Sean Eugene Reilly - Lamar Advertising Co. Keith Istre - Lamar Advertising Co..

Marci L. Ryvicker - Wells Fargo Securities LLC Jason Boisvert Bazinet - Citigroup Global Markets, Inc. David W. Miller - Loop Capital Markets LLC David Phipps - Citigroup Global Markets, Inc. Alexia S. Quadrani - JPMorgan Securities LLC James Davis Hebert - Wells Fargo Securities LLC.

Excuse me, everyone, we now have Sean Reilly and Keith Istre in the 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 in the company's fourth 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 fourth 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 the conference over to Sean Reilly. Mr.

Reilly, you may begin..

Thanks, Chantelle. Good morning, everyone, and welcome to Lamar's Q4 and full year 2016 conference call. Certainly a lot to feel good about in 2016.

The very successful integration of six new markets from Clear Channel; pro forma revenue growth that handily beat GDP; and most importantly, strong growth in our AFFO per share; very clean, very strong operational and financial results. Regarding 2017, pacings indicate low single-digit growth for Q1 with growing momentum as the year progresses.

Every quarter after Q1 is showing acceleration in our pacings. Consequently, our AFFO guidance for 2017 implies pro forma revenue growth in the low mid-single digits. We're characteristically trying to be conservative in our estimates of other components of AFFO, namely maintenance CapEx, tax leakage, and interest expense.

All said, 2017 looks like a solid, steady as she goes year.

Keith?.

Good morning, everyone. Just to click through a couple of the high points in the quarter and the year. For Q4, on a pro forma basis, our consolidated revenue was up 2.0%. Consolidated expenses were up 1.9%, and that translated to a 2.0% increase in EBITDA.

Our EBITDA margins were right at 45%, 44.9%, and that's the highest fourth quarter EBITDA margin we've had in several years. On a full year basis for 2016, our consolidated revenue was $1.5003 billion, which for us is a milestone. It's a record; we've never broke $1.5 billion before, and on a pro forma basis that's up 2.9%.

Consolidated expenses were up 2.3%, and that translated to a pro forma growth in EBITDA of 3.7%. As Sean mentioned, our AFFO for the year came in right where we projected it would as far as the high end of our guidance range. It was $489 million, and that's what we projected last year to be the high end of our range.

And that was translated to $5 per share of AFFO, and that was an 8.9% increase over 2015. On a free cash flow basis, our free cash flow before dividends was approximately $418 million. The company paid out approximately $293 million in dividends in 2016, and that produced $125 million in free cash flow after dividends.

We're expecting free cash flow, even with an anticipated increase in dividends for 2017 of 10% over 2016, to be in excess of $100 million as well. CapEx for 2016 was $107 million, which is what we had targeted last year at this time to be our total CapEx spend.

Last, our total debt was $2.378 billion, and that translates to 3.5 times on a pro forma EBITDA basis which is where the company said it intended to operate at some point between 3 and 4 times going forward. So we're right in the middle of what we had intended.

Sean?.

Great. Thanks. Before we open up for questions, I'll add a little color to what we're seeing with our digital footprint, what our plans are for 2017, and what we're seeing with our customer categories. In 2016 we added about 115 new digital displays, and we absorbed roughly 171 from the Clear Channel acquisition.

So we concluded the year with 2,575 digital displays in the air. Our plans for 2017 are to deploy roughly 150. We're going to step up the pace slightly given that last year our same-board digital performance was up 4%, which gives us a little bit of confidence that we can add the additional capacity.

Q4 was, on the same-board digital side, was 1.2% but much of that was a little bit of a slowdown in December. We're feeling good about how the first quarter is shaping up on the digital side.

Regarding local and national business for Q4, local was up 1.2%; national was up 3.5%, so we concluded the year with local being up 2.5% and national being up 4.2%. Our sense, given the early part of 2017 and where our pacings are, is that national will be slightly weaker than local for all of 2017.

That's just the way the pacings are looking as we sit today, so it wouldn't surprise me if on this call next year we give you a year-to-date 2017 where local was slightly stronger than national.

Categories of business, exceptional strength in the service side, up 12%; good, strong, solid growth on the restaurant side of 3%; and amusement, entertainment and sports at 4%. These are numbers for Q4 of 2016 over Q4 of 2015. There are a couple of advertising categories that are seeking their footing post-election.

I think it's safe to say that hospitals and healthcare are trying to figure out what their future holds, and it's showing up in their ad spend. They were down slightly and continue to be down in Q1. We expect they'll be back when the future of the Affordable Care Act is determined.

And then another category which has struggled for its footing is education. We feel good about education going forward. There were – some of the large commercial colleges that advertise with us that were struggling with their business model.

In the latter part to the Obama administration, we feel like they're going to gain their footing but they were down also in Q4, and looking to get their footing in Q1. So with that color, I'll open it up for questions.

And who we got first?.

Thank you very much. Our first question will come from Marci Ryvicker, Wells Fargo..

Thanks. I have a couple of questions. Sean, you started the call saying that you see acceleration throughout the year. So, I guess, how much visibility do you really have? Is this macro? Are there certain ad categories? And then the one category you didn't mentioned was auto.

And then secondly, when – in terms of the AFFO guide, I know you tend to be conservative but how much is really in your control? Isn't it just CapEx or are there other things that you can do?.

So of the – let me hit the AFFO thing first. On the components of AFFO, we can certainly control maintenance CapEx. Last year, we budgeted $45 million; we came in at $38 million. Part of that exercise was the upside surprise in the cost of digital units and their longevity. So we're budgeting $45 million again; we'll see where that comes out.

You don't want to start in maintenance CapEx, so it's not completely in your control but, yes, we can control that one. We can't really control where interest rates go. We budgeted for two interest rate rises, and it's going to cost us a few pennies on AFFO this year. And then the tax leakage, we're guesstimating that it's going to be roughly the same.

Now should a tax reform package come through and corporate rates drop, we would enjoy a 6% or 7% advantage to our AFFO guide. We're not budgeting that, but that's what would happen if corporate rates drop to 20%.

The numbers I'm giving you on our full year look are our actual pacings, so that's stuff that's on the books that's over and above same time last year..

Okay. And is that macro? I mean, I guess, just to give people comfort because if you're seeing acceleration, I guess, you know where it's coming from..

It's harder for us to, when we look forward, to break out the categories.

But what we think is happening is what you're seeing in other companies' reports, in that it seems like near-term GDP is a little bit lighter than what's going to happen in the back half, and maybe the whole macro is anticipating some sort of fiscal stimulus from either tax cuts or infrastructure spend or both.

But, again, these are actual on the books pacings..

Okay..

We're not (12:14)..

And then auto? And one last one is can you just remind us of your NOL situation? And I know at some point you go through those..

Yeah. I'll turn that one over to Keith. Auto for the fourth quarter was basically flat. It's 6% of our book; it's probably normalized at 6%, and that looks to us like where it's going to stay..

All right. And, Marci, we've got approximately $230 million in NOLs that we're allowed to carry forward to future years..

Okay. Thank you..

Thank you. Out next question will come from Jason Bazinet, Citi..

With you REIT structure, I've always thought of you guys as sort of having an arbitrage machine, in that you can pay for assets that are not REITed in a way that's sort of helpful to your AFFO and sort of helps your equity which was not true prior to the REIT conversion.

Would you mind just talking a little bit about the M&A environment as you sort of see it? Because it still strikes me as a pretty fragmented market..

Yeah. Good question, and it is still a fragmented market. For those who don't follow us for a long period of time since we've become a REIT, we generate, give or take, $120 million in free cash after all obligations; that's distribution, all CapEx, interest and the like.

And we typically deploy that in small fill-in and tuck-in acquisitions, and that activity is ongoing; it's relatively predictable.

And to your point, the outdoor advertising business doesn't the use the language of cap rates, and fortunately the valuation front where they've been in the traditional REIT space, they're not – we're not running around paying 4.5%, 5%, 6% cap rates for the assets we're acquiring.

So, consequently, that's been a predictable and valuable exercise for the company. The largest acquisition that we can point to on valuation for the later course is what we did with Clear Channel last year at this time.

The trailing announced multiple of EBITDA contribution was 12.5x; the forward multiple for us under our management, we promised to the market we bring it in in 2016 at about 11.5x. I'm pleased to report those markets performed slightly better than that, and the forward multiple we ended up paying was more around 11-ish.

So that should give you sort of an indication of....

Yes..

...what's going on out there..

And how would you characterize sort of the – if I was an entrepreneur and I happen to own a bunch of outdoor assets personally, has the interest rate environment caused those assets generically to move up, the multiples that you're citing? Or is it more of a static market where those item market valuations don't really move....

Yeah. Well, so....

...even if public valuations tend to move as rates go lower?.

Typically, when we're doing a transaction, particularly if it's a tuck-in, we're the highest and the best buyer. And it's not going to be perfect information on what we can do with the assets and, of course, from the sellers' point of view they want a good, strong historical multiple of how they perform with the assets.

From our point of view, we care about the multiple we're paying on how the assets will perform going forward, and that delta is what allows us to create value..

Understood. Okay. Thank you very much..

Thank you. Our next question will come from David Miller, Loop Capital Markets..

Yeah. Hey, guys. Congratulations on the stellar results. Sean, with local up 1.2% and national up 3.5%, how much did digital contribute to those growth rates? And then related question, Keith, if you want to chime in. CapEx per digital board, we track that on our models. It's coming down ever so slightly.

Is there a way to kind of curtail digital or CapEx per digital board even further or just take advantage of the myriad of suppliers that are out there? It seems to me that the market's broadened substantially over the last five years with just a number of suppliers from South Korea, in particular, that are making these boards, that are lighter and brighter, and it seems to me it just gives you guys a phenomenal opportunity to lower CapEx for board.

Any comment you have around that would be great. Thanks very much..

Okay. So, David, in Q4 our overall platform and our digital platforms, same-board, was roughly the same. So I don't think there would've been a disproportion of (17:32)..

Okay..

Now, the overall digital platform probably did because we had more units in the air than we did Q4 of 2015. So the overall digital platform probably outperformed the rest of the platform.

Does that make sense? Okay?.

Yeah. Yeah. Got it..

And I'll go ahead and hit the CapEx numbers and what we're seeing out there. There are two things that are going on. When we started deploying digital units back in the 2005, 2006, 2007, 2008 timeframe, the expected life was seven or eight years.

Today, because manufacturers are getting so much better at what they're doing and they're producing units that are more robust and have a longer life, the projected average life of a unit now is 12 years. So that added life is really tremendous for us on our maintenance CapEx projections going forward. And then you also have costs coming down.

Now, the cost curve was dramatically dropping three or five years ago, but we're still getting 5% to 10% reductions in the cost of deployment. So modest reductions in cost, but pretty dramatic increases in useful life..

Okay. Wonderful. Thank you..

Yeah..

Thank you very much. Our next question will come from David Phipps, Citigroup..

Hi. Thank you for taking my question. You enjoyed some tremendous success recently, and the credit markets are robust. And I was curious that when you think of your capital structure, if you're considering simplifying it and, maybe, getting rid of some of the senior subordinated notes so that you just have secured debt and unsecured debt..

So good question. We're approaching a window where some of that is callable, and there's no shortage of smart bankers that are giving us advice on when it's accretive to make that move. Certainly, when those numbers make sense we'll act accordingly. Right now, I really like where our capital structure is; it's almost perfect for being a REIT.

80%, 85% of what we have on our balance sheet is long and fixed, and then we've got a little bit of floating that we can amortize if need be. And so I think our capital structure right now is exactly where we want it to be and, absent a meaningful acquisition, I wouldn't anticipate a whole lot of activity this year..

Just if I can follow-up with that.

If – when it becomes accretive, whatever time that is and the market uplifts (20:46) that way, is it more likely that you would continue to have subordinated debt or is it less likely?.

We're going to be opportunistic, so wherever it makes the most sense and wherever the cheapest cost of capital takes us is probably where we'll end up going..

Fair enough. Thank you for answering my questions..

Thank you. Our next question will come from Alexia Quadrani, JPMorgan..

Questions.

First one is how much visibility do you have on the digital side, I guess, versus the static given your commentary to step up the digital deployment this year? I guess how much flexibility do you have to change course during the year if you see things slow a bit? And then the second question is any more color you can provide on the slight slowdown? Is it sort of year end December holiday spend?.

Yeah. I mean, if you recall – I'll take the second one first, Alexia. If you recall back on our last conference call, I was not real optimistic about how December was going to pan out, and quite frankly it came in kind of the way we thought.

And when we look at the categories that struggled, the one that stood out to me the most was education and, again, it was tied back to some of the problems that were experienced with the commercial colleges. The good news is it appears to us that those problems are being worked out.

There was a big article in The New York Times just the other day about how the commercial colleges are feeling better about their future. And then the other category that was likewise down was on healthcare. Both of those in our book are local, by the way, and so that's, I think, where some of the local softness came from in December.

So we're – getting back to digital and how we handle deployments and how we gauge demand, we're a bottom-up organization when it comes to yield management, and what I mean by that is I don't dictate from Baton Rouge how many boards are going to be deployed.

Rather, our local general managers gauge demand and give us a feel for what they believe can be absorbed in the marketplace. So I think it's the right way to do it. It's a gauge of demand and supply that is on the ground and in touch with our customers every day.

So if our local GM say I don't want any more of it because customers are happy with the supply we've got, then we don't deploy. If they call us up and say, look, I can put two more out here because it makes sense given what I'm seeing in the marketplace, then we send them out.

Does that make sense?.

Yeah. That makes perfect sense..

Okay..

Thanks so much..

Thank you. Our last question will come from Davis Hebert, Wells Fargo..

Good morning, everyone. Thanks for taking my question. I just have one. The transit business, it's pretty small part of your portfolio. You've had some of your rivals secure new deals in airports and things of that nature. I know you do have an airport business.

Just kind of curious, State of the Union of that business from Lamar's perspective, do you see an organic growth opportunity in that space or perhaps even M&A opportunities in that sector? Just kind of curious.

Your thoughts?.

Sure. Good question. Let me start with the fact that both of those businesses, transit and airport, are in our TRS, they are in our taxable REIT subsidiary.

We like those businesses but we tend to have a different approach than the JCDecauxs and OUTFRONTs and Clear Channels of the world in that we pretty much stick to the DMAs that are below the top 20.

So, consequently, our portfolio is a very large portfolio of relatively small transit contracts, so no one contract represents more than 1% of that business. And what that allows us to do is we just sort of incrementally add them over time.

We've added successfully over the last few years, probably, dozens of transit agreements to our portfolio because none of them are meaningful in and of themselves. We don't do a press release on them, but we just kind of slowly grow the business. The airport business is the same way.

We purchased that business a couple of years ago for a modest amount of money, and we've added some franchises to it. And this year we're looking to have, give or take, $30 million in revenues from the airport business and, give or take, $3.5 million in EBITDA contribution. And that'll be across 20 different airport contracts.

So, again, no one big contract is going to make or break us in that business, but we're just going to sort of incrementally add them and we'll wake up in a few years and you'll go, wow, that was fun..

Got it. Okay. Thank you..

Thank you. At this time we have no further questions, so I'd like to turn the conference back over to Sean Reilly..

Well, Chantelle, thank you and thank you, everyone, for listening. Again, we're looking forward to a 2017 that'll be, as I described, solid and steady as she goes, and we look forward to visiting with you on our Q1 2017 call in a few months..

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..