Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

I'd like to welcome everyone to JPMorgan's 51st Annual Telecom, Media and Communications Conference. My name is Richard Choe, and I work on this communication services and media team here at JPMorgan. I would like to welcome Sean Reilly, President and CEO of Lamar Advertising. Thank you for being here.

Thanks for having me.

I wanted to start off with, I guess, a part of the business that has consistently done well, and I think people have appreciated the strength of Lamar's business through, I guess, I would say, a much more volatile macroeconomic and advertising environment and that's the local business. Can you help people get a sense of why and how that's been so consistent? And then are you seeing that change at all over the last few months?

Sure. Well, as you know, we're about 80% local, about 20% national. Those local accounts, and there's 45,000, 50,000 of them touched by about 1,000 account executives across 160-some-odd offices. So it's steady. As you know, I've been doing this a long time. Taking a 30-year look back, local tends to do this, national tends to do that. It's got a high beta. If you smooth out the beta in national, over time they grow at about the same rate, right? And both are going to be tethered to GDP. So you kind of want to start there when you think about how we're going to do during the year then look at projections for U.S. domestic ad spend. Right now, there is a big divergence between what's going on in national and what's going on in local. As I mentioned on our earnings call, if the definition of a recession is 2 straight quarters of being down, then we're in a national ad spend recession, not just Lamar, but as you know across a whole lot of platforms. No change from what we talked about on the call. The change for us in terms of expectation for this year is really what we saw happen in April to our national book of business. In February, we knew we were going to be down in Q1 in national. But we felt like the activity levels were strong enough to have us be positive by the time we closed out the year, like maybe two. April delivered a bit of a surprise to us on the national front. And what we saw there has convinced us that we're going to be probably down one for the year. And to put numbers around that, that's about 3% on $400 million that we're not going to have, right? We're still going to get to our -- we believe we'll still get to our AFFO guide, but we're just going to get there a different way. Instead of getting there hitting our top line expectations, we're going to get there with expense control. It's one of those years.

No, that makes sense. And it seems like the national part didn't recover as much or as quickly as you thought? Or was it just -- or did it get worse? Like, I guess, in trying to figure out a little bit, and I know it's not a huge part of the business...

Yes. So it got marginally worse in terms of a few large accounts, a couple of verticals we thought were going to behave a little differently, it turns out they're not. And we influence the local dollar. We touch customers, we sell them actively. We convince them of the value of their spend with us. On the national side, we don't really influence that dollar. We just service it, right? We respond to RFPs. We don't even call our national account executives. They're really just servicing business and helping place it and responding to RFPs. So to a certain extent, again, national can have this higher beta, and it can buffet us about a little bit.

And I guess to kind of finish up national a little bit, is there -- do you think it's being driven by certain categories being weak, like auto insurance, the insurers are having a tough time with rates and damages and collisions not being able -- and so they're pulling back on advertising? Or is it more uncertainty? And I guess you talked about it's an advertising recession now, but people are worried about a real recession hitting later this year. Kind of, one, is it driven by certain verticals? And two, are you expecting a real recession like later this year at all?

We're not -- well, I'll start with the second question. We're not seeing a recession in our book. As a matter of fact, as we look at Q1, Q2, Q3, Q4, there is actual marginal improvement as we go through the year reflected in our pacings right now. On the national front, it really is -- it's a little bit of pulling back a little bit across a lot of verticals just marginally, right? I mean you're talking about 3%. But it is 2 primary verticals. It's, as you mentioned, insurance. And that's basically 2 customers. I don't like to publicly talk about our customers, but you can guess who they are. And online gaming. And again, it's a couple of customers, and I don't like to talk about our customers, but you can guess who they are. That's the bulk of who pulled back and is significantly under this year what they were last year -- this time last year. But on the local side, again, it's steady Eddie. I've got smaller and medium-sized markets that are setting records in May, highest grossing month ever, right? So it depends on market size and a little bit to geography. The main street in Middle America is hanging in there better than the coasts.

Got it. And I guess focusing a little bit on the local business, it feels like you have a much closer connection. And to your comment earlier that it's something you can actually drive a little bit or impact a little bit more, I assume that sales process or organization has taken a long time to develop and you feel very comfortable with it. And can you give us a sense -- I guess you gave a little bit, that things -- are they running a little bit better than you were expecting earlier? Or is it kind of in line to where you are?

So we, from 25,000 feet, we came into the year with our internal budgets and our guidance reflecting about 4% pro forma growth for the year. April has convinced us that, that's going to be challenged, right? So we're now comfortably pacing along. It's something below that, but that we'll keep our goals intact on the AFFO front. It's important to know about Lamar that we are flat decentralized in terms of our organization. And we give an awful lot of autonomy to our local GMs, our local sales managers and, hence, our local account executives. Yield management, pricing, all of that happens at the local level. And we set our budgets relatively late at the end of January, some 200 budgets, right? And those managers have complete control of their P&L. They turn on the lights, turn off the lights, hire, fire, and their compensation depends on them hitting those goals in large part. So in terms of alignment and having, again, a sense of how the local dollar is going to play out, we're pretty in tune and in touch. I mean we know what's going on there.

And I guess with that, it probably is rare that they don't hit those budgets that they set for themselves. And I think is -- that's what giving you the confidence that if the revenue is not there, they're going to find it on the cost side.

They're going to find it.

Okay. Something that I guess has been a big focus, and I thought was interesting from the call was a lot of the outdoor advertising names are focusing on transitioning to digital, and you're doing a lot there. But it seemed like because of the performance in digital recently, you're not changing course but maybe reevaluating the course. That was a little surprising in that everyone seems to think it's the future, I guess, so to speak. And can you give us a little bit more on what you're thinking about your digital strategy and the conversions.

Sure. First of all, there's no change, right? We're still going to try to put up about 300 this year. What I said on the call is, look, one of the surprises in Q1 was our same board digital being down 3.5%. And so then what I said on the call was, look, we're going to be keeping a close eye on that. Right now, it's according to plan, 300 units. If our local management feels like we might be getting a little out over our skis, then I'm going to hear that, right? Right now, I'm not hearing that. As a matter of fact, May, I believe, when we close the book on it, same board digital will be positive. So that kind of tells me -- went through a little bit of softness. You could argue that because digital is our shortest cycle sale that it could be sort of a canary in the coal mine, right, in terms of thinking about a recession, right. But what I'm seeing in May makes me more comfortable.

Got it. And is digital sold through the local GMs or is that...

Yes.

Okay. So that's...

Yes. So it's roughly the same. It's roughly 80-20. So it's 80% local. It has a slightly different component in that some of that is programmatic. And that is a national sale. So it skews a little bit because of that in terms of the verticals. So your verticals are going to be slightly different, but the mix is going to be roughly the same.

All right. And then in terms of the pacing of digital, it seemed like it was generally driven by regulation and kind of local zoning issues. I guess because of that, does it make sense just to keep the same pace instead of trying to change anything radically or...

Yes. I get this question all the time. Why don't you go faster because it's your fastest-growing product and it's our premium product? It just turns out that about 300 is all you can do when you take into consideration the regulatory environment, the local zoning, when you take into consideration that they're essentially outdoor construction projects, right? All the logistics have to come together. It's not quite as bad as remodeling your kitchen, but it typically takes a little longer. It costs a little more than you want.

And then have costs or -- gone up because of that, whether it's the actual boards themselves or the labor? Or has it stayed roughly the same?

Last year at this time, we were having a little bit of issues with steel, but that's kind of calmed down, right, maybe you see that in a wide variety of other industries. So now it's just, again, sort of steady as she goes. We have wrung the costs out of the actual unit. I mean the diodes that were the main ingredient are pennies, right? So it's the basic arithmetic that I've been quoting for the last 4, 5 years. If it's a large format, 14x48, by the time you retrofit the actual structure, that's the steel part and get the actual screen there and up, you're going to be spending about $220-some-odd-thousand. And the payback on that has been remarkably consistent for as long as I've been doing this. You're taking something down that does, let's call it, 3,000 a month, that's your analog base. You put up something that is going to do about 5x that. So let's call it 15,000, 18,000 a month. Your incremental margin on that is going to be about 85%. And if you do all that arithmetic, you'll see it's a pretty good...

Pretty good returns?

Yes, yes. It's good. Now from our customers' point of view, in aggregate dollars, they're paying about the same. They were paying $3,000 a month. And oh, but they had to buy the vinyl, right. We go to digital, and they no longer have to buy the substrate, the vinyl, right? And they're probably paying about the same, $3,000 a month, but they're sharing the space with 6 other advertisers. That means the CPM goes up. So their absolute dollars are about the same, CPM goes up, why do they do it because it's so dynamic. They can change their message from their desktop at their whim, and they do, so...

No. Seems great. Last year, we talked a little bit about price increases because inflation was a big topic. Inflation is coming down a little bit, but still high. But I think you saw with the utility of your boards and -- that you felt like you had pricing power. Can you give us an update on how pricing has gone over the past year?

So this time last year, we were getting double digits. That's not happening anymore, right? Part of it is because our local customers are saying, " Wait, wait, wait. You all got me last year and inflation is coming down." So if you go back to '21, we were pro forma up double digits. Last year, we were pro forma up 10. '21 was a little bit odd because it was also a recovery year, right? So what -- not true apples-to-apples. But I would argue that most of last year truly was real rate-driven, right? And it's just hard to have those discussions every year when that's not where inflation is anymore.

And I guess on the expense side, some of your peers, I guess, had some higher-than-expected kind of lease increases. I don't think you're in the same situation. But are you seeing your kind of ground lease expense pressure upward or...

No, it's remarkably consistent, year in, year out, it grows at about 1%. Our portfolio looks a little different than Clear and Outfront. Number one, it's 170,000 billboards, north of 70,000 leases with every term you could imagine, right, from month to month to 99 years. But the real difference is it skews middle market hugely, right? And the world is just different in Little Rock than it is in Boston, right? It just is. So fortunately, we're not seeing any pressure there. We came into the year, and I think we guided to 3.4% or 5% expense growth. We're going to beat that significantly. It's going to be in -- I believe, something more in the 2.5% range, and that's how we're going to hit our AFFO goals because we're going to beat our expense guidance pretty handily.