Thank you for standing by. My name Ajeeb and I will be your conference operator today. At this time, I would like to welcome everyone to the Salem Media Group Incorporated 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. I would now like to turn the call over to Evan Masyr, Chief Financial Officer..

Welcome and thank you for joining us today for Salem Media Group's second quarter 2023 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; and 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 and adjusted EBITDA.

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 with that, I will now turn the call over to Dave Santrella.

Dave?.

Thanks, Evan, and thanks to everyone for joining us on the call and on the webcast. My prepared remarks will include a review of Salem financial performance in the second quarter and a discussion of some assets sales.

Once I'm done, I'll turn the call back to Evan to provide more details on the second quarter financial performance, talk about our debt and give guidance for the third quarter. While we continue to face some headwinds from a tough economy and high interest rates, total revenue for the second quarter declined 4.2% and expenses increased 5.2%.

This resulted in a 77.2% decline in adjusted EBITDA. While these numbers are in line with the guidance we provided on our last call, we are not happy with these results.

Accordingly, we have taken further cost cutting measures, including the elimination of the 401(k) match banning all non-essential travel, a restructure of some general manager positions, and our sales organizations and pay cuts have been taken by senior management. In total these cuts amount to approximately $10 million in annual savings.

We continue to look for additional efficiencies as we navigate the challenging economy. I always like to summarize the total of our digital efforts on each earnings call because I think this is often overlooked by investors.

When we take the digital revenue in the Broadcast division, which includes the – includes assets like our Podcast Network, Salem Surround, and the Salem News Channel, and the revenue from our National Digital division, total Salem digital revenue was $20.8 million in the second quarter. This represents 31.6% of our total revenue.

While the growth in digital has slowed and was only up 0.5% in the quarter, we still believe that digital represents Salem's most important growth opportunity. Now I'll review the financial performance for each division in the second quarter. Revenue from the Broadcast division declined 5.3% in the quarter.

Similar to last quarter, spot revenue is the biggest driver of the decline with national spot down 29.5% and local spot down 10.1%. More than half of the decline is due to political revenue, which was $0.3 million in the second quarter compared to $1.5 million in the second quarter of last year.

Excluding the impact of political, Broadcast revenue declined 3% in the quarter. It is worth noting that the first of the Republican presidential debates is scheduled for later this month, we anticipate an increase in the pace of political revenue in the second half of this year.

Aside from the reduction in political revenue and the continued decline in traditional spot advertising revenue is due to the advertiser pullback in response to the overall economy. We also saw a slowing in the pace of revenue growth of the digital revenue in the Broadcast division, which was up 0.6% in the quarter.

Revenue from national block programming increased 0.8% in the quarter. Now as you know, most of our block programming deals are long-term. Many of our newer block programming deals were finalized in Q1 of 2022. So as the anniversary, we see that growth slowdown.

Therefore, we're pleased to see that we continue to grow, albeit at a slower place – pace than the previous 12 months. Network revenue, not surprisingly, is feeling the impact of a tough economy as it decreased 5.8% in the quarter. However, excluding political revenue in both Q2 this year and last year, network revenue actually increased 0.4%.

The pace of growth in Broadcast expenses decline compared to last quarter, as a reminder in Q1 Broadcast expenses increased 12.3% as we continue to make investments in many of our digital initiatives, including the Salem News Channel. By comparison, Broadcast expenses in the second quarter increased 4.8%.

While we are still making these investments as we believe digital will play an even larger part of the future, the reduced pace in expenses reflects the various cost cutting measures that we've taken. Revenue at Salem's National Digital division increased 0.5% in Q2.

This business continues to face challenges from algorithm changes made by Facebook and the declining use of the third-party cookie. In the National Digital division expenses in the quarter increased 9.1% primarily due to increased marketing and sales cost and professional services. Book Publishing revenue decreased 3.5% in the second quarter.

Book sales net of the estimated returns allowance was just about flat in the second quarter compared to Q2 of last year. The bestselling titles in the quarter were Manhood by Josh Hawley, Letter to the American Church by Eric Metaxas and Overture of Hope by Isabel Vincent.

In the third quarter, we’re releasing The Ever-Loving Truth by Voddie Baucham and The Babylon Bee Guide to Gender. Expenses in the Book Publishing division were up 10.9%, primarily due to an increased inventory obsolescence reserve. Turning to M&A activity, we have a few asset sales to report.

Last month, we closed on the sale of two stations in Seattle, KLFE-AM for $500,000 and KNTS-AM for $225,000. Additionally, on June 29, we entered into an agreement to sell KSAC-FM in Sacramento for $1.0 million and expect to close that transaction in early October.

And with that, I’ll turn the call back over to Evan for more details on the quarter’s performance and guidance for the third quarter..

Thank you, Dave. For the second quarter, total revenue decreased 4.2% to $65.8 million. Operating expenses on a recurring basis increased 5.2% to $63.1 million and adjusted EBITDA decreased to $2.7 million.

Compared to last year, net broadcast revenue decreased 5.3% to $49.7 million and broadcast operating expenses increased 4.8% to $43.5 million resulting in station operating income of $6.2 million, a decrease of 43.5%. On a Same Station basis, net broadcast revenue decreased 5.8% to $49.4 million. And SOI decreased 37.7% to $6.8 million.

These Same Station results include broadcast revenue from 99 of our 102 radio stations and the network operations, which represents 99.4% of our net broadcast revenue. As of June 30, total debt was $182.0 million composed of $159.4 million of 7.125% 2028 Notes, and $22.6 million outstanding on the Asset Based Loan Facility.

Because we had less than $4.5 million available on our revolver during the quarter, we were required to test against a fixed charge coverage ratio covenant. Unfortunately, due to declining adjusted EBITDA and free cash flow, we were not in compliance with that covenant.

Yesterday, we signed a forbearance with Wells Fargo Bank whereby they agree not to exercise remedies on the default during the month of August. Additionally, the notional amount of the revolver was reduced from $30 million to $25 million with a minimum availability required of $1 million.

Finally, the interest rate associated with the revolver increased by 2 percentage points effective July 1 through the effective date of the forbearance. The company and the bank are mutually working toward a longer-term amendment and waiver and we’re optimistic that we will reach a reasonable outcome.

Looking forward for the third quarter of 2023, Salem is projecting total revenue to decline between 3% and 5% from third quarter 2022, total revenue of $66.9 million. Excluding the impact of 2022 political revenue, the company would project total revenue to decline between 1% and 3%.

Salem is also projecting operating expenses before gains or losses on the sale of disposal of assets, stock-based compensation expense, legal settlement, changes in the estimated fair value of contingent earnout consideration impairments, depreciation expense and amortization expense to be between a decrease of 1% and an increase of 2% compared to third quarter 2022 non-GAAP operating expenses of $60.8 million.

And this concludes our prepared remarks and we would now like to answer any questions. And with that, I will turn it back to the operator to poll for questions..

Thank you. [Operator Instructions] Okay. Your first question comes from the line of Michael Kupinski from NOBLE Capital Markets. Please go ahead..

Thank you. Good afternoon, everyone. So as I kind of look at the trend line numbers as we could look for 2023, we’re looking at roughly flat revenues to what you reported in 2021, but then if you look at the expenses, it’s up what looks like to be trend line growth of about $30 million.

I was just wondering if you can kind of give us a sense of where the initiatives and what type of initiatives and in terms of the expense growth that we’ve seen over the course of the last couple years, where that’s being spent and what you anticipate.

Are there ways that we can see, like, I understand that you're – seems like you're going to kind of paired out some of the investments in some of the digital. I'm just wondering if there are ways that we can see expense reduction going forward..

Yes. So I mean, Michael, what you're seeing is, increased expenses in digital, right, primarily in from two places. First off, we're bringing more people in-house here with digital expertise.

And we're doing that to reduce third-party marketing costs, right? So when we sell something on our own and operated websites or own and operated digital assets, we sell it and it's much more profitable for us than when we sell something where we have a cost of sales of those goods.

And so the more that we can control that by having people inside, the better those margins will eventually become, but there's that kind of curve when you're in the – when you're kind of in the middle of doing that, which is where we are in many respects right now.

And so we've – we're investing in digital personnel, and of course, as we sell more direct marketing services, digital advertising, that comes with a lower margin and a greater expense..

Got you. And then in terms of just looking at the publishing revenues, it was a little bit better than what I was looking for. Were there some expenses in publishing that were maybe – may have been pulled forward just because of the timing of the publishing aspect of that and marketing around the books.

So in looking forward to like the third quarter, would expense growth be slower because of that or I'm just wondering if there was any….

I guess, there were two in the publishing expenses, we did increase our inventory obsolescence reserve in the second quarter, which is why the expense increase in publishing is larger than the kind of revenue being flat. And that's really just a kind of an increase in the reserve. So that wouldn't have any impact on Q3 or Q4..

Okay. And then in just in general, do you have any, I'm sorry….

So Q3 and Q4, our biggest titles are Q4. So looking ahead, we've got Ted Cruz, Rand Paul, and Tulsi Gabbard as three big books that will get published. Maybe some books will ship Q3, but the vast majority are Q4. So yeah, that's really what you should expect for the rest of the year is, yes, those opportunities..

Gotcha. And do you have a sense of what the titles or the number of titles that you'll have for 2024, because I know that that's a very big year for you..

We are still signing titles for 2024, but I would say, we'll be targeting 75 to 80 titles in total. But it’s really driven by what big titles are we able to sign? And it's a little too early to kind of really comment on that. But it is a political year. So typically even numbered years are better for that reason odd numbered years..

In 75 to 80 titles, is that a typical year for, yeah, even number?.

Yes, we don't really changed the number of titles from odd numbered years to even numbered years. Just, yes, the bigger titles tend to, yes, kind of get published in the even numbered political years..

Got you. And then in terms of the expenses, is there also an investments in a movie or can you talk a little bit about that? Because I think there was another movie that you guys were looking like you're going to invest in..

Yes, we're under contract for another Dinesh D'Souza movie. We've made the initial investment and that investment sitting on our balance sheet. And yeah, that – all of the revenues and expenses associated with that movie would be recorded once it's released. So there's a few hundred thousand dollars sitting on the balance sheet, I believe..

Got you. And then just in terms of the broadcast environment, I know you reported, you know, kind of roughly flat, let's say results.

Can you talk a little bit about the tone of the advertising market, the scatter market, spot market as you kind of look in to Q3?.

Yes. I mean, Michael, it's spotty, I would say at best right now. I don't you know – it's still sluggish and typically local follows national. At least that's been my experience.

So national's been hit particularly hard across our sector and when the big guys aren't spending money, the smaller – they're smaller mom and pop competitors tend to sit on their cash as well. So I think we’re going to see, and at least the way pacing would tell me right now.

I think we’re going to see a challenging third quarter from a spot perspective..

Final question, in terms of the recent austerity moves that you guys have made, you said that it’s 10 million on an annualized basis.

When does the bulk of that savings come through? Does that begin in the third quarter or is it really kind of fully affect the Q4?.

Most of what we put in place, you’ll see hitting in Q3 and continuing into Q4. So some of it will phase in, but most of it we’ve already taken action on. And we’ll – you’ll see that impact in Q3 and that’s why you see our expense guidance is on the low side down one on the high side up two..

But it’s only a partial impact on Q3, a very little impact on July, for example..

Got you. Okay. All right. I’ll let others ask questions. Thank you..

Thanks, Michael..

[Operator Instructions] Your final question comes from the line of David Marsh from Singular Research. David, go ahead..

Hi guys. Thanks for taking the questions.

Could you just tell me in terms of political, have you guys seen any revenue as of today from political? And what are you hearing on that front in terms of when that’s going to start to pick up?.

We’ve seen a little political, I think, we mentioned zero point what – 0.3, so about $300,000, so far in political, which is almost nothing.

But it’s a little bit, just based on conversations we’re having with different political agencies with our political contacts, I would anticipate that we’ll start to see some political revenue late Q3, Q4, I think next year is going to be a really big political year for all of us. But I do think you’ll start to see some late Q3, Q4.

David, do you?.

Just being a bit more specific. I think there are three states, maybe four that have early Republican primaries, for example, Iowa. There is spending in those three or four states, however, those aren’t states where we have radio stations.

So we are picking up a little bit of business there where we have a digital presence or where we have a radio affiliate. But for us that’s relatively small dollars because they’re not the states that we have a radio presence in. But the political spending has started in those early primary states..

Okay.

And could you remind us of what the top line contribution of political was in 2022? And would it be safe to assume that it’s probably going to grow from there in 2024?.

Yes, I believe our number in 2022 was $6.6 million, which was our biggest political year. And look, I think you would expect political to grow next year from that..

Okay, that makes a lot of sense. And then just lastly for me. Congrats on the station sales in the quarter.

Any other assets that have been identified and classified as assets, sales or sale at this point, or any other assets in particular that there is maybe some significant potential interest where you could perhaps sell an asset and help to de-leverage the balance sheet a little bit?.

Yes, David, we’re working on a number of assets sales, some are further along than others until we have those transactions signed. It’s a little too premature to discuss them. But as soon as we have those deals locked in, we’ll certainly let you know..

So would it then be safe to assume that you wouldn’t expect any other sales to close this fiscal year?.

No, I would not agree with you on that..

Okay. Okay. No, that’s good. All right, well, it sounds like things are moving along with the bank. So I wish you well on that. Look forward to an announcement in the near term of a nice amendment there and wish you well for the balance of the quarter and hopefully the political starts kicking in here and starts moving things the right direction..

Thank you..

Yes, thanks Dave..

All right guys. Thanks..

I’ll now turn the call back over to David Santrella, Chief Executive Officer.

David?.

Okay, thanks operator. Thanks everybody for being a part of the call. We’ll talk to you again next quarter. Bye..

Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect..