Lamar Advertising Co (LAMR) 2014 Q2 法說會逐字稿

Good morning. 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 up the floor for questions.

(Operator Instructions)

In the course of this discussion Lamar may make forward-looking statement regarding the company including statements about its future financial performance strategic goals and plans, and the amounts in timing of any distributions to stockholders.

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 its important factors that could cause actual results to differ materially from those discussed in this call and 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 2014 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 the conference over to Sean Reilly.

Mr. Riley, you may begin.

Thank you Chantel and good morning everyone welcome to Lamar's Q2 earnings call.

The tone of business is improving as we move into the back half of the year. Pacings are particularly strong for back to school months and into Q4. We continue to track towards the upper end of our AFFO per share guidance for 2014 and I am particularly pleased with the performance of our digital platform. In Q2 we were up 5% on a same board basis and double digits in actual numbers, given the units we add during the quarter.

So we feel real good about that. And it bodes well for that platform going forward.

Now I'll turn it over to Keith for more color on the numbers and our transition from monthly to daily revenue recognition.

Good morning, everybody.

Let me start by saying that our release tries to highlight potential volatility that may occur quarterly due to Lamar recognizing revenue on a daily versus monthly basis in the bullet points at the top of the release. As I think most people remember, we started the transition at the end of 2013, we converted our 2013 in 12 numbers, revenue numbers to daily revenue versus monthly which was the method we had always used prior to that.

The primary driver for this volatility is the effective start date of the contracts entered into in the last month of each quarter as compared to previous quarters. To illustrate, our first and second quarter revenue results on a daily basis as reported increased 3% and .8% prospectively. This is on an actual to actual basis. That's not pro forma.

To give you an example of how that translates into real dollars, the average contracts start date in June of 2013, which we track was June 8 versus June 12 in 2014. So we lost four days of comparative revenue in June 2014 as compared to June 2013.

That amounted to $3 million worth of revenue folding into July 2014 this last month instead of being recognized in June 2014 in the second quarter. That being said, as we stated in the release, in spite of the potential quarterly volatility historically the difference in annual revenue on a daily versus monthly basis is immaterial.

In 2013, our daily versus monthly revenue difference was $1 million on a $1.250 billion in revenue. So we apologize for any inconvenience as we go forward throughout the rest of this year. We will continue to guide on a monthly revenue recognition basis as we have in the past. But we will report both numbers to the market. The daily and the monthly. Speaking of which, for the second quarter, on a pro forma monthly basis, revenue increased 2.1% which was right at the top end of slightly in excess of our guidance for the quarter.

Our consolidated expenses increased only 1.3% and for the year to date our pro forma consolidated expense increase is 2%. We think that that number should hold throughout the rest of this year. At around 2%. And that 2% is including our REIT expenses so far for the year to date.

And EBITDA accordingly increased 3% with perspective to the decrease of net income and AFFO we incurred an extra new charge in Q2 of approximately $21 million for loss of debt extinguishment. This was in conjunction with the refinancing of $400 million of our 7 7/8% how yield notes during the quarter.

Last guidance from Q3 revenue on a monthly basis is basically the same as Q2. $330 million to $334 million or 1.5% to 2.5% increase on a pro forma basis.

With that, I'll turn it back over to Sean.

Thanks, Keith.

Let me walk through a couple of the metrics that you're familiar with and then we will open it up for questions. First, on our digital units, absolute count, we ended the quarter with 1,943 digital units in the air.

We are pacing to add in 2014 about 160 units this year and we feel good that we'll hit that by the end of the year. A quick mention of our maintenance CapEx, we are on pace to do what we said we were going to do. A little more went out the door in the first half, but by the time the year is concluded we will be in that 150 -- I mean that $50 million to $55 million range.

We mentioned the same board digital revenue was up 5%. That's a strong number and gives us a lot of confidence that we can accelerate our deployment.

On rate and occupancy excluding digital, posters Q2 2014, 73% occupancy versus 74% in Q2 2013. That is a minus 1%. Bulletins, Q2 2014 80% occupancy versus 79% Q2 2013 that's up 1%. Average rate per panel Q2 2014 posters $451 average rate per panel versus $444 in Q2 2013; that's 1.4% increase.

Bulletins, $1,109 average rate per panel Q2 2014 versus $1121, Q2 2013; that is a drop of 1.1%. Local versus national, as we mentioned in the release local was particularly strong and up 4% percent. National struggled a little bit in Q2 down 2.9%.

It seems to be improving, again, as we move into back-to-school and Q4 and local is continuing its relative (technical difficulties). Categories of business on the strong side, service was up significantly: up 16.3%, Q2 2014 over 13. Education insurance also showing relative strength. Real estate was up 25% in Q2. Good to see that number.

On the relative weakness side, retail ticked down slightly, but has stabilized and is in positive territory as we go into back-to-school, so we feel good about that. Telco was also down. We've talked about that on many calls. The good news is the whole that was created by Verizon is being filled by other players; in particular much of Metro PCS and US cellular.

If you look at our top 10 customers Q2 2014, the line up is McDonald's, Cracker Barrel, State Farm, then Metro PCS, Panera, Sheets, Miller Coors, US cellular, Allstate, and Subway. There is some new names in there as I mentioned. Metro PCS and US cellular, in particular, are replacing Verizon.

So that's how the verticals look and Chantel will now open it up for questions.

(Operator Instructions)

Marci Ryvicker, Wells Fargo

Thanks. I have a couple questions, I'm going to start first with your operations.

Sean, the metrics you gave us so it looks like occupancy is down for posters but rate is up and occupancy is up for bulletins rate is down. So it looks like there is some correlation here. Just if you could talk about those two metrics and how they relate to each other the first question?

And then the second question is just your thoughts on M&A. I know you just made a nice small tuck and acquisition if you can give us any metrics around how much the Mark has made his add to AFFO and if there are other assets that you are looking at currently.

Sure. Thanks Marcy, I will hit the M&A question first. That was a nice little deal in New Orleans. It's a jewel of a plan.

Next time anyone is in New Orleans you see that we enjoy with this acquisition a real nice high spot bulletin presence in and around major Orleans and it we've been talking to Mark Winston for decades now and it was nice to be able to finally get the yes with him. It'll add about $0.02 to 2015 AFFO per share. So you know it's nice an accretive and importantly its a really high quality assets.

We've probably got a pipeline that's going to end up the year at around $70 million in those types of sort of smaller tuck-in acquisitions and their predictable and nicely accretive. We do anticipate that some larger companies are going to hit the market and we intend to be players.

On the rate and occupancy, on posters Q2 was a little skewed are the timing of our McDonald's buy that was moved around in some actual cancellations in Q2 that affected 2014 versus 2013. So that one is I wouldn't read too much into what's going on with posters.

We still need to do a better job of pushing rate on bulletins. There's no question about it.

But keep in mind, as we take down our best analog bulletins and convert them to digital bulletins that it is having some what of an effect on that. But I'm not happy with our average rate per panel on the bulletin side.

Thank you.

Doug Arthur, Evercore

Yes, Sean, the pickup in digital in the second quarter is really encouraging. Did you I guess, what's sort of behind that obviously the comps are not that typical. Then do you foresee the growth rate on his same panel basis as picking up even more in the second half if you could just flesh that out a little bit?

Again, we are seeing pacings across the whole platform that are stronger than what they've been year to date. Particularly, in again a sort of fight the back to school period, September, October and then in the fourth

One of our categories that was up real strong is amusement and entertainments, and sports. So in Q2 that was up 7.3%.

They tend to be the heavy users of digital. Because it's time sensitive advertising. So that's the first thing I'd point to their using digital the right way and that's helpful for what they want to accomplish.

And again if you've got date sensitive copy then digital is the way to go. So that's where I point to.

And then just as a follow-up on National being down not that significantly in the second quarter that you are seeing you're encouraged by the trends and what's driving your encouragement?

So the categories that seem to be showing relative strength as we move into the back half are insurance, fast food, and it retail. As I mentioned, back-to-school looks pretty strong, so those categories are up as we move into the back half. And that negative number that we experienced in Q2 should be, you know, positive in the sort of two-ish range as we go into the back half.

Great. Thank you.

Jason Bazinet, Citi

Thanks, I just had a slightly longer-term question. Based on what you've learned on about the digital market so far, where do you think ultimately your number of digital units begins to flat line?

That's a tough one to answer. We are probably, you know, we're pushing 20% of our revenue is digital compared to our overall book.

We have markets that are more penetrated than that. There in the 30%s. Our management in those markets seem to be happy with where they are and they're not clamoring for more digital.

Okay.

But then we have other markets that are penetrated less than that in the tens and teens percent, and they are confident that they can take more units and they're asking for more units. So does that mean we tap out at 30%?

I think it remains to be seen. What does appear to be happening is that as we built out and CBS builds out and Clear builds out we are creating a national platform that is relevant and useful to national buyers. That's a good thing.

So I can't give you a straightforward answer. I like the fact that we are penetrated to the tune of about 20% now and were still growing the same board at 5%. That's a good thing.

Yes. Okay. Very helpful. Thank you.

David Miller, Topeka Capital Markets

Hello guys so just on the M&A theme, as you are looking at some of these other sort of regional smaller deals, do they have to be AFFO accreted in year one? I mean would you ever consider doing a deal where you couldn't that being sort of a number one on number two market player in a given market but it may not be a AFFO accretive in year one it's maybe accretive in your two? If you could really if it scalable and if it's allows you to have a dominant market position and whatever market you're looking at? Just curious. Thanks a lot.

You know given the landscape I see, I don't think we need to go to a place where were not immediately accretive.

Okay.

I really feel like there's a good runway of fields where we are the highest and best buyer, the most logical buyer. Sometimes on these little transactions, we are the only buyer. That's not always the case but many times it is and so it's really just the function of sitting down and negotiating with sellers at a price that gets everybody to yes.

Clearly, there will be a few larger regional players and it will involve auctions and will have to sharpen our pencil. But I feel very, very good about our ability to bring an accretive transactions.

Have you seen any fluctuation in private multiples at all with these kind of regional operators since you attained to REIT status?

We've seen multiple fluctuate over the last couple of decades. Sometimes there in the pre synergies 12 range post synergy 10 post range. Sometimes it's pre-synergies13, post synergies 11. Pre-synergies 11, post synergies 9.

The Billboard business is now that we're REIT to outsiders looking in it might seem different, but for people that have been in this industry for a long time it's always been a predictable real estate business. And these are businesses that are very resilient, people that are in them don't have to sell. So you really haven't seen huge swings in private market valuations literally since we've been doing this.

Thank you very much.

William Bird, FDR

Good morning. What do you think needs to happen to see greater price influctuation for bulletins and then secondly, do you still feel good about the potential for double-digit distribution growth in 2015? Thank you.

I'll take the second one first, yes. I can't speak for the Board, but it's our stated intention to grow the distribution by at least 10% in 2015 over 2014.

The question about the bulletin rates is something that we have to managed to. It would be nice to have a little macro inflation that we could hang our hat on.

Keeping in mind, oftentimes we're renewing like real estate with the same customer year after year after year and in a non-inflationary environment it's hard to push too hard on rates. So I put that at number one.

Historically, inflation has been a very good thing for our industry. And if we could again return to a macro environment where there's a justification for pushing rate, that would be helpful.

And I was wondering if you could break out what the kind of REIT conversion expense was in the quarter and maybe just discuss kind of REIT next steps.

The expense for the quarter was right at $800,000 for all of our legal and accounting services. And most of the big cost except one remaining have been spent between last year and this year.

We have a financial advisory fee that we still owe to one of our financial advisors at the time of final conversion. That'll be about $1 million and we should recognize that before year end.

And as far as the other part of the question was the timing?

Yes just what the next steps are on the path to be officially a REIT.

We've got some legal processes and Board approvals to get in place and we're working on those and we hope to have all of that finished up in Q3 were or early Q4.

Thank you.

Rich Fitzgerald, Twin Capital

Hello guys good morning and congrats on the strong quarter. Just a quick follow-up on the dividend growth question.

Sounds like you still feel good about double-digit dividend growth in 2015. Just wanted to get a sense for kind of beyond 2015 how are you thinking about dividend growth both before and after you utilize your remaining and a well-balanced.

Thanks.

Sure. So we pretty much guided our shareholders to expect 10% a year for the next -- guess now three years. So 2014, 2015 2016, 2017 and again we can make that promise with a degree of confidence because we are using our NOLs up to modulate that dividend growth.

In 2018 we run out of the NOLs as currently projected and our distribution will go to 100% of what our NOI, net income will be at that moment. And assuming all things being equal then it you'll see a spike at that point because again we've been modulating the distribution through the use of NOLs.

Right. Okay. That's appreciate it. Thank you.

At this time, we have no further questions and the queue.

Great. Thank you Chantel and thanks everybody for listening and we look forward to speaking again in November.

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.