Lamar Advertising Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 7 speakers on the call.

Operator

Excuse me, everyone. We now have Sean Reilly and Jay Johnson in conference. Please be aware that each of your lines is in a listen only mode. At the conclusion of the company's presentation, we will open the floor for questions. In the course of this discussion, Lamar may make forward looking statements regarding the company, including statements about its financial performance, strategic goals, plans and objectives, including with respect to the amount and timing of any distributions to stockholders and the impacts and effects of general economic conditions, including Inflationary pressures on the company's business, financial conditions and results of operations.

Operator

All forward looking statements involve risks, Uncertainties and contingencies, many of which are beyond Lamar's control, and which may cause actual results to differ materially from anticipated results. Lamar has identified important factors that could cause actual results to differ materially from those discussed in this Call in the company's Q2 2023 earnings release and its most recent annual report on Form 10 ks. Lamar refers you to those documents. Lamar's Q2 2023 earnings release, which contains information required by Regulation G Regarding certain non GAAP financial measures was furnished to the SEC on Form 8 ks this morning and is available on the Investors section of Lamar's website, www .lamar.com. I would now like to turn the conference over to Sean Reilly.

Operator

Mr. Reilly, you may begin.

Speaker 1

Thank you, Britney. Good morning all and welcome to Lamar's Q2 2023 earnings call. We had a solid second quarter with revenue growth that accelerated on an position adjusted basis from Q1 and good discipline on the expense side. That combination translated into growth in adjusted EBITDA On an acquisition adjusted basis of just shy of 3%. Also an improvement from Q1.

Speaker 1

Revenue for each of our businesses, billboards, logos, transit and airports, was up in the quarter. Unfortunately, as turned the corner into Q3. We observed a slowdown in activity. There is more hesitation on the part of customers to pull the trigger on renewals and new contracts. As we booked fewer dollars, that hurt not just the current month, but also rippled through the balance of the year.

Speaker 1

That softening combined with weak results from the programmatic channel mean that the top line is not shaping up as we anticipated it would for the second half of twenty twenty three. While we still like what we're seeing on the expense side, we have revised our guidance for full year AFFO to a range of $7.13 to $7.28 per share as you saw in our release. The pacings now indicate full year acquisition adjusted revenue growth of approximately 2%, coupled with full year acquisition adjusted Expense growth of approximately 1.5%. So bottom line on the second half revenue outlook Is that we are still growing, just not at the pace we thought we would when we set the full year guidance in February. Back to Q2, Categories of strength in the quarter included service, which was up more than 16%, as well as amusemententertainment, education and financial.

Speaker 1

Weaker categories included gaming, real estate and insurance. The Atlantic region and to a lesser extent Gulf Coast and Southwest regions saw good growth, while Northeast and Midwest, which includes the Pacific Northwest lag. Local revenue for Q2 was up 2.4%. National revenue was up 1.4% in the quarter. Digital accounted for 30% of our Q2 revenue.

Speaker 1

Programmatic has been a drag, but nevertheless, we saw improving trends on digital same store sales, which were down 1% for the quarter, But up 3% for June. As of quarter end, we had 4,612 digital billboards operating, And we are on track to meet our goal of approximately 300 organic conversions this year. The first half has been relatively quiet on the M and A front, As we anticipated that it would be, we are still pursuing deals, but for now there are fewer sellers in the market. Happily, there is also less competition for the assets We do get to review. As of June 30, we had closed 16 transactions for a total of $42,000,000 The dollar volume is likely to pick up a bit in the second half of twenty twenty three as we work through deals we have under contract.

Speaker 1

For the full year, acquisition spend is likely to be somewhere between $100,000,000 $150,000,000 With that, I will turn it over to Jay to walk you through the numbers.

Speaker 2

Thanks, Sean. Good morning, everyone, and thank you for joining us. We continue to experience modest growth in our portfolio during the Q2. However, due to the rising interest rate environment, AFFO declined year over year as it did in Q1. In the Q2, acquisition adjusted revenue increased 2.7% from the same period last year against a difficult comparison in which pro form a revenue growth was 12.2% in the Q2 of 2022.

Speaker 2

Our billboard regions grew in the low single digits with the exception of the Northeast and Midwest, which contracted year over year as a result of their exposure to national advertising. Acquisition adjusted operating expenses increased 2.5% in the 2nd quarter, which was slightly better than anticipated. We now expect operating expense growth for the full year to come in around 1.5% on an acquisition adjusted basis. Adjusted EBITDA for the quarter was $253,900,000 compared to $243,400,000 in 2022, which was an increase of 4.3%. On an acquisition adjusted basis, adjusted EBITDA increased 2.9%.

Speaker 2

Adjusted EBITDA margin for the quarter remained strong at 46.9%, which was essentially flat to last year, contracting only 7 basis points from Q2 2022. And despite inflationary pressures over the last 18 months to 24 months, The company's adjusted EBITDA margin remains well above pre pandemic levels. Adjusted funds from operations totaled $194,400,000 the Q2 compared to $196,900,000 last year, a decrease of only 1.2%. This was despite cash interest increasing by $13,800,000 over Q2 2022. Cash interest was a headwind of approximately $0.13 per share as AFFO decreased 2.1 percent to $1.90 versus $1.94 per share in the Q2 of 2022.

Speaker 2

An AFFO decline of $0.04 against the $0.13 cash interest headwind Underscores the resilience of our business model with the portfolio heavily concentrated in billboards focused on local markets. We experienced acceleration in both local and national business across our portfolio. Local and regional sales grew for the 9th consecutive quarter, increasing 2.4%. In addition, we saw our national business, which includes programmatic, return to growth for the first time since Q3 of last year, increasing 1.4%. Local and regional sales accounted for approximately 78% of billboard revenue in the 2nd quarter.

Speaker 2

On the capital expenditure front, total spend for the quarter was approximately $51,000,000 including $17,500,000 of maintenance CapEx. For the first half of the year, CapEx totaled $93,000,000 about a third of which was maintenance. And for the full year, We anticipate total CapEx of $185,000,000 with maintenance comprising $63,000,000 Volume in our acquisition pipeline is moderated as expected, Following through extremely active years on the M and A front. During the quarter, we closed on $28,500,000 of acquisitions and should have a more regular level of activity in 2023. Through June 30, acquisitions totaled approximately $42,000,000 Now turning to our balance sheet.

Speaker 2

We have a well laddered debt maturity schedule and continue to focus on the company's best in class capital structure. Earlier this week, we closed on the amendment and extension of our $750,000,000 revolving credit facility, which now matures in July 2028. The transaction was well received by our existing bank group and we have no maturities until the Term Loan A in February 2025, followed by AR securitization in July of that year. In addition, we have no fixed income maturities until 2028. Based on debt outstanding at quarter end, our weighted average interest rate was approximately 5%, with a weighted average debt maturity of 4.8 years.

Speaker 2

As defined under our credit facility, we ended the quarter with total leverage of 3.25 times net debt to EBITDA, which remains amongst the lowest in the history of the company. Our secured debt leverage was 1.09 times at quarter end, and we're comfortably in compliance with both our total debt and current and secured debt maintenance test Against covenants of 7 times and 4.5 times respectively. Despite the sharp rise in interest rates over the past year And based on current guidance, our interest coverage should end the year at near 6x adjusted EBITDA to cash interest. While we do not have any interest coverage coming in, in any of our debt agreements, we do monitor this important financial metric. Healthy interest coverage exemplifies the strength of our balance sheet and the company's ability to service its debt.

Speaker 2

At the end of the quarter, we had approximately $661,000,000 in total liquidity comprised of $47,800,000 of cash on hand, $608,000,000 available under our revolver and $5,000,000 of availability on the AR securitization. This morning, we revised guidance for the full year and now expect AFFO to finish the year between $7.13 And $7.28 per share. Full year cash interest in our guidance totals $170,000,000 A $0.50 per share headwind versus last year and includes an additional 25 basis point rate hike in September. As I touched on earlier, maintenance CapEx is budgeted for $63,000,000 and cash taxes are projected to come in around $11,000,000 And finally, our dividend. We paid a cash dividend of $1.25 per share in the 2nd quarter.

Speaker 2

Management's recommendation will be to declare a cash dividend of $1.25 per share for the Q3 as well. This recommendation is subject to Board approval, and we will communicate the Board's decision later this month. The company's dividend policy Remains to distribute 100 percent of our taxable income and for the full year management still foresees a 2023 dividend of $5 per share, also subject to Board approval. Again, we had solid results with pro form a revenue growth accelerating in the quarter. We're particularly pleased with our efforts around expenses and we'll continue to focus on expense control in the second half of the year.

Speaker 2

I will now turn the

Speaker 1

call back over to Sean. Thanks, Jay. And again, to focus again on expenses, Recall on our last call, we anticipated the full year expense growth pro form a would be approximately 2.5%. Year to date through Q2, we're running at 2.3%. And again, we expect to finish up the year with Full year consolidated expenses around 1.5% pro form a.

Speaker 1

A quick word on the impact of political before I get the question. The back half last year political was about $11,600,000 and that compares to second half in 2021, a non political year of a little more than $4,000,000 So it is creating a $7 plus 1,000,000 headwind in our back half. With a stronger macro, we would have replaced it, but with this weaker macro, not so much. Let me touch quickly on the impact of programmatic. As we've mentioned, it Has been a disappointing year for our programmatic channel.

Speaker 1

Looks like for the full year, it's going to be down 11% or 12% Under last year, if you exclude the impact of programmatic on our same board digital for Q2, it was actually up 0.1%. And as I mentioned, even with programmatic as a drag, it was plus 3 for June. Similarly, It had an impact on our national book. If you look at Q2, as we mentioned, our national was up 1.4%. If you exclude the impact Programmatic national was actually up 3.1% in Q2.

Speaker 1

And we do still expect national To be down 1% to 2% for the full year. I mentioned categories of strength and weakness. I'll reiterate a few of those and put some numbers around them. I mentioned service, particularly strong, up 16%. That is our largest Category of business, amusemententertainment was up about 12%, education was up about 6% And financial was up almost 8%.

Speaker 1

On the downside, gaming was down a little more than 4%, Real estate was down a little more than 9% and insurance continues to be a laggard for us, down almost 21% In Q2. All right. So with that, Britney, you can open it up for questions.

Operator

Thank And we'll take our first question from Ben Swinburne with Morgan Stanley. Your line is now open.

Speaker 3

Great. Hey, good morning, guys. Hope you're well.

Speaker 2

Hi, Andrew.

Speaker 3

Hello. I guess a couple of questions. So what are you hearing from the field on the local business, which obviously is the majority of your business? It's an interesting environment because we've got some Consumer confidence is getting a little better. It feels like we're not that we're on the continent at all, but sort of heading towards the soft landing.

Speaker 3

Do you think this is just sort of the natural lag Kind of this unprecedented rate environment working its way through the system or anything else you'd share that might be interesting for us as we think about the ability for the business to Accelerate in 2024, which I think is probably most people's hunch given how this year is shaping up? That's kind of the first question.

Speaker 1

Yes, sure. Good question. Of course, we read your note yesterday that came out, and it was fairly prescient. So I would say that I wouldn't call this a main street recession. I wouldn't even call it a local ad spend recession.

Speaker 1

I would just call it a sort of general softening. And it has that has spread To the local level. And it's not like we can put our finger on a single thing. I would just call it sort of a general softening. And that's what we're hearing from the field.

Speaker 1

Just As I mentioned, customers are they just have a little hesitancy right now. And on the last call, it was It seemed to us that it was relegated to national and it's become clear to us that a little of that softening is spread to the local level as well.

Speaker 3

Okay. And then on national, I mean, this quarter was actually pretty good, especially ex programmatic. I was a little surprised to hear you reiterate the year expectation. Anything you'd add to sort of the down 1% to 2% after a nice positive Q2 improvement from Q1?

Speaker 1

Customers as being a little disappointing this year. But that aside, they really wouldn't put their finger on any one thing. Activity is still there. So we're not seeing the bottom fallout. We're not Seeing any wheels coming off.

Speaker 1

It's just sort of a, again, a sort of general softening that's spread a little bit.

Speaker 3

Okay. And then lastly, just Amusement Entertainment at 12. I don't know how big that is in your book and sort of what The pieces are, but obviously, you have this labor strike going on and Warner had their call this morning, which I don't think you listened to, but they started maybe Delaying some film releases. Is that an area that we should be thinking about maybe as a risk factor just in terms of the strikes? Or is movie And TV is kind of small in that grand scheme of things?

Speaker 1

Yes. So for us, number 1, it's a little over 5 Our book of business, it's the 5th largest category for us. It's not quite frankly very much your theatrical release movie stuff, that tends to gravitate towards LA and New York, which is not a big presence for us. It's really your sort of roadside attractions, concerts, amusement parks, things like that.

Speaker 3

Okay. Thank you so much.

Speaker 1

Yes.

Operator

We will take our next question from Jayson Advazni with Citi. Your line is open.

Speaker 1

Thanks. I think maybe I missed it, but On your revenue expectations for the year, I think originally the old AFFO guide was 4%, I think top line growth? Correct.

Speaker 4

What's the new expectation for top line growth for the year?

Speaker 1

The new expectation is approximately 2% for the year. 2%.

Speaker 4

Okay.

Speaker 1

All

Speaker 4

right. And then can I ask one question? One of the things that I always marveled about your business is your verticals can sort change over time. And the insurance number, I think it's only 3% or 4% of your book of business, but it's such a big drop. But I was going back in time, insurance used

Speaker 1

to not be it didn't show

Speaker 4

up in the top 10 historically.

Speaker 3

Is this one of those things

Speaker 4

happening Were insurance is going to sort of not show up as a

Speaker 1

top 10 category or is

Speaker 4

this more cyclical or something going on?

Speaker 1

So You're right. It's about 2.5% of our book today. Last year, it was a little bit bigger. What goes on with insurance, keep in mind, it's predominantly 2 big national accounts. So you put your finger on it, they can swing in and out of our book.

Speaker 1

They'll come in, they'll go out. It was great Up until about the Q3 of last year. And we're in one of those periods where they're just not As they're just not as big in our book as they have been, we expect they'll come back. Like I said, it's primarily to Very large accounts on the national level.

Speaker 4

Okay, super helpful. Thank you.

Speaker 1

Yes.

Operator

We'll take our next question from Richard Choe with JPMorgan. Your line is open.

Speaker 5

Hi. I wanted to follow-up on the local side. I guess you said there's a little bit more hesitancy. Could that hesitancy go away if I guess, if Hani does stay stronger than people think. And I had a follow-up after that.

Speaker 1

Yes. That's a good question, Richard. And that would be our anticipation for sure. At the end of the day, we are tethered to GDP to a certain extent. And to the extent It serves as a headwind.

Speaker 1

We're going to feel it. And to the extent it's a tailwind, we're going to feel that as well. So I would anticipate that turning the corner into next year, assuming That the macro gets a little better than you'll see some good performance out of us and that will be led by Strength at the local level.

Speaker 5

Got it. And on the Meetings and Entertainment, I guess some of the theme parks Are seeing a little bit more pressure from very high levels. Are they changing their spend at all that you can see?

Speaker 1

No. I mean because when you think about Lamar and theme parks, it's not so much What happens in Orlando and Disney World and Universal? It's more things like what happens in Branson, Missouri with Dollywood And what happens in Hershey, Pennsylvania with the Hershey theme park. These are regional theme parks that are not Necessarily fly in destination, but more the kind of theme parks you drive to.

Speaker 5

Great. And last one for me. On the direct Residing expense, that's the expense rate there has been very low relative to the other categories. Are you seeing any pressure there in

Speaker 1

Are you talking about our direct expenses?

Speaker 5

The direct advertiser is in expense line, yes.

Speaker 1

Yes. So there's a couple of ways that you need to think about that when you think about Lamar. Number 1, if you followed us for a while, you know we're pretty good at expense control. There are some expenses at the direct line that Flex with revenue. So if revenue is coming in a little lighter than we anticipate, then expenses will come in a little lighter as well.

Speaker 1

Those are things like Sales commissions, things like revenue share leases, and to the extent we're not Hitting our management goals, it will flow down through to management bonuses. And then there There's also some expenses that are related to what we're doing with our ERP conversion. There's been some low hanging fruit, and we're realizing the benefit of some of the IT initiatives that we've had, and that's filtering out into the field as well. So really, those two things are helping us out on the expense side. Great.

Speaker 1

Thank you. Yes.

Operator

And we'll take our next question from Avi Steiner with JPMorgan. Your line is open.

Speaker 1

Hi, thanks for the question. Just one follow-up. I think you had mentioned that

Speaker 6

the guide is now 2%. For the full year revenue growth, I guess, embedded in AFFO, I think a couple of quarters ago, you had disaggregated the 4% as plus 2% organic plus 2% inorganic, does that mean we're flat on the organic side now? Thank you.

Speaker 1

No, that 2% is acquisition adjusted pro form a. It's organic. If you include the impact of acquisitions, it's going to be more like 4.5 3, 4, something like that. Okay. Thank you.

Speaker 1

Yes.

Operator

We have no further questions in the queue at this time. I will turn the program back over to Sean Reilly for any additional or closing remarks.

Speaker 1

Great. Thank you, Britney, and thank you all for listening, and we'll talk again next quarter.

Operator

This does conclude today's program. You may disconnect at any time and have a wonderful day.

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Key Takeaways

  • Management revised full-year AFFO guidance down to $7.13–$7.28 per share, reflecting slower second-half growth with acquisition-adjusted revenue up ~2% and expenses up ~1.5% amid customer hesitancy and weak programmatic sales.
  • In Q2, acquisition-adjusted revenue rose 2.7% and adjusted EBITDA reached $253.9 million (+4.3%) with a 46.9% margin, while AFFO was $194.4 million (–1.2%), demonstrating resilience despite higher cash interest costs.
  • Expense discipline remained strong as acquisition-adjusted operating expenses grew only 2.5% in Q2 and are expected to increase just 1.5% for the full year, helping maintain stable margins.
  • Digital accounted for 30% of Q2 revenue with same-store sales down 1% for the quarter but up 3% in June; the company operates 4,612 digital billboards and is on track for ~300 organic conversions this year.
  • A healthy balance sheet was highlighted by a revolver extension to July 2028, no material maturities until 2025, net leverage at a historical low of 3.25× EBITDA, and $661 million of total liquidity.
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Earnings Conference Call
Lamar Advertising Q2 2023
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