Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

My name is Richard Choe. I'm part of the communications services and media team here at JPMorgan. I would like to welcome Sean Reilly, CEO and President of Lamar Advertising.

Hey, Richard.

Thank you for being with us today.

Happy to do it.

Just wanted to start off. The company is off to a strong first quarter start in both billboard and transit. And the industry looks pretty strong, which, I guess, the strength kind of returned middle to end of last year, and that's been continuing. Can you give us a sense of what you're seeing today both in your business and the overall industry?

Yes. Great. No, we're on fire. The industry is on fire. Lamar's continuing to set records every day. First quarter, we set records for almost every financial metric, revenues, EBITDA, AFFO, both in terms of absolute and growth. It was interesting. We released, as you know, last week -- and I don't know that I remember ever hitting the trifecta before. But we beat analyst expectations on every single metric, and then we also raised our guidance, and then we raised our dividend substantially. So hit on all 3, and that was just -- was very gratifying. And I'm not seeing anything that suggests the momentum is slowing down. My team tells me that business remains really strong. We had our industry conference last week in Florida. It was as upbeat and confident as I've ever seen. So out-of-home in general and Lamar in particular, we're feeling pretty good about the world.

No, that's great. I think given some of the economic volatility and concerns, and they seem like right now to be kind of impacting the consumer most than SMBs or enterprises, but maybe that will start to trickle down later on, but that's for later in other calls and conferences. But in terms of right now, there's been no change from small advertisers or big advertisers. And if there isn't, how are their, I guess, purchases? Where has it been trending? What are they focused on?

So like I said, we were at this conference. And at this conference, you have all of the media owners. You also have all the big agencies. Our buyers are there. And just a lot of confidence in the agency world, particularly as regards to the specialists that buy out-of-home. You might not get the same story out of the agency folks that are buying various digital platforms or various video platforms. But the ones that are buying out-of-home say their budgets are growing and their customers are glad they're using out-of-home. Mostly to tell the world what they're up to. As you know, the digital space is -- this is one to one, and we're one to many, right? And you need both to really build your brands and make the cash register ring. So no, all good on that front. It's coming in from everywhere, everywhere. So the last conference I was at, people were concerned about DraftKings and FanDuel and MGM because of issues they've had, but they're still spending like drunken sailors. Auto is strong. Health care, very strong. Services for us means mostly lawyers, and they're spending crazy. The quick-service food business is doing extremely well. And we're, for many of them, their primary medium. Think Cracker Barrel, Raising Cane's and McDonald's. And then we have the recovery of amusements, entertainment and sports. So that's giving us a little extra lift, if you will. That was the only vertical that coming into the year was still struggling a little bit. But now they're full speed ahead. And then we got political. Political this year is stronger than it was in the presidential. I've never seen that before. Never. So we got an off-cycle election, and we're getting more political dollars than we ever have.

And was that just for the primaries that you've been getting in? And so like when general public -- or are you seeing an early general...

It's early -- there's a lot -- as you know, there's a lot of activity in the primaries in some key states, Georgia, Pennsylvania, et cetera. So there was an earlier-than-normal spend, but it's ramping all the way through the fall.

And you kind of went through, I guess, what I would think are your more traditional out-of-home advertisers. But I think there's also this view that there -- and it's interesting because you have some kind of big brand names like a T-Mobile or an Apple who do advertise that you would consider more digital or kind of techy. But it seems like your traditional verticals have recovered and are expanding. But are you seeing maybe new companies kind of come to that home space?

Yes. The direct-to-consumer business, Carvana, for example. Carvana is spending huge with us. They love billboards. They love billboards so much that the founder put his nephew in the billboard industry. He bought a plant. So they really believe in the medium.

Okay. And then I think one of the other trends that people are expecting is that out-of-home trends higher and gets a bigger wallet share. I think it's generally been less than 5%. It seems like the overall market is probably growing, but also there's potential for a bigger share to be taken. Has it been more -- or what kind of trends do you think you can get to or has it been that?

Well, COVID accelerated trends that were already in place, right? It accelerated cord-cutting, accelerated what I believe is going to be the ultimate demise of local network affiliate television, right? They don't have an over-the-top compelling offering. So to the extent we have customers that spend on local TV, to the extent they lose eyeballs and their CPMs go up, dollars are going to move our way. It already happened with newspaper, and I have lots of data around that. It, of course, happened to the Yellow Pages. I still actually get a book thrown in my driveway and I use it as a door stop. But you're going to see that across all traditional local media. And for folks that don't spend their time immersed in local media, it's a different world, right? It's your local TV, your local radio, your local newspaper, if they still have one, and us. And all the other ones are losing their audience. And with that, they're going to lose share, and we can see it happening.

And I think you mentioned you also -- a big competitor you consider is like radio -- local radio. I think local affiliates makes a lot of sense. I think there's cable -- local cable that are -- and these aren't necessarily companies that are looking to -- or businesses that are looking to [ diverse ] just as much as they realize that old medium isn't as popular or they're not getting the eyeball. So it seems to be the real prime to take share.

And of course, as you lose eyeballs or ears, even if you don't raise prices, by definition, your CPM goes up, right, because it's cost per thousand impressions. Our audience is growing. Our CPMs are steady. Or given that we have pricing power going up, right? And we told the world about 9 months ago that we were going to aggressively go after rate this year, and we have. We were going into the year at about peak occupancy. So if we were going to hit our growth goals, we had to get it through rate. And we're going to end the year on a pro forma basis being up something in the neighborhood of 9% on the top. That's going to translate to a low double-digit growth in EBITDA. We issued new guidance. The midpoint of the range implies about $2 billion in sales, about $925 million in EBITDA, a little north of a 46% operating margin, and those are just great metrics.

Yes. And I was going to say you said trifecta, but I think the pricing and utilization, kind of even though it's kind of full -- going higher, it's probably a good place to be in. In terms of, I guess, if -- you're there on utilization. You're pushing rate because you can right now. Can you -- what are you doing to, I guess, expand inventory, so not just rely on rate but grow? And I know some of that is the digital transition.

Yes. So the way you grow capacity in the billboard business is you convert analog units to digital units. There are no net new analog billboards being built in America today, right, but there's lots of digital conversions going on. We've got a -- we have, by far, the largest large-format digital network in the country. It's about 4,000 units. Those units will do about $550 million in revenue this year or about 27%, 28% of our total. And we're going to try to grow it as fast as we can. We're going to try to put up 300 new digitals this year. So that's how we expand capacity. And then of course, we do it the old-fashioned way. We do an awful lot of M&A, right? Last year, we did a little over $310 million in billboard transactions. The average transaction size was $6 million, right? So it's a lot of little tuck-ins. And it's helpful in a number of ways. Of course, they're financially accretive, right? But they also enhance our distribution in a given DMA. So we can broaden the coverage area that we can offer our customers or it oftentimes broadens our distribution across the whole country so that we can offer a new city to a national advertiser that we otherwise couldn't have, right? So last year, we did about $310 million in deals. This year, we'll do probably a little better than $350 million. Just announced a great one, Elkhart. Old-line family business, very typical Lamar, dominate middle markets, places like South Bend and Fort Wayne and Lafayette, Indiana, little places like that where you just own all the billboards.

So are those almost like local monopolies given that they...

I don't use that word.

Understood.

But the answer is yes.

Okay. So do you have a whole team working on this internally? And I guess can that be ramped up? And can you talk a little bit about maybe what the dynamics have been that are ramping up the M&A activity in the sector? Like why are these private maybe family-owned companies wanting to sell now?

To answer your first question about having a team, so Lamar has a very flat decentralized organizational chart. We have about 200 offices around the country. I would encourage anyone to go on to our website, hit browse inventory, a map of the U.S. will come up. You'll see 200 dots on that map. That's where we have offices. And then if you drill down, you can actually drill down to see the individual billboards themselves. And you'll -- first thing you'll be struck by is, wow, these guys are everywhere because we are, right? So my M&A team is 200 local general managers. They source the deals. They've been driving by the inventory for 10 years. If you go to Little Rock, Arkansas, our General Manager there, who's a guy named Tom Givens, the mayor of Little Rock thinks Tom owns Lamar, right? And there's going to be in places like Little Rock and Tallahassee and Boise and Baton Rouge, middle-market U.S.A., there's going to be another small billboard player, maybe been around for 20 years or so, built a nice little plant over the years. And Tom goes to church with the person that owns that billboard company, right? They play golf together. They go out to dinner. And so when it's time to sell, the first person you call is Tom Givens, right? So I mentioned that last year, we did maybe 40 or 50 transactions. Average transaction size was $6 million. Picture that phone call to a local Lamar General Manager that sources our deal activity. And oftentimes, it's not even a competitive bidding process. It's just let's get to yes, and that's the vast majority of the deals we do. Now we still get them coming over the [ trench ] on where they have sophisticated sellers represented by brokers, and there may be some sort of auction environment for those. But again, most of the deals, they bubble up from the field.

Got it. And it's interesting because in some of our other industries that we've covered, there's more of an auction environment that a lot of other funds or capital has flowed into and that's really pushed up prices. Can you talk a little bit about maybe the disparity between what you're buying these assets for in terms of multiple versus where Lamar is trading at and how you...

You mean where Lamar was trading at?

Where it's trading at.

So we're trading at about 13.5x EBITDA to talk media speak and about the same multiple of AFFO per share to do REIT speak, right? So we're trading at about 13.5x year in and year out. If it's a fold-in acquisition, typically, we bring it in at about 10 to 11x forward EBITDA contribution. Last year, things got a little frothy towards the end of the year. That number probably ticked up a turn. But still, you're talking about something in the 12-ish range of forward EBITDA contribution. In the world of REITs, of course, they talk about cap rates, right, and we don't use cap rate language. But I will tell you this, we don't run around and pay a 4.5% cap rate for any billboard. It just doesn't. That arithmetic doesn't work for me.

And then, I guess, can you talk a little bit about once you make the acquisition, how you improve on the asset and how quickly that maybe the ending multiple is probably lower and what you add to the...

Yes. So the first thing that happens is we don't need any of the people for most of the acquisitions, right? We're folding it in to an existing operation where we have an office. We have general managers, sales manager, account executives, guys and trucks that run around and hang up finals, production manager, all that stuff. So we don't need any of the infrastructure of the seller. We're really just buying billboard structures, permits, advertising contracts and ground leases, right? So it becomes a very, very predictable exercise. So the first magic is on the expense side, right? Don't need the people and the trucks and the stuff. Then over time, there's a little bit of magic on the revenue side. we have access to advertisers that a local competitor may not. Mostly, it's the national ad spend. So typically -- and this doesn't happen right away. But typically, there's a little bump in rate that we enjoy, let's call it, year 2, 3 out from the acquisition.

Makes sense. In terms of when you're making these deals, a lot of, I guess, the billboard assets don't always own the ground under...

No. Most of the time, we don't own them.

But in acquisitions, are they generally -- since they're -- is the ground lease owned by the person selling it or...

We'll pick up some real estate with deals. But for the most part, we're buying ground leases, right? If you look at our portfolio, right, we own about, give or take, 10,000 parcels under our billboards, and we own the real estate under about 20% of our billboard revenues, right? But the other 80% is going to be on, give or take, 60,000 ground leases, right? And that ground lease portfolio is -- has terms that go from month-to-month to 100 years and everything in between, right? A certain percentage of them are actually with sophisticated landowners that get a percentage of the revenue that we generate, right? That's about maybe 20%-ish. But most of them are long-term fixed, and that expense for us runs a little north of 20% of our revenues. So it's our largest expense, runs a little north of 20% of our revenues, tends to grow in terms of expense about 1% a year. I get asked this question a lot, in inflationary times, what happens to our lease portfolio, and it really doesn't affect it.

So most ground leases are -- they're more like...

They're long and fixed. Our second biggest expense is people, right, at about 20% of revenues. We've seen a little bit of wage pressure there, like everybody has seen. Nothing that's going to erode our margins. Last year, we did, give or take, 46% operating margins. We'll do a little better than that this year. So the -- most of what we're seeing on the wage side is when we lose somebody, their expectations are that they're going to be paid more when you hire somebody new. That's most of how it's happening. It's happening mostly with churn. But if we weren't talking about it, you wouldn't notice it.

And I assume there's -- once you're rapidly expanding to more new markets, which you're already in 200, that there's capacity going to grow within that market or nearby office without having to increase people a ton. That there's some operating leverage to those...

Yes. And again, it happens 2 ways. It happens with digital conversions within a market, and it happens with acquisitions in and around the DMA, again, where you don't need to add people, trucks, all that stuff.

Something that we talked about before we started that I think the audience would be -- useful for them to go through is people are worried that we're about to enter a recession, even though there's a lot of argument on ways on how, when and how big it might be. Can you give us your historical perspective of, I guess, the past economic hardships?

Sure. So I can't believe I've been doing this for 30 years. I've managed through a lot of recession and so I'll call them garden-variety recessions, right? And in a garden-variety recession, we are not as cyclical as people think. We've never been down more than 2% on the top, and we've never been down in successive years in a garden-variety recession. Now there's a couple of reasons for that. Number one, we have the lowest CPM in all of advertising. So if somebody does sense that their world is slowing down and they need to cut back, they cut back on ad spend that costs them a lot more. So they typically cut back on TV. They were going to cut back on some digital stuff. So that helps us be a little more inelastic when it comes to our customers' ad spend. The other thing that makes it relatively inelastic is the term of our contracts. The average length of our contract is 4 months. And so if you are having, like I said, a sort of short garden-variety recession, it just doesn't -- we don't become really part of the conversation, right? Now that wasn't the case during the Great Recession, right? I mean that was a very deep and dark time. And when we normally manage through a recession, we hold the line on rate, and we suffer a little bit in occupancy. Occupancy comes back faster than rate. During the Great Recession, it was just a disaster. We lost control of rates. We lost control of occupancy. We had customers going out of business. We were all crawled up under our desk in the fetal position. And it took us a long time to get rate back right after the Great Recession. It actually took 5 years for us to get our average rate per panel back. Contrast that with going through COVID, where the world shut down, we had customers shut their doors. They wanted to call up and cancel. And we said, "Look, in lieu of canceling, we just won't send you a bill." And they said, "Okay, that's fine." And then when they opened their doors a couple of months later, we just reinstituted them in billing instead of having to have a whole new contract discussion and having to have a whole new contract discussion around rate, right? So when we came out of COVID, we didn't lose any rate. And occupancy came back like that, and we just flew out. I mean we're doing substantially more on the top and on the bottom and with operating margins than we were doing pre-COVID.

Got it. Something that -- it seems like it shouldn't impact it, but people ask about it is, if there are higher gas prices. And people don't travel as much for summer as we kind of roll into the summer here. Does that affect your business in a big way? Or you're just not seeing that people are really -- maybe they don't go as far, but they're going to still go on vacation in the summer when the kids are out of school.

Yes. I've been reading a lot of stuff around this issue because we haven't seen it in so long. If you look at the AAA data for vacations, they are estimating shorter trips but trips, but then they try to figure out, well, it's not cheap to fly either, right? It's really not cheap to fly. So what they are postulating is that at the end of the day, there's going to be about the same net miles driven. It just may change the length of some trips, right? For us, one of our great categories are kind of out of the way amusement, entertainment type stuff. Like Dollywood is what I'm talking about here, right? And we're Dollywood's primary medium. I mean she's just not going to get rid of our billboards. I mean you're driving down that highway, you're going to see them, right? So we're less about sort of big-time entertainment, right, and we're more about middle America entertainment. And folks are going to -- they're going to be out and about.

And it seems like a lot of amusement parks and, I guess, state fairs and a lot of that type of, call it, big event, but small, not massive, like worldwide tour type events is coming back, and I assume that helps.

Yes. It's coming back and their customer doesn't fly to them. Their customer drives to them, period. I mean that's just the nature of that type of entertainment venue.

Great. Something about -- I just wanted to make sure we hit on the digital conversion. There's been some issues with supply chains and kind of getting the equipment. How are you managing that inventory for getting the equipment to do a conversion? Because a lot of it seems to also just be getting the regulatory permits in local zoning.

Yes. So the supply chain thing is still real out there. It used to take us a couple of weeks to get 14 by 48 digital unit. These are big, massive pieces of digital equipment. They cost around $180,000. Now the lead time is like 3 months. Again, like our acquisitions, our digital conversions emanate from the field, right? So I don't have some algorithm in Baton Rouge that says this is where they should go. It's the considered management of 200 general managers, right? The sum of that. So consequently, we have to wait until they actually apply for one before we order one. Well, we decided not to wait this year. So we put in a preorder of 200 units just to make sure because we knew given the demand for our digital product that we were going to at least be able to put up that many in the back half. I think we'll get to 300 this year. It will be a little bit of a challenge, but I'm still holding out that we'll get there.

And is that $180,000 price going up dramatically as you see it going forward or is that...

There's been a little bit of inflation in there. It's mostly their labor. The price of the diodes themselves are cents, pennies. It's their labor.

Got it. It seems like we talked about a little bit of the verticals and political and, I guess, the vacation season. Is there a typical seasonality in this business that is kind of going away because of how strong the business is right now? And do you expect some sort of level of seasonality come back in future years?

Yes. So there's a little bit of seasonality in the billboard business, not as much as in many other businesses. First quarter is typically our weakest quarter. Let's say it usually accounts for about 23% of annual revenues. So one quarter being 23%, and then just spread it ratably throughout the rest.

So not a lot?

Not a lot, yes.

Yes, got it. You talked a little bit about margins and operating leverage. Is there room to expand these margins as the business shifts? I guess, one, pricing will obviously put a -- that there's some flow-through with the revenue share on the ground leases. But in terms of if you go more digital, if the dollars do get higher, what kind of margins are you kind of thinking that you could achieve eventually long term?

So there's sort of 2 answers to that. One is just growing the top. There's a little bit of magic on the bottom. Higher fixed cost business. And then second is, as you said, growing the digital platform. We manage the real estate under our digital boards very aggressively so that our lease costs under our digital billing, that $550 million, runs about 10% of that revenue, right? And so as we convert analog to digital and our lease cost goes from 20% to 10%, that's when you'll see that, again, a little margin contribution there.

That seems like a really nice change in the business. Two last questions. Just wanted to hit the transit business. Now Lamar, what's important for it? What's your strategy around it? And how has it been performing for you?

So Lamar is a little different. You guys are going to listen to Outfront here in a minute, right? Outfront specializes in and is best in the country at large market transit operations. Think Boston, think MTA in New York. We specialize in middle-market transit operations. We've got like 60 or 70 different transit agreements. And again, you want to think about places like Albany, New York and Albuquerque, New Mexico and Salt Lake City and places like that, right? We're also in the airport business. But again, same strategy. Your big airport players worldwide are JCDecaux and Clear Channel. And they are in marquee airports. Again, think O'Hare, et cetera, JFK, Logan. We, on the other hand, have the same approach, right? We're in a bunch of middle-market airports. The biggest one that you would fly into would be Vegas. So next time you're in Vegas, look at all those on screens. That's us.

Great.

Oh, by the way, the business is doing great. It's fully recovered. We have one last little operation that's still COVID-affected, which is our Vancouver transit up in Canada. It's still struggling a little bit. Canada has a different recovery trajectory, but anything in the lower 48 is doing fine.

It's funny, a lot of the markets you mentioned are places where I think a lot of people are moving to. And the income is -- so there could be higher population and growing faster than most. Just wanted to end with a little bit, given revenue growth, given margin for -- and that you raised the dividend, what is the dividend strategy? And I guess you have your capital plan, which seems like a pretty fixed plan. There's the spend for digital. There's, I guess, M&A, which is separate, but seems to be very local. But if you generate above and beyond the plan for cash flow, what are you looking to tap with that or...

Good question. So as a REIT, there's rules around our distribution. We have to pay out 100% of what would otherwise be our taxable net income. Lamar has traditionally used legacy tax shelter, NOLs, depreciation, amortization, to artificially suppress our distribution. So if you look at our payout ratio, in the world of REIT speak, our payout ratio is about between 60% and 65% historically. Most REITs pay out 75% to 80% of their AFFO per share. That's the number that I'm talking about here, AFFO per share. Again, a REIT metric. That should tell you a couple of things. Number one, we have headroom to increase our distribution. And number two, eventually, we'll have to because we're going to run out of tax shelter, right? And so you will see our distribution grow over time. Now in terms of the waterfall for how we use capital, right, real quick, let's start with, let's call it, $925 million in EBITDA this year. We'll have interest. Our interest is going to be somewhere in the neighborhood of I think $115 million this year. We've got no principal amortizations. You got a little bit of tax leakage, let's call it, $11 million. We have all total CapEx. Our total CapEx is going to be about $165 million, of which about, give or take, $65 million will be maintenance for purposes of calculating AFFO per share. Then you have the distribution. We've got 102 million shares outstanding. The quarterly dividend is now $1.20 a share. For the year, it's going to be $4.70. So let's call that $475 million. And then when you -- you'll see that you got about $150 million left over. That's what we typically use for fill-in acquisitions. So we use internally generated funds for most of our acquisition activity. Now this year, we're going a little faster and spending a little more, but it's a high-grade problem. We'll just draw on our revolver and then pay it back.

Great. And that's all the time we have. Thank you.

Appreciate you.

Yes, thank you.

Give Jeremy my best.