represents 16% of our total revenue. Book publishing revenue decreased 31.8% to $3.9 million and represents 6% of total revenue. As of March 31, 2022, total debt was $172.4 million, made up of $114.7 million of 2028 Notes and $57.7 million of 6.75% 2024 Notes.

Salem had nothing drawn on its $30 million ABL revolver. The leverage ratio was 4.59 as defined by our credit agreements. And looking forward, for the second quarter of 2022, Salem is projecting total revenue to increase between 6% and 8% from second quarter 2021 total revenue of $63.8 million.

Salem is also projecting operating expenses before gains or losses on the sale of disposal of assets, stock-based compensation expense, changes in the estimated fair value of contingent earn-out consideration, impairments, depreciation expense and amortization expense to increase between 7% and 10% compared to the second quarter of 2021 non-GAAP operating expenses of $55.0 million.

And this concludes our prepared remarks, and we would now like to answer any questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Michael Kupinski with NOBLE Capital Markets..

So the -- let's start with the guidance. So the guidance looks a little stronger than what I was expecting. And I was just wondering what are the key drivers there.

Maybe you could just talk a little bit about is the -- are we cycling in now to a better environment with -- for books' titles, the number of titles versus last year, if you can give us a little thought about that? And then I have some further questions..

Yes. David Evans may want to mention -- or talk about some of the book titles. Certainly, it's a better Q2 in Publishing revenue than Q1. That is part of it. But also just everyone else seems to be doing -- getting some positive indicators. Broadcast revenue is doing a little bit better. Digital is strong.

Obviously, we have a little bit of revenue, kind of a nominal amount in the guidance for this film, 2000 Mules. That's also something that's different in Q2 that wasn't in Q1..

Got you.

And in the titles, can you guys give us a sense of what that looks like for the balance of the year?.

So book publishing is still soft in Q2. Kind of looking ahead, book publishing, the big titles are all in Q3 and Q4. We've got books lined up from Ted Cruz, David Limbaugh, Dennis Prager, the Babylon Bee, Kurt Schlichter, who's one of our top writers on Townhall, but all of those books are scheduled for Q3 and Q4.

So I wouldn't expect a big increase from book publishing in Q2, more likely to be flat or even down a little bit. It's the second half of the year that you should be looking at..

Got you. And then can you talk a little bit about the film? Just to understand a little bit, it was -- the cost was $4.5 million and you're in 300 theaters at this point.

Do you have some sense of what revenues you're kind of contemplating in terms of the film, what type of return you're expecting? And then how you, I guess, further commoditize that on some of your other platforms?.

So Michael, first off, yes, our $4.5 million investment was an investment in both the production of the film and the marketing of the film. The film was initially -- it premiered in about 300 theaters, 400 screens for 2 days. It then moved to this premiere at Mar-a-Lago, then had a virtual showing at the [indiscernible] theater in Las Vegas.

And then as of Saturday, was also available on SalemNOW, which is Salem's transactional video-on-demand platform as well as on Rumble/Locals as a paid release there. So that's kind of -- and right now, as of Sunday, it was available and is available on SalemNOW and on Rumble's as well as DVD sales, which are significant for the film.

So that's kind of where we've gone with it. In terms of the revenue, it's really early on to speculate where that is. But I will tell you that we're very pleased with the pace that we're seeing right now. And our -- and expect to see a nice profit there..

And David, how do you view SalemNOW? What are your thoughts in terms of adding more content? I mean, I'm just kind of trying to understand, are you thinking you're getting into the movie business? Obviously, it's more of a documentary, if I recall.

But can you kind of give us your thoughts on how you plan to develop SalemNOW?.

Yes. And I'll make some comments, and I'll have David Evans to give some color as well. But again, Salem's calling card is the fact that we appeal to a few very specific audience groups. That's what we do best is appealing to those that are interested in content related to Christian, conservative and family-themed values.

And so as a result of that, it allows us to really be targeted in the kinds of things that we produce. And so SalemNOW is just another great example of us being able to either acquire or invest in content that will appeal to that audience and put it on the SalemNOW platform.

We did that last year with No Safe Spaces from Dennis Prager and Adam Carolla. That was followed up with Larry Elder's Uncle Tom. We've had other movies of lesser of a hit than those. And now, of course, this movie, 2000 Mules, which is a significant hit.

So Michael, we continue to look at curating additional content, both from existing content that's available that we can put on the site and then potentially from an investment in other documentary-style movies going forward.

David, anything to add to that?.

Yes. I think you should expect us to be highly selective. We're not going to just kind of jump into the movie business into the deep end of the summing pool. So we'll be looking for movies that are a fantastic fit for our audience. We know who our audience is. We think we know what topics resonate with them.

So we're going to be very focused on our sweet spot audience, talking about the right topics that our audience is interested in, brought to you by the right talent with the right timing. I think we have to get all of those things aligned. And I think you see that with 2000 Mules and Dinesh D'Souza. Dinesh D'Souza is a great fit for our audience.

The topic of the movie is very much on the minds of our audience right now. So expect a small number of movie investments all thought about very selectively..

Got you. And then my final question. Any updates on Salem News Channel? And then if you can just kind of give us some thoughts on how much of the elevated expenses that you're talking about, 7% to 10% growth in Q2, how much of that might be related to the expenses related to the news channel..

Well, the Salem News Channel continues to make progress. We have our first video-only program on with Andrew Wilkow. We now have put, in addition to that, the Dinesh D'Souza podcast as an edited video version. That's also on the Salem News Channel. So in addition to our network hosts which are there, we now have a few video-only programs.

We have some additional video-only programs that we'll be launching, kind of rolling those out slowly to control expenses. So we're pleased with where we're headed with the Salem News Channel. We are just beginning really in more significant sales effort there as we wanted the product to be right.

We're starting to get good signals that the product is right and we'll be moving more aggressively in the sales process moving forward..

Michael, I was going to say some of the increased expenses in Q2 certainly relate to expenses that weren't around in 2021 related to Salem News Channel. For example, the video-only show of Andrew Wilkow and some of the personnel needed to run the Salem News Channel. So that does impact some of the elevated expenses in second quarter of 2022..

And is there a way to break that out or you're not breaking those elevated expenses out at this time?.

No. We're not breaking out Salem News Channel expenses separately at this point..

Your next question comes from Lisa Springer with Singular Research..

I have a couple of questions about political ad spending, thinking more towards the second half.

I wonder with the Supreme Court potentially taking up the abortion issue again, do you expect that to have any kind of meaningful impact on political ad spending?.

A fair question and to be perfectly transparent, one that I've not given a lot of thought to how it would impact political ad spending. So Lisa, I mean, I can tell you this, but look, we're already seeing an increase in political ad spending, and that was up significantly, obviously, in Q1 of this year. Whether the Roe v. Wade or reversal of Roe v.

Wade would impact political ad spending, I guess, my intuition says it probably would because it becomes a hot button issue that both sides of the aisle will want to play off of. So I think it probably will increase the intensity of political ad spending for both parties..

Okay.

And the next question I have about political ad is are you expecting with this cycle that it's going to be more heavily weighted towards digital than broadcasting compared to previous cycles? And if that is true, how could that impact your margins?.

Well, the great -- so first off, I think the trend with all political advertising, in general, has been an increased amount of their ad budget go into digital. The great news is that we have ample and robust digital vehicles to offer them now. Those vehicles do come at a slightly smaller margin than radio does.

But any time that we talk about political advertising, we always talk about the very effective combination of radio and digital together. Radio creating awareness, digital creating action and the 2 of them are a potent and effective combination. And so we actually look forward to this political season because we have more to offer than we ever have..

Your next question comes from Barry Sine with Spartan Capital..

First, I know you're not giving estimates on how much revenue 2000 Mules could generate. But if you could kind of walk us through the mathematics. I think it's, what, $30 to stream the movie on SalemNOW. And I know that movie economics get kind of complex.

If I were to make an estimate of how many people might stream that over the quarter, would all that $30 flow-through as revenue? How do the economics work so we can kind of do our own math and do our own assumptions?.

Yes. And you're right, Barry. It is a complicated issue when you talk about movie accounting. But the first thing that happens is the marketing money gets paid back first. And then the second, the production cost. So Salem will get the first $4.5 million plus a little bit of interest on that money of proceeds. So that will come to us.

Additionally, anyone that streams on SalemNOW, we get a certain percentage for being the distributor of the film. The rest of the proceeds after that go into the LLC, that is the owner of the film. And then there's a split from there, which Salem will participate in as well..

So that first chunk, the $4.5 million recovery, does that show up as revenue?.

That's a great question and one that we're still wrestling with and discussing with our outside auditors to figure out the exact correct accounting. It has a lot to do with how the LLC is established in financial control and things like that. So there was no revenue in Q1. So this is something we'll have certainly resolved as we get into Q2..

Okay. And kind of a larger macro question around SalemNOW, and this also, I guess, relates to issues you've seen on publishing at Regnery.

As you've seen other titles, whether they're authors or movies get banned or blocked or canceled on more traditional publishing houses, or I don't know if Amazon Prime would have even allowed this movie to be shown, is that creating a new longer term, larger opportunity? A large proportion of the population described themselves as conservative.

Are you becoming kind of the welcoming platform, not just in movies, but in publishing? And do you see that as a significant growth driver over the next several years?.

I'll let David address the -- David Evans address the publishing part. On the SalemNOW part, Barry, I would say a couple of things.

First off, even before you get into films that may be -- or content that would be banned on more general marketplace platforms, there's a very unique audience that we appeal to, and we can put content on SalemNOW that they -- it's just easier for them to find it on our site than it would be sifting through millions of titles on some other platforms.

And so just general interest content for politically conservative audiences and Christian audiences can show up on our site and do well. But then beyond that, certainly, SalemNOW becomes a home for content that maybe just wouldn't find a home at all on other platforms largely due to the cancel culture.

However, I will say this, and that's that Salem still has a responsibility, and we take it very seriously, to make sure that any content that shows up on our site is responsible content. And David, I don't know if you want to address the book publishing side..

Well, we've certainly seen the general market New York publishers cancel or turn away a number of conservative offers, and that's certainly been an opportunity for us. And we've signed up those authors and those books. And we -- there's definitely an opportunity there, and that's a gap that we've sought to fill.

But kind of also recognizing what Dave said, we want to be proud of every book we publish. We're selective, and we're publishing the books that we think are a good fit for our audience and that we think are very well written. So it is an opportunity in both books and in movies..

Okay. And my last question, actually a 2-part question around if you can help us in forecasting free cash flow, and there's 2 parts to that question. First of all, I know you're upgrading many of the radio stations to add video capabilities. So presumably, that's going to elevate both operating expense and capital expense.

So if you can give us any color on that. And then also on cash interest expense. I know that's not linear. I think that tends to be higher in 2Q and 4Q. If you could give us some help there and some outlook there, what that cycle will look like for the rest of the year..

Yes. So we certainly are upgrading some of our studios. We already have in New York and Washington, D.C. -- I'm sorry, in Los Angeles and Washington, D.C. to have kind of more TV-friendly backdrops for our hosts that are on air, on the radio, but also on Salem News Channel.

You'll see some more of that this year and certainly will be a cause for elevated CapEx. Not necessarily much in the OpEx, more in the CapEx line. I think where you will tend to see that. And then as far as interest, you're right, we pay interest every June 1 and every December 1.

And with our interest -- or with our debt payer down, you're talking just over $6 million is the interest payment in June and December. So you're looking, on a combined basis with our current debt, $12.1 million..

[Operator Instructions] Your next question comes from Edward Riley with EF Hutton..

Just to piggyback on the CapEx question. Would love to hear more on capital allocation throughout the year. And if you think you're going to reach your target leverage ratio below 4 by the end of the year and kind of what capital allocation looks like thereafter..

Yes. I don't -- I'm not sure we're going to hit the below 4 level of leverage by the end of the year, but that still continues to be our target, and we're working very much towards that. And as far as right now, capital allocation, really the default is debt retirement, unless we have some good M&A opportunities out there.

Obviously, we look at opportunities. We pass on a lot of them, but we certainly look at things to see if it makes sense. But you'll see us continue to focus on paying down debt the remainder of this year. And yes, you will have elevated CapEx this year due to some additional studio upgrades.

And then, I guess, to kind of round out your question, what that's going to look like when we get below 4? We'll see. We'll see what we end up doing at that point. I don't think we've made any decisions on how we'll allocate capital at that point. The first thing is just to get there..

Got you.

And should we maybe use the first quarter as a guide for what subsequent quarters look like in terms of CapEx, particularly on the tenant improvements?.

Yes, that's probably a decent number. The other thing that we're doing that will probably say that it will be a little bit higher in the back half of the year is we're also in the process of upgrading all of our automation systems to be the same vendor.

But right now, we have 4 different vendors for our various automation systems in the markets, and we're in the process of getting them all on one uniform automation system. So there will be some CapEx associated with that as well..

Your next question is a follow-up from Michael Kupinski with NOBLE Capital Markets..

It seems like you guys are pulling a rabbit out of the hat in finding sales of land and so forth. I was just wondering if maybe you can give us some update on any visibility of additional land sales or asset sales..

Yes. Michael, we continue to look for other opportunities. Our real estate division is always getting updates on what our land values are and what the marketability is for those sites. And then at the same time, if we were to sell it, what are the opportunities for that transmitter being relocated or diplexed or whatever.

I think right now, all of the low-hanging fruit that's available, we're grabbing that. And we want to get those to completion and then we'll move forward from there..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to Mr. David Santrella for closing remarks..

Well, thanks, everybody, for being on the call. Thank you for your questions. We appreciate your interest in the Salem Media Group, and I look forward to speaking to you again next quarter..

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