They started?
Yep. Hi, I'd like to welcome everyone to JP Morgan's 51st annual Telecom Media and Communications Conference. My name is Richard Choe, I work on this Communication Services and Media team here at JP Morgan. I'd like to welcome Sean Reilly, President and CEO of Lamar Advertising. Thank you for being here.
Thanks for having me.
I wanted to start off with, I guess, a part of the business that has consistently done well. I think people have appreciated the strength of Lamar's business through, I guess, I would say a much more volatile macroeconomic and advertising environment, that's the local business. Can you help people get a sense of why and how that's been so consistent? Are you seeing that change at all over the last few months?
Sure. As you know, we're about 80% local, about 20% national. Those local accounts, and there's 45,000-50,000 of them, touched by about 1,000 account executives across, you know, 160 some odd offices. It's steady. As you know, I've been doing this a long time. Taking a 30-year look back. Local tends to do this. National tends to do that. It's got a higher beta. If you smooth out the beta in national, over time, they grow at about the same rate, right?
Mm-hmm.
Both are gonna be tethered to GDP, so you kinda wanna start there when you think about how we're gonna do during the year. Look at projections for U.S. domestic ad spend. Right now there is a big divergence between what's going on national and what's going on local.
As I mentioned on our earnings call, if the definition of a recession is two straight quarters of being down, then we're in a national ad spend recession. Not just Lamar, but as you know, across a whole lot of platforms. No change from, you know, what we talked about on the call. You know, the change for us in terms of expectation for this year is really what we saw happen in April to our national book of business.
In February, we knew we were gonna be down in Q1 national, but we felt like the activity levels were strong enough to have us be positive by the time we closed out the year, like maybe up 2%. April delivered a bit of a surprise to us on the national front, and what we saw there has convinced us that we're gonna be probably down 1% for the year. You know, to put numbers around that's, you know, about 3% on $400 million that we're not gonna have, right?
Mm-hmm.
We're still gonna get to our, we believe we still get to our AFFO guide. We're just gonna get there a different way. Instead of getting there, hitting our top line expectations, we're gonna get there with expense control.
Got it.
It's one of those years.
No, that makes sense. It seems like the national part, didn't recover as much or as quickly as you thought, or was it just, d id it get worse? I guess in trying to figure out a little bit, I know it's not a huge part of the business.
Yeah. it got marginally worse.
Okay
In terms of a few large accounts, a couple of verticals we thought were gonna behave a little differently.
Mm-hmm.
Turns out they're not. you know, we influence the local dollar. We touch customers, we sell them actively. We convince them of the value of their spend with us. On the national side, we don't really influence that dollar. We just service it, right?
Yeah.
We respond to RFPs. We don't even call our national account executives, account executives. They're really just servicing business and helping place it.
Mm-hmm
And responding to RFPs. To a certain extent, again, national can have this higher beta, and it can buffet us about a little bit.
I guess, to kind of finish up national a little bit, is there? Do you think it's being driven by certain categories being weak, like auto insurance? You know, the insurers are having a tough time with rates and damages and collisions not being able. They're pulling back on advertising. Is it more uncertainty? I guess, you know, you talked about it's an advertising recession now, but people are worried about a real recession hitting.
Right
Later this year. Kind of, one, you know, is it driven by certain verticals? Two, are you expecting a real recession, like, later this year?
Yeah
At all?
Well, I'll start with the second question. We're not seeing a recession in our book. As a matter of fact, as we look at, you know, Q1, Q2, Q3, Q4, there is actual marginal improvement as we go through the year reflected in our pacings right now.
Mm-hmm.
On the national front, it really is. It's a little bit of pulling back a little bit across a lot of verticals. Just marginally, right?
Mm-hmm.
I mean, you're talking about 3%, but it is two primary verticals. It's, as you mentioned, insurance.
Mm-hmm.
Basically two customers. I don't like to publicly talk about our customers.
Mm-hmm.
You can guess who they are. Online gaming.
Mm-hmm.
Again, it's a couple of customers, and I don't like to talk about our customers, but you can guess who they are.
Mm-hmm.
That's the bulk of who pulled back and is significantly under this year what they were last year.
Last year.
This time last year. On the local side, again, it's Steady Eddie. you know, I've got smaller and medium-sized markets that are setting records in May. Highest grossing month ever, right?
Mm-hmm.
It depends on market size and a little bit to geography.
Mm-hmm.
You know, the Main Street in Middle America is hanging in there better than the coasts.
Got it. I guess focusing a little bit on the local business, it feels like you have a much closer connection. To your comment earlier that it's something you can actually drive a little bit or impact a little bit more. I assume that sales process or organization has taken a long time to develop and you feel very comfortable.
Yeah.
With it. And can you give us a sense, I guess you gave a little bit, that things. Are they running a little bit better than you were expecting earlier, or is it kind of in line to where you are?
You know, we came from 25,000 ft, we came into the year with our internal budgets and our guidance reflecting about 4% pro forma growth for the year. April has convinced us that that's gonna be a challenge.
Mm-hmm.
Right? We're now comfortably pacing along at something below that, but that will keep our goals intact on the AFFO front. You know, it's important to know about Lamar that we are flat decentralized in terms of our organization. We give an awful lot of autonomy to our local GMs, our local sales managers, and hence our local account executives. Yield management, pricing, all of that happens at the local level.
We set our budgets relatively late, at the end of January. You know, some 200 budgets, right? Those managers have complete control of their P&L. You know, they turn on the lights, turn off the lights, hire, fire, and their compensation depends on them hitting those goals in large part. In terms of alignment and having, again, a sense of how the local dollar is going to play out, we're pretty in tune and in touch. I mean, we know what's going on there.
I guess with that, it probably is rare that they don't hit those budgets that they set for themselves. I think is that what giving you the confidence that if the revenue is not there, they're gonna find it on the cost side?
They're gonna find it.
Okay.
Yeah.
Something that I guess has been a big focus and I thought was interesting from the call was a lot of the outdoor advertising names are focusing on transitioning to digital, and you're doing a lot there. It seemed like because of the performance in digital recently, you're not changing course, but maybe reevaluating the course. That was a little surprising in that everyone seems to think it's the future, I guess, so to speak. Can you give us a little bit more on what you're thinking about your digital strategy?
Sure.
The conversions?
First of all, there's no change.
Mm-hmm.
Right? We're still gonna try to put up about 300 this year. What I said on the call is, look, one of the surprises in Q1 was our same board digital being down 3.5%. What I said on the call was, look, we're gonna be keeping a close eye on that. Right now, it's according to plan, 300 units. If our local management feels like we might be getting a little out over our skis, then I'm gonna hear that.
Mm-hmm.
Right? Right now, I'm not hearing that. As a matter of fact, you know, May, I believe, when we close the book on it, same board digital will be positive. You know, that kinda tells me, you know, went through a little bit of softness.
Mm-hmm.
You know, you could argue that, because digital is our shortest cycle sale, that it could be sort of a canary in the coal mine, right?
Up in there.
Thinking about a recession, right?
Mm-hmm.
What I'm seeing in May makes me more comfortable.
Got it. Is digital sold through the local GMs, or is that.
Yes.
Okay.
Yeah. It's roughly the same. It's roughly 80/20.
Mm-hmm.
It's 80% local. It has a slightly different component in that some of that is programmatic. That is a national sale.
Mm-hmm.
It skews a little bit because of that, in terms of the verticals.
Okay.
Your verticals are gonna be slightly different, but the mix is gonna be roughly the same.
Got it. In terms of the pacing of digital, it seemed like it was generally driven by regulation and, kind of local zoning issues. I guess because of that, does it make sense just to keep the same pace, instead of trying to change anything radically or.
Yeah, I get this question all the time. Why don't you go faster because it's your fastest-growing product and it's our premium product. It just turns out that about 300 is all you can do when you take into consideration the regulatory environment, the local zoning. When you take into consideration that they're essentially outdoor construction projects, right? You know, all the logistics have to come together. It, you know, it's not quite as bad as remodeling your kitchen, but it typically takes a little longer and costs a little more than you want.
Have costs or gone up because of that, whether it's the actual boards themselves or the labor, or has it stayed roughly the same?
Last year at this time, we were having, well, a little bit of issues with steel. That's kind of calmed down, right? You see that in a wide variety of other industries. Now it's just, again, sort of steady as she goes. We have rung the costs out of the actual unit. I mean, the diodes that were the main ingredient are pennies, right?
Mm-hmm.
It's the basic arithmetic that I've been quoting for the last four or five years. If it's a large format, 14 by 48, by the time you retrofit the actual structure, that's the steel part.
Mm-hmm.
get the actual screen there, and up, you know, you're gonna be spending about $220,000 some odd. The payback on that is has been remarkably consistent for as long as I've been doing this. you're taking something down that does, let's call it, $3,000 a month. That's your analog face. you put up something that is gonna do about 5x that, so let's call it $15,000-$18,000 a month. Your incremental margin on that is gonna be about 85%. if you do all that arithmetic, you'll see it's pretty good.
That's good return.
Pretty good return. Yeah, yeah. It's good. Now from our customer's point of view, in aggregate dollars, they're paying about the same. You know, they were paying $3,000 a month and, o h, they had to buy the vinyl, right?
Mm-hmm.
We go to digital, they no longer have to buy the substrate, the vinyl, right? They're probably paying about the same, $3,000 a month, but they're sharing the space with six other advertisers. That means the CPM goes up.
Mm-hmm.
Their absolute dollars are about the same.
Mm-hmm.
CPM goes up. Why do they do it? 'Cause it's so dynamic. They can change their message from their desktop at their whim. They do.
No, it seems great.
Yeah.
Last year, we talked a little bit about price increases because inflation was a big topic. You know, inflation's coming down a little bit but still high. I think you saw with the utility of your boards and that you felt like you had pricing power. Can you give us an update on how pricing has gone over the past year?
This time last year, we were getting double digits. That's, you know, that's not happening anymore.
Right.
Part of it is because our local customers are saying, wait, wait, wait. Y'all got me last year. Inflation's coming down. You know, if you go back to 2021, you know, we were pro forma up double digits. Last year, we were pro forma up 10%. 2021 was a little bit odd because it was also a recovery year, right? It wasn't, not true apples to apples. I would argue that most of last year truly was, you know, rate, real rate-driven.
Mm-hmm.
Right? It's just hard to have those discussions every year when that's not where inflation is anymore.
Yeah.
Right?
I guess on the expense side, you know, some of your peers, I guess, have had some higher than expected kind of lease increases. I don't think you're in the same situation, but are you seeing your kinda ground lease expense?
No.
Pressure upward or?
No. It's remarkably consistent year in, year out. It grows at about 1%.
Mm-hmm.
Our portfolio looks a little different, than Clear and OUTFRONT. Number one, it's 170,000 billboards, north of 70,000 leases.
Mm-hmm.
With every term you could imagine, right? From month to month to 99 years. The real difference is it skews middle market hugely, right? The world is just different in Little Rock than it is in Boston, right?
Mm-hmm.
It just is. Fortunately, we're not seeing any pressure there. We came into the year, I think we guided to 3.4% or 5% expense growth. We're gonna beat that significantly. It's gonna be in, you know, I believe, something more in the 2.5% range, and that's how we're gonna hit our AFFO goals 'cause we're gonna beat our expense guidance.
Mm-hmm.
Pretty handily.
Can you talk a little bit about where that savings is coming from? Because you are doing, I think, a big internal project in your systems, which, I think is for this year and maybe the next two years?
Next year.
Where is that savings coming from?
Sure.
Can you talk a little bit about the internal project?
Sure. Some of the savings are things that flex with the top line, right? We're gonna come in a little short on revenue, but some things flex with that, like sales commissions, management bonuses, percentage pay leases. Not huge in our portfolio, but in some, right? There's a little bit there. There's a little bit, as we described, that we have management that is acutely tuned to it, so they're gonna get there.
As you mentioned, we're undergoing, for the first time ever, an enterprise conversion, an ERP project. Some of that is low-hanging fruit, right? Can be done quicker and will result in some savings, right? We're getting a little bit already of the benefit of joining the 21st century in terms of our IT. I would say it's those three things, and by the time you add it all up, that's gonna get us where we need to be on the expense side.
Great. Coming back to the leases a little bit because you mentioned the 72,000. Last year, I guess you were at about just under 10,000 of owned-
Yeah
Leases, it's up to ten five. What's your strategy about buying the actual land under? Eventually that's gonna be a high return, but I assume it's very difficult to go through and make all these negotiations.
Yeah. number one, we do it locally. We have a lease manager in all of our offices. They are in touch with every landowner in the DMA, right?
Mm-hmm.
They gen up the opportunities for us. We tend to go after our highest, most valuable leases cause we wanna protect them for forever. We tend to go after digital-worthy leases because we wanna capture the digital economics, right? If you look at our whole portfolio, we own the dirt under about 20% of our billing. If you look at just our digital billing, we own the dirt under about 30% of our digital revenues. We really do kind of, as a matter of strategy, focus on that.
I guess that leads. You know, we talked about it in little pieces, but, in the sense of your overall CapEx spend, you know, how much is going to maintenance? How much is going to the digital conversion? Then the last piece I wanna circle back to was M&A because you did a lot of that last year, but you've said that you expect that to come down for this year. Can you walk through those little pieces, and then we can talk.
Sure.
About M&A a little bit more?
Total CapEx will be in the sort of $180 million range.
Mm-hmm.
Maintenance CapEx will be in the sort of $65-ish range. When you get to digital, we're gonna spend something in the low to mid-$20s. That's maintenance. That's replacing units that are, like, 10, 11 years old,
Mm-hmm.
12 years old, something like that. You know, something a little north of $30-ish, on new digital deployments. The other CapEx runs the gamut. We're still converting from inefficient lighting to super efficient LED lighting for our billboards.
Mm-hmm.
That brings down the cost of our electricity bill. You know, we'll spend $20 some odd million on that, you know, this year. It's that. It's sort of the cadence. Then on the M&A front, it's gonna be a little bit of a quieter year this year.
Mm-hmm.
We'll probably spend something in the neighborhood of $120 million-$130 million.
Mm-hmm.
Which is, y ou know, prior to the last two years, that was kind of our run rate in the 2012, 2013, 2014, 2015, 2016, 2017 horizon. Occasionally a big one comes along, and we digest that. You know, the last two years was a lot of small ones, a lot of transactions. Average transaction size was $9 million or $10 million.
Mm-hmm.
We deployed almost $800 million, right?
Yeah.
Over the last two years. not a bad thing that we're gonna kinda digest a little bit and.
Have you seen a change in the sellers, for whether it's rate or maybe taxes or anything kind of in terms of the environment there?
Well, going back the last two years, 2021 and 2022, I think we pulled forward some of the activity that we would otherwise have had this year, in part because, you know, owners of these assets. I mean, COVID scared the hell out of them, right?
Revenge.
We're in the out-of-home business, and everybody was locked in their home, right? We were an oxymoron. They recovered very quickly, as did we, right?
Mm-hmm.
Our medium showed incredible resilience coming out. You know, I think some of them said, you know what? I don't think I wanna do that again.
Mm-hmm.
You know, capital was still relatively inexpensive, and their businesses were performing very well, and I think they just said, you know what? It's time. Fast-forward to today, you've got folks that own out-of-home assets. You know, these assets are, again, extremely resilient. They do well. Nobody has to sell.
Mm-hmm.
I think some of them may be thinking, you know, capital's a little more costly. Maybe I'll wait till the next cycle, right?
Mm-hmm.
Even the smaller amount of deals we're doing, we haven't seen much fluctuation in valuation.
Mm-hmm.
If that's.
Been pretty steady.
Thrust of the question, right?
Yeah, no.
The arithmetic is the same as it's been most of my career, right?
Right. something that last year, I guess, I think you saw a little bit of a tailwind and just wanted to hit back on it a little bit, was that a lot of, I guess, seasonal driving happened. People were going on vacations more, you know, gas prices were high. in anticipation of this year, do you see any change or it?
No. I mean, if you look at what AAA is projecting for summer driving, people are gonna be all over the roads.
Yeah.
They just are. you know, if you look at, traditional commute patterns.
Mm-hmm.
They're very different, time spent is down.
Mm-hmm.
If you look at general time spent in the car, it's up.
Mm-hmm.
For us, that's really good because most of our inventory is not going from home to downtown, hanging out in the office, walking around, and then going home. That was four years ago, right?
Yeah.
Now it's, I'm spizzing around four or five zip codes where I live.
Yeah.
That's where our inventory mostly is.
Mm-hmm.
Right? It's good for us.
I guess some of the other outdoor advertising companies have talked about metrics and trying to track this. How does Lamar address this? Is this since it's local, the negotiation is kind of there because you see it? Or are you creating kind of data around this, or how is that measured?
We have, Geopath is our measurement, industry measurement, entity. It's a nonprofit. It's actually governed by the large national advertisers-
Mm-hmm.
In large part. They're very comfortable with it, and they care a lot about measurement. National.
Mm-hmm.
They care. Our bread-and-butter local customers don't really care that much. They know exactly who's driving by their billboard, right?
Mm-hmm.
Interestingly, one of the reasons they like to use us is, you know. Let's call this Little Rock.
Mm-hmm.
All right? You've got a jewelry store up here, right? In northern Little Rock. If they buy TV, they're talking to the whole DMA, right? That's not where their customer comes from. Their customer's gonna come from four or five zip codes right around here.
Yeah.
Not the whole DMA. They can buy four billboards, cover those zip codes, and not have wasted circulation.
A lot of money.
Right. again, that's just sort of an example of why they don't really care that much about measurement. They know the arteries they wanna be on, where their best potential customers are coming from, and they know that we can get them in front of them.
We talked about this before we started a little bit, but, you know, I guess a lot of people are continuing to cut the cord, and, you know, video for cable's gone down dramatically. A lot of, I guess, advertising that I would say is alternative to using billboards was on these local cable ad channels. Are you seeing more demand or dollars coming from that to your business?
Yeah. Well, let me go back. I'm gonna go back to Yellow Pages, right? Now I'm going way back.
Way back.
Our fastest growing and largest vertical happens to be services. Within that vertical are attorneys. They used to spend. I'm going back 20 years.
Mm-hmm.
The bulk of their ad dollars in the Yellow Pages.
Mm-hmm.
Right? Yellow Pages go away, they come to us. radio. All right? Radio's not dead yet.
Getting there.
With the advent of our digitals, you know, go back 20 years. If you were a concert promoter and ticket sales were slow for the Saturday show, on Monday, you would call up your radio guy, you'd cut a radio spot, it would go up on Tuesday, you'd run it through Friday.
Mm-hmm.
Right? Today, if your event tickets are slow, you call us on Monday, you're up in an hour.
Additional.
You run it through.
Mm.
Friday, we can sort of document that in our amusement, entertainment, and sports vertical, we're taking that from radio, right?
Mm-hmm.
Now, linear TV. The other shoe is gonna drop. We're hearing it. I can't point to a vertical. I can't give you the data.
Mm-hmm.
We're hearing anecdotally that local customers, and these tend to be large local customers, think auto dealers, hospitals.
I was thinking auto dealers.
Right? They're having a hard time buying television. They can't figure it out. They can't. They don't know who's watching it. So we're hearing the frustration, which is the first step towards, you know, pitching them real hard.
Yeah.
Right? I think it's almost inevitable that, you know, to some degree, we're gonna be the last mass with huge audience reach medium.
Yep.
Right?
I do feel like the auto dealers and hospitals are potentially very large categories 'cause they do spend a decent amount.
Yeah.
Are they already kind of big customers of yours?
Mm-hmm.
You think you can get even more share with them?
I just threw that out as an example of sort of the anecdotal we're hearing that they're not happy.
Okay
With TV. When you look at local large buyers of not just out-of-home, but local media, it's your autos.
Mm-hmm.
Okay. For us, that's about 6% of our book.
Mm.
That's not big GM.
Mm.
That's local auto dealers. healthcare and hospitals runs about 8% or 9% of our book.
Mm.
It's important to us.
Mm-hmm
And we're important to them. You know some of your other large ones, you know would typically be, McDonald's, 'cause McDonald's doesn't buy us corporate. It buys us-
Right
Through buying co-ops. They're franchisee driven. you know, Those are some examples of some of the larger verticals that are important to us and we're important to them.
We're getting to close to the end of time. Wanted to hit a few other questions. One was on your dividend policy. How should investors think about the dividend this year versus last year? I guess, you know, your leverage is pretty low. I assume you're comfortable with it there. How are you thinking about those two.
Sure
The dividend policy and leverage?
Our leverage is actually below our target range right now. It's in the sort of low 3%s. As we've said many times, we're comfortable going up to 4%.
Mm-hmm.
We've got some powder. The distribution is, you know, Obviously we're a REIT, so there's rules and guardrails-
Mm-hmm
Around it. If you've seen our history, with the exception of COVID, we just sort of gradually increase it. We use some legacy tax shelter NOL stuff to moderate the distribution. I think you should think of it as, just gradual increases and, until we run out of those legacy, NOLs, and then it's gonna shoot up.
Mm-hmm.
Our distribution as a percentage of our AFFO per share is on the lower side for REITs.
Mm-hmm.
Right. It's about, you know, give or take 65%.
Yeah.
Most REITs are distributing about 75%.
Mm-hmm
Of their AFFO per share.
When do you think that NOL runs out? Is it in the next two years? Five years?
That's a Jay question.
Okay.
We've got a couple of years left.
Okay.
Absent doing, you know, some more asset transactions where we get more-
I know.
Shelter ability. Yeah.
I guess as much as you're comfortable answering, one of the other companies has a activist investor that wants them to sell assets. In that if they were to sell U.S. assets, would those be something you'd be interested in or do you find those assets not attractive because they're not in your type of markets?
Yeah, we're staying pretty close to that situation. We're monitoring it. You know, what I can say is we will not be the solution if there's in search of one.
Mm.
They do have some very attractive assets that do look like Lamar Land.
Okay.
We've about five or six years ago, we bought some assets from them. We did extremely well with them. They have a collection of what you could describe as non-core.
Mm-hmm.
In their public filings, they actually list them as all other markets when they're breaking out their revenue by market.
Mm-hmm.
It's like the top 15 DMAs, and then it says, all other.
Mm-hmm.
Think about all other.
Okay. you don't want San Francisco?
I, you know, I, we'll just leave it at that.
Great.
I don't think anything's gonna happen anytime soon, though.
Okay. That's.
All right, great.
Greatly done. Thank you.
Yep. Thank you, guys.