Earnings Call Transcript - SGA Q3 2022

Warren Lada, Interim President and CEO

Good day, ladies and gentlemen, and welcome to the Saga Communications Third Quarter Earnings Conference Call. It is now my pleasure to turn the floor over to your host, Warren Lada, interim President and CEO at Saga Communications. Sir, the floor is yours. Thank you, Holly, and welcome, everybody, to our third quarter 2022 earnings call. Joining me today is Sam Bush, our Chief Financial Officer extraordinaire, who's been with us for a million years, somewhere thereabouts; and also Chris Forgy, Senior VP, Operations. And you have not heard my voice for over 4 years. I used to do these calls when I was the Chief Operating Officer for Saga. And due to the very sad, unfortunate circumstances that we are in today relative to our Founder, Chairman, CEO passing in August, I am back on again on an interim basis. And I'll have a little bit more to say about that a little bit further down the line. You've heard Ed talk about the word saga, which is loosely translated in Icelandic as a never-ending journey. One person's journey is now over, and that's Ed. And we do deeply miss him. It feels very different not having him around. The loss is palpable. That said, I will tell you, and you'll hear more about this, that our company is extraordinarily solid, stable, in good shape, doing the right things the right way. And all of us continue to do those sorts of things that we did from the day that Ed passed to today. So the news is good. And the news is positive moving forward. You'll hear more about this. But let me turn it over to Sam, and he can tell you more detail about the actual quarter and then we'll come back to you afterwards. Sam?

Samuel D. Bush, Chief Financial Officer

Thank you, Warren. This call will include forward-looking statements regarding our future performance and operational results that involve risks and uncertainties outlined in the Risk Factors section of our most recent Form 10-K. We will also discuss certain non-GAAP financial measures, with reconciliations for all non-GAAP measures to the most directly comparable GAAP measures provided in the selected financial data tables. I want to take a moment, as Warren did, to acknowledge the loss of Ed Christian, Saga's Founder, Chairman, President, CEO, and inspirational leader since Saga's inception in 1986. His passing is a significant loss not only for Saga but for the entire radio industry. This earnings call marks my 100th call participated in since joining Saga as CFO in 1997; it’s only the second one I’ve done without Ed. It’s striking to think that 98 of those 100 calls were shared with him. As many of you are aware from previous calls, Ed preferred not to report adjusted numbers, but it’s important that we do so, and we did in our press release for this quarter because the purely reported numbers do not adequately reflect Saga's strong operational performance and financial strength. For the quarter ended September 30, 2022, net revenue increased by 3.9% to $30 million compared to $28.8 million last year. Gross political revenue for the quarter was $858,000 compared to $256,000 for the same period last year. Without political revenue, gross revenue rose by 2.3%. Station operating expenses increased by 2.8% to $22.3 million over the 3-month period, while station operating income rose by 4.1% to $8.9 million. Our operating income was $1.1 million, and free cash flow was $1.6 million for the quarter. We experienced a net loss of $104,000 for the third quarter. Following Ed's passing, Saga incurred several payments to his estate as per his employment agreement. These expenses were accounted for during the third quarter, resulting in an increase of $3.8 million in the reported corporate general and administrative line item for both the quarter and the 9-month period. Adjusting for these expenses would have led to a 5.8% increase in operating income to $4.9 million compared to $4.6 million from the same period last year. Free cash flow would have increased by 36.5% to $5.4 million from $4 million last year, and net income would have risen by 7.9% to $3.7 million compared to $3.5 million for the third quarter of 2021. After adjustments, diluted earnings per share would have recorded at $0.62 this quarter compared to $0.58 for the same quarter last year. For the nine-month period ending September 30, 2022, net revenue increased by 7% to $84.8 million compared to $79.2 million from the same period last year. Gross political revenue during this period amounted to $1.8 million compared to $894,000 the previous year. Without political revenue, gross revenue rose by 6.1%. We had a solid quarter and a strong year even without political revenue, although that revenue is always beneficial. Station operating expenses increased by 4.9% to $64.6 million over the nine-month period. Station operating income grew by 9.6% to $23.7 million, with an operating income of $8.1 million. Free cash flow for the period was $6.7 million, while net income for the first nine months reached $4.9 million. Adjusted for the previously discussed $3.8 million in increased corporate general and administrative expenses, operating income would have increased by 18.4% to $12 million compared to $10.1 million last year. Free cash flow would have risen by 5.9% to $10.5 million compared to $9.9 million last year, and net income would have increased by 17.3% to $8.8 million, compared to $7.5 million for the third quarter of 2021. Diluted earnings per share would have been $1.45 for the nine-month period compared to $1.25 the previous year. Capital expenditures for the quarter totaled $1.2 million, roughly unchanged from the same period last year, while the nine-month total was $4.7 million compared to $2.7 million last year. The increase in capital expenditures of approximately $2 million is primarily attributed to two projects. As discussed in our second-quarter earnings call, capital expenditures include $1.1 million for the purchase of a building in Norfolk which we will convert into office and studio facilities, allowing us to move out of our currently leased space and resulting in significant cost savings for our Norfolk operations in the coming years. Additionally, we have completed work on our new studio building in the Gainesville-Ocala market, with about $800,000 spent this year. We anticipate spending between $5.5 million and $6 million on capital expenditures in 2022. The fourth quarter of 2022 is currently projected to exceed the same period last year by approximately 3.5% to 4%, despite ongoing concerns regarding the current interest rate environment, a potential recession, and global uncertainties. As mentioned in the second quarter, our situation remains fluid, with adjustments required week-by-week, month-by-month, and sometimes day-by-day as we navigate economic turbulence. We declared a quarterly dividend of $0.25 per share along with a special dividend of $2 per share to our shareholders on October 21, 2022. The combined total of these dividends was approximately $13.6 million. Saga has distributed over $93 million in dividends over the last decade, with our first special dividend paid out on December 3, 2012. The company will continue to pay regular quarterly cash dividends moving forward. In line with our strategic goal of maintaining a robust balance sheet while also providing shareholder value, the Board of Directors will also contemplate future special cash dividends, possible variable dividend policies, and stock buybacks. As of September 30, 2022, our balance sheet reflects $58.3 million in cash and short-term investments. By October 31, we reported $45.3 million in cash and short-term investments. The decrease in cash is primarily due to the payments made for the $13.6 million dividend on October 21 and the $2 million to Ed’s estate that is part of the previously mentioned $3.8 million accrual. We expect our station operating expenses to rise by approximately 5% to 7% for the year compared to 2021, driven by additional sales commissions and music license fees associated with our revenue growth, as well as increased costs related to sales surveys and general expenses due to inflation. Our tax rate is anticipated to be in the range of 28% to 30%, with deferral taxes of about 5% to 7%, leading to an annualized tax rate of approximately 34% to 36%. The tax rate for the third quarter was influenced by the $3.8 million of nondeductible expenses incurred following Ed's passing. I will now turn the call back to Warren and Chris.

Warren Lada, Interim President and CEO

Thank you, Sam. I want to share a personal story about my return as interim President and CEO. First and foremost, it’s truly an honor to step into this role. I've been with Saga for 32 years, and those years have been remarkable. Upon my retirement, I became a Board member and have actively served in that role for the last 4.5 years. On my first day back, I entered Ed's office, sat on the couch with the lights off, reminiscing about the countless good memories we shared, the decisions we made, and the company's growth. To be honest, I felt a bit overwhelmed that day. I took a stroll through the office, chatting with everyone. By the second day, I finally turned on the lights and settled at my desk. By noon, I started to feel like the Maytag repairman, who, due to the excellence of the product, found himself with little to do. That feeling reflected the strength of our operations and the quality of our management throughout our history. On Ed's door, there’s a tortoise emblem. We often discussed the fable of the tortoise and the hare, where the tortoise always wins by being steady and focused. Looking at Saga, we have a solid amount of cash on hand and have not faced any significant operational issues. We are able to provide our shareholders with a healthy dividend, and we continuously assess that. Our stability is a testament to the dedicated individuals here. Despite Ed's departure, we haven’t experienced a loss in talent; in fact, there's a renewed enthusiasm to carry forward our mission: to be exemplary broadcasters, responsible stewards of our licenses, and to engage our audience through various platforms, both on-air and digitally. Our success is not by chance; it’s the result of a well-structured approach and high expectations for our team. Many of our employees have been with us for years. I want to acknowledge our team in Grosse Pointe Farms, including senior management and various departments, who have all contributed to our ongoing success. Some might think that a long-tenured workforce could lead to stagnation, but our results demonstrate that we have maintained our energy and dedication to our responsibilities. The recent numbers reflect our strong company culture, allowing us to thrive in a challenging financial landscape. I’d also like to highlight Cathy Bobinski, who I consider the secret sauce of Saga. She meticulously analyzes our financials and provides invaluable insights that help guide our decisions. My gratitude extends to everyone in our Grosse Pointe Farms office and all our stations across different markets. We've built a collaborative environment that fosters extraordinary broadcasting through innovative digital pathways. Recently, I received a note from Lisa Norton, a salesperson in Portland, Maine, celebrating her 25 years with us and expressing her ongoing enthusiasm. Similarly, Gerry Perrett, a long-serving production director, is retiring this year but leaves behind a legacy supported by other long-time employees, like Bob Bellini, our general manager in Milwaukee. As we gather here for our first call without Ed, I want to assure everyone that Saga remains strong. We will continue to prioritize local programming and explore new ways to engage our audience digitally. I want to thank our long-standing shareholders for their trust in us to manage this operation effectively, contributing to our stability. I also extend my gratitude to Katz Media for their unwavering support, especially after Ed's passing, and for helping us achieve our financial success. We are actively searching for my successor and have engaged in a thorough process, considering both external candidates from across the industry and strong internal prospects. The results of this search will be shared soon. We continue to perform well and are already establishing our strategy for the upcoming year, focusing on growth in digital areas. We are exploring innovative ways to deliver news, particularly in markets with decreased local newspaper presence. While the loss of our Founder, Chairman, President, and CEO weighs heavily on us, it also energizes us to continue the incredible work we’ve accomplished.

Christopher Forgy, Senior VP, Operations

Thank you, Warren. As Sam has pointed out a couple of different times, I'm serving as the color commentary to you, as a play-by-play guy, Warren. So I'll give a little color to some of the things we've talked about. And I'll keep my remarks brief. However, I would be remiss if I didn't address Ed's passing and the impact that it's had in the context of our operations. When a beloved forever leader like Ed Christian is lost, the members of that leadership team sometimes find themselves lost as well, 'Where do we turn? Who do we go to? Oh, my gosh, what are we going to do now?' Not in Saga. We have the strongest, most capable leadership, not I think, I know, I've ever been around in my 24 years in Saga without question. Our culture is so established and ingrained in the hearts and minds of our people that they're all moving ahead in a north compass, I would call it, with a renewed sense of purpose and resolve to finish what we started and what Ed was not able to finish with us. This type of resolve and behavior is a tribute to our ongoing Saga culture. And it's strong, as Warren pointed out, and it's a credit to the leadership of our team in our markets. We have a picture that hangs in all of our general managers' markets that we sent out to all of them. The picture hanging on the wall simply says, 'We cannot direct the wind, but we can adjust the sails.' And so we deal a lot in the things that we can control. We call them the controllables. And there are really three revenue silos that we look at from that perspective. One is local direct business, business that is not affected by an advertising agency; number two, nontraditional radio, typically they're event-type business; and finally, our digital platform. I wanted to give you a little bit of color on that. But before I do that, we've also found another emerging revenue silo, and Warren referenced it in his early remarks. And that's in the area of our national. We mentioned Tom Howe and Bruce Werner. And I'd also like to mention Christine Travaglini, who is also a big part of that team. But from a national perspective, you would say, 'Well, we don't really have a lot of control over that.' Well, I tend to disagree because I think it's not so much what you do, it's how you do it. When you look at the team that's created with Tom Howe and Bruce Werner and Mark Gray and Chad Brown and Christine and the way they work together with the customers, with the buyers in the market, it becomes more of a controllable because of the way that they impact the business and the way that they build relationships inside of the buildings and the businesses that they're working with. And that, too, has become a little more of a controllable for us and will get more and more attention as we move forward. And just to give you an idea, nonpolitical, Saga's national performance is very strong right now in a climate where most broadcast companies are down significantly in national business. And that's in nonpolitical. So getting back to the controllables themselves for the quarter. Local direct, to give you a little reference there, we do almost $5 million more in local direct business during the quarter than we did in local agency business. In NTR for the quarter, nontraditional revenue, we were up $350,000 or 21%. In digital revenue, our most emerging category, we're up over $350,000 and up 14%. So those are our controllable categories. And just to give you a little idea of how we impact those, on this call last year at the end of 2021 or beginning of '22, I reported that we had produced in 2021, 21,000 spec spots that year. A spec spot is a commercial that is done on a speculative basis to play for a customer to let them hear what it might sound like if they were to communicate their message on our radio stations in our markets to the local community. We produced 21,000 of those last year. And we're on track to surpass that number in 2022. In fact, in Q3, we produced and presented nearly 6,400 spec spots with a closing ratio well north of 30%. That's impressive. In fact, one example of that and then I'll close is that we had a brand-new seller, a very talented seller. We spend a lot of time on the front end of the onboarding process with our sales talent in evaluating talent. We determine if they're talented enough to be there, then it's on us to be sure that we provide the environment to make sure they're successful. We hired a brand-new seller in Charlottesville, Virginia. Her name is Whitney Tedford. She never sold anything, never earned $1 selling on a commission basis. She went through our training with our general manager, Garrett Klingel, there. She identified a prospect, researched the prospect, produced a spec spot, made a cold call. A cold call is a call that you've never met the individual before in your life, and you walk in cold and do a cold call with that client. She was well-prepared, like I said, did research, played the spec spot, closed a long-term schedule on her very first call. So the day before yesterday, she celebrated her first sale with Saga. Our next question was, 'When are you going to go get another one?' So she is excited and as all of our team members are for the challenges ahead and what we can do in the spirit of what Ed would want us to do. That's all I had, Warren.

Samuel D. Bush, Chief Financial Officer

Yes, we did get some questions sent in ahead of time, questions about local versus national, political revenue, digital revenue, fourth quarter pacing. All of these, I think, we've already answered or addressed in your comments, my comments, Chris' comments. We did get a couple of questions, which I'll address now. One was about acquisitions and what the market for acquisitions are and what we're seeing in the market. And I would tell you as Ed did in the second quarter as well, something very similar, that the market for acquisitions is not currently very active, mostly due to the turbulent economic conditions that exist throughout the economy. It's very difficult to establish a sale or a purchase price, given that market turbulence. That said, we will always look at acquisitions anytime that they make sense and would be accretive to the company. Ed ingrained in all of us, and all of us here have been here quite a while, Ed has ingrained in all of us how to look at acquisitions, not just as where you're going to be when you make the acquisition relative to it being accretive, but where you're going to be in 6 months, 12 months, 5 years, 10 years relative to that acquisition. That philosophy and that ingrained thought process has not changed and will not change going forward if the market does open up and present appropriate acquisition opportunities. We also got a question that we had not addressed so far about dividends and stock buybacks and how we consider them. We've got several questions on that, as you can imagine. But we have done both dividends and stock buybacks in the past. Our Board will continue to consider both these methods of returning value to shareholders in the future. Both of these avenues are considered regularly at Board meetings, between Board meetings and conversations here with thought given to what our stock price is, what the stock float is, what the trading patterns have been, what our cash balances are, what acquisition opportunities are there, and a lot of other things that go into that consideration. I believe if you stay tuned as shareholders for the near future, you'll continue to see and hear more on these subjects as you have recently with the special dividend we just did of $2 that was paid on October 21, along with the $2 per share that was paid on October 21, along with our regular quarterly dividend of $0.25 a share.

Warren Lada, Interim President and CEO

With that, I think we're in good shape to wrap up. Holly, we'll turn it back over to you to let you wrap up the call.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.