Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

All right, ready?

Ready to roll.

Okay. Quick disclosures. Please note that important disclosures including my personal holdings disclosures and Morgan Stanley disclosures all appear in the handout available in the registration area and on the Morgan Stanley public website. Very happy to welcome back to the conference, Sean Reilly, who is the CEO of Lamar Advertising, one of the largest outdoor advertising companies in North America. Sean, thanks for coming back.

Thanks for having me. Always a pleasure.

Always good to see you. I guess I'll start off with the same question I've been asking everybody at this conference, just to get it out of the way.

Sure.

Obviously, the last 2, 3, 4 weeks have been pretty wild in the markets. And obviously, people are focused on everything cyclical and advertising related. How should we think about the impact, if any, from what's going on out there on Lamar's [ functions ]?

Yes. Good question. So I'll attack it from 30,000 feet and get a little more granular. So what do businesses typically worry about? You worry about supply chain disruption. I don't really have to worry about that. The billboards will not fall down. Then you worry about workforce disruption. So I've got 3,600 employees, 200 offices around the country. Virtually all of those functions can be done from home if it comes to that, so not really worried about that. So then how diversified am I both across markets and customer base? Talk about markets first, no single market that we operate in represents more than 2.5% of our revenue. TheSo for example, let's say, Las Vegas somehow gets affected and becomes Macau, it's about 2% of my revenues, and I probably wouldn't even mention it on an earnings call. Customer categories. So Lamar has a huge customer base. At any moment in time, I've got 40,050 customers under contract. Average length of those contracts is about 4 months, so you've got that sort of longer-contract duration, which makes us a little bit different from other ad-supported medium. So for us, the way I look at it is it could create a macro headwind, in which case, we'll manage to it. I've been doing this a long time, and I've managed through 3 garden-variety recessions. We know how to do it. In a typical recession, we were not down more than 2%. And we've never been down in consecutive years, so the bounce back for us has passed.

And you reported not too long ago, fourth quarter, you gave some guidance for the year. And you talked about the first quarter being off to a strong start. Any update or change to that perspective?

Yes, no change. As you know, we're refraining from giving specific pro forma quarterly guidance these days, but I will give you some color. And the color that we had on the call was we're off to a fast start. I would describe it as strong. And our guidance for the year is extremely reasonable. Basic building blocks grow last year's pro forma core revenues 3%, and then layer in some incremental gains from political, which is off to a good start, thank you, Mike Bloomberg, and incremental gains from programmatic. And if you do all those things, you're up 3.5% to 4%, and you're at the upper end of our guide. That's the way we think the year is going to shape up and feeling good about it.

That's great. Great to hear. Thank you for that update. If we step back, I've had these conversations for many years, I do feel like the business, the industry has picked up in growth and market share gains over the last couple of years. And I know you and I have talked about them. I'd love to get your latest and greatest thoughts on where that's coming from and what's driving it from your perspective.

Sure. So Lamar-specific, there's a couple of things going on. As you know, we're predominantly local, 75% local, and we have huge market shares in our local middle market position. So what drives us primarily is share shift in local market media, and it continues to be the case that other local media are losing their audience. It's either dwindling or becoming fragmented. And some of that share loss comes our way. Most of it's going to Google and Facebook, but enough of it's coming our way that it...

Some of that changes. OUS, yes.

Yes. The other thing that's happening is our digital footprint is growing very fast, 12%, 13% total footprint. About half of that is same board performance and about half is added capacity. Last year, we did $400 million in digital revenues on a base book of business of $1.75 billion. And that is again bringing more share our way and also growing faster than the overall ad pie by a pretty big margin. So we've got, I think, wind at our back. We've got other companies in the space like Outfront that are likewise doing very well. The dynamic is a little bit different. Last year, the top 20 DMAs grew a little faster and that has been primarily the result of large tech advertisers driving up rates in those markets. We don't -- we have some inventory that looks like that. But it can only be a good thing when inventory tightens and rates goes up, it trickles down to us in Baton Rouge as well.

This is why I'm supposed to congratulate you on the LSU perfect season, right?

Yes. Joe Burrow, man.

You were asking for that. Yes, I was just chatting with Rich Bressler, who says hello, by the way, about their business. And one of the things that, at least he thinks, is helping their business is just what's happening in television. I don't know if local TV is something you think is maybe because of ratings, and viewership levels might be helping you.

I think it's the next shoe to drop. I've seen it. And what has happened to print, obviously, the Yellow Pages -- our fastest-growing and largest category is professional services. They used to use the Yellow Pages and some of that came our way. A lot of the display ads for local retail that used to go to the newspaper, some of that has come our way. And I think the next shoe to drop is local network affiliate television. Their business model, I think, is challenged. They still get a tremendous amount of auto, for example. And I think that some of their advertisers will soon get disaffected with the audience fragmentation. And I think some of that will come our way as well.

Yes. I mean it would seem that digital for you, with the ability to do stuff short cycle, maybe even day parts, really could help accelerate that.

Yes. We have done real well with amusement, entertainment, sports, call it the action type stuff. And sure, we're taking that from radio because radio used to be the place a concert promoter, for example, would go. If it's Monday and ticket sales are soft for the Saturday concert, they would cut a radio spot, get it up on Wednesday and run it through Friday and hope it would make a difference. Today, they're calling us, and if they're freaking out on Monday night, I can have them up on Tuesday morning, and it's instantaneous.

That's a digital phenomena. Yes.

Yes. And that's really helped us.

Great. That's helpful. So you gave us the building blocks for revenue growth. I want to come back to programmatic and political. Starting with programmatic, Sean, where is that investment process for you guys? And what does the product evolution look like as you look out over the next couple of years?

The way I look at it is it's not necessarily a, call it, product or even a technology, it is a channel that we used to not be able to tap, right? So you've got traditional ad spend. You've got digital ad spend. They don't necessarily cross-pollinate. They don't really communicate with each other. They come from different pots. And we were doing fine with traditional ad spend, but we weren't getting any of this because they couldn't buy us, right? So we developed an open architecture API that any DSP or SSP can plug into. Today, we have 4 SSP-DSP partners, Vistar being the largest, but we also have the Place Exchange, which is tied into The Trade Desk. We've got Broadsign, and we've got Hivestack. Vistar is the largest. And the way it works is fascinating. Again, it's a channel, not necessarily a technology. And there is a sales process in it. Vistar goes to a potential digital customer, ask them what they're willing to pay for an impression against a certain demographic group, right? Vistar lays -- comes back to us and says, okay, this can happen 2 ways. Either open exchange, that's the sort of last-minute auctioning-type thing or private marketplace. If it's a private marketplace, we reserve space and guarantee them a certain number of impressions against the demographic. And that has been a real wonderful experience for us because our CPMs are going up in that environment, in that private marketplace environment. So that's a good thing, and it's growing. Last year, we did $13 million in that channel, and we really just opened up the pipes last year. This year, we're budgeting $20 million. Now where we get visibility on that is from our partners because we don't actually have pacings in our programmatic book. We rely on Vistar and the Place Exchange, et cetera, to tell us what's working and what we can expect to come in next month, month after month after month. And they've been pretty reliable, predictable partners, and so we feel good about where they're telling us we'll finish the year.

And what inventory are you running through this? Is there sort of -- I guess, is there some sort of remnant equivalent inventory in the billboard business?

So it depends. If it's open exchange, that is a last second buy and can typically be unsold. I wouldn't call it remnant because it's all good inventory. But it might have -- it might be vacant tomorrow, right? So it's midnight tonight, what's it look like tomorrow? On the guaranteed reserved impression by -- through the private marketplace, that is a guaranteed space against a certain number of impressions for demographic. And we're not guaranteed to get the buy. But if it comes through, we get it at a guaranteed CPM, and we are guaranteeing a certain number of impressions at that CPM.

Right. So it allows you to control pricing a little bit?

It does. It does. And interesting phenomenon, private marketplace, we're getting slightly higher CPMs than we get at the local level; open exchange, slightly lower. When you blend the 2 programmatic, it's a slightly higher CPM on a blended basis. So it's good. And at this stage of the game, it's -- we can say with confidence that it's incremental net new dollars we wouldn't have gotten. Talk to me in 3 years when we're doing $150 million on it and I might not be so sure, but it will all be good.

Yes, yes, yes. Presumably, you're sharing some economics with all these partners. Is there an evolution of this business where you take more of this process inside of Lamar? I mean you guys obviously have salespeople.

Yes. So that's a great question. Our cost of sales through traditional channels runs about 7%. Our cost of sales through the programmatic channel runs 10%. I'm willing to pay 10% if it's net new, right, net new customers that otherwise I wouldn't get. But if I can't be assured it's net new, we really got to think through it because I can't convert a huge platform that has a 7% cost to a platform with 10%. So we're monitoring that very closely, and we'll see how it evolves.

Okay. And then the other one I wanted to ask about was political. So you touched on it before, I know Mayor Mike is out, but there's money still around.

Yes. So hey, we're -- one of the reasons we're off to a good first quarter start is because political this year is coming in more heavily weighted first quarter because of presidential. In the 2018 cycle, it was more second quarter and fourth quarter; second quarter, driven by primary contests, right, contested primaries; and then fourth quarter, contested general. All that being said, most of what we get year in and year out in a political cycle is not really national, it's more local. It's -- we're hyperlocal. Most of our political is local. So in 2018, we got $11 million. We're telling the world $13 million this year, I feel pretty good about that number. And incrementally, that's 8 more than we did last year. So the incremental contribution is about 8.

Got it. Okay. When you think about the industry growth and Lamar's growth over the past kind of 2 years and into this year, are there particular verticals or geographies in your business that have led the way? You mentioned top DMAs at the industry level. But for you, what's been driving the growth? And...

So we do have inventory in places like New York and Atlanta and Chicago and Dallas. And so we had a disproportionate lift in the major metros. I've been -- like I said, I've been doing this a long time, that ebbs and flows. Sometimes local is stronger than national, sometimes national is stronger than local. It just kind of does this. I think as I mentioned, in the larger metros, the big tech companies are seemingly willing to pay what it takes to get the inventory they want. And inventory has tightened up and pricing has gotten much better in the last 18 months for all of us for Outfront, for Clear Channel, for Lamar. I talked about the share shift, at the local level, that continues. And then, really, it's just let's really focus on growing that digital platform. For the -- for Outfront and Clear Channel, that means flipping airports and transit environments to a digital product, which they've both been doing very well. For us, it's traditional large-format faces that we're converting from analog to digital. For us, it's happening a little more slowly because we're bigger, we have a bigger digital footprint. But it's material. I mean you grow $400 million, 12% a year for a few years and suddenly, you're in a good place.

Yes. One of the concerns that's been out there is whether the whole ad market, including out-of-home, has benefit from some of these direct-to-consumer startups, and are we bracing for some sort of correction in that area? Is that something you see in your business at all?

No. No. I mean -- you mean Pets.com?

Yes. Exactly.

No, we're fine. First of all, we don't get a whole lot of that stuff just because of the nature of our markets. Our verticals, as you know, they're happy, they're healthy, and they're broadly diffused services. Restaurants, retail, hospitals and health, financial services, education, they're all doing well. I mean the only one that seems to be rocking a little bit is auto, and everybody knows what's going on there.

Right. On the digital board front, what is your latest view on sort of whether you want to accelerate the deployment of that or not? I know that's something you guys always manage. You really empower your local GMs to help you make that decision. Where are their heads at right now?

So I'm trying to get them to be more aggressive, particularly coming off last year. Last year, we only put up about 200 greenfield conversions, but we acquired 135. So we were doing a little bit of digesting. So I said, okay, guys, that's fine, but we need to do better this year. As you rightly said, that activity emanates up from the field. But I do kind of give them some targets. I think this year, 250 looks good. I'm trying to gear us to be a little more aggressive going into 2021. I think my goal for 2021, it's going to be 300. And that's going to take a little bit of getting us internally a little more geared to execute on that. And I'll have more to say about that a little later in the year, but it involves essentially incenting our local management to be a little more aggressive, and with that comes risk, right? Because I put every deployment through an ROI screen at corporate. We build every deployment into their budgets, so it could hit their pocket book if they don't hit their numbers.

Is that really the pushback, basically, the additional inventory that...

Yes. I mean let's say it's -- Tom's given a Little Rock and he goes into this year, and he sets his budget that assumes 2 new digitals, right? And he knows he can hit that. He knows the local demand. Well, I come in and say, no, I want you to put a 4, he might go, well. So I have to manage through that and decide the risk tolerance of deploying capital and how we want to do that. But we're good and faithful stewards of our shareholders' capital, and we're going to be careful.

Any supply chain concerns at all on the digital board front?

No, we buy from domestic producers, their largest supplier is Daktronics. They're headquartered in South Dakota, and they should be fine.

Okay. South Dakota seems safe. Although, who knows who's safe.

Yes. Yes.

So you mentioned that you guys were very -- you've been busy on the acquisition front. It's actually been a very, I think, nice part of the accretion and growth of the business. Is this a digestion year? Or do you think there's another decent pipeline in front of you guys?

Yes. So we bought 9 freestanding billboard companies across several states, spent about $700 million over the last 15 months. So last year was active and a digestion year. I wouldn't call this year a digestion year. We've done all the...

The digestion...

All the digestions happened and all the synergies have been brought to bear. There just aren't that many big ones that are ripe, right? The big one is defined as $200 million to $500 million.

Right. Meaning they're for -- like, for sale?

Right, they're for sale. Right, right, right. So we're going to go back to the -- what we do year in and year out. We, year in and year out, do $100 million to $120 million, $130 million worth of little fill-in acquisitions, $5 million, $10 million, $20 million deals. We don't release them, because in and of themselves, they're not material. But at the end of the year, we let you know how much we did and what it meant, and it's nicely accretive and highly predictable.

Are you guys getting better at this as you do more?

So we've always been really good at the acquisition game. And it's primarily because our acquisition team are our 200 general managers. It's not a team of...

Of Baton Rouge.

Of folks sitting around Baton Rouge. The acquisitions come up from the field. The field does the due diligence. They do the pro formas, and they have to live with it. What we do in Baton Rouge, me and Buster, is pricing and negotiating with sellers. One reason I would say we are a little better is just, as opposed to 20 years ago, the sheer scope and scale of our footprint makes virtually everything a fill-in, right? I mean if you go to our website and look at browse inventory and pull up the map of the U.S., the first thing you're going to see is over 200 dots. Those are offices, right? And they're in every nook and cranny of the lower 48. And then you drill down, and you'll see, wow, these guys basically have billboards everywhere. And that -- the breadth of those 200 offices allows me to run virtually any billboard as a fill-in, right? I don't need to add account executives, back shop folks, general management. I just buy structures, ground leases, advertising contracts and permits. And so that's what makes it a pretty predictable exercise.

And why -- I would have thought given the rising importance of digital, and I don't mean just boards, but everything digital, selling, your partnerships with -- the cost of the mom-and-pops is getting larger relative to a scaled player. So it would seem like that would shake somebody loose in terms of being ripe, as you say?

Interestingly, with the first advent of digital, we were seeing that because it was tough to be an independent and convert to digital. These days, there are technologies out there that do it for the digitals. I mean there's a little company called Fliphound. There's a little company called Blip. And they allow an independent player and with 5 digitals in a place like Orlando to...

Just plug in.

Plug in and get digital ads. So that being said, if you're an independent billboard operator, life is pretty good. You're making pretty good money, and it's usually a life event that has you pick up the phone and call Sean and say, "We're ready."

Right. How about the big consolidation? And I really just have to -- I'm contractually obligated to ask you about it every year which is the opportunity for one of the big 3 to come together, or maybe Dakota come into this market, is that something you think is increasing in likelihood? And is there a regulatory path towards something like that in your mind?

Sure. So I've got Outfront right here. And what I'm going to say there, because I love Jeremy, I think he's doing a great job. They have managed their business to make it too valuable for me to be able to afford. How about that as a complement? All right?

[ Even ] that out.

So yes, I mean, they're doing a great job. They're executing really, really well in the transit space. There's not a lot of kitchen logic behind the Lamar-Outfront combination because of the large market transit. It's not really what we do well. And also, like I said, they're not for sale because they're running a great business. Clear Channel is interesting. They have a different set of problems, mostly around their balance sheet and mostly around their international and China divisions. They are wrestling that to the ground. They run a great domestic U.S. business, and their management team is strong. Scott does a great job. The regulatory environment is incredibly hard to predict, not just for billboards, but anybody trying to go through the Justice Department is going to run into unpredictability. No one's been through lately with any scope or scale that would give us a road map that says this is what you have to do from a regulatory point of view. So that uncertainty creates a great deal of risk. So even if there was something looming, the regulatory impediments shouldn't be underestimated right now.

And I would have assumed not much interest in leaving the United States for Lamar.

No, No, for a variety of reasons. Number one, we're a REIT, right? We're domestic U.S. REIT. And the REIT rules get a little funny when you get into different countries. The business in some countries just structurally isn't as good a business. And I've had my finger scorched not in any major way. I thought Puerto Rico was safe. I think mean they do business in U.S. dollars. And suddenly, the economy goes to this way, and people are putting billboards up in front of mine, and I'm kind of -- so, I bought -- actually, I bought Outfront's business down there, and they were really happy to get rid of it. So yes, where we have a small presence in Canada, Canada feels safe to me.

Right. Okay. Let me ask you one more. And if there's anyone in the audience who wants to ask Sean a question, please raise your hand or else, I'll keep going. You guys did some refinancing work?

Yes.

So let's talk about the balance sheet. This interest rate environment just gets lower and lower. Where do you want the balance sheet to be? What's the right leverage for you guys? And how do we think about sort of the dividend growth outlook from here?

Sure. Balance sheet is pristine, by far the best in the industry. We're at a leverage position now that is very comfortable, give or take, 3.6, 3.7x. That refinancing was a record breaker by all accounts.

The new CFO has proven...

Here you go, Jay. Yes. You all are going to love Jay. He's a super guy, comes out of the REIT world. And I think he's going to help us speak to that investor base a little better than we have in the past. But anyway, so we did 10-year high yield, $400 million at 4%. We did 8-year high yield, $600 million at 3.75%, never been done by a noninvestment grade company in history. And then we repriced our $600 million term B 7-year interest-only at L plus 150. While our revolver, we upped to $750 million, and it carries a rate of L plus 150. We've got 1 more piece of paper in May that we could wrestle to the ground. It's $535 million at 5%. So depending on the environment at the time and depending on the piece parts we use to take it out, we could work a little magic there, too, so all good on that front.

Great. Yes, go ahead.

So both Outfront, which you presented earlier and yourself, you're taking market share from other mediums. As you do so, the other mediums are raising their game with respect to measurement and attribution. Just talk a bit about the state of measurement attribution within your industry, which historically has been hard. And if you improve that, does that lead to better pricing over time?

Yes, great question. So the industry initiative around that is called Geopath. It's our industry measurement organization. And they have gone beyond their measurement charge, and they've gotten into things like attribution and the like. I'm hopeful that it will create incremental demand. It's more important to the Outfronts and Clear Channels of the world because they have a bigger national presence in terms of their mix of business. Our local customers don't worry about that so much. They know who's driving by the billboard and they know what ZIP code they want to reach and the like, so it's not as important to moving our needle. But I'll tell you where it is really important, and it's really important in the programmatic world because we're guaranteeing impressions against a certain demographic, right? And so we have to be able to demonstrate that. Typically, the way we do that is not using Geopath data. We typically do that, at least Lamar does it, by getting off-the-shelf data sets, and that's a commodity now, and having our customers pay for it on a campaign-by-campaign basis. And to get a little more granular, we aren't even buying the data set, it's Vistar. And they marginally mark it up and sell it to the customer. That seems to me to be growing in importance and gaining in accuracy. And I think it's critical to do that well to grow the programmatic piece of our business.

All right. I'll take one last one, guys.

In the past, you've talked about different ad categories and verticals that are off of their peaks. Maybe you can refresh us on maybe a few of those that you think have an opportunity to go back to prior highs and those that you think are kind of gone for a while?

Sure. So for most of our verticals, and over time, they're remarkably stable. I mean they're the same percentage of our book of business and they're rank-ordered top 10 down to whatever. For most of our verticals, there can be a little cyclical swing based on what's going on in their world, like, for example, during the debate over the Affordable Care Act, the health care industry kind of pulled in a little bit because they didn't know who they were going to be talking to in terms of their ad spend. And then once that cleared up, they came back in and they've been super strong. So we see that little ebb and flow across verticals. Secularly growing, I would put amusements, entertainment and sports because of our digital footprint, it's very important to them, time sensitive, concert this weekend, right? For catch-all, largest category also growing fast is professional services. These are folks that used to use the Yellow Pages, think accountants, lawyers, mostly lawyers. Secularly challenged, I'm only really thinking about 1 vertical that seems to be wobbly and that's auto. And on one hand, I can see it growing because of the challenges for TV that we talked about. On the other hand, their business model is getting challenged because most of our business is local dealers. So when I say auto, it's not General Motors, it's thousands of General Motor's dealers. And that business model is getting challenged.

What about real estate?

So real estate is growing. It's -- I think it's worked its way up to about 4% of our book from 2% at the depths of the great recession, so it's just sort of gradually working its way up.

Okay. Well, we're out of time. Sean, it was great to see you. Thanks for coming.

Great. Yes. Always a pleasure, thank you all for listening.