Lamar Advertising Company (LAMR) Q1 2013 Earnings Report, Transcript and Summary

Excuse me, everyone. We now have 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. All forward-looking statements, including statements with respect to Lamar's consideration of an election to real estate investment trust status, involve risks, uncertainties and contingencies, many of which are beyond Lamar's control and which may cause actual results to differ materially from anticipated results. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this call in the company's most recent annual report on Form 10-K as updated by its quarterly reports on Form 10-Q. Lamar refers you to those documents. Lamar's first quarter 2013 earnings release, which contains information required by Regulation G regarding certain non-GAAP financial measures, 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 Sean Reilly. Mr. Reilly, you may begin.

Thank you, Tiffany, and welcome, everyone, to our discussion of first quarter results. Kevin will not be on the call as he is out of the country. I'll begin with a quick comment on our endeavors to seek REIT status. We don't have a substantive update today as we continue to await final IRS response to our PLR request. As you'll recall, we filed in November of last year and were told to expect it in 3 to 6 months. We're now at the outer edge of that time horizon, so, hopefully, it'll be sooner rather than later. When we do get it, we will thoroughly analyze it and communicate its ramifications to the market as soon as possible. I'll now turn it over to Keith, and he'll discuss the financial results.

Good morning, everyone. Just a couple of highlights from the quarter. You saw from our press release revenue came in at $283.5 million. We had guided to a range of $282 million to $285 million, so we were in the midpoint of that range; on a pro forma growth basis, up 2.4%. The nice surprise in the quarter was that the direct and G&A expenses before corporate overhead was exactly flat or even with last year's first quarter, absolutely no growth whatsoever. There's a couple of things that created that dynamic. One was we have gone to a state-of-the-art illumination system for all of our static billboards, and we are still rolling that out. I had mentioned it on a call last year. But our illumination expense was down $0.75 million in the quarter due to that technology. And in addition, we used to own our own printing facilities, and, at the end of last year, we divested of those and went under contract with a national supplier for all of our advertising copy that we put up on the boards for the customers and that resulted in a first quarter savings of $1 million as well. Corporate expenses were up about $1 million. As I told you last quarter, we were going to be incurring some REIT expenses at the corporate level. About $250,000 of that $1 million increase was REIT related, and the other -- another $200,000 was legal and accounting related to 2 acquisitions that we did in the fourth quarter of last year. All of that being said, that resulted in a EBITDA pro forma growth of 5.2%. And our margins were 39% for the quarter, and that is the best first quarter results as far as our margins since the first quarter of 2008. With that, I'll point it back to Sean.

Great. Thanks, Keith. So as Keith mentioned on the operating side, it's pretty much steady as she goes. Our team continues to run an extremely tight ship on the expense side. But it should continue throughout the year. We'll continue to see the benefits of savings on illumination, and, of course, our outsourcing of our printing operation should again continue to show benefits through the course of the year. Let me kick off the familiar internal stats and then I'll open it up for questions. Let me start with digital. As of today, we have 1,750 digital units in the air, 972 bulletins and 778 posters. We put up 42 in Q1, so we're pacing slightly ahead of plan in terms of our digital deployment. And it looks like we'll end up the year with about 150 new digital units in the year. Some of -- we've been fortunate on the regulatory front of late. And when you have these regulatory wins, sometimes it's use it or lose it. So we went ahead and accelerated our pace of deployment because of those regulatory wins. On the same board, digital revenues side, slightly disappointing. We came in, in Q1 at minus 2.7% primarily at the tail end of the quarter; things it got a little soft in March. We are reading the tea leaves into May and June, and we think we're seeing some improvement. So hopefully, when we get together next, you'll see that number turning the other way. On the traditional side, rate and occupancy, posters, occupancy Q1 '13, 63% versus 61% Q1 '12 or an increase of 2%. For bulletins, Q1 '13 occupancy, 75% versus Q1 '12 of 74%. On posters, rate Q1 '13, $418 average rate per panel versus Q1 '12 of $415 average rate per panel. And on bulletins, Q1 '13, $1,082 average rate per panel versus Q1 '12 of $1,083 or essentially flat on bulletin rate. Interestingly, the strength in Q1 came from the national book. The national book of business was up 5.6% in Q1 versus 1.4% for the local book of business. On the major categories, a couple of categories of note. Top category, restaurants, which is 13% of our business, was up 7% in Q1; retail, which is 11% of our book, was up 8% in Q1; and automotive, which has moved from 6% of our book last year to 7% of our book this year, was up 11% in Q1. So we are appreciating the growing momentum in the automotive category. We had mentioned real estate in -- on our last call, and it's continuing to show gradual improvement. In fact, for March and April, real estate was up 2% to 3%, and that's the first positive numbers we've seen in that category for quite some time and happy to see gradual recovery there. Hotel/motel remains challenged. Q1, it was down 7%. So with that, Tiffany, we're happy to open it up for questions.

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

So looking at your stock today, I guess the market is telling there is concern about the private letter ruling. And I know, Sean, you mentioned at the beginning that hopefully you'll get it sooner rather than later. Do you still feel good that digital will be included? And has there been any conversation or -- with the IRS that would lead you to believe there are some issues in that slice being held up?

We really don't have a substantive update in that regard, Marci. We get some smoke signals from our lawyers and accountants on process, and those smoke signals are telling us that the sooner is probably to be expected than the later in terms of timing. But it's not the most transparent of processes on the substantive side, so we really don't have anything to pass on other than what we said. And I know everybody's anxious. We're all anxious. As soon as we get it, we'll get with everybody.

Now in terms of just the process, we've seen other nontraditional REIT conversions in some companies who have done -- they submitted the filings to the SEC, they've communicated the E&P distribution and the AFFO before they received the private letter ruling. Is it reasonable to assume that once you get this ruling, that the other steps in this process are in place, where we would get communication rather quickly? Because I think there's a fear that you're going to get the private letter ruling and then we're going to have to wait a significant amount of time until the next step happens that might miss you to or cause you to miss a January 1, 2014, conversion time.

Yes, I mean, we haven't heard anything that leads us to believe we're behind on our timetable. The -- I think the discussion around the E&P distribution and sort of divining what our AFFO is going to look like for '14 is probably a discussion that happens in the sort of July, August time horizon. We've sent some indications to the market that the E&P distribution is going to be nominal. We haven't put a fine pen on -- pencil on that yet. But I think our comments in that regard has been that it's going to be either 0 or nominal on the E&P side. So we -- I don't think we'll be talking about counting AFFO in June, July, but I think it's reasonable to say August, September time horizon.

Okay. And I just have one follow-up for Keith. Noncash comp in the first quarter, or FAS-123, was pretty high. Any comment on that on what we can expect going forward?

It should be relatively immaterial going forward. It was much higher because we issued options in the first quarter. So it'll be actually -- what would be the second quarter?

It would be $32 million for the year. I think that’s in the first quarter.

Okay, $32 million for the year is what it'll be.

Our next question will come from Ben Swinburne with Morgan Stanley.

Could you weigh in on digital and how you're thinking about sort of the balance of inventory and price? I know you mentioned that March got a little soft and you expect to see a rebound. But you've also, I think, made the decision to accelerate your digital build-out. So I'm just curious if you can give us an update on how you're thinking about managing the supply side.

Sure.

And then on that point, any update, guys, on the CapEx outlook for the year since digital board sound like they'll be a little higher than what you thought? I don't know if that's being redeployed from other parts of the budget.

I don't think it's material. I think we kind of guided to $130 million and it might come in around $150 million for the year, so I'm not anticipating a big difference on our total CapEx budget, which we laid out in the $90 million to $100 million.

Okay.

Yes, Yes, it's a little, I guess, counterintuitive if we accelerate it a little in the first quarter. And in looking at the markets that receive digital, there are really 2 buckets that it falls into. As you know, we rely on our local general managers to keep their finger on the demand pulse. And we have some markets where, because of regulatory reasons, their digital penetration is still in the single digits and they feel like they can use some more given local demand. So there's a little bit of that going on. And then the other thing that happens is when you have a regulatory win, it often has a timetable attached to it. If you get a digital right, if you don't use it, you lose it. So we're, in some cases, deploying a little -- maybe a little in advance of market demand just because you'll never get that right again. So that's the dynamic that's going on. In general, we still believe that we have some markets where we're a little ahead of market demand and we're trying to throttle back a little bit.

Okay. And then just quickly on the national strength. I don't know if telecom was a part of that. Last year, that was a noisy vertical and a headwind a bit, but I thought you -- it sounded like you felt better about that piece of the business. So I wondered if that was the driver.

Yes, it's interesting. We’ve got some good business from AT&T. As a matter of fact, in the first quarter of last year, AT&T dropped out of our top 10 customer list, and they're now back in it. So that's the good news. But customers kind of come and go. And I'm looking at our top 10 and U.S. Cellular was in it first quarter last year and they're not in it this year. In talking with John Miller, telecom was sort of just sort of steady in the first quarter. The real drivers of national in the first quarter were fast food, beverage, gaming and automotive. Those were the national drivers.

Our next question will come from James Dix with Wedbush Securities.

Just a couple of things. First, do you have the same-store, or same board rather, digital growth in the quarter? And then just what the reported digital revenue was for the full quarter. And then I had 2 others, but I'll just take them in turn.

Yes. So the same unit, as I mentioned, was 2.7. And the total growth that included new units, I don't have it in front of me, but I'm sure I can -- somebody will have it and give it to me. And then the actual?

It's stuck [ph]. It's -- yes, that should -- digital [indiscernible]. Total.

Okay. Yes, I got it. Okay. So digital posters, the actual that includes new units, was up 11.5%, and bulletins were up 9.5%.

Okay. And do you actually have the dollar figure total for digital in the quarter?

About $40 million.

About $40 million.

Great. Okay, that's pretty big. And then secondly, do you have any sense as to your OpEx, operating expense growth outlook for the second quarter, Keith, just given the experience you saw in the first quarter, with a little bit of outperformance there? Should we be looking for maybe a little bit on the lower end, more in that 2% range? Or would you...

Yes, that's what we're hoping. We're hoping it comes in flat again. I mean, we should continue to experience some savings from the 2 categories that I mentioned. But at some point in the year, they will begin to lap last year's numbers. But we're hoping that the second quarter will be low singles or, if we're lucky, flat again, yes.

As I reflect on the performance, one thing I feel good about is we didn't take it out -- it's not coming out of our payroll. We did give an across-the-board [indiscernible] percent raise this year. So we're finding productivity increases, again, are in places that are real and sustainable and, again, sort of in that illumination category and in the materials print category.

Okay, great. And then one last one. Assuming you do get a favorable ruling and can go forward with your REIT conversion, would that change your posture regarding doing acquisitions either in the mom-and-pop category or maybe even something bigger, like the assets of one the other major players, just because you potentially have a currency that would become more valuable?

We've been studying up on REITs in other industries, and that can be the case. I've noticed that first movers in the nontraditional REIT space can sometimes enjoy an acquisition advantage. So we'll just have to see. We believe that our balance sheet, when we turn the corner to next year, is going to be superbly positioned as we take out the higher-coupon senior secureds and refinance our senior facility. You're going to see a balance sheet that's ready to go.

Great. And that would -- that could potentially include something bigger as opposed to just mom-and-pops, you think?

I don't know what your definition of big is, but there's a handful...

I don't know. It's something that might begin with a C.

Yes, yes. Well, they've got their -- they're on their own path, glide path, to REIT status. But there's -- in general, our strategy dovetails with being a REIT in terms of what we would be looking at. And that would be high-quality traditional out-of-home assets, i.e., posters and bulletins, not necessarily the stuff that's non-REIT qualified in the domestic U.S. And if you survey the landscape, there's a handful of -- that fit that criteria that are of high quality and medium size.

Our next question will come up room Alexia Quadrani with JPMorgan. Alexia S. Quadrani - JP Morgan Chase & Co, Research Division: Could you just give us a little bit more color on the, like, the relative softness in the local [indiscernible] trends in the quarter? Was it one category? Was it just sort of general malaise in that area? I guess any color you can give would be helpful.

We've been telling this story for a while. Our top 10 categories of business tend to show relative strength. For example, in Q1, if you added up all our top 10, which is 77% of our business, they were up 5% in the quarter. That kind of tells me that a little bit of GDP drag that everybody was talking about in the fourth quarter and possibly into the first quarter may have hit Main Street a little bit. We -- looking forward, like I said, in May and June, if we're reading the tea leaves correctly, we're seeing relative strength. So hopefully, that's Main Street U.S.A. Alexia S. Quadrani - JP Morgan Chase & Co, Research Division: And how much of the -- it sounds like a fair amount of the auto is -- goes into the -- is a national play for you. Is there any -- how much -- any color on how much of your auto exposure is sort of more locally focused?

Actually, the bulk of it is local. It's -- it tends to be local dealers. So on the national book, the relative strength of auto is sort of the law of small numbers. It's -- the bulk of our auto business is local dealers. Alexia S. Quadrani - JP Morgan Chase & Co, Research Division: So that segment even on a local level is very strong for you? It's just everything else hasn't quite...

Yes, it's just -- it's categories 11 through 30.

Our next question will come from Eric Handler with MKM Partners.

Just looking at your occupancy rates and your pricing, pricing and occupancy for a while has been pretty stagnant. As you think about the leverage you can pull to maybe stimulate demand or -- what leverage do you possibly have with people who have been very steady maybe raising pricing a little bit?

It's in an extremely low interest rate environment, where people are getting 0.0006% on their CDs. It's a difficult conversation to talk about aggressively going after rate with long-term renewals because they're all living in that same world. So traditionally for us, a little bit of inflation has been a good thing. And we tend to outperform in an inflationary environment. So I think what we're going to need is a little macro help.

Our next question will come from Herbert Davis with Wells Fargo Securities.

Thanks for detailing us on your approach to the capital structure going forward -- rather, leverage. I want to you ask a question about the long-term capital structure assuming the REIT conversion goes through. Is a credit facility still part of the conversation for the longer term? And then any change on timing in terms of how you might look to refinance those 9 3/4%?

Yes, the 9 3/4% are callable at a reasonable price in the fourth quarter. So I think we're looking at a November, December event. We should probably combine that with a rework of our whole facility. We've got what about $300 million and -- got about $400 million out in our A facility and we're a little pale on the Bs. So it probably makes sense to wrap that whole thing. Now whether it's a traditional bank facility or a -- some sort of securitization or some sort of long-term senior secured offering, we'll just have to wait until we get there and we'll pick the right door. But in general, philosophically, it seems to me that given -- the requirements of a hefty distribution once you become a REIT, it makes sense to be, as long as possible with as distribution-friendly amortizations as you can layer in. So I don't know if that answers your question, but that's where I had to -- a long...

It does. Okay, that definitely helps. And then another question on M&A. You mentioned a "handful" that fit your criteria. What's the environment from the sellers' perspective. Is there any urgency for them now that the industry is moving more towards a REIT structure or digital CapEx? Is that an impediment to them operating longer term?

Well, we've had a few smaller, independent digital -- these are immaterial. These are deals in the sort of $20 million range that our phone has started ringing and with their -- they've obviously seen the multiple expansion that we've enjoyed. And they've also read-through [ph] some pretty tough times. And so we have noticed the phone ringing it, it is generally independents that have focused their bulletin operations in middle markets or sort of in a very concerted way. And then the world got tough and they rode it out, and now they're seeing a little light at the end of the tunnel and they've given us a call. So we've got a few of those going on. And we typically don't make a big deal out of them because they're not hugely material [ph], but there's a great deal of them.

Thank you. Mr. Reilly, it looks like we have no further questions at this time.

Great. Well, I look forward to our next call, and hopefully it'll be about us becoming a REIT very shortly. Thanks, everybody.

Thank you. This concludes today's presentation. You may disconnect at this time.