Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

All right. Why don't we get started? Good afternoon, everybody. I'm Ben Swinburne, Morgan Stanley's Media Analyst. Please -- one disclosure for a second. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, reach out to your Morgan Stanley sales rep. I'd like to welcome back to the conference live and in person, Sean Reilly, President and CEO of Lamar. Sean, it's good to see you. Thanks for coming.

Yes. And great to be here. Good to see all you guys again. Awesome.

It has been great to get everybody back together. Sean, maybe we could start -- you guys reported not too long ago, your fourth quarter results better than expected on the top and bottom line, and you grew the dividend, increased the dividend by about 10%. How are you feeling about sort of the ad market and Lamar's position as you look out over the rest of 2022?

It feels great, really. Looking at Q4, I mean, we set records across virtually every financial metric, top line, bottom line, AFFO, AFFO per share, operating margin, really setting records. So, it was gratifying to see. And of course, we declared a special dividend and then increased the dividend this year. So, all good on that front. All we're seeing is the same momentum carrying forward. We guided to 7 plus. I've been telling the various folks assembled that you can plug in 7.5, that's kind of what plus means. And interestingly, again, we're seeing a lot of momentum, but the cadence through the year is going to be a little different, right? It's loaded in Q1 because of the comp and because of 2021 Q1 was still kind of COVID affected, right? But it's going to be a good year. I feel good about it, so -- and our visibility is as good as it's ever been. I knew you were going to ask the question on that. So, I did some very current pencil whipping. And as of yesterday, we have 62% of our goal, let's call goal the top end of our guidance, 62% of our goal is booked. It's done, right?

For the year?

For the year.

Wow.

And in 2019, same day yesterday we were 61% booked to where we actually finished '19, right? So, I mean we're right on top of it. So, that feels good. So yes, as of right now, everything is flashing green.

That's great. Thank you for bringing some new numbers to the conference. I appreciate that. It's interesting because your visibility is essentially, well, in theory, the same or be a little bit better than '19 in terms of your forward -- ability to see forward. But I would have thought with digital becoming bigger in many ways that could make it harder to see. So, it's interesting that even with digital growing as a part of the business you're through that locked in?

Yes. I don't know that it's material yet because in '19, it was probably what, 22%, 23% of our book. Last year, it was 26%-ish, Q4, it was 31%, great number, right? So, it's growing fast as a percentage of our book. And so this year, I'm hoping it will be somewhere in the 30-ish percent, right? That would be a good thing to see.

And just going back to your point on the quarter, obviously, as you pointed out, Q1 is sort of the last favorable comp on the pandemic. And then I would imagine Q4 is decent with political, right? Political has become something you typically hadn't talked about for a while, and it has become a decent business, right?

Yes, it is. And it breaks late. Political for us, breaks in the second half. It's harder to predict. It's certainly harder for our General Managers to budget for it. So, they -- if they're sandbagging in my numbers, it would be there, the -- because they don't know whether or not they're going to be -- they're going to have a street fight in their market, right? So, it breaks late, a little harder to gauge. I will give you a good number just to sort of think about so you can get order of magnitude. The last time there was or let's go 2020 over 2019 because we do get political in odd years, right? It was $11 million, most of which broke in the back half.

Incremental. Yes. Got it.

$11 million '20 over '19 breaking in the back half.

Yes. Okay. And at this point, I would imagine midterm versus presidential, not much of a difference?

The prognosticators say we're going to break records this year, right? And if they're right, there won't be that big a difference in midterm versus presidential.

Right. What are the priorities for the company? And obviously, the business is going well, there's momentum. But strategically, what are you and Jay and the team focused on in terms of driving the business longer term?

You know, I hate to say more of the same, but I'm going to say more of the same. I mean really, we have to execute on accretive acquisitions. We did about a little over $300 million last year. Average transaction size, $6 million, 45 separate transaction. So, a lot of activity. So, let's execute on that. Last year, we didn't quite hit our goal on digital deployment. We had some supply chain issues. So, we set a target of $300 million this year. We need to execute on that. And then we need to hit the financial metrics we just laid out. So, if we do all that, everybody would be happy. Hopefully, no surprises.

Yes. I'm sure you get this question all the time. If we look back over the many years that you've been coming to the conference and we've been following your company, organic growth was sort of in that -- if you think about after the financial crisis, kind of that 2% to 3% zone and then really towards the latter parts of that cycle, right, '17, '18, '19, we started to see the business inflect and you always like to remind me that 2020, you would have crushed my numbers. It's not -- because of the pandemic. So, I'll preempt that by bringing it up. But you talked about the 7-plus faster with acquisitions. But as we come out of '22, we're sort of back to -- the comps are normal and we're back to whatever normal is going to be. So, I know you don't have a crystal ball, but how do you think about what the long-term growth rate is for your company through this next cycle?

So yes, if you're talking about the top line, you got to -- you still got to start with GDP, whatever you think that's going to be going into the year. Then you think about U.S. domestic ad spend, right? So, and you turned a lot of sources in December to kind of guess what that's going to be. As you know, usually, ad spend is going to beat GDP by a smidge, right? And traditionally, we've beaten U.S. ad spend by a smidge. How big that smidge is? How effective are we on digital deployment, if you're talking same-store, right? That's critical. If you're talking bottom line, enhancing the margin, right? So, you heard us explain the expense issues around some corporate initiatives and the return of the [ MAGs ] and to put that in perspective, if we're going to grow 7.5% organically on the top, normalized expense growth is going to be about 3.5%. And that's going to be commissions expanding and percentage paid leases, things like that. The difference between the 3.5% and the 6.5% guide is the return of the MAGs and some corporate initiatives. But for that $25 million, our margin would have gone from 26 -- I mean, from 46% to 47% this year. So, that's a long-winded way of saying, if I'm going to grow EBITDA disproportionate to the top line, I got to expand my margin. And so my goal is to hit 47% in '23, right? And that will, of course, slow down to AFFO, AFFO per share. Now, if you're talking about growing AFFO per share, then you layer in the accretive acquisition because that really flows down nicely to AFFO per share. So, those are the ingredients and there's no magic to it. We just have to execute.

Yes. You always talk about your business, you're more local than the other public out-of-home companies, so tends to be lower beta. Is driving the national business something that can -- I know we're talking smidges, but every smidge counts as they say in the business. Can you drive more share of digital -- of national as you deploy more digital? And is that something that maybe could kick in a little bit over time?

Yes. And the driver there is keeping in mind that it's 25% of what we do. We're 75% local, 25% national. The driver there is really programmatic because that's 100% on national dollar. It's as of today, 100% incremental. And when we report national local, that's national and programmatic, right? And programmatic is growing faster than the underlying national base. So, that's the arithmetic there. That may cause national to skew -- growth rates to skew a little more than local, right?

Yes. And what are you guys doing as a company to make programmatic more widely adopted across the agencies and national advertisers?

Well, it's -- this is one where the successes of the industry and newer to the benefit of all, I mean as clear and out front expand their programmatic capabilities, it's only good for us. Now we have an open architecture. We are -- our pipes, if you will, are plugged into by all your major DSPs, the trade desks and et cetera. And they have 4 primary specialists that pitch out-of-home programmatic to those DSPs and/their respective customers, right, the ultimate client, be it an agency or going direct to a P&G or somebody like that, for example. And those 4 players are Vistar, Place Exchange, Broadsign and Hivestack. And all of us use them, right? So in a sense, again, the more digital out-of-home that's out there, the more that agencies and large advertisers can get the kind of the distribution and coverage they want that lists all those.

Right. And I know Clear has a relationship with Hivestack. I'm sure you guys do as well. And you're an investor in Vistar, is that right?

In Vistar, yes.

Okay. What else are you guys doing digitally in terms of providing more tools, particularly on the local side? Are there things you can do to make that to take more share from local television or radio?

What's -- it's just happening. I'd like to say that it was superior management, but it's really a superior product quite frankly. And our local customers know how to use it. They use it in lieu of other media that they used to -- to use to accomplish their goals and it's easily for me to anecdotally point it out, right? It's just a very dynamic platform for whatever local advertiser wants to use it and whatever they want to do with it. It can do the kind of dynamic things that no other media can do and it can do it far quicker. And it works with whatever they're trying to accomplish in social media, far better than any other media and it's proving itself out. So again, I'd like to say it was Sean, but it's not, it's just a very good product.

Do you think that part of this kind of 2017 and beyond growth rate we've seen in out-of-home and what we -- I think we expect to continue into '23 and beyond has to do with the fact that TV's reach is declining and it's less clear what's happening with radio? But certainly, television, which is a big local media, there's real obvious pressure there. Do you think that's helping drive some share shift?

No question about it. And it started -- it started with the demise of the Yellow Pages, right? They're -- one of their largest clients were local attorneys. Well, you've seen that come our way. I mean it's now become our largest category. And then on radio, our amusements, entertainment, sport, event-driven category, which is rebounding rapidly, it was up 60% in Q4, they use us in lieu of radio to accomplish some of their goals and I can show you that, right? So, we can see it happening. And so the demise of audience for other traditional local media is enduring to our benefit.

Yes. I know that from the pandemic obviously, created a massive impressions issue for out-of-home, but you don't sell an impression, but I wanted to ask you something I asked Scott yesterday, I think it was yesterday, it's all starting to play together, which is about gas prices and how that may or may not impact cars on the road and therefore your business because we're seeing numbers that we've not seen before.

Yes. So, the short answer is I don't really know, right? But my gut tells me and AAA will have some data around this, particularly for summer driving pretty soon. There is a certain amount of your commute, especially in middle markets that's relatively inelastic, right? You got to drive the kids to school. To the extent you're going to the office, you're going to drive, right, because there's no mass transit. There are variable routes to get to where you want to go. So, you're not driving the same way every time. That's just a phenomenon in middle market. So, for that part of the driving that people do, which is the vast majority of it and the most important part for our advertisers to REITs, I think it's relatively inelastic. The most elastic is the summertime driving that is, honey, let's pile into the van and go to the beach for 3 days. And there's probably no doubt that that's going to get hit, right? So the question is, what do they do in lieu of that? They may drive someplace closer to home, that's 40 minutes away instead of 1.5 days, right? That place they're going that's 40 minutes away, they're still our customer, right, the vast majority of them are. So, we'll just see how it plays out. When I was at the Citi Conference, talking to the REIT community...

Much less on this community.

Absolutely. [ Dollar ] faces all around. I got a lot of questions about how does your platform perform in a stagflation environment, right? And I kind of jokingly said, well, that was early '70s, I was 10 years old. But I would usually flip the script and say, look, in an inflationary environment, we do well. As a matter of fact, and I'm talking Reeds Peak here, we do better than most other property classes because our contract duration is shorter. I get to have a rate discussion every 4 months, not every 5 years. So, that's what the REIT community was concerned with and it happens to be the truth. To the extent stagflation is mostly inflation, we'll be fine.

Yes. I'm going to go from stagflation back to irrational exuberance in the ad market, if you don't mind. There certainly have been some categories that we've been spending more time on like sports betting, direct-to-consumer where we've had a lot of businesses where their marketing has ripped, their profits had not.

You mean they were spending like drunken sailors?

That's not how I would describe it.

And there was a hangover.

Yes. Well, I guess the question for you is, do you look at any part of your business -- I know your categories tend to be, as you mentioned, services and food, but still, I'm sure parts of your New York and elsewhere have some of that. How do you think about either the categories that have really come in strong that may not be sustainable? And also categories that haven't rebounded all the way that could pick up the slack?

Sure. Yes. So, let me hit the sportsbook real quick because I have numbers around that. So Q4 gaming, and we report gaming traditional and sports book that's in that category. The whole category was up 35%, right? The vast bulk of that was online because that wasn't really around in Q4 2020, right? In absolute dollars, Q4, $25 million gaming broadly defined, Q4 2020, 18.5%. Delta mostly online in absolute dollars, Q4 online $6 million. Full year, $17 million. So, you're talking less than 1% of the book, right? And look, they're going to spend. It's going to change from the promotional customer acquisition spend, the 3 giveaways, right, that got them in trouble to more sort of traditional brand. It's also going to roll out -- they could only advertise in states where it was legal. We're in all the states. So -- and it's only legal in about half our state. So, you're going to see us continue to get that spend as they come in and spend like drunken sailors and states soon after they legalize it, then it normalizes, right? So, that's that category. Gaming was outsized, right? Another category that was a little bit explosive in the course of 2021 was healthcare. Healthcare actually leaped over restaurants as our second category, right? That will probably settle back into its third place because that's where it's always been. We'll see. And then, of course, I mean, in general, the 9 of our top 10 verticals are happy, healthy and up, right? The only one that's not yet is amusements, entertainment and sports. And it's coming back fast and was up 60% in Q4. So, it's going to get to where it usually historically has been.

And how about auto? You didn't mention auto.

Auto is good. Grew last year in spite of all of the challenges they had.

Fully recovered?

Yes.

Okay.

Well, fully, I would say, yes, because historically, it's been about 6% of our book and it's right about there, right? So -- and it usually occupies the sort of #6 slot in our [ hit ] rate and it's basically there. So, yes.

Okay. Just on -- coming back to acquisitions because certainly that's an area where we've had the perspective that given how you came through the pandemic, you've got a real opportunity to do more than maybe your competitors. What's the...

And we did.

And you did last year, yes, you did. So, maybe just remind us, how much is that going to contribute to growth this year?

Yes.

Based on what you've done so far?

Sure, sure. So last year, we deployed a little over $300 million, right? A lot of little transactions. The average transaction size was $6 million, right? So, very predictable low beta exercise, highly accretive. So, pro forma, let's call it, 7.5%. As reported this year, assuming everything goes the way we expect 9.5% to 10%, right? So, that's what you should sort of expect and when we actually print.

Okay. So, that'll be based on what's already closed and then...

That's based on last year's activity, not this year's activity.

Okay. So, you could do better than that if you have a robust acquisition?

I mean, you should leave me something in the tank, Ben. How can I beat expectations if I tell you everything?

I know, I know. It's too early in the year.

Now to answer your question, I think this year is going to shape up like last year. Last year, the closings were for a variety of reasons skewed to the fourth quarter. I think you can expect that to be more ratable this year, right? We've already closed something a little north of $50 million and we've got around $150 million under letter of intent that should close in $60 million to $90 million. So, I mean, again, I think you should expect it to be a little more ratable throughout the year.

Okay. That's great. Yes...

Don't model it.

We won't. I won't touch [ it till you sell ]. We were wondering if there are seasonality to M&A because if you actually look back over the years, you have -- it's been more back half weighted, I think in most years and it could be more.

Yes. There's a little bit of a rhythm to it, people that want to -- are fearful that next year may bring tax law changes...

Yes, makes sense.

They want to do it in December. People that want to hold on to their money longer, want to close in January because then they won't pay the cap gains until right. So, it's -- they do play that little game, yes.

Yes. Makes sense. So, how does this all translate? We were teasing you about the REIT or we were teasing the REIT community, but we shouldn't because they're important shareholders. And I think that's been a transition, frankly. For many years, we've talked about chipping away at that. What is that investment community looking for from Lamar that may be different from what you've historically been focused on or what maybe all of us have been focused on?

Sure. So, your typical REIT, the REIT community owns in the 30% to 40% in terms of shareholder base. For us, it's 15%-ish, 20% in that range, depending on whether they're coming in or out, so 15% to 20%. We do have the big guys, right, but in the smaller quantity. They sometimes have a difficult time getting their arms around if they think we're more cyclical than other real estate asset classes. I don't happen to think that's true, but it's a perception and we do what we can to dispel it. The things that I talk to them about are, if you look from 2014 to today and look at our total return, we're in the top quartile of REIT asset classes. If you look at the valuation they put on us as a multiple of AFFO per share to share price, the REIT PE, we're in the lower third, right? So, they need to start thinking about that. That would be helpful. And -- the fact of the matter is we're neither here nor there in terms of are we a media company for these guys, right, for you all? Or are we a REIT, right? And because to the REIT community, we look cheap, to you guys, we probably look expensive, right, because you're used to buying media companies that are several turns below us. So, that's what we're wrestling with.

Yes. But at the end of the day, I imagine you're trying to drive free cash flow growth, AFFO growth, dividend growth?

Look, Jay and Buster can worry about the percentage of my shareholder base to this REIT. I worry about driving those financial metrics.

Okay. We've got a few minutes left. So, I want to make sure the audience had a chance to ask you any questions they might have. If you wouldn't mind just waiting for a microphone, that would be great. Otherwise, I could keep firing away.

Sure. I don't even think you need a mic. You can just... yes, go ahead.

Just on transit, maybe just remind us your exposure there. I think that's one of the pieces of the higher expense guide and it feels like Outfront had their issues last year and maybe you guys are kind of feeling a little bit this year?

If you could repeat, so the webcast...

Yes. So, the question is transit, what's our philosophy behind it? How material is it to the overall enterprise? Great question. Number one, we have a portfolio of small middle-market transit. So, you won't see Lamar trying to go get the MTA or for that matter, a large market airport or large market transit. And that's just because that's not what we do. I mean, Jeremy is much better at that and it's just not part of what we do. Order of magnitude, let's call it 1.9, I'm not allowed to say this, but don't write it down, $6 billion, $7 billion, $8 billion. On the top transit airports, it will be about $130 million, right? So, relatively inconsequential. In both those airports in transit, it's a large portfolio of small market contracts. No single contract represents much. And so when a renewal comes around, it's not going to keep me up.

But I think to the question, it is having an impact on this year's margin, right?

Yes. Just to understand what's going on, in COVID times, we got forbearance on the minimum annual guarantees. Some of those came back in the fourth. You didn't notice it, but they did. A lot of them are coming back this quarter and that's skewing our expenses. To put it in absolute terms, it's about $20 million in -- not one-time expenses because they're going to keep going but one-time growth in expenses. And then the other $6 million or $7 million of corporate initiatives, what is that? We're converting to an UPREIT. The REIT community is pumped about that because it gives you a significant advantage when it comes to M&A. And so that's about $1.5 million and then about $5 million or $6 million is some deferred maintenance on the IT side.

So, what is the M&A advantage without spending an hour on an UPREIT?

Yes, I'll do it real quick. C-corp rules, it has to be C-corp for C-corp and the seller has to take over 50% consideration in stock. And UPREIT rules are different. Number one, you can do UPREIT units for assets. A lot of our deals are asset deals. So, you can't even do stock deals, right? And you can do any mix of consideration and you can treat partners differently. So, if an asset is owned by 4 different limited partners, they can decide what fits them. They can take 25% in units and 75% of cash or 75% units, 25% of cash. So, it's very flexible and attractive to sellers who are tax-sensitive, which most are, right? That's it in a nutshell.

And by units, you mean equity? That's the...

Yes. It's the same thing. An UPREIT unit is essentially a share of stock.

Right. Got it.

It's a financing and accounting fiction and it's only available to REITs and most REITs have a corporate structure that is UPREIT. When I go to the REIT conferences, they ask me why I'm not one.

Right. All right. Well, since we covered that and everything else, I think we're out of time. Sean, great to see you.

Well, thanks, yes.

Enjoy everybody.

Thank you, guys.