Lamar Advertising Co (LAMR) 2007 Q1 法說會逐字稿

We now have Kevin Reilly, Sean Reilly, and Keith Istre in conference. Please be aware each of your lines is in a listen-only mode. At the conclusion of the Company's presentation, we will open the floor for questions. (OPERATOR INSTRUCTIONS)

In the course of this discussion, Lamar may make forward-looking statements regarding the Company including its statements about future financial performance, strategic goals, and stock repurchase program. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this call in the Company's reports on the 10-K and 10-Q, and the registration statements Lamar files with the SEC from time to time. Lamar refers you to those documents.

Lamar's first quarter earnings release, which contains the information required by Regulation G, was furnished to the SEC on a Form 8-K this morning and is available on Lamar's website at www.lamar.com. I would now like to turn the conference over to Kevin Reilly. Mr. Reilly, you may begin.

I want to welcome everyone to our first quarter earnings call, all our shareholders and friends. As is our custom, we will make a few brief remarks, and then we'll open up the floor for 30 minutes of Q&A. The overview is that we're off to a good start this year. Our top line growth looks promising from healthy customer demand across all of our products, and in addition our costs are in line, so that should lean to margin expansion for the rest of '07.

And on top of that, our digital deployment is proceeding as planned. So we're expecting a good '07 for this Company. With that, I would like to call in Keith Istre, our CFO, to walk you through some of the particulars, and then he will have Sean share some of the operating stats.

Okay. Thank you. Just briefly, some color commentary, as you saw in our press release our top line growth for the quarter was 7.4%. We had guided to approximately 7.5%, so we were in line with guidance. As we talked on the last call, there was a slight pullback that we noticed in the first quarter in some of our static ad revenue spend, and that is why we did guide on a to 7.5%, slightly lighter than the fourth quarter.

As you probably noticed in our press release for the second quarter we're guiding to approximately 9% top line pro forma revenue growth again, and Sean will give you more detail on it, but it is primarily due to our pick up in our static ad revenue coming back after the temporary breather that we saw in Q1. Kevin mentioned about our margins, as you noticed probably in the press release, we did pick up 1% on our consolidated EBITDA margins from 40% to 41% for the quarter.

Our operating expenses expenses, before corporate overhead, were at 4.9% on a pro forma basis, and digital accounted, once again, for about 1% of that. As we had mentioned on the last call, as long as we're going to be deploying digital, you can expect about 1% growth in expenses due to the digital. We had asked everybody on the last call, as well, to recalibrate your thinking. Historically, our pro forma expense growth on the operating side is typically been 3% to 5%, so we just ask that you retool and think of it in the 4% to 6% range on the operating side before overhead.

On the overhead, on corporate overhead, just one note, Kevin had mentioned this on the last call. We are helping to fund the TAB rating study along with CBS and Clear Channel, and we picked up an additional $450,000 in expenses in corporate overhead for the quarter. Our portion of the fees for that study, and we will pick that same $450,000 up for the next three quarters throughout the end of '07, which is our commitment to helping fund this project.

On our debt, as I am sure most of you know, the Company paid a special dividend in March, and we continued our stock buyback, so our our debt increased in the first quarter $480 million from the end of '06 Q4. Just to put that in terms of ratios, our total -- our debt without the converts that we have on the books went from 3.4 at the end of Q4 -- 3.4 times EBITDA to 4.3 times at the end of Q1, so we picked up about a point in our leverage, and with the converts our total debt went from 4.0 to 4.8 times trailing EBITDA.

Last, in CapEx, if you noticed on our press release we spent about $50 million for Q1, $34 million not counting digital. We had guided on the last call to about $105 million in CapEx for '07 before digital, and even though $34 million is slightly ahead that far pace, we do feel at this time comfortable with the $105 million that we gave out on the last call. With that, I will hand it off to Sean.

Thanks, Keith. I will hit a couple of the key metrics that we generally talk about. First, on our number of digitals you saw in the release, as of release date we had 428 digitals up operational and in billing. That breaks down 243 bulletins and 185 posters. We're putting up about 1.25 units per business day, and we're now operating digital in 107 markets across the country, so we're really very pleased at how that rollout is going.

On the national versus local sales mix, we're running about 80% local and about 20% national. National was particularly strong in the first quarter, it was up year-over-year 9.5%, and we're seeing that performance accelerate into the second. We should be easily up double digits on the national side going into the second quarter.

The categories are the usual suspects remaining strong but with a couple of highlights. We got a tremendous regional buy from Toyota which was a real shot in the arm. Wireless continues to do well. Auto is hanging in there, but one category that really is coming on strong is beverage, and we're very pleased to see that.

On the acquisition front, we closed 42 acquisitions year-to-date, total purchase price of a little more than $69 million. That pace is probably going to be indicative of what you'll see going forward through the year. With that, why don't we open it up for questions.

Ladies and gentlemen, at this time the floor is now open for your questions. (OPERATOR INSTRUCTIONS) Our first question comes from John Blackledge with JPMorgan.

Thanks for taking the question. A couple things. On the acquisition side, just wondering what the private market multiples are, or were the past quarter and how that compares to last year? And then on the digital boards, just wondering about the cost side, if the costs are coming down for the boards? I know you noted last year they were flattish given higher technology costs, if you just give us some color there, that would be great? Thank you.

On the acquisition and private market multiple side, for the most part the our arithmetic hasn't changed. In a couple of instances where we're looking at high spot urban bulletins that are candidates for digital conversion, the price discussions get a little different, but certainly not to a level where I would be uncomfortable with it, or should our shareholders.

On the cost of digital units, we continue to work with our vendors. As we said in the more recent calls, the cost curve isn't reacting as dramatically as it was earlier on in the digital revolution. We still have work to do on it. We still believe we can make progress on costs, but it hasn't been dramatic in sort of the recent six-month time horizon.

Thank you.

Our next question comes from Chris Ensley with Bear Stearns.

Thank you. During the quarter, I was wondering if you can tell us what digital contributed? I kind of have it in the 350-basis-point range, and then a follow-up on the digital. You were on plan, but you didn't spend as much, and that does imply either the pricing has come down relative to a year ago, or the mix is different, that you might be buying more posters than bulletins. I was wondering if that might be true?

I would say the most accurate answer is it is a timing difference between cash out the door and commitments to vendors. That being said, there has been some marginal help on the cost side.

But the mix is still the same or is it about 55/45 bulletin--?

I can't do the arithmetic in my head that fast. Of the 428, we've got 185 posters and 243 bulletins, somebody else is going to have to do that for me real quick. On the contribution to pro forma growth, which I think was the first part of your question, you're pretty much spot-on with 3.5%. It kind of depends if you're comparing it to all of our product lines or just our billboards. If you compare it to just our billboards, the top line growth was 4% static and 3.6% digital. If you compare it to just our billboards, the top line growth was 4% static and 3.6% digital. If you roll in our other product categories, transit and logo, then it becomes a 4.1% core business growth, and 3.3% digital contribution.

That's really helpful. One quick follow-up. When you say $69 million of acquisitions, does that include easements or exclude?

It includes easements.

Great. Thank you very much.

Our next question is from Bishop Cheen with Wachovia.

Thanks for taking the question. Going to the acquisitions, have you been able to use your stock as currency on the $69 million?

We never wanted to.

We're in cash for assets mode.

Those were all cash for assets.

Okay. And as we plan that run rate, should we think of it that way for the rest of the year unless we see a dramatic change in your stock or anything else?

Yes. I think you can anticipate that pattern cash for assets, and that pace sort of being indicative of what we expect through the year.

Okay. And then, I don't know when the Q is going to be filed, but I was just trying to plug in the additional debt in the multi-level balance sheet, so you have that incremental term loan that had only had $207 million drawn. Did you load that up and then load up the revolver that I think only had about $100 million drawn before the -- I guess at year end '06?

Yes. We just initiated a new add-on to our bag facility at a total of $575 million. We cleaned up the revolver that was outstanding that had been used to fund previous buyback, stock buybacks, and then the rest was used to pay the dividend and continue with the stock buyback program.

Do you have just one big term loan now?

That's part of our capital structure, yes.

Okay. What's the total capacity of that term loan?

Well, the capacity is constrained by our leverage ratio.

Right, right, but I mean if there is a -- let's say the unfunded commitment or whatever it may be on the term loan?

We have a revolver that's basically unfunded as of today -- undrawn, I mean. It is $400 million.

$400 million. So that's what it was at year end?

Yes. Nothing has changed.

Okay. So the old term and you have the incremental term?

Right.

Okay. Well, then the Q, do you know when you're going to file the Q?

Today, this afternoon.

That's fine. I don't need to drive you nuts. Thank you.

Our next question comes from James Dix with Deutsche Bank.

Good morning, gentlemen, oh, good morning, good afternoon, gentlemen. A couple questions. First, if you could give a little bit more color as to whether you're seeing any cannibalization in any of your markets on digital? For example, if your core business is growing at 4% in the first quarter, do you think that is slowed at all by the digital growth that you saw, and then looking forward in the second quarter on your 9% pro forma guidance, is the breakout in terms of the incremental impact from digital pacing kind of the same, kind of a net 3.5 percentage point range, or does it look to be any different? And then, any color on operating expense growth guidance for the second quarter?

It looks to us from where we're sitting now that the second quarter 9% guidance is being driven mostly by the core analog business, so the digital contribution will be roughly in that 3.5% range of that 9% total pro forma growth, so again, I sort view that as extremely good news on the issue of cannibalization.

We have, as we mentioned, we're pushing in some of our local markets where digital is constituting about 20% of their total book of business. Not that there is anything magical about that, but we're very closely monitoring how those markets perform going forward as they cross that threshold and, to determine whether or not they're cannibalizing or truly growing their business.

The early returns are pretty good.

Operating expenses up?

They look good. Operating expenses look where they need to be.

So within that 4 to 6, on the higher end of that range we're thinking about because revenue is a little bit better?

We haven't given any numbers, but I think you can expect that pretty nice margin expansion for the rest of '07. Our feeling is that our costs are well in line.

Okay. Thank you.

Our next question comes from Laraine Mancini with Merrill Lynch.

Thanks. Given that your core business grew 4% in the first quarter and your occupancy was pretty high, should we assume that was mostly all rate, and if so is your rate ticking up then in Q2 to get to that 9% growth?

Thanks for reminding me I forgot to give you the usual rate stats. So why don't I do that now. Yes. Most of it was rate.

As you know, on the occupancy side there is a little white noise in our data because of digital. It is the same thing exists on the rate side, but I've got a stripped out number for you, so these numbers exclude digital units. On the poster side our average rate in Q1 '07 was $426, and that's over $406 Q1 '06. That's a 5% increase. On the bulletin side our average right Q1 '07 was $1,140, and that's over Q1 '06 of $1,064, or a 7% increase in rate, so that's where it is coming from.

Okay, thank you, and then one more question, if I could. I think you said national was up double-digit going into 2Q. So does that suggest that perhaps you can get occupancy even higher?

You know, I think as is typical when we do get better than expected national business, it does help us with occupancy, quite frankly, so I think your instincts are correct. We'll have to wait and see what actually comes through in the data, but that would be my expectation.

Great. Thank you.

Our next question comes from Marci Ryvicker with Wachovia Securities.

Thanks. Do you have a feel for how many boards you can put up this year for digital? Is the 1.25 board per business day a good run rate, or do you think you can accelerate from there and then, secondly, Sean, can you give us the occupancy statistics for both posters and bulletins?

On the digital run rate in terms of putting them up, I think, we went into the year hoping to finish up somewhere north of 600 units by the end of this year. We're feeling pretty good about getting there. I am much more comfortable saying we're going to be pacing along at 1 to 1.25 per day, and if we can beat that, then everyone is going to be happy.

On the occupancy I am going to quote you Q1 '07 only because it is the only one I have in front of me, and it is going to exclude digital. It is posters at 60% and bulletins at 76%.

Thank you.

Next question comes from Jason Helfstein with CIBC World Markets.

Thanks. Two questions. It seems to us, based on everything we've been learning, that the gating factor to more digital is basically how fast you're willing to approve the spending of digital, and a lot of that has to do with how long it takes the account executives to ramp the digital revenues once they're up.

Can you talk about, perhaps, what are you doing on a corporate wide basis to essentially train your AEs to be more aggressive sellers of digital to teach them how to use the software to help their advertisers, and then I have one follow-up? Thanks.

Jason, I will field that one. That's not really the necessity gating issue. There are three qualifications for digital location. One is regulatory approval. The other is dwell time, that's how long it can be seen from the road, and then the third is the lease arrangement underneath the structure, and all three of those things have to qualify, you just can't have one. So that is really what dictates how fast we can get these up.

The organization is doing well, responding to selling this space, and you did touch on something that's really important, and that is our -- we have to have a very customer friendly website and a website that the AEs can navigate around with confidence in front of the customer because where we're headed with this thing is we're -- the customers will acquire time across our platform, and then they will insert their adds for the time they acquired, and it takes all of five minutes to do an ad insertion once your thumbnails have been approved and you can have as many as 100 thumbnails that could reside in your password protected website.

That is a little bit of a different interaction with the customer than we're used to having with our analog units. We just -- we shoot them a piece of art work over the internet. We get them to approve it. We put the board up and then we're gone for three to six months. But I will have to say that across our platform, our salesforce and management, they're adapting to this new product offering, and we're not at a point where we do share lessons learned, but we do not -- it is not a top down exercise.

We have a lot of confidence in the field, their ability to market the space, and we have a lot of confidence in our local customer feedback, ones that is acquire this space, and that's how we're going to build this network. Having said that, every Friday we have a webcast, and all of the AEs in Lamarland are allowed to tune in, and we have some very accomplished trainers that walk them through what we can currently do for our customers, and it is changing.

By the end of the year our website is going to be a lot more robust than it is today. Hope that answers your question.

That does. Just go back to the first three things you said, can you rank them as far as difficult to least difficult?

Regulatory first, dwell time second, dirt third.

Okay. And then other follow-up was we've been hearing that, particularly in the biggest markets, the top five or six markets, that national is weaker in second quarter. Obviously, that's not affecting you given your guidance.

How much of that would you equate to just seeing regional business, or do you really feel like kind of your national growth has decoupled from, let's say, the Clear Channel, the CBSs, because you operate in different markets than them? Thanks.

When we quote national it actually includes regional so you're making a pretty good distinction there, and the strength we're seeing does have a pretty strong regional component. I mentioned Toyota. There are others. We track it a little differently maybe than those guys do, than our competitors do, but we feel very good about, quite frankly, both components of the business, the truly national spend and what we're able to capture regionally.

Great. Thank you.

Our next question comes from Anthony DiClemente with Lehman Brothers.

Good afternoon. Thanks for taking the questions. Two quick ones. First off, on lease costs, if you could quantify what percentage of your expense growth in the quarter was from lease costs, and then maybe as a corollary to that, update us on your easement purchase program, and then, two, do you expect to have more or less than 1,000 digital boards by the end of 2008? Thank you.

Digital question. The digital question, I don't know that we want to touch 2008. Let's hit 2007. On the lease cost as a percentage of --

I think it was about 3.5.

3.5% is what Keith is giving me. We might have to get back to you on that one.

Meaning 3.5% of the expense growth?

No.

The portfolio grew 3.5%.

But what about in terms of the contribution to the total growth? Is that too tough to figure out?

I think we would have to calculate that and get back.

Understood. Thanks.

Next question comes from Mark Wienkes with Goldman Sachs.

Great, thank you. Just wondering, a couple questions. Is the mix of the local versus national advertising on your digital boards much different than the 80/20 on static, that's first, and then, second, what's the average rate, if you have it, of the static boards you're converting versus that $1,140 corporate average for bulletins and the same for posters?

The national mix on digital is presently running about 5%, so it is 95% local, 5% national, so the vast majority of the 80/20 is in our core analog business. The second question was about --

Average rate of the static that you're converting?

It is going to be all over the map. Quite frankly, the best number to use is, for posters it is pretty easy. It is going to be right around the average rate we quote, $426. For bulletins, it is an individual exercise, board by board.

Okay. Does each new digital board that you put up replace one static board or is it the ratio difference such that the net number of boards will increase or decrease over time?

It is typically one face for one face.

What would change that?

Our ability to develop new locations would change it, but --

We're running to our perspective, they're not saying, oh, take down those two for that one we'll give you?

No, but we're willing to do that and I think that's where we're had headed as an industry. I think 10 years from now there will be fewer billboards in America, but they will be more robust and as long as people are driving and looking at them, they will be, I think, even more important because the message is going to be changeable.

Got it. Thank you.

Next question comes from Jonathan Jacoby with the Banc of America Securities.

Thank you. A few questions here. Keith, or Kevin, as you mentioned, the regulatory approval process is part of the reason or the hurdle that you have to get through. Are you seeing any changes, and I know it is market by market? I believe you guys have mentioned that you're going to use the (INAUDIBLE) product as sort of a test process to see if you can alleviate some of the regulatory issues.

Is that a second half of the year project? And then, secondly, can you break out how your local transit business grew as separately? I know the total was 7.4 and 7.6 on the billboards. We could probably back into it, but if you can just walk through that, and then I have one follow-up.

I will let Sean do the transit, and then he can add to what I say regarding the regulatory environment. We just passed a law in the state of Tennessee, so now we have a blanket approval in the state, the entire state of Tennessee. Illinois. Indiana, we just passed a law in Indiana, as well, so now there is -- those were two states where there was no enabling legislation that addressed this new technology. Now, the legislation is on the books, and that's helpful.

So when you look at the tone of the regulatory environment, every time we have a success, we're building on that success, and I think that these units are going to be, at the end of the day, they are going to be viewed as useful and informative.

Having said that, there are still risks out there, and one risk is that there are those out there that are claiming these things could be unsafe. And so the industry and the federal government, we need to look into this and prove that they're not unsafe. But that is a risk, and if research comes out that leans in the wrong direction, it will ripple throughout all of the regulatory bodies that manage these digital signs. But having said that, we have experienced resistance in several places across the United States, but we're also getting a lot of support from customers, and it is helpful to us that 95% of our customers are local because when we do go, because most of the regulatory friction is at the municipal level.

And so when we go to the municipalities and we talk about the benefits of these things, it is nice to have friends down there with us to help explain that they have a stake in the successful deployment of these signs, as well. Let me hit a couple of other questions. On the Magink sort of experiment, we look delivery on a current generation of Magink display, and from a customer point of view we're not comfortable with the performance in a variety of settings, so we're not going to be deploying that generation of Magink, and we're awaiting the next generation to see if performance improves.

On the transit side it was essentially flat, [pro formaed] for year-over-year contract changes. We manage about 60 contracts in our transit portfolio. Transit did in Q1 '06 $12,691,000 and Q1 of '07 $12,692,000 on the top, so it was about at flat as you get.

And that's transit and logo together?

No, that's strictly transit, bus wraps and bus shelters. Logo was actually a net contributor to our pro forma growth. Logo in Q1 2006 did $10,345,000 on the top, and Q1 '07 did $11,770,000 on the top for a 13.8% increase, so essentially they canceled each other out so that our overall pro forma growth was where it came out at 7.4%.

Just to follow up, a point of clarification, in Tennessee and Indiana those states, now, do you have to worry about municipal approval or does the state -- the new state regulation cover any municipality?

Virtually every where we go the stars have to align both at the state level and at the municipality level, so it is a multi-jurisdictional battle, and we're fighting on all fronts.

Thank you.

Ladies and gentlemen, at this time the question-and-answer session is closed. I will now turn the conference back over to Mr. Kevin Reilly for closing remarks.

We look forward to next quarter's announcement. We've got a lot of momentum in our business. We expect the call to go well, and we want to thank all our friends and shareholders for listening in. With that, I would like to conclude the call. Thank you very much.