Lamar Advertising Company (LAMR) Earnings Call Transcript & Summary

All right. We are on time. So let's get started. And first, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representatives. And with that, my name is Cameron McVeigh. My pleasure to welcome Sean Reilly to the conference, CEO of Lamar Advertising. Sean?

I appreciate you having me.

So to start, Sean, you've described the 2026 is having a really good setup. And it sounds like pacings for the rest of the year are promising. The guide if I recall correctly, it's about 3.5% acquisition adjusted growth, 4% AFFO per share growth. I was hoping you could walk us through maybe the building blocks of that guidance and what gives you confidence in the trajectory?

Yes. I would say we're basically being conservative with the guidance. Our pacings are stronger than those numbers. National is a real tailwind, and it's been a headwind in the past. And also, I think we're being conservative on our projections for [indiscernible]. It just feels like it's going to be a little stronger than we suggested I feel good.

Great. Good to hear. As you think through 2026 and your outlook for the year, what are the priorities for you, Jay and the team?

We got the ERP thing. We got it get done, right? On that front, we're done in August. Go live, you'll see the spend tail down. As a matter of fact, we guided for about 1.8% growth at corporate and expenses. So we'll finally start realizing some benefits of that project. We have put a number out there in terms of what we expect the margin enhancement to be from it. About 0.5% of margin enhancement, which we should see as we start going through 2027 and in '28. I told a lot of folks today that we expect by the time we get to 2028, we'll be north of 48% on consolidated on our margin. So that's a nice tailwind for AFFO growth.

That's great. And just on the ERP point since we're on the topic. Can you just remind us what the catalyst was to start the ERP? What you expect the benefits to be going forward?

So we had what IT people call technical debt, right, 20-, 30-year-old legacy systems built by Lamar, for Lamar, not cloud-based on-premise. And so cleaning that up was number one. Number two, in order to realize whatever promise AI brings you have to clean up your data and you have to have a backbone that can support an overlay of AI products. So that's another big motivator. And what we expect is that it will take a sales process that might take 14 people hours to get a nice proposal out and get in front of a client and take that down to maybe 6 people hours, right? So the sales process is going to get much more efficient and much more intelligent, right? So more pitches, better pitches, more intelligent pitches. And hopefully, that's not just cheaper, but also more successful. Hopefully, it also helps the top line.

Great. Sean, in response to the 2026 goals, it sounds like national, there's been sort of an inflection point from some national advertisers. And recently, you highlighted some of the top 5 accounts were GEICO, Progressive, JPMorgan, Coca-Cola, Johnson & Johnson, large blue-chip national advertisers. And I'm curious what you think is driving the resurgence of these advertisers? And do you see this more as a cyclical or a structural tailwind?

By and large, you've heard me say this before. National for us tends to be more cyclical, right? So they can come in and go out. This year feels better because verticals that were soft are now coming in big, right, insurance, auto insurance, definitely going to be much stronger this year than the last 18, 24 months. And then there's cracking the pharma code was -- is, I believe, can be huge. We had a big pharma buy in Q4. That's kind of what led to the upside surprise. And they've recommitted to Q2, right? And so that can be a game changer for us. It's big dollars, big budgets. And the fact that they immediately committed to another sizable buy means they had a good experience, right? So it feels much better this year than it has on the national side than it has 18, 24 months ago.

Great. That's helpful. I guess just a follow-up on the pharma point. How big do you think pharma can be as a vertical. And was the interest immediate following some of the change in the rules around the disclosure levels?

Yes. The FDA disclaimer rules huge, right, made their messaging really billboard friendly, right. This was one, really only 1 customer that has been making the difference so far, and there's lots of them out there, right? So anything that you see on CNN in the way of drug commercial is a candidate for us, literally.

Got it. And is there a new sales team or function to try and pursue these pharma ads? Is that part of the strategy now?

Yes. We have a dedicated team that's going direct. So -- and this buy was direct to the pharmaceutical company. It was not an RFP response type of national buy. Now they ended up running it through their agency. So there is an agency of record, but it was direct.

Great. And just to double-click in on the industry verticals, health care, financial services, building and construction were all double digits in the last quarter. Telecom and beverages, a little soft. How should we think about the composition going into '26?

Everybody is happy and healthy, particularly our top 6 verticals, all doing fine. Telecom is coming back. So we feel better about that vertical than in the recent past. I would say beer and wine, they're struggling. It's beer, wine, alcohol, less people drinking. It's about half local for us, beer distributors and about half national, I think Constellation Brands. So that one is probably still going to be a little wobbly. It's about 3% of our book.

Got it. Okay. Maybe just on the local side. It sounds like sentiment is still a little bit cautious. As we enter '26, what do you think it takes for local ad spend to start to reaccelerate?

I think we're there, yes, I do. I think Main Street is feeling pretty good about the world.

Great. Great. Okay. Sean, I wanted to hit on political. We have the midterm election coming up. Maybe if you could talk about your expectations for political ad spend and how that compares versus '25 and '24?

Sure. So '25, $11 million; '24, about $30 million, right? So let's call it a delta of $20 million. We were being cautious looking at this year, and we guided to roughly $12 million, $13 million, $14 million in terms of '26 over '25. I think that's conservative, given what I'm hearing out there. So I feel good about that one. That runoff in Texas didn't hurt.

Definitely. Okay. And speaking of other onetime cyclical tailwinds, but if we think about the World Cup, I know you've sized in the past around a $3 million to $4 million incremental opportunity. Are there any broader maybe indirect benefits you might expect to see whether if you think about category mix shifts or pricing power?

So, in general, it's going to help clear and out front a little more than us given their presence around the major venues, but it's going to be helpful. Seattle is a big market for us, and that's 1 of the venues. It will be helpful in Kansas City, Dallas, in and around Northern Jersey. So incrementally, it's nice. It's already in-house, by the way. We got the contract signed, and it's a little north of $3 million. We might get some bits and pieces come in between now and then. We get really, really good pricing which is really nice now, but then we have to figure it out next year, right? So -- but incrementally, it's good stuff. It's really good advertisers. And they go after our best units in those markets. And so looking forward to that. We are getting better at pricing and price optimization around big events. We do incredibly well, for example, at Coachella in Southern California, just kill it there. So as a team, we're getting better at that.

Great. I was talking to one of your main competitor up here earlier today around the digital momentum in the out-of-home space and especially around programmatic. Can you just talk about what you're seeing in the programmatic trends, maybe what inning it is? And where do you expect that to go going forward?

Yes. It's still, let's call it, third inning. And primarily because we haven't opened up the channel to our local customers, right? So that's the next step. In terms of national programmatic, we're well established. It's still our fastest-growing channel by far. One of the problems we have growing the channel is the fact that we're selling by definition, unsold inventory. And so to the extent we're full on a digital unit, we can't offer it up to the programmatic channel. So we're a victim of a little bit of our own success in that regard. But we're figuring out ways to work around that to make space preemptable and available for that channel because while the absolute cost of sale is 10%, which is more than our normal channels, which is 6%, the CPM we get is higher and it makes up for that. So we're working it. It will grow this year in the neighborhood of 10%, this year over last year. Last year, it grew 20%. So it's, I believe, going to become increasingly important, but it's really going to matter when we open it up to our local customers, and our local customers are no longer essentially soaking up demand at a lower CPM that would otherwise go to a programmatic buyer, right? That's a couple of years away.

And I recognize it's probably easier said than done, but what do you think the process is to open up to the local SMB type based on a programmatic buy?

They have to be sophisticated, right, relatively big budgets. Increasingly, I think that they're going to want to buy us the way they buy Facebook and Google, right? And so we have to do it, right?

Got it. Okay. And Sean, I wanted to switch over to the acquisition strategy. You guys are acquisitive. Maybe if you can speak to your broader acquisition and outlook for the year and maybe bring us through just some of the synergies that Lamar brings to the table?

Sure. Last year, plus or minus $200 million in cash for assets types of acquisitions, 1 big UPREIT deal. And this year, I think, is going to look like last year. We've got a couple of leads on the UPREIT structure. And then on the cash for assets deals, if they're fill-ins, we just knock those out just day after day after day. They're relatively predictable. Some of them are not very big. We mentioned we did a little over $40 million year-to-date in cash for asset deals. The average transaction size was like $6 million, right? And so we just see that continuing. And those are highly predictable. Typically, we don't need some of the infrastructure that the seller needs, so we can get expense synergies really quickly.

Great. And with the UPREIT structure, how has potential seller interest been with the new structure? And how is the pipeline developing?

There's a lot of interest out there. It does take a special seller, someone who doesn't need the cash, right, someone who might have 0 basis in the assets. So the tax thing is real. They have to have a lot of confidence in the industry because they're going to be part of our group, right? And those folks are out there, right? They're families still that have been running these businesses for generations, have little or no basis, don't need the cash, sort of check all those boxes, right? So -- and we're the only company that can do it. So that's a competitive advantage, right, when it comes to sitting down with a family or entrepreneur and it's not an auction environment. It's very much a -- it's a romance, if you will.

That's great. And curious how private multiples are looking and maybe how that's been trending recently?

Remarkably consistent. What might look like a 13, 14 multiple to a seller by the time we take it on and do our thing, it's 10 or 11, right? But it all depends on the quality of the inventory, the size of the transaction, lots of ingredients go into getting to yes, right? But that fundamental ability we have to get to where they want to be and still get to where we need to be, that is really our secret sauce, right? The fact that almost anything we do is a fill-in given our scale and scope and broad national footprint.

Great. And Sean, I wanted to ask about the Clear Channel news that we saw with the go private and the go-shop period. Just curious your broader view on potential industry implications and what that might mean for Lamar?

I don't expect that Scott and his team are going to manage any differently, right? They've run a good shop, have as a public company, they'll do the same as a private company. I think it's good for the industry that they will have a short up balance sheet. It's good to have in any industry, healthy competitors. So I view that as a good thing. And so yes, I think it's just steady as she goes. And I'm happy for Scott. It's a good deal for him.

Definitely. Okay. Great. And on the M&A acquisition topic, can you talk a little bit about Lamar's newly appointed President of the Outdoor division, Ross Reilly?

Yes, I can talk about him. He is sitting right there. Ross is going to be great in this new role. He has a breadth of experience across our whole company in terms of roles and responsibilities. But most importantly, our -- as with every industry and the impact of AI and the impact of technological change, it's -- I understand it, but I don't understand it like this guy, right? It's -- he is in the right place to only drive the change being brought up by ERP, but also help us realize the promise of AI. And so yes, it's a good move. And he might have prolonged my CEO life because for 15 years, I've had 16 direct reports and now I've only got 8. So maybe I'll last a little longer.

Yes. Great. On the topic of AI, obviously, a big topic to date. And in the out-of-home industry, in particular, it almost seems like it's this new industry vertical coming in, bringing in some marketing budgets. But I'm curious just how you look at it on a -- maybe the potential impact from the new industry, but also potential implications on broader marketing budgets into the out-of-home industry more broadly?

Let me start with -- it can only help us, right? There's a lot of industries where it's going to be disruptive and quite possibly damaging, not so with us, I think it can only help. Now you drove from the airport to here. You saw all those billboards with AI on them. I wish I had inventory in San Fran, but I don't. So we're getting some of it. We're not getting as much as you're seeing around here. It will hopefully help our customers buy smarter, help us with attribution and measurement in a way that -- because the information is so readily available and accurate and so rich with data that it gives them more confidence to use more of us. And I think there's some logic to that, right? The other thing I think it can do for us, particularly Lamar, our digital yield management is not where it needs to be in terms of optimizing. I think it can help us there. I really do. So as a yield management tool in the hands of our local managers, I think it can make a difference.

Got it. That makes sense. I wanted to open it up and see if there's any audience Q&A while we -- over here.

Sean, you guys had a nice little investment gain in Vistar. I think it closed about maybe a year ago or so to T-Mobile. Has that asset and sort of the whole programmatic space evolved much under T-Mobile's ownership? Have you seen anything change meaningful?

I think we will. The most meaningful thing that happened was T-Mobile came back in and is buying more. But -- so the CEO of Vistar, Michael, is rapidly rising at T-Mobile, and he is taking on more responsibility for their -- not their marketing budget, but they're marketing products. And so yes, I think it's going to be good for us. And it was a little bit of a shock when I was told that it was T-Mobile buying. But I think it has proven to be a good thing. Yes.

Just on Clear Channel, was that an asset that you would have looked at? And how do you think about the potential for a larger scale M&A in this space?

So their leverage was made it impossible for us to think about the whole, right? We would like to have had some discussions around buying some piece parts didn't get anywhere with that. But I think they're going to -- like I said, they're going to go in, they're going to go private. It wouldn't surprise me if they didn't become a private REIT. They're going to -- I think Scott still has some expense work that he can do given the changes they've gone through. And I think they're going to delever a little more. And I wouldn't be surprised if they weren't a public company in 3 years, right. But we'll see what happens there. There's a handful of independence with asset value, let's call it, $300 million to $1 billion, right? They're still out there. And one of which is private equity backed. They've got a time horizon. So we'll see. In the meantime, we're just going to keep cranking it out a few small deals at a time.

Great. Sean, I wanted to ask on capital allocation. Your balance sheet is arguably the healthiest of the industry, and it enables different forms of allocation. So curious if you could just walk through how you prioritize your capital?

Sure. Our best ROI is still digital conversion. It's about $65 million we'll spend this year on that. Second best ROI is going to be the tuck-in acquisitions that we just do year in and year out, hope to spend $150 million to $200 million on that kind of activity. I would like to see us spend more money on purchasing land under our billboards. We've budgeted about $20 million for this year to do that. I'd like to double or triple that, because that's a nice return, and it also protects our best assets. And then we executed on a buyback last year. Our timing was very fortuitous. We bought near the low of 52 weeks. So yes, that's a good hierarchy. But we're a REIT, right? So number 1 is pay the distribution and hopefully increase it, right, like we're going to do this year. So that's the hierarchy of capital.

Got it. When you go to buy land, you generally target digital boards first by the land.

We do. We target digital conversions, but not exclusively. It makes most sense to do it under your best units though, highest performers.

Great. And as we wrap, I wanted to ask a bigger picture industry, if you look out 5 to 10 years and you think about the outdoor advertising industry, how it's going to look, maybe the mix of digital versus static and what role programmatic plays. Curious just your high-level thoughts?

Sure. The industry here is plus or minus 30%, 35% digital, right? In the U.K., for example, Australia, it's over 50%, right? So we should be moving more towards that. So much more digital. You're not going to think about digital dollars and traditional dollars. The pots are going to emerge, right? So there will be much more programmatic buying going on, right? Because now it's mostly in digital shops, right? We will have opened up automated programmatic buying for everybody. And that I think is going to result in higher revenue because ease of buying, better proof of performance. So I think that -- all of that stuff bodes well for out-of-home. And I think other media are going to continue to get disintermediated, right? So Again, that's good for us. So I think it's very bright. I'm optimistic. I'm not going to the beach yet, but I'm going to hand off a good ship to Mr. Reilly here.

That's great. Looking forward to it. I think that's a good place to wrap. Sean Reilly, thank you so much.

Yes. Appreciate it. Thank you, guys.