Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Jason Bazinet with Citi Research. Pleased to have Lamar's President and CEO, Mr. Sean Reilly. Sean, how are you?

Hey, Jason. All good.

Fantastic. This session is for Citi clients only. If media or other investors are on the line, please disconnect. Disclosures are available on the webcast at the AV desk. For those in the room or on the webcast, you can sign into liveqa.com and enter the code citi2023 to submit any questions if you don't want to raise your hand, and I'll be happy to read those. So can I just start with a little bit of a confession and observation just to kick us off?

Absolutely.

So I don't know if your mic is on actually.

Is it? Let's see. How is that?

All right. That's perfect. So I don't know how many years I've covered you guys, maybe 15 years. And I was slow, I think, to warm up to both the attractiveness of outdoor as a business and you guys as a management team and how well you've performed vis-a-vis your peers over a long period of time. So my question is sort of simple. You just cost the $2 billion mark, you put up 46% margins, which is fantastic, and maybe you can just set the stage by just talking about how you view the outdoor business and, more importantly, what is it that makes Lamar different than some of your competitors?

Great question. So I'll start with number one, these guys really are good. That's Jay and Buster and the rest of the team. The average tenure of Lamar General Manager, and we've got about 200 of them around the country, is north of 15 years. Our Regional Managers have been with the company north of 25 years, most of them their first job was with Lamar typically, as an account executive. What makes Lamar different? So when you think about Lamar, think small, mid-size markets where we have tremendous market shares. In 80% of our footprint, we have 85%-plus market shares. And given the regulatory environment around billboards, those market shares are forever protected. We're regulated at the federal level, the state level, and finally, almost every local jurisdiction has a sign ordinance, most of which we drafted. So tremendous moat around the business. When you also think about Lamar, think about flat decentralized org chart. Our local General Managers have tremendous autonomy to run their businesses. They handle yield management, they spade up a lot of our M&A opportunity. They hire, they fire, they turn on the lights, they turn off the lights. As I like to say, if you went to the Little Rock, Arkansas, and asked the Mayor of Little Rock, who owns Lamar, he would tell you Tom Gibbens who's our local General Manager, who's only been doing it for about 20 years. And with that kind of long tenured and seasoned autonomous local leadership, you just get better performance. One of our compensation secret sauces is, again, I'll use Tom Gibbens as an example, we set our budgets late. So for this year, January. Tom sends me his budget third week of January, maybe he's sandbagging a little bit, I don't know. But we shake hands, and we convert that accrual budget into a cash budget. And keep in mind he controls every aspect of his P&L all the way through the bottom. His incentive comp is $0.10 on every dollar collected over that cash goal, so he's not just incented to drive the top, he's heavily incented to control expenses as well. And again, that's helpful for me to sleep at night because I don't get a lot of surprises.

How do you make sure they don't lowball the number they give you at the beginning of the year?

I've got some of my scouts as well out there. Now we have -- so obviously we have pacing reports down to each market, and I know if -- I'll let him get away with a little bit of sandbagging, but not too much.

So you gave credit to the folks in the field, but can you just spend a second about some of the things that are happening at headquarters and some of the bigger strategic decisions that you make? Because I can think of a handful of things, even as a layman, that separates you from some of your competitors in terms of the types of business you enter. So I'm sure there's other attributes other than just tenure and decentralization.

Yes, y'all pay us to be good stewards of capital. And I think we do an exceptional job there. We really do stick to our knitting. So over the last 2 years, we did about $800 million worth of acquisitions, the vast majority of which fit that Lamar model, small, medium-sized markets, and very predictable fill-in acquisitions. Again, it's a very predictable exercise. Good use of your capital. And so I would say, rule #1, be a hedgehog and stick to what you know to quote Collins. #2, we are really pretty good also fast followers when it comes to tech. And I think that's where you want to be as a fast follower. You don't want to be on the bleeding edge. And a, for example, on that one is, once it became clear that digital billboards were a super-good investment and great for our customers, we jumped in, and today we have by far the largest network of digital billboards in the country, and it represents about 1/3 of our business now.

Not boards, revenue you mean?

Not boards. No. we've got about 170,000 billboards and only 4,500 of them are digital, but this year they'll approach or maybe even do a little better than $600 million in revenues on a book of about $2 billion. Programmatic, same thing. We didn't pioneer it, but once we figured out it was a helpful way to allow digital buyers to buy our space, we pretty much jumped all in and even bought a minority stake in the largest programmatic enabler in the country -- in the industry, Vistar.

That's great.

So yes, a fast follow on the tech. Don't take the arrows in the chest, stick to what you know.

All right, that's good. So can we talk -- since your business is an ad-based business, I want to talk a little bit about the ad market and maybe this is my second confession in the second question. This strikes me as the strangest ad market I've ever seen when I look at the trends in advertising for you guys versus the ad agencies versus the big digital guys. Can you just talk about what you're seeing macro? Your interpretation of these very divergent trends that we're seeing off of a lot of different businesses that traffic in advertising? And then specifically what sort of underpinned your thinking as you gave your guidance for 2023?

Sure. So again, when you think Lamar, think local. 80% of our business is local advertisers, 20% is nation. The national ad buyers they buy through 6 or 7 large agencies that we touch with national account managers. So I'll start there. National for us was down in Q4, and it's going to be down for us in Q1 of this year. The good news is local is really strong. [ Main Street ] is showing it's very resilient. And I've been doing this a long time. I can look back 30 years, and national has always had a higher beta, right? It's always been a little more fickle dollar. Local has always been a little more steady, just Steady-Eddy, right? Very predictable and dependable. So I'd start with national softness, Definitely there local relative strength. I. Mentioned we budget late, and so my first glimpse of what the year should hold for me is the sum result of 200 budgets being rolled up throughout Lamar land. And I get that data point about the third week of January. And our budget year in and year out is going to be really pretty much right on top of our guidance, right? So as they were reaffirming that the 4%-ish pro forma guide. And then we also have pacings, right? And so when we look at our pacing and where we sit today, 60-ish percent of our annual book of business Our goal for the year is already contracted for. So it's pretty good visibility, right? And I can sit today and see where we were today last year and where we are relative each month, right? And the pacings, again, are right in line with where our guidance was, so.

The 80% of the business, what do you attribute the strength in that business to? is it normally strong, is it cyclically strong? Is there movement from the Internet to billboards that's causing it to be strong, whatever views you have on that?

Sure Any moment in time, we're going to have 45,000, plus or minus, tenants that are touched by a thousand account executives. And certain of our verticals, at any moment in time, are going to show relative strength. So for example, in Q4, our largest vertical is services. It's a catchall for a lot of different local services, but a lot of it is lawyers. That vertical was up 21% in Q4. That's not a number I've seen in a vertical since really COVID recovery, right? That really is amazing. You can talk to Jason about that. Local ad spend just doesn't shift around like that normally. What could be going on? There is share shift going on at the local level. So think about audience erosion in the newspaper business, the local radio business, the local TV business. Because they're struggling with their audience, their ad spend is down. And some of that's coming our way, and I think in no small degree was the cause of that 21% up in local services for us. But even our other verticals like, for example, when you think about relatively cyclical verticals like auto or retail, Q4 of those verticals were up each 5% in our book of business. A countercyclical vertical is education when people are scared about getting laid off, they usually go get more credentials. So think a broad range of different schools from charter schools and high schools, private high schools, for-profit schools, universities. One thing we're really doing well with, particularly given our middle market focus is universities. The name, image likeness, movement in college sports, a lot of athletes are on billboards, a lot of athletes are on billboards in college towns.

There's a lot of -- Citi is forecasting recession in the second half. Do you think that will have any bearing on the 40% that you haven't booked already? If there's a recession in the second half, do you think that will have a bearing on the 40% that you haven't booked already?

Yes. If there's a serious macro headwind, because we've got to sell for the rest of the year. We got to sell 40% to hit our goal. In any given month going into the month, we've got 80% to 90% booked, so in a month, for the month, we got to sell that 10%, right? I can tell you that given our pacings as we sit today, Q1 will be our lightest quarter up modestly. Q2 is looking good. I would think it's too late for us to suffer momentum loss there, I think. Q3 looks strong as well, not seeing any signs of deterioration. And Q4 will be slightly sequentially down from Q3. Part of that is seasonality and part of that is it's a nonpolitical year, and we got a little boost in Q4 of last year from political.

So are you baking in a recession in your 4% or is it...?

No, I'm baking in what we're seeing.

Got it. Thank you. Can I ask you a question about this local-national dichotomy that you talked about? Is that sort of an organic mix that just percolates in the type of markets that you serve or is that something that you intentionally drive to inject more stability and less cyclicality in your revenues?

Mostly it just happens because of where we are. National advertisers like to be in New York, LA, Chicago. We have a small presence in those bigger DMAs, but not near the presence as say an OUTFRONT or a Clear Channel would have. But it's also a little bit by demand -- by design and by that I mean yield management happens at the local level in Lamar Land. I mentioned Tom Gibbens, right? I'll give you an example. Let's say our national account team is working on a buy from General Motors, and they want to buy across maybe 100 Lamar markets. Our national account team will call up Tom Gibbens and say, General Motors is willing to pay $3,000 for that Bulletin on the Interstate in downtown Little Rock. Well, Tom has the right to say, I don't think so. I've got it sold to my local dealer for $3,500 a month, right? And so that yield management at the local level results in, I believe, slightly skewed local book, which I believe is a good thing.

Understood. This latest quarter, you put up -- I think it was -- it struck me as a very wide disparity, I think, where your local was up 7% and national was down 7%, and you talked a little bit about the sports betting firms driving some of that weaknesses in national as they get less promotional. Did that strike you as a particularly large dispersion in local-national, or have I just sort of been asleep at the switch and this has happened many times before where you see that big of a spread?

That's a big discrepancy, right? Now because it's only 20% of our book, I don't even describe it as weak verticals. It's really a handful of big accounts, right, FanDuel, DraftKings, couple of auto insurance accounts that you could probably call to mind, a couple of big medical care companies. They're going to come back in. As a matter of fact, FanDuel and DraftKings are still buying from us. They're just not buying as much, right? GEICO and Allstate still buying from us, just pulled back a little bit. So I would call it a big discrepancy. The way I described national doing this and local doing that, if you smooth out national, there's really not a dime's worth of difference, right? We're just at a moment in time, there's a quarter where...

Understood. Can we talk a little bit about digital conversions? So you guys have been running -- I think, your guidance this year is to do about 300 conversions, which is pretty typical for what you normally do. When I listen to you guys talk about the high IRRs that come from a $1 of capital that is deployed to convert to digital, it would seem like you would want to go so quickly. And yet, I feel like we've been talking about digital conversions for, what is it, 12 years or something like that. Why so slow? Like why can't we go quicker on the digital conversions, if they have so good IRRs?

You know that regulatory environment I was describing?

Yes.

Most signed ordinances address digital signage in a similar fashion. So we have to go get permission. It can take 12, 15, 18 months, sometimes it's a negotiation with the jurisdiction. We'll take down 5 billboards that are over here, if you let us put up on digital over here, right? And you got to pay for that and et cetera, et cetera. They're also -- they are construction projects outside. You've got to have the huge digital unit arrive at the same time as your construction crews. You have to retrofit the structure to handle the extra weight. And so the 300 is about as fast as we can go. I would love to go faster, right? That just seems to be the pace at which we can make it happen. And it's still basically twice as fast as our peer group.

Okay. When I -- again, maybe layman's perspective, but when I think about doing a digital conversion, I always think that you would put the project where there's sort of insatiable demand at the front of the queue because it's not your property, but everyone wants to advertise in Times Square or over the Lincoln Tunnel or whatever. And so 12 years into this, are we beginning to see some degradation in those IRRs? Or they're just as rock solid even if you're moving to a board that might not be passed by as many folks?

It has really been a pleasant surprise for me over the 1.5 decades we've been doing this at how resilient the IRRs are. Digital board #100, digital board #4,500 that we're going to do this year, very similar ROIs. And another thing to keep in mind, you got to calculate the return based on the opportunity cost of being a [ static ] because you're taking it down. So if you take down something that's doing $3,000 a month, and you're going to do, let's call it, $15,000 a month, and the incremental margin contribution is 80% to 85% of that revenue, and it costs you a little over $200,000 to make that conversion, you can do that arithmetic and see that it's a very good investment. It might not be the same economics in Times Square. I will tell you, I can get those economics in a little place called Alexandria, Louisiana, right? Time Square might actually be worse economics because you're giving all the money to your landlord, the guy that owns the building. And that's not uncommon, right? So what we pay the landowners that own the land under our digital billboards amounts to about 11% of our revenues once we convert. In Times Square, you're paying 85% of your revenues...

Interesting.

That's why we like Alexandria, Louisiana.

Understood. Understood. And that 11%, just for a perspective, what would that percentage be on a static board in your markets?

Our whole platform, lease cost runs about 22% on boards where we lease property. Now we own the land under about 10,000 of our billboards. And a lot of those, from a revenue perspective, are the digital ones. That's why the digital overall lease cost runs less as a percentage of revenue.

Got it. That's perfect. So can we talk a little bit about your cost forecast as well? You hit on the 4% top line, but can you talk a little bit about costs? Because I think it was -- maybe I'm going to screw the numbers up -- 3.5% all-in cost growth, but 2.5% if you stripped out the IT upgrade you're doing at headquarters. Is that...?

Yes. So for our outdoor group, which is the bulk of what we do, it's going to come in -- expense growth is going to come in right around 2.5%. So we're done with inflation. The Fed can stop. Thank you very much. Now consolidated it's going to be a little more than that, some corporate initiatives plus a little bit of recovery in some of our franchise businesses like airports and [ those mags ], so their inflation is a little more, but not much more. But yes, all told, 4%-ish on the top, 3% and some change, consolidated expenses, and that will add up to consolidated margins north of 46%.

So I've been surprised, I know we've all seen the sort of rate of inflation change, right? It feels like it's not getting worse. But at the same time, I'm also reading articles that we're not seeing wage inflation, like a lot of employees are not keeping up with the pace of inflation. Is that -- is there anything unusual in your wage structure that you've had to do because of inflation? Or are you like broader America where wages haven't been inflating as much as the headline inflation?

So we had some wage inflation. And last year it happened 2 ways. Our account executives are paid heavy on commission. So when you're up 10% pro forma, that commission structure is really also going to be up. Incentive comp -- other incentive comp was up. Some of our leases in our lease portfolio are percentage pay. So they are also going to flex a little bit with the top line. And so fast forward to today, you're going from 10% up pro forma to 4% up pro forma, that's going to contract the inflation that's built into that aspect of your people base. The other people we have are folks in trucks that hang up vinyls, right, hourly, and we have to take care of them, right? We took care of them back half of '21 and all of last year, they got more than their usual annual merit 3% increases. And so we're starting to lap that. And now that we're lapping it, it's no longer inflation, right? It's built into the cost base, right? So yes, that's it. I mean, it's pretty simple, right? And people costs are only 18% of our revenue base.

Yes. Can you talk a little bit about that because that seems like one of the real unique facets of your business in an environment when inflation is running a little bit hotter than you have the site lease costs, which are, I think, your biggest expense item?

Lease costs are our biggest expense. It's a huge portfolio, A little over 80,000 billboard structures. We own the land under about 10,000, so about 70,000 leases, managed by professionals in each one of our local offices, right? Hyper local and it's a very, very local thing. The terms in that lease portfolio run the gamut, every imaginable from month to month to 99 years, some, as I mentioned, very few have revenue shares, some not very many have escalators that you would worry about at all. And it tends to grow year in and year out as an expense in our expense base a little over 1% a year. So that's, give or take, 22%. The next expense is people. We talked about people, that's about 18%. The next expense -- the next largest expense is our electricity bill, which runs about 3%. And then you have a bunch of nickels and dimes, right? So very high margins, very predictable business, moat around it.

You all went a long period of time where you didn't take rate up aggressively, and we just exited a period where you did take rate up more aggressively. You just said that there's many, many types of contracts for these site lease expenses. But is there anything that investors should be worried about where there's like some sort of expense growth that will manifest itself on the income statement now that you've taken big rate in 2021-2022 that sort of shows up like a ticking timebomb in 2025?

No.

Nothing like that we should be worried about.

There's no timebombs out there.

Okay. All right.

I mean the timebomb this year was interest rates, right. And in the wake of what I call normalized top line growth, normalized expense growth, reasonable growth in EBITDA, our AFFO guide per share was a little light because $40 million in interest that we didn't have last year, but we'll be fine.

So can you talk a little bit about your philosophy on fixed versus variable rate debt and where you are? And encapsulated in that answer, what is a good rule of thumb or heuristic that investors should use for just sort of AFFO growth per share year in, year out, just sort of plain vanilla environment, no recession, no interest rate shock? Just what's a good sort of middle-of-the-road number that investors should bear in back of their mind?

When we -- I'll go back to when we first converted to a REIT. We had the opportunity, which Jay has done a masterful job at, to lower our interest costs and take advantage of the fact that we're in a zero rate environment, right? And so we, through that and through aggressive acquisitions, grew our AFFO per share pretty rapidly, right, more so than most. And also, the corollary is we increased our dividend, our first 5 years as a REIT, we increased it 10% a year, our distribution. As we think about where we are today, our floating debt is a little higher than we would like at about 37%. The rest is fixed at really, really good rates. The reason for that is the acquisition activity last year was more than usual. We bought $480 million worth of stuff, right? And our free cash flow after everything, after the distribution, after interest payments, after total CapEx, after a little tax leakage, what's left over at the end of the year is, give or take, $120 million, $130 million. So this summer we saw that the activity was going to be there. We were a little too far into our revolver. Normally, we would do a bond issue. But that world disappeared on us, right? And so Jay went and executed a great bank deal, Term A, priced it real tight. But eventually, our hope is to take that and term it out into a bond when rates get where we think they should be, right?

That's helpful. Do you have a question? No. You're okay. All right. You have a question? Yes. Can you just hit the microphone, sorry, just so everyone can hear you?

I guess if debt markets are kind of closed near term, I guess most other REITs can maybe sell an asset to raise funds in times of capital needs. It could be harder to sell billboards, I guess. Just other capital sources that you can harvest if need be?

Well, first of all, we don't need to. Our leverage is the lowest it's ever been in the company's history, give or take, 3.2x, right? And we have plenty of access to liquidity. And we could fire off a bond deal today, right? It just would be at 6.75%, not 5 and some change, which is where we want it to be. So yes, we don't really have any need to raise capital. We have plenty of capital to take us wherever we want to go. Our total liquidity right now, Jay, is about $700 million, something like that, when you count our revolver and other. So all good on that front.

So I actually got this question from an investor a couple weeks ago, and they were asking Lamar seems to do a fair amount of M&A. You talked about the $800 million that you did over the last couple years. And the question was how much more runway is there in any outdoor company to do these tuck-in acquisitions before we sort of hit a brick wall? So can you just talk a little bit about beyond the big 3 public companies, how fragmented is the market? How much more runway is there if you want to do tuck-ins?

Surprisingly fragmented. You're talking well over, not counting Clear, not counting OUTFRONT, $1.5 billion to $2 billion in asset value out there. There's a handful of companies' asset value, let's call it, $250 million to $1 billion. And then there's hundreds and hundreds of little, small tuck-ins we can do. I'll use Little Rock again. Tom Gibbens will call me up and he'll say, "Well, Mac is finally ready to sell," and Mac will have 7 billboards in Little Rock, right? And we'll sit down with Mac, and we'll reach a deal. There's hundreds and hundreds of those out there, asset value from $1 million to, let's call it, $10 million.

And then my last question, and I think I know the answer since we started this saying, one of the things that makes you distinctive and good is you stick to your knitting. Any appetite to do anything international on the M&A front? Or Lamar is and always will be a primarily...

If you consider Canada to be international, we actually are in Canada. We have a couple of businesses up there. One is this wonderful little logo business, that's blue signs on the side of the highway [ through gas ] line. We do that for the province of Ontario. We are the transit provider in Vancouver. And then if you go to Niagara Falls and cross the border, we have a handful of billboards on the other side. But that's about it. We did a small foray into Puerto Rico, which I didn't consider international, but I got a quick lesson, and we got our finger scorched a little bit there. So to answer your question, no.

All right. Well, Sean, this is great.

Yes.

Thank you for the time.

All right. Thank you, guys.