Lamar Advertising Company (LAMR) Q2 2013 Earnings Report, Transcript and Summary

Excuse me, everyone, we now have Sean Reilly and Keith Istre in the 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 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 second 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 the conference over to Mr. Sean Reilly. Mr. Riley, you may begin, sir.

I'm going to actually send it over to our Chairman, Kevin Reilly, for a quick discussion around the REIT products.

All right, that's David in the line. I welcome all of our listeners to this important call. I'm going to restrict my comments to our application to the IRS for the private letter ruling. And I've got some prepared remarks that I'd like to read to the group. As stated in our press release, we have no new information from the IRS concerning our REIT PLR request. We've been in touch with the IRS and they've not given us any guidance as to when we may have a response to our PLR. Without going into technical detail, we could receive a response in 2014. And assuming it was favorable, still qualifies a REIT for 2014. The good news is there is a new associate Chief Counsel at the IRS who just came onboard. This person has jurisdiction over financial institutions and products, which include REITs. Hopefully, this will have a positive impact on the pause the IRS has taken in evaluating REIT PLRs that are currently pending. As soon as we know something meaningful, we will inform the market. That's a sort of detailed way of saying that we don't have any new information for the marketplace, but we are willing on this call to entertain specific questions regarding our REIT PLR request that are not speculative. With that, I'd like to go ahead and turn the call over to Sean.

So why don't we turn it over to Keith and walk through the numbers.

Okay. Just a real quick highlight, some of the performance in the quarter. You saw in the press release that our pro forma revenue growth was up plus 2.7%. Our guidance for the second quarter was up 2% to 3%. So we came in at a little -- at the higher end of the range. Obviously, you saw in our guidance for the third quarter revenue, we were slightly less at up 1% to 2%. And of course, Sean, will provide you some detail and give you a little color on that in a minute. Our expenses continue to perform as we had hoped. Our pro forma direct and G&A expenses before corporate overhead were up 1.2% for the quarter. This is primarily due to our salary increases that we -- the company gives out to all employees, except senior officers, every March. We continue to do well in the elimination and production categories, as we talked about on the last quarter. Once again, those expenses came in at about slightly less than the $1 million down for the quarter. Corporate overhead was up 12.3% in the quarter. The company incurred $900,000 worth of REIT-related expenses in Q2. There was no REIT-related expenses in Q2 of last year. So if you want to get an apples-to-apples, back that out, and that will give you comparative numbers. Q3 expenses, I think we're expecting consolidated expenses to be somewhere in the low-single digits, approximately 2%, similar to the second quarter that we just finished up. A couple of other notes. As of June 30, you saw in the press release, we accumulated $119 million in cash. We've mentioned on previous calls that this was our plan for this year, to stockpile cash. And the use of that cash will go to help redeem the $350 million outstanding senior notes maturing in April of '14. That redemption will occur prior to 12/31 of this year. Last, our debt leverage as of June 30 peaked below 4:1, ending up at 3.95x. The last time we were in the 3s was in the mid-1990s. So that's a little bit of a benchmark for us as well. Sean, can you...

Great. Thanks, Keith. Before I go over key operating stats, let me give some important color to the guidance for Q3. The bottom line is we are not seeing a second half deceleration. The issue is really one month, September. September got soft on us, particularly national, with a couple of cancellations in the beer and home improvement categories. These were pullbacks across all of media, and not Lamar outdoor specific. Again, for Q3, July and August were fine. And importantly, as we look past September, Q4 pacings are presently back above the 2% mark. The story on key operating stats is slow and steady improvement through Q2. I'll hit the digital first. We ended the quarter with 1,785 digitals in the air; 992 were bulletins; 793 were posters. We added 42 during the course of the quarter; 20 posters and 22 bulletins. And we should end the year with about 130 to 140 new digitals in the air. On same unit digital revenue, Q1, as you recall, was down 2.7%. Marginal improvement in Q2, down 2.1%. On rate and occupancy, excluding digital, posters and bulletins for occupancy were both up 1% in the quarter. Q2 '13 for posters, 74% occupancy versus 73% last year. Q2 '13 occupancy for bulletins, 79% versus 78% last year. On rate, posters were up 2%. Q2 '13 average rate per panel of $444 versus $435 last year. And bulletin rate was up marginally. Q2 '13, $1,121 average rate per panel versus $1,116 average rate per panel last year. In Q2, the relative strength was in the national book. National was up 5.1%. Local was up 1.9%. As I mentioned, that -- national has been the source of the pullback in September, but looks better -- national looks better in Q4. With the exception of wireless, which was down 3%, all of our key verticals are healthy and strong in Q2. I'll tick off a few of them. Restaurants were up 7%; retail was up 6%; service was up 11%; amusement, entertainment and sports was up 7%; and automotive was up 12%. Real estate, by the way, was up 3.5%. So with that, David, happy to open it up for questions.

[Operator Instructions] Our first question comes from Doug Arthur with Evercore.

The -- I mean, just from a seasonal point of view, how significant -- I mean, I guess it is really fairly similar month-to-month-to-month, but September in media is generally a pretty big month. So that's a little surprising to see a pullback then. Do you have any clues as to why that happened and why it's just September?

I think what you're going to see when we close the books on it is that your traditional back-to-school was relatively good for us. Again, this was a sort of unique combination of factors in our national book. The cancellations we've referenced started happening in the back half of Q2 and spilled over into Q3, and it was the beer and home improvement. We're talking to these national accounts, this wasn't something that was in Lamar draw board specific, it was a general pullback across all media for these 2 categories, or these real 2 customers.

Okay. And I'm sorry, just Sean, going back to something you said. I kind of missed that. When you said down 2.1% in Q2, were you speaking about same board digital?

Correct. Yes, it was 2.7% in Q1 and 2.1% in Q2.

Okay. And just finally, on terms of categories, a number of the broadcasters have mentioned that auto has accelerated in the third quarter. You obviously had a pretty big Q2 in auto. Are you seeing that in Q3?

Yes, I think the auto is going to be a force in Q3. It was up 12 in Q2, and I'm expecting something in that neighborhood for Q3.

Our next question comes from Marci Ryvicker with Wells Fargo.

I just want a little bit of clarification on some of the REIT comments, I guess. You mentioned that even if you get a Private Letter Ruling in 2014, you can still can elect to convert to a REIT in 2014. Is that what you said?

Correct. Yes.

Okay. And the question is, do you need to wait for a Private Letter Ruling before converting? Or can you do something like what GEO Prism [ph] did earlier this year?

We could, but we're not. Now that they're reviewing their approach to unconventional PLRs, we think the prudent course is let the process run and not try to get out ahead of it because they could make a retroactive ruling.

Okay. And then have you submitted any filings to the SEC at this point? Or is that going to come after the Private Letter Ruling as well?

After the Private Letter Ruling. Yes, we have not submitted anything. We have an S-4 drafted, but it's sitting on the shelf.

Okay. And I just have one clarification for you, Keith. For the expense guidance for the third quarter, are there any REIT-related expenses in there or is that plus 2 a clean core expense growth number?

No, that's about the same. Our budgeted expenses contain about $1.25 million for the second, third and the fourth quarter of this year.

For REIT.

For REIT.

Our next question comes from Matt Chesler with Deutsche Bank.

On the digital performance, they're down 2.1%, but better than last quarter. But can you just give us your assessment in terms of what's continuing to hold back that part of the business from going at the rates you're seeing elsewhere?

We still believe that it's added capacity. We've been aggressively adding capacity the last few years, and it hadn't been the strongest of economic environment. And our business judgment tells us that we should slow down the deployment, which we have, and let the demand catch up with the capacity that we've added. On the last call, I've described why we're putting up 130 new ones this year in spite of trying to push back. And a lot of that has to do with the regulatory environment and the fact that oftentimes, the clock is ticking when we get the right to put one up, and so we kind of have to deploy.

Okay. The -- your transit and logos businesses did pretty well in the third quarter, both of them. Any comments on if growth was comparable and -- in the second quarter and does any of your comments about the third quarter relate to those 2 businesses?

Transit is very, very -- not transit, I mean, logos, is very steady, very predictable. And they've been a great anchor this year performing well and will continue. Transit can be a little more unpredictable. And it appears to us that it has participated a little bit in the September slide, but should finish out the year doing just fine. The first half of the year, they did very well, our transit businesses.

And then just in terms of the cash build. Can you provide a little more color on whether that cash build is just internally generated? If you look on the investing section of the cash flow statement, there's a big delta between the outflow and the CapEx there. Can you comment at all on what we're going to end up seeing in the Q?

It's all internally generated. We -- the way that our cash builds is in the first quarter, we're basically a net 0 cash generator income versus outflow. And then we start building cash in the second quarter and then the momentum picks up in third and fourth. And that's how we -- and that's just how it's -- historically, we've always been able to put cash on the balance sheet. As far as the cash flow statement, we've had some acquisitions during the quarter, but they were immaterial. But the $118 million is all internally generated.

And do those acquisitions work with those other vendors? Can you maybe go into a little more detail on what's that?

It was just small, fill-in acquisitions. It wasn't much. $24 million, actually, in total purchase price.

Yes, they were Billboard acquisitions.

Do you have an estimate for the incremental contribution that they'll have on your financials?

It's not really all that material. Clearly, when we report the same store, we pull them out so that you're getting a true apples-to-apples. You can assume that if we spent $24 million, you can analyze, we'll probably get about $2.5 million to $3 million incremental billboard cash flow from it.

Our next question comes from Rochette Westcott with S&P Capital IQ. Westcott Rochette - S&P Capital IQ Equity Research: It's Westcott Rochette. With the situation going on in Los Angeles, can you just remind us how that affects your ability to expand in Los Angeles and then how you see that kind of playing out for Lamar?

Sure. We -- Lamar owns the 8 sheet plant in Los Angeles. It's a large number of billboard -- small billboard basis that don't generate a whole lot of either revenue or cash flow. It's really a real estate play. The companies engaged in the billboard business in Los Angeles have been negotiating to the extent they can with the city to take down faces and add large format and/or digital. We have a proposal in before the city to take down all of our 8 sheets, there's 5,000 of them, and go back with, as I said, large-format statics and digitals, if they open up the digital opportunity. So for us, given that we don't have any large-format or digital in the city, the shutting down of digital in the city hasn't affected our financial performance. And it is our hope that when the city reaches its final resolution, it will be advantageous to us to take down those 8 sheets and go back with whatever the large-format option is available to us. Westcott Rochette - S&P Capital IQ Equity Research: Okay. That makes sense. And can I ask one bigger picture question. It seems like as you consider the reconversion and go in that path, you've kind of adjusted your capital structure philosophy, and some of that's pulling back on digital, but just kind of in general, paying down debt. If, per chance, the REIT doesn't go through, does that change the way you look at your capital structure kind of going forward? Or is this part of the evolution of the company and looking across more mature cash generating kind of landscape?

Yes, this calls for of broad brush answer. So I'll try to frame it. When we looked at Lamar as a REIT and looking at that REIT universe, to us, it seems to make sense to have a capital structure that is longer. And ex -- as opposed to short-term debt loading with amortization. So the general proposition, that's where we're gearing our capital structure. For a C Corp, it's not a REIT, it may make sense to have some amortizations that you can pay off in the nearer term rather than the longer term. That's just sort of a general proposition. We began last year preparing our balance sheet with a longer, lower cost of capital. And it's my anticipation that we're going to continue to do that. The rest of the stuff is kind of harder to predict.

Our next question comes from David Miller with B. Riley & Co.

Just a question on the REIT conversion, not to beat a dead horse, but I mean, from a gut sense, is your perspective on this that the delay here is mostly due to the whole Iron Mountain imbroglio? Because it seems like Iron Mountain has just kind of started this whole thing by ruining the whole Q with the IRS for everyone else. Is it all Iron Mountain or is the IRS taking a second look at the digital aspect or another portion of your asset base that's kind of in question? Or is this just all due to Iron Mountain and this is all going to get sorted out? Just appreciate any commentary you have.

Well, it's not Iron Mountain or Lamar. In particular, it's the IRS has received quite a few petitions for nontraditional REIT PLRs. And based on the petitions that were coming in over the transit, the IRS made the decision that they wanted to pause and look at their procedures for denying or approving these PLRs in an effort to make sure that they are consistent across the board. So that's what we're up against and that's why we don't -- unfortunately, that's why we don't have any news, one way or the other, for the marketplace regarding our petition. Our position is that we're right down the middle of the fairway. There's plenty of law in the books that addresses billboards and real property, and we think when they get cranked up and get this process going again, that, 2 things for us. We think that we're in good shape. One is we're at the front of a queue and we're having ongoing discussions with the IRS. And secondly, we think we have a good case and we've got a reasonable petition before the IRS. So that's where we are. Hopefully, we'll have some information for the marketplace sooner than later.

And at this time, we have no further questions. I'd like to turn it back over to Mr. Kevin Reilly.

Well, thank you. I want to thank all of our listeners for tuning in, and we look forward to speaking with you on our next earnings call. And that concludes the call, David. Thank you very much.

Ladies and gentlemen, that concludes today's conference. You may disconnect your phone lines and have a wonderful morning.