Lamar Advertising Co (LAMR) 2010 Q2 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 that Lamar files with the SEC from time to time. Lamar refers you to those documents. Lamar's second quarter 2010 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. I want to welcome everybody to our quarterly call.

The news is pretty much the same as the last call. We're gradually coming out. National business is better than local. Expense guidance going forward, particularly for Q3, is a little higher than normal, but Keith will go into that. Expenses are under control and we are optimistic that our local business as each quarter progresses is going to get marginally better which will help us with our occupancy rate. As of today and for the next quarter or so is not something that we are able to push because of the occupancy numbers. But suffice to say that on the expense side, we're very pleased and we think that for the next year or so, the expense controls that we put in place are sustainable.

With that, I'd like to turn the call over to Keith to walk us through the numbers.

Good morning, everyone.

Just to recap some of the numbers on the press release and give you a little color. As you saw our revenue for the quarter was up 3.7% on $10.3 million. May and June came in a little stronger than we thought when we guided to up two for Q2. There was no one particular category that we can point to that created that extra kicker for us. It was just a mixed bag across the board. So we were pleased for that extra revenue.

On the expense side, you saw a pro forma consolidated operating expenses including corporate overhead were up $1 million for the quarter or 0.6%. Of that million, $600,000 was directly attributable to an increase in our transit revenue sharing for the quarter. So as Kevin mentioned our expenses continue to remain well contained. Billboard expenses for the quarter were down. Our corporate overhead was up slightly and that was primarily due to a national sales commission and the salary increases that we put into effect March 1. So everything continues to run as we had expected it to. Again, for the year-to-date, our consolidated expenses are down $3.2 million, or minus 1.0%.

Now for Q3 as Kevin mentioned, let me just give you a heads up. We're expecting our expense growth to probably be somewhere in the 5% range. There are a couple of reasons for this spike. The primary cause is a tough expense comp that we have carrying over from Q3 2009. Let me just take a second to summarize our pro forma expense comps for you from 2009, and this includes corporate overhead so you'll understand where we're coming from. Q1 and Q2 obviously, you have already seen those numbers on our earnings release. But just to restate in Q1 our pro forma consolidated expenses were Q1 2009 were $157 million, in Q2 of 2009 which we're comparing to this quarter, they were $154 million. In Q3 of 2009, which is the quarter we'll be comparing to on the next go round, they were $150 million.

So there's been quite a drop from Q1 and Q2 into Q3. And Q4 they go back up to $156 million for comparative purposes. So that's primary driver of the percentage increase that we are projecting. There's a couple of other actual expense drivers. Let me just mention, the Company reinstated our 401K contribution program effective July 1. We had suspended that throughout 2009 and the first half of 2010. This reinstatement is going to add approximately $1 million in expense in Q3 and Q4. Our health insurance program was up for renewal on July 1 as it always is. And as with all healthcare in the country, we took a 10% increase in our premiums, we had about another $400,000 in expenses, per quarter, going forward.

So the tougher comps, the benefit items that I mentioned and you're looking at somewhere in the neighborhood of 5%. Now that being said, at the beginning of this year, we told everybody we expected our pro forma expense growth for the year to be up approximately 2%. Based on the actual performance in Q1 and Q2 and our easier expense comps in Q4 even though we're guiding to (inaudible) for Q3, we certainly continue to stand by that 2% guidance. In fact, depending on our Q4 expense actual performance we think it could even be less than 2% for the year.

All that being said as you saw, EBITDA was up $9.3 million, or 7.7% for the quarter and for revenue increase retention rate of 90%. So we were very pleased with that. Last, our free cash flow you saw is up and it is the Company's focus to continue to reduce our debt. And our total debt leverage at the end of June, 6/30/2010, was 5.6 times. So we continue to de-lever from slightly north of six times down to our more traditional range of five times and possibly even lower.

So with that, Sean, do you have your comments?

Sure, let me hit some of the traditional stats we cover on the call.

First, digital counts. As of the end of the quarter, we had 1,155 units in the air; 586 were bulletins and 569 posters and 140 different markets. Digital continues to perform extremely well. Posters year-to-date are up 12%. Bulletins are up year-to-date 25%. Because of we haven't added a material number of units, that's essentially a same-store number. So, again, Digital continues to shine.

Occupancy and rate, Q2 2010 for posters occupancy of 73%, that compares to Q2 2009 of 67%. Q2 2010 bulletin occupancy of 74%, that compares to 72% Q2 2009. On pricing, the rate for posters Q2 2010, $431 as compared to Q2 2009 of $436, that's a decrease of 1%. And for bulletins, Q2 2010, $1,111 average rate per panel versus $1,119 average rate per panel Q2 2009 again, a decrease of 1%. Pricing power returned during the course of the quarter, both posters and bulletins turned positive year-over-year in rate for the month of June. So the trending as the quarter went on was a good trend and we anticipate that trend will continue.

As Kevin mentioned, national is leading the way in terms of year-over-year growth. National for the quarter was up about 7%. Local was up about 2%. If you take it in terms of aggregate dollars, both national and local were up about $4 million in our book of business. As a percentage, obviously, national would be higher because it's a lower percentage of our book. For the quarter local constituted 77% of our book of business and national constituted 23%.

Anecdotally, our folks in the field are telling us that they're confident that their local economies are going to improve as the year unfolds. So we feel like the book, particularly the local book, is going to hold up for us. In terms of verticals, one of the things that's driving that is auto has finally turned the corner for us. It turned positive year-over-year as a vertical for us in April and improved every month through the quarter. May auto business was up 3%, June auto business was up 7% and for the month of July, our auto business was up 18%. So that again bodes well for the strength of our local ad spend.

No surprises in the rest of the verticals. Top five remain restaurants, retail, hospitals, service and amusement industries. Top 10 advertisers; McDonald's, Verizon, Cracker Barrel, AT&T, and Miller-Coors. Again, on the national front, Telecom remains extremely strong with the spend that is coming out of Verizon and AT&T.

So Keith that's about it on the ops side and we'll open it up for questions.

Ladies and gentlemen, at this time we would like to open up the floor for questions. (Operator Instructions).

Our first question will come from Marci Ryvicker, Wells Fargo Securities.

Good morning. There seems to be no sequential improvement from Q2 to Q3 in terms of what you reported and what your guiding for revenue. So is this just a function of tougher comps?

There's just - - I mean it's just the way our book is shaping up. The comps are similar. We just , July was good and we're expecting August and September to be so as well. But those are the numbers that

Can you give us any data on pacing per month in the third quarter? Or at least tell us how July finished.

July was strong. We hate to give those numbers out because the comps are different from month-to-month. And we did have some additional national business in the month of July for McDonald's. So I think it would skew the statistic.

Okay. And then one question for Sean. What are your thoughts on relaunching an aggressive digital rollout? Still planned for 2011? Would it be more the beginning, the middle? Any color on that?

We are going to give you a very precise number on the next call, Marci. We're in the process of a pretty rigorous bottoms-up analysis by market of what our plans are going to be in 2011. Really kind of weighing everything, the market demand, the regulatory environment, the ability to secure locations and the like. So we're going to have to - - we'll have to wait for the next call, but it's going to be a very precise number that would have been derived from a very rigorous bottom-up analysis.

Great. Thank you.

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

First, generally on the oil spill in the gulf. Could you comment a bit about I guess how much exposure you have in that area. Or if you're seeing any sort of I guess negative ramifications from the oil spill or businesses that may be suffering - - given that event. And the second question really is in the growth you're seeing in digital. Could you give us some color in terms of where those incremental advertising dollars are coming from? Are they coming from traditional users of static or they are they sort of trading up? Or are they coming more from advertisers of other media?

Sure. Let me talk briefly about the oil spill. Obviously, we're a Louisiana headquartered Company. So we're very much in touch with what's going on down here. From the point of view of our overall business, the financial results of the Company, it's not material. Obviously, to the communities affected it is material. On the panhandle of Florida, our business is actually strong and from a Lamar centric point of view, there hasn't been any effect. In the communities in south Louisiana like Lafayette, Houma and actually moving over into Gulf Shores, Mississippi, and into Mobile, our customers are struggling a little bit.

The folks that have had problems paying their bills are right now being propped up by British Petroleum. We're actually getting payment from those few customers that have borne the brunt of it. So in terms of our bad debt expense, you're not going to see anything tick up there from those communities. So I guess long story short, it's a pain that can be felt in those communities, but it's a negligible part of our overall enterprise.

Can you quantify percentage-wise? Are you talking a couple percentage points in terms of what those would account for?

No, not even that.

Okay.

You're talking way, way less than 1%.

Okay.

Now on digital - - it's been - - our experience with digital and we've mentioned this in the past, is that it's a product that is a premium product. It's a shorter cycle sale and therefore tends to have a higher beta. When business got extremely tough, digital fell further and as businesses come back, it's risen higher. And - - I think that's to be expected and it's not necessarily a bad thing. The advertisers tend to be more call to action driven, more time and date sensitive; amusements, special events, promotions and the like. We're feeling very good about the performance of digital. And as I mentioned to Marci, we're going to be releasing a very precise number of units we'll be adding in 2011, and we're hoping that it's a pretty robust number.

Thank you.

Thank you. Our next question will come from Anthony Diclemente from Barclays Capital.

Good morning. Thanks for taking my question. Just also in terms of the quarterly progression, was wondering about the fourth quarter. I know that's structurally your business doesn't get a lot of political advertising revenue, but given the contentious election we have coming up, I would anticipate maybe some crowding out effect in the system. Is that part of what your folks in the field are seeing in terms of their optimism anecdotally that you mentioned in your comments as we go throughout the year? And how should we think about that acceleration in the Q4 and into 2011? Thanks.

Well typically, in a political year, you're exactly right, it helps our pricing umbrella. Because all of the inventory in the local ad space starts to tighten up. So that's a good thing. While we don't typically get a tremendous amount of national political ad spend, tightening of the inventory helps us and we do get a pretty good local ad spend, I mean, local elections.

So this wouldn't be folks running for US Senate or Congress but more folks running for City Council and judgeships and the like. So it should be helpful on the margins. A little too early to look into Q4, but we're feeling pretty good about the way we're going to finish up the year. If you look at historically coming out of recession, this is shaping up like a fairly typical recovery year. That's what it feels like now. And that bodes well for 2011 because typically, the year after a recovery year we perform very well.

Well, the only thing about that is that you went down by a little more than you've gone down in historical recessions. So - - I think one way that some folks have been looking at it is since we don't view the billboard business as being structurally different. If you took a deeper dive in the 2008, I'm sorry 2009, where your revenue is down 13%. Then some of us are thinking maybe you get a bigger recovery than just your - - your mid-single digit recovery. So I guess not though?

Yes, - - the tale is going to be told in 2011 on that score. As this year has progressed, it's been fairly typical.

Okay. Thanks for having me on the call. Thanks.

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

Okay. Great. Thanks for taking the question. First, just a number question here. Could you give us the digital percentage of revenues? And you gave us the growth rates in the quarter for posters and bulletins. I was wondering if you had a combined kind of digital growth rate?

Sean, I can answer that. On the digital, on the billboard side, digit on pro forma was up 2%, static was up 1%.

Okay. Maybe we can follow-up off line. I'm not sure that the question came through the way I was looking for it. The other question I was wondering about is a little bit more about the third quarter guidance. I was wondering if you could talk more about why you're keeping growth - - at 4% given that the few numbers you have cited like auto accelerating to 18% growth in July. And July overall pacing - - skewing the quarter northward. What can you tell us that would keep us from treating the guidance as perhaps more conservative than - - would normally be the case?

Sean, are you going to - - I'm sorry, we're in three different cities, so we're having trouble - -

There's nothing we can tell you other than our guidance is our guidance.

Yes.

And we're trying not to fudge one way or the other. So this is a fragile recovery we're in. And the previous caller actually, there is a little difference when we say it looks like a typical recovery year.

The percentage recovery, the numbers are typical. But the weakness throughout the economy in my opinion is not typical. So even though there's a - - we're experiencing an ad recovery, we still see some weakness throughout the country, especially with our local ad companies, our local customers who are having difficulty getting access to credit.

One of the ways that's manifesting itself is the length of the buy. I would say that one of the differences with the severity of this downturn and previous downturns is people, our customers are buying shorter. So it probably does affect our ability to project out with a high degree of confidence. Instead of buying for six to 12 months, they're buying for two to four months.

Okay. All right. I'll leave it there. Thank you very much.

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

Good morning, guys. Just two questions. One, I guess following a little bit on what Kevin mentioned about weakness. Are there any particular regions where you're seeing particular strength or particular continuing weakness in terms of the growth? I'd be interested in hearing any color that you have on that. And then second, in terms of - - you've kind of had almost coming up now on roughly two year hiatus from really an intensive buildout of digital.

And, Sean, you mentioned you're going through a bottoms-up review. I'm just wondering if you could give any preview in terms of any themes that you're seeing in terms of what people are telling you about feasibility? In terms of how the landscape has changed over the past two years for digital? Is the regulatory environment shaping up to be looking a little bit better or worse than you thought it might be? Are the pro formas on the economics turning up more or fewer candidates than you might have thought for conversion to digital? Just a broader brush - - without giving particular numbers on boards that's come to your attention so far? I'd be interested in that.

Sure. On the question of regions, this won't come as any surprise. South Florida, the Southeast region is still the softest. Mostly driven by real estate issues, both related to their local economies and related to our book of business. Real estate has virtually disappeared as a category for us. I would say second weakest would be the far West, although there seems to be signs of life in Las Vegas and Southern California. There appears to be a pulse out there again. But again, real estate was a huge part of our book of business out there three years ago and it's still weak.

In terms of strongest regions, the Northeast is the strongest region, probably for a couple of reasons. Number one, we now have a very strong presence in New York City and national is strong. And number two, their local economies seem to be bouncing back a little stronger than the rest of the country. So the same-store growth across the Northeast seems to be pacing a little better. The Midwest is pacing a little better as well. So I would point to those two as the stronger regions. And Southeast and far West as the weaker.

On the digital front, we just remain very confident in that product. And it's our goal to have a fairly robust buildout as I mentioned in 2011. The regulatory environment is I would say about the same. We have done pretty much all of the work on the national level and at the state level. The skirmishes now are sort of intensely local and market-by-market. And we tend to do fairly well in that environment. So I'm not anticipating that the gating issue is going to be regulatory. At this juncture we just need to be highly confident that 2011 is a good year for the macro economy.

Just one follow-up. Is the pricing of the product, the actual conversions, is that potentially going to be substantially lower in 2011 as opposed to what you were paying for conversions back a couple years ago? Do you think that will have an impact?

Yes, our vendors have been extremely diligent over the last couple of years during the hiatus in improving their product across the board, not only in pricing, which pricing is much better for posters, mid-sized bulletins and bulletins. We're seeing significant decreases in pricing. But the product is much better.

The life span, the projected life span of the product, has moved from about seven to about 10 years. The energy consumption of the product has dropped tremendously. So while we have been riding out a pretty tough environment the last couple of years for ad spend, the vendors, YESCO and Daktronics, have done an incredibly good job of upgrading their product.

Great. That's very helpful. Thank you.

Thank you. Our next question will come from Jim Boyle, Gilford.

Good morning. Sean, how far forward is your visibility now versus let's say either six months ago or even 12 months ago?

Well, I'd say from six months ago and 12 months ago, it's better. Just because things have turned positive and - - we can - - I think we can look at the book and say that we've taken our hits in categories like real estate and auto. And we can certainly point to some pretty good month-over-month improvements in the auto book. It is true as I mentioned that our customers are buying shorter, and that's just the reality. It happens in every recession.

Obviously, this one was the severest one we've ever seen. And our customers are a little bit more skittish than they've been in the past. But, Jim, we've been through these things before. Our management team knows how to manage through them. And for me, again, looking at the aggregate numbers, this feels like a fairly typical recovery year in anticipation of a pretty good year next year.

So it might be a month or two better than six months ago and maybe two to three months better visibility than a year ago? Is it that type of magnitude?

Yes, - - you look a year ago we were all wrestling with some things we'd never seen before. Where we are today, we can feel fairly confident that things are on the right track.

And finally, Sean, what one signal or trend among local advertisers seems to worry your regional managers the most about potentially the economy in the second half not improving like they think but going the other direction?

Every vertical feels good in terms of our customers, Jim, except hotel, motel, and real estate. So - - I can look at real estate and see where it was in our book three years ago, where it is in our book today, and actually make the case that when real estate recovers, that's going to be a good thing for us. That that could be a good cyclical kick when that happens. The hotel, motel business is - - that's been sort of a slow decline, and we're not real sure when that turns.

So if those are the only two weak ones though, do you view those more as lagging indicators or potentially leading indicators?

I think that in terms of real estate, they just have their unique issues. I think that that's a vertical that went through a near-death experience. So I think that's a cyclical thing. And it's lagging because of the just severity that that industry has been - - that it went through. The hotel, motel businesses just as a part of our book over the last five years just sort of slowly become less important in our world. It's down to 4% of our book of business.

Almost cut in half.

Yes.

Okay, much thanks.

Thank you. Our next question will come from Bishop Sheen, Wells Fargo.

Hi, everyone. Thanks for taking the question. If you are right and you've certainly been here before and the back half starts to improve. You're certainly paying down debt and generating free cash flow. When you look at the possibility of changing dividend rate, do you think about doing anything like a one-time dividend payment? Or any other kind of equity enhancement to arbitrage the tax rates?

No. I think we would reserve our thinking there as we just sort of analyze all of our uses of capital. For example, if this digital thing takes off and CapEx spikes, then that would preclude any thinking in the areas that you mentioned.

Okay. And then certainly you've got your balance sheet I guess the way you want it. There's no near-term maturities. So it's really a function of how much interest in CapEx, it's pretty predictable. As you look out for the rest of this year, can we pretty much assume all the free cash flow will go toward debt reduction?

Yes.

Okay. That's pretty much it. Thank you, gentlemen.

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

Good morning. Thanks very much for taking the questions. Quick one on occupancy and long-term occupancy trends. This quarter's poster rate has you back pretty close to let's say the eight-year peak of about 75%. Things are lagging a bit on the bulletin side. Any structural reason why you don't believe that you could get back to let's say a peak of 80% to 82% occupancy on bulletins? I have one quick follow-up?

Sure. I think, Peter, that eventually, we're going to get back to the 85%, upper 80s in bulletin occupancy. We're going to get there a slightly different way than we have in the past. In the past, it's been pretty much just cyclical recovery and demand.

As you know, we have been aggressively attacking our real estate portfolio and our leases, and part of that has been actually taking down units. The sum of the recovery in bulletin occupancy is kind of peaked because we are actually reducing the number of available units marginally. Not a huge number but enough I think to affect that occupancy stat over time. So one question might be, why is that different? Why are you having to do that now? And you haven't had to do it in past downturns. There are probably two reasons.

Number one, when I look at the amount of inventory that was added, particularly on the bulletin side 2003, 2004, 2005, 2007, 2006, 2007, you could make the case that there were some overbuilding that went on and some marginal locations went up. And that sort of, this recession is weeding that out. And then number two, is we're adding capacity with digital. We probably are rendering less attractive some of our C and D locations on the bulletin side. Because a customer can move from a C or D location to the best location in town and yes, they're sharing space.

But they don't have any production costs and the move is roughly the same amount of aggregate dollars. So those two things have made the landscape a little bit different as we get back to normalized occupancy on the bulletin side. We're going to get there. It's just the route as I said is going to be a little bit different.

Great. And then a quick question on directionals. Do you see any kind of structural changes? Are directionals going to play a significant a role, long-term directionals a significant role, on the bulletin side going forward as they have in the past? Or is the ubiquity of GPS now in cars, whether OEM-supplied or after-market. Is that kind of fundamentally changing the use of directional advertising for some categories such as perhaps hotel, motel?

We don't know yet. But we've been watching the consumer behavior. And seems like on the roadside motel area that they are making their decisions a little earlier. Several years ago, 33% of the people that made their decision to stay in a roadside motel made it that night or that day while they were driving. And those numbers are starting to change a little bit. So hand-helds are having an impact in our world.

But our experience at interchanges is that the competition at interchanges throughout America is so fierce that I think that even though you'll have hand-held devices and GPS. They're still going to want their logos, their still going to want their billboards and their still going to want the high-rise signs that tell people about what food, gas, and lodging opportunities are available at the next exit. So we're still wait-and-see on the impact of hand-helds on our directionals business.

The other category of directional being restaurants. We're very much in touch with our restaurant customers, particularly our large ones, McDonald's and Cracker Barrel. And they are telling us that we are vital and important to them and will remain so. And again, if you look at our book of business, they're ticking up.

Thanks very much for the color.

Thank you. Ladies and gentlemen, at this time we have no further questions. Kevin, do you have any closing comments for us?

Thank you for handling the call and I want to thank all of our listeners for tuning in and we look forward to the next quarterly call. And with that, thank you.

Thank you very much, ladies and gentlemen. This conference call has now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you.