Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

I'm Jason Bazinet. Very pleased to have Lamar with us here this morning. Mr. Sean Reilly, CEO of the company. Sean and Jay Johnson, CFO, is here as well. So this session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter the code GPC26 to submit questions. And with that, Sean, I'll just turn it over to you to kick it off.

Sure. And thanks for having us. Appreciate it, and you can fire away with whatever questions you have.

Well, let me just start with a big one. We're sort of in a -- I would characterize it as a pretty unique time in the market, right, where there's a lot of sort of cross currents going on. Macro seems pretty good. But what would be the top 2 or 3 reasons you would give to investors on why they should buy Lamar over some other security that's out there?

Well, sure. Let me talk to us as a REIT first. Even though we're trading close to all-time highs right now, our yield is still pushing almost 5% and the average REIT yield is 4%. Our AFFO multiple is around 15 or 16, and the average REIT is around 20. So relative to those metrics, we're still cheap, right? And I would argue that our business model is superior to most REITs. So we shouldn't trade at a discount to them.

When you say your business model is superior, I'll tell you what I hear from investors when they call me and say, "Oh, I want to talk about Lamar." What they're looking for is just pro-cyclical exposure in the REIT portfolio. That's the main inbound I get. So if you're a REIT investor and you're sort of defensively positioned, you sort of want to get cyclicality, you buy Lamar. What would be the other attributes that you say make Lamar superior?

Let me start by quoting Warren Buffett. He likes businesses that have a moat around them. And by the way, Berkshire is in us. It's almost impossible to build a new billboard in the United States today. And unlike other real estate asset classes where capacity comes online regularly, our capacity is severely constrained, and that protects in Lamar's case, dominant market shares in middle and small markets. I mean we have across 80-plus percent of our footprint, 80-plus percent market share, pushing 85%, 90%, which puts us in a very unique position, right? Now the capacity is being added by conversion to digital, right? You take down a static unit, you put up a digital unit and you instantly have 7 more faces, right? That said, because of our market shares, we are able to essentially control our destiny when it comes to the digital competition in our footprint.

So can I go back to that barriers to entry point? I think what you're referring to, but maybe it's something different, sort of the Highway Beautification Act that sort of restricts new billboards. I always think of -- that's technically true, but there are a lot of places where billboard assets sit off the highway, right, off of the federal interstate infrastructure.

Yes. So we're regulated at 3 levels. It starts at the federal level, Highway Beautification Act. And that's all of your federal A primary roadways. But then there's a level of state and local regulation and zoning that is actually more strict. We operate in hundreds and hundreds and hundreds of jurisdictions. Most of them have their own sign ordinance that is specific to what they call off-premise signs. So you start there. Then you're subject to the same time use, manner, zoning regs that overlay virtually every municipality. And then we are subject to state permitting requirements, right? And that permit is actually the property right that allows the billboard company to have that physical structure. And that permit runs with the billboard company, not the landowner. That's a very, very important distinction. So anyway, when you combine all those 3 regulatory regimes, you get a huge moat built around your business.

That's great. What would you say about AI? How -- I mean, this is on the mind of every investor. How does AI impact your firm?

Great question. And of course, we do exist in the real world we're physical, right? We do words and pictures, and that's what AI does well. So it can really only help us, right? It can only make our sales process more efficient, our ops process more efficient. And quite frankly, our business intel that much more powerful actually. We are -- as you know, we're in the process of finishing up a massive ERP program that thankfully, this is the last year of it. And that is in preparation for laying over that new Oracle, Salesforce cloud-based platform, laying over it a closed AI system that will enable us to better mine our data and again, be more intelligent.

That's great. What do you think -- I mean, do you have a guess in terms of what -- I always measure advertising in the U.S. as a percentage of personal consumption as an example. Do you have a guess in terms of what happens to the ad intensity of the economy as AI becomes bigger?

I think there's a lot we don't know about AI and its impact on various businesses. I -- when I think about U.S. domestic ad spend, I tend to look first at the consumer, the Michigan consumer index. And then there's lots of prognosticators that guess what a given years -- the coming years U.S. domestic ad spend is going to be. Ultimately, for us, we're going to be somewhat tethered to GDP, right? You've heard me say that every year I've been here. Hopefully, if we do our job and we have a good year, we typically can beat GDP. And I'm anticipating that this year.

Any questions from the audience? Okay. Well, maybe we can just start with just your distillation of maybe recapping 2025. Tell us what you think went well, what didn't go well, if anything? And then how you think 2026 might be a little bit different, if at all?

Well, 2025 was one of those years where you -- we missed it a little bit when we were in January of last year, and we were setting our budgets and setting expectations for the year. We kind of thought the year was going to be up 3-ish, and it ended up being up 2-ish, right? We actually had to sort of tweak our guide, as you know. Interestingly, though, we finished way stronger than we thought we would. We had an incredible holiday season. December was up 6% on the top EBITDA and December was up 13.5%. And that drove about $0.07 of AFFO per share that we kind of didn't know was going to be there, right? And we ended up at the top end of our range for our original guide, I apologize for that miss. So that was last year. This year, we've got some tailwinds that were headwinds last year. For example, political. Last year was a headwind, and this year is going to be a tailwind. probably to the tune of about 0.5% of pro forma growth. So that's helpful. We also did about $300 million worth of highly accretive acquisitions last year that are going to pay off this year in terms of a little shot in the arm for AFFO per share. And those integrations have gone exceedingly well. 80-plus percent of them were fill-ins where highly predictable exercise, just fold them into existing operations. And the magic happens on the bottom when we do that fairly quickly.

So can I just make 2 comments on what you just said. The first thing is, for those of you that are new to Lamar, the fact that Lamar sort of took their guidance down and then sort of came out ultimately at the high end, I think, speaks to the integrity and honesty of this management team because they don't sort of pretend and hope that everything is going to be a hockey stick at the end of the year. They just tell you exactly what's happening, which you always do a great job on your conference calls, just telling us exactly what's happening, whether it's good or bad, there's not a lot of fluff or spin or anything like that, which is.

Well, we've been public for 30 years. So you kind of have to be consistent. You can't cover up 30 years, right? You got to.

That's fair.

You got to lay it out just like it is.

The other thing that's just interesting to me is I keep reading about this K-shaped economy and the market seems very nervous about the low-end consumer feeling sort of stressed. You can sort of see it in the, I think, the polling numbers, right, where people are very frustrated the economy in a ways that aren't tethered to GDP growth or the S&P 500, like there's real pain out there. And yet here you are saying that the fourth quarter was sort of surprisingly good for you. How would you square that or reconcile those 2 things, which feel somewhat contradictory to me?

Well, there's parts of the K-shaped economy that are good for Lamar. The obvious example being when McDonald's, who is our largest customer, decides they want to promote value meals, they use us, and they came in pretty heavy, right? So that's just an example of how that works. But we also had a brand-new vertical buy at scale, right? Pharma came in big, and it was mostly fourth quarter. When we were sitting in August and we did that tweak to our guidance, we didn't have that contract in hand. And about a month later, suddenly, we've got a $5 million big pharma buy, which they're continuing, by the way. And that is great news for the industry because it's a vertical we've never had before. And I think it's very promising. And again, that's a tailwind for us this year as well.

Would you say that, that new pharma vertical is a function of some of the changes that happened from a regulatory standpoint as it relates to pharma advertising on television? Or do you think it's sort of unrelated to that, you have to guess?

So the regulation that changed was the FDA said -- if pharma doesn't say what the drug cures, they don't have to do the disclaimers. Now keep in mind, billboards don't work with paragraphs, right? And so they were disincentive to use us because they'd have to have all this fine print all over the place. Well, now they don't have to do that, right? They can have the name of the drug, some pretty pictures, the name of the drug company and then say, call your doctor. That's perfect for out-of-home. I mean it's just absolutely perfect. Now what we do, do is we geofence the unit. And if a phone that has the right app goes within -- drives by that billboard, it gets pinged with the ad that has the disclaimers in it. So you get the same ad, but now you get everything else and a ton of information, right? So geofencing and that ability has also resulted in pharma really using our medium effectively.

That's great. So what about -- can we talk about 2026 and some of the undulations things that are embedded in your guide? You mentioned the 50 basis points, I think you said of political tailwinds. What about the Vancouver exit and the Verde acquisition? Can you talk about those? And also, I think World Cup, I think you said $1 million to $3 million was -- I think you said that on the call, maybe I made that number.

Yes. It's actually the high end of that. We've already got a little over $3 million in contracts that are World Cup related in and around World Cup venues. So yes, you've got political as a tailwind. You've got the World Cup as a nice little piece of business. Vancouver was one of those transit franchises that had a tough recovery coming out of COVID because the audience is actually the people that ride the train. When you look at our other transit businesses, we wrap buses, right? They drive around the DMA and the audiences are people that are in and out and about, right, not necessarily the ridership. Well, Vancouver, it's the ridership and ridership obviously went way down after COVID. So we struggled there. It was a money loser until last year. It turned the corner and made a little bit, but last year was also the year we had to rebid it. And it went to a Canadian company. You can probably imagine why. And so when we lost that franchise, we didn't really weep over that because it was plus or minus $24 million in billing, but no EBITDA contribution to speak of. Verde, on the other hand, is -- was about the same in terms of billing, but its flow-through EBITDA contribution in our hands is about 70%. So I'll take that swap any day.

Okay. So neutral to revenue but positive [indiscernible].

Yes.

What about -- this part still confuses me, you told me this, but I'm a little bit slow. There was a time when you used to talk about programmatic through the digital subset of your -- and so we're a little bit hesitant about programmatic because by the time you pay all those ad tech fees going through the machine, it can be more than our sales commissions. And I think it was like 12 or 18 months ago, you sort of reversed course on that. And I'm still confused because I -- maybe I'm wrong but that...

I wouldn't say we've reversed course. Let me walk through the arithmetic and you can see what I'm talking about. So our overall cost of sales through our traditional channels, let's call it, 1,000 account executives, our national account managers that touch big agencies, runs about 6%. Our programmatic channel runs about 10%. That's what we have to pay the tech enablers that do it for us, the Vistar's of the world, right? And that's still the case, right? So as that channel grows, our cost of sales is going to tick up. One reason it doesn't concern me as much as when we started is our CPMs are demonstrably higher with programmatic. So we're making up for it. If you look at our average CPM across our whole platform, it runs about $3 cost per thousand impressions. We're getting about $7 cost per thousand impressions for a programmatic buy. That's what our customers are willing to pay to go through that channel. Now why will they pay more? They pay more because they're getting, number one, a much more precise delivery of their ad to a targeted demographic at a moment in time and a place they want to be. They're taking a rifle shot, if you will, as opposed to a shotgun shot. So that's number one. Number two, they also have access to a richer set of data to prove out the efficacy of their buy. And that is paid for in that data fee we pay sometimes and sometimes it's actually paid for by the customer themselves. But they are willing to pay a higher CPM for those 2 reasons.

That's interesting. Is there any sort of difference between a national -- like when I think of television, I always think of it in general, local CPMs being higher than national CPMs. Is there any sort of corollary in your business where if you're selling to a national advertiser, the CPM is demonstrably different than a local advertiser? Or is it just a function of just the board and how popular is the board and the traffic that goes by the board, independent of who their customer is?

Yes. I don't know that there's a big difference. Now there are varying dynamics, right? So some customers are able to drive a little better rate because they buy in bulk, right? So think -- again, think McDonald's, think Cracker Barrel, a couple of our larger customers. And so they use that to drive their CPMs down, right, as you would imagine they would. But there's an interesting -- we have local customers that actually buy smarter than the national customers because they know the inventory a lot better than the national customers. So it can work both ways, local and national. It all kind of washes out. I will say this, as you know, we're 80% local, 20% national, plus or minus during a year, 40,000 or 50,000 local customers touched by about 1,000 account executives. It tends to make us more important in their world. And what I mean by that is if you look at market shares and other traditional media, right? We're much more important in the world. We take a much greater share of wallet locally, obviously, than we do nationally. And so if you go to a place like Little Rock, Arkansas and talk to Tom Gibbons, who's our GM there, he can tell you what the newspaper pulls, what the TV stations pull, what the radio stations pull. And I'm going to guess, and it's not even a guess. We're now pulling more than the newspaper out of most of those middle markets. That's a dramatic change from 20, 30 years ago. We're pulling probably more than all the radio stations combined, right? That's a dramatic change. You still have a significant chunk of local dollars going to local network affiliate television, but that's beginning to change, right? So when it just comes to garnering share locally, we're in a good place.

That's great. Any questions from the audience? I don't have any on my website. So maybe we can shift to pricing.

Yes.

So you can correct me if I'm wrong, but I remember there was this long period of time where pricing was sort of not part of the narrative of Lamar. And then we went through the higher levels of inflation. I think you guys took pricing for a while. And I sort of lost the thread in terms of where pricing is in terms of your overall thinking to hit your long-term AFFO targets. Do you mind just sort of talking about philosophically where we are on pricing?

So let me go back to the Great Recession. Coming out of the Great Recession and recovering, it was all about occupancy coming out of that, right, at first. And then it became about rate. But as everybody recalls, interest rates and inflation were almost nonexistent, right? I mean we were in a 2% world. And we lived with that until COVID hit. And then we had to do it all over again. We had to build occupancy back. One thing we were able to do that was different in COVID as opposed to the Great Recession is we didn't have to reeducate our customers on the value proposition. So we held the line on rate. We suffered in occupancy during COVID, and then we absolutely rocketed out of COVID. Now we still weren't talking a lot about rate because interest rates again were very low and inflation was seemingly very low. And then boom, '23 hits, right? I think the take home here is, particularly for REIT investors, inflation is our friend, very much our friend because we -- our average length of contract runs about 6 months. And so that means in an inflationary environment, we get to have a rate discussion every 6 months. And we drove rate double digits during that time of hyperinflation, and we've had just an incredible year. Where are we now? We are now at a place where interest rates and the expectation of inflation is around a 3% kind of thing. The -- we, at Lamar are at what I call peak occupancy. So the gains you're going to see this year are going to be driven primarily by rate. And we're -- if we're in a 3% inflationary GDP world, as you know, we guided to somewhere above that, 3.5-ish. So that's our expectation is to drive to that number, and it's going to be mostly rate.

Okay. That's great. Can I give you my sort of mental framing of rate and occupancy and the dynamics and then tell you the one thing that if we end up having a recession sometime over the next few years, what scares me a smidgen. So my sort of narrative is you go into a cyclical soft patch. And the first thing that happens is the utilization rate drops pretty quickly and then you discount on the rate side to sort of fill up the boards and then we sort of equilibrate and then the utilization comes up and then you begin to take price when we get to the top of the cycle. So rate and occupancy are both quite good.

Let me challenge one of those. Other than the Great Recession, and I've managed through several. I hate to admit it, I've been doing this for 30 years. During a garden variety recession, we hold the line on rate. And we suffer in occupancy, occupancy comes back faster. In a garden variety recession, we've never been down in consecutive years and never down more than a smidge. I say that because people do tend to view us as -- since we are ad supported as more cyclical than we actually are. Now the one caveat to that was the Great Recession. We couldn't hold the line on rate during the Great Recession, and everybody was curled up under their desk in a fetal position. But the garden variety recession, that's how we manage through it.

Okay. That's great. And then I remember going back to the GFC, you guys did a phenomenal job in terms of managing your expenses to minimize sort of the impact to AFFO. I mean, I've never seen anything like it in my career actually. But it feels like you run a pretty tight ship sort of day in and day out. I mean, if we end up having something that is something other than a garden variety recession, I mean, do you still feel like you have shock absorbers on the expense side? Or it's a lot less than it was, say, pre-GFC?

Yes, there's a couple of shock absorbers. One is there -- we can prune for want of a better word, our real estate portfolio. These are the ground leases we have billboards on. We have a stockpile of not great performing financially leases. We keep them for a variety of reasons. We keep them to block out competition. We keep them to use as trade for jurisdictions to allow us to put up digital. But we can attack that lease portfolio and drop our costs pretty significantly. Obviously, you have sales commissions that flex with sales. You have management bonuses that flex with sales and bottom line performance. So yes, I mean, we -- one stat when we became a REIT, and I was educating the REIT community on our business, actually, during the Great Recession, we could have paid the distribution that we paid the first year we became a REIT. And a lot of REITs couldn't say that, right?

That's great. So can I shift gears to the ERP project that you touched on at the very beginning. Can you just sort of step back and just give us a lay of the land in terms of what is this ERP system going to do? How much have you invested so far? And then what are the key things that investors should keep an eye on as '26, '27 unschool?

Yes. So we're 3.5 years into this, and this is the last year, and we will have spent plus or minus $50 million on it. We -- about 40% of that is OpEx and about 60% is CapEx. This year, again, being the last year, we'll spend about $3 million in OpEx and about $6 million in CapEx and we'll be done. Phase 1 was the back office part of the shop, the CFO functions, if you will. And we had old legacy systems that were 20, 30 years old, built by Lamar for Lamar and being held together with paper clips and baling wire. So we did that first. That was Phase 1, highly successful. Phase 2 was the rest of the enterprise, touching virtually every aspect of our business. Fulfillment, sales cycle, sales process, operations, I mean, you name it. And the promise is that it will take -- let's talk about the sales process. It will take something that looks like this today and maybe has 3 people involved in 14 people hours to make a nice proposal and get in front of a client, and it will take it to that, right? And now it might be 2 people and 6 hours. But what it will also do is allow us then to create and overlay a closed AI system that will then take the sales process that's here and take it to there, right? Smarter proposals, more proposals, getting in front of more clients and logic would dictate from that, you get more business. So that's the promise of it. And in terms of financial benefit, I think conservatively in '27, you should see 0.5% of expense savings, right? So -- let me say that a different way. You should see an uptick of 0.5% on our margin -- consolidated margins. So that's what, $12 million annually. And I think it only gets better from there.

So one of the things that I've always marveled at to be candid with you, is when I look at the verticals where you guys have exposure, there will be an area like, I don't know, 2006, I'll say, or 2007, and real estate will be a big vertical. And then we'll go into the GFC and it will sort of disappear, but then sort of out of nowhere a new vertical shows up and sort of backfills real estate. And this happens over and over again where your sales force seems to be able to find the pockets where they can get sort of new clients, new customers and they're sticky and they stick around for many years. And there could be some event that happens that changes that. But your sales force always comes up with something new. Does this ERP system allow them to do that more quickly? I mean not that they've done it in a slow way, but is there a response function that will make them more nimble? And if I can just pause for those of you that are listening to the webcast, when Sean was saying it used to look like this and now it looks like this, he was taking his hands that were maybe 3 feet apart and making them 1 foot apart.

Well, yes, I mean, we've -- I have to remind our investors that customers come and go, verticals come and go. In 1998, cigarettes, tobacco was 24% of our business. That year, it was legislated off the billboards. That year, we grew. We replaced 24% the same year, it disappeared. In the early 2000s, travel and lodging, hotel, motel was 14% of our business. Two things happened. You had the recession generated by 9/11 and you had the advent of the Expedias of the world. Hotel/Motel quickly went to 2% of our business. And over that time horizon, we grew. So there's lots of examples like that. But what I would say that our ERP plans and our AI plans will do for us is it will allow us to keep up with the additional velocity we're creating as we deploy more digital and do more acquisitions. I mean, over the next 3 to 5 years, we're going to spend well over $1 billion doing acquisitions. And we're going to add every year, hopefully, 350-some-odd digital units to our footprint. And that just requires a larger velocity of artwork and proposals and the like. And we'll be able to meet that with our existing sales force, right, because they're going to be that much more efficient. And logic would dictate that if they can be smarter about their proposals and get in front of more people that, that's going to result in more business.

That's great. Any questions from the audience before we wrap up?

Sorry, I don't know if you touched on acquisitions at all for this coming year relative to the $300 million you said you did in 2025?

So we -- of that $300 million, roughly $200 million was cash and one was an UPREIT transaction, first ever done in our industry. It's my hope and expectation that we'll probably approach that same number on a cash basis. We'll probably get to about $200 million. The pipeline looks pretty strong. And we also have a couple of leads on some possible UPREIT deals. So yes, it should be another pretty active year. We are the only company as of right now in our industry that can pull off an UPREIT deal. So it's a little bit of a competitive advantage. So yes, and Jason, thanks. Appreciate the time.

Absolutely. That's great. Thank you.