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Salem Communications Corp. (NASDAQ:SALM)

Q3 2008 Earnings Call

November 7, 2008 5:00 pm ET

Executives

Evan D. Masyr – Chief Financial Officer

Edward G. Atsinger III – Chief Executive Officer

David Evans – President of Non-Broadcast Media

Analysts

Lee Westerfield – BMO Capital Markets

Bishop Sheen – Wachovia

James Goss – Barrington Research

Aaron Watkins – Deutsche Bank

Operator

Welcome everyone to the Salem Communications third quarter 2008 earnings conference call. (Operator Instructions) Mr. Masyr you may begin your conference.

Evan Masyr

Welcome and thank you for joining us today for Salem Communications third quarter 2008 earnings call. As a reminder if you get disconnected at any time, you can dial into 973-582-2717 or listen from our web site at www.salem.cc. I’m joined today by our Chief Executive Officer Edward Atsinger and our Division President of Non-Broadcast Media, David Evans.

We’ll begin in just a moment with our prepared remarks. Once we are done the conference call the operator will come back online 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.

Actual results may differ materially from those anticipated as a result of certain risks and uncertainties including but not limited to, market acceptance of Salem’s radio formats, competition in the radio broadcast internet publishing industries, and new technologies. Adverse economic conditions and other risks and uncertainties detailed from time to time in Salem’s reports on Forms 10-K, 10-Q, 8-K and other filings filed with or furnished to the Securities and Exchange Commission. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Salem undertakes no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances or unanticipated events.

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 Reg. G information required to accompany the disclosure of non-GAAP financial measures, including a reconciliation of such non-GAAP financial measures included in this conference call to most directly comparable financial measures prepared in accordance with GAAP is available on the investor relations portion of the company’s web site at www.salem.cc as part of the current report on Form 8K and earnings release issued by Salem earlier today.

I would now like to turn the call over to Edward Atsinger.

Edward Atsinger

Thank you all for joining our third quarter 2008 earnings call. Let me start by focusing on the current economic situation in terms of the challenges it faces, it presents to the radio industry in general and to Salem specifically. As you know for the third quarter it was very difficult for the radio business. According to the RAB total industry spot revenue fell more than 9% for Q3. In comparison Salem’s total revenue decreased 4%.

We face the same challenges as our general market radio counterparts for the advertising dollars and that business declined 11% for us, but our block programming business again demonstrated its resiliency with a decline of only 2% and our non-broadcast businesses grew 17%. Our major energy has been directed toward minimizing the impact of these revenue declines on our EBITDA by identifying and implementing appropriate cost cutting measures as well as pursuing a number of asset sales.

Since our last call we signed an agreement to sell WRBI-FM in Louisville, Kentucky for $3 million to WAY-FM, an organization which operates non-commercial contemporary Christian music stations around the country. We expect this transaction as well as the sale of WRFE-AM in Columbus, Ohio which we announced earlier for $4 million, to close in the fourth quarter. Both of those should close some time in the fourth quarter.

We are actively engaged in pursuing opportunities to sell additional assets in our portfolio and we expect to announce further asset sales in the coming weeks. In the area of cost containment, a number of things have taken place. These included eliminating the President and COO position.

We brought Eric Halvorson back to join the company in July of 2007. He had been with the company off and on since 1985 including serving on our board. He was brought back to develop a plan to downsize and implement some strategic restructuring consistent with the new economic environment. He accomplished much of what we brought him in to do. Ultimately he identified his own position as one that could be eliminated including his board position as further cost reduction measures and we have implemented those.

Last week we eliminated four senior management positions and reorganized their responsibilities among remaining management team members. Given the current economic realities we believe that these responsibilities will be managed as effectively as they were in the past and without any negative impact.

These senior management reductions are in addition to other staff layoffs that have been made over the past year. We have now reduced our annual payroll by more than $7 million. We’ve also instituted decreases in hiring in salary increased, the elimination of all non-essential capital expenditures and further reductions in marketing expenses, and there are other areas of reduction that we will continue to pursue.

The major purpose of these expense reductions and asset sales has been to position the company to avoid having to seek an amendment to our bank credit agreement. Our bank leverage ratio will decrease from 6.75 to 5.75 on March 31, 2009. It is our intention to reach that date with our actual leverage ratio adequately beneath this covenant requirement.

We think we’ve taken the steps necessary to achieve this, we think we’ve got a good plan, though obviously given the volatile economic conditions, if there is extreme further deterioration in the economy it could make this more challenging. We will continue to proactively discuss this situation with our bank group as we have in the past such if an amendment should prove to be necessary we will have support of lenders behind us.

At this point I will turn the call over to Evan for a discussion of our third quarter results and to provide fourth quarter guidance.

Evan Masyr

For the third quarter our total revenue decreased 4% to $54.4 million and adjusted EBITDA decreased 14% to $12.7 million. Net broadcast revenue decreased 7% to $47.4 million and station operating income decreased 13% to $16.4 million. We have 41 of our stations that are programmed in our foundational Christian teaching and talk format and these stations contributed about 42% of our total revenue.

Our block programming revenue which accounts for 66% of the revenue on these stations decreased 2% on a same station basis. Same station net broadcast revenue for these stations was down 9%. We are continuing to see weakness in national local spot advertising, most notably from the loss of revenue in the financial services and related categories and automotive.

Our 12 contemporary Christian music stations decreased 13% for the quarter and contributed 18% of our total revenue. We’re seeing the same issues this quarter as we had mentioned last quarter. National spot revenue declined 20% while local spot revenue was down 12%. KLTY in Dallas was hit particularly hard with a 37% shortfall in its national spot revenue. As you know our music stations generate more revenue from general market radio advertisers as compared to our talk stations. As a result this format has seen greater revenue declines than our other formats, particularly in national business.

Our news talk platform, which consists of 24 stations, had a 3% decline in same station revenue. Overall these stations contributed 13% of our total revenue. As we discussed in our last call we added WNYM- AM in New York to this format in August and thus far we are pleased with its initial results. In September we rolled out our Spanish Christian teaching and talk format in Omaha, Nebraska. We continue to be impressed with the results of this format in the six markets where we now operate.

Revenue on these stations was approximately $650,000 for the quarter which was well above prior year. Looking at our broadcast results overall on a same station basis, net broadcast revenue decreased 7% and SOI was down 12%. Same station block programming revenue declined 2% to $17.1 million. Same station local advertising revenue was down 13% to $18.3 million. Same station national spot and network advertising revenue was down 3% to $6.7 million.

Other revenue which includes infomercial revenue increased 2% on a same station basis to $3.4 million. Our same station results include revenue from 81 of our radio stations in our network representing 96% of our net broadcasting revenue.

We once again had another strong performance from our publishing and internet operations. For the quarter non-broadcast revenue increased 17% to $7.1 million or 13% of our total revenue. Revenue from our internet businesses grew 25% while our publishing business grew 9%. Our non-broadcast business generated operating income of $600,000 for the quarter as compared to operating income of $400,000 in the prior year.

These results were impacted by the startup losses associated with the launch of our town home magazine in January of this year. During the quarter we had asked members of our senior management to consider voluntarily surrendering stock options that were significantly underwater. As a result of the surrendering of options that were unvested, we recognized an additional $1.6 million in stock-based compensation expense during the quarter.

Additionally, we tested for impairment the FCC licenses in certain markets during the third quarter. In connection with this review, we recognize an impairment of $20.3 million associated with the FCC licenses in our Cleveland market. As usual we will conduct our annual test of all of our FCC licenses during the fourth quarter. As of September 30, 2008, we had net debt outstanding of $335.8 million. We were in compliance with the covenants of our credit facilities and our bond indenture. Our credit facility leverage ratio was 6.07 versus a compliance covenant of 6.75 and our bond leverage ratio was 6.14 versus a compliance covenant of seven.

For the fourth quarter of 2008, we are projecting total revenue to decrease in the high single digit ranger over fourth quarter 2007 total revenue of $58.5 million, and we are also projecting operating expenses to decline in the mid single digits as compared to fourth quarter 2007 operating expenses of $49.5 million.

This concludes our prepared remarks and we would now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Lee Westerfield – BMO Capital.

Lee Westerfield – BMO Capital

Ed, clearly we're seeing unprecedented times in the advertising environment and these are very difficult things to budget for. What I want to ask is this, you recognized any highlighted in your comments that you have a step-down in your debt covenants at the end of I believe it is March 31 next year and then another in the future. You've already set the stage with some cost reduction programs.

What I want to ask are really two questions, number one Evan if you can help me and the audience understand what the cost reduction comparatively would look like if just carried straight forward from the fourth quarter into the first quarter how that compares with the first quarter of 2008 so we can model out at least as far as March 31 on a cost basis assuming no further actions than you already planned for the fourth quarter this year.

The second question really relates to this upcoming reason of renewals in your block programming and what we, I know at this stage about a month and a half in advance of the process, but what we might anticipate in terms of block programming looking into that stable revenue stream as it gets renewed in late this year?

Edward Atsinger

Let me deal with the block program. Evan can address your question regarding the pro forming back the fourth quarter reductions that you're talking about. That may be a bit complicated and, Lee I don't know Evan can decide, but we my have to get back to you with a more comprehensive answer on that.

We have noticed and we've commented on this in our past couple of calls some weakness on I would say maybe a half dozen of the block programmers that are among the 35 or 40 national ministries that we deal with pretty consistently, about a half dozen that began to have some difficulties. I think some of them were fairly unique to these organizations. For example, in one case the speaker and the leader of the organization died. In another case the speaker had died four years ago and the program carried on fairly well for a while but then there began to be some fallout.

There were other unique circumstances that were uniquely associated with I'm going to say four or five of these organizations. The 2% decline that we've experienced can be largely attributed to those organizations and that pattern actually began two or three maybe four quarters ago at least two or three. The renewals, it's still an early timing for those but so far their going reasonably well. I think in this environment will be unlikely that we will look for much in the way of increases but the goal will be to maintain so the block doesn't decline and I think that based upon what we know about the principal partners that we have they all seem to be in pretty good shape.

Obviously, fourth quarter's a big time for them and we'll see how that progresses. By the end of fourth quarter that could change. There would be some more pressure on those organizations, but at this point I feel pretty good about block renewals. I don't think that there's going to be an aggressive attempt to increase obviously in this environment.

Lee Westerfield – BMO Capital

That's understandable. Evan, if it's a short answer and I don't want to burden the conference call with a lot of detail if it's a long answer, but it's a short answer as far pro forming costs great, if not we can talk offline.

Evan Masyr

Really the best way to look at next quarter's cost reductions and the fact that we're projecting a mid single digit decline in our costs that's taking into account the staff reductions, the reductions in marketing that we have already instituted and that we expect to continue into the next quarter.

Operator

Your next question comes from Jim Goss – Barrington Research.

James Goss – Barrington Research

I had a couple of questions. One related to the $1.6 million stock based comp expense the voluntary giveback you had mentioned. How does that work exactly? If it was underwater what does the charge relate to or how exactly does that get calculated?

Evan Masyr

The accounting rule is essentially when you grant a stock option you have to use a Black Scholes model to come up with an intrinsic value for each option granted and you recognize that expense over the vesting period of those options. So, regardless of the future performance of the stock price whether they go underwater or they're in the money, you're still recognizing the same expense. In this situation, we had unvested options that still had value to be amortized over the remaining vesting periods. With those options given back we were required to recognize the expense associated with those unvested options.

Edward Atsinger

Jim, just a little clarification on that, I was probably the principal since I had the largest number by far of underwater options. In fact, I don't think I've ever exercised one, but in any event they were way out of the money and our stock option plan initially was established with a certain number of options over the year since we had been a public company the comp committee had pretty much dispensed those and there was very little left in the stock option pool so that in the event they would grant any in the future if it was justified, it may be it may not be who knows?

But the problem was they simply had no capacity and I'm sitting and others in the management team were sitting with large numbers of options that were so far underwater that it just didn’t seem to make any sense and most of us voluntarily surrendered those with no strings attached, no understanding that it's going to mean anything. The only motivation would be to recharge the stock option pool so the comp committee at least has the flexibility as conditions developed that if there's a need to grant options to anybody for any purpose they at least have some that they can grab.

James Goss – Barrington Research

To the extent you'd do it at this stage there is enough selling advantage to the company because really wasn't the treat of dilution for a long time anyway and they weren't of value to you or the others but if new options were granted it'd be based more on the stock price that is currently in existence.

Edward Atsinger

Well granting options that are so out of the money that their meaningless is an exercise in futility. The comp committee may well decide that there's no event that in the foreseeable future that justifies it. Before they had absolute capacity they didn’t have that option. They at least have the option now because I think the pools been recharged by a substantial number of options should conditions develop and there are all sorts of circumstances to develop where the comp committee may want to look at options for a variety of purposes. That’s there call and we’ll see.

James Goss – Barrington Research

Where does that show up on the income statement? Where should I be looking for that?

Evan Masyr

A majority of that charge is corporate expenses, part of it hit broadcast and a small part hit non-broadcast but the predominance of the 1.6 million will be in corporate expenses.

James Goss – Barrington Research

Okay, and that’s why you gave guidance that was separate from that and tied it to last year’s corporate expense levels?

Evan Masyr

Correct.

James Goss – Barrington Research

Other media revenue has actually declined by 2 or 3% this quarter which hasn’t been that commonplace event. I wonder if you'd talk about that and maybe Dave might comment on if there are other areas of a non-radio nature that he plans to be getting into.

David Evans

The other media revenue's year-to-year for Q3 ’08 compared to Q3 ’07 were up 17%. There is some seasonality in our non-broadcast business from Q2 to Q3, so you may see a modest decline from Q2 to Q3. We have three magazine publishing titles that are published six times a year. So there are two issues released in the second quarter but only one issue released in the third quarter.

So in our non-broadcast business you will always see stronger Q2s and Q4s, and weaker Q1s and Q3s, but it’s simply the seasonality of the magazine publishing business nothing more. So the best measure of performance is the year-to-year comparison and we’re up 17%, we’re up 25% on the Internet side of things.

We had substantial growth in page views, our conservative opinion website townhall.com. That page view growth pretty much started kicking in at the time of the democrat convention and it went crazy with the announcement of Sarah Palin as the VP nominee and with the Republican convention. So that drove out Internet performance in the third quarter. We also saw very strong performance from Xulon Press, our Christian print on demand book publishing business.

Operator

You’re next question comes from Bishop Sheen – Wachovia.

Bishop Sheen - Wachovia

I’ll try to keep this brief I know it’s been a long week. So let me focus here on the balance sheet. Its 335.8 net, net of what, cash?

Evan Masyr

Correct

Bishop Sheen - Wachovia

How much?

Evan Masyr

Very little cash.

Bishop Sheen - Wachovia

Yes, I know you guys generally have very little.

David Evans

$184,000.

Bishop Sheen - Wachovia

So, we have this maturity and you correct me if I’m wrong, we have the revolver maturing come end of March?

Evan Masyr

Correct

Bishop Sheen - Wachovia

I was just looking to see how large, it’s not a large revolver I thought the last time I looked at it, it was around 60?

Evan Masyr

It’s a $52.5 million revolver. There have been some commitment reductions. We currently owe zero on the revolver, however.

Bishop Sheen - Wachovia

Then no other big maturities until 2010 when you ring the bell, that’s big bulge in the pipeline. So the next big event for you guys obviously is to step down and to avoid having to negotiate the waivers because nobody knows, you stop me if I’m wrong here. Nobody quite knows what mood the banks are in and how it may change and what it’s going to be like to be at the front of the line or the back of the line because the line seems to be forming, and if I have said anything that does not represent what you are looking at please let me know.

Evan Masyr

You’re analysis I think is fairly accurate. Our stance is to try to not get in that line.

Bishop Sheen - Wachovia

I’m just trying to get a full assessment, by Q4 you’re going to have roughly 7 million in and you've got with pending acquisitions, what do we got 4 million pending to go out on the last acquisition that is pending, roughly 7 million of inflow and 4 million that you're waiting to pay on the last acquisition?

Evan Masyr

We have the only real pending acquisition is 2.7 and we have paid that money already it's just have some FCC issues to actually get the last [inaudible] transferred to us.

Bishop Sheen – Wachovia

So, that's already reflected in the 9/30 balance sheet or was that an October or November?

Evan Masyr

That was in the 9/30 balance sheet.

Bishop Sheen – Wachovia

So, it's really just 7 million - -

Evan Masyr

So, 7 million coming in.

Bishop Sheen – Wachovia

Everything else is up to us and our modeling but you've given us the guidance. The last thing I just want to focus on is the covenant EBITDA to the actual EBITDA. Right now when we do the math if we just do the straight math it looks like your leverage is more like 6.5 times not 6.1 times. Is there anything changing short-term that is going to tighten up the covenant carveout versus the actual leverage, because I believe carveout, and correct me if I’m wrong, both in bond and slightly different ratio in the credit facility has to do with startup expenses on a trailing 18-month period or something?

Evan Masyr

Bishop, we’re allowed to exclude from cash flow any losses or basically the cash flow associated with a station that we acquired and launched reformatted into one of our key formats, and we are also able to exclude 50% of the debt associated with that acquisition. So that’s your primary difference between call it actual of GAAP EBITDA as compared to what we have in our leverage ratio calculation.

Bishop Sheen - Wachovia

So that change is not necessarily going away any time soon because you always have something that you’re launching or starting.

Evan Masyr

Yes, the biggest station in there right now is the Miami acquisition that we bought WAMD closed the early part of this year for about $12 million. So you have a $6 million delta just in debt alone.

Bishop Sheen - Wachovia

I guess the other thing that, I keep asking everybody, you’re Internet which is fabulous because you want to stay in shape and keep that. It’s a real tool but is there we can’t EBITDA or cash flow coming out of the Internet. I know about the top line growth but are you seeing contribution to your earnings from your Internet?

David Evans

Yes, the non-broadcast division had profits of about $600,000 in third quarter. The profits would have been higher than that except in January ’08 we launched our town hall magazine. So we had some startup losses for that title in the third quarter. So, yes our Internet business was pretty profitable and showed some solid growth from Q3 a year ago.

Bishop Sheen - Wachovia

That $600,000 is the non-broadcasting commission which has both old media publishing assets and then Internet based assets. Correct?

David Evans

That’s correct, yes.

Bishop Sheen – Wachovia

So you're saying that rest assured that part of that $600,000 in Q3 and whatever is going to be the run rate for the year. The Internet is actually contributing cash flow.

David Evans

Yes, Evan may have the precise breakdown in front of him, in which case he's going to interrupt me. Of that $600,000 the magazine publishing business in Q3 lost a little money because of that town home magazine startup I mentioned. The print on demand book publishing business I would say made a couple of hundred thousand dollars in the third quarter, and the balance would have been the profit of our Internet division. So that would probably be $300,000 to $400,000 of profit off the top of my head, Evan may correct those numbers.

Evan Masyr

He's pretty much dead on those numbers.

Bishop Sheen – Wachovia

Well that is helpful because I've got to tell you not everybody can talk about real cash flow coming out of their Internet business. They can go on forever about page views. So, you're not different from anybody else in that you're fighting some very tough headwinds. Maybe you're doing a little bit better because your certainly more diversified business mix, but it is tough out there and there's nothing that I've heard you say that makes me think you see anything different for '09 or whatever visibility we have. It is tough it's going to be tough.

Edward Atsinger

Well that's certainly true. We obviously model the future as far as we can with as much visibility as we can. We look at our pacing but it is true that with the volatility that's out there in so many sectors and the overall economy, you don't know how, even if your models are conservative and cushioned, these days it's difficult to know whether they'll play out that way, you try to get as close as you can. We feel that we've got a very good handle on fourth quarter.

First quarter becomes a little more opaque, but we've got a lot of ways forward. We've got options and different paths that we can go and we're very focused and going to do all that we can and have a degree of confidence that we'll be able to do it to get to these various key dates so that we're in compliance with a reasonable and adequate cushion. So we'll have to see how it plays out. As you say it's difficult and it's volatile, and we're functioning and focused with those realities in mind.

Bishop Sheen – Wachovia

You've given us a very good handle on it. I guess the last question on this inquisition is going back to the revolver. The reducing revolver, I call it a reducing revolver for lack of a better term, I think it is a classic one, that goes away and matures so if you want some sort of revolving facility, come April would you have anything that you can still draw on?

Evan Masyr

At this point we would not other than a $5 million, kind of daily overdraft swing line that we –

Bishop Sheen – Wachovia

[Inaudible] $5 million right?

Evan Masyr

What we're hoping to do to get to 5.75 is going to require these asset sales that we've talked about. We want to start keeping cash in our balance sheet probably in lieu of extending a revolver which would probably be costly in today's environment with respect to upfront fees rather just sit with some cash on our balance sheet.

Bishop Sheen – Wachovia

So it's going to be a less frisky Salem going forward, less acquisitions and you're just going to try and get all the assets that you have to perform the best and get to the other side of where that dislocation is.

Edward Atsinger

That's a good way to put it and I don't think there are any acquisitions in our immediate future, but unless they're painless, unless somebody comes to us with a deal we can't refuse, where you don't pay for 10 years or something, but no I don't see that...

Bishop Sheen – Wachovia

Careful what you wish for Edward, we've all been through those deals we can't refuse.

Edward Atsinger

Yes, well I think there's not much that we can't refuse these days, now look we're focused that, we'd like to avoid having to amend the bank agreement, even in a minor way and that seems to be in the best interest of our company, our shareholders, the cost of even these amendments.

Even on reasonable terms, its just something that we'd rather, we want to continue to focus on de-levering and we don't want to have to spend unnecessary money if we can avoid it to get us to a proper level of de-levering and then when we have to, we will then try to refi the debt on terms that are good for the company and good for shareholders.

Bishop Sheen – Wachovia

Sounds like a plan. So your job I hope is to have a very good weekend and I thank you for giving us a good beat on Salem.

Operator

Your next question comes from Aaron Watkins – Deutsche Bank.

Aaron Watkins – Deutsche Bank

For the third quarter how much cash did you actually have come in from some of the asset sales you had done?

Edward Atsinger

Third quarter? I'm trying to think too, was it Milwaukee, and that was second quarter?

Evan Masyr

I don't know if anything closed during the third quarter. We did collect some money from one of our sales that we had earlier in the year KTEK had a deferred note, two notes, one being short-term one being long-term. So we did get $1.75 million from that, but I'm not sure if we closed anything else during the third quarter.

Aaron Watkins – Deutsche Bank

So the revolver that you paid down that was predominantly from free cash flow you generated.

Evan Masyr

That's correct.

Aaron Watkins – Deutsche Bank

Then I think you mentioned that you're continuing to work on selling some more stations and the buyers of these stations, obviously the size isn't huge in terms of dollar amount, but your buyers are able to line up financing even in these sort of tough credit times?

Edward Atsinger

Well the ones that we're talking to are, yes. The ones that we've dialoged with, we're only pursuing opportunities that we think are doable.

Aaron Watkins – Deutsche Bank

What's your sense out there, I'm just curious in terms of a demand standpoint. If financing was a little more available, is it your sense that the list of buyers would be substantially longer? Is there still a demand out there and a desire to own radio stations? There's been a lot of noise with competition from whether it's online or satellite radio or people listening to iPods, what's your sense on that?

Edward Atsinger

First of all if you focus on the acquisitions that we've announced in recent quarters, go back to Milwaukee focus on this WAY-FM in Louisville, WRFD in Columbus. The entities that we have done business with are all non-commercial operators who are primarily listener supported.

Now the good news for the whole industry, in my view, is that the consumption of radio seems to be alive and well as much as it ever has been. What the real challenge is has been a contraction in advertising dollars, first because some of it fled to online advertising that had not been a competitor, some 10 year ago.

Each year the online advertising piece of the advertising pie has grown at the expense of traditional media and then of course with the economic downturn and the collapse in the financial sectors and the mortgage, radio stations that are dependent upon those advertising categories that are advertiser supported have suffered greatly, and as the economy contracts and we move into recession that's going to be the continuing challenge.

That certainly impacts non-commercial radio but not as severely the products being consumed by listeners and being supported directly by listeners. This is one reason why our block programming is resilient because at the end of the day, the organizations that buy time from us also derive their support from their listeners.

So in a sense it's indirectly listener supported or really in a sense directly listener supported. The other reason I mention that is that it does suggest that the business is still a good business, and the consumption of radio the consumers are there, trying to figure out maybe an adjusted business model is the challenge for the industry going forward and I think everybody's focused on non-traditional revenue and other ways to monetize it.

So there is demand for properties with those who have a business model that still works, and there are those, as always, who see that this time will pass and this business is still being utilized by consumers and it'll take advantage of very low prices to position themselves, maybe to extract a good business in the future.

That's the best I can, Aaron, can give you my crystal ball as I look at this situation in the future.

Aaron Watkins – Deutsche Bank

It's easy to sort of pile on when we're hopefully at a trough in the cyclical cycle, right, so, but that the last thing I just wanted to ask you, and I know this probably isn't a popular question is you're talking with the banks, but what flexibility do you have to use free cash flow or even your revolver to perhaps be out there and buy back bonds which are trading at a substantial discount to par value and obviously that would be a de-leveraging type proposition?

Dave Evans

Unfortunately our credit facility precludes us from doing that. I'd love to amend that and can de-leverage that way. However, now is not a time to go back to the bank group and ask for anything, so.

Aaron Watkins – Deutsche Bank

So even free cash flow, it's sort of locked up at the banks?

Dave Evans

Yes.

Operator

Your next question comes from Jim Goss – Barrington Research.

James Goss – Barrington Research

Another question about the block programming, Ed, maybe you were eluding to this before, but the decline was more related to the mix element and not a full slate of block programming relative to some prior quarters, is that correct first of all?

Edward Atsinger

Yes. I think what we try to do constantly is to take the temperature of those various businesses to see how they're doing, and it's like all things and you have to do analysis if you don't have an unlimited amount of data, but the well-established organizations that we've done business with for a long time are doing quite well from all that I can gather. There was a handful for a variety of unique reasons, have stumbled and had some problems. I mentioned some of the situations.

There's no question that if the economy continues to turn down in and this recession is long and deep, I think it will have some impact on block programmers ability, their donations will be impacted. Usually they are. Sometimes in some circumstances it helps them, but in most cases they're going to be other enterprises. Everybody's got a little pressure, financial pressure, and their listeners will have that same pressure.

So I suppose that there will be more pressure on them, but the ones that are well established seem to be navigating through this pretty well, and so that's the best I can give you, Jim.

James Goss – Barrington Research

I was thinking historically though, there were almost more than you could use on your sort of A list stations, enough to at one point almost get a second station in some markets. Has it dried up a lot more than that since that time, or are there no new interested parties in taking some other's half-hour spots, or?

Edward Atsinger

Well it's a little more complicated, you also have preferred dayparts so you may have some demand out there for, say morning dayparts, and not so much for late afternoon, and you might have a number of people lined up that would like to have those dayparts and they don't want another one, and therefore while you've got the multiple demand, you may have an avail at certain daypart that those particular parties are not interested in. That may become a matter of negotiations at some point. It may become making it more attractive.

I think that what has happened over the years is that as the quality of these programs continues to improve and they continue to provide compelling content for their audiences and listeners become increasingly discriminating in who they want to support, those organizations that stay up, that stay current, that are evolving in terms of the taste of their audiences, they continue do well, they continue to be good demand, and they do it very well, maybe much better than even they did in the past.

Those that are weaker or are not as sophisticated or whose content is not quite as compelling, I think it's a little more challenging environment for them. So in past years you might have seen in certain markets you might see two and three and four stations that might be dabbling with block programming. Today it's probably fewer. Probably that phenomenon doesn't probably exist quite as it did maybe 15, 20 years ago. It's a very slow moving target and it's difficult to get too specific about trends.

James Goss – Barrington Research

Do your conservative news talk stations have any expected impact from a resolution of the election, or do you think that's sort of a non-event, that it's you're talking about whatever you're talking about at any given time?

Edward Atsinger

Well I'm not quite sure what you mean. Are you talking about perhaps new regulatory burdens or you talking about - -

James Goss – Barrington Research

No, I guess I'm just thinking the outcome of the election as it might affect the content of your stations.

Edward Atsinger

Well I would tell you that as far as the news talk stations go, they always have a spike in election years, so Dave, for example, mentioned the townhall.com., the page views were very correlated with political events, particularly say the Palin decision, but we have seen the growth in those. We've seen, as Evan mentioned, the revenues in the news talk was the least in terms of declines, and look, I just did an interesting little swing through about five or six markets.

We promoted events with our talent in Denver last Monday, a week ago and we had 3,000 people show up, just one-week promotion. We flew on to Minneapolis and had 3,000 people show up, filled up their concert center, went from there to Cleveland in which we had about 1,500, which was the capacity of the event.

Those formats are alive and well, and they are getting a good response. Frankly, in some cases what's interesting is that I remember some of the more conservative organizations say that they built brand new headquarters, they've expanded their operation, and they refer to it as the house that Bill Clinton built. In some cases when you're the loyal opposition and you're challenged by all sorts of what you'd perceive to be incorrect policy, which may be even alarming policy, it does seem to get the P1s more active than ever.

So I feel good about that format. It continues to grow. A PPM seems to help our numbers. We seem to do better with PPM than diary in some cases, where that's a factor.

James Goss – Barrington Research

Last thing, are you willing to give any scope to the station sale ambitions you might have in terms of total dollars you're considering?

Edward Atsinger

I'm not quite sure what you mean.

James Goss – Barrington Research

In terms of the amount of station sales you hope to pursue over the next 3 or 6 or 12 months raising the cash to up the balance sheet.

Edward Atsinger

Well, look, you have an open mind and you explore all opportunities. It's a tough environment, as we've commented on earlier. There is some demand and there are situations that are always attractive, and we're going to pursue anything that's in the best interest of our shareholders and our company and the goals we have of de-levering, so I can't really quantify it. I do expect that we will produce some good accretive of asset sales in the coming weeks, and we'll announce those and give you the specifics as soon as we're in a position to do that.

Operator

At this time there are no further questions.

Edward Atsinger

Well thank you all for joining the call and we look forward to visiting with you again in three months. Thank you, Operator.

Operator

This does conclude today's conference call, you may now disconnect.

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Source: Salem Communications Corp. Q3 2008 Earnings Call Transcript
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