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Lamar Advertising Company (NASDAQ:LAMR)

Q2 2007 Earnings Call

August 8, 2007, 11:00 AM ET

Executives

Kevin P. Reilly, Jr., - CEO

Keith A. Istre - CFO

Sean Reilly - COO and President of the Outdoor Division

Analysts

Jason Helfstein - CIBC World Markets

Marci Ryvicker - Wachovia Securities

Christopher Ensley - Bear Stearns

Jonathan Jacoby - Banc of America Securities

James Dix - Deutsche Bank

Laraine Mancini - Merrill Lynch

James Boyle - C.L. King & Associates, Inc.

Eileen Furukawa - Citigroup

Mark Wienkes - Goldman Sachs

John Blackledge - J.P. Morgan

Gordon Hodge - Thomas Weisel Partners

Presentation

Operator

Excuse me everyone. We now have Kevin Reilly, Sean Reilly, and Keith Istre in conference. Please be aware that each of your line 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 to those documents. Lamar's second quarter earnings release which contains the information required by Regulation G was furnished to the SEC on 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 Kevin Reilly. Mr. Reilly. Sir you may begin.

Kevin P. Reilly, Jr., - Chief Executive Officer

Thank you, Henny. I want to welcome everyone to our Q2 conference call. And as is our custom, we are going to lead off with a few brief comments and then open up the line for Q&A. Keith will cover Q2. I just like to make some comments about our guidance for Q3.

What we see are currently seeing is the decline on our rate of growth from about 9% to 6% and the pause is in our core business exclusively primarily in our short cycle products, postures and transits. Interestingly we are not currently seeing it in the real estate category but in those local businesses that are affected by the housing downturn, businesses such as home furnishings, local mortgage brokers and local financial institutions. So it's broad-based across the platforms and in our local ad spend category.

We are on pace with our digital deployment and digital revenues, and we expect our efforts in this area to continue to generate 3% to 3.5% organic growth for the rest of the year. And as you can see from our announcement, we will probably meet or exceed our stated goal of 600 units up by year end.

Regarding margins, our expenses are in line. So at a 6% and 6.5% growth rate we expect to see margin expansion throughout the rest of the year. And there will be no changes in the company's uses of its free cash flow.

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

Keith A. Istre - Chief Financial Officer

Good morning everybody. I am just going to add some color on a couple of items in the press release. As Kevin mentioned we continue to see expansion in our consolidated EBITDA margins. We added another 1.3% from 47.1% in the second quarter of last year to 48.4% in the second quarter of this year. That's similar to same addition that we recognized in the first year of this year, a little over a percent growth in the margins.

Also, as you probably saw in the reconciliation... the pro forma reconciliation schedule in the press release, our operating expenses before corporate overhead grew at 5.7% for the second quarter and that's about as expected. Going forward in the third and fourth quarter, we should see a deceleration in this rate of growth. We will be lapping some heavier than usual expenses in the third and fourth quarter of last year primarily with respect to our logo business as we discussed on our previous calls. Again that should, even at the 6% to 6.5% top line growth that should continue to provide margin expansion.

As far as corporate expenses, let me just give you a hats-off to a third quarter event in the... that will hit the corporate expense category in Q3. We completed an exchange offer with respect to our convertible notes. It was in the press release. We did complete that project in July of this year, and the fees to administrative agents and attorneys and so forth added up to about $800,000. So that will be a one-time charge in July that will show up in corporate in the third quarter; that is a one-time event.

Just to touch on that exchange offer, obviously we did it if you saw the explanation in the press release to avoid having to give our common shares to the noteholders upon conversion of those notes. If that takes place in December 2010 we'd prefer to give the value of those converts in cash rather than our shares. And so that was the motivating factor behind that. As such we do now consider that $288 million debt, and we include that in our total debt which at the end of the quarter was 4.8 times EBITDA.

With that, I will pass it over to Sean.

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

Well thanks Keith. I am going to hit a couple of the key operating metrics that we try to give you every quarter. I'll start with our number of digital units and number of markets as within the release. As of the call today we have 534 digital units, 294 of those are post bulletin and 240 of those are posters and we have digital presence now in 116 of our market. As Kevin mentioned that, it appears that a little bit of a deceleration is local in nature and I've got a couple of stats I will give you that kind of reaffirm that.

Our occupancy in posters was down a percent Q2 '07 under Q2 '06. In Q2 '06 our poster occupancy was 74%, Q2 '07 it was 73% and that appears to be the corporate because bulletins held steady at 80% across the border over both time period, and those numbers exclude digital.

June in particular was a problem with poster occupancy as period-over-period occupancy dropped 3%, for posters from 76% last year to 73% June of this year. So that, that appears to be where a little bit of a slowdown is emanating from and that's highly localized business.

In terms of rate, posters Q2' 07 over Q2 '06 were up 4% and in terms of average rate $451, Q2 '07 as opposed to $434 Q2' 06, and for bulletins rate was up 6% Q2 '07 over Q2 '06 or $1,182 average rate over $1,114 Q2 '06. Again this appears to be local business because our national book of business is a stronger.

Our mix local/national with 81% local, 19% national Q2 '07 as opposed to Q2 '06 which was 82% local as opposed to 18% national and in doing a check on our national book of business through the end of the year, it looks like we will end up the year national in the low double digit increases. So national is hanging in there with a sort of expected rate of growth. So this looks and feels like sort of a, local sort of aggregate economies pause.

Kevin mentioned the real estate category, in June of '07 it's is 8% of our book of business and in June of '06 it was 8% of our book of business and it's hanging in there steady at about $8.5 million to $9 million in absolute book of business amount. So while the rate of growth in that category is certainly slow it hasn't evaporated.

So that's the color I've had to offer on that and we'll be happy to open it for questions.

Kevin P. Reilly, Jr., - Chief Executive Officer

Henny, we are ready to open up the line for Q&A.

Question And Answer

Operator

Yes. [Operator Instructions]. The first comes from Jason Helfstein with CIBC World Markets.

Jason Helfstein - CIBC World Markets

Hi, thanks. So the way kind of look at this is the guidance basically implies something like a non-digital business that is going to slow in the third quarter to like under 3% growth from probably about 5.5% in the second quarter. And I think what you are basically saying is it's not price, it's volume. And so at what point in the quarter did you see the volume fall off for third quarter and how easy is that to replace with other advertisers, other lines of business? And then I have got a follow-up. Thanks.

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

Well I'll hit the issue of poster occupancy is really where it appears to have been a problem and it was really the last, I would say week or so of June we started seeing a little problem in the poster book of businesses. Occupancy was up in May year-over-year. So that sort of leads me in that direction. I think it's firmed up. So if the question is this 9% growth going to 6% growth going to something that looks and feels like a recession, we are not seeing that. July seems to have firmed up for us in that regard.

Jason Helfstein - CIBC World Markets

Okay. So that's kind of what we had heard that there was weakness in the quarter in the middle of the quarter and then it kind of bounced back in July and into August. So that's consistent with what you are seeing.

Kevin P. Reilly, Jr., - Chief Executive Officer

Well no, no, I don't see a bounce back. I think what all this depends on is what happens to our customers that are affected by the housing downturn and our customers that are affected by interest rate sensitive... that are interest rate sensitive, and we've got thousands and thousands of small customers. So we're not going to run out there overnight. If this thing is a much deeper thing we're not going to run out there overnight and replace those with other customers. But we are feeling pretty good, when GDP is going to be in the 2% range and we are going to beat GDP by 3 times or more. That's we are not... we're not jumping off to any quest but we see a lot of our small customers being affected by this housing downturn.

Jason Helfstein - CIBC World Markets

And there still should be some replacement on top of that. So here's my follow up. As you continue to add digital and go deeper into some of the small markets, you said in the past or you have told us that it takes on average kind of 6 months to fully ramp the revenues to kind of a normalized run rate when you add a new digital display. How does that run rate over that ramp differ when you're adding displays in bigger versus smaller markets? I am just wondering and if that means that as you go... as you are adding more in smaller markets does it take longer for us to see the benefit of digital hitting the revenue? Thanks.

Keith A. Istre - Chief Financial Officer

Jason,I am a little confused that to the premise of the six months ramp up, I am not sure what you mean by that I mean.

Jason Helfstein - CIBC World Markets

So when you add a digital display, all of the revenues obviously not there tomorrow, it takes time to go out and sell it right? And it takes some amount of time to go and sell the display?

Keith A. Istre - Chief Financial Officer

Actually our experience has been many times, they're sold before we put them up.

Kevin P. Reilly, Jr., - Chief Executive Officer

It just takes a... it takes 2 or 3 weeks to work the bugs out of the unit. You don't want to put a customer up until you guys are working right, and then you loaded with customers. Now I think the thing you need to be... what you touched on is what we focus on is you got a bigger bank for your buck in the bigger markets than you do in the smaller markets just because of the rates for spot is so much greater.

Jason Helfstein - CIBC World Markets

Okay.But otherwise there is no... timing is consistent.

Keith A. Istre - Chief Financial Officer

No difference.

Kevin P. Reilly, Jr., - Chief Executive Officer

Yes, are you talking about the time it takes to actually get one up?

Jason Helfstein - CIBC World Markets

No, no, once it's up how long does it take to get the revenue on it, what you're saying it is consistent

Keith A. Istre - Chief Financial Officer

Yes

Jason Helfstein - CIBC World Markets

Okay. Thank you very much.

Operator

Thank you. The next question comes from Marci Ryvicker with Wachovia Securities.

Marci Ryvicker - Wachovia Securities

Thanks. It looks like since June, the end of June there has been an acceleration in digital boards. Sean, I don't know if you could talk about this. It looks like between the last conference call and on tuck it [ph] call, you were doing about 1.2 boards per business day and then from June 22 to now it's about 2.2 boards per business day. Is that a good run rate or is it just the timing difference in the past six weeks?

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

Yes I would say it was a timing difference like Marci. I mean like we commented on earlier calls these are little construction projects and sometimes the weather is good, sometimes all the stars align and you come together and it happens. And so I would say it is a timing thing. I am comfortable from here on out averaging one a business day. And I think that gets us something around 620, 630 and that was our stated goal when we began the year and I'd leave it at that.

Marci Ryvicker - Wachovia Securities

Okay. And I have one follow up for Keith. It looks like CapEx excluding digital is running about $35 million per quarter which I think bringing above your original guidance which was $105 million, is this the right way to think about this?

Keith A. Istre - Chief Financial Officer

It is but our ops guys are telling us that in the fourth quarter our CapEx should be minimal. Yes I mean if you annualize it you are correct. We are not ready to change the guidance right now. If we do that it would be the third quarter.

Marci Ryvicker - Wachovia Securities

Okay, thank you.

Operator

Thank you. The next question comes from Chris Ensley with Bear Stearns.

Christopher Ensley - Bear Stearns

Thank you very much. Kevin, in the past you have talked about going short to digital boards, selling them in shorter cycles. And I was wondering with some of your, the local business slowing a little bit, does that still seem like the way to go because often times you take a little bit more comfort if you get longer term contracts?

Kevin P. Reilly, Jr., - Chief Executive Officer

Yes, you need to... I think we need to go short because that's the purpose of this product is to satisfy customers that have short cycle promotional needs, and this is in instantaneous. So we can cover all of their needs. If they want to go long they can buy bulletins and they have brand building long term campaign. They want to go medium term. They can give you posters and transit. If they want to do really short cycle call to action, I mean that's one of the uses for these digital units. Now you can also use it for brand building and just sort of change your copy and that's something generic running but. No, we think we always need to be... have a product available for that type of customer and digital is perfect for that. So there is always going to be some time on these units that will be available for short cycle ad spend.

Christopher Ensley - Bear Stearns

And then just one sort of follow up the, each quarter, you've been in kind of up to provide sort of a data point for I guess the latest month, in the month of June maybe on what, how many boards and what kind of revenues they generated? Is that something and maybe not for June, maybe to, is there a month that you could share the digital data with?

Kevin P. Reilly, Jr., - Chief Executive Officer

Yes I think in March she figured it out because she had a summer data point and then she has a number of unit to date but it shows an acceleration in the deployment I think it was 60... how much boards went up in the July, 60? Okay. we put up 61 in July but that was a bubble. I don't know if we have the revenue associated with.

Keith A. Istre - Chief Financial Officer

I don't have the revenue, I can tell you that little bit of a slowdown that we saw in June had a marginal impact on digital revenue performance. July seems to be pacing better and where it needs to be on the digital front. And when I look at the occupancy numbers for Q2 '07 and put digital in them you quickly reach the conclusion that it's not digital that caused a bit of a slowdown. Digital's performing both in terms of revenues and occupancy as we would predict. So really is the, it's the core analog poster product that caused the...

Christopher Ensley - Bear Stearns

Right.All it's clear to me that you are ahead of my pace of what I thought the number of boards will be up. But do you also have just a June 30 number of where you finished the quarter?

Keith A. Istre - Chief Financial Officer

We finished, board for... the number of board [ph], 468.

Christopher Ensley - Bear Stearns

Right. Thank you very much.

Operator

Thank you. The next question comes from Jonathan Jacoby with Banc of America Securities.

Jonathan Jacoby - Banc of America Securities

Thank you. Good morning. Just if you could touch on this real estate category, I know you are not seeing weakness now but if those are longer term contracts, so if you sort look back to last year, is there anyway you could see where the spike was and how long the contracts were? So if we can sort of to try normalize perhaps when as this contract is coming out the model, the potential impact. Second question is what percentage of your business is short term? I thought that was pretty interesting and I never thought about it like that. Could you give us a little bit more color? And then lastly on the regulatory front, there was a bill that was postponed in California. Is that considered a... is that sort of a big issue or should we not overly focus on the California bill? Thanks.

Keith A. Istre - Chief Financial Officer

Let me start with regulatory and then I'll turn it over to Sean. On the regulatory fund front we are still working in the state of New York and the state of Texas. There is nothing going on in California that either positive or negative that we're working on at point, right know the... we have permission to deploy these units in the state of California. And they've got a good set of rags on the books. What was your, the first part of your question? I was going to answer that one, I forgot.

Jonathan Jacoby - Banc of America Securities

It's on the real estate category, right, how should we think about it?

Keith A. Istre - Chief Financial Officer

You actually kind of mis-categorized, it's not long term business. We have... it's a mixed bag, it's 8% of our book. We have developers who have... who do have long lead times and they have bulletins and they have contracted for in some cases even multi-year periods. But we also have real estate agents who buy on a 30 day basis.

So it's... and then the homebuilders, homebuilders tend to be longer term and then the real estate agents tend to be shorter term. So it's really, it's a mixed bag of business and right know I just found it interesting that we have not experienced a decline in that business when the newspaper industry has experienced significant declines in their real estate advertising category.

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

So the short long analysis should be product specific not vertical and customer category specific. As I am looking at it now it's really the shorter cycle sale tends to be, posters tends to be transit and that's the products that we have that are showing a little bit of relative weakness.

Jonathan Jacoby - Banc of America Securities

And I understand I have to look at it like that but just because I am curious if you broke if possible that real estate category down between homebuilders and agents, is it what 50-50? I am curious sort of what between the two.

Keith A. Istre - Chief Financial Officer

I have never sliced it that thinly.

Jonathan Jacoby - Banc of America Securities

Okay. I know we're getting into real miniature.

Keith A. Istre - Chief Financial Officer

Yes but just for the notion that maybe there is an elephant going through bow constrictor in this book of business, it really doesn't look like that to me. When I looked at the last 12 months and looked at every month the real estate category was between and $8-$9 million every month.

Jonathan Jacoby - Banc of America Securities

Okay.

Keith A. Istre - Chief Financial Officer

So in absolute dollars it just has been very, very steady, up basically through June which is the latest month of that data on it.

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

Let me say something about on the regulatory front. We've had some... I want to congratulate Clear Channel on what they did in Minneapolis regarding the bridge collapse up there. Within hours after that bridge collapsed they converted all of their digital time to a safety advisory for drivers. And it was noted by all of the public officials in the state of Minneapolis and by national public officials. And so some of the things I have been saying about the usefulness of digital displays and how there is a public safety angle to what we are doing is... was borne out by the good works of the folks up there in Minneapolis and Clear channel. And I congratulate them for what they... for their efforts.

Operator

Thank you. The next question comes from James Dix with Deutsche Bank.

James Dix - Deutsche Bank

Good afternoon, gentlemen. I've got a couple questions. Could you give a breakdown your revenue growth in 2Q by product, bulletins, posters versus transit and digital increment? And then if you could give any color on third quarter pacings also by product just so we can see that difference. And then do you have growth by month in the second quarter and pacings by months for the third? And then I guess my final question just, are you seeing any regional differences in growth? I know we have heard, I think you have mentioned even in the past some issues like the Florida and Nevada but just are you seeing any changes in regional growth patterns as you are going into the third quarter from second?

Kevin P. Reilly, Jr., - Chief Executive Officer

James I'll let Sean do Q2 but we don't pacings by product line.

James Dix - Deutsche Bank

Okay.

Kevin P. Reilly, Jr., - Chief Executive Officer

On a forward basis but we can just give you the Q2 thing and can give you some color across the platform.

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

Yes on the regional question first, that's pretty much the same story that we have been telling the last few months. Things are very tough in Michigan and Northern Ohio and places that are reliant on the automobile industry and so that region that North Central region is probably in growing in the 3% to 4% range for our businesses. The real estate and ancillary businesses that have affected local advertisers, seems to be a little more problematic in Florida than it is in Nevada and Southern California. But both those places had a super hot real estate market, and they are feeling the effect but right now it looks like Florida in terms of how it's impacting the overall economies seems to suffering a little more.

On contributions to our overall growth in Q2 I am going to break it out by digital, core, billboard and then logo and transit and the following percentages will add up to 8.8%. Digital contributed 3%, our core static business 5%. Logo contributed 0.4% and transit contributed 0.4%, for a total same-store growth of 8.8%.

James Dix - Deutsche Bank

Just one follow up and so you're not really seeing any change going into the third quarter in terms of regional growth and then do you have the second quarter growth by month?

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

Do we have second quarter about the regional growth?

Kevin P. Reilly, Jr., - Chief Executive Officer

We don't slice it by month.

James Dix - Deutsche Bank

Okay.

Kevin P. Reilly, Jr., - Chief Executive Officer

The only thing I can tell you James is what Sean had mentioned earlier is that in June we started to see a fall-off in growth.

James Dix - Deutsche Bank

Okay.

Keith A. Istre - Chief Financial Officer

What was the other one you wanted was a...

James Dix - Deutsche Bank

If any regional changes as you're going into the third quarter or that wasn't really what's going on in the third quarter, it's not really regional.

Kevin P. Reilly, Jr., - Chief Executive Officer

I don't think it's regional. Again my sense says that it's cross the country and its local and primarily customers affected by the housing downturn and interest rate sensitive businesses.

James Dix - Deutsche Bank

Okay. Great. Thank you.

Operator

Thank you. The next question comes from Laraine Mancini with Merrill Lynch.

Laraine Mancini - Merrill Lynch

Thank you. I have two questions. First now that you're including your convert in your leveraged calculation, does that mean you are more sensitive to buyback since you're nearing 5 times leverage on that basis? Second, flat penal TV costs, the press is reporting they may go up because of the shortage for that, impact the cost of digital boards. And my final question is going into 1Q you also saw a pause in the business and at that time you were relatively confident that it was temporary pause and that we shouldn't extrapolate it further out. How would you characterize the pause that you are seeing in 3Q and should we carry that during the 4Q as well?

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

I think the pause is for the rest of the year. I don't think it's going to take off like a rocket in Q4, I think Q4 is going to be better because we had an extraordinarily poor month in June and July. But the flat panel display question is, no, our technology is LEDs. So we are not... we won't be affected by that. I don't think we're going to get a big price break because we're focused on product improvement and better resolution and other issues related to the units. So I don t think we're going to be able to drive the price down that significantly in the near term, or the longer term. I do think prices will continue to come down.

And then there was one other part to your question, the answer is this is stock answer that we have always given. We're very comfortable with the free cash flow characteristics of the company to be leveled at between 4 and 6. We are slightly under 5. So we have got plenty of room to maneuver. And also as I mentioned earlier that there are no changes to the company's uses of its free cash flow and its debt capacity.

Laraine Mancini - Merrill Lynch

Great, thank you.

Operator

Thank you. The next question comes from Jim Boyle with C.L. King.

James Boyle - C.L. King & Associates, Inc.

Good morning. Keith, what would be roughly the full year digital CapEx range given the Q2 acceleration in the first half of roughly $41 million? And Sean, which advertising category concerns you the most in the latter part of the year?

Keith A. Istre - Chief Financial Officer

As far as the Q2 acceleration on the digital CapEx, this is an approval process that our guys in the field have got to follow. And I am not sure if there is any real whiner reason you could say well the weather is better in the spring and summer than it is in the winter. I think as Kevin said some of it was just a bubble. It's just the way that the chips fell. And as far as the CapEx we got it to about $65 million to $70 million for the year at the beginning of the year. And I think that's where we think that we will hit as Sean said between 600 and 630 by year end units.

James Boyle - C.L. King & Associates, Inc.

So you did a 81 million last year, you are going to do less this year in digital CapEx?

Keith A. Istre - Chief Financial Officer

Well we will, if we have to up guide, that's up guidance, restate guidance for digital CapEx we would do that in the third quarter.

James Boyle - C.L. King & Associates, Inc.

Okay. Sean?

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

Yes, Jim,let me hit that real quick because there is not a clear cut answer other than kind of the way Kevin described it is. You have a lot of little businesses dependent upon strong housing economy. And just to illustrate why it is not an obvious category issue I am going to attack, I am going to just sort of tick through the categories of business and the take-home message here is each one of these categories of business is exactly the same percentage of our book for June of '07 as well as June of '06. Restaurant 10%, retailers 10%, automotive 9%, real estate companies and developers 8%, hospital 7%, service industry 6%, gaming 6%, hotel motel 5%, financial institutions 5%, amusement, entertainment sports 5%. And again each one of those as expressed as a percentage of book of our business is exactly the same June this year, as well June of last year. So there is not a category that's screaming in, that is fragile. I think really the best way it describe it is as we have tending to hit our shorter cycle sales, predominantly the poster business and it tends to be those local customers that are dependent upon a strong housing market, which tends to be a lot of local customers so, that's where it is.

James Boyle - C.L. King & Associates, Inc.

Okay. And finally Kevin, do you see any change in the regulatory atmosphere given the two recent studies that suggest digital robots are now dangerous distraction?

Kevin P. Reilly, Jr., - Chief Executive Officer

Well we found it very helpful. So it's especially at the local level where local city councils and planning commissions, they are not capable of assessing whether these things are safe or not. So they need third party validation. So it's helpful to have data like that out there in the marketplace that we can use. And we have used it and we have used it with some success. And over the long haul, I think don't... I think locally we are going to demonstrate that these things are useful and informative and we have a plenty of customer support and also support from public officials. We do need more work at the state level primarily in Texas and New York and we hope to make some strides in that area.

The other thing that we found interesting is that these high density mixed used developments that have their own entitlements, they have been going to municipalities and petitioning municipalities for, say, look we want to put up some interesting signage not only for cars but for pedestrians. And there is nothing in the code to address this. So on a couple of occasions we have been brought in to actually consult with the municipality on how to fashion these entitlements for these high density mixed used developments. That's new for us, new for the developer, new for the municipalities. But what I find interesting about it is that they are open because usually what we are talking about is new technology digital etcetera and they are very open to figuring out ways that they can deploy these devices in a tasteful and safe way. So I see out there momentum, we're at the very beginning, we didn't see as much momentum behind acceptance but now, today I see a lot more momentum today than I have seen, than last year.

James Boyle - C.L. King & Associates, Inc.

Thank you.

Operator

Thank you. The next question comes from Anthony Decoventy [ph] with Lehman Brothers.

Unidentified Analyst

Hi thanks for taking the question. So if we look at just the real estate category at 8%, on the financial services category of 5% if you compare those two categories in terms of which one of them is shorter cycle versus longer cycle, do the interest rate sensitive customers tend to actually be shorter cycle than the real estate customers? And then the second question is can you help give us a little bit of texture around rate in occupancy and you talked a little bit about how the poster occupancy had come down just a little bit year-over-year. At what point does rate start to sympathize with the trend in occupancy if ever?

Kevin P. Reilly, Jr., - Chief Executive Officer

I'll let Sean do the rate in occupancy question. Now I'll try to hit, you are trying to get at the volatility of some of our customer verticals. And...

Unidentified Analyst

Just relative to each other.

Kevin P. Reilly, Jr., - Chief Executive Officer

YesI think, basically real estate and financial institutions are pretty much the same. You have got certain customers in each category that are building brand and you have certain customers that are engaged in call to action advertising. So there is no real difference in volatility. You have got short cycle business and brand building going on in each vertical and it's not lots that it in financial institutions or in the real estate category. We can't... we haven't sliced it thin enough to tell you, just intuitively I am telling you that I can't... haven't sliced it thin enough to tell you that it is exactly 50-50. But that what I can tell you that's more short cycle is home furnishings that's much more call to action in sale oriented and seasonal then brand building.

Unidentified Analyst

Got you. What percentage of your business is home furnishing?

Kevin P. Reilly, Jr., - Chief Executive Officer

Doesn't even measure.

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

Yes it's not in the top 10, but hitting the rate and occupancy question start to, looking at it from 30,000 feet for those that have followed us for a long time, as you know we work pretty diligently to hold the line on rate if we think we're going into a recession area environment and we suffer on the occupancy front. And we've been through this numerous times and that seems to be the best way to manage your way through a soft spot. So in general what you will see out of Lamar is, the real focus on maintaining rate integrity.

You know as I mentioned we did see rate increases in Q2, '07 of 4% on the poster side and 6% on the bulletin side quarter-over-quarter. It's probably too early in the game to think about whether or not you're going to see the kind of occupancy and rate comparisons to 01 and 02 and we're certainly not seeing that as we look out. We are not seeing ourselves going into a recessionary type of performance. I think we're going to stabilize occupancy and you're going to see rate at still driving, being the primary driver of growth.

Unidentified Analyst

Great. Thanks guys.

Operator

Thank you. The next question comes from Eileen Furukawa with Citigroup.

Eileen Furukawa - Citigroup

Hi thanks for taking the question. I just have a quick follow-up question on real estate. How fast did you say the real estate category rates grow in the second quarter and what do you think the chances are that you could see this category actually turn into a decline? And then also what percentage of your total ad dollars comes from Florida, California and Nevada and if you know and what percentage of your real estate dollars come from those states? Thanks.

Kevin P. Reilly, Jr., - Chief Executive Officer

I can't slice it for you regionally. The real estate category actually grew 13% in thee second quarter. That's what made it very difficult for us to pin point and absolutely say that it's the real estate category that is causing a deceleration in the growth rate. The percentage of business that comes from Sothern California, Nevada and Florida, I have to get offline with you and calculate that for you.

Eileen Furukawa - Citigroup

And so you said that the real estate category grew 13%, was that just from new advertisers or is that from existing advertisers, increasing their spend?

Kevin P. Reilly, Jr., - Chief Executive Officer

Both.

Eileen Furukawa - Citigroup

Okay, thanks a lot.

Operator

Thank you. The next question comes from Mark Wienkes with Goldman Sachs.

Mark Wienkes - Goldman Sachs

Great. Thank you. If I can ask Jonathan's question another way. What percent of your business is on the books for third quarter versus the fourth quarter? And then secondly for, Keith, assuming the fact these proposed real change on the accounting for those cash pay converts does not go through, what do you expect the impact to your reported earnings will be? I am stopping on that covert.

Keith A. Istre - Chief Financial Officer

I didn't hear the question.

Kevin P. Reilly, Jr., - Chief Executive Officer

The answer is none.

Mark Wienkes - Goldman Sachs

No impact.

Kevin P. Reilly, Jr., - Chief Executive Officer

No impact. Then the pacing question, what, percentage of book to budget?

Mark Wienkes - Goldman Sachs

Right, exactly.

Kevin P. Reilly, Jr., - Chief Executive Officer

Those numbers we used to give, but I don't know if it's on Sean's content or not.

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

Well wekind of quit doing that for a couple of reasons. Number one, it was scrubbed as a percentage of our budget, since we don't release our budget it became sort of a difficult thing for you guys to make sense out of.

Mark Wienkes - Goldman Sachs

Yes, could you give it relative to the plus 6 pacing in 3Q?

Sean Reilly - Chief Operating Officer and President of the Outdoor Division

I don't have that number at my fingertips. Maybe Keith can get back to you on that one. But the another reason we stop doing was because digital started skewing the relevance of comparing a period over period, So at the end of the day it became a meaningless thing to give out in terms of percentage book to goal. But percentage book to the aggregate number that was on the press release that maybe Keith can get back with on that one offline.

Mark Wienkes - Goldman Sachs

Okay, but I guess if you could generalize you wouldn't think that would be meaningfully different versus previous years?

Keith A. Istre - Chief Financial Officer

No, no, it's not meaningfully different. We are not that pessimistic about the fourth quarter.

Mark Wienkes - Goldman Sachs

Right. Okay, great. Thank you.

Operator

Thank you. The next question will be from John Blackledge with J.P. Morgan.

John Blackledge - J.P. Morgan

Thanks for taking the questions. Just wondering what the margins, the EBITDA margin on the digital boards were in the second quarter '07 versus second quarter '06. And then you know just given the compelling economics of returns for the boards, is there something that you guys are doing when you convert a static board to a digital board in X market that limits the I guess the land owners uptake in the economics and looking at that over time as you continue to convert boards. And then secondly just wondering what the costs of the boards were, the bulletins and posters at this point versus this point last year? Thanks.

Keith A. Istre - Chief Financial Officer

Well on the price points for digital board, we've seen... over the last 12 months we've seen a small price break, the larger price breaks were driven in the previous two and three years. So we have I think temporarily flat line in terms of getting better pricing on digital boards from our existing vendors. And I think in the coming 2 or 3 years we're going to start seeing a little better price performance out of them. What was the first part of the question?

John Blackledge - J.P. Morgan

The first part is you're 20% to 40% return on your boards.

Keith A. Istre - Chief Financial Officer

Yes the margins in our digital deployment have been very good for a couple of reasons. Number one, the revenue expansion in Minneapolis is outstanding and the cost structure is slightly better. One of the things we do is we try to secure the real estate either through an ease men or outright purchase of property or do some sort of long term relationship that allows us to enjoy those economics. And so we have been very aggressive in doing that.

John Blackledge - J.P. Morgan

Okay.And just one follow up you converted 29% of your EBITDA into free cash in the first half, is that something that we can see in the second half and kind of longer term in terms of converting EBITDA into free cash flow, right?

Keith A. Istre - Chief Financial Officer

Yes absolutely.

John Blackledge - J.P. Morgan

Thank you.

Operator

Thank you. And our final question comes from Gordon Hodge with Thomas Weisel Partners.

Gordon Hodge - Thomas Weisel Partners

Good morning. Not much left to ask but I don't think you commented on the sort of the M&A environment, just curious if you are seeing any change now that the excitement around digital I think it's pretty well out there, our seller is looking for a bit more...

Kevin P. Reilly, Jr., - Chief Executive Officer

We really haven't seen that much change in the M&A environment other than as everyone knows it's less important now to our overall growth rate than obviously it was in 3 or 4 years ago. Let me tick through some deal metrics for you that you can wrap your arms around. Year-to-date we've closed 53 acquisitions for an aggregate purchases price of $86.5 million. And as I look at across that landscape of acquisitions, there is a typical small mom and pop fill-in and I really haven't seen much of a change in the way that is going to be executed over pricing.

Gordon Hodge - Thomas Weisel Partners

Great.Thanks.

Kevin P. Reilly, Jr., - Chief Executive Officer

All right. That concludes our call. I want to thank everyone for tuning in and we look forward to our next quarter call. Thank you, Henny.

Operator

You're welcome. You may disconnect at this time.

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