Viad Corp (VVI) 2003 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Thank you for standing by today.

  • Good day everyone and welcome to this Viad first quarter 2003 earnings release.

  • Today's conference is being recorded.

  • At this time I would like to turn the call over to Ms. Ellen Ingersoll, the Chief Financial Officer.

  • Please go ahead ma'am.

  • Ellen M. Ingersoll - CFO

  • Thank you.

  • Good morning.

  • Thank you for attending our conference call.

  • I'd like to remind everyone that certain statements made during this conference call, which are not historical facts, may constitute forward-looking statements.

  • Actual results may differ materially from those projected in the forward-looking statements.

  • Additional information concerning business and other risk factors that could cause actual results to materially differ from those in the forward-looking statements is contained under the caption 'forward-looking statements' in Viad's financial statements, filed with the Securities and Exchange Commission.

  • During today's call we'll refer to Tables 1-3 in the press release, so if you'd like to have the press release in front of you as listen to our comments, you can refer to those tables.

  • The press release is available on our home page at www.viad.com.

  • Historically we have presented financial results, specifically revenue and operating income, on a taxable equivalent basis.

  • Beginning with 2003 results, as we have previously reported, Viad is reporting offering guidance on a GAAP basis only.

  • One last comment before we begin, this conference call may not be recorded or reproduced in transcript without the exclusive written permission of Viad.

  • Now I'll introduce Bob Bohannon, Chairman, CEO and President of Viad Corp.

  • Robert Bohannon - Chairman, President, & CEO

  • Good morning everyone.

  • Let me tell you some of the participants that we have on from the company today.

  • For Travelers Express we have Philip Milne, President;

  • Dave Perrin, CFO;

  • Bill Putney who vets the investments at Travelers, and Gene Benson, who's the controller.

  • GES we have Paul Dykstra, and in Exhibitgroup/Giltspur Kim Fracalossi.

  • Here in Phoenix we have Ellen that you just heard from and Patty Phillips, head of Investor Relations.

  • Let me start by saying I can't find words to tell you how upset and embarrassed we are about the sequence of events that we reported in this morning's press release.

  • Secondly, I apologize, I take responsibility for, and I also apologize on behalf of our team.

  • But the issue is, and the important thing is, to make certain that we get it right, and I'll take you through the sequence of events.

  • When we announced the impairment charge on April 10, I want to point out nothing has changed in the way of cash flows at all, that we talked about then.

  • Rather, the issue has become what EITF pronouncement covers these structured notes.

  • For reference point, and to refresh your memory, what we talked about on the April 10th call, we have about $260m of these structured notes at Travelers, most of which are AAA, principal guaranteed.

  • That hasn't changed.

  • Now let’s talk a bit about the sequence of events.

  • Travelers started purchasing structured notes in 1999, and accounted for them under EITF 9612.

  • As announced April 10th, 2003, as a result of the normal review of the investment portfolio yield, and the change in expected cash flows for certain structured notes, we announced an impairment charge of $11.8m, based on EITF 9612.

  • The company's external auditors reviewed and concurred with the amount of the adjustment, and the application of EITF 9612.

  • On the afternoon of April 22 2003, Viad was informed by its external auditors that they believe the adjustment should have been made under EITF 9920.

  • EITF 9920 was a pronouncement that became effective the second quarter of 2001.

  • So accordingly, the additional impairment charge that we announced today, of $8m, represents the difference between the EITF 9612 and EITF 9920.

  • Had EITF 9920 been applied retroactively, we do not believe there would have been any material affect on the prior year's results.

  • Now if that wasn't enough, in addition to all of that, last evening, April 23rd, we were informed by our external auditors that there was some debate in the firm as to whether or not the structured notes may further need to be accounted for separately as a U.S.

  • Government strip security and an equity tranch[ph] of a collateralized debt obligation.

  • The company and the external auditors are reviewing this issue further, and the impact, if any, may result in additional impairment of as much as $10-15m.

  • I know there are going to be a lot of questions about this, and we're going to be very happy to stay as long as necessary today to answer them.

  • But given that, what I would like to do now is to take you through the businesses.

  • The fact of it is, the quarter would have been a decent quarter had we not had these impairment charges.

  • We reported 26 cents, we had 14 cents of these impairment charges, and so we would have totaled 40 cents.

  • Unfortunately, as is usually the case, this type of news just really obscures some of the good things that are happening in the business.

  • Obviously with the 26 cents reported, the first quarter results fell below the expectations.

  • Payment Services showed great growth in Money Gram, but overall the results were dampened by the impairment charge.

  • During the quarter Viad maintained its financial strength, cash and corporate investments stood at $203m.

  • That does reflect $98m spent on the acquisition of the minority interest in Money Gram on January 17th, and, as announced then, we also paid an $8m dividend to the minority interest at that time.

  • Our debt has decreased $6m since the fourth quarter to $356m.

  • EBITDA cash flows, shown on table two of the press release, was $47.8m for the quarter, down from $62.4 in the first quarter '02.

  • Free cash flow for the quarter was $17.9m, down from $38.4m in the first quarter, and the dividend to the minority interest on Money Gram, the restructuring that we're doing at Exhibitgroup, clearly had some impact on the free cash flow this quarter.

  • You'll recall that when we took you through the impairment on April 10, the impairment charges do affect the revenue as well as the operating income at Travelers.

  • After the impairment charges, they showed a revenue growth of 1.6%, over first quarter '02.

  • Operating income was down 33.5 quarter-over-quarter, again, primarily due to the impairment.

  • Revenue for the Convention and Event services segment fell slightly below expectations, as did operating income.

  • Revenue was down from last year's quarter by 12.9% and operating income was down by 16.4% for the quarter.

  • As we talk about the Convention and Event segment performance, you may want to refer to the results in Table 1 of the press release, which shows revenues and operating income for this segment.

  • Now I'd like to turn it over to Paul Dykstra to make some comments about GES, and that will be followed by comments from Kim Fracalossi, Exhibitgroup/Giltspur.

  • Paul.

  • Paul Dykstra - President & CEO

  • Thanks Bob, good morning everyone.

  • In the first quarter our revenue and operating income were below last year, mostly due to unfavorable show rotation, but in spite of this we produced good cash flow in the quarter.

  • The unfavorable show rotation is related to the Conex ConAg show, this is a very large construction and heavy equipment show that we serviced in the first quarter of 2002, that did not recur in this first quarter of this year.

  • In periods where we have negative show rotation, we try to offset the revenue within the year for the year business.

  • That business was down moderately in the first quarter, which affected our revenue.

  • We will have positive show rotation in the second quarter, but negative show rotation in the third quarter, with IMTS, the International Manufacturing Technology Show, which does not recur this year.

  • Clearly this is a tough environment, but GES has a lot of good news too.

  • We had several strong shows in the quarter, including a very successful consumer electronics show, which was held in January.

  • GES was bigger this year in terms of square footage and attendance than last year.

  • Also in the quarter we resigned nearly $90m of future business, which insures that about 70% of our revenues are contracted through long-term agreements for '03 and into 2004.

  • We remain very bullish on GES' ability to offer strong profits and good cash flow, because we're convinced we're doing the right things to make our company even better.

  • We're seeing very good progress.

  • We're building our management team with top notch, experienced professionals, and our employees, seeing the successes we've had in a very tough environment, are more committed than ever to winning.

  • We're developing new ways to manage show costs, and we continue to do everything possible to manage through the tough times, with a view to the future.

  • Bob, I'll turn it back to you.

  • Robert Bohannon - Chairman, President, & CEO

  • We now will hear from Kim Fracalossi at Civic Group Giltspur [ph].

  • Kim Fracalossi - President & CEO

  • Hello.

  • As expected, Exhibitgroup's first quarter revenue and operating income performance was down from last year's first quarter.

  • While we in our industry continue to face weak demand, as exhibitors refurbish old exhibits in lieu of new construction, we continue to work diligently to drive cost out of our business.

  • Our biggest challenge this year is keeping our top line as strong as possible, in light of consumer uncertainty and delayed capital spending.

  • Our revenue will remain under pressure, in this environment of diminished corporate spending and caution.

  • Visibility for 2003 is poor, and as many of our client companies struggle with their own businesses, it makes it difficult.

  • With this in mind, we're working to develop products and service offerings that are flexible and that meet the customers’ demand for better value, and in this context I'll mention the fact that Exhibitgroup/Giltspur[ph] recently won a prestigious industry award, and it was the best of show award at the exhibitor's show held in Las Vegas a few weeks ago.

  • Our award-winning exhibit featured daily structural and sematic[ph] changes to showcase our company's creativity and our versatility in design, technology, installation and dismantling.

  • Our customers, particularly in a difficult economic environment, demand flexible and adaptable exhibits to stretch their marketing budgets.

  • This show also generated many leads for us, confirming our ability to provide greater value through our innovative product offerings.

  • On the cost side, we had announced in the fourth quarter that we were pursuing further restructuring, in order to make our businesses more flexible.

  • We're right on target with our restructuring efforts, and as mentioned previously, we'll reduce our fixed and semi-variable costs by about $12-14m pre-taxed, on an annualized basis, with about $8-9 million in pre-tax savings scheduled for 2003, and that's primarily due to the timing of the consolidations of the manufacturing.

  • This projected level of savings is not contingent upon any revenue improvement, it's definitely cost coming out of the system, and as of the first quarter we realized just over 10% of that projected annual savings, which is actually a little bit ahead of schedule.

  • Our restructuring activities are positioning us for a very strong future.

  • In addition to that, we're instituting other cost saving measures, such as reinventing and streamlining our business processes, and realigning our workforce to capture more value in the manufacturing process.

  • The list goes on, but the point of all the activities is that when the economy rebounds, we will have positioned Exhibitgroup/Giltspur to emerge as the strongest and most steadfast exhibit building company in the industry.

  • Our company will weather the protracted economic downturn, because we remain strong, both financially and organizationally.

  • None of our competitors can leverage the level of financial support that Viad provides.

  • Few can afford to reinvest in their core businesses as Exhibitgroup/Giltspur is currently investing.

  • The large customers we currently have, and the ones we're pursuing, demand the financial strength from their tradeshow partner, and will continue to use our help as a source of advantage.

  • Our goal is to continue to leverage our strengths relative to the competition, to win.

  • Back to you, Bob.

  • Robert Bohannon - Chairman, President, & CEO

  • Thanks Kim.

  • Phil, I'll now turn it over to you for your comments.

  • Philip Milne - President & CEO

  • Thanks Bob, and good morning everyone.

  • First I think Bob has explained the history of the impairment issue, and I'm going to focus my comments on our operating performance for the quarter.

  • Turning to the first quarter results, as shown in Table 1, in the first quarter we had revenue growth of 1.6% and operating income fell just about 34%.

  • Results this quarter really reflect the impact of the impairment of $19.8m, and once again, this amount is comprised of the $11.8m previously announced in our press release of April 10, plus the additional $8m we announced this morning.

  • As you know by now, this impairment relates to structured notes held in the company's float investment portfolio.

  • And I'm sure the question that everyone wants to ask is, is this over or is there more to come, and I think the answer remains what we discussed in the previous conference call.

  • We've evaluated current market conditions and we've determined our best estimate of the fair value of these securities.

  • However, these estimates can change and actual future cash flows could be less than projected.

  • I want to move on, just talk a little bit about some of the operating results.

  • Average investable balances for the quarter were $6.8b, that's up $1b or 17% over the prior year first quarter.

  • However, these results were negatively affected by the lower interest rate environment.

  • Short-term rates were down about 50 basis points, and the five-year treasury was down 150 basis points in the quarter, in comparison to last year's first quarter.

  • If you turn to Table 3 in the press release, you can follow along with my next statement about the impact of lower rates.

  • If you look at the section labeled "Changes in Float Income and Commission Expense 2003 versus 2002", you'll see that while higher balances had a positive impact of $15m in revenue and $5m in operating income, this impact was partially offset by lower interest rates, which caused a decrease in revenue of $9m and a decrease in operating income of $3m.

  • As we have indicated over the last few quarters, we need to maintain higher short-term liquidity during periods of heavy refinance activity as money moves in and out of the portfolio very, very quickly.

  • In the first quarter, we had substantial liquid balances invested at very low overnight rates.

  • And while results are affected by the interest rate environment, our core operating businesses continue to perform very well.

  • We are particularly pleased with the results from Money Gram.

  • It showed excellent results this quarter.

  • Revenues from Money Gram were up over 25%, with transaction volume up 34% this quarter, over first quarter last year.

  • Once again, revenue growth was slightly lower than transaction growth, due to the mix between our lower price point, ExpressPay wire transfer product, and our international wire transfer product.

  • ExpressPay, just to remind everybody, does have a lower price point than our international wire transfer product.

  • Let me give you a few highlights of the Money Gram performance, and I think this will help indicate how well this business is doing and the progress that we're making.

  • International originated transactions grew by 41%, reflecting the continued strength of our Money Gram international business.

  • And our domestic originated transactions, which does include ExpressPay, also increased 41%.

  • Our agent base grew 10% over the prior year quarter to over 60,000 agents.

  • Since we bought Money Gram back in May of 1998, our agent base has grown at a compounded annual growth rate of about 20%.

  • And during the quarter, we signed a total of 1,000 new agent locations in Mexico, Indonesia, Jordan and Greece.

  • In the first quarter, we also completed the acquisition of the minority interest in Money Gram International Limited.

  • During the quarter, MIL transactions, as I discussed, increased by over 40%, as international agents processed record volume.

  • We're really excited about the possibilities now open to us with the completion of this acquisition.

  • We are really leveraging our international network to move quickly to implement new programs.

  • It's easier for us to link Global and Global Send and Receive agents.

  • International growth is a very important driver of our overall growth for Money Gram.

  • I want to move onto Official Checks, or our Prime Link product.

  • Official Check was not a strong driver of revenue or operating income growth this quarter, really due to the impairment charge and lower interest rates.

  • However, it still showed strong growth in balances and new signings.

  • Official Check average investable balances grew 24% in the first quarter this year, compared to first quarter 2002.

  • Our backlog stands at $103m.

  • This is slightly less than what we've been recording for prior quarters.

  • In a low interest rate environment, banks are less compelled to outsource as much business to us because returns are not as attractive.

  • Nonetheless, we continue to write a substantial new book of business and this business will improve as interest rates increase.

  • During the quarter, we signed new bank customers, including North American Savings Bank and MBT Bank.

  • And looking out towards the rest of the year the prospects for more significant new bank customer signings in this year look good.

  • Turning our attention to Money Order, Money Order volume was down on a quarter-over-quarter basis, but was slightly better than our expectations.

  • Over the course of the last 18 months, we cut about 2,000 Money Order agent locations in an effort to insure that our credit losses stayed at very low levels.

  • As the credit situation is beginning to stabilize, we focused on re-energizing our Money Order sales effort.

  • We've initiated new sales incentive plans in the first quarter.

  • We've signed more new Money Order agents in the first quarter than we did in the first six months of last year.

  • So, we've made really good progress on that.

  • Margins remain very strong for the business and we do expect positive growth in Money Order volume in the second half of 2003.

  • Relative to our guidance for 2003, the following assumptions are implicit in our guidance.

  • Money Gram transaction volume continues to grow at a similar rate to the first quarter.

  • Money Order transaction volumes will stay flat in the first half of the year but begin to pick up an increase in the later half of the year.

  • Average investable balances are expected to grow in the range of $750m to $850m.

  • PrimeLink Official Check is the primary source of the growth in balances, with the balances from the MondyOrder product being relatively flat.

  • This growth is a little lower than we've had over the last couple of years, due to the persistence of low interest rates, combined with a strong mortgage refinance market.

  • We expect the overall investment yield on the portfolio to continue to decline for the remainder of the year.

  • Just as a point of reference, I'm referring to the investment yield as shown in table 3 of the press release, which was 5.44% in the first quarter.

  • Going forward, we assume that there is continued risk of another Fed funds cut, rate cut, and that significant mortgage refinancing activity will continue, which impacts our portfolio yields.

  • I think, just to wrap up from an operating perspective, we continue to grow balances and add new customers.

  • Money Gram is performing very well by all measures and we've begun to see a turnaround in the money order business.

  • We had a lot of progress despite a very tough interest rate environment.

  • Be assured we're only going to add and sign high quality business with great margins, and we're not going to reach to make up the impact of lower rates.

  • Now, I'll turn it back over to you, Bob.

  • Robert Bohannon - Chairman, President, & CEO

  • OK, thanks Bill.

  • I'll now ask Ellen Ingersoll to discuss some of the financial highlights for the quarter.

  • Ellen?

  • Ellen M. Ingersoll - CFO

  • Thanks, Bob.

  • As shown in table 2 in the press release, cash flow EBITDA was $47.8m, vs. $62.4m in 2002, down 10.7%.

  • Also shown in table 2, free cash flow, defined as cash from operations, excluding the change in Travelers’ Payment Service assets and obligations, less capital expenditures and dividends, was $17.9m for the quarter, vs. $38.4m last year.

  • Payment Services total average investable balances were up over 17% for quarter and Official Check balances were up nearly 34% for the quarter.

  • At March 31, 2003, we had total cash and corporate investments of $203m.

  • The decrease from year-end of $303.m was the MIL acquisition of about $100m.

  • Our total debt at the end of the quarter was $356m, bringing our debt to capital ratio to 32.4%.

  • We paid down over $6m in the quarter, from $362m at the end of December 2002.

  • Net interest expense for the quarter decreased $741,000, when compared to the first quarter of 2002.

  • Depreciation and amortization for the quarter was $12.2m, slightly down on a comparable basis with last year's $13.2m.

  • Capital expenditures for the quarter were $7.2m, up from $7m in the prior year's first quarter.

  • The income tax rate for the first quarter of 2003 was 27.5%, vs. 26.8% for the 2002 quarter.

  • And our average outstanding and potentially dilutive shares for the quarter were 86,326,000, compared to 86,728,000 in the first quarter of 2002.

  • And now, I'll pass it back to you, Bob.

  • Robert Bohannon - Chairman, President, & CEO

  • Thanks, Ellen.

  • Let me now give some guidance for the second quarter and then the full year and just a couple of notes about that.

  • As we've mentioned before, the visibility for our Convention and Event business remains very, very poor, particularly in Exhibitgroup Giltspur[ph].

  • We just don't know when some of our customers of that business will start spending again.

  • Also, travel [unintelligible] based revenues can be affected by changes in interest rates, impairments and how much we know and other market factors.

  • And in giving these numbers, I should point out too, that we've mentioned upfront, there could be an additional impairment charge of $10m to $15m.

  • Those numbers are not reflected in the guidance I'm going to give.

  • So, for the second quarter we expect EPS in the range of 41 to 44 cents.

  • Second quarter '02 was 36 cents.

  • Payment Services revenue, the segment revenue, is expected to grow at a mid single-digit rate, while operating income is expected to be flat.

  • Conventional and Event Services segment revenue is expected to grow at a low single-digit range, from the second quarter 2002 levels.

  • And operating income is expected to improve at a double-digit growth rate from 2002, due primarily to positive show rotation that we'll have in the second quarter and the cost taking offset we've been making in those businesses.

  • For the full year '03, the projected diluted EPS should be in the range of $1.34 to $1.39.

  • This has been adjusted to include the impact of the $19.8m of impairment charges, but again does not reflect any potential impairment that we talked about, the $10m to $15m.

  • It also reflects lower projected interest rates for the year.

  • As for a rebound, specifically Giltspur[ph] [unintelligible] lower than planned.

  • And, the most recent event that we now have to think about is the SARS epidemic that could have an impact on personal transportation in Canada, since many Asians visit that part of the world.

  • Payment Services segment revenue is expected to grow at a low to mid single-digit rate.

  • Payment Services segment operating income is expected to decline at a low double digit rate, primarily related to the impairment.

  • And [unintelligible], they talked about the other assumptions that are used behind revenue and operating income guidance for Travelers.

  • Convention & Event Services revenue is expected to decline at a mid single to low double-digit rate from the 2002 levels for the full year, primarily due to the decreased demand for new exhibit construction and Exhibitgroup/Giltspur[ph].

  • The segment's operating income at Convention and Event is expected to increase at low double-digit rates from the 2002 levels, primarily due to performance at GES and the related ongoing cost take outs at GES, and Exhibitgroup Giltspur[ph].

  • In summary, when I look back, I'm very, very pleased in most respects with our team's efforts to manage these businesses under very, very difficult conditions.

  • For the Convention & Event companies, business meant managing through very much of a down cycle.

  • These companies are instituting business disciplines and practices that we believe will make them the best in the industry.

  • They are driving costs down and we have no doubt they'll emerge very strong.

  • And when the cycle turns positive, they'll be able to take full advantage of it.

  • For Travelers, this has meant taking a company from a small, relatively unknown player, to a formidable market presence.

  • There have been bumps along the way.

  • We just experienced such a bump, in the form of income volatility, as indicated by today's press release, and the impairment.

  • I encourage you, as we are, to stay focused on what the Company is doing to build over the long-term.

  • They continue to sign major customers and grow volume.

  • They just delivered their tenth consecutive year of record earnings, 2002, and we believe this is a great, great company, with great growth products.

  • Obviously, we're not pleased with the financial results.

  • We certainly wish they were better.

  • But I think they reflect certain realities about the external environment.

  • Visibility is poor.

  • Customer spending is weak or nonexistent on the Exhibitgroup side.

  • And on the Payment Services side, competition remains tough and capital market conditions are difficult as well.

  • These aren't excuses, just reality.

  • We believe the best way to manage through this reality is to press on and build strong foundations for the future; but most important, to maintain a strong balance sheet.

  • Regarding the necessity for a strong balance sheet, I don't believe any of us have ever witnessed the absolute carnage we've seen in the corporate world from the Dot Coms going out of business, to the corporate governance fiascos, to the telecommunications collapse, to the number of corporate bankruptcies, to the terror that we had on our shores and to the absolute unrest that we've seen in the world, particularly given the Iraqi situation.

  • As if all this turmoil was not enough, we all now have the SARS issue that we have to be concerned about and its possible effect, particularly in personal transportation.

  • It's been a very tough environment and it remains a very tough and uncertain environment.

  • Overall, I think our people have done an excellent job in managing through all of this.

  • Our balance sheet is much stronger than when all this began.

  • And through restructuring, best practices that have been put in place, and adding a considerable amount of people skills and talent, we stand in great shape to take advantage when most of the uncertainty goes away and the economy rebounds.

  • Like every company, we have had horrible obstacles to overcome.

  • But our employees have done, and I believe will continue to do, an excellent job in managing through the most difficult environment that most of us have ever encountered.

  • And all in all, I must tell you I'm very proud of them.

  • Let me end the call back to the comments that I made when we started.

  • With the sequence of events that we've gone through on impairment, it's embarrassing, it's upsetting, and I apologize for it.

  • But again, the issue is, we must get it right.

  • And, we have taken you through those sequence of events, when we learned of those things and this press release that we've just issued reflects all of that.

  • So Stephen, with that we'd like to open the call up to the Q&A part, please.

  • Operator

  • Thank you, Mr. Bohannon.

  • The question and answer session will be conducted electronically today.

  • If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone.

  • If you are using a speakerphone today, please make sure that your mute function is turned off to allow your signal to reach our equipment.

  • We will proceed in the order that you signal us, and we'll take as many questions as time permits.

  • Once again, please press star, one, if you have a question.

  • We'll begin our first question today with Mr. Jack Kelly from Goldman Sachs.

  • Jack Kelly - Analyst

  • Good morning Bob.

  • Just focusing on convention services, if maybe Paul and Kim could elaborate a bit on a couple of things.

  • Paul, with regard to, you mentioned the consumer electronics show was quite successful.

  • But could you give us some color on what's happening with the other shows in terms of revenue per show?

  • Are they not ordering as much in terms of carpeting, electrical outlets, on kind of an apples to apples basis.

  • I know it's difficult, but if you could just give us some sense of, even though the show was here this year versus last year, what are kind of your revenues per show.

  • And then Kim, you don't have the visibility that maybe Paul has in terms of looking ahead in terms of booked shows, but what are the customers doing?

  • I mean are they actually just canceling new exhibits, and if they are canceling, are all refurbishing or are they in some cases doing neither?

  • In other words they're canceling their new exhibit and not refurbishing the old.

  • Again, just some color in terms of what's happening.

  • Robert Bohannon - Chairman, President, & CEO

  • Paul, do you want to take Jack's first question?

  • Paul Dykstra - President & CEO

  • Sure, good morning Jack.

  • As we've said before, shows tend to kind of go as their industries go.

  • But I think overall, that's what we've seen again in the first quarter, is shows that are following strong industries have done well, shows that are following weak industries have performed less well.

  • We've made a concerted effort at GES to kind of use our new technology, new outbound call center capabilities to really reach out and touch exhibitors more, which has helped kind of drive up the per spend per exhibitor for us, as well as it's been a very nice service win for us.

  • So we're continuing to focus on that.

  • Visibility is somewhat cloudy, again, mainly because people are waiting to make any spending commitments until the last possible second.

  • Robert Bohannon - Chairman, President, & CEO

  • Kim, do you want to take the second part of Jack's question?

  • Kim Fracalossi - President & CEO

  • Yeah.

  • On these shows we're actually seeing exactly the same thing Paul is seeing, but the impact on us is a little different.

  • They still, the customers are going to the shows and they do what we call show services, which are the things that Paul's group takes care of.

  • But they're not, certainly not building new exhibits, and the refurbishments in the past would tend to be more construction related, where you may change some of the walls or do some different things associated with actual hard construction, and now it tends to be more on the graphics side and very soft, type of refurbs, which really aren't the big construction and the better margins for us.

  • So our mix of business has shifted to a lot more show service activity and away from the construction side or the refurb side, and that's what's going on.

  • So they are still going to shows, but they're taking the old booth.

  • They may refurb the graphics, but that's really a soft construction or refurb for us.

  • Jack Kelly - Analyst

  • Paul, just following up on your comment, so if the show was in a strong industry, you're basically saying the spending per show is about the same by those participants?

  • Paul Dykstra - President & CEO

  • Or slightly up.

  • Jack Kelly - Analyst

  • OK, good.

  • Thank you.

  • Operator

  • Kartik Mehta with Midwest Research will have our next question.

  • Kartik Mehta - Analyst

  • Good morning.

  • Bob, can you, as you look as these securities that you've taken the impairment charge on, what is the impact on a quarterly basis because of the net yield adjustment?

  • I'm assuming that you had expected a higher yield when you gave out the original guidance, and now that yield is going to be a lower.

  • So what would you say is the impact by quarter on that?

  • Robert Bohannon - Chairman, President, & CEO

  • Nothing has changed in respect to the anticipated future cash flows that we took into consideration when we made the announcement on April 10th, in respect to that $11.8m impairment.

  • What changed was that that analysis was done, and concurred with at the time by the external auditors, on the 9612, which we had operated under on these notes since 1999 because 9920 did not even come into play until the second quarter of '01.

  • So the yield adjustments and so forth, the cash flows, they have just not changed, and I believe, Bill correct me if I'm wrong, what we said on April 10th on this particular piece, was that on the, for that $11.8m impairment, it would have the effect of about $700,000 per quarter on a go forward basis.

  • Now I'm going to ask Ellen to add a little bit more color to this, Kartik.

  • Ellen M. Ingersoll - CFO

  • Kartik, under 9612 we're required to provide an even yield over the life of the security. 9920 does not work that way.

  • So where we thought we would have a decreasing yield over the coming quarters, we actually, and we're still doing the alphas on this, because this has really literally just come up within the last couple of days, but we are actually probably going to have about the same yield going forward as we would have.

  • So we don't have to go back retrospectively. 9920 is a prospective method.

  • So the yield adjustment down that we thought we were going to have under 9612, we do not have under 9920.

  • Kartik Mehta - Analyst

  • OK.

  • Has there been a change in auditors over the last five years, or is this the same auditing firm you've had?

  • Robert Bohannon - Chairman, President, & CEO

  • No, this is the same firm that we have had for years.

  • We have had a partner rotation over the last;

  • I think two, two and a half years ago.

  • But it's the same firm.

  • I also should point out to you and to the conference call participants, that we also have separate auditing statements on Travelers Express.

  • We are required to do that by some of the states, because of the money order licensing arrangements and that type of thing.

  • So we have separate auditor statements from Viad and Travelers.

  • Kartik Mehta - Analyst

  • I know someone answered this on April 10th, and I'm just trying to better understand it, as to why now you have such a large impairment charge, $19m.

  • I'm assuming over the four years that you've held these securities that you saw that maybe the yield wasn't going to be the same.

  • Maybe it didn't happen in '99, but maybe in 2000, 2001.

  • So I'm just trying to better understand why such a large charge now, rather than doing something along the way.

  • Robert Bohannon - Chairman, President, & CEO

  • Sure.

  • I'm going to answer it in the broad sense, and then I'll ask Bill Putney to comment on it.

  • On April 10 when we made the announcement, we had to have this first quarter impairment on the $11.8m because we saw a deterioration in cash flows in the first quarter.

  • We announced at that time, and it was reaffirmed today, that on that analysis, there was no material impairment on these in the prior years.

  • I mean this was a first quarter event.

  • Bill, can you add to that please?

  • Bill Putney

  • Yes.

  • I think that that's why it's really to break it apart.

  • When we talked 10 days ago that $11.8m was really due to cash flow changes in the first quarter.

  • When we looked at these securities, we analyzed them, looked out, said we don't believe that those cash flows will develop, and that amount came on to the $11.8m.

  • The $8m is really due to the fact of going from 9612 accounting to 9920, and 9920 forces you to market these securities, and that $8m is the mark to market, if you will, on these securities.

  • So that is the additional impairment.

  • Kartik Mehta - Analyst

  • What would you think is the liquidity for these securities?

  • If at some point you do decide that you want to move it, and I'm assuming you're still, are you still holding these as held to maturity, or is the 9920 mark to market change that?

  • Bill Putney

  • No, unfortunately the 9920 does not change that, and yes, we still do hold those as held to maturity.

  • Kartik Mehta - Analyst

  • Bob, and last question, then I'll let other people ask questions here.

  • Your thoughts on a share buy back, based on what might happen to the stock here.

  • Robert Bohannon - Chairman, President, & CEO

  • Kartik we've always believed, and I think we've had a pretty good history, where we've had the money available, we have fairly actively, over the last two or three years, repurchased shares.

  • We thought, before this announcement, that our shares were under valued.

  • We clearly don't expect a positive reaction to this news in respect to our share price, so it's something that we have actively done in the past and you can bet that we certainly will look to see if that's something that we should do.

  • Kartik Mehta - Analyst

  • Thank you very much.

  • Operator

  • And representing Lehman Brothers, next we'll go to Adam Waldo.

  • Adam Waldo - Analyst

  • Bob I wondered if we could just return to investment philosophy again over at Travelers, and ask the question, what have you learned from sort of the investment portfolio issues over the last three quarters, as it affects your investment strategy going forward in terms of asset classes?

  • Robert Bohannon - Chairman, President, & CEO

  • I'll take it in the broad sense, and we'll certainly ask Bill and Dave Perrin and Bill Putney of Travelers to comment on it.

  • As you know, we're very, very limited in respect to the type of investments that we can make.

  • We're regulated by each and every state, and all but four of those states have permissible investments.

  • Our posture has been, and remains, that we want to be in as secured investments as possible, and the overall portfolio rating has maintained the AA characteristics since way back when, and that's still true today.

  • Obviously now in hindsight, I mean given the accounting issues and how do you account for structured notes, which is a big matter of debate, whether 9612, 9920 or whatever.

  • Given in hindsight, and given the volatility, we certainly would not have these structured notes in the portfolio.

  • Having said that, these offer attractive yields, the principal, and this is something we did like about these notes then, and still do today, the principal on these notes are AAA protected and backed by the treasury.

  • That's one of the safest things that you can do.

  • The issue is, I think, not so much are these good investments or not, but whether, can you afford the volatility of the related accounting treatment, and we've learned an awful lot about that.

  • By rule, we're limited in respect to the municipal bond market, which is liked very much, but because of the alternative minimum tax issues, you know, we have had to go to a posture of not buying those, and in fact, selling off some of the municipals.

  • We have liked the mortgage backs, but during this refinance era that's been a tough proposition.

  • We've also have always liked AA's on the corporate side of the support, but we all know there's been some hiccups there.

  • I guess it gets back, Adam, to the whole thing; we try to be as conservative as we possibly can.

  • But I think that we've all learned, that whether it's mortgage backs, whether it's AA corporate or whatever, there is just absolutely no certainty in any of that.

  • I'd also make reference though, that those things have been the only thing that have happened to us, and I think the biggest thing to me on Travelers, one of the biggest things that we've seen, has been the overnight funding rate.

  • I mean that, again, has cost us a good bit of money because for liquidity purposes, and particularly during this heavy refinance market, we must maintain a very high liquid balances in the overnight market.

  • Bill Putney, do you want to add to what I just said?

  • Philip Milne - President & CEO

  • Hey Bob, this is Phil, just one comment and then I'll turn it over to Bill.

  • Good morning Adam.

  • Adam Waldo - Analyst

  • Good morning Phil.

  • Philip Milne - President & CEO

  • I think from in terms of an investment philosophy, the first and foremost thing that we always look at is the safety and soundness of the portfolio and protecting the principal that is associated with the payment instruments.

  • I think from there, it's really looking over the long term, creating economic value, and that's how we continue to manage the portfolio.

  • Being regulated, as Bob said, we do have constraints about what we can be in, and what we can't be in.

  • I think over the long haul, we've definitely hit some bumps in the road, over the long haul the portfolio has done very, very well for us, and in the future will continue to do very, very well for us, and with the re-fis and the economy, we've hit a couple of bumps in the road.

  • But I think first and foremost, the philosophy is the safety and soundness of the payment instruments, and that's really how we formulate our strategy.

  • Bill, anything to add to that?

  • Bill Putney

  • Again I think Bob and Phil have covered it quite nicely, and again, I guess we cannot stress enough that the business is regulated and we have to comply with that, and it's very important to insure the principal value of the investments.

  • When we look at that, we have to look across various asset classes, and when you're going into a credit environment, or you're in a credit environment, like we've been in the last couple of years, in a volatile interest rate environment, unfortunately we're going to create some more income volatility to prevent us from taking on some other events, which would be principal volatility, which we just can't withstand, being in a regulated business.

  • Adam Waldo - Analyst

  • Fair enough.

  • Bill Putney

  • And once again, these structured notes are continuing to offer very attractive yields for us and once again, the principal is protected.

  • So with that I'll turn it back over to you, Bob.

  • Adam Waldo - Analyst

  • Bob, if I could ask another couple of quick questions.

  • With respect to the additional potential $10-15m impairment charge that could be booked in future quarters, I know that you've had certainly a lot of conversations with your auditors over the last couple of days.

  • So this is sort of a moving target at this point.

  • But do you have a sense from your auditors as to when they'll make a final determination, as to whether that additional impairment charge will be required?

  • Robert Bohannon - Chairman, President, & CEO

  • Thanks for that question.

  • That's something I should have covered in my comments.

  • We've not had a discussion over the last couple of days.

  • At 8:30 Phoenix time last night, 11:30 east coast, I was informed by our audit partner here, that there was a partner in Deloitte that had looked at this and said at that time, that maybe if these things are consolidated we would have to re-look at each individual, the treasury strip and then the equity piece.

  • So I got that news at 11:30 last night, east coast time.

  • They are going, starting this morning at the external auditors, they're going to look at it along with our people.

  • It was reported to me that it was just a question, but we wanted to err on the side of caution, and when that question popped up last night, recognizing that their defense, and our defense, that there was no time whatsoever, for any analysis prior to this telephone call.

  • We quickly came up to what we thought would be a range on the implication side, if in fact, if in fact, we had to apply that methodology.

  • So, I suspect that they're all over this, within the firm, that type thing.

  • They have a lot of very bright and talented people.

  • And I'm very hopeful, I'm very hopeful;

  • I can't speak for them, but I'm very hopeful that we can certainly get some sort of conclusion on this within the next week or so.

  • Dave Perrin - CFO

  • Hey Bob, this is Dave Perrin.

  • I have just one point to make sure everybody understands.

  • These structured notes are structured as a security and we have those securities recorded on our books, obviously.

  • So there is a carrying value.

  • It's a question of how you look at the value of those securities, and that's really what they're dealing with.

  • Adam Waldo - Analyst

  • OK.

  • I have two quick questions for Ellen, if I could.

  • Ellen, could you just clarify for us the revenue effect on Payment Services done in the first quarter of the $19.8m impairment?

  • Did the full effect of that pre-tax hit the revenue line?

  • And therefore was it basically passed through without direct costs?

  • Ellen M. Ingersoll - CFO

  • It did hit the revenue line.

  • It's included in Payment Services' investment income, which is included in our total revenues.

  • Adam Waldo - Analyst

  • Great.

  • And then, with respect to float income for the balance of the year, you make reference, both in your prepared remarks and your press release to an assumption that the effective interest rate on the float declines over the balance of the year.

  • I wonder if you could provide for us a little more quantification of the level of the earnings yield that you're expecting for the balance of '03 in your new EPS guidance?

  • Robert Bohannon - Chairman, President, & CEO

  • Again, we hope, Adam, I'll turn this over to Phil and Dave Perrin, we hope we are exercising a bit of caution here.

  • And maybe a tad of conservatism.

  • We don't know.

  • The consensus on our peoples' part is that the Fed is likely to cut the overnight rate again.

  • Beyond that, we believe that the refinancing activity is going to continue.

  • It hit a high point early March, the refinance index.

  • We believe that, though, it is going to have a little longer tail than we had originally anticipated.

  • It would be hard to come up with a number per se to answer in a direct basis to your question.

  • But Phil, Dave Perrin and Bill Putney, do you want to take it form there?

  • Philip Milne - President & CEO

  • Yeah.

  • Hey Adam, it's Phil again.

  • Adam Waldo - Analyst

  • Hi again, Phil.

  • Philip Milne - President & CEO

  • I think we, what we tried to do is, just looking at the market and really putting our best estimates to where we think rates are going to go, as well as the effect of re-fis in the second quarter and maybe into the third, I think from the re-fi standpoint, the index hit an all time high in early March, and, you know, after we hit the all time high last fall.

  • So, I think we just have to let that cash work its way through the system.

  • That's really how we based the estimates on.

  • Adam Waldo - Analyst

  • OK, so, you know, we had an effective yield of about 5.44% in the first quarter.

  • I mean directionally, are we talking about assuming that by the fourth quarter of this year, maybe that yield's 20 or 25 basis points lower?

  • Is that a reasonable thought process for us to have in terms of what you baked into your guidance?

  • Philip Milne - President & CEO

  • I think what we try to focus on is the net margin and we see some, you know, we really see some further compression on that.

  • That's what we really tried to build into the forecast.

  • You know, a lot of it will be driven, too, by the re-fis and the prepayments that we get on the mortgage portfolio.

  • Adam Waldo - Analyst

  • OK.

  • Thanks very much.

  • Philip Milne - President & CEO

  • You bet.

  • Thank you.

  • Operator

  • And we'll go next to Dris Upitis, representing Credit Suisse First Boston.

  • Paul Bartolai - Analyst

  • Good morning, thanks.

  • This is Paul Bartolai for Dris.

  • I have just a follow up.

  • Hi, how are you doing?

  • I have just a follow up to Adam's question.

  • The $19.8m, is it a straight pass through to operating income, so that operating income would've been $19.8m higher?

  • Ellen M. Ingersoll - CFO

  • Yes.

  • Robert Bohannon - Chairman, President, & CEO

  • That's correct.

  • Paul Bartolai - Analyst

  • So, are we correct to assume that operating income would've been up almost 30%, excluding this?

  • And if so, what drove that?

  • Robert Bohannon - Chairman, President, & CEO

  • Paul, are you talking Travelers, or total Viad?

  • Paul Bartolai - Analyst

  • Payment Services.

  • Robert Bohannon - Chairman, President, & CEO

  • Payment Services?

  • I'll get Ellen to quickly add some numbers there.

  • Yeah, Payment Services would've had a very good quarter.

  • Ellen M. Ingersoll - CFO

  • You're right, Paul.

  • And that was mostly driven by the Money Gram growth, that Phil talked about in his comments.

  • Robert Bohannon - Chairman, President, & CEO

  • Money Gram growth, I think Phil too, something we haven't talked about, Phil and his team over the course, they've gotten into such a great environment, I think they've done a very, very fine job in respect to the cost take outs in Travelers as well.

  • We've had some very, very nice productivity gains, particularly in the Official Check and the Money Order side, as well as Money Gram.

  • And the other thing, of course, that helped is that we did not have to reflect the minority interest in Money Gram, by virtue of the acquisition that we made in January.

  • Paul Bartolai - Analyst

  • OK.

  • Philip Milne - President & CEO

  • Hey Paul, this is Phil.

  • I think, just to echo what Bob and Ellen said, I think for the quarter we were particularly pleased with the performance on Money Gram.

  • The growth that we saw there, and the throughput and I think, really, Bob hit as well in the Money Order and Official Check, we've just done, and our operations team, have done a terrific job of continuing to get productivity gains out of the back office.

  • I think those things were really the primary drivers for us.

  • Paul Bartolai - Analyst

  • OK, and then, the agent growth thing up 10% this quarter, you know, was a little slower than we've seen recently.

  • Any trends there?

  • And, kind of, what are we looking at for the full year?

  • Philip Milne - President & CEO

  • Well, I think one thing, the trend there, and it's probably a little distorted, because last year at this time, we were rolling out Post Italian, and I think we added almost 10,000 locations over that time.

  • So, I think that kind of brought it down a little bit, in terms of the comparison.

  • But we continue to see real solid agent growth, and we have a strong prospect list.

  • And, you know, I think we're trying to do two things: One, we want to continue to add agents.

  • But we want to make sure we're adding the right agents, you know, as we're cresting over 60,000 of them now.

  • And two, we're really focusing a lot of time on the corridor business, and getting more out of the existing agents in those corridors that we see a lot of potential.

  • Paul Bartolai - Analyst

  • OK, then lastly-[crosstalk].

  • Robert Bohannon - Chairman, President, & CEO

  • Paul, I would one other piece to that, also, Phil, for the Money Gram products that we all understand.

  • We have not, asked Phil to do anything in the way of the front-end expense side.

  • In fact, we're increasing that, because there're some terrific opportunities worldwide.

  • And as the ramp up of these agents that we've signed from the banks in China to the post office to the Wal-Mart, etc., etc., we're putting, now that we own this thing 100%, particularly on the International side, we actually are going to be adding some front-end sales executives, and so forth on that.

  • Because, we think the opportunity is that great.

  • Philip Milne - President & CEO

  • That's a great point, Bob.

  • I'm glad you brought that up, because every time we look at Money Gram, we think it's a better opportunity than we'd thought previously.

  • And so, we are going to continue to invest heavily in that business, and really see it as a growth driver for us.

  • Paul Bartolai - Analyst

  • OK, and then lastly along with that, can you give us any more color on how Mexico performed in the quarter?

  • Robert Bohannon - Chairman, President, & CEO

  • Sure.

  • I'll just take a hit on that, and then you can add to it.

  • I think we probably should've talked about the Cambio Plus product, but Mexico, I think, was up slightly, 1% to 2% for the quarter.

  • It continues to be one that we are focused on.

  • It's a very important corridor, but each quarter goes by, it becomes less and less of the total piece of Money Gram, and obviously Travelers, but very important nevertheless.

  • As we've changed that around, given the niche players, the pricing competition that we had in that market over the last couple years, Phil, I think you ought to add some color on the Cambio Plus then, if you can, please?

  • Philip Milne - President & CEO

  • Yeah, and you know, we did have positive results in Mexico, as Bob said, and we were very excited about that.

  • I think we continue to see us making progress on Mexico.

  • Once again, we consider Mexico a big opportunity for us.

  • We like that segment, we like that corridor.

  • We've done a lot to add agents down in Mexico and we've done a lot of work here in the States on the [unintelligible] side.

  • So, we're going to continue to focus on it and we think it's a big opportunity.

  • We're real pleased that after a couple of quarters of negative growth that we have turned that around.

  • And I think the other point that Bob made, you know, our Cambio Plus product, which was the fixed-price product, was up 26%.

  • So, that has now become the biggest part, and I think you'll see the pick up just from the growth we've had on that.

  • Robert Bohannon - Chairman, President, & CEO

  • So what you have, you have where the hit has come, the old product that was heavily influenced by foreign exchange rates, declining and Cambio Plus, the fixed rate product, growing.

  • Paul Bartolai - Analyst

  • So Mexico overall is up 1% to 2%, and then Cambio-[crosstalk].

  • Robert Bohannon - Chairman, President, & CEO

  • That's correct.

  • Paul Bartolai - Analyst

  • OK, and what's-I'm sorry, one more follow up there.

  • What's the total mix of Mexico right now, of the total?

  • Philip Milne - President & CEO

  • I don't think we break that out, but as Bob said, you know, as excited as we are about the opportunity, we're also happy that as part of the overall business, it's been coming down.

  • Robert Bohannon - Chairman, President, & CEO

  • Phil, I think directionally, it's fair to, and we've talked before about Mexico and total Travelers and I believe that back in '98, when we first purchased Money Gram, that whole Mexico market, as I recall, was about 50% to 60% of their total business.

  • Today, on Money Gram, I think it's safe to say, less than 20%, Phil?

  • Philip Milne - President & CEO

  • That's correct, Bob.

  • Paul Bartolai - Analyst

  • Great, thank you very much.

  • Operator

  • I would like to remind those participants that have already queued up for a question, if you find that your question has already been answered and would like to remove yourself from our question queue, you may do that by pressing the pound-key on your touchtone telephone.

  • We'll proceed to our next question.

  • This is Michael Millman, representing Smith Barney.

  • Michael Millman - Analyst

  • Thank you.

  • I guess that I have several questions.

  • One, I wanted to follow up on the Payment Services, when you adjust, and as has been brought out, first quarter might have been up 30% and yet, you're saying operating earnings flat in the second quarter, where at least it doesn't appear that the environment is a lot different.

  • Second question is, also when you adjust for the impairment it looks like you're just 2 cents off your earliest full-year guidance, I think $1.50 to $1.55, which could be attributed and maybe it should be a question, is it attributed just to what was the 9912.

  • And now, that might be reversed, that 2 cents.

  • Also, could-let's see.

  • How much was the minority interest that you didn't have to pay out in the quarter?

  • Robert Bohannon - Chairman, President, & CEO

  • And Mike, does that conclude your three?

  • Michael Millman - Analyst

  • And, and the other question then, is the, on the 9920, will you, each quarter, be making a mark-to-market adjustment?

  • Robert Bohannon - Chairman, President, & CEO

  • Mike, let me take a shot at a couple of these, and I'll certainly ask Phil, and then Ellen Ingersoll to give you the right number of the minority interest for the quarter.

  • On the last, excuse me, your second question the 2 cents off, yes we did do that.

  • That did not have anything to do with the 9920, because what that is reflecting is anticipation, perhaps, of another Fed cut.

  • Beyond that, we anticipate some impact on Brewster now, because of the SARS issue.

  • And we also have some caution in respect of this whole SARS issue, was that if it took effect more in the United States, what that might do to the trade show industry.

  • With Brewster, a lot of their traffic is from the Asian markets.

  • While we've not seen any decrease, great decrease in respect to reservations, that type thing, we are very, very concerned about it and what the impact might be.

  • So, the 2 cents that you referenced, again, not anything to do with the impairment thing, but rather other issues.

  • Michael Millman - Analyst

  • So that means, just to clarify it, that it's because the 2 cents, somewhere you found some additional earnings potential for the year?

  • Robert Bohannon - Chairman, President, & CEO

  • I'm sorry, Mike.

  • I'm missing your question.

  • Michael Millman - Analyst

  • You're saying the 2 cents difference, between the current adjusted outlook for the year and the earliest outlook, is made up of some of the items you just mentioned.

  • But there was another 2 cents that came from 9912, so, do we assume-is that still in the number, the 9912?

  • Or, is that now out of your full year guidance?

  • Robert Bohannon - Chairman, President, & CEO

  • Mike, let me see if I can express it this way, and I don't have the exact numbers in front of me.

  • I think they're pretty accurate and I'll ask Ellen and Patty to correct me if they aren't.

  • The guidance that we provided previously, at the beginning of the year was $1.50 to $1.55 overall, for the year.

  • We now have taken an impairment charge that we've announced, of 14 cents off that.

  • So, that gets us there to $1.36, on that basis, to $1.41 on the old guidance.

  • We now have said that the guidance is $1.34, to $1.39.

  • Patty, am I incorrect on any of that?

  • So what, if you look back to the guidance that we issued at the start of the year again, $1.50-$1.55, impairment was 14 cents, which got us to $1.36-$1.41, and the guidance that we [unintelligible] $1.34-$1.39.

  • I think that's the best way to explain it Mike.

  • Now the difference between the $1.36 and $1.41 after you factor out the 14 cents, to the $1.34-$1.35 that is trying to reflect what I just talked about in respect to some interest rates, some impact perhaps on Brewster on the SARS, and a little bit of a greater degree of a lack of visibility at Exhibitgroup/Giltspur.

  • We had thought on Exhibitgroup/Giltspur, after all we were hopeful, as we put the plan together, and the guidance that we gave at that time, many were saying that if, in fact, the Iraqi situation could be resolved relatively quickly, and given everything else, that perhaps the economy would start to turn in the second half of the year.

  • We didn't reflect all of that optimism, if you can call it optimism, but we certainly reflected some of that in the Exhibitgroup plan.

  • So this two cents is our attempt to make an adjustment for those factors that we just talked about.

  • Now in respect to the minority interest, Ellen, what is that number?

  • Ellen M. Ingersoll - CFO

  • That number is about $1.5m.

  • Robert Bohannon - Chairman, President, & CEO

  • OK, and then Phil, in respect to Mike's first question on the payment services side, as to what has changed in the environment and that type of thing, and then under 9920, would you and Dave handle that?

  • Philip Milne - President & CEO

  • Yeah, I think on the first question Mike, and good morning by the way.

  • Michael Millman - Analyst

  • Good morning.

  • Philip Milne - President & CEO

  • I think from our standpoint it was really driven by Money Gram here in the first quarter, was stronger than we had anticipated for a number of reasons.

  • I think first and foremost is, some of the seasonality that we'd seen before, where from the fourth quarter to the first quarter, we just didn't see and the growth just kind of continued for us.

  • So a little stronger volume, and I think some timing on the marketing expense.

  • I think as a percentage we spent more on the marketing last year in the first quarter, where we'll probably spend more in the second quarter this year.

  • So I think it's a timing issue on that, and I think number three would be just a little better performance than we had anticipated in the money order side as well.

  • So I'd say it's those three things, but more heavily weighted on a very solid Money Gram performance in the first quarter.

  • Michael Millman - Analyst

  • And you don't expect that to continue in the second?

  • Philip Milne - President & CEO

  • Well we do expect to continue to grow, I think some of the differences are probably more on the marketing side and some of the expenditures, and what we're doing in the second quarter versus the first quarter.

  • I think it's more of a timing issue for us than anything.

  • And the 9920 issue, Dave.

  • Dave Perrin - CFO

  • Yeah Michael, Dave Perrin.

  • You asked about the possibility of more potential adjustments on a 9920.

  • The process really is to look at the cash flows from those securities, and we do that on a regular basis, and always have.

  • To the extent there are any changes in those, negative cash flow changes, that can have an impact on the carrying value of the securities.

  • We have to look to see, at that point, if there is a negative change, whether or not we continue to carry that security at a fair value.

  • And if in fact that we aren't, then there is an adjustment.

  • So the possibility exists, but it's a continual process of looking at those cash flows.

  • Robert Bohannon - Chairman, President, & CEO

  • But back to my earlier statement, we think we did our best estimate, with market conditions.

  • Michael Millman - Analyst

  • But, it’s those, that, can be written up, well, quarterly.

  • Robert Bohannon - Chairman, President, & CEO

  • No.

  • On 9612 it could have been, on 9920 it's not.

  • Michael Millman - Analyst

  • OK, I see, thank you.

  • Operator

  • I would like to take this opportunity to remind the participants that if you do have a question or comment for our presenters, please signal at this time, by pressing star, one, on your touchtone telephone.

  • We'll take our next question from Mr. Chuck Webster with Kidron Capital.

  • Chuck Webster - Analyst

  • Good morning, just a few clarifying questions, and then a cash flow question as well.

  • First of all, in the minority interest, just so I'm understanding where it's coming from, it's coming out of corporate and minority last year, this year there's just no minority, because you bought it out.

  • Ellen M. Ingersoll - CFO

  • Exactly.

  • Chuck Webster - Analyst

  • OK, so it's true apples to apples looking up at the impairment add back to payment services income.

  • So it is up 29% internally.

  • Ellen M. Ingersoll - CFO

  • Right.

  • Chuck Webster - Analyst

  • OK.

  • What else is in the corporate and minority this time, versus last time?

  • Is the $1.5m take out the real major change, or is there anything else.

  • Robert Bohannon - Chairman, President, & CEO

  • Ellen is looking, Chuck.

  • Ellen M. Ingersoll - CFO

  • I’d say that, just off the top of my head, the $1.5m take out is about it, because corporate expenses were pretty flat quarter-over-quarter.

  • Chuck Webster - Analyst

  • Maybe I'm doing the math wrong, but it looked like they're up 20-25%.

  • Ellen M. Ingersoll - CFO

  • You know what, the minority interest last year first quarter though was more like $400,000.

  • So it would have been $1.5m this quarter, but first quarter last year it was about 400.

  • Chuck Webster - Analyst

  • Oh, OK.

  • Ellen M. Ingersoll - CFO

  • So that's the difference.

  • Chuck Webster - Analyst

  • OK, that helps, doesn't it?

  • OK.

  • Then the only other thing was, wondering about the cash flow, was there, I think you mentioned something about Exhibitgroup and some restructuring that impacted working capital, but maybe I missed it.

  • What caused cash flows to be down so much, the operating cash flow line?

  • Ellen M. Ingersoll - CFO

  • Right, we had the $8m dividend related to the MIL acquisition so that went -

  • Chuck Webster - Analyst

  • But that's below.

  • I'm just talking the - I've got cash from ops, net of the payment services, 53.5, goes down to 41.2.

  • Ellen M. Ingersoll - CFO

  • Bear with me for just a second. 53.5 down to 41.2, one of the factors was bonus payments in the first quarter of 2003, primarily related to GES, that were not made in the first quarter of last year.

  • Then the rest of the difference is working capital differences, some slower collections on AR the first quarter versus first quarter last year.

  • Chuck Webster - Analyst

  • OK, are those worrisome from a permanent perspective?

  • Ellen M. Ingersoll - CFO

  • No, they just fell right after the quarter ended, so no.

  • Chuck Webster - Analyst

  • So you've seen some good free cash flow growth normalized year to year for the last several years.

  • Any concern that that might not continue this year?

  • Ellen M. Ingersoll - CFO

  • Well free cash flow will be lower this year.

  • We're expecting the range of $70-80m, and the reason for that is we ended up last year, quite a bit higher than we thought we would.

  • We had some capital expenditures that we projected to have in last year that we'll have in this year, that's about $12m.

  • Last year we received a significant income tax refund of $16m, so obviously that's not going to recur this year.

  • As I said before, we had some bonus payments this year that we did not have last year.

  • So there are several differences year-over-year.

  • But we're expecting about $70-80m on an annualized basis.

  • Chuck Webster - Analyst

  • OK, and just so I understand what that is referring to, that is tracking this free cash flow number down here?

  • Ellen M. Ingersoll - CFO

  • Yes.

  • Chuck Webster - Analyst

  • That's after dividends, after minority interest and so on.

  • Ellen M. Ingersoll - CFO

  • Right.

  • Robert Bohannon - Chairman, President, & CEO

  • Chuck another little piece of that I would add into what Ellen just said, in addition to that, Travelers had a few signing bonuses that we anticipated were going to be paid out in 2002 and they were not, and they will be in 2003.

  • Ellen M. Ingersoll - CFO

  • Correct.

  • Chuck Webster - Analyst

  • OK.

  • And what's your appetite for share repurchase, if you can put it in dollars or shares.

  • Robert Bohannon - Chairman, President, & CEO

  • It would be very, very difficult for me to do.

  • I would tell you again, as I answered the earlier question Chuck, and I'm not trying to waffle on this whatsoever, but again with the market close yesterday, we thought our shares were undervalued.

  • Again, every CEO I know thinks that.

  • We have repurchased a reasonable number of shares over the last two to three years.

  • We will obviously look at this, and look at it, very, very, very hard.

  • We will also keep in mind, obviously, the balance sheet.

  • We will also keep in mind, perhaps a longer-term objective versus a shorter term, in respect to any type of separation of these entities that we've talked about before.

  • So I'm not trying to waffle, I think though that's the best answer that I can give at this point.

  • Chuck Webster - Analyst

  • OK, thank you.

  • Operator

  • And our next question today will be from Ross Taylor with Caxton Associates.

  • Ross Taylor - Analyst

  • Bob, at the beginning of this call you said you really couldn't find the words to express how badly you felt about effectively double tapping your shareholders with another, and deeper charge, on the structured financial notes, two weeks after you had come out with your first charge.

  • Given the fact that these notes are going to continue to provide further uncertainty to your shareholders, and the fact, that it really was an effort at financial engineering, appears to be serving to mask some pretty good operating performance.

  • I think at the start, more than a few of your shareholders would suggest "I resign" would have been appropriate words.

  • Away from that, I strongly urge you guys to take whatever steps are necessary to eliminate the risk of future write-downs from these vehicles.

  • They basically are dogging the stock and they're a large part of why Viad is as undervalued as it is.

  • But I do want to ask a question as well, beyond just making the comments.

  • The question is really, what steps need to be taken, what benchmarks need to be achieved, before you will be comfortable in splitting this company into two parts?

  • You talked about doing it before;

  • I think last call you laid out a few benchmarks.

  • Could you update us on what those benchmarks are, and where you stand with regard to them?

  • Robert Bohannon - Chairman, President, & CEO

  • Yes.

  • Ross, let me just say I don't like your comment, but I'll certainly take it in the vein that you offered it, and I will certainly, as I always do on these things, keep our board of directors fully informed on that type of stuff.

  • Ross Taylor - Analyst

  • Well when I make a mistake as bad as the one you guys have made with regard to this, I do offer to resign, and sometimes they take it, and sometimes they don't.

  • But I think it's a matter of integrity.

  • It’s just, the shareholders are the ones who are really suffering here, management isn't suffering.

  • We're the ones suffering, because we're the ones who most directly need and want the stock to go up in the immediate, as opposed to some unspecified future timeframe.

  • And that would be comment to you.

  • It's frustrating;

  • I think there have been a series of non-recurring items here that are costing confidence.

  • You hear it in the tone of the questions that have been asked on other calls.

  • It's hard to make a stock work when no one is comfortable that they're not going to get an ambush in the way of a one-time item.

  • I think there's just been too many of those in the last few months, few quarters.

  • Robert Bohannon - Chairman, President, & CEO

  • And Chuck again, I was being defensive on this.

  • It's been a very, very difficult environment and that type of thing.

  • The other thing I'd like to point out is that the executive group of this company, we own over 1.2% of the stock, there is real ownership, myself, Phil, everyone else connected with this.

  • So, believe me we have suffered along with shareholders, because we are shareholders.

  • In respect to the benchmarks of any separation, consistent with what I've always said, a lot depends upon the markets, the equity markets, the credit markets.

  • A lot depends in terms upon Travelers, because the most important thing is that we retain that BBB investment grade rating for them, particularly for our bank, official check customers.

  • Very, very important.

  • Ross Taylor - Analyst

  • What specific benchmarks are you giving on what it takes to keep that BBB or better rating?

  • Robert Bohannon - Chairman, President, & CEO

  • Well as we talked on the last call, we worked very closely with the rating agencies; they certainly come up with tight parameters.

  • But no one, particularly on the agency side, is willing to sit down and say X, X and X. They have to look at the total picture; they have to look at the particular environment at the time, particularly on the credit market side, that type thing.

  • I would leave it to say that we are going to, as we tried to do last year, in respect to this thing, we are going to move as soon as we believe we have a viable alternative to move, and I would leave it at that.

  • Ross Taylor - Analyst

  • OK, I would strongly encourage that value enhancing steps be taken, because it's clear that the other issues are really what's running the stock right now.

  • Robert Bohannon - Chairman, President, & CEO

  • Ross I have no disagreement with you, and again I just refer, not on a defensive basis, but back to the original thing, you have executive management here that has got a significant stake in this company and the only way that they're going to realize anything is if the share price goes up.

  • Ross Taylor - Analyst

  • Unfortunately your time horizon and that of most of your shareholders is not exactly correlated.

  • Robert Bohannon - Chairman, President, & CEO

  • Well Chuck, excuse me, Ross, what I do have to take into consideration thought, is the reality of the equity markets and the credit markets, and the rating agencies and a host of other things.

  • Ross Taylor - Analyst

  • OK.

  • Operator

  • We'll go next to Joe Dickerson with Sanford [unintelligible].

  • Joe Dickerson - Analyst

  • Good morning.

  • I just had two quick questions on the Money Gram business.

  • I was wondering if you could break out the Express Pay transaction growth for me?

  • Robert Bohannon - Chairman, President, & CEO

  • Yeah that was -- Phil you can add to this.

  • Joe, that was over 70% over last year quarter-over-quarter.

  • Phil, is that correct?

  • Philip Milne - President & CEO

  • Yes sir.

  • Joe Dickerson - Analyst

  • And that's included in the domestic --?

  • Robert Bohannon - Chairman, President, & CEO

  • Yes.

  • Joe Dickerson - Analyst

  • Then I just wanted to know, are you seeing increased competition in the domestic money transfer business, and if so, what is your response to it?

  • Robert Bohannon - Chairman, President, & CEO

  • On the domestic side, no, it's really still concentrated heavily between us and Western Union.

  • Really where you see the competition is more in the corridor business.

  • Joe Dickerson - Analyst

  • OK, thank you.

  • Operator

  • And we will next take a question, representing H&R Block, from Mr. Dan McBride.

  • Dan McBride - Analyst

  • Good morning gentlemen and ladies.

  • I had a question to do with the residual cash flows on the structured term notes, and actually not with respect to those notes themselves, but do you have any other investments that rely on residual cash flows such as these, from corporate or from real estate related investments?

  • Robert Bohannon - Chairman, President, & CEO

  • Bill Putney?

  • Bill Putney

  • No, we do not.

  • Dan McBride - Analyst

  • OK, so you don't anticipate that there's any possibility of a similar sort of problem as we had with these here?

  • Bill Putney

  • Not in that fashion, no.

  • Dan McBride - Analyst

  • OK.

  • All right, that was my question.

  • Thank you.

  • Robert Bohannon - Chairman, President, & CEO

  • Thank you.

  • Operator

  • And at this time I show that there are no further questions in the queue, and I would like to return our conference to our presenters.

  • Mr. Bob Bohannon, sir would you like to take back over please?

  • Robert Bohannon - Chairman, President, & CEO

  • Steven, thank you.

  • Again, thanks everyone for participating in the call.

  • I hope we would add a little bit more color and flavor on it.

  • I would just reemphasize, in respect to the potential impairment, again we'll work very, very hard with outside auditors to thin that down as soon as possible, and announce if in fact there's any further impairment.

  • And on the base businesses themselves, I have every confidence in Kim and Phil and their teams, and Paul Dykstra, to drive as much as they can and we'll just shoot very, very hard.

  • At the same time, we're going to make certain that we don't do things for the short term and keep the long-term decision making process in mind.

  • So thank you very much.

  • Operator

  • And this does conclude today's Viad first quarter 2003 earnings release conference call.

  • We do appreciate your participation;

  • I hope everyone has a wonderful afternoon.

  • Thank you.

  • Good-bye.