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Lamar Advertising (NASDAQ:LAMR)

Q3 2011 Earnings Call

November 03, 2011 11:00 am ET

Executives

Kevin P. Reilly - Chairman, President, Chairman of Lamar Media Corporation, Chief Executive Officer of Lamar Media Corporation and President of Lamar Media Corporation

Sean E. Reilly - Chief Executive Officer

Keith A. Istre - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Jaime Morris - UBS Investment Bank, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Nadia Lovell - JP Morgan Chase & Co, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

William G. Bird - Lazard Capital Markets LLC, Research Division

James Dix - Wedbush Securities Inc., Research Division

Operator

Excuse me, everyone, we now have Kevin Reilly, Sean Reilly and Keith Istre in conference. [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 to those documents.

Lamar's third quarter 2011 earnings release, which contains the information required by Regulation G, was furnished to the SEC on a Form 8-K this morning and is available on Lamar's website, lamar.com. I would now like to turn the conference over to Kevin Reilly. Mr. Riley, you may begin.

Kevin P. Reilly

Alabama fan all of us here in Baton Rouge, thank you for helping us kick off this call. I want to welcome all of our analysts and friends on this call. One of our goals today is to shed some light on the cannibalization issue, i.e. digital on our analog business. And also to shed a little light on the secular versus cyclical, as it relates to our analog business. And in a few minutes, Sean will give you some data points that we hope will help the marketplace get their arms around those particular issues.

With that, I'd like to go ahead and start with Keith Istre to walk us through the quarter.

Keith A. Istre

Yes, just very briefly. Not much to say this morning. I wanted to just highlight the paragraph in the press release concerning the extraordinary expenses for the legal claims and the fees associated with it. On the last call, I mentioned to everybody that our third quarter expenses should come in slightly under our second quarter expenses because we were going to be lapping some of the employee benefit programs that we had put in place beginning in the third quarter of last year. And I just wanted to draw a quick reconciliation.

Last quarter, the second quarter of this year, our direct and G&A expenses were up 2%. This quarter, without the extraordinary settlement of the legal claims, the $1.2 million indirect in G&A we would be up 1.7% in pro forma expense growth. So basically, where we thought we would come in. Our consolidated expenses with -- including corporate overhead, without those claims and the fees associated would be 2% up for the quarter versus 2.1% up for the second quarter of this year. So we're going into the fourth quarter, we feel good about our expense growth for the year and we see no unusual items on the radar as of this time, for our fourth quarter.

Also, if you look at the impact that those expenses had on our EBITDA, if you took those -- if you added those expenses back to our reported EBITDA for the quarter, we would have retained 65% of our revenue growth as our increase in EBITDA. So we're pleased with those numbers. With that, I'll turn it over to Sean.

Sean E. Reilly

Thank you, Keith. As Keith mentioned, expenses are in great shape, excluding those extraordinary legal expenses we're below 2% pro forma, so I feel good about that. One of those settlements by the way, was the permitting issue in New York City, and I'm happy to report we reached a great settlement with the city and the settlement's good for the city, it's good for the Lamar, it's good for the industry. And it leaves Lamar as -- with the largest number of fully permitted traditionally faces in the 5 boroughs and so, we can feel good about the way that played out.

Getting onto some of the traditional numbers that we give you guys. We ended up the year -- I'm sorry we have at this moment in time, 1,378 digitals in the air. If you include the 40 that we have on order, we should finish up the year with roughly 250 new additional digitals this year. And the third quarter was a good quarter for us to look at and analyze in terms of whether this digital growth has come at the expense of our traditional platform. If you look at all of Q3, digital revenue was up 18%, and the rest of the platform was up 1.6%. So the rest of the platform continues to grow and that's in the face of what we believe is about 1%, U.S., domestic ad spend growth. Particularly if you look at September, I hate to just look at one month, but because we were adding digitals during the course of the quarter, it might instructive. Our digital book for business for September was up 26%. The rest of the platform was up 3.1%. Again, pacing ahead of U.S. domestic ad spend and ahead of GDP.

So current trends hold, we will have invested in digital this year, we will have grown that platform, it would have performed, quite frankly, better than we had expected. And the whole digital platform will be up high teens as we look back on 2011. And it's my belief that at the rest of our platform will outperform U.S. domestic ad spend. So I think with confidence, we can say 2 things. We are growing our digital business, not wholly at the expense of our traditional business, number one. And number two, the dollars we're spending on digital are getting us a great return. All of that said, you can count on us to be aggressive going forward in our digital deployment.

A few stats on rate and occupancy. Q3 2011 poster occupancy 72%, that compares to Q3 of last year of 70%, an increase of 2%. Same increase on the bulletin side, Q3 '11, 77%, Q3 '10, 75%. On rate, Q3 '11 for posters average rate of $440 per panel, that's an increase of 2% over $430 for Q3 of '10. For bulletins, rate was essentially flat Q3 '11, $1,116 average rate per panel, versus Q3 '10 of $1,118.

National versus local sales mix, essentially the same. 66% local, 24% national. Year-to-date, that number would be 77% local, 23% national. For the quarter, and I think this is another good data point for us going forward, for the quarter, local in Q3 was up 4%, national Q3 was up 3.2%.

Last call, we give you a stat that we haven't given you before, because we were trying to measure the impact that the recession of 2009 had on our overall customer base. And I think we've got a good trend here as well. In 2008, we had 46,000 customers, that's our whole book of business throughout the year. In the depths of the recession, that number fell to 40,700 customers, and as we climb out of the recession, our customer count as of today is 41,152. So I'm encouraged by that trend because those customers that we lost tended to be smaller businesses on Main Street and seeing them come back is a good thing.

In terms of verticals, a couple of note. Restaurants are up 1% and our book of business to 14%. As is -- amusements and entertainment is now 7% of our book, and health care is now 9% of our book. So those categories remain very strong. Auto in Q3, as you heard from others, leveled off to slightly down. It remains at 6% of our book but in the aggregate, through the quarter, it was basically flat. And then of course, on real estate and hotel motel, both were down, give or take 10%.

A couple of good data points are, number one because our aggregate book of business was up, our guys in the field are doing a good job of replacing that business. And number 2, it appears that the rate of erosion is declining, both of those categories were pacing down in the high teens and now it's around 10%.

So with that, Jenilee, I'm happy to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I have 2, 1 for Sean and 1 for Keith. Sean, the third quarter was up nicely in revenue versus your guidance. So, did something happen? And we're getting questions on what's the beat with in Q3 and then the sequential decline in Q4. So if you can touch on that, that would be great.

Sean E. Reilly

Well, I'm not convinced we're going to have a sequential decline in Q4, but we did guide, up 2.5%. It seemed to us that the tone of business turned towards the middle to latter part of the third and it was across the board. I don't think that you could point to a single category being a surprise. Our digital platform did extremely well in September. And again, continues to meet or exceed our expectations. Perhaps it's because the digital buy has a shorter cycle and the crystal ball isn't quite as accurate on a shorter cycle buy, but the news is good on that front.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

So did the upside surprise come from digital or it was across the whole platform?

Sean E. Reilly

I think it was across the whole platform because all the platform -- the rest of our platform was up 3.1% -- was up, but I think it was mostly September and digital came in real strong.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. And then just interpreting from your comments, is it safe to assume that pacing’s right now are ahead of where you're guiding?

Sean E. Reilly

I don't know. Look, we try to provide the best guidance we can.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

All right. Then I'll ask one for Keith. Any comment on expense growth for Q4 or how we should think about 2012.

Keith A. Istre

I think it will be similar to Q3. As far as 2012 is that what you asked, Marci?

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Yes.

Keith A. Istre

We haven't started our budget process yesterday, but Sean and I did have a call with all the regional managers and I think what the company will be looking for is 2% to 2.5%, something in that range, next year.

Operator

Our next question will comes from Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

I wanted to ask about the customer count information, Sean, I think that you gave, which I thought was really interesting. I think that's peak to trough, about a 13% decline in customers and you guys are obviously marching your way back up now. Any particular, either regions -- I guess we could probably guess -- or verticals that came out of that count in the downturn? Probably also could also guess. And do you have a sense -- and this might be an impossible answer to get, but whether those customers or those businesses have disappeared because of the economy or they just are not advertising with you anymore?

Sean E. Reilly

Well when we talked about this last time, the anomaly in our book in the second quarter was the fact that our top 20 categories, either larger advertisers with larger ad budgets, were actually up, and up north of 5% in the second quarter. And it tended, to us, to look like it was those customers from -- in categories 20 to 40, which tend to be smaller customers with smaller ad budgets that were struggling in our book. And as we dug, we found that, that erosion from 46,000 customers to 40,700 just goes to show you the effect that, that 2009 recession had on Main Street U.S.A. Do we know if they're in business? The way -- I mean we don't know if they're in business or out of business, but what we do have a sense of is that they're clawing their way out of it and local was up 4% in Q3. That's a good sign.

Benjamin Swinburne - Morgan Stanley, Research Division

Just to follow-up, last quarter you guys I think spoke about, I think national declined last quarter, if my recollection is correct, and you called out Telco as a particular vertical there. I know local is -- drives the ship here, but national picked back up again. Does that put up with what's happening in digital and the acceleration is that more of a national buy, and any comment on sort of the national piece of the story, which looks like it turned again. It's sort of bouncing -- every quarter it’s sort of moving at a different direction here.

Sean E. Reilly

Well, historically, I'm looking back 30 years. Historically, local has tended to be a little more stable, have a less beta over time and national has traditionally bounced around a little more. That hasn't been that case coming out of this recession, actually. National showed a little more steadiness and with local, that was disappointing. I think digital has a little something to do with it. We're clearly building a medium that is attractive when you take our platform and combine it with CBS and Clears, you can really execute a digital buy that gives you lots of flexibility and huge numbers of eyeballs quickly. Just as another data point, our digital book of business on the national front is up 20% year-to-date. So clearly, between what Clear and CBS are doing, and what Lamar is doing, and I think you hear this from the other guys, we're building something that is attractive to national advertisers.

Benjamin Swinburne - Morgan Stanley, Research Division

Do you guys think you're gaining share heading into the fourth quarter. I know that's a tough question because you're dominant in your markets, but the outlook you guys and your body language, your tone which sounds very positive is kind of in contrast what we've from other -- from your peers in the outdoor business but particularly across local, heading into the fourth quarter?

Sean E. Reilly

Well, these share questions can get complicated so I'll try to simplify it and I think -- hopefully simplified some of the questions about secular shift and digital cannibalization, by just looking at the aggregate growth rate. We are in the world of this year probably 1%, U.S. domestic ad spend growth, and so what we're focused on is, can we aggressively grow our digital platform and at the same time, have our traditional analog platform exceed the growth in U.S. domestic ad spend, and if we do that, then we know that this investment we're making in digital is a good one.

Operator

Our next question comes from Nadia Lovell with JPMorgan.

Nadia Lovell - JP Morgan Chase & Co, Research Division

I just have a couple. Local slightly outpaced national in Q3. Is that still the case so far in Q4? How has it turned in?

Sean E. Reilly

We don't like to talk to that level of specificity going forward. Mainly because at little bits of movement in our national bookings can skew it, and it's a little difficult to read, if I was going to say that one was going to grow up and the other's going to grow why, the relative strength seems to be in both in terms of how the fourth is looking.

Nadia Lovell - JP Morgan Chase & Co, Research Division

Okay, that's helpful. And now coming out of the recession, we saw contract wins decline. How are those looking now and then is there any visibility into next year?

Sean E. Reilly

It's too early to be thinking about '12 but the short versus long nature of our books seems to have stabilized. The number of contracts that are 12-month duration and the number of contracts that are 1-month duration and all of the gradations in between, we've seen a stabilization there over the last couple of years. Our books used to be a lot longer, and it has gotten shorter in duration, but then it sort of stabilized, about 45% of our contracts are of 12-month duration now.

Nadia Lovell - JP Morgan Chase & Co, Research Division

Okay, that's helpful. And then I was hoping that you can provide some color on the tax expense in the quarter in Q3? And what could look like in Q4?

Keith A. Istre

In Q3, it's really skewed. We had a lot of nondeductible, non-cash comp expenses that we address in the 10-Q, which we file today and it more -- and it explains it in a little more detail. That happens from time to time, it's the timing difference. I'm not sure about Q4 at this point in time. I don't have the projections, but if we do have another disparity like we had in the third quarter, that will be the reason why.

Operator

Our next question comes from James Dix from Wedbush.

James Dix - Wedbush Securities Inc., Research Division

I guess 2 questions. If you look at your -- the digital numbers that you gave in terms of the growth when you laid out that cannibalization. Were those all reported growth figures or were those same display growth figures. Just looking at the same group of boards this year versus the last? And if it wasn't, do you have any of those same display figures?

Sean E. Reilly

No, James. Yes, the growth rates I gave you on digital included the increased capacity. And why we find that, the number to look when you're thinking about cannibalization is, during the course of the quarter and during the course of this year, we added a large number of digital faces and added capacity. So the question is, did we just simply move customers around, did it come at the expense of our traditional platforms? And -- I think the data is pointing to a pretty strong case that digital is enhancing the overall platform, and not just moving customers around. If you went same board, and I don't have the number in front of me, but the same board growth in digital would be in the 5% or 6% range. So if you took September, you've got 26% increase in the performance of the digital platform, about 20 points of that would be extra capacity added through the year and then about 6 points would be same-board year-over-year growth.

James Dix - Wedbush Securities Inc., Research Division

Okay. That's very helpful. And do you see much trend in that 5% to 6% growth throughout the year on the digital?

Sean E. Reilly

Well, throughout this year, it's been a little frustrating. Looking back to January, our overall book of business was pacing up 6.5% and we watched it kind of erode as GDP, kind of fell hard on us. At that moment in time in January, virtually all of our digital growth was same board because we hadn't erected any during the course of the year. And our digital book was pacing up about 15% at that stage of the game. So, yes, there's been a little bit of erosion in same board, but you also have had a disappointing year from a GDP and ad spend point of view.

James Dix - Wedbush Securities Inc., Research Division

Okay. And is that now stabilized and -- or turned around do you think, moved the other direction?

Sean E. Reilly

Yes. I mean, we kind of solved it -- the second quarter was when the wheels came off a little bit, and that's -- that was a disappointing quarter for us.

James Dix - Wedbush Securities Inc., Research Division

Okay. And then, on those, the customer analysis you did, I found that was very interesting. Do you have any sense of the customers that you've kept? Like, where is their spending now versus where it was before the recession? How much have they come back in their budgets with you versus their prior peak?

Sean E. Reilly

Well I suspect that some of those customers are no longer in business, so I'm not so sure that they moved ad spend. My sense is that, that was a very tough time in Main Street U.S.A. and some folks didn't make it through. Again because it was clearly those customers that make up the bottom 20 of our categories, which again, tend to be smaller folks, with smaller ad budgets. I think the good news is, as we progress through this year, to the extent we still have erosion in a couple of categories, real estate and hotel/motel, our folks are finding other customers out there to replace them. And that's also -- is borne out in our occupancies statistics which we do a pretty good job of tracking over a long period of time, and our occupancy stats are now beginning to trend in a more traditional way, looking back 20, 30 years.

James Dix - Wedbush Securities Inc., Research Division

Okay. So, I guess one of your points is that, that 41,000 or so current customers of -- versus the 46,000, there's been some change over within that mix? So it's not.

Keith A. Istre

It wasn't so much 46,000 customers that you counted and then off that list, you've got 41,000. There's been some change within mix too.

Sean E. Reilly

Oh, absolutely. Oh yes. In that universe of customers, customers come and go. They use us when they need us and have a specific goal, some use us all the time, some come in and out.

James Dix - Wedbush Securities Inc., Research Division

Okay. And then just 1 last 1. On the incremental margin that you've mentioned, Keith, is that -- that 65% do you think that's a good way of looking at the incremental margins on your revenue or do you think that potentially can go up a little bit if you start getting a bit more revenue growth?

Keith A. Istre

I mean, I guess that's possible, I mean that was on 3.2% growth and the 2% expense growth, obviously if we keep our expenses at 2% and the revenue continues to, were to exceed 3.2%, then obviously it's going to go straight to the bottom line.

James Dix - Wedbush Securities Inc., Research Division

Okay. So you think incremental margins are probably at least that high, and maybe a little higher typically?

Keith A. Istre

They've been in that range in normal times in the past.

Operator

Our next question comes from Jason Bazinet with Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

I just had a question, I think the market is sort of struggling as we sort of bounce along the bottom trying to figure whether, we're in the early signs of the recovery or if in fact we're going to double dip. And I guess my question is, you guys did such a phenomenal job cutting costs in the last downturn. If the worst-case scenario unfolds, is there just -- are there opportunities to sort of rationalize your expense structure? To the same level you did last time or was that -- should we view that more as -- there were some fat that built up in the system over time and it was easier to do last quarter other than this time?

Sean E. Reilly

Sure. If you look at what we did last time, and none of us want to go through that again. Nobody in any industry wants to go through that again, we essentially took the costs out in 2 places. We aggressively attacked our real estate portfolio and did quite frankly a great job in reigning in that expense, which is our largest fixed expense. On the people side, we did a range of things on the benefits and on layoffs. We went from 3,600 employees to 3,000. And we pretty much held steady there. Part of that ability was a change in the substrate that allowed us to be more efficient on the production side. So we were fortunate in that when the industry moved away from paper and glue and went to hanging polyethylene posters, it significantly cut down on our back office production expenses. So that was the story then. Looking out to next year, a couple of points: If the world really collapsed again, I don't know that we can do a whole lot of the people side, I think we're right sized, I think we're in good shape there, and I don't think that there's a -- nor will I want to go there in terms of taking out some sort of recessionary 2012 on our people. We could attack the lease portfolio again, there certainly is room there. We've demonstrated we can do it, we know how to do it, and we can turn on a dime if we have to. So that's where we would go look forward if we had the worst-case -- for next year. It's way too early to talk about next year, I can say one thing that our book is not showing an ad recession. As we look forward, we're not seeing evidence that there's a recession looming on the horizon.

Operator

Our next question comes from Jamie Morris with UBS.

Jaime Morris - UBS Investment Bank, Research Division

I was just wondering if you could remind us what your analog book of business did in 1Q and 2Q.

Sean E. Reilly

In 2Q, it was pretty disappointing. It was 0.70%? What was it? Jamie, I don't have that in front of me.

Keith A. Istre

Let's see, and what quarter is this now?

Sean E. Reilly

1 and 2.

Keith A. Istre

All right. I've got it. Analog for Q1 on the poster side was up 1.4%; our bulletins were up 3.2%. In Q2, analog posters were down 1.1% and our static bulletins were up 1.1%.

Jaime Morris - UBS Investment Bank, Research Division

Okay. And then on the digital side on the same board basis, I think that in 2Q was up about 8%? Is that correct?

Keith A. Istre

For the same store?

Jaime Morris - UBS Investment Bank, Research Division

Yes, same board.

Sean E. Reilly

I don't have that in front of me.

Keith A. Istre

They've been running.

Sean E. Reilly

The same board started off midteens and sort of went into the singles and then settled in at 5% or 6%.

Keith A. Istre

Well in -- I mean, it's been fairly consistent. In Q2 the digital posters on the same board were up 6.8%, and the digital bulletins in Q2 were up 3.5%.

Jaime Morris - UBS Investment Bank, Research Division

And can you talk -- the change on the same board or the slowing down, is that on the pricing side or is that occupancy or is it a little bit of both?

Sean E. Reilly

You've got a different model there right? You've got 6-second slots, and so -- we don't tend to measure it on at the same rate in occupancy matrix that we measure our traditional. What we do is we just track the total billing associated with the board, keeping in mind that yield management is a local function in Lamar land and so you've got a lot of leeway and pricing that we give our local management. And so, we find its most helpful just to look at it on the same-board. Monthly billing basis is probably the best way to look at it.

Jaime Morris - UBS Investment Bank, Research Division

Okay. That makes sense. And 1 more quick 1. On your last call, I think you talked about that it had been very difficult to push pricing. And I realize that on the bulletin side, pricing was flat again in this quarter. But has that conversation with advertisers changed at all?

Sean E. Reilly

I think we're in a -- I'm not talking about Lamar land here, I'm just talking about what -- where we are in the U.S. domestic economy. We seem to be in a 2% world. And it's -- that's the best world that it's very difficult to have aggressive pricing conversations there. So I look for our outperformance next year. I'm looking forward to be on the occupancy side, not the rate side.

Operator

Our last question will come from William Bird with Lazard.

William G. Bird - Lazard Capital Markets LLC, Research Division

I was wondering if you just had a preliminary view on the pace of digital expansion in '12?

Sean E. Reilly

We don't, we haven't penciled out a hard number yet, but I'm comfortable with the description of aggressive. We're going to put out as many as we can.

William G. Bird - Lazard Capital Markets LLC, Research Division

And can you talk a little bit just about digital pricing. I was just curious if there's much of a difference in pricing between more seasoned boards and newer boards?

Sean E. Reilly

No. I mean, you got – that’s a market-by-market analysis. And we have digitals in markets as small as Cookeville, Tennessee and as large as Las Vegas and Chicago. So it's the local managers are, like I said, are in charge of yield management. When they put up a new board, they're probably plugging it into to an existing pricing structure. I can't say that when we look at it in the aggregate, the additional capacity performed as we expected and we modeled it market-by-market based on what their current experience was. So there's a couple of takeaways. Number one, we could add the capacity and still perform on our digital footprint as expected and we could and capacity and not totally at the expense of our traditional platforms. So that -- I mean, those are the 2 takeaways that caused me to use that word, we're going to be aggressive next year.

All right, well let me thank everybody for listening. We look forward to closing out 2011 real strong and reporting to you in Q1 of 2012.

Operator

Thank you for joining us. You may now disconnect your line and enjoy your day.

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