Q2 2022 Lamar Advertising Co Earnings Call
Excuse me everyone.
We now have Sean Reilly and Jay Johnson in conference.
Please be aware that each of your lines are now in listen only mode.
At the conclusion of the company's presentation, we will open the floor for questions.
It's of course in the course of this discussion Lamar may make forward looking statements regarding the company, including statements about its future future financial performance strategic goals plans and objectives, including with respect to the amount and timing of the distribute.
<unk> of stock holders.
And the impacts and effects of general economic conditions.
Leading inflationary pressures on the company's business financial condition and results of operations.
All forward looking statements involve risks uncertainties, and contingencies, which many of which are beyond <unk> control and which may cause actual results to differ materially from the 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 second quarter 2022 earnings release and its most recent annual report on Form 10-K.
<unk> refers you to these documents.
The more second quarter 2022 earnings release, which contains information required by regulation G regarding certain non-GAAP financial measures was furnished to the SEC on a form.
T. K. This morning and is available on the investors section at Lamar website.
W. W Lamar Dot com.
I would now like to turn the conference over to Sean Reilly. Mr. Riley you may now begin.
Thank you Carlos good morning, everyone and welcome to Lamar's Q2, 2022 earnings call.
Let me start by saying our business remains on solid footing. We were extremely pleased with our second quarter results, which were even stronger than we had anticipated.
Our bookings for the balance of 2020 to remain encouraging.
As a result, as we noted in the release, we are pacing towards the top end of our previously provided guidance for full year <unk> per share.
Certainly we are aware of the general macroeconomic concern out there, but apart from notes of caution around a few national accounts, we are not presently seeing signs of a slowdown in our book.
That's not to say we will not.
But for now we're still feeling very good about the back half of 2022.
Let's turn to the second quarter, where we once again saw strong growth across all business lines and geographies with Billboard revenue up more than 10% on an acquisition adjusted basis, Our transit and airport business is also really performed well and with the exception of Canada, all our business units have surpassed pre COVID-19 levels.
We were able to push pricing in Q2 with rates up high single digits versus.
Q2, 2021, both on analog posters and bulletins means.
Meanwhile, our digital billing increased by more than 10% year over year on a same unit or same store basis growth that reflects both higher rates and better sell through.
As we look forward, we will be comping against what was a strong second half of 2021, and we think it's likely that those growth rates will normalize to around 3% to 5% top line growth.
And we expect expense growth, which you saw was above trend in Q2 to normalize also as we finished 22 in round into 2023.
<unk>.
Expense growth numbers will normalize to around 2% to 3% expense growth so to repeat.
We expect as we move through the second half of the year revenue growth to normalize to 3% to 5% and expense growth to normalize to 2% to 3%.
Categories with particular strength in <unk>.
Q2 included education retail and service as well as amusement entertainment and sports which continues its recovery.
In fact, all of our top 10 categories, including automotive were up on a year over year basis in Q2 <unk>.
Political while not a top 10 category is also very strong right now, particularly on digital political is pacing up 82% 22 over 2020 and about 50% of that spend ends up on our digital platform candidates really appreciate the flexibility to respond in real time that digital provides.
By the way digital revenue for Us will top 500 million this year.
As I've said before we aggressively are aggressively building out our network. So that number will continue to grow.
The M&A market is a little less frenetic and less frothy than it was six months ago, but we remain busy on that front, our integration of assets from the Burkhart deal, which we completed in May is ahead of schedule and the pipeline of additional deals remains for year to date, we have completed about $275 million worth of deals.
And by the end of the year that total should top $350 million.
As you saw on July one we converted to an up REIT structure, which we believe will also be an advantage as we pursue additional deals with that I will turn it over to Jay to walk you through a few more numbers. Thanks, Sean.
Morning, everyone and thank you for joining us I will begin with brief comments on the quarter, then review our balance sheet and conclude with a discussion of our current financial position.
We had another solid quarter and are extremely pleased with quarterly results, which exceeded our own internal expectations as well as consensus estimates across revenue adjusted EBITDA and <unk>.
The company achieved <unk> growth for the seventh consecutive quarter improved.
Improving 10, 9% to $1 94 per share on a fully diluted basis.
Following our first quarter performance and based on the outlook for the remainder of the year.
May we revised guidance upward for the full year and today reaffirmed that guidance as we are tracking to the high end of the revised range.
In the second quarter acquisition adjusted revenue increased 12, 2% from the same period last year.
Both revenue and adjusted EBITDA set new high watermarks for any quarter on record and revenue in May was the highest of any month in the company's history.
As in the first quarter all of our regions experienced pro forma revenue growth ranging from the high single digits to mid teens.
And through the first half of 2022 year to date, all outdoor regions had double digit growth.
Acquisition adjusted operating expenses increased 13, 2% in the second quarter, driven primarily by variable expenses tied to revenue.
The most notable is the return of minimum guarantees associated with our transit and airport divisions.
Operating expense growth decelerated in the quarter and should continue to moderate as we progress through the year and compare against more normal operations less impacted by Covid.
Despite expense increases the company maintained strong margins, which continued to lead the out of home industry.
Our sales team has done a tremendous job pushing rate across the portfolio.
Rates in our large format traditional bulletins increased 9% in Q1.
And accelerating even further in Q2 by 60 basis points rising nine 6% versus the same period last year.
In addition, our outdoor portfolio remains at historically peak occupancy.
Adjusted EBITDA for the quarter was $243 3 million.
Compared to $213 $5 million in 2021, which was an increase of 14%.
On an acquisition adjusted basis, the increase was 11, 1%.
Free cash flow in the quarter also improved increasing 200 basis points over the same period last year.
During the first six months of the year acquisition adjusted revenue grew 15, 1%.
And adjusted EBITDA on an acquisition adjusted basis improved 16, 5%.
Local and regional sales accounted for 79% of Billboard revenue in the second quarter.
We experienced acceleration in both local and national business across our portfolio for the fifth consecutive quarter.
Our local and regional revenue improved 10, 4%, while national business, including programmatic increased by eight 4%.
On the capital expenditure front.
Total spend for the quarter was approximately $47 million, including $18 $5 million of maintenance Capex.
For the first half of the year Capex totaled $75 8 million $31 7 million of which was maintenance.
We anticipate total capex for the full year of $170 million with maintenance capex comprising $65 million.
Given the strength of our balance sheet with low leverage and ample liquidity, we have been extremely active on the acquisition front the.
The company closed $179 million of acquisitions in the quarter, adding over 3500 advertising displays.
Acquisitions in the first half of 2022 comprised over 40 transactions totaling $234 $3 million with approximately 3900, new displays added to the portfolio.
Our acquisition pipeline remains robust and we are on pace to exceed last year's total of $312 million.
Furthermore, on July one Lamar completed its reorganization to an umbrella partnership real estate investment Trust, a common operating structure for publicly traded Reits.
<unk> can provide an attractive deferred exit strategies for owners, who may recognize a significant capital gain in the sale of real estate.
The conversion to an upright should serve as an additional competitive advantage and execution of our M&A strategy.
Turning to our balance sheet, we are pleased with the company's capital structure and are well positioned going forward.
Consistent with our focus on the balance sheet during the quarter and subsequent to quarter end, we took significant action to bolster our liquidity as well as extend our maturity profile.
In June we increased the facility amount of the AR securitization from 175 million.
To $250 million and extended the maturity one year to July 2025.
Upon closing, we drew $65 million of additional funding and use those proceeds to repay outstanding under our revolving credit facility.
Additionally, subject to subsequent to quarter end, we closed on a new $350 million term loan a to further enhance liquidity of the company and support accretive acquisition activity.
Proceeds from the term loan were used to repay the revolver in full as well as a portion of the AAR securitization.
Pro forma for the transactions, our revolver is undrawn with $738 million available.
The balance remaining on the AAR securitization is $170 million with $73 million of availability.
And the company had approximately $25 million of cash on hand.
This all resulted in total liquidity of over $835 million.
As of July 31.
And should position the company to weather any potential macroeconomic headwinds.
More importantly, these financing activities set us up well to execute our acquisition strategy and continued to be the best capitalized and lowest Levered company in the sector.
We have a well lettered debt maturity schedule with no maturities until the revolving credit facility and term loan a in February 2025.
Followed by the AAR securitization in July of that same year.
And we have no bond maturities until 2028.
Based on debt outstanding at quarter end, our weighted average interest rate was three 6% with a weighted average debt maturity of five nine years.
As of July 31, approximately 65% of our debt was fixed rate.
Since December 2019, we've increased our fixed to floating rate mix by 20 percentage points as we recapitalize the balance sheet and to mitigate interest rate risk.
We feel this is an adequate level of fixed versus floating in our sector are highly correlated to changes in short term rates.
Despite the recent rise in interest rates and as a reminder, the progress achieved on the balance sheet projected cash interest. This year is approximately $35 million less than for the full year 2019.
As defined under our credit facility, we ended the quarter with total leverage of three two times net debt to EBITDA, which remains amongst the lowest in the history of the company.
Our secured debt leverage was <unk> nine times at quarter end and we are comfortably in compliance with both the total debt and current and secured debt maintenance test against Covenant of seven times and four five times respectively.
Now moving to our dividend, we paid a cash dividend of $1 <unk> per share in the first quarter, which was a 10% increase from the fourth quarter regular dividend.
Because of the Companys, improving <unk> outlook, we increase the second quarter dividend to $1 20 per share a 9% increase over Q1.
Management's recommendation at the upcoming board meeting will be to declare a cash dividend of $1 20 per share for the third quarter as well.
This recommendation is subject to board approval and we will communicate the board's decision following the board of directors meeting in September .
If the board approves management's recommendation and assuming a $1 20 dividend for Q4.
Lamar's distribution for the full year will total $4 70 per share, which is 17, 5% above the companys dividend paid in 2021 and represents a yield of four 7% as of Yesterdays closing stock price.
Again, we are extremely pleased with this quarter's performance and are cautiously optimistic about the outlook for the remainder of 2022.
Our balance sheet is strong and we maintain excellent access to both the debt and equity capital markets.
A strong balance sheet is core to our operating strategy and serves as a significant competitive advantage I will now turn the call back over to Sean.
Thanks, Jay let me.
Highlight a couple of points before we open it up for questions.
As Jay and I'll discuss the normalization of our topline growth and our expense growth as we move through the back half we expect to finish out the year at.
46, plus percent consolidated EBITDA margins, which would essentially mirror.
Sure.
EBITDA margins from last year.
Turning to <unk>.
Sure.
Our digital footprint and the number of units we have in the air we ended the quarter with 4159 units.
Up and operational.
Those.
Year to date of 114 are newbuild.
We expect to finish up the year.
Somewhere between $2 50, and 300 in terms of.
New digital conversions for 2022.
We mentioned same unit revenue increase and.
We're really pleased with how that's gone it was for Q2. It was up 10, 6%. If we look at it on a year to date basis.
Our digital same board performance is up 15%.
Yes.
Sure.
As Jay mentioned, we are basically at peak occupancy for our analog platform. Our traditional platform. So gains are primarily being made through rate and.
And the story there is likewise very strong.
For our poster product rates were up in Q2, seven 6% for our bulletin product our largest product rates were up nine 6% so really.
Pleased with the way.
The field is driving rate and the environment that we're in.
Yes.
We're still in that familiar 80% local 20% national.
But I would note that in Q2, it was a very balanced quarter in terms of relative strength.
As Jay mentioned local was up 10, 4% and national Slash programmatic was up eight 4% so relative balance there.
Looking at.
<unk> strength.
Our service, which is our largest vertical.
At 13% of our book of business was up about 18%.
Restaurants, very important category for us, it's about a little more than 9% of our book of business was up 11% retail.
It was up 18%.
Amusement entertainment and sports continues its recovery it was up 42%.
And in Q2.
Education up 21% gaming up 12%.
So really as I mentioned all of our top 10 verticals are performing nicely.
I mentioned a couple of.
National accounts that were showing relative weakness. This was primarily in the insurance category, it's not a top 10 category.
But our belief is that that weakness was particular to that vertical and not indicative of a broader slowdown.
So in sum we are optimistic.
As Jay mentioned cautiously optimistic as we move into the back half of 2022, and we expect strong results as we close out the year.
With that correlates, let's open it up for questions.
Absolutely at this time, we will open the floor for questions. If you would like to ask a question. Please press star one on your techs tone phone now.
Questions will be taken in the order in which they are received if at any time, you would like to remove yourself from the questioning queue. Please press star two.
Again to ask a question.
Press Star one we will take our first question.
Bob.
Ben Swinburne with Morgan Stanley Your line is open.
Thank you Hey, good morning, guys, hopefully well Hey, Ben.
Good morning.
Maybe first Sean I was just curious.
<unk> been through a lot of cycles I guess, we don't really know what the cycle looks like you over the next year, but.
What are you looking for.
In the business or in the field to sort of suggest maybe some changes to how you allocate capital or operate the business.
And are there other things you're thinking about today in terms of investments or your cost structure or your digital boards that you are maybe being a little more or M&A or you're being a little more deliberate just because of everything we're seeing around us or we're not.
So I guess I guess it would be the the.
The first question.
Yes, Great question first of all as you've heard me say many times.
Lamar has been around for a long time.
We buy through the cycles.
So I don't think youre going to see.
Yeah.
Whatever the business cycle brings effect.
How we would view M&A for example.
And given.
The strength, we're seeing in our digital footprint.
Even if there is a little softness somewhere out there in the macro I think youll still see us pedal to the metal.
On digital build out.
So I think the answer would be no.
We're just going to keep on keeping on whatever the macro brings.
Okay, No that makes sense and then I wanted to just follow up on your comment about right I mean these rate increases.
<unk> or the benefit of rate these are big numbers.
Can you talk a little bit about how much of that is is.
Showing up from Advertiser mix in other words are the same advertisers paying you 10% more this year than last year that feels like.
That's a lot of cost pressure on their side or is the field succeeding in bringing in different advertisers and sort of the mix shift is driving right I don't if that question makes sense, but I was just curious if you can.
And how that makes a lot yes. It makes a lot of sense. Then we can we get this question a lot.
We've been a REIT for I guess, five or six years now and.
<unk> been telling our REIT investors.
Inflation is our friend when it comes to Lamar.
And that's because our average <unk>.
Links of contract is four months, which which means every four months, we get to have a new rate discussion.
To answer your question.
Yes, its new advertisers coming into the space and since it's turning over every four months again and that turnover is ratable through the year right.
So we're able to push rate because it's a new tenant.
Now it may be a familiar advertiser, but theyre coming on.
Two.
<unk>.
<unk>.
A different unit.
Yes, we have advertisers that are long.
Term occupants of the same space.
That becomes a slightly different discussion maybe not so aggressive on rate, but again as AD space turns over in a new tenant comes in Thats. When you get to have a new discussion.
Okay that makes sense and then maybe for you or Jay I wanted to ask about the acquisitions, you've completed I see the margins on those acquisitions are are lower than your overall margins and I'm wondering I know that the assets that you bought are not all the same billboard 40% plus businesses or maybe theyre not yet. So just wondering if you could talk.
<unk>.
This sort of integration process of margin capture because I think I think if I look at the press release, it's like a 30% margin on the acquired business.
And just wondering if that's just the state of those assets or.
If you can get those businesses up and then I just wanted to ask about the upright is there is the.
A way that benefits the seller and therefore benefits Lamar.
Function of using your stock.
Or would that also apply to a cash acquisition and then I'm done.
Ben Yes, I think youre misreading something on the margin contributions from acquisitions.
Okay.
With the exception of the colossal acquisition, which was.
Completed last year.
Colossal has a different margin profile it operates more sort of in the 10% to 15% margin range.
But with that exception all of the other traditional billboards we bought are going to have incremental margin contributions between 45 and 60%. So I think we're going to have to circle back with you on that arithmetic and see where that number is that yes. It could be just colossal, bringing the average down that could be it.
And then on the upright and I'll, let Jay speak to this as well but.
What the up REIT structure allows us to do is as you know in a traditional C Corp.
Stock transaction, the seller has to take at least 50% of the consideration in the buyer stock.
And it can only be C Corp to C Corp.
With the upgrade allows us to do is be much more flexible.
To address sellers tax situations you can for example, do up REIT units four assets you can do up REIT units partnership interest you can do up REIT units.
C Corp.
Stock.
And you can also treat.
Buyers.
Differently, depending on their own individual tax circumstances. So we just view it as a very flexible way to meet sellers.
Tax needs on a J you might want to sure. So ultimately opening units are convertible on a one for one basis into the market common stock.
The issuance of opening units, though to the seller.
Is not a taxable transaction so that's the benefit for the secondary which further their taxes.
After holding the units four year, they're eligible to convert those.
One for one for Lamar stock at our option, we can redeem those with either Lamar stock or cash so we kind of control.
That side of the transaction, whether we elect to issue equity or.
The equivalent in cash.
Thank you thanks guys.
Sure.
Okay.
And our next question comes from Jason.
Okay.
With Citigroup your line is open.
Thanks, so much.
So I guess.
This period is really confusing to me and maybe you can sort of give you a color in terms of what's happening, but we're watching.
AD agencies put up double digit growth.
Guidance employed implies deceleration in the back half.
And a lot of the digital properties like Youtube.
Brochu, just have just massively collapsing growth.
I guess, Mike My intuition is is that there is some it's some combination of inflation and.
Advertisers skittishness, where they're sort of pulling dollars from.
Sort of tactical buys that they do in real time, and then I listen to your commentary it seems like youre largely immune so.
Maybe not to the inflation part, but certainly a slowdown so I'd just love to get your take on what you actually think is happening in the broader AD market because it feels very different than anything I've ever seen.
Jason So here's what we're hearing.
<unk>.
There is sort of a difference between what's going on in your traditional.
Digital platforms that rely on.
Pinpoint accuracy in Germany.
Who the viewer is and what their proclivities are online.
As you know Apple has come down with new privacy protocols there.
Have called into question the efficacy of some of those platforms.
So what we're seeing is large national advertisers are pulling back and trying to figure that out so theyre pulling away from the snaps and facebooks of the world because again privacy protocols have called into question.
Number one the pinpoint accuracy on the front end of a buy and number two the efficacy on the back end of a buy.
We think ultimately that's going to win you are to our benefit actually.
We don't have to wrestle with those issues. So.
I think.
That is all good.
For out of home in general and Lamar in particular.
Ultimately those advertisers are going to figure it out right, they're going to figure out what they want to accomplish in the digital world.
And social and mobile and search.
But for right now, there's just a little bit of confusion out there in large advertisers are stepping back and trying to figure that out.
Super helpful. Thank you.
Once again, if you would like to ask a question. Please press star one on your Touchtone phone.
Next we will take a question from Richard Choe with.
J P. Morgan your line is open.
I wanted to follow up on the comment on national versus local.
In your guidance, you're saying, 3% to 5% does that depend on the national piece kind of staying strong or improving or is that 3% to 5% range.
Just across the business.
Well it starts with what we're seeing in our pacings, which includes both right.
And right now.
There is a little skittishness out there as I mentioned in the insurance category.
But we as I mentioned think that's particular to that vertical and not indicative of a broader slowdown in national in our book.
When we touch base with all of our.
Our unit operators.
Management yesterday.
One of the overwhelming comments was that.
Local remains really strong.
And that our renewal activity and rate discussions are likewise very strong.
And keep it keeping in mind that thats, 80% of what we do right.
So.
It starts with our pacings and what we have actually booked.
To close out the year and then.
Of course the other.
Benefit we have in 2022 is that we've got political tail wins that are going to be kicking in.
As we move into September and October .
And to follow up on political is growing well and it seems like it will continue in a big way to really potentially move the needle. This year is that fair to say.
Yeah, it's not a top 10 category, but it is a nice.
A nice tailwind.
This year is amid a mid cycle year, its not a presidential year and yet were pacing well above what was the 2020 presidential cycle.
Which is the first time I've ever seen that so yes political is going to be exceptionally strong this year.
And then just two last ones for me one you talked about.
Your contracts coming up every four months.
The business that isn't the long term business that you mentioned that I guess focus on retention.
Retention, so pricing might be a little bit lower are you seeing more.
I guess people will not renew because of the price increases or has that held steady and your receivable or and you are able to replace it with new business just trying to get some color there.
Sure.
If you've followed us for a while Richard Youll see youll notice that our verticals and our customer.
Our customers tend to be remarkably stable right I mean year in and year out the verticals are very stable and year in and year out our top 10 customers are.
The same ones.
That said.
As Jay mentioned, we're basically at peak occupancy.
And.
What that means is <unk>.
For one we're gaining it on rate and number two we're moving the space right I mean, even though we are.
Driving rate and in some cases double digits.
Sure.
We are maintaining peak occupancy.
The our shortest cycle sale is our digital platform.
And.
That same board yield is up even higher than what we're doing driving rate on our analog.
Products. So again, we're seeing that strength across our shorter cycle sale, our mid cycle and our longer term contracts, which are our annual contracts.
By the way those annual contracts don't all renew in January .
They renew ratably throughout the year.
Which again gives us the opportunity to have that rate discussion.
All during the year, if you will even on 12 month contracts.
And then last one for me on the M&A front have you seen asking prices change it seems like you're pacing is kind of.
Picking up.
Is that.
Due to prices being a little bit more reason will be safe.
It's been interesting to see what happened is we came out of the pandemic last year, we greatly exceeded our M&A.
Expectations with over $300 million in deals will be north of $3 50 this year.
Billboard companies are great businesses.
You don't Youre not going to steal one even if things get a little soft so we're not necessarily seeing.
People's expectations.
<unk>.
For.
Pricing.
But I do think as I look forward to 2023 I think all of this activity has made may have pulled forward.
Pull forward some of that M&A activity.
Great. Thank you.
Yes.
Okay.
It appears we have no further questions at this time I will now turn the call back over to our presenters for closing comments.
Well once again, thank all of you for your interest in Lamar and we will visit again.
In our on our Q3 call.
I'll shortly.
Again, a few months.
Okay.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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