Lamar Advertising Co (LAMR) 2008 Q4 法說會逐字稿

Excuse me, everyone. We now have Kevin Reilly, Sean Reilly, and Keith Istre in conference. Please be aware that 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 statements about its future financial performance, strategic goals and plans. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this call, and the Company's reports on Forms 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 fourth quarter and year end 2008 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, www.lamar.com.

I would now like to turn the conference over to Kevin Reilly. Mr. Reilly, you may begin.

Thank you. As is our custom we'll lead off with some brief remarks and then go ahead and turn the call over for questions. I want to thank all of our friends and shareholders and analysts for tuning in.

As you can see from our fourth quarter revenue performance and our Q1 guidance, the bottom dropped out of sales in December and January. And we're seeing more volatility than usual in our bookings which naturally leads to less visibility.

Needless to say, this is a very challenging environment. And in this environment, in addition to trying to maximize revenue, it's all about expense management, controlling CapEx and free cash flow generation.

So during this call, we want you to be aware of what management is doing in these areas, especially expense management because we've had to cut the cloth to fit the pattern. And all of our cuts by the way, in both CapEx and in expenses, are sustainable and they will not damage our franchise.

Of course, in the past we've given expense growth guidance, but in 2009 there will be a significant reduction in expenses over 2008. And Sean will give you more color on what the Company has done to date and what the Company did in the fourth quarter of '08.

On an encouraging note, sales trends for Lamar are playing to our strengths. National business is weaker than local. Discounting is primarily confined to the larger markets and more centered around national cross market buys. This relative strength in local sales leads me to believe that outdoor, over the years, we will continue to get a larger share of local ad spend. And we will garner that ad spend primarily at the expense of newspaper radio and TV.

Before I turn the call over to Keith and Sean, I'd be remiss if I didn't thank all of our employees, especially our managers, who have responded quickly to make the necessary expense adjustments required by the current ad climate. With that, I'd like to turn the call over to Keith Istre.

Good morning, everybody. Just a little color on Q4 and the year. As you saw from our pro forma numbers for Q4 we came in at down 11.7% in revenue for the quarter, our guidance had been for 9%, down 9%. To kind of give you a breakdown by month how that came about, the 11.7, we generally don't get into the monthly numbers, we just talk about the quarter. But at the end of October revenues were down 9% over October '08, November we were down 9%, over November of '08 and then in December the bottom, as Kevin said, fell out. we were down 16% over December of '07. I'm sorry, I was saying '08, '07.

The good news is that the expenses came in way under our normal growth of between 4 and 6% actually, consolidated expenses which are our outdoor operating and corporate overhead, minus 4.4 for the quarter. We don't generally post the annual revenue EBITDA and expense growth in our press release, but just to give it to you, revenue for the year was down 3.2%. EBITDA was down 9.1%, and our consolidated expense growth for the year was 1.2%. Again, well below the 4 to 6% that we normally experience.

With that, I'd just like to make a couple of comments on our capital structure. In our third quarter press release in November of last year, we put in an indebtedness section that, among other things, included a schedule of maturities by year of all our debts so the market knew exactly what was coming due and when.

If anyone on the call hadn't seen that, you can call up the press release from the third quarter, or if you have and you have forgotten about it, it's out there.

On the last call, the two predominant questions were will the Company need an amendment to its bank credit agreement, increasing its debt to EBITDA ratio and what does the Company plan to do about the converts that are coming due in December 2010. Obviously those questions continue to be asked and the answer today is the same as on the last call.

We are currently in compliance with all of our credit agreements. Our debt to EBITDA at the end of the fourth quarter was slightly below 5 to 1. Our bank covenant, which is our most restricted covenant, is 6 to 1.

We currently need no amendments. We do not know at this time if we will or will not need an amendment in the future. That depends on the performance of the Company going forward. And if at some point in the future we do need to seek an amendment, we will engage in discussions with our lenders at that time as we've done in the past.

As for the converts, again, the answer is the same. Those notes are due December 31, 2010, approximately 2 years out. We have no plans currently to address the converts as we do with all our debt instruments. We continue to monitor the convert markets, so we know what the conditions are at all times. Sean?

Thank you, Keith. I'm going to run through the traditional statistics we give out on these calls. But I did want to speak to the expense side first.

On our last call we were -- as we mentioned, we were targeting 0 to minus 2 expense declines off of our pro forma actual. And as we got into December and saw the unprecedented rapid deterioration in our business, we took that up a notch, so I'm going to try to give you some color on that.

Our pro forma actual expenses are $706 million. That's the base off of which we are cutting. First we addressed head count. We have laid off approximately 10% of our workforce. That's about 350 folks. And the attendant savings there, as Kevin mentioned, are sustainable. And we believe we can hold that as -- for the next few years.

We are also very aggressively managing our lease portfolio. We are renegotiating leases, we are taking down billboards that are unproductive. And we have so far saved about $10 million on an annualized basis. That program will continue through the year and I will hopefully be able to give you updates as we go through the quarters.

We're leaving no stone unturned. We have consolidated our cell phone usage and are going to save almost $1 million on an annualized basis. We've discontinued our 401(k) match program, and we're really doing all those things that you would expect as we try to manage our way through this period.

On rate and occupancy stats, let me give you the posters first. Occupancy for Q4 '07 was 66%. In Q4 '08 it fell to 57% on posters. On bulletins, occupancy in Q4 '07 was 77%. And in Q4 '08, it was 71%.

On rate for posters, Q4 '07 was -- average rate was $444; and in Q4 '08, average rate was $453. For bulletins, average rate Q4 '07, $1202; Q4 '08, $1163.

As we go into this quarter, traditionally, Lamar has tried to hold the line on rate, and suffer in occupancy. Occupancy comes back faster when things get better. We're going to try to continue to manage to that. As Kevin mentioned, there has been some pricing pressure. It tends to be limited to the larger, more competitive markets and national customers. We are hanging in there with rate on our local book of business.

On national versus local and how that's tracking, as Kevin mentioned on a relative basis, local is showing a little more strength than national. In December national dropped 17% and is tracking in Q1 to be down somewhere between 17 and 20%. And so you can see that local is on a relative basis slightly stronger.

Also on -- as is more typical of downturns, our shorter cycle products are now showing more of the weakness as opposed to our longer term bulletin contract. And as Kevin mentioned, we are acutely aware of our CapEx, and our CapEx for 2009 is projected to be around $30 million.

On digital, as of February 26th, we had 1,095 digitals in the air in 135 markets. As I mentioned, in December, our shorter cycle businesses took a tumble and that was certainly the case for digital as our same board digital was down for digital in the mid-20s percent.

In terms of our verticals and our top advertisers, for the most part, our top advertisers are hanging in there as we go into 2008, our largest -- I mean as we go into 2009. For year-end 2008 our largest customer was McDonald's then Verizon, then Cracker Barrel, then AT&T, then Coors, then State Farm. All of those customers are hanging in there for 2009. Obviously, the biggest category and customers that are struggling as we go into 2009 is our auto business.

In terms of categories of business, same lineup -- restaurants, retailers. In 2008, auto was 7% of our book. And again, that's the vertical that's struggling the most. Hospitals and medical care are doing fine at 6% of the book. For 2008, real estate was 6% of our book. Interestingly that is the same percentage it was in 2004, so we seem to have taken the brunt of that hit and, hopefully, that will stay at about that level in 2009.

The rest of the verticals are familiar to you and I'm happy to take any questions on them. Keith, Kevin, back to you.

We'll go ahead and open -- I'd like to go ahead and open up the call for questions.

Thank you. Our first question comes from Mark Wienkes with Goldman Sachs.

Good morning. I was wondering, could you provide a little more color with respect to the OpEx controls that you see through the year? Like if revenue pace is down 15%, do you think OpEx can, the savings can accelerate from the down 4.4 which is impressive, I guess, acceleration in the savings. Could you be down 5%, 6%, something along those lines?

Yes, that's -- off of that pro forma actual 706 we are budgeting and are confident that we can be 5 to 7% below that pro forma actual. The head count reductions have taken place. The lease program has paid off to the tune of about $10 million annualized so far. And we anticipate that, continuing throughout the year, that number's going to grow as we go throughout the year.

Right. Great. And could you just -- how would you characterize the nature of the conversations with advertisers? Are they more of -- the advertisers are saying, "We just don't have visibility in our business, and so we just need to cut our spend and some just -- we don't know when or what magnitude we'll be back," or the conversation is more of certain advertisers - (inaudible) Verizon, etcetera, are coming back. But certain ones, that are more national just not spending at all, and others saying, "We proactively have worked through our '09 budgets and our own projections and we're just mapping our ad spend to down 10, down 15, whatever it is, to our projections," and there's more of a measure of confidence in the outlook.

Well, anecdotally, what we're hearing from the field is that the folks that are -- we believe they're going to still be in business in 2009, the folks that have a little more visibility are going shorter. And so most of the renewals that are with categories that are struggling, folks are buying, but they're buying shorter. They have less visibility in terms of their business.

The auto situation is a difficult one. That's clearly local auto dealers are under a great deal of stress and strain. The ones that are buying are buying short as they sort of work through their issues, but so -- anecdotally, it is -- for those that are buying, they're buying a little more short. We do have some customers that are saying, "Look, I want to -- I'm not buying in the first, I need to see how the year shapes up."

Right. Do you think that the Obama administration, should they infuse the auto sector with a bunch of capital, does that filter down to the dealers? Does that help them at all? And then if it filters to them, does it help you?

Well, we certainly want our dealers -- no, because I mean the road map is pretty clear that they're going to be fewer dealers domestic US over the next couple years, which, hopefully that will be a good thing for the auto industry. You'd have to put it back on the consumer and access to credit which would kickstart things for our auto dealers. And barring a German plan where they come out and say, "We'll buy every automobile over 7 years old or over 10 years old for X amount of dollars," which would stimulate a lot of activity, barring that, we really don't see that.

But having said that, we had this dramatic dropoff in December and January. But we have some auto dealers who are resigned to the new reality that they're going to be selling fewer cars, that they may have to live off of their repair department. That's what they're doing, they're advertising their parts and labor and their repair, and maybe some of their used car offerings. And they're tiptoeing back into the market with us.

And we're the lowest cost per thousand out there, so clearly electronic media is going to take -- and newspapers -- are going to take the biggest brunt of their issues. I think what we have to do is not hope for a Hail Mary from the federal government, but think about trying to offer up that inventory to other customers, if our auto dealers don't want it.

Makes sense. Thank you very much.

Thank you. Our next question comes from Alexia Quadrani from JPMorgan. (Operator Instructions).

First, you mentioned December got very soft, down 16%. Could you let us know if January was actually worse than that? And the second question is, you're obviously doing a tremendous job on the cost side. I just want to get a sense if you feel you have a bit of a cushion after your initial cost-cutting plans if revenues were to worsen much worse than what you were seeing, is there another layer you can cut back?

Sean, I can take the January question. We guided to down 15 for the quarter. January, of course, is behind us, and we were down exactly 15% for the month. And we expect for February and March to basically run in that same range. So there's not a peak and a valley in the quarter like there was in the fourth quarter. It seems fairly consistent for all three months that we'll be down in the mid teens.

Sean, did you want to take the --?

Well, yes, on the expense side, again the -- one of our biggest expenses is our lease portfolio, and we are aggressively managing that. And that will continue throughout the year.

Even as business firms it up, we're going to continue to do that, because we do have some nonperforming units out there that are coming up for lease renewals, and those discussions are ongoing with landlords and we plan to keep them ongoing throughout the year. When we were on the last call and we were talking about this program, we were kind of focusing on unbuilt leases and totally nonproductive units that had not had billing for the last year.

We're now aggressively going after essentially every lease that has what we would consider to be a lease cost as related to revenue of being too high. So we are definitely asking our landlord partners to participate in this recovery.

Again, those discussions are ongoing, they're happening every day. And in some cases we're actually taking billboards down.

I think you said in the fourth quarter call that 15% of your boards were under water. Would you say -- how has that number changed? And I guess if you want to give us some color, maybe your broader definition as well, what sort of percentage of these leases you're talking about?

Well, I'd prefer to -- prefer to express it another way. And that is, 20% of our leases provide -- of our units provide roughly 70% of the Company's revenue. Is that correct? 37% of--. 30% of our units provide 70% of the Company's revenue, so there's plenty of opportunity in the lease portfolio.

You start with the least productive ones first, but you have got to be careful because that is our franchise. So you just be careful about how you manage your lease portfolio, your takedowns, because you don't want to destroy your franchise because of a one-off extraordinary ad environment.

Because I am convinced that over the next five years you're going to see local ad spend come the way -- come to outdoor, because the other outlets are just going to have different business models and smaller audiences.

Thank you. Our next question comes from Jason Helfstein with Oppenheimer. Go ahead, Jason.

Yes, thanks. Two questions -- one, relating to both OpEx and CapEx. So clearly you're telling us that you're managing expenses for this year, they're going to be down in the mid double-digits if not more range.

One, how much of those costs need to come back next year? And then on the OpEx side you're obviously managing as well your CapEx, your CapEx to manage free cashflow. How much of that is sustainable? Does the maintenance CapEx have to come back next year to the traditional billboard business? Thanks.

I'll let Sean do the OpEx but on the CapEx, it's sustainable, because of the aggressive reinvestment we put back into our plan. And so if we're involved in takedowns, we don't scrap this material. These are erector sets, so we have a ton of material that will be in inventory available for repair and maintenance. The only thing that really would cause us to accelerate CapEx is when we get back in the business of rounding out our digital platform, which we are going to do. But we're taking a temporary pause right now because of the environment that we're in. But the $30 million CapEx number is a number that we can live with for the next three years.

Sean, you want to address -- you missed the -- he was talking about double-digit decline in OpEx.

Yes, the -- essentially again, off that pro forma actual of $706 million, we're highly confident that this year we'll come in 5 to 7% below that on the OpEx side. And it's our opinion and our field's opinion that that is sustainable.

If and when business comes back, and if it comes back real real strong, we'll have that sort of high grade problem of perhaps having to add some folks in the back of the shop to post more copy, but for the foreseeable future, this is a sustainable level of OpEx. And as Kevin mentioned we're not doing any long-term damage to the franchise.

If I can ask a follow-up on digital?

Yes.

Remaining our digital conversion rates as far as number of--.

You broke up.

You broke up, Jason, I didn't hear that.

I think the question was, is your conversion rate the same? Well, no, it's not the same, our total platform is sagged. But what we have enjoyed, and what we are pleasantly surprised with, especially over the last couple of months is as the customers, our customers become resigned to the environment that we're in, and they decide to go ahead and tiptoe back into the ad space, they like the digital, even though it's a higher cost per thousand, it's a lower long term, it's not a long-term commitment. They can tiptoe in for a couple weeks.

And so we like what we're seeing in the platform, but no, the conversion rates are not the same. The overall platform is sagged, as Sean mentioned. December we were down in the low 20s. But having said that, we still are going to erect about 30 units in '09 in order to fulfill our take or pay contracts with the vendors.

Thank you. Our next question comes from Marci Ryvicker with Wachovia/Wells Fargo.

Thank you. I have a couple of questions. Regarding Q4, the falloff in December -- I guess I'm struggling with the fact that you guys typically have longer term contracts than other media. So I would think that by the time you actually report and are providing guidance that you're fairly comfortable with how the month looks, so was there anything that happened in December? Was it cancellations or something else that you could just kind of explain? That's the first question.

The second question is in terms of Q1 guidance, how much visibility do you have now, how much of your business is booked?

On the -- what happened to us in December, even though we have long-term contracts, they renew ratably throughout the year. And we had just unprecedented nonrenewals in December really across the platform.

But as I mentioned, it was really the shorter cycle sale products that struggled the most. I mentioned digital was down same board, 24%. That's a very short cycle buy. And posters, really struggled.

So again, we do have long-term contracts, but they renew ratably throughout the year, and if people are scared and they don't renew, then we're going to feel the pain. and it was truly unprecedented in December.

Also in January, we had national customers who just took a pause. They said, "Look, our renewal discussions are coming up this month, we don't want to talk about it until February." They just went away for an entire month.

How much visibility do you have for Q1 right now?

Our visibility for Q1 is pretty good. And -- but usually our visibility extends out 4 or 5 months, and that's where there's more volatility in our book, and it provides less visibility. But, of course, we have pretty good visibility right now, because we're -- we've only got one month left for the quarter.

So would you say that you're basically at the same point this year than you were last year in terms of percent of business booked? Or is it less?

Well, I mean, obviously it's less, because last year in the first quarter, we were up about 2% on a pro forma basis, we're guiding to down 15. And when you're -- when we used to give out guidance as far as where we are in our bookings, it was to budget and obviously in this environment, I'm not sure how accurate a measurement -- or if that would give any relative benefit to give to the market. Our budget is an operating budget and I don't know if again it wouldbe relevant.

I just have one last question for Sean, it sounds like digital is just weaker overall than your core business. I just wanted to make sure that I understand that, and if it is, is it occupancy or rate that's the biggest problem?

It is and it's interesting as we were rolling out this product and thinking about how it would perform through business cycles. We did have a sense that as a shorter cycle product that it would be a little more volatile than the overall book, and of course, that's come to pass.

It's both. It's rate and occupancy. The markets where we have digital competition are struggling most. One of those happens to be Las Vegas, which has a truly challenged economy. And we have a pretty stiff competition in our digital product mix. So Las Vegas digital is really struggling. Where that's not the case, we're holding up better.

But again, this is a product that customers can come in and out of. And, of course, the world stood still in December.

Yes, Marci, it's not clear that that's going to be the case for the entire year. We're just looking backwards at December and January. As we look forward and we see some of the activity that's taking place for February and March, we kind of like what we see in the digital space.

Okay.

Thank you. Our next question comes from James Dix with Wedbush Morgan.

Good morning, guys, I have a couple of questions. First, could you just give a little seasonality on how your occupancy trends typically go, how much lower are they typically in the first quarter than the other quarters of the year, and for posters and bulletins and how is that tracking now? And do you have any reason to think that seasonality is going to differ a lot this year?

And then, I guess on the operating expense side, when you renegotiate the new leases for the boards you go back to the landlords on, what types of lease terms are you getting? Are you trying to convert to just a fixed escalator at a lower base? Or is there a possibility that as your revenue comes back on those boards, the operating expense or the lease cost on those boards is going to rise faster than normal, because that's the deal that you're cutting?

Well, on the lease portfolio, these are individual negotiations taking place across multiple markets and they're really all over the map. But in general, if it's a board that is truly nonperforming, we're going to 0 and either cutting it down. Or if the landlord says keep it up there, and business comes back, we'll talk again.

For the most part we're going lower and fixed, if it's a board that's a performing unit but the lease cost is too high relative to the revenues. But truly these negotiations are -- they're all over because they're highly localized and there's thousands of them going on.

But in general, on this portfolio, the renegotiated ones, if revenue comes back, you would still expect the lease costs on those to increase kind of in line with the lease costs on your overall portfolio?

Correct. Because we still believe that it's best for the shareholders to go long on the lease portfolio. And that over time long fixed rate payments are better than percentage leases.

Thank you. Our next question comes from Bishop Cheen with Wachovia.

Hi, thanks for taking the question. I just want to make sure for modeling, based on your guidance, we understand, when you talk about your operating expense, you're including obviously your direct G&A and your corporate expense in that total number?

Correct.

And then you've given it, I think twice now, the guidance is down 5 to 7% off of the pro forma. I think that came to about 7.06 on the expense side?

Correct.

And then on the -- can you tell us in your RP basket in that -- how much capacity you have in there for the RP basket, or the bonds?

Okay, you're talking about under our--?

Restricted payments baskets.

Under our senior sub notes?

Yes.

It's a cumulative basket, and right now it will probably be $800 million, $900 million.

Yes, so you have got--?

Based on something like that.

Huge capacity in there.

Yes.

That is -- that you -- I mean, if you -- if you decided to play the arbitrage ratio game on your debt by taking in bonds at a discount there would be nothing to stop you from doing that at this point. Is that correct? Because you're not in violation of any CREF facility covenant.

No, we could do that, but there's a $100 million limitation.

Okay. So -- and where are you -- have you used any of that limitation?

No.

Okay, so that -- so you have full $100 million capacity for the ratio arbitrage?

Correct.

And then the last [insidious] question, is there any restriction if you decided to buy in the converts?

As long as we are in compliance with our credit agreements, there are no restrictions.

All right. Very helpful, guys, thank you.

Thank you. Our last question comes from James Marsh with Piper Jaffray.

Yes, hi, two quick questions. The first, I was wondering where the bulk of the head count reductions are coming from? Like what specific type of employees?

And then secondly, when you talk about the lease portfolio and working with the landlords as partners, it doesn't really sound like a partnership to me. It sounds like you're just ratcheting down your lease expense, and then when things bounce back, they don't really benefit at all.

Is there any other mechanism in there that makes it more "partner like"? Or -- am I missing something?

Well, on the lease discussions, look, some of these discussions are white knuckle and we are taking down units. So if we don't come to terms that suit the Company, then we're taking down billboards. And that word spreads. I use the word partners because at the end of the day, over the long run, their interest and our interest are aligned. Everybody wants--.

Sounds like my employment agreement.

What?

Sounds like my employment agreement.

But again, this is something we've done before. And we've done it with success, and we're enjoying some success with the program now, and we expect it to continue throughout the year.

Remember, James, some of these discussions are not around contracts that are expired, some of the contracts are in full force and effect. That's a very partner like discussion, because you have an existing agreement.

Right.

So it's just -- again, it's 60,000 some-odd landlords, and across a very large geography, and everyone comes to their decisions differently, and each -- not every lease contract is on what you would call the standard form. So --.

I guess the important thing there is, that when you bounce back, you're going to bounce back hard. It's not like you're sharing the upside with them?

Every negotiation is different. In some cases we're going to 0, and saying when business comes back, we'll revisit and we'll keep the board up. And in some cases, we're just reducing the payment to a lower fixed fee.

So, again, they're all over the map. In the aggregate, as I mentioned, we've -- on an annualized basis -- reduced the expense of that portfolio about $10 million already, and we're going to continue to work it throughout the year.

On the head count, as I mentioned, it was about 350 employees, 10% of our workforce, all over the country and essentially, across the board. Probably primarily, if I had to pigeonhole a disproportionate hit, it was probably in the back shop on the operations side and less on the sales side.

The reason that is sustainable is because we have moved to a new substrate, which is polyethylene as opposed to paper and glue. That substrate is more durable, stays up longer and requires fewer truck rolls. I mentioned that on the last call.

It was across the board, including management and corporate overhead.

Basically across the board.

Very light on the -- like Sean said. Very light on the sales force side.

Okay, great, thanks, guys.

Thank you. Now, concluding our question-and-answer session, I'll turn the floor back over to you, Kevin, for closing comments.

Thank you very much. And I want to thank everybody for tuning in to this call. And we look forward to our next quarterly call.

Thank you. Please hang up to end the call.