Lamar Advertising Co (LAMR) 2011 Q1 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 in 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 first-quarter 2011 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. Riley, you may begin.

Thank you, Chantrel. I want to welcome our shareholders and friends and analysts to the call. I'd like to start out with some brief remarks and then turn the call over to Sean Reilly.

Topline revenue growth for the first two quarters has been disappointing. We are hoping for a better second half, but it's tough to achieve 6% pro forma topline growth with a national economy that has a 1.8% GDP growth.

Rest assured, though, that expenses will remain under control. We will continue to improve our digital footprint. However, bad weather has caused a slow start in that department. The April storms caused damage to our signs, but the damage was not material. Our thoughts and prayers go out to those impacted by the devastation.

In closing, we are actively engaging our customers in a conversation about speed and transparency. And we think that it will take much of the friction out of the planning, contracting and fulfillment experience. And it's just another example of incremental improvements that we are making to our business that we think will allow us to be competitive in the years to come.

With that, I'd like to turn the call over to Sean Reilly.

Thanks, Kevin. As Kevin mentioned, the strong recovery in US ad spend is more of a Madison Avenue recovery and less of a Main Street recovery. Local ad spend actually saw a slight softening late in the first quarter that carried over into the second quarter.

The good news is it does not seem to be carrying into the third quarter. June is pacing better than April and May in this quarter, and Q3 is pacing better than Q2. So we don't think this is a throughout-the-year sequential event. We are looking for a better Q3.

And let me also reiterate the point that Kevin made -- we can and will manage expenses aggressively. As I turn the call over to Keith, he will highlight that point and give you a few stats. Keith?

Yes, just a couple of quick notes on the press release that you got this morning. One has to do with the expenses. We'd mentioned on the last call that we thought our expense growth this year would be somewhere between 3% and 5%, and that's including the additional expenses related to 300 new digitals that we intend to roll out.

Anyway, as you saw, we were up 3.5% consolidated pro forma expense growth for the quarter. That was on the low end of that range. And if you take into account an extra $2 million for the benefits that we reinstated in the back half of last year, 401(k), deferred comp raises, etc., that were in the first quarter of this year but not in the first quarter of last year, if you add $2 million to our pro forma numbers for last year -- expense numbers -- you will come up with approximately a 2% expense growth in Q1.

As Kevin and Sean both mentioned, we think we can control expenses pretty well throughout this year, and we think that we will be on the low end of our guidance.

The only other thing that I wanted to mention, you saw in the press release, was the free cash flow. Obviously, we were down about $10 million for the quarter. That's primarily due, as you saw, to the CapEx. I don't think we -- I don't recall that we gave specific guidance on CapEx for the full year on the last call, but our plan is to spend approximately $100 million -- $50 million in new digital and then $50 million for the core business, which is static billboards, logos, transit and operating equipment.

So, that's pretty much it. Sean, I will flip it back to you.

All right. Let me hit some of the typical metrics that we go over. I will start with our digital deployment. As of today, we have 1244 units in the air, 642 bulletins, 602 posters. That compares to 1208 units in the air since the last time we talked.

As Kevin mentioned, Mother Nature hasn't been very cooperative the last few months. We still had our stated goal of getting 300 units in the air, and we think we can hit that number. They may go into service slightly later through the year than we had originally planned.

The good news is the digitals we've put up so far are performing to plan. And the whole digital platform is up midteens, both the last few months and pacing throughout the year. So we've got a lot of confidence in what we're doing on the digital front.

Rate and occupancy -- for posters, and I think this is the story of the latter part of the first quarter and early part of the second, Q1 occupancy on posters was 58%. That compares to 59% Q1 2010. And that point dip in occupancy is certainly not typical of a strong local ad rebound.

Better news on the bulletin front -- Q1 '11, 72% occupancy; Q1 '10, 70% occupancy, a 2-point improvement in occupancy. Both products were up in rate. Posters Q1 '11, $415 average rate per panel; Q1 '10, $406 average rate per panel, an increase of 2%. And on the bulletin side, relative strength -- Q1 '11, average rate per panel $1095 versus Q1 '10, $1064 or a 3% increase.

So the story I think here is obviously that dip in rate in Q1 this year, which we hope will reverse itself as we progress through the year.

National/local, we were 80% local and 20% national. That's up from Q1 of last year, 81/19, respectively. I think that reflects the relative strength of national as compared to local ad spend.

Top 10 advertisers, let me give a shout out to Diageo. They've cracked our top 10 customer list for the first time, and we are happy to see them there.

On the verticals, the story here is virtually all our top 20 verticals are in good shape, except the ones we talked about on the last call -- hotel/motel and real estate. Hotel/motel has been -- was down in Q1 about 10%. And real estate just continues to show no signs of life.

Hotel/motel in fact dropped out of our top 10 categories. It dropped from 5% of our book last year at this time to 4% of our book. And it's been replaced by educational institutions, which have ticked up from 4% to 5% and is now in our top 10 verticals.

Auto is a good-news story, tracking through the first quarter mid-, upper teens. That is carrying into the second quarter in the midteens. And we continue to see a good rebound in the auto category.

So with that, I think we will go ahead and open it up for questions.

(Operator Instructions). Marci Ryvicker, Wells Fargo.

I think investors are worried that the slowdown in topline growth is secular versus cyclical. And some of the things that have been mentioned to me are Groupon, auto and real estate. So can you touch briefly on each of those and tell us what you think is going on cyclical versus secular? That's my first question.

And then, the dip in poster occupancy, is that due to lower demand, or are you holding out on rate?

And then one clarification -- Sean, can you just repeat the rate for bulletins, Q1 2011 versus Q1 2010? Thanks.

Sure. I will start with the rate on bulletins -- Q1 '11, $1095, and Q1 '10, $1064. That's an increase of 3%.

On the occupancy dip in posters, we are holding rate. Rate was up in the first quarter. So I think that is reflective of a not-as-strong recovery in local ad spend as we are clearly seeing in national ad spend.

On the secular versus cyclical question, you know, I think when we close the book on this year, you're going to see that Lamar's book of business will be up higher than total domestic local ad spend. And I think that's the truest measure of that issue.

If you want to dig into the verticals, what you see is a strong rebound in auto, up midteens. I think that's going to continue, and I think we're going to get our share there over time.

When I look at real estate, my view of real estate is that that is still in deep, deep, cyclical throes. And when they come back, I again believe we will get our share.

The hotel/motel category is a little more complicated. They have more options now. There are technologies out there that serve as substitutes for what we do and have done historically for the hotel/motel trade. There's lots of ways to tell people where you are.

As I've said in the past, our challenge is to be more relevant to hotel/motel operators in their branding strategies. We need to be more aggressive in telling people why they should stop in a particular place, not just where the hotel is. And we are communicating that. We are aggressively pushing it. It is my feeling we are going to stabilize that category somewhere around where it is.

So, I think, again, we are getting our share of local ad spend. There's not a secular shift from us to others when you look at where the local ad pie is in terms of growth.

Are you seeing any money going to Groupon?

Groupon, from where we sit, is more of a larger-market phenomenon. We have had merchants in the middle markets that have used Groupon. And our task -- not necessarily Groupon, but just Groupon/search -- our task is not to get complacent and say, look, we are comfortable selling against newspaper, radio and television, and we are going to ignore these other wonderful disruptive technologies that are out there. And we are going to just say, that's in the home, and we are out of the home.

And we just can't -- we can't fall back on that phrase anymore, because handheld devices, they are out of the home. People are carrying them around. And they are getting more and more robust every day. And people are using GPS technology to figure out where things are and what activities they can engage in.

We don't necessarily see Groupon as a huge threat right now, simply because of the cost. I know there are a lot of people out there who say, well, you know, if they can keep the redemptions down on a Groupon campaign, then it will work out, and the return on investment is very attractive.

But from what we are hearing from our local merchants and the middle markets is that, yes, they've tried it, because it is compelling. But they were a little taken aback by the cost, and they're a little concerned about their regular customers saying, hey, you're offering all these discounts. I'm a regular customer, and I'd like to participate.

And so they are not necessarily convinced that those promotions are going to stick. But that's enough said about Groupon. Whether we are right or -- whether I am right about that or not is really not the issue. These are wonderful amenities for people who -- Groupon and GPS-based advertising, I just think they are just wonderful opportunities for people to try to figure out what's available.

And our challenge is to learn how to compete and also learn how to fit into that environment. And that's one of the reasons why we are investing heavily in digital, because it is a media that's quick, and we can be responsive. And it's another reason why we are investing heavily in our customer relation environment. And that's why at the end of my comments, I mentioned that we are actively engaging our customers, and the conversation revolves around speed and transparency.

Thank you so much.

Ben Swinburne, Morgan Stanley.

I guess just to touch on that answer you guys just gave, which was very helpful, and make sure we understand what the message is from Lamar today, which is -- it seems that what you're saying is that the cyclical pressures in your business, particularly around a couple of key categories and probably in some specific geographies, have decelerated the local growth rate.

I just want to make sure that's correct. I think the search and online GPS stuff -- and that's been around for a while -- obviously, it is always improving. But I just wanted to understand if you think there's been a change in the competitive pressures from online platforms broadly, or if this is really about, from your perspective, cyclical weakness.

And then I have a follow-up.

Yes, from our perspective -- this is Sean -- I do believe that local ad spend just hasn't rebounded the same way national has. And the pressures of online, etc., would show up there as well. I mean, you can look at CBS's release yesterday. Companies that are using outdoor to brand are going to use outdoor to brand.

Groupon is a discounting mechanism. And as we look to see how our customers are using the various online alternatives available to them, some of them are using us to mix and match our digital platform. We have customers Tweeting, using their Facebook in live time on our digital units.

So, again, our challenge is to be relevant in their branding strategies, and they can use Groupon, as they use other analog discounting technologies.

But getting back to the major point, it's pretty clear to me as I look at our book and I talk to other local outlets, that local ad spend -- again, as I introduced it with my comments -- Main Street is not enjoying the same robustness that Madison Avenue is. And as we see strength across local economies, you'll see strength in our book.

My comment was really not about -- it was more about just complacency. I think a little bit of paranoia is a good thing, whether it is real or imagined. And I don't think that we should fall back on the idea that we are out of home, our audience is drivers and we're totally insulated from everything else that is taking place out there. And so, we just need to work hard every day to improve our processes.

So, that might be more for our internal group than it is for the marketplace, but that was what was motivating my comments to Marci.

Understood. And just, I would be interested if there were any geographies you would call out as being particularly weak or particularly strong, help us think about the mix.

And then, you commented that auto was strong. And if you have the numbers -- yes, I think you did give us what auto was up. And everyone I think is focused on the supply chain issues, potential issues out of Japan. Are you seeing anything looking ahead that suggests auto will slow? Any comment there would be helpful.

Usually what happens, if there is something that is a black cloud, we hear it from our local management. You know, when auto went into the tank during the '08-'09 recession, we were hearing from our local managers that auto dealers were going out of business in their marketplace.

We are not hearing any of that, and we are not seeing it in the book. It's not to say that it wouldn't -- it can't or won't show up. But as we sit right now, everything looks good on the auto front. And I'm just glad to see that people are out there buying cars and feeling confident again.

You know, like I said, virtually all of our top 20 verticals are in relatively good shape, with the exception of the two that we talked about.

And on geographies?

On the geographical front, as we talked on the last call, I don't think there's been a big change. You still have challenging times in Southern California and Nevada. You know, I think -- we think that perhaps Florida is turning the corner. It's doing relatively better than Nevada and Southern California. The rest of the geographies are kind of performing the way we indicated on the last call.

Thanks a lot.

Alexia Quadrani, JPMorgan.

Could you give us the breakup of the growth of national and local in the first quarter, and what you are seeing for those two segments in Q2?

And second question -- you talked a bit about the verticals and gave us some good color, which is great. Any sense, though -- is there one vertical that maybe is incrementally a little bit softer in Q2 versus Q1? I'm just trying to get at the guidance number you're giving out for Q2.

You know, we unfortunately talked a little prematurely about local and national for the first quarter. And it is as we indicated -- it is give or take 3% and give or take 8% or 9%, the 3% being local, and the 8% or 9% being national for Q1.

We are going to try to get away from getting too specific on that breakout, because particularly with national, a small movement in the book can change the rates of growth pretty quickly, and it can cause people to get a slight misread. So I'm going to stay away from guiding forward on those numbers, but happy to slice them and dice them looking backwards.

On the verticals, you know, let me tick through Q1, and maybe it will give you a little clearer picture. Restaurants were up 1 point in our book. That's our top category, so Q1 2011, up 13%, 2010 Q1, up 12%.

Hospitals also ticked up 1 point; that's number two in our book -- Q1 2010, 9% of our book; Q1 2011, 10% of our book. So both of our -- again, our top to verticals are showing relative strength and are a good news story.

Retail and service are number three and four, respectively, both at 9% of our book. Retail ticked down slightly, so Q1 2010 it was at 10%, Q1 2011 at 9%. And I think that's your pure local story there.

For us, retail is a very much Main Street phenomenon, and that probably ties back to the poster occupancy dip. So I think that's pretty much where the book shaked out. The rest of the verticals are all coming in where you would expect and relatively stable.

And auto is roughly, what, 6% or 7% of your book?

Auto is at 6% of the book, and through the first half of the year pacing up midteens.

Barton Crockett, Lazard Capital Markets.

I wanted to get back to one thing that came out of the fourth-quarter call, and that was your aspiration, I think is the way to put it, for a full-year revenue growth in the 6% to 6.5% range. I was wondering, given what you're seeing now in the first and second quarters, do you still have that aspiration, or has that kind of been reduced?

And then I want to follow up was some digital questions as well.

As Kevin mentioned at the outset, it is awfully hard to get there with 1.8% GDP growth. So for us to get there, we will definitely need better tailwinds at the local ad spend level.

If GDP growth stays where it is and the local economies perform the way they've performed, then it's going to be awfully difficult for us to get there.

Okay, great. And if we are looking at kind of a slower growth environment, are you at a place where you can exercise some cost controls? Or have we really gone as far as we can, given the past couple of years that we've gone through a lot of cost controls?

Yes, again, let me hit two points. As I mentioned, June is pacing better than April and May, and Q3 is pacing better than Q2. So I don't think we are in a sequential throughout-the-year environment going down. So we do expect things to get a little better in the third.

And as Keith mentioned, yes, we can control expenses. We saw things getting soft at the tail end of the first quarter. And whereas we had guided to something in the 4.5% range for expenses, we were able to bring that in at 3.5%. And again, stripping out for extraordinary reinstatement of benefits, actually it was around 2%.

So the take-home message there is our team can and will manage expenses very aggressively, depending on what we see happening out there in the world of local ad spend.

Okay. And then, one final question here on the digital. You know, I think you were talking generally about the digital portfolio is up, I think you were saying midteens, similar pace I think in the first quarter as the fourth quarter and second quarter. It all sounded kind of similar, but you've added some boards.

Are we to read into this that there's some deceleration in the trend per board, or are the numbers just so loose and really the per-trend board is still what it was?

You know, we are cycling around to some very difficult comps on the board-by-board, because last year they really led us out of the recovery and were comping against, in some cases, 20% up. So I will kind of phrase it this way -- the digitals that we are putting in the air this year are performing to plan as we spec'ed it out. And the whole platform is pacing up midteens.

The same board story is going to vary depending on market and where things are. But we haven't added tremendous capacity yet, given the weather issues we've confronted. So I'm confident that the same-board performance is good and strong.

Okay. What is digital as a percent of revenues? Can you give us that number?

It's approaching 12%.

All right, that's great. Thank you very much.

Jim Boyle, Gilford.

Sean, do you have a feel in the second half of the year what occupancy might be, given the trend in your books so far?

Well, prior to that little poster surprise we got in the first quarter, I would have said we would have been trending to normalized occupancy.

It looks that way in bulletins. And when thinking about when do we hit full, normalized occupancy, I've been saying that it should be a 2012 phenomenon, and we could get pretty close this year.

I think we are still on pace to do that with bulletins, if things continue to track the way they are tracking. If we have the kind of Q3 that I think we're going to have with posters, then we will get back on track with posters. But that tick-down in Q1 on posters was a little bit of a surprise to us all.

Okay. And finally, looking towards the summer, when people drive more and pass by billboards more, are there any months that stand out in particular in either a positive or negative way when you talk with your regional managers?

You know, other than what I've said, Jim, I think they are feeling much better about June than the way March and April shaped up. And then Q3 looks pretty good. We are cautiously optimistic there.

James Marsh, Piper Jaffray.

A couple quick questions regarding the weather. First, on the April storms, you mentioned some damage to boards. Could you just remind us how those local rules work? I assume these are legal but nonconforming, so I guess if they are destroyed you can't rebuild them, but if they are damaged you can repair them.

And then I have a follow-up.

Sure. We are in good shape on getting the boards back in the air. You know, you're talking about some sort of damage to about 40 or 50 units, with maybe 30 or so on the ground. The total CapEx dollars to get them back in the air, our estimate at this point is about $1.5 million across Missouri and Alabama and Northern Louisiana and Southern Tennessee and North Carolina. These were pretty vicious storms in April. So, you know, about $1.5 million.

In terms of lost revenue for the months of April and May, order of magnitude about $200,000 to $250,000. We are still putting those numbers together. So, a little -- a tad bit of the weakness in April and May is due to inventory on the ground. I'm not going to blame it on that, but that's sort of order of magnitude what we're talking about in terms of lost revenues for those months. That billing should be back up and in the air by June, mid-June.

In many cases, when you have nonconforming inventory, you get a special dispensation because of the extraordinary storms.

Okay, all right. And then related to the digital installs, you mentioned the slowdown driven by weather. A lot of that really bad weather seemed like it was in April. So I'm trying to understand, is it solely weather that is driving that slowdown in installs, or is it that market demand seems a little soft and you don't want to be adding a lot of inventory at this time?

You know, I think the former. Our guys are committed to being aggressive this year. They've seen the digital platform perform well over the last 18, 24 months.

You know, February was awfully snowy and April was awfully windy. And so we are looking forward to some calmer, more moderate weather through the summer that can get us back on track.

And in terms of our construction pacings, we still did manage to get units in the air and operational and sell them during that time period. And hopefully, you'll see a lot more numbers going up this month, next month and through the summer.

Okay, great. Thanks, Sean, Kevin.

David Miller, Caris & Company.

Keith, I just want to make sure I have it straight on your covenant situation, because -- correct me if I'm wrong -- in the bottom half of this year, your covies begin to constrict. So what I have here is that your covie as of the end of the March quarter is 7 to 1. That's obviously still light by any measure. But the covenants begin to step down and move to I believe a 6.25-to-1 requirement by the end of the third quarter, then back to a 6-to-1 requirement after September 30, which I believe -- correct me if I'm wrong -- was the original requirement that you guys were obligated to before recalibrating the covenants in April 2009.

Is that correct, or do I have that wrong?

You know, I don't have all the covenants in front of me. But even at -- I think it doesn't step down that drastically by year end. I think it's more of a 6.5 to 6.25. I could be wrong. But even at that, we're looking at being at about 4 to 1 by the end of the year. So that's still two -- even if it is 6, that's still two whole turns of leverage capacity that we have. So we are in no danger whatsoever of coming close to breaking any of our bank covenants.

Okay, wonderful. Thank you very much.

Doug Arthur, Evercore Partners.

Yes, I just wanted to ask a question on sort of the critical mass nationally of the digital boards. At what level of board install does the potential for kind of national network ads -- in other words, an ad appearing on all boards at the same time for a movie or a new car introduction during certain parts of drive time on a Friday night -- at what point does that become a significant potential? Or are you starting to see that already?

We are starting to see it already, actually. If you look at the growth in national, in our digital book compared to our total book, national is actually growing faster in our digital book. So we are seeing that.

And I guess the second way to answer the question is, we are not the only ones with digitals in the air. So if someone wants to execute a national buy, they can make two phone calls and cover virtually the whole country.

So, the platform for executing a very effective national buy across virtually every market in the country is there, and national advertisers are taking advantage of it. And I think you will hear that out of Clear Channel and CBS as well.

They can also include -- patch together other digital out-of-home opportunities, like National CineMedia and the like.

Interesting. Okay, thank you.

Bishop Cheen, Wells Fargo Securities.

It's Davis Hebert with Wells Fargo in for Bishop. You guys paid down a little bit of debt in the quarter. I just wanted to get some color on what bucket that actually went into, if it was term debt or bond buybacks or what.

That was our bank Term B loan tranche. We have a Term A and a Term B and a revolver. The revolver was completely undrawn. Term A is all of our commercial lenders, and then the Term B is the institutional money. And that's a little more expensive.

So, as we've done in the past, we will continue to do in the future; we will continue to put free cash flow down on that Term B loan, the more expensive tranche.

So is that something we can expect as the year progresses as opposed to building cash?

Yes, yes.

Okay, so you're going to continue to pay down the Term B with free cash flow?

Oh, yes, yes.

Okay, that's great. Thanks.

At this time, I would like to turn the call back over to Kevin Reilly for closing comments.

Thank you, Chantrel. And I want to thank everybody for tuning in, and we look forward to the next call.

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