Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

Hi, my name is Daniel Powell, and I work in equity research at Goldman Sachs. Really appreciate everyone being here for the session with Lamar today. Especially want to say thank you to Sean Reilly, President and CEO of Lamar Advertising, for being with us here today during such a busy time. Thanks so much, Sean.

Oh, Daniel, thanks for having me, and happy to be here.

So maybe a good place to kick things off and get started. 2020 has been quite the year, as you and I were talking about a little bit before the session. A lot has changed in a very short period of time. So maybe just a good place to start, particularly for investors who might be new to Lamar, is maybe describe to us what do we see at Lamar today, what is it that you and the leadership team built that we see at Lamar.

Great, and good question to start with. We certainly have had some turnover in our shareholder base, so I'm happy to start with sort of what makes Lamar unique, and so what I'll start with is our footprint. We just absolutely dominate in middle-market USA. So in 80% of our footprint, we have 80-plus percent market share in these local DMAs. So while we are in places like New York and L.A. and Atlanta and Chicago, our bread and butter and what makes us unique is the absolute dominance we have in places like Little Rock and Baton Rouge and Tallahassee and Boise, Des Moines and places like that. That insulates us somewhat from stormy weather, if you will. And certainly, in the post-COVID world, our smaller- and medium-sized markets are returning to normal much faster than our markets that are in the sort of top 10, 15 DMAs in the country. So we'll start with -- we have a tremendous moat around our business. Highly regulated industry that protects those market shares that I described, regulated at the federal level, the state level and the local level. And by the time you layer all those over each other, it's -- you're playing 3 dimension chess to try to get a new goal, which is good for us as the incumbent, right? Heavily local in our mix of business. 75% of our business comes from local customers, tens of thousands of them that are touched by almost 1,000 account executives at the local level. So 75% local, 25% national. The COVID experience has been such that national has fallen harder and has taken longer to come back. Our local customers are coming back faster. And as I like to say now there, most of our verticals are normalizing in our book just the way they traditionally have. So it's a great business model. We gen a lot of free cash flow. We have the best balance sheet in the industry by a long shot. We were, thanks to Jay and his team, as positioned as well as we could be to go into this thing. As a matter of fact, we just called $535 million worth of our bonds. Because we feel that good about our prospects going forward, we didn't feel like we needed to hang on to that extra liquidity and used our cash and a little bit of our revolver and tapped the capital markets and took out those bonds just recently. The balance sheet stuff we've done this year is going to dramatically reduce our interest expense next year. It's going to go from $135 million this year to about $115 million next year. Pretty dramatic improvement. We're a REIT. And while it was painful to have to announce that we were cutting our distribution, unlike a lot of REITs, we didn't eliminate it. We reduced it, and we fully anticipate as we recover increasing it off that $2.50 base. So for people that aren't all that familiar with REIT economics and REIT accounting, the key metric is AFFO per share, and from that is derived your distribution requirement. And this year, if it plays out like we think it will, our payout ratio is actually going to be less than it has been historically. So that suggests we have headroom to raise it going into [indiscernible]. So that's my expectation on 2021. It's too early to start opining on 2021, but others have so I'll quote them. Most -- as you know, most of the pundits that try to predict what ad spend is going to be are seeing an up year next year. A number that seems to be bandied about most is about 7% 2021 ad spend over 2020. If that's our backdrop, then we're going to have a good year. So again, that's not guidance, and I'm quoting somebody else. But if that is our fate, then we're going to do just fine.

Understood. No, that's all really helpful. And definitely, a couple of things we want to sort of dig into there as the session goes on. Maybe over the next couple of months and quarters, I know there's a lot of macro uncertainty out there. But as you sort of alluded to in some of those industry forecasts, things look like they're getting better, things are starting to normalize. What are sort of the key priorities in place for Lamar? Recognizing with 80% market share in 80% of your market, some of that is just doing what you do well. But any key priorities you would call out as you sort of navigate some of the uncertainty in the market here over the next couple of months?

Sure. So I think the first thing is beginning to play a little offense instead of playing defense. And in Q2, we did that with our balance sheet. And we are beginning to do that by freeing up some CapEx dollars and maybe some acquisition dollars and feeling confident enough in what we're seeing to, again, as I say, play a little offense instead of playing defense. So I would say that's the first thing we're doing. The second thing we're doing is making sure we execute on a couple of fronts. We have seen a nice rebound in our programmatic book of business. It evaporated to nothing in April, May, June. And this month, we may well do as much business in September of '20 as we did in September of '19. So I'm feeling really good about the rebound in our programmatic business. And that should bode well for the fourth quarter, and we need to make sure we continue to execute on that. Political is also a nice tailwind. Political book of business is pacing substantially ahead of the last cycle, and that's going to help us as we go down the stretch. I said on the call that I felt like we had a shot at the upper end of the guidance we gave for AFFO per share, and I'm feeling even better about that now. I feel like we have a good shot at the upper end. So the tone of business feels good. Obviously, there's some weak geographies still out there, primarily in the West. Vegas is still struggling. Southern California is still struggling. Seattle is struggling. But much of Lamar land is normalizing and feeling really good going into 2021.

That's good to hear. So in early August, you laid out on the earnings call some of the sectors that were doing really well like health care, home improvement and mentioned some that are still challenged. Since then with some of the back-to-school dynamics and more normalization, have you seen any changes in those conversations with those client groups or any insights you're getting from those groups?

Yes. I would say, as I like to describe it, most of the verticals are normalizing. Things are actually better in that regard than actually when we were on that call. The one thing that hasn't changed is local is still substantially stronger than national. And so to truly rebound, we need a more robust national ad spend picture. And then we still have that vertical out there that's very important to us that is still struggling, which is amusements, entertainment and sports. That's for obvious reasons, we're not getting together in large gatherings. And for -- again, for us to really rebound and have a robust 2021, we need to have that rebound as well because it's not just event organizers or promoters or participants advertising with us, although they do. That's that 80%. It's also the ancillary economic activity that those things generate. Without the big trade shows, Vegas won't be Vegas, right? And again, it's not just the electronics show participants or promoters advertising with us, although they do, it's all the ancillary economic activity that happens in Vegas around it. It creates a backdrop for better, stronger customers coming our way. So that needs to rebound. Again, for Lamar, in general and out-of-home and -- or I should say, out-of-home in general and Lamar in particular to fully rebound, we need to have a rebound in amusements, entertainment and sports.

And it sounds like that falls a little bit on the lines of small versus larger markets. And I know there's been somewhat of a split there. The national decline was sort of nearly 2x what you're seeing at the more local level. Has that gap started to close, widen, stay the same?

I think it's slowly closing, and I've got some hopes that Q4 national is going to come on a little stronger. We've had some real success stories on the national front. Insurance has come on real, real strong, GEICO, Allstate, State Farm. So they're -- they've been with us in numbers that are larger than last year. Beverages, same story, doing strong there. But there's a huge category that just hasn't come out of this thing yet, and that's entertainment. And now I'm not talking about events, I'm talking about movies, right, and streaming video. And they're big buyers, and we need them to get healthy. We need movie business to get healthy again. And then finally, one thing we are seeing and I think a little recovery in is big tech. This is anecdotal, but Lamar has the largest painted wall in the world in New York City, and it's that big wall right outside of Penn Station on 42nd Street. And Apple just bought it, and they're paying a great rate and they committed through the end of the year. That's anecdotal, but I mean that's a big commitment. You're talking north of $200,000 a month to rent that wall. So that's -- again, it's just a little data point, little anecdotal, but it's good to see.

Right, absolutely. Is there anything from those names that might be anecdotal? But are you getting a sense that there's more optimism heading into Q4, which just seasonally is a good period for advertising? Or are people still kind of in wait-and-see mode and not sort of ready to be more optimistic about a Q4 in 2020 yet?

So here's what John Miller is telling me, he's our Head of National Sales. It's -- he says, activity, and that's just RFPs out there, proposals, inquiries, inbound, just activity, right, not necessarily contracts, is almost back to March levels in terms of just activity. So there is some buzz going on out there on the national side. However, because they're not -- Apple notwithstanding the big painted wall, because for the most part, they're not targeting the larger DMAs, the dollars aren't as much, if that makes sense to you. So the good news is activity, national ad spend, national agencies, national brands are beginning to find their voice and decide where they want to put their ad spend. That's the good news. On this sort of still challenging front, the dollars aren't pouring into -- as much into New York, Chicago, L.A., et cetera.

Understood. No, that makes a lot of sense, but good to hear on the activity levels that you're starting to get back to some of the pre-COVID levels. A bit earlier in the year, you took some restructuring actions. I think about $60 million in cost savings was what you're sort of targeting. Could you sort of help us understand where those costs are coming from and sort of how that positions Lamar on the other side? Are there areas that you'll need to reinvest in as things recover? Or are those more permanent and that's where they're coming from?

Great question. The news there is good. It's actually better than we expected. It looks like we're going to wring about $75 million out of our cost OpEx base, which is a little better than the $60 million we put out there. For next year, assuming next year is a pretty decent recovery year, let's use the 7% '21 over '20 that the pundits are throwing out there, if that happens on the top line, then about half of that $75 million comes back into our expense base, basically because it toggles around the top line, right? Sales commissions, revenue shares both in transit and some of our ground leases for our traditional billboards, cash bonuses for general managers, all that sort of stuff, that's going to come back. But about half of it won't, so we'll be coming off a substantially smaller expense base for '20. Again, about half of that $75 million comes back into the expense base. And then on top of that, you'll have 1% to 2% of our normal inflation in our expense base. So armed with all of that, you could pretty -- get pretty close to what our OpEx is going to look like in 2021. I just gave you a lot of information that you could probably get pretty close if you're modeling us. So that's good news, right? Because if we do grow the top in that 7% range, the bottom will grow double digits, if you do all that, right? So I think we're positioned well in terms of how we've positioned our OpEx. On the CapEx side, we dramatically curtailed our CapEx, both growth and maintenance. I've got a working number that I'm kind of throwing out there for next year. This isn't guidance. It's just sort of how are we feeling now. I'll have a better number in November when we're on that call. But I'm thinking $100 million in total CapEx next year, $50 million of it growth and $50 million of it maintenance, and that should take care of us. My team may come up and they may say, "Sean, we cut it back to the bone this year, so you got a little catch up next year." So maybe it's a little bigger than that number, but that's my working number right now. On the growth CapEx side, again, not guidance, just sort of thinking through if we've got a good macro, what should we expect to do in digital deployment? I'm thinking there's some pent-up demand from this year, the digitals we didn't do this year, plus our normal run rate of a little north of $200 million or so. So that number could be around $300 million. And that would sort of -- that sort of feels right, right now. It would require that we have a little macro tailwind next year, which it isn't a great leap of faith to think that we can't grow 7% over what happened in Q2 and Q3 and -- so anyway, that's -- it's way too early in the game for me to have gone through all that arithmetic with you, but I just think in a COVID world, I just owe you guys all the information I can give you on what we're seeing. And just keep in mind, that's subject to change.

No. That's all extremely helpful. Great. Stuff is changing every day, but always helpful to sort of hear the latest thoughts. Maybe coming back to something you mentioned earlier in your priorities about going on the offensive a little bit more. You're comfortably within your leverage covenants, the May deal priced well. If things begin to recover more meaningfully, could we see you getting more aggressive and leveraging up to go after opportunities? What might an opportunity look like in order for it to be worth you going down that road?

So we still want to get back to where our leverage was, around 4x. So -- and by the time -- the best way to get there is to operate your way there, right, grow the EBITDA so that just sort of happens organically. There may, however, be a little bit of pressure to pay down a little debt. So I think if 2021 plays out the way we hope, I think it's a real good conversation for us to have with shareholders about what we ought to do with the excess cash. Because it could well be that shareholders say, "Look, I don't want you paying down debt that's costing you less than 2%. You can get a better return going and buying billboards." And so that may well be how that conversation goes. I don't think our strategy, if you will, has changed because of COVID. I think you're going to see us play the acquisition playbook in a very familiar way. In other words, you've got this long tail of independents, small transactions. Very easy for us to accretively deploy $100 million, $120 million, $150 million doing those cookie-cutter tuck-in acquisitions, right? I think you're going to see that as we turn the corner into next year. There may be some larger independents that kind of get in trouble through this whole experience that were maybe a little too levered going in. If you've got 7x leverage in March, by the time December rolls around, that could be 10x, right? And that's a troubled place to be, and I do know there's some independents of decent size that have found themselves there. So that might create an opportunity.

No, that makes a lot of sense. That makes a lot of sense. I guess as -- we talked a little bit about the tailwind from political. How should we think about the political calendar in this year, acknowledging it hasn't been like most other election years? But it sounded like from what you're seeing, it's tracking a little bit better than the last cycle. So just curious to hear what the implications would be for Lamar on a local versus national level.

Sure. Most of our political is local, although we did get some interesting presidential buys this year just because it was such a -- was and continues to be a rather extraordinary year. So last presidential, we did $6 million or $7 million in total political. So that was 2016. 2018, we did $11 million, and it was not a presidential year. Had COVID not hit, I think we were destined to do $16 million, $17 million, $18 million this year. Obviously, the second quarter just totally blew all that up. But in spite of all that, I think we'll end up the year doing about $13 million or a little north of $13 million in political. So even in spite of COVID, we're sequentially better than the last cycle. And the bulk of that is hitting in -- obviously, in the back half of the year, which has provided a nice little tailwind. For years and years and years, I didn't even talk about political because it just wasn't, number one, that important in our book. And number two, it wasn't odd year, even year, odd year, even year phenomenon. Literally, we would get a few million bucks every year because some of the local elections are off cycle. It's become increasingly important, and I think it's because our digital platform is responsive in a way that political campaigns need. They got to change their message overnight, right, and we can do that for them. So I think that's one reason why it's becoming more important in our book. And of course, the other reason is, as a society, we're spending incredible amounts of money on politics these days.