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Executives

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

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

Sean E. Reilly - Chief Executive Officer

Analysts

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Matthew Chesler - Deutsche Bank AG, Research Division

Nadia Lovell - JP Morgan Chase & Co, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

James G. Dix - Wedbush Securities Inc., Research Division

Lamar Advertising (LAMR) Q3 2012 Earnings Call November 7, 2012 11:30 AM ET

Operator

Good morning. We now have Kevin Reilly, Sean Reilly and Keith Istre in conference. [Operator Instructions]

In the course of this discussion, Lamar may make forward-looking statements regarding the company, including statements about its future financial performance, strategic goals and plans. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this call and the company's reports on forms 10-K and 10-Q and the Registration Statements that Lamar files with the SEC from time to time. Lamar refers you to those documents.

Lamar's third 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 this conference over to Kevin Reilly. Mr. Reilly, you may begin.

Kevin P. Reilly

Thank you, Chantelle, and I want to welcome everyone to our Q3 earnings call. As you can see from the press release, we are managing our expenses in a low-growth environment, not very sexy, but necessary. And in addition, we are proceeding according to plans regarding our REIT efforts. And when there's a meaningful milestone, we will certainly report that to you.

As is our custom, we will turn the call over to Keith for some Q3 color, and then Sean will give you some operating details. And then we'll open up the call for Q&A. So, Keith?

Keith A. Istre

Thank you. Good morning, everybody. Just to recap Q3 real quick, you saw our pro forma revenue was up 2%. If you recall, we guided to approximately 1% to 2% for the quarter, so we came in at the top end of the range. Our consolidated expense guidance for the quarter was for approximately 2%, and obviously, we did much better than that, coming in at minus 0.4 point on the consolidated expenses. Part of the reason for this was timing issues.

You may or may not recall, but we settled 2 lawsuits in Q3 last year that had to do with patent infringement, and that was approximately $2 million that hit our Q3 expenses last year, that we don't have this year. From an operating side, we had two 5-week hourly pay periods in the third quarter last year. We only had one this year, in Q3, and that resulted in a $1 million decline in our direct labor costs.

In addition, we did have some pickup or some reductions in some of our operating expenses. One of them, our illumination cost, was down $0.5 million. We've introduced a new form of energy-saving lighting and illumination monitoring system, and it's saving between $200,000 and $300,000 a month.

Going down, EBITDA was up 4.9%, the margin was 45.9%. That's the highest quarterly EBITDA margins we've generated since Q2 of 2008. As far as Q4 guidance, revenue guidance, as you saw in the press release was for up 2% to 3%. As we noted, this does not include revenue from the NextMedia acquisition that closed on October 31. We didn't feel comfortable with giving that guidance, being that it was such a newly acquired asset, but we will provide the Next revenue numbers in our Q1 '13 guidance. For modeling purposes, on an actual basis, we expect that acquisition for the months of November and December combined to generate approximately $5 million in revenue.

On the expense side for Q4, we're projecting expense growth of approximately 1% to 2%. We had expected expense growth -- or we had projected expense growth for the full year of approximately 3%, but with expense growth in Q4 of 1% to 2%, for the full year, we should be closer to a 2% expense growth number than a 3%.

Last, in the recent developments, you may have seen our press release at the end of October, but the company issued $535 million in new 10.5 year high-yield notes at a 5% coupon. As you saw in the press release, proceeds from that -- net proceeds after expenses was $527 million. What we did with some of that is we called the remaining 6 5/8% 2015 high-yield notes that were still outstanding, and we funded the Next acquisition. The total of that, those 2 transactions, was $284 million. So that leaves the company with approximately $0.25 billion in cash on hand. And Sean has some things that he's working on that may require that cash on hand.

With that, Sean?

Sean E. Reilly

Thanks, Keith. And before I get into our normal operating stats, let me quickly touch on 3 other things. Number one, as Kevin and Keith both alluded to, our team continues to do an excellent job managing expenses in the field, and their performance on that front has simply been outstanding, and everyone involved needs to be commended.

Number two, regarding the financing in the Next acquisition, the bond financing we closed last week continues to lower our cost of capital, and it's, in my view, also a key step towards optimizing our balance sheet for the REIT conversion. The integration of the Next acquisition, we also closed last week, is progressing smoothly. As Keith mentioned, you should model approximately $30 million in top line contribution in 2013 from that acquisition, and the $15 million EBITDA contribution from 2013 from the Next acquisition.

And again, with the extra cash on the balance sheet, we are currently in the second round on another potential acquisition. If we get it, that will be a good outcome for the company. If we don't get it, we will pay down the Term B on our senior facilities, and that will be an equally good outcome for the company. So that is the plan for the extra $0.25 billion that we're carrying on the balance sheet. And either one of those directions, it should be clear in the next 30 days.

Finally, number three, on Hurricane Sandy, the structural damage from the storm was minimal. Storm-related CapEx will be less than $500,000. Business interruption from these events was a little harder to predict, but right now our read is that the storm's impact on our customers' plans and our fourth quarter revenues will also be minimal nationwide. Whatever top line impacts occur in the northeast, we feel, is reflected in our Q4 guidance, and again, we don't believe that it'll be material.

Let me go over some of the statistics that we typically cover on the call. First, as of today, a number of digital units, we have 1,670 digital units in the air as of today. Keep in mind, that includes 30 from our purchase of American Outdoor in Phoenix this summer and 59 from our purchase of NextMedia last week.

In terms of new digital builds, we ended the quarter with 164 new digital builds for 2012, and it looks like we'll finish up the year with right around 200. Same board digital continues the story that we saw in Q2. It's essentially flat, actually up 0.1% for Q3. Rate and occupancy, excluding digital, posters Q3 '12, 72%; 72% for Q3 '11; bulletins, 78%, Q3 '12, that's 1% better than Q3 of last year. Regarding rate, Q3 '12 posters, $432 average rate per panel. That compares to $440 average rate per panel in Q3 2011. Bulletins, average rate, $1,126 for 2012 Q3. That compares to $1,116 for Q3 '11 or an increase of 1%.

Local, national. In Q3 of '12, our local book of business constituted 77% of our total book. National constituted 23%. For the quarter, local was up 3.3%, and national was up 1.8%. Reflecting on the year-to-date, local has been slightly stronger and slightly steadier at 3.6%. National has been slightly below that at 2.8% but a little more volatile as we progressed through the year.

Year-to-date, top 10 categories of business, restaurants -- or this will be Q3, restaurants, 13%; retail at 10%; hospitals and health care at 10%; service, 8%; amusements, entertainment and sports at 7%; automotive, 6%. Interestingly, automotive came on strong in the third. In the third quarter, automotive was up 16.6% of our book. Retail was also surprisingly strong in the third at 14.2% of our book or 13.2% up.

The only disappointing category in the top 10 continues to be telecommunications. Telecom's 4% of our book and was down 25% in the third quarter. Wireless is showing some signs of life in the fourth quarter, both Verizon and AT&T. And hopefully, that'll carryover into 2013.

So that's the typical operating stats. I'm happy to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Marci Ryvicker, Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Two questions. One, just clarification. Sean, can you remind us when you're expecting the IRS letter? Is it January, or just some time in Q1, or sometime in the first half of the year? And then the second question, Keith, you talked about 2% expense growth in the fourth quarter. Is this a good number going forward? And then also, sticking with Q4, you gave us $5 million in revenue for NextMedia, but what about expenses?

Keith A. Istre

Okay. As far as the numbers going forward, on expenses, we'll have to give you that in the first -- on the fourth quarter call in 2013, Marci, just like we did this year. We'll give you the best indication for the quarter and the year as a whole. But we don't see things changing much. I think 2% to 3% is basically where the companies would be coming out. As far as the expenses, those guys were running about a 40% margin, maybe a little higher. So I think you can just back into it, use something in the 40 -- low 40s for your EBITDA and then the expenses. We think that there'll be some expense savings, but we're not sure -- we know there's going to be some expense savings due to the synergies involved, but we just don't know if we're going to -- how much we're going to get since the thing actually just closed October 31 and our guys, our operating guys, were allowed to get in there on the day of closing, so they still won't [ph] get their arms around it.

Sean E. Reilly

Marci, this is Sean. I think for '13, we're fairly confident that it'll be a $30 million on the top and $15 million on the bottom from Next. And the letter, we're still on that timetable. I think we announced sometime in Q1. We should be hearing back. By the way, Marci, my flight was grounded getting up to New York today because of the weather. I don't think I'm going to be able to make it in for your conference. We might want to huddle up offline and maybe try to find -- figure out some sort of video or audio link for tomorrow.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Yes, we'll do that.

Operator

Our next question will come from Matt Chesler, Deutsche Bank.

Matthew Chesler - Deutsche Bank AG, Research Division

I just wanted to get a clarification on the sort of the timing for some of the reconversion milestones. You had been talking about how you were looking to, actually -- to file a letter by the end of the third quarter. Can you confirm whether or not that had happened?

Sean E. Reilly

Yes, we're being advised to stay away from too much process talk, but just -- it sometimes takes people into the wrong direction. So we're going to just kind of stick with where we -- what we've announced to date, which is we think we'll have that ruling back sometime in the first, and we -- near as we can tell, we don't have any reason to believe we're not pacing for that Jan 1, '14, date.

Matthew Chesler - Deutsche Bank AG, Research Division

Understood. Do you think -- in September, you guys have made some comments about having felt fairly good about the trends. I'm not clear whether or not that was in reference to the third quarter or the balance of the year. But that being said, can you comment on how the quarter turned out relative to your expectations? And maybe a little bit more on what you're feeling the environment is for rate and occupancy going into the fourth quarter as you know it so far?

Sean E. Reilly

Yes, we're guiding to what should be sequentially up in the fourth from the third, so we're feeling good about that. It's too early to peek into next year, but we're not seeing anything that suggests that next year can't be a good one. So the trends are pretty good. All of our top 10 customers are showing really good strength with the exception of telecom. If we can get AT&T and Verizon back on track, then I think that bodes well for us, not only for the fourth, but going into next year.

Matthew Chesler - Deutsche Bank AG, Research Division

And would you -- I mean, it's a modest -- modestly better quarter. Would you break that down in terms of the contributing factors to being more occupancy than rate or the reverse or really both?

Sean E. Reilly

It's -- we're still in a relatively low-growth environment, obviously, in the macro. And again, it's too early to call what the mix is going to be, whether it's going to be rate or occupancy. I suspect when we're talking about this in February, we're going to see that posters actually performed very well on the occupancy side. That's -- my sense is that's where the relevant strength is going to be.

Matthew Chesler - Deutsche Bank AG, Research Division

Is your visibility into the quarter any different than it's been historically?

Sean E. Reilly

No, it's pretty much steady as she goes.

Operator

Our next question will come from Alexia Quadrani, JPMorgan.

Nadia Lovell - JP Morgan Chase & Co, Research Division

This is Nadia in for Alexia. Just a couple of questions. Given the muted growth in digital that we've seen over the last couple of quarters, I think you said it was flat, what is your intention for keeping investing in digital boards in 2013? Are you still looking for -- could you be looking for 200 boards as well in '13?

Sean E. Reilly

I'd say that's a good point of departure. Again, we're still confident that the platform is going to pay off and that the investment is paying off. Reflecting on this year, so far, our newbuilds have performed as they're supposed to, so a little disappointing that the environment we're in is creating a flat same board year-over-year. But in terms of the capacity we've added, it's performing as we expected. So yes, I think that's a pretty good number for next year.

Nadia Lovell - JP Morgan Chase & Co, Research Division

And what has newbuild added to? How much has that added to the growth?

Sean E. Reilly

Well, if you look at..

Keith A. Istre

This is what we've added so far this year. $4.5 million. She's talking about actual revenue.

Sean E. Reilly

Okay, so actual revenue through Q3, it added $4.5 million. I was looking for the growth number, which I think is in the 12% year-to-date range. No, year-to-date, it's 13% for digital posters and 17% for digital bulletins. And it's been -- virtually, all of that's coming from the newbuild activity, given the flatness in the same board.

Nadia Lovell - JP Morgan Chase & Co, Research Division

Right. And then the weakness that you're seeing in telco, is it -- is some of it moving into another category? Or is the category itself just generally soft? Is it moving to another media?

Sean E. Reilly

What I'm hearing from virtually everybody is, that there was a pause in telecom, really, across a variety of platforms, so I don't think there's anything secular going on. I think that -- I think we're actually in for -- if fourth quarter trends continue, I think we're in for a pretty good year next year on the telecom side.

Nadia Lovell - JP Morgan Chase & Co, Research Division

Okay, excellent. Now given that we now know the outcome of the presidential election, I think in the past that you guys have talked about if you don't convert to a REIT that you'll possibly declare a dividend or grow a dividend. What are your views on that now?

Sean E. Reilly

It doesn't make a difference to us. Right now, we're hopefully still on a glide path to our announced intention to carry on with the REIT conversion. I don't see anything out there in the landscape that suggests that's not the wisest course of action.

Nadia Lovell - JP Morgan Chase & Co, Research Division

Okay. And if you have to create a taxable -- a subsidiary, would that, does that impact the timeline in any way?

Sean E. Reilly

No, it's a very typical thing in these conversions, and it's pretty clear that there are certain aspects of our business that will require that. For example, the transit businesses that involve wrapping buses will clearly not qualify as REIT assets and that's a -- that, clearly, would drop down into a taxable REIT subsidiary.

Operator

Our next question will come from Jason Bazinet, Citi Investment Research.

Jason B. Bazinet - Citigroup Inc, Research Division

I'm sure you guys like -- we have gotten a lot of questions from investors that are not necessarily outdoor investors traditionally, more REIT investors. And I was just wondering if you might be willing to share sort of the common questions that are coming from those investors and your responses to those questions, because I think what the big swing factor, other than the fundamentals on your stock, is really sort of ultimately what multiple will these new class of investors pay for an outdoor asset. So I'm sure you get sort of the same questions over and over. Do you mind just sharing sort of what some of those are, and how you've addressed them?

Sean E. Reilly

There are a couple aspects of our business model that I think we can address early on in this process, and I've tried to, in various other forms. The first one is really the nature of our CapEx. REIT investors are acutely attuned to AFFO, and that is a calculation that incorporates maintenance CapEx. And I've tried to help people understand the fundamentals of our business in terms of projecting forward the CapEx. For modeling purposes in maintenance CapEx, you should year in, year out model in about 5% of our net revenues for maintenance CapEx. And the other key point is that it's highly discretionary. If we need to, we can dial it back, and the billboards will not fall down. For those of you that have followed us for a while, you know we had to do that in 2009, and we cut CapEx to virtually nothing. And so I would make that point that relative to the REIT universe, I think our CapEx is relatively more discretionary. The other question we get is how do we compare to the rest of the REIT universe in terms of our exposure to the business cycle, and that's a harder thing to get our arms around. We are doing some analysis on how we fared through the ups and downs versus the rest of the REIT universe. It's my view that as we drill down more into that, we're going to compare favorably. Prior to 2009, which, of course, was a traumatic event across a lot of industries, our worst same-store decline through many, many recessions that this management team has managed through was 2%, and we never had consecutive same-store declines in any given year or across years. So I think as we continue to refine that story, drill down into the numbers, we'll compare favorably in that regard. Those are the 2 questions that we get most often from traditional REIT investors.

Jason B. Bazinet - Citigroup Inc, Research Division

And can I just ask one follow-up? On the 5% of revenues, which I think you've been fairly consistent on, that includes anything on the maintenance for digital, or is that sort of a common...

Sean E. Reilly

Correct. Yes, what we will do is, as we approach a year in which the digital maintenance CapEx may be a little heavy, we'll just dial back the traditional CapEx.

Operator

Our last question will come from James Dix, Wedbush.

James G. Dix - Wedbush Securities Inc., Research Division

Just a couple of things. I guess, first, in terms of the visibility of the business. You just discussed it a little bit. Earlier the year, you were talking about a fair amount of monthly volatility in terms of like where you were seeing growth. It was varying more than usual. Has that changed at all over the course of the year and in terms of the pacing that you're seeing going forward? And if so, why do you think that is? And then I've got 2 others.

Sean E. Reilly

It's -- I don't know that it has changed. There's still some pretty dramatic monthly swing. It's -- that's been a little bit frustrating and maybe causing us to err on the side of conservatism when we put out these ranges for guidance. But reflecting on the third quarter, we did see some swings through the quarter across months. What was the other one, James?

James G. Dix - Wedbush Securities Inc., Research Division

Yes, 2 others. You mentioned you, obviously, you had a big M&A deal with -- or relative to recent history, certainly with NextMedia, then another one potentially coming up. Are you seeing a change in the M&A environment more generally in terms of things that are coming onto the market that might be more attractive, maybe as a result of the economy or some other sources? Just any color you could give kind of looking out maybe over the course of the next year, in terms of the likely pace of M&A activity versus where it's been over the past 12 months?

Sean E. Reilly

No. I think these were special situations, James. We didn't go looking for these. They were, one, the Next acquisition was driven by a financial buyer, who had purchased the debt of Next and taken it through a bankruptcy proceeding. And so I think for them, it was just a matter of when, and they decided to pull the trigger this fall. The other acquisition, I think is, again, sort of a special situation. It's a company that I think the seller is tax motivated. As I look across the landscape in our industry, there aren't a whole lot of what I would call really good candidates for Lamar. I mean, we're really going to focus on high-quality assets in the traditional outdoor space. And you can count those on one hand, really.

James G. Dix - Wedbush Securities Inc., Research Division

Okay, great. And then my last one is just when you think about the potential to convert to a REIT, is there anything we should be thinking about in terms of your traditional leverage comfort, and how it might change under a REIT? Because I think, Keith, in the past, you've said, broadly speaking, depending a little bit on what M&A activity you've done, 4x to 6x made some sense, maybe the recession changed that a bit. But I was just wondering whether there's anything we should be thinking about if you got to a convert point of -- thinking about a conversion, as to whether that range might change at all?

Sean E. Reilly

I think on the last call, Kevin used the words that we're going to manage the balance sheet more conservatively when thinking about where the leverage should be for a REIT conversion. Certainly, that puts it at the lower end of that range, maybe even at or slightly below the lower end of that range. I think more importantly, though, as I mentioned, when you're positioning the balance sheet for a REIT conversion, long -- longer-term, interest-only very predictable AFFO is what these investors look to. And you really can't beat what we've done this year in throwing a little over $1 billion of our capital structure long at an average rate of about 5.5%. And keep in mind that's the junior portion of our capital structure. The real magic happens this time next year when we take out the senior secured, dramatically reducing our cost of capital and layering in something that, in all likelihood, will be even more attractively priced than the 5.5%. So when I think about preparing for the REIT conversion, I think those are the things that we're focused on.

Operator

At this time, we have no further questions. Mr. Reilly, I'll turn it over to you.

Sean E. Reilly

Well, great. We look forward to a very productive call next quarter and a very productive 2013. Thank you, all, for listening.

Operator

Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone lines, and have a great rest of the week. Thank you.

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