Lamar Advertising Company (LAMR) Q4 2013 Earnings Report, Transcript and Summary

Excuse me, everyone. 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 and 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 fourth 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 this conference over to Sean Reilly. Mr. Reilly, you may begin.

Thanks, Chantelle, and good morning, everyone. I'd like to welcome everybody to Lamar's Q4 earnings call. Before I turn it over to Keith, I'll make a few high-level observations. Number one, our efforts to convert to a REIT are progressing nicely, and our professionals tell us we should hear positive news soon. Number two, based on our current pacings, we believe you should model between 2% and 3% pro forma revenue growth for the full year 2014. Our Q1 guidance is a little short of that. But again, our forward pacings at this time indicate we can make it up during the course of the year. We got off to a slow start in January, but momentum is building in the book, both for the rest of Q1 and for the rest of 2014. Now some quick color on Q4 of 2013. The fourth quarter of last year was really the story of one month, December. We were positive going into the month, but ended December negative on a pro forma basis, creating a slight miss for Q4 revenue expectation. There were several factors contributing to the softness, the chief among them were softer-than-expected national sales, particularly in the telecom vertical, and a decline in our retail vertical during the holiday season. Much has been made of retail's woes. In December, a near-weak season spilled over into our book. That softness in retail, particularly in the Northeast Region, our largest region, continued into January and February. Had retail in our Northeast Region alone normalized in January and February, we would be guiding to up 2% to 3% pro forma revenue growth for the first quarter. Our experience with tough weather is that ad campaigns don't tend to go away, they tend to get deferred. We've already heard from some key retail accounts in the region who plan to come back in this spring. And we are seeing relative strength in our March, April and May pacings. The weather is improving and so is our book of business. I'll turn it over now to Keith, who will walk through the numbers and speak to the change in revenue recognition from a monthly to a daily basis. Keith?

Good morning -- yes, good morning, everyone. Just a couple of highlights on the fourth quarter. As you saw in our press release, our revenue performance on a pro forma basis was up 0.3%. Our guidance was for growth of between 0.5% and 1.5%, and that was recognizing revenue on a monthly basis, as we have consistently done in the past. EBITDA was down 0.9 of a point, and that was primarily driven by the fact that our consolidated expenses were up only 1.3% for the quarter. Our guidance on the last call for expense growth in the quarter was for up 1.5% to 2% without REIT expense. REIT expense for the quarter, which is included in that 1.3%, was $600,000. So from an expense standpoint, it was a very good quarter. To briefly highlight the year. Again, on a pro forma basis, the revenue was up 1.9% compared to 2012 pro forma. Again, that's on a monthly revenue recognition basis. EBITDA was up 2.4%, and consolidated expenses were up 1.6%. In looking back on last year's transcript, the guidance we gave the market for expense growth for '13 was up 3% without the REIT conversion cost and 4% with REIT expense, which for 2013 came in at $2.1 million. We think there'll be another couple of million that we'll recognize for REIT expense in 2014 as we finish out this conversion process. The expense guidance for 2014, much like the revenue, we're anticipating up 2% to 3% on a pro forma basis. To touch on the change in our revenue recognition method, during 2013, we spent a lot of time evaluating our tax and financial reporting systems in anticipation of becoming a REIT. In some cases, we decided to change the methods we have previously adopted for the tax…

Right. Let me -- before we open it up for questions, I'll run through some of the typical statistics that we provide on this call. I'll start with the number of digital units that we have in the air as of the end of the year and the increase over the prior quarter. We ended 2013 with 1,861 digital units: 1,048 of those were bulletins and 813 were posters. And that represents an increase of 41 over the prior quarter. I got a little bit of encouraging news on our same digital board performance. As you all are aware, we were experiencing slight declines in our same board revenues for digitals in the early quarters of the year. And we announced that we were going to slow down our deployment and let demand catch up with supply. That appears to be working. If you recall in 2 1 -- in Q1 of '13, our same board digitals were down 2.7%. In Q4, that shrank to down 0.3%. And in January, our same board digital revenue was up 0.7%. And as we look at our pacings, particularly for digital bulletins, the same board pacings are up mid- to high single digits as we look into 2014. I'm liking what I'm seeing there, and it tells me that maybe we can get a little more aggressive on our digital deployment plans for 2014. Rate and occupancy, ex digital. For posters, Q4 '13, 66%. Occupancy, that is flat with Q4 of '12, 66%. Bulletins, Q4 '13, occupancy up 2% at 78%, compared to 76% in Q4 '12. Rate. Posters, average rate per panel, Q4 '13 of $432, which is a 1% increase over our Q4 '12 average rate per panel of $428. On bulletins, Q4 '13 average rate per panel of $1,100. That compares to $1,124 average rate per panel in Q4 of '12, or a decrease of 2%. Our sales mix, national and regional and local stayed the same at 78% local/regional versus 22% national. That's the same as it was last year, same time. Q4 increase in terms of mix of business. Local was up 1.2% in Q4 and national was up 0.6% in Q4. In verticals, I've already addressed the issue with retail and I spoke to telecom. Our national sales team tells us that telecom has stabilized this year. In Q4, it was down 23%. A very disappointing performance out of that vertical. But again, our national sales team tells us that 2014 will -- should be level with 2013 in terms of telecom spend. On a very encouraging note, real estate was up 19% in Q4. And that vertical is pacing up about 20% for the first half of 2014. Autos were up about 7% in Q4 and is pacing up 8% or 9% for the first half of '14. So those 2 verticals are real stars in our book. With that, we'll open it up for questions. Chantelle?

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

First question, if you are accounting for revenue on a daily basis, why aren't you accounting for expenses on the same sort of basis?

We -- the only thing that we have that would really fall into that category would be our lease expense, as we've looked at it. And our leases, the vast majority, are paid on the first of the month, every month, year in and year out. So there's really no distortion on a quarterly or an annual basis. Everything else is basically paid for when it's incurred. So that was the results of our findings. Leases was the only thing that would have been comparable to revenue. And as I said, that's mostly, the vast majority are paid monthly, on the first of the month.

Okay. And then, Sean, what gives you confidence that telecom isn't going to look like hotel/motel, where that category kind of went down and sort of went the smartphone way and didn't need outdoor anymore?

Sure. Well, in general, customers come and go. The decrease in telecom has -- was predominantly one customer last year. And as we go into this year, there are others that are taking up the slack. We've gotten some great buys from U.S. Cellular. AT&T is going to be up more this year than they were last year. And of course, the customer that disappointed us last year, Verizon, they're telling us that we might be able to expect some spot buys from them. But that would be LAN [ph] yet. As of right now, the book is looking, like I said, pretty much flat '14 to '13.

Okay. And then the last question I have is that it looks like, just in the data you gave on bulletins, occupancies up 2%, rates down 2%. Is there really like a 1:1 correlation with that, where you're giving up rate for occupancy, or should we not read into that?

I was very disappointed, when I got that data point. That shouldn't be the case, quite frankly. When I look at where we are with occupancy on bulletins, it's my belief that we're approaching normalization, historical normalized occupancy. That should allow us to drive rate. And so we had a full day retreat on that issue with our regional managers. That's something we can manage, too, and something we can fix and something we will fix.

Our next question will come from Jason Bazinet from Citi.

I guess, I have a sort of a bullish question and a bearish question. I'll start with the bullish one. These trends in real estate and auto that you talked about, I mean, given your experience of watching these trends and sort of forward economic movement, I mean, do -- would you interpret those bullish numbers you gave as an interpretation that the economy really is getting better? Or do you think these are more easy comps or something like that? And then my maybe bearish question is, we keep following these miles driven statistics across the United States, and they keep decelerating. Do you view that as sort of impediment to your top line growth if it continues going forward?

Sure, I'll take a stab at the second question first. We do pay a little bit of attention to commute times, which tends to be a more relevant statistic for us because it represents more time spent. And those commute times tend to be -- they'll ebb and flow. But over the long term, they tend to be relatively stable, if not growing. The issue of auto and real estate, I'd like to put it in a larger context of what happened to both of those verticals in 2008, 2009, when the world got really bad. And if you see what's happening with auto, as it grows faster than other verticals, it's actually getting back to its normal position in our book of business. And that's fairly clear, as we're looking at it. Real estate is a little bit different, in that I would argue 2007, when it was 9% to 10% of our book of business, was probably not the real world. But the world we're in now isn't the real world either and it's getting back to some place in the middle. So our expectation is that real estate settles in at 4% or 5% of our book.

Our next question will come from Benjamin Swinburne, Morgan Stanley.

I don't know if you'd want to talk about sort of your dividend philosophy. I know it's looking past this REIT adventure we've been on for the last 2-plus. But if you look at your release, you generated $300 million of free cash at over $3 a share of free cash flow. And it sounds like you're feeling pretty good about '14. Anything you can share with us about how to think about the dividend on a recurring basis, if you guys have thought about it at all? And if you have, could you talk about the important number of kind of book versus tax depreciation, which is a key element to calculate that, say, 90% QRS threshold that drives, at least the minimum?

I'll speak a little bit of what we've told the public thus far about where we'll be on the REIT distribution and then Keith can address that second question, which I don't, quite frankly, understand. So what we've told our investor base in conferences and former -- previous conference calls is that, if you look at the yield that is typical of REITs, you can count on us to sort of be down the middle of the fairway on it. We have a little bit of leftover NOLs that can sort of modulate that distribution over time. But once those are used up, it's basically -- you can basically plug in 100% of NOI, because we don't have the ability to, again, to sort of modulate the distribution. Our anticipation for '14 is that a slight E&P purge will be required, and that will be coupled with the distribution to hit that yield I described, if that makes sense.

And on your depreciation and amortization question, on a book basis for '14, it looks like the total of those 2 for the year will be about $250 million. On a tax basis for 2014, it looks like round numbers. It'll be about $200 million. So it's about a $50 million difference between book and tax. But as Sean said, we also have roughly $300 million in federal NOLs that will be coupled with the depreciation and amortization to help manage the distributions, if you will.

Got it. And then maybe a more interesting business-related question on digital. How do you guys think about your competitors pushing digital further? And you said you feel better about digital with the early start to '14, you might add more boards or more facings. And what happens if Clear Channel and CBS follow suit? Does that create issues, you think, for the market? Or do you just look at it and say, "We're fairly consolidated in our core markets, and so as long as we run the balance on our own platform, we should be in good shape."

Sure. So there's a couple of ways to think about that. I think the first and most important way is, in terms of national footprint for very important national customers, more is better, regardless of who owns them. Because if they want to execute a nationwide buy and they want to be in key markets where Lamar isn't, we want there to be digital in those markets because we'll get the buy in our markets. So in general, I think that Clear Channel and now, CBS', aggressive embrace of the model is good for us over the long haul. Now we clearly have some markets where we compete head-up and supply and demand can become an issue. But if you look at Lamar's footprint, give or take, 80% of what we do is in places where we have 90% market share and places where CBS and Clear aren't. Yes, again, the way I look at it, and particularly what CBS is doing. They're doing a great job. They have refined their views on digital and they did a great job last year with their digital deployment.

Our next question will come from William Bird, FBR. William G. Bird - FBR Capital Markets & Co., Research Division: Could you talk a little bit about your 2014 CapEx plans and expected pace of digital build-out?

It'll probably look a lot like last year in terms of the aggregate. The numbers will be fairly similar. You'll see a slight decrease in maintenance CapEx. We heavied up a little bit last year on our PP&E, catching up on some stuff. So I think the maintenance will come in a little bit less. You may see the growth CapEx in digital come in a little heavier. But in total, it should be, give or take, the same. William G. Bird - FBR Capital Markets & Co., Research Division: And assuming REIT treatment, how do you see your acquisition strategy developing?

There's a -- there are a handful of high-quality, traditional, out-of-home companies that are out there, excluding Clear Channel and CBS. Just take those off and sort of think about what the rest of the universe looks like. These are, again, traditional, high-quality, out-of-home assets. You're not talking, in the scheme of things, large numbers. These acquisitions would be between $250 million and $500 million. And again, you can count on them on one hand. So that's sort of a long-winded way of saying we can accomplish a few good things without much stress and strain. William G. Bird - FBR Capital Markets & Co., Research Division: Just one final question. On expenses, how do you see stock-based comp developing? Will you be tilting more of your comp mix as you transition?

You're talking about as a REIT? William G. Bird - FBR Capital Markets & Co., Research Division: Correct.

I don't think we're -- you're going to see much in the way of changes to our plans. We reward certain key regional managers and executives with a restricted stock awards that are tied to hitting a performance grid. And I don't see that changing. It's sort of part of our culture.

Our next question will come from David Miller, Topeka Capital Markets.

A couple of questions. Just related to Marci's question, there's just been a lot of chatter over the last couple months about just the secular story with outdoor and just overall secular concern, especially in light of what's happened with the telecom category in the fourth quarter. Could you guys talk about some of the new categories that have entered into the fray on your platform, particularly on the digital side. I know that health care is one of them. But maybe you guys can just talk about a couple, maybe 2 or 3 categories, that didn't exist on digital a year ago that are now a lot more comfortable with the medium? And then, Keith, on the debt structure, are you guys, I mean, just given your free cash flow generativeness, are you comfortable now kind of moving towards nibbling at that bank debt or are you still nibbling on the 5 7/8% paper? Maybe you could just talk about that a little bit.

All right. Let me hit the categories that are picking up the slack. So service has been a great category for us. I'm looking at the full year of '13, up 11.24% and in Q4, up 11.35%. Amusement, entertainment and sports kind of cuts to that who's using digital question. And for Q4, they were up 9.68%. Again, taking up the slack of telecom and what was a sort of a disappointing retail month for us, health care is showing good relative strength. Health care was up 5.5% in Q4. You may have heard other media outlets talking about it, even picking up a little bit of the Affordable Health Care Act spend that's been coming down the pipe. I think the real message is that customers come and go. I mean, they have their branding and promotional goals. And we're in the mix. There was a year, in the mid-'90s, when tobacco was 24% of our book of business. And in 1 year, it all went away because of legislation. And in that year, we were actually up on a pro forma basis. So I don't tend to get too caught up in the shifts between categories, as long as we can continue to grow at a reasonable pace.

With respect to your question on the debt side, as you guys saw, we put out some releases back in January, and of course, it's in the press release as well. We had issued a senior note, $510 million at 5 3/8%, 10 years. And we used that to take out all of our bank debt. So as of today, we no longer have any bank debt outstanding. And we do have a $400 million tranche of 7 7/8% notes that are callable as of April 15 of this year. I'm assuming that's what you're referring to. We'll -- I think we will go ahead and address those, as we've said throughout last year, as soon as we put this earnings season behind us, we'll -- we have several options, bank debt, sub-debt, senior debt, a revolving credit line with our bank group. We increased that from $250 million to $400 million in January as well. So have a lot of options. And we're going to go ahead and make a move on those, as I've said, just as soon as all of this is behind us. But that being said, our internal model show that even with paying what we think is a very friendly dividend, the company, as a REIT, the company still is projected to throw off significant free cash flow over the next 5 years, which is how far we've run our model.

Our next question will come from Doug Arthur, Evercore.

This is actually Tracy Young. I have 2 questions. The first relates to retail. Can you tell us what percentage it represented of revenue in Q4 '13 versus Q4 '12? And then just following up on the IRS, the private letter ruling, is there any other color that you can give us or really, would the information you gave us in January is what we have?

So on retail, retail was 12% of our book of business for Q4 '13, and it was 13% of our book of business in Q4 '12. And for the quarter, retail was down 1% in terms of its, the aggregate spend in our books.

REIT.

The REIT news continues to be positive, as I said. And we're being told that literally any day now, we could get the word. Internally, we've accomplished everything we need to do to flip the switch. It's -- all of those things that you would expect us to be doing, including completing our reorg by December 31, calculating all the transfer pricing as between the TRS and the tax and the qualified REIT holding company, calculations of things like the purge. We're not going to do it today, but we could give you a range of AFFO per share for '14, but probably not appropriate. But anyway, all of those things that you would expect us to do to get ready are done.

Well, at this time, speakers, we have no further questions in the queue. So I'd like to turn this conference back over to Sean for any closing comments.

Well, great. Thanks, everybody, for listening and we look forward to visiting again soon.

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.