Lamar Advertising Company ($LAMR)

All right. Sorry for the delay. We'll get started. To my left is Sean Reilly, President and CEO of Lamar Advertising. Sean, thanks for being here.

Happy to be here, David.

I'll give you a kickoff question. So last week, you were at OAAA in Dallas, maybe give us the latest on the mood of the industry, any kind of takeaways from the event.

Yes. It was a great conference. The enthusiasm and the confidence and the sense of possibilities this year was measurably better than last year. So there's something going on. There's a lot of excitement in the industry. All of the publics had unbelievably good earnings calls just before. Outfront posted some great numbers. Clear channel. One thing Scott Wells told me was I finally had an incredible quarter, and I'm not doing conference calls anymore, he said -- going private. But no, the industry is in a good place.

Got it. So you reported earnings also. You noted forward bookings are -- you said the strongest you've seen since COVID. Maybe walk through a little bit more specifically what things look like for Lamar at the moment and what's giving you confidence to kind of signal that potential change to your outlook in August when you report?

So there's a few components to it. Political is certainly coming in stronger than we anticipated. And as I mentioned on the call, usually, we see a drop off in a midterm as opposed to a presidential cycle. This midterm cycle, we're going to do double-digit better growth over '24, so that feels very good. We also have a huge new category that wasn't with us a year ago, which is pharma, and that buy has been meaningful to us and well received by them. So we're very happy with the way that's played out. But in general, it's strength across the board. National, which 18 months ago was a headwind is now a tailwind. And our local business is steady Eddie. The growth there is healthy and above our overall platform growth last year. So good news.

Let me unpack some of those pieces. And maybe on the local side, we did hear, for instance, some a few broadcasters, you cited incremental weakness. Why do you think on the local side, the outdoor is holding up better than, say, on the television side?

Our verticals aren't exactly the same as theirs. And some of our verticals actually performed very well in a K-shaped economy. Our -- for example, restaurant business is quick service. It holds up well. Our retail business can be both ends of the K shake that we get good strong buys out of jewelers, right? But we also get good strong buys out of convenience stores, right? So it's both ends -- and our local services category is exploding. So it could be a little bit of the story around what your verticals look like. And it could be the fact that our audience is growing and certain other broadcast media, that's not the case.

And I got to ask on local services? Anything in particular? Is it lawyers? Is it...

So we announced as on our calls, we call it services. It's our fastest-growing vertical. It's about 21% of our book. Attorneys make up about 60% of that, and they're very healthy. They're increasing their spend with us, but it's also other services that you could imagine like pest control and let accountants. So it's a very healthy, large and growing segment for us.

And maybe going back to political. I think in February, you were a bit more conservative. So what's changed? Is it something specific to the Lamar footprint and the races there? Is this sort of a broad effect across the industry?

Yes. So broadly defined for local races, we are more important, 2 races happening in middle markets than large markets. That's been true for a long time. I think what's different this year is you have a lot of early primaries, hard fought, oftentimes Republican against Republican in places like Louisiana, where we've had just intense races, some of which are going to happen again because no Republican candidate in the primary got more than 50% as was the case in Louisiana, just this weekend. And we got good spend from all the candidates engaged in that. Another thing that's going on, which I think is probably even more important, what we code as political is actually advocacy. It's not necessarily candidate running against Canada. It's someone trying to promote a particular position around a particular issue. And I am finding comfort in that because that can happen in off-cycle years, right? Not to the degree it's going to happen in an even year, but to some degree. And so we're -- I'm really looking forward to at the end of this year, ferreting out number one, what happened. Number two, how the cadence through the year because I feel something a little bit different this year than in the past. And we need to understand it. We need to communicate it to you guys so that you all have an easier job model because we didn't get it right last year, and we didn't get it right this year, but to the upside this year.

And it feels like the issues tested is one of the...

I got to get to the end of the year and really slice it and dice it, but yes, that does feel a little different, too.

Got it. And maybe can you just remind us on the recent history of national versus local and national picked up a bit starting in the back half. And maybe you can talk to some of the drivers you mentioned pharma, we can hear a little bit more about where you're getting more traction.

Yes. I would start with our good friends in big pharma. But it's really across the board. We have customers that were long time, great verticals for us that maybe hit the pause button 18 months ago. Who are now back in auto insurance, I would highlight there. And then we've got some -- a telecom customer who we never had before. who's coming in this year. So it's a combination of new friends and old friends and just general strength across our national buyers. It's wonderful to see. And I think that's one of the reasons the attitude and atmosphere at the convention was so good, particularly when you look at the footprint that Outfront and Clear have and the numbers they posted, they were very impressive. It's because of national recovery.

Do you think anything structural is going on across channels, for instance, 1 of your peers sometimes put forth the notion that, if you look at everything going on in search today, there is disruption there caused by AI and marketers are looking for alternative reach vehicles and outdoor has 1 and sort of cost-effective reach. Any veracity to that do you think? Or is that more of a go-forward kind of comment?

No, first of all, Nick is very eloquent when he talks about in real life, which I think you probably referenced -- yes, Scott got good at that, too. I think there's something to it. It feels like something is different. It's not just the sort of cyclical yen national is up and it's going to be down. There seems to be a rethinking of by big brands of what exactly they're getting in the digital ecosystem and where that's going. Those guys are still going to command the vast bulk of the dollars. But just a little shift our way is big in our world right?

Maybe extending the conversation on national. I don't know if you can just update on the latest in terms of conversations with the ad agencies in the past, we've talked about some of the challenges of getting increased allocations in there. Maybe just an update on where things stand there.

Yes. So one of the good things about going to the convention is it's not just the billboard owners talking to themselves. The buyers go as well. And -- all of the meetings that I had with the agency partners that we enjoy, they were all good. Everybody was everybody was as busy as they've ever been and they don't see any change going into the back half. So the vibe was just really, really good.

Okay. Maybe last one from a category perspective. AI has been called out as a vertical point of strength in New York, more than California. Maybe those are a bit less material markets for you, but have you observed any impact across your [indiscernible].

Yes, we have. It entered a top 10 position for us. That said, it is more of a san fran phenomenon. I mean you can't drive from the airport into San Francisco without seeing every single AI, large and small entity represented. And we're not in san fran, unfortunately. But that said, no, they're using us and they're using us well.

Yes. For Lamar, I was sticking Vegas, maybe if there was a...

There convention we did well with them. We are the Vegas airports. We got some of that stuff.

Got it. Okay. So programmatic grew 25% in Q1. I think that's well above the kind of roughly 10%. You'd expect it at 1 point for the year. Maybe just where is that growth coming in stronger than expected?

Number one, across the board, right? It's just -- it's a channel that is increasingly being embraced by the digital specialists. But I think the primary driver, and I don't typically name names in public, so I won't, but we got some customers back that were big spenders with us across our whole platform, let's call it, 2 years to 18 months ago. And now they're coming back because they can buy programmatically. The dollars aren't as big as they used to spend with us, but they're getting there. And they're almost exclusively programmatic in their reentry into Lamar.

And in that particular instance, was there any kind of catalyst that pushed them back into the market?

Well, the channel the programmatic channel is highly targeted really easy to execute on. And their digital shops that specialize in placement for them are placing them on us the same way they place on this, right? So the very same metrics and algorithm and everything they're looking for, it shows up on here and it shows up on the interstate.

Maybe just staying on that or on programmatic. Can you just speak to where you are overall in developing the channel? I think at this point, it's all national. What would you need to see to then extend that into the local clients.

So the good news is we're seeing it already because we're experimenting with a product that we call Flex Direct, which is available to our local customers. So backing up for a minute to your comment, when we first started going down the programmatic path, we wanted to make sure it was net new business, and we wanted to make sure we could protect our CPMs right. And we had very good experience doing that by limiting it to only digital-native shops and only national. What we've learned is we can protect our CPMs, even enhance our CPMs, number one. And number two, we have sophisticated local customers that buy across platforms like Meta and Google and they are used to buying impressions in a self-service way. And they want to do that with us. And so we're rolling out a platform that enables them to do it, and we're really excited about it because we think the ease of buying will get them to buy more.

Maybe staying on digital. So I think you framed 350 conversions as sort of a reasonable annual run rate. I think the associated cost of that is around $65 million. A question we often receive is why shouldn't or why can't Lamar accelerate this, especially just given the high returns and obviously, your balance sheet flexibility. So, maybe just walk through what kind of governs your conversion pace, whether you have or what conditions are there for you to accelerate?

The #1 gating issue is the permitting regulatory environment. right? Now that works both ways. The permitting process is a barrier to entry in our business, and so it can work as our friend. When it comes to accelerated rollouts, we have to navigate a variety of different sign ordinances and rules in something approaching 4,000 to 5,000 jurisdictions. And so navigating that landscape just takes time. So that's number one. Number two is these are big construction projects outside right? And so things have to happen. Crews have to arrive on time, the structure has to be retrofitted to hold the extra weight, you have to get the actual screen itself to a place and all that stuff that just has to happen. Believe it or not, sometimes we get held up because we're waiting on the power company. It's just so much as I'd like to go faster, if I could do that and have 5,000 more, I would do it, but that's not the world.

Maybe just remind us at this point what the current kind of revenue and cost uplift looks from a conversion, how do you think about the IRR thresholds?

Sure. First point I'd make is the returns have been remarkably consistent. Board #1 that went up 20 years ago and Board #5,000 that went up 18 months ago, right? Same return profile. And I think that's a testament to really, as we get more digital out there and our customers get more used to using the platform and use it in wonderfully inventive ways, the demand is there. And so that's been gratifying over the course of time to see that. So you've got a picture of billboard -- you got something that's making, let's call it 3,000 a month. That's on average. Now it's going to be different in Vegas and it's going to be in Baton Rouge. So our customers pay in 3,000 a month. They also have to buy the substrate. That's what they print on. That probably cost them $1,000. They amortize that over a 6- to 12-month contract. That's the economics as a static. Now it's digital, and we have 6 to 8 slots. The advertiser typically pays about the same absolute dollars. So it's probably still 3,000 for them to be on it. right? But from their point of view, it's the CPM goes up because it's shared space. From our point of view, we've got the opportunity to put 6 to 8 customers up there, paying almost the exact thing. So picture something to be conservative. We were making 3,000. Now we're going to make 15,000 to 18,000 and the incremental margin contribution from that is going to be somewhere between 65% and 75%, depending on how well we manage the real estate. If we do a great job on the real estate, it's more like 75% incremental margin. If we're just do a so-so job managing the lease portfolio, then it's 65%. Either one is a good one. Yes. And you can do the ROI. It's pretty good.

And I'm going to ask in that situation, right, where the advertisers paying the higher CPM, are you bringing in different advertisers since the CPM is higher, right, essentially? Or

It's -- yes. So typically, you contract for 1 slot and then you've got -- you're sharing that space with, let's call it, 5 other advertisers. And they're happy to pay a slightly higher CPM because it's so dynamic. They can integrate it in with their social media, they can change the copy from their desktop. They can copy daypart right?

Got it. Maybe switching to the expense side. So you've talked recently about completing the ERP project in August. Maybe what should investors expect on this in terms of costs and operating improvements?

So on the first quarter call, I went out there and said we're going to do 1 point better, right, 100 basis points better on margin, which will take it from 46.7% to 47.7%. There are some different components to that. One was a very simple component. We got rid of the Vancouver transit franchise, which really helped with our margin profile. But another part of the component of that is tuck-in acquisitions. We do because those also come down at an EBITDA contribution margin of plus or minus 65%. And we did a lot of those last year. So you're seeing the effect of that this year. On the ERP project, two things of note there. Number one, the spend on it is going to trail off as we get into the back half of the year because will be -- you're never done with this stuff, but we're kind of sort of done. And then given we're evaluating, okay, what did we get and how much is it going to help us. But we had some wins, and you should see from that activity, again, some margin enhancement as we get to tail end of next year and particularly going into '28 is when I really expect a little lift there.

And then I don't know if this falls strictly into the bucket of cost, but I want to ask about AI, right? You've been asked this question before, how it impacts your business. I'd like to quote you usually say AI is good at word in pictures, right? That's what Lamar does, but curious if you could update your thinking on that, right, as your clients consider what they could do, maybe with their creative under board.

Yes. That's an interesting story actually, and it's got a ways to work itself out. You've heard the term AI slot?

Sure.

We're experiencing a little bit of AI swap right now because our clients are using AI to design their own copy. They think it's gorgeous, but it's not real good billboard art. And you don't want to go back to a client and say, no, let -- we're working our way through that, and that's going to sort itself out. Ultimately, what it's going to do though is, like I said, it's good at words and pictures. We're going to figure that out. We're -- by the way, we're a Gemini shop. And internal to Gemini, you can build what they call gems I don't know if you all have heard that phrase before. We're building a gym to get rid of that AI slot that we're going to make available to our clients. And it's going to put guardrails around what colors you can use, what aspect ratios you can use, how you don't want 32 words on a billboard, you want something around the neighborhood of 10. And it will just sort of help them do good billboard copy so that when they bring it to us, we can say that it's beautiful. I got some space for you. So that's what we're doing to work through the AI slot issues.

Okay. On the M&A side, so Lamar as completed 19 acquisitions year-to-date for $80 million in cash, math would suggest deals on the smaller end of the market. Just kind of curious, overall, is that where you're seeing kind of the most opportunity right now?

Yes. We're feeling real good about the marker we put out there to kind of do about $200 million in cash deals. And that -- we're on pace to do that. That feels kind of like it did last year, and they were very successfully integrated and doing what they're supposed to do. We hadn't landed the big [ UPREIT 1 ] yet. And that -- those are structurally a little more complicated. You got to have just the right seller someone with low or no basis, someone who loves Lamar and wants to take our stock, someone who doesn't need liquidity. Those people are out there and are -- they have been in touch. They know the structure, and it's really just a matter of the timing being right for them for the bigger ones. North of $100 million kind of say.

And you're saying that post Verde, the UPREIT investors are more at that size level?

Yes. And they've -- like I said, these are either sophisticated families or there's someone like Ernie Garcia, who's a sophisticated investor, -- that's the profile of the seller that this is the perfect vehicle for them.

Got it. Maybe how would you just frame overall the seller's mindset today, right? And is it more challenging for you given kind of going back to your initial commentary, you just had 3 publicly traded firms or report great results? And does that sort of change everyone's in terms of this best environment or not?

So a couple of ways to think about that. The environment is a little more frothy for sure. And whether they're a sophisticated seller or not, everybody knows Lamar's arithmetic. Our model is pretty easy. No, you work really hard figuring us out, but our model is pretty easy to figure out, right? And so what gives Lamar an advantage is our footprint. Our footprint is such that almost anything in the outdoor space is a fill-in for us, right? And that gives us an advantage. And as long as we can operate somebody's inventory as the highest and best user. We can offer them a multiple that makes them happy and a post-synergy multiple that makes us happy. And that is the sort of secret to us being able to knock down so many of these long-tail deals.

Maybe just staying on capital allocation. You've also talked about wanting to ramp spending on easements. I think you budgeted $20 million this year, but expressed the desire to double or triple that -- does the higher rate environment open up an opportunity to potentially execute on that?

Yes. That's a good observation because typically, when we're buying easements or real estate, it can become a cap rate discussion, right? And so the higher the interest rates, the higher the cap rate, which is a lower purchase price. We don't tend to talk the language of cap rates. We tend to talk the language of multiples of foregone lease cost because that's what you're doing. You're buying down your leases. And so if we're paying somebody a year to have a billboard on their property, and they feel like they would rather have 1 lump sum of $400,000. That's the kind of conversation we want to have with somebody and those people are out there. And it's a good use of capital. It's a no-brainer. It's a riskless return.

And can you just remind us the percentage of your portfolio that you own?

Expressed as a percentage of revenue, it's slightly more than 20% of our revenues. We actually own the real estate under our billboards, expressed as actual billboard locations. It's -- let's see 160,000 billboard faces, and we own the real estate under 20,000-ish. Did I get that cash right? I got that right, yes.

Yes. Great. Maybe about about 5 minutes left. Anyone in the room want to ask one, if you do, feel free to raise your hand. Okay. Maybe just stepping back, I'll ask going on margins. Maybe just speak more broadly on the path towards the long-term target. I think your communication in March was to I think it was to exceed 48% by '28. As we noted earlier, though, I think the goal this year is 47.7%. So is there kind of room to execute to the long term early? What would be the factors around that?

Start with the macro -- so assuming that's constant the things we talked about relative to IT and AI should contribute? But I think the most important thing is continuing to pay attention to those tuck-ins that fall to the bottom line at a margin that's higher than our consolidated margins. Digital conversions fall to the bottom line at a margin that's higher than our consolidated margin. Don't do anything stupid to get into a mix of businesses where the margins are lower. So don't go bid on some huge big city contract that's going to come in at a margin contribution lower than your consolidated margins. So yes, it's a combination of do the good things and avoid the bad things, and we should get there.

Got it. Maybe it's a smaller part of Lamar, but your airports division posted over 15% growth in Q1. I think the logos were up over -- saw some other transit results that were strong across peers. I just maybe just unpack the strength and just transit broadly at the moment.

So for us, we're not in the airport business, we're not Logan in our Kennedy or LaGuardia, where middle market airports, large portfolio of small contracts. Same thing for the transit business. We don't do the MTAs of the world. We have lots of contracts with middle and small markets. And that's a portfolio approach that allows you to sleep at night because no one big contract is a must have. As a matter of fact, when we win a franchise or lose a franchise, you don't even know it. We don't even announce it. The only reason we announced that we were exiting Vancouver was because it had an impact on our margin profile. So that's that business. The logo business is a fun little niche business we have. It's the blue signs on the highway right away, let's say, food gas lodging. We do that under contract with highway departments. We're by far the largest player. It's a niche industry. So the margins have stayed healthy in that business. It's not even really advertising because it's price fixed. Per our contract, anyone that applies, we have to put them up, and we can only charge them what our contract with highway department says we can charge them. So it's a funny little business. We invented it in 1989. And like I said, it's a fun little niche business, plus or minus $90 million in revenues with, call it, a 35% margin profile.

Every year, we ask you about measurement I always think it's a relevant topic given the industry has kind of long flagged a gap to your actual reach. Just how do you see that landscape evolving? Anything on the latest would you...

Yes. Yes, there's good news. And the industry and the buy side are united. We're walking and lock step. We're abandoning the data provider that used to feed Geopath. It's a company called MotionWorks -- and we're going with a globally respected brand called Ipsos. They do the measurement in Australia, for example, in the U.K., for example, where out-of-home is a larger share of total media spend. So I'm excited about measurement for the first time in my career, and I've been doing this a long time right. I'm hopeful that this time, we're going to get it right. And like I said, Lamar, Outfront, Clear Channel, independents and on the sell side and all the agency players care about our space. We're all hang -- singing from the same book. We're all pulling in the same direction. So I feel good about this one.

Great. With that, we're out of time. Sean, thanks for joining.

Appreciate it. Appreciate it, David. Thanks.