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Lamar Advertising Co. (NASDAQ:LAMR)

Q3 2007 Earnings Call

November 8, 2007, 8:00 AM ET

Executives

Kevin P. Reilly, Jr. - CEO

Keith A. Istre - CFO - Sean E. Reilly - COO

Analysts

John Blackledge - JP Morgan

Christopher Ensley - Bear Stearns

Mark Wienkes - Goldman Sachs

Jonathan Jacoby - Banc of America Securities

Jason Helfstein - CIBC World Markets

James Dix - Deutsche Bank

Marcie Ryvicker - Wachovia Securities

Anthony DiClemente - Lehman Brothers

Eileen Furukawa - Citigroup

James Boyle - C.L. King & Associates

John Klim - Credit Suisse

James Bryant - Morgan Stanley

Operator

Excuse me, everyone. We now have Kevin Reilly, Sean Reilly, and Keith Istre in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of the Company's presentation, we'll 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 Form 10-K and 10-Q and the registration statements that Lamar files with the SEC from time-to-time. Lamar refers to those documents.

Lamar's third 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 at www.lamar.com.

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

Kevin P. Reilly, Jr. - Chief Executive Officer

Thank you, Santail. I want to welcome all of our shareholders and friends to Lamar’s Q3 call. As is our custom, I will lead off with some opening comments and then turn the call over to Keith Istre, our CFO and then over to Sean Reilly, our COO.

Let’s get right to it, what you can expect for the rest of the year is continued margin expansion as we control our cost. Note that our consolidated EBITDA margin for Q3 ’07 was 47.8%, that’s a 1.8% increase over Q3 ’06. And as we mentioned on our last call, greater growth in the static billboard business would decline in the second half of the year. As you can see from our guidance, we expect the same for Q4. Markets for real estate is a significant driver of the local economies where we operate. They will continue to under perform. Digital continue to out perform. As of today, our revenue run rate is $80 million against a total investment of approximately $170 million, that’s not bad.

Briefly for ’08, we expect the ’08 environment to be challenging. Our real estate and automotive customers will be very circumspect regarding their ad spend. We will likely step up the pace of our digital deployments in ’08 as the regulatory environment continues to improve and as local and national advertisers are attracted to our expanding platform. Interesting to note that our national digital ad spend year-to-date is at 7.8% of our digital book, and it was 0% last year. So, we are getting somewhere regarding our network. Our hope for ’08 is that share shift and our expanding digital platform and our low cost per thousand impressions will allow us to provide superior free cash flow for share returns to our shareholders in what we consider will be a very difficult environment.

With that, I would like to turn the call over to Keith Istre to walk us through the numbers.

Keith A. Istre - Chief Financial Officer

Thank you. Good morning everybody. Just a couple of points to add some color to the numbers in the press release, I guess. As you saw our pro forma revenue growth for the quarter was 7%, slightly higher than what had guided to and that was coming up against a fairly tough comp in the third quarter of last year. If you recall, we posted an 8.3% pro forma revenue growth in Q3 of ’06. So, we were pretty pleased with this environment with that performance.

I wanted to just make everybody aware from last call when we said that we saw things slowing down, that didn’t mean that we were going to see month-over-month deceleration in our actual net revenues. Some people may have misunderstood that from calls that I got after that. Actually, August and September were up sequentially over July. August was up over July, September was up over August as is the norm in any year. What we didn’t experienced this third quarter is the typical acceleration that we see in August and September after vacation and back-to-school and so forth. There was acceleration, but not the typical acceleration. And just to give you some numbers to back that up, our pro forma growth for August and September, were both 6.5% on the net revenue side.

Looking at the expanses, as you saw that the expenses were basically inline with what we had told you on the last call, low single digits on the operating expenses. Before corporate, those came in at 2.9, corporate was 6.7, the consolidated expenses for the quarter were 3.2. On the expense side that will… you can expect that to basically be the same in Q4 as Kevin mentioned about the continued margin expansion.

The guidance to 5% to 6% in the fourth quarter, takes into account two things. The slowdown that we show… that we talked about on the last conference call and that Kevin mentioned again just now. And the fact that our fourth quarter ’06 revenue growth was 9% that was the toughest quarter from a comp standpoint that we had in ’06… the back half of ’06 was very strong for the Company. So, we are taking that into account when we putting our guidance.

Last… on the last call, we have some questions about CapEx and what our guidance would be. At the beginning of the year, we estimated that we are going to spend approximately $170 million for the year in CapEx, roughly $65 million in digital and $105 million in traditional CapEx, which is traditional billboards, transit logos, operating equipment, and real estate, land, and buildings not easily purchases. Anyway, we are going to re-guide today to approximately $215 million for the year, of which $90 million would be for digital. Again, our original estimate was $65 million, so we're going to spend a little bit more than that and on all the other categories, it’ll be approximately $125 million.

With that being said I’ll pass it on to Sean.

Sean E. Reilly - Chief Operating Officer

Thanks, Keith. Let me first echo Kevin on how proud I am of our folks at Lamar who delivered margin expansion and great operating leverage. As we told you, going into this year, that was going to be one of our focuses and for those at Lamar land listening in on this call, thank you for keeping your eye on that ball.

Let me give you a few of the typical operating statistics that we would like to give out during the call. First, I’ll start with the number of digital units we have in the air as of the end of the quarter and as of this call. As of September 30, we had 574 units in the air in a 117 markets, and as of today we have 599 units in the air in 119 markets.

Rate and occupancy stats, I’m going to break it out for you a little bit differently. Today than traditionally, because we're now seeing the impact of digital and I want to quote it to you with digital and without digital. So, the stats with digital. On occupancy in Q3 ’07, our occupancy for posters was 74% as opposed to 73% in Q3 ’06. And our occupancy for bulletins was 83% as opposed to 82% in Q3’06. So, up a point in each category. Without digital, the numbers are down a point in each category. So, Q3 ’07 poster occupancy was 71% as opposed to 72% in Q3 ’06, and for bulletins 79% as opposed to 80% in Q3 ’06. So, again, it’s sort of reconfirming what's going on in our book of business. Digital is performing extremely well and is additive to our aggregate statistics on this front.

On rate quoted the same way. Q3’ 07 our average rate for posters was $464, that’s a 5% increase over Q3 ’06, and for bulletins our average rate in Q3 ’07 was $1,231 or an increase of 6.7%

Quoting that same stat without digital. And you get Q3, ’07 average rate of $449 or 2.7% increase over Q3 ’06. And for bulletins, an average rate of $1,194 or an increase of 5.3% over Q3 ’06. So, again, you can see how digital is performing in our aggregate book of business.

Local national, and this is one where we are getting some clarity on where the sluggishness is. It’s clearly local, because in our aggregate book of business national ticked up in Q3 ’07 to 19% as apposed to 18% in Q3 ’06. And in terms of growth in the third quarter, our national book of business was up 13%. In the third quarter, we had very strong buys out of telecommunications, entertainment, beverage, insurance. On the national front, retail and restaurants held their own and on the national front, Big Three automotive was down, but Toyota was up in terms of spend with the Lamar on the national front. But the headline there is that national remains strong, it’s gone remain strong going to the fourth quarter and that the sluggishness is really in the local economy.

Speaking of a verticals. September was a first… and I think a good first. If you are familiar with what we have described as our biggest challenge in digital is getting comfortable selling into the retail vertical and we made some stride in September. For the first time September showed retail as our largest vertical. Again, for those of you to follow us year-in and year-out, you usually see restaurants at the top of our vertical. And in September retailer constituted 10% of our book that essentially being driven by their embracing of our digital product. Other than that, there is nothing really dramatic in our verticals. We are focusing in a little bit on real estate, in September, it was 8% of our book and in September of ’06 it was 8% of our book and in September of ’05 it was 7%, and in September of ’04 it was 6%.

Year-to-date, real estate is 9% of our book. Last year it was 8%, in ’05 it was 7%, and ’04 was 6%. So, it remains strong category of business for us. In absolute dollars, real estate was up in October in our total book of business, but its rate of growth has been declining if you track it month-by-month through the year, but in the aggregate it was still up in October in our total book of business, but it’s rate of growth has been declining, if you track it month-by-month through the year, but in the aggregate it was still up in October.

Just to give you a little bit of a glimpse into the third quarter on occupancy stats… I am sorry… into the fourth quarter. In October, poster occupancy was flat and this is a quote without digital. Poster occupancy was flat at 70%, it was 70% in October of ’06. We experienced a 1 point decline in occupancy in October ’07 under October ’06 in our bulletin category. On rate, October poster rates ex-digital was up 3.7% and on bulletins ex-digital up 5.2%.

That's all for the detail. And turn it back to Kevin and open it up for questions.

Kevin P. Reilly, Jr. - Chief Executive Officer

Santail, I would like to go and open up the call for questions.

Question and Answer

Operator

Thank you. [Operator Instructions].

Our first question will come from John Blackledge, JP Morgan.

John Blackledge - JP Morgan

Thank you taking your questions. Just wonder if you could talk maybe a little bit further on your step up in your digital deployment in ’08. As always… cost coming down for the digital boards and the rate of growth that we are going to see… I mean you have been at it 300 plus boards per year. Does that step up even higher? And then on the rate of growth in the static billboards declining, just wondering what that rate of growth is and what that digital added in the quarter? Thank you.

Kevin P. Reilly, Jr. - Chief Executive Officer

Why don't you do the quarter and I'll talk about’08.

Keith A. Istre - Chief Financial Officer

You wanted to know the… break it out static versus digital in the quarter?

John Blackledge - JP Morgan

Yes.

Keith A. Istre - Chief Financial Officer

Okay. On… this is billboards only. So, our total reported pro forma growth which includes logos and transit was seven. If you look only at our billboard it was 6.9. Of that 3.6 was same store growth in static and 3.3 was the contribution that digital made to that same store growth was 6.9%.

Kevin P. Reilly, Jr. - Chief Executive Officer

Regarding ’08 the plans for digital we are not prepared to quantify that for you, regarding the pricing of the individual units, it’s tough to call because we have got great vendors who have added sort of value to their units which is very helpful to us, may not necessarily result in tremendous price spikes like making the leap units lighter, having them consume less electricity, things like that, better resolution but it stands to reason that if we step up our activities in ’08 that given substantial volume that we would be expecting a break in the price per unit of these things.

John Blackledge - JP Morgan

I get to just one follow up. If you look out of the first quarter of ’08 and… I don’t know how much of the dollar you have, is the static… static revenues are maybe decelerating even further in the first quarter from where the fourth quarter is pacing?

Kevin P. Reilly, Jr. - Chief Executive Officer

We generally don’t try to give guidance beyond the next quarter but I can tell you this that it’s the same as Q3, we are not seeing a radical, just like we said in Q3, we are seeing a softness in our business, we got 160 markets where we operate and those markets that are stressed by the real estate where real estate is a significant contributor to their local economy like Fort Myers and Las Vegas and several other markets in the Panhandle, Florida, they are under stress and they are under performing and we said they will continue to under perform but if you look across the entire platform, the answer is no, there’s not a dramatic run off in our book of business.

Sean E. Reilly - Chief Operating Officer

Let me add a little color just on the term national business in ’08. The term seems to be good on the national side. All of our renewal discussions are good, no one’s talking about pulling in their horns so on that front things seem to be really strong and we can feel good about it, there’s going to be certain categories that come in stronger than others, again we certainly don’t know where Art is going to end up but telecom and the others I mentioned are really very strong

John Blackledge - JP Morgan

Thank you very much.

Operator

Thank you. Our next question will come from Chris Ensley, Bear Stearns.

Christopher Ensley - Bear Stearns

Good morning. Thanks for taking my question. Couple of questions on M&A. Did you… how many deals that you complete and for how much and are you still doing easements at the same rate and I guess perhaps the price of land et cetera is coming down, maybe you are getting better deals there?

Keith A. Istre - Chief Financial Officer

Yes. I think, first of all, the answer on M&A and easement is steady as she goes, virtually identical to the guidance we gave you. Today, as of this call, we’ve closed 67 transactions and spent $120 million on the acquisition front, and the easements are pacing as we previously guided. We hope that one of the good silver linings in the real estate environment as we can knock down some better deals. The proof will be in… our performance, and hopefully over time, we will be able to report that we took advantage in the environment.

Christopher Ensley - Bear Stearns

And just, kind of a follow-up, on the just the overall tone, is there anyway to… I have been struggling to find a theme, whether it is large versus small markets, whether its regional strength and weakness, I mean if you have been able to put anything together or is it really just market-by-market?

Sean E. Reilly - Chief Operating Officer

I think there is a theme that it’s emerging nationally stronger than local and if you track the history of adverse session that’s the bit of a normal usually national has more volatility in it. So, that’s an interesting data point and I think of the theme that the Bears watching. There is a little bit of regionality that we can point to, and again as Kevin mentioned, it’s… those parts of the country where real estate is just such an important vital component of their overall economy, but it’s causing the whole local economy to go into a fund. So, that would be Florida, Nevada, and then there is just sort of the continuing issues up in Michigan and Northern Ohio are related to aggregate weakness in their economies.

Christopher Ensley - Bear Stearns

The Northeast is running your bigger regions or any--?

Sean E. Reilly - Chief Operating Officer

It is a big region and they had a great first half of the year, a little slowdown on the local level and what’s they are experiencing in the back half and to that I would point to… again just sort of the difference in rates of growth between national and local that we are experiencing in our book of business. I think you see it in the other guys in clear channel in CBS, their percentage of national business and their aggregate book of business is higher, and so they have marginally higher rates of growth.

Christopher Ensley - Bear Stearns

Thank you very much.

Operator

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

Mark Wienkes - Goldman Sachs

Great. Thank you. Just wondering, as you know that second half ‘07 looks like nice margin expansion. How do you think about expense growth for ’08? Is there any lumpiness that we should expect through the quarters? And then--?

Sean E. Reilly - Chief Operating Officer

I don’t think you're going to see any lumpiness. I think it’s pretty much steady as she goes. Our business model is pretty predictable.

Mark Wienkes - Goldman Sachs

Okay. So, it’s the same sort of 3% to 4% to 5% in that range?

Keith A. Istre - Chief Financial Officer

Correct.

Sean E. Reilly - Chief Operating Officer

Yes.

Mark Wienkes - Goldman Sachs

Okay. And then on the national business, now being 8% of your digital book. Is it? Are you selling it differently, I guess? Other agencies now becoming involved?

Keith A. Istre - Chief Financial Officer

No. I’m talking with John Miller our national Head of Sales. It’s still a tiny percentage of the overall book. They are buying it more for position and to learn the medium. The way he described it to me, they are not buying it right.

Mark Wienkes - Goldman Sachs

Yes.

Keith A. Istre - Chief Financial Officer

But they are looking at it and we're had the opportunity to up sell. For example, AT&T is coming real strong in the fourth quarter and they took the opportunity to take a few digital boards as they bought, their traditional buy. And I think they are learning it. And I think is, as clear channel and CBS and Lamar get closer to a national platform that’s only good.

Kevin P. Reilly, Jr. - Chief Executive Officer

And that was really the point that I wanted to make. That last year was zero and this year we're beginning to discover the benefits of scale and the benefits of growing our platform. We still aren’t anywhere near close to where we want to be in terms of presenting a robust platform to national advertisers, but obviously we're close enough to attract some interest.

Mark Wienkes - Goldman Sachs

Right. And then, just one last model question on the step up in CapEx on the traditional side from $105 to $125 what's the extra $20 million just traditional billboard or--?

Keith A. Istre - Chief Financial Officer

No. What you’d be looking at is about another $15 million in traditional billboard and another $10 million in the other categories that include logo, transit, land, buildings and operating equipment.

Kevin P. Reilly, Jr. - Chief Executive Officer

One thing I can say with, about ’08 with a lot of certainty, with quite a bit of certainty because a lot of our CapEx is discretionary is that you will see a traditional, you will see an acceleration in our digital CapEx, but you will see a substantial reduction in our traditional CapEx.

Mark Wienkes - Goldman Sachs

Got it. Okay. Great. Thank you very much.

Operator

Thank you. Our next question will come from Jon Jacoby, Banc of America Securities.

Jonathan Jacoby - Banc of America Securities

Thanks for taking my question. Last time if I recall correctly you spoke that the only weak softness we are seeing was sort of a slight slowdown in occupancy rate which seems to have continued in the poster business which is shorter term. Now you are seeing it in the Bulletin business. And I am wondering if that is which is giving you caution into ’08. I am clear you are taking positively about the national market placements, trying to get a sense on the tone of caution. And perhaps how we should think about the appropriate revenue picture and I understand that, very hazy and no one has that focus to ball, at least I don’t, whether I would be sitting here. And then the second question is as you look out how should we think about the real estate category as a business, fourth quarter into early next year and then some of those ancillary categories that you mentioned last quarter?

Kevin P. Reilly, Jr. - Chief Executive Officer

And I will let Sean field the real estate question and most of the balance of your question but let me just… precaution comes from an organic growth rate in our static business 5% to 6% going down to 3% to 2%. But then we are not going to try to guess that it is going to run off to zero. I mean if we saw that dramatic runoff in our book we’ll call it. We think we… our platform is big enough in the United States that… and we got enough small customers across this country that we might an interesting indicators to how things are going in the heartland and the way we are calling it is that across the 160 semi-markets where we operate, it’s gone spotty and the worst performers are the real estate related economies not real estate vertical but the real estate related economies and we don’t see, we have seen this to us very significant movement from 5%, 6% down to 2% to 3% in our core business. But from there we are not seeing a fall off a cliff in 08. But, given all the other data points that you have and we have regarding the economy. We just… we are expecting ‘08 to be a very difficult environment for many.

Sean E. Reilly - Chief Operating Officer

Yes, part of it is what you see in the headlines everyday in the Wall Street Journal and where the aggregate economy is, specifically to real estate, the bad points that I have looking into ’08 are national renewals with those customers is strong, Tom Miller tells me and the conversations are good. So what I think you will see in that vertical is something that’s flat, you know not something that’s going backwards that’s what it feels like right now and again I don’t know if October is a right data point or not. But in the aggregate they were… that category was still up in our book. But it’s not reasonable for us to try to forecast ’08 vertical. The real estate, because 160 markets, that’s a 160 separate discussions with five real estate customers in each market. So you are talking about thousands of discussions and they don’t… the contracts don’t necessarily break all in January. So there are thousands of discussions that are going to take place throughout the entire year of ’08 and so it’s just not… we don’t feel constructive for us to try to guess or try to lead our investors as to where… how our verticals are going to perform. When we try to forecast and we look… see what’s happening to our business rather then study the verticals we actually just study the overall book and how those pacings compare to the same time last year.

Jonathan Jacoby - Banc of America Securities

And just one follow up if I may. What’s your comfort leverage as we head into a year like ’08, just taking a little bit above 5, if I am running them as correctly?

Kevin P. Reilly, Jr. - Chief Executive Officer

Yes, we have always said 4 to 6, good time 6 and less than robust time some at lower end so we are right at the mid point of the range and so we are fine where we are.

Jonathan Jacoby - Banc of America Securities

Thank you so much.

Operator

Thank you. Our next question will come from Jason Helfstein, CIBC World Markets.

Jason Helfstein - CIBC World Markets

Thanks. Two questions, just one, I don’t think you specifically gave us what the digital contribution was on the 7.1 in the quarter and then… all of the pro-forma growth in the quarter. And then, I mean basically did you think about the Billboards, I think there is a lot of concern that when you get renewals for the… particularly the 9 and 12 month contracts that that will accelerate the weakness. I mean you are basically saying you are not seeing that today? Correct. And maybe expand upon that.

Keith A. Istre - Chief Financial Officer

Yes, I mean not in a sense that it feels like we are going into something like ’01. It doesn’t feel like that to us. Getting back to contributions breakout between static and digital for Q3 ’07, and Jason this is for the billboard book only, I am not including logo and transit in the total number. And so it’s going to add up to 6.9%. The static contribution same-store organic growth to that number was 3.6% and the digital contribution to that number was 3.3%.

Jason Helfstein - CIBC World Markets

And then just… let me follow up just on that first… on the other point. I mean, talk is there seasonality to renewals to some of the longer term contract that we should be cognizant of?

Sean E. Reilly - Chief Operating Officer

Not really. At the end of the day there are slightly more in January of because of the national sales, but you can just… it’s readable through that… readable through the year.

Jason Helfstein - CIBC World Markets

And you already having those conversations correct?

Sean E. Reilly - Chief Operating Officer

Correct.

Jason Helfstein - CIBC World Markets

Okay. Thank you very much.

Operator

Thank you. Our next question will come from James Dix with Deutsche Bank.

James Dix - Deutsche Bank

Good morning gentlemen. Couple of questions. Just if you could say what the real estate category grew year-over-year in the third quarter. Secondly, are you expecting your digital contribution to growth in your guidance for the fourth quarter to be similar kind of in that 3 point range? And finally, if you give a little more color on the out layers that you are seeing market growth in the third quarter like the best markets were up certain amount and the worst markets were down, certain amount, that might help to give a little more clarity in terms of the variance you are seeing regionally?

Keith A. Istre - Chief Financial Officer

Sure. For the third quarter, real estate was up 5.09% in the book of business. Now, in July, it was up 10.76% and then it dwindled down 2.5% up by September. So, again, in the aggregate it is up, but you can see the trend line.

James Dix - Deutsche Bank

All right.

Keith A. Istre - Chief Financial Officer

On the real estate category. On, sort of I guess, regional and market performance difference, right now, the strongest region and it probably won’t surprise anybody is the Southwest region, which is predominantly Texas, those economies are very strong. Let me get to the… yes, I got it. In Q3, the Southwest region was up same-store 10.5% and that’s been trending up through the year just for point of reference in the first quarter same-store Southwest region was up 6.4%. So, that’s an indicator of real strength in the Northwest region, isn’t as dramatic, but in Q3, it was 8.4%. Another strong one is the Mid Atlantic region. That region was up 10.6% same-store organic. I think one of the explanations there is that region has been the more successful region we have in deploying digital and digital is in these numbers so that maybe a reflection of that double digit. And the Gulf Coast remains very strong up 11.6%. The once that are struggling, North Central that is Michigan, Northern Illinois and alike 2% same-store organic growth. The Southeast, which includes Florida was up 5.5%. Q3, that’s down from being up about 9% in Q1. And then the other ones, it’s hard to really collect any sort of meaningful information on them. The Western region, I think it was up 7.5% same-store in Q3, but that is down from about 10 in the first of the year and that’s mostly reflective of Las Vegas where the local economy there is beginning to reflect what’s going with a real estate economy.

James Dix - Deutsche Bank

And then just on your… in your guidance your expectation on digital contribution kind of similar to the third quarter two three points or so.

Keith A. Istre - Chief Financial Officer

Yes.

James Dix - Deutsche Bank

Okay.

Keith A. Istre - Chief Financial Officer

Yes. I mean take half of it and attributed to digital and half of it attributed to same-store static.

James Dix - Deutsche Bank

Great.

Keith A. Istre - Chief Financial Officer

Let’s hope it to the top end of the range.

James Dix - Deutsche Bank

Okay. All right. Thanks very much.

Operator

Thank you. Our next question will come from Marcie Ryvicker, Wachovia Securities.

Marcie Ryvicker - Wachovia Securities

Does the softness in your traditional business have any sort of residual impact on your digital board maybe in terms of pricing, or are this now different customers… specific customers that you are serving is the first thing? And then the second question is can you talk about your share repurchase activity, it picked up in the quarter. Should we expect the same level of activity throughout the rest of the year and maybe into next year?

Kevin P. Reilly, Jr. - Chief Executive Officer

I’ll do the digital question and then pass it off. It was very encouraging to me amongst that the data points that I looked at in September to see retail for the first time be our largest category of business. And when we dug deeper into the numbers, it was clear that digital was driving that. And if you think about what we’ve been saying about the ultimate power of digital in terms of value proposition to the customers, it’s most valuable to that retail category because they have a need for call it action. So, I feel good about that. The digital performance across every market… markets that are challenged economically and markets that are still robust, digital is performing well and it’s delivering on all of its promise, quite literally and every market whether it’s Toledo, Ohio or Las Vegas or Gulfport it seems to be again living up to the promise and as we learn more about how to sell it, I think all is good on that front.

Marcie Ryvicker - Wachovia Securities

So is it just that there’s no business shifting from traditional to digital at this point?

Sean E. Reilly - Chief Operating Officer

Well I was… that’s made it a little strong, I count on it that I can go that far. I think that if you look at the aggregate statistics and the growth and its contribution to growth you can say that it is additive and it’s creative and it’s everything that we want it to be. I didn’t interpret the question to mean that no customers from our analog business go to our digital business.

Kevin P. Reilly, Jr. - Chief Executive Officer

Yes, we have a lot of the same customers, I guess put it another way we are not cannibalizing our static business with the digital.

Sean E. Reilly - Chief Operating Officer

Yes, I mean the static business is a reflection of everything you have read about in the weakness in local ad spend.

Kevin P. Reilly, Jr. - Chief Executive Officer

That’s it, Anne. It’s the economy

Marcie Ryvicker - Wachovia Securities

Okay and on the share repurchases?

Keith A. Istre - Chief Financial Officer

We have got approximately $264 million left to go on the last authorization. As you mentioned we spent about $150 million in this past quarter. We plan on continuing to firm that repurchase through the fourth quarter and on into the first quarter. I am not certain when we will finish it up but I would think it would be within the next two quarters, the fourth quarter and then on to the first quarter.

Marcie Ryvicker - Wachovia Securities

Thank you very much.

Operator

Thank you. Our next question will come from Anthony DiClemente, Lehman Brothers.

Anthony DiClemente – Lehman Brothers

Can you hear me?. Sorry.

Kevin P. Reilly, Jr. - Chief Executive Officer

Yep.

Anthony DiClemente - Lehman Brothers

Thanks for taking the question. Just a follow up to Mark’s earlier question, I can’t analyze and figure out how to maul your operating expenses and it seems like you did a great job managing expenses in the quarter. You have talked Keith about the 46% long term expense growth. Should we take that to mean ’08 expense growth is 46% and then beyond that if you could please give us a little more color on the number of points that are driven by static operating expense growth versus digital and even if you could talk about the drivers of your cost structure more broadly like the lease cost, the sales force cost and the digital cost looking into your operating expenses, just to help us out with the modeling of OpEx. Thank you very much.

Keith A. Istre - Chief Financial Officer

On a pro-forma basis our operating expenses outside of corporate have always grown 3% to 5%. Inflation… Bears this cost business inflation driven and that’s historically been our run rate. Digital adds one point to that and so we upped that at the beginning of this year for our expectations to be 4 to 6. I would assume that if you want to model you're ’08 numbers, I would use the mid point of that range, a 5 maybe even a 4 especially in the first half of the year our expenses were higher in the first half of this year. Than I mean on a comp basis when they were in the back half. Our largest expense is our lease expense. It’s a third of our total expenses and it generally grows about 5% a year. Our labor cost is the second largest expense. It’s almost as large as the lease expense. It’s about 30% of our total cost structure and a lot of that is hourly wage and that is also a tie closely to inflation and all of the rest of the cost or just your G&A cost, sales cost, commission, primarily commission based. So if the company's doing well the sales force does well, also if the company goes backwards, then they don’t do as well as they do in good economic times. I don’t know if I touched on all your points. But if I haven’t?

Anthony DiClemente - Lehman Brothers

You have. That was awesome. I, actually what, what I am trying to get at is… of those costs as well, which do you consider controllable or which do you truly consider fixed versus variable. I would think that the commission is variable based on your topline performance but then I would think, your lease cost and then your salaried sales force costs are fixed so maybe you could just comment on that? Thank you very much.

Keith A. Istre - Chief Financial Officer

It’s just the commission and production… is a variable production and a lot of times we pay for the advertising production its less production is going up on the boards and that cost comes down. Those are really the two variable items. This is not the kind of company that if we see a slow down on the horizon where we start reducing our headcount because we're pretty excited about the long-term prospects for our business and we're already indicated that if all goes well in ’08 we're going to accelerate our digital deployments in ’08. So there’s going to be lots of activity and we need all hands on deck and all the troops focused on that activity and the sales will come.

Anthony DiClemente - Lehman Brothers

Great. Thank you.

Operator

Thank you. Our next question will come from Eileen Furukawa from Citigroup.

Eileen Furukawa - Citigroup

Hi. Thanks for taking my question. I have a couple. I’m just wondering, has the price of digital boards come down? And is that also pointing a desire to be more aggressive on the digital side and also you talked about an easing of the regular environment kind of feeling, your desire I just a little more color there? And then also you talk a lot about the comps hurting your business in third quarter and fourth, but the comps really do ease a quite a bit in the first quarter, does that mean that you think it makes that easy that you should be able to actually see the acceleration of growth in the first quarter? Thanks.

Sean E. Reilly - Chief Operating Officer

You always talked about tough comps when you under perform. You never mentioned the easy comps when you blow it out of the water. We are not going to talk about Q1, but beside the above reductions in the cost of digital units. You sort of got backwards, at the current cost, we are very pleased with how things have gone. Our expectation is that the cost will come down because if you do accelerate our activity, it means more volume to our vendors and they have been good partners in terms of value engineering, the structures that they… the signs that they sent to us. In addition, passing on the volume discounts, in exchange for aggressive commitments, but we don’t… we are not going about this exercise by saying if we can get the price, it actually put up more. It’s all regulatory driven, and the regulatory barriers have improved over the last year both on the national front and in certain states. In addition to that at the local level we will begin to demonstrate the usefulness of these things from a public safety point of view. And it’s a different conversation that we have with municipality about the utility of these changeable message signs versus a static billboard. And because we can have these different conversations, they are more open to possibility.

Keith A. Istre - Chief Financial Officer

Eileen, this is Keith. Just to clarify on the first quarter comp, our first quarter of 2007, our pro forma revenue growth was 7.5%. I’m not sure if that's considered… we consider that a very simple hurdle.

Eileen Furukawa - Citigroup

Okay. And then, I just… another kind of follow-up. I’m just curious, historically when you have seen that slowing down in your business before, has this been a leading indicator compared to other firms of local media like newspaper and radio and TV or do you usually see other tradition media slowdown before your business does?

Sean E. Reilly - Chief Operating Officer

Well, this is Sean. I don’t really look at it that way. I try to look at our bookings and within our book, think about what would be the best leading indicator. And it’s our shorter cycle sale products and so the first thing I look at it is posters, if you recall on our third quarter call, when we sort of became harbinger it was the poster occupancy dropped three point in the month of June. That usually the canary in the coalmine and that’s what I look at. It was nice to see it firm up as the quarter progressed and poster occupancy seems to be remaining stable right at that 70% level and comping well year-over-year or at least flat. So it’s not declining. So, that’s what I look at, that tends to be the earliest indicator, if you are going to look at something else, you’d look at softness in the transit business. That tends to be an ad dollar that in tough times goes away first, and interestingly enough, we had a great month and our transit business just recently settled. There is conflicting data point but there’s choppy seas out there.

Eileen Furukawa - Citigroup

Great. Thank you very much.

Operator

Thank you. Our next question will come from Jim Boyle CL King.

James Boyle - C.L. King & Associates

Good morning. Sean, you sometimes on the call the sort of feed back that you get from your veteran experienced regional Vice President’s on your call-in. was there anything on the call-in this month that surprised you either positively or negatively?

Sean E. Reilly - Chief Operating Officer

Not really Jim because it just sounded a lot the bring down call for the fourth sounded a lot like the third. At the end of the day if I had to sort of overall characterize it. People are disappointed but they are not finishing the back half of the year real strong. But also they’re not talking about ad recession. So just kind of in going through the regional book of businesses that weren’t a great deal of surprises and the fourth feels like the third. But having said that Jim in those real estate, in those markets where they are heavily dependent on the real estate economy. They’re using recession like body language. Customers deferring making decisions, cancellations and those kinds of things. The good news is, is that’s just a portion of our 160 unit platform.

James Boyle - C.L. King & Associates

So given all that and given the occupancy situation and the ad rates being up. Overall if you were a fancy economist on TV. It sounds like you're saying we're not recession, we're not going into a recession. Would you say we are in… I guess perhaps a near session or that you feel it’s getting slightly tougher.

Kevin P. Reilly, Jr. - Chief Executive Officer

Well, Jim if I didn’t have to read the Wall Street Journal everyday and my only data point was our book of business. When you’re up even mid-singles, that’s not a recession and so…

James Boyle - C.L. King & Associates

Doesn’t it feel like a near recession?

Kevin P. Reilly, Jr. - Chief Executive Officer

Not in our book of business but you know you read the Wall Street Journal, you can pretty depressed.

James Boyle - C.L. King & Associates

Okay. Finally Sean. What’s the next pendant state regulation for digital that you are looking forward to or maybe that you worried about?

Sean E. Reilly - Chief Operating Officer

On the state, state by state front its, all new as good. I mean, we got a favorable ruling out of the Federal Highway Administration which is going to in the near term I believe lead to relief in Texas and in the mid-term lead to relieve in New York and those are two incredibly important states. So on the regulatory front probably feel good.

James Boyle - C.L. King & Associates

Can you kind of quantify how important Texas and New York are to you?

Sean E. Reilly - Chief Operating Officer

Well, to broadly quantify, if it goes the way we think it goes then we’ll exceed this year’s deployment in digital.

James Boyle - C.L. King & Associates

Okay. Thank you.

Operator

Thank you. Our next question will come from John Klim, Credit Suisse.

John Klim - Credit Suisse

Good morning gentlemen. If you have an idea as to what, or which medium, given the idea which medium you might be taking share from in the retail categories specifically and then in the past I think you’ve discussed selling your digital networks in shorter ad cycles, and as digital becomes a larger component of your total revenues, could that add volatility to the … to your total revenue performance? Thanks.

Operator

Hello, excuse me, ladies and gentlemen this is the operator, I expect we experiencing some technical difficulties. Please continue to remain holding in line and we will be right back questions. Thank you. Ladies and gentlemen once again thank you for continuing to hold. We are still waiting on the speakers to reconnect. We’ll be right back with you. Ladies and gentlemen we now have our speakers reconnected in conference, speakers would you like Mr. Klim to repeat the last question. Thank you. Mr. Klim would you mind repeating your last question for them. Please.

John Klim - Credit Suisse

No. Not at all.

Operator

Thank you.

John Klim - Credit Suisse

In terms of the retail performance on your digital science, do you have any idea which medium you might be taking share from there. And then in the past you discussed selling digital networks in shorter ad form cycles and as digital becomes larger component of your above revenue stream. Do you think that could add volatility to your revenues on a quarter-over-quarter basis? Thank you.

Sean E. Reilly - Chief Operating Officer

Well, yes. On the volatility question I think there is no question, but that, as we get more comfortable selling short and more successful selling short then you are going to have the corresponding volatility that, that implies. As to… I think its too early in the game to be able to ascertain which medium the share shift is coming from. It’s a nice data point to validate that we are getting some share shift. It would be anecdotal at this point. When I look at couple of other category I think you can point the share shift from newspaper for example, we are getting a lot of real estate that looks like real estate classified traditionally, that would traditionally be in the news paper. Advertising house price points and then pictures of happy brokers with sold signs over the house and you know that’s good and that come probably right out of the newspaper. But on the retail side it’s probably too early to call.

John Klim - Credit Suisse

Right Thanks.

Operator

Thank you. Our last question will come from James Byrant Morgan Stanley.

James Bryant - Morgan Stanley

Hi. Thanks for taking the question, can you just, I mean, given, can you just go over the cost of your digital boards. I mean, historically you kind of given us what the larger formats doing your bulletins and the posters are from a CapEx perspective? And then can you just update us on what the monthly run rate digital numbers are per board and what the numbers that you’ve sort of given on the previous calls.

Keith A. Istre - Chief Financial Officer

We're going to have to fumble around on the cost per board. You mean cost per…

James Bryant - Morgan Stanley

The CapEx.

Keith A. Istre - Chief Financial Officer

Total per unit or…

James Bryant - Morgan Stanley

Yes.

Keith A. Istre - Chief Financial Officer

Well, each deployment has a different cost associated depending on how much work you have to do to the physical structure. So you got that component. And then you got some times it’s actually communication to the sign can be significant. But… then of course, the component is the actual cost of the digital unit itself that you receive from the manufacture and we got different sizes, different pitch which means different resolution type science and now we are have different type engineered signs so, we are not really. I don’t think we can help you on the… on this call to give you the cost per sign but we can safely say that in ’08, we expect because of the volume, we will be the largest purchaser of LED signs in the world in ’08 and we expect that the volume associated with these orders should result in a lower cost per unit across the different sized signs that we deploy.

James Bryant - Morgan Stanley

And may be I will ask that one differently. You have mentioned on the recent conference that you thought that you will be able to get the cost of your digital posters from 140, 000 to under 100,000 NOA that was your goal. How do you sort of look at this into performing towards that. You think that’s the sort of and do you think that the Billboard, the larger formats can come down with that same type of directionality there. Do you think it’s the smaller, will change.

Sean E. Reilly - Chief Operating Officer

Directionally, we are felling good about those goals of driving the price down. We haven’t concluded negotiations with our vendors. The smaller format posters in our initial conversation with price points is a little more… is dropping a little more than on the larger formats. I can’t quantify it for you now because again we are in the close of these discussions with our two largest vendors, but directionally, we are feeling very good about where they are taking us.

James Bryant - Morgan Stanley

Okay. Great and then just last one on the run rate and digital revenues, where we stand now on the latest month?

Keith A. Istre - Chief Financial Officer

I think the latest, the last month of the quarter was $6.7 million, that was October. $6.7 million in October.

James Bryant - Morgan Stanley

Okay.

Kevin P. Reilly, Jr. - Chief Executive Officer

Santail, thank you for orchestrating us a wonderful call and we look forward to this conversation for our Q4 call. Thank you everybody for tuning in.

Operator

Thank you very much. This call has now concluded, ladies and gentlemen. You may now disconnect at this time. Everyone have a great day.

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Source: Lamar Advertising Co. Q3 2007 Earnings Call Transcript
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