Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

Well, I'm Jason Bazinet, Citi Research. I want to welcome Sean Reilly, President and CEO of Lamar Advertising. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast or at the AV desk. [Operator Instructions] So Sean, thank you for coming.

Glad to be here. Thanks for having me.

Now I couldn't help but notice you were fanning yourself a bit there. I hope the air conditioning is on.

Yes, it got a little toasty in here.

I'm sorry about that. Maybe we could start with just giving us a brief overview of Lamar and then we'll turn it over to Q&A.

Well, yes, we'll do billboards 101 real quick.

Okay.

So Lamar is the largest out-of-home company in North America and by market cap and enterprise value, the largest in the world. We specialize in middle-market billboard companies. That's important to know because in those markets, we have absolutely dominant market shares 85-plus percent. And I'm talking places like Little Rock and Baton Rouge and Tallahassee, when you think about Lamar. Less so places like Miami or New York. Although we do have good coverage in some top DMAs like New York and Chicago and Atlanta. But when you think Lamar, think middle-market billboards, dominant market shares and, importantly, a moat around our business, as Warren Buffett likes to say. There are no net new billboards being built in America, right, because of all the regulations. And because of that, our market shares are protected. And I think relative to other property sectors, that's a very unique thing that stands out for Lamar as an investment.

Okay. That's super helpful. Maybe the opening question I was asked to ask you, and I think they're going to do this for all the companies. If you had to give 3 reasons for why an investor should buy Lamar over any of the other REITs that are here today or property companies, what would they be? You just gave one, big moats around the business. What would be the other 2?

Well, I'll start with the fact that we're just on fire, Jason. I mean we just concluded an incredible fourth quarter where we set records across virtually every financial metric, be it record revenues, record EBITDA, record margins, record AFFO, AFFO per share. We're just in a really great place and a great space right now. So that would be #2. And I think #3 would be the secular tailwinds that are in out-of-home and helping out of home today. We are gaining share on our local media competitors because their audiences are under threat. They're eroding. There are fewer eyeballs watching network-affiliate television because of the over-the-top cord cutting. Obviously, we know the demise of print and newspapers and what that's meant. And those customers that used to use those outlets are coming our way.

That makes perfect sense. One of the things that we noticed in 2021 across the broader ad market is we just saw this huge growth in digital advertising, huge growth, right, because personal consumption was just off the charts in 2021. I think it was something like a 12% or 13% growth in personal consumption. And for a lot of the nondigital ad mediums, we didn't see -- we saw healthy growth for sure, but it didn't sort of track personal consumption at that level of sort of one-to-one mapping between digital ad growth and personal consumption. Is there anything that you get nervous about? Because investors are nervous about moderating PCE growth as we move forward. Is that something that could be a headwind for you guys as consumer spending moderates? Or do you think that's not so much of an issue?

Not so much of an issue for us when you think about where our tenants come from and what their sectors are. So for example, our largest sector is services. So think attorneys and accountants and the like. Our second largest is restaurants. Think McDonald's, Burger King, Cracker Barrel. So when you start ticking off where our customers come from, doesn't seem to be that big of a concern for us. I mean for us, the explosion was people really wanted to get out and about. I mean, when they were allowed to get out of their house, keeping in mind we're out-of-home, that is our name of our industry. When people wanted to get out and about, our customer, our tenants wanted to use us to talk to their best potential customers and talk to those folks that were now finally free, right? You mentioned digital, the growth of digital has accelerated, obviously, the erosion of the eyeballs for other media. And so digital is a threat to things like, obviously, newspaper, Yellow Pages, even traditional television, traditional radio. For us, digital is actually -- augments our business. It actually -- we work with this as opposed to selling against it. People carry this around. It's out. What happens on your phone can inform what goes up on our digital billboards. What's on our digital billboards actually can inform what shows up on your phone. So when you think about digital and out-of-home, you want to think about, again, secular tailwinds, not headwinds.

That makes perfect sense. So can we dig a little bit deeper in terms of your digital transition? I think it's only about 2.5% of your displays, something like that today, and a much, much larger portion of your revenue, maybe a little over 1/4, I think it is now. How do you -- just can you help us understand how you guys go about deciding when to convert a board to digital and how big that could ultimately get in terms of your business because that's a huge disparity, right? A couple of percentage of your displays and 1/4 of your revenue. So it seems like a big part of revenue.

So yes, good question. So how big can it be? Well, in the fourth quarter, again, we set records across the board. Digital was 31% of our book of business. And as you mentioned, it's less than 3% of our units. So the short answer is, we're converting as fast as we can. Now there are logistical issues that every time we convert a digital board, it's a construction project. You have to get permitting in place. You have to get the units in place. You have to get the crews out there. And we ran into some logistical issues last year, supply chain issues. We're overcoming that this year. I think we're going to be on a glide path to put up about 300 new digital units this year. How do we decide which ones to do? Dwell time is very important, right? Because by dwell time, I mean the number of cars and the speed of the cars as they pass the unit because you're transitioning 6 to 8 tenants during the course of a loop, right? Every 6 or 8 seconds depending on the regulations in place at the local level. So dwell time is very important. Lots of cars is very important. You put those 2 together, and you can take down a unit that's doing, let's call it, 3,000 a month as a static unit. And you convert it to digital, and it will do 15,000 to 18,000 of them, right? So the lift can be dramatic when we do a conversion. And again, our digital platform performed so incredibly well last year. It was up over 20%, somewhere in the neighborhood of 23%. So -- and that was same board, right? That's same unit performance. So we're going to go as fast as we can.

Okay. I've got -- can I ask one clarifying question before -- I had a question from an investor. How should investors -- I remember this period of time for your company where you would say, "Oh, we're going to do x number of digital conversions this year." And the buy side would go out and they would do the math on the lift that you just talked about. And it never quite ended up being as large as everyone thought, right? And so it felt like there was some sort of migration that happened where maybe a customer of yours on the static side moved their dollars to digital, but it wasn't 100% incremental. Is that a real dynamic? Or is everyone just doing the math wrong as they go through these number of conversions and multiply it by 6x or 8x or...

Yes. We track it very, very carefully. So I will tell you that the performance of a conversion matches up with that math. Now when you take the whole platform, analog and digital, and $1.7 billion in tenant dollars, there is some migration. So there is a little bit of cannibalization as you look at the whole platform. And so what we track there, of course, is what's the rate and occupancy on our traditional units. And I'm here to tell you the news there is great. In the fourth quarter, our rate for our analog product was up 6%. So we are driving rate. And you're probably going to ask me the inflation question, so I might as well answer it now. Inflation historically has been our friend, because if you look at us relative to other property sectors, our tenants turn over more quickly, every 4 months on average. Now we have some products where the tenants are there for a year. We have some products where the tenants are there for 3 months. Our digital product is our shortest-cycle sale, right? And that's, again, why we are enhancing the yield there because we have a rate discussion there almost every week, right? So we can pass on whatever is happening in the world of inflation. So on the revenue side, it's traditionally been a good story for Lamar, inflationary times. Now we haven't had inflationary times, and it seems like a lifetime. But the early returns are good, given what we saw in the fourth quarter, we were able to drive rate. And if you look at this year and our guidance, we're looking at 7-plus percent up on the top, right? So clearly, we're able to pass on whatever it is we're seeing out there. Now on the cost side, our largest cost is what we pay our landlords' ground leases, right? We own the structure, we rent the ground that we put the structure on for the most part. That's a huge portfolio, some 60,000-plus leases. And that portfolio is -- runs about 21% of our revenues. It's cost relative to our revenues. And it grows at about 1% a year, year in and year out. So with the exception of a small number of revenue share leases, this is where the -- we share actual revenue. Most of our leases are fixed. That's going to remain really stable on the cost side. Our second-largest expense running a little around 20% is people, right? We're seeing a little bit of wage pressure there. But at 20% of our revenues, we can afford to be good to our folks and still keep consolidated margins at 56%, right? So I'm feeling good about where we are today.

That's great. So I had a question come in over the Internet here. It says, who are your biggest competitors? And where do you fit in versus Google, Facebook and other digital-native companies?

So if you're talking about the billboard business out-of-home, there are essentially 2 other large public companies. One is called Clear Channel Outdoor. The other is called Outfront. We tend to compete with them in the larger DMAs. So again, think Atlanta, Dallas, L.A., Chicago, New York. Top, let's call it, 20 DMAs. When you get below the top 20 DMAs, we really don't have much in the way of traditional billboard competition. There would be some local mom and pops that have small market shares. But again, when you get to places like Little Rock and Baton Rouge and Tallahassee and Boise and drive around, it's really just Lamar is all you're going to see. So when you broaden out the definition of competition to other local media, as I mentioned, we compete against TV, radio, newspaper, Yellow Pages, to the extent they're still throwing that book in your driveway, and there, as I mentioned, the secular trends are our friend in terms of where ad dollars are going in the local ad pie. And then, again, as I mentioned, yes, certainly, people are taking their dollars to Google and Facebook and the like, but we don't sell against those guys. What we try to do is help our customers augment whatever they're doing in social media, which tends to be 1:1, right, augment it with out-of-home, which is your one to many, right? You want that personal relationship with your customer, but you also want to tell the world about that personal relationship, right? So that's the way we handle the competitive landscape out there, and it seems to be working pretty well.

It is working well. I mean it's one of the -- your sector of the advertising ecosystem has performed much better than I would have thought if I rolled the clock back 10 years. I mean it's just been a very, very resilient space, outdoor. And you guys have performed very, very well within that space. So I certainly don't get nervous about the Google, Facebook dynamics for whatever it's worth. So here's another question. Came in online. It says, "Seems like Lamar has gone pretty slow when it comes to digital conversions. Why so slow? As you point out, not many units converted. What percent is static versus eligible for conversions?"

Yes, good question. I get that question a lot. Please know we're going as fast as we can, and we are going faster than any other company out there. These are big construction projects, basically. We're not converting little screens in a transit setting. Although we do, do that. We're talking about big screens, 14 by 48 out on the highway. And so we're going as fast as we can. The other guys, on average, put up maybe 120 to 160 to maybe 180 a year. We clip along generally, with the exception of last year, at about $300 a year. So that's question number one. Now how big can it get? In the U.K., digital out-of-home is over 50% of total out-of-home ad spend, right? Fourth quarter, we were at 31%. I think absent that gating issue of being able to convert more, I think we could easily get to 50%, right? We certainly have plenty of units we can convert. There are regulatory hurdles we have to overcome in certain jurisdictions, but we work on that. That's the permitting piece, which can slow you down. But when you look at the universe of eligible conversions that we have, there's still plenty of runway for us.

Okay. That's great. If anyone in the audience does want to ask a question, please let me know. I do -- I can actually see the room there, so I can see if anyone stands up. So don't be shy if you want to walk up to the microphone. I'll certainly call on you. Someone walked up. Great, okay.

I would like you to define your eligibility for conversion a little bit more. As you think about how many units -- there are a bunch of rural units, I would expect, you're not going to convert. So what is the actual number we can imagine over the next 10 years?

Yes, good question. I think about it first in terms of percentage of our revenues. And the reason I think about it that way first is we have some customers that don't want to use digital. Think Cracker Barrel, right? They're our largest customer. They like to buy static units on the interstate, telling you that you can exit here to get pancakes for $7.99, right? That's what they want to do. And we have a lot of customers that look like that, right? And so I'm not looking at a day where every single unit is digital, even if it was logistically possible to get there. And then historically -- again, thinking about the percentage of our revenues that are digital as opposed to analog, historically, we've gone faster than the market wanted us to. We built supply quicker than the demand was there. I'm going back about 8 years now. And Jason, you probably remember this. We had that little dip where our same-unit growth kind of stalled on us, right?

Yes. Yes.

Now the good news is because in most of our markets, we're the only provider, we can moderate supply and demand, right, because we pretty much have all the supply. So again, we're going to measure it. We look at it carefully. Right now, the product is so widely and wonderfully received by our tenants. There's just a wide universe of units we can convert if we could just -- logistically just get there, right? Again, we were up 23%, same board yield last year. And the whole platform was up 31%, same store in Q4. So just tells me we've got a lot of running room.

That's great.

One last point. We have about 170,000 billboard faces. And we've only converted about 28,000.

So as we think about 100 to 120 per year...

About 300 a year.

Oh, 300 a year.

Yes.

For the next 10 years?

Yes. Hopefully, we get to where we can do better than 300. Maybe 400, 500. Right now, the supply chain is a little stressed. The same thing that's causing cars to take 6 months to deliver is causing our digital billboards to take a little more time. It used to -- lead time used to be 2 to 3 weeks for us to get a digital unit. Now it's 6 to 8.

So I've got a question here, online. Who owns the ground underneath your billboards? Is it big corporations or mom-and-pops?

It's all of the above. Again, 60,000-plus ground leases. Some of them are with incredibly sophisticated landlords like Simon Properties, right? And some of those are percentage pay leases where we pay them 25% or whatever we get. And then some of them are farmers on the interstate between Monroe and Shreveport, Louisiana on I20, right? So it's literally -- it runs the gamut. Highly diverse portfolio. No single landowner owns even close to 1% of our revenues -- the ground under our revenues. As a matter of fact, we're our own biggest landlord. We own the ground under about 20% of our revenues. And we own about, give or take, 6,000, 7,000 parcels. So yes.

Another question online. It says a while ago, people said there was an opportunity to have small cells or micro cell towers on the billboards. Are you seeing any of that opportunity today?

We see a little bit of it. We probably do a little over $1 million and change in terms of cellular revenues for carriers that put their cells on our billboards. It's trickier than it seems at first blush. When you're out in the country, they need to be higher up. That's why the tower guys do so good, right? They need to be up 120, 150, and our average height tends to be around 90, right? So we're a little too short, if you will, for cell sites out in less-dense areas. And then when you get into dense urban areas, there's just lots of competition. You can put cells in lots of places. The other issue is, you need to bring fiber to the deployment, right? So when you put all that together, we're not ideally suited for the last generation of rollout. Next generations of rollout, we'll see.

Jason, I think we have a question.

Yes, over here.

Do you mind stepping to the mic so we can hear you? Thanks.

Could you remind us, please, of the algorithm about how much supply is actually created from going digital?

Sure.

And is that like 6 versus 8 or 7 versus 6 why the portfolio has that slight percentage cannibalization? i.e., you can -- you create 8 new spots, you charge a little more for each one, and that's kind of what's -- how does that internal engine work?

Sure. So I'll just kind of go through all the metrics, so you can get a sense of the ROI, right, for a deployment. And this is average, right? It's going to be different in Las Vegas than it is in Baton Rouge than it is in Boise than it is in Los Angeles, right? But on average, you're taking down, with a large format, 14x48. You're taking down something that is doing, as an analog, about $3,000 a month, all right? And when you take it down and put up a digital, you now have 6 slots to sell to 6 different tenants, all right? Now as I mentioned, you're going to take something that was doing $3,000 and it's going to do $15,000 to $18,000 a month. So what that tells you is you're selling that slot for about $3,000, right? It's the same absolute cost to the tenant but it's shared space, right? And what that means is, since the average -- I talked about dwell time, since the average number of views is 2.3, that's 2.3 cars see it, your cost per 1,000 impressions goes up from about 4 to about 9, okay? So absolute dollars, same for the tenant. Cost per thousand impressions goes up. So that's sort of the basic story there. It cost us a little over $200,000 to do that conversion, all right? Our ground lease cost under our digital units runs about 10%. So the incremental margin contribution runs in the 75% range. And if you do all that arithmetic, you'll see the payback is real quick on that $200,000. It is a very attractive ROI, right? Did that arithmetic make sense to everybody? And then the cannibalization piece is we have some customers that buy across both platforms, right? So I'll use McDonald's as an example. They're one of our biggest tenants, all right. Prior to the advent of digital, they were obviously only buying analog boards and they were paying whatever the going rate was in a given market. Now they buy across both platforms. And if they are spending the same dollars, then they're taking a little bit of their analog buy and pushing it over here to the digital. Now the good news is, if they come off this analog billboard, there's another tenant waiting to rent it, right? It might not be McDonald's, but it will be somebody because if you look at our occupancy right now across our platform, we're at peak occupancy, which is why we're driving rate so well. We're at peak occupancy.

So I have another online question. Can you discuss the sales cycle to move a customer from static to digital? And are your new customers, maybe new to Lamar, more interested in static or digital?

So probably the biggest customer category -- tenant category currently on the boards is the online gaming, right, DraftKings, et cetera. And they're buying across both platforms. So new customers come in, they buy across both platforms, analog and digital. You could call up a Lamar sales rep in Boise and say, "I want to buy that bulletin on the interstate right here". And in an analog world, we'll have you up in about a week, all right. In a digital world, we can have you up in a nanosecond. Jason, I could take your picture with my iPhone and have you in front of 130 million eyeballs in 5 seconds, all right? And increasingly, people are buying our digital billboards the same way they buy ads on the phone, right? They're using what's called programmatic buying. They drop a digital dollar into an algorithm. The algorithm is searching for places on here and searching for places out in the physical world with digital billboards. And if we have an availability at the right price and the right place, at the right time, the buy automatically shows up, never touches human hands. So in a sense, programmatically, we're selling space -- we're renting space in a nanosecond. And that's the fastest-growing sales channel at Lamar is our programmatic. It's growing very quickly. And it's net new tenant dollars because we don't allow our traditional channel customers to buy programmatically, right? We're only allowing people to traditionally buy here to buy that way.

I'm going to do 2 rapid-fire, quick questions.

Hey, Jason, we've got one question here. Sorry.

Quick question. So you talked about cost per thousand going up about 3x. For the customer, are they getting sort of better returns than what they're paying? Or like what are their goals? Is it just that they could display different material on a digital versus static?

Yes. Good question. First and probably most importantly, at $8 or $9 cost per thousand impressions, we're still cheaper than radio, TV, newspaper. So when you think about the cost per thousand impressions, sort of there's a pricing umbrella, and we are at the bottom of it, right? We're the cheapest medium, which should give you comfort, right? Because our customers, if they're going through a rough patch, they tend to cut the stuff that they're spending the most dollars on, right, as opposed to what they're spending in out-of-home. So again, it's still cheaper than, as I said, radio, which is the second-cheapest medium. Now why do our customers pay a higher CPM? It's incredibly dynamic. They can change the copy from their desktop, right? We have customers, their copy automatically changes based on what's trending in their social media, right, just automatically. Or if, let's say, you're a restaurant and you want to advertise pancakes in the morning and then hamburgers at noon and steak at dinner time, you can change your copy, right? You can't do that with an analog billboard. So that -- it's that dynamism, that ability to marry what you're doing in social media, the ability to change your message instantaneously that they just really appreciate. And they use it -- I mean, they really use it to push dynamic messages.

Okay. Two rapid-fire questions here. And this one, you normally ask your CFO, Jay Johnson, to answer. But a year from now, where do you think the 10-year will be, Sean?

Jay, where is the 10-year going to be? 2.5. Jay says 2.5.

2.5. All right, last question. A year from now, fewer number or same number of publicly traded outdoor companies?

I think it will be the same. There's -- as I mentioned, there's 3 large domestic U.S. players. There's 1 large global player in JCDecaux. There's a public company called Stroer, which is -- dominates Germany. And then there's a smaller public company called Boston Omaha. And I don't see much changing in that landscape.

Makes perfect sense. Sean, thank you very much. It's a great session. Very good to see you as well.

Yes, indeed. Appreciate it. Thank you all.

Absolutely. Thank you.