Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

Interesting. Okay. With programmatic, you talked to Cascade before, but that sounds like it was more of a one-off. I mean where are you seeing more of the kind of vertical interest on the programmatic buzz?

Again, across the board. It's -- some of it is around the entertainment space, which you're seeing movie releases come back. Again, for us, it's not as important as it is for Outfront and Clear, but that is a space through which we do get some of those dollars.

And what do you think the partners appreciate here? Is it just the flexibility to do a late buy? Is that sort of the key piece of it?

No, not really. So you have 2 pools of dollars, right? You've got the traditional pot, right? And then you've got the digital pot. And most of that goes to your phone. And those digital buyers don't pick up the phone and call an account executive, right? They don't want to go out to lunch or play golf. They want to buy through an algorithm. They brought a digital dollar into the algorithm, we load our CPM, the geography of the board, the demographic they're going to hit, they load what they're willing to pay, who they want to talk to and where they want to talk to whom and at what time. And if we have the avails and all of those match up, the buy just happens, right? It's convenient. It's easy. They also get a higher level of data to back up and prove out their buying. And this is provided by the digital enabling shops, the DSPs, the SSPs. In our case, it's mostly Vistar, which we own a minority stake in, and again, Vistar provides a richer data set to the customer.

In terms of targeting, attribution?

In terms of targeting attribution. And again, they also have a very precise buy. When you add all that up, we get a higher CPM, right? Our traditional digital CPM runs, let's call it, 6, 7-ish cost per thousand impressions. We're getting 8, 9, 10 through the programmatic platform.

New programmatic display still on national?

It's all national today. One day, we'll open it up to our sophisticated local customers.

I was going to say, right, a lot of your customers assume pretty [indiscernible] buying on Facebook and Google, right?

Yes. I mean, look, there's a reason we don't do it, and that's because a programmatic dollar of the cost of sale runs about 10% right? That's what we pay the SSP world. And our overall cost of sales through all the other channels runs about 6%, right? So I'm not going to unleash this thing on our buying community until volume is such that the cost of a programmatic sale drops down to around 6%, which it will. I mean, right now, it's in its infancy. There's not as many dollars flowing through the channel. But when that happens, we open it up to everybody.

You've targeted digital conversions this year, 200 to 250, down slightly from the recent run rate. Part of that stated capital allocation, we can touch on that later. But how do you see the long-term opportunity in terms of digital conversions? What are the kind of gating factors to consider in terms of regulation, bringing supply to the market? You talked about supply being a risk sometimes.

Yes. On the demand side, I feel great about it. I mean if you look at places like the U.K., for example, well over 50% of out-of-home is digital, right? And in this country, it's about 30%. It's about 30%, right? So the demand is there, right? And it's really a supply constraint issue. We've got 160,000 billboard faces and only about 4,500 of them are digital. Those 4,500 boards do 30% of our billing, right? So we're moving as fast as we can. Again, sort of with the slight exception of this year, but that's -- those digital conversion opportunities are still there. We'll crank it up again next year.

Do you see any change in the ROI as you go through this, right? Someone might make a case that you converted the best possible locations initially and you can see it...

No. I mean it's remarkably consistent. It's really surprised me because I would have thought the same thing, right? But we're getting the same ROIs on a digital deployment that we do today that we did -- that we got a decade ago. And so again, it's not a question of demand. It's really a question of how quickly we can get them out there.

Can you just refresh on what the rev uplift -- the revenue uplift is, cost uplift, what you typically see?

Sure. So you've got static billboard on the interstate, let's say we're getting $3,000 a month for it, right? We take it down, we put up a digital and we're going to get, give or take, $15,000 to $18,000 a month for it, right? Now from the customer's point of view, they're paying about the same aggregate dollars, they pay $3,000. Now they had to buy the substrate, right, that they amortize over the length of the contract. That's the vinyl with the image on it. With digital, they don't have to buy a substrate. So they save there. And they can obviously change their copy from their desktop. But -- so what changes for them is the cost per thousand impressions. They were paying, let's call it, 3 to 5 cost per thousand impressions. Now they have shared space, 2.6 views per car, right? You do the arithmetic, they're now paying, give or take, like I said, 8, 9, 10-ish, right, depending on the market. Those are kind of aggregate numbers. It's going to be different in Vegas than in Baton Rouge, but sort of give or take. And then because we manage the real estate under our digital unit so aggressively and our lease costs are about -- run about 9% of revenues, the incremental margin contribution from digital is huge, right? I mean, you can do the arithmetic. It's quite good.

Great. I want to touch on transit, which is strong in the quarter, 12% growth. You did have an extra day we talked about Super Bowl in Las Vegas probably helped. But there was some improved benefit from ridership, maybe you could unpack a bit what you saw in the quarter? Does that ridership benefit kind of flow through on the board?

Sure. So most of our transit is wrapped buses. So the audience is not the ridership. It's not the people on the bus. It's really the whole DMA as the bus moves around, okay? That's most of what we do. That came back much faster [indiscernible]. So that has fully recovered and is doing quite well. We have really sort of one exception to that, which is Vancouver, which is a traditional rail subway system. The audience is the ridership, and it hasn't fully recovered, although it's recovering. And I'm thankful to say that Vancouver is, I think, back, right? So some of that 12% was the recovery of Vancouver, right? And then another big chunk of it was our airport division, which is just knocking it out of the park. It had recovered last year, but this year, it's just -- and you heard the same thing from Scott at Clear Channel. I mean our respective airport divisions are really doing well.

What's driving that? Is that just...

It's airports are packed, just packed.

Yes. I want to move to the expense side. You've talked to 2% to 2.5% annual increases for the long term. Should we think if that growth is kind of given as part of that variable expense tied to the top line. I guess what we're getting at is what's the operating profile of the company over the long term?

Tremendous operating leverage in our business. There are some expenses that toggle with the top line, sales commissions. We have some revenue shares, not many, but some revenue shares with our landlords. We have revenue shares with our transit partners, right? So as that revenue goes up, that expense base grows slightly faster than the rest of the expense base. But the way you should think about it, our largest expense is our ground lease portfolio. It's some 65,000 ground leases with every conceivable term you could imagine from month-to-month to 99 years. It tends to grow at 1% a year, year in, year out. I mean, even when inflation was running rampant a couple of years ago, that expense base grew 1%, right? The next biggest expense we have is people, right? That runs, give or take, 18% of our revenues. The ground lease expense runs about 21% of our revenues. But people, some of that's variable. You have incentive comp for management. You have, as I mentioned, your salespeople that are on commission. But again, a lot of that is fixed as well. And then you get down to our electrical bill. You go from those 2 big expenses all the way down to our electric bill, which runs about 3%. And then you get into nickels and dimes, right? So all that adds up to a, give or take, 53%, 54% operating margin at the operating level and close to 47% consolidated operating margin.

Okay. Just want to go to the room. If anyone has a question, feel free to raise your hand. We got 2 here.

[indiscernible].

Maybe just repeat the question.

Is that -- that was the 160,000 faces, but only 4,500 are digital.

[indiscernible].

So again, the gating issue is supply. I mean, going as fast as we can, we're going to do 350 a year.

[indiscernible].

Oh, that's a good question. From our customers' point of view no, because we have customers like Cracker Barrel. All they want is the static face on the interstate that says Pancake $7.99, get off here, right? So there are a number of our customers who only want static, all right? And then there's customers that want to buy across, static and digital, think McDonald's, right? And then we have customers that only want to buy digital. So when I think about in a perfect world, where are we going with this, we're -- if we could get to 50% of our revenues being digital, that's a good thing to shoot for.

[indiscernible].

Well, we're doing 30% of our revenues on about 3% of our billboards right now. Yes.

[indiscernible].

Yes. Yes. Well, look, our customers really like it. It's a great product. Really good.

[indiscernible].

Cracker Barrel was one of those long, long, long time customers that we really love, right? But they occupy the same space over a span of decades, right? I'm talking about the same board, renewed over and over and over again. They dropped some of those perms. We had a friendly, but protracted negotiation with them about their buy. The good news is those boards because they had been bought over the course of decades with like sort of 2% or 3% increases, we've been able to sell for more to our local customers. So we're comfortable where Cracker Barrel is. They're still a great big customer of ours. But at the end of the day, they're running about 0.6% of our book, something like that. We have no customer that's over 1% of our book of business. Our largest customer being McDonald's, and they're kind of right at 1%.

There's one in the front.

What's the payback on a conversion? And what's the gating factor? Or how do you think about payback in...

The gating factors, I'll hit that. It's -- one of them is regulatory, right? You got to get a slew of permits to convert a static to a digital. And in some jurisdictions you can't, like Los Angeles, right? They ban digital billboards, right? So it's just -- it's a tougher slog in some areas than other areas. There are little construction projects, right? You've got to have a big, huge digital screen arrive at the right time, at the right place with the construction group. Hopefully, it's not raining. And then the payback has, like I said, been remarkably consistent. Digital 14x48 costs a little north of $200,000. And you've got a retro, the structure a little bit. Like I said, it's a construction project. Let's tack on another $20,000 or so. So that's your CapEx. Your revenue is $15,000 to $18,000 a month, times 12, subtract sales commission of, give or take, 6% and subtract your ground lease expense, which is about 10%, so your incremental margin is in the low 80s percent, and you do all that arithmetic and you see a very quick payback and a nice ROI.

So it's just permits in construction?

It's permits in construction, yes, pretty much. Yes. mostly regulatory that is the big area.

I want to touch upon M&A. You've talked to $1 billion in investment capacity by year-end. Part of that comes from the slowing of the digital conversions. We assume you see some potential for material deals next year. I guess, first, what gives you confidence on that? And then maybe second, assuming those deals -- or larger deals didn't come to fruition. Could you make that up and over a more fragmented market?

Sure. So the -- let me talk about the industry and its fragmentation and sort of where we are in the consolidation. So you've got maybe this many companies outside of the Big 3 that have asset values of, let's call it $500 million to $1 billion.

And for those on the webcast, you're holding up a 5?

I'm holding up 5, that's right. Then asset value between, let's call it, $50 million and $500 million, you've got I'm going to hold up 2 hands, all right? You got about that many. And then asset value under, let's call it, $100 million, there's literally hundreds of them, right? So you've got a long tail of smaller independents. And traditionally, in a given year, we've done, give or take, $120 million to $150 million worth of those little deals like lots and lots of deals averaging $8 million, $9 million, right? This year, we curtailed that activity a little bit because, again, we want to pay down this term. I got a lot of questions about that at the beginning of the year when it looked like the Fed was going to have 6 rate cuts. Some people wondered why we were doing it. Now I'm not getting that question so much and people are saying, yes, you all should probably pay that debt down. So -- anyway, so that's sort of the structure of the industry as we sit today. So there's plenty of capital to deploy, and we've got lots of powder.

Just in terms of M&A generally, what's the typical playbook on deal synergies?

So those little deals that I'm talking about, let's call them, $5 million to $50 million that we do day in and day out, those are predominantly tuck-ins. We don't need to buy people or trucks or operations. We're just buying billboard structures, permits, ground leases and customer contracts, right? And you just fold it into your existing operation. Those are incredibly predictable, very accretive, a great source of shareholder value creation. Over the years -- I mean, I've been doing this for 30 years, and I've probably done well over 1,000 billboard deals. And if you look at our footprint, and I would encourage you to go to our website, go to the browse inventory thing that pops up first, you'll see a map of the United States. You'll see some green dots. Drill down to the green dots and you can get down to the individual billboard. And you'll just note that we have billboards everywhere. I mean virtually, everything is a fill-in for us, right, which gives us a tremendous advantage when it comes to M&A.

Got it. All right. We got about 30 seconds left. I think it's good to end there. Thank you.

Yes. Great. Thank you. Appreciate it.