Lamar Advertising Co (LAMR) 2016 Q3 法說會逐字稿

We now have Sean Reilly and Keith Istre in conference.

(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, plans, and objectives including, with respect to 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. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this call and the Company's third-quarter 2016 earnings release and its most recent annual report on form 10-K as updated or supplemented by quarterly reports on form 10-Q. Lamar refers you to those documents.

Lamar's third-quarter 2016 earnings release, which contains information required by Regulation G regarding certain non-GAAP financial measures, was furnished to the SEC on the form 8-K this morning, and is available on the investor section of 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, Chantel. Good morning, all and welcome to Lamar's Q3, 2016 earnings call. Certainly a lot to like about performance in Q3 as we highlighted in the press release, digital same board performance was stellar up 6.6%. And our overall top line and bottom line numbers, keep us optimistic about finishing 2016 at the top end of our AFFO first-year guidance.

The markets acquired from Clear Channel earlier this year are now fully integrated and performing well. And let me also remind everyone that we expect to raise our dividend another 10% next year, marking the fourth year in a row we have raised our distribution 10%.

Regarding Q4, pro forma revenue guidance, pacings indicate low single-digit pro forma revenue growth at this moment in time. I will now turn it over to Keith for some more detail on the numbers.

All right. Good morning, everyone. Just to reach out to some of the metrics in the press release, the acquisition adjusted revenue for the quarter was up 3.6%. Just a reminder from the last call, that used to be titled pro forma revenue but we changed that and renamed it in Q2 of this year.

The consolidated expense increased 3.3%, that is slightly higher than our norm. This is primarily due to a comp issue from Q3 of last year. Q3's consolidated expenses last year were the lowest expense quarter for 2015. To illustrate what I am saying, if you look at our Q2 consolidated expenses, they were $211 million, Q3's consolidated expenses for 2016 were $210 million. So our run rate was the same for both quarters, but again we had a tougher comp in Q3.

For the year our consolidated expenses are up 2.5%. If you remember at the beginning of this year, we guided for approximately 2% of growth in consolidated expenses for the year and that is where we should end up. To note, operating margins before corporate overhead in Q3 were 49.5%, after corporate overhead there were 45.7%. That is the best margin quarter we have had this year.

Sean just mentioned dividends. Free cash flow for 2016 before dividends this year of approximately $290 million will be in excess of $400 million. CapEx for 2016 should come in right around $100 million. Last year was $110 million and our total debt leverage, as of September 30, was 3.6 times. Sean?

Great. Thanks, Keith. Let me give a little color on pro forma performance by region. I will give you a sense of regional strength and weaknesses.

No real surprises here. Strongest growth has been on the coasts, weakest in oil patch. I do want to highlight that our southwest region with the most oil patch exposure, was up 2% on the top at Q3 and is positive on the top and bottom year-to-date. And I just think that speaks to the resiliency of our platform and it was great work in a tough climate for those folks in the oil patch.

Digital units, we ended the quarter with 2,542 digital units keeping in mind that 171 of those came from Clear Channel. And I mentioned the stellar performance, same unit revenue is up 6.6%. That gives us a lot of confidence has a layer in our plans next year for growing our digital platform.

Local national sales mix, we were 77% local, 23% national, in Q3 of this year, that mirrors Q2. The pro forma growth was 2.3% on the local side and 5.4% on the national side, so year to date national is still pacing ahead of local. It looks like Q4, those trend lines will reverse a little bit. And I still believe that we will finish up the year with those pro forma growth rates being relatively the same.

On key verticals, I am just going to kick through the top five, to give you a sense of how our largest verticals are performing. Restaurants being our largest at 12% of our book, was up 3% in Q3. Service revenue which is also 12%, was up 14% in Q3. Hospitals and healthcare was up 4%. Retail was up 3% and amusement, entertainment, and sports was up 8% in Q3. So our top five verticals were doing really well.

A couple of others to highlight. Beverages, mostly beer, popped into our top 10 and is now 3% of our book. It was up 44% in Q3, so we really got a lift out of beer. And real estate was also extremely strong in Q3, it was up 14%. So, with that, Chantel, I am happy to open it up to questions

Thank you very much.

(Operator Instructions)

Marci Ryvicker, Wells Fargo.

Thanks. A couple of questions I guess on the current pace. Sean, you said up low-single digits. Is that a deceleration from the third quarter? And then, also related to that, I know political has added 50 basis points to your growth. Can you talk about that for both Q3 and Q4?

Yes. Thanks, Marci. So political, I would have to describe it as coming in late but came in pretty strong. If you recall in the summertime, we were a little nervous about our political pacing and, at the end of the day, it looks like our political for 2016 is going to be $1 million more than it was in 2014, which you know was the last cycle. It should come in at about $8.5 million. Quite frankly, it is not Election Day yet and we're still getting political trickling in.

October looks good. I am not real happy with what I am seeing for the holiday season and so that gives us a little bit of pause to be cautious with the guidance. It could very well be that people are waiting until after Election Day to layer in their plans but we will see where it comes out. We will leave it at low singles for now and hope for a good holiday season.

Can you just talk about the auto category? And then, one more question would be how is same-board digital trending now?

So auto has been a little weak. For the quarter it came in at minus 3. For year to date, I do not have that number in front of me, year to date it's flattish. So, we'd like to see a little more activity there.

And the same-board digital for where we are today seems to be positive and in good shape. We expect for it to outperform the rest of our platform going forward. It will still be the strongest product we have out there on pro-forma same-board growth.

Got it. Thank you very much.

Yes.

Thank you. David Miller, Loop Capital Markets.

Hey, guys, congratulations on the stellar results. Sean, it has been almost a year since you acquired the 5,500 extra displays from Clear Channel back in January. Just wondering what you have learned from those markets? Correct me if I am wrong, I think a lot of those markets represented brand-new markets for you guys at the time, much larger markets than I think you guys had been used to operating in, in the past. What have you learned from those markets that you could apply to maybe some other markets? And do you feel like everything is integrated the way you want it now or is there still work to be done on that front? Thanks a lot.

Sure. So, yes, the Clear Channel markets were all new markets for us, places like Seattle and Des Moines and Cleveland and Columbus and Memphis and Reno. And number one, we went in and installed some systems that helped us on the expense side. That happened pretty quickly. So on the margin front, we are operating at better margins than we inherited and that was a very pleasant experience.

On the top line, it took us a little bit of time to make that gel, mostly on the local sales front, and we are seeing a nice lift there. So, I feel like we are hitting our stride. If you go to any of those markets, you will see that the boards have been spruced up, they have been branded Lamar and all that work has been done and they are fully integrated, so it's been a pleasant experience.

Okay. Thank you.

Thank you. Alexia Quadrani, JPMorgan.

Thank you. Just on the strength of additional billboards you guys have had such success with that which could be potentially such a big growth driver for you. I guess is there any consideration of increasing the rollout of digital boards next year? Do you want to stay measured as you planned? And I know this is a difficult question to ask, I've asked you before, but I know you have a lot more information than I do, any sense in terms of what is the (inaudible) saturation in the market? How far, what percentage of boards can be digital where you feel that it is the right balance versus static longer term?

So certainly being up 6.6% in the third gives us a lot of confidence as we lay in our plans for next year's digital deployment. This year, we wanted to see how it played out. We are going to come in at probably -- not counting the new Clear Channel boards, probably somewhere around 110-ish. So a little lighter than our usual buildout. I would anticipate that we will accelerate that going into 2017. I do not have a number for you yet. But all the trend lines indicating that we should be more aggressive next year than we were this year.

Traditionally, I've said that 30% of our market's total revenue's coming from digital seems to be about where it is shaking out. We have some markets that are more than that. And we have a number of markets that are below that. If you look at our whole footprint, we are at about 20%. So give or take $300 million on give or take $1.5 billion, this also tells me that we've got some running room.

But those are guesstimates. We still have a lot to learn about digital. I would point out that UK's experience in the UK, digital billing for out of home has surpassed 50%, which is quite a number. But, anyway, that is where we are. I think we still have runway even if it tops out at 30%, we are 20% so we have got lots of running room and the platform is growing.

Thank you.

Yes.

Thank you. Ben Swinburne, Morgan Stanley.

Good morning, guys. Just a quick CapEx question. I think you guys came in a little lighter, or you're coming in a little lighter than the initial guidance. Is that due to the lower digital deployment or anything else you are doing on the efficiency front? And are there trends in the digital board costs that might give you additional tailwinds into next year on a per-board basis, or any other color you could give us on capital spending?

Sure. I think it's a tad lighter on the new builds. But the most pleasant surprise, Ben, has been what it costs us on the maintenance CapEx side as we retire early generation digitals. Certainly the cost has come down. But more importantly, the performance has been enhanced. We are experiencing a much longer life from these units than we had anticipated when we first started deploying digital some 10, 12 years ago. So it's a combination of costs coming down, useful life being prolonged, and really just a much more efficient unit that is coming in from all of our vendors, really, at a price point that has been pleasant to watch.

So, just to make sure I hear you right, you are retiring gen one digital boards at a slower pace than you expected or we expected it earlier.

Yes. So both, yes, we're getting a longer life from the ones we deployed. Where we expected a 7-year life from units that we deployed in 2007, 2008, we are experiencing a 10-year life on those. And those numbers are only getting better.

Yes. Thank you.

Yes.

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

Well thank you, Chantel, and thank you, all, for being on the call. We will get together next year and put a wrap on 2016. Thanks.

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.