Lamar Advertising Co (LAMR) 2013 Q2 法說會逐字稿

Excuse me everyone. We now have Sean Reilly and Keith Iste 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. All forward-looking statements, including statements with respect to Lamar's consideration of an election to real estate investment trust status involve risks, uncertainties, and contingencies, many of which are beyond Lamar's control, and which may cause actual results to differ materially from anticipated results. Lamar has identified important factors that could cause actual results to differ materially from those discussed on this call. In the Company's most recent annual report on Form 10-K as updated by its quarterly reports on Form 10-Q. Lamar refers you to those documents. Lamar's second-quarter 2013 earnings release, which contains information required by regulation G regarding certain non-GAAP financial measures was furnished to the SEC on 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 Mr. Sean Reilly, Mr. Reilly, you may begin sir.

I'm going to actually send it over to our Chairman, Kevin Reilly, for a quick discussion around the REIT topic.

All right. I want to welcome all our listeners to our quarterly call. I am going to restrict my comments to our application to the IRS for a private letter ruling and I've got some prepared remarks that I'd like to read to the group.

As stated in our press release, we have no new information from the IRS concerning our REIT, PLR request. We have been in touch with the IRS and they have not given us any guidance as to when we may have a response to our PLR. Without going into technical detail, we could receive a response in 2014, and assuming it was favorable, still qualify as a REIT for 2014.

The good news is, is there is a new associate Chief Counsel at the IRS who just came on board. This person has jurisdiction over financial institutions and products, which include REITs. Hopefully, this will have a positive impact on the pause the IRS has taken in evaluating REIT PLRs that are currently pending. As soon as we know something meaningful, we will conform the market. That's sort of a detailed way of saying we don't have any new information for the marketplace, but we are willing on this call to entertain specific questions regarding our REIT PLR request that are not speculative. With that, I would like to go ahead and turn the call over to Sean.

Why don't we turn it over to Keith and walk through the numbers?

Okay, just real quick, highlight some of the performance for the quarter. You saw in the press release that our pro forma revenue growth was plus 2.7%. Our guidance for the second quarter was up 2% to 3%. So we came in a little -- at the higher end of the range. Obviously, you saw in our guidance for the third-quarter revenue, we were slightly less at up 1% to 2%, and, of course, Sean will give you some detail and color on that in a minute.

Our expenses continue to perform as we had hoped. Our pro forma direct and G&A expenses before corporate overhead were up 1.2% for the quarter. This is primarily due to our salary increases that the Company gives out to all employees, except senior officers, every March. We continue to do well in the illumination and production categories as we talked about on the last quarter. Once again, those expenses came in at about slightly less than $1 million down for the quarter.

Corporate overhead was up 12.3% in the quarter. The Company incurred $900,000 worth of REIT-related expenses in Q2. There were no REIT -- we want to get an apples to apples, back that out and that will give you comparative numbers.

Q3 expenses, I think we are expecting consolidated expenses to be somewhere in the low-single digits, approximately 2%. Similar to the second quarter that we just finished up. A couple of other notes. As of June 30, you saw in the press release, we had accumulated $119 million in cash. We have mentioned on previous calls that this was our plan for this year, to stockpile cash, and the use of that cash will go to help redeem the $350 million outstanding senior notes maturing in April of '14. That redemption will occur prior to December 31 of this year.

Last, our debt leverage, as of June 30, ticked below 4 to 1, ending up at 3.95 times. The last time we were in the 3s was in the mid-1990s, so that's a little bit of a benchmark for us as well. Sean, to you?

Great, thanks, Keith. Before I go over key operating stats, let me give some important color to the guidance of Q3.

The bottom line is we are not seeing a second-half deceleration. The issue is really one month, September. September got soft on us, particularly national with a couple of cancellations in the beer and home improvement categories. These were pull backs across all media, not Lamar or outdoor specific. Again for Q3, July and August, were fine. And importantly, as we look past September, Q4 pacing's are presently back above the 2% mark.

The story on key operating stats is slow and steady improvement through Q2. I will hit the digital first. We ended the quarter with 1785 digitals in the air, 992 were bulletins, 793 were posters. We added 42 during the course of the quarter. 20 posters and 22 bulletins, and we should end the year with about 130 to 140 new digitals in the air. On same-unit digital revenue, Q1, as you recall, was down 2.7%. Marginal improvement in Q2 down 2.1%. On rate and occupancy excluding digital, posters and bulletins for occupancy were both up 1% in the quarter.

Q2, '13 for posters, 74% occupancy versus 73% last year. Q2, '13 occupancy for bulletins, 79% versus 78% last year. On rate, posters were up 2%. Q2, '13 average rate per panel of $444, versus $435 last year. And bulletin rate was up marginally, Q2, '13 $1121 average rate per panel versus $1116 average rate per panel last year.

In Q2, the relative strength was in the national book. National was up 5.1%, local was up 1.9%. As I mentioned, national has been a source of the pullback in September, but looks better. National looks better in Q4.

With the exception of wireless, which was down 3%, all of our key verticals are healthy and strong in Q2. I will tick off a few of them. Restaurants were up 7%, retail was up 6%, service was up 11%; amusement, entertainment, and sports was up 7%; and automotive was up 12%. Real estate, by the way was up 3.5%. So with that, David, I would be happy to open it up for questions.

Ladies and gentlemen, at this time the floor is now open for your questions.

(Operator instructions)

Doug Arthur with Evercore.

Just from a seasonal point of view, how significant -- I mean, I guess it is really, fairly similar month to month, but September in the media is generally a pretty big month. So it's a little surprising to see a pull back then. Do you have any clues as to why that happened and why it is just September?

I think what you're going to see when we close the books on it is that your traditional back-to-school was relatively good for us. Again, this was a sort of unique combination of factors on our national book. The cancellations that I referenced started happening in the back half of Q2 and spilled over into Q3 and it was the beer and home improvement. Talking the national accounts, this wasn't something that was Lamar or billboard specific, it was a general pullback across all media for these two categories or these, really two customers.

And I'm sorry, Sean going back to something you said, I kind of missed that. When you said down 2.1% in Q2, we you talking about same board digital?

Correct. It was [2.7%] in Q1 and 2.1% in Q2.

Okay. And just finally, on terms of categories -- a number of the broadcasters have mentioned that auto has accelerated in the third quarter. You obviously had a pretty big Q2 in auto. Are you seeing that in Q3?

Yes. I think the auto is going to be there for us in Q3. It was up 12 in Q2 and I'm expecting something in that neighborhood for Q3.

Great. Okay. Thank you.

Marci Ryvicker, Wells Fargo.

Thanks. I just want a little bit of clarification on some of the REIT comments, I guess. You mentioned that even if you get the private letter ruling in 2014, you can still elect to convert to a REIT in 2014. Is that what you said?

Yes.

Okay. And the question is, do you need to wait for a private letter ruling before converting or can you do something like what Geo Prizm did earlier this year?

We could, but we're not. Now that they are reviewing their approach to unconventional PLRs, we think the prudent course is let the process run and not try to get out ahead of it. Because they could make a retroactive ruling.

Okay. And have you submitted any filings to the SEC at this point or is that going to come after the private letter ruling as well?

After the private letter ruling.

Yes, we have not submitted anything. We have an S4 drafted, but it's sitting on the shelf.

Okay. And I just have one clarification for you, Keith. For the expense guidance for the third quarter, are there any REIT-related expenses in there, or is that plus 2, a clean-core expense growth number?

No, that's about the same. Our budget expenses contain about $1.25 million for the second, third, and fourth quarter of this year.

For REIT.

For REIT.

Okay. Thank you very much.

Matt Chesler, Deutsche Bank

On the digital performance, the down 2.1%, but better than last quarter. Can you give us your assessment in terms of what is continuing to hold back that part of the business from going at the rate you are seeing elsewhere?

We still believe its added capacity. We've been aggressively adding capacity the last few years, and what hadn't been the strongest of economic environments. And our business judgment tell us that we should slow down the deployment, which we have, and let the demand catch up with capacity that we've added. On the last call, I described why we are putting up 130 new ones this year, in spite of trying to pull back. And a lot of that has to do with the regulatory environment and the fact that often times the clock is ticking when you get the light to put one up. So, we kind of have to deploy.

Okay. And the -- your transit in the logos businesses did pretty well in the first quarter, both of them. Any comments on if growth was comparable in the second quarter and does -- just does any of your comments about the third-quarter relate to those two businesses?

Transit is very -- not transit, logos is very steady, very predictable and they have been a great anchor this year, performing well and will continue. Transit can be a little more unpredictable. And it appears to us that it has participated a little bit in the September slide, but should finish out the year doing just fine. The first half of the year, they did very well. Our transit business.

And in terms of the cash build, can you put a little bit more color on whether that cash build is just internally generated. If you look on the investing section of the cash flow statement there is a big delta between the outflow and the CapEx. Can you comment at all on what we're going to end up seeing in the queue?

It's all internally generated. The way that our cash builds, is in the first quarter, we are basically a net zero cash generator. Income versus outgo. And then we start building cash in the second quarter and then momentum picks up in the third and fourth. That's how we -- that's just how historically we've always been able to put cash on the balance sheet. As far as the cash flow statement, we have had some acquisitions during the quarter, but they were immaterial. But the $118 million is all internally generated.

Those acquisitions, were those other vendors? Can you go into more detail on which --?

It was just small fill-in acquisitions. It wasn't much. $24 million, I think, in total purchase price.

Yes, they were billboard acquisitions.

Do you have an estimate for the incremental contribution that they will have on your financials?

It's not really all that material. Clearly, and we report same-store, we pull them out so you are getting a true apples-to-apples. You can assume that if we spent $24 million you can annualize we'll probably get about $2.5 million to $3 million in incremental billboard cash flow from it.

Great. Thank you.

Rochette Westcott, S&P Capital IQ.

Thank you, that's Westcott Rochette. Can -- with the situation going on in Los Angeles, can you just remind us how that effects your ability to expand in Los Angeles and how you see that kind of playing out for Lamar?

Sure. Lamar owns the 8 sheet plant in Los Angeles, it's a large number of small billboard faces that do not generate a whole lot of either revenue or cash flow. It's really a real estate play. The Company is engaged in the billboard business in Los Angeles, or have been negotiating to the extent they can with the city to take down faces and add large format and/or digital. We have a proposal in before the city to take down all of our 8 sheets, there's 5000 of them. And go back with, as I said, large format statics and digitals, if they open up the digital opportunity. So for us, given that we don't have any large format or digital in the city, the shutting down of digital in the city hasn't effected our financial performance. And is, our hope, when the city reaches its final resolution, it will be advantageous to us. To take down those 8 sheets and go back with whatever the large format option is available to us.

Thanks. That makes sense. And can I ask one bigger picture question? It seems like as you consider the REIT conversion and going along that path, you have kind of adjusted your capital structure philosophy and that's pulling back on digital but -- kind of just in general, paying down debt. If per chance, the REIT doesn't go through, does that change the way you look at your capital structure going forward or is this a part of the evolution of the Company and looking across a more mature cash generating in the landscape? Thank you.

That calls for a broad-brush answer, so I will try to frame it. When we look at Lamar as a REIT, and looking at the REIT universe -- to us it seems to make sense to have a capital structure that is longer and fixed, as opposed to shorter and floating with amortization. So the general proposition, that is where we are gearing our capital structure. You know, for a C-corp that's not a REIT, it may make sense to have some amortizations that you can pay off, you know, in the nearer-term rather than the longer-term. That's just sort of a general proposition. We began last year preparing our balance sheet with a longer, lower cost of capital. And it's my anticipation that we're going to continue to do that. That's kind of harder to predict.

Of course. Thank you very much. Good luck, guys.

David Miller, B. Riley and Company.

Hi, guys. Just a question on the REIT conversion. Not to beat a dead horse, but from a gut sense, is your perspective on this that the delay here is mostly due to the whole Iron Mountain imbroglio? It seems Iron Mountain just kind of started this whole thing by ruining the whole Q, you know with the IRS, for everyone else. Is it all Iron Mountain, or is the IRS taking a second look at the digital aspect, or another portion of your asset base that is kind of in question? Or is this just all due to Iron Mountain and this is all going to get sorted out? I would just appreciate any commentary you have.

Well, it's not Iron Mountain or Lamar in particular. It's the IRS has received quite a few petitions for nontraditional REIT PLRs. And based on the petitions that were coming in over the transit, the IRS made the decision that they wanted to pause and look at their procedures for denying or approving these DLRs -- in an effort to make sure they are consistent across the board. So that's what we are up against. And that's why -- unfortunately, that's why we don't have any news one way or the other for the marketplace regarding our petition. Our position is that we are right down the middle of the fairway. There is plenty of law on the books that addresses billboards and real property, and we think when they get cranked up and get this process going again, that -- two things for us, we think that we are in good shape. One is that we are at the front of the queue, and we're having ongoing discussions with the IRS. And secondly, we think we have a good case and we've got a reasonable petition before the IRS. So that's where we are. Hopefully, we will have some information for the marketplace sooner than later.

Thank you.

At this time we have no further questions. I'd like to turn it back over to Mr. Kevin Reilly.

Thank you. I want to thank all of our listeners for tuning in, and we look forward to speaking with you on our next earnings call. That concludes the call, David. Thank you very much.