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Lamar Advertising Company (NASDAQ:LAMR)

Q4 2011 Earnings Call

February 22, 2012 10:00 a.m. ET

Executives

Kevin Reilly - President and Chairman of the Board

Sean Reilly - Chief Executive Officer

Keith Istre -Treasurer and Chief Financial Officer

Analysts

Marci Ryvicker - Wells Fargo Securities

James Marsh - Piper Jaffray

Benjamin Swinburne - Morgan Stanley

James Dix - Wedbush Securities

Jaime Morris - UBS

Bishop Sheen - Wells Fargo

Operator

Excuse me, everyone. We now have Mr. Kevin Reilly, Mr. Sean Reilly, and Mr. 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 your questions.

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 and 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 fourth quarter and year-end 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, www.lamar.com. I would now like to turn the conference over to Mr. Kevin Reilly. Mr. Reilly, please begin sir.

Kevin Reilly

Thank you, David. I want to welcome all of our friends and guests to our quarterly call. As is our customer, Keith will walk through the numbers and then Sean will try to give you some color. As we -- I think about the next couple of years, we are going to continue to push our maturities out and use our free cash flow to reduce debt and expand our digital platform.

With that I would like to turn the call over to Keith Istre to give you some color regarding Q4.

Keith Istre

All right, good morning, everybody. For the fourth quarter of ’11 we saw that the revenue came in slightly higher than our guidance at 4%. No one category contributed to that. Sean will get into more detail later, but it was a good quarter across the board. On our consolidated expenses on the last call, we talked about expenses running like they have all year in approximately the 2% range, but the consolidated expenses as you saw came in at 0.7 tenths of a percent. The main contributor to that downward or that decreased amount, was primary the bonuses that were paid to the officers throughout the corporation. In 2011, the officer core took less in bonus payments then they did in 2010 based on performance grids, and so in the fourth quarter we accrued approximately $2 million less for officer bonuses then we did last year. So that’s primarily what contributed to that.

EBITDA. You saw our margins were 43.7% for the quarter versus 41.8% last year. So we picked up a couple of points. To recap, the full year revenue growth on a pro forma basis was 3.3%, our consolidated expense growth was 2.4%, which is about what we guided to last year at this time. EBITDA was up 4.6% for the year and EBITDA margins were 43% for 2011 versus 42.4% last year.

On the guidance for 2012 Q1, we gave you a number for revenue up approximately 3% on a pro forma basis. For the expenses for 2012 we will tell you that as of right now our projections for the year are up approximately 3%, slightly higher than they were in 2011. But the expenses for the first quarter will be higher than what they will average for the year, in fact we are expecting pro forma expense growth in Q1 of ’12 of approximately 5%. And a part of that is real and part of it is timing.

On a timing basis, there is one extra hourly pay period in the first quarter of ’12 than there was in the first quarter of ’11. That’s just a way it falls sometimes. That accounts for about $1.2 million in additional wages in Q1 over last year’s Q1. We gave out raises effective March 1 last year to all the employees except the officers to there is a couple of months worth of raises in the first quarter of this year that were not in the first quarter of last year. And on a real basis, minimum annual guarantees and escalators on our transit contracts are expected to jump $1 million in the first quarter of this year. They are expected to go down, they will not be that high in the second and third quarter going forward.

Just to touch on a balance sheet issues that we completed at the end of January. You saw in the press release, we issued some new subordinated bonds of $500 million and 5 7/8%, 10 years interest only. We took out a new $100 million term loan on our bank credit agreement and we called $700 million of our existing 6 5/8% 2015 bonds. We got approximately 600 million of those tendered. We will settle this coming Monday, February 27. If you do the math you will see we came up $100 million, we tendered for seven, we got six. We were planning on borrowing and extra $100 million off of our revolver to cover the last 100.

So once we close the $600 million out on Monday, we will decide later down the road if we will call the additional $100 million that we originally tendered for. All in, if you are adjusting your models due to the refinancing, the company will save approximately $10 million in interest in 2012 by taking out those bonds with cheaper money. With that, Sean?

Sean Reilly

Thank you. The great story in Q4, as it has been all year for 2011 and continue we think with good momentum in the 2011, but the great story is digital. And I will go over some stats and you will hear how well that platform is performing.

We ended the year with 1410 units in the air. As of this call, we have 1433 digital units in the air. 757 of those are bulletins. 676 of those are posters. For the quarter, digital book of business for Q4 2011 was up 23%. Now that of course includes new units going on the air, but on a same board basis, digital business was up 6.4%. If you take a look at the full year 2011, digital book of business was up 17%, and of course that includes units going up during the course of the year. But importantly, on a same board basis, digital was up 5.6%. So it continues to -- on a same board basis continues to outperform not only our traditional platform but handily beating growth in U.S. ad spend.

So that gives us a great deal of confident as we go into this year. Before I get the question on how many we are going to put up in 2012, I will just go ahead and answer it with this. We are going to put up as many as we can. So I am not going post a hard number, but just know that we are going to be very aggressive, put them as fast as we can.

On some rate and occupancy stats that don’t include digital. Posters occupancy in Q4 ’11, 66%, Q4 ’10, 66%. Bulletins Q4 ’11, 76%, Q4 ’10, 74%. On the rate, Q4 ’11, for posters $426 average rate, Q4 ’10 $427, average rate for panels. So we had a dollar decrease on average rate for panel in posters. Bulletins, the average rate Q4 ’11, $1119, Q4 ’10, 1117. So we still continue to be an environment where it’s hard to push rate. We are getting some occupancy gains as we go through the year. If you look at our total billing on the traditional platform, essentially posters were flat and bulletins were up 1.5%. So again, the digital story is driving our growth.

On customers, as Keith mentioned, there wasn’t any one customer that drove the performance in Q4. But we did have some good growth in our top customer categories. Restaurants for the quarter were up 8.32%. Retail was up 9.8%. Hospitals and healthcare was up 13.2%. And mostly due to our digital platform, amusement, entertainment, sports, this would be the movie category, was up 12.5%. Particularly in the fourth quarter we got some great movie buys on our -- some great movie national buyers on our digital platform. So that performed extremely well.

Top ten advertisers for 2011. McDonalds, Cracker Barrel, Verizon, Diageo, MetroPCS, Coors, U.S. Cellular, Burger King, AT&T. Again categories of business, restaurants was 13% of book, retail 10%, hospital 9% of our book, service 8%, amusement, entertainment and sports, 7%, that picked up 1% in 2011. Really the only category, I would say, that was slightly disappointing was telecom. In the national book, the wireless book of business was down for 2011. Food and beverage, extremely strong.

So with that background color, we will we happy to answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities

Couple of questions. Keith, your expense guidance for 2012 is higher than 2011. So could we infer from this that you are anticipating that revenue for 2012 will be higher than revenue was in 2011 in term of a growth rate. And then the second question relates to occupancy. Sean, where are you versus normalized occupancy and will you reach normalized occupancy this year?

Keith Istre

Well, our guidance for revenue is up 3% for the quarter. We are not giving out -- we don’t give out guidance for the full year. But I think there comes a time when we have to be realistic and we are handing out 3% raises. You know for the past couple of years we have been handing out 3% raises across the board to our employees. The takedown program that we implemented in 9/10 and partially continued in ’11, we basically weeded out a lot of those units. Inflation is a couple of percentage points. So 3%, maybe the new norm. But even at that, it’s still better than what we are used to on prior to the downturn, which was on a pro forma basis, 4% to 5%.

So we will just play it by the ear. I mean we are doing everything we can to keep expenses under control. No nickels are walking out of here on unaccounted for.

Marci Ryvicker - Wells Fargo Securities

Okay. Is that 3% fixed or does that include variable as well?

Keith Istre

Yes, that’s correct. That’s our projections for the year. That’s consolidated all the across.

Marci Ryvicker - Wells Fargo Securities

Okay.

Sean Reilly

Yeah, Marci, on the occupancy question. You know I think we have got a few percent in both categories to get to normalized. And I think, knock on wood, maybe that’s a this year event. If we get just a little bit of tailwind in the local economy, get a little bit of tailwind in U.S. ad spend, I think you will see us normalize as we go through the year.

Operator

Our next question comes from James Marsh with Piper Jaffray.

James Marsh - Piper Jaffray

Quick questions. First, I just want to talk a little bit about the trends in miles driven. There was a recent report out from the department of transportation and, I guess since 2007 we have been just trending down slightly. And it seems like for the last 50 years that continually went up. And I am just trying to get a sense, what do you guys think is driving that? Is it the economic cycle, is it demographics, is it a secular issue, more people telecommuting or something like that. But just, obviously, miles driven is important because it’s effectively ratings for you guys. I just want to get a sense for what you think is driving it and whether it’s permanent or cyclical?

Sean Reilly

Well, what we focus on is how our customers view using our media. And if you look at some of the recent data on that, some research reports that have come out of late, they basically poll large, and medium and small advertisers and say how do you feel about using outdoor. Do you think you are going to use it more or less? And in virtually every category in polling that was done for 2011, advertisers say they continue to see us as effective. They like our low cost per thousand. Of course the only category that didn’t indicate that they were going to use outdoor more was the hotel/motel category. And of course we talked about that on previous calls. So on the miles driven, I think we all sit in traffic, and as long as that’s happening we are going to be fine.

James Marsh - Piper Jaffray

Okay. Great. Thank you. And then just a quick question on the cost of digital boards these days. What’s it costing you guys on average to put up a board? Maybe you could give us a sense for how that compared to prior years. My understanding was those costs were coming down fairly dramatically.

Sean Reilly

The cost curve dropped very dramatically from when we first put up our first digital units, five or six years ago. Back then a 14X48 bulletin cost about $0. 5 million. Today, we can put up a 14X48 bulletin for about $180,000. And we can put up a poster for under $100,000. So that’s come down dramatically. We don’t anticipate that kind of dramatic cost curve in the future because our vendors have wrung a lot of the cost out. So I would expect that it’s going to stay around there until we have some sort of technological breakthrough.

James Marsh - Piper Jaffray

Okay. And just one last follow-up question. It seems that more government agencies and authorities, and municipalities seem to be trying to get in the outdoor business. And obviously they’ve got, I guess, easier zoning issues to deal with. They are hard up for cash. They don’t want to raise taxes. Are you guys working together with some of these agencies when they want to put up a board or do you kind of view them as new competition.

Sean Reilly

Well, you know every municipality, every jurisdiction we work with is basically different. And we have to be sensitive to what local landscape is. But to answer your question, we work with them to put up units on their property. We work with them to take down non-performing traditional units and put up digital on our landlord’s property. Again, every negotiation is different and every jurisdiction we work with has their own needs. But I wouldn’t say -- I wouldn’t call that a trend, of units going up on public property.

Operator

Our next question comes from Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

I was wondering if you guys could give us the national versus local performance in the fourth quarter. Any early read on sort of Q1 in ’12 on those two.

Sean Reilly

Sure. For the quarter, local was up about 3%, and national was up about 7%. And if you go for that full year 2011, local was up 3.1%, national was up 4.4%. And we don’t like to try to predict what's going to happen in the future in those two category. We have got our guidance out there and we will just kind of leave it that.

Benjamin Swinburne - Morgan Stanley

Okay. And the national growth, which obviously was very healthy came despite headwinds in the wireless business. Is that a fairly significant category in national, I know you guys called that out before.

Sean Reilly

Yeah, wireless -- you know I have to say that wireless was disappointing last year, for the full year. We are hopeful that we will see a little stronger wireless business this year. Interestingly, 50% of the growth in national business came from our digital platform. And so we are clearly building something that is attractive to national buyers. And we had some truly remarkable buys in December from the movie category. They would call us up, if the movie was hot they could execute a buy in a matter of two hours and had it out there. So they are really learning to make an execute very rapid buyers on our digital platform. That’s good news going forward.

Benjamin Swinburne - Morgan Stanley

Why do you think we are seeing -- or you are seeing that, I certainly wouldn’t describe it as a sudden improvement, but sort of more time sensitive national money coming your way. Do you think it’s a change at the agency level? Are there more, sort of out of home folks or TV folks at the agency level, focused on digital boards? And is the scale getting to a point we are starting to just to attract bigger advertisers because you have got enough out there and maybe the whole industry does. I don’t know if you have any comments on this as well.

Sean Reilly

I think you are right on the scale. I mean if you can make two or three phone calls and buy markets one through 150, the thing that we have noticed is they are getting better at it. They understand how to use it. And they are also buying deeper, so that’s good for Lamar. They are not just buying LA, Chicago, they have bought stuff down markets 150, 175, that’s good for us.

Benjamin Swinburne - Morgan Stanley

Great. And my last question is just, I know you don’t want to give a digital board addition number in ’12 and I understand that. You made a comment about the cost per board more or less being flattish in ’12 versus ’11, I think that was your implication. But any way we can think about your capital spending expectations this year or maybe whether you expect to grow your free cash flow? And also are there any constraints to adding boards from the supplier perspective for you guys.

Sean Reilly

No, the suppliers are in great shape. They have really done a great job of meeting the industry needs through the good times and the bad times. And so as we ramp they are ready. Without offering too much detail, I think you can expect aggregate CapEx for ’12 to look much like aggregate CapEx for ’11.

Operator

Our next question comes from James Dix with Wedbush.

James Dix - Wedbush Securities

Just a couple of things. Did you see in fourth quarter any particular differences in regional growth that you think are worth calling out. And then, just to follow-up, Sean, on the strength in national for digital. Do you have the number on what the local versus national ad mix is for digital for the quarter, or for the year. And I have just two follow-ups.

Sean Reilly

Well, on the regional story, it’s pretty much the same thing you have heard. I think we are seeing signs of life in the Southeast. If I had to say it was something a little bit stronger than what we have spoken to in the past, that would be it. It’s still a struggle out in Las Vegas, in Southern California. As we all know until we straighten out what's happening in real estate out there it’s going to be tough slog.

Let me see if I have the local national breakdown for Q4. No, I don’t have it. It’s expressed as percentage, but do you have it Keith?

Keith Istre

I’ve got it for the year. As far as the digital, James that’s what you want?

James Dix - Wedbush Securities

Yeah, that’s fine. The year is fine.

Keith Istre

Well, let me give it. I don’t have it by percentage but I can give it to you. The national for the year was approximately $30 million. And the local was approximately $109 million. So I don’t know what, 70:30, something like that. 70:20 -- 68, whatever. 72:28, something like that.

James Dix - Wedbush Securities

Okay. Great. And then just in terms of the overall revenue growth. Just following up on something you said Sean. Until you hit kind of normalized occupancies, would you continue to expect kind of rate growth to be, kind of in the low single digit range. Like not changing too much from what you have seen. And then just one question on margins. You know as you look back to what your margins were before the downturn and then what you think they can be on a similar revenue base going forward? I mean given the takedowns you have done and some of the other things you have done on cost, do you think we should be looking for EBITDA margins to be a few points better than what you had, once you get back to your prior peak or is that maybe too aggressive? Just any thoughts you had on how your cost base has changed over the cycle?

Sean Reilly

Sure. On the occupancy side, like I said, I think we have a few percent in both posters and bulletins to get there. And quite frankly until we get our occupancy up to our traditional levels, in the end it’s going to be hard to drive rate. So I am not expecting heroic data on the rate side this year. But I hope to get more than just 2% improvement in occupancy. So that’s what we should be looking for and of course to get that, like I said, we need a little bit of a tailwind on local economies. That would be helpful.

So as we get back to the kind of margins we did in ’06 and ’07, you probably need to see top line growth in the 4% to 6% range. Again, that’s going to take something a little bit stronger in U.S. domestic ad spend then what we see now. Clearly the last few years. Most people are not projecting that U.S. ad spend at political is going to hit that 4%, 5% up range. But let's see how the year unfolds.

Operator

Our next question comes from Jaime Morris with UBS.

Jaime Morris - UBS

Just a quick one on the -- you put up 4% growth in 4Q but you are guiding to 3% in 1Q. And I wonder if you could just talk to -- if there is anything driving the difference in those numbers.

Sean Reilly

Well, Jaime, it’s guidance. So let's see how the quarter unfolds and if we can do a little better than everybody is going to be happy on the next call.

Jaime Morris - UBS

Okay. But it’s not specific national versus local or a specific category, or customer?

Sean Reilly

No. No, it’s just, let's just put a number out there and hope we can get it.

Jaime Morris - UBS

Okay. And then just one other. You may have said this and I might have missed it, but did you talk about what auto did in the quarter?

Sean Reilly

I think it was essentially flat. Yes, auto was basically flat in the quarter and for the year was up 6%.

Operator

Our final question comes from Bishop Sheen with Wells Fargo.

Bishop Sheen - Wells Fargo

So the residual of about $260 million of the 6 5/8 roughly. Would you take a run at those again or look to do something in the open markets with them?

Keith Istre

You are talking about the last 100? Right. Now after next Monday there will be about $260 million still left out. So...

Bishop Sheen - Wells Fargo

Right. So I mean that’s the stuff left out, and I am just wondering if you would take a run at tendering them again.

Keith Istre

I don’t know Bishop. We have to wait, we are going to let it cool down. Let the tender expire on Friday of this week. Settle up on Monday. And let the old tender cool down and in the next two to three weeks we will make a decision as to whether or not we will go after $100 million of the remaining $160 million. We wanted to get in $700 million and leave the rest out. So if we do that we will make a draw on our revolver, if not, we would just let him hand out there and maybe try to pick them off in the open market.

Sean Reilly

Well, David, that concludes our call and I want to thank everybody for tuning in and we look forward to the next quarterly call.

Operator

Ladies and gentlemen that concludes today's presentation. You may disconnect your phone lines at this time and have a wonderful afternoon. Thank you.

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