Lamar Advertising Co (LAMR) 2004 Q2 法說會逐字稿

Good morning, my name is Jenny and I'll be your conference operator today. At this time I'd like to welcome everyone to Lamar Advertising second quarter 2004 earnings release conference call. [Operator Instructions]

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 differ materially from those discussed on this call in the company's report on forms 10K and 10Q and the registration of statements Lamar has filed with the SEC. Lamar refers you to those documents. Lamar's second quarters earnings release which contains the information required by regulation G, was furnished to the SEC on form HK this morning and its available on the website, www lamar.com.

I will now turn the conference over the Mr. Kevin Reilly.

Thank you Jenny. I'd like to welcome all of our shareholders and friends to Lamar's Q2 earnings call.

Let me begin by saying that sales are good, sales are very good. We haven't been this confident in our forward look since 2000 and I'd like to share with you what we think is a relevant stat.

On our space sales are booked to budget for '04, we are currently running at 87.5%. At this same time last year in '03, our booked to budget, and remember '03 our budget was not as aggressive as it is in '04, we were running at 82.8%. So it looks like we're headed for a very strong second half of the year based on our bookings and based on our book-to-budget. Why do we have such healthy momentum going into the back half of the year, I think there are three reasons for that, one, the local economy is good. Two, our audience is stable and our audience is attractive to advertiser both local and national. Three, we deliver that audience at a very attractive low cost per thousand impressions.

With that I would like to turn the call over to Keith Istre, who will walk us through the numbers.

Good morning, everybody,

Obviously I assume everybody got the press release that we put out this morning so you saw the results for the quarter and the guidance for Q3. I would just like to touch on a couple of stats and maybe explain a couple of things with regard to some of the results.

First of all, our consolidated EBITDA margins which are not in the release for Q2 was 47.1%, that is consolidated EBITDA after corporate overhead. Last Q2 of '03 we were at 45.2. We had experienced some margin erosion over the past couple of years due to flat sales and increasing expenses. For the year to date, six months, our consolidated EBITDA margins are 44.1, versus the 6-month margin of 41.8 last June of '03, so we are making our way back due to healthy top-line growth and minimal, same-store expected growth, which we always told you guys is generally between 3 and 5%.

Our free cash flow continues to grow rapidly. As you saw in the press release we were up 43% for the quarter and 53% for the year-to-date, and there are two main reasons for that, is the strong top and bottom line growth in revenue and EBITDA and all the refinancing activity we've done over the past couple years, which has helped trim our interest costs by approximately $30 million a year. We have gone through that with you before.

For the second quarter our direct and G&A, as you saw, or as you should see in the last page of the -- in the press release, which is the pro forma comparison to actual as reported in the pro forma numbers, our total direct G&A expense before corporate overhead grew 3.2%, as we have always told you, it is generally between 3 and 5.. Of course, that is at the low end of that range.

On a consolidated basis for the quarter, including corporate overhead we were at 4.6. I told everybody on the last call that we would be 4.5 for the quarter, which was slightly higher than we had been in Q1 and the last two Qs of last year, and that was due to a couple of things. Number one, we had reversal of a legal charge in Q2 of last year that deflated our corporate overhead by approximately a million dollars, and so when you look at the numbers on a corporate basis it is not truly apples to apples. You have to add in a million dollars more to last year's Q2 numbers for corporate expenses to really get an apples to apples comparison.

At the direct and G&A level, there is only a couple of things that are really variable cost. As you know, we're highly fixed cost business, number one, are the bonuses paid to the management in the field, their bonuses are based on a formula as to how well they do compared to their budget. The better they do, the more bonus obviously they get. In sales commissions, the better the sales are, the better the commissions are to the account execs. And for the quarter, those two items combined came in at 2.5 million more than they were last year second quarter and our expenses only grew 3.2% with $2.5 million additional charge on top of the normal operating expenses.

The other thing I would like to address, I saw something on Yahoo this morning talking about we missed our earnings per share. I guess there is good news/bad news there. This is the first time I can remember in 8 years of being public that we had earnings. The Street, Thompson's First Call said that they were expecting 10 cents a share and we reported 8 cents. We don't generally give guidance to earnings per share because it is not something that you all prize as a measurement of this company's strength and ability. But since they brought it up, and others have called this morning and brought it up, I'd like to point you to our financial statement, our P&L. There was a line under operating expenses loss, gain on disposition of assets, there was a loss of approximately 3.5 million. I had addressed that on last quarter's call. We had disposed of approximately 5 of our transit companies in the western part of the country, and I mentioned to everyone on line at that time that there would be about a $4 million loss. We're not exiting that business. It was just businesses that did not fit our profile and it fit someone else's, and so it was a win-win situation for both of us. But that $3.5 million loss on disposition, created the extra 2 cents that somebody was focusing on as far as the earnings per share.

Our total debt hadn't changed much with a billion sixty-eight as of year end with all debt, that's holding company and media company with 4.47 times total leverage. Our interest coverage is over 5 to 1. We've never been stronger in terms of our interest coverage in the history of this company.

I touched briefly on CapEx. I'll go through the numbers. Our total outdoor CapEx was 14 million for the quarter, real estate was 2.5 million, operating equipment was 1.7, logos was 0.5 million. That comes up to about 19 million in total for the quarter and 35 million for the 6 months ended June. We told everybody we would be at about 75 million for the total year so we're definitely on track at 35 million. You double that, that is about 70. So we should be somewhere in that range at year end.

Other than that I think I'll turn it over to Sean right now to go through operating stats and then we will open it up for questions.

Thanks, Keith, I'm going to hit a couple of the operating matrix that are typically addressed in the Q&A.

First on occupancy, the trends are extremely strong. Q2 '04 occupancy posters, 70%. Q2 '03 the poster occupancy was 67%. So we improved 3 points there.

On the bulletin side the story is even stronger. Q2 '04, occupancy bulletins 79%. Q2 '03, they were 75%. So we had 4 point increase on the bulletin side on occupancy.

On rate, the rate picture is following the occupancy picture. Q2 '04, average rate per poster was $426, Q2 '03 average rate on posters was $416. So the increase is about 2.4% there.

And on bulletins, again, the story is even stronger. Q2 '04 average rate on bulletins was $1,037, Q2 '03, the average rate was $996, so we've had 4.1% bump in rate on the bulletin side, quarter over quarter.

Those trends are continuing into the third quarter. I feel real good about rate and occupancy as we move into the back half. As Kevin mentioned, we have a lot of momentum.

On the acquisition front, the story is as we told everybody it would be, a pace of 150 to 200 million through the course of the year. Year to date we closed 42 transactions and we spent approximately $124 million purchasing new billboards. The vast majority of those are fill-ins, we feel real good about them and think that they will make an accretive contribution almost instantly.

Finally, the categories of business, particularly as we look forward, there is no surprises in the verticals that you're used to hearing us talk about, so I'll just hit the particularly strong ones that we see coming in. Beer is extremely strong, real estate is extremely strong and we've got a new category that is coming on real strong, insurance. Most of that is coming nationally and it is up 90%. All State, Farm Bureau, GEICO, and we're really pleased with the way the insurance business is coming on.

Year to date nationally, I think because of the investments we've made in growing that business, we're growing I think just disproportionately to other media. Our national book is up 5 to 6%, and I think the investments that we've made here at corporate to service that book of businesses is beginning to pay off and will continue to do so.

We with that, why don't we open it up for questions.

Jenny

[Operator Instructions]

Your first question is from Drew Marcus with Deutsche Bank Securities.

Good morning, guys. Quick questions. One, Sean, can you give more flavor on the third quarter, i.e., how did July wrap up. Second, Keith, given the extra 2.5 million and a million bucks from last year, underlying expense growth in the quarter, or 1% area, looks like basically, your guidance is about 3 in the third quarter, I just want to make sure my math is right there.

Mine is a short answer, yes, your math is correct. We, on the last call I said, that for the year expenses should be somewhere between 2 and 3% for the entire year, even with the total of 4.6% in the second quarter due to some of the unusual things that I mentioned, or the things that I mentioned, the third quarter we are expecting to come in somewhere around 3 and for the year, 3 and maybe some change, lower end of our normal operating expense growth range.

Drew, rather than talk about July specifically, let me just talk about Q3 guidance, broadly. We think it's good, aggressive guidance on top of a strong back half in '03, and we just wanted to remind everybody that I don't know of anybody who's been rewarded by coming out with overly rosy guidance to the market place.

Thank you.

Next question is from Jim Boyle with Wachovia.

Good morning, Sean, the new local search engines of Google and Yahoo are thought to be aimed at kind of low-cost local advertising such as yellow pages, and perhaps even outdoor clients. Has your sales force in any way encountered chatter in the field about this?

No, not at all, Jim. I mean, I mean, it's not only not on the radar screen, I don't even think it is in their lexicon, yet.

Laughter, okay, Kevin, is this growth coming more from your existing clients buying more boards or better location boards or is it coming from new clients.

With exception of insurance and radio, which is, you know, big surge in those two categories is all of our existing clients buying more units at better pricing.

That's a nice combination. Thank you.

The next question is from Laraine Mancini with Merrill Lynch.

Thanks. I'm curious about auto as a category. We know there are more auto launches this year than ever before. And one of your radio peers, competitors, I guess, suggested that auto would use TV before radio because of the image so I'm wondering if you are seeing any those dollars coming yet for the new auto launches?

Auto has been extremely strong this year, just a quick anecdotal, GM in our book is up 39%, you know, that's one customer. As a total category, it remains at 10% of our book. It was 10% of our book in June. It was 10% of our book in June of '03. It was 9% of our book in June of '02. There was a little bit of secular shift. If you take a longer view, go back like eight years, auto would have been mid-single digits in our books and now it has crept into double digits. So at least as regard to that category it appears that we're taking share.

Great. And then one other question. : Can you just give us a little bit of an update on Nielsen's progress with the rating system. I thought that Chicago was supposed to try and roll out around September and New York I thought by year end. Is that still on track or are there changes?

They're on track. And the preliminary results are pretty good and it looks like Nielsen's going to do a great job of promoting the results to the agency community. So I'm pleased about that. But when you look at Lamar, remember it's going to take a while for audience measurement to move the needle for this company, because it's going to play a big factor in the top 10 markets in the U.S., and I do think it will have a positive impact on media planners and buyers and; hopefully that impact is going to trickle down into the middle markets throughout the U.S. Because we're primarily middle market, you know, we really don't have a good feel for how fast the audience measurement data will roll out to our individual markets, and so we're just -- we're just kind of hoping to get caught up in the back draft of that whole exercise.

Do you have any expectation for Lamar on when you might see this in the revenue, or is that too hard to predict.

It is too hard to predict, but we do like the buzz, and the things I said about the ability for this company and our industry, to post high single double-digit organic growth, are going to hinge on three things. One thing that has already happened is that consolidation of the industry, making it easier for the customer to buy. This industry measurement piece we think that that's important to kind of get our industry in sort of the main stream of the planning process. And then the third thing is just the audience fragmentation and the problems that the other traditional platforms are facing. We just think that that's going to create enough angst out there so folks will look at billboards. And younger buyers are looking at billboards as something new and different.

All right. Thank you.

Next question is from Tuna Amobi with Standard and Poor's Equities.

Thank you very much. Good morning. Can you update us on where you are with digital billboards. And second question, as you look out for the second half of the year, and maybe next year, as well, if you can comment on where you see your greatest source of operating leverage and will you expect some more cost containment? I know you have taken a number of actions with health care and lease cost and production, or should we be expecting the top line driven by the rates and occupancy that you already talked about? Thank you.

Well, let me hit the digital question first. We, for the first time in Pittsburgh, have our full compliment of digital posters up. So the next few months are going to be very interesting to look at and gauge the power of that particular product. Our folks are very excited about it. The advertisers in Pittsburgh are excited about it, and it's -- our hope that on that product we'll be billing something in the neighborhood of 120 to 130,000 a month in the near future. So that is a sort of stay tuned. We're not there yet on a monthly run rate, because we just got the full compliment of ten posters up.

On the bulletin side we're still pleased with the way the, you know, the single bulletin deployments are going. The gating issue, as we point out, frequently on these calls, is a regulatory issue. So we're not rolling them out as quickly as we would like to. Given the regulatory hoops we have to jump through. But our belief is that business model is proven and that it is a wise use of the company's capital to continue to deploy.

You know, looking at the back half of this year, we just got a tremendous amount of momentum and it's, you know, for our company it is the fact that main street USA seems to be feeling good about the world, and it's driving the local ad dollar is driving our performance, and it is across the board. So you know you'll hopefully see that continue and continue into the next year. I don't see any reason why things should slow down.

How much of that--how much more can you squeeze out of what you have already gotten from the health care and the fees and production and all of that?

On the expense side, you know, I think for people that are modelling us long-term and we prefer people that would take the longer view. You know, Keith's guidance has always looked -- model it 3-5 and you won't get any surprises. We may can squeeze a little more out of the production side. I think the work has been done on the health care side and we have an extremely fixed cost business which gives us a lot of operating leverage when times are good, which we see that--we're in one of those good time periods. But, again, maybe there is a little more efficiency to be squeezed out on the actual production of vinyl and paper.

Okay. Thanks very much.

Next question is from Jason Helfstein with CIBC World Markets.

I understand you guys are trying to be conservative with your guidance and I think that is in the norm of how you guys usually guide. I was looking back at what you guys said as far as bulletins and poster occupancy and pricing in the first quarter, and clearly you're seeing an up-tick on poster pricing. I think it is actually double the growth rate in pricing we saw in the first quarter, and then bulletins you're seeing higher occupancy in posters, you are seeing materially higher occupancy. So I guess my question is, is there anything that you look at on the horizon that says things should slow down. And when you think about the back half of the year, what do you think will grow faster? Occupancy or pricing? Two questions.

I think it's going to be close as to try to pick between the two and they'll probably jockey back and forth across the month. At some level the occupancy gets to normalize, Jason, and so the growth there levels out, and, you know, we have typically said that where we're looking to get is low to mid-80's on bulletins and low to mid-70s on posters. We're not there on an annualized basis, so there is some room to run. And I think it is probably going to take us about another year to get there. Assuming next year is a strong year for local economies and GDP, you know, we'll be sitting down on this call and; hopefully, we'll be saying, you know, we're at normalized occupancy now and most of our growth is coming through rate, which you can then drive which you're at normalized occupancy. So that's the story, I think.

In line with that comment, I guess you said about the economy, are you seeing -- I think we saw a slow-down in local advertising, that was pricing driven, kind of end of the second quarter, early third quarter and part of that correlated to what appeared to be a slow-down in consumer spending. Are you seeing any kind of volatility on your pricing side? Or is it really steady as she goes.

It is definitely steady as she goes. Those percentages that I quoted, Q2 over Q3 on both matrices are continuing into the third quarter.

Remember Q3 and 4 of last year we didn't experience that volatility, we were coming out back then.

Um-hum. And just last thing. The kind of momentum you're seeing now, is it kind of similar to what you were seeing a few months ago? I mean, I would assume there is no slow-down in the momentum.

I'm not seeing a slow down in the momentum.

It was actually better when we did our bring-down call yesterday, we reviewed where their bookings were for the next couple of months relative to their internal goals, and that's why we -- are extremely positive about the back half of this year, because I think as we've said on the call before, we know that going into every month if a region or plant needs 20% or less, or if they have 80% or less booked, 80% or more booked going into every month, we know they're probably going to reach their internal goal. And the word that we got yesterday on the bring-down call, and this was--we didn't have any exceptions, all nine regions were very positive about their bookings.

When is the last time you guys internally revised budgets, upwardly revised budgets?

We don't tend to do that. Obviously we do it to account for the acquisitions, and we're very rigorous about that, but you know we set the budgets, we set them to beat GDP, and we're going to actually exceed that. As Keith mentioned, that does mean we'll paying out a lot of bonuses to GM's and they earned it.

Well Jason, that's one reason we don't tinker with it. Because, you know, you strike a deal at the beginning of the year, and it would be very deflating to the group to retrade the deal. But, you know, you have good years and you have bad years, and some years you have more aggressive budgets than others. I think it all evens out, but I think that that would be a real betrayal to our management to try to retrade the deal. We could internally adjust our budgets, but I don't think we would retrade the economics that we laid out from an incentive point of view to our group.

Right. We got 155 some-odd GM's out there, that their total compensation is basically the 80-20 rule, 20% of their total comp is based on how they perform relative to budget, and also how they perform on cash collections. I don't think they would like it if you changed the rules in the middle of the game on them. They will have earned some nice bonuses and I'm proud of them.

Okay. Thanks.

Next question is from Paul Sweeney with CSFB.

Thanks very much, good afternoon now. Actually in terms of thinking about your business, Keith, you've been--and Sean and Kevin, you've been consistent over the year saying that typically your business grows more or less in line with radio, but this is a fourth quarter in a row as you look at your third quarter guidance where your outlook is growing meaningly more than radio. So I'm wondering, you know, Kevin, are you in fact -- do you believe you're starting to see a beginnings of share shift. I know you mentioned auto, is there anything more fundamental than that, or is this perhaps more of a short term phenomenon. Second, just on the hotel-motel category, can you comment on that, presumably the higher gas prices are not helping that kind of [inaudible] they seem to be getting through that. And just lastly, lease buy-down, are you still looking to buy-down leases [inaudible].

Hey, this is Sean. I'll hit the last two first and then Kevin can comment on us relative to radio.

On the easement purchases we are continuing to do that. The pace is give or take the same as it was last year. You know, again we--it is our view that operationally it is good because it helps stem the growth in that, our largest expense, and also it is a good use of the company's capital given the cash on cash return. So we are going to continue doing that. I think, as I look out, you know, two to four years, we may even step up the pace, given the free cash flow we are going to be generating and the options we have to invest it.

Your instinct was correct on hotel-motel. It is not that they are struggling like they were in '01 and '02 and the first half of '03. They seem to have stabilized. Their business is stabilized and their business with us is stabilized. They are, however, being passed by other categories of business. So that in our book hotel-motel has fallen to 7% year over year. In '02 it was 9% in June and '03 it was 8% and in June of '04 it is 7%. I don't think it is because they're shrinking in absolute terms, I think it is because other categories are passing them up. But your instinct seems to be correct, I would love to see them a little more healthy. Paul, what was your question to me, why are we growing faster than radio.

Seems like we got four quarters that seems to be the case industry-wide. Are we back to starting to see this share shifting.

I don't know. Let me fudge and say, there is a high beta, so we don't know yet, they can blow it out in the second half of the year and post some fabulous numbers. So that's the fudge there, but I guess I'll just volunteer a couple of things that probably most of the people on the call already know. You know, that the commercial space is kind of crowded, and I think that's been a little bit tough, the clutter has been a little bit tough for advertisers. Some of the simulcasting and taking of talent and spreading it over several markets may undermine your effort to make yourself attractive to local advertisers. And then of course you have the technology and the -- the technology risk. But again I'll just go back to my introductory remarks. We see the local economy, throughout the entire country as being strong. We think that our audience is popular with both local and national advertisers, and even though we don't walk and we don't talk, we deliver that audience at a very attractive low-cost per thousand, and I think that's helping us out in this -- in what we view is a very good, strong local economy.

All right. Thanks very much.

The next question is follow up from Tuna Amobi with Standard and Poor Equities.

Real quick, can you just -- do you have a number for your accumulated net operating losses?

It's about a quarter of a billion, 250 million. For tax purposes.

Thank you.

All right. Jenny, I want to thank all of our shareholders and friends for tuning into the call. That concludes the call, and we look forward to our Q3 earnings call.

Thank you for attending. You may now disconnect.