Lamar Advertising Company (LAMR) Q4 2012 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. All forward-looking statements, including statements with respect to Lamar's consideration of an election to real estate and 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 the 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 and year end 2012 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 Kevin Reilly. Mr. Reilly, you may begin.

Thank you, Chantelle. I want to welcome our friends to Lamar's Q4 call. As was announced, we filed our private letter with the IRS in November, and we're awaiting word. The themes for 2013 are to continue to manage our balance sheet in anticipation of a REIT conversion, to continue to manage the REIT conversion process in an orderly way and keeping the market informed as we cross certain milestones. And then lastly, try to operate our business smart in an environment where we still don't quite have the national economic winds at our back. And with that, I'll go ahead and turn the call over to Keith Istre to walk us through some of the numbers.

Okay, just to recap briefly the fourth quarter, you saw the operating performance on the last call, we had guided to Q4 without the NextMedia acquisition, which we closed October 31. And as we posted in our press release, the pro forma revenue guidance growth for Q4, without Next, was up 2.6%; EBITDA pro forma growth of 3.6%, and our consolidated expenses for the quarter came in at up 1.8%. And we had guided to approximate [indiscernible] For the full year, including Next, [indiscernible] revenue on a pro forma basis of [indiscernible] 4.6 and consolidated expenses grew at exactly 2.0. I don't know if anybody recalls, but last year at this same time, we had guided expense growth for 2012 of approximately 3%, so for the year, we came in a little bit better than we had thought. For 2013, obviously for the first quarter, you saw what our revenue guidance was. We're projecting up 2% to 3% on a pro forma basis and that includes the Next acquisition in those numbers. For the expense growth for 2013, let me just make a couple of comments. Just like last year, we think if you take our pro forma operating expenses for 2012 and grow them 3%, that's where we are projecting to come in for the year. We are, as Kevin mentioned, we are in the process of moving forward with our request, and we think that in addition to the 3% pro forma growth in our base expense that we should have about $5 million in additional REIT-related expenses in 2013, so that would add about an extra 1% to our expense growth for the year. We're not sure exactly when those expenses will hit. We budgeted for them, but for Q1, without REIT expenses, we would probably guide you to approximately 3% for the quarter. Just a couple of housekeeping things. CapEx budget for 2013, just like '12, looks like it will come in at approximately $100 million at this time. And last, we're projecting free cash flow in '13 to be approximately $320 million coming off of $267 million in 2012. And with that, I'll turn it over to Sean.

Thank you, Keith, and welcome, everybody. I guess the watchwords for 2013 are, "steady as she goes", both strategically and operationally. Keith mentioned the CapEx budget, a little over 1/2 of that will be maintenance and a little under 1/2 will be growth as we move through the year in 2013. I want to accomplish a couple of things as I walk through the operational statistics. Number one, to walk through those aggregate statistics with you, but I am going to highlight what I believe are some very encouraging data points from the fourth quarter that are carrying into the first. First, on our total digital units in the air as of the end of the year, we had 1,693 digital units up and operational. That includes 64 from NextMedia. If you recall, in the middle of last year, we began seeing our same board digital go flat and even be slightly negative. In Q4, that turned and our same board digital was slightly up at 0.3%. And given our February book, it looks like that's continuing into the first quarter. Occupancy stats, Q4 '12 and Q4 '11 were identical for both posters and bulletins at 66% for posters, 76% for bulletins. Here's another one of those data points that I think might be a green shoot for us. We're finally getting a little bit of our growth out of our traditional platform on rate as our rate was slightly up Q4 '12 over Q4 '11 for both posters and bulletins. Average rate per panel for posters, Q4 '12, 428 versus Q4 '11 of 426. And for bulletins, Q4 '12, 1,124 versus Q4 '11 of 1,119. National versus local. Q4 was about local. Our Q4 local book was up 3.4% in the fourth quarter and up 0.1% for national. For…

Chantelle, can we open up the call for questions?

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

A couple of questions. The first, Sean, can you just kind of outline the next steps once you get the private letter ruling and talk about whether you still feel comfortable this could come in March, or is there a chance it comes shortly thereafter? The second question is, if you could update us on your thoughts for digital billboards for '13? And then my last question is if you're seeing acceleration throughout the first quarter, or are you seeing more stability versus the volatility you were seeing at some point last year?

I'll take them in reverse order. Thanks, Marci. The book is still showing some month-to-month volatility. As we look out a little bit further into the year, there seems to be a smoothing, but the first quarter looks a little lumpy. I think you ought to model about 130 new digital units for '13. And we'll obviously update everybody as we move along. But that's a good conservative number to start out with. And then finally, on the REIT process, it's one that's a little bit beyond our control. We're being told that in terms of meeting our timetable of January 14, we're still in good shape. The IRS process is, they tell us 3 to 6 months. So if you count that down from November, it's my hope that sometime between now and our next quarterly call, we'll have some information to pass on to everybody. But it's not a perfectly predictable exercise. I would note, as Keith mentioned, that we have penciled out a rough estimate of what we think the conversion expenses will be, and we do have our team in place. We have a financial adviser, we have our attorneys, we have our accountants, and they're hard at work.

Okay. And can you just describe what kind of expenses would be in that $5 million?

Well, probably, the largest is probably legal, I'm guessing. And then the second-largest would probably be our financial adviser, who we recently retained; and then finally, the accounting. But until you get the PLR and understand exactly what kind of structuring you're going to have to do, it's again, kind of hard to predict. We are being told by our experts that as regards other nontraditional REIT conversions, we're a little simpler and easier to get our -- to get your arms around because of the nature of our business and the fact that we have very little in the way of international operations. So once we get the PLR, it ought to be a slightly more predictable exercise on penciling out expenses and penciling out the timeline.

Our next question will come from Matt Chesler, Deutsche Bank.

Just a question about some of your top categories. Within restaurants, are there any particular trends within the restaurant category that you're seeing that you would want to call out? It was nice to see retail grow and become a -- your largest category. To what extent did that, sort of phenomenon, take place because of any kind of -- because there were -- other categories were giving up some share?

Sure. Retail -- restaurants are fine. I mean, for the quarter, they grew essentially the same amount as the aggregate book, so I don't think it was at their expense. And in '13, it's looking strong. McDonald's and Cracker Barrel are both going to be vying for 1 and 2 in terms of our top customers in our book of business. So I don't think the retail growth was at the expense of anybody, I think it was on top of. And again, it's -- for us, that's a little bit of a milestone because we traditionally, come November and December, we aren't the medium of first choice for retailers, and it's encouraging to me to see that we may be more important in their plans at the most important point in their year. So I'm hopeful that, that happens again next year.

Okay. And then onto the REIT topic, if you don't mind, a few things. One, it would be, how are you thinking about using your NOLs either before or as a REIT, relative to the timing of conversion? And then would you -- to what extent would you be using those to manage any potential dividend payout? And what are your advisers telling you about a potential for any purge? And if so, can you give us any sense of magnitude directionally on that? And then finally, just a question on the balance sheet, do you have a sense for what cash interest might be in 2012?

Keith, do you want to hit the cash interest?

Yes, cash interest, we're predicting -- projecting about $130 million, down about $10 million from 2012. We're going to be doing -- we're planning on doing a little refinancing of some high-cost debt during the year. And we took advantage of some really low rates last year to knock down some of the high, higher-cost interest debt that we had been carrying along for the past several years. So we'll get a little bit of a break there.

It's a little premature to be thinking about a P&E purge and where the dividend is going to be set and how we would use the NOLs. And we've just brought, as I mentioned, our financial adviser on board, JPMorgan, and they're going to be laying out different options. But I think for us to do the kind of work we need to do to get that right, that's a third and fourth quarter discussion with the rest of our shareholders. The board and our financial advisers need to do their work.

And having said that, we don't expect any surprises on the P&E purge or EMP purge.

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

Just 2 things. I guess, one, a housekeeping item, maybe, Keith, you can handle it. Just your pro forma full year revenue now, including Next, just that base that we should be using for revenue and EBITDA for 2012, just in terms of our modeling for 2013. And then, if you want to take that and then I'll add one follow-up.

Yes, our pro forma revenue with Next is right at $1.213 billion and EBITDA is $528 million.

Great. And then just in terms of capital expenditures, if you could give just a little bit more color as to how we should we thinking about maintenance CapEx going forward, more generally. I know you said it was going to probably be a little over 1/2 of the $100 million you're budgeting for this year. But also just some color as to -- what can cause that to vary from year-to-year? I know people are interested in that as they look out at the REIT conversion. And then in addressing that, if you could talk at all about how you typically budget for repairs for kind of unpredictable things like storms, because I know you've indicated that you self-insure for that, and then how much variability have you gotten at the most, related to that? That would be helpful.

Yes, as a general rule, you should -- as you model it out and look out in the future years, you should reserve about 5% of net revenues for maintenance CapEx. So given $1.25 billion-ish, $50 million to $60 million, and of course, that's right around where we're budgeting for this year. Our maintenance CapEx is variable in the sense that we can throttle it back and if we need to, and we can prioritize different products depending on useful life. And the most important one there is digital. The next few years, given the way we rolled out digital over the last 10 years, the next few years are going to be a little heavy on digital CapEx. And so we will throttle back on the traditional CapEx, so as to keep it within that $50 million to $60 million band. It's my anticipation that we can keep it there indefinitely. I mean, year-in and year-out, that's about what we need to do. We've gotten very good at protecting our units from storm damage. We've learned a lot of lessons over the last few decades. Number one, we have a tear away copy along the coast so that the wind blows the copy out but doesn't blow the structure down. That's proven to be very, very helpful, the last few storms that have come ashore. And so I don't see that as a risk, sort of extraordinary storm damage. We've pretty much got that drilled down.

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

I have 2 questions. One, I would love to hear some more about the trends you're seeing at real estate. As you mentioned, that was a big headwind for a long time, and particularly, how are markets like Las Vegas and Southern California performing now, which I think have been drags on the overall book? And then I guess, unrelated around the REIT conversion, and particularly, in lieu of CBS's move, do you think the move towards REIT status for the outdoor business in the U.S. for 2 major players increases sort of consolidation in the industry in general? Obviously, you guys have picked up your pace on acquisitions a little bit already, but would just love to get your thoughts on what that might mean, if there's any relationship there in your mind?

We -- I can't really speak to pace of acquisitions, but I can speak to what it's done in terms of our strategic focus. Obviously, when we get the PLR back, we'll have more clarity on what assets are deemed requalified and what of our operations aren't. But it's clear that high-quality, traditional out-of-home qualifies. And if you limit our universe to that in the domestic U.S., there's a handful of good, quality, potential acquisitions. But we really are sharpening our focus on high-quality, traditional out-of-home assets in the domestic U.S. Obviously, the conversion to a REIT drives you to that conclusion. The other question was?

Real estate.

Oh, real estate. Yes, it was interesting. Real estate's been, for the last 4 or 5 years, a double-digit down to single-digit drag on our same-store performance. In December, it went positive. And as I'm looking at the first quarter pacings, it's slightly positive. That's a good thing. I mean, if we don't have to fight that headwind, then hopefully, as the year progresses, we can sell more traditional units and see a return to growth in our same board traditional platform. And we've got the whole organization focused on that. And as a matter of fact, we've tweaked our incentive comp for our AEs and our GMs to focus laser-like on that. So -- and hopefully, that will bear fruit as we move through the year. Oh, Las Vegas. The Western Region had been trailing the pack in terms of our regions. As we reflect on last year, it's moved up to the middle of the pack, so there has been a little bit of a recovery out there in Southern California and in Las Vegas. And as I look at Florida, pretty much the same thing. So they're not leading the pack, but they're not trailing the pack.

Our next question will come from David Miller, B. Riley Caris. David W. Miller - B. Riley & Co., LLC, Research Division: A few questions. First of all, on digital, how much did digital rise on a revenue basis in the quarter, in the December quarter on both an aggregate basis and also on a same board basis? And then, Keith, if memory serves, you guys took out -- you guys were pretty efficient in taking out a portion of the 6 5/8% paper on the bond refi. When do you feel comfortable moving in terms of, moving down the capital structure here and taking out a portion of the 7 7/8% paper?

Keith, do you want to do that one first?

Yes, the 7 7/8% don't return until '18, so we're not that focused on them at this point. We're more focused on the senior notes that were put in place in 2009, the 9 3/4% that we're going to be addressing some time in '13, probably toward the back half of the year. And there's also, note -- there's a make-whole on the 7 7/8% that doesn't go away until April of 2014 when we have the right to call those. So it would be very expensive to take those out at this point in time, the 7 7/8%. But we will address that as we move forward.

Okay, so on the digital question, in the aggregate, and most of this growth was increased units in the air. Digital posters were up 7.3% in Q4, and digital bulletins were up 13.5% in Q4. Again, most of that, the bulk of that was additional units. The same board performance, if you recall Q3, was a low point for us. The same board performance was down 1.5%. Q4, same board performance was up 0.3%, so we did see a little turnaround there. And I'm encouraged by what I see in the February book.

Our next question will come from Tracy Young, Evercore.

So 2 questions. The first, you talked a little bit about geographic performance, but could you -- have you seen any difference in performance in your other categories? The second question is, when you do acquisitions like the NextMedia, where do you see synergies?

On the acquisition question, and particularly for Next, it's primarily on the expense side. And it's a fairly predictable exercise when we do something like that. It's -- for example, using Next as an example, they had 5 operating offices, and we were able to skinny that down to 2.5. And then of course, you don't need the redundant corporate overhead and the like. So primarily, when we do these types of acquisitions, you can expect a pretty quick and predictable expense synergy, and that's typically what makes them accretive. On the regions, there was a little bit of a flip-flop in '12 versus '11. In '11, our strongest region was the Northeast. And actually, as we closed out 2012, it was our weakest region. And that -- we can't blame that one on Sandy. It just -- it is what it is. Sandy had a very negligible impact. And our strongest region was the Midwest, so that includes sort of traditionally as what you think of as the Midwest, a very, very strong performance there. And I'm liking what I'm seeing there for sure.

Chantelle, that concludes our call, and I want to thank all of our shareholders and friends for tuning in, and we look forward to the next quarterly call. Thank you very much.

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