Sean Eugene Reilly - Lamar Advertising Co. Keith Istre - Lamar Advertising Co..
Marci L. Ryvicker - Wells Fargo Securities LLC David W. Miller - Loop Capital Alexia S. Quadrani - JPMorgan Securities LLC Benjamin Daniel Swinburne - Morgan Stanley & Co. LLC.
Excuse me, everyone. We now have Sean Reilly and Keith Istre 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 future financial performance, strategic goals, plans and objectives including with respect to the amount and timing of any distributions to stockholders.
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 and the company's third quarter 2016 earnings release and its most recent annual report on Form 10-K as updated or supplemented by its quarterly reports on Form 10-Q. Lamar refers you to those documents.
Lamar's third quarter 2016 earnings release, which contains information required by Regulation G regarding certain non-GAAP financial measures, was furnished to the SEC on a Form 8-K this morning and is available on the Investors section of Lamar's website, www.lamar.com. I would now like to turn this conference over to Sean Reilly. Mr.
Reilly, you may begin..
Thank you, Chantelle. Good morning, all, and welcome to Lamar's Q3 2016 earnings call. Certainly a lot to like about our performance in Q3. As we highlighted in the press release, digital same-board performance was stellar, up 6.6%.
And our overall top line and bottom line numbers keep us optimistic about finishing 2016 at the top end of our AFFO per share guidance. The markets acquired from Clear Channel earlier this year are now fully integrated and performing well.
And let me also remind everyone that we expect to raise our dividend another 10% next year, marking the fourth year in a row we've raised our distribution 10%. Regarding Q4 pro forma revenue guidance, pacings indicate low single-digit pro forma revenue growth at this moment in time.
I will now turn it over to Keith for some more detail on the numbers..
All right. Good morning, everyone. Just to recap some of the metrics in the press release. The acquisition-adjusted revenue for the quarter was up 3.6%. Just a reminder from the last call, that used to be titled Pro Forma Revenue, but we changed that and renamed it in Q2 of this year. The consolidated expense increased 3.3%.
That's slightly higher than our norm. This was primarily due to a comp issue from Q3 of last year. Q3's consolidated expenses last year were the lowest expense quarter for 2015. To illustrate what I'm saying, if you look at our Q2 consolidated expenses, they were $211 million. Q3's consolidated expenses for 2016 were $210 million.
So our run rate was the same for both quarters, but again, we had a tougher comp in Q3. For the year, our consolidated expenses are up 2.5%. If you remember, at the beginning of this year, we guided for approximately 2% growth in consolidated expenses for the year and that's where we should end up.
To note, operating margins before corporate overhead in Q3 were 49.5%. After corporate overhead, they were 45.7%. That's the best margin quarter we've had this year. Sean just mentioned dividends. Free cash flow for 2016 before dividends this year of approximately $290 million will be in excess of $400 million.
CapEx for 2016 should come in right around $100 million. Last year, it was $110 million. And our total debt leverage as of September 30 was 3.6 times.
Sean?.
Great. Thanks, Keith. Let me give a little color on pro forma performance by region. Give you a sense of regional strength and weaknesses. No real surprise here. Strongest growth has been on the coasts, weakest in the oil patch.
I do want to highlight that our Southwest region, with the most oil patch exposure, was up 2% on the top in Q3 and is positive on the top and bottom year to-date. And I just think that speaks to the resiliency of our platform and was great work in a tough climate for those folks in the oil patch. Digital units.
We ended the quarter with 2,542 digital units, keeping in mind that 171 of those came from Clear Channel. And I mentioned the stellar performance, same-unit revenue was up 6.6%. That gives us a lot of confidence as we layer in our plans next year for growing our digital platform. Local/national sales mix.
We were 77% local, 23% national in Q3 of this year. That mirrors Q2. The pro forma growth was 2.3% on the local side and 5.4% on the national side. So year to date, national is still pacing ahead of local. Looks like Q4, those trend lines will reverse a little bit.
And I still believe that we'll finish up the year with those pro forma growth rates being relatively the same. On key verticals, I'm going to just tick through the top five to give you a sense of how our largest verticals are performing. Restaurants being our largest at 12% of our book was up 3% in Q3.
Service revenue, which is also 12%, was up 14% in Q3. Hospitals and Healthcare was up 4%. Retail was up 3%. And Amusements, Entertainment and Sports was up 8% in Q3. So our top five verticals are doing really well. A couple of others to highlight, Beverages, mostly beer, popped into our top 10 and is now 3% of our book.
It was up 44% in Q3, so we really got a lift out of beer. And Real Estate was also extremely strong in Q3. It was up 14%. So with that, Chantelle, I'm happy to open it up for questions..
Thank you very much. Ladies and gentlemen, at this time, we will open the floor for questions. Our first question will come from Marci Ryvicker, Wells Fargo..
Thanks. Couple questions, I guess, on the current pace. Sean, you said up low single digits. Is that a deceleration from the third quarter? And then also related to that. I know Political has sort of added 50 basis points to your growth.
Can you talk to that for both Q3 and Q4?.
Yes. Thanks, Marci. So Political, I would have to describe it as coming in late, but came in pretty strong. If you recall, in the summertime, we were a little nervous about our political pacings. And at the end of the day, it looks like our Political for 2016 is going to be $1 million more than it was in 2014, which was the last cycle.
It should come in at about $8.5 million. Quite frankly, it's not Election Day yet and we're still getting Political trickling in. October looks good. I'm not real happy with what I'm seeing for the holiday season and so that gives us a little bit of pause to be cautious with the guidance.
It could very well be that people are waiting till after Election Day to layer in their plans. But we'll see where it comes out. We'll leave it at low singles for now and hope for a good holiday season..
Can you just talk about the Auto category? And then one more question would be, how is same-board digital trending now?.
So, Auto has been a little weak. For the quarter, it came in at minus 3. For year-to-date, I don't have that number in front of me, but year-to-date, it's kind of flattish. So we'd like to see a little more activity there.
In the same-board digital, for where we are today, seems to be positive and in good shape, we expect for it to outperform the rest of our platform going forward. It'll still be the strongest product we have out there on pro forma same-board growth..
Got it, thank you very much..
Yeah..
Thank you. Our next question will come from David Miller, Loop Capital Markets..
Yeah, hey, guys. Congratulations on the stellar results. Sean, it's been almost a year since you acquired the 5,500 extra displays from Clear Channel back in January. Just wondering what you've learned from those markets? Correct me if I'm wrong.
I think a lot of those markets represented brand new markets for you guys at the time, much larger markets than I think you guys had been used to operating in in the past.
What have you learned from those markets that you could apply to maybe some other markets? And do you feel like everything's kind of integrated the way you want it now or is there still work to be done on that front? Thanks a lot..
Sure. So yeah, the Clear Channel markets were all new markets for us, places like Seattle and Des Moines and Cleveland and Columbus and Memphis and Reno. And number one, we went in and installed some systems that helped us on the expense side. That happened pretty quickly. So on the margin front, we're operating at better margins than we inherited.
And that was a very pleasant experience. On the top line, it took us a little bit of time to make that gel, and mostly on the local sales front, and we're seeing a nice lift there. So, I feel like we're hitting our stride. If you go to any of those markets, you'll see that the boards have been spruced up. They've been branded Lamar.
And all that work's been done and they're fully integrated. So it's been a pleasant experience..
Okay. Thank you..
Thank you. Our next question will come from Alexia Quadrani, JPMorgan..
Thank you. Just on the strength on the digital billboards, you guys have had such success with that, which seems to be such a big growth driver for you.
I guess is there any consideration of increasing sort of the rollout of digital boards next year or do you want to stay measured as you planned? And I know this is a difficult question to ask; I've asked it before. But I know you have a lot more information than I do.
Any sense in terms of what is the saturation in the market? How far – what percentage of boards can be digital and where you feel that is the right balance versus static longer term?.
So certainly being up 6.6% in the third quarter gives us a lot of confidence as we lay in our plans for next year's digital deployment. This year, we wanted to see how it played out. And we're going to come in at probably – not counting the new Clear Channel boards, probably somewhere around 110-ish. So a little lighter than our usual build-out.
I would anticipate that we will accelerate that going into 2017. I don't have a number for you yet. But all the trend lines are indicating that we should be more aggressive next year than we were this year. Traditionally, I've kind of said that 30% of a market's total revenues coming from digital seems to be about where it's shaking out.
We have some markets that are more than that. And we have a number of markets that are below that. If you look at our whole footprint, we're at about 20%. So give or take $300 million on give or take $1.5 billion, which also tells me that we've got some running room. But those are guesstimates. We still have a lot to learn about digital.
I would point out the UK's experience. In the UK, digital billing for out-of-home has surpassed 50%, which is quite a number. But anyway, that's where we are. I think we still have runway. Even if it tops out at 30%, we're at 20%. So we've got lots of running room and the platform's growing..
Thank you..
Thank you. Our last question will come from Ben Swinburne, Morgan Stanley..
Hey. Good morning, guys. Just a quick CapEx question. I think you guys came in a little lighter or you're coming in a little lighter than the initial guidance.
Is that due to the lower digital deployment or anything else you're doing on the efficiency front? And are there sort of trends in the digital board costs that might give you additional tailwinds into next year on a per board basis? Or any other color you can give us on capital spending..
Sure. I think it is a tad lighter on the new builds, but the most pleasant surprise, Ben, has been what it costs us on the maintenance CapEx side as we retire early-generation digitals. Certainly the cost has come down. But more importantly, the performance has been enhanced.
We're experiencing a much longer life from these units than we had anticipated when we first started deploying digital some 10 years, 12 years ago.
So it's a combination of costs coming down, useful life being prolonged and really just a much more efficient unit that is coming in from all of our vendors, really, at a price point that has been pleasant to watch..
So, just to make sure I hear you right, you're retiring Gen1 digital boards at a slower pace than maybe you expected or we expected earlier?.
Yes, so both. Yeah, so we're getting a longer life from the ones we deployed. Where we expected a seven-year life from units that we deployed in 2007, 2008, we're experiencing a 10-year life out of those. And those numbers are only getting better..
Yes. Thank you..
Thank you. At this time, we have no further questions in the queue..
Well, thank you, Chantelle. And thank you all for being on the call. We'll get together next year and put a wrap on 2016. Thanks..
Thank you very much. Ladies and gentlemen, at this time, this conference has now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you..