Earnings Call Transcript - SGA Q2 2021

Operator, Operator

Good morning, everyone, and welcome to the Saga Communications Second Quarter 2021 Earnings Conference Call. It is now my pleasure to introduce your host, Ed Christian. Ed, you have the floor.

Edward K. Christian, CEO

Thank you very much for setting us up for this interesting conference call we should have today. Well, we're going to start in a second here, but I was just telling Sam a few minutes ago about a story that I remember as we were going through some items before the call. And years ago, over 30 years ago when we started Saga Communications, we actually found ourself with one FM station in New York. When we did, we sold it to two young burgeoning entrepreneurs. They then arranged meetings with two different banks to discuss financing. They sat in the conference room with the banks, and at the beginning of the meeting, they said, 'Do you mind if we just run a few numbers by you?' The bankers walked in and said, 'No, not at all. Be glad to have you run a few numbers by us.' So the bankers opened their books and reports and started taking notes. The two young entrepreneurs asked, 'Are you ready?' They replied, 'Yes, go for it.' So they immediately got up, took out spreadsheets, and ran around the table saying, 'We're running numbers around you.' What I think is a clever story in the world. Unfortunately, the banks didn't quite react that way, and as a result, they were probably some of the shortest operators of radio stations. So normally, I would say to Sam, 'Take it and run, and you can run a few numbers by us.' In that respect, I think Sam will be a much more cogent speaker when it comes to explaining exactly what we have. We've got a lot of things to talk about today. So we'll start with Sam. Also joining us on this call for a few words on a couple of areas will be Chris Forgy. Chris is our Senior Vice President of Operations and is a very important part of our small group of men and women that fight the everlasting battle of being radio broadcasters. More on that soon.

Samuel D. Bush, CFO

Thank you, Ed. No, I will talk about the numbers, but I will not run them around the room. 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 second quarter results show significant improvement as the economy continues to recover from the market uncertainties attributable to the COVID pandemic and related economic issues. It's important to note that these uncertainties are ongoing and may increase with the recent uptick in the Delta variant and its ensuing effects. That said, net revenue for the second quarter increased a healthy 66.3% to $28 million. Free cash flow was $4.2 million for the quarter. During this time, we continued to manage the business at every level. Station operating expenses were up $2.4 million, with over half of the increase being in sales commissions and music licensing fees directly related to the growth in revenue. Operating income was $4.6 million. Last year's second quarter was the only quarter during the pandemic that both our operating income and free cash flow were negative. As bad as things got beginning in mid-March last year, we returned to both a positive operating income and free cash flow in the third quarter and have continued with positive results, including this quarter. Net income was $3.3 million or $0.54 per fully diluted share. Gross political revenue for the quarter was $430,000 in 2021 compared to $289,000 for the same period in 2020. We expect political revenue to be lower in 2021 due to the normal election cycle and the significant amount of political revenue we did in 2020. In each of the individual months of April, plus 83%; May, plus 74%; and June, plus 47%, revenue was significantly up over the comparable periods in 2020. Internally, while we don't expect to return to 2019 revenue levels for the full year in 2021, we are pushing to get close to 2019 monthly revenue levels as we approach the later part of the year. Net revenue for April and May were both approximately 15% to 16% below 2019, while June was only down approximately 7%. The third quarter of 2021 is currently pacing ahead of the same period last year by 21% and below the third quarter of 2019 by 9%. Our strength continues to be local direct revenue as we adjust that category for the third quarter compared to 2019, we are showing an increase of a little over 1%. Not earth-shattering, but a solid improvement. In further comparison to 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 this year’s comparison to 2019 was behind 13%. With our current pacing for the third quarter showing us being behind 2019 by 9%, we are continuing to see improvement. Of course, as I mentioned before, the third quarter and future pacing exclude the potential impact of ongoing events related to the Delta variant. For the six months ending June 30, 2021, net revenue increased 17.3% to $50.3 million. This reflects January and February and the first half of March getting the year of 2020 off to a very good start until the bottom fell out with the COVID impact. Operating income was $5.5 million, and station operating expense was $39.9 million for the six-month period ended June 30, 2021. Free cash flow was $6 million for the period compared to virtually no free cash flow for the same period in 2020. We had $59.4 million in cash on hand as of June 30, 2021. Currently, we have $59.6 million of cash on hand. I also want to reiterate that Saga is very proud of reinstating its quarterly dividend with a declaration of $0.16 per share dividend, which was paid on July 16. I'm fairly sure we are the only broadcaster who can make this statement. This brings the total of all dividends paid since the first special dividend was declared in 2012 to over $72 million, a very respectable number. Ed, with that, I'll turn the call back over to you.

Edward K. Christian, CEO

Thank you, Sam. I think that was better than having you run a few numbers around us. So we are good in that respect. This is a kind of hard call to really adjust and come into speaking points that are real because some companies come and report 2020 to 2021 and then rave about how they were doing badly in a year that was just a miserable year for business in general, while others look at '19 and '20 and '21. It's hard for us to get our hands on numbers and know where we're going, especially with the changes going on in the industry. By the way, pardon us, but there are some allergies going around up here in Michigan right now, so if I sound like I'm losing my voice, I probably am, but we'll get back to that. With this being said, let's talk a little bit about what's going on in the industry and why we feel that we are in a really good position for what we're doing. It amazes me as I look over the last couple of years how strong radio companies have decided that one of the easiest ways to change the paradigm is to change their name from radio. I don't quite understand that part. Why would you take an identifier that is so highly recognized as radio and say, 'We’re not that anymore, we’re audio'? It's a very difficult thing to go out and tell people what you do for a living. If you say, 'I’m in audio,' they respond, 'Oh?' But if you say, 'I’m in radio,' people say, 'Oh, really? You're in radio? How – what are you doing in radio?' So we stick with it because that's part of the recognition we have in the communities we serve. We would not change our name or go into audio at all because that's a betrayal to the sacrosanct nature of the industry itself from where it's been for the last 100 years. That just doesn't happen to us. It makes no sense. We’ve talked about it when other companies start doing things like that. They say, 'Well, you’ve got to get with it, you've got to be contemporary, you’ve got to change your name.' Well, changing your name doesn't change the events of what you're doing in the marketplace. Especially, as I said, in the markets we serve, which are the medium size to not on the top 50 markets, but from markets 50 and up, is where we look because that's where the community side we serve. I just don’t get it. I was reading in a journal this morning that the auto show has been canceled in New York City. I was thinking, wait a minute, they used to be automobiles, then they became the auto show, and colloquially, they were referred to as cars. But I have never been able to figure out how cars are related to automobiles, except that they became that. And what do we do now, now that we’ve made this statement that by 2030, we are going to be 50% in electric cars? Is something going to change and we are going to call them QUMETS, which is Quality Moving Efficiency Transporters? Do you go to a QUMET dealer? We want to be hip, we want to be in it, but we can't call them cars anymore because they're not cars or QUMETs. Well, we are radio. We’re not going to change the name, and that’s how we are identified in the smaller communities. A lot of people say to us, 'Oh, how can you do this?' and it's very difficult to do. And it's not. That's kind of what saved our bacon in the last couple of years in some respects where we've gone heavier into that arena. And Chris, are you on the line?

Christopher Forgy, Senior Vice President of Operations

I am.

Edward K. Christian, CEO

Go ahead. Okay, Chris said his two words. Thanks, Chris.

Christopher Forgy, Senior Vice President of Operations

You're so welcome. It's five words.

Edward K. Christian, CEO

Chris and I started talking about this earlier. A number of years ago, we really started to identify where our business is, and that's in the local businesses in the marketplace. Maybe you can speak for a few seconds or a minute or whatever about what we've done there in the last couple of years as you look over the numbers every single day as to what's coming in and what's happening in terms of how our business has been changed and what the effect is and how it has helped us really kind of survive the pandemic.

Christopher Forgy, Senior Vice President of Operations

I’ll do that all in a few seconds. To your point, Ed, we’re not distancing ourselves from the word 'radio.' We’re actually embracing it and have been for some time, and we will continue to do so. You’ve heard digital first and radio first. Well, we’re customer first. It's all about how you approach your business. From a quarterly perspective through our live and local initiatives, it’s really paid off. Local direct in Q2 represented 50% of our total revenue for that period. We averaged $1.8 million more per month in local direct revenue than we did in local agency revenue. This is greatly due to our non-negotiable ongoing commitment to the use of spec spot selling and the process selling and also focusing on new emerging categories that had not previously been involved in radio. As a result, in Q2, we produced and created almost 5,500 spec spots over the quarter.

Edward K. Christian, CEO

Just wanted you to explain exactly what a spec spot is.

Christopher Forgy, Senior Vice President of Operations

Yes. A spec spot stands for speculative. What we do is make some assumptions about the client we're going to be talking to and have a Q&A or Customer Needs Analysis with them. We spend some time to find out exactly where they want their business to go. Then we come back, take that information, and work with our creative team to write a commercial and then have it produced with the client's information on it. We have a standard operating procedure of taking things like boom boxes or very nice audio playbacks to really make it sound big. We take the commercial back in, and that’s one of the biggest pieces that we use in terms of moving a business forward, showing them in a sample what their commercial and messaging would sound like when talking to our audiences.

Edward K. Christian, CEO

And even more than that, the value of spec spots is that when you walk in to talk to our customers, even if it's a cold call, and you have something to say, 'Let me play this for you.'

Christopher Forgy, Senior Vice President of Operations

That's right.

Edward K. Christian, CEO

It shows that you already made an investment in the client’s business. That one-on-one tactile connection is essential for building a relationship with the client, demonstrating that we made the investment and took the time to learn about their business. That jumpstarts our people over the competition. Go ahead, Chris. I'm sorry.

Christopher Forgy, Senior Vice President of Operations

No, that's great input. We have had that happen frequently because often the customer will initially say no, not to us but to the idea itself. We get an opportunity to get feedback from the customer, make the changes on the spec spot, and then make it more effective for them. Additionally, we’re focusing not just on spec spot activity and productivity but also on new business categories we approach. Traditionally, automotive is the number one category, followed by banks and insurance. However, in Saga, particularly in Q2, our two largest categories were home improvement and professional services, which includes plumbing, HVAC, and the like. There was one example from Columbus that I think really illustrates how you approach the business affects how you succeed. A typical avail came from the Kentucky Board of Tourism. This was a win-and-take-all situation with a budget of $65,000 over two months. Instead of reacting to the avail by simply providing pricing and sending it back, the Columbus Group created a strategic plan centered around live and local radio combined with social media, websites, and jock interactions. The general manager of the market has ties to Kentucky and had a recent staycation there, which really helped. They put together an idea with spec spots and promotional announcements, and they approached it as a local direct account would. Ultimately, they secured $60,600 of the $65,000 buy over two months.

Edward K. Christian, CEO

We didn't have a transactional thought process, Ed, towards that piece of business; it was local direct. That's the thought process that’s coached and taught to all of our leaders in the company, to approach every account as if it is a local direct account, leading to better business outcomes. That’s why I say we’re more focused on our customers than digital first or even radio first. I think it's also important to mention that through this process we have discovered many businesses that have never been approached before. For instance, I recently saw the quality of what we’re bringing in from Ocala, where we just signed a new customer as an axe-throwing facility. Frankly, I have to process that for a second. We sent a salesperson out with the commercial, made a pitch, and got it, including a renewal with an invitation to return and learn how to throw axes. That’s what we’re doing well—adding new categories. With the industry shifting away from the name radio, we are also seeing a degradation of sellers in the business. Recently, we talked about a radio company that is downsizing in some locations. They went from initially having 20 sellers down to just three. For us, we’re looking to add people because we have more demand in a smaller marketplace, and that’s aiding our efforts significantly.

Christopher Forgy, Senior Vice President of Operations

Yes, we are a radio, customer-first company. However, we also recognize the value of digital to complement our core business. We’re continuing to see nice growth there. Digital currently represents about 6% of our total revenue. Recently, in Q2 alone, our streaming revenue totaled in excess of $350,000, and year-to-date we have written over $1 million in streaming revenue compared to just $460,000 in all of 2019. Significant changes are taking place, and we're starting to see the results of our efforts from a digital partner standpoint, which is targeted display and audience extension.

Edward K. Christian, CEO

I’m excited too. It's not dilutive to our core competency in radio.

Christopher Forgy, Senior Vice President of Operations

Right.

Edward K. Christian, CEO

In other words, we're not saying, okay, we're going to allocate $0.80 of every dollar to radio and 20% to the other. We're maintaining a 100 cents on the dollar for radio and then adding more in digital because it’s a different genre, per se. Chris, thanks.

Christopher Forgy, Senior Vice President of Operations

You're welcome.

Edward K. Christian, CEO

Do you have any questions in mind, Chris, while you’re...

Christopher Forgy, Senior Vice President of Operations

Yes. What time is lunch?

Edward K. Christian, CEO

Did you get lunch?

Christopher Forgy, Senior Vice President of Operations

Yes.

Edward K. Christian, CEO

Well, go ahead. Thanks, Chris.

Christopher Forgy, Senior Vice President of Operations

Okay. You're welcome.

Edward K. Christian, CEO

We'll call you for lunch the next time, okay?

Christopher Forgy, Senior Vice President of Operations

Okay.

Edward K. Christian, CEO

Nice to hear from you there.

Christopher Forgy, Senior Vice President of Operations

Thank you.

Edward K. Christian, CEO

Down the hallway here. I think that’s some of the important things we're looking at, and part of what we're talking about is the tradition of radio. We're talking about the fact that the people that are inside still care about what they're doing in terms of this net cutting, not trying to find quick ways to pretend that they're serving their community, but doing what we're doing. That's so important to us. For instance, we've got some advertising going out where we're looking to hire—Geez, I don't want to indicate a number, but it's quite a few new broadcast news people. One that can also cross-pollinate from being a good news reporter but then can bike over to the morning show and segue right out of the news class and do an interview in a morning show. That again shows the whole infrastructure we're trying to build that is one thing to the community; when they want to find news, want to know what else is going on, want to be entertained, want to know what's happening to the local sports team, we can deliver that. Even as the challenges increase, we find ways to adapt and continue serving our listeners. We are committed to doing what we do best.

Samuel D. Bush, CFO

The only thing we had come in—we had a few questions come in, but they're all basically the same questions. One, I think you've already talked about a little, and I'll just address briefly: we do believe radio advertising, as Chris pointed out, is very effective with what we're doing with spec spots and so forth and is very competitive with digital advertising. We hear on every newscast and entertainment cast about digital, digital, digital. Well, that’s great, but it works so much better in conjunction with radio advertising. We feel very competitive and strongly that our stations will be able to continue to compete with the Googles and Facebooks of the world because we are live and local, and we do it online, on air, and on-site. I think that’s very important. The other question came in from several people, but it's a question we talk about often. We've been very conservative, to some extent, with our cash balances during the downturn, building cash during the downturn in anticipation for the future. The question becomes your thoughts at this point about plans for that cash position relative to acquisitions, stock buybacks, dividends?

Edward K. Christian, CEO

Let's take dividends first because I know that comes up a lot. Believe me, it was difficult in 2020 when we had to stop the dividend. It was something we did not like doing, but we had no visibility into the future. We initially wanted to maintain cash liquidity in the company. We sat down and decided to increase it to half of where it was. We want to have the ability to watch and see how we can build this point back up to where it was historically. That's also a priority for us—rewarding our shareholders who have been very understanding during good and bad times. Secondly, I think in the next couple of years, you'll see some really good opportunities in the markets where we serve—from acquisitions to building or even in areas where we don’t currently serve. Our criteria for looking for radio stations is strict; we’re not out there adding stations just for the sake of it. They need to fit our five or six criteria. If they don’t, it’s off the table. I believe that there will be good ones available as some companies get tapped out. Right now, we know that if we had to borrow, we’re looking at 6% to 8%, which is a significant cost. That said, we have done a couple of small acquisitions in our markets, just as basic additions to what we’re doing. They consist of AM and FM stations that add up to a new smart station in one market. In the second market, we haven’t announced anything yet, but we have plans to do that and enhance our services there, as we believe in talk radio and the need to shift from AM to FM and require those acquisitions. Regarding stock buybacks, it’s something we constantly discuss during Board meetings. If we reach that threshold of excess cash on hand, it’s something we would consider. Over the years, Sam, how much have we utilized for stock buybacks?

Samuel D. Bush, CFO

I don't have that readily available, but it's been a sizable number—tens of millions of dollars.

Edward K. Christian, CEO

I want to say $72 million.

Samuel D. Bush, CFO

$72 million is the total dividends we’ve paid since we started the dividend in 2012. I have the total stock repurchases in my office, but I don’t have it here. Actually, I do have it here with me. The total purchases since the inception of our buyback program, which goes back many years, is about almost $57 million.

Edward K. Christian, CEO

I wasn't too far off.

Samuel D. Bush, CFO

Yes.

Edward K. Christian, CEO

Okay.

Samuel D. Bush, CFO

So $50 million in dividends...

Edward K. Christian, CEO

Good boy, Sam. That was really a fast catch right there; thank you for that.

Samuel D. Bush, CFO

I was running again, Ed. There we go.

Edward K. Christian, CEO

Anything else that I missed?

Samuel D. Bush, CFO

No. I think that’s good coverage, and it was great to have Chris on the line with us today.

Edward K. Christian, CEO

We have to introduce him every now and then. I mean, you’ve got to bring Chris out and give him a chance to say, 'Hi, I’m Chris.' Actually, Chris has been with us for several years. He was our General Manager in Columbus and was brought up here a few years ago when Warren Lada retired. Chris has been wonderful for us in the team here. We just wanted him from behind the stage to say his few words on the mic.

Christopher Forgy, Senior Vice President of Operations

Thank you, Ed, and thank you, Sam.

Edward K. Christian, CEO

See, he speaks again. All right. I thank everybody for being on the call today. Listen, Sam and I and even Chris would be available to talk to anybody. We are here in the office, and please feel free. We’ve always been accessible. We don’t use scripted material; we use our hearts and our feelings and our love for radio. We’ve had to make some modifications in how we do it, but we know that radio is still an integral part of America. You will never find us calling ourselves audio proliferators. Like that? That’s pretty good.

Samuel D. Bush, CFO

Like that.

Christopher Forgy, Senior Vice President of Operations

That was good. Audio proliferators.

Edward K. Christian, CEO

Yes. Okay.

Christopher Forgy, Senior Vice President of Operations

Write that down.

Edward K. Christian, CEO

Thank you. All right, everybody. Thanks so much for joining us on the call today. Again, anyone who wants to talk to us, we love to talk about radio. Thanks.

Samuel D. Bush, CFO

Catherine, we'll turn it back over to you to wrap it up.

Operator, Operator

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.

Samuel D. Bush, CFO

Thanks, Catherine.