Lamar Advertising Co (LAMR) 2009 Q2 法說會逐字稿

Welcome to the Lamar Advertising Co. second quarter 2009 conference call. 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 question.

(Operator Instructions)

In the course of this discussion, Lamar may make forward-looking statements regarding the Company, including statements about its future financial performance, future goals and plans. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this call on the Company's reports on Form 10-K and Form 10-Q, and the registration statements that Lamar files with the SEC from time to time. Lamar refers you to those documents. Lamar's second quarter 2009 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 Mr. Kevin Reilly. Mr. Reilly, you may begin.

Thank you, Operator. I want to welcome all of our listeners to our quarterly conference call.

As is our custom, I will kick off the call with some general statements and then turn it over to Keith Istre, and then Keith will turn the call over to Sean.

Just to refresh everyone's memory, back in October of ' 08 we began making adjustments in five areas of our business. Today, we have a good handle on four out of those five. Those areas are M&A, expenses, CapEx, and the Company's capital structure; and, of course, last is revenue. On the revenue side, until the economy turns and ad demand picks up, we -- that is just one area of our business where I think we are -- we are just dependent on a turn in the economy.

But in the meantime, what we plan to do is to listen and nurture our sales force and stay very close to our customers. We still are very convinced that our issues on the revenue side are cyclical and not secular. So when things do turn, they will turn quickly for the better for us.

With that, I would like to go ahead and turn the call over to Keith.

As in line with what Kevin was saying, we don't have a whole lot to say. I will just go through a couple of fine points here.

On the guidance for the second quarter, we came in at approximately 16% down, which is where we guided, and the 16% was even across the quarter; all three months were down 16% each. There were no peaks and valleys, so we feel good about that.

On the consolidated expense side for the quarter, we were down 15%, a little bit better than the first quarter. For the six months ended June, our pro forma '08 consolidated expenses were $357 million. Our actual ' 09 consolidated expenses through June were $309 million. So that is a $48 million reduction in actual pro forma expenses for the first six months of the year, or down 13%.

Just to remind everybody, back in the beginning of the year we estimated that on the high side we would be able to reduce our expenses by 7% or $49 million for the year. So the Company has achieved its goal of the $49 million in the first six months. For the third quarter, expenses should continue to track in line with Q1 and Q2. We see no change. Again, as Kevin mentioned, we have contained the expenses, and they should remain contained through the end of this year.

As you may have noted, even with our reduced revenue our consolidated margin for Q2 was 44%; that is compared with 46% last year's second quarter. So even with our reduced revenue, we are still able to maintain EBITDA margins in the mid-40s.

On our capital structure, just to recap, this is kind of old news. But at the end of the first quarter and the beginning of the second quarter we addressed that issue. We issued new senior notes, we amended our bank credit agreement, and we addressed our outstanding convertible notes. After two tender offers we have $13 million worth of principal convertible notes left outstanding, and we have reserved that amount of cash at Lamar Advertising Company to deal with those notes, either on or prior to December 31, 2010, when they mature.

As far as our total debt leverage at June 30th, it was 5.97 times. Our leverage covenant under our newly amended bank agreement of June 30th was 7.5 times. We clearly have lots of headroom. And going forward, from July 1 through next June 30th, our leverage covenant rises to 7.75 times. Again, lots of running room, and we feel that is very adequate based on our expectations.

There was a blurb in the release about our liquidity position. All I can say is that we are very comfortable with our liquidity going forward, and we see no issues there.

Lastly, the CapEx was $21 million at June 30th. I would divide that by two, and expect that to be the run rate for the year. Our operators continue to tell us that we should come in for the entire year at approximately $35 million, which is where we thought we would come in at the beginning of the year.

With that, Sean?

Thanks, Keith.

I will run through some of the typical statistics, and then give a little bit of color that we are hearing from the field. On the digital front, as of today, we have 1,122 units in the air. 568 of those are bulletins and 554 of those are posters. The color we are hearing from the field is that on a relative basis, digital is outperforming our other products. Customers are still very receptive, and the contracts and top line strength there has been evident. So we still have a lot of confidence in that product, and are very glad we have made those investments.

Occupancy and rate stats for our traditional analog business, on the occupancy side Q2 '09 occupancy for posters 67%, that compares to 73% in Q2 '08. For bulletins Q2 '09, 72%, compared to Q2 '08, 76%. On the rate side, posters Q2 '09, $436 average rate, compared to Q2 '08 of $458. On the bulletin side Q2 '09, $1,119, compared to Q2 '08, $1,198. The color there I think is on the bulletin side, that is a decline of 7% year-over-year, and that's a little disappointing. In the environment we are in right now, it is getting -- has been difficult to hold rate.

On the national and local front, it is essentially on a relative basis national and local are performing the same Q2 and into Q3. In Q2 national was marginally better than local because McDonalds came in, and in Q3 local is going to be marginally better than national, because McDonald's came in Q3 last year. The take away it is mid-teens both national and local, in terms of year-over-year decline.

Categories of business, no surprises here. Automotive and real estate continue to be the weak spots. Automotive is down to 6% of our book of business, and that's down from 9% of our book of business two years ago. Real estate has dropped out of the top 10 categories of business, down to 4% of our book, and that compares to real estate being at 9% of our book back in 2007.

There are some categories that have ticked up and are showing relative strength. Notably, healthcare is up 1 percentage point in our book of business. Restaurants are up 1%, that's our leading category business, 12%, and telecom and services are hanging in there. The story there again is real estate and automotive continue to struggle.

As Kevin and Keith mentioned, our team is doing a great job of managing what they can control, particularly on the expense side. And as Kevin mentioned, when things turn, I think we have established a new expense and cost structure in our business that should inure to our benefit when things turn.

With that, we will open it up for questions.

(Operator Instructions)

Our first question comes from Marci Ryvicker with Wells Fargo.

A question for Keith and one for Sean. Keith, I just want to be clear on expenses for the rest of the year. It looks like you did $100 million in direct advertising expenses both in Q1 and Q2, and about $44 million and $45 million in G&A in Q1 and Q2. Should we take those absolute numbers for Q3 and Q4?

Yes, I think so.

Okay. And then for Sean, does it feel like rates are getting worse, like materially worse in the second half of the year versus the first half of the year? And then how do you regain pricing power when we are supposedly in a recovery, or going into a recovery?

I don't think materially worse is the description I would use. So you know, I think you can probably assume that that down 5, down 7-ish for both products is probably what you are going to see going forward through the end of this year. Customers are still skiddish, they are buying short. If there is a message you are hearing out there that we're hearing from the field, it's customers who used to buy 12-month contracts and sign up and put the business to bed are now buying 3-month contracts, even in categories are traditionally 12 months, directional. Customers are skiddish out there and they are price sensitive.

It is basically the same story on the price side. In highly competitive, large bulletin markets, it is tougher going. In our traditional middle markets, there are very reasonable discussions. But again, there is no question but that customers are nervous out there.

Do you get a sense that some of the pricing downturn or declines is coming from other media, and that is pushing it down to outdoor?

No, that's not the sense we are getting. The sense we are getting is that in large markets it is the competitive bulletin pressures, and in our traditional middle-sized markets it is just customers that are struggling. And again, they are buying short and they are waiting to see a turn in their business. But I don't think we are seeing a pricing umbrella change relative to other media.

Thank you.

Our next question comes from Alexia Quadrani with JPMorgan.

This is actually Monica DiCenso for Alexia. Just curious, a little more on advertising, as we get closer to year end, I know you mentioned that people are spending in shorter-term cycles, but are you getting any inclinations from advertisers that 2009 was a bit of a wash maybe, and they are looking forward to spending a little bit more in 2010?

Then with regard to verticals, we have heard from some companies that if the auto makers come out of bankruptcy, spending is looking a little bit better in the back half of the year. I'm just wondering whether you are seeing on the local side in any of your markets?

On the auto question, it's -- we are predominantly dealers, not predominantly national on the auto side. I think the whole dealer question is still working its way through. I happen to believe that when dealers know where they stand, they will come back in. Anecdotally, that's what we are hearing from the field. But I think there is still a little bit of uncertainty in the dealer community, and hopefully that will work through sooner rather than later. What was the other question?

Just sort of the tone for 2010, whether in conversations people are saying they are sort of waiting a little longer?

As you know, we don't do an up front. So it is a little early for us to be talking about 2010. About the only customer that we know is looking at expanding their spend with us from a national point of view is McDonald's. McDonald's has traditionally used outdoor in a sort of every-other-year fashion. This year, they came in two years in a row for the first time in a long time. They bought a little less this year than they bought last year. Last year was their normal every-other-year cycle.

So we are -- we do feel good about the kind of tone and tenor that we are getting out of McDonald's. Other than that, it is too early to tell.

Great, thanks.

Our next question comes from Mark Wienkes with Goldman Sachs.

Thank you. On the customers buying shorter, how much of that do you think you've cycled through in terms of your book of business? How much of that is left to price at spot? Are you mostly through that at this point or no?

Keith, do we have any -- so the question would be, what percentage of our book is now 3 to 6 months as opposed to what would traditionally would have been 12 months?

Yes, that's good. Like, how has the average contract duration changed. My understanding was a year ago it was like 8 months on average, and now it is obviously shorter. How much of that are we through, such that you effectively repriced everything at spot, and there is only 10% more of the book to go, or how much is left?

I don't have that in front of me. Keith?

I think from talking to our regional managers -- in every quarter, we have a bring down call before we have the call with you guys, to get some color. I think what they were indicating, Sean, a lot of the customers that have had 12-month contracts on the bulletin side are buying shorter cycle, and that you are looking at anywhere between 3 and 6 months. I think normally -- probably I think their estimate was about 50% of our bulletin customers go 12 months, and they were saying that now they think that is about 20%.

Okay.

I don't know if we can get to that question of how much of that we cycled through. We would have to get back to you on that one.

I guess you must have started going through that process by the beginning of the year, though?

Yes. It actually started fourth quarter of last year.

We are almost a year into it. Our ordinary cycle, our bulletins renew ratably over the year.

Right, okay. Then on pricing, on the bulletin side being down 7, is there a significant discrepancy between the larger markets and the mid-markets and small?

Yes. There is no question but that it is tougher sledding in the Atlanta and Chicago and New Yorks of the world than it is in the Baton Rouges, Little Rocks and Oklahoma Cities of the world.

Like twice as bad? Because we're just hearing from the larger operators that down 15 is closer, and I know you don't have a large SKU of that but --

Right. Yes, that would not surprise me. I think you would see their pricing down -- that makes sense to me. Them down 15 and us down 7 over the same period.

Okay. And then just the last one, I assume no M&A during the quarter?

No.

Okay, thank you.

Our next question comes from Jason Helfstein with Oppenheimer & Co.

Two questions. Sean, can you give us the revenue impact of digital on the quarter as far as the percent of revenue? And then just a follow-up on the expenses, can you update us on how many displays or contracts you guys have terminated year-to-date? You talked about it last quarter, right, going in and looking at contracts that basically kind of value to you below a normalized level. So maybe update us where you are, what your year-end goal is, what expense reductions you have seen from taking those contracts down, those that have [stayed] down, and if you hit your year-end target, what you think the full-year savings will be. Thanks.

Sean, I'll do the dismantles and you do the rest. I'm going to need you to do digital, too, I don't have that one in front of me. Okay. Jason, on the dismantles it is about 1,800 units year-to-date. The average rate per panel is only a couple hundred bucks per month. So not that much revenue loss, and not really that much savings from the cancellation of the lease expense associated with those units. The real savings has come in, and is where we have had an opportunity to chat with our landlords and talk with them about where we are and where we think we are headed, and what percentage of our revenue we should dedicate to our lease costs. So most of the savings on the lease portfolio has come from lease negotiations.

You have asked -- you have touched on something that will be interesting for the Company for 2010, because we have done an excellent job of ringing the costs out of our business, across all aspects of our business, and that will be tough to replicate in 2010. So the real opportunity is through the active management of our lease portfolio, and I expect we will continue to actively manage that portfolio through 2010.

On the digital, as far as the percentage of the total revenue for Q2, it was about 8%.

Okay. Thank you.

Our next question comes from Jim Boyle with [Guildford] Securities.

Good morning. Sean, roughly what percentage of your revenue is from either ad agency business, whether it be local, regional or national, or direct -- converse, direct to client?

It is 50/50 when you take out national. So if you take -- that percentage of our business that is local, which is about 80% of our business, 50% of that business will be local or regional ad agencies, and about 50% will be direct from our sales force.

Kevin, would it take either flat or slightly positive, or perhaps even better, year-on-year revenue revival before you start thinking about moving up again on digital CapEx?

Yes, I think we have had no problem honoring our [take a pay] contracts that we have out there. You know -- well, we want to make sure that our leverage is appropriate in 2011, when we have got some maturities coming due. So our CapEx, and how aggressively we move in the digital direction will be 100% dependent on the Company's leverage.

Okay, thank you.

Our next question comes from James [Mark] with Piper Jaffray.

Hi, it's Michael Sklansky for James. One question on CapEx. Can you help us understand, with reduced CapEx levels, how you are prioritizing your CapEx needs?

Then I had a question on interest expense. Should we look at this current quarter's interest expense and sort of project that forward, or were there some one time expenses in there that are giving it a short time boost of what we will see going forward?

We had a little trouble hearing the question.

Both questions?

No, I think we got the -- let us tackle the CapEx and then get you to repeat the other question that we didn't hear. Digital is number one on CapEx and the rest of our CapEx effort is -- the way we brand our product is we like to have a nice, clean uniform look across the country, and so whatever maintenance is required to achieve that. And then after that, it is -- don't spend it unless you absolutely have to. The good news is over the last few years we have spent an awful lot of money making sure that our structures look the same and they are safe, and they present our customers in the most positive light we can. That is going to inure to our benefit over the next couple of years. We can go three, four, five years at very skinny CapEx because of the investments we have made the last three, four, five years.

Great. So I will take another stab on that second one. Another way of asking, is given no reduction or increase in debt levels, should we see a similar interest expense for next quarter or were there some -- was there some irregularities in that second quarter?

If you look on our free cash flow schedule in our press release, the cash interest was $46 million, the book interest on the statement was $56 million. There is obviously some amortization of original issued discount in the $56 million. There was a one-time charge that we took in the book interest for the -- without going into accounting detail, on the convertible tenders, the transactions we had in the second and third quarter. So that should come down -- the book interest should come down slightly going forward.

The cash interest, that's pretty much I think the run rate going forward. Does that answer the question? Anybody? Hello? Are we still on the call?

Yes, sir. Our next question comes from James [Hoeg] with Wedbush.

Two questions. Going to a normalized revenue environment, whenever that reappears, would you expect to get back to your normalized operating expense increase expectation, kind of in that 3% to 5% range excluding digital, or how do you look at that?

Then, secondly, just in the quarter was digital overall accretive or dilutive to overall -- you know, that pro forma decline of 16.5%? Otherwise put, what was your pro forma growth excluding digital in the quarter, if you have that?

Sean, I can answer the digital. On the pro forma, the digital ad was zero. It added no pro forma growth and no pro forma decline.

Okay.

What was the first one?

When will expenses -- if revenue stabilizes --

Right. There are parts of our business where I think we have permanently changed our cost structure. Kevin alluded to the lease portfolio, and I think on some of the other OpEx items, I have talked a little bit about the impact of moving away from paper and glue, and we now have a different substrate for posters. That is helping.

Going forward, when business picks up the expense item that will rise with that are AE commissions. You will see that maybe tick up disproportionately as business picks up. But other than that, I think the work we have done is permanent and lasting, and helped us essentially establish a new cost structure for our business.

So would the two things kind of offset, and kind of get you back to that similar expectation? I think, Keith you have sometimes given it to 3% to 5% if you are in the mid-single digit growth environment, maybe with the commissions being -- growing a little faster than historically but some of other parts not?

Yes, but taking off of what Sean said I think you would see it going forward more toward the 3% than the 5%. Because, again, the changes we have made, especially in our lease portfolio and the way we manage that now.

Okay. Thanks very much.

Our last question comes from Bishop Cheen with Wells Fargo Securities.

Thank you for taking the question. You guys have been busy with your balance sheet. You have done a great job, given yourself a lot of flexibility. This shouldn't take long, I just want to make sure I have the right pro forma snapshot. So you are roughly sitting on about $40 million of cash pro forma for the July 15th transaction?

Yes, that's right.

Okay. And then on the $200 million revolver, you had at June 30th about $143 million available. Did that change into July?

Let's see. Right now we have about $155 million available today.

Okay. So you only had drawn something like $45 million on the revolver?

We have drawn $35 million, and then we have $10 million' worth of letters of credit backing up some of our insurance programs, and that reduces the availability as well. So all we have is $35 million drawn in cash on that.

Okay. And then all the other balances, the term loan was about 370, the incremental term was about 773; did those change at all?

From June 30?

Yes.

No. The next principal payment is September 30.

All right. And then obviously the three -- the 2Q, the 6 and 5 days and the 7 and a quarter, those balances were roughly the same? There was nothing that changed there?

Correct.

The final question is the 2.8 -- what did we have -- $2.8 billion, Sean, at June 30th?

Yeah, that would be right.

Is that still pro forma as we're into July, roughly the same, there's been no --

Well, we reduced it by $120 million, because we had the second tender for --

That's what I wanted -- now I'm with you on the same page. You are back to really under 2.8 billion?

Yes.

About $2.78 billion, somewhere around there.

$2.75 billion.

Yes. All right, so you have all this flexibility, and then as you get past the rest of this charming year and into maybe a better environment in 2010, how are you looking at expanding your expenditure for digital? On a quarterly basis? On a big yearly basis? I mean, how do you go thinking about how much you can expand your budget for digital?

It is a function of -- it takes some lead time. So it won't happen overnight. But we are still out there working sites and developing sites. We are just not going forward with the completion of that work. So there will be some pent up demand, but it won't -- it takes a while for the digital factories to gear up. It would be -- I think the money would be spent pretty evenly over the quarter, and how much we would decide to spend during that period, it is all a function of demand. So we are -- we are not in the position to make any estimates at this point.

Right. You are sticking with -- you gave very specific guidance at the beginning of the year of exactly how much you would spend on digital, and it doesn't sound like it has changed a whole lot?

It hasn't changed and it will not change. What we were spending was to honor the contracts we had in place.

Okay. This is all very helpful, thank you.

Operator, That concludes our call, and I want to thank everybody for tuning in and we look forward to the next quarterly call.

This concludes our conference. You may now disconnect from the call.