Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

All right. Great. So my name is Jason Bazinet with Citi Research, and we're pleased -- very pleased to have Sean Reilly, CEO, President of Lamar. Sean, how are you?

I'm good. Jason. All good.

So this session is for Citi clients only. Disclosures are available at the corporate access desk. You'd like to ask a question, and we love -- absolutely love audience questions. Please raise your hand. If you think you're shy, you can go to liveqa.com and enter the code GPC25. So I don't know -- maybe I'll just start with an introductory question, Sean. There's a lot of REITs here at this company -- at this conference. So what would be the defining characteristics that you think makes the outdoor business -- an attractive business? And to answer the question, I think it's worth highlighting what it is specifically about Lamar that makes it unique relative to other outdoor advertising REITs that might publicly trade?

So, I'm going to have to dance around a little bit because I've got a Board member in here, who's presenting on behalf of his company, Marshall and the East Group. So I can't trash the other asset classes that are at the conference that -- adding to the pressure. I've got my son in here, who's on the IR team at Prologis. So it's like -- Okay. Look, the outdoor business is -- it's a unique real estate asset class. It is I would say the defining and most important characteristic is there's severe constrictions on supply, which is not the case with a lot of real estate asset classes. There are no net new billboards being built, right. So that's very helpful. That's the industry in general, Lamar-specific -- the defining characteristic is our market shares. Our local market shares run 85%. So in places like Little Rock and Baton Rouge and Tallahassee and places like that, which is 80% of our footprint, we have 80-plus percent market shares and that puts us in a very powerful position. So I would highlight those two things. Do you even want some more?

No, that's good. Maybe can you say one word about -- because I think it's so important in the current investor debate about your philosophy as it relates to Transit contracts. Your philosophy as it relates to geographic exposure?

Sure. So when you think about Lamar, I think middle markets, as I mentioned, middle small market. Market shares is an outgrowth of that, but also tenant characteristics are an outgrowth of that. For example, we are 80% local customer base. Our customers are touched by over 1,000 account executives. It's a very steady business. Our tenant base is extremely predictable. Our -- our categories and verticals shift very slowly over time. It ebbs and flows in ones of percent, right? We have no single tenant that represents more than 1.5% of our total billings. That tenant happens to be McDonald's. And that's not a single tenant. It's franchisees that buy through buying cooperatives. So when you really think about it, there's no one single purchasing agent that represents more than 1% of our business. At any given moment in time, we have 40,000 tenants touched by those -- 1,000 accounting executives. Now when it comes to trends. There's a similar philosophy. We operate that in small and middle-sized markets. We have a large portfolio of small contracts, and that's very important, because if you're wedded to something like the New York MTA or the Atlanta's Hartfield Airport, you have a tendency to do irrational bidding when the contract comes up to be let. They're also extremely competitive. Whereas we -- when we show up and sit down with a small market transit authority, we're often the only people there, right? And so our portfolio looks different. All that said, we are predominantly Billboards on a business book of $2.2 billion, Transit revenues and Airport revenues combined represent about $160 million. On that $160 million, you're going to want to put about an 18% margin on it. 15% or thereabouts depending on how things are shaping up there. So it's not a large part of what we do, and I like it that way. The Transit business is not as good as the Billboard business. Now what does the other 20% look like in our footprint? We are in places like Atlanta and Dallas and -- and places like that, San Diego, et cetera. But our product mix is very carefully curated. We have no small market screens and small market inventory -- I'm sorry -- small screens and small formats. And that's important. We have large format only. And those -- that space is contracted for each unit individually. That's important. And it's all about location, location, location rather than overall broader market distribution. And if I'm getting into the weeds here, just stop me, Jason, but that is very important and distinguishes us from the portfolio and out-front and the portfolio at clear channel.

Okay. That's great. If anyone does have a question, feel free to raise your hand. If you don't mind, I want to roll the clock back, just to go back to 2024. So during the fourth quarter, I think you've laid out on a midpoint basis, your AFFO guidance was $7.75. You raised your guidance twice during 2024. And when you exited the year, you ended up at $7.99, I believe, of AFFO. So can you just spend a second and talk about what was it that led to those upward revisions and then you're ultimately beating the high end of your last range?

So, when we go into the year, we budget late, so we get a pretty good look. So all of our -- the budgets come in and get finalized at the end of January, right? The process is highly decentralized and bottom up. That's important because when those budgets roll in, we get our first look at how the field feels about how they're going to do, right? It's also important to know that we're heavily incentive comp based company and that our local management runs every aspect of the P&L, top to bottom, and they get a profit sharing of 10% of every dollar they collect over their cash goal that we agree on in January. So they're kind of incented to be cautious around their budgeting, right. The other thing that happened last year was we had a serious anomaly in February. It was a leap year, and a Super Bowl in Las Vegas, where we have a disproportionate share of the inventory. So consequently, February was up 10% last year, which is definitely an anomaly. It was great last year, not so this year. It's making for a very difficult comp in Q1. So our Q1 is going to come in well below the guide of up 3% for the year. And what we're seeing in our pacings right now is each successive quarter getting better as we progress through the year for 2025. And last year, sort of the same thing happened. Our -- political came in heavier than we thought. That contributed somewhat to the Q4 beat -- so we'll see. I don't think we're going to play out exactly like we played out last year, but we are -- I believe we came out of the blocks with cautious.

Okay. That's great.

And I would add now that we're -- this is public, right, there's no [ Reg FD ] issue here. Our pacings are towards the top end of the range we gave a few weeks ago. So they're a little stronger than that 3%. That's as we sit today.

So how do -- I just want to make sure I understood that. So you said that the Q1 guide is going to come in below the 3% growth embedded in your guidance.

Correct. But our overall pacings for the year have us tracking towards the top end of the range we gave you on AFFO per share. That makes sense?

Yes. And how much visibility when you say our pacings for the year?

So these are actual pacings. These are contracts on the books as of today compared to the same day last year. And as of today, about 61% of our goal is contracted for. So pretty good visibility, right. Not perfect, but pretty good.

That's great. Are there any questions or any of that commentary regarding what happened last year?

When does that [ bottom-line process ] came in [indiscernible]?

Yes. So we budget very late. We want the best look we can get at a year before we lock arms and say, this is what we're going to do because everybody's compensation depends on hitting their number. Process starts in sort of mid-December and it finishes up the last week of January.

Can you comment on the business segments that are driving that strong pacing?

Our segments or our clients?

Clients.

Clients. Okay. So our -- as I mentioned, our tenant base, particularly at the local level, is extremely stable. The largest vertical we have is Local Services. The largest piece of that business is attorneys, lawyers. So it would be services, local services overall is about 18% of our business. Attorneys make up about 55% of that. So about 10% of our business is attorneys. And it's -- hundreds and hundreds of them across the country. So no single attorney represents much at all of that. But when you add them all up, it's a lot. The next most important customer category is health care and think hyper-local, local clinics, local doctors' offices, dentists, plastic surgeons, some large clients, some big regional hospitals are important to us, but it's mostly a pretty fragmented health care vertical. Number three would be restaurants, and restaurants is not going to be table cloth and sit down. It's going to be fast food. Our largest client, as I said, it's McDonald's. We also have Cracker Barrel, Burger King and Jack In The Box and all those kinds. Next vertical is going to be retail. Hyper-local. So don't think Walmart or Target. It's thousands of local clothing stores, jewelry stores, et cetera. And then you're dropping down to Auto, give or take 6% of our book. Again, not corporate. This is not coming from GM New York. It's thousands of local car dealers, right? And that's a good steady business. Interestingly, I got the question about the impact of tariffs on that vertical, right? And when they don't have new inventory to advertise, they'll advertise repairs. So instead of copy that says come buy a new car here at x price, it's come fix your car here, right? So they tend to keep their inventory even when they don't have a tremendous amount of access to new cars. And then after that, you're talking about verticals that are 3%, 4% of our book.

[indiscernible].

It's going to be in that 3% to 4% category, right? It's like 8% to 9%, [indiscernible] what is broker? 2.5%. A bigger category is developers and builders, right? I don't know if you've seen -- if you lived here, you'd be home by now, right, kind of thing, and that was what it was up a lot and it's north -- a little north of 3%.

What about national?

So national has been tough for us for about 18 months. And last year, it was a real headwind until the fourth quarter. I wouldn't say it's fully back and growing. It's, I would call it more sort of stabilized. Q1 is going to be kind of flattish. We -- and then at little bit of growth as we move through the year. But at least it's not a headwind. It's just sort of not a great tailwind. And that's a long-winded way of saying local is going to carry us again, digital is going to carry us again in a subsection of national that we -- we get through a programmatic channel is growing 15% to 20%, but it's off a small base, right? So yes, the growth drivers in terms of the top line, local, most important, digital and then programmatic.

[indiscernible].

20%. Small -- so 20% on $2.2 billion, and that's national broadly defined. Programmatic is going to be $50 million of that this year. So small, but growing.

Can you comment on the [indiscernible].

Yes. So number one, it's picked up significantly. But to back up and think out loud about what we were talking about last year. So we went into the year shoring up our balance sheet, retiring some debt. So we actually had on purpose curtailed activity last year. But we were talking about the prospects of some pretty large deals breaking loose. They're not really materializing. There were some circumstances that -- are not going to get completely into, but we had reason to leave some things would break lose -- that would be $1 billion plus in terms of asset value. Not actionable now, at least in the near term. But what is happening is we're seeing a lot of activity. We're seeing some real good inventory come to market, one of which is, I would say highly likely -- and north of $100 million and negotiated buyer-seller environment. Another one just came to market it's going to be a highly competitive auction kind of thing, harder to predict, same order of magnitude. And then there's the little cookie cutter, mom and pops that we buy day in and day out. The $10 million deal, the $20 million deal, et cetera. Those just kind of come our way. And -- for the most part, we're the -- really the only buyer for those folks because of the nature of our footprint.

There's a lot of change happening at [indiscernible].

I think they should -- just put it that way. There -- and I knew their management team very well, Jeremy, I knew very well, he retired the CIO left, the Chief Revenue Officer left, and they've had some -- a little bit of turnover there. They've got a interim CEO, named Nate Brian, who I've not met yet -- we've scheduled a date to get together. But it just strikes me that it is an opportunity for them to rethink their exposure to Transit, their exposure to markets that are outside the top 20 DMAs that might not fit their particular profile. And that would present an opportunity if they came to that conclusion.

[indiscernible].

No, we wouldn't be interested. We would stay away from that.

[indiscernible] is that something [indiscernible].

Yes. So they have inventory below top 20 DMAs that looks a lot like what we do. Very, very similar. Some of it's -- complete dominating local market presence like we have in places like Louisville and Columbus, Georgia and Portland, Oregon and places like that. They also have a lot of what I would call sort of scattered hither and yon highway paint that would be complete fill-ins for us, right? We would not need any of their operations people. We would just be buying structures advertising permits, advertising contracts and ground leases. And that's a highly predictable exercise and highly accretive. So that would be nice. That would be nice.

[indiscernible].

Yes. Keep in mind that while as a REIT, we don't have to file HSR. There might be some thorny justice department issues that others would raise if we try to swallow the whole thing, because we do have significant overlap in the larger DMAs.

[indiscernible].

In our space, it's an unpredictable exercise. I've been through it personally three times. First time was 1999. It was awesome, largest transaction we've ever done. We were a [ C-corp ] at the time, right? And we flew through. And I had completely the opposite experience in the mid-2000s. And it doesn't matter whether it's an [ R or a D ] in the White House. It's -- the landscape can shift.

Can I just ask one favor from the audience for the benefit of those better listen on the webcast. Just to make sure you speak into the mic. That's all right. That's all right. That's okay. So can I ask about your 2025 FFO guide? I think it's $8.20 on a midpoint basis, you mentioned earlier, embedded in that was 3% top line growth, and you gave some other particular cash interest, cash taxes and maintenance were all specified. My question is, if someone is out there and they want to take the over on Lamar doing better than 3% underlying acquisition-adjusted revenue growth. What's a reasonable flow-through margin down to EBITDA? Like if you get an extra $10 million above that sort of 3% number?

Great question. I'm going to say, give or take, 65%. Our operating leverage can be very impressive if we grow the top in that sort of 4.5% to 6% range and then keep our expense growth to 2.5% to 3%, it gets impressive.

Okay. And then as investors are trying to pencil out sort of all of the puts and takes, you mentioned roughly $15 million of political headwinds relative to '24. You mentioned the Leap year. You mentioned the benefit of the Super Bowl that was in an attractive city last year. So those are all headwinds, right, that people can pencil out. One tailwind, I think you're going to do more digital conversions this year?

Correct.

You said at least [ $350 million ]. What's the back of the envelope math that your investors could do to say how much of a tailwind could that run?

Yes. So let me start with when we budget and I kind of describe that process. The budgets are based on last year's actual and growth there on and really doesn't include the extra juice from the digital rollout at the individual plant level. A long-winded way of saying there's a little [indiscernible] at there, right? Assume that they are deployed ratably throughout the year, they don't all go up in January, right? So it happens throughout the year. The crude economics are -- you take down -- this is at the individual Billboard level. You take down something that an analog unit was doing $3,000 a month, let's say, and that's average. It's going to be more in Vegas, less in Tallahassee, right. When you put up a Digital, you now have 8 slots to sell. Let's assume we don't sell all of them, maybe we sell 5 or 6. The client is paying almost the same aggregate dollars. So each one is still paying about $3,000. And -- so your lift is 5x or 6x that. So something that was doing $3,000 is now doing $15,000 to $18,000. We manage the real estate under our digital portfolio very aggressively. So you can assume that the incremental margin contribution is going to be somewhere in the neighborhood of 65%, 70%. And you can do the arithmetic and all that stuff. And from the advertiser's point of view, they're paying the same aggregate amount but their cost per thousand impressions goes up, because it's shared space, and not every car is seeing every ad. So on average, the asset view shed allows for the viewing of 2.6 lots. So what is a normal analog CPM of $3, $4, $5 cost per thousand impressions goes up to $7, $8, $9. So from their point of view, they're paying more. but they can do so much more with the space. That's why they love it.

That's great. And I just want to make sure I understood what you said. You're saying when you sort of pencil out 3% acquisition-adjusted revenue growth in your guide, it does not include any tailwinds from the Digital conversions that you're going to be doing in the year. It only includes the Digital conversions. You did last year and the benefit...

Kind of sort of yes and no. I'm not saying we're sandbagging. But at the end of the day, I don't want a disincentive for our local managers to be very aggressive on a digital rollout. And if I built it into their budget and they kind of missed the mark on one of their pro-formas on a deployment could cost the bonus, right? So I want to make sure that for them, it makes they're getting their bonus more likely.

Understood. So you mentioned at least I remember this from the last call, maybe you've said it in the past that in order to hit your long-term AFFO goals, right? So we're moving -- we're not talking about '25 now. The price has to be part of the mix to achieve your long-term goals. And I could be wrong, I might be misremembering, but it felt like you went a long time like a decade or something without taking over price increases and then you took price increases when inflation was really high, right? Correct me if I'm misremembering.

No, you got it.

Okay. So this feels different to me. Now that you're saying, hey, whether inflation is running 6% or 8% or 3% or 2% price as part of the calculus?

Let me say it a couple of different ways. First of all, as you know, we're tethered to GDP. So you kind of start with what you think GDP is going to be. And if our team does what we should do, we should slightly beat GDP -- all right. So we'll kind of start there. Last year's GDP was in the 2.78%, whatever it was, and we came in at 4.2%. It was a good year, right. We are at what I call peak occupancy. So to get what we were going to get in terms of top line pro forma revenue growth, it pretty much has to be [ rate ]. And you nailed it with your comment about inflation. Inflation is our friend. And when we had inflation in '22, we were up double digits on the top, and it was primarily rate. Now the decade between the -- great recession and COVID, we have been a 2% world. And keep in mind, we've been around for 120 years. We have a lot of long-term tenants that have been with us forever. We're in a 2% world and there's no expectation of inflation. That renewal discussion becomes 2% or 3%, just does, right? Not that we're in a 2% world now, but I don't quite know what world we're in right now in terms of what to expect in inflation. I can tell you in the broader economy, there's not the kind of expectation for inflation that we were experiencing in the '22, early '23 time horizon. It's just -- it's not like that.

You're not alone. I mean, I think the tenure in the last month went from 4% to 4.1% something.

And the flip side of the equation is our business experienced inflation back then and it's not now. Where -- we have no inflation pressure on our expense base.

Okay. Can I shift gears and talk about the ERP investments you're making? Because I know you've been working on that for a couple of years. I think you said that those investments, maybe I'm misremembering, mostly done or done by the third quarter of this year. Is that right? And then things will really kick in for '26. Is that...

Yes. Let's call it done in the Q1 of '26. I now know why CEOs don't like to do this. It's -- these things are tough. We're done with Phase 1. Phase 1 was mostly financial reporting, accounting control. Phase 2, which we're just launching now touches a lot of operational aspects of our business, primarily the sales function from first client contact to billing. And we're going to be an Oracle shop with sandwiched in between Salesforce for our account executives. To your question, the benefit, let's call it, I'll be disappointed if in 2027, it's not a full point of margin expansion. So like I said, I will be disappointed if it's not [indiscernible] margin expansion, we don't do 48% margins in 2027.

And then on top of that, I guess, I guess you're already doing sort of record margins now with the ERP investment? But do you mind sort of tangling that a part about how much of that is investments, the ERP investments that you're making now that go away versus incremental costs that you can take out of the business?

There's some truth to the benefits happening now, just less paper flying around our office. And the ability to not charge for -- we charge for credit card stuff that we couldn't do before, and that's a little margin enhancement. But bigger picture, what affects our margins. The incremental margins from Digital, as I mentioned, can be 65%, 70%. So the more Digital we put out by definition, our margins tick up. And you've seen that over the last 3 years since COVID from like -- high 45% to where we are now, high 46%, almost 47%. To the extent we do tuck-in acquisitions, that's margin-enhancing because tuck-ins come in at 60% to 65% incremental margin contribution. Again, sort of by definition, your overall margin is going to tick up. And then staying away from low margin businesses like Transit is helpful as well.

Understood. Okay. That's great. We have about 1.5 minutes left, and I would just love it. Let me give you -- I just want to talk about Vistar first. And I'm going to just do a quick sort of my dummy explanation of what this is, correct me if I'm wrong. And what I really care about is for you to paint the bull case for what this could mean for the category and for Lamar. So I think of Vistar of sitting in the middle have a bunch of advertisers on the demand side, and we'll send their dollars into platforms like Vistar. On the supply side, you have a lot of Digital inventory where that advertising could be placed?

Correct.

And T-Mobile just bought this. It's not yet closed, but they just bought it.

It is closed. It was closed. We invested $30 million in Vistar, got a 20% interest about 3 or 4 years ago, and we just got a $130 million valuation on that. So yes, a good deal.

What is the blue sky case for what it could mean? Because I look at it at one level on like what is a mobile carrier buying this asset....

So here's what's important to know. There are third-party data providers out there that are useful for us do measurement and prove out campaigns with. Those third parties buy their data from the telcos. So we now have the primary source of data, highly vested in the industry. And T-Mobile wants to monetize the data in a way that goes directly to the customer, which happens to be us and our customers. So in that sense, it makes a great deal of sense. They're also a great marketer. They're an entrepreneurial company. They love out-of-home, and they own some out of home. They actually are in the business. So yes, nothing but good for the industry.

That's great. And can I just ask one last one while the music goes? The proceeds from the sale of the gain, does that impact your AFFO at all?

No impact on the guide, and it's going to result in give or take a $0.15 to $0.20 -- special dividend -- to our distribution. Thank you.

Thank you. Appreciate it.