Okay, let's do it. So before we start, please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. With that, my name's Cameron McVeigh, Equity Analyst here covering advertising stocks, and it's my pleasure to welcome Sean Reilly, President and CEO of Lamar Advertising to the conference.
Great, thanks.
Sean.
Appreciate it, Cameron.
Great to have you here.
Yeah, relatively intimate group, so raise your hand at any moment. I thought I might start off with what I said in Miami at the city conference on Monday. I had a couple of updates for them that were well received. On the earnings call, I had mentioned that we were tracking toward the upper end of our guidance range that we gave for AFFO per share. On Monday, I said February was fantastic and we're now tracking above that range. So that was the change in lexicon there. I also talked about our distribution and where we see that going. As you know, we increased it to a run rate of $5.20 this quarter. Under the REIT rules, that distribution is tied to our net income.
Where we see that going is we're probably going to have to raise the distribution again in the third quarter, and quite possibly have a December top-up as well. Again, this is arithmetic. It's tied to our Net Operating Income. And, you know, for those who have followed us for a while, we have traditionally used legacy NOLs and depreciation and amortization to moderate our net income. We're running out of those. So you'll see over the next few years, continued increases in our distribution for that reason. I talked about Same Board Digital being really good in February, which is meaningful because last year we struggled with that. Our Same Board performance on our digital platform was slightly down for the year. It was up 7.5% in February. Good number. Now, February this year had an extra day.
That was helpful as well. That represented about 3.5% of that 7.5. So still up, right? 4%. Good number. Happy with that. Hey, Ben. How are you, man? Programmatic was a big contributor as well. Year to date, up well over 10% year-over-year. Glad to see that. But in general, just what we're seeing is a very healthy Main Street USA. You know, last year it seemed, at this conference everybody was asking me, how do you perform in a recession? Not so much this year, right? Nobody's asking that. And, you know, when all that chatter is out there, it has an impact on how Main Street feels about the world. And, again, our customers don't seem to be thinking like that anymore.
They're really thinking that it's going to be a good year for, you know, for them, which translates into a good year for us.
That's great. Thank you, Sean.
Mm-hmm.
When you think of 2024, in your positioning, you know, how, how did the quarter shape up in your mind, in the context of your guidance and then broadly, you know, any priorities that you're looking at for in 2024 and beyond?
Yeah. Let me start with that question because, on the call we mentioned that we're slightly changing our capital allocation. I would call it temporary. We're curtailing acquisition activity. When you look at our CapEx budget going from $185-$125, and we're taking those savings and we're paying down the Term A that's due February of next year, we can take out about half of it with free cash and then we're going to take out the other half with our revolver. Of course, when we set this plan in motion in late October, early November, you know, the financing environment was pretty rough and we were being quoted something in the neighborhood of high 7% for a high yield. We're getting quotes in the sort of low 6-ish% today, right? That world is changing.
But we're going to stick to our game plan. You know, we're going to, some people interpreted the M&A change as the runway shortening. We got that question after the call. That's actually not the case. Again, you take our industry, it's still highly fragmented. The number of companies with asset value between $5 million and $75 million is literally in the hundreds of independents out there. Asset value $75 million to even over $1 billion, dozen or more. And I'm not counting the other two publics in that. So, it's really just that I had to go get the money from somewhere. So instead of doing $140 million in deals, we'll do about $130 million in deals this year. We're not going to miss anything. There's nothing material coming to market.
We also think that back half of 2025 going into 2026 could be a meaningful year. Material billion-plus transactions, so. We're prepping the balance sheet for that, assuming we execute on our operating plan and we execute on this financial plan. We'll be below 3 to 1 in our leverage. We'll have well over $1 billion in debt capacity to go shopping.
That's helpful, Sean. On that point, how would you describe the current level of regulatory scrutiny in the outdoor advertising industry? And how are you seeing, you know, private market multiples trending?
You know, this is such a good business that you really don't see much beta in multiples even in and out of the cycle. You really don't. A little bit, but nothing like you see in other industries. So on the multiple thing, the multiples are still very healthy. Probably healthier today than they were in November, when we were in the eighties. You know, the issue of sort of you know how we're feeling about the cadence to the year, I wouldn't call us a cyclical business, but first quarter is typically slightly weaker than the rest. In a normal year, that would also apply to the fourth quarter. But this is a political year. So you're actually going to see a little more robust fourth quarter given that that dollar falls in October, November.
So that's kind of the cadence that we're seeing to the year. You had something else you were curious about and I forget what the question was.
One was just the, you know, cadence of growth, but then, you know, regulatory scrutiny and then.
Oh, yeah, yeah, yeah. So, we're a REIT. Under the REIT rules, we don't have to file HSR even if it's a transaction over the HSR threshold. So that doesn't keep me up at night. Regulatory rules because we haven't had to go down to the Justice Department since we've been a REIT.
That's great.
Yeah.
Since you mentioned politics, you know, it's an election year and maybe less contested than, you know, people were expecting. When you think of your political advertising, you know, how much of that is a crowding out effect from other mediums and versus, you know, pure play advertising on billboards?
Sure. Let me go to the difference between an odd-numbered year and an even-numbered year because whether it's presidential in our book doesn't make that much difference. Most of what we get is local, you know, councilmanic, mayor races, governor's races, congressional races, judges, and the like, right? So it's remarkably consistent whether it's a presidential or just a regular, you know, even year. We do get political in odd years, right? Let's call it $9-$10 million. In even years, let's call it $22, $23, $24 million. Remarkably consistent. But think of the lift as being the difference between the two, two, let's call it $12 million. Breaks late. As we sit today, maybe only 20%-25% of that is booked, right? So the rest is to come and it breaks late. It's not in our pacings right now.
Got it. That's helpful. Going back to the, I guess, the leverage point, you know, you mentioned at the end of the year maybe down around three times. Do you have a, a long-term net leverage ratio that you're you would target? That's ideal. Are you comfortable where you are now?
Since we've been a REIT, we've operated between three and four. Most of the time between three and a half and four. Of late, even with the $1 billion or so we've put out in the last few years in acquisitions, you know, we're down at the very much low end of that range.
Got it. I want to go back to the general advertising market and what you're seeing. You know, if you think of your local advertising trends, you know, you've seen growth in the past 11 quarters. Some pockets of softness in national. You know, what's key to unlocking more national money to flow into, you know, growth? Then is there an ideal mix between local and national in your mind?
I like where we are, you know. I like being 80% local and 20% national. It's not by design other than the fact that by design we're middle market. That's just the nature of doing business in Little Rock as opposed to New York, right? You know, you know, where we're seeing it, at the local level, it's just general broad-based strength. It's not vertical-specific. At the national level, it is a tad vertical-specific, primarily insurance, but this last year, and they have not come back yet. As I mentioned on the call, we will still be down in national and Q1. However, we think we're seeing a higher level of activity. RFPs coming out of New York and L.A. and Chicago. So, you know, we're hopeful that sequentially as we move through the year, it'll get better.
We're not promising that it will be even positive by the end of the year, but that's baked into our guidance, you know. So if there's upside, you know, to where we're seeing our business trend, it would be in a slightly stronger national, you know, as we move through the year than what we're projecting. You know, for Out front and Clear, the reason they're feeling a little better about their national book is they skew New York, L.A., right, larger markets. We skew below the top 20 DMAs. The entertainment film lift that they've seen, we don't really feel, right? So, Dune was great for Jeremy and Scott, right? But it didn't send enough my way to even hit my radar screen. So that's kind of the difference in how we're mutually seeing our national book through the year.
Theirs is slightly stronger.
Got it.
For that reason.
That's helpful. Are there any other verticals you would, you know, call out, either positive or negative, that you've seen into the first quarter?
Not really. Remarkable consistency, really. I mean, you won't see percentage changes in the verticals through the book. I'm talking percentages of our business.
Sure.
You'll see relatively, this one's up that much, this one's up that much, this one might be down a little bit. But over time, it's been remarkably consistent.
When you think about the growth in your business from a long-term perspective, you know, Lamar had 2%-3% organic growth pre-COVID. 2023, you had 2.1%. You know, you recently guided to.
Man, give me 2022, baby. Come on. We were up 10% in 2022. I put those two years together. We were up 6. Come on, man.
It's there. It's stacked. It's, it's high. Okay. So if you think of long-term 25 plus, you know, where.
Sure.
How do you think about it?
Yeah. So look, y'all have followed us for a long time. You can't untether Lamar from GDP. So start with GDP, right, going into a year. Or even a longer time horizon. Then go to whatever you think U.S. domestic ad spend's going to be, kind of. Think about those two together. And the way I think about it is over time we should marginally beat both of those, all right? We should beat them for a couple of reasons. Number one, our digital deployment in the year, new digitals, is additive to our organic growth, right? In any given year, it's give or take 1%, okay? And then number two, there is subtle but discernible share shift going on at the local level, all right? This is real rough and Ben's going to call me out on it, but 30 years ago your ad pie looked like this.
Down the middle, half of it was newspaper. Cut the other half in half. Top quarter was linear TV. Mostly network affiliate local TV, but some of the cable stuff in there. This is local ad pie only. Then take the lower quarter and divide it into thirds, give or take, and it was radio, outdoor, and yellow pages. Okay. That's, that's the world that used to be. World today. Same circle. Cut it in half. Digital. Facebook, Google, local use of digital, right? These are our sophisticated local customers that know exact, exactly what they're doing on that. And they used to buy the newspaper or the yellow pages, okay? Cut the other half in half. It's still basically linear television, right? But that's starting to do this.
Take the other quarter, divide it into thirds, maybe not even thirds, but then you have out-of-home, radio, and the remnants of newspaper. Yellow Pages are gone. So that's what the world looks like now. We should benefit as linear TV starts to do that. I think it's inevitable, right? I think it's happening in real time. You can look at their stock prices, right? So yeah, that's why, that's why we should, on a relative basis, outperform general domestic ad spend and GDP. Does that make sense?
It does. That's helpful. And that's, the share shift is, is that primarily from linear? I mean, do you see newspaper, radio?
Yeah. I mean, look, those guys are still, newspapers, they're still there. We don't know for how long and so there's some opportunity there. But I think the big opportunity is linear television. I mean, that's a lot of dollars. That's a ton of money. And look, I can draw a straight line from the demise of yellow pages to the rise of attorneys in our book. That used to be their primary medium. Now we are, right? I can draw a straight line from the erosion of radio audience to our digital amusement, entertainment, and sports vertical, which is the vertical that over-indexes to our digital footprint, right? I can't draw a straight line from the demise of linear television yet, but what you want to look for is auto growing in our book because auto still buys local network affiliate television.
They buy those silly news adjacencies that nobody watches. So that's the one that I would look at and hopefully we'll be able to draw a straight line.
That's very helpful. Let's switch gears a little bit to programmatic.
Mm-hmm.
You called out that as a bright spot in the fourth quarter. I think it was up 10% with momentum carrying into 2024.
Absolutely. North of 10 for year to date.
You know, what, can you discuss what's driving that growth and then, you know, how you think about the opportunity in programmatic going forward?
So general weakness in national spilled over into programmatic. Programmatic is 100% national, right? And, and to some degree responsible for our Same Board performance on digital because programmatic, if it's weak, feeds our digital footprint. It's 100% digital, okay? So the uptick, across the board, strength with some really interesting customers coming in that we don't see much of. Procter & Gamble, right? We very rarely see that. They did a programmatic buy for Cascade. Pharmaceutical. Very, they have a very hard time using us because of the disclaimer requirements. You wouldn't be able to read the verbiage on the board if they had to do all those disclaimers. But what they have gotten regulatory approval to do is a call-your-doctor prophylactic coverage on that disclaimer if they don't go into too much detail about the symptom or even the disease they're trying to treat.
So it's very vague. They'll use the name, a very vague description of what you're treating, and then say, "Call your doctor." That's perfect for billboards. So hopefully they're not just dipping their finger in it and hopefully they had a good experience with us. But that was one of the customer categories that I think gave us a lift.
Got it. That's great. Maybe to the, you know, Enterprise Resource Planning initiative. You're, from what I can tell, you're trying to, you know, digitize some of your backend technology, customer relationship systems. Can you maybe talk a little bit more about, you know, the process here, how it's going?
Sure.
Then, you know, margin benefits.
It's going well, but we're not live yet. So I'll know on April 1. We go live with the ERP. Our partner is Oracle. They've been great. You know, our, our PwC is our consultant. We've invested a lot of time and money in training. I've learned, you know, from my IT shop that getting the tech right, getting the software right is the easy part. The hard part is the people. So we're spending a lot on that. We're at peak spend for that project, by the way. You're going to see elevated corporate expenses this year for that reason. The spend on the project, you know, kind of ran, you know, three quarters of last year into all of this year and then maybe a half to three quarters into next year. The second half, so the ERP part goes live April 1.
That's all the backside of the shop stuff, right? The customer-facing, sales process stuff will begin this summer. We do have Salesforce as our CRM, but it's, it exists separate, apart from many, many of our other legacy software, which is, when I say legacy, it's old, 20 years or so. That, that will be plugged into Oracle and their customer-facing softwares. And it will allow us to extend the what we do with Salesforce. So it's going to be a big deal for our account executives. It's going to provide a lot of efficiencies in the sales process, allow us to touch more people, and eventually allow us to do whatever AI does to help that sales process be more efficient.
Got it. When I, you know, look at the margin profile of your business and if we normalize for some of the airport renovations this year, you know, your margins were in line with 2021.
Yep.
How should we think about expense growth going forward, you know, Lamar's ability to drive margins higher?
Sure. You know, we singled that out as a reason we were guiding to, let's call it, a little north of 3% expense growth instead of, let's call it, 2.5, right? Two things. The ERP, you know, peak spend, and the airport abatements that, order of magnitude $10 million last year that won't repeat this year, right? All that said, you should expect us year in and year out to grow the expenses, give or take 2%-2.5% going forward. You know, the trick to margin expansion in the billboard business is really, really simple, all right? Grow the top line a little faster than you grow your expense line and you'll grow your margin. Build some digital billboards because the incremental margin from digital is about, give or take, 75%-80% incremental margin contribution, right?
And then do a whole lot of tuck-in acquisition because the incremental margin on a tuck-in can run upwards of 65%. All of that is accretive to what is a 46.5% run-rate today margin profile.
Got it. Very high incremental margins from conversion.
That's primarily because we really focus on the real estate. So the largest cost is your lease cost. The lease cost under our digital platform runs 10%. Under the total platform it runs 21%. So you've got an 11% delta there that flows right to the bottom line. We own a lot of the real estate under our digital boards and continue to be active doing that because it's very accretive.
Definitely. On that point, I think you targeted 200-250 organic digital conversions. Down a bit from last year, you know, is there any concern that you have about adding too much supply there?
You know, every time we have a year where Same Board goes down, we have to be a little more rigorous in thinking about it, you know? As long as we're trending up, it's like, you know, pedal to the metal. But here's how you should think about it. Number one, that's part of the overall trimming of CapEx that allows us to pay down the Term A. So that kind of figures into our thinking there. We don't have any questions about the runway for digital. When you think about the demand side, you know, we get our signals from, obviously, our local general managers. You know, when their local digital network is full, they ask for another one. And quite frankly, that happens a lot, right? So it's, it's, it's almost that simple, right? The local GM says, "Okay. I can handle another one. Okay.
Let's go." But another way to think about the demand is in the U.K., well over 50% of total out-of-home spend is digital. It's 30% for us. That implies, you know, all things being equal, some runway, right? So no, we feel good about it. Again, we're, we're kind of pausing to pay down some debt, maybe pausing a little bit to digest, you know, acquisition of digital and what we did last year. But, you know, when I see a February up 7.5 in spite of that extra day, you know, that's got to make us feel good, right?
Definitely. One of your competitors also highlighted this strong digital revenue, you know, profile in the U.K.. Is there anything special about that area or why is there so, so much digital revenue from there?
Well, for one reason, there's more digital screens. So it's harder to switch a switch and convert a traditional large format roadside billboard. It's much easier to flip the switch and convert what was an analog presence in the airport to 100% digital. We've done it, right? I mean, you go flying to Vegas. That's us. I mean, you can do that overnight. So one reason is there's more, transit subway setting, out-of-home in the U.K.. So they just have more digital screens. But the point is, at least for me, regardless of how they got to their level of digital screens, there's that much demand for it, right? Now, the supply side is a huge constraint on us.
I mean, if we've got 4,800 and we're only doing ±300 a year, I mean, I got to figure out a way to pick up the pace, right? so.
Definitely.
Yep.
I wanted to see if there's any audience Q&A. Feel free.
Thanks, Sean. A few questions. Obviously, you know, planning for some M&A, you know, it takes two to tango, as they say. So if, if these deals don't present themselves, and I guess this is sort of a multi-year question, what do you, do you take the leverage back up? I mean, obviously, rates seem like they're going to be coming down. So what, what happens in that scenario?
You weren't here for my discussion about the distribution. We're running out of NOLs, as you know.
Yeah.
We're likely going to have to increase the distribution this year and next year. And when you get to 2026, it starts to hockey stick on us, right? So there's that. There's another demand for our capital, which is a great thing, right? You know, hey, let's give you guys more money. To that point, how much is left over after all of your obligations? We've done a five-year model and it's consistent at take our EBITDA that year, subtract the distribution, subtract interest, subtract total CapEx, a little bit of tax leakage. We'll have about $100 million left over when we in past years have had more like $140 million left over, right? So that's that arithmetic. I think you were out of the room when I went through the runway too, the M&A runway.
No, I heard that.
Okay.
Yeah, yeah, I got that.
There's still a lot out there.
Yeah.
Right? It doesn't have to be the $1 billion deal, or $1.25 billion, depending on which one you're talking about. We'll put the money out. I mean, in the last few years without a large transaction, we've put out over $1 billion.
And then on your comment about Main Street's strength, and I think you talked about February, are you, are you just translating this into organic growth? Are you seeing the local business accelerate in growth here early in 2024 relative to when you exited 2023?
I got a lot of questions around that. You know, our guidance implied something like 3.25 in the middle of the range, mid-ish of the range. And December, was it 4? What's going on? I'm fairly confident first quarter will beat December, so I'll leave it at that.
Okay. Then lastly, just a clarification on your HSR comment. A REIT doesn't have to file, but if you're acquiring a non-REIT, does that change that answer or is it the same?
It's the assets that matter. If they're REIT-qualified assets, you don't have to file.
They're REIT-able.
If they're REIT-able , you're good.
Gotcha. Okay. Thank you very much.
Just following up on that, that exemption is regardless of size.
Correct.
All is REIT-able through HSR.
Correct. Correct.
Thank you. And then on the $140 million versus the $100 million, you know, that lower, call it net available for cash, does your allocation to that change over time? Does that impact the M&A that you can do going forward?
Well, all things being equal from a leverage point of view, yes. Now, if you look at us historically, we've done well over our free cash flow number in acquisitions the last few years and our leverage has gone down, which would intimate that whether it's $100 million or $140 million, if it's the right opportunity and good assets, we're going to do it.
In terms of maybe just going back to transit, you know, strong in the fourth quarter, you know, how do you think about transit as on a run rate basis? Where should we see growth trends?
So, our bus transit business was up mid-teens year to date. Our airport business is even doing better than that year to date. So a little bit of the strength we had January, February as a result of that. Some of that is recovery. As you know, Ben, Vancouver's been a drag on us for a while. Canada was later coming out of COVID. That transit business is also a subway for half of it where the viewership, the audience is the ridership, whereas when you wrap a bus, the audience is the whole DMA that sees the bus, not the people getting on the bus, which makes a difference when you're talking about transit because transit ridership is down. That's what's unfortunately going on without an MTA, right? And that's what Vancouver looks like for us. It looks more like the MTA than.
Anyway, long story short, it's recovered and, and it happened pretty quick and it's happening this quarter. So that's been helpful. How do I view the business going forward? We run both our transit businesses and our airport businesses as a portfolio, right? It's a large portfolio of middle market, transit contracts, airport and transit. That approach for us allows us to grow it organically by getting, you know, a couple of more franchises in a given year in a middle market and then grow it organically just because it's growing like the rest of our platform. The other reason we run it as a portfolio at middle markets is the large markets are highly competitive and you've got a large minimum annual guarantees, larger revenue shares.
So it's a long-winded way of saying, you know, you're not going to see, you know, Lamar go bid on the Atlanta airport or Logan or LaGuardia or the MTA or the Chicago transit. It's not our expertise, and it is not, again, sort of a portfolio approach to the business where if you lose one, it doesn't kill you, you know, and you don't get in a lot of pressure to overbid, right? So that's the way we look at it.
Got it. And just my last question, how's the LSU football team shaping up this year?
I'm feeling pretty good.
Yeah?
Yeah. I think we're going to have it at the skill positions for sure. Defense, we worked on through the portal. And yeah, yeah, I think we're feeling good.
That's great.
Yeah.
Good to hear. Thank you, Sean.
Yep.
Thank you very much.
All right. Hey, thank you guys.