Salem Media Group, Inc.

Greetings and welcome to the Salem Media Group second 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Evan Macer, Executive Vice President and Chief Financial Officer. Thank you. You may begin.

Welcome, everyone, and thank you for joining us today for Salem Media Group's second 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 Edward Axinger, Chief Executive Officer, David Santrella, President of Broadcast Media, and David Evans, President of Interactive and Publishing. We will 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.salemedia.com. And with that, I will now turn the call over to Edward Attinger.

Ed? Thank you, Evan, and thanks to all of you for being with us on today's call. In my prepared remarks, I'll focus on our Q2 financial results. I think you can go into digital and provide an update on M&A and our leverage. I'll then turn the call back to Evan, who will provide more detail on Q2 and will also give guidance for Q3. So with that, Let's talk about the second quarter. For the second quarter of 2021, total revenue increased 20.6%. Expenses increased 9.9%, resulting in a 212.1% increase in adjusted EBITDA. While the increase in revenue and adjusted EBITDA are significant, obviously we're comparing Q2 2020, which bore the biggest brunt of the COVID lockdown, so it distorts it a bit. It's therefore also important to compare performance to 2019, though the economy is still not fully recovered in 2021 as it was in 2019, but it's a better comparison. Comparing to 2019, total revenue decreased 1.4%, expenses increased 0.9%, and adjusted EBITDA decreased 13.9%. On the last couple of calls, I've been highlighting the combined digital revenue for Salem, both the digital revenue in the broadcast division and the Digital Revenue and Peer Play Digital Division. In the second quarter, combined digital revenue was up 19.7% to $18.1 million and represents now 28.3% of the total revenue. Let's take a look at results by division to provide a little more perspective. For the second quarter of 2021, broadcast revenue increased 18.5% when compared to the second quarter of 2020. While the overall economy continues to improve and open more, much of the second quarter saw continuing restrictions in many of the markets in which we operate. When comparing second quarter 2021 revenue to second quarter 2019, when the economy was fully open, total broadcast revenue was down 4.7%. With respect to the growth compared to last year, we continue to see meaningful growth in broadcast digital revenue, which was up 36.7% compared to last year, and up 110.5% when compared to the second quarter of 2019. So good progress there. Much of this growth is due to our recent digital initiatives, Salem Surround, Salem Now, and Salem Podcast Network, in addition to growth in streaming revenue. The newest of these initiatives is the Salem Podcast Network, which was launched at the beginning of this year. Both revenue and the number of podcasts continue to grow. We recently added Trish Reagan in mid-June, and we do expect revenue growth in the future to continue as we add more high-profile talent. We certainly will provide updates as we do. Traditional spot revenue, advertising revenue was up 35%. with local advertising up 35.4% and national advertising up 33.7%. We're still not back to 2019 levels due to the economy, but if we compare it to 2019, we're making progress. Total spot revenue was down 20.9% in the quarter, but it's moving in the right direction. Our national network had another strong quarter with a 17.1% increase in revenue. This growth is driven by an increase in affiliates, particularly from the Charlie Kirk show. Comparing to 2019, national network revenue was essentially flat, down only 0.1%. National block programming was up 0.8% in the second quarter compared to the second quarter of last year, while local block programming was up 3.3%. In total, block programming was up 1.6% compared to last year and declined 9.3% compared to the second quarter of 2019. Expenses in the broadcast division were up 9.3%, due primarily to increased revenue with station operating income improving 66.6%. When compared to 2019, expenses were down 4.1% due to cost containment initiatives that we've discussed in some of the previous calls, and SOI was down 6.6%. At our national digital division, revenue increased 9.5% compared to the second quarter of 2020, and increased 3.8% in the period of the second quarter of 2019. While Salem Web Network, our critical news site, and town hall media had slight increases, the significant growth driver in the second quarter was Eagle Financial Publications, which was up 26.7% compared to 2020. The increase was from the Retirement Watch newsletter as a result of increased investment in marketing. Additionally, revenue at Salem Church Products was up 11.1% in the second quarter, primarily due to the increased drop postings at churchstaffing.com. Expenses in the National Digital Division increased 9%, again due in large part to the increased marketing cost at Eagle Financial Publications, partially offset by cost-saving initiatives. Operating income improved 11.8%. Finally, our publishing division had a revenue increase of 68.3% compared to the second quarter of 2020. Revenue was up 18.1% compared to the second quarter of 2019. Both segments of this division had solid growth in the quarter compared to last year. Revenue at single author services increased 42.9% from growing the sales force and some increased marketing. Additionally, we had a small benefit from COVID with people being stuck at home as some decided to take the time to write books, which always got us business. Our traditional book publisher, Regnery Publishing, had a 100.2% increase in revenue compared to last year. We had a couple of titles that performed very well for us, including Speechless by Michael Knowles, Irreversible Damage by Abigail Schreier, Fault Lines by Votie Bachman, and The Unanswered Letter by Ferris Cassell, which was a National Jewish Book Award winner. Publishing expenses were up 15.4% due to costs associated with increased book sales, and we posted a $234,000 profit in the division. On the M&A front, we closed on a couple of previously announced transactions. On June 1st, we acquired two AM radio stations in San Francisco for $600,000. We also acquired Centerline New Media for $1.3 million on April 28th, Additionally, on May 25th, we closed on the sale of Singing News Magazine and Singing News Radio for approximately $100,000 in cash, plus the buyer assumed the subscription liability of approximately $400,000. Finally, as far as transactions that were mentioned in our last earnings call on June 25th, we closed on the sale of approximately 34 acres of land in Louisville, Texas, just outside of Dallas, for $12.1 million. We retained nine acres of the parcel and were broadcast from there with virtually no loss in coverage and therefore no loss in revenue. With respect to previously unannounced transactions, on July 1st, we closed on the acquisition of Shift Worship for $2.6 million. We will roll this business under the Salem Church Products Division. Finally, I'd like to conclude my prepared remarks with a brief discussion about debt and leverage. If you recall, a year ago, our leverage ratio was 8.96, which was badly distorted by the impact of COVID-19. but it's improved substantially since then. As of June 30, 2021, we had $216.3 million in bonds outstanding and nothing drawn on our revolver. Additionally, we have PPP loans of $11.2 million recorded as debt on the balance sheet as of June 30. Last month, we were informed that the SBA has forgiven all but $20,000 of those loans. We also had $19.9 million in cash on June 30th. Our leverage ratio was 6.06 as defined by our credit agreements. If, however, we met the cash we have on hand and reflect the forgiveness of the PPP loans, our leverage ratio would have been 5.23. Substantial improvement for which we are very grateful. Additionally, if you factor in the $12.1 million of cash we received in July, From the Dallas land sale, leverage would be below five. So with that, I'll turn the call back to Evan for additional details on the quarter's performance and guidance. Evan?

Thank you, Ed. For the second quarter, total revenue increased 20.6% to $63.8 million. Operating expenses on a recurring basis increased 9.9% to $55.0 million. which resulted in a 212.1% increase in adjusted EBITDA to $8.7 million. Net broadcast revenue increased 18.5% to $46.8 million, and broadcast operating expenses increased 9.3% to $36.2 million, resulting in station operating income of $10.6 million, an increase of 66.6%. On a same station basis, net broadcast revenue increased 18.7%, to $46.5 million, and SOI increased 58.7% to $10.6 million. These same station results include broadcast revenue from 94 of our 100 radio stations and our network operations, and represents 99.3% of net broadcast revenue. I'll now briefly review revenue performance of our strategic formats. 38 of our radio stations are programmed in our foundational Christian teaching and talk format, These stations contributed 38% of total broadcast revenue and increased 5.0% for the quarter. Our 31 news talk stations had an increase of 13.2% in revenue for the quarter. Overall, these stations contributed 17% of total broadcast revenue. Revenue from our 12 contemporary Christian music stations contributed 17% of total broadcast revenue and increased 57.3% for the quarter. Our network revenue increased 17.1% for the quarter and represents 11% of total broadcast revenue. Revenue from our national digital media division increased 9.5% to $10.3 million and represents 16% of total revenue. In publishing, revenue increased 68.3% to $6.7 million and represents 10% of our total revenue. And for the third quarter, we're projecting total revenue to increase between 2% and 4% from third quarter 2020 total revenue of $60.6 million. Compared to the third quarter of 2019, we're projecting revenue to decline between 2% and 4%. Now in the third quarter of 2020, we had approximately $3.5 million of revenue from political and the Uncle Tom film on Salem Now. So if we exclude that revenue, Revenue is projected to increase between 9 percent and 11 percent from the third quarter of 2020. We're 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 considerations, impairments, depreciation expense, and amortization expense to increase between 7 percent and 10 percent compared to the third quarter of 2020 non-GAAP operating expenses of $51 million. Compared to the third quarter of 2019, we're projecting expenses to be between a decline of 1% and an increase of 2%. This concludes our prepared remarks, and we would now like to answer any questions. Operator?

Thank you. And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from Michael Kopinski with Noble Capital Markets. Please state your question.

Thank you and congratulations on your quarter. a couple of questions. Ed, you were talking about the leverage at the company being, you know, five times. And I can recall that that's historically pretty much the average where Salem has been, I think, in terms of the leverage ratio, if I recall. And I was just wondering what might be the allocation of capital kind of going forward here, because historically you have maintained a relatively higher amount of leverage, given the fact that you had such

stable businesses including the block programming and so forth what what from here what are you looking at continue to pare down debt or what are the options that you might be considering here well we're still focusing on reducing debt and continue to work on leverage I mean for a long time our goal has been to get below four or get to four below and below five now just barely if you know as of today with the additional adjustments that Evan mentioned. So we're on our way. We feel pretty good about it. The sale of the Dallas land, of course, helped. And the forgiveness of the PP loans, that all helped get us there a lot quicker. But we're making solid progress, and that's going to be our focus. To the extent that we engage in acquisitions, we're looking at them very, very carefully. And they're going to be delevering if we enter into them, unless there's some extraordinary circumstance, which I don't envision at this point. So I think we stay the course. We're still not out of this effect of COVID. We still have a lot of cost-cutting measures in place to make sure that if this thing doesn't open up that we can survive it and continue to be productive.

And just talking about the expenses there, can you talk a little bit about the expense guidance for Q3 and the contributing factors to the growth expected there. I know the expense growth seems a little outsized relative to the revenue growth in this quarter year over year. I know you were making comparisons to 2019, but are there timing elements to the expenses or particular division that is accounting for the majority of the expenses, or can you give us a little color on what's going on there?

Yeah, you know, if you recall last year in the, you know, second and third quarter and even through the remainder of the year, We were really tight on expenses, and some of those expenses have, you know, we've loosened up a little bit. We talked about in our previous call some of the pay cuts that we put in place we've restored. So you're seeing some of that. But I would just draw your attention really to 2019. If you look at the expenses there, which I think is a better comparison, the expenses we're saying are going to be anywhere between down one and up two. And I think that gives you a better sense. on what expenses are really doing, rather than comparing to a quarter in 20 where we were trying to tighten the belt everywhere we could.

Gotcha. And has the company cycled through all of the discounts that were given for the block programming last year? Can you give us a sense of where rates are going for block programming at this point?

Yeah, let me just talk about cycling through, and then Dave may want to give some comment on rates. We have cycled through all of the discounts that were given to the ministries. They were given discounts on airtime from May of 20 through December of 20, so they are back to paying full rates. Yeah, and in terms of going forward, as we renew for 2022, I think you'll see our rate increases back to kind of what they've traditionally been. you know, Michael, and you'll see that, you know, somewhere in the, you know, 3% to 4% range.

Great. And in terms of the publishing business then, are, you know, obviously you're getting a little benefit from the pickup in personal publishing, I guess is what you would call it. Can you talk a little bit about the titles, things that are coming up in the second half of this year as you kind of prepare going into a political year next year where I think you tend to sell more books and have more titles. Can you kind of give us a sense on how the book publishing division is faring for the second half?

So the second half of 2021 is going to be relatively quiet compared to last year. Obviously last year was an election year. It's also going to be quiet compared to the first half of this year. We had a very strong first half of this year. there isn't really a breakout title in the second half of this year so um we're more focused towards 2022 again an even numbered year you know midterm elections you know we've got titles in 2022 that we're anticipating from david limbaugh for example from Dennis Prager. So the publishing schedule is coming together very nicely for 2022, but second half of 2021 is going to be a little leaner.

And the digital operations are obviously growing really well, Salem Now, Salem Surround. Can you kind of give us a sense of what type of revenue growth that you might be looking for in terms of your digital businesses in the second half? I know obviously you had a very strong second quarter business but I'm just trying to get some framework around all the initiatives you might have there in terms of what the opportunity might be and how you anticipate the business to grow in the second half.

Well, let me start with the pure play digital component, and then Dave Centrallo will kind of complement that with radio digital. For the pure play digital division, Revenue will probably be down compared to last year, but that's solely due to one item. It's our conservative websites that had massive page views kind of leading up to the presidential election. They had very significant political revenues, so that's a very challenging comp. So that's why the pure plate of digital division will be down. So solely because of the conservative political websites. Other than that, the rest of the business would be up kind of low to mid single digits.

Yeah, and on the broadcast side, Michael, we expect that we'll see in some areas some growth and then we'll have one particular challenge. So Salem Surround and sales of our owned and operated digital assets on the broadcast side, that's been strong all year. That will remain, I think, strong. The pacing is good. And so, you know, you've seen that as an example in Q2 at 36.7%. I think you can expect to see strong growth, similar growth in the quarters going forward. Salem Podcast Network continues to grow. That will be strong. The challenge will be Salem Now. Salem Now and Q3 had a blockbuster movie with Uncle Tom, and so it will really depend on what kind of titles we have for Q3 with Salem Now. And to be frank, many times those titles come up rather quickly. An opportunity will present itself to us, and suddenly that movie is available and we're putting it on. So if there's an opportunity for us to see a decline, it would only be in the Salem Now aspects of broadcast digital.

Great. I'll let others ask questions. Thanks so much, guys.

Thanks, Michael.

Our next question comes from Lisa Springer with Singular Research. Please go ahead.

Thank you. Regarding the podcast business, I'm wondering what strategies are you using to drive traffic to the podcast and what have you seen in terms of people actually viewing the podcast in terms of that growth?

That's always the benefit of our business is that we already have a built-in marketing machine with 100 plus radio stations and a lot of our own digital assets with which to drive people to the podcast. We're using our own free marketing to be able to drive podcast listens. And we're seeing steady growth of those podcasts, a number of downloads to, for instance, the Charlie Kirk podcast is in the half a million downloads a week to his show alone. And we're seeing very strong revenues there.

Great. Thank you.

Thank you. And just a reminder, to ask a question at this time, press star 1 on your telephone keypad. To remove yourself from the queue, press star 2. Our next question comes from Stephen Pfeiffer with Weld Capital Management. Please state your question.

Hello, and thank you very much for taking the questions. I have a couple of quick, easy ones on here. The call actually had a slight problem. I don't know if it's my phone or not there, but the revenue guidance and the expense guidance for third quarter, fourth quarter came out tangled. So I'm not sure if I have the correct numbers. Can you please tell us what, are you only offering numbers for third quarter or do you have it for the full year? And can you please repeat what those numbers were?

We are only offering guidance for just the third quarter. And so really briefly we said revenue would be up 2% to 4% compared to the third quarter of 20. Compared to 19, that revenue is down between 2% and 4%. I also mentioned, as David just even alluded to, the Uncle Tom film and also with political, that was about $3.5 million of revenue in the third quarter of 2020. So if I factor those out, revenue is going to be up between 9% and 11%. compared to third quarter of 20.

And the expense number is one that was interesting. Do you need me to repeat those as well? Yes, please.

So we're saying expenses will be up between 7% and 10%, but when you compare those to the third quarter of 19, they're going to be between a decline of 1% and an increase of 2%. I'm down one to up 2%. Okay.

That's correct. Thank you. Okay. Um, the next question I have for you on your total debt right now is 227 and a half million, uh, roughly of that 11.1 of it. Is that the special loan out there? Um, it said on there that it should possibly could hopefully be forgiven in the fourth quarter. Is that still the timeframe we're looking at when that could possibly be redone?

Actually, I've got good news to report, which I know Ed had mentioned in July. So actually, on July 31st, we got the last piece of good news, but all of those loans have been completely forgiven with the exception of $20,000. So we did have to repay $20,000 of the $11.2 million. So that will be reflected in the third quarter financial statements.

And is that known as a gain or a taxable gain? We have to pay taxes on that as a gain on your business? Or how exactly does that work?

I don't believe it is a taxable gain, but I know it shows up on our financials. It will be below the line as other income. I know there was a lot of discussion when PPP came out that businesses were getting the benefit of these PPP loans, then getting it forgiven, only to have to repay a bunch of it in taxes. So, my anticipation is that we will not have to be paying taxes on that.

And so now that it has been forgiven, if I remember correctly, in the previous quarter you talked about the possible primary use would be to repaying debt off of there. Have you gone through with an official word on how that would happen or is that going to happen? Because if I remember correctly, a year or so ago when you bought back bonds in the market, you guys paid a much higher price than what everyone else was paying. So I'm trying to figure out what exactly the strategy is for this time.

Yeah, you know, look, as Ed mentioned when he was asked about, you know, use of capital, certainly retiring debt is something that is high on our radar and something that we want to continue to do. So ultimately we want to get our leverage lower than what it is, and that would involve, you know, taking down debt.

Do you have full covenant compliance where it's available to be used up to a certain level? Are there any covenant issues from buying it in the open market, or do you have to repay using the call schedule?

there are no covenants that will prevent us from tapping into the open market.

The last time when you did this, you actually ended up paying a higher price than bonds bought before and after you did your transaction off of there. Is it possible that you could maybe do like an open market bid or something along that side? Or is there any different strategy or is it something still up in the air?

I would say we haven't decided exactly what we're going to do or how we're going to do it, but we're going to look to do whatever we can to you know, get the most bang for our buck in retiring debt.

That sounds like a great plan off there. Yeah, looking at the market, this market can sometimes be liquid and sometimes it's not. It can be exciting. So I'm trying to figure out what the plan is because it's, yeah, paying up five points off the bonds is never the most effective route. Sometimes that's what seems to happen. So anyway, thank you very much for answering the questions and good luck on the next step. Great. Thank you.

Thank you. Our next question comes from Michael Kopinski with Noble Capital Markets. Please state your question.

Yeah, I just had one quick follow up in terms of the allocation of capital. Again, does any of your debt covenants prohibit you from buying back stock? I know that we focused on debt reduction, which is the priority. But, you know, from time to time, it would seem like maybe buying back stock might be interesting as well. What are your thoughts? that, and are there any debt covenants that might prohibit you from doing that?

Yeah, buying back stock is a restricted payment under the indenture, so we do have some abilities to do it, but there are limitations as far as how much we could use to buy back stock if we were so inclined to do so.

Gotcha. Okay, that's all I have. Thank you.

Thank you. There are no further questions at this time. I'll now turn the call back to Edward Atzinger, CEO, for closing remarks. Thank you.

Thank you, Operator. And again, thanks to all of you for joining us on the call. We'll look forward to visiting with you when we report on Q3.

Thank you. This concludes today's conference. All parties may disconnect. Have a great evening.