Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

Good morning, everybody. Welcome back to our TMT conference here on day 3, quick disclosure statement. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Very excited to welcome to the conference this year virtually, Sean Reilly. He is the President and CEO of Lamar Advertising. And Sean, it is great to see you this morning, live from Baton Rouge, thanks for being with us.

Thanks for having me, Ben. Pleasure to be here.

Great. So I know you just reported last week, so hot off the press, and your guidance was, I thought, bullish and certainly ahead of where we were expecting for 2021. There's a lot of stuff to get into. Maybe we can just start, you had a very strong fourth quarter, I think, stronger than maybe you guys even were expecting. Sitting here today, March, early March, so how do you feel about where we are in the recovery, given what we've been through and what you see ahead of you?

Yes. Good question. We feel really good. Our -- virtually all of our verticals have normalized with the exception of one that I'll get into. And most of our geography feels healthy with a few assessments I'll get into. And because we're predominantly traditional out-of-home, posters and bulletins and digital, our pacings are strong. There's a couple of exceptions there, too. So why don't I touch on the exceptions. One vertical, of course, that has yet to recover is anything around gathering venues, amusement, entertainment, sports, and that's important to us, right? There's a lot of ancillary economic activity around gatherings. Traditionally, amusement, entertainment and sports runs about 8% or 9% of our book of business, and it's hovering around 4% right now. So that's the one that we're anxiously awaiting normalization. And then COVID treated different geographies differently. And in general, large coastal cities, it was more of a traumatic experience. So our business is slower to rebound and slower to get healthy in places like, as you could imagine, Southern California, New York, Las Vegas, important places to us. So again, we're looking forward to that geography getting better. And then we have some smaller businesses that, as you could imagine, haven't recovered either. We're in the airport business. The airport business in healthy times contributes a little more than $40 million in revenues for us, and that's basically been cut in half, and it's going to take longer to rebound. We also run transit in Vancouver. Vancouver is our largest transit market. Larger transit has been slower to recover as well. Our smaller transit operations look a little bit more like our billboard company. But the larger transit is, again, going to take a little longer to heal. But all that said, as I said on the call, the gun went off March 1. That was Monday. And looking at total contract value that we're adding in these early days of March, I'm feeling good.

Yes. Yes, it feels like the weather is getting better, everyone's thirsting to get outside. No question, literally and figuratively. So you also announced that you plan to crank the digital board machine back up again in 2021. So that tells us something about your confidence level, but maybe talk about why that makes sense today, kind of the range you're thinking about. What the thought process was there?

Late third quarter and early fourth quarter, what we were seeing was a pretty dramatic rebound with our digital footprint and the channel by which we sell a lot of digital, which is programmatic. And as a matter of fact, in Q4, our digital billing was more than Q4 of 2019, which was a great stat to see. And programmatically, we did more in Q4 of '20 than we did in Q4 of 2019. So both those data points told me, let's go, pedal to the metal, let's get as much new digital in the air as we can. And so that's our game plan.

Okay. And I know you said on the call, and you've got -- I've been covering you guys a long time. I know you're very sensitive to adding inventory to a market or markets when you're adding digit. So I guess we can take from this that you feel confident you can sell it without cannibalizing, even at this point in the recovery.

Yes. Yes.

So why do you think digital has come back so much quicker? I mean, the obvious thing I think of is just it's a quicker thing to turn on and turn off. So it's just the timing of the business, but maybe there's more going on there.

A couple of things. Number one, it's a great product, right? The value proposition for our customers is definitely there. And -- but the second thing is, as you mentioned, you can turn on a dime, and one thing that is happening in recovery -- COVID recovery is advertisers are a little bit slow to pull the trigger. They're making decisions later on, and they want to be able to move quickly. Finding their voice in the world of COVID has been tricky for a lot of advertisers. And as they find their voice and find their message and then commit dollars, we're just finding it's happening a little bit later. And of course, you can pick up the phone and call us. And in 5 minutes, we can have you in front of about 60 million eyeballs with our digital product, right? It's just that responsive.

Yes. So it's really that flexibility. I guess that makes a lot of sense. I have heard -- and I'm sure this is true for you that there are advertisers that actually prefer static. I was chatting with Scott wells about that on Monday, and there are some big ones like Apple who don't want to share the screen, but is there some sort of natural level of digital penetration where you start to see maybe the sort of portfolio stabilizing and mix over the long term?

Yes, there's a lot of ways to think about that. Let me start with the fact that digital billing is now pushing about 25% of our book of business. But it's only about 2.5% of our faces. We've got 170-some-odd thousand billboard faces, and only about 3,600 of them are digital. Now it's true some of our customers they just want static. Apple, you mentioned. Apple loves the big iconic units that are in the major metros. But we also have Cracker Barrel that's our largest customer, right? And Cracker Barrel only static inventory within a certain radius of their stores. And that's not going to change. So there is a little bit of a ceiling on digital, but every time I'm asked this question of how much of our book of business can be digital, I sort of sense that it's growing, right? I mean if you look overseas to the U.K., well north of 50% of all out-of-home is Digital. So I think we've got a huge runway and I'm looking forward to finding and testing out the limits of how much of our billing can come from Digital.

Sure. I want to talk more about technology. But before we go further on that point, just back to last week, you did talk about the first quarter being a bit of a step back relative to what we saw in Q4 and relative to your full year guidance for growth. Just fill us in on kind of January, February and why Q1 is where it is.

Yes. Well, first of all, we were killing it in Q1 of 2020. I mean we were poised for our best year in history and our best first quarter ever. As a matter of fact, February was up double digits. And we ended the quarter with -- even with the slide in the last 2 weeks of March, we ended the quarter up about 4.5%. So we got a very difficult comp. And then you couple that with, again, we've got some products that aren't healed. We've got some geography that isn't healed, and we just -- we've got some verticals that haven't healed yet. So you add all that up, and we'll be down year under year for the Q1. But the good news is our comps are so easy after we get to Q2 and Q3. It's going to be a lumpy year in terms of the cadence. But when we do a look back in December, I feel pretty good that we should claw about halfway back to 2019 levels of billing, which is about that 5% up for the year on top.

Presumably, I put you in a pretty good spot for '22 in terms of getting back to your high watermark.

That's our goal. Our goal is to have 2022 be 2019, and we'll go back to the future. Interesting, when I was looking at how we finished up 2020, it basically cost us 3 years. We did almost exactly to the dollar, what we did on the top and the bottom in 2017. So it pushed us back 3 years. I'm going to get it back in 2. That's the game plan.

I like that. It's good strategy. When you look beyond COVID, you mentioned the business was humming. I mean it's a little bit almost tragic to hear February of 2020 was that strong. But what are the things in the business that you think are going to allow out-of-home and Lamar to grow faster than it did? When we look back at the last cycle, it ended well, but it wasn't barn burning through a lot of the years, a lot of 2s and 3s along the way. So when you look out to the, let's call it, 2022 to 2026 period, are there things that you see, Sean, that give you optimism that this can be more of a 4%, 5% kind of business versus a 2%, 3% business without putting numbers in your mouth?

Sure. Well, we are tethered to GDP. And of course, the year's 2010 to 2019 were slow, steady growth, and we kind of reflected that. So it would be nice to have a little healthier GDP to help put a little wind at our back. But there are some things going on in the industry that I think are going to move the needle for us. I mentioned programmatic and digital, that growth is going to continue. We are evermore dipping into pools of buys that are digital in nature. And the way that this screen is bought is more and more going to be the way that our big screens are bought. And the digital dollars that flow into traditional digital advertising, we used to not have access to. We had access to the traditional ad pie. The digital ad pie, though, the way they buy and sell inventory without programmatic, we couldn't talk to these people. And more and more we're getting dollars that are over here in this bucket. So I think that's going to happen. You're going to see that happen a lot in out-of-home. There's just going to be an explosion of digital screenings and along with that will be the ad tech support that helps grow that business.

And you always talk to us about the local business being kind of your steady Eddy and national being the beta. And given your mix, Lamar tends to be then less volatile versus some of your peers or your competitors. Does programmatic and sort of the technology initiatives at the industry level have a bigger impact on that national piece? Or is it broader? Because obviously, SMBs are kind of Lamar's bread and butter, right?

Yes. So today, it's a national phenomenon. And you probably heard me say this before. As a matter of fact, I think I said it at this conference last year, we were live. But my charge to my team as we go down the road towards evermore programmatic is, number one, don't lose control of our CPMs, that's what happened to the digital publishers when they first started using this for programmatic. So control your CPM, which we do. And number two, make sure that it's net new business for us. And the reason I'm obsessive about that is our total cost of sales, if you take our whole platform, and that's 1,000 account executives, their commissions and base, that's our national sales team, et cetera, runs about 6% of revenues. And the programmatic ecosystem cost 10% or 11%. And so I got to be careful not to turn that 6% cost into 10% or 11% cost. And so when I think about opening up the channel to our traditional local customers or, for that matter, our traditional national customers. I have to make sure that I'm not paying a toll to the digital ecosystem. And there's ways that we're going to manage that. As I look 2, 3, 4 years into the future, we can build our own automated platform for local customers. That's an option. Or we can just make sure that whatever digital ecosystem we allow in, the toll is no greater than 6%. But the pie is huge, right? I mean the pie is huge if we get there.

Sure. I should mention, if anyone has questions, there's a lot of folks on this webcast. Go ahead and drop one into this chatbox, and I will try to get it to Sean as we continue to chat here. Maybe just continuing along the technology conversation, measurement's something that we've talked about over the years. It sort of comes and goes as a major focus area for investors. But it does feel like this acceleration of digital adoption that's hit marketing and hitting the consumers pretty powerful. Is that something that -- as someone who's running one of the biggest outdoor companies in the United States, are you focused on a better measurement, more attribution, more analytics? Is that something that can matter to the business over time?

It does and, in particular, again, as we were mentioning the programmatic space. So one of the things that we have done in terms of our investment in all of the tools that ad tech can bring to us, it is our architecture is completely open. And what that means is our customers can plug-and-play with any SSP or DSP that they want to have access to our inventory, number one; number two, they can use whatever data source they want to prove out their campaign. So we're not wedded to a single data source. Of course, the industry has geopath, it has its approach. But that's basically a baseline of measurement. And we can overlay literally, there's dozens of different data sources out there that each one has its strength and can help our customers, again, sort of prove out their campaign in the way that they want to. And typically, it's paid for on a campaign-by-campaign basis by our customer in partnership with whatever DSP or SSP is executing for them. Does that make sense? So...

Yes.

At the end of the day, we're not buying the data set. Our partner, let's call it, Vistar as our largest DSP, SSP partner. Vistar will open up a menu of data sources for attribution or with post 5 analysis, whatever the customer wants. And then the customer picks and chooses and pays for as part of the campaign.

Yes. Well, presumably, that's what you're getting in your 10%, 11% fee.

Yes. Yes.

Yes. Exactly. That's, I guess, the debate for you over time if you want to bring more of those tools in-house, capture more economics. I'm sure that's the trade-off.

It's something that obviously can be done. I mean if you look at Outfront, for example, they've developed a whole suite of stuff in-house at considerable expense. And now they actually have some of these products that they can themselves have their own sort of black box, right? So that is one approach for sure.

Let me ask you about M&A consolidation, acquisitions, just picking up on the point you were making. A lot of these things that you were talking about, we've seen this in other sectors. We're seeing it in the audio space now where you're starting to see ad tech getting cobbled together by the major players in the market to kind of create kind of one-stop shops. Consolidation helps those kinds of things. I know you've got an appetite for M&A. What's -- maybe talk a little bit about your expectations for acquisitions at Lamar this year and also the larger question around the benefits or value potential from larger scale, big 3 consolidation.

Sure. Well, first, COVID has definitely changed the landscape in global out-of-home business. That astounded me. But at a $671 million in EBITDA that Lamar turned in last year, that was more than JCDecaux, Outfront and Clear Channel combined. So we find ourselves as again, emerging from COVID as the strongest player globally. And one of the things we're staying up at night worried about is how we can capitalize on that. Our balance sheet is, by far, the best in the industry. And so we've got a lot of powder in a target-rich environment. So yes, I'm hoping that this is going to be a pretty active year. Certainly, we feel good about the long tale of fill-in opportunities. As you know, year in and year out, pre-COVID, we would do $130 million to $150 million worth of tuck-ins. Very predictable exercise. We use our free cash flow. There's no stress and strain on the balance sheet. We're just buying assets, billboard structures, permits, leases and advertising contracts. We don't need to worry about people because we just kind of folded into our existing footprint. For those of you that are not as familiar with Lamar that are watching this, I would encourage you to go on our website and go to the Browse Inventory click-through and a map of the United States will come out, and you'll see dots all over it, and those are our offices. And the first thing you'll notice is we're everywhere. So virtually, anything we buy as a fill in. And then if you drill down, you can drill down to the individual billboard, right? So you can see where these -- all of these billboards are across the country. And again, that gives us such an advantage when it comes to doing acquisitions because almost everything is a fill in for Lamar. And it, again, is a very predictable exercise.

And Sean, how about on the larger scale side? Obviously, you're not -- it's no secret that some of your competitors have a capital structure that needs to be worked on potentially through asset sales. I think you sort of just touched on it, but are there -- are you able or interested in large market assets? Or are you much more focused on mid, small as you look out? Because you're right, this could be a moment in time that you won't have forever, right?

Clearly, last year, our middle-market companies did far better than our top 20 DMAs. That said, we are there. We have an office in New York. We have inventory in New York. We have an office in LA. We had inventory in LA. We are in Chicago in a pretty big way. So I don't think there's any place that's off limits in terms of domestic U.S. traditional out-of-home for Lamar. Our charge -- we're a REIT, so our charge is high quality, REIT-qualified, out-of-home assets. And those are to be found everywhere in the lower 48.

One of the things that I highlighted or I noticed, I guess, in your results last week was just -- you had almost a 50% margin. In the fourth quarter. I think -- I could be wrong. I think it was the highest since the fourth quarter in 2007, something in that zone. And -- but a lot of these large markets, by definition, are structurally less profitable because you got a lot of rev share in there. How do you think about that when you go look at properties?

Well, we pay a lot of attention to the underlying real estate, and correct, our average lease cost runs a little north of 20%, and that's for the whole footprint, right? That includes Alexandria, Louisiana and Manhattan. But we can make it work in the large markets and do pretty well there. Don't get spoiled by that 50% margin. That was some pretty heroic expense work we did through the course of last year. And I hope that when we're fully recovered, hopefully, 2022, you should see margins in back into that 45%, 46% consolidated, after-corporate overhead.

Yes. People want EBITDA dollars as much as they can, more than EBITDA margin points as it goes. Just coming back to our conversation earlier on technology. Do you think there's an opportunity to sort of bring some of these self-serve tools to SMBs the way -- maybe not in the same scale of the Facebook and Google, but those guys have obviously built massive small business businesses and by making it super easy for customers to buy their inventory. Is that something that out-of-home can do more in and something you're focused on?

Yes. I mean, ultimately, I think it's inevitable. You -- I'm pretty close to the auto dealers here in Baton Rouge. And they don't want to go play golf with an Account Executive. That's not the way they transact their business. And they're really super good at disappearing into their back office and use -- and doing Google AdWords or getting up on Facebook, they can just self-serve. So I think it's inevitable that it hits virtually every local medium because that's the way our customers want to buy. Again, I think as long as I can get that tool to them and not have to pay a toll that exceeds my overall cost of sales today, I think that's a happy place to be. So it's not going to happen in 1, 2, 3 years. But you look out 4, 5 years, I think it's kind of inevitable.

Got it. Maybe just to wrap up in our last few minutes on kind of capital allocation and all the work that Jay has done since he got there, put you guys in a pretty good spot. Nice dividend increase for 2020. I think the dividend plan, when we were sitting together last year in San Francisco, was, I think, $4, right, I believe, for 2020. Is that an area you want to get back to? How do we think about the drivers of dividend growth, realizing you're a REIT as we move beyond this year?

So we were hopefully cautious this year. If you look at our planned AFFO per share and our planned distribution of $3 a share. We're at the lower end of that AFFO payout for REITs. So we've got headroom to raise it. And that's our goal. As a matter of fact, if we perform even better than planned this year, we might have a nice surprise in the back half. Because for REITs, ultimately, the distribution is about arithmetic, right? You've got to distribute a certain percentage of your otherwise net income. And if you just do the arithmetic, you'll see that if we hit the upper end of our guidance this year, then we'd probably going to have to take a hard look at it. Even this year, increasing it from $0.75 a quarter or something a little north of that. And again, it's just the arithmetic.

Yes. Just to get to that 90% TRS number, basically. And that might be paid out, what, early next year. I think you have some time before you have to finalize that.

So we still have some legacy NOLs and otherwise tax shelters. So we're able to kind of modulate a little bit and be a little more predictive about where we were going to end up the year. So until we run out of that tax shelter, we don't have to do a true-up like other REITs. We pretty much just announced what we feel is reasonable and move on from there.

Yes. What is the sort of ratio -- payout ratio of AFFO that your REIT investors or shareholders are focused on or you think is normal or average or typical?

So for most of our REIT life, we were in the sort of mid- to upper 60s percent of AFFO. It's not uncommon for REITs to be in the low 70s percent of AFFO. And again, if we hit our goals, we're going to be in the -- for this year, if we don't change it from $3, we'll be in the upper 50s percent. So again, lots of headroom. Just wanted to be a little bit cautious. We don't know exactly where everything is going to play out with COVID variance and the likes. So hopefully, everybody is healthy and vaccinated in -- at the end of June, and college football stadiums are packed in September and life is normal. And I think we will hit our goals, if that's the case. So...

Yes. Awesome. Well, listen, we're out of time. We really appreciate you joining us this morning. It's great to see you and looking forward to getting together in person someday.

Awesome. Thanks, Ben. Appreciate it.

All right. Thanks, everybody, for joining us. Have a great rest of your day.