Lamar Advertising Co (LAMR) 2014 Q3 法說會逐字稿

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, including with respect to the level of potential acquisition activity, election to real estate investment trust status and the amount and timing of any distributions to stockholders. All forward-looking statements 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.

Forward-looking statements give Lamar's current expectations and projections relating to its financial condition, results of operations, strategic plans, objectives and future performance. As such they are subject to material risks and uncertainties including economic conditions and their effect on the markets in which Lamar operates and the broader demand for advertising, levels of expediters on advertising in general and outdoor advertising in particular, and risks and uncertainties relating to Lamar's significant indebtedness.

Lamar has identified 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 10K as updated or supplemented by its quarterly reports on Form 10-Q. Lamar refers you to those documents.

Lamar's third 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. Reilly, you may begin.

Thank you, Chantel, and welcome everybody to Lamar's third quarter 2014 operating results conference call.

I feel like our third quarter was very solid. National headwinds continue, in terms of national ad spend, but our folks on the ground, they talk to local customers day in and day out, are doing a great job and making up the difference. Just to put it in perspective, national for the third quarter was down 2.4%, yet we were able to make that up and grow the book in the face of that.

More importantly that momentum particularly at the local level is continuing into the fourth quarter. We feel real good about the way our book is shaping up. Importantly where you would expect our local growth to be strong in those parts of the country where local economies are exhibiting relative strength, our local book is exhibiting relative strength. So, I feel good about where we are and I'm looking forward to finishing the year strong and on a high note.

Keith?

Thanks, Sean.

Just a couple of quick comments. Once again as you see in the press release, we continue to report our revenue and EBITDA using the daily revenue and monthly revenue recognition basis. Just to be clear, the daily numbers are actual as reported for Q3 2014 versus Q3 2013. Those are not adjusted for pro forma acquisitions.

The monthly numbers are actual monthly basis Q3 2014 versus actual Q3 2013 adjusted pro forma for acquisitions. We've provided Q4 2014 monthly revenue guidance on a pro forma basis as usual. As you saw in the release we expect that revenue growth to be up between 2.5 % and 3.5% for the quarter.

This will be the last time the Company will provide this monthly guidance and Q4 will be the last time we report both the performance metrics daily and monthly. In 2015 we will only report revenue and EBITDA performance on a daily revenue recognition basis. So, we'll talk more about that on our next quarterly call.

Last just a note on AFFO, in looking at our AFFO computation schedule in the press release, please don't try to annualize AFFO for 2014 based on the Q3 or year-to-date numbers. Through September 30th of this year we have been recording income tax as a C Corp. In Q4, assuming the merger is approved on November 17, when we are scheduled to have the shareholder vote, we will be accounting for taxes as a REIT and there will be reversals of prior tax accruals in Q4. I think you saw something similar yesterday in CBS's press release for their third quarter.

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

Thank you, Keith.

I'll walk through a couple of the metrics that you all like to receive on these calls. Let's start with our digital buildout. We added 56 digital units in Q3. We ended the quarter with 2,010 digital units in the air. 1,141 bulletins and 869 posters.

For the full year year-to-date we've added 137 digitals. I think as we look to finish out the year we will probably add about 175 digital units organically and will probably pick up 20 to 25 through acquisitions. So a net addition to the digital portfolio of about 200 units in 2014. Our same digital unit revenue continues to perform and outgrow the book in general. In Q3 our same board digital increased 3.6% and for the year it's 4.1%. So we're encouraged by those numbers and it bodes well as we move into 2015 for our digital expansion.

Rate and occupancy excluding digital, Q3 2014 posters occupancy is 73% compared to 72% in Q3 2013, an increase of 1%. And for bulletins, Q3 2014 occupancy of 81% versus 79% last year same period, an increase of 2%.

On the rate side, average rate per panel for posters Q3 2014, $441 average rate per panel compared to $437 average rate per panel same period last year, an increase of 0.9%. And on bulletins, Q3 2014 average rate per panel of $1,107 compared to $1,123 same period last year, a decrease of 1.4%.

National versus local. I already spoke to the shrinkage of the national book. It decreased 2.4%, offset by local increasing 3.8%. In terms of percentage of the book, that was reflected in a tick down in our national percentage of the book to 22% of our total book of business, so we were 78% local, 22% national.

Categories of business of note, relative strength service was a big performer in Q3 2014, up 17%. And real estate continues to show relative strength, up 22% in the third quarter and the weakness is where we've pointed to throughout the year, telecom down 16% in Q3. And, of course, that's mostly reflective of the national book.

With that, Chantel, I'll be happy to open it up for questions.

Thank you very much. Ladies and gentlemen, at this time we would like to open the floor for questions.

(Operator Instructions)

Marci Ryvicker, Wells Fargo.

Hello and good morning. I have first a question on just trends in Q3 and Q4. First of all, did you get any political in the third quarter and are you seeing political in the fourth quarter or is the acceleration into Q4 really just organic?

And then the second question is, Sean, you mentioned 20 to 25 digital boards coming from acquisitions. Are those acquisitions you've already made or are those coming from new acquisitions?

These are pretty much on the digital boards acquired, that's just a collection of smaller transactions we've done throughout the year. I think we're going to close the year having spent, give or take, $75 million to $80 million in smaller acquisitions like New Orleans, for example, where we're picking up some digital units.

On the third quarter, political wasn't much of a factor but as we look forward to the fourth, it looks like it's adding about 0.5% to what would otherwise be organic growth, Marci. So that's a pretty good number for you to think about. Again that's fourth quarter guidance. That's about 0.5 a point.

One follow up. The auto category, I think people have been concerned about just in general. What are you seeing in auto?

We're basically seeing it level out. In Q3 it was slightly down. But when I put it in perspective and look at the full year and where auto is in terms of recovering in our book of business from 2009, I would say that we're about there. Auto for us is about [normalized].

Okay. Great. Thank you very much.

Ben Swinburne, Morgan Stanley

Hello, Shawn, how are you doing? Thanks for the comments up front. You hit a lot of what people are focused on.

On your point about local economic growth correlation, maybe you could just take us around your regions and help us understand where the growth is better than it is in other parts of the country and what you're seeing in the local economy that's sort of fueling that so we can understand that historical correlation of GDP and growth which maybe was breaking down earlier this year, maybe it's coming back in again now.

Yes. Great question. I think that's the appropriate question. When I look at growth in our local book, that's the part of our business that's most likely correlated with GDP. It tends to be more Main Street as opposed to Madison Avenue. That national spend can be a little bit fickle and a little bit disconnected from GDP.

When we look at local economies that are strong, the strongest local economies in Lamar-land are places like Texas, Oklahoma and the like, which makes sense. Louisiana. Strong job growth. Lots of oil-and-gas related activity. That was our top-performing region, the Southwest. It was up 6.1% same-store in Q3.

And then if you continue along the Gulf Coast, again relatively strong economies. Again, that was our second strongest region at up 5.1% pro forma. Good strong numbers there.

Then in some places where housing was hit the hardest and they fell the hardest, places like Southern California and South Florida where real estate is coming back and you can see stronger relative local growth. Those companies are doing, again, very well and trending higher than our overall book. So that gives me a good feeling that when we get some economic tailwinds that we'll perform.

And then just quickly my last question back on national. In addition to being fickle, I think it's also pretty concentrated in a couple customers. So I think Telecom's been a headwind.

Can you just help us remember when you lapped some of that stuff? I would think as you move into next year, just from a comps perspective, national gets a little bit easier, but I don't want to over- read it.

Yes. It's a little bit early for us to peer into next year. But, that being said, the chatter is better than it was going into 2014. I've described it as more steady as she goes, with maybe a little bit of a tailwind if things break right with a couple of big customers.

On the Telecom front, it's interesting. We had a couple of smaller regional wireless players step in when the bigger ones stepped out.

So for example, in Q3 of 2013 our third-largest customer was Verizon. This year Verizon is not in our top 10, but our number three customer this year, Q3 of 2014, is MetroPCS.

They will come and go depending on what their objectives are and we just have to manage around that. But again we're hearing slightly better things going into 2015 on the national front.

Thanks a lot.

Alexia Quadrani, JPMorgan.

Thank you. Just two questions. First, on the digital commentary you've seen some good growth in digital boards and it looks like your demand is continuing into the end of the year. Could you give us a sense of how far you think you can go? I guess how strong is the backlog for demand? And any color you could potentially give us on now where those can go?

And then my second question is just a follow-up in your commentary in political with the political spending that we're seeing in the local markets. You mentioned you're seeing some coming into billboards, but are you also seeing a benefit from maybe the crowding out or core advertisers that would otherwise be on TV that might be coming to outdoor at this point?

I'll take the second question first. Traditionally, for Lamar in particular, and I think outdoor in general, we've never been the kind of medium that reported numbers ex- political because it's never had that dramatic affect or swing in our numbers year-over-year. That's for a couple of reasons.

Number one, the political we do get tends to be spread out throughout the year, not just focused in the fourth quarter. This is historically now because there has been a little shift in that.

And also because our races are local, hyper-local races, like city council and judges and things like that, they tend to not be focused in the even years. So they're not national in their scope and focus.

We've seen a little bit of change in that the last two cycles given the amount of money that's being spent in political. So I would say that the best number to use for us, if you wanted to think ex-political, would be even-numbered years about 0.5 point bump in the fourth quarter. Other than that, it's not going to be material in terms of moving our numbers around.

We might get a little bit of crowding out. There are some people that want to avoid the fray.

But when I look at what's really going on in our book, we have, at any moment in time. 45,000 customers. And they're making their decisions, I think, based on what their marketing and advertising goals are. And I think the key driver for us in the back half of this year is some economic tailwinds in some parts of the country that are driving local business. Did that answer your question?

That's very helpful. And then just any commentary on the digital side?

Oh, the digital side. So we do this bottom-up. When our local general managers see demand, then they request digital units. As long as we're seeing our local GMs and their level of confidence suggesting that there's sufficient local demand to fill up more digital units, we'll keep putting them out there.

Keep in mind we have uneven development throughout our footprint. We have some markets that have 20% to 25% digital penetration.

We have others that are 5%, 10%, 15% digitally penetrated. So it tends to be those that are less penetrated that are asking for additional digital units.

On that point, are there any sort of oddities about those markets or they just happen to be -- is there some higher concentration or some different geographies or is there some characteristics about the digital markets versus the ones that haven't quite seen the demand yet?

Typically it's being driven by regulation. Different local DMAs have different rules and regs that [revolve] over time. So that really is the key driver of relative digital penetration across our footprint.

Okay. Thank you very much.

David Miller, Topeka Capital Markets

Hello, guys. When you look out onto the acquisitional landscape, and obviously you guys haven't been shy about saying that you want to get bigger opportunistically. Do you see in future acquisitions acquiring other regional operators that are similar to you in your construct, meaning sort of an 80% local, 20% national type of platform? Or could you see going out and acquiring something like a VanCampen, for example, that has much more of a 50-50 sort of national-local component?

Just being opportunistic here, just given that the national portion is obviously weaker right now. Thanks for the context. I appreciate it.

Sure. In terms of where we're going to focus our acquisition activity, I like to describe it as high quality, traditional out-of-home inventory that is requalified. So when you look through the out-of-home universe in the domestic US and ferret out those assets that fit that description, you get back to a handful of targets that would be attractive to Lamar.

National, while it's fickle, it comes back. The way like to describe it is it's no better nor no worse than local, it's just has a higher beta. When you take a longer view of the world, there's really not a dime's worth of difference in the growth prospects as between local and national when it comes to billboard ad spend, it's just the volatility. Given that as the backdrop, if there are good high-quality traditional out-of-home assets that are requalified in a top 25 DMA, then we're certainly going to take a look.

Wonderful. Thank you.

James Marsh, Piper Jaffray

Two quick questions. First, on real estate as a percentage of total, can you just kind of remind us where we were at the peak and where we are today just to give us a little context? Then I just wanted to follow up on -- in one of the comments you made earlier about the oil and gas markets being strong.

How do those markets typically react when you see a material decline in oil prices? Obviously there's a lot of talk about oil price is down these days.

Is that something that takes a while to kind of work its way through those economies? Are there other factors that kind of insulate them from those types of changes in oil prices?

On that question of predicting local GDPs based on oil prices, I don't know that I'm qualified or smart enough to do that.

That makes two of us.

I think I'll shy away from trying to play economist, other than to say, if you take a snapshot in time right now and look at relative economic strength, you're going to find it in those places like Oklahoma and Texas and Louisiana. And, again, that's where our book of business is up mid- to upper-single digits, reflective of that strong local economy.

So real estate. In 2007 it peaked at about $100 million in our book. I think at that stage of the game it was 9% or 10% of our book of business. And I would argue that that probably wasn't the real world and that if you take a 30-year view of where it had been and where it should settle out, it should probably be in the neighborhood of 4% or 5% (technical difficulty)

Right now, it's kind of clawing its way back to that 4% or 5%. It's probably at about 3% now of our book. And, like I said, it's growing at about a 20% clip. So I would expect that it would normalized rate around 4% or 5%.

Okay. That's helpful. Thanks very much.

Eric Handler, MKM Partners.

Thanks for taking my questions. A couple of things on the rates that you've been seeing for the traditional billboards. While not huge swings, and we've seen now about five consecutive quarters where bulletins are down in the 1% to 2% range and posters have been increasing in the 1%, 1.5% range. Any particular reason why you're seeing this disparity or why bulletins have been declining with rate and posters increasing?

Yes, it's something that's happening across the industry. When I talk to my colleagues at Outfront and Clear Channel, they're experiencing the same thing and there's some different theories.

Keeping in mind that when we convert a bulletin to digital we are typically converting our best units and that static inventory is coming out of the calculation. So that could be swinging it a little bit.

To me, I can't stop at that explanation because I think it's something we should manage to and do better. Of all the stats that I've been looking at for the last year, that's the one that bothers me the most.

I do think that you can't just pin it on the digital conversions. We really need to do a better job of driving rate. We talk about it every day here. On trying to make that metric improve, because if we can drive rate on bulletins, then there's a huge lift. We're getting (inaudible) gain but we're not getting the rate gain.

So I don't know if you have this data, but if you took out the bulletins that have been converted for digital, so you have a like for like, bulletins that were same-store bulletin units, would the rate be up then?

Well, I don't have it at my fingertips, so I can't answer the question. I think if we drill down, we can probably get there. We spend a lot more time tracking the other side of the equation, which is once you do a conversion, are you getting the lift you expect? But it's just harder to quantify that.

Okay.

But, like I said, that's a reason, not an excuse. And I think we should manage better to that problem.

Okay, thank you.

Tracey Young at Maguire

Hello, just two questions, if I could. I don't know if you answered a question on retail, but what does retail represent as the percentage of total revenues and how did that perform in the quarter? And then also just a question on depreciation, the debt this quarter, is that something we should expect going forward or is it just a timing issue?

Keith, why don't you hit the depreciation thing while I look up the --

I'm sorry, could you repeat the depreciation question?

Yes, just depreciation was down during the quarter. I'm just wondering if it's a timing issue or if it's going to be lower going forward?

Yes, we've got acquisitions going back into the late 1990s that are rolling off and each quarter you're going to see, going forward, there could be some slight decline quarter over quarter. The largest acquisition we ever did was in 1999., it was about $1.7 billion we're depreciating that over 15 years. So that's coming to an end.

And some of the other things that we allocate purchase price to have shorter lives than the billboards. The contracts, the lease agreements with the customers, things of that nature. So that's not unexpected.

Okay, great.

On the retail question, retail is 10% of our book and in the third quarter it was down slightly. Down 1%.

Okay. Thank you very much.

Bill Bird, FBR

Good morning. Do you still feel you have a reasonable shot at the upper end of the AFFO guidance range? And then just as a follow- on on bulletin pricing, what do you think needs to happen to see greater price inflection for bulletins? Thank you.

We are tracking sort of right down the middle right now on our AFFO guidance. I think the softness in national has cost us $0.04 or $0.05 in the back half on that metric.

The other question was --

On bulletins.

Bulletin pricing. I think if we could get a rebound in national in particular with some of those Telecom guys, you can see that rate tick up. They tended to buy our best units at our best prices.

So I'm watching our head of national sales to agree with me on that. That's probably number one. A swing upwards in demand from our national accounts would be very helpful in that regard. We've been kind of swimming against that tide.

And then other than that, I think bulletins are location driven and sold individually by location. Individually negotiated. So that when there is a whiff of inflation expectation, we're able to inject that into the conversation.

Right now you don't have a whiff of inflation expectation. And so come renewal time, there tends not to be that sense that we can drive rate.

So I would point to those two things: a rebound in national demand and a whiff of inflation expectation. And you should see our bulletin rates start improving.

Thanks a lot.

Jason Bazinet, Citi

Just following up on Bill Bird's question. I think a lot on the buy side, maybe from comments from you guys, are also using this 10% to growth in AFFO per share as a bogey for 2015. Would you say that the $0.05 or so that the softer national caused you this year augmented with your commentary about it feeling a little bit better makes that still a reasonable proxy for the buy-side (inaudible)?

I feel good about that. There's a couple of things driving that. We're going to get a break on REIT-related expenses that don't carry over into next year.

We're going to get a break on our interest expense due to our refinancing. So there's some artificial things that are giving us a leg up there.

I would rather have that $0.05 this year and grow at 10%. But if you want to play the comp game, we'll play the comp game. Yes, we have an easier comp.

Very good; thank you very much.

Thank you. Speakers, at this time we have no further questions in the queue.

All right. Thank you all for listening in. We appreciate your interest in Lamar and we look forward to visiting in February of 2015.

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.