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Lamar Advertising Company (NASDAQ:LAMR)

Q3 2008 Earnings Call

November 6, 2008 11:00 am ET

Executives

Kevin Reilly - CEO

Keith Istre - CFO

Sean Reilly - COO and President of the Outdoor Division

Analysts

Marci Ryvicker - Wachovia

Mark Wienkes - Goldman Sachs

Anthony DiClemente - Barclays Capital

Jason Helfstein - Oppenheimer

Harry DeMott - King Street Capital Management

Kit Spring - Stifel Nicolaus

Operator

Excuse me, everyone. We now have Kevin Reilly, Sean Reilly, and Keith Istre in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of the company's presentation, we will open the floor for questions. (Operator Instructions).

In the course of this discussion Lamar may make forward-looking statements regarding the company, including statements about its future financial performance, strategic goals and plans. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this call in the company's reports on forms 10-K and 10-Q, and the registration statements that Lamar files with the SEC from time to time. Lamar refers you those documents.

Lamar's third quarter end 2008 earnings release which contains the information required by Regulation G was furnished with the SEC on a Form 8-K this morning, and is available an Lamar's website, www.lamar.com.

I would now like to turn the conference over to Kevin Reilly. Mr. Reilly, you may begin.

Kevin Reilly

Thank you, Chantal. As is our custom, management will open up the call with some brief comments and then we will turn to Q&A.

Let's get right to the Q4 guidance. The negative 9% surrounds weakness in three areas, auto, real estate, and other media. I want to take this opportunity to let our shareholders and friends know how we plan to manage through this recession and my comments directed really to what we can do right now in areas of CapEx and expenses, and not towards what we think might happen regarding revenue.

We have a plan in place to generate $200 million in cash over the next 13 months. This is how we are going to get there. We are going to cut total CapEx to $30 million, and that is against across all areas of CapEx, real estate, digital, and analog, and we are going to hold our expense growth to less than zero. That plan is in place, has been in place for the last three weeks and we know where it is, and we know how to get it, and so we have a very high level of confidence that we will generate a couple of hundred million dollars in cash flow.

What we are also confident of is that our strong free cash flow against our modest leverage and Keith is going to cover some details regarding our leverage and our modest fixed charges. This effort will serve our shareholders very well over the next few years.

With that, I would like to turn the call over to Keith.

Keith Istre

Good morning. Just to touch on Q3 as you saw in the press release, our revenue for Q3 declined by 3.9%. We had guided to downsize for the quarter and August and September came in just a hair better than we expected at the time we gave out the guidance.

The good news is that the expenses, direct and G&A expenses for the quarter were up only 2.7%. As you know, 4% is our normal run rate and that should hold true for Q4 as well. We should be somewhere in the 2.7 or less expense growth range.

That being said, as Kevin mentioned, we did include a supplemental indebtedness schedule in the release, which is something that we never done before, but there is a certain amount of misunderstanding and misinterpretation with our credit agreements and our outstanding debt, and we just wanted to clarify with respect to these issues.

There are three common misunderstandings in the investment community. Number one is that our senior credit facility total debt ratio test steps down from 6 to 1 to 5.75 to 1. That is not the case that was in the original agreement and we amended that ratio to remain at 6 to 1 for the life of the seen credit agreement, the bank agreement with our bank consortium. So it is at 6 to 1 today and it will remain 6 to 1 for the life of the loan.

The second misunderstanding is that our convertible notes at Lamar Advertising Company which is $287.5 million that those notes are included in total debt for covenant calculation purposes. That is not the case. Those are at as I said, Lamar Advertising Company, that is the holding company all other debt is at Lamar Media Company, which is a wholly owned subsidiary of Lamar Advertising. So, those are not included in any of our debt tests, and are not counted as debt under our debt agreements.

The last misconception referred to in the last paragraph on that first page. It says there is a line, the last sentence in that last paragraph, the supplemental indebtedness schedule says in addition and without regard to any limitations described in the preceding sense under the indentures Lamar Media may at any time incur up to $1.3 billion in indebtedness under any senior credit facility.

People read that, those are in our high that is a basket given to us in our high yield senior subordinated notes and what that means is not that we can only borrow up to $1.3 billion under our senior bank credit facility, it means that at any time, regardless of our EBITDA, if the company had zero EBITDA, and we could convince our bank group to lend us $1.3 billion, then that would be permitted under our high yield indentures.

After we exceed the $1.3 billion, then we are on the incurrence test of 6.5 to 1 in those agreements. As you see in this schedule, our senior outstanding indebtedness today is $1.328 billion. So, I hope that clarifies it.

If there are any questions remaining, please ask them as we go through Q&A. Sean

Sean Reilly

Thanks, Keith. I will take the opportunity to run through some of the metrics that you are all familiar with. Let me start with the number of digital units we added during the quarter and call-over-call. We ended the third quarter with 976 units in the air and in billing and as of today, we have 1,012 units in the air. We estimate we will finish up the year with about 1,065 to 1,070 units in the air and in billing.

Kevin mentioned that our game plan in '09 on the CapEx side is to limit our CapEx to $30 million. That plan is in place and is very easy for us to execute. On the digital side, it means that we will spend about $15 million on digital CapEx in '09 adding roughly 100 units.

Let me take a moment to acknowledge our vendors who have been working with us as we had to alter our game plan on digital deployment. Daktronics and Yesco have been great partners. They are honoring their pricing commitments to us and allowing us to push out into the future some of the remaining commitments we have to spend with them and I just wanted to acknowledge that they have been great partners and when times get better in the back-half, hopefully of '09, we will be able to sit down and revisit our plans for '10 on the digital front. For now, we are anticipating about $15 million in digital CapEx for '09 and again about 100 extra units.

Let me talk to rate and occupancy in the third quarter. On poster occupancy, Q3, '08 occupancy was 68%. That compares to Q3 '07 of 71%. On the bulletin side, occupancy of 75%, in Q3, '08, which compares to an occupancy of 79% in Q3 '07. On the rate side, our average rate in Q3, '08, on posters, was $456. In Q3, '07, it was $449, a slight increase of about 1.6%.

On the bulletin side, rate in Q3 '08 was $1,179, average rate Q3 '07 was $1,194 or a slight downtick of about 1.3%. So, you can see that as is typical of the way we manage through recessions, we are doing our best to hold the line on rate and the shortfalls are coming in occupancy. It is our experience as we go through recessions that occupancy comes back far faster than rate.

Now, where we have to drop rate to move space, we are doing it on a short-term preemptable basis, just like we did very effectively after 9/11. For those of you who have been following us for a long time, after 9/11, that Q3, Q4 time period was a difficult one, and we sold short and preemptable where we needed to move space and when demand came back, we were able to get rate back to where it needed to be.

Our national local sales mix year-to-date, it is 80/20. I would know note that Q3 '08, local ticked down to 78%, national ticked up to 22%. That is not really apples-to-apples. We recall, we did the Vista deal, which gave us a slightly stronger national presence in New York and Los Angeles. By the way anecdotally, New York is doing extremely well. It is one of the bright spots in terms of markets for us, Q4. Acquisitions, to-date and this is probably be about all of them for the year, closed 64 transactions, total cash purchase price of about $233 million.

Let me take through briefly out top 10 advertisers and top 10 categories of business and then may be give you a little more color on them. Our top 10 advertisers year-to-date, McDonalds, number one; AT&T, number two; Verizon, number three; Cracker Barrel, number four; State Farm, number five; Coors, number six; Dr. Pepper, number sever; Geico; Dodge, number nine, and Holiday Inn, number ten.

Of note, the biggest customers that have dropped out of our year-to-date top 10 and this been a surprise is Chevrolet. In spite of that, when you look at our year-to-date categories of business, the shift is not that perceptible when it comes to automotive.

So going through our categories of business, we have got restaurants at 11%, which is up from 10% last year. Retail at 9%, that is the same as last year. Automotive at 8% year-to-date, that is the same as last year. Hospitals at 7%, which is the same as last year. Real estate has tick down three percentage points on our book of business year-to-date, it is at 6% of our book of business year-to-date as oppose to 9% in September of '07.

Those levels of 6% of our book roughly approximates where is real estate was in 2005. On service industries, 6%, gaming, 6%, that is the same. Amusements and entertainment, those are mostly directional, that is the same. Hotel/motel again, primarily directional at 5% of our book of business, roughly the same as year-to-date '07, and telecom at 5%, and that is the same as year-to-date '07. The most perceptible move of course has been in that real estate category.

As Kevin mentioned, we have put in place an expense reduction plan that we have essentially already executed. It will show some benefit in the fourth quarter, as well as substantial benefit in 2009. We have targeted and are budgeting, and these are the budgets that our general management receives bonuses on, a 1% pro forma reduction in our expense base for 2009. We are getting it in primarily two places. Headcount, which again we have been aggressively pursuing that. We anticipate savings of $6 million to $7 million, or 1% of our expense base from headcount reduction.

Aggressively pursuing lease reductions. We maintain a bank of un-built leases so that when times are good, we can build and grow. When times are not good, we can cancel them and that is what we are doing. We are also aggressively renegotiating and in some cases taking down non-performing units where given the current climate, the lease cost actually exceeds the sales on those units. We anticipate that that will likewise generate savings of about $6 million to $7 million, or 1% of our expense base.

Another category of expense that we are going to realize some savings on, the whole group is moving away from paper and glue and to a substrate on posters that is polyethylene. We will no longer be buying glue and other related expandable materials to our formerly paper and paste poster product. We anticipate that savings to be about $1.5 million.

We will see some benefit from lower gas and energy prices. That by the way will not only help us, it is going to help our audience which is drivers and many of our customers who rely on any them. So, some of the savings you are going to see in fuel and illumination. The rest of them are miscellaneous, but as I minced, they are all real and actions have been taken to but them in place over the last month.

So Keith, I think that is about all I have got. Kevin, I turn it over to you.

Kevin Reilly

When you add it all up again, it equals $200 million in cash which we will put on our bank indebtedness and we expect in '09 on the revenue front to rely heavily on our low cost per thousand, emphasize with our customers, our audience, which is drivers, which hopefully some share shift will insulate us to some extent and then do not forget one-third of our business comes from highway directional, and the average length of stay of our customer on the highway directional side is seven years. So, my expectation for '09 and 2010 is that this company will have plenty of headroom in order to operate its business. Remember, we do not have to borrow one nickel to fund our operations.

With that, I would like to go ahead and open up the call. Chantal?

Question-And-Answers Session

Operator

Thank you, sir. (Operator Instructions). Our first question will come from Marci Ryvicker from Wachovia.

Marci Ryvicker - Wachovia

Your suspension in your digital investment, is this a permanent suspension or just temporary during the current climate?

Sean Reilly

Let me take that. This is Sean. One thing that we remain is very bullish on the digital future. If you look at the third quarter and I meant to give this out to you guys, if you look at the third quarter approximately down 4%, digital contributed plus 2% same-store growth. So, we remain bullish on the business case, but we also have to be very cognizant of the environment we're operating in.

We could not, number one, add a tremendous amount of additional capacity, given what we see in the world of ad demand, and ad spend, and quite frankly given the concerns out there about total leverage, right now, if we're going to generate $200 million in free cash flow and pay down debt with those funds, we had to temporarily suspend much of our digital plans for next year.

Kevin Reilly

Remember, Marci, it's not just CapEx. We were investing very aggressively in our front end, and so we had a lot of ancillary other expenditures associated with this effort, which we as soon as we start see something daylight, we're going to crank that up.

Marci Ryvicker - Wachovia

Sean, can you talk about pricing on digital in Q3, and also what you're seeing in Q4, because I think you had mentioned at a conference it was down around 9%?

Sean Reilly

I think that sort of range is about where it is. Again, we have a lot of confidence in the digital model, but we have been adding tremendous amounts of capacity in the face of pretty tremendous headwinds. So, I think that the prudent thing for us to do is focus laser-like on selling the units we have in the air, rather than adding, potentially adding 50% to 60% more capacity in '09. So, that's our game plan, and we feel like it's the prudent game plan, and we also feel like that digital will probably be the first thing to lead us out as thins get better. Hopefully as we move into the summer.

Marci Ryvicker - Wachovia

All right. Thank you so much.

Operator

Thank you. Our next question will come from James Farrin [ph], Morgan Stanley.

Unidentified Analyst

Thanks for taking the question guys. As you look into Q4, can you give us just the expectation for the digital contribution from a revenue perspective and then given the expected 9% decline, how much of that is pricing relative to occupancy on sort of poster and bolt-ins? Thanks.

Keith Istre

I'm going to tell you that in Q4, and I'm guessing here a little bit, but it's an informed guess that the bulk of the decrease is going to be on occupancy. Again, when we manage through these recessions and this isn't our first one, this management time has been around for a while.

We do our best to hold the line on pricing. You saw that in the third quarter and we allow units to go unsold, because when demand comes back it's occupancy that comes back faster. Now as we continue to monitor the situation and we move into '09, there may be some isolated customers for whom we make pricing concessions on a short-term preemptable basis. As I mentioned, we did that with great success after 9/11, and we're anticipating that that strategy can help us out here.

Unidentified Analyst

Okay. So is the expectation that as we look into 2009, the contract lengths are in general going to shorten across the board as you sort of try to manage more on a sort of quarter by quarter basis?

Keith Istre

Basically, what we're hearing from the field is that people are playing their cards. I'm talking about our customers. Our local customers are playing their cards very close to their vest. They don't know what the future holds for them and their businesses. As a consequence, they are more willing to go short than long, and they are understandably having renewal discussions later on in the contract period, so that they can get a little better visibility on what their world looks like.

These things again, going into recession, these things are not new to us. We've seen them before and we know how to work with our good loyal customers to make sure they stay good loyal customers.

Sean Reilly

You're correct in assuming that our bulletin contracts will be shorter in duration, less volatility there and more volatility on the digital and posters which our digital contracts are can be as short as three days and the poster contracts can be short as 30 days.

Operator

Thank you. Our next question will come from Jason Helfstein, Oppenheimer. Jason, go ahead. Jason, if you have your phone on mute, would you please un-mute your phone now.

Kevin Reilly

You can go ahead and move on, Chantal.

Operator

Thank you. Our next question will come from Mark Wienkes from Goldman Sachs.

Mark Wienkes - Goldman Sachs

Great, thank you. It sounded like the categories really haven't changed outside of real estate, but so I was wondering, could you talk to the depths of the advertisers like the number of advertisers that are in the category, does it just thinner, fewer clients at the table.

What's your visibility now versus typical, but at this point in the fourth quarter, business on the books for this quarter and next year now versus before sort of how much visibility do you have?

Keith Istre

We traditionally don't have a great deal of visibility as we turn the corner in a new calendar year. There are a couple of reasons for that. Outdoor doesn't have an upfront like some other media and our contracts tend to be signed and entered into our system a little bit later than other media as well.

Traditionally we set our budgets in January, the budgets by which our general managers are held accountable and gave bonuses on. This year, given the environment, we have set our expense budgets and we did that last month, so that we could execute on the expense savings immediately and not wait till 2009. So, we have set our expense budgets. We did not set our top line revenue budgets for next year yet and that's not new. That's not something year in and year out; we set those budgets in January.

Now, as regards visibility for the fourth quarter, it is what it is. Our history is to hopefully under promise and over deliver like we did in the fourth quarter. We know, we got into five and we went to four. Hopefully, we're doing the same thing here.

Mark Wienkes - Goldman Sachs

Just wondering, on the, like I went through your OpEx, your budgets for 2009, you said you haven't set the revenue number, but the question is what percent of your fixed costs are actually fixed for today that may not be fixed as you look out a year from now?

Right like how much more variable can your cost structure get if you assume sort of that outdoor follows newspaper and radio got forbid, but if revenue is down 15%, then where are the other big sort of big buckets of potential cost cuts?

Keith Istre

Let me speak first to that scenario, which yes we don't see by the way. The secular story is still in place. We still have customers that are migrating to us, because they're disaffected with their spending in other media. You can look at the percentage down that other media are suffering through as oppose to us and in the phase of a shrinking pie and difficult climate, we are experiencing share shift toward ourselves.

Mark Wienkes - Goldman Sachs

Right, half is bad.

Keith Istre

Looking to history a little bit, I do believe and I think most of us believe that this is more severe than most of us have experienced in the past. But it is helpful to look to history. In 2001, our fourth quarter was down 5% and our full year was down 2% and so you do get this sort of through the calendar year effect when we're going into a recession. The next year we were up 2%, and there was a recovery in the back-half of the year. Same thing happened in '91. So, I would caution you not to take a down 9% and just say, okay, that's what's going to happen for the rest of '09 and keep in mind the comps we had. Some of your other media were down double digit, on down double digits in '07.

Mark Wienkes - Goldman Sachs

Exactly, with political.

Keith Istre

With political; we were up 6.5% last fourth quarter. So we're comping competing? against that. As you turn the corner on the easier comps and our sales force and general management has a full year to sell into the summer of '09. You're not going to see what you fear.

Mark Wienkes - Goldman Sachs

Okay.

Kevin Reilly

Mark, this is Kevin. I will chime in. Your question about visibility I think is a good one. Although things are usually cloudy, right, this time in year as we make the turn, I've never seen it this cloudy. Then secondly your question about, well, I'm comfortable with the 200 million that you're going to generate, but what if your revenues are down 10% or down 15%?

This management team has never experienced a down drop of that magnitude and we would have to manage our expenses, it wouldn’t be easy pickings because you'd be focusing on your two biggest costs, which is your headcount and your lease expense, but those are the two areas that we would have to manage very aggressively to compensate for that kind of down drop which is by the way not where we're planning on and not where we're seeing in our book of business.

Mark Wienkes - Goldman Sachs

All right. Okay, understood. Thank you very much.

Operator

Thank you. Our next question will come from Anthony DiClemente, Barclays Capital.

Anthony DiClemente - Barclays Capital

Thank you. Just a follow-on on Mark's line of questioning on the just in terms of comparing outdoor to other media, like your radio, like newspaper, or spot TV, it seems to me that because you guys have a longer sales cycle that it could be that your revenue that you're reporting and guiding to is actually a lag effect versus something like spot radio, newspaper, spot TV where it does show up right away. So I guess, is that valid? Is there a chance that those double digit declines are just on a lag for you guys where as we head into '09 just given the three to six month sales cycle? And I have a follow-up, thanks.

Sean Reilly

Only if you assume that with two thirds of our businesses is bulletins and you've got, they're on staggered matures, so you've got equal renewals, little heavy in the first quarter but equal renewals throughout the year. Only if you assume that as those units come available for sale that we will not renew any of them and those that we do renew we'll be renewing at substantial discounts.

Keith Istre

Let me speak to it a little differently. Those other media have secular issues with their audiences that are well documented and well known. When you look at what has happened with outdoor over the last couple of years, the face of pretty tough local ad climates, like I'll go back to '07, local ad spend and total ad spend was down in the aggregate, and we were up 7%.

So, I mean, we continue to outperform other local media. As Kevin mentioned our, our audience is not under fire. I mean people will be driving. Gas prices are coming down, and we have good local customers who need to advertise their goods and services, and compared to other media, our cost per thousand is so low. That somewhat insulates us from the buffeting winds.

We have shorter cycle sale businesses Anthony that would be leading indicators, our poster business and our digital business looks more like the other media and our bulletin contracts renew essential ratably.

Anthony DiClemente - Barclays Capital

Is it fair to assume though that the portion of your business that's more a shorter cycle, like what you just mentioned would be pacing worse in terms of year-over-year comps than the longer cycle for any given time period? Do you understand my question?

Sean Reilly

In the past, we have seen poster occupancy be the canary in the coal mine, and if you notice, I think the key static is occupancy was down in posters in the third quarter but rate was right there and that's a pretty good data point for you.

Keith Istre

You're right, it should be pacing worse, but you've got other things happening out there. For example, Chevrolet, when they canceled their national business, that was all bulletins. So, it had a much greater impact on our bulletin book of business than our poster book of business.

Anthony DiClemente - Barclays Capital

I understand.

Sean Reilly

To give you a little color on the national side, again, we don't have an upfront, though obviously we have conversations ongoing. The best description that I'm getting from our national sales folks is they don't see it falling off the cliff in '09, they see it hanging in there particularly with some of our largest customers in the wireless category and in the restaurant category.

Anthony DiClemente - Barclays Capital

One follow-up and then I'll stop, thanks for taking my question. The cost cutting initiatives, just in general, to what extent could the cost cutting actually impact revenue generation, meaning can you give us some comfort on why the cost cutting is not really coming to meet sales operations that are important? Thank you.

Keith Istre

Our charge to the field is we still have to sell and service our inventory, and we're not doing anything at this juncture that would damage that. We have had, related to digital, and related to other initiatives, we had beefed up our headcount, and we are able to reduce it by the magnitude that I mentioned, and not really cut into our ability to sell and service.

The lease initiatives, the reduced lease costs are again something we've done before in the past. As I mentioned, when times are good, we have a bank of un-built leases, and they're cancelable, so there's no revenue associated with canceling those. When times are tough, as they are now, we also have units that have underperformed for the prior 12 months. In deed, if you look at our occupancy statistics on the bulletin side, we have units that have gone unsold for the last 12 months. Those are right for renegotiation with landowners, or indeed if they have high fixed lease costs, let's just take the unit down.

Kevin Reilly

We are not diminishing our signal in any way, because one-third of our inventory generates 73% of the company's revenue.

Anthony DiClemente - Barclays Capital

Okay. thank you.

Operator

Thank you. Our next question will come from Katrina Faulen [ph], Citi.

Unidentified Analyst

Thanks for taking the question and thanks for all of the detail too on the supplemental indebtedness schedule. That's very helpful. I had a couple of clarification questions. I suppose for the fixed charges coverage ratio, is it true that the convertible notes payment in 2010 is also not included in that?

Keith Istre

That is correct. It's a restricted payment.

Unidentified Analyst

Right. Okay. And then you said that it also looks like cutting CapEx would help you on the fixed charges coverage ratio as well?

Keith Istre

You're going to be pulling out 210 million in CapEx on a trailing basis and replacing it with $30 million on a going forward basis, interest rates, we are paying one over LIBOR today on our bank agreement LIBOR is 177. This morning that's down 50%, 60% over what it's been in the past 12 months or at least last year at this time. So, all of those larger charges will be melting away.

Unidentified Analyst

Then with the $200 million in cash that you hope to generate next year, is the intention to use some of that to pay down debt? I mean, it looks that even you're still well above the six times covenant, even if EBITDA goes as low as say 430, but you would still use that cash than to pay down debt and give more room essentially?

Kevin Reilly

Gives us plenty of headroom all the way through '09.

Unidentified Analyst

Then can you give a little bit of a split on the digital bulletins that you did put up this quarter? Can you give a split between bulletins versus posters?

Kevin Reilly

It looks to me like 75 of the ones that went up in the third quarter were posters and 59 bulletins.

Unidentified Analyst

Okay. Then going forward, with the hundred for next year, do you expect that that will also be more heavily weighted towards posters?

Kevin Reilly

It's hard to say. This year we had a big push on posters, because we wanted to build out our poster networks in the variety of markets we have them in. We have some greenfield opportunities in Texas that we need to capitalize on in '09. I suspect many of them will be bulletins.

Unidentified Analyst

Okay. I guess just two other questions back on the debt. Have you looked at all about buying your own debt on the open market, because that's even trading at a discount now different if you looked at that?

Kevin Reilly

We've looked at that. The bonds are high yield notes are trading in low 70s, and $0.70 on the dollar and we are still considering that.

Unidentified Analyst

Okay. And then I guess another option, would you use some of the shelf to raise capital?

Kevin Reilly

No, we would not intend to. We file that shelf simply because our old existing shelf was expiring December 1. We put out a press release on Monday. The company has always had a shelf, and we will always have a shelf, but, no, there are no intentions. Let me make a comment and now that you are focusing on the debt side.

This company has been out of compliance before. It's been in business from 107 years and in the 30 years I've been here, I can't tell you how many times I had to go to the bank group and ask for amendments and we are very closely in touch with all of our heavy supporter members of our bank group and they are telling us, if we happen to coast into default at the end of '09 or sometime in '10, depending on the economy, that they will be there with an amendment. It will cost the company some additional money in the terms of its interest that it's paying, but they are going to be there with us and for us.

We have a very good relationship with our group, JPMorgan is our administrative agent, and has been since 1983. Two of the former managing directors of that bank are on our Board of Directors.

Unidentified Analyst

Sure. That certainly makes sense and that we've seen some of that with newspapers that have been kind of in much worse financial straits, so no doubt that they would be there. Thank you very much for the questions.

Keith Istre

I'd also want to quantify this. First of all, we're not going to coast into default.

Unidentified Analyst

Right.

Keith Istre

But if you take, let's just take $400 million. The bottom drops out and we do $400 million in EBITDA at the end of the year, and now we're in default, and let's say the max penalty is an extra 300 basis points. That's an extra $40 million in interest on our bank indebtedness. The company would still have 200 million in free cash flow.

It's in default, there's no access to any credit and has to pay an additional $40 million in interest and it's still got $200 million in free cash flow. So, a friend of mine called in and said, it's kind of open [mike night] for some of these analysts who talk about default and sky falling. That's not the case with this company, whether it's in default or not in default. Basically for the next two years, we do not need to borrow money to fund our operation.

Unidentified Analyst

Great. Thank you.

Operator

Thank you. Our next question will come from Jason Helfstein, Oppenheimer.

Jason Helfstein - Oppenheimer

Hi, thanks and I apologize before, I was trying two calls at once. Did you guys give a break down of the negative 3.9 between static and digital, I am not sure if I missed that.

Keith Istre

Yeah, I did, Jason. Roughly 2% up on digital and roughly 8% down on static.

Jason Helfstein - Oppenheimer

Okay. And then do you have, can you try to gander at the 9% down, how that would split between digital and static for the fourth quarter?

Keith Istre

I don't have that.

Jason Helfstein - Oppenheimer

Okay. Then just thinking about next year, let's assume, bulletin occupancy falls to, I don't know, 70%, something that's like below the last recession, poster to 80%, I think that's just about at the low end, maybe it goes to 58%. Kevin, I mean, what do you think is like the worst case for pricing, and you guys talked whether you try to keep pricing flat, but ultimately if you have to capitulate on price or do you hold pricing or you just keep letting occupancy fall? Thanks.

Sean Reilly

I did address that a little bit in my opening comments, this is Sean. In 2001, when the world stood still in the third and fourth quarter after 9/11, we adopted short-term preemptable pricing for those customers that we had to help out with lower rates to move space. It served us well, and when demand came back, pricing came back. I can't anticipate that going into the early parts of next year, that you could see that.

Jason Helfstein - Oppenheimer

Right.

Sean Reilly

Again, it's something we've done in the past when times were tough, and it's worked in the past when times were tough. If you look at it, again, through the course of the year, we were down 5% in the fourth quarter of 2001 and for the year, that year, we were down 2%. Now, this is a little steeper. It looks like we're going to be down hopefully 8%, 9% in the fourth, and for the full year, minus 3% for this year, right?

When you circled around the calendar year, in '02, we had a down first, and a flat second, and then we circled around, number one, to far easier comps, and number two, we had a full year to execute a game plan to get customers on the boards. And we have almost a thousand people on the street talking to customers, and they're going to have time next year to make the back-half of '09 look better and they will and that's been the history of this company as we managed through tough times.

Jason Helfstein - Oppenheimer

I actually remember when you guys did that when the short-term pricing, for the shorter term preemptable contracts. Just last thing, what right now is the current price you have been paying for a bulletin and a digital poster?

Sean Reilly

I didn't have my digital pricing stats, but I did it for static. Let me hit it for you.

Jason Helfstein - Oppenheimer

No, no. Not for what you're charging. What you're paying, your CapEx per unit.

Keith Istre

With respect to our vendors, we don't give out that information anymore.

Jason Helfstein - Oppenheimer

Got it. Okay. Thank you guys.

Operator

Thank you. Our next question will come from Harry DeMott, King Street Capital Management.

Harry DeMott - King Street Capital Management

. Thanks for taking the question. Had a couple of them here. If I could just go back to one of Anthony's questions, (inaudible) that I I'm not a 100% sure he got the answer tried it a couple of times, maybe I'll try it a different way. Having listened to God knows how many calls over the last week and a half from TV companies, radio companies and listen to them, be in auto, advertising down, radio also down 37% this quarter, and the TV guys are saying it's down dramatically going into the fourth quarter.

You still have it at 8% so far this year. Have you seen sort of a real steady drop-off in that number as these contracts rollover? So, I mean, if you sort of roll this thing forward, and you're looking at 8% going to 5% just like real estate went down, because it fell off earlier and quicker, or are you seeing still some strength in the auto category there?

Kevin Reilly

I'm going to turn it over to Sean in a minute, Harry. It's tough to call. That vertical is going to be under stress. They were talking about a dealer group in Oklahoma. This was not one dealer, it was a dealer group got together for a meeting and they wanted to talk about the month and they sold one car. The entire group.

So we expect that that vertical is going to be under stress. The good news for us is our low cost per thousand, and also the fact that we're such a small percent of the auto dealers overall ad spend, so when he is looking for relief on that expense line item, he is going to go after the gorillas first, and hence, you see the activity on the TV side.

Harry DeMott - King Street Capital Management

Right.

Kevin Reilly

It doesn't mean that we're immune from it. So I do expect that there's going to be some stress on that vertical, but it's hard to call exactly how it's going to be. The other thing is a lot of times the auto dealers are using outdoor not for specific promotions, but just for brand building.

They are out there, they are up in the marketplace, they're paying a $1,000 a month, and they've got their name bigger than life up on the board, and a lot of times they just run with that brand advertising through the duration.

Sean Reilly

I was going to put a little color on that as well. It has picked up a little bit. I'm not talking about the??? it for, but just the difference between Q2 and Q3. In Q2, auto was down 8% under the same period in '07, and in Q3 it was down 1% same period.

Now, that is predominantly national. At this stage of the game, it's not as much local dealers. As I mentioned, when I went through our top 10 advertisers, and I'm talking about not categories here, but actually customers, Chevy disappeared in the year-to-date category. That is national. I mean, that's a national Chevy buyer, it's not local.

As Kevin mentioned, they are going to be under stress. The way they use us is a little bit different than the way they use other media. Some of them, quite frankly, use us as directional to let you know where the dealership is. Our experience in the past, as Kevin mentioned, it's such a small piece of their ad spend, they tend to keep it.

Harry DeMott - King Street Capital Management

Right. Then, not completely off the topic, I was sort of interested to hear that 130 of boards produced three quarters of your revenues. When you look at all of your structures, boards, bulletins, posters, what percentage of these guys would you say are net-net kind of low ROIs or underwater in terms of lease versus what you're actually getting on these things? as revenues decline in a bad economy here, do you continuously cull these things?

Kevin Reilly

Well, you've got to be careful because you've got a one-year, two-year situation. That's your signal. You don't want to dismantle your business. But I thought if we answer your question, we probably have 15% of our structures that are underwater. To be more specific about Sean's plans, when he said he could get $6 million out of the lease portfolio, that's what he is attacking. He is attacking that 15%. And we measure the productivity of every unit, so it's not hard for us to know how they're doing.

Harry DeMott - King Street Capital Management

Last question for Keith. You talked about buying back some of your bonds in the market. How much availability either with cash and/or availability on bank lines do you have to do that right now? If you have it, obviously, you have to weigh that against what you might need it for otherwise, but as you guys have demonstrated for a lot of years, you're pretty good cash generators.

Keith Istre

Actually in the press release on that supplemental indebtedness schedule, there's a footnote. It shows that we have approximately $219 million available on our $400 million revolving credit line today. So we do have $219 million available that we can draw on to operate the company, buyback bonds, whatever.

We'd rather buy the bonds back with free cash flow that we generate on a monthly basis, daily, weekly, whatever, if we do that. But that being said, we are restricted under our bank agreement to only buying back $100 million worth of those notes. So in order to buyback more, we would have to get an amendment.

Harry DeMott - King Street Capital Management

Right. And how much have you bought back so far, so how much is left?

Keith Istre

We haven't bought any back yet.

Harry DeMott - King Street Capital Management

Okay. Got it. Okay. Thank you very much, guys.

Operator

Thank you. Our last question will come from Kit Spring, Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

I think one other opportunity to deliver in the event that things are as bad as some of these analysts worry about would be to do asset sales. Any venture to guess if that's available as an opportunity? Would there be potential buyers or would the multiples just be too depressed? Thanks.

Keith Istre

No asset sales and no pipes coming into this company.

Kit Spring - Stifel Nicolaus

Okay. Thank you.

Operator

Thank you. At this time, I would like to turn the conference back over to Kevin.

Kevin Reilly

Just want to close by thanking all our shareholders and friends for tuning in, and we look forward to next quarter's call. Thank you, Chantal.

Operator

Thank you, speakers. Ladies and gentlemen, this call has concluded.

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