Lamar Advertising Co (LAMR) 2015 Q2 法說會逐字稿

(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, and the amount of 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 conditions, 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 barter demand for advertising, levels of expenditures on advertising in general, and outdoor advertising in particular, and risks and uncertainties related 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 10-K, as updated or supplemented by its quarterly report on Form 10-K. Lamar refers you to those documents.

Lamar's second-quarter 2015 earnings release, which contains information required by Regulation G require 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 call over to Sean Reilly. Mr. Reilly, you may begin.

Thank you, Tiffany.

Good morning, all, and thank you for joining us on Lamar's Q2 2015 earnings call. We are happy to report a solid second quarter. Our team delivered strong local sales growth and, once again, kept a tight lid on operating expenses.

Keith will speak to a one-time reconversion expense at corporate that elevated those expenses, but I can't be more proud of the operating discipline shown by our team in the field. I don't see any reason why that can't continue into the back half of the year.

Regarding our outlook for Q3 top-line growth, what we see now indicates low-single-digit pro forma growth and mid- single-digit as-reported growth. We continue to track at the top end of our previous AFFO guidance for the year. As you recall, we entered the year with the goal of increasing AFFO approximately 10%, and as we track today, that goal is in sight.

I'd now like to turn it over to Keith, who will walk through some of the numbers.

Good morning, everybody.

As Sean mentioned, we had some final reconversion expenses at corporate in the quarter of approximately $1.2 million that should be the final significant conversion expenses that we see coming through for the rest of this year and going forward. The other item that I'd like to address is the income tax expense for the quarter: it was $15.3 million. Of that amount, $13.1 million is a non-cash valuation allowance taken on our Puerto Rico deferred tax assets, due to a tax law change in Puerto Rico in May of this second quarter. So that's an extraordinary item that will not appear again, and again, that's non-cash.

So Sean, back to you.

Great. Let me cover a couple of topics of note. I'll start off with our digital deployment and our same-board digital growth. We are on pace to add about 175 units organically, and about 30 through acquisition this year, so it's been a pretty aggressive year in our digital deployment. It appears that that aggressive deployment has affected our same-board digital performance, which slipped to minus 3.8% in Q2.

We continue to analyze and monitor it. I believe we will be dialing back our 2016 deployment, in order to allow demand to catch up with supply. We'll have more detail on that next call, but if I was going to highlight a little disappointment in Q2, that would be where I would start.

If I was going to highlight something that was a bright spot, as you know, since we've switched from monthly to daily billing, our rate and occupancy stats have a little bit of noise in them. However, bulletin rate was once again a bright spot for us, at approximately up 2.5%. As you know, that's a good harbinger for our overall platform, when we are able to drive rate in the bulletin space, and I'm happy to see that has continued over from the first quarter.

Regarding verticals, a lot of good news in our largest verticals. Service, which is primarily legal these days, was up 11%; that's our second-largest category. Hospitals and health care was up to 9%, it's now up to 10% of our book of business, our third largest category. Retail was up 4%, that's nice to see. Real estate continues to strengthen in our book. It has now cracked back into our top 10 verticals, and was up 9% in Q2. Hotel/motel was flat, which again is nice to see that that vertical has stabilized.

The weakest category for the quarter was gaming. Part of that is due to the Harris bankruptcy, which has been a little bit disruptive, but we are looking forward to them coming back into the book.

So with that, I will turn it over to questions.

At this time, we will open the floor for questions.

(Operator Instructions)

Our first question will come from Marci Ryvicker with Wells Fargo.

Thanks. Sean, you talked about low-single-digits for the third quarter. Can you give us a little more color? Is it the same as Q2? Is there deceleration? And then on the digital yield, is it better or worse, or the same as that negative 3.8%? Then the second question is, the Alliance Airport Advertising acquisition. Any color on your strategy there, and any financial impact? Thanks.

Let's see, three of them. Let's talk a little bit about digital first. We don't like to manage that portfolio quarter-to-quarter, we like to get a slightly wider-lens look at how it is performing. Our folks in the field are telling us that it's not now time to manage to that, that they feel that the year is going to shake out a little better than what Q2 indicated. So once we circle around through the third, and we can take a real hard look at it. Like I said, we were very aggressive this year in our deployment. We've seen this happen before, where we can get out a little bit ahead of demand with the supply, so we're just going to look at it, we're going to manage to it, and while we are probably not going to be changing our 2015 plan, it wouldn't surprise me if we didn't dial back a little bit, as I mentioned, in 2016.

What our patrons are indicating are a couple of things as regards our guidance. When I look at the book, the basic verticals are healthy. We do have a little bit of a tough comp on the political vertical from last year, obviously it being a non-political year, so we think that's catching up to us a little bit. I don't want to split hairs on what exactly low single means, that you can splice that. The important point is, again, our goal for the year, to growth AFFO by approximately 10% is there and intact and in sight, and we continue to track it at the top end of that range that we put out there at the beginning of the year.

We are really excited about the Alliance acquisition. It's small, but if you look at what's going on in out-of-home, and where the most exciting executions are, and where you can do fun and exciting out-of-home executions, a lot of that is happening in the airport environment, and we picked up some great airports with the Alliance acquisition, Portland, Las Vegas, Phoenix, et cetera. Financially, that division for us is relatively small. We dipped our toe into it a couple of years ago, picking up organically a couple of small airports, and so we learned the business. And then, of course, once we developed a point of view about airport advertising and decided we liked it, we went ahead and stepped up, and teamed up with Alliance.

If you wanted to try to model its effect, on a 12-month basis you're probably looking at something in the $23 million, 24 million range on the top, and something in the $2.5 million to $3 million range in EBITDA contribution. So it's not huge, but again our folks [suggest] -- if you see what we did in the transit business, we put together a large portfolio of middle-market transit authority contracts, and that business today does, give or take, $75 million on the top and, give or take, $12 million to $13 million in EBITDA contribution. I would expect that you will see our team adopt that same sort of strategy. Does that answer the question, Marci?

Yes, thank you very much.

Our next question will come from Alexia Quadrani from JPMorgan.

Good morning, this is Julia Yue on for Alexia. Just a follow-up to the Alliance Airport acquisition, as airport advertising is in requalified revenue, what are the limitations in terms of how much business you can actually pursue? And then I have a follow-up.

It was a little fuzzy on the question, but I think what you asked was is it was requalified, and the answer to that question is no, we are operating that business in the TRS. It's unclear going forward whether some of the structures would be deemed requalified. Right now, we are assuming they are all not requalified. We have a huge basket of room in our portfolio to operate non-requalified assets. I think where we stand right now, we are 95%/5% in terms of the asset test, is that right, Keith?

It's 92%/8%, and we're at 8% in the TRS.

8%, okay, so we are at 92%/8%, and the test is 75%/25%?

25% on the TRS, so we 17 points to --

Yes, so we have a lot of room in there, Alexia (sic), but also I would note that we operate some assets in our TRS that we know that are requalified, and we them down there for a couple of reasons, most notably that we're getting some shelter benefit from them in the TRS. That would be some bus shelters, that would be some Puerto Rican assets, et cetera. So we feel like we have a lot of headroom to grow the TRS, and again, we are excited about the Alliance acquisition.

Okay, that's very helpful. Then also can you give an update on Lamar's automated buying initiative? I think you had concluded beta testing as of the first quarter call. Have you rolled out the product to your broader client base, and if so, how have the initial results been? And then longer-term, how long do you think it might take for advertisers to get comfortable with this system, given that your asset base is more weighted towards local markets, and advertisers that tend to run [longer campaigns]? Thank you.

Sure, great question. Yes, we are live with our automated buying platform, and we have hit what I would categorize as a few singles with it. We haven't hit the home run yet. The plumbing works. If you drop a digital dollar into the platform, it will go grab inventory across a variety of platforms, not just ours, according to targeted demographics, and [avails] and CPMs. So we are happy with the plumbing, and we have had live buys with live customers.

As of today, it's not moving the needle, and part of that has to do with buyer behavior, but I'm optimistic. I feel like if we can get buyers a little more comfortable, then some more digital dollars will flow our way. The buyers we've had to-date, while small, have been 100% out of the digital pot, which would not have received had we not had the platform. So to answer your question, it's -- we are aggressively promoting it. Our agency partners are pitching it, and our technology partner is delivering.

That's great to hear, thanks so much.

Thank you. Mr. Reilly, it looks like we have no further questions at this time.

Great, well look, I appreciate everybody listening, and I look forward to getting together again for the third quarter call.

Thank you. This concludes today's presentation. You may disconnect at this time.