Lamar Advertising Co

NASDAQ:LAMR

Earnings Call Transcript 2018-Q2

[Operator]

Excuse me, everyone. We now have 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 will 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, plans, objectives including with respect to the amount and timing of any distributions to stockholders. All forward-looking statements 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 second quarter 2018 earnings release, and its most recent annual report on Form 10-K, as updated or supplemented by its quarterly reports on Form 10-Q and current reports on Form 8-K. Lamar refers you to those documents.

Lamar's second quarter 2018 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 the Investors section of Lamar's website, www.lamar.com.

I would now like to turn the conference over to Sean Reilly. Mr. Reilly, please go ahead.

[Sean Reilly, CEO]

Thank you, Katie. And good morning, all, and welcome to Lamar's Q2 2018 earnings call.

Q2 was a good all-around quarter for Lamar. Everything clicked, every business unit, billboards, transit, airports, and logos all lines of business exceeded plan on the top and bottom.

As reported results reflected successfully integration of last year's acquisitions and their accretive contribution to AFFO growth, our digital platform continues to shine with stellar same-board growth north of 6%, and our pro forma overall growth of 3.4% reflect the continued confidence our customers have in out-of-home to communicate their message to the right audience at the right time in at the right place.

As mentioned in the release, we expect to Q3 pro forma to be in the same neighborhood and we are consequently raising our AFFO per share guidance to $5.30 to $5.40 per share. Again, an all-around good performance by great Lamar team.

Keith?

[Keith Istre, CFO]

Good morning, everyone. Just a couple of comments on Q2 metrics one of those - couple of those metrics are in your press release but this is the acquisition adjusted results for the six months ended on a consolidated basis.

The revenue was up 2.4%, EBITDA was up 5.3%, again that's on a acquisition adjusted or a same-store basis. So you can see that they are positive impact that the control of the expenses that we've recognized in the first two quarters of this year have had on the bottom line. The bottom line is basically double what the topline pro forma revenue growth is for the first six months.

Back to the second quarter, as Sean measured it was a really good quarter for us. Our EBITDA margins came in at 47% of last year's Q2 was 46%. So we managed to pick up an extra point over last year's same quarter.

With respect to AFFO per share and our revised guidance, you may have noticed in the schedule that we included showing the revised guidance of $5.30 a share to $5.40. Maintenance CapEx is now at - projected to be $44 million. We initially used $48 million at the beginning of the year that was our internal expectation.

So we have dropped that down about $4 million. Last year's actual maintenance CapEx came in at 43. So we think it'll look a lot like 2017 with regard to maintenance CapEx.

Our total pro forma leverage ratio came in at 3.6 as of the end of June which is where we pretty much reside. And last just to reiterate our free cash flow for 2018 before dividend should come in the $470 million range, and we expect dividends to be approximately $360 million for the year.

Sean?

[Sean Reilly, CEO]

Great. Thank, Keith, I'll touch on a couple of other operating metrics. I'm going to start with digital's and where we stand with our new build activity.

Year-to-date we've built 72 new digital units and the performance with those new units has been - as it's not exceeding expectations. We ended the quarter with 2,905 digital units in the air, recall that we have sold to Puerto Rico and that dropped our digital count by about 55 units. So, that number is now at 2905 with the new builds that we've put in the air year-to-date.

As mentioned, our same-board digital performance was quite good at 6.3% same-board. And if you take the effect of the new builds and some acquisition activity, our digital platform actually grew mid to upper teens in year-to-date.

In terms of national/local, local was little stronger than national in Q2, up 3% and some change. National is up approximately 1%. We expect actually national to pick up a little bit in Q3, and it would not surprise me if there was an equal contribution from local and national when we report on Q3.

The vertical - I will tell an interesting story, we have had quite a research and some verticals that we've had to talk about the last 12 or 18 months. I'll start with education, there's been a lot of discussion around that category. Education was up 6%.

Financial, financials were up 10%, if you drive around town, you'll see a lot of ads - advertising CD rates right for community and local banks. And that's a great thing to see, I think that might even be read through for some of you guys in your lingo

Amusements, entertainment and sports was up 9%, and services were up 8%. So, when you just take that selection of some of our more important and larger verticals, those are impressive numbers. By the way real estate cracked the top 10, and was up 6% in Q2.

Auto struggled a little bit, you've been hearing that from other media platforms, down mid-single, as was gaming down mid-singles. But all around, very, very pleased with what we're seeing in the verticals.

So, with that Katie, I'll open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from Stephan Bisson from Wells Fargo.

[Stephan Bisson, Wells Fargo]

Quick question, how much benefit did political provide in Q2? I know that you guys discussed it on the last call, and maybe how much you're seeing in the second half?

[Sean Reilly, CEO]

Sure. In Q2, political added 0.5% to what would otherwise have been our pro forma growth. It will be in that neighborhood maybe - it maybe had more in the back half. I think when we finished the year, if it comes in as we project, it'll be in that neighborhood of 0.5% contribution. Through June, political for 2018 is tracking 30% over the 2014 midterm.

[Stephan Bisson, Wells Fargo]

And then given that really great digital trends, any thoughts on potentially increase the number of digital deployments this year?

[Sean Reilly, CEO]

We're going as fast as we can.

[Stephan Bisson, Wells Fargo]

And then lastly, on expense growth you guys are clearly growing revenue faster. How should we think about expenses I guess for the balance of the year and then just getting a higher revenue?

[Keith Istre, CFO]

We should turn them in the same neighborhood. First quarter was as you recall, little extraordinary. But I think second quarter is - it should be reflective of what happened in the back half, 1.5% to 2%.

[Stephan Bisson, Wells Fargo]

And then I guess just one more. Auto, has auto improved in Q3 or Q4? Are you seeing any signs of that or not?

[Keith Istre, CFO]

It's a little too early to tell. We don't slice and dice our verticals, looking forward we do that in years. It's little disappointing in Q2 because Q1 auto was up a little north of 2%, and in Q2, I think we have felt the effect of a lot of other media platforms. Auto group just seemed to fold in their horns across the board.

So we will see. What was a good thing for me to see was a little bit of struggle in one vertical and several other verticals stepped up to the play.

[Operator]

Our next question comes from Alexia Quadrani from JPMorgan.

[Alexia Quadrani, JPMorgan]

Just a couple of things. What do you think is going to driving or beginning to drive the better growth in national are you seeing in the third quarter or the back half? And also on the strengthening you're seeing just in general local and national, are you taking - do you find you're taking share from another media or is it just sort of better spending by your advertisers?

[Sean Reilly, CEO]

There's a lot of share shift going on at the local level with traditional media and I think when the story is written on 2018, you'll see that we did take some marginal share from some of the other media that are struggling with their audience. Our audience is solid and growing, more people are spending more time without a home than ever before as they commute to linked and they're spending more time away for now.

So, I think again, when the story was written on 2018, you'll see that we will have take share from some of the other traditional media. For example, the obvious one is our service category which was up 8%. These are folks that you see is the Yellow Pages. And as we all know what's going to Yellow Pages.

So, that's sort of an obvious example and I think there's other customer categories where a story similar to that will be told.

[Alexia Quadrani, JPMorgan]

And on the better growth of national, where is that you think coming from?

[Sean Reilly, CEO]

National is a more fickle dollar as we know, it tends to ebb and flow a little more than local and the first half of the year was one of those ebbs. There were some big categories that didn't show up in the first half of the year, most notably Qualcomm. But they're coming back a little bit in the back half. So, it's just that natural ebb flow of the national add been.

[Alexia Quadrani, JPMorgan]

Then just last question on - anything new on M&A in terms of the pipeline or priorities or anything you'd add on M&A?

[Keith Istre, CFO]

I am glad that you brought that up because we didn't mention the ATM or the universal shelf that we've just bought. So, we've got about - so, year-to-date about $100 million in acquisitions in various stages of letter of intent and contract and closing.

In anticipation of that, we did tap the ATM for about $15 million worth of equity in the late spring. And we also have a seller that wish to take - part of is consideration in our stock that is the reason for the universal sale. That was give-or-take 10.

So, LOI contracted $100 million worth of out of home assets. We're funding $75 million with a drawn down on the revolver and about $25 million in equity, combining the ATM and the Shell. Does that make sense?

[Operator]

Our next question comes from Jason Bazinet from Citi.

[Jason Bazinet, Citi]

Just had a quick question. You guys are kind enough to give same-store revenue and EBITDA. And I think when you do that you're sort of giving the number that you reported in the quarter and then pretending that you own that asset in a year ago period. And I was just wondering, if you reverse it and really did same-store on assets you had a year ago and what the - the same assets would be this year without M&A, if you sort of see the same sort of revenue and EBITDA trajectory?

[Sean Reilly, CEO]

Yes, good question. It's basically the same. You can do it either way. The important thing is to have a real clean as reported in a real clean acquisition adjusted. Sometimes the terms pro forma and acquisition adjusted can be intermingled and interchanged. We try to be very, very clear on our methodology. Some companies do it the other way. If you did it to our activity last year it would be virtually the same.

[Jason Bazinet, Citi]

So you guys think you can get this sort of operating leverage in the business even if they M&A spec it, dial back or turned off?

[Sean Reilly, CEO]

Yes, absolutely. So the as reported results obviously reflect the accretive nature of the acquisition. The pro forma results show what would happen to the platform if we were just steady-state.

[Jason Bazinet, Citi]

It just seems like if you're buying one of these assets type I presume that your acquisition adjusted EBITDA multiple is lower than the headline multiple that you're paying for the assets as you read about some overhead and costs from these acquired properties.

[Sean Reilly, CEO]

Yes, absolutely. No, I mean sellers have a trailing multiple that looks pretty racy. When we do these feel in acquisitions we're really just acquiring advertising contract, structures, permits and ground leases we typically done - because of our really expensive national footprint virtually every billboard we buy has a fill in and we don't need trucks and people and the like. So, yes, absolutely. It's a very traditional exercise.

[Operator]

Our next question comes from Ben Swinburne from Morgan Stanley.

[Ben Swinburne, Morgan Stanley]

Sean, have you kind of thinking about sports, gambling what that might mean to the business and I know you mentioned gaming was soft in the quarter and I realize this is just starting to move across the country from the legislation perspective, but I don't know if you had any examples in some of the early states where this seems like it could be an opportunity for you guys.

And then I just wanted to ask if corporate cost I think were down year-on-year anything unusual they are and is that a trend you expect in the back half?

[Sean Reilly, CEO]

So, I'll hit the corporate cost first and then Keith might be able to add a little color to that but we are cycling through a little bit of a heavy litigation expense year, last year, so that's been a little bit of a benefit. Keith may have some other things that are sort of approval waiting things like that.

But on the gaming, yes, we do expect that the sports book will reduce hardening the time our gaming. When DraftKings and FanDuel first got started a few years ago and they were ramping up, they within a very short amount of time had gotten to about 600,000 and spend with us over a very like four to five month period and then they were shut down.

So, we expect that activity at some point to come out of way when all that sort of comes a little more clear. They got some M&A activity going on, but when all that will settle down we expect them to come our way.

The other benefit we hope to see is casino activity particularly in Mississippi. Mississippi is one of those states that already voted to allow sports book if there are fixing us. So, we are hopeful that in the back half of the year will see some of that as well.

Gaming has been a little bit of a enigma for us. What we are hearing anecdotally is that it's going to come back particularly in Vegas. Vegas has been recovering from a number of things that had an impact on the way the big casino groups hone their message. The shooting, those deep win things and all of that. We talked about that in the past.

[Ben Swinburne, Morgan Stanley]

Just one more follow-up, you mentioned Sean that you're taking share from Yellow Pages, I'm sure that's intuitive to folks. Another media you've been competing with for years with the traditional radio, would you see any share shifts, you talked to your GM's there that might be accelerated, I asked because the numbers this year have been a bit soft for traditional radio and maybe all streaming, which is growing nicely. But I'm curious if you think you guys are doing better against radio than you have in the past for whatever reason?

[Sean Reilly, CEO]

So, I think as service is pretty direct correlation to share shift from Yellow Pages. Another category that's growing rapidly for us particularly on our digital platform is amusements, entertainment and sport. This is a tractor pull next weekend, is that kind of thing.

And that has traditionally been a radio sweet spot, right. Because you can produce a radio very, very quickly and respond to however your ticket sales are going, we can do that in digital in a nano second. And if there's a need to sell tickets, if there's a need to promote a concert, if there's a need to juice ticket sales in Friday, Saturday, and Sunday, and if you're sitting at Wednesday, you can do with our digital platform. So, I would say that's a pretty direct correlation there to what radio's strength used to be.

[Operator]

And at this time, I'm showing no further questions in the queue. I would now like to turn it back over to Sean Reilly for closing remarks.

[Sean Reilly, CEO]

Thank you all for listening. We'll talk again in November and we'll talk about Q3 and how we're going to finish out the year. But for now let's enjoy what was an outstanding Q2.

[Operator]

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.