Lamar Advertising Co (LAMR) 2009 Q4 法說會逐字稿

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 in the Company's report on Forms 10-K and 10-Q and the registration statements that Lamar files with the FCC from time to time, Lamar refers you to those documents. Lamar's fourth quarter and year end 2009 earnings release which contains the information required by Regulation G was furnished to the FCC on a Form 8-K this morning and is available on Lamar website at www.lamar.com.

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

Thank you. I want to welcome everyone to our 4Q quarterly earnings call.

As is our custom, management will make a few comments and then we will open up call for Q&A. The results that you see before you speak for themselves, and it looks like 2010 is a recovery year and every month is getting better and better. Keith and Sean have more color to give you, and, so, I would like to go ahead and turn the call over to Keith Istre, and then over to Sean Reilly.

Good morning, everybody.

As Kevin said, it is pretty straightforward. You saw the results, just a couple of color commentaries on the revenue side. Our guidance was for 7% down in 4Q, we came in at 6%. To give you a sense of how that came about by month, October was down 9% over last year's October, November was down 5% and December was down 4%. So, as Kevin said, we continue to see some sequential improvement. The expenses were down 6% pro forma in 4Q. I noticed one or two of the commentaries that came out this morning, that they were expecting something around the 9% range. I guess we probably were, too, on the last call. That is what I indicated.

Let me give you a sense of a couple of expense items that came through that brought that down a little bit. Bad debts in the fourth quarter were $1million higher than they have been in any other quarter. That is due to the fact that our guys were going in and cleaning up their H-file balances to start off the new year. We had a couple of serious accidents on the structures at the end of the year. We hadn't had any in a long time. It was very disappointing. But we had to take an additional accrual of $1.5 million in the fourth quarter to cover the reserves that our workman's comp insurance has set up for the rehabilitation on those employees.

We took an additional $700,000 accrual for bonus expenses. Kevin and Sean thought that some the officers in the field went above and beyond their performance grid requirements. And since we came in above our EBITDA guidance of $440 million for the year, as you saw we came in at $441 million. They decided to reward some of those folks with some subjective bonus. And for the Company as a whole, again, because we were above our EBITDA guidance, the Company awarded everybody, all non-officers, a one-time, $500 special bonus that we accrued for in the fourth quarter at $500 a piece. That amounted to $800,000 additional expenses that we took in the fourth quarter. So you add those up, that comes up to $4 million if we had not had to incur those additional expenses, we would have been down 8% for the quarter.

And remember, as we said on the last call the fourth quarter of 2008 is when we really started imposing the cost reductions, so we knew that our expense decline as a percentage would be much greater - - or much less than it had been in the previous three quarters. The only other comment, the guidance that we had given for CapEx was between $35 million and $40 million for the year. You saw we came in at $38 million, and that is basically what our budget is for 2010, as well.

With that, Sean?

Thanks.

I will first hit some of the stats that we typically give out and then try to give you a little color on the first quarter and what we are seeing in the books and what we are seeing for the year to the extent we can see that far out. As Kevin mentioned, it is feeling an awful lot like a recovery year. What we are seeing in the book is some good momentum and every month is getting better. Going back to the quarterly stats, we ended the year with 1,146 digital units in the air; that is 582 posters - - I'm sorry, 582 bulletins; 564 posters. As of today, we have 1,154 digital units in the air, 590 bulletins and 564 posters. Digital continues to perform exceptionally well. It is the product category that is leading us out as we recover. Year-to-date our digital billing is up 15%. It is pacing that way through the year and momentum is building in our digital book. It is virtually equally split between national and local.

In terms of rate and occupancy; posters 4Q 2009, occupancy, 63%; 4Q 2008, 57%. Bulletins; 4Q 2009, 72% occupancy; 4Q, 2008, 71% occupancy. What you are seeing again as we progress monthly as we pull out of this thing is occupancy is firming up quite nicely. On rate; 4Q 2009 posters, 417 average rate per panel; 4Q 2008, 453 average rate per panel; Bulletins, 4Q, 2009, average rate, 1096, 4Q 2008, average rate, 1,163. We obviously have never seen anything like what happened to us last year. Those rates statistics are something that we have never seen before, but the good news, again, is as we track it monthly, those rates are firming up.

The top 10 advertiser mix 2009 compared to 2008, was virtually the same top five that you are use to hearing; McDonald's, Cracker Barrel, Verizon, Coors, AT&T, a little bit of jockeying amongst them but essentially the same. Going into 2010, virtually all our top national accounts are indicating increased ad spin with us. And they are all feeling better, obviously, going into this year than they felt going into last year. Categories of business, again, very similar. A couple of minor percentage changes. Restaurants in 2009 was 12% of our book of business, picked up from 11% in 2008. Retailers stayed the same at 10%. Hospital and medical care picked up 1%, to 8% in 2009 from 7% in 2008. Gaming, amusements stayed the same. Obviously, automotive kicked down from 7% in 2008, to 5% of our book in 2009. We are hearing better things out of our local dealers as we go into 2010.

The first quarter, January started off down 3%. February is up about 0.5% and March is likewise pacing up, hence our guidance. And our thinking that as we progress, things are getting better monthly and momentum is building in the book. On the expense side in 2009, we essentially built a lower base on the expense line from which we will now run our business. I am awfully proud of what we did last year. In fact, I believe we performed over and above the call of duty. Going into 2010, you can expect from that base expenses to rise give or take 2%. And that includes a 2010 raise for our back shop, non-commission, non-bonus employees of about 3%, that cost about $3 million. So we are taking care of our folks and we are going to keep expenses as you expect in line.

With that, Kevin, we're opening it up for questions. Chontel, let's go ahead and open up the queue for questions.

Thank you.

(Operator Instructions).

Our first question will come from Jason Helfstein, Oppenheimer & Co.

Thanks.

Just two questions. One, Sean, can you just give us what the specific impact of digital was on the quarter? And then secondly, should we expect any impact from lease renegotiations in 2010, and could that contribute to, I don't know, even lower expenses relative to 2% guidance? Thanks.

On the lease portfolio question, Jason, we are continuing to work it real hard. As a matter of fact, when we sat down in December and thought about whether or not we could give 3% raises to our clerical and folks in the back, we set a goal of a minimum reduction in our lease portfolio from an absolute amount of $3 million, so that it would be a wash. So, if we can can do better than 3, then we do better than the 2%. And - - I think we are tracking to do marginally better than a - - $3 million absolute reduction in the overall lease portfolio. Long story short, we continue to work it very, very hard, because we learned an awful lot last year. What was the other one?

The impact of digital on the quarter? Millions or percentages or something?

Are you talking about fourth or - -?

Fourth quarter, fourth quarter.

It was up about $6 million over last year.

Okay. Thank you.

Thank you. Our next question will come from Marci Ryvicker, Wells Fargo Securities.

Thanks.

Sean, in terms of the digital boards, are you still expecting to accelerate the roll out in 2011? And then if so, what do you envision in the terms to have pace? And when would we start seeing this hit CapEx?

It is a little too early to talk about 2011. I can say with a good deal of confidence that 2010 is going to look like 2009, roughly the same deployment. Again, one thing we are learning is that we can also move these things. We had - - a marginal number, maybe 1% or 2% under performed last year in the downtime, and we are finding better locations for them. So we are hoping we can drive digital billing by moving a few around and not spending to spend as much on CapEx. All that being said, if we perform to your expectations in 2010, and 2011 looks like the kind of year that coming out of these things like 2003 and 1993 were, yes, you will see us aggressively go after digital codes, it is proving itself out. All indications are that the way our digital book is coming together for 2010, that 2011 will be a very aggressive year in that area.

And then one other question. Can you just talk about the average length of you are contracts now versus the last three months and even pre-recession?

On the poster side and digital side, there is no material difference. On the bulletin side, about 50% of our bulletin book of business is 12-month contracts. If you go back four or five years, that number would have been about 70%.

Thank you so much.

Thank you. Our next question will come from James Dix, Wedbush Securities.

Good morning, gentlemen.

Just two questions. I think, Sean, you've through out kind of a goal, or a - - I don't know how you would characterize it for revenue growth maybe in 2010 on the third quarter call, maybe 3%. I am just wondering what you are thinking about it is now that you've had a chance to look at it more closely at how the book is building throughout the year? And then secondly, just in terms of operating expense, that 2% number. Are there any other major sources of variance on that or how that could be either higher or lower this year? You mentioned lease costs, maybe could give you some downside to that. Anything else we should be thinking about, especially if revenue picks up more over the course of the year? Thanks.

Sure. Are you sure I said 3%. I may have been quoting US domestic ad spend. Okay. - - the way the book is building, it feels like that. I don't want to guide to that, but it feels like at least that. - - we need obviously for the US economy to keep mending, and for it to continue to get better through the year. But - - for sake of argument, you can plug that number in.

On the expense side, if we do better than 3% on the top, than the variable is commissions we pay our sale's people. So, for example, built into the 2% expense growth, assuming we do 2.5% to 3% better on the top, and again, this is just to give order of magnitude, that would be about $2 million more in commissions. So, you can scale it from there. If we do 5% growth on the top, then obviously, commissions would grow proportionately. But that is probably the biggest variable that grows as revenue grows.

Okay. Just so I am clear, the $2 million number represents what in the scenario you were discussing?

2.5% to 3% revenue growth this year would mean about $2 million more in commissions to our sale's people.

Got you. All right. Thanks very much.

Thank you. Our next question will come from Alexia Quadrani, JPMorgan.

Thank you.

- - in this recovery as we see it play out, could you give us some color on how you see pricing and occupancy playing out. Would you expect occupancy to recover obviously at a faster rate than you are able to raise prices? And then along those lines, how long do you think it might take you to recover the pricing concessions you lost last year?

Well historically, if you go back through recessions that we have riden out as a management team, occupancy recovers much faster than price. The other recessions, which obviously weren't as deep and traumatic, we usually saw only 1% or 2% price erosion. Obviously, we have seen more than that here. But what we are hearing from the field is that pricing is firming up as we speak, and it is happening monthly. In other words, we are seeing it through the first quarter month by month. And - - as we mentioned, every month seem to be getting better.

And when you say firming up, do you mean - - no longer deteriorating, or actually increasing?

I don't have the February numbers yet. Obviously, January we were down 3 in the aggregate book, so there was a little bit of pricing erosion still in January, although better than what we saw in December. So, again, it is getting better by the month. February is right now pacing about 0.5% up. I don't have the rate and occupancy stats yet for February. We haven't closed it out yet, but I anticipate that you are going to see that line move positive in March or April on pricing.

And just following up on the earlier comments on the digital roll out in 2011. Do you feel like internally, do you have a certain occupancy number where you feel you should generally be at before you really ramp up your digital investment spending in 2011? Or is it just for 2011 because the demand is there you want to go forward?

Yes, it is going to be demand driven. The way we put these out, is the field asks for them. So they are in charge of yield management. They are close to their local customer base, and our local general managers and sale's managers are going to know when their market is ready for additional capacity. It is not 100% demand though. We still have capital constraints given the Company's leverage.

Okay. Thank you.

Our next question will come from Jim Boyle, Gilford Securities.

Good morning.

In the last recovery, outdoor in Lamar seemed to lag Radials recovery by about a quarter or so, but that was predigital billboards. In this recovery, you are also mathematically comparing against Radial's much deeper decline of 7% to 10%. Radial Industry seems to be pacing up mid-single digits in February and March. How much, if any, with digital in this new world might outdoor lag this time versus Radial's bounceback from, admittedly, deeper declines.

Hi, Jim. It sounds like your opening comment is going to play itself out. Typically, we lag by a quarter, that is what it is feeling like. Given where our book is pacing now, we will be in positive territory in the second. So maybe digital is not a big enough part of our book to have a material impact yet on that quarterly lag.

Okay. And are you starting to notice whether your sale's force in the street - - are advertisers starting to place poster business any earlier than before, or is it still somewhat last minute?

The poster book is up, Jim, first quarter. Materially more than our aggregate book. So it is bulletin business that is lagging right now, the longer term contracts. And what we are hearing is a lot of activity, a lot of proposals. There is still a little bit of a shorter by focus on the bulletin side. Hence, Marci's question about average duration of contract. Last year at this time, it was still about 50%, 12-month business, and we are still at about 50% 12-month business. We had a secular event within the poster catagory. We changed our substraight from paper to recyclable vinyl. It has been very popular with the advertisers. I think that change to our production method I think has helped a little bit, as well. Our pacings and posters for the year are significantly up over last year, Jim.

Okay. And finally, is there any advertising category that year-to-date or you believe middle of the year, perhaps, that's going to be surprisingly better than you would have expected six months ago?

We are hoping that auto is going to tell that story, Jim. I don't think real estate is healthy enough yet to be a surprise vertical in 2010. But, we are hearing a lot of good stuff from our local auto dealers. So - - that is what we are hoping will be the real catalyst for a surprise year.

That would be a big category to surprise then. Much thanks.

Thank you. Our next question will come from Barton Crockett, Lazard Capital Markets.

Okay. Great. Thanks for taking the question.

I was wondering if you could give us a bit of color on the competitive environment in your bigger markets versus the smaller markets where there is less competition? I know in the past there has been discussion, pricing pressures. (Inaudible) I wonder if you could comment on that a little bit?

When you look at the recovery, the middle markets are recovering faster and the larger markets where we are typically the number three operator, the competitive pressures are dampening our comeback. And I guess the other area where there - - things are sort of slower than normal are those markets in Florida or out there in the west that have a real heavy dependence on the local real estate economy, for their local economy. So those would be the two areas where we are lagging. Those isolated economies that are heavily dependant on real estate and in the larger markets where you have some competitive dynamics at work. The preponderance of our billing is in the middle markets and we're extremely pleased with what we are seeing there.

Okay. And then on the auto commentary. Can you drill down a little bit more in the first quarter, are you seeing auto up year-over-year in the first quarter?

Right now it is pacing about flat.

Okay.

But there is pretty good chatter out there.

Okay. And then did you guys give the national percent of your business?

For 2009 , it was 75% local, 25% national. A little bit of color on where national seems to be coming in first quarter, it is slightly stronger than local. In January, the national book was up 2%. The local book was down commensurate with the down 3. So, national is starting the year a little stronger. What we are hearing from both our national sales folks and our local management, is that those lines are going to end up crossing at some point, and local is going to catch up with national in terms of relative

Okay. Then one final question. You guys, in 2008, you bought a billboard operation I think from [Macho Vision] that had some New York and some Los Angeles exposure.

Sure.

I know New York has been doing some things in the regulatory front with illegal boards and facings. Is there anything happening there that is meaningfully different or notable for your business, particularly in New York than you see elsewhere?

Sure. First, let me say none of it is material financially. That being said, we have the largest legal large format plant in New York. So we are actually in favor of this. The bulk of our large format billing will be in good shape, and we believe that it will be more valuable when the grey inventory is taken down. In LA, we are the eight sheet operator. Essentially, that plant was purchased as an asset play because we believe there's gong to be a settlement out there that allows us to take down small formats and put up large formats. That has yet to play itself out. But, we are optimistic that we are going to get a favorable regulatory ruling on the exchange of 8-sheets for larger formats in Los Angeles.

Okay. That is great. Thank you.

Thank you. Our next question will come from Ben Swinburne, Morgan Stanley.

Thank you. Good morning.

Just a couple of points of clarification from earlier comments. First on digital, I think - - are you indicating the digital revenue in the quarter was just north of $30 million? I think you gave an increased number, so I just wanted to clarify that one?

$6 million for the quarter.

Digital was $6 million for the quarter?

In 4Q it was up $6 million.

Right.

And what I mentioned was, the first quarter year-to-date, it is pacing up 15%.

Got you. Thank you. Then on your point about incremental revenue, incremental operating expense on the commission side, I just want to clarify. Are you saying every 2% to 3% points of additional revenue growth would lead to $2 million of incremental operating expense on the commission side? Or are you saying, if we do 2% to 3% growth in 2010, that is an additional $2 million of outbacks from our guidance?

Yes. On the commission side, that is what I said, the second one.

Keith, is it incremental? Is it every 2% to 3% would be another $2 million in commission? Does it scale that way?

Well, it depends. On posters they pay them 1%.

It depends on the product. It will vary by product.

Okay.

(Inaudible) Bulletins are - -

Yes so, to answer your question I said the later. If we are up 2.5% to 3% on the top, we will pay an extra about $2 million in commission. But that is built into the 2% percent that I gave you.

It is built into the numbers that are already out there, the expense numbers that are already out there.

It is not in addition to.

Okay. Okay. I think I got that. Thank you. And then lastly, - - political advertising we all associate with outdoor, but obviously the Supreme Court ruling has an impact this year. I am just wondering if you think that could be a surprise in the back half? Just maybe how it impacts overall pricing in your markets, if it could help give you an additional boost as we get into the third, and more importantly, fourth quarter? Any viewpoint you guys have would be interesting. Thanks.

Not really. We have always had advocacy groups in an election cycle buying outdoor to get their message out. So I think more money flowing into that space might have a nominal impact. But, when you look at political advertising in general, if it is a new issue, billboards seem to be working, and might be something that would be in the tool kit of these advocacy groups. But if it is an existing issue that is already out there in the marketplace, they need to refine their message, and they probably need to refine it on a daily or weekly basis. So in many cases, outdoor just doesn't fit the bill.

So health care might be something that would fit? Given that's an issue today and I'm sure it will be an issue this fall?

I've got a little different take on it. Typically the political that we get is not the congressional, senatorial or gubernatorial races where that ruling would really have an impact. We typically do more local district judges, city council, that kind of stuff. So it tends to be not the kind of fire-up, bushwhack politics that goes on. Now, that being said, there is a pricing umbrella out there that we all live with. And, I think that it will be good news for the overall media pricing umbrella.

Yes. That makes sense. Takes a lot, everyone.

Thank you. Our next question will come from George Hawkey, Barclays Capital.

Hi. Good morning. Thanks for taking my question.

I had just a quick one about a comment you made on the last call regarding digital billboards. It was suggested that the multiple of return against revenues for digital had been coming down over the course of the year, and hence the reason you were cutting back on the digital roll out. Given some of the news that you were giving out today, do you think that is still the case? Is the multiple return on revenue still coming in?

Yes. As we get a chance to look monthly back at the business cycle, 2008/2009 , what you see is that the digital billing was down almost - - it almost mirrored the business cycle. So, when we were thinking about this in the depths of the recession back in May, June, July and the numbers we were looking at, we were plugging in returns based on those numbers. Now we are looking at extremely positive numbers same board as the economy comes back. So, I would say that we probably may have over reacted a little bit to the cyclical dynamics going on. But then also keep in mind we were pretty severely capital constrained last year. So it would be a combination of those that led us to curtail the digital deployment and also think a little bit differently about the return. The numbers I am looking at now - - pacing up 15% this year with digital, we are very comfortable with the digital returns going

Great. Thank you.

Thank you. Our next question will come from James Marsh, Piper Jaffray.

Hi. Good morning.

A couple quick questions. First, just to go back on the digital CapEx side. For the quarter, it looked like you spent about $9.8 million and about $3.6 of that was digital. Was it like digital maintenance CapEx? Or was that new investments? And then I've got two housekeeping questions.

Yes. Those were new. I think Puerto Rico was a big chunk of that, which we had great experience with digital in Puerto Rico.

Okay. Just two quick ones for Keith. Keith, on the interest expense for the fourth quarter, it was tracking up in that $52 million range. Is that a good number to use as we move throughout 2010? I saw some one-time items in there that inflated it a little bit in the back half of last year.

Yes. There's some one-time items, amortization, things of that nature. Is the best guess, James, in a cash basis in 2010, we will good looking at $175 million to $180 million in interest for the year. Obviously, we continue to reduce our debt. The other noncash items, or amortization of OID, we took some interest expense amortization due to the calls of those converts and some accounting treatment that we had to recognize in 2009. But on a cash basis, $175 to $180 million should do it.

And it's going to be kind of a 50-plus on a reported basis?

Okay, close.

Okay. Then on the tax rate, it was 38% in 2009? I thought we talked about that coming down a little bit in 2010, but I just want today confirm there is nothing weird going on there?

No. We've had some quarters and some years where we had some strange things do to options and non-cash compensation and things of that nature. But no, that should hold.

Okay. Perfect. Thanks, guys.

Thank you. Our last question will come from Peter Stabler, Credit Suisse.

Good morning. Thanks very much for taking the question.

If we could go back to digital just for a minute. Given the disparity and the run rates, just wondering if you could comment on the categories coming into digital and whether there is a meaningful difference in the types of advertisers pushing that run rate up? Or whether it is tracking more closely to the total plans?

I don't have it in front of me in terms of being able to lay out for you the verticals in digital, but I can give you some antidotal. Retail is doing very well with digital, particularly local retail. They are learning how to use it in a way that is good for their business. So if I was going to point to a vertical, I would say retail first. This is going to be a little bit counterintuitive, but also what real estate business we are getting is using digital. It is not builder developed or real estate as it was in the past, using bulletins to advertise their developments that are going to be recently opening. But rather, it's brokerage, so we are seeing real estate brokerage, the kind of stuff that would have been in the classified real estate section of the newspaper; a picture of a house, a price point, a picture of the broker, and then a "sold" banner going across it. So, retail and real estate are using it well. But that's antidotal, I tell you what, maybe we'll go try to slice it a little more and we will have it for you if you call me up.

I guess just that, a quick follow on that would be, is digital bringing in new advertisers? Are you seeing folks coming in to outdoor for the first time who let's say looked at the production expense before and said, not for me. Or looked at the duration of methagene and said it's not flexible enough? And is digital changing that equation at all?

Absolutely. Of that there is no question. It is not only the no production and the fact that you can move in and out of it more quickly. It is also obviously the ability to have multiple messages and changing messages. And - - again, that sort of fits with the retailer.

Thanks very much.

All right. I want to thank everybody for tuning in. This concludes our call.

Thank you. Ladies and gentlemen, at this time this conference has now ended. You may disconnect your phone lines and have a great rest of the week. Thank you.