Evan D. Masyr - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Edward G. C. Atsinger - Founder, Chief Executive Officer, Director and Director of Salem Communications Holding Corporation David A. R. Evans - President of New Business Development Division Interactive & Publishing

Thomas Kerr - Singular Research

Hello, and welcome to the Salem Communications Fourth Quarter 2013 Earnings Conference Call. Today's conference is being recorded. I would now like to turn the call over to Evan Masyr, Executive Vice President and Chief Financial Officer. Please go ahead, sir. Evan D. Masyr: Thank you. And thank you all for joining us today for Salem Communications' Fourth Quarter 2013 Earnings Call. As a reminder, if you get disconnected at any time, you can dial back in to area code (719) 325-4821 or listen from our website, www.salem.cc. I'm joined today by our Chief Executive Officer, Edward Atsinger; Dr. Frank Wright, our newly appointed President and Chief Operating Officer; David Santrella, President of Radio; and David Evans, President of Interactive & Publishing. 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. More information on risks and uncertainties that may affect our business and financial results are included in our Annual Report on Form 10-K for the year ended December 31, 2013, and other public filings we have made with the Securities and Exchange Commission. This conference call also contains non-GAAP financial measures within the meaning of Regulation G, specifically station operating income, 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 our website at salem.cc. I'd now like to turn the call over to Edward Atsinger. Edward G. C. Atsinger: Thank you, Evan, and thanks to all of you for joining us for our fourth quarter 2013 earnings conference call. There's a number of important developments since our last call, and I want to spend a good bit of my time today discussing those developments. But let me begin first with a brief overview of our financial results for the quarter. I'll hand it off to Evan when I'm done and he'll give you a much more detailed look at finances and guidance for Q1 2014. Total revenue for the quarter increased 3.5% with our expenses increasing 6.3%. This resulted in a 6.2% decline in adjusted EBITDA. Our top line growth included a 1% increase in broadcast revenue and a 16.6% increase in Internet revenue. But to get a better idea of the true picture, you really need to factor out the impact of political revenue in both quarters, fourth quarter 2012, fourth quarter 2013. In 2012, we had $2.4 million in political revenue; but in 2013 Q4, we had only $200,000. So quite a dramatic difference. If political revenue is excluded from both quarters, our revenue would have grown 7.6%, and our adjusted EBITDA would have increased 10.3%. So there was some real progress made in our core businesses, which we think bodes quite well for 2014 with the potential revenue impact of the midyear election in 2014 added to this growing base. So we're optimistic that 2014 looks good for us. Expenses were a bit higher in Q4 than we had anticipated. The biggest single increase was related to health care cost during the quarter, which increased about $700,000. A number of years ago, we made the decision to move from a guaranteed health cost insurance program arrangement with outside providers to become partially self-insured. With our employee base, which is relatively young and relatively healthy, this is a very sound decision. We did review, for example, the last 4 years in comparing costs, and, as a result of this change, we estimated that we saved about $2.3 million over that period of time. So the only minor downside is that you don't have the absolute predictability of costs from quarter-to-quarter, so occasional spikes like those that occurred in Q4 can happen. But we're happy to trade up a lack of predictability of cost in a given period for the actual savings that we've realized. Revenue from our broadcast segment was up 1% with a 3.7% increase in expenses, resulting in a decline in station operating income of 4%. Internet revenue was up 16.6% with a 9.9% increase in expenses, resulting in an increase of 33.2% in Internet operating income. Virtually all of this growth, I might add, is organic since we have not made any material Internet acquisitions until we bought Twitchy.com, but that was late on December 10, 2013, with very little impact on the quarter. Our Christian websites were up 37.1%, while our conservative opinion websites were flat due to the strong political revenue impact of Q4 2012. Again, if we were to exclude the political revenue from both quarters, the conservative websites would have been up 28.9%. This segment of our business continues to perform well for us. We made 2 important hires during the fourth quarter that I want to just comment on briefly. First, we hired Tony Calatayud to head our newly created Spanish language Christian Teaching and Talk division. Tony has a wealth of experience in this area, and we anticipate some significant growth over the next few years. I might add in fact that we just closed on a radio station acquisition in San Antonio from Disney corporation, which will be formatted in Spanish Christian Teaching and Talk, and we'll launch that in about April 1. In December, we announced the appointment of Dr. Frank Wright to the position of President and Chief Operating Officer beginning January 1, 2014. We created this position in 2007. But in the midst of the Great Recession, we cut back in this area, and the position has been vacant since 2009. We're delighted to have Frank on board. Frank is a team builder, strong entrepreneur and leader. Having Frank aboard will improve the execution of our day-to-day operations and will allow me to devote more time to focus on strategic opportunities and initiatives. We also made some important acquisitions, which we announced in December and January. In December, we closed on the purchase of groundbreaking Twitter -- a groundbreaking Twitter curation website called Twitchy.com. Twitchy was founded by Michelle Malkin, and Michelle will continue as part of Twitchy promoting the site. In early January, we bought the assets of Eagle Publishing. Included in that purchase was the leading publisher of conservative books, the iconic Regnery Publishing. Regnery has been around since 1947 and has published some of the most influential works impacting and shaping the conservative movement in America. Among the heritage of Regnery were some of the landmark books such as William Buckley's God and Man at Yale, Whittaker Chambers' the Witness. Regnery was -- has recently published books by Ann Coulter, Dinesh D’Souza, Newt Gingrich David Limbaugh and Michelle Malkin, just to name a few. In addition to Regnery, the websites humanevents.com and redstate.com, 2 websites focusing on the conservative opinion community, were part of that acquisition, and we're happy to get those and integrate them with our Townhall.com and HotAir.com, and, of course, with twitchy.com. With our existing multimedia platform, including radio, network, existing websites targeting the audiences interested in conservative opinion content, we know we are uniquely qualified to expand those businesses and to increase traffic and revenue. We have completed a pro forma, by the way, a financial pro forma that incorporates the impact of the Eagle acquisition on our 2013 results. And when you do that, it produces about 28% of our revenue in New Media. Now new Media in our publishing business. So one of our goals that we announced to the investment community as far back as 2009 was to continue to build our nontraditional media assets to keep up with what's happening in the communications world and to be a more diversified multimedia company. So we're very happy about this acquisition. And as I say, we think we're uniquely qualified to exploit those assets. If you followed Salem in the last couple of quarters, you know that our board voted last December to increase our quarterly dividend by 5% to $0.055 per quarter, which makes the third out of the last fourth quarters that the board has concluded that a dividend increase was appropriate. All of us at Salem, both management and the board, continue to be optimistic about the ability to generate free cash flow for the company and enhance flexibility and capital allocation. So with that, let me turn the call back to Evan to provide you with a more detailed discussion of fourth quarter financial results and to provide some guidance for first quarter 2014. Evan? Evan D. Masyr: Thanks, Ed. For the fourth quarter, our total revenue increased 3.5% to $62.7 million, operating expenses on a recurring basis increased 6.3% to $52.3 million, and adjusted EBITDA declined 6.2% to $13.1 million. Net broadcast revenue increased 1% to $47.4 million, and broadcast operating expenses increased 3.7% to $31.6 million, resulting in station operating income of $15.8 million or a 4% decrease. On a same-station basis, net broadcast revenue increased 0.2%, and SOI decreased 4.6%. These same-station results include broadcast revenue from 97 of our radio stations and our network operations, which represent 99% of our net broadcast revenue. I'll now take a look at that broadcast revenue by format. 39 of our radio stations are programmed in our foundational Christian Teaching and Talk format. These stations contributed 44% of total broadcast revenue and remained flat for the quarter. Block programming was up for -- in this format by 2.9%. Our News Talk stations had a decrease of 4% in revenue for the quarter entirely due to the lack of political revenue. Overall, these stations contributed 15% of our total broadcast revenue. Our 12 Contemporary Christian Music stations contributed 24% of total broadcast revenue, an increase of 5% for the quarter. Again, we're seeing some strong results from many of our music stations, most notably this quarter in Dallas and in Atlanta. The 7 stations that we have in Spanish language Christian Teaching and Talk grew revenue by 11%, and this format is now 2% of our total broadcast revenue. Finally, in terms of format, we have 10 stations doing a business talk format. This format contributed 3% of total broadcast revenue and increased 15% for the quarter. Our network revenue increased 1% for the quarter and is 9% of total broadcast revenue. Publishing revenue was flat at $3.4 million and is representing 5% of our total revenue. Finally, revenue from our Internet and e-commerce businesses increased 17% to $11.9 million. Our Internet revenue is 19% of total revenue. During the quarter, we repaid $750,000 of our Term Loan B and $2.5 million of our revolver. And now that -- since we refinanced in March of 2013 and put this credit structure in place, we've repaid $15.7 million of debt. At December 31, we had $291.3 million outstanding on our Term Loan B and nothing was drawn on that revolver. Leverage ratio was 5.49 compared to the compliance covenant of 6.75. Interest expense for the quarter declined 40% to $3.7 million from $6.1 million as a result of the refinancing earlier in the year. For the first quarter of 2014, we're projecting total revenue to increase 9% to 11% over first quarter 2013 total revenue of $55.6 million. We're also projecting operating expenses before gains or losses on disposal of assets, impairment losses and stock-based compensation expense to increase 13% to 16% as compared to first quarter of 2013 operating expenses of $48.2 million. Let me provide some additional information with respect to the fact that these expenses are growing faster than revenue growth. Primarily, it's due to 2 items. First, as Ed mentioned, we hired 2 new senior executives. Additionally, this guidance -- our guidance for Eagle contemplates a loss of $0.4 million for the quarter. This is caused by a combination of the assumption of some unfavorable contracts that will fairly rapidly unwind and due to the fact that the first quarter is typically a soft quarter in the book publishing business with the big titles being released in the spring and in the fall. We expect to see Eagle deliver strong financial performance for us for the year as a whole and look forward to updating you on upcoming calls. And this concludes our prepared remarks. Now we'd like to answer any questions anyone may have. Operator?

[Operator Instructions] And we'll take our first question from Tom Kerr with Singular Research. Thomas Kerr - Singular Research: I have several questions here. First one, on the expenses, that -- the increase of 5.3%, you mentioned the health care, that $700,000 and the 2 additional hires, was that the bulk of what the expense was, sort of that increase? Evan D. Masyr: The largest increase from what we had kind of given guidance in anticipation for fourth quarter was the health care. The new hires are starting in 2014. So that's impacting our 2014 guidance. Thomas Kerr - Singular Research: Okay. So nothing that are material besides the health care that was responsible for that? Evan D. Masyr: Well, certainly, revenue outpaced the guidance, so you have commissions associated with that. But that's really -- the biggest increase as far as expenses from what we were anticipating when we gave guidance was the medical. Thomas Kerr - Singular Research: Great, okay. And on Eagle, I'm sorry if I missed this, but are you guys prepared to give more financial information on Eagle? What revenues were 2013 and what you expect revenues to be this year? Evan D. Masyr: We're not planning on providing necessarily their operating results of what they had in 2013. Certainly, we think we're going to be able to operate better than they were able to. So we're not providing any historic information that could potentially be misleading. Trying to give a sense for what it's going to add, revenue, we said, was going to be 9% to 11% increase. If you back out Eagle, you're probably would be looking at about a 4% to 6% increase on an organic basis of just Salem's business without Eagle. Thomas Kerr - Singular Research: Okay, [indiscernible] through that. And still, despite the first quarter, I think you said breakeven or small loss. It's expected to be accretive for the whole year or profitable as expected? Edward G. C. Atsinger: Correct. Thomas Kerr - Singular Research: Okay. Profitable and accretive. Evan D. Masyr: We're expecting it to be profitable for the full year. Thomas Kerr - Singular Research: Okay. Edward G. C. Atsinger: And accretive. Thomas Kerr - Singular Research: And accretive, okay. And then just some 2014 guesses. If you can look out a little bit farther, sort of how you're looking at the debt paydown. How much could you pay down? And would you want to pay down? Is there a goal in terms of total debt that can be paid down in this calendar year? Evan D. Masyr: I would say that the big wild card in figuring out what we're going to pay down or how much we could pay down is really what unique acquisition opportunities are out there. Clearly, we're focused on paying down debt. Since we've put this credit facility in place in March, we've paid almost $16 million of debt. We'd certainly want to continue to do so, but it really depends what acquisition opportunities present themselves. I would say if there are no good acquisition opportunities, you'll see a bigger paydown in debt; and if there are great opportunities, you might see a little smaller paydown in debt. Thomas Kerr - Singular Research: Okay. And that leads to my next question. So what is sort of the M&A market that you're seeing for Internet properties or radio? Similar to the last 12, 18 months? Getting better or getting worse in terms of bang to buy? Edward G. C. Atsinger: I think it's getting a little better perhaps on the broadcast side, maybe a little tighter on the Internet side. And the opportunities just seem to develop in the course of the year, and you just flush them out and you find them and there's usually an opportunity that's challenging and complicated that you have to pursue. So it's really difficult to say. I mean, we've got a certain -- we're anticipating a certain amount of free cash flow that will allow us some flexibility in capital allocation, so there are no question that we'll pay down some debt, and there's no question we'll have some dry powder for appropriate acquisitions. And our Board has returned cash to shareholders in the form of return of -- we call them dividends. But in our case, they're actually return of capital because we're not a net taxpayer at this point. But we'll have flexibility to certainly pay down the debt, and we'll -- on your M&A question, I would be quite surprised if we don't have some opportunities, but they just sort of present themselves along the way. Thomas Kerr - Singular Research: Okay, last question for me is on the CapEx bill. Around $10 million? Less than $10 million? Greater than $10 million? Any comments on the CapEx for 2014? Evan D. Masyr: CapEx is a little high in 2013, but there were some unique situations. For example, Superstorm Sandy caused a bit of damage in New York. We probably had about $1.2 million in CapEx just related to that during 2013. So if you back that out, you'd probably get to a more normalized number, except 2014 we do have a few unique situations where we're going to have some relocations. Partly, in certain cases, it's eminent domains takings where we'll have some relocation costs. So the number in 2013 is probably a good number to use for 2014. But I would say that's a little abnormally higher than what we should see in the future.

[Operator Instructions] We will now go to Pete Enderland [ph] with MAV Partners [ph].

When are you going to file the 10-K? Evan D. Masyr: We're going to be filing the 10-K on Monday, March 3.

Okay. And that -- and then that will not have pro formas for Eagle Publishing in it? Evan D. Masyr: Correct, yes. It falls pretty short of the Rule 3-05 requirement by the SEC to provide pro forma financial statements.

Okay. And can you give us an idea what revenues Eagle has to achieve to get the earn-outs that you've laid out Eagle to avoid you pay up front or what you're paying in -- up front and installments? David A. R. Evans: Yes, this is David Evans, President of New Media. The purchase price on Eagle is $8.5 million. There is contingent compensation that could add a further $8.5 million to that depending upon the financial performance over the next 3 years. We are looking for a 15% to 20% ROI from this investment. We think we can get there relatively quickly. The first year will be profitable and accretive. The second year will grow from that as we leverage the Salem marketing platform to drive revenue and profitability. So profitable and accretive year one and on a kind of net present value IRR basis, we're looking at a 15% to 20% ROI kind of regardless of what the end -- the purchase price ends up being. If the revenues and profits do better, yes, we have to pay out more, but it kind of gets you back to the same ROI kind of almost regardless of the actual outcome. So we feel very good about the acquisition, and I think we'll see a strong ROI quite rapidly.

Are the payouts based on both revenues and earnings? David A. R. Evans: The payouts are based upon revenues. So the seller doesn't have to worry about our cost structure. We have to worry about that. But we were pretty careful about how we set those thresholds.

So can you give us an idea of what the revenues would have to be to get the additional $8.5 million? David A. R. Evans: Not off the top of my head. They -- the thresholds -- there are 4 businesses that we acquired. There are different thresholds for each of the 4 businesses, each standalone, and there are different thresholds for each year with higher thresholds for political years and lower thresholds for nonpolitical years. So...

Well, the third year is a big political year, obviously. David A. R. Evans: Yes, '14 and '16 are both really big political years, and we address that in the specific thresholds. Evan D. Masyr: I would say just one final kind of qualitative thing. To -- for us to pay out all $8.5 million, it will be pretty impressive revenue growth for us to be able to do that. So that would actually -- if we have to pay it out, it's not so bad because we have, well... David A. R. Evans: And our ROI in that particular case would be north of 20. Edward G. C. Atsinger: So I guess we would say we'd be delighted to pay it out. And by the way, one of the reasons that we use revenue as the benchmark and didn't get into expenses, we think there's a very substantial -- well we know there's a substantial opportunity to reduce expenses because we roll many of these assets, these businesses under our existing infrastructure, and much of their infrastructure we didn't acquire in this acquisition. So we left some of their expenses. We will consolidate a lot of them with our existing platform, certainly on the website. And consequently, there'll be substantial cost savings over how they've operated. And that's one of the reasons why we haven't provided historical information about their financials, because I think, as Evan said, it would be misleading.

Right. Okay. They had some land sale in the -- are there other stations that have land that could be sold or monetized? Edward G. C. Atsinger: Well, there are none that come to mind right now that there's -- there was excess property in the transmitter site. We spun off a piece of it. It was in a very interesting area of the -- quite valuable for a lot of users. I might add that on that particular transmitter site, there's also an active oil well that they -- there was a little oil discovery some years ago. So it's -- you never know what's going to happen with these real estate assets, and we do have a lot of them. We've had oil discoveries on at least 3 of them over the years. They're not really big gushers but interesting. But, no, I don't have any that I know of right now. There's probably still some additional land in Cleveland we could spin off with that transmitter site. That's unnecessary for that purpose. But the deal we've done is the only one we've done.

Are there any possible asset disposals that could happen this year outside of the land? I mean, other operating assets or other types of assets that you could sell? Edward G. C. Atsinger: I don't think so. I mean, we've got some stations that are -- do well for us that are not strategic that we would consider selling. And we've had some conversations, but there's nothing pending at this point on any of those. We've got some real estate that we acquired some years ago for a possible transmitter site relocation in Los Angeles, a fairly large tract of land in Southern California that as the market improves, we will try to see if we can't spin off, we don't need it. I'm not sure if it'll generate a lot of revenue, $1 million or $2 million perhaps. But that depends on the market. And at this point, I don't know that there's any -- there's nothing that let -- leads me to believe that we'll do something in the near future on those.

Okay. And then what is the outlook for interest expense for this year? Evan D. Masyr: So our Term Loan B is LIBOR plus 350 with a 100 basis point floor. Any projection I've seen of LIBOR does not show it going above 1% during 2014. We did enter into an interest rate swap back in March of last year that kicks in March 27 of this year. If rates stay low, and that's -- we swapped $150 million of our debt. If rates stay low, that swap will be 5.5%. So blended, we'll be closer to 5% for the year.

And it appears there are no further questions at this time. I would now like to turn the conference back to Mr. Edward Atsinger, Chief Executive Officer, for any additional or closing remarks. Edward G. C. Atsinger: Thank you, operator. And again, thanks to all of you for joining us for the conference call. We hope that you'll visit with us in 3 months when we report on first quarter performance. So thanks, and we will see you then.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.