LAMAR ADVERTISING CO/NEW Q3 FY2024 earnings call

• Business trends are encouraging with robust demand from local and regional advertisers, especially programmatic sales channel offsetting national advertising weakness. - Expenses increased 5.4% on acquisition-adjusted basis but expected to correct in Q4, with Q4 revenue pacing ahead of Q3 due to political spend. - Raised full year AFFO per share guidance to $7.85 to $7.95 per share (midpoint up nearly 6% over 2023) and full year EBITDA margin expected around 47%. - Political spend was a bright spot, with records set in Q3 and year-to-date. - Digital units at 4,892, plan to reaccelerate rollout of new digitals in 2025 with goal of 375 to 400 new digitals. - M&A activity slow in 2024 but expected to pick up in 2025 with tuck-in transactions. - Debt management: extended $250 million AR securitization for 3 years, well-laddered debt maturity schedule, low leverage. - Dividend increased in Q3, plan to recommend regular and special dividend at year-end.

Consolidated revenue grew 4% or 3.6% on an acquisition-adjusted basis for the third quarter, the 14th straight quarter of growth. Revenue increased across all products (billboards, transit, airport, logos) and all operating regions. Local/regional revenue was up 4.9% while national was off 2.9%. Digital revenue grew by nearly 5%, with programmatic revenue increasing over 70% from the year earlier quarter. Billboard regions had acquisition-adjusted revenue in the low to mid-single digits, except the Gulf Coast which was relatively flat. Adjusted EBITDA for the quarter was $271.2 million, an increase of 2.1% on an acquisition-adjusted basis. Adjusted funds from operations totaled $220.7 million, up 5.7% from the prior year. Diluted AFFO per share increased 5.4% to $2.15. Local and regional sales accounted for approximately 79% of billboard revenue in the third quarter.

• Raised full year AFFO per share to a range of $7.85 to $7.95 per share. - Full year EBITDA margin expected to come in right around 47%. - Anticipated total CapEx for full year is $125 million with maintenance CapEx approximately $50 million.

Q: Just curious, as you look ahead into 2025, how you're thinking about the growth opportunity and the potential growth drivers?

A: Certainly, we're going to be looking to programmatic to be a contributor there. And we're also looking for a rebound in national. Some of that is going to be easy comps. I hate to use that as a reason why we're going to do better in national, but it's the math of that. And again, we're seeing some customers come into our book through programmatic that have traditionally not been big players in out-of-home, consumer packaged goods and pharma. So we're certainly looking to that.

Q: Secondly, from an industry perspective, could you discuss the current state of programmatic ad spending in out-of-home and the long-term industry impacts?

A: Sure. As you're aware, when talking about Lamar in particular, we limit our programmatic channel to national customers. And we limit it to those buying agencies that are digital specialists, i.e., they only buy programmatically. And that universe of buyers is growing, and that's why our programmatic book is growing. And certainly, when you hear from the other industry players, you'll hear the same thing. Where we see this going, number one, we see the general digital pot of advertising growing much faster than the traditional pot of advertising. And those 2 pots are actually probably going to merge in 3 to 5 years. And so you'll just talk about ad spend and you won't really break it out that way, which leads us to the conclusion that programmatic is going to be even more important as that channel is opened up to more, I would call traditional ad players. And then finally, what we see happening is opening up that channel to our local book, our local and regional book. And then that's when it becomes really exciting. So it's going to take us 3 to 5 years to get there. And -- but when we do, you'll see a whole lot of ad dollars going through that channel.

Q: I just had 2 questions. One, it was nice to see the AFFO guidance is up, as you said, about 2% from where we started at the beginning of the year. But I noticed that the earnings number fell about 1% over that same period. So I was just wondering, could you just tease out sort of the dichotomy between the earnings and the AFFO? And then my second question is on programmatic. I may be misremembering, but when programmatic first started, I would almost characterize your tone is somewhat cautious on it just because of the negative margin implications and now you seem less concerned with that. And I don't know if that's just because the quantum of programmatic dollars are so huge, if it just makes sense? Or if the margin concerns you had early on are just no longer applicable because of some shift in the industry?

A: Yes. Jason, I'll hit the programmatic question, and I'll turn the net income question over to Jay. So yes, programmatic margins. It is a fact that today, the cost of a programmatic sale runs about 10%. And our overall cost of sales, what we pay our account executives and what we pay our national account managers runs about 6%, right? So you got about a 4% delta there. Now where do we see that going? Number one, we get a slightly higher CPM through the programmatic channel, and our customers are willing to pay that higher CPM because they get a richer data set that helps prove out the effectiveness of their campaign. So that little bit of extra expense is offset by a higher CPM. The other thing that we see happening is it's 10% for that channel when we have $40 million going through it. But when we have $240 million going through it, we're going to see that cost go down. So we're looking at volume to bring that cost down. Jay Johnson: Jason, on the net income question, it's our stock compensation plan, which, as you know, is noncash. If you look at where our stock is trading now, it's significantly higher than it was at this time last year. And our plan is based around fix shares. So fluctuations in stock price can really impact the value there. The other contributor on the stock compensation plan is simply where we're tracking against budget. We're having a much better year than last year. So our payout on a percentage basis is going to be higher. So you put those 2 things together, and that's why you see the increase in the stock compensation.

Q: political, if I may. I think you mentioned the political contribution as $50 million year-to-date and seeing a record as of now. I guess can you help us think about the political contribution for Q4? And then maybe relatedly, we saw TV broadcasters report this week, and they collectively talked about their core ads being down somewhere between mid-single digit to high single digit from political crowd out. So do you think you picked up any of those dollars? Or did those advertisers completely drop out of the market? It doesn't seem apparent in your results that maybe you benefited from crowd out in the quarter, but anything you can add there?

A: We lost you there at the beginning of the question, but I'll just hit what I heard. So political, as I mentioned, was -- is about $15 million year-to-date. In Q4, it's going to be about that number, give or take. So we will end the year close to $30 million total in terms of political. So that will give you a sense for where it's going to land in Q4. We can't -- we can't measure it in terms of TV political crowding out their traditional spend and how much of that comes our way. But we know some of it does. And so we're going to have -- you can just sort of see it in the growth in our book. So I think that's what I heard your question to be whether or not we pick up some of those dollars. And again, I can't measure it, but anecdotally know that it happens.

Q: So we've done some work on the financial benefits from digital conversion, but can you talk about the potential revenue uplift that you might expect from adding almost twice as many digital billboards next year as you did this year?

A: Sure. I'll just do it based on sort of unit economics, right? So I'll make -- I'll just illustrate one and then you can extrapolate. So when we take down a static unit, on average, it's doing about $3,000 a month. And you replace that with digital unit that cost you a little over $200,000 to make the conversion. And your revenue lift is, give or take, 5 or 6x. So you're going to do something in the neighborhood of $15,000 a month on that board now. So that's sort of the unit economics of a conversion. And it's been very gratifying for us to see that those economics have held up over the decades that we've been doing this. It's been remarkably stable that, that return and those unit economics. Interestingly, from the advertiser's point of view, as I mentioned, they're paying about $3,000 for the space for a static unit, but they then have to buy the substrate, right? They have to buy the vinyl and amortize that cost over the length of their contract. When they move over to a digital unit they're paying about the same absolute dollars. They're paying about $3,000 for the slot that they occupy, but they don't have to pay the production. And they can, of course, change their copy from their desktop at their will. And that flexibility is why they're willing to share the space with other advertisers. So their absolute dollars in terms of the cost of the space stays about the same. Their cost per thousand impressions goes up. So that's the economics of a digital conversion, both from our point of view and from our customers' point of view.

Q: You had mentioned last quarter gaining share in programmatic due to better metrics in large format. I just want to ask if you could provide some more color on how you're able to measure these KPIs and improve them out to marketers and how well known this is or if there's more room to take share as the data increases and education continues? And then secondly, I wanted to ask if you could provide any color on what kind of opportunities you're looking at for M&A going into '25, if there's any specific geographies or capabilities you're willing to build out?

A: Sure. I'll hit the M&A question first. We kind of purposely slowed down a little bit this year. We were catching our breath and we were preparing our balance sheet. And as you know, we retired our Term A loan. And all that work has been done, and it's been incredibly fruitful in terms of where our balance sheet is. As a matter of fact, when we close the books on 2024, our leverage, as measured by our bank covenants is going to be less than 3 for the first time in the company's history. So we're really happy about the work we did there. And part of that was slowing down the M&A activity this year. So that said, going into next year, we see it picking up. And without talking about specific transactions, the first level of activity is going to be the fill-in activity that we're, quite frankly, very good at. I mean, if you look at footprint, we're nationwide and basically everywhere. So almost any M&A activity for us is going to be fill-in, where we just absorbed the inventory into our existing operations. And it's a very predictable exercise. We're very, very good at it. And at the end of the day, it's not really geographic specific. We can absorb anywhere -- inventory basically anywhere in the country and any region in the country. So yes, we're going to be very active next year, and we're looking forward to what that brings to our footprint and to our customers, and quite frankly, enhancing our margins. The question on -- what was the other one? What was the other question?

Q: The other question I had was you'd mentioned gaining share in programmatic due to better metrics in large format. And so I wanted to ask if you could provide more color on how you're able to measure those KPIs and how well known [indiscernible]?

A: Yes, yes. Sure. So it's increasingly well known in the industry. There are third-party data providers that can do attribution analysis and measure foot traffic and lift as part of a campaign. Quite frankly, there are more of those third-party data providers today than there have ever been. So it's going to be an increasingly good thing for the industry. And again, our programmatic customers are willing to pay a slightly higher CPM because it is included in their buy by the programmatic enablers, folks like Vistar and the like who are plugged into our pipes and enable us to deliver programmatic buyer to those digital buyers. So that's essentially what's going on out there, and it's increasing as more third-party data providers come to the fore.

Q: You called out Gulf Coast was a drag on results. Any thoughts as to why? And are you seeing that come back in the fourth quarter? I'm wondering if the weakness was more or less pronounced at either the beginning or the end of the quarter? Was it evenly distributed? What's going on there?

A: Every now and again, you'll have a region that just is catching its breath, and maybe not the local economies aren't as robust as what's going on elsewhere. So for us, the Gulf Coast is essentially Arkansas, Louisiana, Mississippi, Alabama, is the basic Gulf Coast region. And I don't think there's anything to be read into that really. It's just things might just have been a little bit softer there, and they'll come back. Jay Johnson: I'd also add, Lance, that in Q3 of last year, the Gulf Coast outperformed the broader portfolio. So a little bit of a headwind there from a year-over-year company.

A: Yes, they had a tougher comp in some of the other places.

Q: And then just on the M&A outlook, could you talk a little bit about why you're seeing it picking up? Is it a function of interest rates having stabilized beginning to come down? Or is it the improving outlook for the real economy? Is it people kind of buying in more to the -- well, just wondering what's driving that trend? Or was this just really more driven by your internal decisions to take a pause?

A: There were certainly a little bit of that, Lance, in terms of when Lamar decides to catch its breadth, everybody sort of slows down a little bit and then when we say, look, the checkbook is open, come talk to us, keep in mind, a lot of our M&A activity is internally generated. These are either entrepreneurs or family, mom-and-pop operations that have been around for a couple of decades. We know them well. And when they decide to sell, they give us a call, right? So some of it is just that. And then some of it is just, I think to your other point, as interest rates start falling, then activity picks up. And we're in a different interest rate cycle. So I think those 2 things will make for an active year next year.

Q: And you mentioned tuck-ins a couple of times, but what about a potentially larger transaction, something like an Adams or a Link, would you consider -- or would you consider those tuck-ins?

A: Well certainly, there's a measure of tuck-in in both of those. We don't obviously control what those guys are going to do. That's one of those things that's more event-driven than sort of day in, day out tuck-in acquisition activity that we engage in. So yes, that would be sort of a stay tuned.