Lamar Advertising Co (LAMR) 2018 Q4 法說會逐字稿

Excuse me, everyone. 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 of time and -- 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 can cause actual results to differ materially from those discussed in this call in the company's fourth quarter 2018 earnings release and its most recent annual report on Form 10-K as updated or supplemented by its quarterly reports on Form 10-Q and current reports on Form 8-K. Lamar refers you to those documents.

Lamar's fourth quarter 2018's earnings release, which contains information required by Regulation G regarding certain non-GAAP financial measures was furnished to the SEC on Form 8-K this morning and is available on the Investors section of Lamar's website, www.lamar.com. I'd like to now turn the conference over to Sean Reilly. Mr. Reilly, you may begin.

Thank you, Stephanie, and good morning, everyone. Welcome to Lamar's Q4 and Year-End 2018 Earnings Call. I'm very pleased with the way we closed out 2018. Q4 organic growth was 5.6%, a number we haven't seen in some time, and it's quite gratifying. This brought our full year organic growth to 3.4%, and importantly drove our AFFO per share to levels that exceeded our expectations. Full year AFFO per share for 2018 ended up at $5.50 a share easily exceeding our guidance.

Same-board digital performance continues to shine, up 10.8% in Q4 and up 7.1% for the full year. We continue to add digital capacity as quickly as possible, adding over 220 units in 2018 and targeting a goal of 250 units in 2019. And of course, we closed on the Fairway transaction in December. The integration of the Fairway asset is going well. Indeed the $4 million in promised synergies are already largely in place, and we are looking forward to significant contributions from the USF to our 2019 AFFO per share growth.

Turning to our AFFO per share guidance for 2019. Please note the range provided in our release of $5.67 to $5.83 per share. The midpoint of the range reflects 3% pro forma top-line growth and 2% pro forma expense growth. Our full year pacings are actually stronger than 3%, and as of today, position us towards the top end of that range. Regarding Q1 2019 guidance -- Q1 guidance, pacings are softer than 3%, let's call it 2% and some change. We had one major advertiser shift several million dollars around and while they will spend as much or more with us for the full year, a chunk fell out of Q1 and moved to the rest of 2019.

So again, midpoint of 2019 AFFO per share guidance reflects 3% pro forma growth, full year pacings are presently north of that, Q1 pacings are presently south of that at 2% and some change. Keith will give you some color on expected Q1 expenses which will come in a little heavier than 3%. However, we are confident that when we close out 2019, expenses for the full year will come in around the familiar 2% range. Keith?

Good morning, everyone. As Sean mentioned, our first quarter was really strong, organic revenue EBITDA growth. As such, our organic expense growth was up 5%. On our last earnings call, we stated that we expected our Q4 expenses to be higher than our usual 2%. This was primarily due to the additional bonuses and sales commissions because of the strong revenue growth in the quarter. For the full year 2018, organic revenue growth, as Sean said, was 3.4%. Organic EBITDA growth was 4.9% and organic expense growth was 2.2%, which is our normal range somewhere between 1% and 2% on expense growth.

Free cash flow for 2018 after dividends was $110 million. We expect something similar in 2019. We had mentioned earlier in a press release that the company was planning on asking the board to increase the dividends for '19 by 5% and we will have that board meeting on February 28 and hopefully they will approve that. We expect organic consolidated expense growth in Q1 of '19 to be approximately 4%. Two things that contribute to that number: number one, Q1 '18 expense growth, if you will recall, was negative 1.1% last year; and secondly, there are some onetime expenses that will hit Q1 related to the Fairway acquisition that we closed on December 21 of 2018. For the full year, our internal budget projections call for consolidated organic expense growth of 2%.

To help you with your model, our CapEx budget for '19 is $128 million in total, $80 million in growth CapEx and $48 million in maintenance CapEx. We are projecting cash interest expense to be approximately $148 million. Cash taxes at the TRS will be approximately $10 million. TRS is our taxable REIT subsidiary. Anyway, that's about it. Sean?

Great. Thanks, Keith. I'll touch on a couple of metrics that we commonly call out on this call, and then, I'm going to talk about a couple of initiatives we have going there. I think you're going to find them interesting. So I mentioned digital and the count. With the Fairway acquisition, we acquired 149, and we added organically about, again, a little over 220 in 2018. So that brings our year-end '18 total digitals in the air to 3,220. Again, our goal for '19 is to add 250 more given that we are seeing such strong same-board performance.

National, local, please note we code political local so this number is a little bit skewed for that reason. But Q4, local increased 8.1%, national increased 3.1%. Regarding political in Q4, it added about 1% -- a little over 1% to that 5.6% organic growth, so the core was right around 4.5%. For the full year, political added about 0.6% to 0.7% to our otherwise organic growth.

Verticals. Some real strong performance, obviously, in the fourth quarter. I'd point out hospitals at -- up 8%; education, up 8%; financial, up 9%. Here is an outlier, insurance was up 82%, that's the law of small numbers but GEICO did pop into our top 10 advertisers for the first time in a while. Auto for Q4 was down 2% and I want to pause and think with you a little out loud about what's going on with auto. Last year, we hired a consultant to help us do a deep dive into local auto dealer vertical. Through that effort, we developed some insights into how their business model is changing, how they are viewing their ad spend across all media and how they view out-of-home. As you know, all other media are struggling with declining auto ad spend.

These insights helped us roll out some initiatives targeted directly at the local auto dealers early this year, and the early results are promising. Auto for us, Q1 is pacing up 3% and as you know it's down for most other verticals. And interestingly, it's pacing up 4.5% for the full year. Now, it's early yet and -- but this is against a backdrop of declining auto ad spend in other platforms. So I look forward to giving you updates on that and how it progresses through the year. But again, the early returns are promising.

Number two, 2019 looks to be the year when programmatic automated buying begins to bring digital dollars to our platform in a way that will make real incremental contributions to our pro forma growth. We have expanded our number of partners in this endeavor from 1 to 4 to go after these dollars, and we've made the necessary investments last year to make sure our platform is truly plug-and-play. And again, I look forward to updating you on our progress in this programmatic initiative as the year moves along as well. With that, Stephanie, I'm happy to open it up for questions.

(Operator Instructions) Our first question comes from David Miller with Imperial Capital.

Congratulations on the stellar results. A couple for you, Sean. So on the Fairway integration, how would you characterize, like, how that's going so far? And how do you think that integration so far is different than some of the other acquisitions that you guys have done, say, over the last 2 or 3 years? And then, also, and maybe, Keith, if you want to chime in. I've got -- if you have an end-of-year digital board count of 3,220 then that means, at least, by my models you installed 336 digitals in 2018 which would be a record for installation in 2018. Do I have that number right? And then I have a follow-up.

Sure, thanks, David. Let me hit the digital thing real quick. I think you may be conflating the ones we acquired with the ones we built organically. Yes, so with Fairway, we acquired -- let me give you that number again, 149.

And regarding Fairway -- on the integration of Fairway, it's going very, very well. Typically, the low-hanging fruit is on the expense side and that happens pretty quickly. And as I mentioned, those promised synergies are largely in place and going fine. And then usually, there's a little lift on the top line as we bring, sort of, a different philosophy of sales management and sales and how we go about going after new business to the platform. And that takes a little longer and that will happen over the next, let's call it, 12 to 18 months. But the $4 million that we noted when we released the transaction, that's again, largely in place because it's largely on the expense side.

Okay. And then I would be remiss if I didn't say to Keith, congratulations on your retirement. We will miss you. You were wonderful to work with over the years.

Thanks, David.

Thank you very much David, I appreciate that.

Our next question comes from Alexia Quadrani with JPMorgan.

Just a few questions. First off, I apologize if I missed it, but did you give us what the local was in the fourth quarter ex political? And then I just wanted to see if you had a sense of when you look at the pacings for Q1, kind of -- where the strength is national versus local. And then I have one more.

Sure. So local Q4 was up 8.1% and national Q4 was up 3.1%. I don't have it expressed as a percentage of local but I have it expressed -- political expressed as a percentage of total organic growth and that would be a little over 1%. So if you look at, again, 5.6% minus a little over 1%, let's call the all other core growing at about 4.5%. I don't have a local national number for you yet for the first. So we'll have to just -- we'll have to wait till the next call to call them out.

And then just looking at Q1, you talked about the major advertisers sort of pushed off into the rest of the year. You guys tend to have pretty good visibility. It sounds like you're pretty convinced that there is -- you are going to see it materialize the rest of the year. I guess any color on your level of confidence of that? And just -- and also just on political, you had a great political year in 2018. I guess, did you see anything different from political spending in this past cycle that may have us look at political differently going forward?

Sure. So that large advertiser, you can probably guess who they are. They have contracted with -- so these dollars are actually in billing, so that's about as visible as you can get. And as of now, they are contracted for slightly more than they contracted in 2018. It's just the timing of when their spend is going to come in. And then as we look at our pacings, pacings are pacings. They are a snapshot in time. Right now, we're pleased with full year pacings. And you still have to sell in the period for the period to make the period as I preach to our folks every day. But things are looking good as we sit here today. The other question was about -- Alexia, what...

Political, you had such a great political year in 2018, I wondered if anything was different that you sort of learned about it, how we should think of it differently going forward?

Well, one thing we learned is that if you really focus on a vertical, you can make a difference and we made a concerted effort to go after those dollars last year and it paid off. I will note that it's an odd year this year, it's not an even year. What do we usually get in political in an odd year? We usually get between $2.5 million and $3 million. So if you're trying to think about what's the delta that Lamar needs to make up, let's call it $7.5 million to $8 million. But we're scrambling after and we feel good about making up, if that's helpful.

Our next question comes from Marci Ryvicker with Wolfe Research.

A couple of questions. First, Sean, that 10.8%, I think same-board digital, did that have any political in it or is that totally core?

You know it probably had some political in it, Marci. I haven't -- I don't have it broken out, I can probably get it for you though but -- one thing that politics seems to be about these days is tit for tat and our digital platform is pretty good at that because they can change it at their whim. It's a very responsive medium.

And then can you tell us what percent auto is of your book as a category at this point?

Yes. Yes, let me turn to that real quick. So I'm glad you highlighted auto because we're making a concerted effort at targeting that vertical this year in ways that we haven't in the past and I think it's going to bear fruit. So automotive is now 5% and as you know historically, it's been 6% and it's had its challenges of late, and that's why we're going after it. And then like I said, I'm going to give you guys updates on how we're doing there as the year progresses because I think that it's an important vertical across a whole lot of advertising platforms and we intend to get our share.

Got it. And then the last one's either for you or for Keith. There were 2 onetime items in the guide reconciliation for AFFO and FFO. Can you just talk a little bit about that $15 million to $20 million onetime noncash tax adjustments? I think it's related to Fairway. And then the $11 million reclass from this revenue to something else. We're just trying to figure out how that is impacting the AFFO guide.

Marci, I'm going to let our corporate controller address that question. Obviously, as of January 1 of '19, all companies have to comply with a new FASB rule concerning the capitalization of their leases out front clear us anybody that has lease obligations. And it is a non- -- we will capitalize our lease obligations. It will add about $1.3 billion in assets to our balance sheet and $1.3 billion in capitalized debt. It's not debt according to any of our credit agreements, it's just a GAAP measurement similar to asset retirement obligations. And in our AFFO calculation, it is an item that we do use to reconcile. But again, it's a noncash item like depreciation and amortization, (inaudible). Do you want to upgrade a little bit?

Yes. Marci -- on the lease accounting, the $11 million, our revenue contracts currently are accounted for as a lease and under the new standard, they won't be. So under rev rec, we have to capitalize install costs and for modeling purposes you would roll out $11 million of the credit to direct labor throughout the year, it's like probably over 10 months, 9 or 10 months is the average life of our contract. So it's a onetime event. Of course, our revenue portfolio would change a lot. But we're treating it as noncash for AFFO.

So lease standard non-Fairway adjustment had any effect on AFFO for the year. So they both got a slight net income. But the Fairway is strictly related to the fact that the Fairway company didn't elect REIT status in 2018. They're going to elect it in 2019. And when they do, they have the right obviously to defer tax liability similarly to the way we did it. So that's -- we're estimating between $15 million and $20 million will be a tax benefit in the period they elect REIT status. So (inaudible) you would model over 10 months and looking forward it just depends when they elect REIT status in 2019.

And just to clarify, none of these charges or benefits will affect our EBITDA. Our EBITDA will be accounted for as we have always accounted for it. So it will be comparative apples-to-apples, quarter-over-quarter, year-over-year for 2019.

Our next question comes from Eric Handler with MKM Partners.

Wondered if you could talk a little bit about how your acquisition pipeline is shaping up for 2019?

So we have about $230 million -- $240 million under various stages of agreement, some under letter agreement, some actual under APA, teed up for this year. So it's going to be another active year in my opinion. You'll note just for -- to highlight that we've raised $250 million in a fairly attractive high-yield tack on to one of our existing notes for purposes of recharging our revolvers so that we would have the capacity to take care of the opportunities as they come in this year. But -- as of right now, that's what it looks like and they're all very attractive and we certainly have the power to do it.

Our next question comes from Jason Bazinet with Citi.

I think it was maybe 4 years ago, you all used to give sort of a utilization and the rate. And if I remember correctly, if you went into sort of the full economic cycle, if things got weak, utilization dropped then pricing dropped then utilization came back and then pricing came back as sort of the last chapter of the cycle. And -- you guys put up just such good numbers, I was wondering if you could give any sort of qualitative, I don't need the precise numbers of how much of what you're seeing will be more pricing versus utilization.

Sure, good question. Just to refresh your memory on why we stopped doing it. We moved from monthly revenue recognition to daily revenue recognition about that time, Jason, and it just created white noise in these latent occupancy figures, it made them noncomparative. But that being said, it's pretty clear to me that the gains we are making today are primarily rate driven. I would argue that given where we are in the cycle, our occupancy is normalized and pretty much is where it is and where it needs to be and where we're getting the gains is in rate.

Our next question comes from Ben Swinburne with Morgan Stanley.

Sean, I know it's always hard to have a direct, sort of, causal relationship between adding digital capacity and driving revenue. But I'm just wondering, given the strength of the business now and the growth in digital boards, if you could update us on how you think about that supply of inventory impacting revenue? You seem to be seeing a lot of demand in the marketplace, but I know at the same time, I'm sure you'd acknowledge you have to make sure you're balancing that and not creating too much supply that impacts pricing. So just any update on, sort of, today's marketplace and the ability to drive more digital into your footprint?

Great. Yes, thanks, Ben. Great question. So I would start with the fact that, as I've said in the past, Lamar is a highly decentralized organization. Yield management takes place at the local level. So you've got 200 some-odd professionals that run our profit centers that are gauging local demand because they have their finger on the pulse of local ad spend in a way that I could never replicate here in Baton Rouge. So it's really the sum wisdom of 200 folks that have their finger on the pulse of local ad spend that drives this decision on how many boards get booked. Another check on making sure we don't get too far ahead of ourselves is those local managers -- that local management is held accountable for how their boards perform. And so that's sort of your check and balance on getting it right.

And then finally, as I've also said before, because we're such a dominant provider of digital out-of-home in most of our markets, we can modulate supply in a way that meets demand just because in many places we're the only large format digital provider. And so when we put all that together, we feel pretty confident that we can match up supply with demand. But you've been following us for a while. Sometimes we don't get it right and same-board performance will reflect that. And we can pause, hitting the pause button. I think you saw us do that a few years ago. So again, it's a decentralized exercise, it's not something that happens by mandate or dictate from Baton Rouge. It is truly an exercise of bottom up not top down.

Got it. And if I can just ask, Keith and your controller a couple of quick other number questions. One, Keith I don't know if you have the political number for Q1 '18 just so we know what we're comping against for the first quarter. And then if you don't mind, just going back to the items on your AFFO build, the onetime tax adjustment in the ASC 842. I think what's happening here is that net income is benefiting from these 2 and then you're adjusting them out from net income to AFFO, is that accurate? I just wanted to come back to the explanation you gave before and make sure we understand it correctly.

Yes, that's exactly right. The $11 million will be in direct labor and the other will be on the income tax line for Fairway.

But again, that's for GAAP purposes that will not be reflected in our press release for the next earnings call as a plus to EBITDA.

Okay. Is there any revenue impact from these?

No.

No. And as far -- okay, as far as with the political in Q1 of last year, it was irrelevant. Most of the -- I don't have the exact numbers in front of me, but I can tell you that bulk of the political spend came in the back half of last year, it's the third and fourth quarters.

Mostly fourth, actually.

Yes, fourth.

Our next question comes from Drew Borst from Goldman Sachs.

Sean, I was wondering if you could give us some color on geographic revenue growth, organic revenue growth, maybe for 4Q and whether there are any sort of outliers plus or minus in terms of the regions?

Sure. So you've heard me say this in the past that perhaps the flyover states aren't doing quite as well. Happy to report Q4 that the Midwest region was actually pretty strong. Their revenue growth was up 7.3%, which is nice. Slightly behind the Western region, which was the strongest. That's California and Oregon and Washington and Nevada. They were up 8.2%. The Northeast was up 7.1%. So it's still sort of a bicoastal phenomenon but it was nice to see the Midwest have a really good strong quarter.

The oil patch is recovering, Drew, a little bit. You're probably reading about what's going on in the Permian basin, in Texas and the like. Our Southwest region was up 5.8%. So again that was pleasant to see. The Atlantic Coast was up 5.4%, Central region, which for us, is kind of Tennessee, Ohio, around in there, was up 5.4%. The region that struggled the most was the Gulf Coast, that's Louisiana, Mississippi, Alabama and the Florida Panhandle. Couple of things going on there. While the Permian has recovered for the oil patch, the Gulf has not and there's still some struggling economies along the Gulf Coast that rely on good strong activity in the Gulf of Mexico.

Was that Gulf region still positive or was it actually declining?

Yes, it was positive. It was 0.3% -- up 0.3%, there is a little bit of (inaudible) performance, but the rest of the regions were quite strong.

Yes, it seems pretty broad based with the exception of the Gulf and maybe the oil patch a little bit. Another question I have for you, the CapEx guidance of $128 million. I notice that's a little bit higher than you guys have been doing in the past, could you explain maybe why it's ticking up a little bit this year?

Sure. Well, digital, we're budgeting to put up 250 which would be more than last year's 220. So some of it is that digital goal that we have. Obviously, if we don't get them all in the air we won't be spending as much on that. The maintenance CapEx is a little bit higher than the previous couple of years. We have a 2008, 2009 vintage digital rollout that is now needing replacement, so a little bit is falling into that. I would say those are the primary drivers.

Okay. And then just lastly, can you remind us how much visibility you have into full year revenue? I think in the past, you used to talk about maybe somewhere around 1/4 of the full year revenue maybe being, sort of, booked or you have visibility on. Is that kind of what you have at this point for '19?

No. We're actually -- as we closed out January, we're right at 50% booked to that goal.

Okay, that's great. And is that pretty consistent from prior years?

Yes. That, I'd say the last, gosh, 5, 6 years, it's been right around 50% as we close out January and that's when we can take a real good snapshot of how the year is going to turn out. If I go back further in time, go back maybe 16 years, that number used to be around, I'd say, 65% would be booked. But a greater percentage of our contracts back then were 12 month. And as the Great Recession cycled through, we got leaner and meaner and taught our customers how to give a shorter notice and quicker turnarounds and that number fell to about 50% and it stayed there really, I'd say, since the Great Recession.

Our next question comes from George Smith with Davenport Asset Management.

You guys seem to have momentum right now that a lot of other mediums do not and I'm trying to figure out if this is just general economic strength or if you're seeing renewed interest in the category given disruption that we're seeing elsewhere. Or do you sense that there are even new types of buyers coming into the medium, maybe driven by digital or again, that disruption we're seeing in other areas?

Great question. So let me start by just saying that one of the things that's driving out-of-home is the fundamental fact that our audience is growing. More time -- more people are spending more time in their commutes than ever before. They're spending more time out-of-home. They're interacting with our medium more than ever before. So it kind of starts there. And you've got other local media that are struggling with their audience. Their audience is either becoming fragmented or they're turning away and that's inuring to our benefit to some degree. I can tell you that there are certain categories that are using us in lieu of other media that they used to use.

I would point to, for example, in the service category, that's attorneys and accountants and the like that used to use the Yellow pages. Yellow Pages don't exist so they've been coming to us. And service is, quite frankly, our fastest growing vertical right now. Our digital platform is also making us responsive to the needs of advertisers in a way that is causing them to steer dollars our way.

Clearly, amusement, entertainment and sports is fast growing in our book and it's primarily because digital is so responsive to their needs that they have time-sensitive or price-sensitive information they need to get out right away. They can use us in a way they haven't been able to before and I would argue that some of those categories used to rely on radio more because of the way radio could be responsive to their needs. And as radio listenership dwindles, they're coming to us. So those are some of the factors that are resulting in out-of-home being a growth medium where a lot of other local media are struggling.

And do you see in discussions with some of the bigger buyers, I mean, are they generally making bigger buys or even broader buys in terms of geography, to blanket more of the country or any -- and I see that pricing's obviously going up. But how about any change to contract duration?

We did have some large customers commit earlier in '18 for their buy in '19 and also buy a little longer. But I would say that you need to keep in mind that we are intensely local. 77% of our business is local and that book is built by the sum effect of 1,000 local account executives touching 30,000, 40,000, 50,000 local customers. So it's really sort of that sum effect. So I would point more to if other local media continue to struggle with their audience, it can only inure to our benefit.

There are no additional questions at this time. I'd like to turn it now to Mr. Reilly for closing remarks.

Well, great. Thank you all for listening. I thank you for your interest in Lamar. And as I mentioned in the press release, we're looking forward to a solid 2019. Thank you all.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.