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Lamar Advertising: The Canary in the Coal Mine

lamarlogo.gifOutdoor ad provider Lamar Advertising yesterday played host to one of the most brutal, depressing analyst conference calls I've ever heard. This was significant because Lamar claims to be the country's largest outdoor ad provider, and thus it arguably functions as a proxy for the ad biz as a whole.

While a number of recent ad agency earnings calls have been somewhat depressing, the brass at those companies have continued with their management-speak prognostications about being "well-positioned" "flexible" and ready to take advantage of the recession.

Not at Lamar. In terms of sheer negativity, the management painted a picture of an industry in freefall. If you had any illusions about how the ad business might get through the next couple of quarters by encouraging clients to keep advertising while their rivals cut back, they should be put to rest after the Lamar nastiness. The Reillys should get credit for their straight talk and honesty -- and then they should pour themselves a stiff gin and tonic for making it through the day.

Consider: Ahead of the call, Seeking Alpha reported that Wall Street believed the company was in danger of defaulting on its debt and that its business had "fallen off a cliff" in the last 10 days. Citigroup said the company was a victim of a "bad combination" -- words you never want to hear Citigroup say. The stock took a scary dip (but later recovered).

Then the Q3 release came out. The news was ba-a-ad. The company suspended its stock buyback program (usually a sign of a company struggling to retain cash). Its revenue was flat at $312 million (not too bad, but ...). Net income collapsed, down from $14.5 million to $3.8 million (yikes!). The only bright spot was cashflow, which was on the rise (possibly because it was hoarding the money it previously dished out to investors on stock buybacks?). Lastly, Lamar said it expected Q4 revenues to plummet 9 percent.

The company also put out this statement:

As of September 30, 2008 and currently, we are in compliance with the covenants and restrictions included in our senior credit facility and our outstanding senior subordinated debt securities.
Why would they need to reassure anyone if there was no question? The answer came in the call itself. I've edited it down to just the grueling highlights (and some of my commentary). Now peep through the cracks in your fingers and read on:

CEO Kevin Reilly, CFO Keith Istre and COO Sean Reilly told investors they had stopped investing in their digital billboard rollout.

Marci Ryvicker - Wachovia: Your suspension in your digital investment, is this a permanent suspension or just temporary during the current climate?
COO Sean Reilly: If we're going to generate $200 million in free cash flow and pay down debt with those funds, we had to temporarily suspend much of our digital plans for next year.
Next came the issue of how many Lamar billboards are actually occupied by paying customers, and how many are empty. Lower than 70% occupancy would be below the last recession:
COO Sean Reilly: In the past, we have seen poster occupancy be the canary in the coal mine, and if you notice, I think the key static is occupancy was down in posters in the third quarter but rate was right there and that's a pretty good data point for you.

CFO Keith Istre: You're right, it should be pacing worse, but you've got other things happening out there. For example, Chevrolet, when they canceled their national business, that was all bulletins. So, it had a much greater impact on our bulletin book of business than our poster book of business.

So there's you explanation for why WPP, Publicis, IPG and Omnicom have been relatively rosy so far: If outdoor is the canary in the coal mine, then the real hurt has not yet begun to arrive in more diversified businesses.

Sean Reilly then seemed to directly address Caris analyst David Miller, who was the one who had said he believed business has "fallen off the cliff."

COO Sean Reilly: The best description that I'm getting from our national sales folks is they don't see it falling off the cliff in '09, they see it hanging in there particularly with some of our largest customers in the wireless category and in the restaurant category.
Then the company's debt came up again.
CFO Keith Istre: I'd also want to quantify this. First of all, we're not going to coast into default.
Unidentified Analyst: Right.
CFO Keith Istre: But if you take, let's just take $400 million. The bottom drops out and we do $400 million in EBITDA at the end of the year, and now we're in default, and let's say the max penalty is an extra 300 basis points. That's an extra $40 million in interest on our bank indebtedness. The company would still have 200 million in free cash flow. It's in default, there's no access to any credit and has to pay an additional $40 million in interest and it's still got $200 million in free cash flow. So, a friend of mine called in and said, it's kind of open [mike night] for some of these analysts who talk about default and sky falling. That's not the case with this company, whether it's in default or not in default. Basically for the next two years, we do not need to borrow money to fund our operation.
On the subject of autos, where spend has really fallen off:
CEO Kevin Reilly: That vertical is going to be under stress. They were talking about a dealer group in Oklahoma. This was not one dealer, it was a dealer group got together for a meeting and they wanted to talk about the month and they sold one car. The entire group. So we expect that that vertical is going to be under stress.
To understand the significance of the next question, you need to know that Lamar operates about 160,000 billboards:
Harry DeMott - King Street Capital Management: Right. Then, not completely off the topic, I was sort of interested to hear that 130* one third of your boards produced three quarters of your revenues. When you look at all of your structures, boards, bulletins, posters, what percentage of these guys would you say are net-net kind of low ROIs or underwater in terms of lease versus what you're actually getting on these things? As revenues decline in a bad economy here, do you continuously cull these things?
CEO Kevin Reilly: Well, you've got to be careful because you've got a one-year, two-year situation. That's your signal. You don't want to dismantle your business. But I thought if we answer your question, we probably have 15% of our structures that are underwater.
Wow. Canary in the coal mine. Expected nine percent drop. Dealership groups selling only one car. And 15 percent of the business losing money. That's about as bad as we've seen it, folks.

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