Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

For those of you who are just joining, thank you very much for joining us today. I'm Alexia Quadrani, the media analyst here at JP Morgan. I'm so pleased to welcome Sean Reilly, the CEO of Lamar Advertising, to our JP Morgan TMC Conference here. Lamar is one of the largest outdoor advertising companies in the U.S. that operates billboards, logos, signs and a little bit of transit advertising displays as well. And thanks so much for being here today, Sean.

Great. Thanks, Alexia. Glad to be here.

Let's start off, kind of just big picture kind of on the advertising market. Last year, we'll start up a little bit in what happened in 2019 and kind of get up to what's going on now, which is obviously unprecedented. Last year, the advertising market strengthened with the recovery in certain verticals. I guess what was the momentum that you saw late in 2019 and the beginning of the year, just in general, for out-of-home?

It was, just general, momentum across the board with a little bit of extra kick from programmatic and political. Absent COVID, we were on our way to one of the best first quarters we've had in my memory. I mean, it was just fantastic. Of course, COVID changed everything and we figure that the last 2 weeks of March, when the world stopped, cost us, let's call it, $5 million or so in unwritten business that we would have had. But we really had a lot of wind at our back until the last couple of weeks of March.

I guess it was -- was it really sort of the middle of March when you started seeing slowdown and it all kind of hit at once? Or was it just certain verticals at first that were pulling back?

So it was state-by-state. As soon as a state would shut down, we would get a phone call from, let's call it, a local jeweler or a local restaurant and they say, hey, I mean, my doors aren't open. Can you give me some relief? At the local level, typically, that relief came in the form of suspended or flexible billing. So we just would say, okay, look, we got this. Rather than cancel your contract, let's suspend your billing for the rest of March and for April. We'll see where this thing is going. And we'll take that billing, and we'll amortize it over the remaining term of the contract, which they were very amenable to. And that wasn't a play we had in our playbook during the Great Recession. In the Great Recession, there was either cancel or not. And when you cancel, that means when they come back, you have a whole other rate discussion. If you suspend the billing, you don't have to have a rate discussion because the -- you just go back to the terms of the contract. So we did that wherever we could, and I think it's going to help us maintain rate integrity going forward.

When you say you did that wherever you could, were there different conversations? Were they really just did -- was it your choice, you didn't want to suspend? Or was it their choice? They just wanted, sounds like, I guess, what made a difference in discussion?

Sure. Whether it was national or local, the national buyers have slightly different cancellation clauses, and they tend to be a little more aggressive in booking them in times like this. Our local customers, they're our neighbors, right? We're just going to have a different kind of conversation around it. They would call up and say, I need to cancel, and we would steer them to the suspend option, and they would take it, in many cases. And the other thing that's different this time around than last time around, it was clear, the fourth quarter of '08 and all of '09, that this was a long deep recession. It -- we don't know how this is going to play out, but we do know how it -- the shutdown is going to play out. It's a certain window, right? And we can navigate that window with a sense that what's on the other side is not necessarily going to be a long drawn-out L-shaped recession, could be a V, could be a U. But it doesn't feel like that sense of dread we had back in 2009.

I think that bodes well for pricing. I mean, correct me if I'm wrong, but I think I remember in 2010, 2011, you were sort of trying to get yourself back to your pricing levels in this sense, at least you're starting off at a better point. I mean, there's no guarantee, but...

Yes. Yes, we get a sense that we're not going to have to retrain our customers on the value proposition, particularly with where we see traffic going. I mean, traffic is rebounding rapidly.

Yes. Well, let's talk about that for a minute. That the -- what states are you seeing, I guess, beginning to come back in terms of where you're -- you see have the most concentration? And where it is still lagging? And anything you can give any color on traffic? I know you talked about a bit on the earnings call, that would be very helpful.

Yes. Yes. So first, let me direct anybody who's listening to our website. You'll see on our Investor page, 2 things: number one, a map of the U.S. with real-time traffic compared to last year for every market in the country. And it's very eye-opening because you'll be stunned at how many people are out and about and driving across the country; and you'll also see very quickly that it's happening in small and middle markets and in the heartland of our country, much quicker than it's happening in the major metros and the coastal areas and places that were hit harder by COVID. The same can be said of sales activity, just general commercial sales activity and advertising activity, and touches that our account executives are able to make in terms of sort of reigniting our customer base. Small and middle markets are -- it's just happening faster. So it's not necessarily geography in the sense of what states, it's more market size. And as you could imagine, places that were hit far less hard by COVID.

Just looking at sort of your Q1 performance, it seems that 3 of your top verticals, I think it's services, hospitals and restaurants, I think are showing resilience in this environment. Can you elaborate a bit on that?

Sure. Services is primarily lawyers and other professional services. It's actually expanding slightly, that category, into home services that, as you could imagine, are things like cleaning services, pest control, office cleaning services, they're coming out to brand themselves because the brand matters now for a cleaning service. If you're a restaurant or a retailer and you want to make people comfortable that your establishment is safe, you want the right truck sitting in the parking lot being your sanitation -- sanitizing company. So we're seeing that. So services is fine and is going to be fine. Health and hospitals, they stuck with us the whole time. They spent a lot of their spend on telling people to stay home, congratulating frontline workers and thanking them, recognizing them. And now, they're shifting to elective procedures because there was a hiatus on that. So they need to tell the world, okay, now we're open for that knee replacement or whatever it is. And we're seeing sort of the smaller clinics and LASIK shops and cosmetic surgery things come out. So I feel good about that vertical. Restaurants, most of our restaurants are, as you know, fast food. It's quick service, it's McDonald's, Burger King, Chick-fil-A, and they're fine. As a matter of fact, I think they're going to increase their spend with us as America hits the road this summer, which I'm firmly convinced we will. But there is one portion of our restaurant business that is going to take some care and feeding, part in the pun. We do have sit-down, table-cloth restaurants, right, that are independents. And we help them as much as we could, telling the world, and we did this gratis, in many cases, telling the world that they were open for curbside and they were open for takeout, but they can't make it that way. And they can't make it at 25% occupancy. It's just the business model doesn't work. So I'm keeping my fingers crossed, they're beginning to pay us for our digital space now to tell the world they're open, where they're opening up in states. But the real question is, do they make it to the other side of this thing? And that's hard to predict. So that's restaurants. Financial institutions are going to be fine, particularly community banks. They actually did real well with this PPP thing and touched customers in ways that they hadn't before. So I feel good about that vertical. I feel good about education. Interestingly, high schools and colleges need to tell their potential students that they're actually going to be open in the fall, and you need to enroll and they're also touting their online capabilities, as you could imagine. So that vertical is going to be fine. The challenged verticals, amusement, entertainment and sports. Obviously, the country is going to take a while before we're comfortable in large venues. A lot of this is about concerts. And again, sort of large athletic venues. And that's going to take a while. That could be first quarter, that could be second quarter next year before we're all really of a mindset to do that. I will say one thing. For some of the spring events, think the masters. They've been rescheduled for the fall. So we may see a little bit of liveliness in that vertical as events that were supposed to happen now happen in the fall. But we'll see. But I still think that one's going to be a little bit longer in its recovery. Gaming is going to also be a little longer. Vegas is an important market for us. And that market is going to struggle for a while. They have not announced openings yet for their casinos. And I sense that it's going to be a little longer for them than the regional casinos. Now 90% of our gaming business is regional casinos, Gulf Coast casinos, Indian casinos, Riverboat casinos, and those venues are beginning to announce they're opening up. And they need us because people don't fly to those places. They drive to them. And increasingly, people are going to drive, and fewer people are going to fly. So it's going to take longer for that vertical, but I feel good about where it's going to land. So yes, I mean, that's a quick walk through the traditional verticals.

I guess if you were to look at -- and you may not have an answer to this, sorry I apologize if it's coming out of black field, but if you were to look at the verticals or your client base and not the ones that are going to potentially be delayed, like you said, like amusements or entertainment. But the ones that the sit-down restaurants that may really be in risk of maybe not surviving, have you guys internally taken a look and given us sort of a ballpark of what percentage of your customer base that might be of your advertising revenue?

Yes. So it falls primarily in 2 buckets, a little bit in restaurant, as I mentioned. So restaurants, let's call it, 10% of our business, and I'm going to say that the sit-down is maybe 20% of that 10%. Kind of ballparking this a little bit.

Just an idea.

Yes. And the other bucket that it falls in is retail. And retail is about 8% of our book. And that is predominantly main street USA. It's thousands and thousands of jewelry stores and dress shops and shoe stores and knickknacks and this and that. I think in the macro, if we're vulnerable to a bad, bad macro, that's where we would feel it the most. Now there's going to be a flurry of activity in the next month or 2. Those stores are just going to use us to tell people they're open, right?

Right.

But it's really the longer fourth quarter, first quarter of next year, that we just got to keep our fingers crossed and hope that the PPP does what it was supposed to do and keep some of those guys in business.

And then just looking at national versus local, I was actually surprised that hearing you explain it all and listening to you on your earnings call as well. It's clear why it's happening, but I usually always thought that national seemed bit more resilient than local in a downturn. But clearly, the local here is the one that's proving the resiliency. I guess do you agree with that? And is it simply because that of the concentration, where the COVID is in the bigger cities? I guess, any thoughts on that?

Yes. There's a little something to that, Alexia, in the sense that national spend tends to skew to the top 10 DMAs, and the top 10 DMAs shut down sooner. We're affected more dramatically, particularly New York, of course. And so when they turned it off, they turned it off, right? Whereas if you're in Little Rock, Arkansas, it's almost like nothing ever happened, right? And fortunately, for Lamar, 80% of our business is done in places like Little Rock and Baton Rouge and Tallahassee and Boise and places like that, that quite frankly, didn't have the same impact, and people really never stopped moving around. They were just -- they were out and about and doing stuff.

Looking -- I think you touched a bit of this on the earnings call, but looking into the June quarter that we're in and even further out into the September quarter. What are you seeing now in terms of activity? I guess, how has it trended throughout the quarter?

Sure. So the world stopped late March and through about April, let's call it, the third week of April. I mean, nobody was doing anything. Right around the third and fourth week of April, we started seeing business being written for the back half of the year. In other words, our customers were beginning to think, okay, I know where this is going. I need to advertise, and I'm going to -- so I'm going to start booking with Lamar for September, October, November, December. That activity has picked up as we've moved through May. Now one thing I did stress on the call is May is going to be slightly worse than April. And the reason for that is the most important selling period for a month is the month before. And because no one was writing business in April, that really adversely affected May. Not down 40%, but a little more than down 20%. It also has a residual impact on June. We're hopeful that June is better than May. But we still have work to do. You heard me say many times, you have to sell in the period for the period to make the period. And the next 3 or 4 weeks are just critical to making June. As we look out further, we're writing a good bit of business. We're not writing -- for example, yesterday, we wrote business that carried all the way to Christmas, right? And every month remain. But not quite at the same pace as last year. So we're still making up ground on last year's pace, but I'm optimistic that we're going to be fine in terms of selling for the rest of the year at a good enough pace to have the kind of year that is a little better than you thought about a month ago.

And would it be fair to say, given limited visibility that Q2 is the trough and that it is quite even possible you could see a positive quarter before the end of the year?

That would be pretty amazing if we could write enough business to be positive in the fourth. We have a couple of tailwinds. We have political going in our favor. And I'm cautiously optimistic that programmatic is going to be very dynamic in the fourth. It all but disappeared in April because we couldn't guarantee impressions. It's the only channel that we actually guarantee impressions, and we couldn't measure to do that. Plus people were going to buy anyway, and that is the shortest cycle sale we have. But I feel good about that now. Now being -- don't hold me to being positive in any quarter this year. But being less negative than Q2, I think that's a very, very realistic aspect.

Okay. When you look sort of longer-term at the mix of national versus local, or just national versus local buckets itself, which one do you think is going to be the outperformer looking a few years out? I mean, I guess does this crisis change anything, is what really I'm trying to ask.

I really don't think it changes anything other than if there was a trend in local media consumption before COVID, COVID accelerated it, right, so cord cutting, over-the-top TV trends. Linear television was phasing out slowly. This will accelerate that. And to the extent, it's local networks affiliates that get hurt that narrows to our benefit because part of that local spend will come our way. Unfortunately, the trend in newspapers is going to be accelerated. I think this is the -- for many, many, many small and middle market newspapers, this is the last straw. I mean, this is going to be big shaving. So in that sense, our space becomes more valuable at the local level. I've been doing this a long, long time and through good times and bad and weird times, and this and that, the ebb and flow of national and local is -- the only thing you can say for sure is that there's a bigger beta in national. It tends to do this big beta. Local tends to be more stable. But across time, their growth rates are basically the same. Man, I've seen that for 30 years, and I don't think this is going to change.

I know we were talking about this before we started the broadcast here about this probably real pickup in driving places versus flying when we get into sort of the next stage of the reopening. Do you think your advertisers are recognizing that and embracing that, that there could be actually even maybe heightened traffic in some markets versus pre-COVID?

Yes. As a matter of fact, we're seeing it slightly already. For example, we just got a buy from MillerCoors. Sometimes they tend to be top 20 centric. They now understand that people are -- way more people are out in the heartland in terms of driving around. We have some markets where traffic is up 20%, 30%, 40% in some of these places over last year. And so they realize that and they're skewing their buy to the more middle markets and heartland markets, if you will. So we're seeing a little bit of that. The summer, it's clear to me for a variety of reasons that we're going to set a record in terms of miles driven in America. People are not going to fly to Europe. They're not going overseas. They're not even probably going to fly domestically to those destination spots they used to fly to. They're going to drive. And there are going to be different destinations. It may not be Disneyland in Orlando, but it might be Hershey, Pennsylvania to go to the Hershey Park or it might be the Grand Canyon or Yosemite, but it's really, really clear that people are going to be on the open road. And that's an ecosystem that's in our DNA. That's where we were founded. And we're going to be there for them. And I think that's a clear trend that is coming out of this. Another trend is less mass transit. Fewer people are going to be taking mass transit. They're going to be driving into work. We don't know how that commuter pattern is going to play out. Are they driving in 3 days a week? Are they driving in 1 day a week? Are they permanently working from home? But we do know this, when people work from home, they still drive a lot. They really do. They just spend that -- within that 3 or 4 ZIP codes of their house, and there's a lot of our billboards there. So lots more people on the road, and that is only good for us.

Yes. I know. Just driving to the grocery store for me is a big thrill of day at this point. I get out of the house. The digital billboard conversions, I wanted to touch on that. In '19, I think you organically converted over 200 digital billboards and added, I think, 130 from acquisitions. I guess, could you talk about your appetite for -- you had seen pre-digital boards amongst sort of your customer base, how that may have changed at all during this crisis?

So yes, we were knocking it out of the park with digital in the first quarter. Our same-board performance was better than the overall platform. And then we ran into COVID, and we have dramatically curtailed our CapEx, including our digital growth CapEx. The good news is once we see the right light at the end of the tunnel, we can turn it on like that. We turned it off like that, we can turn it on like that. And it's my hope and aspiration that on our November earnings call, I'm announcing many, many hundreds of new digitals planned for 2021. But for the balance of this year, we're going to stick to the game plan. Our total CapEx is going to be $58 million. For the remainder of the year, it's only going to be about $30 million. Some of that is some new digital growth CapEx that was in the pipeline that we had to finish up. But as you can see, that's a pretty dramatic curtailment from the $130 million we thought we were going to spend this year.

Are you seeing certain verticals that are -- that maybe didn't use out-of-home before that are embracing it a lot more because of digital?

Yes. We're early in the come back here, but there are some interesting customers that are popping up. Cleaning services, as you could imagine, they want to brand themselves, as I mentioned. And so they're popping up on my drive from my house to the office this morning. I saw Jani-King, which is a cleaning service up on the boards and the Clean Team, which is a another clean service. So they're coming out. Pest control and the like. We have a little category, it's #19 on our list, and it's basically home improvements. I imagine that's what people are thinking about there. We're seeing activity there. But for us, what's really going to bring us back and make the difference between a good solid recovery year and not, it's going to be the stall works. It's going to be the traditional verticals that have always used us. And the question is not whether they want to use us, the question is whether they're financially viable. And that's just a macro question that's unanswerable right now. And hopefully, this is a V or U and not an L recovery.

Okay. I've got a ton more questions, but I did want to tell the participants that are listening. If they want to ask a question, the way we're doing it is just sort of typing into chat. And I can then see those questions and I could go ahead and ask them. So if you guys have questions, just go ahead and type them in, and I'll keep an eye out for them. On the -- I just want to jump on to the expenses as well because we haven't touched on that. You guys historically have always done such a great job on the cost side. I guess, how much do you expect to be able to lower expenses to the cost cutting measures? And also maybe touch on your building. Would you renegotiate some of your lease payments with your land owners during this crisis?

Sure. We got pretty granular on the call. So our pro forma expense base for 2019 was $980 million. We -- for the balance of the rest of the year, we'll cut approximately $50 million out of that expense base or about 5%. The biggest number is executive and management bonuses. That's about $16.5 million. The second biggest number is the, as you mentioned, our lease portfolio and savings we can realize there. It's our largest expense. Some of it is just hard work, renegotiating leases, actually taking down billboards that are unproductive. You might ask why do we even have unproductive billboards, but even in good times, there's a certain small portion of our billboard portfolio where they're not productive billboards, but strategically, they can be helpful. They can either be helpful in negotiating with cities over take downs for digital, right? Take down these over here, and you put up a digital over there. They may be helpful in a strategic sense of blocking out another billboard from going up because of the way billboard regs work. So on a lease portfolio expense base of about $300 million. We've identified about $20 million in leases that we can take down, and you would never notice it, and it would reduce our lease expense by that much annualized, right? It won't all be realized this year. So there's that piece of it. Some of our leases are revenue shares, as you know. So that's kind of flex with billing. And some of the savings that we spoke to on the call are a result of that. And then we've -- we have been successful in negotiating our minimum annual guarantees for our airports and our transit franchise agreements to revenue-share only. And in some of our transit operations we're going to be fine because it's not advertising targeted at the ridership. It's wrapped buses that go around the market and are seen by everybody, so buses going around Albuquerque or Portland or Salt Lake City. That business is going to be okay. It's the transit operations where it's geared towards the traveler, the person riding the train, where it's difficult. Fortunately, we only have one agreement, one market like that, that's Vancouver, and Vancouver is going to struggle. There's no question about it. And then our little airport division is going to be severely challenged, right? Nobody is flying. And look, the airports know that. They know that there's no traffic, right? There's no audience to sell ads into. And so they're being cooperative in terms of helping us out on the minimum guarantees.

I've got a question here from the participants. Do you think any of Clear Channel's assets will become available? And if so, would you be interested? And maybe alongside with those -- that question, maybe you can also just touch on the high-yield deal you just did and because it might be related.

Sure, yes. So we did a $400 million bond issue yesterday, and the execution was outstanding. I still can't believe it. The -- it's an 8.5-year piece of paper that we're paying 4.78%, which is -- that's the kind of rate you would get in good times on a good day. So in tough times, that was really amazing. So $400 million, we're going to take the proceeds and pay down our revolver to 0, we have a $750 million revolver, and we'll have about $270 million in the bank. So we'll have over $1 billion of liquidity. And that's just a great -- that's a great place to be. I mean, I'm convinced we're going to emerge from this as the strongest or one of the strongest, if not the strongest, companies in the industry. And so that means, hopefully, opportunities will come our way. Now specifically, as regards to Clear Channel, they -- they're going to go through a rough patch. And I don't know where it ends for them, but their leverage is going to tick up. I really admire their management team, and they are doing all the things that you would do that would suggest that you're going to be around forever. So I'm not looking for anything near-term there. However, there are some independents that are pretty decent size that could get in trouble as this thing unfolds. So that might provide a little opportunity for us. And then finally, I would note, while there is a little negative carry in having $270 million sitting around, we won't have to have that sitting around for long. If we can't identify a better use, we can always pay off the 2023s, which are callable one-on-one right now.

Okay. Great. I know we only have a couple of minutes left. I just wanted to ask you a real quick question. Do you expect any longer-term changes, I guess, to result from the COVID-19 impacts just on the outdoor industry itself?

So there's going to be some good if you're in the traditional billboard business. I think, again, it's clear, there's going to be more cars on the road, and that can only be good for us. There's going to be some bad, if you're in the out-of-home business and it's large market transit. That's just going to be -- that's going to be challenged. And it's going to take a while before we feel comfortable taking mass transit again. Hopefully, it's not that long. Hopefully, we will get a vaccine and life goes back to normal. But I suspect that long run, more people are going to drive. And as I mentioned, even though you're "working from home," you're not necessarily staying inside. So interesting, I don't -- in New York, for example, New York traffic, at its worst, was down 80%, and it's now recovered to about down 60%, right? So I'd say there's been a 20% jump in traffic. You can't get a parking place in New York, right, because people are driving in. But the other thing that's happening is a lot of our inventory that we call New York DMA is actually Northern New Jersey. And there's traffic all over the place in Northern New Jersey. It's just people again are spiraling around their own sort of couple of ZIP codes, but they're still going by our billboards. So that's good.

Great. Well, we are out of time. I want to thank you so much for doing this. I really, really appreciate it. And thank you, everybody, for listening.

Always a pleasure. Thank you, guys, and thank you all for hanging in there.

All right. Stay safe.