Lamar Advertising Co (LAMR) 2009 Q3 法說會逐字稿

Excuse me, everyone, we now have Sean Reilly and Keith Istre conference.

Please be aware that each of the lines is in 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 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 report on Forms 10-K and 10-Q in the registration statements that Lamar files with the SEC from time to time. Lamar refers you to those documents.

Lamar's third 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 Sean Reilly. Mr. Reilly, you may begin.

Thank you for that. Thank you all for being on the call, and welcome. As mentioned, we won't be hearing from Kevin today, He is out of the country at a wedding. We will certainly miss him, but we have some really good things to talk about today. And you're going to hear two major themes.

On the revenue side the theme is guarded optimism. Our folks in the field feel that the worst is behind us. Our customers are doing better and that's showing up in ad spend. We will touch on that in a little more detail later.

And on the expense side, the theme is sustainability. As we attacked the cost side of our business this year, we were determined to focus on those things that would carry us into future years and not have just a short-term reaction to a severe cyclical downturn. But rather take this opportunity to make us leaner and stronger so that when the storm clouds clear and blue skies return, Lamar will emerge better on the backside and better for having weathered it . And that's what we have done. Quite simply, we have learned new and better ways to run our business.

I'll touch on that in more detail later, but for now let me turn it over to Keith. He will walk us through

All right . Good morning everybody. As you saw in the release today, our actual 3Q revenue came in somewhat stronger, down 13% than we guided to which was down 15% on our last call the first week of August. Just a little color on what transpired since then. Bookings and new contracts at the time of the last call were showing really no change from the pacings we saw in Q2. In addition, all the news about the back to school season and the impact on retail was bad, so we felt guidance to down 15% was prudent. During the third week of August our daily contract activity started showing distinct improvement, not only for the rest of August, but for September and the fourth quarter as well. As of right now we're continuing to see that trend and Sean will get into a little more detail about that later.

On the expense side, there's no surprise there. We said on the last call expenses would continue to run at these levels through the end of this year. For Q4 the actual expense run rate will be in line with the first three quarters. But the percent decline will be less because we started our expense reduction program, if you remember, at the beginning of last October last year. So our Q4 actual expenses last year were significantly lower than the other quarters. The pro forma -- because of this, the pro forma percent decline you're going to see in Q4 this year will be approximately 8% to 9% versus 12% to 15% we have been running. So please keep this in mind and no need for alarm when we put out our fourth quarter press release.

Just a little color on where we were at the beginning of this year as it pertains to the guidance we have given this morning. At the beginning of 2009 when all of our budgets were completed, I did some sensitivity analysis on the numbers. At that time I told Kevin and Sean that our best case EBITDA for 2009 would be $410 million, worst case would be $365 million. After we mulled it around, we kind of all settled on a number of about $390 million as probably where we would end up. From the guidance we have given you today, when you do the math you will come up with full year EBITDA for Lamar of approximately $440 million, so we're going to end up a little better than we had even hoped.

If you noticed in our press release, our free cash flow for the nine months ended September 30 was $191 million. All of that has been applied to reduce our outstanding debt. We will continue to apply all free cash flow for that purpose. And our total debt at 9-30-09 was 6.0 times. As we guided for the full year CapEx, it will end up at approximately $35 million. Sean assures me this is a very sustainable run rate for 2010. That being

Let me talk about digital first. I'll give you the numbers for our total number of units in the air as of today, 1135, 574 of those are bulletins and 561 are posters. And we now have our digital product in 138 markets. Very happy with the digital performance, particularly the last six or eight weeks. It is recovering faster than our other products. Stronger performance, it's our premium product, higher CPM, shorter cycle sale, and I think that bodes well for our feeling that, again, the worst is behind us and things are picking up. So very pleased with that. As Keith mentioned on the CapEx side, we limited our CapEx this year to $30 million to $35 million, about half of that was digital Cap Ex. As we look into 2010, probably looking at about the same aggregate number. We're going it hold our CapEx to that $30 million to $35 million. Hopefully, if that digital trend continues, we'll be able to skew a little bit more to digital.

Rate and occupancy, posters first on occupancy. Q3 2008 was 68%, Q3 2009, 67%. Bulletins Q3 2008, 75%, Q3 2009, 73%. A little bit surprising there. The occupancy has held a little stronger actually than I thought. What you will see when I get to rate is that the decline was a little more dramatic there than traditional down turns. Something we're going to have to keep our eye on. So rate for posters, Q3 2008, 456; Q3 2009, 423; or a decline of 7.2% on poster rate year-under-year. For bulletins, Q3 2008, 1179; Q3 2009, 1097 average rate per bulletin panel or a decline of 7%. So interestingly as we're navigating our way through this particular downturn, the severest we have ever seen, we're seeing a little bit more erosion in rate than usual and a little less erosion in occupancy than usual, so that's kind of an interesting, interesting phenomenon. Again we will be watching that.

Acquisitions this year, none.

Let me talk about our customers and how they're performing in the book. Again, not huge changes, but we do have some relative strength relative to other categories. Telecom,for example, is doing very well, Verizon, AT&T. Health care is up, insurance is strong, State Farm, Geico. Financial and banks, particularly community banks, are showing relative strength. Education is up year over year. And interestingly, as we looked at the book of business, other media is up. Which was a little surprising to me, but happy to see that.

But in general if I had to categorize it across the board and these are, again, relative strength, there's pretty small movement in the numbers. At the end of the day it's just sort of what we're sensing is a broad base across the board recovery in ad spend.

Let me talk about the expense side. One of the questions we're asking ourselves and managing to is the sustainability of what we did this year. And when we look at the various categories of expenses and the gains we have made, we continually ask ourselves what is sustainable. And the conclusion we have reached is a very significant percentage is sustainable. On headcount, we are about 500 folks fewer today than we were this time last year. Now, 200 of that was by attrition and about 300 was actual layoffs. And as I talk to the field and we think through our headcount we feel pretty good going into 2010.

On the lease portfolio, we continue to exceed our expectations as we attack the lease portfolio. And as we think through what we did this year on the lease side, we're approaching $15 million in annualized savings. That will certainly carry over into next year. But more is what we learned. We now have analytics and an approach that we're going to take year in and year out in good times and bad, so that the lessons we learned on the lease side inure to our benefit and it's not just a cyclical reaction.

I've talked a little bit about the switch from polyethylene on our poster product from paper and glue. We have come of pencilled that out, we're saving a few million on paper and glue. We, of course, now recycle that product so that it's not only green, but it saves us a little money. People pay us to pick it up, our used material, rather than us having to pay others to take it to a landfill. But it's also helped us in the back shop. We have fewer installers, our trucks are lighter, and all that ends up saving money in terms of man-hours and truck expense for servicing our customers on the poster side.

I've covered that a little bit in previous calls, but what I may not have spoken to is a similar phenomenon you're going to see as we move into 2010 and 2011 as we move from PVC for our bulletin product to polyethylene. Again, lighter sub straight, cheaper sub straight. We will save on printing. We saved about a million dollars this year on printing, not printing on paper, but printing on polyethylene. And I think you will see a similar number when we move to a cheaper and lighter sub straight with polyethylene. You will see a similar phenomenon in the field because it's so much lighter and recyclable. So that sustainability theme is something we're carrying through as we think about making our business better, more green and leaner.

We have also this year started taking our digital maintenance in-house rather than relying on warranties from our manufacturers. I thought this was going to be a small number when we first started thinking through it, but actually run rate this year we will save a little over $3 million doing that. We're about 75% of the way through that program. So again, the theme here is we really wanted to focus on being better at what we do, not just reacting to the cyclical downturn. And that seems to be the case and I'm very proud of all of our folks in the field.

As Keith mentioned on the CapEx side, we spent a lot of money 2004, 2005, 2006, 2007 integrating a lot of acquisitions. And that money was well spent and it's going to serve us well into the future. Our run rate CapEx can stay where it is for quite sometime. And the only thing that I see affecting that is what we decide to do on the digital front. Of course we control that. But in terms of making sure our structures look good and are safe, that money's been spent and again will serve us well, well into the future. So with that, let's open it up for questions.

(Operator Instructions). Our first question comes from Martha Ryvicker with Wells Fargo Securities.

How much visibility do you have into 2010 and do you have a feeling as to when your top line could actually turn positive? Secondly you made comments earlier this year about digital billboards and cannibalization that you were seeing. Can you talk about digital now in the context of new advertisers and also cannibalization.

It's a little early , Marci, to be thinking 2010. We are sort of just in the throes of those discussions with our national advertisers. John Miller who runs our national sales shop is -- probably would use the same word "guardedly optimistic" going in. The tone is better. But again, it's early to be thinking about that. We do have to be cautious because our book of business is shorter at this moment in time than it traditionally is, so it is a little harder for us to look too far beyond three months. That can be a good thing. Because to the extent that we have had some rate erosion being short in the book can be helpful when things come back. So again, it's just a little too hard to look into 2010.

On the digital front, what we're hearing really across the board from virtually every region with the exception of Las Vegas, is that the digital product is doing for our customers exactly as advertised. They are using it aggressively, they are changing copy repeatedly, they're being very creative with the space and they feel like they're getting great value for it. , And digital as a percentage of our book today is over 10% on a monthly run rate basis. So it's increasingly becoming an important product within our mix. And the reports from the field is that it's

And is it basically new advertisers that are interested?

Yes. Well, I hit on the financial category. A lot of the community banks are trying to increase deposits and they're averaging daily changes in their CD rates, their savings rates, etc. While the real estate development and builders category has virtually evaporated. We are seeing a come back from the real estate agents and brokers who use us in lieu of the newspaper classifieds. So they're advertising specific homes at specific price points. So that's all good. The auto category is tip-toeing back in. But I'd have to label that tip-toeing.

Great, thank you.

Thank you. Our next question comes from Jason Helfstein with Oppenheimer and Company.

Hi, how you doing. Just asking a little bit more on the digital since it's the hot topic. First I just want to clarify, if we wanted to figure out revenues, if we use 10% for digital revenue for the quarter. Is that a good number or do you want to give something more specific?

As far as --

The actual.

The actual yes.

It was approximately $24 million.

Okay. So then my question is Sean, do you have any statistics you can give us on average change in price for digital, let's say year to date. And as the sale team is pushing digital, any thoughts on has that been cannibalizing static. Then do you have any examples in markets where the digital conversion rate has held up? So if I recall when times were good, the digital conversion rate was five to six times, mathematically last quarter it was almost about one times. So just any commentary on any markets where it has held up. Then if you can talk about how fast you think that that conversion rate comes back.

Well, if I look at it same board Jason, so this would be sort of -- this would be a mix of rate and occupancy, just sort of a same board performance, it's probably running a couple of points better than our other products. So the beta through the year has been higher than our other products. When we started out the year, I think we were telling you that same board was down in the low 20s. And our book was down in the mid-teens. Today, same board's probably down in the -- for the third quarter down upper singles versus the whole portfolio being down 13. And trending, trending better. It's hard to get into too many specifics on it because you don't want to get lost in the weeds. But in general, we're feeling very good about it. We feel like this year we added the right amount of capacity.

Next year if things feel like they're getting better, we're going to skew that $30 million to $35 million in CapEx that way. One unintended good consequences of our dismantle program is we have a whole lot of steel on the ground right now. And to the extent demand comes back for new builds on the static side, traditional bulletins, we can execute without having to spend a lot of money. We have got the steel, concrete is cheaper, etc. So we will be able to skew the CapEx and stay very disciplined to that $30 million to $35 million. We will be able to skew it to digital if demand is there.

Any examples where the conversion rate has held up, like the average number of advertisers has still held up or the price has held up or something like that.

You're talking about stuff we deployed this year?

I mean, in general you used to be able to get five to six times revenue per digital display and that's dropped dramatically. I'm wondering if there's any examples in any markets where that's held up? Or has it kind of been universal across the portfolio?

The only place I can give you where we put up green field digital this year that exceeded our expectations is Puerto Rico. We're doing extremely well down there and sending more units. In terms of green field, we have been fairly disciplined, very careful about where we're spending these dollars. I guess that answers your question.

I'll go one more. So when you think about pushing the portfolio, are you concerned at all that you get digital sales at the expense of static sales?

Not really. When we first started going down this road when times were better, both were growing. We had same store good performance across the board. When things started getting soft, 2008-ish, you go back and you can look and we started reporting digital was still up, bit we started seeing a little bit of erosion in our bulletin business. Where we now know the recession started in December 2007. So was that cyclical or was that us taking share from ourselves?, I would say we're still in the throes but coming out of a severe cyclical downturn. The product that is our premium product with our highest CPM and shortest cycle sale is leading us out. I mean those are the data points we have.

Okay, I appreciate it.

Thank you. Our next question comes from with Alexia Quadrani with JPMorgan.

Hi, thank you. A couple of questions. First, can you give us an update on your contracts with the landowners, roughly what percentage they are structured as a percentage of revenues versus more of fixed fee. The second question, I know you're mostly in the smaller markets, but if you can give us a sense how business is trending in the large markets versus small markets, is there any difference?

This is Keith. I'll answer the number questions on the leases. Last year our total lease cost was approximately $200 million and our percentage paid was $15 million of that $200 million or 7%. This year our percentage paid because of the downturn in revenue, our actual out-of-pocket expense will be about $10 million compared to $15 million last year. So as far as percentage, I'm not sure. It will be probably about -- our total portfolio has declined, so it probably -- even the $10 million will probably still be 6% to 7% of the total expense cost.

Yes, I mean the short answer there is percentage leases make up a small amount of our portfolio. Large market, small market, I think that pricing pressure is still there in the larger markets. Pricing has recovered, I believe, and is recovering in the smaller markets. This is going to be, I think, sort of an uneven lumpy recovery if you look at the nation as a whole. Regions went into it at varying times and in varying degrees. And they're going to come out of it at varying times and varying degrees.

So when I look at it, I think it's going to be -- the recovery is going to be more regionally focused rather large small focused. Right now on a relative basis, the northeast seems to be pulling out faster than, say, the western region, California, Nevada. There are signs of life in the southeast. Even in Florida. So it's going to be uneven and lumpy, I think, in that way. Traditionally, in our business there's a higher Beta in bigger markets. They fall further, but come back higher and faster. So we will see if that holds true.

Okay. And just one more question, I know you mentioned that the contract lengths are still fairly short term and therefore you have limited visibility into next year. But are you getting any sense that some of your clients are willing to contemplate or consider longer term deals now?

For us, we really have to focus on our bulletins. And we're so heavily skewed local that it's tens of thousands of decisions that are being made. That being said, 50% of our bulletins are still 12 months. In previous years that number would have been in the 70% or 80%. So in order of magnitude, we're shorter than usual. But you've got again, when 75%, 80% of your business is local and you've got 30000, 40000 customers, it's an aggregate read you have to get rather than trying to focus on one category or one customer.

Okay, thank you very much.

Thank you. Our next question comes from George Hawkey with Barclays Capital.

Hi, thanks for taking the question. I just have one. I know you spoke about it a little bit on the comments before the questions, but I wanted to get a better sense of how to really think about total expense growth going forward into 2010. I mean, I think it makes pretty significant difference in margin and in total EBITDA moving forward. So if you could give some sense how to think about that going forward I'd appreciate it.

Well, we spent a lot of time thinking about this. And we have reached the conclusion that you're not going to see any sort of catch-up spike, if you will, where we did some things this year that we can't carry into next year. Now, there are some things that we have to take a hard look at. For example, we suspended the 401(k), that's one of those things that we did. We wouldn't be the kind of company that that you guys would be proud to be covering if we didn't have a 401(k). So sooner or later we're going to have to look at that. We haven't made any decisions yet, but obviously sooner or later we will have to look at it. So there are those sorts of things. They're not big dollars, but they're things you have got to think about.

Let's assume some growth on the top line so that we're not in an environment where we have to be draconian again. With some growth on the top line, I think you will see expense levels at the 1% to 2% off of actual this year. If that's sort of a fair number for you guys to model.

Sure, that makes sense.

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

Thank you. Just to follow up on that question from perhaps a different angle. If you think about the incremental EBITDA per incremental revenue dollar next year relative to your 45% margin that you just posted, or relative to the average -- the full year margin, EBITDA margin for 2009, do you think the EBITDA flow-through from the revenue growth next year is sort of right around the average EBITDA? Does that make sense?

I'm not sure if we follow, Mark.

Essentially the incremental margins in 2009, will they be above, at or below your average margins for 2008?

2008, what was that, 45%?

45% this quarter on our math.

But I mean for 2008 2009.

I'm sorry, 2010 versus 2009.

2010 versus 2009. Every incremental dollar of revenue flows down to what increment, 45% or higher, that's the question, right?

Yes.

I saw your note this morning, I thought that was very interesting interpretation, I agreed with it. I don't know, it's just hard to say. It depends on the top line revenue growth, and as Sean said, if we have got some -- let me put it this way. It's not going to be any less than 2009. If we have to take additional steps to insure that that happens, then that's just what we have to do.

Right okay. Then the reduction in CapEx is larger in dollars on digital, but percentage-wise it's actually larger on traditional billboard CapEx. You mentioned the M&A impact. How much of the roughly like $40 million of lower spending on traditional CapEx, how much of that is related to getting integrating M&A versus other stuff?

A huge amount of what we did before this year was integrating M&A, getting boards that we purchased up to our standards. You also had a little bit of a frothy environment in terms of just new builds. We were putting up net new units in some places. What the field has come back and told me is that those dollars will serve us well, because we could not have to spend much on traditional maintenance CapEx, going forward, really, into the foreseeable future, three, five years. I mean, we have retrofitted all of our posters, the product looks good. For those of you in New York City, our 30 sheets look really good. We're getting good comments from advertisers and they're selling well. And we have done that all over the country. So that part of the equation is pretty much taken care of.

And I mentioned on the new build side, we have taken down about 4,000 units this year. So we have got a lot of steel sitting in our yards really all over the country. So to the extent we have opportunistic new build opportunities, they will go up a whole lot cheaper than they have in the past. So I think all of that's good.

Okay. One final, what drove the $15 million, $16 million tax benefit in the quarter?

That was NOL's. We just filed our tax return for 2008 and we were able to carry back NOL's for a refund that we will receive in the first quarter of 2010.

Okay. Excellent, thank you.

Thank you. Our next question comes from Barton Crockett with Lizard Capital Markets.

Hi, this is actually Victor Anthony in for Barton Crockett, thanks for taking my call. I have a few questions. One, I was wondering if you could discuss the competitive landscape in both your big and small markets, and whether or not the competition's coming from billboard, other billboard providers and other media formats.

Second question I had was on your EBITDA margin again. Looks like it's trended over the past decade between low to mid-40% range. I was wondering as you look at your business over probably the next couple years, do you envision a situation where you could drive their margins north, far north of where it has historically trended?

Third question is whether or not you could at least give us -- for your ad categories if you could give us percentage of revenues.

On the question of margins, really from here out it depends on top line growth. If we revert to our -- before this year historically, you could look back 30 years and outdoor grew 5% to 6% a year organically. And if we get back to those days over the next few years, you will see a pretty tremendous spike in our margins. On the competitive landscape, about 80% of what we do is in smaller and medium size markets where we on the outdoor side have a pretty commanding share and have traditionally had it. So our pricing umbrella is really set by other media. Other local media are awash in capacity right now.

So we are having to talk to our customers relative to what's happening to them with other media. So a nice rebound in TV, which seems to be happening, would be good to us. In the larger markets it's -- hopefully, we're at the tail end of all these pretty painful rate discussions. And my sense is that we are. Again, in talking to all of our guys in the field, they feel like pricing is firming up and that customers are coming in and they're not -- the first thing out of their mouth isn't I want a break on rate. They're now thinking more about I want to get as good a showing as I can get and I want my creative to be the best on the street. So the conversations have a better tone about them. Then you asked another question about --

Yes, I was wondering if you could give a breakout of the ad categories as a percent of revenues.

As a percent of revenue, yes, I can do that. Restaurants are 12%. This is going to be year-to-date through September. Restaurants 12%. Retail 9%, hospitals and health care 7%, service 7%, gaming 6%, amusement and entertainment 6%, automotive 5%, that by the way is down from 8%. Hotel motel 5%, telecom 5%, and financial has cracked the top ten for the first time in the last three or four years. Financial is at 5%. So there's our top ten. The ones that I kind of am keeping a close eye on, obviously the auto category is something that we believe is going to come back. And so we believe there's growth from that 5%. For the last three years year-to-date 2006, 2007 and 2008, it has held steady and firm at 8%. So those guys are going to come back.

What do you think about the real estate, I know you talked about it earlier. Do you think it will rebound as much as autos?

Well, it's fallen out of the top ten for the first time. If I can give you a little history, in 2007 it was 9% of our book, in 2008 year-to-date it was 6%, and of course today, it's fallen out of the top ten. And it's probably around 4% or 5%.

The broker business, the buying and selling of real estate, is something that is going to happen regardless of where pricing is. And so we are seeing a little bit of strengthening there. The developer builder side is still struggling. And has virtually fallen out of the book. As those folks come back, they will come back to us. But your guess is as good as mine as when people will be able to launch new developments. That was a significant chunk of our business and it's virtually gone today.

Okay, thanks.

Well, look, you want one more? We got time. All right, we will take a couple more.

Your next question comes from Ben Swinburne with Morgan Stanley.

Thanks. Good morning guys. You made some opening comments on occupancy and price, and it sounded like you thought there was some interesting trends there just beyond the headlines. How do you typically see those metrics move coming out of a downturn, what's different now? Your occupancy has held up, it's not that far off your typical over the last few years. I'm just curious if you think the pricing is a function of a different kind of downturn given it's driven by housing, how your competitors are behaving. I would think all your -- in a given local market, everyone has to start to see improvements, I think you alluded to that for pricing to tick back up again. Is there a better mix of how revenue is driven over the next couple of quarters as you recover between those two. I mean, at the end of the day, revenue is revenue, but I was curious how you think about those levers?

We have been through a number of these downturns, the management team here. And traditionally, our approach has been to hold the line on rate as best as possible and suffer in occupancy. And traditionally, I mean if you look at the 1991, 1992 recession, the 2001, 2002 recession, our average rate would hang within one or two points going through the cycle. And our average occupancy would drop about in both products, let's call it 7% blended. This time we're seeing a little different spin on that. Now, the occupancy has essentially done what it always does. It's blended down about 7% from normalized occupancy. And so the severity of this particular cycle, I mean this particular ad recession which has been more severe than we have ever seen in our business careers, is showing up mostly in rate as evidenced by my rate and occupancy discussion. So, and again, traditionally coming out of a recession, occupancy comes back faster than rate. That's been traditionally our experience.

So from a lower base rate, you it's our belief that we can come out with essentially more in the way of occupancy gains than rate gains. That's traditionally been the pattern. And we have room to move on occupancy, because we're down again, as I mentioned, the 7'ish percent that usually happens going into these things. One percent increase in bulletin and poster occupancy across our platform rate being the same, is $12 million in revenue to us. So we're going to be laser like focused on that, because, again, we believe occupancy comes back faster.

And if I could ask one follow up on -- I don't know, Keith, if you have the lease expense change year -on-year. It sounds like you guys are saving maybe $3 million or $4 million bucks year-on-year. Sean, you mentioned you have some analytical tools you feel better about this going forward, how you manage that cost, which is a big one for you guys and it takes time to renegotiate them. Should we see -- going back to your 1% OpEx growth in 2010, should lease expense be flat or maybe even down next year as you sort of continue to cycle through these savings?

Yes, at the end of the day if you look at our lease portfolio and look at our history, year in and year out our lease portfolio which is huge, right, I mean it's 75,000 different landlords --

Yes.

-- and agreements, it typically gross at the sort of 3% to 4% to 5%, depending on where CPI's are. I'm giving you sort of a 30 year look back, right?

Yes.

If we did nothing, that's what you would expect. I think because of what we did this year and what we have learned -- more importantly, what we have learned about how to better manage this, we should be able to hold that below that traditional growth rate. Going into next year I think flat to one is doable.

Yes.

Because we will be able to analyze real savings in the portfolio this year and we will keep attacking it. We have learned a few things.

Yes. Thank you very much.

All right. This will be the last one.

Our last question comes from James Marsh with Piper Jaffray.

Hi, guys. I just wanted to circle back on a couple points you made here, Sean. And I guess I'm trying to just get to this 5% to 6% organic growth rate. Is that a number that we get back to at some stage. Because I hear you saying some of these other local ad media provide kind of an umbrella for pricing, were awash in inventory. I think we've got a secular local advertising issue to deal with. Your rates are relatively expensive. At least during this rebound, it seems like rates are down in radio and TV land still down in the mid-teens. I'm just trying to see how you get back to 5% to 6% revenue growth without a really robust ad market.

Sure. Well, a couple of points there. Our C PM's are still far below radio, TV, newspaper. So while they're -- on a relative basis while their rates have fallen more than ours, our CPM's on an absolute basis, we're still the cheapest game in town. I would argue that that rate erosion they're suffering is secular and cyclical, whereas what we're going through is a cyclical phenomenon. I think they're still challenged from an audience point of view and so they are still wrestling with some secular issues with their business model. So for us, it's really a matter of rebound and less a matter of what the other guys are doing. In terms of getting back to normalized growth rates.

When you talked about "some revenue", then you gave cost quote number of 1 to 2, what is some to you? Is some the historical organic growth rate in that mid-single digit range, or are we talking about positive print?

Yes, I mean if I had to guess right now what it is for next year and I'm not looking at our book, I'm just thinking about what folks that look at aggregate ad spend are saying about the world next year, in my head I've got my head wrapped around sort of the 3% growth number. It seems reasonable to me. Again, this is not a statement on our book of business. This is more what does the world of ad spend look like, what does domestic US add spend look like for next year. And again, wiser minds than mine are trying to get their head around that number.

Just to follow on that, if we're talking about slightly positive, I'm just trying to get to the 1% to 2% cost growth. It just seems hard to get there with an inflation rate of 3%, some variable cost element related to sales, 401(k) coming back in, it just seems very difficult to get there. I'm hard pressed to get there.

One of the things you need to look at is some of the things we have done actual this year are not annualized. They happened mid-year. So we will get the full benefit of them next year. We believe that the strides we have made on the lease portfolio in particular will carry over into next year.

Those are inflation -- you have a fixed cost with inflation rate right around there. Then you have got, you said 7% of your portfolio that's variable, right?

No. We don't have inflation, it's very very few of our leases are tied to escalators and inflators.

But you have to roll them forward, so you're always rolling forward and they're always in nominal dollars. There's a percentage of the portfolio that's always negotiated in past dollars right, in historical dollars, then you're in current dollars. So it's kind of always rolling. You can't hide from inflation just because you don't have an escalator built in.

But the majority of our leases are flat pays. Right. They have an average of seven year life.

Is real estate going up or down? I mean, just fundamentally, are the fundamentals of real estate going up or down?

If they're going down where's the ad mark, they're going to be correlated.

Not necessarily. And particularly, not necessarily with our lease costs. Because again, because of where we operate, very few of our leases are percentage pay. So when we get a spike in revenue, we don't necessarily have to hand that check to the landlord. Now that's a different phenomenon in larger markets. But where we operate, we maintain a lot of operating leverage on our lease portfolio when times get good.

So I mentioned some of the other things we anticipate happening. This move to polyethylene away from polyvinyl chloride is a pretty big deal and it's going to be very helpful. The headcount, we feel pretty good about where we are. I'm not getting a lot of grumbling from the field that they can't service their customers because of what we did this year. So all of that stuff again is, in our view, sustainable.

All right, well, thank you Sean. Thanks Kevin.

Yes. All right. Well look, again thanks for listening and we look forward to talking again as we wrap up this year and head into next.

Thank you. This conference has concluded. You may now disconnect from the call and have a great day.