Lamar Advertising Company (LAMR) Q2 2011 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, strategic goals and plans. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this call in 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 second quarter 2011 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.

Thank you, Chantal. I want to welcome everyone to our quarterly conference call. As is our custom, management will make some brief comments and then we'll turn the call over for our Q&A. 8% GDP growth didn't help much, but you can't sugarcoat weak performance and a weak guidance. We had an exceptionally tough time closing business in the month, for the month, especially with our smallest customers. And that leads me to believe that there still is a lack of conviction out there among our local customers. So until demand there bounces back, we will continue to manage our expenses and our balance sheet accordingly. Of course, one bright spot throughout the year and we expect going forward, is our digital efforts, and we do expect good things there. With that, I'd like to turn the call over to Keith Istre, our CFO.

Okay. Welcome, everybody. Just a couple of quick comments. As you know, we've guided to approximately $296 million in revenue for Q2. You saw we came in at $293 million and some change, so we obviously were a little light, and that's disappointing. Sean will get more into the details of what drove that. But accordingly, based on our bookings and our Q2 performance, our guidance for Q3 revenue is identical to our actual loss for Q2, and that's $293 million, which is up 2%. In our fiscal years, our Q2 and Q3 revenues on a pro forma basis are pretty much identical. So FYI, our Q3 pro forma revenue from last year is identical to our last year's Q2 pro forma revenue, which we show in our press release that you have. The only other comment is on our expense growth. Our consolidated expenses, including corporate overhead, were up 2.2%, that's on an actual-to-actual basis. If you pro forma the end some of the benefit costs that weren't there last year, we would be up about 1%. So for the rest of the year, we do expect our expense growth to remain in the low single-digits. Sean?

Thanks, Keith. And I'll hit some of the highlights and also point out some areas of weakness. On the highlights, Keith mentioned the expense controls. Obviously, we saw that the economic tailwinds weren't as strong as we had hoped, and we began to manage expenses accordingly, and we'll continue to do that. On the digital front, as Kevin mentioned, we've got a lot of confidence in how we're doing on the digital front. As of the end of July, we had 674 bulletins in the air, and 629 posters in the air, for a total of 1,303 units. That's an increase of 134 units since we announced our goal of getting 300 in the air last November. We were slowed down a little bit by the whims of the weather in the first half. I estimate now that we'll end the year with approximately 250 additional units in the air since we announced that goal, so we may come up with tad short, not because we don't want to put more in the air, but we are getting them up as fast as we're physically able. Digital has grown to 13% of our book of business. It was up 15% in the first half of the year. So again, that indicates to us that we need to keep pedal to the metal when it comes to growing our digital footprint. Rate and occupancy stats for Q2 -- we're in an environment now where it's very difficult to push rate with our local customers. And it showed up in the rates statistics, Q2 2011 average poster rate of 437, Q2 2010 average poster rate of 431, or an increase of only 1%. On the bulletin side, Q2 2011 average rate, $1,112, versus Q2 2010, $1,111, or absolutely flat. And that's a little bit of disappointing and I think reflects the economic environment. On the occupancy side, we continue to see a little bit of struggle on the poster side of our business. Q2 2010 occupancy was 73%. Q2 2011 occupancy was 72%. The news is a little better on the bulletin side. Occupancy is up 3 points on the bulletin inside. Q2 2010, occupancy of 74%; Q2 2011 occupancy of 77%. Other than the general economic sluggishness, the story in Q2 was also one of a sort of disappointing performance on the national front. Our national book of business actually declined 1% in Q2, and that was a bit of a surprise to us. Local was up 2.8% in Q2, national was down 1%, and that got us to the pro forma growth that we reported. That national performance seems to be carrying into the third quarter. At best, national will be flat, and it could be a mirror of the second quarter, down 1%. So that seems to be where the weakness is. On our top 10 advertisers and top 10 categories, nothing really new to report. Auto was up 10% in Q2. It was up in the 18% in Q1. It looks to be up the 5-ish percent for Q3. So holding its own, and of categories that are not holding their own, the story there is a little much pain as we reported on our last call. We're still struggling in the hotel-motel category, down almost 10%, and we're still struggle in real estate, again, down almost 10%. So that's the story on the verticals. And we're happy to answer the questions. Chantal?

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

There's been some investor concern that the digital boards are cannibalizing the rest of the business. So Sean, you sound very confident in digital. How can you make investors listening to this call also comfortable and confident that cannibalization is not occurring more than you had already expected?

Well, yes. The first thing we look at is overall analog book of business growing as we would expect. It's a little weaker than we would expect, obviously. But again, with 0.8% GDP growth, it's hard for us to dramatically outstrip that with our basic book of business. We were up 3.4% in the first half against that GDP growth, and digital was up 15% against that GDP growth. So I'm comfortable that while we may have some customer migration going on, that's not disappointing. The real story here is our hope for stronger economic tailwind did not materialize.

Okay. And then, just one quick question. Just for auto, how do been affected by the supply shortage in Japan? Have you seen any cancellations or has the deceleration been more about renewals?

I think the deceleration in terms of growth of auto as a category is more a reflection of the economy. I don't think it's supply chain interruption or anything like that. Q2 was up 10%. That's a pretty good number. We're turning the corner on auto on some pretty tough comps. If I recall, auto was up almost 20% Q3 last year. So we're comping now against the recovery in that category. It's up to 6% of our books, Marci, and that's up from 5% last year. My view is it's growing and it's still healthy, and it's going to get where it needs to be.

And our next question will come from Ben Swinburne, Morgan Stanley.

I just wonder if you guys can sort of step back and comment on how you think your managers are executing in the market, just to give us a sense. I think you've commented before, last quarter, in particularly, about sort of a need to do better, and maybe you could just give us a sense for how you rate your performance this quarter? And then, I'd love to get some regional color, if you guys would spend a little bit of time just talking about the different regions in your business. There was big dispersion in performance, and that would help us think about the sort of economic impact if there is in natural markets.

Well, I think that for the first half of the year, the story was probably large markets doing slightly better than smaller markets, I think that reflected the economy. We're a little bit confused as to the negative-1 in national in Q2. I think a lot of what happens on the national front isn't completely in our control. And I don't know if that's a harbinger of bad things to come, or whether it's just a blip on the national scope. In talking to our colleagues in the industry, they're seeing a similar phenomenon. I believe Clear Channel announced that local outperformed national in Q2 as well. In terms of regional performances, the story there, I would say, is pretty much the same as we reported on the last call. The recovery has not taken hold in the Western region, that would be Southern California and Nevada. They're still struggling a little bit, although we are beginning to see signs of life in Las Vegas. Florida is recovering, I think, a little better, but nothing to write home about. At the end of the day, there has been a divergence with this recovery between Main Street and Madison Avenue. That's just the way this recovery has played out. And our fortunes are tied to Main Street USA. So that's the recovery we're looking forward to. If you look at our Top 20 verticals, and I think Kevin alluded to this, our Top 10 are up and were up in Q2, 5%. It's really the smaller customer base, that vertical from #10 to #30. That includes tens of thousands of small businesses on Main Street USA, where we're having a hard time getting traction.

That's very interesting. Is there any category or a couple of categories that really changed on the national front Q1 to Q2?

Yes. It's interesting, Telecom was a little bit of a surprise for us in Q2. AT&T and Verizon had been spending very predictably and very heavily. They stepped back a little bit in May and June. We don't think that's a trend. We just think that they're pausing a little bit. They've got some things going on, particularly AT&T, and worrying and thinking through the T-Mobile thing on how they're going to approach their brand strategy and how they're thinking about things. So I would say that was the one surprise where we had a little disappointing phone call.

Interesting. It's not a category you'd sort of call cyclical, particularly cyclical?

No. Telecom's been good for us. I think when you talk to the other guys, they will tell you that they feel like it's still healthy and still good and will do good things for us in the future.

. Our next question will come from Jim Boyle, Gilford.

Sean, given the change in digital board and salt pace this year, is that going to change your pace in 2012, or should that be about the same all else being equal?

Well, Jim, what we're going to do is make those decisions in November. Where I sit right now, I'm feeling pretty good about what we're doing on the digital front, and I don't see any reason to change it. It's not a huge capital commitment. This year, we'll spend somewhere between $40 million and $50 million building that footprint, and it wouldn't surprise me if we didn't settle on around the same pace next year.

Okay. And secondly, you'd mentioned the difficulty in pushing for in-month business, especially with the smaller businesses. How were the national advertising rates in Q2 versus the prior year, and is the Q3 trend similar?

Yes. I don't think it's a question of rate if the discussion is strictly national. We are in an environment where it's hard to tell customers that you're going to push them real hard on rate, again, given where the economy is. Again, I think that surprise that we got was AT&T, Verizon, and we're not getting indications going into next year that there was anything more than a pause on their front.

Our next question will come from Paul Sweeney, Bloomberg Industries.

Kevin and Sean, I know in the past you've mentioned that the outdoor industry, and you guys in particular trying to get involved in the buying process a little bit earlier, maybe more in the strategy part of the buy that might give you a little bit more control over national. And as we think about your national business being weaker than expected, as you mentioned, and if we compare that against national television, which is just exceptionally strong, and so we look at your business being a bit slower. So that would suggest that your industry and maybe you in particular are not having much success and kind of working with agencies getting a little bit earlier in the planning process. Is that in fact the case? And is there anything that you guys as maybe you in particular can do to kind of try to improve that process?

Well, as an industry, we weren't in the planning cycle going into this year. But this cycle, we will have the Eyes On data in the planning cycle. So if it shows up, it will show up next year, not this year. In terms of Eyes On helping us get into the planning cycle. But that's not a reason to pin the poor performance in Q2. We had a strong national book, and it's started deteriorating. And as Kevin mentioned, selling in the month, for the month, has been a frustrating process as we went through the year. At the last call, our third quarter book was pacing up 5% when we made our last call. And as June turned into July, turned into August, we could see selling in the month, for the month slowed down. And I think that's a reflection of what's going on in the economy.

And just as a follow up, do you think on any of your verticals in particular, or any of your markets you're seeing any impact from perhaps some of the Groupons or the world and the local advertising inventory that's coming into the market. Is that impacting your business at all? Have you heard that from any of your sales people?

Oh. We have one vertical, where our sales people and our local folks tell us that advertisers are picking other vehicles, and that's the hotel/motel category. That category used to be upwards of 8% of our book, and it's down to 3% or 4% of our book. So that's the one vertical where customers are picking other avenues. We're not seeing that in other verticals. In other verticals, the story is a cyclical story.

Our next question will come from James Marsh, Piper Jaffray.

Two quick questions. First, Keith, on the expense focus, if the top line remains soft, I mean, what specific categories are left to really go after, in your opinion, that are going to be big enough and meaningful amounts to help offset declines in revenues? And then secondly, could you just remind us what political ad spend was for you guys last year? In my recollection, it was modest, but if you could quantify that, that would be helpful.

James, on the first question, the expense categories obviously, everything's in play. Our 2 biggest expenses are lease costs, which is #1 at about $190 million, and then our employee, our personnel costs, which is #2 at about $170 million. So I mean so if you're going to look at cutting significant numbers, those 2 things have to be looked at. That being said, we've cut about $30 million to $40 million out of our lease expense since 2008 by taking down units, renegotiating leases. At the end of the fourth quarter of 2008, we had 3,600 employees. We eliminated 600 positions in the beginning of 2009, and we have not replaced any of those positions. We still have 3,000 employees employed by the company, which is what we had at the end of our first quarter of 2009. But again, those are 2 big categories, and those are always something that we would take a look at. And then, you have the other categories, the smaller stuff, obviously: entertainment, travel lodging, bonuses for management, the costs of board. But again, just as in 2008 and 2009, everything is -- would be considered if it came time that we really had to go back and reduce expenses to where there were negative growth. As far as politics, we have very little politics. As usual, we don't get that business. That's all the broadcasters. I think it might have been $1 million, $1.5 million last year that we got.

Our next question will come from James Dix, Wedbush.

Three things. Just one housekeeping thing, what was the growth of the static business in the second quarter? And I have 2 others, but I would just take that one.

Keith, do you have that one broken down?

I'm sorry, Sean. Therese was having a chat with me. What was the question?

James was asking what was the growth in static was in Q2. I don't have that in front of me.

Hang on, static, I've got it somewhere, hang on. In Q2, our static was up about 0.1 point. It was basically flat.

Okay. I gather your guidance kind of incorporates a similar assumption for 3Q?

Yes. We don't break it down when we look at it. But obviously, we're just -- we don't break it down by individual units, poster, bulletin, static, digital, et cetera. We just look at the total book. But we're assuming that the -- at a guidance of $293 million, which is the same as what our actual Q2 revenue was, that the mix would be similar.

Okay. And then, can you see a difference in mix with advertisers on the digital versus the static that you think might explain on the one hand, some of the lack of conviction you think you're seeing in some of your smaller local customers? And then, obviously, the relative enthusiasm of the customers who were getting on the digital boards? And then, I have one other follow-up.

The category that is post-dramatically different on digital is as you would expect, it's amusement entertainment. It tends to be time-sensitive, date-sensitive advertisements. Other than that, it's not hugely material. You get slightly less restaurant as compared to our other business. If I had to point to something that was disappointing in Q2 on the digital front, and this is probably the only disappointing digital news, and it ties back to the AT&T, Verizon, AT&T and Verizon both were very disappointing in Q2 on the digital front. Our national book of business on the digital front was up 11% for Q2. And that's in the face of cancellations from both of those guys, from AT&T and Verizon. So normally, Telecom and Wireless are pretty vigorous users of the digital platform. The bad news call that we got in Q2 was that cancellation.

Okay, that's very helpful. And then just lastly, as you go through a typical year of a recovery, do you normally see a lot of variance in the year-over-year rate growth you get by quarter? Or is it more like you go into the period where you negotiate your annual goals and that kind of gives you the expectation for what the coming year is going to be, and then there's not a lot of variance in rate growth by quarter? I'm just kind of curious in that dynamic since you talked a little bit about rate earlier.

Sure. Well, the first thing you have to look to is when our contracts come up for renewal. It's essentially ratably throughout the year. So it's a pretty good reflection of what's going on at that moment. So we were having much better rate discussions when we turned the corner going into this year, when GDP was in the 3 -- we thought was in the 3-ish range, facing up in the 5, or 6, or 7-ish range, and we were having good discussions. It's very hard now to go to local customers and beat them up on rate.

Our final question will come from Jason Bazinet, Citi.

I just had 2 quick questions. If I can back to Marci's question at the very beginning of the call, and I apologize. This is probably because I'm just ignorant about this. But your explanation saying that the analog book was growing, I thought you guys were going to answer by saying, "If we look at some pocket of our footprint, that maybe as more rural where there's no digital, we sort of see better trends, or similar trends to areas where there are a lot of digital that's why we know the digital isn't cannibalizing." Is that not the right way to look at it? Or is it not possible to cut the pricing or utilization data between those markets with digital and without?

Well, we've got digital in now 140 of our markets. And they are -- they run the gamut of market types, they are large urban and smaller rural. So I think you could get into the weed if you had to do it that way. What we try to do, is we try to do it based on an aggregate performance of both platforms, that's where we start. And then we try to dig into the performance of individual units regardless of where they are. And that data is tracked by Buster and Brent [ph]. They look at it very rigorously. They look at it as we put new units up, they look at the historical performance of units that are up. And they look at the performance of analog units that are in the neighborhood of those units to see if customers are migrating. And so we do it as rigorously as we can. But I still think the most reliable thing is to look at is, is the aggregate book of business growing? Does it make sense to continue to deploy? Is the local ad climate sufficiently strong to absorb the additional inventory?

Okay. And can I ask one follow-up? When you mentioned that the hotel vertical is the only one where you're seeing some sort of migration to other form, other types of advertising, can you just elaborate on why you think it's hotel? And if you saw another category sort of succumb to similar pressures, which ones would it be?

Sure. The hotel/motel business, any people decide -- they used to decide at the last minute driving down the interstate looking at billboards. Particularly for your downscale side-of-the-interstate, at-the-interchange hotel/motel business. And today, people are booking with the various online services. They're using their handhelds to figure out where a hotel or motel is rather than looking at the billboards. It's a trend. When we go back and look a decade into that vertical, the hotel/motel business, really never recovered from 9/11, and that was a major blow to them. And from a cyclical point of view, they started deteriorating in our book. And if -- had it not been for the secular issue, they probably would have been rebounded. They never really rebounded. So it went from 8%, 9% of our book down to 3%, 4% of our book. And in managing to that, we're not assuming it's going to go back to 8%, or 9%. We are managing and selling to that vertical like they're where they're going to be, and we need to find another customer.

Okay. And if it spills into another vertical, which one do think it would be?

Well, you look at consumer behavior, and you're just sort of think about what's out there. As I mentioned, our top 10 verticals are healthy. As a matter of fact, they were up in Q2, 5%. It's those smaller customers reflected in verticals below the top 10, and I'm going to argue that their struggles are cyclical and it's not secular.

Chantal, that concludes our call. I want to thank you for conducting it, and we look forward to the next quarterly call.

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