Lamar Advertising Co (LAMR) 2004 Q1 法說會逐字稿

Good morning. My name is Tamika and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lamar Advertising Co. Q1 2004 earnings results conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. In the course of this discussion, Lamar may make forward-looking statements regarding the company, including statements about its future financial performance.

Lamar has identified important factors that could cause actual results to differ -- to differ materially from those discussed on this call, and the company's reports on Forms 10K and 10Q and the registration statements Lamar has filed with the SEC. Lamar refers you to those documents. Lamar's 1st quarter earnings release which contains the information required by Regulation G was furnished to the SE on form 10 -- I'm sorry Form 8K this morning and is available on Lamar's website, www.lamar.com. I will now turn the call over to Mr. Kevin Reilly Jr. Sir, you may begin your conference.

Thank you, timinka, I would like to welcome our shareholders and friends to Lamar's Q1 earnings call. I'd like to begin the call with some brief comments and as is our custom turn the call over to Keith Istre, CFO, to walk through the numbers. Sean Reilly is also here with us when we turn the call over to -- to Q and A.

One thing that I'm excited about right now is really relates to the entire billboard industry, domestic U.S., is that I -- I've never seen as much cooperation among the billboard vendors, domestic U.S., as I ever have in my -- in my career. And I -- I think what's driving it is the new audience measurement initiatives that are out there and also just a general sense that if we cooperate, get organized, make it easier for our customers to buy, that we will be well-positioned to accommodate what appears -- what may appear to be a significant surge in -- in national business.

And that's -- that is a quite a -- encouraging. To drill down on what Lamar in particular, given our financial performance in Q1, it looks like our recovery is here and it's actually been here for more than just Q1 but back to the -- the end of '03 as well. And from where we sit, it looks like it's going to go ahead and continue throughout the rest of this year. With that, I'd like to go ahead and turn the call over to Keith Istre who will walk you through the numbers, and then we'll open up the lines for Q and A.

Okay. Good morning, everybody. I'm going to be real brief. Everybody I assume has got the press release and has got everything in there that I think is -- is relevant. But just a couple of highlights, and there's one or two things that I'd like to discuss that's not normally discussed in this opening process.

But anyway, as far as consolidated revenue, you saw in the press release, we ended up at 201. Our guidance was for 197. And so we did do a little bit better than we had -- we had hoped. Consolidated EBITDA was 82. Our consolidated margins are coming back.

A combination of strong revenues and expense contractions. We were at 40.7 for the quarter of -- 1st quarter of '04, and we were at 37.9 for the 1st quarter of '03, so about a 3% pickup. Free cash flow per share was really strong. 70 -- free cash flow, I'm sorry, was really strong at 70% growth for the quarter. Free cash flow was -- per share was 64%.

A lot of that is driven by a couple of things. Obviously the strong earnings, the EBITDA, and the interest rate declines that we are enjoying the benefit of because of the refinancing environment that we took advantage of over the past couple of years. To talk about a couple of the -- talk about the pro forma growth that's on the last page in your press release, as far as the revenue, we -- we grew at 5.9% for the quarter. Our guidance was 4%.

So we did a little bit better there. Our direct and G&A operating expenses, which is all outdoor and all -- all outdoor, not corporate overhead, crew 1.1% on a pro forma basis for the quarter. Outdoor operating income before corporate was 12.5%. Corporate grew 9.4%, and we expected that.

There's several initiatives that we've taken over the past 12 months to help provide better service to our customers, and our board of directors. One, we've Sean's talked about it on previous calls, at the end of the summer last year we really beefed up our national sales department. Actually, really didn't have one as such. And one of our management team took that over as his responsibility, beefed up the -- the staff, all of the services we provide to the national customers, to provide uniformty and consistency with respect to requests for proposals by these national accounts, and it seems to be working pretty doggone good.

We hired a internal auditor last year to -- to make the board feel more comfortable in their roles as overseers of the -- the financial processes of the company. That didn't happen until the end of the 1st quarter. Also, in the -- in the 1st quarter, our audit and legal fees spiked up, the auditors because of all of the hoops that we have to jump through now, and legal fees I think was just a timing issue.

So a couple of these things are going to even out as we go through the year. But it was about a $600,000 pickup. National sales was about a third of that. So anyway, you will probably be seeing some of that going forward, at least until we get toward the back end of the year. EBITDA was 12.8%. We'd had guided to 7.

So we had a little bit better quarter than we had -- we had hoped. Consolidated expenses, as you see down -- you don't see it on your schedule, but consolidated with corporate overhead and all of the direct operating expenses came in at 1.6% on a pro forma basis. As far as the top line growth of roughly 6%, the story continues to be pretty much the same.

The main driver is continued strength in bulletin rate and occupancy. It is consistently continued to increase month by month from the -- the end of last year, through the end of the 1st quarter. And Sean can give you some -- some numbers as far as what it looks like. The posters are still -- one month they show a slight gain, the next they're flat, the next they may be down a point, and it is the same with their rates.

So they're really not at this point driving the train, but it is the bulletins and it is both on rate and occupancy. While I'm talking about the financials, let me just mention this, that in Q2, not that it's a material item, but we are going to show a loss on sale of assets of approximately $4 million. That is -- we divested five transit franchises at the end of April.

And so that revenue and expense will not be in the -- the numbers, and we will not -- no longer have that. And the -- the last on the transaction was about $4 million. That wasn't a cash loss. That was obviously a book loss. The last thing I got -- that I want to talk about are the expense growth numbers in Q2, actual, compared to pro forma.

The actual operating expenses in Q2, and I'm going to try to be very clear about this. And if you have any questions when I get through, please ask me, the actual operating expenses in Q2 '04 should be in the same range as the actual expenses were in Q1 of '04: 120 million, plus or minus. The pro forma expenses on the other hand for Q2 '04 will be approximately $2 million less than the pro forma expenses in Q1 '04.

And of course, you have those listed in -- in the press release on that last page that we just talked about. So you can do the math, and figure out the -- the -- the numbers. And there's two reasons for this. In Q2 of '03, last year, the company took reversed a charge that it had taken in the previous year for a verdict that was handed down to us in Dayton, Ohio for cutting some trees.

It was a punitive damage award of 2.4 million. And we appealed it. Last year, several issues -- new issues had come to light that made us rethink that reserve, and between our accountants and our -- our legal -- the team, we decided that that was totally unreasonable. So we took a million dollar reduction in that charge in Q2 of '03.

So that's one of the reasons were our pro forma's comparative expenses are going to be left -- are going to be less than Q1 of '04. On an actual expense basis, in Q2 '03 they had approximately $700,000 less in actual expenses than Q1 '03 did. So you take the -- the total of those two, and again I'm just saying approximately, you're going to see a $2 million drop in pro forma in Q2 '04 compared to Q2 -- I mean Q1 '04.

The rest of the year, Q3 and Q4, looks just like it did in Q1, baring any additional acquisitions. Due to the above -- due to the above items I've just mentioned, the expense comps in Q2 '04 are going to be tougher for us. And that being said, you should expect to see a pro forma increase in total expenses of probably 3-4%, probably more in the 4% range.

We're going to calculate it both ways, throwing in the million dollar and the reversal of the law. The -- the legal judgment. So that we've got to look at it -- it's an extraordinary item, we concede it is extraordinary. It is not a normal operating item. So we're going to look at it both ways when we tally the score.

But that's -- that's going to be something that we didn't want anybody to misunderstand or be blindsided by, since the last three quarters we've been in the 1 to 2% range. We still think our guidance of 2 to 3 for the year, is fair looking at the expense levels that we are at right now. I hope that is clear to everybody. I'm -- I'll be clad to -- glad to take call -- questions on the Q and A.

At this time I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question is from Marc Nabi.

Thanks very much. Hi, guys how are you doing?

Good.

Question related to maybe occupancy levels, Sean. I don't know if you can give us some more details of what you've seen, I mean, from 4th quarter to 1st quarter on the bulletin side. Also, are you noticing if things are -- you know, you see a lot of strength happen in the larger markets. You know, are you starting to see that trickle-down effect where things are -- are getting deeper as far as what advertisers are willing to advertise -- you know, advertise and maybe talk about some sectors that you're starting to see a lot of strength, particularly in your markets?

Yeah, Mark. Let me -- let me hit that real quick. You know, as Keith said, it's -- it's being driven primarily by bulletins. So let me quote you bulletin occupancies and rates, and I'm going to quote you Q1 '04 over Q1 '03 numbers and then April '04 over April '03 numbers. I don't have the sequential in front of me, but on the -- you know, the Q4 '03 numbers to Q1 '04 but, you know, those aren't, in my view, as -- as meaningful.

So I'm going to go year-over-year on it. Q1 '03 occupancy was on the bulletin side was 73%. And in Q1 '04 it is 76%, so we're up 3% on occupancy. And sort of -- to give you a feel for the trend line, in Q1 '02 we were at 71% occupancy on bulletin. So over the two-year comparative, you know, we're up 5%.

On rate, Q1 '04, over Q1 '03 we're up 3.5%. So it's -- it's being driven primarily -- now we're seeing some -- some rate. But it's been primarily getting the occupancy back up towards the normalized level, because that rate improvement is really a recent phenomenon. For example, in April, April '04 over April '03, rate on bulletins is up 4.5%.

So, you know, for -- for those of ya'll that have followed us for awhile, we -- we tend to -- when things get soft, we suffer on the occupancy side, not so much on rate. And it's our view that occupancy comes back first and strongest and fastest and -- and then the rate -- the good things start happening on the rate side. On posters, it's -- it's sort of a flattish to a 1%-ish story.

Occupancy Q1 '04 over Q1 '03 is 1%. Rate over the same time period is up 1%. And the April numbers '04 over '03-'03 are 1%. So a couple of things to read into that --

Sean, could you give us the actual percentage though for posters?

Oh, yeah.

The occupancy.

56 in '03, 57 Q1 '04. So the -- I think the take home message is we saw a little bit of a recovery in our short cycle business last year. I -- but I think we have a long ways to go in posters. What I'm hearing out there anecdotally, things are strongest on the coasts, so the Western region, the Northwestern region, the mid-Atlantic region, Northeastern region, the Southeastern region, they're reporting their their poster occupancies and rates are doing better than that -- than that 1% story.

But if you take the sort of swath through the middle of the country, from Louisiana, Mississippi, take it straight up towards Canada, it's really sort of the heartland where the -- the strength in the poster business has not been as robust. So, Marc does that get your question?

Yeah, it definitely does. Thanks very much.

Your next question is from Kit Spring of Stifel Nicolaus.

Hi, thanks. Good -- good quarter. Can you give us an update on your digital billboards? On whether you think ratings is going to be something that you're still excited about? And then on the posters versus the bulletins, which do you think is the leading indicator and why? Thanks.

On the digital question, we're still very committed to rolling out LED displays on our traditional platform. And we're kind of unique in that regard. The other two companies are rolling out digital in other settings, like transit and the like. But we're -- we're rolling it out on our traditional large format bulletins.

We're very happy with the product. We're comfortable rolling it out in a -- in a variety of market sizes. And market conditions. So we -- we feel good about that. We're going to do it as aggressively as regulations will allow us.

The gating issue on deploying that type of technology tends to be state and local regulations that we have to navigate before we can put one of these things up. We also have a pretty exciting product we're rolling out in Pittsburgh where we're taking the digital format and we're deploying it in the poster size category, and selling it as a -- as a signal, if you will, across the whole Pittsburgh market. That's going well.

The advertiser acceptance is good. Great categories of business are up, and expressing interest. So I'm leased how that's going. The leading indicator question is -- is a -- you know, a multi-part answer. Last year at this time we were excited because our short cycle business, the poster category was -- was -- had a -- a pretty meaningful improvement in occupancy.

And -- and we were pretty excited. Now it clicked up about 3 -- 3-5% in occupancy, and then it stayed there and quite frankly it is still there and what's been driving the performance back half of last year and into this year has been bulletins. And, you know, that's a longer cycle sale. And it's a -- it's a piece of business that, once it's on the books, it's on the books for a long time. So, you know, I don't know how to read that. I'll -- I'll do the audience measurement piece. First of all, we're not making a big deal about the digital billboards and the deployment of digital, because it's really not material at this point. But everything that we've done to date has been very successful on a small scale.

So it's just best not to beat the drums regarding that effort at this point. But audience -- audience measurement, it's going fairly well. Nielsen will do Chicago and one other large market this year, and then ten additional markets next year.

Arbitron has had a small set back in that they realize that the diaries are not going to work and they need to go with some sort of GPS technology, I guess. And that -- and that question sort of leads me back to what I -- my opening comments, this audience measurement thing is going to be significant for our -- our industry. The technology is already here.

GPS technology is our friend, not our -- not our enemy. And the industry can smell it. I can see that the vendors are cooperating. Vendors, I mean Lamar, Clear and Viacom in an effort to get this rolled out as quickly as possible.

We're really focusing on the distribution channels,all the intermediaries between us and the customers, agencies buying services, et cetera. And we think we're that going to help them become more efficient and successful in servicing their customers. And, you know, at the end of the day we hope it is going to lead to a significant amount of business. As far as the cost, we don't know.

We -- you know, hope that some of the competitive dynamics come into play between Arbitron and Nielsen and we get this job done at a reasonable cost. But at this point, what it is going to cost the vendors or the billboard industry is -- is -- it's not really apparent at this point.

Thank you.

Your next question is from Drew Marcus of Deutsche Bank.

Thank you. Nice quarter, guys. Two questions, number 1, can you guys give us a sense on how occupancy is going in highway directionals? And then, second, if things recover strongly and let's say for example revenue growth goes up to the 7, 8% area, can you still keep costs within the 2-3% growth?

On the -- the highway directionals, I don't -- I don't break it out directional versus general coverage, Drew, or at least I don't have it right in front of me. The occupancy trend, let me -- I'll give you a trend line. I did -- I did the Q1 '04 over Q1 '03.

Um-hum.

Of 3%. But let me give it to you by month on bulletin, just to sort of give you a sense of, you know, whether or not -- there is going to be directional mixed in there, right?

Yes.

It is basically 75, 76, 77, 78, January, February, March, April, so you can see a nice trend on occupancy. Some of that is seasonal, right? So why don't I give you year-over-year in April, it's up 4%, 74% was the occupancy on bulletins in '03 of April of '03 and it's 78% today.

Drew, that is not where the opportunity is. Remember that average length of stay on our highway directional customers is 7 years. So, you know, we were concerned about some softening in the hotel/motel business and those universal potential customers is a little bit thinner. So, it is harder to replace customers when they leave. Let me give you the hotel/motel story, anecdotally it is stronger but as a percentage of our book it is still 8% as opposed to the traditional 9%. So the way I'm reading that is that a rising tide is lifting all boats, but hotel/motel business is not as a percentage of our book increasing faster than the other categories. It is increasing at the same rate, so it's still at 8%.

Drew, I'll -- I'll address the question about expenses. You know, we're a very efficient cost business, we've said that for the pass three years which is why our margins have declined somewhat and we've had expense increases of 3, 4%. We haven't any numbers to that effect, but if it does go up to a 7-8% margin -- I mean a growth rate, obviously you're going to be looking at more bonuses for management in the field, you're going to be selling more posters and bulletins, that's more vinyl and poster paper that we have to buy.

We turn around and sell it to the customer, but when you look at the poster -- post paper and vinyl expense, you will be comparing it to some years were our occupancy was down in the low 70s on bulletins and now we're starting to get back up to the high 70s and so, yeah, you could very well see some expense growth there. A couple of other thing, sales commissions, the sales commissions are up. And rightfully so.

Sales are up. So there are some things that are related to the -- the growth on the top line that will affect the bottom. But I -- I can't answer your question with a hard number.

But -- but broadly you -- you should see with -- with the accelerated top line growth, you are going to see significant margin restoration, because of the operating leverage that we have in the company.

And one -- just one last, final question. Did you spend money on purchasing easements this past quarter?

Not much. I -- I think, by the time we finish out the year, this year is going to look a lot like last year. So we'll probably spend in the neighborhood of $8 million and we'll hopefully buy down about a million dollars worth of lease expense.

Thank you.

Your next question is from Tuna Amobi of Standard Poors Equity.

Hi, thank you very much. Good morning. I wanted to know, if, you know, the transit business, it seems like it's been on the decline for the last couple of years. I just wanted to know if you guys are gradually getting out of that and what's your outlook for transit? And I have a follow-up.

As -- as Keith mentioned, we did sell a couple of transit bus shelter franchises. These were in some cases transit assets we had where we didn't have traditional outdoor. Or in other cases they were transit franchises that we inherited through the Chandler transaction that just didn't have the kind of economics that we look for if we're going to be in that business. So we did sell 'em, and, you know, that's -- that's probably a -- a signal as to how we feel about that business.

It's a business that we're in primarily in our -- as a compliment to our core business in markets where we have the traditional outdoor. Each franchise is a -- sort of an individual analysis as to whether or not it's got a decent return attached to it. To the extent it doesn't have a good return, we're going to try not to be there.

It's fair to assume that you don't plan to aggressively beat on any contracts going forward in the outdoor -- in the transit business?

We haven't bid on one for quite some time. There's -- you know, there's two types that we have. We have one bus agreement in Denver. We actually do fairly well there. But you -- you don't see Lamar participating in that business in -- in other markets, or bidding on those franchises in other markets. And we probably have 17 or 18 bus shelter agreements. Those have been in place now for quite some time, and we haven't bid on a new one in probably three or four years. That's not to say that we won't occasionally, but it's not a -- a large focus for us.

Okay. And on the acquisition front, if you could please comment on, you know, what -- what you're seeing out there, what's your -- has your philosophy changed? Are you going to be more aggressive this year? How much are you looking to spend? Et cetera et cetera.

Yeah. The answer on that front is pretty boring, we are going to do the same thing this year that we've done the last couple of years, we anticipate deploying something in the neighborhood of $150 million and it's going to be the same -- same old, same old. A whole lot of small transactions, predominantly fill-in, very predictable, easy to execute, easy to model, and sort of steady as she goes.

Okay. And -- and cap ex for '04 finally?

About 75 million.

Thanks very much.

Your next question is from Jim Boyle of Wachovia.

Good morning. Would it be either lesser pricing or lesser sellout more likely to derail your Q2 revenue guidance?

Lesser pricing or -- Jim, that's a obtuse question.

Are you more concerned about pricing or sellout in Q2?

Okay. Well, we feel pretty good about Q2. So I -- I think we've got good trends on -- on pricing and occupancy on the bulletin side. That as of April are better than -- than -- than Q1, so I feel good about both on bulletin. You know, the only thing that could hurt us is if some -- something weird happened in the economy, or in the -- in the -- you know, the -- the global situation that caused people to not buy the short cycle products, you know. So -- posters. But, you know, I -- I don't see that happening. I mean, we're -- you know, we're -- our book to goal is stronger than it's been the last two years by a significant degree. Jim, I -- this is Kevin, I'll just chime in. We still have plenty of inventory to sell. So from where I sit, the -- the focus ask on selling more units, and we're still not really driving price the way that we have been capable of driving price in the past. But, you know, one of the reasons why we came out before everybody and the reason why our run rate at this point is so visible is because we had a ton of unsold bulletins. And we just started this -- we just started selling them. At rates that were not that much, you know, more than '02 and '03.

Faster debt pay down versus the acquisitions?

What was that, Jim? I didn't --

I was asking Kevin how do you decide between either paying your debt leverage down faster versus the roughly 150 million in tuck-in deals that you might do this year.

Well, my office is right next to Sean's and when I think he is overpaying, I'm going to pay down debt. When I think he's -- you know, if -- if -- behaving with some discipline out there in the marketplace, then we're going to -- we're going to keep doing what we've been doing. It's -- it -- it's accretive to our shareholders and it adds anywhere between 1 and 3 points improvement to the company's free cash flow on an annual basis.

And finally, if you could just tell us how local did versus national in Q1?

It's really a local story, Jim. You know, if we're up, give or take 6. National was up year-over-year only give or take two or three. So it really is a local story. You know, last year national for large markets and for some degree for us came back earlier and stronger than local. And then local started to come on in the back half of the year and it's really continued that trend and -- if not accelerated so year-to-date, up two to three. On national. And -- but year-to-date, up six on the whole book. So it's the local that's driving the whole book performance.

Thank you.

Your next question is from Gordon Hodge of Thomas Weisel partners.

Good morning. Just a couple of quickies. Curious, Keith, on your comments about corporate expenses. You talked about national, I think, affecting that number. And I'm just wondering, so are you running the national sales force and the national research and other services through corporate?

Yeah. That is all here in Baton Rouge.

Okay, got it. And then just curious, the -- you talked about shedding some transit contracts and a $4 million loss. I'm just curious, were those contracts meaningful from a revenue and expense standpoint? I mean, should we be looking at taking those out going forward or were they rather insignificant?

No. They were -- they were rather insignificant. The -- the markets were not performing well. They were a distraction. They were losing money. And they weren't -- neither on the top line or the bottom line were they numbers that would be significant to your modeling.

Okay, great. And then lastly, just if you could break down, and I apologize if I missed this, if you commented on it earlier, just fixed versus floating debt situation right now?

Yeah. It -- it hasn't changed. We have about a billion in floating and the other 700 and some change in fixed. And --

What are you paying on the floating again?

Well, we get another -- we're down another 50 basis points -- 25 basis points on our -- we're below 5 on the total debt of 1.7 billion, we're at 474, that includes the converts.

Um-hum.

And where the pricing is, is, you know, without the converts, and so we're at 1.4 billion and we're below 4. We're at 3.9 on that. So we are going to be at 350 -- I mean 150 over libor after we report to the bank the -- the results of the -- the 1st quarter. We were at 175, but the -- last quarter.

Okay. So it goes down 25 basis point.

Yeah. It goes -- every time you hit a -- a milestone.

Great.

So it's going to be -- it's going to be good.

Sounds good, thanks.

Your next question is from Richard Rosenstein of Goldman Sachs.

Thank you. Good morning. A question about your pricing opportunity. It seems like you're about a third of the way toward closing the gap between where your occupancy bottomed and bulletins and where it would be in a normalized environment. At -- at what point do you feel that you would have the greatest pricing flexibility to sort of improve? Do you need to get fully back to the occupancy levels that are normalized or can you -- can you start getting there a little bit earlier than that? And then second, related to your occupancy improvements thus far, when you look at the boards that have been empty that have been filled in thus far are they new advertisers or existing advertisers spending more budget? Thanks.

Given the -- I'll answer the second question first. Given the stability in the categories of business when you look across the whole platform, we're not seeing tremendous amount of change across categories of business. I mean, there -- it's the same story we give you guys every -- every call. It's the picture of stability.

You know, that being said, real estate is up 1 point. That's one category I can look at and say, yeah, we're getting a lot of real estate business, developer business. And, you know, to the extent -- I'm looking back 18 months to two years, that's probably a new business. But within the other categories, it's -- it's -- as a percentage. Our book, they're the same.

I think it's -- those businesses feeling better about their business, and they're buying more advertising. Every -- every category is -- you know, we're getting reports that across every category, it's just stronger buying, be it cellular, other media, financial, healthcare, autos, et cetera. So, you know, I -- that makes me feel good. It's -- it's very broad brushed.

On the pricing power question, it's a -- really sort of a market by market answer. We've got some markets that are sold out and are enjoying very nice rate discussions with customers. Other markets hadn't quite gotten there yet, and they're working on their occupancy before they have those discussions. So it's sort of hard to generalize across the platform.

But suffice it to say I think your -- your initial comment was correct. We haven't gotten across the whole platform all the way back to normalized occupancy. And, you know, I still think that that's going to -- you know, take us into '05 before we're there.

Thank you.

Your next question is from Paul Sweeney of Credit Suisse.

Thanks, very much. Good morning. Two questions. One, Sean, you had a few opportunities to do some swaps last year. I'm just wondering what you think the opportunities are in 2004 and if they could potentially be meaningful? And then number two, Kevin, just sort of a bigger, I guess, picture question as we think about the next couple of years, outdoor industry's ability to perhaps be a little bit more relevant to national advertisers. I guess my question to you is kind of -- what is the gating issue?

I know we've talked in the past about really having a reliable third party ratings kind of service that provides quality demographic information. It seems like that process is just by the nature of things is going to be a fairly slow go. So are you concerned? Are you, I guess, concerned that, perhaps, outdoor may in fact miss what could be a -- you know, a little bit of a sea change in how the national advertisers think about placing their dollars to the extent that [inaudible] and things like that impact the TV business at all?

I'll -- yeah, I'll do that question and then turn it back over to Sean, Paul. The gating issues, right now the way I see it, on the local front, I think our industry is doing a great job. And our local customers, every -- most of the billboard companies have built -- have built pretty sophisticated backbones where the customer can go in, select their locations from digital photographs, they can improve their art work, go into the companies proprietary websites, approve their art work, press a button, the art work goes to a printing facility, it is turned around real quick with very little paperwork and bureaucracy, the copy, the ad is executed and then the vendors get paid.

And it's a very -- not a lot of intermediaries in the middle of the process. The customers are very facile, they know who -- they how to select the boards that reach their best potential customer. And they're very happy. And we think we're making great inroads against our competitors in the local marketplace, our competitors being the traditional, other traditional media platforms, local television, newspaper, radio, magazines, et cetera.

And they are experiencing the same angst that the national customers are experiencing regarding the way -- their ability to reach the audiences that they used to reach with these local platforms. So we're making great strides there. We don't need a lot of sophisticated audience measurement to attract those customers because intuitively they're, you know, seeing it happen first -- firsthand.

Now to attract a brand manager for Procter & Gamble, we've got to have the audience measurement in place. It is rolling out a little slower than we hoped. But, look, technology is our friend this is not that hard to put a -- get a GPS device in the car and then follow that individual around. And so it's -- it's coming.

And even if it stops at the top 25 markets in the United States, it -- the audience measurement piece will allow our industry to be in the planning modules, so we'll be at the planning stage, even if it's -- begins only at the top 25 markets. They can extrapolate below the top 25 of markets, even though if you don't have the precise demographic data. So once they get in the habit.

And once we're part of a -- a system where we're treated like everybody else, it's going to make it very easy for a brand manager for Procter & Gamble to rationalize why you should take a risk with outdoor and shift his dollars over -- away from some other platform. Are we going to miss the window? That's the million dollar question.

And I -- I think the industry is -- is really cooperating right now. We as a group see three years of relative calm. And actually more than relative calm, just some significant popularity. In the perception that our audience is stable, it's not under attack.

And it's a -- it's an audience worth paying up for. And we think during the next three years that their -- I mentioned the word the other day, a tidal wave of national business. And our -- our national sales executive said let's just call it a wave, let's not call it a tidal wave.

But I -- I do think that audience measurement is a gating issue for the national customers. The way the distribution channel is organized is a little cumbersome because there are lots of intermediaries between the customers and the vendors, the out of home vendors, meaning Lamar, Viacom and Clear and others. That distribution channel needs to be worked on a little bit. It is a little bureaucratic and they haven't used technology as well as they should.

Of course they can't use our backbone because they might have 50 different vendors that they're working with. So maybe there is an opportunity there for the industry to develop a common backbone that will make these intermediaries more efficient. And we're all talking about spending the money now to get these things in place. To help our intermediaries to be more successful out there.

And I wish that I could put a number on what -- you know, give you a number of what the benefits going to be and how long it's going to take us. But I don't think we're going to miss the window. Because the issues regarding the -- the -- the assault of technology on these other platforms is -- is so significant that I think the window is going to be open for quite awhile.

On the swap question, you know, we've spent a lot of money and -- and a lot of effort over the last three years getting our -- our foot print and our platform just the way we want it. And, you know, that's obviously going to be paying some dividends this year and into next year. We're pretty much there.

At least on the -- the strategic operational swap front. I don't see a whole lot of activity going on. Going forward. Maybe a few little ones. But they're -- you know, they wouldn't be meaningful to -- to -- to what you guys are doing on the modeling front.

So I -- I wouldn't -- I wouldn't anticipate -- certainly nothing that would be announced or released or anything like that in -- in a meaningful way. We're -- we are extremely happy with where we're doing business, the distribution we can offer our customers, our position in the large markets that we've chosen to stay in is extremely good. And those properties are performing extremely well.

Great. Thanks very much.

Your next question is from Mike Russel of Morgan Stanley.

Thank you. I was wondering, Kevin, could you just give us an idea of when you have had discussions about the audience measurement costs, are they more about per market, or per inventory, or per population? How -- what's the mechanical way that you this I that you think you'll get charged for the cost, rather than the level?

I think it will be per market and then divied up amongst the vendors according to their market share in the marketplace.

So roughly a similar amount for each market independent of size?

Oh, no, not independently of size, obviously Los Angeles is going to be a hell of a lot more expensive than Pittsburgh. So, yeah, the -- I -- I think -- you know, as you go further and further down the market, the -- I don't know -- I don't know what the math is on the relevant sample. But I suspect that the -- that the relevant sample in a smaller market might be smaller.

Okay. And there have been -- I know McDonald's is your largest customer, and Coca-Cola has been moving money out of TV into outdoor, both of those had some changes at their -- the top of their companies. Have you seen any change in posture or strategy coming from those two outdoor advertisers?

That's a -- actually a good question. One of the reasons why our national business looks so weak only at a -- let's say at 2 or 3% in McDonald's was in this year last -- this month, last year. And so they're up against tough comps. McDonald's is not in right now.

We expect that they will be in this year, they're just coming in a little bit late. And the amount of their ad spend will be about the same. Coca-Cola, that's -- if they do anything significant, it won't hit our books until the back half of the year. And -- if we get the business, it's going to be spot buys placed by the local distributors. So it will be through Coke Enterprises, not through Coke International.

Okay. My last --

Yeah. Let me -- let me clarify a couple of things on that question and answer. Actually Cracker Barrel is our largest customer, not McDonald's. McDonald's is in -- our second largest customer they're in but they're in through their local buys not a national buy.

Got it. All right and then Keith I've tried to do this will be the second quarter in a row where you've actually performed better than your guidance, which after years of looking at your guidance versus your actuals, they were always pretty much on top of what you -- you said would happen. I'm just wondering, you know, as you think about guidance, was there something that kind of developed? Did the poster business, while up only 1%, actually perform a little bit better than you had been estimating when you put together the guidance? Because it would seem like the outdoor business -- the bulletin business has been strong, but none of that should have been surprising. So I'm just trying to understand kind of --

Well --

Mechanically, how you pull together guidance.

Well, if you look at the bulletin of performance -- well, I mean it's a variety of ways, Mike. Some of it is intuition, some of it is running hard numbers. But, you know, if you look at -- let's see, January, here we go, in January bulletin occupancy was at 75 as Sean said in February is was at 76, March it was at 77.

So we've continued to see -- and in April it was up a point over that. So we continued to see, you know, a nice trend there, and pricing is up as well. And, you know, in the past three years we've always guided precisely to the number. And in '03 everybody was giving a head shake.

Everybody thought that '03 was a comeback year. And so, you know, we're still, you know, trying to -- to make sure that we're coming in pretty close to what we -- we're telling you guys. We just -- we just saw some things happen in the 1st quarter that were a little better than we expected, and, you know, hopefully that trend will continue.

Great. Thank you.

Um-hum.

Your next question is from Jason Hefstein of CIBC World Markets.

Yeah, two questions. Just Kevin, could you perhaps go into a little more detail on the digital billboards? I mean, one of the things that we're hearing from Clear Channel is they still feel like it's kind of several years away based on the cost of installing the billboards. I think the numbers we hear from them is $750,000 to install the digital billboards. And they don't really see active deployment of it until the costs come down $150,000, to $200,000 a board. So can you just discuss kind of what you are doing and what you're seeing and how that might differ from what we're hearing from them? And then I've got a follow-up on the cost side.

I'm going to let Sean answer the question, but it's -- it's apples and oranges. They're not pursuing our -- we're pursuing a traditional deployment, highway billboards, I say highway billboards, billboards in high areas in DMAs and that's not the deployment -- deployment that they're pursuing. Now, you know, we're not going to comment on their efforts and their strategy and whether it's, you know, effective for their shareholders, if they want to comment on our strategy, that's fine. But I'll turn it over to Sean to explain to you -- to you exactly what it is we're doing. Yeah, their deployment to date has been in transit settings with smaller units, multiple smaller units. We're -- our cost numbers are a little different than what -- what they're quoting you. It costs us about a half a million dollars to deploy a 14 by 48.

And what we have found is that if you put it in the right place, and you sell it the right way, that your return on invested capital is outstanding. The -- the ROIs tend to be north of 50% and the payback tends to be faster than two years. And that's been our experience in all of our deployments to date, so we're -- we're fairly comfortable with the model we're using.

And then that $50,000, I mean obviously that is coming down due to technology model and so forth. How much do you see that coming down each year? Could that be down to, I don't know, 350 or something in the next two years? Is that possible?

I'd like to think so. I'd like to think that Moore's law applies to this technology, like it seems to apply everywhere else. You know, we are now visiting with Clear Channel about trying to get them to accelerate their view of deploying large format in traditional settings because we'd like for them to be buying some of these things. And as an industry drive the prize down.

You know, we've got two very reliable vendors that are working with us on it. They're -- they understand over the long pull the kind of pricing we need to deploy this more aggressively and more rapidly. So, you know, we're trying to -- we're trying to influence the cost curve as much as we can. There's only so much of that we can do given how many of these things we're buying.

And then just also on kind of how we think of your billboards. I mean I think if you talk to Clear Channel they'll say that, you know, the revenues tend to be concentrated where maybe they get, I don't know, 70% of their revenues from 20% of their boards or something like that. I mean, how would that figure compare for you guys? I mean, that's probably a little more spread out but -- because I know you get questioned all the time, well, what percentage of your billboards could you -- could you upgrade to digital and obviously it is a small percentage but the revenue in those areas is probably disproportionately higher than the number of boards.

Yeah. But I don't think we're -- our platform doesn't look exactly like theirs.

Sure.

I think you'll find given their concentration in top 20 markets they'll have -- they'll have some units that are just eye poppers that bill extraordinary amounts of money. And -- and we tend to look a little different.

Um-hum.

So I -- I don't know that the analysis would be the same.

What is the percentage then, just right now you guys are thinking that in -- what percentage of your reveneu do you think you convert to digital over the next three to five years?

Well -- Think there's -- there's two answers to that, I'll interrupt Kevin cause I know one of the answers he's going to say is don't model it yet.

We're not modeling.

Because he doesn't want you guys to get out ahead of us. The second answer is we're still learning. We're -- like I said, we're happy with the way we've deployed to date, but there's a variety of settings and a variety of circumstances, like, for example we've never deployed two large formats in one market. And so we don't know yet whether that is a -- is a good move or a bad move.

We're still learning how deep in market size we can go. You know, we've deployed just recently in a small market, Tort Walton Beach. So we're going to learn how we do in a market that's, you know, below 150. And so I think the honest and short answer is we're still learning.

Okay. And then just on the cost side, Keith, I guess some the things that partially drove the expense growth you guys talked about in the 4th quarter.

Right.

Or -- or reduced the expenses were cost savings from easements and some outsourcing of the poster costs. Can you say how that -- that had an impact on the current quarter?

Yeah. I -- we definitely saved money on the production side. We definitely are getting the benefit of the easements that we bought throughout last year. We still are enjoying in the 1st quarter of this year the reductions that we achieved in the healthcare, which we didn't get until July 1 of last year.

We talked about that on many occasions. And so, you know, all of those things are still with us. Now, you know, healthcare is going to be a -- renewing on July 1 and, you know, there's going to be an increase. Not nearly the size of increases that we've seen in the past, but, you know, there will be an increase. We budgeted for it.

But, you know, it is a -- it is -- that is definitely not a fixed cost. It is a variable cost based on the -- the cost of healthcare. So, you know, all those things are still producing results.

Um-hum. If you -- if you looked at your cost growth in the quarter or looked at the changing costs and you actually, you know, stripped out the insurance savings, the easements and the outsourcing of poster, do you have an idea what the core growth would have been?

In the expenses?

Yeah. If you stripped out the kind of one-time benefits that you are seeing year-over-year.

No.

What the gain growth would have been .

No, no, no.

Okay.

Again --

Intuitively though we're 3 to 5 year-over-year.

Yeah. Even when Drew asked the 7 to 8% growth question, I should have responded in the past -- in the past five years from '96 to 2000 we were growing 7 to 8% a year, and our expenses were growing 3-5. So that should have been my answer but it had been -- it didn't come to me.

Okay. Thank you, guys.

Yeah.

Your next question is from Bill Meyers of Lehman Brothers.

Thanks it's late so I have just two very quick questions. First off, if you could give us your average bulletin and poster rates. And then Keith on the tax side, what is your effective cash tax rate for '04? How should that ramp going forward? Basically when do you become a full cash taxpayer? Thanks.

Okay. I'll just- my answer is quicker. It looks like '07 is when we run out of a NOLs and become a full-fledged federal taxpayer and '06 we'll be a partial tax payer. And that assumes, you know, reasonable growth rates over the next several years and no big acquisitions.

And what should we assume for this year?

Oh, about 38%.

On the cash, on the cash tax side.

Well, we don't have any federal tax side. We just -- you're talking about on the cash basis?

Yeah.

We -- we'll do is we'll pay -- I think we had -- we made a payment of about 300,000 in the 1st quarter on state estimates. But, you know, it will be like the past few years, we'll pay a million to two million in state taxes, state income taxes, but not federal.

Okay. And similar levels, I guess, for '05?

Oh, yeah, we got a quarter of a billion dollars of net operating loss carried forward to offset, you know, taxable earnings.

Okay. And then just in terms of the -- the average rates?

Average rate, posters, Q1 '04, $401 dollars. Average rate on bulletins, Q1 '04 $1,008.

Thanks very much.

Your next question is from Douglas [Pratt[ of [Asset] Capital.

Thank you. A quick follow-up on the earlier question on interest rates. To what extent have you hedged out -- I'm assuming you've not hedged out the floating rates? And what's your feeling the potential cash impact as rates go up through this year?

Could you -- could you repeat the first part of that question?

Well, essentially one caller earlier asked about your floating versus fixed rate, you have a significant amount at floating. It looks like -- at least the market feels the direction of rates is going to be up. What sort of impact should be we expecting, will you fix some more of that or will you simply ride the rate increase up?

Well, you know, we haven't made that decision yet. Obviously the feds look like they're going to raise rates, don't know exactly when. But we've always been in that -- in that range, between 50 and 60 floating and 50 and 40 fixed.

That's not a -- not a uncomfortable place for us to be. And even if the feds raise rates, if you just go back 20, 25 years and look at their -- back to the early 90s. You know, they started raising rates again when things started coming back. And then things started stopping in the middle of the road, and so they had to come back and peel them back again.

So I'm -- I'm not sure if they're going to make that mistake. So 150 over libor and libor is right at 1 now, that's 2.5. And even if they raise them 2 points over the next two-and-a-half years, that's still 5.5% debt. I can't -- I couldn't get fixed rate debt at 5.5% today.

Let me also put it another way, our cash -- our free cash flow is so strong that we would only entertain those -- these fancy hedging products if we were on the margins and we just couldn't afford volatility in interest rates. But given where we -- where we sit, we don't need to be buying those things on the way down, or on the way up. And if you look at the average life of our bank facility, it's probably less over the last 12 years it's probably less than 2.5 years. And so what happens is these products end up being extremely, extremely expensive, if you find yourself in a situation where you have to unwind them.

I -- I think, Doug, I may have missed -- I didn't have my glasses on. I said our rate would be 5.50. But at 1.50 over libor the feds would have to go up 4%, I think I said 2% or 2.5.

4.50.

They'd have to go up 4%. And, you know, if we keep having another quarter or two like we had this quarter, we'll be down at 125, so 1 before year-end.

Okay. So you're -- that will offset the increase in rates to a small extent and we should just expect to see the interest line to stay where it is or go up slightly.

I would think so.

And you made a comment earlier as the improvement continues greater expenses will compensate for employees. Sort of on that line, you dramatically cut your use of options over the last couple of years. Should -- as things have been tougher. Does that mean we should be looking for an increase in options? And I believe a couple of years ago it was as high as 16 million on a black shoals methodology. Are you going to maintain that approach and simply run it through the income statement if, as appears now, it's going to be required to be expensed or go to some other form of compensation?

Well, you know, we haven't determined that yet. You know, the -- the -- we are in the process -- yes, we're going to have to take a charge for it. But our controllers working with our auditors, KCMG, because there's still no real set -- this is what it -- it is -- absolutely have they said you can use the black shoals by no means but black shoals, I forget the -- the -- the way they put it when I read the last release, but the -- the -- they prefer that people use the binomials, I think, but not everyone using it, it is not perfected so you have to use the black shoals which they do not think is really worth using. Am I right on that? Yes.

Yeah.

So, you know, everybody is just kind of -- we're going to run some calculations and see what it comes out to be and we'll be at a point to talk about that later in the year. It sounds as though you will simply expense -- you will not go away from options, you will continue to expense.

Well, philosophically we -- we believe that because we're so decentralized and we have independent autonomous managers that have -- that are responsible for the company's assets that we should always have in place a -- a -- some sort of equity form of compensation that runs deep throughout the organization. These are complete businessmen and women that have P&L responsibilities.

And we just think that that's -- it's an important part of the -- the -- the company's overall compensation. If you look at how the -- I think it's less than 8% of the total shares outstanding, and if you look at -- at -- actually the way we go about our business, the top executives in the company have less than, what is it? It's less than --

10 million options.

It's less than 5%.

It's not even that.

It's less than 3% of total options outstanding.

Okay.

So we tried to -- you know, make sure that the -- the managers that -- that -- their critical to the -- the way we run our business. We -- we make sure that they're not only professional managers but they're owners as well.

Yeah. I'm -- I'm not criticizing the use. Don't misunderstand. I'm just trying to get a sense of the impact.

I know.

And the follow-up question.

I just wanted to get on my soapbox there for a little while.

Okay. Should we expect.

You know, I'm the guy who's got to sign-off on the black shoals model that stipulates what the expenses are to the company and the auditors are telling us that they don't really, you know, believe that it's an accurate reflection of the -- of the true expense to the company.

I don't know if it's going to really be relevant for us or our shareholders, because we're not really an earnings per share, company, as you know. And I think what will happen is us, as well as a lot of other companies, you guys will go ahead and back out that number and see what the real EBITDA is and what the real free cash flow is because it's not a operating expense, it's just -- I -- I think it's overkill by all of the things that have happened over the past couple of years with the accounting frauds. Anyway.

Okay. Well, thanks very much.

Okay.

I could be wrong.

There are no further questions at this time. I will now turns the call back over to Mr. Kevin Reilly. Mr. Reilly, if there are no closing remarks? I would like to -- pardon? Thank everyone for participating in today's conference. You may now all disconnect.