Lamar Advertising Co

NASDAQ:LAMR

Earnings Call Analysis

Lamar's Q3 Shows Revenue Growth, Reduced Expenses

Amid a cautious Q3, Lamar saw moderate revenue growth and reduced expenses, yielding an impressive operating margin of 48.3%, improving from last year's 47.6%. COVID relief contributed one-time benefits. The quarter's standout sectors were services and amusements, while retail, education, and real estate lagged. Expectations are to potentially exceed the revised full-year AFFO per share guidance's top end, previously raised in August. Digital growth was notable at nearly 7%, now making up 30% of billboard revenue, despite a small same-board decline. The company executed 11 acquisitions worth $78 million, and anticipates a quieter 2024 M&A scene. Financial health is solid with total liquidity at about $645.7 million, and a reaffirmed full-year AFFO guidance of $7.13 to $7.28 per share, hinting at possibly surpassing the high end. The Q3 dividend was $1.25 per share.

Challenges Amid Modest Growth and Expense Management Efforts

Lamar's third-quarter earnings call highlighted a turbulent operating environment, with national advertisers exhibiting caution, leading to modest revenue increments and a slight dip in expenses, the latter thanks to stringent local management. The company experienced an improved operating margin from 47.6% to 48.3% despite facing a 100 basis point reduction in growth due to political advertising in an off-cycle year. Revenue growth was powered by services, amusements, and entertainment sectors, while retail, education, and real estate displayed weakness.

Digital Expansion and Future M&A Outlook

Lamar has seen digital revenue grow nearly 7%, making up 30% of billboard revenue, even as overall digital grew at a slightly lower 1.7% on a same-board basis. In this quarter, Lamar continued its digital expansion with 84 new digital billboards. M&A activity reached $120 million year-to-date but is expected to cool down in 2024 after a two-year active stretch.

Financial Metrics and Liquidity

Adjusted EBITDA showcased a 5.8% year-over-year increase to $265.7 million, and diluted AFFO per share inched up to $2.04 from $2.03 previously, highlighting business resilience despite an $11.1 million rise in cash interest. CapEx is projected to hit $180-$185 million for the year, with a third allocated for maintenance. Current total liquidity stands robust at approximately $645.7 million.

Robust Balance Sheet and Dividend Outlook

With a solid debt maturity schedule and no immediate maturities, Lamar maintains a low leverage of 3.21 times net debt to EBITDA, strong interest coverage near 6 times, and total liquidity of over $645 million. A steady dividend of $1.25 per share in the third quarter heralds a continued commitment to distributing 100% of taxable income, anticipating a $5 per share dividend for the full year, subject to board approval.

The Road Ahead: Positive Momentum but Mild Revenue Headwinds

Lamar looks toward 2024 with positive momentum, especially as December indicates stronger performance. Nevertheless, political headwinds impact growth, with October starting weaker than anticipated. Lamar anticipates better figures for November and December, potentially exceeding the upper AFFO guidance limit of $7.28 per share. With 77% of billboard revenue generated from local and regional sales, focus remains on these areas, while national and programmatic sales remain muted but are expected to pick up next year.

Earnings Call Transcript 2023-Q3

[Operator]

Excuse me, everyone. We now have Sean Reilly and Jay Johnson in conference. [Operator Instructions].

In the course of this discussion, Lamar may make forward-looking statements regarding the company, including financial performance, strategic goals, plans and objectives, including with respect to the amount and timing of any distributions to stockholders and the impacts and effects on general economic conditions on the company's business, financial condition and results of operations. All forward-looking statements require 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 can cause actual results to differ materially from those discussed in the call in the company's third quarter 2023 earnings release and its most recent annual report on Form 10-K. Lamar refers you to those documents. Lamar's third quarter 2023 earnings release which contains information required by Regulation G regarding certain non-GAAP financial measures was furnished to the SEC on the 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, you may begin.

[Sean Reilly, executive]

Thank you, Katie. Good morning all, and welcome to Lamar's Third Quarter 2023 Earnings Call. As we mentioned in the release, the operating environment remained choppy in Q3 with customers continuing to take a cautious approach to their campaigns, particularly on the national side. Despite that, we demonstrated impressive operating leverage in Q3, increasing revenue modestly while decreasing expenses on a year-over-year acquisition-adjusted basis. The expense result is a credit to the disciplined management of our local general managers. Our team is doing a great job of managing to the macro environment. We also benefited from onetime COVID relief payments in the airport business. Our operating margins without the onetime airport relief payments in Q3 were 48.3%. Again, that's an operating margin of 48.3%, an improvement over last year's Q3 margins of 47.6%. Again, a great performance by our team.

Pro forma expenses without the airport payments were essentially flat. We expect a similar combination in Q4. Slight pro forma revenue growth coupled with pro forma expenses that are flat to down slightly. Recall that on the revenue side, we will have a political headwind that is likely to cost us 100 basis points or so of growth. Nevertheless, as indicated in the release, we are on track to reach or even likely exceed the top end of revised guidance for full year AFFO per share that we provided in August.

Q3 Categories of particular strength included services and amusement and entertainment while retail education and real estate were weaker. Insurance, which has been a tough category all year, has stabilized and was close to flat in Q3. Political, by the way, was off about $2 million from Q3 in 2022, which is typical for an off-cycle year. For the quarter, rate was largely unchanged across our analog platform versus the year earlier period, a little up on posters and flat on bulletins, while occupancy was a little down on posters and flattish on bulletins.

As alluded to earlier, local and regional revenue increased, while national and programmatic declined slightly. I would note that as we move through Q4, programmatic is strengthening and is tracking to be up this Q4 over last year's Q4. We added 84 digital bulletin displays in the third quarter, bringing our total to nearly 4,700 at quarter's end. Our digital revenue increased nearly 7% from the year earlier period and accounted for 30% of our billboard revenue. On a same forward basis, digital revenue was off about 1.7%.

We completed 11 acquisitions in the quarter for $78 million, including the purchase of a terrific legacy billboard plant along the Florida, Alabama, Gulf Coast. That brought our year-to-date total in M&A spend to $120 million we should be largely done for this year and, by the way, anticipate another relatively quiet year in 2024 on the M&A front. Speaking of 2024, it's a little early to offer any solid predictions. We are having our usual year-end conversations with the big agencies and have not heard anything that causes us particular concern. And as we enter the holidays, it looks to us that we will have positive momentum going into next year. In fact, December is looking very good.

With that, I will turn it over to Jay to run through some more numbers.

[Jay Johnson, executive]

Thanks, Sean. Good morning, everyone, and thank you for joining us. We continue to experience modest growth in our portfolio during the third quarter and exceeded internal expectations for both operating expenses and adjusted EBITDA. In the third quarter, acquisition-adjusted revenue increased 1.6% from the same period last year against a difficult comparison in which pro forma revenue growth was 6% in the third quarter of 2022. Our billboard regions grew in the low to mid-single digits, with the exception of the Northeast and Midwest, which contracted year-over-year as a result of their exposure to national advertising. Acquisition-adjusted operating expenses decreased 110 basis points in the third quarter, which was slightly better than anticipated. We now expect operating expense growth for the full year to come in around 1% on an acquisition-adjusted basis. Adjusted EBITDA for the quarter was $265.7 million compared to $251.2 million in 2022, which was an increase of 5.8%.

On an acquisition-adjusted basis, adjusted EBITDA increased 4.5%. Adjusted EBITDA margin for the quarter remained strong at 49%, expanding by 140 basis points over Q3 2022. And despite inflationary pressures over the last 24 months, the company's adjusted EBITDA margin remains well above pre-pandemic levels. Adjusted funds from operations totaled $208.8 million in the third quarter compared to $206.4 million last year, an increase of 1.2%. This was despite cash interest increasing by $11.1 million over Q3 2022. And even though cash interest was a headwind of approximately $0.11 per share, diluted AFFO increased to $2.04 versus $2.03 per share in the third quarter of 2022. The slight improvement in AFFO against an $0.11 cash interest headwind underscores the resilience of our business model with a portfolio heavily concentrated in billboards focused on local markets. Local and regional sales grew for the tenth consecutive quarter, increasing 2.3%. Softness returned in our national business, which includes programmatic and declined 3.4% in the quarter.

Local and regional sales accounted for approximately 77% of billboard revenue in the third quarter. On the capital expenditure front, total spend for the quarter was $39.1 million, including $13.4 million of maintenance CapEx. Through the first 3 quarters of the year, CapEx totaled $132 million about 1/3 of which was maintenance. And for the full year, we anticipate total CapEx in the $180 million to $185 million range with maintenance comprising approximately $60 million.

Now turning to our balance sheet. We have a well-laddered debt maturity schedule and continue to focus on the company's best-in-class capital structure. We have no maturities until the term loan A in February 2025, followed by the AR securitization in July of that year. In addition, we have no fixed income maturities until 2028. Based on debt outstanding at quarter end, our weighted average interest rate was approximately 5% with a weighted average debt maturity of 4.5 years. As defined under our credit facility, we ended the quarter with total leverage of 3.21x net debt to EBITDA, which remains amongst the lowest in the history of the company.

Our secured debt leverage was 1.08x at quarter end, and we're comfortably in compliance with both our total debt incurrence and secured debt maintenance test against covenants of 7x and 4.5x, respectively. Despite the sharp rise in interest rates over the past year and based on current guidance, our interest coverage should end the year near 6x adjusted EBITDA to cash interest. While we do not have an interest coverage covenant in any of our debt agreements, we do monitor this important financial metric. Healthy interest coverage exemplifies the strength of our balance sheet and the company's ability to service its debt. At the end of the quarter, we had approximately $645.7 million in total liquidity comprised of $39.4 million of cash on hand and $606.3 million available under our revolving credit facility. Subsequent to quarter end, we repaid $70 million on the revolver, and currently, there is $65 million outstanding on that facility.

This morning, we reaffirmed our full year AFFO guidance of $7.13 to $7.28 per share. But as Sean mentioned, we do see a path to potentially exceed the high end of the range. Full year cash interest in our guidance totaled $168 million, a $0.47 per share headwind versus last year. As I touched on earlier, maintenance CapEx is budgeted for $60 million, while cash taxes are projected to come in around $10 million.

And finally, our dividend. We paid a cash dividend of $1.25 per share in the third quarter. Management's recommendation will be to declare a cash dividend of $1.25 per share for the fourth quarter as well. This recommendation is subject to Board approval, and the company's dividend policy remains to distribute 100% of our taxable income. For the full year, we anticipate a 2023 dividend of $5 per share, also subject to Board approval. Once again, we experienced modest revenue growth in the quarter and are particularly pleased with our efforts around operating expenses. We will continue to focus on expense control for the balance of the year.

I'll now turn the call back over to Sean to close things out.

[Sean Reilly, executive]

Thank you, Jay. I'll add a little color and then open it up for questions. As Jay mentioned, regarding relative geographic strength and weakness, it's been tough this year in large markets in the Pacific Northwest and in the Northeast, where those markets have more national exposure. Everywhere else across Lamar's footprint is by and large, solid. I mentioned that we had nearly 4,700 large-format digital faces up today, and we are still tracking to add a total of a little over 300 this year. On rate and occupancy, I mentioned analog bulletin rate and occupancy were basically flattish, analog post rate slightly up. Occupancy, a little down. Jay mentioned the national regional versus local sales mix. Local regional was 77%. National programmatic was around 23%. Similar numbers that you're used to hearing. In terms of revenue growth by quarter, local regional was up 2.3%, and National ex programmatic was down to 2.6%.

As I mentioned, Programmatic has been a drag on national for the first 3 quarters of the year, but we're seeing good momentum in our programmatic book as we move through the fourth quarter. Services and amusements were particularly strong in Q3, up approximately 16% and 11%, respectively. And they are both, by the way, up a like amount year-to-date. Categories are relatively weakness. As I mentioned, retail down 8%; education, down 6%; and real estate, down 10%. So with that, Katie, I will open it up for questions.

[Operator]

[Operator Instructions]. Our first question will come from Cameron McVeigh with Morgan Stanley.

[Cameron McVeigh, analyst]

It's great to hear there's positive momentum into the holiday season and into December. Just curious how that's trending on a local versus national basis looking forward. And then I have a follow-up.

[Sean Reilly, executive]

It's almost exclusively local regional, Cameron. That remains where the strength is.

[Cameron McVeigh, analyst]

Got it. Into -- yes, looking ahead into '24, I know you guys gave some color on it, but is it appropriate to assume the implied 24 -- the 4Q '23 organic growth is an appropriate run rate? Or are you expecting more of an acceleration into next year?

[Sean Reilly, executive]

Are you talking about the 126 run rate from Q3 going into next year?

[Cameron McVeigh, analyst]

Yes, that's right.

[Sean Reilly, executive]

I would expect something measurably better.

[Cameron McVeigh, analyst]

Got it. Okay. Great. And just one follow-up. I saw that you guys paid down $70 million in outstanding borrowings on the revolver. You have a great looking balance sheet. Curious how you're approaching your capital allocation going forward. What's the priority?

[Sean Reilly, executive]

Well, I'll let Jay hit it on more particulars on the balance sheet. But as we look into next year, we're going to continue to invest in our digital footprint. It wouldn't surprise me if the M&A activity was a little softer or a little bit less active. That's a combination of the fact that we pulled a lot of M&A activity forward in '21 and '22. And also just sort of where the seller activity seems to be coming out. So if we do have the opportunity to pay down some more debt, that wouldn't surprise me either, particularly on that term loan A that's out there. Jay?

[Jay Johnson, executive]

That's exactly right. So if we're in a more muted acquisition profile next year, we're going to be pretty aggressive and use our free cash flow to pay down our floating rate debt. That's probably the best investment that we can make at this moment. And we'll be focused on, Sean mentioned the term loan A, which is our nearest term maturity. And if we're in that sort of profile next year, we can see leverage tick down by the end of the year below 3, which would be the best in the issue of the company and set us up well for any opportunities.

[Operator]

And we will take our next question from Richard Choe with JPMorgan.

[Richard Choe, analyst]

Strong December or some confidence in December, can we see growth accelerate into the fourth quarter because it's kind of been trending down through the year but you have that political headwind of 100 basis points that could kind of mitigate.

[Sean Reilly, executive]

Yes. I think that's a good way to frame it. October was obviously facing that headwind of political. The way I like to look at it now is November was better than October and December is measurably better than November. So that's the sort of turn as we move through the quarter. And I think it bodes well for how we go into 2024.

[Richard Choe, analyst]

Great. And it seems like national, I guess, is continuing to be soft, but there's some hope that next year kind of comes back. Is that fair?

[Sean Reilly, executive]

I had to lean on easy comps. But we're going to have awfully easy comps when it comes to national of next year. So you should see instead of -- in lieu of those negative numbers that you saw as we move through the year, you should see positive numbers.

[Operator]

And I am showing that we have no further questions at this time. I'll turn the call back to our presenters for any additional remarks.

[Sean Reilly, executive]

Well, great. Thank you, Katie, and thank you all for listening. I hope you all have a happy and safe holidays, and we will talk again in 2024.