Salem Media Group, Inc.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Greetings and welcome to the Salem Media Group third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . Please note that this conference is being recorded. I will now turn the conference over to our host, Evan Masyr, Executive Vice President and Chief Financial Officer. Thank you. Sir, you may begin.

[Evan Masyr:]

Thank you and welcome all of you for joining us today for Salem Media Group's third quarter 2020 earnings call. As a reminder, if you get disconnected at any time, you can dial back in or listen from our website, www.salemmedia.com.

[Edward Atsinger:]

Thank you Evan and thanks to all of you who have joining the call today. The third quarter of 2020 was certainly a much better quarter than the second quarter of 2020 due to the at least partial reopening of the economy. In my prepared remarks today, I will focus on our financial results and also some of the challenges that we continue to deal with due to the COVID-19 pandemic. I will then turn the call back to Evan to provide more detailed financial information on the third quarter. So for the third quarter of 2020, total revenue declined 5.4%, expenses declined by 7.4%, which resulted in a 6.9% increase in adjusted EBITDA. To get a little better understanding of performance, let me look at our performance by division. For the third quarter, broadcast revenue increased by 15% when compared to the second quarter, but declined 4.8% when compared to the third quarter of last year. Despite that decline, those numbers compare favorably to the industry as a whole. According to Miller Kaplan, in the markets where we operate, the radio industry was down 30.2% compared to last year. And our performance, I think, highlights the difference in our business model with a foundation on national and local ministry block programming and our most recent investments in Salem Surround and SalemNow. Just as a reminder Salem Surround is our local digital multimedia advertising agency and SalemNow is the over-the-top streaming movie business that we launched in Q2.

[Evan Masyr:]

Thank you Ed. For the third quarter, total revenue decreased 5.4% to $60.6 million. Operating expenses on a recurring basis decreased 7.4% to $51 million, which resulted in a 6.9% increase in adjusted EBITDA to $9.6 million. Net broadcast revenue decreased 4.8% to $45.4 million and broadcast operating expenses decreased 8.1% to $34.3 million, resulting in station operating income of $11.1 million, an increase of 7.1%. On a same station basis, net broadcast revenue decreased 2.4% to $44.6 million and SOI increased 2.7% to $11.1 million. These same station results include broadcast revenue from 95 of our 99 radio stations in our network operations and represents 98.3% of our net broadcast revenue.

[Operator:]

. Our first question comes from Michelle Kupinski with NOBLE Capital Markets. Please state your question.

[Michael Kupinski:]

That's an interesting one, Michelle. Okay. Congratulations on your quarter. Actually, you beat my expectations and things look like they have certainly improved from the second quarter. Just a couple of questions. Can you give a little bit more color on how significant Salem Surround is at this point in terms of revenues in the third quarter? And how that's looking as it goes into Q4? And then I know that you gave the political number for Q3. I was wondering now that political is over, what is the total political for the year? Or can you just give us the political for Q4?

[Edward Atsinger:]

Yes. I will start with answering the question on political. The fourth quarter, first of all, I think there will still be some additional fourth quarter political revenue with the two Senate seats in Georgia that will be highly contested. And that election is January 5. And we have stations in Atlanta that should get some additional revenue for that. It looks like our revenue will be north of $2 million of political in the fourth quarter of 2020, which by the way compares favorably. Fourth quarter of 2018 was $1.7 million and fourth quarter of 2016 was $1.4 million. So it looks like a robust political year for us. And Michael, in terms of Salem Surround, Salem Surround continues to be a growth engine for the company right now. It's generating pretty regularly 40%-plus revenue growth on a quarter over prior year quarter basis. And we really, right now, it's still pretty still early on with that. We don't see that slowing down too drastically, at least within the next several quarters.

[Michael Kupinski:]

And what margins are you getting on that? Are you getting some decent margins?

[Edward Atsinger:]

Yes. I mean the margins are okay. Certainly they are not the size of radio. But they are still, Evan, what is it, mid-30%?

[Evan Masyr:]

Yes.

[Edward Atsinger:]

I would say it depends on what we are actually selling. So different products have different margins. I would say that the high is 30% and some margin could be as low as 10%

[Evan Masyr:]

Yes.

[Michael Kupinski:]

Got you. And you obviously went through a lot of cost cuts earlier in the second quarter. How should we think about the cost savings that you had so far as we cycle into Q4? And it looks like business trends are improving a little bit.

[Edward Atsinger:]

The cost cuts that we have had in place during the latter half of Q2 and all of Q3 will continue to all of Q4.

[Michael Kupinski:]

Okay. Great. I will let others ask question. Thank you.

[Edward Atsinger:]

Thank you, Michael.

[Operator:]

Thank you. And our next question comes from Lisa Springer with Singular Research. Please state your question.

[Lisa Springer:]

Thank you. In the publishing business, I am wondering, in October if you are seeing any improvement in bookselling environment? If you are seeing booksellers with a little more ability to sell? And if you could give us some insight into if you have get new titles coming out in the fourth quarter or early into next year?

[Edward Atsinger:]

So we have seen, I would say, a return or more of a return to normal in the book publishing area. Our numbers are beginning to get much more comparable to last year. Having said that, Q4 is always pretty light in terms of releases, but particularly so this year because with the election, we wanted to make sure that we released any political titles early enough in the election cycle to have enough weeks to sell. So our biggest release of Q3 was our Ted Cruz book on the Supreme Court, which was extremely timely. And that book has continued to sell very well in October. And as a result of that, we expect to see our book publishing business in Q4 up on last year, kind of probably, low double digits. So that does reflect a return to normal and the strong sales of that particular title.

[Lisa Springer:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Michelle Lim with New York Life. Please state your question.

[Michelle Lim:]

Hi. Thank you for taking my questions. Just two quick ones. Can you update us on your revolver availability?

[Evan Masyr:]

We typically, at this point, keep about $4.5 million or so available. So we had $16.6 million drawn. So we had about $21 million available at the end of the quarter.

[Michelle Lim:]

Okay. And can you give us an update on how you are progressing with your asset sale?

[Evan Masyr:]

Ed, you may want to talk about asset sales.

[Edward Atsinger:]

Well, we haven't announced any station sales and we don't have anything in the works. We are looking at opportunities to monetize some of our real estate holdings that might provide some capital. But nothing has been finalized. And we probably should have some progress on that and we can make some further comments in Q1, maybe January, February. But right now, discussions are underway and we are exploring options and some of the challenges that we have are that we want to figure out how that we can continue to operate some of our facilities while at the same time monetizing surplus real estate and/or putting together situations where we can have a dual use facility that doesn't impact negatively either of the uses. So as we get closer to deals, of course we will announce them.

[Michelle Lim:]

Can you give us a sense for magnitude of the potential proceeds? And then where they are located in the country?

[Edward Atsinger:]

It's difficult to do. The biggest challenges is determining whether or not you have a dual use opportunity. And that gets into a lot of complicated engineering problems. But we have a lot of real estate holdings all over the country. How many of them we can actually be able to develop and monetize and generate revenue is still an open question. But we were actively exploring all opportunities. And I can't really, at this point I think it would be highly speculative because the regulatory environment is so complicated these days. And particularly if you have towers and you have to move towers, that can be a complicated road which takes a lot of time and a lot of money in terms of the degree of entitlement requirements that you have, sometimes involving environmental impact reports, expensive ones. But it's something that likely will continue for the foreseeable future. We will continue to explore it. And I think that we will find some opportunities of next year and in subsequent years. But as we get closer, we will certainly try to be transparent in that.

[Michelle Lim:]

Great. Thank you. And congratulations on a good quarter.

[Edward Atsinger:]

Thank you Michelle.

[Operator:]

. Our next question comes from Steven Pfeiffer with Wells Capital Management. Please state your question.

[Steven Pfeiffer:]

Hello there. Thanks for taking the time to answer questions. Question for you is about your cash management strategies. I saw that your debt for the revolver went down by $3 million in the third quarter from the second quarter. I am not quite used to it. I think that's basically you keep it at about $5 million less than the max. Does that mean that the revolver availability dropped by $3 million in the quarter and that's why you paid it down? Or does the cash seems to be about the same? And then I was just kind of wondering what the general cooking point is for cash management and possibly paying down debt or buying back bonds, which you did before? What's the general ideas? Thank you.

[Evan Masyr:]

Yes. The revolver absolutely, the availability did drop. It's an asset-based loan. So it's a function of a calculation of some real estate availability that we have but more importantly based on our receivables. So as you would imagine, during this pandemic, you saw not only us but other company' revenues drop. Therefore receivables dropped and therefore the amount we could borrow declined. Now as far as cash management strategies and buying back bonds, it's something that we will look to do again, but probably not at this point. We would like to see the markets stabilize. Right now, we would like to just maintain as much liquidity as possible.

[Steven Pfeiffer:]

Okay. Thank you very much. Then as far as the asset sale, the call cut out a just a little bit on the previous comment on here. You are continuing the current asset sale process to continue. Is that what I heard? It cut out.

[Edward Atsinger:]

No. What I said was that we are actively reviewing all of the opportunities that may exist across the whole landscape of the country. We have lots of real estate holdings, some of which can be monetized through dual use modification, some of which can be monetized by relocation of station facilities from one location to another and then develop property. And we are actively exploring all those opportunities. As you might imagine, they are complicated. The entitlement process today is very complicated. But we have got holdings in many, many states and there are many opportunities that should be explored and we are exploring. And we think some of them will come to fruition and could result in some substantial increased cash for the company that we would welcome. But we don't have anything that we can announce today. And as things develop, I would be happy to share that with the investment community.

[Steven Pfeiffer:]

Okay. I just want to make sure that I understood it correctly. It is ongoing then? I just wanted to make sure, was it ongoing? Could it have been freezed?

[Edward Atsinger:]

No. We are doing. We have got an active group within the company that deals with our real estate issues and also the deals with nonessential properties that we might consider, that are not mission sensitive that we might consider selling. This is not a great environment for selling radio stations right now, given the crunch the industry is facing. So this is not a time where we would be real aggressive in trying to self the radio facilities. But we have some facilities in our repertory that are probably not critical. They are not mission oriented. We have certain key formats that we like to offer in most of the cities. We have picked up stations along the way that were just bargains and that we could roll in and tuck-in to an existing cluster to get a little scale that aren't that essential. And if they are underperforming or are minimally performing and we get offers that are attractive, we will look at those. That inst a phenomena that's occurring very widely today and I doubt that it will until this economy opens up fully and business improves. But we are actively reviewing all of our assets, both station assets, web assets, real estate assets and we are constantly reviewing them and determining whether or not there is some that we can monetize that can better serve the company if we spin them off. And that's an ongoing effort.

[Steven Pfeiffer:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Michael Kupinski with NOBLE Capital Markets. Please state question.

[Michael Kupinski:]

Thanks. Just a clarification. Evan, you mentioned that national was up about 34% in October. I was wondering how much of that was political? And ex-political, what would national be up?

[Evan Masyr:]

I don't have that number of ex-political. But I can tell you that was a large driver of why national spot was up.

[Michael Kupinski:]

Okay. All right. Okay. Thanks.

[Evan Masyr:]

Thank you.

[Operator:]

Thank you. There are no additional questions at this time. I will turn it back to Mr. Edward Atsinger for closing remarks. Thank you.

[Edward Atsinger:]

All right. Thank you operator. And again, thanks to all of you for joining us for the earnings call. We look forward to visiting with you again on our next call.

[Operator:]

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