Lamar Advertising Co (LAMR) 2013 Q4 法說會逐字稿

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, and 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 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 fourth-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.

Thanks, Chantal. Good morning, everyone. I would like to welcome everybody to Lamar's Q4 earnings call. Before I turn it over to Keith, I'll make a few high-level observations. Number one, our efforts to convert to a REIT are progressing nicely, and our professionals tell us we should hear positive news soon. Number two, based on our current pacings, we believe you should model between 2% and 3% pro forma revenue growth for the full-year 2014. Our Q1 guidance is a little short of that, but again, our forward pacings at this time indicate we can make it up during the course of the year. We got off to a slow start in January, but momentum is building in the book both for the rest of Q1 and for the rest of 2014.

Now, some quick color on Q4 of 2013. The fourth quarter of last year was really the story of one month, December. We were positive going into the month but ended December negative on a pro forma basis, creating a slight miss for Q4 revenue expectations. There were several factors contributing to the softness. The chief among them were softer than expected national sales particularly in the telecom vertical and a decline in our retail vertical during the holiday season. Much has been made of retail's woes in December, and their weak season spilled over into our books.

That softness in retail, particularly in the Northeast region, our largest region, continued into January and February. Had retail in our Northeast region alone normalized January and February, we would be guiding to up 2% to 3% pro forma revenue growth for the first quarter. Our experience with tough weather is that ad campaigns don't tend to go away, they tend to get deferred. We've already heard from some key retail accounts in the region who plan to come back in the spring, and we are seeing relative strength in our March, April, and May pacing. The weather is improving, and so is our book of business. I'll turn it over now to Keith who will walk through the numbers and speak to the change in revenue recognition from a monthly to a daily basis.

Good morning, everyone. Just a couple of highlights on the fourth quarter. As you saw in our Press Release, our revenue performance on a pro forma basis was up 0.3%. Our guidance was for growth of between 0.5% and 1.5%, and that was recognizing revenue on a monthly basis as we have consistently done in the past. EBITDA was down 0.9 point, and that was primarily driven by the fact that our consolidated expenses were up only 1.3% for the quarter. Our guidance on the last call for expense growth in the quarter was for up 1.5% to 2% without REIT expense. REIT expense for the quarter, which is included in that 1.3%, was $600,000. So, from an expense standpoint, it was a very good quarter.

To briefly highlight the year, again on a pro forma basis, the revenue was up 1.9% compared to 2012 pro forma. Again, that's on a monthly revenue recognition basis. EBITDA was up 2.4%, and consolidated expenses were up 1.6%. In looking back on last year's transcript, the guidance we gave the market for expense growth for 2013 was up 3% without the REIT conversion cost and 4% with REIT expense, which for 2013 came in at $2.1 million. We think there will be another couple million dollars that we will recognize for REIT expense in 2014, as we finish out this conversion process. The expense guidance for 2014, much like the revenue, we're anticipating up 2% to 3% on a pro forma basis.

To touch on the change in our revenue recognition method, during 2013 we spent a lot of time evaluating our tax and financial reporting systems in anticipation of becoming a REIT. In some cases, we decided to change the methods we had previously adopted for the tax and financial reporting purposes. Recognition of revenue, as you saw in the Press Release, was one of those changes implemented in Q4 and going forward. We will now recognize revenue on a daily basis versus a monthly basis. The difference in methodology has been deemed immaterial in prior years. We have included a schedule for 2013, 2012, and 2011 showing the difference by quarter and full year on page eight of the Press Release.

As noted in the Press Release, we will continue to provide quarterly revenue guidance using monthly revenue recognition compared to monthly pro forma revenue for the previous year's comparable quarter. Just as we always have in the past. The actual versus pro forma comps for the fourth quarter, revenue, outdoor operating income, and adjusted EBITDA, using monthly revenue recognition are shown on page seven of our Press Release. Which the revenue is up, as I mentioned -- was up 0.3%. EBITDA up -- down 0.9%. We will continue to include this reconciliation each quarter throughout 2014 as we always have in the past. Pro forma revenue for your modeling purposes for Q1 2013 is recognized on a monthly basis as $287 million versus guidance of $290 million to $293 million for Q1 of 2014, which is also projected to be recognized on a monthly basis, and that translates to an increase of 1% to 2% pro forma growth for the quarter. So, if there are any other questions concerning the change in that methodology, we would be glad to address them. Sean?

Right. Before we open it up for questions, I will run through some of the typical statistics that we provide on this call. I'll start with the number of digital units that we have in the air as of the end of the year and the increase over the prior quarter. We ended 2013 with 1,861 digital units. 1,048 of those were bulletins, and 813 were posters, and that represents an increase of 41 over the prior quarter. Got a little bit of encouraging news on our same digital board performance. As you all are aware, we were experiencing slight declines in our same board revenues for digitals in the early quarters of the year, and we announced that we were going to slow down our deployment and let demand catch up with supply.

That appears to be working. If you recall in Q1 of 2013, our same board digitals were down 2.7%. In Q4, that shrank to down 0.3%. And, in January, our same board digital revenue was up 0.7%, and as we look at our pacings -- particularly for digital bulletins, the same board pacing are up mid- to high single digits. As we look into 2014, I am liking what I'm seeing there, and it tells me that maybe we can get a little more aggressive on our digital deployment plans for 2014.

Rate and occupancy, ex- digital, for posters, Q4 2013, 66% occupancy. That is flat with Q4 of 2012, 66%. Bulletins, Q4 2013 occupancy up 2% at 78% compared to 76% in Q4 2012. Rate, posters, average rate per panel Q4 2013 of $432, which is a 1% increase over our Q4 2012 average rate per panel of $428. On bulletins, Q4 2013 average rate per panel of $1,100. That compares to $1,124 average rate per panel in Q4 of 2012, or a decrease of 2%.

Our sales mix, national and regional and local, stayed the same and 78% local regional versus 22% national. That's the same as it was last year, same time. Our Q4 increase in terms of mix of business -- local was up 1.2% in Q4, and national was up 0.6% in Q4. In verticals, I've already addressed the issue with retail, and I spoke to telecom. Our national sales team tells us that telecom has stabilized this year. In Q4, it was down 23%. Very disappointing performance out of that vertical. But, again, our national sales team tells us that 2014 should be level with 2013 in terms of Telecom spend. On a very encouraging note, real estate was up 19% in Q4, and that vertical is pacing up about 20% for the first half of 2014. Autos were up about 7% in Q4 and is pacing up 8% or 9% for the first half of 2014. So, those two verticals are real stars in our book. With that, we'll open it up for questions. Chantal?

(Operator Instructions)

Marci Ryvicker, Wells Fargo.

First question, if you are accounting for revenue on a daily basis, why aren't you accounting for expenses on the same basis?

We -- the only thing that we have that would really fall into that category would be our lease expense as we've looked at it. And, our leases -- the vast majority are paid on the first of the month, every month, year in and year out. So, there's really no distortion on a quarterly or an annual basis.

Everything else is basically paid for when it's incurred. So, that was the result of our findings. Leases was the only thing that would have been comparable to revenue, and as I said, that's mostly the vast majority is paid monthly on the first of the month.

Okay. And then, Sean, what gives you confidence that Telecom isn't going to look like hotel/motel where that category went down and went the smart phone way?

Sure.

And, didn't need outdoor anymore?

Sure. Well, in general, customers come and go. The decrease in Telecom has -- was predominately one customer last year, and as we go into this year, there are others that are taking up the slack. We've gotten some great buys from US Cellular. AT&T is going to be up more this year than they were last year. And, of course, the customer that disappointed us last year -- Verizon. They are telling us that we might be able to expect some spot buys from them, but that would be lagniappe. As of right now, the book is looking, like I said, pretty much flat 2014 to 2013.

Okay. Last question I have is it looks like just in the data you gave on bulletins, occupancy is up 2%. Rate is down 2%. Is there really a one-to-one correlation with that where you're giving up rate for occupancy? Or, should we not read into that?

I was very disappointed when I got that data point. That shouldn't be the case, quite frankly. When I look at where we are with occupancy on bulletins, it's my belief that we're approaching normalization -- historical normalized occupancy. That should allow us to drive rate. So we had a full day retreat on that issue with our regional managers. That's something we can manage to and something we can fix and something we will fix.

Great, thank you so much.

Jason Bazinet, Citi.

I guess I have a bullish question and a bearish question. I'll start with the bullish one. These trends in real estate and auto that you talked about -- given your experience of watching these trends in forward economic movement. Would you interpret those bullish numbers you gave as an interpretation that the economy really is getting better? Or, do you think these are more easy comps, or something like that?

And then, my maybe bearish question is, we keep following these miles-driven statistics across the United States, and they keep decelerating. Do you view that as an impediment to your top line growth if it continues going forward? Thanks.

Sure, I'll take a stab at the second question first. We do pay a little bit of attention to commute times, which tends to be a more relevant statistic for us because it represents more time spent. And, those commute times tend to be -- they'll ebb and flow, but over the long-term, they tend to be relatively stable if not growing.

The issue of auto and real estate -- I like to put it in a larger context of what happened to both of those verticals in 2008, 2009 when the world got really bad. And, if you see what's happening with auto, it grows faster than other verticals. It is actually getting back to its normal position in our book of business. And, that's fairly clear as we're looking at it.

Real estate is a little bit different in that I would argue 2007, when it was 9% to 10% of our book of business was probably not the real world. But, the world we're in now isn't the real world either, and it's getting back to someplace in the middle. So, our expectation is that real estate settles in at 4%, 5% of our book.

Very helpful. Thank you.

Benjamin Swinburne, Morgan Stanley.

Thanks. Good morning, I don't know if you'd be willing to talk about your dividend philosophy. I know it's looking past this REIT adventure we've been on for the last year-plus. If you look at your release, you generated $300 million of free cash so over $3 a share of free cash flow. Sounds like you're feeling pretty good about 2014. Anything you could share with us about how to think about the dividend on a recurring basis? Have you thought about it at all?

And, if you have, could you talk about the important number of book versus tax depreciation which is a key element to calculating that 90% QRS threshold that drives at least a minimum?

I'll speak a little bit what we've told the public thus far about where we'll be on the REIT distribution, and then, Keith can address that second question which I don't quite frankly understand. (laughter) So, what we've told our investor base in conferences and former -- previous conference calls -- is that if you look at the yield that is typical of REITs you can count on us to be down the middle of the fairway on it.

We have a little bit of leftover NOLs that can modulate that distribution over time. But, once those are used up, it's basically -- you can basically plug in 100% of NOI because we don't have the ability to again to modulate the distribution. Our anticipation for 2014 is that a slight E&P purge will be required, and that will be coupled with the distribution to hit that yield I described, if that make sense?

Yes, got it.

And, on your depreciation and amortization question, on a book basis for 2014 it looks like the total of those two for the year will be about $250 million. On a tax basis for 2014, it looks like, round numbers, it will be about $200 million. So, there's about a $50 million difference between book and tax, but as Sean said, we also have roughly $300 million in federal NOLs that will be coupled with the depreciation and amortization to help manage the distributions, if you will.

Got it. And then, maybe a more interesting business-related question, on digital. How do you think about your competitors pushing digital further? You said you feel better about digital with the early start to 2014 it might add more boards or more facings. What happens if Clear Channel and CBS follow suit? Does that create issues you think for the market? Or, do you just look at it and say, we're fairly consolidated in our core markets, and so as long as we run the balance on our own platform, we should be in good shape?

Sure. So, there's a couple of ways to think about that. I think the first and most important way is in terms of national footprint for very important national customers, more is better regardless of who owns them. Because if they want to execute a nationwide buy and they want to be in key markets where Lamar isn't, we want there to be digital in those markets because we'll get the buy in our market. So, in general, I think that Clear Channel and now CBS's aggressive embrace of the model is good for us over the long haul.

Now, we clearly have some markets where we compete head up, and supply and demand can become an issue. But, if you look at Lamar's footprint, give or take 80% of what we do is in places where we have 90% market share, and places where CBS and Clear aren't.

Very helpful.

Again, the way I look at it -- and particularly what CBS is doing -- they're doing a great job. They have refined their views on digital, and they did a great job last year with their digital deployment.

Thank you so much.

William Bird, FBR.

Good morning. Could you talk a little bit about your 2014 CapEx plans and expected pace of digital buildout? Thank you.

It will probably look a lot like last year in terms of the aggregate. The numbers will be fairly similar. You'll see a slight decrease in maintenance CapEx. We heavied up a little bit last year on our PP&E, catching up on some stuff. So, I think the maintenance will come in a little bit less. You may see the growth CapEx in digital come in a little heavier. But, in total, it should be, give or take, the same.

And, assuming REIT treatment, how do you see your acquisition strategy developing?

There are a handful of high-quality, traditional out-of-home companies that are out there, excluding Clear Channel and CBS. Just take those off and think about what the rest of the universe looks like. These are, again -- traditional, high-quality, out-of-home assets. You're not talking in the scheme of things large numbers. These acquisitions would be between $250 million and $500 million, and again, you can count them on one hand. So, that's a long-winded way of saying we can accomplish a few good things without much stress and strain.

Just one final question on expenses. How do you see stock-based comp developing? Will you be tilting more of your comp mix as you transition?

You're talking about as a REIT?

Correct.

I don't think you're going to see much in the way of changes to our plans. We reward certain key regional managers and executives with restricted stock awards that are tied to hitting a performance grid. And, I don't see that changing. It's part of our culture.

Great, thank you.

David Miller, Topeka Capital Markets.

Hello. Congratulations on the results. A couple questions. Just related to Marci's question, there's just been a lot of chatter over the last couple months about this secular story with outdoor and overall secular concerns especially in light of what has happened with the Telecom category in the fourth quarter.

Could you talk about some of the new categories that have entered into the fray on your platform, particularly on the digital side? I know that healthcare is one of them. But, maybe you can just talk about a couple -- maybe two or three categories that didn't exist on digital a year ago that are now a lot more comfortable with the medium?

And then, Keith, on the debt structure. Are you -- just given your free cash flow generative-ness, are you comfortable now moving towards nibbling at that bank debt? Or, are you still nibbling on the 5 7/8% paper? Maybe talk about that a little bit?

All right. Let me hit the categories that are picking up the slack. So, service has been a great category for us. I'm looking at the full-year of 2013 up 11.24%, and in Q4, up 11.35%. Amusement, entertainment, and sports cuts to that who is using digital question, and for Q4, they were up 9.68%. Again, taking up the slack of Telecom and what was a disappointing retail month for us. Healthcare is showing good relative strength. Healthcare was up 5.5% in Q4. You may have heard other media outlets talking about it even picking up a little bit of the Affordable Healthcare Act spend that's been coming down the pike.

I think the real message is that customers come and go. They have their branding and promotional goals, and we're in the mix. There was a year -- in the mid-1990s, when tobacco was 24% of our book of business, and in one year, it all went away because of legislation. And, in that year, we were actually up on a pro forma basis. So, I don't tend to get too caught up in the shifts between categories as long as we can continue to grow at a reasonable pace.

With respect to your question on the debt side, as you saw, we put out some releases back in January. And, of course, it is in the Press Release as well. We had issued a Senior Note of $510 million at 5 3/8%, 10-years. We used that to take out all of our bank debt. So, as of today, we no longer have any bank debt outstanding, and we do have a $400 million tranche of 7 7/8% notes that are callable as of April 15 of this year. I'm assuming that's what you're referring to?

Yes.

I think we'll go ahead and address those as we've said throughout last year. As soon as we put this earnings season behind us, we'll -- we have several options. Bank debt, sub debt, senior debt. Revolving credit line with our bank group, we increased that from $250 million to $400 million in January as well. So, we have a lot of options, and we're going to go ahead and make a move on those, as I've said just, as soon as all of this is behind us.

But, that being said, our internal models show that even with paying what we think is a very friendly dividend for companies as a REIT, the Company still is projected to throw off significant free cash flow over the next five years which is how far we've run our model.

Wonderful, thank you.

Doug Arthur, Evercore.

Hi. This is actually Tracy Young. I have two questions. The first relates to retail. Can you tell us what percentage it represented of revenue in Q4 2013 versus Q4 2012? And then, just following up on the IRS Private Letter Ruling, is there any other color that you can give us? Or, really would the information you gave us in January is what we have? Thanks.

So, on retail. Retail was 12% of our book of business for Q4 2013, and it was 13% of our book of business in Q4 of 2012. And, for the quarter, retail was down 1% in terms of its aggregate spend in our book.

Thank you.

Oh -- the REIT news continues to be positive, as I said, and we're being told that literally any day now we could get the word. Internally, we've accomplished everything we need to do to flip the switch. It's -- all of those that you would expect us to be doing including, completing our re-org by December 31. Calculating all the transfer pricing as between the TRS and the qualified REIT Holding Company. Calculations of things like the purge. We're not going to do it today, but we could give you a range of AFFO per share for 2014. But, probably not appropriate. But, anyway, all of those things that you would expect us to do to get ready are done.

Okay, thank you.

Thank you very much. At this time, speakers, we have no further questions in the queue. I would like to turn this conference back over to Sean for any closing comments.

Great. Thanks, everybody for listening, and we look forward to visiting again soon.

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