Pursuit Attractions and Hospitality Inc (PRSU) 2017 Q2 法說會逐字稿

Welcome to the Viad Corp's Second Quarter Earnings Conference Call. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect. At this point, I'd like introduce Ms. Carrie Long. Ma'am, you may begin.

Thank you, and good afternoon. Thank you for all of us for joining us on Viad's 2017 Second Quarter Earnings Conference Call. During the call, you'll be hearing from Steve Moster, Viad's President and CEO; and Ellen Ingersoll, our Chief Financial Officer. Certain statements made during this call which are not historical facts may constitute forward-looking statements. Information concerning business and other risk factors that could cause actual results to materially differ from those in the forward-looking statements can be found in Viad's annual and quarterly report filed with the SEC. We'll be referring to certain non-GAAP measures during the call today, and important disclosures regarding these measures can be found in Table 2 of our earnings press release, which is available on our website at www.viad.com.

With that I'll introduce Steve Moster.

Thank you for joining us on today's call. Viad delivered strong second quarter results with better-than-expected growth at both business units. Our consolidated revenue increased 12.3% year-over-year, and our income per share before other items grew 17.3%, surpassing the high end of our prior guidance range by $0.23. We continue to see strength in key metrics like same-show growth at GES and visitation and RevPAR growth at Pursuit. GES delivered stronger-than-expected revenue growth of about 12%, with its adjusted segment EBITDA margin expanding to 12.5%. GES's adjusted operating income came in about $3.5 million better than our prior guidance, reflecting broad-based strength across the business. Our base same-show revenue in the U.S. grew by a larger-than-expected 7.5%. We also saw better-than-expected growth from our major nonannual events, with positive show rotation of about $14 million in revenue versus our expectation of about $10 million. Revenue from short-term bookings remained strong, and we continue to see new business wins internationally. We are benefiting from healthy industry fundamentals, and our actions to position GES as the preferred global full-service provider for live events.

Our acquisition of ON Services is tracking in line with expectations. The integration is going well, and our investment thesis in this leading audio-visual service provider is proving to be sound. As we have commented in the past, this acquisition gives us important scale in the $2 billion U.S. audio-visual event production market and provides both revenue synergies from cross-selling and cost synergies from insourcing AV equipment that would otherwise need to be sub-hired from a third party. During the second quarter, we successfully completed our largest insourcing event to date, the American Neurological Association annual meeting. Our in-house AV team had serviced this complex event prior to the acquisition of ON Services. This year, we are able to leverage the resources of ON Services, and I'm pleased to report that through reduced rentals and strong execution, we drove significant margin improvement on this event versus its prior occurrence.

Our AV team continues to work hard towards capitalizing on more insourcing opportunities like this, and we're cultivating a healthy pipeline of new revenue opportunities.

Additionally, our recent acquisition of the Poken event engagement technology is garnering significant interest from clients. The pairing of this solution with our existing restoration software provides event organizers even more insightful analytics and reporting to drive enhanced event performance. And we're seeing good traction in selling the combined offering. We also continue to have success cross-selling audio-visual services and event accommodations to existing GES clients, which included E3, the Paris Air Show and Money20/20 Europe during the second quarter.

In addition to driving growth in higher-margin service lines, we continue to make gains in underperforming higher-margin segments in the live events market. We recently announced some exciting new projects in the consumer event space. In collaboration with HBO, we are designing and building a new 10,000 square foot interactive experience based on the hit series, Game of Thrones, that will begin a worldwide tour this fall. This exhibition will immerse fans in the center of the Seven Kingdoms for an up close and personal look at authentic props, costumes and set decorations from the show.

We also announced the creation of the newest Harry Potter themed environment, with a holiday twist called Christmas in the Wizarding World. These holiday installations will debut in select shopping centers this fall. We've been touring the highly successful Harry Potter, The Exhibition for almost a decade, and we're excited to expand upon its success with these new holiday-themed exhibits.

Overall, GES is performing well with broad-based business momentum and favorable industry trends. With the strong first half in 2017 behind us and a solid outlook for the balance of the year, we believe we will exceed our previously announced full year growth and profitability targets for GES.

Now let me switch gears to Pursuit, where we had another great story. Pursuit kicked off its 2017 peak season on a strong note, with revenue growth of 10.3% and adjusted segment operating income that exceeded our prior guidance by approximately $2 million. About half of the profitability upside was due to business interruption recoveries related to the Mount Royal Hotel fire that were not included in our prior guidance. The remaining upside reflects increased visitation and great results from our revenue management initiatives and the investments we made towards our Refresh, Build, Buy strategy.

During the second quarter, we saw significant improvement in our key performance indicators. Same-store passengers at our attractions increased 13.3%, with revenue per passenger up 21.6%. At our hospitality assets, same-store RevPAR increased 4.5%. Our Banff Gondola, which finished a $22 million renovation last year was the key driver of our attractions revenue growth this quarter. I'm happy to report that our investment to upgrade this attraction is exceeding expectations. Compared to its pre-renovation performance in 2015, year-to-date revenue from the Gondola was up 46% on a passenger increase of 19% and an increase in revenue per passenger from ticket sales, retail and dining. We made several other refresh and enhancements to our properties during this past off-season, which are receiving strong guest feedback and driving revenue growth. At our Glacier Discovery Centre, our guests are enjoying the upgrades we made to the 2 restaurants. The center is the starting point for our iconic Glacier Adventure and Glacier Skywalk attractions and welcomes over 1 million visitors each year.

We also made some impactful renovations to our historic and iconic Prince of Wales Hotel that enhances the charm of this picturesque property as it celebrates its 90th anniversary this year. Executing on the build component of our strategy, we introduced new tiny home village at our St. Mary's property adjacent to the Glacier National Park. This village which opened last week comprises of 10 properties that guests can rent on a per night basis, similar to cabin rental. This concept capitalizes on an emerging market and is unique to the Glacier National Park area. We're encouraged by the initial demand which has been stronger than we expected, and we have the capacity to double its size in future years if there is sufficient demand for additional units. Another build initiative that our team is working on is the reimagination of approximately 100 acres of under -- undeveloped land adjacent to the Glacier National Park that we acquired in connection with our purchase of the West Glacier Properties in 2014.

We are nearly through the permitting process for the development of a new RV park and cabin village that will have approximately 100 full-sized RV slips and 20 guest cabins. We expect the park to be fully operational for the 2019 season, and depending on construction timelines, we may have a portion of it online during 2018. The RV park market is quite fragmented in the region, with limited supply to satisfy the 2.9 million visitors to Glacier National Park. Our site is ideally located at the park entrance. And with this established -- with our established presence in the area, this makes an ideal project with lucrative economics and expected high-yield returns.

Finally, our recent acquisition of FlyOver Canada attraction in Vancouver is performing well and delivering results that are in line with our expectations. We continue to evaluate opportunities to expand this high-margin attraction into additional markets.

I'm also happy to report that we recently resolved our insurance claims related to the fire at the Mount Royal Hotel. Our insurers will pay us a total of approximately $35 million, including about $4.8 million for business interruption and about $30.2 million to reopen the property.

Currently, we anticipate spending an incremental $5 million more in order to provide an upgraded guest experience that maximizes returns from this asset.

We've made good progress towards reopening the Mount Royal property. Some of our retail tenants have already reoccupied their space, and the remainder are expected to be online before the end of the year. In addition, we expect to reopen the on-site dining outlets later this year. As it relates to the hotel itself, we are still tracking towards a grand reopening midyear 2018. With the Mount Royal Hotel insurance claims now resolved, our stronger-than-expected start to the peak season and a favorable outlook to the balance of the year, we are now -- we now expect to exceed our prior full year guidance for Pursuit.

And now I'd like to turn it over to Ellen to provide some more color on our financials. Ellen?

Thanks, Steve. As Steve mentioned earlier, our results for the second quarter of 2017 came in better than our prior guidance with stronger-than-expected performance from both GES and Pursuit. Our income before other items was $1.22 per share on revenue of $364.8 million, adjusted segment EBITDA of $55 million and adjusted segment operating income of $40.5 million.

As a reminder, by definition, income before other items, adjusted segment EBITDA and adjusted segment operating income exclude restructuring and impairment charges or recoveries, resolution of tax matters and acquisition transaction-related integration cost.

A reconciliation of these non-GAAP measures to net income can be found in Table 2 of the earnings press release. As compared to the 2016 second quarter, consolidated revenue increased 12.3% or $40 million, adjusted segment EBITDA increased $10.1 million and adjusted segment operating income increased $5.7 million, reflecting growth at both business units.

Moving on to the business group results. GES second quarter revenue was $320.1 million, up 12.2% or $34.7 million versus the 2016 second quarter.

On an organic basis, which excludes the impact of acquisitions and exchange rate variances, GES revenue increased $25.3 million or 9%. GES U.S. organic revenue increased $5.1 million or 2.4%, primarily due to base same-show revenue growth of 7.5% and positive show rotation of approximately $4 million. Partially offset by certain nonrecurring business in 2016 that we discussed during our 2016 third quarter conference call.

Specifically, we did not renew an existing contract for a portfolio of events. As we align our resources against higher profit opportunities, we made the decision to seek a meaningful price increase on that contract to bring it more in line with market, and the organizer chose to take the business elsewhere.

Excluding the impact of that nonrecurring business, U.S. segment organic revenue would've increased by 6% versus the 2016 second quarter. Organic revenue for GES international segment increased $20 million or 27.5%, primarily due to positive show rotation of approximately $10 million and continued new business wins.

The acquisitions of ON Services and Poken contributed incremental revenue of $17.3 million during the second quarter, which was partially offset by a $7.9 million revenue decline from unfavorable currency translation. GES's adjusted segment EBITDA was $39.9 million, up $6.2 million from the 2016 quarter. U.S. adjusted segment EBITDA increased $1.6 million, primarily due to contributions from the ON Services acquisition, partially offset by higher compensation expense. International adjusted segment EBITDA increased $4.5 million, primarily due to higher revenue and strong operating leverage.

GES's adjusted segment operating income was $30.5 million, an increase of $3.1 million versus the prior year quarter, including incremental depreciation and amortization expense of $3 million primarily due to the ON Services and Poken acquisition.

At Pursuit, second quarter revenue was $44.7 million, up 10.3% or $4.2 million year-over-year.

On an organic basis, which excludes the impact of acquisitions and exchange rate variances, Pursuit's revenue increased $2.9 million or 7.3%.

The organic revenue growth was primarily driven by our high-margin attractions, which more than offset expected declines in package tours and hospitality. Both the Banff Gondola and the Glacier Adventure saw strong visitation and higher revenue per passenger year-over-year. The package tours revenue decline was about $4 million, reflecting our downsizing of that lower margin line of business.

Hospitality revenue was down about $500,000 due to the fire-related closure of the Mount Royal Hotel, which generated revenue of about $1.5 million during the 2016 second quarter.

We saw improved RevPAR across most of our other hospitality assets. The acquisition of FlyOver Canada contributed incremental revenue of $2.4 million during the second quarter, which is partially offset by $1.1 million revenue decline from unfavorable currency translation.

Pursuit's second quarter adjusted segment EBITDA of $15.1 million increased $3.9 million year-over-year, primarily due to growth in revenue from our high-margin attractions.

Additionally, in connection with receiving insurance proceeds related to the Mount Royal Hotel fire of $3.7 million during the quarter, we recognized a business interruption gain of $1.1 million, which represents lost profits of about $400,000 in the first quarter and $700,000 in the second quarter.

Pursuit's second quarter adjusted segment operating income was $10 million, an increase of $2.6 million year-over-year, including incremental depreciation and amortization expense of about $600,000 from the acquisition of FlyOver Canada.

Next, I'll cover some cash flow and balance sheet items before discussing 2017 guidance. Viad's consolidated cash flow from operations was $27 million for the 2017 second quarter, down from $37.3 million in 2016, primarily due to unfavorable working capital changes, partially offset by higher income.

Of the $3.7 million of insurance proceeds we received during the quarter, $1.5 million representing contra expense and business interruption was included in our cash flow from operations. The remaining $2.2 million, representing impairment recoveries, was recorded at cash flow from investing activities.

Capital expenditures totaled $12.8 million for the quarter as compared to $13.3 million in 2016. At the end of the quarter, our cash and cash equivalents totaled $44 million, debt was $242.6 million, and our debt-to-capital ratio is 37%.

Now moving on to guidance. And as Steve noted, we're raising our full year guidance to incorporate the resolution of our insurance claims related to the Mount Royal Hotel and the expectation that we will realize stronger operational performance at both GES and Pursuit than previously anticipated. We now expect full year revenue to increase by 6% to 8% versus our prior guidance of 5%. Adjusted segment EBITDA is now expected to be in the range of $153.5 million to $157.5 million, which is up $9 million from our prior guidance, and includes about $3 million related to the Mount Royal Hotel that was previously -- that was not previously contemplated in our guidance range.

The remaining $6 million increase is put evenly between GES and Pursuit and is reflective of our stronger-than-anticipated year-to-date performance and our outlook for the balance of the year.

Our full year cash flow from operations is expected to be in the range of $115 million to $125 million, and capital expenditures are expected to be in the range of $62 million to $66 million, which now includes about $18 million related to the reconstruction of the Mount Royal Hotel.

For the third quarter, we expect income per share of $1.23 to $1.38 as compared to $1.74 in the 2016 quarter. The expected decline primarily reflects negative show rotation and the downsizing of package tours, partially offset by contributions from our recent acquisitions and underlying business growth.

For GES, we expect third quarter revenues to decrease by approximately $67 million to $57 million from the 2016 quarter.

We expect negative show rotation of about $80 million in revenue to be partially offset by continued same-show growth and incremental revenue of $10 million to $12 million from the acquisitions of ON Services and Poken.

GES's third quarter adjusted segment operating income is expected to decline by about $23 million to $20 million versus the 2016 quarter, primarily as a result of lower revenue as well as approximately $2 million of additional depreciation and amortization expense.

For Pursuit, we expect third quarter revenue to increase by approximately $2.5 million to $7.5 million from the 2016 quarter. This guidance range includes a revenue decline of about $11 million from the combination of our continued downsizing of package tours, the Mount Royal Hotel closure and unfavorable currency translation.

We expect these headwinds to be more than offset by growth across the rest of the Pursuit business and revenue of $3 million to $4 million from the acquisition of FlyOver Canada.

Pursuit's third quarter adjusted segment operating income is expected to increase by about $6 million to $9 million from the 2016 quarter, reflecting strong revenue growth from our higher-margin attractions and hotels. We expect additional depreciation and amortization expense of about $1 million year-over-year.

Additional details regarding our 2017 guidance and the resolution of our Mount Royal Hotel insurance claim can be found in the earnings press release. Steve, back to you.

Thanks, Ellen. In closing, I'm really encouraged by our performance to date and excited about the second half of 2017. We continue to see favorable industry conditions on both sides of our business. Our teams remained focused on delivering excellent service for our customers, driving strong results for our shareholders and executing our strategic goals to enhance shareholder value in the years to come.

I want to thank the entire team for their commitment to our strategy and to our customers. And with that, we will open the call up for questions. Brian, can you please open the call?

(Operator Instructions) And we now have our first question, and it's from John Healy.

Steve, I was hoping you could give us a little bit more color about the opportunity with Game of Thrones. I was kind of curious how those items kind of come together, where are you guys from a selling process standpoint and maybe what the pipe looks like there and also how it kind of builds in from a revenue standpoint. Is it -- do you get paid for the production of the -- for the exhibit? Or do you continually get paid as it tours? And I was just trying to understand how this one might compare in size and scope to what you have with Harry Potter?

Sure. Thanks, John. We're very excited about the Game of Thrones opportunity, which again, we'll launch later this fall. The way we sell these or these come up is we're constantly working with the studios around major releases. And when there's an opportunity, we basically enter into a licensing agreement with those studios for brands like Game of Thrones. The financial way it works is that it's really -- we work with local promoters that will bring it to a certain city. In exchange for that, we're usually given a minimum guarantee as well as sharing in the upside in both ticket sales and retail, if there's retail component attached to it. So that -- so we will experience revenue throughout the year as the Game of Thrones or our other touring exhibitions go to one market after another. In terms of scale, we're very excited about it. We think it's going to have a lot of appeal to the audience that's attending the Game of Thrones, but we also recognize that in terms of scale, it's overall a small percentage of our revenue. And we'll see how it plays out once it opens in the fall. So we're very excited about it.

Great. And I just wanted to ask from a kind of a going-forward basis for the third quarter, and not that just one for Pursuit, was there any sort of major sort of guidance associated with some of the wildfires in Western Canada? Or is that kind of a wait-and-see approach for you guys right now?

Well, British Columbia has given a state of emergency around the wildfires that are in that province. And obviously, we care a lot about the people that are impacted by these fires. However, our assets are about 300 to 400 miles southeast where the fires are. And so they're really not at this time impacted by what's happening in British Columbia.

And our next question is from Steve O'Hara.

Just on the development opportunity with Pursuit, can you just talk about maybe returns you target there? And what other opportunities that you might have in the portfolio for other things like this?

Sure, we're really excited about some of the organic opportunities that we announced today on the call as well as other things that we have in the pipeline. As we've talked before, we're very transparent in what we're looking for in terms of our returns from these investments. So we target 15% or greater IRR, whether that's an acquisition or any kind of internal or organic opportunity. So very excited about the RV park, which will come online in 2019, potentially in 2018 if we're able to finish all the permitting and the construction timeline cooperates with us. We're excited about Tiny Homes, which we launched this season. And we have other areas, whether they be renovations or refresh projects or new builds like the 2 I just discussed. There are other opportunities within our portfolio for those type of projects, and we're excited about that going forward.

Okay. And then just -- I mean, so if there's these opportunities that are available, what's stopping you from doing them now? Is it bandwidth? Is it capital? How do you think about that?

We're doing this at a pace, a pretty aggressive pace, as you think about in the last couple of years, you have the Gondola, you've had the Mount Royal Hotel or you will have the Mount Royal Hotel, you'll have the Discovery Centre, you'll have the RV park. And so we're doing this at a pace that we think we can design and develop the best experience for our guests. That's our primary focus, is making sure that whatever we develop, that it's the best that it can be. And I think that's what we're doing out of a good clip, and I would expect us to continue with other projects in the future.

Okay. And just maybe going back to the RV park, could you just talk about other projects that were maybe contemplated on that site and maybe why they weren't -- why did the RV park work versus other opportunities out there or other potential opportunities?

Sure. We have -- with the acquisition we did of the West Glacier Properties that we did in 2014, we acquired about 177 acres of land right next to West Glacier, which is essentially at the entrance of the park. And there are a number of different investment opportunities that the team contemplated and looked through. The one thing that was glary to us is that there really wasn't enough accommodations or lodgings in the Glacier National Park area for the 2.9 million visitors that come every year, which is growing at a pretty good clip. We felt that the RV park really fit well within the space, good economic returns. We also believe that we'll benefit from the visitors that stay at the RV park coming in to West Glacier and spending money at our food and beverage offering, our retail, our gas station, all of our assets that are essentially right next door to where the RV park will be built. So again, we see a gap in lodging around the area, and that's why it rose to the highest priority for us to do.

Okay. And so just going back to the hotel renovation, and I guess refresh maybe is the right word too. I assume that you're talking about the same kind of return from that investment as well. Or is that maybe less because you kind of have to do it? I mean, or should we think about kind of the returns you target there as well?

No, we're confident that it'll have greater than our 15% hurdle. As you've seen with some of our other investments, when we are doing organic opportunities, refreshes, things like that, it's -- they tend to drive higher returns. And so we're looking for strong returns out of the Mount Royal Hotel once we're able to open it up to the public.

And our next question is from Marco Rodriguez.

I was wondering if maybe you could just talk a little bit more about these industry trends that you're seeing last quarter, and how you kind of see those trends through this quarter playing out?

Yes, so on the GES side of our business, one of the main things we look at is the same-show growth. And as a refresher to everybody, these are shows that happen the same quarter year-over-year in the same city. And it is -- it can constitute somewhere between, say, 30% and 50% of our revenue each quarter. We have seen kind of mid-single-digit growth from -- in this industry for the last several quarters. That's what we anticipated for the second quarter of 2017. Obviously, came in stronger. We expect it to be still mid-single digits as we go through the balance of 2017. So that's one that -- based on what we see, it's been stronger than we have expected. And that's propelling some of the growth that you see at GES. On the Pursuit side of our business, what we talked about in the second quarter, some of our properties aren't open for the full second quarter. So really, what we're talking about mostly are things in the Banff-Jasper area that are open year-round. And so we -- the metrics we look at are obviously the same-store passenger and also revenue per passenger as well as RevPAR for the hotel or hospitality assets. We think that the trends are strong and positive going into the third quarter, which is our busiest season for this side of our business. So we're very optimistic as we go through the third quarter and into the fourth.

Got you. And maybe if you can talk a little bit more on the GES side. I understand the base show growth was pretty high here in comparison to what it has been historically here in the past year or so. But has that been a function of providing more services to your customers, you're gaining more customers or the same customers are just spending more money but doing the exact same services from you guys? Any sort of color there?

Yes, Marco, there's really 3 levers in the same-show growth side. So it's our ability to sell more services to the existing exhibitors or attendees that are attending an event, so it's capturing more of their spend, that's one way that we can influence it. The other is that the event itself grows in size. The net square footage of the event grows in size, and our revenue for many of our services tends to track well with that square footage. And then the last is that it just grows in terms of the number of attendees or the number of exhibitors that are there. And so what we see in the second quarter is obviously a strong same-show growth metric. A lot of that was driven by all 3 of those levers and highlighting where we're able to sell additional services into those events. The metric that you also touched on is our ability to acquire new customers, meaning new events within the quarter. And I think we've looked a little bit at what's happened internationally and the strong growth we've had, a lot of that was from capturing new wins.

Got you. That's helpful. And I'm not sure if I caught this on the call, ON Services and Poken, how are they tracking to expectations?

They're tracking in line with expectations, encouraged by the integration that we've done. And I gave an example of how we're -- through the integration we've been able to insource some of the equipment needs for the events, and that's led to higher margin from those events year-over-year. So again, encouraged by the integration, and it's in line with kind of our expectation.

And our next question is from Peter from Artko Capital.

Just maybe thinking a little further down the line, you guys seem to be -- well, I guess 2 questions. One, are you guys seeing anything in the business environment? There's a lot of uncertainty, I guess, from [Mike Janicek] that I've heard, not in your industry but in general, both from the stub legislation and the uncertainty with the macro policy. So are you guys seeing anything, like within the next year, that will cause you to pause? And I guess the second follow-up to this is you're a different company now with more add-on audio, video, visual things. How do you think about your cost structure in a -- I guess, in a recessionary a scenario?

Yes, good questions, Peter. The first is we are not seeing any negative trends in our business right now. Basically, coming off the second quarter with strong same-show growth, that's very positive for the GES business. And another thing to consider is we tend to lag the overall economy by about 9 months. The reason for this is that companies that are attending an event typically will buy their space a full year in advance of attending that event and buy their services that they may need for that. So we're seeing -- we tend to see things about a 9-month lag if something happens to the overall general economy. The second part of your question is how we'll react to any downturn, given that we now are a different company, we have different services. And I would say we would react the same way that we did in the last downturn. The bulk of our business is still very labor-based, and we have the ability to scale up and down that labor based on the amount of work that we have at any given month or any given event. So we have complemented our current -- our existing business with new services, like technology offerings, like audio-visual, but I think our answer, and the quickest way for us to respond, would be through reduction of our labor.

And we show no further questions at this time. (Operator Instructions)

No more questions, Brian?

Yes, sir. We show no more questions.

Okay. Thanks, everybody, for your questions and your interest in Viad. We look forward to speaking with you again next quarter. Take care.

That concludes today's call. Thank you very much for your participation. You may now disconnect at this time.