Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

All right. Well, welcome, everybody, we appreciate your interest in Lamar, and we're going to have a, give or take, 20-minute presentation on Lamar. And then we'll take Q&A. My name is Sean Reilly, I'm the CEO; and with me is Jay Johnson, our CFO. So Lamar company profile. We are the largest out-of-home advertising company in the U.S. by revenue. And also by market cap, we are the largest in the world. We are predominantly billboards, traditional billboards, that's 88% of what we do. But we also have a transit and airport division that we operate in our QRS. Our billboards are REIT qualified, as well as our logo division, which is about 5% of what we do. Those are also REIT qualified assets. When you think about Lamar, you should think about just dominant player in small- and middle-sized markets across the whole of the domestic U.S. We -- about 80% of our footprint have an 80% or better market share. So we just tend to dominate in those markets. And we've been doing this for a long time. We were founded in 1902, almost 120 years of operating experience. And our senior management team is likewise long tenured. The average tenure of our regional managers is over 30 years with the company. Same can be said of our general managers, just a ton of experience. You have a very seasoned executive team that's been tested through the years. We run a tight ship. Our core billboard business runs 40-plus percent consolidated margins. Pre-COVID, 44%, 45%. But even this year, we will run consolidated EBITDA margins north of 40%. We tend to be more local in terms of where our advertising tenants come from. A huge diversified tenant base of over 40,000 billboard tenants under contract at any moment in time. Lamar also operates the largest network of digital billboards in the U.S. More on that later. It's our fastest-growing division. And finally, we touch those 40,000 billboard tenants through almost 1,000 account executives and sales professionals across the U.S. and in Canada. So Jay, you want to take the next slide?

Sure. So outlined here is some key thoughts as you think about Lamar from a REIT perspective. Really, what it really cuts to is we are the category dominant billboard REIT. Geographically diverse. We have the benefit of an industry that has significant barriers to entry. Many of our sites simply can't be replicated. They are nonconforming sites that were a -- that a billboard can be built on those sites today. So somewhat of a moat there. In addition, we have geographic diversity. We have a very granular tenant base. No more than -- no tenant accounts for more than 2% of sales. We have proven to be an effective partner to social and mobile advertising. So when you think about disruptors, we actually partner with our disruptors, and I came from the lodging space where the same cannot be said there. Our digital platform, which Sean will touch on later, has continued to grow, particularly through the programmatic advertising channel. And when you hear programmatic, that is simply the online delivery of our digital sales platform in an end-to-end e-commerce fashion. We have the strongest balance sheet in the industry. I think it is a key competitive advantage for us. And then as we continue, we have a proven track record with growing our dividend pre-COVID. And even in a challenging environment like this year, still anticipate to pay out $2.50 per share, assuming our Board approves our $0.50 dividend recommendation in Q4. And then finally, Sean touched on our margins. Our adjusted EBITDA margin in Q3, even with -- in this challenging environment, with the top line, has been declining. We ran adjusted EBITDA margins in Q3 of 44.2%. So really, when you think about our business, it's billboard versus transit and airport unlike our competitors, and we dominate local markets, which lead to those industry-leading margins.

All right. So again, here are our primary products. The one in the upper left is a logo. That's our logo division, food, gas, lodging, next exit. We operate that business under long-term contracts with highway departments that grant us on a state-by-state basis, little -- basically monopolies. So we're the sole provider of that product in the states within which we operate. The one on the right of the logo is a digital billboard, and that is REIT qualified even though the tenant is up there for only 6 seconds and rotating with other tenants. Lower left, you'll see an airport display. We, again, operate those displays within our TRS. Down in the middle is a traditional billboard, REIT qualified. And then on the right is a transit unit, again, that we operate in our taxable REIT subsidiary. Next slide. So here's a map of where our offices are. You can see that we pretty much blanket the Lower 48. I would encourage you to go on our website, lamar.com, and click on Browse Inventory. And what you will see is, number one, all these offices. And number two, if you drill down, you can drill down to the individual billboard. And you'll be struck by a couple of things. Number one, the breadth and depths of our footprint is pretty incredible. We're virtually ubiquitous. And as I said, blanket the Lower 48. And the states you see shaded are where our logo sign offices are, and that's where, again, we operate under the auspices of a contract with local highway departments. Next slide, please. That ubiquity that I mentioned, the fact that we're virtually everywhere, plays into our acquisition strategy. And if you look here at the market pie, you can see that there's 3 big players, Lamar, Outfront and Clear Channel, but there's also hundreds and hundreds of small independents. And that is where a lot of our acquisition activity takes place. It's -- we typically spend, give or take, $120 million to $150 million a year acquiring smaller independents. These are typically fill ins, highly predictable inventory that is already within one of our DMAs. So we're really only buying billboard structures, permits, tenant contracts and ground leases. In other words, the lease with the landowner that allows us to be there. And again, it's a highly predictable and highly accretive activity. Next slide, please. So a little bit of billboards 101 here, just so you can understand the REIT-qualified nature of our business. And you can think of it as vertical real estate and also think of it analogous a little bit to the tower business and that we own the structure, you can see there. Next slide, please. We typically lease the ground where we build the structure from a landowner. Next slide, please. And then we rent the vertical face, the real estate, to our advertising tenants. So it's pretty much as simple as that. And again, if you could sort of think analogous to the tower business in the sense that they typically lease ground, own the structure and rent space at the top of the structure. Next slide, please. Huge barriers to entry in the billboard business. We're regulated at 3 levels of government. At the federal level, we're regulated through the Highway Beautification Act, that governs where billboards can be built. We're also regulated at the state level. The state very importantly awards permits to billboard operators. And those permits, by the way, run with the billboard owner, not the landowner. And then finally, there's a host of local ordinances that governs where billboards can be built. And so when you layer all those regulations on top of one another, there's almost no new billboards being built in the United States. We are growing our platform by converting traditional billboards to digital billboards. But again, the key here is all those regulations build a virtual moat around our business and lock in our already dominant market shares in the middle markets. Next slide, please. So our real estate portfolio, and by this I mean, where we lease the ground for the right to put up our billboards, it's a huge portfolio, and it's a very diffuse landowner base of 56,000 distinct landowners with no meaningful concentration. And the term that we have for those ground leases ranges from 99 years to month-to-month, depending on the regulatory regime and the value of the particular structure. And while typically we lease the ground, we also own an awful lot of property. We own easements or property beneath approximately 10% of our billboard locations. These locations are typically are better ones and generate almost 20% of our billboard billing and nearly 30% of our digital structures are on company-owned property, which enables us to capture most of the economics from a digital conversion. Next slide, please. Here's a snapshot of our tenant base. And the take-home message here is that no single advertising tenant accounts for more than 2% of our total revenue, which just, as we mentioned earlier, almost 40,000 tenants at any moment in time will have under contract. Long-standing relationship with these tenants. Most contracts range from 30 days to a year. You can see the familiar names that use us on the national level. And on the right side of the slide is a snapshot of our advertising tenant verticals. And that's -- this is from Q3 2020. And it's remarkably consistent. And as we said on our earnings call, our verticals have been normalizing very rapidly as we move through the year, even in a COVID environment. Virtually the only vertical that hasn't begun recovering, of course, is amusements, entertainment and sports, which is important to our digital footprint. But as soon as the world normalizes, that will be coming back fast. Next slide, please. So why do our tenants come to us to get their message out? Many reasons. But one very important one is our cost. We're very, very cost effective. We deliver a ton of eyeballs at a cost per thousand impressions far less than other traditional media. For our traditional product, it's roughly $3 to $5 cost per thousand impressions. And for our digital product, it's around $8 or $9 cost per thousand impressions. And one thing we've seen of late is while other traditional media are struggling with their audience, they're seeing their audience fragment, they're seeing audience erosion, our audience, being the driving public, has been stable and growing. And that has been something that has made us, over time, more valuable to our advertising tenants and has led to share shift from traditional -- other traditional media to us. Another thing that we're finding is we work really, really well with our customers' social and mobile efforts. And typically, we don't sell against social and mobile. We sell to complement whatever our customers are doing in the social and mobile world. And again, that has also led to share shift to out-of-home. Next slide, please. So I mentioned, when you think Lamar, think middle market, smaller, middle-sized markets that we completely dominate. But you also want to think local tenants, local advertising tenants because 76% of what we do is at the local level and about 24% is national. And as I mentioned, we have about 1,000 sales professionals that have outstanding relationships with our tenants and touch them on a daily basis. We do get business from large agencies in New York, Chicago, LA and the like who have large national clients. As you saw in the tenant slide, it's a diverse blue-chip customer base. We touch them with 75-member national sales team across 9 cities that, again, work with agencies that buy into the out-of-home space. About -- as I mentioned, about 80% of our footprint is categorized as middle market. But we do have offices in the top DMAs, such as Philly, Atlanta, New Jersey, Dallas, New York, et cetera. And we are actively trying to grow that footprint as well. Next slide. Digital, it's been a great story for us. We pioneered digital out-of-home, particularly in the large format space and we've seen tremendous growth there. It accounts for about 25% of our sales. But interestingly, only a little over 2% of our billboard faces. We have about 155,000 billboard faces and 3,600 of them are digital. So we feel like we've got a long runway to accretively deploy capital as we continue to build out our digital footprint. At 3,600 faces, by the way, we are, by far, the largest provider of large-format digital in the country. And again, if you drill down on our website, you'll see that we're approaching ubiquity across the country with our digital footprint as well. Our advertising tenants really like this product. It's allows them to be incredibly nimble. They can change copy at their will. They can integrate copy changes with whatever is trending on their social or mobile media. And it just allows them, again, a tremendous amount of flexibility to get their message, the right message in front of the right person at the right time and in the right place. And I can really see this footprint continuing to grow. Next slide, please. Speaking of growth, coming out of the Great Recession, we had same-store very consistent steady growth. In fact, we had 40 consecutive quarters of acquisition-adjusted sales growth pre-COVID. Next slide, please. And as we converted -- turned into a REIT in 2014, that sales growth contributed to high single-digit growth in AFFO per share over that time period from 2014 to 2019 and correspondingly in our distribution. We grew our distribution 9% per year CAGR over that same time period. So we do have, as Jay mentioned, a track record of growing AFFO per share and growing our distribution. Next slide, please. But then, of course, we turned the corner into the COVID world and 2020 has been a different story. But I think it's been a story of resiliency for Lamar. Of course, we were hurt by the shelter in place measures. And in March and April, we did what you would expect of a seasoned management team. We reduced our expenses for the full year, approximately 8%. We slashed our CapEx. Obviously, we spent our Q1 projected CapEx, but then we cut it to the bone in Q2 and beyond. We pulled our guidance in those early days of COVID. And then we reinstated guidance in our Q2 call. And then we just raised guidance on our Q3 call. So we have seen a relatively V-shaped recovery as we move through the year. And the midpoint of that guidance, of course, implies full year net revenue decline of approximately 12%. But as we have been moving through the year, again, it feels more like a V recovery. In fact, beginning in June, we started writing contracts for the full year, tenant contracts for the full year of 2020 at the same pace as we were writing business in 2019. And that continued into the tail end of the third quarter and into the beginning of the fourth quarter. We cut our dividend in Q2, we were going to pay $1 -- $0.25 for $1 per annum distribution this year. In Q2, we cut that to $0.50 after paying the full $1 in Q1. We anticipate paying another $0.50 in Q4. And I think the key point here is from that $2.50 baseline for this year, that's what we're going to grow off for next year. So we're not thinking about it in terms of growing the distribution off of $0.50 per quarter level, but rather that $2.50 per annum level is going to be the baseline from which we grow the distribution going forward. With that, Jay, I'll turn it over to you.

Thanks, Sean. Turning to our balance sheet. It really has been a transformative year for Lamar. We've raised approximately $2.9 billion of debt year-to-date. And that really has been refinancing higher cost debt, extending our maturities, eliminating scheduled amortization. We -- in Q3, we took a little bit of our liquidity and called all $535 million or 5% sub notes, which was really will help from an interest standpoint going forward next year. We continue to see benefits from the cost initiatives that Sean mentioned. In Q3, acquisition-adjusted expenses declined 11.5%. We ended the quarter with liquidity of approximately $771 million. That was comprised of $69 million of cash, $35 million available under our securitization line and $667 million available on our revolver. All told, this year with the things that we've done, we've been in the bond market 3 times this year, we will save cash interest next year to the tune of approximately $20 million. And then moving to -- and as you think forward about our balance sheet, we actually -- on the fixed income side, have a callable bond in 2026 -- excuse me, the 2026 maturity, that bond is callable in February of next year. So there should be some additional opportunity there as well. We've touched on this several times throughout the presentation, but we really benefit from strong free cash flow generation. We have multiple levers to pull. We have a flexible structure. We have reduced CapEx this year by approximately 50%, reduced it from $130 million last year to $65 million projected this year. And we're beginning to play a little bit of offense to the way of deploying CapEx and pursuing our digital deployment going forward. You'll see our free cash flow generation continues to be strong. We -- in Q3, free cash flow was only down 8% over Q3 of last year. And moving to our debt maturity schedule. We have a well-laddered debt maturity schedule. It's set up well for -- to weather the current environment. Our nearest term maturity is our AR securitization, which matures in December of next year. That is with one bank that we have an excellent relationship and should have no problem extending that maturity should we choose to do so. And then moving beyond that, it's really -- we don't have a maturity until 2025, which is our $750 million revolving credit facility. And our nearest term fixed income maturity I alluded to is our 2026 5.75% senior notes. Those become callable in February of next year. If we were to do a new 10-year today, we probably would be looking in the low 4% area. So a lot of opportunity to pick up additional interest cost savings. And those additional cost savings, should we call those notes next year, are not included in the $20 million that we've already captured. So we're set up really well. We have a strong balance sheet. We view our balance sheet as a competitive advantage We have the best balance sheet in our sector, the lowest leverage, and we're set up well for growth from a balance sheet perspective. So with that, we will turn it over to Q&A.