Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

All right. I think we're live. I hope we're live. Welcome to Citi's 2021 Virtual Global Property CEO Conference. I'm Jason Bazinet with Citi Research, and we're pleased to have Sean Reilly, CEO of Lamar. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now, and disclosures are available on the webcast. For those of us joining here today, if you want to ask Mr. Reilly any questions, simply type them into the question box on your screen, and they will come directly to me and we'll do our best to ask them during the session. And our aim really is to hopefully make this as interactive as possible. So Sean, maybe I could turn it over to you and maybe you can just give a brief overview of Lamar?

Sure. Great. And thanks for organizing, Jason, and thank you all for listening. Lamar is a billboard REIT. We predominantly operate in middle market U.S.A. 80% of where we operate, we have over an 80% market share. So we just have dominant market shares in places like Baton Rouge and Little Rock and Boise and Tallahassee and name a middle market in our country, and Lamar is going to be there. And we came out of the pandemic in exceptionally strong fashion, strongest balance sheet in the industry. A little bit of a shocking statistic for me, anyway, after all the companies released, Lamar did more EBITDA in 2020 than the other large public companies combined: Outfront, Clear Channel and JCDecaux. And so consequently, our market cap has recovered basically to pre-pandemic levels.

That's amazing. So let me ask you one question coming out of the pandemic. If an investor sitting there and they got a lot of these potential REIT stocks that they could own, if they only had to pick one, what would be the 3 reasons you would highlight as to why they should pick Lamar over others?

Well, maybe I'll start with the point that I just made. We way outperformed our industry through the pandemic and coming out of the pandemic and emerged, as I mentioned, by far, the strongest out-of-home company in the world. So that would be number one. Number two, actually, I think, is more important. There were trends in place pre-COVID around audience erosion for other traditional media and -- as opposed to our audience, which is stable and growing. And that's the building blocks of advertising businesses, as you know, Jason. And I believe that COVID in 2020 simply accelerated some of those trends. For example, it accelerated cord cutting and over-the-top TV, which I believe is going to be to the detriment of local network affiliate television eventually. And those ad dollars as they lose their eyeballs have to go somewhere, and we should be the long-term beneficiary of that secular trend. And you can see share shifting happening among local traditional media, and again, we'll be the beneficiary. So that's probably reason number two. And then reason number three is we are incredibly disciplined when it comes to our acquisition strategy in our industry. Again, we have the strongest balance sheet in the industry, and we really put it to work for the benefit of our shareholders, doing accretive acquisitions. And as you know, Jason, you've followed us for many, many years, these are very, very predictable acquisitions that are accretive to our AFFO per share. And we've done well by our shareholders over the years just sticking to our knitting.

That's great. Can I go back to reason number two that you cited? I sort of agree with your broad thesis that COVID accelerated change and agree with your thesis that there's more cord cutting. Why do you think those -- as opposed to hurting the local TV station affiliates, why wouldn't those dollars just go to connected TV where a local advertiser could just go use some sort of digital ad on video as opposed to accruing to outdoor industry in Lamar?

Yes. So certainly, the streaming services are going to get their fair share. I would equate it to what you saw when Google went through traditional local media like a vacuum cleaner. And the -- and just eviscerated yellow pages and eviscerated television -- I mean, newspapers. Most of those dollars went to Google and Facebook, right? But some of them came to us. I think the same thing is going to happen as you see the erosion of audience in over-the-air television and over-the-air radio. I have 3 kids, 23, 21 and 19. I don't think they've ever seen terrestrial television or for that matter listened to over-the-air radio. And those trends, again, are just going to, I think, accelerate.

It's so true. I have some young kids, too, and we just took down the TV in our kitchen, and my kids always on a smartphone banging around on something. Just it's done. One of the things that I've always found amazing about your business is that when we go through these sort of shocks in certain verticals that your sales force is always able to sort of fill up the hole with another sort of sleeve of potential customers. And when I was looking through your 10-K, it seemed like the only one that sort of -- where you saw sort of a discernible mix shift was sort of in amusement and sporting events. Is that sort of the thing that you're most optimistic about that? I think it was, what, 4% or something of your business in 2020? But used to be 7% or something like that, maybe I'm wrong.

In normal times, when we feel free to gather in large groups, amusement, entertainment and sports were around 8% or 9% of our book, particularly important to our digital network, right, because those are -- they want immediate, instantaneous ability to talk to people because, let's say, it's a concert and the concert's on Saturday and the ticket sales are lagging a little on Monday, we can kit them up on the digital boards like that. And Tuesday, Wednesday, Thursday, Friday, they're getting their message out. They're selling tickets. It's a very responsive medium. So we're really looking forward to that moment in time where we can all get together again. I'm asked, what's the biggest risk to our hitting our goals this year? And really, it's just that. It's -- if we have full college football stadiums in the fall, then that's going to be a real good sign for Lamar.

And when you say college football stadiums, just as a proxy for people coming back together? Or are there some things that -- okay. okay.

Yes. Example of -- I could have said concerts, I could have said broadway, I could have said whatever. But there's just an awful lot of -- not only do the events themselves use us, but there's a lot of ancillary activity around events, bring those customers, right? Think about the big convention in Vegas, right? The convention itself uses us to promote. But then all that ancillary activity around the convention also brings us business.

Restaurants and other stuff as well. So can I talk about -- the line of inquiry here is sort of thinking back to the great financial crisis and the steps you took, and then sort of looking at the sort of COVID shock that happened now and trying to draw parallels. And one of the things that I think I remember is that your site lease costs, say, in '08 were at a certain number. And it almost took like 4 years for those site lease costs to bottom. I think you were renegotiating those contracts, and it just took a while to manifest itself through the income statement. But it took a while. As we think about this COVID crisis, is there the same sort of dynamic that investors should anticipate where you did some things with site lease cost, but it will take a while to trickle through the P&L? Or is it not as severe of a crisis, and so it's the wrong analog to draw a wrong parallel?

Right. Yes. Yes. I would say the latter in one sense in that back in '08 and '09, we had to get truly draconian. I mean it was a crisis that was darker and deeper than, believe it or not, what we went through last year. So as a company, we were much more aggressive cutting costs, particularly in our lease portfolio during the Great Recession. Now we did some of that in 2020. Again, not to the same magnitude, and it is -- as you mentioned, it's going to cycle through this year because the activity took place over the course of last year, right? So it does take a little bit of time to calendar its way into -- fully into our P&L, but it's not the same order of magnitude as what we had to do back then.

Okay. And in parallel, there's been this trend also where you've been, it seems like, purchasing the land underneath your structures to a greater extent in the past. And I remember years ago, there was this bear case on your stock that as you put up more digital signage, we are going to see those lease costs sort of go up as the dirt owner participated in some of the economics. And I just wonder, as you're buying more dirt, are you specifically targeting those parcels of land where you have digital billboards to prevent that dynamic from manifesting itself? Or is it just a different narrative and you're just buying dirt when it seems to make good economic sense and there's not a straight line between digital billboard expansion and more dirt ownership?

Yes. Let's call it a curvy line. We are opportunistic. If we have a good deal and can deploy capital accretively for our shareholders, we're going to do that. But to your main point, we try to capture the economics of the digital conversion. And it works like this. Again, remember, we have dominant market shares in middle market U.S.A. And so let's say, we target this billboard for conversion. And -- but before we do it, we go try to negotiate either a really attractive long-term lease with the landowner or we try to purchase the dirt. Now what if the landowner's a little wise to our game and says, "I want a percentage of the digital here." We'll just go down the street because we have another billboard on that street, right? So we have a huge universe of billboards that we can convert. Great statistic for folks that are new to Lamar story. We have about 170,000 billboard faces. Only 3,600 of them are digital. So there's a huge universe out there of inventory for us to convert. Now what's fascinating is those 3,600 billboards are almost doing 25% of our revenues. So our digital network is hugely important now to the mother ship, if you will. And interestingly, coming out of the Great Recession, we didn't have a digital network that was that robust, right? We were just starting to build them. And when the recovery trajectory of last year kicked in, in the fourth quarter. It was driven in large part by our digital network because we actually did more digital revenues in Q4 of 2020 than we did in Q4 of 2019. So that really helped our -- the trajectory of our recovery, having that very robust digital network.

So a few percentage points of your facings make up 25% of your revenue. If you did the -- if you unpack that math, there's like a multiplier on the billboard itself because you can cycle through many ads. I don't know what that multiplier is, 4 or 6 or something. And then there's, I guess, some selection bias in there in that you're going to put digital in the most traffic billboards, right? Are those the 2 -- is that the right way to do the bridge up to -- okay.

Yes. A couple of things to think about as you ponder where we could go with our digital network. Number one, the right way to think about it is not you've got 170,000 faces and you've only done 3,600, gosh, the sky is the limit. Because there are some built-in governors around conversions. Number one, you're right, we're converting our best units. Number two, we have customers that don't want digital. They want their static units. Picture Cracker Barrel, right? They're going to buy that big static unit on the interstate that says "pancake $7.99, get off here," right? And they're going to keep that billboard for decades. And by the way, they're our largest tenant. So we love those guys. So that's a governor. Another governor is how quickly we can actually convert. These are construction projects. And you need permits, you need zoning to be correct. You need the equipment to arrive on time with the trucks that put everything up. And like any construction project, things can go wrong. And what we own is our sort of comfortable pace of building is, give or take, 250 to 300 a year. Now last year, we kind of cut back a little bit because we didn't know where COVID was going. But now that we see light at the end of the tunnel, we're going to try to do about 300 this year. So those are kind of the governors. When you think about the demand side, not the supply side, the demand side seems to be -- it could be upwards of 50% of our book one day if we hold them fast enough. Well, if you go to the U.K., over 50% of the total out-of-home ad spend is already at digital. So digital is already over 50% in the U.K. Now a lot of that's smaller format transit settings, which is it's easier to flip the switch and just convert, right? But it tells you that the demand is there. I mean people really love this product. Our tenants just -- they really like it.

And if you unpack the main reason why some love this so much,as opposed to others like a Cracker Barrel that just loves what they have on the static side, what would be the 2 or 3 things that attract one of your customers to digital?

Well, the first and most important thing is it's immediate responsiveness to whatever messaging they want to put up. They can change their copy from their desktop, instantaneous. And let's take the restaurant example because we have some restaurant customers that love digital. They want to drive time in the morning. They're advertising breakfast. When the kids are getting off of school, they're advertising milk shakes. And when it's a dinner time, it's hamburgers, right? And they can change that copy just like that to respond to whatever the moment brings. Another reason they love it is it ties in very tightly with what they're doing in social and mobile. So whatever is trending on their Facebook account or whatever is trending on whatever social media they're using, they can use that to inform what goes up on the digital. And they can do it instantaneously. We have customers whose cash registers are tied into their use of digital, right? So if they've got something that is selling like hotcakes, they can tell the world; or conversely, if they need to drop price on something that's not moving, they can tell the world, again, instantaneously. So I'd say that's the most powerful reason why customers love it. And then, look, at the end of the day, we're still a cheap date. We're the lowest cost per 1,000 medium out there. Our static CPMs run about $3 to $5 cost per thousand impressions. Our digital CPMs run about $8 to $9 cost per thousand impressions. And as you know, that's below the radio umbrella, right? And we can even be more responsive than radio. So for all those reasons, digital is a product that our customers and our tenants just they really like.

Has it exceeded your -- I mean you've been questioned about this, now you've been bullish on digital for a while. But has it exceeded your expectations when you first embarked on this digital journey?

Certainly Q4 of 2020. And there's something else that's happening. It's early in the game, but many of our customers that are used to just buying this screen, the little screen or -- and they use programmatic to buy the screen are using programmatic buying channels to buy our large-format digital screens as well. And oftentimes, what shows up here shows up on the street as well. That, I think, is -- just bodes really, really well for the growth of our digital network. We did more programmatic dollars in Q4 of 2020 than we did in Q4 of 2019. And interestingly, so -- just so that our audience knows what I'm talking about, most of the ads that are purchased on mobile devices are placed there by an algorithm. You drop a digital dollar into the algorithm and it immediately places the ad based on the demographics, the geography they want to cover and the CPM they're willing to pay. And increasingly, that same digital dollar is carved out for our screens, again, assuming we hit the CPM, get the demographic and give them the geography that they're looking for. And that gives us access to a whole new pool of advertising dollars. The traditional ad pie, as you know, Jason, is shrinking a little bit, right? The digital ad pie is growing. And this digital ad pie used to not talk to us. Because we have a programmatic channel now, we have access to those dollars.

When you say hit the right demographic, that makes sense to me sort of in a traditional Internet world. But what does that mean in the outdoor world? Like I sort of think of almost everyone walks and drives and it's hard to parse sort of demos by your billboard. Am I wrong on that?

Well, you're right in one sense. We deliver a ton of eyeballs, and there's -- every demographic sees us, right? However, with the use of aggregated anonymous cell phone data, we can slice and dice particular demographics as they go buy our digital units. And typically, we do that in conjunction with our DSP, SSP partners, the ones that are actually bringing us the programmatic dollars. They will subscribe to some of these cellular data sets. And our ultimate end client will use those data sets to prove out the performance of their campaign. And they will slice those demographics pretty thinly. If you're Budweiser, you're looking for males 21 to 50 who have the -- check their scores on ESPN apps, right? And we can give them that demo at a particular cost per thousand impressions.

Got it. I've got one question in from the audience here. Would you characterize your outlook, is that of an early COVID recovery or late COVID recovery stock? And why? And then the second part is what was the pattern of fundamental recovery coming out of past recessions?

Great question. This one feels more like a V than the Great Recession. It just feels like it's going to happen quicker. So 2020 knocked Lamar back about 3 years. We did on the top and on the bottom basically what we did in 2017. Our hope and aspiration is that we get about halfway back to 2019 this year. That's where we have set our guidance range, and that's where we've set our internal budgets.

And sorry, when you talk halfway back, you're talking on the top line?

Mostly on the top. Yes. We fell about 10.5 last year. And we're budgeting -- and the midpoint of our guidance is 5 and some change. Now I know that if you fall 10 and you go back up 5, you're not halfway there, complicated. But at the end of the day, that's where we're shooting again. And then hopefully, the real recovery is 2022 when we get back to roughly around 2019 levels in 2022. So I don't know whether that's early COVID recovery or late COVID recovery. But I think relative to some other REIT real estate assets, I think we're going to be a significantly faster recovery than some other traditional real estate.

And then that digital portion of your inventory now is also a shorter lead times, right? So that's going to sort of help it come out a little bit faster, I would imagine, in prior recessions. No? I mean not measured in quarters, but measured in months.

Yes. Yes. It fell the most in April when everything shut down and came back the fastest.

The digital part. Okay. So can I ask you a question about employees? I was going back and looking at the number of employees, and it's sort of -- if I -- I'm going to have rough numbers. But you had maybe -- I think it was 3,300 employees back in 2006. And then we went into the Great Recession, then the employee count fell to about 3,000. And then it just hung out there for a long time, like the employees didn't come back when the economy came back and your ad dollars came back. And then it slowly crept back up to that 3,600. And then we went into COVID and now you're back down to this 3,300 number. Is it the same -- are you sort of anticipating sort of keeping that employee level sort of at that 3,300? Or did you really sort of do some things that you would characterize as temporary in the middle of COVID and that -- and they'll come back? And the reason I ask is your employee count now is about the same as it was in '06 when you had about 30% less revenue. I mean you're really running a leaner machine than you were 10 or 15 years ago.

Yes. A couple of ways to think about that. The punchline is about half those employees are going to come back as business improves and as we move into 2022. The reason we were able to keep the employee count lower after the Great Recession is we actually changed substrates at the same time. We used to put up billboards with paper and paste. We've changed our substrate to polyethylene, which meant you didn't have to have 2 guys in a truck. You only needed 1 guy in the truck. So the technology changed to our benefit right when we needed it, right, right when the Great Recession hit. Interestingly, as you know, we do run a lean machine. And one of the reasons the employee count went up over the course of the last decade is we bought more billboard companies, full-service shops in places like Seattle and Columbus and Cleveland and Reno and Boise and the like. But we run a tight ship.

Okay. What would you guess is going to happen from an M&A standpoint? Because I still look at your industry, the outdoor industry is still reasonably fragmented. I mean we've got the big players that are out there, but there's still a lot of smaller players that are privately held. I mean I don't know how big it is. Is it 1/3 of the market or something like that? Is that...

It's a big chunk. There's thousands of independent operators. And again, for folks that aren't as familiar with Lamar out there, go to our website, go to browse inventory, click through -- and a map of the U.S. will come up. And what you'll see at first is about 200 dots on that map. Those will be our offices. And then if you drill down further, you can actually see each individual billboard. You can go down to the billboard level. And I ask you to do that because you'll be struck by one important thing. Those guys really are everywhere. I mean we have billboards in every nook and cranny of the country. Now what does that mean from an M&A perspective? It means virtually everything is a fill-in for us, right? I mean we can go buy an independent billboard operator that, let's say, they have 20 units in the state of Louisiana. And we can buy those -- that inventory and not have to have any other people. We don't have to add any account executives, any trucks, anything. We're just buying the physical structure, the ground lease, the advertising tenant contract and the permit to be there. That's it. And it makes for a very predictable exercise. If you want to know sort of the secret sauce that allows us to sort of very predictably do M&A in a way that is accretive to our shareholders. That's it right there in a nutshell. We're the highest and best buyer of virtually any traditional out-of-home inventory in the country. And again, there's a lot of those independents out there. It's a long runway. We'll typically spend $120 million to $140 million doing that every year. And then every sort of third year, there's a handful of bigger operators out there with asset values in the $200 million, $300 million, $400 million worth. And it seems like about every third year, we knock down one of those. And then, of course, there's the other 2 big players. And every now and again, we get to take a look at some of their assets as well.

Okay. I've got a question from the audience here. Any nuances on the pace of recovery in local versus national? That's the first one. And I think you touched on this earlier, but the second part is, similarly, which industries do you expect to come back the fastest?

Second question first, we have a remarkably stable verticals. I mean you can look at -- you've looked at us for 10 years, and it's the same 10 groups restaurants, retail, health care, gaming, et cetera, automotive. For the most part, our verticals have recovered. They've normalized, as I like to say. And they're all filling out their respective predictable places in our book with the exception of amusement, entertainment and sports, right? We're not gathering like we used to, obviously, and hopefully, we'll gather again. That used to be about 4% -- 8% of our book, and now it's about 4%, right? So we're looking forward to that vertical recovering. When it does, then Lamar will be fully recovered. I think that's the governor there. And then you sort of asked another question about...

National, local. National, local.

National, local. So national fell further last year, which means on a percentage basis, it's going to recover quicker this year. So what do I mean by that? It fell about 20%. So we're looking for pro forma growth of about 10% in our national book of business this year. The early indications are that there's a lot of activity out there, and that's not a great leap of faith. Local didn't fall as hard. And so it's going to come back on a pro forma basis with a smaller percentage.

Super helpful. So a year from now, if everyone's back together in Florida at this conference in person, what do you think will be the one thing that surprises you most about your business over the next 12 months, if there's one surprise?

If there's a surprise 12 months from now, it will be that our airport division has fully recovered. It's a small piece of what we do. In 2019, it contributed about $45 million in top line revenues, and it's -- we've got about 15 to 18 franchises, including Las Vegas, right? So that business was cut in half, right? And it's still running at about 50% of '19. And so that's my upside surprise, flying around again.

And speaking of flying around, again, if you had to guess about sort of corporate -- or your corporate travel spending in 2022 versus 2019, what do you think it will be? Will it be the same? Or is it structurally lower? Do you think something permanently changes?

I think it's structurally lower, but not -- maybe, let's call it, 80% of -- we'll be back to 80% of that budget, I think.

Okay. And the last one before we go. 10-year treasury note, do you want to pass that off to Jay?

I'm putting that one to Jay.

Okay. Jay, are you on?

Yes. I'm here, Jason.

Okay. So the question is, a year from now, where do you think the 10-year treasury will be? Today, the yield's about 1.5%.

I'm going to go with 2%.

2%? Okay, so a little bit up but not crazy.

Not crazy.

I'll take that.

You concur? Got 2 votes for 2. Very good. Well, you guys have been great. Thank you so much for the time today. It's always nice to catch up with you, and you guys are doing an amazing job running your business.

Well, appreciate it.

Sorry about the COVID hiccup, but you guys are doing great.

Thanks, Jason.

Yes.