Earnings Call Transcript - SGA Q4 2021

Operator, Operator

Good day, everyone, and welcome to the Saga Communications Fourth Quarter and Year-end Earnings Conference Call. It is now my pleasure to hand it over to your host, Ed Christian. Ed, the floor is yours.

Edward Christian, CEO

Catherine, thank you very much. Welcome, everybody, to another one of our entertaining shows. I will tell you that Sam Bush will be joining us momentarily. He is here right now. But I also want you to know that Sam's elaborate numbers, which will occupy several minutes, are the only scripted thing that we have today. The rest will be, I hope, interesting. And with that now, Sam will be interesting too. I don't want to say that what he has is not interesting. Let's get past that because he's giving me this evil look right now. So I'm just going to turn it around over to him and be quiet for a while.

Samuel Bush, CFO

Thank you, Ed. This call will contain forward-looking statements about our future performance and results of operations that involve risks and uncertainties that are described in the Risk Factors section of our most recent Form 10-K. This call will also contain a discussion of certain non-GAAP financial measures. Reconciliation for all the non-GAAP financial measures to the most directly comparable GAAP measure are attached in the selected financial data tables. For the year ended December 31, 2021, net revenue increased 13.1% to $108.3 million. Gross political revenue for the full year in 2021 was $1.8 million compared to $6.9 million for the same period in 2020. When political revenue is excluded, gross revenue increased 18.4% year-over-year. Station operating expense only increased 2% to $83.2 million for the 12-month period, while operating income was $15.1 million compared to $3.9 million when impairment charges are excluded for the year ended December 31, 2020. We had no impairment charges in 2021. Free cash flow was $13.8 million for the year compared to $7.6 million for the same period in 2020. Net income for the 12 months ended December 31, 2021, was $11.2 million or $1.85 per fully diluted share. Net revenue for the fourth quarter of 2021 increased 1.4% over the fourth quarter of 2020 to $29.2 million. Gross political revenue for the quarter was $886,000 in 2021 compared to $3.8 million for the same period in 2020. Without political revenue, gross revenue increased 10.6% for the fourth quarter, while station operating expenses were up only 2.3% for the quarter to $21.6 million. Operating income was $4.9 million. Free cash flow was $3.9 million for the quarter. Net income was $3.7 million or $0.60 per fully diluted share for the fourth quarter. The first quarter of 2022 is currently pacing ahead of the same period last year by a little over 11%. Although with the recent global turmoil, we have seen a bit of a softer market develop in March and going forward. Our strength continues to be local direct revenue. Local direct in the fourth quarter of 2021 was approximately flat with 2019 and 14.3% ahead of the same period in 2020. For the year, local direct was below 2019 by only 3.8% and ahead of the full year 2020 by 19.8%. Local direct represents approximately 50% of our total net revenue for 2021. And I think Ed and Chris are going to talk a little bit more about this in a moment. This is up from 46% and 47% in 2019 and 2020, respectively. Our balance sheet shows $54.8 million in cash on hand as of December 31, 2021. Currently, we have $56.2 million of cash on hand. I also want to remind everyone that Saga reinstated its quarterly dividend in 2021 with a $0.16 per share quarterly dividend paid on July 16, followed by another $0.16 per share quarterly dividend paid on October 22 and a combined $0.16 per share quarterly and $0.50 per share special dividend that was paid on January 14. Saga's Board of Directors declared a further dividend of $0.16 per share on March 1 to be paid on April 8 of this year. With the recently declared dividend, Saga will have paid over $78 million in dividends since the initial dividend was paid in 2012. Capital expenditures in the fourth quarter of 2021 were $1.3 million compared to $434,000 for the quarter ended December 31, 2020, and $4 million for the 12-month period ended December 31, 2021, versus $2.3 million for the same period last year. The company expects to spend slightly more on capital items in 2022 as we reduced our capital spending in 2020 and 2021 due to the uncertainty associated with the COVID-19 pandemic and the resulting supply chain disruption. Currently, we expect to spend approximately $5.5 million to $6 million for capital expenditures during 2022. This does include a couple of building projects, which we will discuss further as the year develops and as they come to fruition. Ed, with that, I'll turn it back over to you.

Edward Christian, CEO

We have recently completed our new studio building in Ocala, Florida, and we expect to hold an opening party in a few weeks. The project is nearly finished, and the engineers are currently working on rewiring. This is one of our successful capital projects. When I mentioned that everything felt scripted, it wasn't meant to be negative; rather, I noticed similarities in other presentations. While many discussions focus on a broad overview, there's much more involved. I want to give you a behind-the-scenes look at our business operations, akin to seeing the kitchen of a restaurant. Often, when we discuss our business, we're showcasing a beautiful front room that looks inviting, but rarely do people ask to see how the meals are prepared in the kitchen. I want to explain how radio stations generate revenue—a peek into that 'kitchen'—to give you clarity when you hear figures in the millions of dollars. The numbers we discuss, including those mentioned by Sam, can be divided into various categories: national, regional, local agency, local direct, and digital, among others. Over the decades, I've observed significant changes in national advertising. My first sales job was at WCAR Radio in Detroit, and I learned many lessons there. I once asked the owner how radio stations set their advertising prices, and he told me a secret: no one truly knows how pricing works. He advised that prices should be raised until customers stop buying; that's when you know you've set it too high. When comparing pricing across different markets, it becomes clear that there isn't a logical consistency. Someone named Tony Hirsch shared insights into pricing strategies that highlighted the lack of a clear standard. The national advertising landscape operates differently compared to our local markets, where Sam pointed out a lack of typical negotiation. Pricing varies greatly; for instance, if a hamburger costs $15 at one restaurant but $13 at another, you wouldn't insist on paying $13 at the first place. Similarly, you don't expect free items just because they are offered elsewhere. This example illustrates the nature of national advertising pricing dynamics. I want to emphasize our focus on local communities, as the future of radio sales depends on them. Chris Forgy, our Senior Vice President in charge of operations and sales, can provide further insights based on his extensive experience. Chris, please share your thoughts.

Christopher Forgy, SVP of Operations

Thank you, Ed. Recently, we had a conversation with someone knowledgeable about National who indicated that the business has quieted down in recent weeks. Our response was that while we can't control it, we need to move forward. We focus on what we can control without worrying about the rest. Thanks to Ed's strategic development of the company, Saga Communications has established a solid foundation with 50% of our net revenue coming from local direct business. We are well-connected within our communities, allowing us to make a significant impact. The areas we concentrate on, like NTR and events, are vital; even though COVID-19 paused some events, they are returning strongly, and we expect a boost in 2022. Our digital growth has been impressive, seeing increases up to 65% per month, particularly in streaming and targeted display. Our favored digital products include native advertisements and expandable banners, and we are witnessing significant monthly growth in these areas. As Sam mentioned, our local direct revenue outpaced our local agency revenue by $5.7 million in Q4 of 2021, averaging nearly $2 million more per month. Over the year, this difference reached $21 million. Our top revenue category is now Home Improvement, followed by Professional Services, with Automotive dropping to third. We create commercials, known as spec spots, based on ideas and client feedback, which fosters engagement. In 2021, we produced over 23,000 spec spots, averaging about 16 to 17 per market weekly. This ongoing initiative significantly boosts our closing ratios, which exceed 35% for businesses utilizing spec spot selling. I hope this clarifies what we discussed, and now let’s move on.

Edward Christian, CEO

Thank you, Chris. I thought that was very good. I'm not speechless, which is unusual for me, but I want to emphasize one more thing about the National business and the reasons we don't participate in it. In the early days, National was significant due to the agencies and the work they did to understand the radio stations and their impact on the community. Many buyers back then knew the names of the morning shows and their roles within the community, which is no longer the case. We still face challenges with how radio is sold overall. Without getting into too many details, I want to emphasize that our focus on the local business is crucial to our company. As Chris mentioned, our approach to this is a key part of what we're doing in those areas. Simultaneously, our efforts in the community are important. One of the initiatives we're starting is a recruitment drive for audio journalists because we are significantly increasing hiring across all our markets. We want more news personnel to join us in gathering and expanding our community presence. Given the current state of newspapers, with many closing or moving their content online, we have the chance to improve in our communities by establishing our own online presence, which we have started in a few markets, such as Tennessee. There, we have developed a substantial audience visiting our website for news, especially since the local newspaper has become virtually nonexistent. These initiatives are critical for us as a radio broadcaster. We believe this is the future of radio, as I mentioned earlier, highlighting our commitment to the community and the mutual passion we share. I wanted to take this opportunity to explain how we view pricing differently and shed light on our core beliefs and ongoing goals. It's vital to have that passion and feeling. We are actively hiring salespeople and news staff, while other broadcasters are cutting back on their sales teams and transitioning to a bulk sales model rather than a focus on local reliance. That summarizes my thoughts. I'm proud of what we’re doing, our team, our direction, and our efforts to pursue new kinds of businesses beyond just product categories.

Samuel Bush, CFO

I think that's very good.

Edward Christian, CEO

Okay. I'm not going to get carried away or anything like that. And I tried not to get to my usual fan speaking and a lot of the other stuff because I think it's important, especially here where we can't plan on national dollars, where we have to have the bedrock of our business that we control, and that's part of what we do. Sam, is there anything else that I should really bring up here?

Samuel Bush, CFO

No, I think that's good. We did have one question come in, and it's understandable, and it was basically a question about the change in our tax rate between 2020 and 2021?

Edward Christian, CEO

Do we do that?

Unidentified Company Representative, Unidentified Company Representative

Well, the change about that.

Samuel Bush, CFO

Unfortunately, we don't control that. So it is what it is. But 2020 was a very unique year due to the COVID impact on the financials. There were a number of reasons that 2020 tax rate was as different as it was, and I'm not going to try to go into all the technical gory details. But as our business begins to reflect a more normal operating environment in 2021, our tax rate returned to a more normalized rate of 28%. And going forward, we do anticipate our tax rate to be between 27% and 29% with a deferred rate of 3% to 5%. And I think that as best we can on a simple basis provides the answer to the question.

Edward Christian, CEO

I want to highlight something important. Our industry tends to focus on lowering rates, but as of last week, we have raised rates across the company. This decision followed several workshops and collaboration with three of our managers representing different market sizes. We have set a minimum rate for each market, which is quite unique in the broadcast industry, particularly during this period of inflation, which is around 7.6%. We've spent about six weeks developing a plan to implement these changes effectively across all markets. This plan includes a way to benchmark our progress as we aim to increase the value we provide along with the pricing. I wanted to make sure this was noted, and I'm happy to discuss the details of the structure with anyone interested. That's where I will wrap up for now. Sam, do you have anything else to add?

Samuel Bush, CFO

No, I think we can turn it back over to Catherine to wrap up the call.

Operator, Operator

Thank you, Catherine.