Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

So before we start, please note that 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. With that, my name is Cameron McVeigh, equity analyst here covering the advertising stocks. And it's my pleasure to welcome Sean Reilly, President and CEO of Lamar Advertising to the conference.

Great. Thanks. Appreciate it, Cameron.

Great to have you here.

Yes, and relatively intimate group. So raise your hand at any moment. I thought I might start off with what I said in Miami at the Citi Conference on Monday, I had a couple of updates for them that were well received. On the earnings call, I had mentioned that we were tracking toward the upper end of our guidance range that we gave for AFFO per share. On Monday, I said, February was fantastic, and we're now tracking above that range. So that was the change in Lexicon there. Also talked about our distribution and where we see that going. As you know, we increased it to a run rate of $5.20 this quarter. Under the REIT rules, that distribution is tied to our net income. And where we see that going is, we're probably going to have to raise the distribution again in the third quarter, and quite possibly have a December top up as well. Again, this is arithmetic. It's tied to our net operating income. And for those who have followed us for a while, we have traditionally used legacy NOLs and depreciation and amortization to moderate our net income. We're running out of those. So you'll see over the next few years, continued increases in our distribution for that reason. I talked about same board digital being really good in February, which is meaningful because last year, we struggled with that. Our same board performance on our digital platform was slightly down for the year. It was up 7.5% in February, good number. Now February, this year, had an extra day. That was helpful as well. That was represented about 3.5% of that 7.5%. So still up, right, 4%, good number. Happy with that. Programmatic was a big contributor as well, year-to-date, up well over 10% year-over-year. Glad to see that. But in general, just what we're seeing is a very healthy Main Street, USA. Last year, it seemed -- at this conference, everybody was asking me how do you perform in a recession? Not so much this year, right? Nobody is asking that. And when all that chatter is out there, it has an impact on how Main Street feels about the world. And again, our customers don't seem to be thinking like that anymore. They're really thinking that's going to be a good year for them, which translates into a good year for us.

That's great. Thank you, Sean. When you think of 2024 and your positioning? How did the quarter shape up in your mind in your -- in the context of your guidance? And then broadly, any priorities that you're looking at before in '24 and beyond?

Yes. Let me start with that question because on the call, we mentioned that we're slightly changing our capital allocation. I would call it temporary. And we're curtailing acquisition activity. And when you look at our CapEx budget going from $185 million down to $125 million, and we're taking those savings and we're paying down the Term A that's due February of next year. We can take out about half of it with free cash, and then we're going to take out the other half with our revolver. Of course, when we set this plan in motion in late October, early November, the financing environment was pretty rough, and we were being quoted something in the neighborhood of high 7s-percent for a high yield. We're getting quotes in the sort of low 6-ish-percent today, right? So that world is changing. But we're going to stick to our game plan. We're going to -- some people interpreted the M&A change as the runway shortening. We got that question after the call. That's actually not the case. Again, you take -- our industry, it's still highly fragmented. The number of companies with asset value between $5 million and $75 million is literally in the hundreds of independents out there. Asset value $75 million to even over $1 billion, a dozen or more. And I'm not counting the other 2 publics in that. So it's really just the -- I had to go get the money from somewhere. So instead of doing $140 million in deals, we'll do about $30 million in deals this year. We're not going to miss anything. There's nothing material coming to market. And we also think that back half of '25 going into '26 could be a meaningful year, material billion-plus transactions. So we're prepping the balance sheet for that, assuming we execute on our operating plan and we execute on this financial plan will be below 3:1. And our leverage, we'll have well over $1 billion in debt capacity to go shopping.

That's helpful. Sean, on that point, how would you describe the current level of regulatory scrutiny in the outdoor advertising industry? And how are you seeing private market multiples trending?

This is such a good business that you really don't see much beta in multiples even in and out of the cycle. You really don't, a little bit, but nothing like you see in other industries. So on the multiple things, the multiples are still very healthy. Probably healthier today than they were in November when we were in the 80s. The issue of how we're feeling about the cadence to the year. I wouldn't call us a cyclical business, but first quarter is typically slightly weaker than the rest. In a normal year, that would also apply to the fourth quarter, but this is a political year. So you're actually going to see a little more robust fourth quarter, given that dollar falls in October, November. So that's kind of the cadence that we're seeing through this year. You had something else you were curious about, and I forget what the question was.

One was just the cadence of growth, but then regulatory scrutiny. And then...

Oh, yes, yes, yes. So we're a REIT. Under the REIT rules, we don't have to file HSR, even if it's a transaction over the HSR threshold. So that doesn't keep me up at night, regulatory rules, because we haven't had to go down to the Justice Department since we've been in a REIT.

That's great.

Yes.

Since you mentioned political, it's an election year and maybe less contested than people were expecting. When you think of your political advertising, how much of that is a crowding out effect from other mediums versus pure-play advertising on billboard.

Sure. Let me go to the difference between an odd numbered year and an even numbered year, because whether it's presidential in our book doesn't make that much difference. Most of what we get is local, counsel manic, mayor races, governor races, congressional races, judges and the like, right? So it's remarkably consistent, whether it's a presidential or just a regular even year. We do get political in odd years, right, let's call it, $9 million, $10 million. In even years, let's call it, $22 million, $23 million, $24 million. Remarkably consistent. But think of the -- Lift is being the difference between the two, let's call it, $12 million. Breaks leg as we sit today, maybe only 20%, 25% of that is booked, right? So the rest is to come and it breaks late. It's not in our pacings right now.

Got it. That's helpful. And going back to the, I guess, the leverage point. You mentioned at the end of the year, maybe down around 3x. Do you have a long-term net leverage ratio that you would target that's ideal. Are you comfortable where you are now?

Since we've been in a REIT, we've operated between 3x and 4x. Most of the time between 3.5x and 4x of late, even with the $1 billion or so we've put out in the last few years. In acquisitions, we're down at the very much low end of that range.

Got it. And I want to go back to the general advertising market and what you're seeing -- if you think of your local advertising trends you've seen growth in the past 11 quarters, some pockets of softness in national. What's key to unlocking more national money flow into growth? And then is there an ideal mix between local and national in your mind?

I like where we are. I like being 80% local and 20% national. And it's not by design, other than the fact that -- by design, we're middle market. That's just the nature of doing business in Little Rock as opposed to New York, right? On the sort of where we're seeing it at the local level, it's just general broad-based strength. It's not vertical-specific. At the national level, it is a tad vertical-specific, primarily insurance bit us last year, and they have not come back yet. As I mentioned on the call, we will still be down in national in Q1. However, we think we're seeing a higher level of activity, RFPs coming out of New York and L.A. and Chicago. So we're hopeful that sequentially as we move through the year, it will get better. We're not promising that it will be even positive by the end of the year, but that's baked into our guidance. So if there's upside to where we're seeing our business trend, it would be in a slightly stronger national as we move through the year than what we're projecting. For OUTFRONT and Clear, the reason they're feeling a little better about their national book is they skew New York, L.A., right, larger markets, we skew below the top 20 DMAs. And the entertainment film Lift that they've seen, we don't really see that, right? So Dune was great for Jeremy and Scott, right? But it didn't spend enough my way to even hit my radar screen. So that's kind of the difference in how we're mutually seeing our national book through the year. Theirs is slightly stronger for that reason.

That's helpful. Are there any other verticals you would call out, either positive or negative that you've seen into the first quarter?

Not really. Remarkable consistency, really. I mean you won't see percentage changes in the verticals through the book. I'm talking percentages of our business. You'll see relative -- this one is up that much. This one is up that much. This one might be down a little bit. But over time, it's been remarkably consistent.

When you think about the growth in your business from a long-term perspective, Lamar had 2% to 3% organic growth, pre-COVID. 2023 at 2.1%. And you recently guided....

Man, give me 2022, come on. We were up 10% in 2022. I put those 2 years together, we were up 6%. Come on, man.

The stack. It's high. Okay. So if you think of long-term 25-plus where -- how do you think about it?

Yes. So look, you all have followed us for a long time. You can't untether Lamar from GDP. So start with GDP, right, going into a year or even a longer time horizon. Then go to whatever you think U.S. domestic ad spend is going to be, kind of think about those 2 together, and the way I think about it is, over time, we should marginally beat both of those, all right? We should beat them for a couple of reasons. Number one, our digital deployment in the year, new digitals, is additive to our organic growth, right? In any given year, to give or take 1%. Okay; and then number two, there is subtle but discernible share shift going on at the local level, all right. This is real rough, and Ben is going to call me out on it. But 30 years ago, your ad pie looked like this. Down the middle, half of it was newspaper. Cut the other half and half, top quarter was linear TV, mostly network affiliate local TV, but some of the cable stuff in there. This is local ad pie only. Then take the lower quarter and divide it into third, give or take, and it was radio, riminess of newspaper, Yellow Pages are gone. That's the world that used to be. World today, same circle, cut it in half, digital. Facebook, Google, the local use of digital, right? These are our sophisticated local customers that know exactly what they're doing on that, and they used to buy the newspaper or the Yellow Pages. Cut the other half in half, it's still basically linear television, right, but that's starting to do this. Take the other quarter, divide it into third maybe not even third, but then you have out-of-home radio and the remnants of newspaper, Yellow Pages are gone. So that's what the world looks like now. We should benefit as linear TV starts to do that, I think it's inevitable, right? I think it's happening in real time. You can look at their stock prices. So yes, that's why we should, on a relative basis, outperform general domestic ad spend and GDP. Does that make sense?

That's helpful. And that's -- the share shift is -- is that primarily from linear? I mean do you see newspaper, radio...

Yes. I mean, look, those guys are still -- newspapers, they're still there. We don't know for how long. And so there's some opportunity there. But I think the big opportunity is linear television. I mean that's a lot of dollars. That's a ton of money. And look, I can draw a straight line from the demise of Yellow Pages to the rise of attorneys in our book. That used to be their primary medium. Now we are. I can draw a straight line from the erosion of radio audience to our digital amusement, entertainment and sports vertical, which is the vertical that over-indexes to our digital footprint, right? I can't draw a straight line from the demise of linear television yet. But what you want to look for is auto growing in our book because auto still buys local network affiliate television. They buy those news adjacencies that nobody watches. So that's the one that I would look at. And hopefully, we'll be able to draw a straight line.

That's very helpful. Let's switch gears a little bit to programmatic. You called out that as a bright spot in the fourth quarter. I think it was up 10% with momentum carrying into 2024, north of 10% for year-to-date. What -- can you discuss what's driving that growth? And then how you think about the opportunity in programmatic going forward?

So general weakness in national spilled over into programmatic. Programmatic is 100% national, right? And to some degree, responsible for our same board performance on digital because programmatic, it's weak, feeds our digital footprint. It's 100% digital. So the uptick across the board strength with some really interesting customers coming in that we don't see much of Procter & Gamble, right? We very rarely see that. They did a programmatic buy for Cascade Pharmaceutical. Very -- they have a very hard time using us because of the disclaimer requirements. He wouldn't be able to read -- the verbiage on the board if they had to do all the disclaimers. But what they have gotten regulatory approval to do is a call your doctor prophylactic coverage on that disclaimer. Yes, they don't go into too much detail about the symptom or even the disease they're trying to treat. So it's very vague. They'll use the name, a very vague description of which part treating and then they call you a doctor. That's perfect for billboards. So hopefully, they're not just dipping their finger in it, and hopefully, they had a good experience with us, but that was one of the customer categories that I think gave us a Lift.

Got it. That's great. Maybe to the enterprise resource planning initiative. You're -- from what I can tell, are you trying to digitize some of your back-end technology, customer relationship systems. Can you maybe talk a little bit more about the process here, how it's going and then margin benefits.

It's going well, but we're not live yet. So I'll know on April 1, we go live with the ERP. Our partners, Oracle, they've been great. Our -- PwC is our consultant. We've invested a lot of time and money in training. I've learned from a IT shop that getting the tech right, then getting the software right is the easy part, hard part is the people. So we're spending a lot on that. We're at peak spend for that project, by the way, you're going to see elevated corporate expenses this year for that reason. The spend on the project kind of ran 3 quarters of last year into all of this year, and then maybe a half to 3 quarters into next year. The second half -- so the ERP part goes live April 1, that's all the back side of the shop stuff, right. The customer-facing sales process stuff will begin this summer. We do have Salesforce as our CRM, but it exists separate and apart from many of our other legacy software, which is -- when I say legacy, it's old, 20 years or so. That will be plugged into Oracle and their customer-facing software, and it will allow us to extend the -- what we do with Salesforce. So it's going to be a big deal for our account executives, it's going to provide a lot of efficiencies in the sales process, allow us to touch more people and eventually allow us to do whatever AI does to help that sales process be more efficient.

Got it. When I look at the margin profile of your business, and if we normalize for some of the airport rent abatements this year, your margins were in line in '21. How should we think about expense growth going forward than Lamar's ability to drive margins higher?

Sure. We singled that out as a reason we were guiding to, let's call it, a little north of 3% expense growth instead of, let's call it, 2.5%, right? Two things, the ERP peak spend and airport abatements that -- order of magnitude $10 million last year, that won't repeat this year, right? All that said, you should expect us year in and year out to grow the expenses, give or take, 2% to 2.5% going forward. The trick to margin expansion in the Billboard business is really, really simple, all right? Grow the top line a little faster than you grow your expense line and you'll grow your margin. Build some digital billboards because the incremental margin from digital is about, give or take, 75%, 80% incremental margin contribution, right? And then do a whole lot of tuck-in acquisitions because the incremental margin on a tuck-in can run upwards of 65%. All of that is accretive to what is a 46.5% run rate today, margin profile. Very high incremental margins from conversion. That's primarily because we really focus on the real estate. So the largest cost is your lease cost. The lease cost under our digital platform runs 10%. Under the total platform, it runs 21%. So you got 11% delta there that flows right to the bottom line. We own a lot of the real estate under our digital billboard and continue to be active doing that because it's very accretive.

Definitely. And on that point, I think you targeted 200 -- $250 million organic digital conversions, down a bit from last year. Is there any concern that you have about adding too much supply there?

Every time we have a [ yield ] where same board goes down, we have to be a little more rigorous in thinking about it. As long as we're trending up, it's like pedal to the metal. But here's how you should think about it. Number one, that's part of the overall trimming of CapEx that allows us to pay down the Term A. So that kind of figures into our thinking there. We don't have any questions about the runway for digital. When you think about the demand side, we get our signals from, obviously, our local general managers when their local digital network is full, they ask for another one. And quite frankly, that happens a lot, right? So it's almost that simple, right? The local GM says, okay, I can handle another one. Okay, let's go. But another way to think about the demand is in the U.K., well over 50% of total out-of-home spend is digital. It's 30% for us. That implies all things being equal, some runway, right? So no, we feel good about it. Again, we were kind of pausing to pay down some debt, maybe pausing a little bit to digest acquisition of digital and what we did last year. But when I see February up 7.5%, it's that extra day, that's got to make us feel good.

Definitely. One of your competitors also highlighted the strong digital revenue profile in the U.K. Is there anything special about that area? Or why is there so much digital revenue from there?

Well, for one reason, there's more digital screens. So it's harder to switch a switch and convert a traditional large format roadside billboard. It's much easier to flip the switch and convert what was an analog presence in the airport to 100% digital. We've done it, right? I mean you go fly into Vegas, that's us. I mean you can do that overnight. So one reason is, there's more transit subway setting out of home in the U.K. So they just have more digital screens. But the point is, at least for me, regardless of how they got to their level of digital screens, there's that much demand for it, right? Now the supply side is a huge constraint on us. I mean we've got 4,800 and we're only doing plus or minus 300 a year, I mean I got to figure out a way to pick up the pace, right?

Yes. I wanted to see if there's any audience Q&A, feel free.

Sean, a few questions. Obviously, planning for some M&A, it takes two to tango, as they say. So if these deals don't present themselves, and I guess this is sort of a multiyear question, what you take the leverage back up? I mean obviously, rates seem like they're going to be coming down. So what happens in that scenario?

You weren't here for my discussion about the distribution. We're running out of NOLs, as you know. We're likely going to have to increase the distribution this year and next year. And when you get to '26, it starts to hockey stick on us, right? So there's that. There's another demand for our capital, which is a great thing, right? Let's give you guys more money. When you do the -- to that point, how much is left over after all of your obligations, we've done a 5-year model, and it's consistent at -- take our EBITDA that year, subtract the distribution, subtract interest, subtract total CapEx, a little bit of tax leakage, we'll have about $100 million left over. When we -- in past years, have had more like $140 million left over, right? So that's, that arithmetic. I think you were out of the room when I went through the runway, too, the M&A runway.

No, I heard that. I got that.

Okay. There's still a lot out there. right? It doesn't have to be the $1 billion deal, $1.5 billion quarter, depending on which one you're talking about. We'll put the money out. I mean in the last few years without a large transaction, we put out over $1 billion.

And then on your comment about Main Street's strength, and I think you talked about February, are you translating this into organic growth? Are you seeing the local business accelerate in growth here early in '24 relative to what you exited '23?

I got a lot of questions around that. Our guidance implied something like 3 and a quarter in the middle of the range, mid-ish of the range. And December was at 4, what's going on. Fairly confident first quarter will [ beat ] December. So -- and I'll leave it at that.

Okay. And then lastly, just a clarification on your HSR comment. So a REIT doesn't have to file, because you're acquiring a non-REIT, does that change that answer? Or is it the same...

It's the assets that matter. If they're requalified assets, you don't have to file, doesn't matter -- If they're readable, you're good.

And just following up on that, that exemption is regardless of size. That's all readable through HSR.

Correct.

And then on the $140 million versus the $100 million that lower, call it, net available for cash, does your allocation of that change over time? Does that impact the M&A that you can do going forward?

Well, all things being equal from a leverage point of view, yes. Now if you look at it historically, we've done well over our free cash flow number in acquisitions for the last few years, and our leverage has gone down, which would intimate that whether it's $100 million or $140 million, if it's the right opportunity and good assets, we're going to do it.

In terms of -- maybe just going back to transit strong in the fourth quarter. How do you think about transit on a run rate basis? Where should we see growth trends?

So our bus transit business was up mid-teens year-to-date. Our airport business is even doing better than that year-to-date. So a little bit of the strength we had January, February as a result of that. Some of that is recovery. As you know, Ben, Vancouver has been a drag on us for a while. Canada was later coming out of COVID. That transit business is also a subway for half of it, where the viewership, the audience is the ridership, whereas when you wrap a bus, the audience is the whole DNA that sees the bus, not the people getting on the bus, which makes a difference when you're talking about transit because transit ridership is down. That's what is unfortunately going on without in the MTA, right? And that's what Vancouver looks like for us. It looks more like the MTA. Anyway, long story short, it's recovered and it happened pretty quick and it's happening this quarter. So that's been helpful. How do I view the business going forward? We run both our transit businesses and our airport businesses as a portfolio, right? It's a large portfolio of middle market transit contracts, airport and transit. That approach for us allows us to grow it organically by getting a couple of more franchises in a given year, in a middle market and then grow it organically just because it's growing like the rest of our platform. The other reason we run it as a portfolio of middle market is the large markets are highly competitive and you've got a large minimum annual guarantees, larger revenue shares. So it's a long-winded way of saying, you're not going to see La Margo bid on the Atlanta airport or Logan or LaGuardia or the MTA or the Chicago transit, it's not our expertise, and it is not again, sort of a portfolio approach to the business, where if you lose one, it doesn't kill you and you don't get a lot of pressure to overbid. So that's the way we look at it.

Got it. And just my last question. How is the LSU football team shaping up this year?

I'm feeling pretty good. Yes. I think we're going to have it at the skill positions, for sure. Defense, we worked on through the portal. And yes, yes, I think we're feeling good.

That's great. Good to hear. Thank you, Sean.

Thank you, guys.