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Operator
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© transcript Emily Beynon © transcript Emily Beynon
Operator
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Jay
Please stand by. Your program is about to begin. Should you need audio assistance during today's program, please press star zero. Excuse me, everyone. We now have Sean Riley 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'll open the floor for questions. To ask a question, please press the star and one on your touchtone keypad. To remove yourself, you can press star two. 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 condition, and results of operations. All four looking statements involve risk, 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 second quarter 2023 earnings release and its most recent annual report on Form 10-K. Lamar refers you to those documents. Lamar's second quarter 2023 earnings release, which contains information required by Regulation G regarding certain non-GAAP financial measures, was furnished to the SEC on Form 8K this morning and is available on the investor section of Lamar's website, www.lamar.com. I would now like to turn the conference over to Sean Riley. Mr. Riley, you may begin.
Jay Johnson
Thank you, Brittany. Good morning, all, and welcome to Lamar's second quarter 2023 earnings call. We had a solid second quarter with revenue growth that accelerated on an acquisition-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. Revenue for each of our businesses, billboards, logos, transit, and airports was up in the quarter. Unfortunately, as we 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 of new contracts. As we booked fewer dollars, that hurt not just the current month, but also rippled through the balance of the year. 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 2023. 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 percent, as well as amusement slash entertainment, education, and financial. 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, lagged. Local revenue for Q2 was up 2.4 percent. National revenue was up 1.4 percent in the quarter. Digital accounted for 30 percent of our Q2 revenue. 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&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 million. The dollar volume is likely to pick up a bit in the second half of 2023 as we work through deals we have under contract. For the full year, acquisition spend is likely to be somewhere between $100 and $150 million. With that, I will turn it over to Jay to walk you through the numbers.
Brittany
Thanks, Sean. Good morning, everyone, and thank you for joining us. We continue to experience modest growth in our portfolio during the second quarter. However, due to the rising interest rate environment, AFFO declined year over year as it did in Q1. In the second quarter, acquisition-adjusted revenue increased 2.7% from the same period last year against a difficult comparison in which pro forma revenue growth plus 12.2% in the second quarter of 2022. 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 second 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 $253.9 million compared to $243.4 million in 2022, which was an increase of 4.3%. On an acquisition-adjusted basis, adjusted EBITDA increased 2.9%. Adjusted EBITDA margin for the quarter remained strong at 46.9%, which was essentially flat to last year, contracting only seven basis points from Q2 2022. And despite inflationary pressures over the last 18 to 24 months, the company's adjusted EBITDA margin remains well above pre-pandemic levels. Adjusted funds from operations total $194.4 million in the second quarter, compared to $196.9 million last year, a decrease of only 1.2%. This was despite cash interest increasing by $13.8 million over Q2 2022. Cash interest was a headwind of approximately $0.13 per share as AFFO decreased 2.1% to $1.90 versus $1.94 per share in the second quarter of 2022. An AFFO decline of $0.04 against a $0.13 cash interest headwind underscores the resilience of our business model with a 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 ninth consecutive quarter, increasing 2.4 percent. 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 percent. Local and regional sales accounted for approximately 78 percent of billboard revenue in the second quarter. On the capital expenditure front, Total spend for the quarter was approximately $51 million, including $17.5 million of maintenance CapEx. For the first half of the year, CapEx totaled $93 million, about a third of which was maintenance. And for the full year, we anticipate total CapEx of $185 million, with maintenance comprising $63 million. Volume in our acquisition pipeline is moderated, as expected, following two extremely active years on the M&A front. During the quarter, we closed on $28.5 million of acquisitions and should have a more regular level of activity in 2023. Through June 30th, acquisitions totaled approximately $42 million. Now turning to our balance sheet, 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 million 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 the 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. 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 incurrence and secured debt maintenance test against covenants of seven 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 near six times adjusted EBITDA to cash interest. While we do not have an interest coverage covenant 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. At the end of the quarter, we had approximately $661 million in total liquidity, comprised of $47.8 million of cash on hand, $608 million available under our revolver, and $5 million 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 million, a 50-cent-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 million, and cash taxes are projected to come in around $11 million. And finally, our dividend. We paid a cash dividend of $1.25 per share in the second quarter. Management's recommendation will be to declare a cash dividend of $1.25 per share for the third quarter 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% 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 forma revenue growth accelerating in the quarter. We are particularly pleased with our efforts around expenses and will continue to focus on expense control in the second half of the year. I will now turn the call back over to Sean.
Jay Johnson
Thanks, Jay. And again, to focus again on expenses, recall on our last call, we anticipated that full-year expense growth pro forma 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 percent pro forma. A quick word on the impact of political before I get the question. The back half last year, political was about $11.6 million, and that compares to a second half in 2021, a nonpolitical year of a little more than $4 million. So, it is creating a $7-plus million 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. Looks like for the full year, it's going to be down 11 or 12 percent 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 of programmatic, national was actually up 3.1% in Q2. 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. Amusement slash entertainment was up about 12%. Education was up about 6%. And financial was up almost 8%. 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, Brittany, you can open it up for questions.
Jay
Thank you. At this time, if you would like to ask a question, please press the Start Ant 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star and two. Once again, that is star and one if you would like to ask a question. And we'll take our first question from Ben Swinburne with Morgan Stanley. Your line is now open.
Ben Swinburne
Great. Hey, good morning, guys. Hope you're well. Hey, Ben. Hello. I guess a couple questions. You know, Sean, 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, you know, consumer confidence is getting a little better. Feels like we're, not that we're ominous at all, but sort of heading towards a soft landing. Do you think this is just sort of the natural lag of 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 24, which I think is probably most people's hunch, given how this year is shaping up? That's kind of the first question.
Jay Johnson
Yeah, 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. I would just call it a sort of general softening. And 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. Just as I mentioned, customers are They just have a little hesitancy right now. And, you know, on the last call, it seemed to us that it was relegated to national, and it's become clear to us that a little of that softening has spread to the local level as well. Okay.
Ben Swinburne
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 expectations. You know, anything you'd add to sort of the down one to two after a nice positive Q2 improvement from Q1?
Jay Johnson
Yeah, we're seeing activity there is okay. Again, you know, if you asked our folks that touch those customers, you know, they would still single out the online gaming and the insurance categories and 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, you know, we're not seeing the bottom fall out. We're not seeing any wheels coming off. It's just sort of, again, a sort of general softening that's spread a little bit.
Ben Swinburne
Okay. And then lastly, just Amusement Entertainment up 12%. I don't know how big that is in your book and sort of what the pieces are, but obviously we have this labor strike going on and Warner had their call this morning, which I don't think you listened to, but they talked about maybe, you know, 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 kind of small in that grand scheme of things?
Jay Johnson
Yeah. So for us, um, You know, number one, it's a little over 5% of our book of business. It's the fifth largest category for us. It's not, quite frankly, very much your theatrical release movie stuff. That tends to gravitate towards LA, New York, which is not a big presence for us. It's really your sort of roadside attractions, concerts. amusement parks, things like that. Okay.
Ben Swinburne
Great. Thank you so much. Yep.
Jay
We will take our next question from Jason Vazney with Citi. Your line is open.
Jason Vazney
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. What's the new expectation for top line growth for the year?
Jay Johnson
The new expectation is approximately two for the year. Two percent.
Jason Vazney
Okay.
Jay Johnson
Yep.
Jason Vazney
All right. And then can I ask one question? One of the things that I've always marveled at about your business is your verticals can sort of 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. I was going back in time. Insurance didn't show up in the top 10 historically. Is this one of those things where insurance is going to not show up as a top 10 category, or is this more cyclical or something going on?
Jay Johnson
You're right. It's about 2.5% of our book today. Last year, it was a little bit bigger. You know, what goes on with insurance, keep in mind it's predominantly two big national accounts. So, you know, you put your finger on it. They can swing in and out of our book. You know, they'll come in, they'll go out. It was great up until about the third quarter of last year. And, you know, we're in one of those periods where they're just not as big in our book as they have been. You know, we expect they'll come back. Like I said, it's primarily to very large accounts on the national level. Okay. Super helpful. Thank you. Yep.
Jay
And once again, that is star and one if you would like to ask a question. We'll take our next question from Richard Cho with J.P. Morgan. Your line is open.
Richard Cho
Hi. I wanted to follow up on the local side. I guess you said there's a little bit more hesitancy there. Could that hesitancy go away if, I guess, the economy does stay stronger than people think? And I had a follow-up after that.
Jay Johnson
Yeah, that's a good question, Richard. And that would be our anticipation for sure. You know, at the end of the day, you know, we are tethered to GDP to a certain extent and to the extent – It serves as a headwind. We're going to feel it. And to the extent it's a tailwind, we're going to feel that as well. So, you know, I would anticipate that turning the corner into next year, assuming that the macro gets a little better, then you'll see some good performance out of us. And that will be led by strength at the local level.
Richard Cho
Got it. On the amusement 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?
Jay Johnson
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, you know, 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.
Richard Cho
Great. And last one for me. On the direct advertising expense, that's the expense growth there has been very low relative to the other categories. Are you seeing any pressure there in the rest of the year, or getting that fee kind of kept low? David Chambers- Are you talking about our direct expenses? David Chambers- The direct advertising expense line, yes. David Chambers- Yeah.
Jay Johnson
So, you know, there's a couple of ways that you need to think about that when you think about Lamar. Number one, if you've 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. 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'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. Thank you.
Jay
And we'll take our next question from Avi Steiner with JPMorgan. Your line is open.
Avi Steiner
Hi, thanks for the question. Just one follow-up. I think you had mentioned that 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%. 2 percent organic plus 2 percent inorganic. Does that mean we're flat on the organic side? Excuse me, flat on the organic side now? Thank you.
Jay Johnson
Mr. No, that 2 percent is acquisition-adjusted pro forma. It's organic. If you include the impact of acquisitions, it's going to be more like four and a half, three, four, something like that. Mr. Okay, thank you. Mr. Yes.
Jay
We have no further questions in the queue at this time. I will turn the program back over to Sean Riley for any additional or closing remarks.
Jay Johnson
Great. Thank you, Brittany, and thank you all for listening, and we'll talk again next quarter.
Jay
This does conclude today's program. You may disconnect at any time, and have a wonderful day.
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