Lamar Advertising Co (LAMR) 2012 Q2 法說會逐字稿

Excuse me, everyone. We now have Kevin Reilly, Sean Reilly, and Keith Istre in conference. (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 in the registration statements that Lamar files with the SEC from time to time. Lamar refers you to those documents.

Lamar's second-quarter 2012 earnings release, which contains the information required by Regulation G, was furnished to the SEC on a Form 8-K this morning, and it 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, Jeff. I want to welcome all our shareholders and friends to our Q2 call. As is our custom, I'll make a few comments and then turn the call over to Sean and Keith for some color.

I guess the first item to cover is the REIT concept. As the Company continues to generate more cash flow than it needs, we're obligated to explore different ways to return capital to our shareholders, and the REIT construct is one possible avenue.

We intend to seek a private-letter ruling. We hope that the timeframe on that would be a Q1 2013 event. And we're thinking that if everything goes right, we would make the election in January 1, 2014. The PLR seeks to answer a lot of questions, and since we're in the middle of the process, it's not that we don't want to be forthcoming, it's just we don't have the answers to those questions. So, as you think about what assets are admissible and what assets are not, we just don't simply have -- we simply don't have the answers to those questions at this time. So, you won't get them.

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

Just to zip through the press release real quick on the pro forma results, as you noted, our pro forma revenue came in at plus 3.6%. That was slightly ahead of our guidance of 3%. That was a total increase of about $10.5 million.

Consolidated expenses were 3.6%. I had, on the last call, mentioned that we thought they would come in around 4%, so we were slightly under on that metric.

Let me point out on the corporate overhead, you may have noticed that those expenses were up about 16% for the quarter, and that's a blip, not a trend. We had some difficult comps to contend with in the second quarter of last year when we saw that we were not going to hit our incentive bonus performance goals. We reduced the bonus accruals in the second quarter at corporate to the tune of about $800,000. So that's $800,000 less in expenses last second quarter that we have -- that we don't have that we do have in this second quarter. So, I think you'll see that flatten out.

On a consolidated expense basis, for the third quarter we think that the expenses will come in somewhere in the 2% range, which going forward, it was up for the year at about (technical difficulty) [3%], which is what we guided to at the beginning of the year.

One other quick note, you saw that we had called approximately $123 million of our senior subordinated high-yield notes due 2015. Several people called and wanted to know how that redemption was going to be structured, and as of right now, we anticipate having approximately $90 million in cash on hand at the end of August when these notes are due, and we will draw the remainder from our bank revolving credit facility to take those out. And that would leave about $137 million of that issue still outstanding that we would like to address before the end of this year.

With that, Sean?

Sure. Thanks, Keith. Let me walk through some of the statistics that we typically cover on the call, and then we'll open it up for questions.

First, our account of digital units, and this is going to be as of yesterday, I'll call over call, and this will include the 30 digital bulletin faces that we purchased in Phoenix during the course of the last quarter. So as of today, we have 1,564 digital units in the air; 852 are bulletins and 712 are posters. And again, that concludes the recent acquisition in Phoenix, which, by the way, we feel very good about it.

If you look at the performance of our digital platform, our large-market digital platform, it's been our best performer. Markets that we are currently in, such as Chicago, Atlanta, and the like, are doing very well. It's clear that we're building something of interest to national advertisers. Our national digital book was up almost 20% in the second quarter. So we feel good about that.

On the slightly negative front, our same-board digital went flat for Q2, and this basically tells us that over the last 18 months in the face of a challenging macroenvironment, we've added a tremendous amount of capacity. We still feel very confident in our digital rollout; however, we may be a little more selective over the course of this year with our rollout as we try to gauge where the macroenvironment will be.

On rate and occupancy, both posters and bulletins occupancy was up 1%. Q2 2012, 73% for posters; Q2 2012, 78% for bulletins. That compares to 72% and 77%, respectively, for Q2 of last year.

On rate, we are still in a macroenvironment that's not conducive to driving rate. Essentially, rates were flat for both categories for the second quarter. For posters, $435 average rate per poster last quarter compared to $437 average rate per poster in Q2 of 2011. And our average rate for bulletins Q2 2012, $1,116 versus $1,112 Q2 last year. So you can see the environment we're trying to sell into, and again, it's not conducive to driving rate.

On local versus national, local is slightly stronger and steadier than national and has been all year, except for digital. As I mentioned, national digital has been quite a good performer.

On verticals, the story is very similar to what you've tended to hear with essentially two things of note. In general, our top 10 categories are very healthy. Top 10 categories were up about 5% in Q2. Where there was weakness, it was in wireless, which was disappointing in Q2. But again, if you add up all the top 10s, very healthy.

Automotive for Q2 was up 3.5%. We're seeing good paces and good improvement in automotive for Q3. We think it's going to end up Q3 in the sort of low double digits up for the third.

And that, by the way, includes a very impressive buy from General Motors on our digital platform. For the first time, General Motors national came in and bought our whole digital platform around the Olympics. That was a good news story for what's going on with digital.

So with that, let's go ahead and open it up for questions.

(Operator Instructions). Marci Ryvicker, Wells Fargo.

Two questions, somewhat maybe related. The first, Sean, you didn't really address what's going on in the third quarter, so curious what the deceleration is coming from. Is it a slowdown in occupancy, a slowdown in rate, fewer digital boards? And then, maybe related, is this deceleration part of what prompted your decision to look at REIT status? And if so, if you could give any color on why now, that would be great.

Sure. You know, on where the book of business is, you know, actually we're not seeing any negative numbers out there. We're not seeing a double dip.

What the field is telling us is while pacings are still where they've been, they're beginning to see difficulty selling in the month for the month. You know, there's two components to hitting a future month. One is what you've got on the books, your pacings, and the other is what you're seeing in terms of economic activity.

So I would have to say that our folks in the field are just a little bit concerned about where they're seeing the macroenvironment. I'm still comfortable with the notion that Lamar will be beat GDP by 1.5 to 2 points by the time we close out the year. So, I wouldn't point to anything other than the macroenvironment and a little bit of caution there.

Is there a specific category because I know auto is improving (multiple speakers) it's got to be something else that's offsetting that?

Yes, I mean, wireless has been a disappointment and it continues to be a disappointment. You know, it's -- those guys have been a little bit light all year.

But to put it in perspective, customers come and go, and whatever category is down, we seem to be replacing it. As I mentioned, for our top 10 categories for Q2, they were up 5%. There's a whole slew of categories of verticals between 10 and 30, and they kind of come and go and come in and out, and I think they're a better reflection of strength of the macro than maybe our top 10 might be.

You know, the decision to elect REIT status is not something you do based on a quarter or a blip. This is a long-term decision that (multiple speakers) has to be in the best interest of all of our shareholders. I wouldn't even try to suggest that it's because of what we saw in August or September.

It really is about making the right decision on returning capital to shareholders over the long pull. And there are a lot of different factors that figure into it, including your tax status and the like, that figure into the timing, but the Board and Kevin and our shareholders, we're all going to make the right decision.

Alexia Quadrani, JPMorgan.

Thank you, just a follow-up (technical difficulty)

Hello?

Ms. Quadrani, we lost your line. Are you still there, ma'am?

Yes, I'm here. Can you hear me now?

Yes, ma'am.

I'm sorry. I just wanted to follow up on your comments about slowing the rollout a bit of your digital boards. Do you -- I guess, could you give us some color what sort of run rate we might consider going forward?

It's our opinion that what we're managing to is a macroenvironment, and the macroenvironment can change, and obviously it's our job to manage to it.

So I wouldn't want you to suggest that if at the end of the year Lamar put up 200 digital units, that that's the new run rate or that's what 2013 looks like or -- we really want the right message to be delivered here. We're being a little bit selective, given what we're seeing in the macroenvironment in general, and in particular where we see continued strong demand and where perhaps a pause is warranted.

Keep in mind, when we roll out digital units, it's not a top-down exercise. This is not something where executives sit in Baton Rouge and order up digital units and start sprinkling them around the country. It's a bottom-up exercise. Our general managers request them, given the demand they're seeing locally in their local market.

So, again, I don't want to put a number out there that suddenly becomes the new norm for modeling.

And then, on the comment about the pacings slowing a little bit with units adjusted, your -- the guidance you gave. Do you see any or would you see any political environment maybe from displacement of advertisers being pushed out from TV?

We don't tend to get much of the tit-for-tat television buys that characterize what happens with political these days. We see a little bit, perhaps, but again it's not the Super PACs piling into billboards. They tend to have all that happening on TV.

Possible that other customers being crowded out?

It's on the margins we get it. On the margins we get some buys from customers that perhaps don't want to be caught in that fray, but it's hard to predict. They can buy us much more quickly in short today than they used to be able to.

So hopefully we'll get a little of that business, and that may be a reflection of why some of our pacings in the back half are better than the guidance that we put in the press release.

Okay, thank you.

James Dix, Wedbush Securities.

Hey, good morning, guys. Just one thing, have you had any feedback from shareholders or analysts about converting to a REIT? And if so, what seem to be the key pros and cons that are important to them? Thanks.

No, because the REIT concept is just one item on the menu. And of course, you know the pros and cons just in general when you talk about returning capital to shareholders, share buybacks versus dividends.

So I think we have a good sense of what our shareholders are interested in and what they're thinking about, but there hasn't been a lot of focus on the REIT concept in general because it's just sort of one tool in the toolbox.

Great. Thank you.

Jaime Morris, UBS.

Hi, good morning. You mentioned that your larger markets are doing better than some of your smaller markets with digital. I was just wondering if you could give us a little more detail on what you're seeing there and what's driving the difference. Is it that national advertisers are using digital more, but just in those larger markets, or any more color there?

I think that's part of it, Jaime. I think that national advertisers are more interested in being in those places. Again, that's one of the reasons we felt confident in entering the Phoenix market the way we did.

There is also -- if you look at the evolution of digital in Lamar land, we more heavily penetrated our smaller and middle markets earlier in the game, and we have some smaller and middle markets where our local management is saying, okay, digital is approaching 35%, 40% of my book of business. Let me pause and absorb some of this capacity, and I'll get back to you if I want some more units.

So, that was mostly the color on same-board performance. You know, in general, across the whole platform, national is stronger and the same-board performance, I think, is pretty much going to track the maturity of the overall digital development in a given market.

From a same-board perspective, then, does that suggest that digital revenue was down in some of your smaller markets on a same-board basis if national was up?

Yes, I mean, it's sort of across the board. You've got -- and again, on some of these things you've got the law of small numbers, right? A little movement can move a same-board performance.

As we look at it and manage to it and look at all the data, there's nothing out there to us that suggests that the business model has issues. We still have confidence in it. It's just a question of where some markets are in their overall digital development.

David Hebert, Wells Fargo Securities.

Good morning, guys. Thanks for taking the question. I just wanted to ask about, with regards to the REIT, how you're thinking about the capital structure, whether you'd like to be at a lower leverage point or if it's not a REIT status, then where do you see leverage going?

You came in kind of weak, but the question was, how do you think about your capital structure if you were a REIT? Is that the question?

That's correct. Yes.

Well, without going into a lot of detail, you know that the distribution requirements on a REIT are in the 90% range, so you've got to manage your capital structure so that you're in a position to make those distributions. So, you know, there's a possibility, once you make a commitment, that you would have to manage your capital structure more conservatively than you would if you weren't a REIT.

Okay. So more conservatively, then? At this early point.

Yes, I mean, given the REIT structure and the distribution requirements, I mean, that would be our thinking.

Eric Handler, MKM Partners.

Yes, thanks for taking my question. Just looking at pricing for digital billboards, it looks like you've seen pretty significant deceleration in CPMs -- the CPM growth over the last couple of years. Is this more a function of the economy, or is it more of a function of the fact that there is just a lot more digital boards out there now, or is there something else going on?

Sure, you know, I don't think the premise is necessarily correct. We really haven't seen a deceleration in our CPMs we're able to get.

If you look at the fact that over the last 18 months we probably added 30% to the capacity that we have, and those boards that we've put up in the last 18 months are performing extremely well and performing and achieving the IRRs that you would expect. So, you know, I think the CPMs that we're getting are holding steady.

If we had same-board increases in performance, that would imply increased CPMs. I'd say they're -- on the boards we have up there, they're holding steady, and the boards we're putting out there are performing to plan. You know, again, if you look at it market by market and where the CPMs are falling out, as a general proposition our CPMs are falling just below radios and holding there and doing fine.

Great, yes, no, I meant the growth in the CPM pricing, not necessarily that you're seeing deterioration in pricing. But thanks.

In general, as a general proposition, digital CPMs again fall kind of right just below the pricing umbrella established by radio.

Great. Thank you.

Doug Arthur, Evercore.

Yes, I may have -- you may have mentioned this and I missed it, but in terms of the 1% to 2% pro forma guidance for Q3, did you differentiate between national and local? I know you made some positive comments on digital national.

I didn't, and we don't tend to do that, mainly because of little teeny movements on the national book can affect that and people read it wrongly. So we've stopped giving forward guidance on national versus local in the book.

Okay. Is it fair to say that -- I mean, you've talked a lot about sort of the uncertainty of the book month to month, much greater variability than you've seen in the past. So this is your best look, but fairly conservative, 1% to 2% at this point, and things could certainly strengthen.

That's our hope.

David Miller, Caris & Company.

A couple questions. Keith, you know, we know you guys are moving pretty aggressively in taking out that 6-5/8 paper. We kind of have the loose calculation here that you'll be done with that before the end of the year. Do you think you might -- just given your cash flow generation, do you think you might be able to get to the 9-3/4 paper before the end of the year or are you going to kind of leave that to the top half of 2013?

And then, Sean, I've covered this sector now for 12.5 years and I just don't recall any example of an advertising-based business moving to a REIT structure. Can you think of any other example? Thank you.

As far as the first question on the senior notes and the sub notes, the -- no, we'll address the remaining senior subs due 2015 before the end of the year.

The senior notes, that will happen in the back half of 2013. They mature in April of 2014, and so we will wait until the third or fourth quarter to address those. Make whole is very expensive, so we want to get closer to the maturity date as the make whole goes down the closer we are to that time.

We have a couple of options. One is to stockpile free cash like we did this year to address the senior subs, our revolver, or going back to the debt markets to take that out.

To answer your question, no. There's no other advertising-based entity that has a REIT structure. The reason why we're looking at it is because of the unique characteristics of the billboard industry and a recent IRS ruling regarding billboards and their status as real property.

Wonderful. Thank you.

Jaime Morris, UBS.

I just had one quick follow-up. In the past, you have talked about taking down some of your traditional boards in light of a weaker macroenvironment. Can you give us an update on the number of bulletins and posters that you have up at this point, or how that growth rate is trending year to date?

Jaime, I don't think I have the absolute numbers of faces for posters and bulletins in front of me. We can certainly get that to you.

In general, the way we're approaching real estate these days is not so much driven by the macroenvironment, it's more driven by what I would call prudent pruning of a portfolio. And that implies a scalpel and not a chainsaw.

You know, back in 2009, things were pretty bleak and we attacked a bleak portfolio very, very aggressively. I would categorize what we're doing today as just prudent management of the lease portfolio. But I can get back to you on the absolute numbers of posters and bulletins.

Okay, thank you so much.

Thank you. I would now like to turn the call back over to Mr. Reilly.

Jeff, thank you very much, and we're looking forward to our Q3 call. I want to thank all our shareholders and friends for tuning in. Thank you very much.

Thank you. This does conclude our teleconference for the day. You may now disconnect.