Lamar Advertising Company (LAMR) Earnings Call Transcript
May 22, 2024
Earnings Call Speaker Segments
Okay. We'll get started. My name is David Karnovsky. I cover media, entertainment and advertising at JPMorgan. Happy to have back at the conference from Lamar Advertising, Sean Reilly, President and CEO. Sean, thanks for being here.
Thanks for having me, David. Appreciate it.
Maybe just start high level, how are you and the team thinking about setting key priorities for the balance of 2024 and the long term?
A great question. We're -- to your goal of give or take $2.2 billion in revenues, we're about 75% of the way there. So we're in good shape on the bookings, feeling good about that. As you know, we set out a goal to pay down some debt this year. We've got a piece of paper, a term A loan that's maturing in February. And so we're taking a lot of free cash flow, and we're putting it down on that. That's going well. And then, of course, we have this big ERP conversion that is we're in the middle of. Phase 1 went extremely well and basically touched all the back office functions, accounting control, all that stuff. Phase 2 is more important, a heavier lift, but is going to be transformational. It really is taking the entire sales process from proposal and quote to cash and truncating it, really making it much more efficient, much more effective, and allowing us, by the time we finish it, to layer in some AI tools and really crank up our sales process. So we're excited about that. That's definitely one of our big goals for the remainder of '24 and moving into '25.
Great. Great overview. So you're coming off of Q1 where results exceeded internal expectations. I think you said April was steady. How are you seeing overall demand currently? What should the organic cadence look like from here?
Sure. We feel -- like I said, we're feeling good about the year, exceeding our internal expectations. And we came out of Q1 plus or minus 5% pro forma growth, Q2, let's call it, plus or minus 4% and then back half back up to plus or minus 5%. So relatively steady as she goes kind of year in terms of pro forma growth and cadence.
And when we're talking about pro forma for Q1, just to clarify, is that sort of adjust for the leap year benefit, is that...
We got little bit...
It's small but it -- for the analysts in the room, they track it very closely.
Yes. Obviously, that will wash itself out as you go through the year. But it was a little bit of a benny in Q1, and it was -- it's funny. I never thought to really budget for leap year, but I guess I got to learn how to do it.
In terms of local, really good performance in Q1, close to 7%. Maybe we can talk to the shape of that as our broad-based in terms of verticals, markets?
It's really across the board. And that's really important and healthy. We touch our, give or take, 40,000 local customers with 1,000 account executives, right? And I've been doing this a long time. And over the course of time, you really don't see a big delta between national and local. It's just that local tends to be very, very steady and do this, and national tends to have a higher beta and do that. And right now, as regards to national, we're down in one of those, right? But it's going to come back up. And again, if you look at it over a couple of decades, there's not a dime's worth of difference between the 2 really in terms of overall growth rates, at least in our book.
As it relates to the economy, macro risk of local marketers like have they largely become [indiscernible] to the higher rate environment and the risk of recession, right? That was a factor last year. It seems like they put that past them.
Look, Main Street is healthy. That's just the take-home message. It really is, and remains that way. And again, last year, at this time, I was only getting questions about how Lamar does in a recession. And all those questions have gone away, which is good because we almost talked ourselves into it, didn't we?
Yes. Anything out on regional. It feels like picking nits, I think Midwest was flattish. Was that national, was that local?
It was really a weakness in the Pacific Northwest. I'd say, last year, you could argue there was a sort of geographical rolling recession almost. And you might could have said Seattle and Portland were kind of sort of in one, but the rest really wasn't and -- but the good news is Seattle is now coming on strong. That particular region is now hitting budget and feeling pretty good about their work.
Got it. A lot of nuances, but local growth overall for outdoor looks better in the recent trend, certainly relative to local television, if you leave aside political, do you see share shifts in your market?
Yes. I am beginning to feel really good about our ability to take share from linear television. It's -- in my view, it's taken too long really. I mean it's been happening for a while that they're struggling with their audience, and we should have had more dollars coming our way, but we're beginning to sense it now. You can feel it.
And where you see that traction? Services, you said was very strong.
Services was strong. But I mean, the real category that was -- we're keeping our eye on is automotive. The local car dealers is -- for us, automotive is local. It's local car dealers, it's not national. And they still buy local network affiliate news adjacencies, which -- who's watching that, right? And now we're beginning to see that come our way. Auto is trending up higher than our overall book, which kind of tells you that, right?
And how do you -- I mean, how does that play out long term, right? I mean you look, there's still huge pools of local dollars, you said local TV and then also radio and print are still fairly substantial, right? And what do you do to kind of make sure that you capture that as opposed to that auto dealers saying put into digital or connected TVs out there?
We used to -- 20 years ago, we would walk into a sophisticated local client, and we would try to augment their spend, right? We wouldn't sell against, we would sell with local TV, local radio. We've changed our tone a little bit. We're now selling against, right? So when we walk into a customer, we show them the CPMs that they're paying on TV. We show them the erosion of the eyeballs, right? And then we show them our CPM and the fact that our eyeballs are growing. And so we now sell against our traditional local competitors, and we sell to augment whatever our customers are doing in social and mobile, right? So there's a subtle tone shift in the way we're pitching.
The idea being, a lot of times, these local dealers might be utilizing social mobile and then outdoor just becomes an effective kind of reach extender on a...
Absolutely. Yes, absolutely.
Got it. For political, I know for Lamar, that's been -- tends to come much more at the local level, hyperlocal level, you could even say as opposed to kind of national. Maybe just refresh us on the typical uplift you might see on a direct basis. How does the crowd-out effect work there?
Yes. So 2 things happen in a political year. We do get some customers who don't want to be part of the nastiness that goes on in election. So they'll actually pull a little out of TV, which is where all that tit for tat tends to happen and they'll send a little bit our way. So that's the crowd-out effect. The other thing that happens for us is just pure political buy, right? So -- this year is trending slightly ahead of 2022, the last cycle, slightly behind 2020, and that's primarily because in that presidential, we actually had a primary season. And this year, we didn't have a presidential primary season. And so it's trending more like your typical every other year congressional type of things. So we'll do -- we're trending, like I said, slightly ahead of '22. It will be a little north of $20 million. To that goal, we're about 50% booked as we sit today. So it breaks a little bit later than the rest of our book. Like I said, we're about 75% booked when you take our goals for the year in our whole book. So that's kind of how it's playing out through the year.
Any prospect for market share gain there? I mean local TV, CPM is very political. Can you go through the...
I -- the whole social media thing has gotten so intense with politics these days. I think the dollars in political that are coming out of television are probably going into that social media is just vast wasteland in my opinion. But that's probably where a lot of it's going.
Got it. As you noted, national going through a little bit of a softer period. I think at earnings, you had said some caution at larger accounts. Any update you could provide here?
No, it's pretty much the same. To put it in perspective, like take the insurance vertical. You're talking about 2 or 3 big accounts, right? And we're filling the hole they created with smaller, but national accounts. So there's a lot of activity, but the dollars aren't as big and it's still a slog, right? So what was down 5-ish, a little north of 5% in the first quarter, slightly incrementally better sequentially as we go through the second and as we look into the back half, but still a slog.
And to be clear, you're filling the hole on national insurance with kind of smaller...
Well, just smaller accounts on the national side. The really good news is we're also filling that hole with good, strong local business, right? And I will tell you this. There are a couple of accounts who trimmed back boards they have been buying for a long, long time at really good pricing, right? And as we replace that with good local customers, we're actually getting bumps in pricing. So we're selling some of those boards that we used to sell to the insurance guys for higher rates just to local customers. So that's a good thing. That's one of the reasons for the lift overall.
On the auto insurance, is that regulatory issue? Is that an agency attention issue?
I think what that is, is if you've been reading all the stories of late about auto insurance and rates and where they're going and the actuarial uncertainty that the GEICOs and state farms and all states of the world experienced last year, I think it just caused them to just -- they lost their footing a little bit, and they just pulled back, not just out-of-home, right? They've kind of pulled back all of their advertising. I think they're regaining their footing. So hopefully, as we turn the corner into next year, they'll be back with us.
Any other besides auto insurance pronounced national verticals...
No. I mean, we had a little pullback on the online gaming, the DraftKings of the world, which was to be expected. They came in real, real heavy as it was becoming legalized in different states, and they were trying to be the first to get on your phone and so they were really spending heavy. And now it's less a market share game and more of a branding game. And so they're spending -- I believe they're spending more responsibly. And I think that's what Wall Street thinks too in terms of how their stocks are performing.
Before you were noting you were at an outdoor conference, you had met with some of the national agency buyers. Kind of curious the tone of the conversations there, how you see kind of outdoor position with the big agency groups?
They feel good. I mean they're -- as long as you weren't handling the insurance guys then you're feeling pretty good. And they're tending to grow their book by, again, sort of growing different customer verticals that are coming into the space. We got -- for example, for the first time ever, we got a pharmaceutical. That was just great to see. And so there's excitement in the industry around that one. You've probably heard Clear Channel talk about the success they had there. And that is a game changer. If they are not just dipping their toe in the water and they really jump into the medium, then that's huge.
Was that a regulatory?
That was a regulatory issue that you have to have the disclaimers, right? And you can't write that many disclaimers on the billboard, right?
You could put a really small...
Right. So what they're able to do now is just say the name of the brand. They can't say what ailment it cures and then they say, call your doctor. So that's perfect for billboards, Right?
I don't know those national TV drug commercial seemed pretty vague too. Any other verticals like that, that are outside the ecosystem, CPGs?
The only other one that, again, and we don't know if they're all in or not yet is packaged good. We got to buy from Cascade, P&G. And again, we don't see a lot of that. So that's another one where we're staying in front of them.
That was sort of a dip the toe in the water and...
That one came in programmatically and it was a surprise. I mean, as you know, we don't contract for that. It just kind of happens.
All right. That's a good segue. Programmatic in contrast to national was really strong, drove digital same-store up. I know programmatic can be volatile, it's coming off a low base, but can you kind of talk to the divergence of national versus programmatic?
Sure. I think a couple of things are happening. Number one, it is being accessed by some customers we don't usually see like P&G. By the way, it's going to be up 35-ish percent Q2 programmatic is. So it's still really performing well. The thing that happened to us last year, we got caught up a little bit in the sort of digital pull back because of the privacy issues. Again, what happens on your phone, right? A little bit affected us. The other thing that happened was some competitive screens came online that were not online before. And so while the programmatic pie was growing, the share to large-format digital wasn't. That script has flipped and the buying community is now appreciating that all screens aren't created equally. And the large-format digital screens are now rapidly gaining share in the programmatic space.
You're saying that -- where was the sort of competition coming on the...
Have you ever seen like gas station TV. You filling up a car, you see a little screen, right? That, for example.
Interesting. Okay. With programmatic, you talked to Cascade before, but that sounds like it was more of a one-off. I mean where are you seeing more of the kind of vertical interest on the programmatic buzz?
Again, across the board. It's -- some of it is around the entertainment space, which you're seeing movie releases come back. Again, for us, it's not as important as it is for Outfront and Clear, but that is a space through which we do get some of those dollars.
And what do you think the partners appreciate here? Is it just the flexibility to do a late buy? Is that sort of the key piece of it?
No, not really. So you have 2 pools of dollars, right? You've got the traditional pot, right? And then you've got the digital pot. And most of that goes to your phone. And those digital buyers don't pick up the phone and call an account executive, right? They don't want to go out to lunch or play golf. They want to buy through an algorithm. They brought a digital dollar into the algorithm, we load our CPM, the geography of the board, the demographic they're going to hit, they load what they're willing to pay, who they want to talk to and where they want to talk to whom and at what time. And if we have the avails and all of those match up, the buy just happens, right? It's convenient. It's easy. They also get a higher level of data to back up and prove out their buying. And this is provided by the digital enabling shops, the DSPs, the SSPs. In our case, it's mostly Vistar, which we own a minority stake in, and again, Vistar provides a richer data set to the customer.
In terms of targeting, attribution?
In terms of targeting attribution. And again, they also have a very precise buy. When you add all that up, we get a higher CPM, right? Our traditional digital CPM runs, let's call it, 6, 7-ish cost per thousand impressions. We're getting 8, 9, 10 through the programmatic platform.
New programmatic display still on national?
It's all national today. One day, we'll open it up to our sophisticated local customers.
I was going to say, right, a lot of your customers assume pretty [indiscernible] buying on Facebook and Google, right?
Yes. I mean, look, there's a reason we don't do it, and that's because a programmatic dollar of the cost of sale runs about 10% right? That's what we pay the SSP world. And our overall cost of sales through all the other channels runs about 6%, right? So I'm not going to unleash this thing on our buying community until volume is such that the cost of a programmatic sale drops down to around 6%, which it will. I mean, right now, it's in its infancy. There's not as many dollars flowing through the channel. But when that happens, we open it up to everybody.
You've targeted digital conversions this year, 200 to 250, down slightly from the recent run rate. Part of that stated capital allocation, we can touch on that later. But how do you see the long-term opportunity in terms of digital conversions? What are the kind of gating factors to consider in terms of regulation, bringing supply to the market? You talked about supply being a risk sometimes.
Yes. On the demand side, I feel great about it. I mean if you look at places like the U.K., for example, well over 50% of out-of-home is digital, right? And in this country, it's about 30%. It's about 30%, right? So the demand is there, right? And it's really a supply constraint issue. We've got 160,000 billboard faces and only about 4,500 of them are digital. Those 4,500 boards do 30% of our billing, right? So we're moving as fast as we can. Again, sort of with the slight exception of this year, but that's -- those digital conversion opportunities are still there. We'll crank it up again next year.
Do you see any change in the ROI as you go through this, right? Someone might make a case that you converted the best possible locations initially and you can see it...
No. I mean it's remarkably consistent. It's really surprised me because I would have thought the same thing, right? But we're getting the same ROIs on a digital deployment that we do today that we did -- that we got a decade ago. And so again, it's not a question of demand. It's really a question of how quickly we can get them out there.
Can you just refresh on what the rev uplift -- the revenue uplift is, cost uplift, what you typically see?
Sure. So you've got static billboard on the interstate, let's say we're getting $3,000 a month for it, right? We take it down, we put up a digital and we're going to get, give or take, $15,000 to $18,000 a month for it, right? Now from the customer's point of view, they're paying about the same aggregate dollars, they pay $3,000. Now they had to buy the substrate, right, that they amortize over the length of the contract. That's the vinyl with the image on it. With digital, they don't have to buy a substrate. So they save there. And they can obviously change their copy from their desktop. But -- so what changes for them is the cost per thousand impressions. They were paying, let's call it, 3 to 5 cost per thousand impressions. Now they have shared space, 2.6 views per car, right? You do the arithmetic, they're now paying, give or take, like I said, 8, 9, 10-ish, right, depending on the market. Those are kind of aggregate numbers. It's going to be different in Vegas than in Baton Rouge, but sort of give or take. And then because we manage the real estate under our digital unit so aggressively and our lease costs are about -- run about 9% of revenues, the incremental margin contribution from digital is huge, right? I mean, you can do the arithmetic. It's quite good.
Great. I want to touch on transit, which is strong in the quarter, 12% growth. You did have an extra day we talked about Super Bowl in Las Vegas probably helped. But there was some improved benefit from ridership, maybe you could unpack a bit what you saw in the quarter? Does that ridership benefit kind of flow through on the board?
Sure. So most of our transit is wrapped buses. So the audience is not the ridership. It's not the people on the bus. It's really the whole DMA as the bus moves around, okay? That's most of what we do. That came back much faster [indiscernible]. So that has fully recovered and is doing quite well. We have really sort of one exception to that, which is Vancouver, which is a traditional rail subway system. The audience is the ridership, and it hasn't fully recovered, although it's recovering. And I'm thankful to say that Vancouver is, I think, back, right? So some of that 12% was the recovery of Vancouver, right? And then another big chunk of it was our airport division, which is just knocking it out of the park. It had recovered last year, but this year, it's just -- and you heard the same thing from Scott at Clear Channel. I mean our respective airport divisions are really doing well.
What's driving that? Is that just...
It's airports are packed, just packed.
Yes. I want to move to the expense side. You've talked to 2% to 2.5% annual increases for the long term. Should we think if that growth is kind of given as part of that variable expense tied to the top line. I guess what we're getting at is what's the operating profile of the company over the long term?
Tremendous operating leverage in our business. There are some expenses that toggle with the top line, sales commissions. We have some revenue shares, not many, but some revenue shares with our landlords. We have revenue shares with our transit partners, right? So as that revenue goes up, that expense base grows slightly faster than the rest of the expense base. But the way you should think about it, our largest expense is our ground lease portfolio. It's some 65,000 ground leases with every conceivable term you could imagine from month-to-month to 99 years. It tends to grow at 1% a year, year in, year out. I mean, even when inflation was running rampant a couple of years ago, that expense base grew 1%, right? The next biggest expense we have is people, right? That runs, give or take, 18% of our revenues. The ground lease expense runs about 21% of our revenues. But people, some of that's variable. You have incentive comp for management. You have, as I mentioned, your salespeople that are on commission. But again, a lot of that is fixed as well. And then you get down to our electrical bill. You go from those 2 big expenses all the way down to our electric bill, which runs about 3%. And then you get into nickels and dimes, right? So all that adds up to a, give or take, 53%, 54% operating margin at the operating level and close to 47% consolidated operating margin.
Okay. Just want to go to the room. If anyone has a question, feel free to raise your hand. We got 2 here.
[indiscernible].
Maybe just repeat the question.
Is that -- that was the 160,000 faces, but only 4,500 are digital.
[indiscernible].
So again, the gating issue is supply. I mean, going as fast as we can, we're going to do 350 a year.
[indiscernible].
Oh, that's a good question. From our customers' point of view no, because we have customers like Cracker Barrel. All they want is the static face on the interstate that says Pancake $7.99, get off here, right? So there are a number of our customers who only want static, all right? And then there's customers that want to buy across, static and digital, think McDonald's, right? And then we have customers that only want to buy digital. So when I think about in a perfect world, where are we going with this, we're -- if we could get to 50% of our revenues being digital, that's a good thing to shoot for.
[indiscernible].
Well, we're doing 30% of our revenues on about 3% of our billboards right now. Yes.
[indiscernible].
Yes. Yes. Well, look, our customers really like it. It's a great product. Really good.
[indiscernible].
Cracker Barrel was one of those long, long, long time customers that we really love, right? But they occupy the same space over a span of decades, right? I'm talking about the same board, renewed over and over and over again. They dropped some of those perms. We had a friendly, but protracted negotiation with them about their buy. The good news is those boards because they had been bought over the course of decades with like sort of 2% or 3% increases, we've been able to sell for more to our local customers. So we're comfortable where Cracker Barrel is. They're still a great big customer of ours. But at the end of the day, they're running about 0.6% of our book, something like that. We have no customer that's over 1% of our book of business. Our largest customer being McDonald's, and they're kind of right at 1%.
There's one in the front.
What's the payback on a conversion? And what's the gating factor? Or how do you think about payback in...
The gating factors, I'll hit that. It's -- one of them is regulatory, right? You got to get a slew of permits to convert a static to a digital. And in some jurisdictions you can't, like Los Angeles, right? They ban digital billboards, right? So it's just -- it's a tougher slog in some areas than other areas. There are little construction projects, right? You've got to have a big, huge digital screen arrive at the right time, at the right place with the construction group. Hopefully, it's not raining. And then the payback has, like I said, been remarkably consistent. Digital 14x48 costs a little north of $200,000. And you've got a retro, the structure a little bit. Like I said, it's a construction project. Let's tack on another $20,000 or so. So that's your CapEx. Your revenue is $15,000 to $18,000 a month, times 12, subtract sales commission of, give or take, 6% and subtract your ground lease expense, which is about 10%, so your incremental margin is in the low 80s percent, and you do all that arithmetic and you see a very quick payback and a nice ROI.
So it's just permits in construction?
It's permits in construction, yes, pretty much. Yes. mostly regulatory that is the big area.
I want to touch upon M&A. You've talked to $1 billion in investment capacity by year-end. Part of that comes from the slowing of the digital conversions. We assume you see some potential for material deals next year. I guess, first, what gives you confidence on that? And then maybe second, assuming those deals -- or larger deals didn't come to fruition. Could you make that up and over a more fragmented market?
Sure. So the -- let me talk about the industry and its fragmentation and sort of where we are in the consolidation. So you've got maybe this many companies outside of the Big 3 that have asset values of, let's call it $500 million to $1 billion.
And for those on the webcast, you're holding up a 5?
I'm holding up 5, that's right. Then asset value between, let's call it, $50 million and $500 million, you've got I'm going to hold up 2 hands, all right? You got about that many. And then asset value under, let's call it, $100 million, there's literally hundreds of them, right? So you've got a long tail of smaller independents. And traditionally, in a given year, we've done, give or take, $120 million to $150 million worth of those little deals like lots and lots of deals averaging $8 million, $9 million, right? This year, we curtailed that activity a little bit because, again, we want to pay down this term. I got a lot of questions about that at the beginning of the year when it looked like the Fed was going to have 6 rate cuts. Some people wondered why we were doing it. Now I'm not getting that question so much and people are saying, yes, you all should probably pay that debt down. So -- anyway, so that's sort of the structure of the industry as we sit today. So there's plenty of capital to deploy, and we've got lots of powder.
Just in terms of M&A generally, what's the typical playbook on deal synergies?
So those little deals that I'm talking about, let's call them, $5 million to $50 million that we do day in and day out, those are predominantly tuck-ins. We don't need to buy people or trucks or operations. We're just buying billboard structures, permits, ground leases and customer contracts, right? And you just fold it into your existing operation. Those are incredibly predictable, very accretive, a great source of shareholder value creation. Over the years -- I mean, I've been doing this for 30 years, and I've probably done well over 1,000 billboard deals. And if you look at our footprint, and I would encourage you to go to our website, go to the browse inventory thing that pops up first, you'll see a map of the United States. You'll see some green dots. Drill down to the green dots and you can get down to the individual billboard. And you'll just note that we have billboards everywhere. I mean virtually, everything is a fill-in for us, right, which gives us a tremendous advantage when it comes to M&A.
Got it. All right. We got about 30 seconds left. I think it's good to end there. Thank you.
Yes. Great. Thank you. Appreciate it.
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