Saga Communications, Inc.

Good morning, everyone, and welcome to the fourth quarter and year-end earnings release 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, Chris Forgey. Her, the floor is yours.

Thank you, Matt. Have you ever considered a career in broadcasting? Those are some awful tones you started with this morning, so thanks very much for that. And thank you to everyone who has taken the time to join Saga's Q4 and year-end earnings calls. We do appreciate your continued interest and participation in Saga Communications, a company that we believe is the best broadcast company on the planet. As you can see, we have a lot to talk about today. A new variable dividend program, $40 million worth of dry powder on hand, and something else new and different in the broadcast sector these days, an accretive acquisition. Firstly, we are pleased to announce the addition of the Lafayette, Indiana cluster to the Saga family. By way of Newhoff Media, and Lafayette is expected to close in mid-May of quarter two of this year. Lafayette is home to Purdue University, Sam Bush, and now the Saga Communications. Lafayette holds beautifully in the Saga's roster of markets and is consistent with our target market acquisition strategy. And is a market, frankly, that we have coveted for a number of years. We are acquiring an entity with great brands and a talented group of passionate broadcasters. We're frankly delighted to get started. And once boggified, Lafayette has the potential for growth in several verticals, including local, digital, and e-commerce. We previously forecasted a 16-market launch of our new online news service. This was to be completed by the end of 2024. As of today, I'm pleased to announce that we've already generated over $1 million in pre-booked revenue for 2024 and 2021. the year-end timelines have accelerated to have not 16 but 18 markets online by the end of not the end of the year, but by the end of quarter two. Also in previous earnings calls, we've reported the intensity with which we utilize audio spec spot creative to present ideas to customers to use as on-air messaging. In 2021, we produced 21,000 spec spots in the company. In 2022, that number rose to 25,000. And again, I'm pleased to announce that in 2023, we have produced 25,500 spec spots for our customers in our marketplaces. The activity level in our saga markets is at an all-time high, yet we're really never – our appetite for success is really never satisfied. Are we experiencing the same countervailing forces you frequently hear about on other earnings calls? Absolutely, you bet we are. Inflation, interest rates, political upheaval – and general economic headwinds. Oh, yes, I almost forgot this one. Business booking later and later in the year. You probably heard that one a number of times on the calls you've been on. The truth is that, you know, we really don't or can't control any of these things, can we? We have a picture that hangs on the office of every one of our market managers' walls that reads, we cannot direct the wind, we can only adjust the sails. which is exactly what we set out to do 13 months ago, adjust the sails. This was done to enable us to navigate in angry economic waters. In fact, we chronicled all that we had implemented in the last 13 months and identified 37 different data points. Now, this isn't like 37 points of light that you may have heard of back in the 80s and 90s. This is 37 different data points that exist in Saga today that did not exist 13 months ago. If you're interested, you will be able to find all of these data points in the annual president's letter in Saga's 2023 annual report. And a note to make as we share the year-end and fourth quarter earnings with you, please note that many of the processes installed are just now beginning to bear fruit. You know, we ask the question, where would we be today without the deployment of these growth strategies? Probably right where many of our operators in the sector are currently. in double-digit decline. So with that, here are a few of the highlights from Q4, as well as the year-ending 12-31-23. National in Q4 was down 4.2%, but for the year-ending 12-31-23 was up 3.7%. Local Q4 was down 1.7%, and for the year-ending 12-31-23 was down 2.7%. Screening. Streaming business which monetizes the simulcast streams of our over-the-air broadcast through multiple distribution channels, both locally and programmatically, was up 46% for the year ending 12-31-23. It was up from 2.6 million in 2022 to 3.9 million in 2023. Total interactive for a quarter was up 35.4% and for the year ending 12-31-23, was up 24.6%. These interactive numbers represent 8% of our total net revenue, with a total 2024 goal of achieving 11% in net revenue. E-commerce. E-commerce provides advertisers who have a limited budget or wish to augment an existing ad campaign the opportunity to do so in exchange for gift certificates to their business. Those certificates are then posted on our station deal sites and sold at a discount. We then retained the revenue, and our customers utilized said revenue to purchase advertising on our market stations. This vertical helped us generate $1.4 million in the year ending 12-31-23. By the way, a 100% increase and still growing. Total net rev, Q4, was down 3.2%, and for the year ending 12-31-23 was down 1.85%. Again, a note of interest excluding political. Gross revenue finished flat for the year ending 12-31-23 and was up 1% in Q4 of 2023. With that, I will turn it over to our bullet maker, Sam Bush.

Thank you, Chris. I'm going to start with the obligatory paragraph. This call will and already has contained forward-looking statements about our future performance and results of operations. That involves risks and uncertainties that are described in the risk factors section of our most recent form, 10-K. This 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. First, let me say that Chris and I are quite proud that our board of directors were able to declare our first ever variable dividend along with our fourth quarter and year-end 2023 press release this morning. The variable dividend policy was adopted and announced on December 7, 2022. The dividend is based on distributing to our shareholders 70% of a calculated amount that starts with net income and adds back non-tax expenses and deducts capital expenditures. Dividends declared during the year, as well as in years where it's applicable, the amount of any stock buyback or any requisitions. I'll call the result of this calculation cash available for the variable dividend for reference purposes. During 2023, the board declared 6.1 million in quarterly cash dividends and a special cash dividend of 12.5 million. The board considered the special cash dividend a capital allocation restructuring dividend based on its previously stated intentions to reduce our cash and liquid security balances over time from approximately 60 million in August of 2022 to a level being more appropriate based on Saga's performance as well as economic conditions. As the press release indicated, I wanted to stress that including the quarterly dividend to be paid tomorrow, as well as the first variable dividend to be paid on April 5th, Saga will have paid out more than $130 million in dividends. Again, that is over $130 million in dividends since the inception of our dividend policy in 2012. All said, we believe Saga is in a strong financial position to continue to return value to our shareholders through our quarterly, special, and variable dividends. The board continues to have discussions relative to the right level of cash to maintain on our balance sheet, and this may change based on global, national, and local economic conditions, changes in the radio industry, and the potential for strategic acquisitions. Also, as Chris indicated, it is exciting to be working towards closing of our previously announced acquisition of five radio stations in Lafayette, Indiana. We missed out on the opportunity to acquire them a number of years ago when they were sold to the new Los Angeles. The current staff's commitment to serving their local community is a great foundation to build off of as we bring them into the Saga family. I'm especially pleased with this opportunity to purchase some great radio stations that have tremendous opportunities in front of them as I received my master's degree from the Krannert School at Purdue. Unfortunately, I did promise Chris that I would not break out singing back home again in Indiana or the Purdue School of Song.

And I am glad for that. Thank you.

Now, on to the numbers. As Chris said, for the quarter ended December 31, 2023, net revenue decreased 3.3% to $29.1 million compared to $30.1 million last year. Again, as Chris said, political impact of the performance as we had $407,000 in gross political revenue this year compared to $1.9 million for the same period last year. Without politics, our overall gross revenue for the quarter would have increased approximately 1% from last year. Station operating expense increased 1.9% to $23.3 million for the three-month period. Operating income was $2.8 million, and station operating income, an on-gap measure, was $7.1 million for the quarter. For the 12-month period into December 31, 2023, net revenue decreased 1.8% to $112.8 million compared to $114.9 million last year. Again, as Chris pointed out, adjusting for political for the year, gross revenue was flat for the same period last year. This year we had gross political rating $944,000 for the year compared to $3.6 million for the same period last year. Station operating expense increased 3% for the 12-month period to $90.2 million. Operating income was $11.5 million, and station operating income, again a non-GAAP measure, was $27.4 million. As discussed in previous conference calls, we made a strategic decision in 2023 to give our staff pay increases in recognition of the tremendous work they do. Most of them had not received any compensation increases in the past three to five years. These pay increases in related payroll taxes amount to an estimated $372,000, or approximately 84% of the increase in the fourth quarter station operating expense, and $1.6 million, or approximately 60% of the year-to-date increase. Similar to previous quarters, other smaller but still meaningful increases in our station operating expenses included increased health insurance, utility expenses, music licensees, maintenance and repairs, programming rights, and sales surveys. You need to keep in mind that our year-end results for 2022 were impacted by a one-time expense of $3.8 million related to Ed Christian's passing, which was recorded during the third quarter of that year. The decrease in corporate expense was offset by an approximately $506,000 increase in corporate G&A expense of what $361,000 was due to the hiring of specific best-of-class individuals to lead our new revenue initiatives that you've heard Chris and I talk about in previous calls and Chris talked about a little bit more in this call already. Capital expenditures for the quarter ended December 31st, 2023 were 959,000 compared to 1.3 million for the same period last year. For the 12-month period, capital expenditures were 4.4 million this year compared to 6 million last year. We currently expect to spend between 5 and 5.5 million for capital expenditures in 2024. As Chris referenced earlier, for the year we continued to diversify our revenue as we saw gross revenue growth in national, which was up $385,000, interactive, which was up $1.9 million, and non-traditional revenue, which was up $679,000. While local revenue was down for the year, it's important to note, as Chris did, that e-commerce, which mostly gets reported as local direct revenue, increased to $1.4 million for the year. We believe that there is still significant growth to be achieved in all these areas as well as in our continued digital efforts. We continue to plan on utilizing our financial strength to strategically invest in our operations, both at a market and corporate level, as we work to grow specific revenue types, including local, national, interactive, e-commerce, and NPR. As I discussed in our second quarter earnings call, due to the FTC's renewed focus on the reporting of non-GAAP financial measures and their review of our filings, we have adjusted our quarterly press releases, starting with our second quarter earnings press release, to include a complete statement of cash flows, as opposed to the abbreviated statement we historically have included in our form team cues. We continue to include the reconciliation of GAAP operating income to station operating income, which is a non-GAAP measure, but now also include other financial data, table, which allows the users of our press release and filings to make direct comparisons to data reported in previous press releases and filings. The company's balance sheet reflects $40.2 million in cash and short-term investments as of December 31, 2023, and $30.4 million as of March 4, 2024, primarily due to the special dividend that was declared in December of last year and paid early this year. Pacing for the first quarter is soft. For the quarter, we are currently pacing down low to mid-single digits January started out strong. February and March have been much softer, although April and May are currently pacing up low to mid-simple digits. It still continues to be an unsettled advertising market given the uncertain economy, the Fed's interest rate policy, the ongoing inflationary environment, in addition to other worldwide issues. We currently expect that our station operating expense will increase by approximately 3.5% to 4.5% for the year as compared to 2023. In addition to the inflationary environment, this is significantly driven by our investment in our staff for those training in ongoing interactive development. We anticipate the annual corporate general and administrative expense will be approximately $11.3 to $11.8 million for 2024. Our tax rate is expected to be 26% to 29% with a deferred tax of 3% to 6% going forward. And now that I've worn all of you out, I'll turn you back over to Chris. Thank you.

Thank you, Sam. So, Sam, your son Brandon is a Delta pilot, yes?

He is a Delta pilot flying A330s to international locations as well as a KC-135 refueling tanker pilot for the Air Force Reserve.

So when Brandon is barreling down the runway at 200-plus miles an hour, I don't know what that is in knots. He could probably tell me. What is he typically focused on?

I actually called him last night, and he was at the – DCW, Detroit Airport, on his way to Frankfurt, and I asked him that question. And he said, well, we're going down the runway at about 180 knots, which is roughly 200 miles an hour, and we are focused on getting the plane lifted off in the air and headed toward our final destination, which in last night's case was Frankfurt, Germany.

So he's not focused on the ground, but what's ahead, yes?

No, he is not. He is focused on what's in front of him.

We're going someplace with this. We don't spend a lot of time with the ground behind us we choose to focus on the task at hand ahead of us and trust our processes and each other to deliver the enterprise to its desired destination. However, at the same time, sometimes it is also helpful to look back in order to see where you have been and where you are going. I received a package of the holidays from Saga's Commercial Production Director in Milwaukee, Wisconsin, Joe Meineke. It was a collection of really breathtaking photographs, Joe had taken from different scenic parts of Wisconsin. These photos were then curated into a collection and presented as the form of a 2024 calendar. As I opened the package, my eyes were drawn to the cover of the calendar, which carried the phrase, looking back while moving forward. In the Latin phrase we use, it goes like this, finis origine pendet, or translation, the end hangs on the beginning. Looking back, while moving forward. That's the reason we are so optimistic, as you heard Sam and I say during this call and others. We're really optimistic about 2024 and beyond is simply this. Many of the processes we've put in place are just now starting to bear fruit and are far from reaching that maturation stage. As we begin a somewhat uncertain 2024, served our communities, our customers, our employees, and our shareholders. We do so with a sense of certainty, of purpose, with an unrelenting faith and trust in our processes. And without cynicism or despair, we will run like our hair is on fire and set sail with a very optimistic belief for growth in 2024. Looking back, yet moving forward. And then some. Thank you all again for your time and your interest and your support of Saga Communications, the best broadcast company on the planet. Dan, do we have any questions?

We did. We got a few questions in. Some of them are related. Some of them are totally independent. We had a couple of our investors send in questions, and the first one is, please give us some more details on the digital growth rates as you enter 2024 and beyond. notes that we've made great progress, as you pointed out, Chris, but is pointing out that we still like our peers and is wondering what our thoughts are for 2024 and beyond.

I'll start, and then you can add colors if you'd like, Sam. Sam and I touched on this during our remarks during this call and others. Currently, our digital represents 8% of total net revenue, and we have forecasted that number going to 11% in 2024. Again, the biggest list we anticipate is with our blended selling process, and that will impact both local and digital. And we're still in the process of implementing this process in our markets. We're just about completed, and we anticipate big gains from this area. Dan, anything else you wanted to add?

No, I think that's good. With my reference to the folks, the best-of-class individuals we brought on hand, we've got the team to do it. We were a little slower, as you pointed out before, in adapting to the digital marketplace, but we're running at a very fast pace right now, and I think we'll see some very good improvements in 2024.

And I want to take this time to recognize somebody who has just done a yeoman's work in development of this and implementing this. We call him the architect of innovation and change. His name is Matt Burgoyne, and he is the one who is leading the charge on that, so we're thus far very excited and very pleased with the progress.

Shareholders also asked, a couple of them asked about Lafayette, which we've talked about already. Did have one shareholder ask, what's the multiple case of Lafayette? And Chris, as I've told you and told a lot of people, I'm not a fan of multiples because when I was a banker, I always said there were five multiples in a deal. There's what the buyer said they paid. There's what the seller said they received. There's what the banker financed. There's what the broker said they got to enhance their position as being the best broker in the business. And then there's the real multiple. So multiples are tough to use because we look at them in a number of different ways. Some people do all sorts of add-backs when they make an acquisition. Oh, here's how we're going to do it, and therefore the multiple changes. Long and short of it is, I think, as Chris pointed out, We believe Lafayette is a great opportunity. If you don't know much about the area, Purdue University is growing extremely strongly when you go down there and see the cranes and the new buildings. Lafayette itself has a big caterpillar plant which has expanded, a food brewer plant which has expanded. Rolls Royce is there with their aviation division because of their relationship with the aviation department at Purdue and so on. It's just a very exciting market. And the fact that Newhouse has been so locally involved, they've set up a basis for us to use all our tools and resources to really enhance what we're doing. So we're not prepared to give a multiple or give a specific financial impact for 2024, but we are looking forward to closing and you'll hear more about how they impact our financials as we go forward.

We are prepared to say, boiler up.

Boiler up, hammer down. We also got a couple of questions or another question from Michael Katynski at Noble Capital. And I think I've already answered one of these questions. We provided some general pacing data for the first quarter and for the second quarter. And he's asking to expand upon Lafayette, Chris, is how are we seeing the current M&A market and are there other opportunities?

As we said before, there are other opportunities. In fact, we changed one yesterday. and they will continue to come, I think, as we've shown in the marketplace, that we are a buyer, not a seller. But they're going to be very prudent and will be careful purchases, obviously, when we do make those purchases, and they will need to be consistent with our market acquisition strategy. So, yes, I think there are opportunities going forward. We will just review those on a case-by-case basis and move accordingly.

Very good. And then the final question, and we've already touched on it to some extent to give you a chance to add a little bit more color to it if you'd like, Chris. Again, from Michael Kopinski. In terms of your revenue diversification strategy, what is the outlook for national advertising? What is classified as national advertising? This has been a growth area for the company, but it's been tough for your peer group. What are you seeing that others are not?

Well, again, as we stated in previous earnings calls, we're very proud of the team that we have established. that is executing our national initiatives. We have taken more of a local approach to national sales, much like the way, Michael, that we've taken our saga story to the investment community with your help. Face-to-face, belly-to-belly, with the help of our director of research and storytelling, Maria Cristino, the CAPS team, and our NSMs, Tom Howe and Bruce Warner. We're making more compelling presentations, telling better stories. And that has had a huge impact on our success in that vertical. We're also now a part of the CAATS network and have forecasted an additional $1.5 to $2 million in revenue in 2024.

Very good. I think I had some good color to it. And I did. I said that was my last question. It really wasn't. We had one more. It's similar to that one. But it's basically what's the outlook for political for the remainder of the year?

Tim, you haven't got to answer these questions. I'm going to let you do this one.

Okay. Political is always variable. While we have a projection of where we think we're going to be at the end of the year, we look back at where we were two years ago, where we were four years ago, where we were six years ago, where we were eight years ago. But we've also had surprises, both good and bad in the past, because it comes down to what's a battleground state, depending on the election. I will also tell you that most of our election money, political money we get, is not presidential oriented. It's going to be whether there's a big senatorial or a big congressional race, a governor's race. Sometimes it comes down to a school board race in a small community or in a medium-sized community. It can make a big difference as to what's going on there. So we do have a positive outlook for political this year. We so far have not seen as much as we had thought we would see, but I've also heard the political starting later this year, and there's still a big belief that there will be a lot of it out there for radio to pick up on. and it's just hard for us to project with any significant confidence numbers at this point because of where they are. We are talking to an outside consultant who we have a call we're setting up with here in the next week or two who does have his hand along what's out there in basically every market and can hopefully point us in the right direction if our local managers are not already in tune with what's going on in these markets. So I think you'll see a lot more, but I think it's going to be third quarter and fourth quarter oriented.

You get your popcorn because it will be entertaining. That's for certain.

To say the least. Well, good. I think we're done.

I think, Matt, we're ready to turn it back over to you and let you wrap it up. Certainly. Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.