Earnings Call Transcript - SGA Q3 2021

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Saga Communications, Inc. Q3 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. It is now my pleasure to turn the floor over to your host, Ed Christian, President and CEO. Sir, the floor is yours.

Ed Christian, President and CEO

Thank you, Kay, and I was going to mix you up, by the way. Thank you for holding. Your parties will be with you soon. Something like that, what should make wonder if we really were live or not. Hello, everybody, and thank you for joining us on this call. Sam Bush, as always, is here with me to discuss what we have done, and I will be here to discuss what we plan to do, you like that, putting away the historical – your historical, not a – I’m the futuristic person on this. With that said, I’ll be back in a few minutes after Sam finishes his presentation.

Sam Bush, CFO

Very good. 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. Saga’s third quarter results continue to show significant improvement as the economy continues to recover from the market uncertainties that are attributable to the COVID-19 pandemic and related economic issues. It’s important to note that there are still numerous uncertainties that are ongoing, including the much talked about supply chain and employment issues. That said, net revenue for the third quarter increased 19.5% to $28.8 million. Free cash flow was $4 million for the quarter. Station operating expenses were up $2.1 million with $1.7 million of that being due to increases in sales-related expenses, including commissions, sales surveys, and advertising and promotion expenses. Operating income was $4.6 million. Net income was $3.5 million or $0.58 per fully diluted share. Gross political revenue for the quarter was $256,000 in 2021, compared to $1.8 million for the same period in 2020. Year-to-date through the end of the third quarter, gross political was $894,000, compared to $3.1 million for the same period last year. Without political, gross revenue increased 26% for the third quarter and 21.5% year-to-date. While we don’t expect to return to 2019 revenue levels for the full year in 2021, we are pushing to get close to the 2019 monthly revenue levels as we approach the latter part of the year. Net revenue for July and August were both approximately 10% below 2019, while September was only down approximately 3%, resulting in the third quarter being down a little less than 8% when compared to the third quarter of 2019. The fourth quarter of 2021 is currently pacing ahead of the same period last year by a little over 8%, excluding political. Keep in mind that we had $3.8 million in gross political revenue during the fourth quarter of 2020. We are seeing some political in the fourth quarter this year, as in October, we had a little less than $700,000, but we don’t expect much additional political in November and December. Our strength continues to be local direct revenue as, when just that category for the third quarter compared to 2019, we are down a little less than 1%. We are currently pacing approximately flat in local direct for the fourth quarter of this year compared to the fourth quarter of 2019. As a further comparison in the improvement in quarterly performance in 2021 compared to 2019, net revenue in the first quarter of 2021 was behind the same period in 2019 by 20%, while the second quarter of 2021 was behind 2019 by 13%. Of course, the current fourth quarter pacing numbers exclude the potential impact of ongoing events as previously mentioned. For the nine months ended September 30, 2021, net revenue increased 18.1% to $79.2 million. Operating income was $10.1 million, and station operating expense was $61.6 million for the nine months period ending September 30, 2021. Free cash flow was $9.9 million for the period compared to $2.5 million for the same period in 2020. Net income for the nine months was $7.5 million or $1.25 per fully diluted share. Our balance sheet showed $62.2 million in cash on hand as of September 30, 2021. Currently, we have $53.5 million of cash on hand, reflecting the $10 million paydown in bank debt on October 27, 2021. I also want to reiterate that Saga reinstated its quarterly dividend with the declaration of a $0.16 per share dividend, which was paid on July 16, 2021, followed up with another $0.16 per share dividend paid on October 22, 2021. This brings the total of all dividends paid since the first special dividend was paid in 2012 to over $73 million. Ed, with that, I’ll turn it back over to you.

Ed Christian, President and CEO

Thank you, Sam. I’m going to talk about a few things today. And I got to tell you, there has been a great deal of capital expense that we’ve had in the last couple of years. We’re not going to sit here and go back and go through everything that you know about the historical area of the company, where we’ve come from and what we’ve done. But we do have a couple of things that I want to talk about today. Let’s talk about the general marketplace. I’m not going to tell you too many things that you already know. But boy, it’s been a whirlwind in terms of what’s happening because every time we turn around, something new occurs in terms of global events or local events or whatever it might be. That makes us have to pivot quickly to find new ways of reinventing ourselves in sales and marketing. And we’ve had that. We’re never one to really talk about a lot of complaints or anything like that. In fact, I was just thinking about something and looked it up to make sure I was correct on it. But in 1975, Henry Ford, who was at that time, President of Ford Motor Company, was supposed to be in a meeting in London and instead was at a meeting in California and found himself arrested by a small police department right in Santa Barbara, where he spent a night and was released in the morning. Well, the word leaked out in Santa Barbara that Henry Ford was being released from a small jail. When he came out, there was a lot of reporters, radio, TV news, whatever it might be there. And they were going, 'Mr. Ford, Mr. Ford, what can you tell us about it?' He just looked at all the reporters and said, 'Never complain and never explain,' and got in a car and was driven away. Well, we’re kind of in the same way here: we don’t complain and we don’t really explain a lot. Because we know sometimes, when we let our ideas out of the bag prematurely or even discuss it, it creates some problems for us with our competitors getting the idea and trying to gain an advantage on us. So we’re a little guarded in how we explain the ideas and where we go to improve ourselves in these difficult times. And there’s no question that the supply chain is creating havoc in many of our marketplaces. It’s tough. Let me give you an example: if you’re trying to go to an appliance store and call them to discuss advertising, they’ll say, 'Look, we don’t have any high-end appliances, especially washers and dryers. We just don’t have them. What we do have are really cheap ones,' and they are cheap for a reason. Those are not the most efficient ones. You go to a car dealer, and we all know the story there about the inventory that they don’t have, and it goes on into construction, you name it. But you couple that with the fact of the lack of staff. Now there are some good signs in that we’ve done a tremendous amount of advertising for employees. And that has been significant for us. But that tells you it’s a sad story when we have to encourage merchants to take the money that they would normally spend to promote their own stores and use it for recruiting staff to create business for them. And we go in and talk to them. One of the things they say is, 'Look, we’ve had to cut back because of staff shortages and we can’t do that. So we’re not going to advertise. Maybe we will, but certainly not to the level we used to do. Maybe we’ll take some of the money that we had and use it for recruiting staff or similar causes.' That makes it difficult for us, but we’re finding ways around this difficulty to ensure we keep moving forward during this period. For example, we don’t typically discuss our marketing ideas, especially new ones. We primarily engage with our market managers, creative directors, and sales staff once an idea comes from within the company. I’ll give you an example of how we’ve pivoted to find new product categories and areas, of which there are many. As I mentioned, we don’t normally discuss much of what we’re doing beforehand. We focus on what has been successful for us in the past. I want to thank Erik Schmidt in Columbus for coming up with a great idea and forwarding it to Lucy Lange, who is our Market Manager in Manchester, New Hampshire. Erik found a dentist who produces a product that stops and inhibits snoring. You might think, 'Oh, great, where is this going?' Well, it’s currently generating about $4,000 a month just in Columbus with one dentist using this idea. Lucy took it and developed a complete marketing plan for our sellers to go out with. She then forwarded the complete pitch, the idea, the whole background about it, to our sellers, managers, and other markets throughout the country. What began with Erik discovering one product related to snoring, which is essentially a mouthpiece designed by this dentist, has proven to be effective. We now have several sellers going out and talking to local dentists. This might not sound big to you, but as an example, we could sit here all day, and I could give you a long list of instances showing where we are and our inventive approaches to marketing. Part of our strategy is to understand that difficulties exist in the supply chain, but we won’t complain or explain because that’s something you already know. The information we have on our snoring solution is great. We have consumer profiles, testimonies, and everything that supports us with that, which makes us different from others. You might say, 'Yes, everybody claims to be different.' But our idea is to be an idea factory, constantly finding new things and new ways to market them. While I don’t want to go into my personal background, I’ll mention that I spent many of my younger years working as a disc jockey and ended my career in Flint, Michigan, realizing I had reached my level of excellence there and shifted into writing copy. I love words, and we imbue our people with words and ideas. It’s all about imagination, being creative, and executing our ideas. One pivotal lesson I learned was about the man who was selling hotdogs. He made the best hotdogs with quality meats and a special recipe, and at lunchtime or after work, there were lines of people waiting to buy them. His son, however, saw how much money he was spending on quality products and advised his father to cut costs due to the recession. The father cut back on the quality of the mustard, the bun, and eventually the hotdog itself. Over time, the line of customers reduced significantly. The father then realized, 'You're right, there is a recession.' The bottom line is that focusing on cuts meant losing customers. Conversely, the reason we are able to announce the numbers we have, along with the profits and dividends, is that we concentrate on what we’re doing in the business itself. We consistently emphasize local, local, local. Many other companies are trying to claim they’re local when in fact, they’re not. An example I recall was listening to a station in Detroit on my way to a meeting one afternoon. I heard a disc jockey on a local radio station who was broadcasting from afar and mentioned no local references. It highlighted for me how important it is to embrace the communities we serve. We don’t just focus on radio stations in large markets; we look for radio stations that fit the parameters of what we’re doing. This is the energy that builds Saga. We understand that within a compact area, we can serve our community effectively. Our sellers are local, while other companies are reducing the number of local sellers and concentrating on national sales. This is where the relationship with clients becomes crucial. For those struggling, we work with them to monetize and advertise their businesses. I will tell you right now, I don’t think it’s going to get easier for a while. I’m not going to be the one to predict when the supply chain will be fixed. All we know is we have to prepare, continue to be creative, continue being local, and remain relevant in what we do. We constantly ask ourselves what's the next step, where do we go, how do we enhance the existing core competency of our product? That’s what defines Saga. Sam read off the numbers earlier; I could have done that too, but that's not our focus today. The focus should always be, how do we keep moving forward during tough times? Sam, I know I’m close to timing out here. So if you have any questions and no surprises, let me know what they are.

Sam Bush, CFO

Yes. We received a couple of questions. By the way, I agree with you that the numbers are historical and statistical. But what you’re talking about is where the future comes from, and that’s the important part of the business from an ongoing basis. Anyway, we got a couple of questions in, fairly similar to what we’ve had in the past, regarding capital allocation relative to what we’re going to do with the dividend, particularly about potentially increasing it back to $0.32 a share, which we reached early last year. Additionally, inquiries about potential use of capital for stock buybacks and why not pay down long-term debt with excess cash. We believe that companies with very low debt or no debt should hold more value than those that are over-leveraged. Long story short, we reported in the press release that we paid down the final $10 million in our outstanding debt on our revolver, as of October 27. So we are now officially debt-free. Ed, I’ll let you discuss the potential for dividend increases and stock buybacks.

Ed Christian, President and CEO

Well, we do also have our credit line, should mention that just in case. We have a solid cash position, and we are very happy about it. We’ve discussed this for several months, and actually for longer. Why are we still carrying a little debt? Why don’t we just write the check to avoid potential issues if something should go wrong? That’s a simplistic view, but there is some truth to it since we maintain great banking relationships. They remain our partners and friends for future investments. By the way, we’re not done with acquisitions; we are always looking. This remains an ongoing task for us to find opportunities that make sense, even in challenging times. We intend to continue to grow the business in ways that make sense for us as radio broadcasters. Regarding dividends, we did declare a payout we felt was appropriate based on our revenue and the existing uncertainties. Believe me, I am committed to Saga Communications; I want to see those dividends continue to flow and increase, just as much as our managers and others who hold stock in the company. The goal is definitely to return to levels of revenue and earnings that will support this, and we will not compromise the core business for dividends, which is why we decided, well, what’s $10 million? Let’s pay it off and move forward. In fact, one of our investors suggested that we just settle the $10 million debt and then focus on building the business, with dividends following subsequently. We remain vigilant and are constantly trying to arrive at appropriate prices at the right times within the company, ensuring we don’t undermine our company’s wellbeing. I’m always cautious about promising too much and under-delivering. This is one of the critical points we are mindful of.

Sam Bush, CFO

No, I think that covers it all. I think we’re good.

Ed Christian, President and CEO

Well. We thank you for joining us today. We try to keep this to 30 minutes, and that’s exactly where we’re headed. If anyone has questions for Sam, or if they have any questions for me, we are fully approachable, and you can reach out individually for anything we might have missed in our discussion today. With that said, Kay, we turn it back to you for a wrap-up.

Sam Bush, CFO

No. Kay, we’ll wrap it up as we go.

Operator, Operator

Thank you, ladies and gentlemen. This call ends abruptly.