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Executives

Evan D. Masyr – Chief Financial Officer

Edward G. Atsinger III – Chief Executive Officer

Eric H. Halvorson – President, Chief Operating Officer

Analysts

Bishop Sheen - Wachovia

James Goss - Barrington Research

Salem Communications Corporation (SALM) Q2 2008 Earnings Call August 6, 2008 5:00 PM ET

Operator

Welcome to the Salem Communications second quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to turn the call over to your host, Evan Masyr.

Evan D. Masyr

As usual, I am joined today by our Chief Executive Officer Edward Atsinger and our President and Chief Operating Officer, Eric Halvorson. We will begin in just a moment with our prepared remarks and once we’re done the conference call, the 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. Actual results may differ materially from those anticipated or 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 and 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, change circumstances or unanticipated events.

This conference call also contains non-GAAP financial measures within the meaning of Regulation Z specifically substantial operating income, EBITDA, and adjusted EBITDA. When conforming with Regulation Z, 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 and most directly comparable financial measures prepared in accordance with GAAP is available on the Investor Relations portion of the company’s website at www.salem.cc as part of the current report on Form 8-K and the earnings release issued by Salem earlier today.

I will now turn the conference call over to Edward Atsinger.

Edward G. Atsinger III

I’m going to turn the call in a moment over to Eric Halvorson and then back to Evan to get into the specifics of the quarter’s performance. I’d like to just review with you some of the material developments that have taken place in recent days that impact our company and I think largely in a positive way.

Some of you may have learned this morning of a format change that took place in New York City. We changed the format of one of the two AM stations that we operate in New York City, WWDJ to our news-talk format that we offer in a number of other cities across the country. We changed the call letters of that station to WMYM. We long recognized a franchise opportunity in New York for news-talk.

Relative to other comparable top markets, New York is always, we felt, been underserved by this format, particularly the brand of news-talk that we employ that focuses specifically on a public policy, political talk and cultural critique. That very specific focus, we really could not take advantage of that opportunity as we perceived it until recently because WWDJ was a 5,000 watt station. The FCC about a year ago branded an application to increase power to 50,000 watts which is the maximum allowable for AM stations and we implemented that about six weeks ago. So we have been operating now for some time with a maximum power 50,000 watt station which significantly increases our reach in the New York metro adding several millions of people to the coverage area but it also intensifies the signal. It makes it much more penetrating which is important in New York given the large urban buildup and the need to have a very strong signal to penetrate in densely populated areas with large construction and edifices.

So we were happy to make that change this morning. We’re quite pleased with the rollout, with the reports that we’ve gotten today as things have developed. This change was facilitated by our acquisition of radio station WAMD-AM in the Maryland area, suburban Baltimore for $2.7 million in July. We weren’t in a position to get too specific at that time as to why we made that acquisition. We did have some questions on our prior calls about it and we answered it in a general way but essentially it was designed to facilitate this upgrade. It adds far more value in our opinion to the 970 frequency in New York City than existed when it was a 5,000 watt station.

So we’re pleased with that change and it also benefits Salem in that, it facilitates our national business in the radio network. As you know or most of you are probably aware, we syndicate 18 hours a day of long-form talk programming. This move insures access for our talent that we syndicate nationally in the nation’s #1 population center and it provides us also with that connection of a very cost-effective way of launching this format since we control all of the product or essentially all of the product, about 70% of the product that we offer over the air.

Last week, we signed an agreement to sell the assets of WRFD-AM in Columbus, Ohio for $4 million to Christian Voice of Central Ohio. Christian Voice operates a Contemporary Christian music station in that same market, WCVO-FM. WCVO has been there for many, many decades as have we. We have long been convinced of consolidating these two stations under one ownership that it would strength the position of both stations. We attempted a couple of years ago to acquire WCVO and those discussions progressed for some time. Ultimately, they were not successful for a variety of reasons, not the least of which is that Christian Voice of Central Ohio really has as their home base Columbus, and for them to dispose of that particular asset would subsequently mean a fundamental change in their mission.

On the other hand, in our case, WRFD was a stand-alone station, one of only two that we continue to operate in the United States. It was not only stand-alone, it was a daytime-only AM station. It’s very successful, it’s been there since 1982 with the current format but it didn’t make a lot of sense to continue to operate it as an independent stand-alone entity if we could find consolidation. So since we couldn’t consolidate it, we took a look at it from the other perspective and decided that the discussion with them about acquiring the station was appropriate. They felt it was. That has led to this current situation. We’re pleased with the deal. It works for both of us.

We’ve been very vocal from the very beginning of our stint as a public company about our commitment to providing a reliable, consistent platform for our block programming partners, ministry partners. Nothing about this transaction changes that but we’re very protective of continuing to be available with that platform if these partners need it. In this case, Christian Voice of Central Ohio has a similar commitment and their, if only, interest in the station was to continue to operate it as it has been operated by us. Fortunately, they will be able to operate it more efficiently and we’re confident and they are confident, that it will be strengthened as a result of this particular consolidation.

The sale price that we got, if we look at the cash flow for the last 12 months, the multiple price for this sale was about 9x, so we’re pleased with it. We will continue to actively look at opportunities to sell additional assets in our portfolio where it makes sense as this one clearly did.

In June, we launched our fifth station formatted with Christian teaching and talking in Spanish in Seattle. Our revenue on these stations for the quarter was well above the prior year and we continue to be quite encouraged by the progress we’re making. We’re still evaluating our portfolio stations to see if they’re might be additional opportunities for this format and we may have some announcements about that in the coming days.

There’s no question that radio continues to struggle with its ability to grow revenues. According to RAB, total industry stock revenue was down 10% in May and June. We’re not immune to these current industry trends. Overall, our advertising revenue was up 9% for the quarter. The mortgage business and home improvement categories that have historically been important growth segments for Salem and because of the nature of this current economic challenge those sectors have been particularly hard-hit. It has had an impact on our advertising revenues.

In addition, we have also experienced larger than normal cancellations with some of our block programming partners. Most of these cancellations based on our analysis relate to unique circumstances, but it does appear the economic slowdown is having some effect on our ministry partners. Efforts are underway to replace these programs and I am confident that we’ll be able to backfill much of this inventory in the third and fourth quarters of this year.

We’ve taken steps to release our cost structure and this may be one of the most significant things that have taken place in the last several months. In our corporate office, in the past year, we have reduced annual payroll costs by $1.8 million through layoffs. Additionally, through June, we reduced our advertising and promotional expense by about $2.4 million to last year and we’ve eliminated many budgeted positions in local markets. We’ve also reduced our spending on capital expenditures. On the previous call, we had identified that we had expected to spend about $15 million on capital expenditures. We now anticipate that spending for 2008 to be in the realm of about $12 million. Our focus on prudent, achievable cost cutting will certainly continue and we think that we’ll make additional progress in those areas.

With that overview of some of the macro-developments that are significant, I will now turn the call over to Eric Halvorson who will zero in on some of these specific second quarter operating results.

Eric H. Halvorson

For the second quarter, our total revenue decreased by 2%. This was comprised of a 5% decrease in net broadcast revenue and a 22% increase in non-broadcast revenue.

We have 42 of our stations programmed in our foundational Christian Teaching and Talk format and these stations contributed 43% of our total revenue. Our block programming revenue decreased 4% due to the cancellations that Ed discussed. Block programming revenue accounted for 62% of the revenue on these stations. Overall, net broadcast revenue for these stations was down 8% as advertising revenue decreased 19%.

We continue to see weakness in national spot advertising and continued softness in local spot in a few key markets most notably New York, Los Angeles, and Washington D.C. Additionally, as highlighted, the loss of revenue from the financial services and related categories has continued to contribute to this decline.

Revenue on our 12 Contemporary Christian music stations decreased 10% for the quarter and contributed 20% of our total revenue. Weakness in national spot business continued with a decline of 28%. Our flagship CCM station KLTY in Dallas has been challenged trying to make up for a 46% shortfall in national spot revenue by attempting to replace that business with local spot which is up 6%.

We had a 1% decrease in same-station revenue for our 26 news-talk stations. Overall these stations contributed 13% of our total revenue. In recent calls, we have been providing specific information about the performance of KRLA in Los Angeles. As you may recall the revenue declines have been shrinking over the past few quarters. In the second quarter 2007, KRLA had an 18% decline in revenue followed by a 13% decline in the third quarter. In the fourth quarter last year, the decline was only 6% and that was followed by a similar 5% decline in Q1 of this year. We continue to see improvement and KRLA delivered a 5% increase in revenue in the second quarter.

Ed briefly mentioned the performance at our recently launched Spanish language Christian teaching and talk stations. Our five stations in this format generated revenue of over $400,000. Approximately 80% of the revenue on these stations is derived from local block programming.

Our publishing and Internet operations once again delivered strong growth. For the quarter, on-broadcast revenue increased 22% to $7.5 million or 13% of our total revenue. Revenue from our Internet business grew 34% while our publishing business grew 10%. Our non-broadcast business generated operating income of $700,000 for the quarter as compared to operating income of $800,000 in the prior year. The operating income of our non-broadcast business continues to be impacted by investments we are making in the form of increased advertising and the recent launch of our Townhall magazine.

With that, I will now turn the call over to Evan for additional discussions of second quarter results and our guidance for the third quarter of 2008.

Evan D. Masyr

Our results for the second quarter were issued in a press release earlier today and are available on the Investor Relations portion of our website. I will briefly comment on our results.

Total revenue for the second quarter decreased 2% to $57.5 million and adjusted EBITDA decreased 9% to $14.7 million. Net broadcast revenue decreased 5% to $49.9 million and station operating income decreased 9% to $18 million.

Non-broadcast revenue increased 22% to $7.5 million in our non-broadcast business. Operating income decreased from $800,000 to $700,000.

On a same-station basis, net broadcast revenue decreased 5% and SOI decreased 8%. Same-station block programming revenue declined 4% to $17.3 million. Same-station local advertising revenue was down 8% to $19.7 million. Same-station national spot and network advertising revenue was down 5% to $7.2 million. Other revenue which includes infomercials increased 5% on a same-station basis to $4.2 million.

Our same-station results include broadcast revenue from 83 of our radio stations in our network representing about 97% of our net broadcast revenue.

As of June 30, we had net debt outstanding of $343.6 million. We were in compliance with the covenants of our credit facilities and our bond indenture. Our credit facility leverage ratio was 5.99 versus a compliance covenant of 6.75 and our bond leverage ratio was 6.03 versus a compliance covenant of 7.

For the third quarter of 2008, we are projecting total revenue to decrease in the low single-digit range over the third quarter of 2007 total revenue of $56.9 million and we’re also projecting operating expenses before a gain or loss in disposable assets to be flat as compared to the third quarter of 2007 operating expenses of $46.6 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 Bishop Sheen - Wachovia.

Bishop Sheen – Wachovia

I want to focus on two things. It looks like on the leverage ratio, they are more aligned than I have ever seen them, the technicals between the credit facilities and the bond. You’ve got three-quarters of the turn roughly in the credit facility with no stepdowns coming for the bond facility; I think you moved a stepdown in April right through March of ’09. Is that correct?

Evan D. Masyr

That’s correct. March of ’09, we have the step down, Bishop.

Bishop Sheen – Wachovia

Right to a full-term 5.75 cents in April 1. So it appears that you have certainly more cushion than you came into the year with. I want your thoughts about that and how you can keep that cushion there so you have something to draw from. Secondly, I want your thoughts about long-form advertising which we’ve seen in other media far more than yours has. Certainly it’s stated that you do so much on the Web and I was wondering if you could talk about anything that you are feeling that is monopolizing long-form.

Evan D. Masyr

Bishop, let me address your first question which was why the bond leverage and the bank leverage ratios are closer than they have been in the past. On June 30, we affected a reorganization from a tax legal entity perspective where by we folded in what was previously an unrestricted subsidiary under our indenture back under Salem Holding Company. So those two numbers should stay pretty close in line going forward.

Bishop Sheen – Wachovia

That makes it a little easier to track.

Evan D. Masyr

Correct.

Bishop Sheen – Wachovia

How do you feel about the cushion you have?

Edward G. Atsinger III

It’s a challenged and we’ll continue to deal with it both in terms of focusing on improving adjusted EBITDA each quarter, getting costs down as we had announced earlier we are doing. Generally improving efficiency continues to identify some assets that are non-strategic and even if they are strategic if their purpose will continue such as this WRFD situation, continue to spin off a few things to get to that point where we can hit it with a comfortable margin. That’s our goal and we are very focused on it. We’ll continue to report on that. To be as candid as we can be, one of the things that you have to face as you go forward is this economy has been about as opaque as any as we’ve seen so as we try to do our own internal analysis looking at trends and looking at pacing, it just seems to be a little different because of the softness in the economy. So we have to be very conservative in our approach but optimistic. We want to hope for the best but be prepared for the worst so to speak. It’s difficult to project with great specificity what the fourth quarter or first quarter of next year will look like. We got a pretty good handle going forward on the third quarter, but Bishop, we’re focused on it. We want to get there with a reasonable cushion in mind.

Bishop Sheen – Wachovia

Long-form or infomercial?

Edward G. Atsinger III

We actually had an uptick in our infomercial revenue. We haven’t seen a whole lot of impact of things going to the Internet as far as we’re concerned. That business is also related to direct response, that if they can get the response using our facilities, it’s not a zero sum gain that they can’t do both radio and Internet. They’ll do both media. They’ll do TV too as long as they continue to get response at the rate they’re paying and so far, we haven’t seen that erosion.

Operator

Your next question comes from Jim Goss - Barrington Research Company.

James Goss - Barrington Research

The New York station that you alluded to earlier, what was the cost of upgrading the signal from 5,000 to 50,000 watts? I presume it is mostly your own network programming and therefore, it could provide a good opportunity for fairly immediate payback especially as one person from another company mentioned, CCM made it easier to get something sellable quickly instead of waiting for a year to have a book to sell. So I wonder if you have some comments on the dynamics of that station.

Edward G. Atsinger III

As I mentioned, we paid $2.7 million to acquire WAMD which really was thinned down, really downgraded in effect so it could accommodate our increase. That asset is not particularly valuable. The value is in the improvement that we can make in 970 in New York. In addition to that, the actual cost of the upgrade, I don’t have the number. Evan might have it. I’m going to probably say, it’s probably $1.5 million involved in that project. We didn’t have to erect any new towers; we did have to go through a complicated entitlement process. We did have to purchase 50 kilowatt transmitters that we’re expensive. It may not have been that high. There was a lot of engineering, a lot of technical, a lot of legal expenses involved. So we can get you a more specific figure. We can budget on that, I just didn’t bring it with me. I’ll give that to you. I’m going to guess, not more than $1.5 million, maybe something less than that.

We will utilize our own talent and yes, it will help the bottom line in ways that otherwise would not be the case were it not the fact that the programming is available to us. It’s guaranteed access, #1, and #2, it doesn’t really cost us anything to put it on. We do give our national organization the inventory but obviously, we’ll have lots of inventory to start up. So that leaves us at a disadvantage. The improvements, the cost benefit of doing this will be manifest more at our national businesses’ level than it will be on the 970 operation in New York.

My point being is that the revenue, the inventory will be monetized more rapidly at the national level perhaps locally but it will certainly manifest itself both locally and nationally. In the future, as you track this, be sure to ask us how we are doing with national network revenue because that’s where it will begin to show up. Just to put one small bit of it in perspective, there is one particular program that we’re offering in New York that we analyzed just to make this one three-hour program available should generate about a half million dollars a year for us just simply by adding New York which is the #1 population center in the country. By adding New York to that network by the analysis that we done, we think it’s a $500,000 upside for just one of the programs.

We will feature about four of our syndicated products, let’s see, one, two, three, four, five actually, five of our programs will be offered there starting with Bill Bennett’s Morning in America. Bill is a New Yorker, from New York. Then we will have Mike Gallagher who was on WABC for several years before we acquired him. That will be followed by Dennis Prager who is from Brooklyn originally and he has strong New York ties. He is well-known because of his extensive writings and publications. His books on Judaism are some of the most widely utilized on that subject in the world. Then followed by Michael Medved and then finally Hugh Hewitt. Medved has ties from Philadelphia. He is a Yale Law graduate. He’s no stranger to that part of the country. He speaks there frequently. Our talent have high profiles there, they have ties to the city. We are quite optimistic. We are going to be able to exploit an opportunity that we have identified for a long time that we were not able to take advantage of because of the fact that the facility really wasn’t ready.

James Goss - Barrington Research

Does the talent usually look at this as an opportunity to ask you for a better contract or do they look at it as an opportunity for that much more visibility than in terms of other ways?

Edward G. Atsinger III

It’s a win-win for everybody. The latter is more the case. They’re just thrilled to be here. Folks that make a living talking on the radio, that’s their gift and that’s their talent. They enjoy it and they love interacting and impacting people and engaging ideas. To be in New York, of course, is everybody’s dream. To add New York is a very positive thing from their point of view and they will pick up additional endorsements. They’ll have a number of local advertisers who will help them to voice spots so it’s more the latter but everyone will do better. It’s win-win for everybody.

By the way, I just pulled up this figure, on the upgrade it was $2.3 million to do the upgrade, complete the upgrade, in addition to the investment we made in WAMV.

James Goss - Barrington Research

One other issue I wanted to raise was block programming. This is an unusual situation, I think relative to your past experience and actually having declines for any reasons, I was wondering if you might address that situation and how it might reverse itself. Are there any options that you might have to deal with that situation?

Edward G. Atsinger III

As I commented when I reported on that decline, we think that most of them are related to unique circumstances. Without getting into the specific organizations because I don’t think that would be appropriate for me, anyone who wants can look at our program schedules from most of our stations and there is much continuity between market to market. There’s obviously some uniqueness in every city. The major, major national ministries are represented in most of our stations and you can go on their websites and you can figure out what’s going on. In one case, for example, a ministry leader died. This was a program, it was D.J. Kennedy’s, this was a program that was very topical and very focused on public policy. It was primarily a TV ministry so that most of these programs, if they’re Bible exposition, frankly, they have long shelf life, long after the founder and featured speaker leaves the scene. In this case, because it was so topical and so current event-driven, and more TV-oriented than radio, it just didn’t survive. It really wasn’t designed to survive.

Then we had a case where an organization relocated from the East Coast, from the West Coast to the East Coast. In the process, there was much dislocation, getting reestablished, the back-room setup. It resulted in some dislocation that forced them to tighten their belt and cut back. We think that’s a temporary move as they get their situation stabilized.

We had another one where they changed vendors, back-room vendors in terms of accounting which for these block program ministries is critical. If you don’t have your database under control so that you can manage your donor base and make sure that your correspondence is going up, you can have some dislocation. We had that situation arise. It’s been a number of things like that affecting maybe four or five key ministries that I think have driven a lot of it. In terms of our ability to address it, in some cases we expect these ministries to recover and to expand again. In other cases, we’ll find replacements.

One of the things that is nice about this format, it just takes a bit of time, there are always local opportunities. We tend to gravitate to the national because their organization is more focused on the radio. That’s what they do. That’s their principal ministry and therefore the product and the back-room, and the services that they offer that are related to their radio program are stronger and have broader general audience acceptance. There are many large organizations in these cities that are big enough that will want that time. We’re going after them and we’ll find them and replace them. It’s not something you can do necessarily in a week or two. Sometimes you have to help them get their own programming launched so those efforts are under way. A lot of that work has to be done by the local GM to identify some of the likely candidates for adding local programs. We’ve been involved for, well since late last year in a pretty extensive training program for our GMs in terms of helping to identify and nurture local talent.

James Goss - Barrington Research

This may be a process that takes the entire year to anniversary because I think you discussed a lot of these same sorts of issues in the first quarter. Is that fair?

Edward G. Atsinger III

Some of them will be quickly replaced; some of them will take longer. It varies market by market. I don’t think that it’s necessarily a problem that will be solved very quickly. Yes, some of it will linger on. It’s the nature of the block programming. It’s very resilient and it doesn’t change very often for the negative but when you try to turn it around for the positive, it also takes time. Once you get it lost, it generally is pretty stable.

Operator

There appears to be no questions at this time.

Evan D. Masyr

We again appreciate all of you that joined the call. We appreciate the questions. We will continue to be available if we can provide additional information and we look forward to visiting again with our next earnings report.

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Source: Salem Communications Corporation Q2 2008 Earnings Call Transcript
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