Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

All right. Good morning, everybody. Please note important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures all appear as a handout available in the registration area and on the Morgan Stanley public website. And really happy to welcome Sean Reilly, President and CEO of Lamar, back to the conference. Sean, great to see you.

Great to be here, Ben. Thanks for having us.

Yes. Thanks for being here. So reported earnings fairly recently, a very strong 2022. Revenue is up over 8%, 4.5% organically. There's been a lot of conversation at the conference about the ad market, as you can imagine. Most of it are fairly sober, frankly. How would you describe the current advertising market? In particular, how you're feeling about Lamar's position this year?

Sure. In general, I feel good, right, mainly because 80% of what we do is local and Main Street is doing quite well actually, very, very resilient, very steady. National is another story. And that was the story of, I think, Q4. Our local book was up 7.6% and our national/programmatic book was down north of 7%, right. And that disparity, that's a pretty big delta. I mean, you don't see that lot.

Yes, that is unusual.

As we sit in Q1, as I mentioned on our call, some of those trends from Q4 carried in, right. National will be down for us Q1. The whole book will be modestly up. Local is hanging in there. As we look forward, based on how we touch those big national accounts and big agencies and based on conversations with my peers, we think we're seeing a lot better activity as we move into Q2, Q3. And we believe that the -- when we look back on 2023, national will be up for the full year, modestly, but up. So that's kind of what we're seeing. As you know, we guided to 4-ish in terms of the midpoint of our range. Your base case model is pretty much right on top of what we're seeing in terms of pacings and in terms of our internal budgets with January and February actual and budgeted for the rest of the year, that feels good. You might want to talk to Jay, about the quarterly cadence, but learn from a year, you're tight on it.

Good. Okay. We'll take that back to the office next week. So I want to get into -- we'll get into a lot of sort of the numbers and the outlook. But maybe stepping back, Sean, what are the priorities for you and Jay and the team in terms of positioning Lamar maximum growth over the next several years?

So I would say, in general, it's keep doing what you're doing, put up as many digital as you can, do as many accretive acquisitions as you can, particularly the fill in ones. We're just going to keep doing that. We do have one sort of corporate IT initiative that we've had to talk about because of how expensive it is and how complicated it is. But we are doing an ERP implementation. And those things are -- they're costly and they're difficult, but it's time. We just have avoided doing it for about 2 decades, so it's this time.

Okay. I mentioned in the next few years, I mean one of the things that I think everyone is trying to figure out is what is normal? Maybe there is no normal, maybe bouncing between different versions of it. But you seem to think that your business is 3% to 5%, 4% to 5%, something in that zone organic business long term. And I go back to what we -- and that was sort of the case pre-financial crisis is not even better.

Correct.

But during the years between the financial crisis and pandemic, there's a lot of 2s and 3s in there. So what's your answer when people sort of say, why is the next 5 years in this cycle is going to look better than the last one?

I would start with what's going on with traditional local media, as you know. Other traditional local media are really struggling with their audience. And the growth in ad spend is going to follow the eyeballs. And I think we're just sitting in a great place because our audience is stable, if not growing. And then you look at linear television, you look at terrestrial radio, you look obviously at newspaper, as their audience erodes, their cost per thousand impressions go up dramatically. And eventually, at some point, they are not reaching enough people to even more in spend. We price under that umbrella, right. So over time, again, looking out 2, 3, 5 years, over time, that gives us the ability to drive rate because we're pricing under their CPM umbrella. It also causes ad dollars to come our way because we're just more effective and more efficient and our audience is still there.

I've always thought of your business is not one in affiliate trades on a CPM basis for those investors. I don't know most advertisers, and that's the case. But is there a greater sense among your advertisers, particularly the local ones that sort of drive the bus for you about those points that you were making in terms of alternative options for them and the audience pressures?

There's no question about it. I mean, look, one of our verticals, our largest vertical, we call it service, it's a catch base for a lot of local services, but it's predominantly about 55%, 60% attorneys. They are finding it increasingly difficult to buy television in the fourth quarter, which was our weakest quarter last year, that vertical was up 21%. And you've been looking at local ad spend for a long time. Number one, verticals don't usually move like that, right, and ad dollars don't usually shift around like that. So something's going on. Something is going on.

Interesting. Let's talk a little bit about the digital competitors, the giant ones. Some of us are at the conference speak at the moment. Those businesses have really slowed. Your business is now growing faster than some of the most significant digital platforms out there.

Correct.

And you and I've talked about this over the years. I'm sure it's very hard to really diligence at this case, but do you also get a sense from your advertising clients that there's been a reduction in the ROI, privacy changes or other factors that may have helped you as well?

I can't prove it out, but I can talk about it anecdotally. There's no question, but that if you're particularly large national customers, if you're used to having pinpoint accuracy on the front end of a buy and great attribution on the back end of the buy, and that gets called into question, you're going to back off a little bit. And that's what we saw happen in the summertime. I think some of that until Q4 and year to our benefit, I can talk about our programmatic experience. And in Q3, you kind of heard me say that we were seeing some cracks in our programmatic business, and it was probably related to that whole digital ecosystem kind of taking a step back. And the other thing that was going on was because our recovery coming out of COVID was faster than other digital screens, we were spreading the programmatic dollar by then over more screens as they came online. So programmatic overall for digital out-of-home, we're growing, but it was spread out over more screens. As we moved into the fourth quarter and saw what was going on with national and saw that it was tailing off and programmatic was tailing off. I think that was more of maybe a canary in the coal mine. You could argue that Q4, Q1, 2 down quarters in national ad spend that we're actually in an ad spend, national ad spend recession. And I think some of my colleagues that are presenting elsewhere in the building would probably agree with that.

Yes. A lot of negative numbers.

Yes. Fortunately, again, for us, Main Street, it just remains resilient, and our local business is solid.

Yes. You've always argued that your business is less cyclical than maybe people think especially to the REIT community. It is interesting, though, to think about how long SMDs or your local advertisers can continue to grow their ad spend given the national backdrop. And it is concerning, I guess, a little bit that maybe national leads and local follows? Or do you see it differently?

Well, so at risk of speaking out of both sides of my mouth, national ad recession, possibly local ad recession, not even close. And I would argue that the country is not in a recession, right. So if this is a recession, bring it on, right.

Better than the garden.

Yes. I would just argue that we're not in one. When I look at our pacings and how they move through the year, when I obviously talked about local management and how they feel about how they're going to do this year, they're not seeing anything that suggests to our cloud. If you think about being just modestly in Q1 and guiding to up 4%, that means Qs 2 and 3 got to be pretty good, right? We'll have -- the cadence is, again modest Q1, good Q2, good Q3, slight sequential drop in Q4 because of the absence of [indiscernible] and that's what's showing up in our -- both in what we see in our pacings and in our internal budgets.

That might be what Jay has to fix in our model this quarter.

Yes.

Makes sense. Okay. Maybe just to wrap up, Sean, on programmatic, it's an area that we've talked about over the years is something that I think you're pretty excited about. I know you've made some strategic investments and some programmatic out-of-home platforms, still a pretty small part of your business. Is that right? And are you -- have you ratcheted back your enthusiasm as to or maybe what you want that to be in terms of size over the next kind of 3 years or so?

That's a good question. And it's -- I think the answer is no. We're still really excited about programmatic. We own a minority stake in the largest programmatic enabler in Vistar. Vistar, by the way, is their business is growing, up 10% in programmatic that we guided to is partly because we have insights into Vistar's book. We sit on their board and partly because of who we touch naturally in that ecosystem. It is still an incremental dollar that we otherwise wouldn't get. I think as it gets bigger this year, our digital book of business is $600 million, programmatic this year is going to be somewhere in the 30-ish range. So it's still small. But it is an incremental dollar we otherwise wouldn't get. And I think it's going to grow faster than our overall digital platform.

Let's talk about your digital business that is large, which is your digital displays, and you guys have been building and that's going to continue in '23. You did say that same-store was down, I believe, in Q4. And I always ask you this question, which is sort of how confident are you that the sales force and the regional folks are not ordering too many of these things? Because once you put the asset in, it's in.

One thing that gives me confidence is this isn't a mandate from corporate. It's a bottom-up exercise. Our local general managers are in complete control of their yield management. And they've got their finger on the pulse, which is why you heard me say, I said, look, even though it was down a smidge in Q4, which was probably actually tied to programmatic and national, not so much local. We still have a lot of confidence and our management team has a lot of confidence in it, and our customers really love the product.

If you're 80-20 local national for the entire business, is it -- how different is that digitally? I know it skews more national, what...

Actually, it's remarkably similar.

That's what I thought, yes.

It's right in that ballpark. The verticals are a little bit different, like amusements, entertainment and sports is a little higher and digital because it's called action. But remarkably similar.

So when you say that digital weakness was a function of national, that's not because of mix. That's because of...

Not because of mix, it was just the [indiscernible] programmatic.

I know you're going to name none here, but...

Yes, well, I usually don't like to call them out, but they're good customers, they still spend with us, but they were spending so much in Q4 of '21 and Q1 of '22. I mean it's just -- it was...

Yes. And so what's the plan for '23 is what about 300 digital...

300, yes.

Okay. Let's talk about margins. You touched a little bit on -- I don't know it's an ERP, if that's the way to describe it, some of the back office investments. But the margin story of Lamar has been a really strong one coming out of the pandemic. How should we think about expense growth here during this somewhat investment period on the OpEx front?

Yes. So I like to call it normalizing both on the top and on the expense growth. In the field, not at corporate, but in the field, our expense growth is going to be around 2.5-ish, right. So that's pretty normal. And you've seen that throughout the years with us. A little more -- a little elevated at corporate because of these IT initiatives, but I feel good about it. And if I had to guess, if you ask where in your guidance is there a high level of certainty and maybe some upside, it would be on that expense guidance. I think we're going to do very well.

And is that a function of sort of the ERP piece on corporate or more?

No, the ERP is costing us, and it's not implemented yet. So that's going out the door. So the consolidated expense guide is 3.5%. Now I'm just talking about what happens out in the field.

Got you. So what are you guys doing there?

So interestingly, number one, we're emphasizing it. I mean I made a big pitch in December as we were putting together our internal budgets. Look, if you're going to hit your goals, you got to hit it on the expense side. So it's not going to be another 10% up year, right? But there are some other things going on. It's the natural drop in expenses when you go from 10% pro forma growth to 4% pro forma growth.

Some variable cost.

The variable costs go down, I think sales commissions, some revenue share leases, incentive comp or a variety of management, that kind of thing. So there's that. We took care of our people in '21 and early '22. So we're lapping that, right. And so when you kind of put it all together and you start watching the nickels and dimes a little more closely, you get to 2.5 out there in the field.

So how long does this ERP pressure last before we start to go back to kind of the normal margin?

Yes, sort of round numbers, it's a give or take, $20 million project, about half of which is going to fall this year, about half of which is going to fall next year. The benefits will start accruing in '25, '26. At corporate alone, we're going to save a couple of million bucks on headcount and pushing paper and things like that, just being more efficient. And there's also going to be some efficiencies in the field. It will make us much more able to get data quicker and more accurately to run our business. It's also going to, I believe, make us better from a cybersecurity point of view. It's just -- you can't -- it's time, so.

Okay. Great. You've touched on a number of verticals on sports gaming, services, attorneys, but just give us a sense of where you're seeing strength, where you're seeing weakness? Maybe we can try to read through the leaves on that from a cyclicality point of view?

Essentially, the same story is carried over from Q4. We had a few insurance customers pull back. We had online gaming pullback, a few large health care pullback -- so that -- we're kind of seeing that carry into the first quarter. So I would highlight those as weaker verticals. Education is still very strong. Service is going to be growing up double digits first quarter. So literally, very, very similar story.

Okay. I don't usually think of health care as particularly cyclical. Is there something in that vertical with you that...

Yes. I wouldn't even call what's going on in our national book cyclical. I really wouldn't. When you think about it, if you think about the online gaming guys, they came in and spent very, very heavy and now they pulled back because now they're just brand building it.

Well, that makes a ton of sense.

Right. The insurance guys, they were having some actuarial issues, I think, that cause them to lose their balance a little bit, and they could kind of pull back a little bit. So again, I don't see cyclical headwinds right now.

Yes, even in health care, these are sort of idiosyncratic kind of customer-specific stuff.

Yes.

Okay. You didn't mention this, but I would think that maybe some of the inflationary pressure on the cost side is abating as well. And I'm wondering if you could talk, Sean, broadly about inflation and the impact on your business. Because again, when I think about today Lamar versus 2015 Lamar, that's a huge -- the inflation piece for everybody in the industry is a big change.

So a little over 20% of our revenue is our biggest expense relative to our revenues is our lease portfolio, right. So you really have to understand that to understand where inflation is going to -- or could affect us. Again, it's a little over 20% of our revenues. A huge portfolio, right, 80-some-odd -- I'm sorry, 70-some-odd thousand leases every conceivable term and my experience in this business has been that it tends to grow year in, year out a little over 1%. And that's going to be the case this year. So that expense, you can kind of sort of check that box. The second big expense we have is people. Now they fall into 2 buckets. Some of them flex with revenues, as we mentioned, sales commissions, et cetera. The other group, as I mentioned, we kind of took care of with raises before and we're lapping that. So inflation being the rate of growth, that's kind of damped down as well. Then our next expense -- our next largest expense is our electricity bill, which is 3% of our revenues, right. Now we're going to probably get a little break on that this year, right, because last year was a high power. And you can see fuel costs coming down, all that stuff coming down. So we're going to get a little break on that. So yes, long story short, margins are going to be north of 46% again. We're going to have a record year in terms of our EBITDA. You've got us slightly below $1 billion EBITDA this year. So the only thing that's really a drag on Lamar's earnings as a REIT is elevated interest expense, right. It's a drag -- a $0.40 drag on AFFO per share this year.

Floating rate debt.

Yes.

You're not alone in that situation. I think you feel any better.

So we're -- if Jay were here, he'd say, look, our #1 thinking around the balance sheet is to take that term A that we did in the summertime and try to push it out as soon as the high-yield market gets rational again, right, because that has placed our fixed to floating debt ratio a little bit outside our comfort zone. We like to hang around 25% floating. And because of our acquisition activity last year and because of the high-yield market shut down, we're now at about a little north of 35% fixed to float, but we'll figure that, that piece out.

And just to finish the inflation and tie it to the revenue side and not to say that you've had pricing because of inflation, but it's been really interesting over the course of last year, double-digit revenue growth, all rate, occupancy levels, I mean, they seem like they're...

They're pretty peak.

They're pretty peak. So in an environment like today, is any of that changing?

Well, yes. Our customers, number one, we asked and we got last year, it's harder to ask and get 2 years in a row. But look, the Fed has done its job. They can stop, please. And our local customers are -- they get it. They like say, okay, we understood last year, but this year is different, and they're feeling of different inflationary environment in their world. And as I like to say, it's all -- it's normalizing. It's that -- hyper double-digit inflation has just gone.

As a management team or in the field, what's the message? Is it let's keep our occupancy at these levels and to be flexible with rate? Or do you hold rate in that occupancy dip?

Well, instead of asking for 8, 9-ish rate increase, you're asking for 3, 4, right. You're still looking for it, right. The question is, what are you going to get? And fortunately, we're still at peak occupancy. There's still good demand for our prime time inventory. And Main Street USA is doing fine.

Yes. I've got one more question and then if anybody in the audience has a question for Sean, please raise your hand and please wait for a microphone. We didn't talk about M&A. It's been a really nice part of the growth algorithm the last couple of years. You guys probably have been in the best position to execute those in the sector. Talk to us about kind of the benefits to '23 from last year's activity and then how you're feeling about the pipeline and your appetite for 2023?

Sure. The appetite is there. It's always there. We've always bought through the cycle. But as we look into the acquisition pipeline, there's just not as much activity, not as many sellers. So I've been getting this question, why are you pulling back? It's not really us pulling back. It's the opportunities that are presenting themselves, just not as many. In terms of the -- what was the...

Activity last year and how much is the...

Yes. So let's call it organic 4-ish. The acquisition activity last year will add about 1.6%, right. And if you can do the arithmetic, they generally happen ratably throughout the year, right. And if you apply -- you assume we bought it a 11-ish forward multiple, and you can kind of back into all that.

Yes. We've tried. Okay. Any questions for Sean before we wrap up. So Sean, I don't know if you want to close us out with any comments, but it sounds like in an environment where most people on the advertiser side are feeling pretty stressed. You feel like your visibility seems pretty good for the year...

It is pretty good.

In terms of positive numbers and negative numbers?

Yes. And we budget very late. We don't set in stone the 200 P&Ls that roll up to me until late January. So we have a good view of the world before we shake hands and say this is what we can do. And our local management is heavily incented to do what they say they're going to do in a given year because their incentive comp is tied towards hitting that budget that we agree on. As a matter of fact, they get $0.10 on every dollar they collect over that goal, right. And they control every aspect of their P&L, top, bottom, every piece of it, right. And that just gives me confidence that they're going to deliver, right. And particularly on the expense side because we really emphasized it as we were budgeting. It's not going to be a 10% year, so you better get it on the expense side, and they're going to deliver. So that feels good. The pacings look good as we sit today. So yes, it's -- those 2 things give me confidence that it's going to be what I would call a very normal year.

But Q1, small growth, gets better Q2, Q3 than you have a low comp in Q4, and the plan in the middle of the runway, that type of thing.

Yes.

All right. Awesome. Thank you so much.

Appreciate it. Always a pleasure. Thank you, guys.

Thanks for coming.