Lamar Advertising Co (LAMR) 2011 Q3 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 third-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, Lamar.com. I would now like to turn the conference over to Kevin Reilly. Mr. Reilly, you may begin.

Alabama fan, all of us here in Baton Rouge, thank you for helping us kick off this call. I want to welcome all of our analysts and friends on this call. One of our goals today is to shed some light on the cannibalization issue by a digital on our analog business and also to shed a little light on the secular versus cyclical as it relates to our analog business. And in a few minutes, Sean will give you some data points that we hope will help the marketplace get their arms around those particular issues.

With that, I'd like to go ahead and start with Keith Istre to walk us through the quarter.

Yes, just very briefly, not much to say this morning. I wanted to just highlight the paragraph in the press release concerning the extraordinary expenses for the legal claims and the fees associated with it. On the last call, I mentioned to everybody that our third-quarter expenses should come in slightly under our second-quarter expenses because we were going to be lapping some of the employee benefit programs that we had put in place beginning in the third quarter of last year.

And I just wanted to throw out a quick reconciliation. Last quarter, the second quarter of this year, our direct and G&A expenses were up 2%. This quarter, without the extraordinary settlement of the legal claims, the $1.2 million in direct and G&A, we would be up 1.7% in pro forma expense growth. So basically where we thought we would come in.

Our consolidated expenses, including corporate overhead without those claims and the fees associated, would be 2% up for the quarter versus 2.1% up for the second quarter of this year.

So we are going into the fourth quarter. We feel good about our expense growth for the year and we see no unusual items on the radar as of this time for our fourth quarter.

Also, if you look at the impact that those expenses had on our EBITDA, if you took those -- if you added those expenses back to our reported EBITDA for the quarter, we would have retained 65% of our revenue growth as our increase in EBITDA. So we were pleased with those numbers. With that, I will turn it over to Sean.

Thank you, Keith. As Keith mentioned, expenses are in great shape. Excluding those extraordinary legal expenses, we are below 2% pro forma, so I feel good about that. One of those settlements, by the way, was the permitting issue in New York City and I'm happy to report we reached a great settlement with the city. The settlement is good for the city, it's good for Lamar, it's good for the industry. And it leaves Lamar with the largest number of fully permitted traditional faces in the five boroughs. So we can feel good about the way that played out.

Getting onto some of the traditional numbers that we give you guys, we ended up the year -- I'm sorry -- we have at this moment in time 1378 digitals in the air. If you include the 40 that we have on order, we should finish up the year with roughly 250 new additional digitals this year.

And the third quarter was a good quarter for us to look at and analyze in terms of whether this digital growth has come at the expense of our traditional platform. If you look at all of Q3, our digital revenue was up 18% and the rest of the platform was up 1.6%. So the rest of the platform continues to grow and that's in the face of what we believe is about 1% US domestic ad spend growth.

Particularly, if you look at September, I hate to just look at one month, but because we were adding digitals during the course of the quarter, it might be instructive. Our digital book of business for September was up 26%. The rest of the platform was up 3.1%, again pacing ahead of US domestic ad spend and ahead of GDP.

So if current trends hold, we will have invested in digital this year. We will have grown that platform. It will have performed quite frankly better than we had expected and the whole digital platform will be up high teens as we look back on 2011. And it's my belief that the rest of our platform will outperform US domestic ad spend.

So I think with confidence we can say two things. We are growing our digital business not wholly at the expense of our traditional business, number one and number two, the dollars we are spending on digital are giving us a great return. All that said, you can count on us to be aggressive going forward in our digital deployment.

A few stats on rate and occupancy. Q3 2011, poster occupancy, 72%; that compares to Q3 of last year of 70%, an increase of 2%. Same increase on the bulletin side; Q3 '11, 77%; Q3 '10, 75%. On rate, Q3 '11 for posters, average rate $440 per panel. That's an increase of 2% over $430 for Q3 of 2010. For bulletins, the rate was essentially flat; Q3 11, $1116 average rate per panel versus Q3 '10 of $1118.

National versus local sales mix, essentially the same; 66% local, 24% national. Year-to-date, that number would be 77% local, 23% national. For the quarter, and I think this is another good data point for us going forward, for the quarter, local in Q3 was up 4%, national Q3 was up 3.2%.

Last call, we gave you a stat that we hadn't given you before because we were trying to measure the impact that the recession of 2009 had on our overall customer base. And I think we've got a good trend here as well. In 2008, we had 46,000 customers; that's our whole book of business throughout the year. In the depths of the recession, that number fell to 40,700 customers and as we climb out of the recession, our customer count as of today is 41,152. So I'm encouraged by that trend because those customers that we lost tended to be smaller businesses on Main Street and seeing them come back is a good thing.

In terms of verticals, a couple of note, restaurants are up 1% in our book of business of 14%. As is amusements and entertainment is now 7% of our book and healthcare is now 9% of our book. So those categories remain very strong. Auto in Q3, as you've heard from others, leveled off to slightly down. It remains at 6% of our book, but in the aggregate through the quarter, it was basically flat. And then, of course, on real estate and hotel/motel, both were down give or take 7%.

A couple of good data points are, number one, because our aggregate book of business was up, our guys in the field are doing a good job of replacing that business. And number two, it appears that the rate of erosion is declining. Both of those categories were pacing down in the high teen and now it's around 10%. So with that, Jenny Lee, I'm happy to open up the call for questions.

(Operator Instructions). Marci Ryvicker, Wells Fargo.

I have two -- one for Sean and one for Keith. Sean, the third quarter was up nicely in revenue versus your guidance. So did something happen and we're getting questions on what the [beat] was from in Q3 and then the sequential decline in Q4? So if you could touch on that, that would be great.

Well, I'm not convinced we are going to have a sequential decline in Q4, but we did guide to up 2.5. It seemed to us that the tone of business turned towards the middle to latter part of the third and it was across the board. I don't think that you could point to a single category being a surprise. Our digital platform did extremely well in September and again continues to meet or exceed our expectations. Perhaps it's because the digital buy has a shorter cycle and the crystal ball isn't quite as accurate on a shorter cycle buy. But the news is good on that front.

So did the upside surprise come from digital or it was across the whole platform?

I think it was across the whole platform because our other platform was up 3.1 -- was up. But I think it was mostly September and digital came in real strong.

Okay, and then just interpreting from your comments, is it safe to assume that pacings right now are ahead of where you are guiding?

Look, we try to provide the best guidance we can.

Okay. All right, then I'll ask one for Keith. Any comment on expense growth for Q4 or how we should think about 2012?

I think it will be similar to Q3. As far as 2012, is that what you asked, Marci?

Yes, yes.

We haven't started our budget process yesterday, but Sean and I did have a call with all the regional managers. And I think what the Company will be looking for is 2% to 2.5%, something in that range for next year.

Great. Thank you so much.

Ben Swinburne, Morgan Stanley.

I wanted to ask about the customer account information, Sean, I think that you gave, which I thought was really interesting. That's, peak to trough, about a 13% decline in customers and you guys are obviously marching your way back up now. Any particular either regions -- I guess we could probably guess -- or verticals that came out of that count in the downturn -- probably also could guess? And do you have a sense, and this might be an impossible answer to get, but whether those customers or those businesses have disappeared because of the economy or they just are not advertising with you anymore?

Well, when we talked about this last time, the anomaly in our book in the second quarter was the fact that our top 20 categories -- these are larger advertisers with larger ad budgets -- were actually up and up north of 5% in the second quarter. And it tended to us to look like it was those customers in categories 20 through 40, which tend to be smaller customers with smaller ad budgets that were struggling in our book. And as we dug, we found that that erosion from 46,000 customers to 40,700 just goes to show you the effect that that 2009 recession had on Main Street USA.

Do we know if they're in business? We don't know if they're in business or out of business, but what we do have a sense of is that they are clawing their way out of it. And local was up 4% in Q3; that's a good sign.

A few other things just to follow up. Last quarter, you guys, I think, spoke about -- I think national declined last quarter, if my recollection is correct and you called out telco as a particular vertical there. I know local drives the ship here, but national picked back up again. Does that foot up with what's happening in digital and the acceleration there? Is that more of a national buy and any comment on sort of the national piece of the story, which looks like it turned again -- sort of bouncing every quarter and sort of moving in a different direction here?

Well, historically, and I'm looking back 30 years, historically, local has tended to be a little more stable, have a less beta over time and national has traditionally bounced around a little more. That hasn't been the case coming out of this recession actually. National showed a little more steadiness and it was local that was disappointing.

I think digital has a little something to do with it. We are clearly building a medium that is attractive. When you take our platform and combine it with CBS and Clear's, you can very quickly execute a digital buy that gives you lots of flexibility and huge numbers of eyeballs quickly.

Just as another data point, our digital book of business on the national front is up 20% year-to-date. So clearly between what Clear and CBS are doing and what Lamar is doing, and I think you hear this from the other guys, we are building something that is attractive to national advertisers.

Do you guys think you're gaining share heading into the fourth quarter? I know that's a tough question because you're dominant in your markets. But the outlook you guys and your body language, your tone, which sounds very positive, is kind of in contrast to what we've heard from other -- from your peers in the outdoor business, but particularly across local heading into the fourth quarter.

Well, these share questions can get complicated, so I'll try to simplify it and I think I've hopefully simplified some of the questions about secular shift and digital cannibalization by just looking at the aggregate growth rate. We are in a world of this year probably 1% US domestic ad spend growth. So what we're focused on is can we aggressively grow our digital platform and at the same time have our traditional analog platform exceed the growth in US domestic ad spend. If we do that, then we know that this investment we are making in digital is a good one.

Thanks a lot.

Nadia Lovell, JPMorgan.

I just have a couple. Local is slightly up (inaudible) national in Q3. Is that still the case so far in Q4? How is it trending?

We don't like to talk to that level of specificity going forward, mainly because of little bits of movement in our national book can skew it. It's a little difficult to read if I was going to say that one was going to grow X and the other was going to grow Y. The relative strength seems to be in both in terms of how the fourth is looking.

Okay, that's helpful. I know coming out of a recession we saw contract lengths decline. How are those looking now and is there any visibility into next year?

It's too early to be thinking about 2012, but the short versus long nature of our book seems to have stabilized, the number of contracts that are of 12-month duration and the number of contracts that are of one-month duration and all of the gradations in between. We've seen a stabilization there over the last couple of years. Our book used to be a lot longer and it has gotten shorter in duration. But then it sort of stabilized. About 45% of our contracts are of 12-month duration now.

Okay, that's helpful. And then I was hoping that you can provide some color on the tax expense in the quarter in Q3 and what it could look like in Q4?

In Q3, it's really skewed -- we had a lot of non-deductible noncash comp expenses that we address in the 10-Q, which we will file today or tomorrow and it explains it in a little more detail. That happens from time to time; it's the timing difference. I'm not sure about Q4; at this point in time, I don't have the projections. But if we do have another disparity like we had in the third quarter, that will be the reason why.

Thank you very much.

James Dix, Wedbush.

I guess two questions. If you look at your -- the digital numbers that you gave in terms of the growth when you laid out that cannibalization, were those all reported growth figures or were those same display growth figures, just looking at the same group of boards this year versus the last? And if it wasn't, do you have any of those same display figures?

Yes, no, James, the growth rates I gave you on digital included the increased capacity. And why we find that, the number to look at when you're thinking about cannibalization, is, during the course of the quarter and during the course of this year, we added a large number of digital faces and added capacity. So the question is, did we just simply move customers around, did it come at the expense of our traditional platform. And I think the data is pointing to a pretty strong case that digital is enhancing the overall platform and not just moving customers around.

If you went same board, and I don't have the number in front of me, but the same board growth in digital would be in the 5% or 6% range. So if you took September, you got a 26% increase in performance of the digital platform. About 20 points of that would be extra capacity added through the year and about 6 points would be same board year-over-year growth.

Okay, that's very helpful. And have you seen much trend in that 5% to 6% growth throughout the year on the digital?

Well, throughout this year, it has been a little frustrating. Looking back to January, our overall book of business was pacing up 6.5% and we watched it kind of erode as GDP kind of [fell] hard on us. At that moment in time in January, virtually all of our digital growth was same board because we hadn't erected any during the course of the year and our digital book was pacing up about 15% at that stage of the game. So, yes, there has been a little bit of erosion in same board, but we also have had a disappointing year from a GDP and ad spend point of view.

Okay. Has that now stabilized or turned around, do you think and going in the other direction?

Yes. Yes, I mean we kind of saw -- the second quarter was when the wheels came off a little bit and that was a disappointing quarter for us.

Okay. And then on those customer -- that customer analysis you did, I found that was very interesting. Do you have any sense of the customers that you've kept, where is their spending now versus where it was before the recession? How much have they come back in their budgets with you versus their prior peak?

Well, I suspect that some of those customers are no longer in business, so I'm not so sure that they moved ad spend. My sense is that that was a very tough time in Main Street USA and some folks didn't make it through. Again, because it was clearly those customers that make up the bottom 20 of our categories, which again tend to be smaller folks with smaller ad budgets.

I think the good news is, as we progress through this year, to the extent we still have erosion in a couple of categories, real estate and hotel/motel, our folks are finding other customers out there to replace them. And that is also borne out in our occupancy statistics, which we do a pretty good job of tracking over a long period of time. And our occupancy stats are now beginning to trend in a more traditional way looking back 20, 30 years.

Okay. So I guess one of your points is that that 41,000 or so current customers versus the 46,000, there has been some changeover within that mix. So it's not -- it wasn't so much -- you had 46,000 customers that you counted and then off that list, you've got 41,000. There has been some change within that mix too.

Oh, absolutely, oh, yes. In that universe of customers, customers come and go. They use us when they need us and have a specific goal. Some use us all the time, some come in and out. That's a healthy thing.

Okay. And then just one last one. On the incremental margin that you mentioned, Keith, is that -- that's 65%. Do you think that's a good way of looking at the incremental margins on your revenue or do you think that potentially can go up a little bit if you start getting a little bit more revenue growth?

I guess that's possible. That was on 3.2% growth and 2% expense growth. Obviously, if we keep our expenses at 2% and the revenue continues to -- were to exceed 3.2%, then obviously it's going to go straight to the bottom line.

Okay. So you think incremental margins are probably at least that high and maybe a little higher typically?

They have been in that range in normal times in the past.

Okay, great. Thanks very much.

Jason Bazinet, Citi.

Thanks. Congratulations on the better numbers. I just had a question -- I think the market is struggling as we sort of bounce along the bottom. I am trying to figure out whether we are in the early signs of a recovery or if in fact we are going to double-dip. And I guess my question is you guys did such a phenomenal job cutting costs in the last downturn. If the worst-case scenario unfolds, is there just a -- are there opportunities to rationalize your expense structure to the same level you did last time or should we view that more as there is some fat that built up in the system over time and it was easier to do last go around than this time?

If you look at what we did last time and none of us want to go through that again, nobody in any industry wants to go through that again, we essentially took the costs out in two places. We aggressively attacked our real estate portfolio and did quite frankly a great job in reining in that expense, which is our largest fixed expense.

On the people side, we did a range of things on the benefits and on layoffs. We went from 3600 employees to 3000 and we pretty much held steady there. Part of that ability was a change in the substrate that allowed us to be more efficient on the production side. So we were fortunate in that when the industry moved away from paper and glue and went to hanging polyethylene posters, it significantly cut down on our back-office production expenses. So that was the story then.

Looking out to next year, a couple of points. If the world really collapsed again, I don't know that we could do a whole lot on the people side. I think we are right-sized. I think we are in good shape there and I don't think that there's -- nor would I want to go there in terms of taking out some sort of recessionary 2012 on our people.

We could attack the lease portfolio again. There certainly is room there. We've demonstrated we could do it, we know how to do it and we can turn on a dime if we have to. So that's where we would go look for it if we had the worst case for next year.

It's way too early to talk about next year. I can say one thing that our book is not showing an ad recession. As we look forward, we are not seeing evidence that there is a recession looming on the horizon.

That's very helpful. Thank you.

Jaime Morris, UBS.

I just was wondering if you could remind us what your analog book of business did in 1Q and 2Q.

In 2Q, it was pretty disappointing. It was 0.7, Keith. What was it?

Jaime, I don't have that in front of me.

What quarter was this now?

One and two.

All right, I've got it. Our analog for Q1 on the poster side was up 1.4%; our bulletins were up 3.2%. In Q2, our analog posters were down 1.1% and our static bulletins were up 1.1%

And then on the digital side, on a same board basis, I think that in 2Q was up about 8%, is that correct?

For the same-store?

Yes, same board.

I don't have that in front of me either.

They have been running --

They started off -- same board started off midteens and sort of went into the singles and then settled in at 5 or 6.

Well, yes, I mean it's been fairly consistent. In Q2, the digital posters on the same board were up 6.8% and the digital bulletins in Q2 were up 3.5%.

Okay, yes, that's where it settled out.

Can you talk -- the change in the same board or the slowing down, is that on the pricing side or is that occupancy or is it a little bit of both?

You've got a different model there, right? You've got six-second slots and so we don't tend to measure it on the same rate and occupancy matrix that we measure our traditional. What we do is we just track the total billing associated with the board. Keeping in mind that yield management is a local function in Lamar land, and so you've got a lot of leeway in pricing that we give our local management. And so we find it's most helpful just to look at it on a same board monthly billing basis as probably the best way to look at it.

Okay, that makes sense. And one more quick one. On your last call, I think you talked about that it had been very difficult to push pricing. And I realize that on the bulletin side pricing was flat again in this quarter, but has that conversation with advertisers changed at all?

I think we're in a -- I'm not talking about Lamar land here; I'm just sort of talking about where we are in the US domestic economy. We seem to be in a 2% world and that's a world that it's very difficult to have an aggressive pricing conversation there. So I look for -- our outperformance next year, I'm looking for it to be on the occupancy side, not the rate side.

Okay, thanks so much.

William Bird, Lazard.

I was wondering if you just had a preliminary view on the pace of digital expansion in '12.

We haven't penciled out a hard number yet, but I'm comfortable with the description of aggressive. We are going to put out as many as we can.

And can you talk a little bit just about digital pricing? I was just curious if there's much of a difference in pricing between more seasoned boards and newer boards.

No, that's a market-by-market analysis. And we have digitals in markets as small as Cookeville, Tennessee and as large as Las Vegas and Chicago. The local managers, like I said, are in charge of yield management. When they put up a new board, they're probably plugging it into an existing pricing structure. I can say that when we look at it in the aggregate, the additional capacity performed as we expected and we modeled it market-by-market based on what their current experience was.

There's a couple of takeaways. Number one, we could add the capacity and still perform on our digital footprint as expected and we could add capacity and not totally at the expense of our traditional platform. I think those are the two takeaways that cause me to use that word we are going to be aggressive next year.

Thank you.

All right. Well, look, let me thank everybody for listening. We look forward to closing out 2011 real strong and reporting to you in Q1 of 2012.

Thank you for joining us. You may now disconnect your line and enjoy your day.