Lamar Advertising Co (LAMR) 2010 Q3 法說會逐字稿

Excuse me, everyone, we now have Sean Reilly and Keith Istre in conference. (Operator Instructions) At the conclusion of the companies 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 third 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 turning the conference over to Sean Reilly. You may begin sir.

Thank you Chantell and welcome everyone to our Q3 earnings call. Unfortunately, Kevin's been caught in transit to an OAAA convention meeting in Washington and won't be on the call. I think we can all be very pleased with our performance in Q3 indeed, for all of 2010. I'd categorize it as a solid recovery year with good solid management from our folks in the field. Given our year to date performance and our Q4 guidance, we look to finish up 2010 approximately up 3% on the top while having held expense growth to between 1% and 2%. Again, a good solid recovery year that has us poised for an even better 2011. Keith is going to walk us through the numbers after which I will get into more operational detail, with particular emphasis on our 2011 digital plans. Keith.

Thanks Sean. Good morning everyone. There's really not much to expound on this morning. The quarter came in I think as we expected and all of the folks that follow us did as well. Looking at the consensus estimates and so forth. We guided up to 4% for the third quarter in revenue. We came in at 4.6%. On the last call I had explained about the expense growth that we anticipated in the third quarter, that it would be on a consolidated basis, up about 5%. That's where it came in, and there were two reasons for that just to refresh everybody's memory. Number one, our third quarter consolidated expenses in '09 were the lowest level of all the quarters in that year. So, It was extremely difficult comps. And we had some real expenses in this third quarter that we did not have in last year's third quarter or the first half of this year. The 401(k) being one of them. That added $700,000 to our third quarter 2010 expenses.

As I mentioned, our health insurance went up 10%, effective July 1. Our policy date, that added another $0.5 million for the quarter. Our sales commissions was up a $0.5 million this quarter, which is good news. Good news for our AEs and good news for our -- from a revenue growth standpoint. So, anyway, that will not happen again in the second -- in the fourth quarter. The up coming fourth quarter, our guidance on the expense side, you should expect on a consolidated expense basis for Q4 expense growth of approximately 2%, somewhere in the 2% range. And, as Sean mentioned, if you add that to the expense performance for the first three quarters, we should come in for the year with an expense growth of about 1%. If you remember, we had kind of given some soft guidance to the market at the beginning of the year that we thought expenses would grow about 2% in 2010. So, everybody did a little bit better on controlling the expense line than we'd hoped.

Everything else pretty much as planned. CapEx should come in at about $40 million where we came in last year, and what we guided to for this year. You may have noticed that free cash flow was down slightly over last year's Q3. But, that was due to, a one time tax benefit from some losses that we generated in '08 and '09 that we carried back to recoup some federal income tax payments that we had made in previous years. Anyway, with that, I will turn it back to Sean.

Alright, thanks Keith. Let me hit some of the traditional operating details that we go through and then I'll again, talk in more detail about our digital plans for next year. Rate and occupancy first, good news on both counts. We're in positive territory, in posters and bulletins, and rate and occupancy, really for the first time this year. Q3, 2010 poster occupancy 70%. That compares to Q3 '09 of 67%. Occupancy for bulletins Q3 2010, 75%, that compares Q3 '09 of 73%.

On rate, Q3 2010 poster rate average $430 compared to Q3 '09 of $423, and for bulletins on the rate side Q3 2010, $1,118 as compared to Q3 '09, $1,097. In both products, that is a 2% increase in rate over the prior year. On the national/local front, in Q3 2010, our local business constituted 76% of our book of business. National constituted 24% of our book of business. Interestingly, year to date, we've primarily been carried by national business and the strength of our digital products. In fact, through September local -- our local book of business is only up 0.5% and our national book of business is up in excess of 9%. When I looked to the fourth quarter, I see some very encouraging signs on the local side. Our national book of business looks to be up 5% in the fourth quarter. And given that our guidance is 4%, you can sort of do the arithmetic there. Local in the fourth quarter looks to be approaching that 4% mark in terms of increase year-over-year. That's encouraging. And again, it gives me confidence going into 2011.

Let me tick through our verticals real quick and give a little color on that. Our top five customers remain the same, McDonald's, Verizon, Cracker Barrel, MillerCoors, AT&T. And our top ten categories of business are familiar as well, restaurants, retail, hospital, service, amusements and entertainments, gaming, automotive, telecom, financial, and hotel/motel. A little color on a few of these. The most pleasant surprise has been automotive which was up 21% in Q3. Other solid performers, restaurants was up 10% in Q3 and hospitals and healthcare was up 12% in Q3. And we're looking for good solid performance in those categories next year.

A couple of categories we got to keep our eyes on, hotel/motel was down 14% in Q3. That category of business now represents only 4% of our book of business year to date. And off course, real estate, we're still looking for a pulse there. Real estate was down 12% in Q3. So, as we go into next year, we need to keep our eye on those two categories of business and hopefully we can see some strengthening. Based on the sort of varying regional performances, our strongest region was the northeast, year to date, it is up almost 9%, followed by the midwest, up about 3.6%, mid-atlantic up about 3% year to date. And of course, the story is the same in terms of the weaker regions. The only difference is, it appears that the western region is turning the corner. Southern California and Nevada appear to have found their bottom and are gradually growing again. Unfortunately, the same can't be said of the southeast. Florida is still in negative territory and hasn't turned the corner yet.

Let's talk about digital. And given the optimism we have about 2011 we are going to get aggressive again on the digital front. As of today, we have 1,169 units in the air, in 140 markets, 595 of those are bulletins and 574 are posters and the run rate revenue from our digital platform is approximately $10 million. Our plans for next year are to add somewhere between 280 and 300 units, the difference being a few regulatory issues we have to work through. But, it will be a significant deployment. Assuming the upper end of the range, 300 units, they will be roughly 50% posters, 50% bulletins. The CapEx for that deployment will be about $50 million. It will happen ratably over the next 12 months.

Assuming that these units perform at the average of our units that are in the air, you should expect that after the end of the deployment, that we will have added about $2.5 million to our run rate digital revenues or annualized about $30 million. You should expect about a --- 65% margin in terms of BCF contribution from those digital's. If you subtract out the lost static revenue from the conversion, which is about $6 million and apply a 65% margin to the remaining, you'll see that the pay back is about 3.15 years. It is a good solid ROI, and we feel confident in our plans for next year. And we are happy to be back in the business of aggressively rolling out our digital platform. With that, Chantell, we'll open it up for questions.

(Operator Instructions) Our first question will come Marci Ryvicker from Wells Fargo.

Thank you and thank you so much for the color. In terms of the digital boards, have you already placed orders? Should we expect that the boards will start going up on January 1 of next year?

We actually have been in close contact to our vendors and we are actually starting this month.

How long does it take? What is the lead time between when you place the order, when the board goes up in the air and then when you start realizing revenue and cash flow?

You know, traditionally, again, I think for modeling purposes, you can start the modeling the next twelve months, and it should happen fast. Our vendors are ramped up. We actually have already placed a significant number of these orders.

And then just a longer term question on the business, do you need the real estate and the hotel/motel categories to cut back in order to reach your historic high single digit revenue growth?

Well, I think -- let me take them separately. I think the issues are different as you talk about those two verticals. On the real estate side, I believe that it has been a gut wrenching severe cyclical issue and that over time we are still valuable to that vertical and as they come back, they will use us more. I would categorize that as more of a cyclical issue. When I look at the hotel/motel business, number one it never really recovered after 9/11. If you look even going back to 2007 which was our best year ever, it was only 5% of our book. Over the last three some odd years, it has ticked down to 1% to 4% of our book. For that vertical our game plan is to hold what we got, make ourselves relevant to their needs and their goals. And we are doing that by helping them understand how we can brand and how we can show their customers a reason to stop, not just where I am, if you get the difference. If traditionally use this strictly as directionals, get off at the next exit, we have been pitching them on copy that says why to get off at the next exit. It could be fifty channels of HD. It could be a sports bar. It could be any number of reasons, but our challenge there is given that there are a lot of ways you can book a hotel room and find a hotel these days, we need to be a little more relevant in their branding and their differentiation.

So, you have got a sense that these categories will come back?

Again, I'm convinced real estate will come back. It just hasn't yet because I don't think cyclically they are through it. The hotel/motel business is a little more challenging. It seems to be very stable. We just need to make sure again, we need to make sure we are relevant in their advertising goals, not just their directional goals.

Thank you so much.

Our next question will come from Alexia Quadrani from JP Morgan.

A couple of questions. At first, I think I got the national and local numbers for nine months through September. Do you have the numbers for the quarter and do you also have the digital advertising growth in the quarter as well?

For the third quarter national was up 16%. I don't have the third quarter digital growth but -- .

digital bulletins -- posters 15.7% and the bulletins were up 22.1%

On that point, those are some pretty nice numbers in terms of digital year-over-year growth in the total book of business and again most of that is same board growth because we didn't add very many. It gives us a lot of confidence in spending $50 million next year to deploy about three hundred units. We should all feel good about what we are doing next year on the digital front.

On the static for a second, on your conversations for renewals going into 2011, are you -- how is the pricing discussion going? Are you seeing continuation and the good lift that you saw in the third quarter?

It is a little too early to start diving too deep into next year. What we are seeing so far is encouraging. We are certainly going into next year from a pricing point of view with a more aggressive posture than we have had in three years and I'm getting good, encouraging signs both on the national and on the local front.

And then just a last question. In the strength that you are seeing now in the local coming back a bit in the fourth quarter, was any of that do you think, early in the quarter, in terms of a bit of a crowding either indirect or direct from political, maybe a crowding out in other media?

I don't really think so. Number one, we don't get much of that political business. Most of that ends up being very quick shouting matches on TV. It appears to us that both TV and radio have plenty of capacity to absorb it. I'd have to say that even though we have seemed to have set world records for political add spend in the last month or so, very little of that spilled over to outdoor.

Okay. Thank you.

Our next question will come from Barton Crockett with Lazard Capital Markets.

Great. Thank you for taking the question. I wanted to drill down a little bit more on the revenue guidance here going into the fourth quarter. I think you said that national was, you were seeing it up 5%, and I think you just said in the third quarter it was up 16%. I'm wondering what is behind the deceleration there and also just if you can comment more broadly, you have stepped up your growth rate a bit in the third quarter over the second quarter, the fourth quarter guidance is a bit of a step down? I know comps are tougher, but you know it almost looks like we're peaking in the revenue trend, that's kind of the contribution from digital. What gets us growing again next year after kind of the deceleration in the fourth quarter?

I don't know that I would categorize it as deceleration. Hopefully we will do better than what we are putting on the table right now. On the national front -- national historically, I'm kind of looking back over many years, national is a little more fickle than local, and our bread and butter has been local. What I'm really focused on is that return to acceleration in the local business. That is meaningful to Lamar. In terms of the national book, it is good and solid and doing what it is supposed to do. It definitely carried us through the first three quarters. My view of the world is what is going to make 2011 a great year is the momentum we see in the local book. I can - I can see in the total book of business, renewals and a book for next year that is far more solid than what we went into this year with. You will see growth next year. It will come, I believe, primarily from the recovery in local ad spend. Lamar doesn't count on year end and year out 9%, 10% growth in national business. By the way, on the national front going into next year, John Miller feels pretty good. His customers are telling him - John by the way is our head of national sales. HIs customers are telling him that they feel good about next year.

Okay. That is very helpful. I'll leave it there. Thank you.

Our next question will come from Peter Stabler from Credit Suisse.

Thank you. Question on acquisitions. You talked about your intent to continue to invest buying digital. Do you have an appetite for additional tuck-ins over 2011? Do you have an appetite for adding to the static plan? And if so, would that include increasing your exposure to major markets? A quick follow on, can you give us a quick update on the Los Angeles situation? Thank you very much.

Sure. As we look at our best use of our shareholder cash, digital is clearly number one. And I think after going through the ROIs on that, everybody would agree. Digital is number one. Again, our plan is to spend about $50 million on that . You may see a few small acquisitions, I don't even think we would get to that number of $50 million. I think you're talking about something considerably smaller. We are also going to get a little more aggressive on the easement front. Again, if we do that correctly, it is a good return, good solid return and a good use of our cash . On the Los Angeles front, it is still a mess. We have a very large but under performing eight sheet plant in Los Angeles which it is our hope that over time as the coordinates get straightened out out there, that we will be able to swap eight sheet square footage for large format square footage.That's still the game plan. We think that the odds of that are good. The issue of digital conversion is a little more cloudy and I think the resolution of that is a little further off and maybe statistically not as likely. That is about where we are at in Los Angeles. The industry continues to try to work with the various governmental entities involved to get some sort

And a quick follow on Sean if I could, with regard to the digital build out, should we assume that you will look across all of your markets for the best opportunities there or would you try to focus the digital build out in markets where you have a dominant share to preserve pricing on that product?

These are going all over the country. Because, what we are seeing is even where there is competition in the larger markets, they are getting a very nice national buy and we are becoming relevant to national advertisers as we expand our footprint is some of the top fifty markets. But, as you mentioned, we also do well in the traditional Lamar markets. We feel good about it. they'll be all over. We do have the ability to prioritize by expected return. So, the ones that have the best pro forma and the strongest ROIs go up first, but basically for purposes of modeling, just do it ratably over the next twelve months.

Thank you for the color.

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

Good morning Sean. In the past, it appears the highest EBITDA margin that Lamar ever achieved was 47% to 48% in 1998 to 2000, when the firm was all analog In three to five years, with likely a greater portion of digital and their higher margins that you noted earlier. Should Lamar be able to surpass that 47% to 48% margin or not?

It would sure be nice to have a very robust national add spend environment with a little more wind at our backs. It certainly -- if we get back to 2006 to 2000 levels of add spend, then we should be able to get up into upper forties and even approach that 50% mark.

Lamar used to buy most of your digital displays from YESCO and Detronics . Have you or will you add a third

We are talking to a third provider for next year not in the kind of volume we're taking from Detronics and YESCO, those two guys have done an incredible job of lowering the price of the units, improving the performance of the units, improving the useful life of the units, the operating costs, just across the board, they have been great partners. They will get 95% if not a 100% of what we do next year. That being said, there is a company called Barco that has gotten up the curve and it can't hurt the industry and it can't hurt Lamar to have a third vendor that is working on this product on our behalf. We are in early discussions with them.

Does Barco bring any technology or is it mainly pricing and having another set of factories working for you?

I would say as of right now, it is the latter.

Okay. Thank you.

Our next question will come from James Dix with Wedbush.

Good morning gentlemen. Three questions. First, the third quarter, what was the pro forma growth of just your just static plants on the top line? What is your assumption that is going into your fourth quarter guidance for that? Secondly in doing your build up of your digital plan for next year, were there any differences that you were seeing, I guess, Sean, in the pro formas that people are giving you - the underlying assumptions of the digital versus before the recession either in terms of the multiplier of revenue or the types of boards that are being converted in terms of their average rates versus the average rates you get on all your plants, just interested in seeing were there were any big differences there now that you are kind of ramping up versus before the recession and then I have one follow-up on costs.

I will let Keith do the issue of static versus digital.

I was just breaking it down. On static posters the growth rate was 3.3% on pro forma for Q3 and bulletins was 2.1%. You blend that, you are probably 2.5%, upper twos.

Is that about your assumption for the fourth quarter too, Keith - is it looking like they are going to be growing that same way or any differences?

No, I think that's about right. We guided to 4% for the fourth quarter and (inaudible) for the third quarter. That should be similar.

Okay

On the assumptions on the -- how we feel about our digital rollout and the pro formas and performance. You know, it is interesting, we are, on our digital platform, same board, pretty close to where we were in 2007. If you look at average rate per slot, average rate per board, occupancy and the like, we are pretty close. You can't say that about our static plant. We are probably two years away from hitting our 2007 stride with our static plant but on the digital side, we are pretty much there. Again, it gives our guys in the field a lot of confidence when they submit their digital plans. When they submit the pro formas that they expect on the new units going in the air. You know, when I look at it and think about putting that number out there for you guys that we are going to spend $50 million. We are going to deploy something in the neighborhood of 300 units and for that, we are going to get about $30 million in incremental revenues and about $16 million in incremental cash flow. You know, I think we can feel pretty good about that number.

Okay. Very good. And then one follow-up on costs, I guess looking out now that the environment is a little bit more normalized, is there kind of a static only at least operating expense growth range that we should be thinking about? Obviously the 1% for this year was very good. I don't know whether you want to hold yourself to that on a run rate basis but I will give you a chance to do it if you want to.

Our folks in the field are good. I don't know that I can ask them to budget that next year. Certain things happen. If we get to normalized top line growth that we've historically enjoyed looking back 20 years to 30 years in the 6% range, there are some expenses that go with that. Typically your sales commissions tick up. If you have revenue shares on your better inventory for landlords, then that will tick up. Historically, Keith has guided to the 3% to 4% range for expense growth. When things are normalized.

That still seems like a decent operating assumption going forward?

Correct.

OKay. Thank you.

Our next question will come from David Miller of Caris and Company.

Sean, on the digital front, can you tell me exactly how many boards you are on target to have at the end of this year and also with regard to categories, we have been hearing from the field the healthcare category has really come on for you guys on the digital side. Could you maybe talk about other categories that have kind of warmed up to digital in this recovery that were absent from digital back in ' 06 and ' 07 when you started the platform?

Yes, healthcare was has been great. The category that is most turned on is amusement and entertainment. It is the largest category in our digital book. It tends to be very time sensitive, as you can imagine, event driven. If there is going to be a rodeo, this weekend, it is going up today. That's the kind of digital buy that we are enjoying. But, interestingly, you know, on the national front, we are also enjoying some pretty good, interesting digital activity that's coming from places that you might not expect. Our largest digital buy comes from AT&T on the national front and then it is followed up by Verizon. Our third largest customer is Fifth Third Bank, on the digital side from the national front and they are probably going up there with rates they are paying on CDs and deposits. Dunkin' Donuts is a big digital buyer. First, I would say events and amusements and then I'd say some of the - some of our usual suspects that really really like and enjoy using the medium. Interestingly on the national front, a year ago our national customers only had about 1,800 copy changes and you know, we were a little concerned that they weren't maximizing the use of the medium. Year to date this year we have 7,500 copy changes from our national clients. They are really warming up to it and using it very well.

On the digital side, in terms of number of boards that you think will be in the air by December 31. I have 1,221 in our models, but we just wanted to run that by you. The bulk of the activity will be next year.

I'd say add about fifteen more by the end of the year. So, again, the bulk of the activity will be next year

Okay. Wonderful. Thank you.

Our next question will come from John Ness from Anchor Capital Management.

Hi, that you very much for taking the question. By my quick calculation it looks like the average CapEx per digital board you are planning is about $167,000, I was wondering, how does that compare to prior expansions? It seems a little bit lower.

Yes, as I mentioned, our vendors have done an incredible job, lowering the cost. There are several components to the cost of an LED and of course, we have different sizes that carry different costs but you have tax, shipping and then a little work you have to do on the structure when you actually put it on it. To give you a sense for posters, we are projecting an all in cost of around $114,000. For junior bulletins which are about 10.5 feet by 30 feet, about $163,000 and for 14 feet by 48 feet bulletin, about $245,000. Again, about half of these things are going to be posters and the other half are going to be junior bulletins and bulletins -- junior bulletins and bulletins, two-thirds are going to be 14 feet by 48 feet and one-third will be 10.5 feet by 30 feet.

Okay. Terrific, thank you. Just a quick question on what percentage of revenue or bookings are currently from digital?

We will finish out the year with about $1.1 billion in sales, about $100 million of that will be transit and logos. So about $1 billion in billboard revenues and $120 million will be digital when we finish this year.

Thank you very much.

Our last question will come from Bishop Sheen from Wells Fargo.

He may have dropped off.

I think he has.

Well, thank you everyone for listening. Thank you for your interest in Lamar and we will talk to you again in the new year.