Lamar Advertising Company reported its financial results for the three months ending September 30, 2001 when it filed a 10-Q Report with the Securities and Exchange Commission on November 13, 2001. Management held a conference call for shareholders and securities analysts to discuss the results on November 7, 2001. Revenue at Lamar was up 1.87% in the latest calendar quarter due to acquisitions over the past 12 months. If revenue is viewed on a “same store” basis (measuring only the income from the billboards that were owned last year at this time), it was down 3%. Not bad considering the weak advertising market for most media companies. The national economy has been weak for nearly 12 months even though a recession probably did not begin until just recently. Lamar’s performance is good relative to other advertising businesses.
The profits in last year’s 3rd quarter turned to losses this year, in spite of the higher revenue. The company earned $12,857,000 in Operating Income last year but suffered a loss of $3,588,000 in 2001. Management reports that land leases and labor represent about 30% of expenses, and these can be viewed as largely fixed. It is short sighted and potentially suicidal to take billboards down in order to save lease expenses. Labor costs are difficult to trim because employees need to be retained to manage the existing sign plant and be available when business turns around.
The loss this year was due in part to the cost of acquisitions. As the acquired companies are fully absorbed over the coming months, total operating expenses are likely to be trimmed and future earnings will benefit. Also, the expenses incurred in making acquisitions will not have to be repeated in future periods.
The company has plenty of recent acquisitions to digest. On January 1, 2001, Lamar bought American Outdoor Advertising and Travel Centers for $31.5 million, and Appalachian Outdoor Advertising for $20 million. On February 1, 2001, Bowlin Outdoor Advertising and Travel Centers was purchased for approximately $44.4 million (including 725,000 shares of Lamar stock valued at $29 million). On April 1, 2001, DeLite Outdoor Advertising was acquired for $43 million cash, and PNE Media was purchased for $21 million cash. The last acquisition was on August 2, 2001 when Capital Outdoor was bought for approximately $30 million. During the nine months ending September 30, 2001, Lamar completed 73 additional acquisitions of outdoor advertising and transit assets for cash totaling $112 million. Americans are beginning to see many more billboards with the Lamar logo.
This hectic pace of acquisitions has come to an end for the time being. Management at Lamar reports that there are currently no additional acquisitions planned for the remainder of the year, and activity is not likely to pick up right away in 2002. Many smaller sign companies still have high expectations about the value of their plants and they are not willing to sell at what they believe are discount prices. Since many of these operators have to meet only modest debt service, they can weather the current weakness in the market and wait for better prices before they decide to sell. Lamar management stated that they are not very happy with values that some sellers are asking right now, and the company will not use its cash to overpay for acquisitions. They will continue to watch for reasonably priced sign plants.
Lamar’s sign plant, like its national competitors, has some strengths and some weaknesses. The strongest portion of the plant is the company’s highway billboards that are categorized as “directional” Bulletins (usually 14X48). These signs are at locations sought by motels, restaurants, and other businesses that want to gain the attention of travelers who may be customers. These advertisers are renewing their advertising contracts in spite of the weak economy because they rely on the highway traffic and need to maintain their advertising exposure. They may also want to keep a competitor from advertising in their place. Highway directional signs are renewing at a good pace for Lamar and many customers have accepted modest price increases.
Other types of signs are not achieving high rates of renewal even at existing prices. General circulation Bulletins and Poster Panels are experiencing weak demand that will not support price increases. In fact, many advertisers are not interested in renewing even at discounted rates. Lamar is getting business from these advertisers by offering “preemptive” advertising contracts. Under this arrangement, the advertiser agrees to buy ad space, often at a discounted rate, for a certain period of time. However, in exchange for the lower price, the advertiser agrees to give up the space after a minimum period if the sign company can find another customer at the regular rate. The sign company can then “preempt” the original ad and put up the message of the new customer. This arrangement allows the sign company to maintain at least some level of income when demand for space is weak. About 30% of Lamar’s billboards are general circulation Bulletins (not directionals), and management estimates between 10% and 15% of advertising renewals for these signs are on the preemptive basis.
During the conference call, a securities analyst asked management’s opinion of the price that Clear Channel paid to acquire AK Media. Management stated that the AK Media plant had “great franchises” in Boston and Seattle and the acquisition seemed attractive at the stated price. The acquired billboards were described as “underutilized,” with the potential for higher income when melded into the Clear Channel national sales efforts.
Lamar sees the billboard industry continuing to struggle for the rest of 2001 and much of 2002. The company expects to have difficulty pre-selling its inventory as far in advance as it normally does. During the past several years, the company has signed up advertisers in advance for about 70% of its annual capacity by the end of January. Such “visibility” of customer sales in future months is unlikely to exist in January 2002. However, management is optimistic that financial results will improve relatively quickly once the economy improves and advertising spending recovers.