Lamar Advertising Co (LAMR) 2013 Q3 法說會逐字稿

Excuse me, everyone. We now have 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. 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 in the 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 third quarter 2013 earnings release, which contains information required by Regulation G regarding certain non-GAAP financial measures, 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 this conference over to Sean Reilly. Mr. Reilly, you may begin.

Thank you and good morning, everyone. Welcome to Lamar's Q3 earnings call.

First, I'd like to address a little bit of white nose in our Q4 guidance, then I'll speak briefly to our REIT conversion process, then I'll turn it over to Keith to walk through the financials.

In our release, we guided to up 0.5% to 1.5% in net revenue, or $314 million to $317 million in Q4 revenues. Last Q4, we received a one-time legal settlement of $1.5 million for lost revenues related to a taking. Adjusting for that result and about 0.5% increase in guidance, we also have a little white noise from closing some modest acquisitions last quarter, and the mid-quarter closing of Next last year. Adjusting for these items, we would be guiding to up 1% to 2%; nothing to write home about, but nothing to be alarmed about, either. If anyone needs to be in touch with Keith about refining your same-store calculations, please feel free to call him after this call.

On the REIT front, after the IRS reopened a couple of weeks ago, our team reopened lines of communications with them. Our experts continue to tell us they have no reason to think we're not on track for our 2014 conversion.

Keith, do you want to walk through the numbers?

Yes. Thank you, Sean.

As you saw in the press release for the third quarter, our pro forma revenue increased 2.1%. The guidance that we had put out for third quarter revenue growth was between 1% and 2%, so we did come in at the upper end of that range. On the expense side for Q3, our consolidated pro forma expense growth, including $700,000 of REIT expenses, was 2.6%. Without the REIT expense, the growth for the quarter would have been 2.1%.

Also, speaking of white noise, we did have an unexpected liability insurance claim for $500,000 during the quarter that hit the expense line. Our liability deductible is $500,000, so any claim up to that amount, we have to pay for out of pocket. As far as Q4 consolidated pro forma expense growth before REIT expenses, we should be in the 1.5% to 2% range. We're not sure what the REIT expenses are going to be. As I mentioned, they were $700,000 in Q3, and we are back actively working with the IRS and our attorneys and advisors to move that process forward.

We said at the beginning of this year our consolidated pro forma expense growth for 2013 should be approximate 3% without REIT expense and approximately 4% with REIT expense. For the year-to-date through September without REIT expenses, our consolidated expense -- pro forma expense growth is 1.5%; and with REIT expenses, it's 1.7%. So, based on that, I think we'll come in well under the 3% and 4% that we projected and we told you at the beginning of the year.

Also in the press release, we had a paragraph on Senior Note redemption. We did issue a call notice on Monday of this week, calling the 9.75%, $350 million Senior Notes that come due in April of next year. We will redeem those notes on December 4 of next month. We will use approximately $180 million in cash on hand and $180 million draw on our revolving credit facility to take those notes out. After that transaction, our pro forma debt leverage will be 3.5 times. It's 3.9 times at the end of September, and our total debt will be $1.970 billion.

With that, Sean, do you want to walk through some of the stats?

Super. Thanks, Keith.

Let me start with digital units in the air and same board performance. As of today, we have 1,836 units in the air. I would note that 25 of those are by acquisitions, those previous acquisitions that I announced that we completed last quarter. On the same board front, we've had a little bit of improvement. As you recall, in Q1 we were down 2.7% same board performance, Q2 down, 2.1%. Q3 we were down 0.9%, so things are getting marginally better on the same board front for our digital product.

On rate and occupancy, which excludes digital. Posters first, occupancy first, Q3 '13, 72% for posters. That's the same as Q3 '12, 72% for posters, occupancy. On bulletins, 79% occupancy in Q3 '13, as opposed to 78% occupancy for bulletins in Q3 of '12. On rate, for posters, Q3 '13 average rate per panel of $437 per panel versus $432 per panel in Q2 of '12, or a 1% increase. And on rate for bulletins, $1,123 average rate per panel in Q3 '13, as opposed to $1,126 per panel for Q3 of '12, or essentially flat.

On the national and local front, Q3 local was up 3% and national was down 0.5%. I really need to give a shout out our local sales force. That's replacing a lot of national softness, and I think they did a great job during the course of Q3. On verticals, restaurants, at 12% of our book in Q3, up 2%. Retail, 11% in Q3, up 7%; hospitals and healthcare up 10%, or 10% of our book, up 3%. Others of note, auto was up 9% in the quarter and now represent 7% of our book. Real estate was up 9% in Q3. I'm glad to see that improvement continuing. On the downside, hotel motel was down 6% in Q3. That's actually one of the smaller numbers we've seen over the last few years. Other weaker categories included telcom, which was down 8% in Q3.

With that, I'm happy to open it up for questions.

Thank you very much.

(Operator Instructions)

Marci Ryvicker, Wells Fargo.

Thanks, I have a couple. The first question is just on the Q4 guide. Is the 1% to 2% more of a new normal, do you think, versus the 2% to 3% that we had been seeing? That's the first question.

And then the second -- as it relates to the REIT conversion, do you have any idea as to when the working group study might finish?

On the REIT question first, we don't have much information on the working group study. What our folks are telling us is that, I guess, what's changed over there is a willingness to engage on other issues related to PLR requests while the working group is meeting. And I think you've heard that from other companies that are going through this process. So, no, we don't really have good guidance on when and if they're going to finish that work.

The new normal -- we do have an early look into next year, and bookings, as we sit today, are stronger than we're finishing up the year. So that gives me some encouragement that we're not living in a 1% to 2% world.

Okay. And I just have one follow-up. You mention in the press release a corporate restructuring. What does that entail?

Keith?

Marci, in order to be able to convert to a REIT effective January 1, 2014, even if we get the response from the IRS in 2014, we have to have our corporate org chart -- our legal corporate org chart set up between the qualified REIT subsidiaries and the taxable REIT subsidiaries, and in place on or before December 31 of this year. So, our attorneys -- we've been working with them. They are in the process of finishing that up and setting up all those legal entities.

And if, for whatever reason, the Company would decide not to convert to a REIT, we just dismantle that structure and go back to the basic C corp. But that's what we're talking about in the release. We will have that in place before the end of December.

Great. Thank you so much.

Ben Swinburne, Morgan Stanley.

Hello. Good morning, guys. I guess two questions. One, and you may have -- I jumped on a few minutes late, so if you hit this, I apologize. But was the government shutdown, or the press and noise around that, a factor, you think, in some of the more local side of your business this quarter?

And then, I recall last year in Q3, you had a really big retail quarter. I don't know if you called that out. But I wondered how much of that comp might have played into the performance in Q3 2013?

I'll hit the retail question first, because that's a good story. We actually had a good back-to-school this year. September for retail was up 11.5%. So, actually that was sort of a little upside surprise, and probably resulted in Q3 being a little better than we thought it was going to be, as September was a little stronger.

I'm not smart enough to know if the government shutdown hurt us in October. I do know that October was slightly negative for us, and it will be the weakest month we have in the fourth --

Probably didn't help.

Yes, it's just one of those things. Marci asked the question about -- are we living in a 1% to 2% world? Absent the white noise, November and December are going to make up for that negative number we posted in October. So that gives me a little bit of encouragement

Okay. And then just on the balance sheet, you guys have talked a lot about this of late, but could you refresh us on what the right capital structure is as a REIT? I think you've talked about longer fixed, lower leverage, but why is that more appropriate as a REIT than not as a REIT?

I think when you're talking about a REIT capital structure, longer fixed makes it very easy to calculate AFFO, which is the key metrics for REITs. It also doesn't create near-term amortizations that would compete with the distribution in terms of your available cash. So, as we're thinking through what our capital structure should look like as a REIT, we are thinking long and fixed.

It's also very helpful that long and fixed is very cheap these days. You've seen that we've executed on a little over $1 billion in extremely historically attractive high yield. And should that window still be there in April when, in all likelihood, we call $400 million in the 7 7/8%, and also redo our bank group, you'll see us execute long and fixed, I would think.

Thank you.

David Miller, B Riley and Company.

Hello, guys. Congratulations on the very strong results, especially on free cash flow. Sean, if you had to go back and look, hindsight being 20/20, over the last 10, 11 months -- obviously most of us thought that this PLR ruling would come at the end of Q1, and here we are in mid-Q4. What would you blame it on, if you had to blame it on any one thing? Or is it just a combination of just the Iron Mountain imbroglio, the government shutdown, the IRS scandal? How would you characterize that, just hindsight being 20/20?

And then also, in my individual model, I have you guys finishing out the year at 1,905 digital boards. Does that sound right to you, or am I barking up the wrong tree here? I'm trying to model free cash flow here off of digital, and I could use some help in that regard. Thanks very much.

I think on the number of digital units we finished the year with, I think you're a little high. I'll tell you what, Buster's telling me you're high, but he's not giving me a solid number for where we're going to actually end the year. So why don't you give him a holler, and he can refine that number for you a little bit. But I think you're a little high there.

No problem.

And the REIT conversion process is not the most transparent process. I think, if hindsight's 20/20, probably sitting here last year, I kind of wish I would've said -- well, it's going to take a year, gang, so sit tight. (laughter) But we obviously didn't know that the IRS was going to be inundated with non-traditional requests. We certainly didn't know that they were going to form this working group, and we didn't know that the government was going to shut down. So, I would say all of the above. But again, it's -- while it's somewhat frustrating, I don't think it's going to affect the end game.

Okay. Thank you very much.

Avi Steiner, JPMorgan.

-- questions, guys. Two very quick debt-related ones. 9.75% coming out, and the comments you made on 7 7/8%. Are there any prohibitions in your remaining existing bonds need to be addressed in order to affect a REIT conversion?

And then on a related note, can you refresh us on where your RP basket stands, if you have that handy? Thank you.

There are no issues that we -- constraints in any of our other debt instruments that would inhibit us from becoming a REIT, or other subnotes and even our senior credit facility. We might have to tweak it on the senior credit facility side but -- for restricted payments -- but that doesn't seem to be an issue at this point in time.

Our restricted payment basket will follow our Q today, and approximately, under our high-yield notes, we have right at $2 billion that we can use for restricted payments going forward as of today -- or as of September 30. And of course, that basket accumulates every quarter. It's a calculation. So it will continue to increase as we go forward.

Thank you very much, guys.

Doug Arthur, Evercore.

Yes, I just wanted to look big picture for a second on the trends in same-store digital boards. Obviously, you've cited some improvement there, so the trend is going in the right direction. But as you sit back and look at the whole portfolio, is the weakness that you've seen coming more national than local? It just surprises me, given the impact of a digital board, it's not growing a little bit better, given the tone of advertising trends we're hearing around media in the second half of the year. Any kind of big-picture comments on why it's been this sluggish?

Sure. Well, let's distinguish between same board and whole digital platform first, because the whole digital platform is up double digits year to date. Now, of course, that's new boards we've added, that are adding to that. So, big picture, we're still confident that our advertisers like the product.

National is actually showing relative strength in the digital book, as opposed to local. And it's primarily in those places where we've got a higher level of penetration.

So, we've got some markets where the digital book of business is upwards of 25%, 30% of the local book of business. And it's those places where we're sensing that if we add capacity, we're not necessarily going to see the same level of performance. Now, we have other local markets where penetration is 5% or 10%, and our local GMs there are saying they want more digital.

So, it's highly market specific. It has to do with the level of penetration in a given market. And again, the overall platform is up double digits when you include the relatively modest number of new builds we did this year.

As I look into next year, and I mentioned, to Marci's question, that the bookings are stronger than our Q4 guidance would suggest for Q1 and Q2 and looking into Q3 of next year. That same holds true for digital. It's looking pretty strong.

Okay. Great. Thank you.

Thank you very much. Well, speakers, at this time, we have no further questions in the queue.

Great. Well, look, appreciate it, everyone, and look forward to visiting in early next year.

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