Lamar Advertising's CEO Discusses Q2 2012 Results - Earnings Call Transcript

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 |  About: Lamar Advertising Company (LAMR)
by: SA Transcripts

Operator

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

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 2012 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 Kevin Reilly. Mr. Reilly, you may begin.

Kevin Reilly

Thank you, Jeff. I want to welcome all our shareholders and friends for our Q2 call. As it is our custom, I'll make a few comments and then turn the call over to Sean and Keith, for some color. I guess the first item to cover is the REIT concept. As the company continues to generate more cash flow, than it needs we’re obligated to explore different ways to return capital to our share holders and the REIT construct is one possible avenue.

We intend to seek a private letter ruling, we hope that the time frame on that would be a Q1 host 2013 event and was thinking that if everything goes right we would make the election in January 1, 2014.

The PLR seeks to answer a lot of questions, and since we’re in the middle of the year process, its not that we don’t want to be forward coming, it’s just we don’t have the answers to those questions. So as you think about what assets are admissible and what asset are not, we just don’t simply – recently don’t have the answers to those questions at this time. So you won’t get them.

With that, I’d like to go head and turn the call over to Keith to walk us through that.

Keith Istre

Just to zip through the press release, real quick on the pro forma results. As you noted, the pro forma revenue came in at 3.6% that was slightly ahead our guidance of 3%, that was a total increase of about $10.5 million.

Consolidated expenses were 3.6%. I had on the last call mentioned that we thought that it would come in around 4%, so we were slightly under on that metric.

Let me point out on the corporate overhead, you may have noticed that those expenses were up about 16% for the quarter and that’s a blip not a trend. We had some difficult comps to contend with in the second quarter of last year when we saw that we were not going to hit our incentive bonus performance goals.

We reduced the bonus accruals in the second quarter at corporate to the tune of about 800,000. So that’s 800000 less in experiences last second quarter that we don’t have, that we do have in the second quarter. So I think you’ll see that flatten out.

On a consolidated expense basis, for the third quarter we think that the expense will come in somewhere in the 2% range, which going forward was up for this year at about as what we guided to at the beginning of the year.

One other quick note you saw that we had called approximately 123 million of senior subordinated high yield notes due 2015. Several people called and I’d liked to know how that redemption was going to be structured. And as of right now we anticipate having approximately $90 million in cash on hand at the end of August when these notes are due and we will draw the remainder from our banks revolving credit facility to take those out and that will leave about $137 million of that issue still outstanding that we would like to address before the end of this year.

With that Sean?

Sean Reilly

Sure, thank you. Let me walk though some of the specifics that typical color on the call and you will open it up for questions. First account of digital units and this is going to be as of yesterday, sort of call and this will include the 30 digital bulleting phases that we purchased in Phoenix during the course of the last quarter. So as of today we have 1564 digital units in the air, 852 bulletin and 712 were posters and again that includes the recent acquisition in Phoenix which by the way we feel very good about it. If you look at the performance of our digital platform, our large amount of digital platform has been our best performer, markets that we're current markets that we are currently in such as Chicago, Atlanta, and the like doing very well. It's clear that we're building something of interest in national advertisers and national digital book with us almost 20% in the second quarter. So we feel good about that.

On the slightly negative front, our same board digital went flat for Q2 and this basically tells us that, moreover the last 18 months in the space of a challenging macro environment we've added a tremendous amount of capacity. We still feel very confident in our digital roll out. However we maybe a little more selective over the course of this year with those roll out and we kind of stay with macro-environment will be.

On rate and occupancy, both posters and bulletins, occupancy was up 1%, Q2 2012 73% for posters, Q2 2012 78% for bulletins that compares to 72% and 77% respectively for Q2 of last year.

On rate we're still in macro environment that’s conducive to driving rate. Essentially rates were flat for both categories for the second quarter. For posters, $453 average rate per poster last quarter, compared to $437 average rate per poster in Q2 of 2011. Average rate for bulletins Q2 2012 $1,116 versus $1112 Q2 last year. So you can see the environment we’re trying to sell into and again it’s not conducive to driving rate.

On local versus national, local is slightly stronger and steadier than national and it has been all year except for digital. As I mentioned, national digital has been – probably good pro forma.

On verticals, the story is very similar to what you tended to here with essentially two things of note. In general, our top 10 categories are very healthy, top 10 categories were about 5% in Q2. Well, there was weakness; it was in wireless, which was disappointing in Q2. But again, if you add up all the top 10s, very healthy. Automotive for Q2 was up 3.5%. We’re seeing good patients and good improvement in automotive for Q3. We think it’s going to end up Q3 in sort of low double-digit, up for the third. And that by the way includes a very impressive buy from General Motors on our digital platform. For the first time, General Motors National came in and bought our whole digital platform around the Olympics that was a good new story for what's going on with digital.

So with that, let's go ahead and open it up for questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Our first question comes from Marci Ryvicker from Wells Fargo.

Marci Ryvicker – Wells Fargo Securities, LLC

Two questions, somewhat maybe related. The first, Sean, you didn't really address what's going on in the third quarter. So curious what the deceleration is coming from, is it a slowdown in occupancy, a slowdown in rates, fewer digital boards and then media related, is this deceleration part of what prompted your decision to look at REIT status, and if so, if you could give any color on why now, that will be great?

Sean Reilly

Sure. On (inaudible) business is actually we are not seeing any negative numbers out there, we are not seeing a double dip. What the field is telling us is while pacings are still where they've been. They are beginning to see a difficulty selling in the month, for the month. There is two components to hitting a future month, one is what you got on the book, your pacings, and the other is what you're seeing in terms of economic activity. So I would have to say that our focus in the field are just – a little bit concerned about where they are seeing the macro environment. I’m still comfortable with the notion that tomorrow we will beat GDP by 1.5 to 2 point by the time we close out the year. So I wouldn’t point to anything other than the macro environment and a little bit of caution there.

Marci Ryvicker – Wells Fargo Securities, LLC

Is there a specific category because I know auto is improving…

Sean Reilly

Auto is…

Marci Ryvicker – Wells Fargo Securities, LLC

There’s got to be something else that’s offsetting that?

Sean Reilly

Yeah, I mean wireless has been a disappointment and continues to be a disappointment. It’s just those guys have been a little bit light all year. But to put it in prospective customers come and go and we are – whatever category is down, we seem to be replacing it. As I mentioned for our top 10 categories for Q2, they were up 5. There is whole slew of categories that – vertical between 10 and 30, and they kind of come and go and come in and out. And I think they are a better reflection of the strength of the macro that may be our top ten might be.

Decision to elect REIT status is not something to do based on a quarter or (inaudible), this is a long-term decision. Have to be in the best interest of all of our shareholders. I wouldn’t even try to suggest that it’s because of what we saw in August or September. It really is about making the right decision on returning capital to shareholders over the long term. And there are a lot of different factors to figure into it including your tax status and alike to figure into the timing, but the board and Kevin and our shareholder (inaudible) make the right decision.

Marci Ryvicker – Wells Fargo Securities, LLC

Great, thank you.

Operator

Thank you. Our next question comes from Alexia Quadrani from JPMorgan.

Alexia Quadrani – JPMorgan

Hi, thank you. Just a follow-up….

Operator

Mr. Quadrani, we lost your line. Are you still there ma’am?

Alexia Quadrani – JPMorgan

Yeah, I am here. Can you hear me now?

Operator

Yes, ma’am.

Unidentified Company Representative

Yes.

Alexia Quadrani – JPMorgan

So I was going to follow-up on your comments about selling the roll out at your digital boards. I guess could you give some color what’s sort of run-rate we might we might consider going forward?

Unidentified Company Representative

Well it’s our opinion that what we are managing to is macro-environment and the macro-environment can change, and obviously its our job to manage through it. So I wouldn’t want you to suggest this at the end of the year and the mark was at 200 digital units, that’s the new run-rate, or that’s for 2013 looks like. We really want the right message to be delivered here, we’re being a little bit selective given what we’re seeing in the macro-environment in general and in particular, where we see continued strong demand and where perhaps a pause is wanted.

Keep in mind when we roll out digital unit, it’s not a top-down exercise. This is not something where executive sitting back in the room and order up digital units and start sprinkling around the country. It’s a bottom up exercise, our general managers request them given the demand they are seeing locally in their local market. So, again, I don’t want to put a number out there that suddenly becomes the new norm for modeling.

Alexia Quadrani – JPMorgan

And then on the – coming back to (inaudible) showing a little bit of risk, suggest that your big identity in U.K, you are in the [BCNA] or what you see in a critical environment maybe some displacement of advertisers sort of being pushed out from TV?

Unidentified Company Representative

We don’t tend to get much of the tit for tat television buys that characterize, what happens with political these days, we see a little bit perhaps, but again is not the super packed tiling and the billboard they tend to have of all that happening on TV.

Alexia Quadrani – JPMorgan

All the customers have been crafted out?

Unidentified Company Representative

It’s on the margins, we get it. On the margins, we get some bias from customers that perhaps don’t want to be caught in that fray, but it is hard to predict much more quickly and short today than they used to be able to, so hopefully we’ll get a little of that business and that may be a reflection of why this some of our patience in the back half are better than the guidance that we put in the press release.

Alexia Quadrani – JPMorgan

Okay, thank you.

Operator

Thank you. Our next question comes from James Dix from Wedbush.

James G. Dix – Wedbush Securities, Inc.

Hey, good morning guys, just one thing if you had any feedback from shareholders or analyst about converting to a read and if so what seem to be the key pros and cons that are important to them thanks?

Unidentified Company Representative

No, because we re-concept is just one item on the menu and of course the pros and cons just general, when you talk about returning capital to shareholders, share buyback versus a dividend, so I think we have a good sense of what our shareholders are interested in and what they are thinking about, but there hasn’t been a lot of focus on the re-concept in general because it’s just sort of one tool in the toolbox.

James G. Dix – Wedbush Securities, Inc.

Great thank you.

Operator

Thank you. Our next question comes from Jaime Morris from UBS.

Jaime Morris – UBS Securities LLC

Hi good morning, you mentioned that your larger markets are doing better than some of your smaller markets with digital, I was just wondering, if you could give us a little more detail on what your are seeing there and what's driving the difference, is it the national advertisers or do you think digital more just in those larger markets or any more color there.

Unidentified Company Representative

I think that's part of it Jamie, I thing that, national advertisers are more interested in being in those places, again that's one of the reasons, we felt confident in entering the Phoenix market in the way we did. There is also, if you look at the evolution of digital against the more land, we more heavily penetrated our smaller and middle markets where local management is saying okay, digital is approaching 35%, 40% on my book of business, let me pause and absorb some of this capacity and I'll get back to you if I want some more units so that was mostly the color on same board performance. In general, across the whole platform, national is stronger and the same board performance I think is pretty much going to track the maturity of the overall digital development in the market.

Jaime Morris – UBS Securities LLC

From a same board prospective, then does that suggest that digital revenue was down in some of your smaller markets, on a same board basis, if not (inaudible) up.

Unidentified Company Representative

Yes I mean it's sort of across the board, you got again Jaime, some of these things you got a lot of smaller numbers right, little movement can move the same board performance. As we look at it and manage to it, look it all the data, there is nothing out there to us that suggest that the business model have issues, we still have confidence in. It’s just a question of were some markets are in their overall business development.

Jaime Morris – UBS Securities LLC

Okay thank you.

Operator

Thank you. Our next question comes from Davis Hebert from Wells Fargo Securities.

Davis Hebert – Wells Fargo Securities, LLC

Good morning guys, thanks for taking the question. Just wanted to ask about with regard to rate, how you’re thinking about the capital structure, whether like to be a lower leverage point or not a read status then where do you hope it’s going.

Unidentified Company Representative

You came in kind of week, but as yeah, question was how do you think about your capital structure if you were REIT, is that the question?

Davis Hebert – Wells Fargo Securities, LLC

That’s correct yeah.

Unidentified Company Representative

Well, without going into a lot of detail you know that the distribution requirements on a REIT are in the 9% manage, so you've to manage your capital structure. So, that you have in a position to make those distributions. So, there is the possibility. Once you make a commitment that you would have to manage your capital structure more conservatively, then you would if you were a REIT.

Davis Hebert – Wells Fargo Securities, LLC

Okay, so more conservatively like that at this early point

Unidentified Company Representative

Yeah, that's I mean, given the restructure and the distribution requirements. I mean that's that will be our thinking

Davis Hebert – Wells Fargo Securities, LLC

Okay. Thank you

Operator

Thank you. Our next question comes from Eric Handler from MKM partners.

Eric O. Handler – MKM Partners LLC

Yes, thanks for taking my question. Just looking at pricing for digital billboards, it looks like you’ve seen pretty significant deceleration in CPM growth over the last couple of years. Is this more a function of the economy or is it more of a function of the fact that this is a lot more digital boards out there now or is it something else going on.

Unidentified Company Representative

Sure, I don’t think that the climate is necessarily correct. We really haven’t seen a deceleration and our CPMs were able to get. You look at the fact that over the last 18 months we probably added 30% to the capacity that we have. And those boards that we put up in the last 18 months are performing extremely well and performing and achieving the IRRs that you would expect. So again I think the CPM’s that we are getting are holding steady. If we had signboards increases in performance, I would imply increased CPMs. I’d say on the Boards we have updated their holding status. And the board we are putting out there are performing compliance. Again if you look at it market by market and where the CPM’s are falling out as a general proposition, our CPM’s are falling just below radio and holding there and doing fine.

Eric O. Handler – MKM Partners LLC

Great. Yeah, no I meant the growth in the CPM pricing not necessarily that you are seeing deterioration in pricing?

Unidentified Company Representative

In general, as a general proposition, digital CPM’s again fall kind of right just below the pricing umbrella status by radio.

Eric O. Handler – MKM Partners LLC

Great thank you.

Operator

Thank you. Our next question comes from Doug Arthur, from Evercore.

Douglas Arthur – Evercore Partners

Yes, you may have mentioned this, I missed it. But in terms of the 1% to 2% pro forma guidance for Q3, did you differentiate between national, local, I know you made some positive comments on digital national?

Unidentified Company Representative

Yeah, Dough, we don't intend to do that, mainly because of little teeny movements on the national book kind of affect the (inaudible) people read it long and so we stopped giving forward guidance on national versus local in the book.

Douglas Arthur – Evercore Partners

Okay. I mean, is it fair to say that, I mean, you’ve talked a lot about some of the uncertainty of the book month to month with much greater variability than you see in the past. So you know this is your best look, but fairly conservative 1% to 2% at this point and things could certainly strengthen.

Unidentified Company Representative

I hope.

Operator

Thank you our next question comes from David Miller from Caris & Company.

David W. Miller – Caris & Co., Inc.

Yeah, hi. Hey, guys. A couple of questions, Keith we know you guys are moving pretty aggressively in taking up that 6 and 5 days paper, we kind of have the loose calculation here that you will be done with that before the end of the year. Do you think you might just given your cash flow generation, do you think you might be able to get to the 9.75 paper before the end of the year or are you going to kind of leave that to the top half of 2013? And then Sean, I covered the sector now for 12.5 years and I just don't recall any example of an advertising based business moving to a restructure. Can you think of any other example? Thank you.

Unidentified Company Representative

As far as the first question on the senior notes and the sub notes, we will address the remaining senior subs due 2015 before the end of the year. The senior notes that will happen in the back half of 2013, they mature in April of 2014. And so we will wait until the third or fourth quarter to address those. We may call it very expensive, so we want to get closer to the maturity date as the makeover goes down, the closer we're to that time. And we have a couple of options one is to stop our free cash like we did this year to address the senior subs, our revolver are going back to the debt markets to take out. To answer your question, no, there is no other advertising based entity that has a REIT structure. The reason why we are looking at it is because the unique characteristics of the billboard industry and a recent IRS ruling regarding billboards and their statuses of real property.

David W. Miller – Caris & Co., Inc.

Wonderful. Thank you

Operator

Thank you. Our final question comes from Jaime Morris from UBS

Jaime Morris – UBS Securities LLC

I just have one quick follow-up. In the past, you have talked about taking down some of your traditional boards in light of a weaker macro environment. Can you give us an update on the number of bulletins and posters that you have up at this point or how that growth rate is trending year-to-date?

Sean Reilly

Jaime, I don't think I have the absolute number of paces for posters and bulletins in front of me. We can certainly get that you. In general the way we are approaching real estate these days is not so much driven by the macro environment, it’s more driven by what I would call (inaudible) of a portfolio. And that implies a scalable change. Back in 2009 things were pretty bleak and we attacked the least portfolio very, very aggressively. Our categories what we’re doing today is just through the management of the RIET portfolio. But I can get back to you on the absolute numbers are posted in both.

Jaime Morris – UBS Securities LLC

Okay, thank you so much.

Operator

Thank you. I would now like to turn the call back over to Mr. Riley.

Kevin P. Reilly

Jeff, thank you very much and we are looking forward to our Q3 call. Thanks to all shareholders and friends for tuning in. Thank you very much.

Operator

Thank you. This does conclude our teleconference for the day. You may now disconnect.

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