On February 13, 2003, Lamar Advertising Company reported its fourth quarter and full-year earnings for 2002, with improvements over the same periods in 2001. Revenue from airport advertising picked up in the final three months of the year, which boosted full-year results. Net revenue increased 9% in the fourth quarter compared to 2001, and revenue for the full year ending December 31, 2002 was up 6% over the prior year.
After suffering a loss from operations of $28,087,000 in 2001, the company reported an operating profit of $56,171,000 for 2002. The improvement was a result of higher revenue and lower charges for depreciation and amortization. Other expenses actually increased as a percentage of sales. Direct Advertising expenses rose from 34.5% of revenue last year to 35.4% in 2002. General and Administrative expenses also increased as a percentage of revenue, rising from 20.7% to 21.6%.
Interest expense declined from $126,861,000 last year to $107,272,000 in 2002. It had been 17.4% of revenue in 2001, but dropped to 13.8% in the latest year. While the company reported another net loss for the year, it was smaller than the loss in 2001. In 2002, Lamar lost $36,328,000 compared to $108,634,000 the year before. Management is encouraged by the turnaround and believes that the company is back on the track to profitability.
The company also reported that billboard occupancy seems to be improving, even if only slightly. The improvement was greatest in the previously depressed Poster inventory. Poster occupancy in the fourth quarter improved to 61% from 57% during the same period in 2001. Bulletin occupancy was also up, rising to 74% in 2002 versus 72% the prior year. Occupancy for Lamar’s inventory during much of the 1990s was typically around 85%. Management believes that the higher level is unlikely to be achieved again until 2004 or possibly 2005. The weak economy has reduced ad spending for many media companies. About 70% of the Lamar’s total income is derived from Bulletins.
Management reported that the pace of acquisitions slowed in the past year, and expected revenue from billboards acquired last year has not been as high as anticipated. The Company’s acquisition prices were based primarily on a multiple of ten times (10X) “forward cash flow”, meaning the cash flow to be generated in the year following an acquisition. However, the weak economy and low ad spending prevented the acquired inventory from reaching its expected revenue levels. Consequently, cash flow was lower and the price paid was a higher multiple. Management estimates that this resulted in an effective multiple of 10.8 times cash flow instead of 10 times cash flow. With the outlook for continuing weakness in cash flow of many target companies, Lamar has reduced its bid price in many cases. Since many sellers are not willing to reduce their hopes and price expectations, fewer acquisitions are taking place. The gap between a willing buyer’s bid for a billboard business and a willing seller’s asking price has widened. This “bid – asked” gap is likely to remain wide until the outlook for billboard revenue improves or sellers lower their expectations.
The company also described other aspects of its business in the conference call with securities analysts.
- Political ads helped the industry substantially in 2002. The record amount of spending on political messages in the U.S. during the past year helped cash flow at nearly all media companies. Billboards got their share, which helped keep occupancy at levels higher than the general economy would have supported.
- Ad spending in large metropolitan markets is coming back faster than in rural areas. This is the opposite of the rapid drop in revenue in major markets when the recession began.
- The market’s apparent recovery from the most recent recession is similar to the pattern that developed after the 1991 recession. While there are certainly differences in economic circumstances, many aspects of this recovery for the billboard market are reminiscent of a decade earlier.
- In a refinancing that occurred in the fourth quarter, Lamar issued new debt at an interest rate of 7.25% to pay off more expensive bonds carrying interest of 9.625%. This will provide a substantial savings in interest expense in coming years.
- Lamar’s capital expenditures were lower than expected for 2002. The company had anticipated spending about $85 million, but actually laid out just $78 million. Part of the reduction was due to the lower level of acquisitions. With less inventory acquired, there was less need to make improvements to signs. A further reduction in capital expenditures should occur in 2003, with the range expected to be from $65 million to $70 million.
- Business for 2003 looks the same or slightly better than 2002. “Booked business” is up about 1% so far in the current year. Advertising rates are up very slightly in the Poster market and about even with last year in Bulletins. Occupancy needs to improve before pricing will rise much.
- Lamar tends to have more small business customers than Viacom and Clear Channel have. Lamar currently has about 48,000 customers in 44 states.
- Certain expenses were up in 2002, which penalized earnings. Taxes and licenses increased by some $700,000 due to acquisitions over the past two years. The company also opened a printing plant in Las Vegas at a cost of nearly $500,000 in order to reduce future costs with outside printing vendors.
- Like most other billboard companies, Lamar’s annual expenses are largely fixed rather than variable. Fixed or semi-fixed expenses include items such as land leases, labor, taxes and licenses, insurance and lighting. These expenses are necessary even if the billboard faces do not have high occupancy. About 15% of expenses are variable with the volume of sales, including commissions to some extent, and printing.