Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

Okay. Great. Happy to have back at the conference from Lamar Advertising, Sean Reilly, President and CEO. Sean, thanks for being here.

Thanks for having me, David. I appreciate it.

Let's start with this. So we could go you are right here in Boston for the OAAA industry conference. How was the mood at the event, any interesting learnings coming out of it?

Yes. The mood was very constructive. I'm not saying it was all rainbows and butterflies, but it wasn't gloom and doom. And the best takeaway I got was good conversations with our large national accounts and their view of the rest of the year, and it's good, steady as she goes. It's -- we're not seeing signs of trouble out there.

So on Thursday, Lamar reported Q1 results. Organic growth for the quarter, just over 1%. There were some unique comp items which maybe you can touch upon, but how are you kind of feeling about the current ad market conditions?

We feel good. It's like I said, steady as she goes. Our pacings right now are indicating that we're in the range. We didn't have to change our guidance. Business is strong enough out there to suggest that we're going to hit our goals. We are, as we sit today, 75% of under contract with enough revenue that takes us to the midpoint of the range. So while we do have to sell that remaining 25%, it's nice to have 75% in hand, and that's fairly typical this time of year for us to have 75% book to goal.

Got it. Okay. And the midpoint of the range, we're referring AFFO. So back in February, you had given an outlook for organic growth of 3% for the year. Where does that stand now?

Same ZIP code. It is back-end loaded, as you've heard from a lot of media companies, it's -- the pacings are showing us sequential strength as we move through the year.

Got it. And then maybe just as a follow-on, how should we think about the collective headwind kind of full year growth from Super Bowl leap year, political, right, in the context of that organic number?

So I'll start with the Super Bowl and leap year. It's -- I can't believe it's the first time in our career. I've had to talk up about leap year for a whole year. But it was material. It was a material impact on Q1. As was the events in Vegas, the Super Bowl leading up to the Formula One event it was important to us. It's our largest airport market. It's one of our largest billboard markets. When you put them together, it's a meaningful amount of revenue for us. And as I said on the call, our Southwest region, which includes Las Vegas, showed relative weakness and was actually down 1%. So that was sort of order of magnitude, the impact of that one. Political is different kind of animal. That is a back half phenomenon. For us to hit our goals, we have to replace, give or take $15 million or so of back half political. Our pacings suggest we're doing that, that we're able to sell that space to other customers, but we still have to get there, right?

Got it. So and if I remember correctly, it was $30 million of political you did overall and then sort of the...

Yes, it's kind of where it fell, and we typically get some political even in off-cycle years. It seems to be local races, mayors and judges and things like that.

Got it. Okay. And there's a lot of debate around heading to an economic downturn or not. But maybe what's important for our investors to kind of understand about your local advertising base and then you've been doing this for some time, right? What are the real lessons from a prior recession, maybe we can leave the pandemic apart, right, and kind of go to a true economic recession?

Yes. So I'll approach that from a few different directions, right? So yes, I've been doing this for 30 years, and I've been through 3, what I would call garden-variety recessions, right, not the Great Recession, not COVID. Typically, in a garden-variety, we're setting, we hold the line on rate, we suffer a little bit in occupancy, occupancy comes back faster. Historically, we've never been down more than 2% and never down in consecutive years. So that's your garden-variety recession. Right now, as we peer into our pacings and talk to our customers, we're not seeing that. We're seeing sort of a okay, not great year, but steady as she goes.

Got it. And I'm curious, maybe we can dig into some of the verticals. Kind of what are you hearing maybe from some of the economically or tariff exposed areas like auto or retail that may or may not have a supply issue?

Yes. Good question. When I look at our top 15 verticals you highlighted the 2 that probably deserve the most tariff attention. Auto for us is not national. It's local auto dealers. And typically, if they're having an issue with new cars and inventory rather than advertising buy your car for me, they advertise fix your car here, right?

Service?

Service. And so typically -- and this happened during COVID as well when they were having supply chain issues. Typically, they keep their billboards, but change the message. That's what happens. So I don't feel like there's a lot to worry about there, and we haven't certainly heard anything from our local auto dealers. They are, by the way, about 5% of our book. Retail is a longer discussion, I think. If a retailer can't get their inventory because of tariffs, that's an issue, right? So we're looking at that closely. We had a really good first quarter with retail. It was up 6% as a category. And it, by the way, is about 7% of our book of business. But that's one we're going to have to keep an eye on. They could be affected. Other than that, it would be some sort of macro thing that would affect the book, right?

And your air retail tends to be smaller kind of...

Absolutely. So when you think about retail for us, don't think Walmart think thousands and thousands of local retailers, dress shops, jewelry stores, shoe stores, the like.

Got it. You've often kind of on the local side, spoken in legal is a champion kind of vertical there. Maybe you could touch on that. But any other categories within local that you see is growth you're particularly resilient in a situation like this?

Yes. So I don't think lawyers are susceptible to either the macro or tariffs. And when you think about that concentration of a vertical, which, by the way, it's about 10% of our book. We talk about it within the context of a larger vertical called services. Services is about 20% of our book. And it's been the fastest growing for some time now. It's not concentrated customer base. because there's thousands of them, right? So it's the aggregation of a bunch of local attorneys, which is a good thing, right? So it's a strong category for us. They are very wise about the way they buy us. They buy us in bulk, they stay up all year. They tend to buy some of our inventory that is -- I'd categorize as sort of C and D inventory. So it seems like they're on every face we have because they buy well, they buy smart, they buy in bulk and they stay up all year. But that 10% that I referenced is 10% of our billing. Not 10% of the phases.

I see on that C&D comment. Does that mean not the prime location?

Yes. Well, they'll buy some of that. But in addition to buying that, they'll buy the left-hand read on the C and D arteries, right? As opposed to the prime right-hand read on the interstate with 120,000 cars going by.

Got it. Right. Okay. So periods of economic volatility, at least if we look across advertising, generally, sometimes that can enable kind of a break in inertia for advertised mix. Is there room in a situation like this to take share from local TV, radio, some of the other categories you compete with there?

Yes. So that is absolutely happening. It's -- I'm beginning to see it in linear TV. Just it's obvious from the comparative growth rates, right? As a matter of fact, we're the only local mass medium that's growing. So by definition, we're taking share. Just a quick anecdote. A very close friend of mine is a guy named Todd Graves. He owns Raisin Cane's, which is the fastest-growing quick service restaurant in the country. Last time I had lunch with him, he said, "Sean, I can't figure out how to buy TV anymore." He will occasionally buy around local sporting events, local network affiliate TV. But for the most part, he has moved 100% of his TV dollars to 2 places, influencers and billboards. And he's very savvy about the way he does it. When he gets a local hero, be it a football coach or a football star or somebody who is respected in the community. As an influencer, he gets them up real quick. And they're on social media and within 48 hours, they're up on the billboards. So it's -- and to your point, at the local level, for sure, there is share shift going on and I personally think that it's already happened, obviously, to newspapers. It's halfway to having happened to radio, and it's just starting to happen to linear TV.

Got it. So national, around 20% of Lamar, it's been a bit of an underperformer lately, declining slightly in Q1. Maybe you can just talk about what you're seeing on a category business or hearing from the agency partners?

Well, I told the story about the convention and the fact that the mood seems fine, right. I was in here listening to you talk to Scott Wells about this topic, and he summed it up the same way I would sum it up. Sometimes you get a change in an agency, a change in a CMO and they have a change in their view of their media mix. Sometimes it works to our advantage and sometimes it doesn't. But I've seen this ebb and flow over my career. The national dollar tends to be more fickle. Local dollar tends to be more stable. If you flatten out the beta in national look over a longer period of time, the growth rates are almost identical.

I asked the prior Q&A about the auto insurance vehicle, for instance, and how that's been touch and go, anything you've seen from your end there?

Again, same answer that Scott gave. A couple of big ones were heavy in the industry. They tended to buy static. They have come back in, but they've come back through programmatic. The spend is not as large as it was but they have not abandoned the industry. And I think they're going to ease their way back in where they're an important vertical.

What's kind of your long-term strategy when you look at national or you look at the allocations from the agencies and how you plan to attack that and get increased dollars?

And to quote Scott, it's not a fight between Lamar, Outfront and Clear Channel to fight over limited dollars. It's really an industry initiative to get agencies to inject into their planning modules out of home, which they don't do today. That's been something we've been working on...

Meaning it's a separate part of their media mix?

It's an afterthought, right? And it's not in their primary planning modules. And for us as an industry to get there. We've got to do a better job with the kind of attribution and measurement that they're looking for to do that. But my main point there is it's not a fight between the 3 public companies over a static pie. It really is, and Scott will say this and the new CEO of Outfront, Nick Brien would stay the same. It's as an industry, we need to get a bigger acceptance amongst the national agencies in their planning. And if we can do that only -- there are only good things that flow.

Got it. Within Nationals programmatic continues to see very strong growth. Can you talk about what you're budgeting for '25 and kind of a long-term strategy?

Yes. This year, our programmatic will do something north of $50 million. First quarter, it was up 30%. So the dollars aren't huge yet, but the growth rates are. The -- just to put it in sort of context, our total revenues, a little over $2.2 billion. Digital total footprint around $650 million. Programmatics $50 million. So again, not huge dollars, fast growth rate. but it enables customers that otherwise wouldn't buy the inventory to buy it because it is a different buyer than the traditional ad pie. It's a dedicated digital buyer, the same person that buys on your phone, it's buying us programmatically.

Got it. You have started beta testing programmatic on the local side. Interested to know how that's going, but what's been the rationale to keep this all national?

The rationale to keep it all national is twofold. Number one, our national customers are -- have -- are sophisticated enough and have big enough budgets to afford a higher CPM and they pay a higher CPM. They also want more sophisticated data sets to prove out the efficacy of the campaign. Local customers, not so much and they're not so much worried about measurement and attribution. And finally, the cost of that sale to us programmatically is 10%. That's what we pay, the DSPs, SSPs, right? The cost of our other channels the traditional account executive, national sales manager runs 6%, all right? So I wanted to make sure that it was net new dollars and that I was getting someone who otherwise wouldn't buy. All right. So why are we experimenting at the local level? Two reasons. Number one, our more sophisticated local customers are increasingly asking for it, right? That's how they buy Google, that's how they buy Facebook. They go into their office [indiscernible] to execute to buy. They're wondering why they can't buy our digital inventory the same way. The second, and I think very encouraging answer is we are executing the beta test with an ad server that is a subscription model, not a per campaign expense. Meaning we can execute this, we can keep an account executive in control of the account, execute automatic buying/programmatic buying and have the cost be 6%.

So once you can get that margin comparable?

Exactly. Yes.

Okay. Lamar recently sold its 20% stake in Vistar as part of an overall sale to T-Mobile. You did sit on the Board of Vistar, so just your take on what this could mean for outdoor measurement, outdoor attribution?

Only good things, right? First of all, you got one of the most respected largest brands in the world jumping into out-of-home. So that's a good thing. They are the primary source of data sets that are involved in attribution and measurement, typically today, we get that from third party vendors who may or may not be buying them from T-Mobile. So to that extent, it could get more cost effective if T-Mobile is the principle providing the data sets. The other thing that they've done and Michael Provenzano, who's the CEO of Vistar, he is being given more and more internal responsibilities inside of T-Mobile. So for example, they have an existing suite of advertising services, not just the Vistar SSP, DSP. He's been given that -- those responsibilities. So I think the more we have a champion of out-of-home, digital out-of-home, programmatic out-of-home within a company like T-Mobile, that's a good thing.

Okay. Sean, I think when you were here last year and some of your competitors have talked about this, there had been some flagging on the digital side of small screen competition, right, inventory growing from places like gyms or gas stations. Has the industry largely cycled through that headwind?

I think 2 things have happened. We've cycled through it a little bit, but we've also educated buyers we've educated the buying community that all screens are not created equally. You're not getting the same reach and frequency, you're not getting the same number of eyeballs. And I think that -- well, I know that, that has in to some degree. There are some small screens out there that are doing well, and they are doing what they're supposed to do. I would highlight some of the retail networks are doing well. But we can coexist in that arena and get our fair share. I'm going to say, plurality of dollars today goes to large-format digital out of home. The smaller screens that are also getting share, we are actually in those businesses, think airport digitals, right? Transit setting digitals. So when you put those 2 packages together, you've got well over 50% of what happens in digital out-of-home.

Got it. Maybe going wider on digital, you plan to convert over 350 boards in 2025. It's a bit of an acceleration in prior years. Can you discuss what covers the pace here? And how consistent are returns as you continue to do conversions?

The consistent -- the returns have been remarkably consistent over the 1.5 decades that we've been doing this. When I go through the economics of a digital conversion and calculate the ROIs. I mean, it consistently falls in the 25 to low 30s percent. You heard Scott say exactly the same thing for how they calculate it. So on that scorecard, it's less dollar that we spend for shareholders. You kind of asked why not a faster pace. And the governor is primarily the regulatory permitting environment. It's just takes time to navigate that.

Got it. On the cost side, Lamar is in the middle of an ERP conversion project. I think you said at earnings, you had just marked on the second phase. So kind of how is that factored into your 3% acquisition adjusted cost growth for the year? And how is the second phase going? What's your kind of ultimate expectations on margin lift?

Ultimately, this is going to be a good thing for Lamar. It's going to enhance our margins. What I'm telling the team and what I'm telling investors, if we're not north of 48% margins in 2028, I'm going to be really disappointed. And I think this is going to be one of the factors that gets us there. To your point, I would say, instead of give or take, 2% to 2.5% expense growth, you're now looking at something in that 3 range because we're doing it. The good news is once you're done, you turn off the spigot, the consultants leave the building. and you're starting from a new baseline. But sort of speaking of margin enhancement, Two other things really affected. One is our fill-in acquisition activity. When we do a fill-in acquisition, it comes into the -- with about a 60% to 65% margin contribution. So by definition, that's going to lift you. And when we do a digital conversion, it's even a little better. It's like more in the 70%-ish range. So the faster we do that, the more we do that, the margin profile of the company improves.

Got it. Any cost or even CapEx pressure to consider from tariffs? CapEx probably more relevant price of steel or anything?

Now you're really in the weeds, but I'll get there anyway. All right. So we print on 2 substrates from a single provider called Circle Graphics. They're a great company. One of the substrates is only sourced in China, all right? That's PEC. That's our fully recyclable substrate mostly on posters. The big ones you see on the interstate are PVC, right? PVC is sourced here in America, all right? So we are converting through Circle Graphics PEC vinyls to PVC. There's a slight extra cost associated with that. You won't notice it. But the take home is it's not going to be a supply chain issue, it is a slightly more expensive substrate to use. So that's one impact of tariffs. The other impact would be CapEx associated with digital deployment and our providers there. So our main provider of digital units is Daktronics. They're a U.S.-based company, no issues there. We do have a Canadian supplier. And they assure us that they have stacked up enough units across the border to take care of us. So in the near term, we're in good shape because they anticipated the issue, and they've moved across the border with the units already. So we'll see. But to answer your question, it's nothing you would notice, it's miniscule.

On M&A, Lamar recently disclosed $70 million of acquisitions to date, likelihood to surpass, I think, $150 million, you had said. It seems like the market's opened up relative to last year. Maybe what's changed, where are you focused?

So as you know, in '24, we intentionally throttled back right. So $150 million is actually a normal year. And this year, we're going to do well over $200 million for a variety of reasons I would point to a little bit of pent-up demand. When Lamar says, we're going to pull back a little bit, then the seller community understands what that means. And they'll say, okay, we'll talk to you next year, right? So we pushed off some activity. And then the other thing is we've got one we're kind of excited about that is of a larger size that is a little more large then your typical fill in, right? And I can't talk about it too much because it hasn't closed yet, but it's very close.

Okay. And every deal is different, but you said before incremental margins on some of these look like 60% to 65%. Can you talk about like multiple ranges roughly on or at least what's ideal for you?

So from the seller's point of view, if it's a pure fill-in, it can look like 13, 14x, right? By the time we have our expense controls put in the synergies happen, which happens very quickly because most of it is expense, right? We don't need trucks, people, buildings. All we're buying is structures, permits, advertising contracts and ground leases. So we just folded in and we operated at an exceptional margin. So by the time we work that magic, which happens very quickly, it will look like a forward multiple in the 10 to 11 range-ish, right? That's forward 12 months after we have it after synergies.

Got it. And to be clear, like when we think about your AFFO guide for the year, how much of the M&A would have been assumed? Would it have been the $70 million you've done, the $200 million you think you'll do -- how do you kind of scale that up?

Yes. Good question, and I got that a lot today in the one-on-ones. So first of all, the buyback, the buyback is accretive, that's easy math to do. That's not included in our expectation of hitting our AFFO guidance.

On the AFFO perspective.

Right. There may be some early little transactions built into that, but the bulk of what we're going to do this year is not in the AFFO guide. Essentially, what our pacings are telling us is we can get there operationally, right? So it's -- we've got a few extra pennies in our pocket because of the buyback and the acquisition activity.

Got it. A question we sometimes get from investors is kind of where in your capital allocation priorities do you rank acquiring the land under the billboards where you currently lease?

The short answer is all of the above, right? So we're going to do digital conversions. That's our highest and best ROI. We're going to do acquisitions that's accretive. And buying easements is also accretive. And fortunately, because of our balance sheet, we can do all of the above. Now that said, in a low interest rate environment, it's hard to buy easements because cap rates get up here, right? And while our industry doesn't talk the language of cap rates, our land owners do. So in a higher interest rate environment, we can get better deals, right? And we're finding that today in a different interest rate environment, not high has been, but still up there from a historical point of view that we can get within our hurdle rates. And so we're doing more of it. We're probably going to spend something in the neighborhood of $20 million this year, buying easements.

Got it. About 5 minutes left. Does anyone in the room? Do you want to ask anything? Quiet for you today, Sean.

I like that.

Okay.

All quiet, nothing to see here, and move along now.

At earnings, you announced $150 million of share repurchases. That's at an average price of on it. I think it was the last time, I can't remember when you were last in the market at that scale, but maybe just discuss kind of your framework for how you approach the buyback market?

So since we've been a REIT, we've never done that before. And I can't say that we knew there was going to be a tariff tantrum. But we had a reason because of consideration that's going into this acquisition I referenced. To institute a buyback to avoid some dilution that's part of that transaction, dilution in the sense that we're issuing UPREIT shares to execute, not dilution in the sense that it's not accretive. So we put in a [ 105b-1 ], I think, it's called. We were in our quiet period, so we had to put in an automatic pilot. And we set the parameters of under $112.50 because if you run the analysis, that's clearly accretive. As fate would have it, we had all that volatility in the market, our shares traded down into the [ 103.45 ] range. And over the average of the 2 weeks we executed, we came in at [ 108 ], and it's clearly accretive and was the right thing to do. We just happened to get a little bit lucky also with the way the market was trending.

Got it. We haven't touched on transit. I know it's a smaller part of your portfolio, but maybe how do trends look there? And how much should we view revenue is tied to ridership or air travel or something that might get impacted by macro?

Yes. Good question. So in our public filings now, we are actually breaking out billboards from the other businesses. It's listed under others. So you can kind of get order of magnitude and see margins because of that. So most of what we do in the transit world is wrapping buses. And so the audience is not the ridership. It's the people around town who see the buses as it moves around, see the bus. So that's going to be steady Eddie, no problem. We have one franchise that does rely on ridership. It's the Vancouver transit, and it's actually up this year. for renewal. That agreement, that business never really recovered from COVID, and it has been either a money loser or breakeven at best. So if we don't get it, I'm not going to weap. And on the August call, we'll talk about what the impact either way is. The airport business has been very steady for us. Our airport business tends to be a large portfolio of small market travel. So don't think Atlanta Hartsfield or Chicago O'Hare or LaGuardia or even Logan. So international travel will probably suffer. But that won't affect us very much. It's been a good, steady business. And then we have this little funny little franchise business. It's called [ Logos ]. These are the blue signs on the side of the highway right of way, say, food gas lodging. We do that under contract with state highway departments, all right? And that's also in the other. So order of magnitude, [ Logos ], I think $85 million annually, very steady 30% to 33% margins. Transit and airport combined, roughly $160 million in revenues. I think on a good day, 15% 16%, 17% operating EBITDA margins. When you put all other together, it's $240-ish million on a total book of $2.2 billion, so a little over 10% in terms of revenue and EBITDA contribution around 5%. And so that's the order of magnitude of what's other in our new breakout on the on the filings.

Great. All right. Sean, we're out of time. Thank you for being here.

Great, David. Thanks for having me, and thank you guys for your interest in Lamar. Appreciate you.