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Operator
Thank you for standing by.
Good day, everyone.
And welcome to the Viad 2005 first quarter earnings release.
Today’s call is being recorded.
At this time, I would like to turn the call over to Carrie Long, Director of Investor Relations.
Please go ahead, ma’am.
Carrie Long - Director of IR
Good morning.
And thank you for attending our conference call.
Before we get started, I’d like to remind everyone that certain statements made during this call which are not historical facts may constitute forward-looking statements, and actual results could differ materially from those projected in these forward-looking statements.
Additional information concerning business and other risk factors that could cause actual results to differ from those in forward-looking statements can be found in Viad’s annual and quarterly reports filed with the Securities & Exchange Commission.
This conference call may not be recorded or reproduced in transcripts without the explicit written permission of Viad.
And during today’s call, we’ll refer to tables one and two in the earnings press release.
This press release is available on our web site at www.viad.com.
And with that, I’ll introduce Bob Bohannon, our CEO.
Bob Bohannon - Chairman President and CEO
Hi, everyone.
And good morning to you.
We’re happy that you’re with us today.
Today’s call you’ll hear from Paul Dykstra, of GES;
Kim Fracalossi of Exhibitgroup;
Ellen Ingersoll, Chief Financial Officer.
And, of course, you just heard from Carrie, our Director of Investor Relations.
As we discuss the first quarter results you may want to refer to tables one and two in the earnings press release.
First quarter income from continuing operations was 12.4m or 56 cents per diluted share.
And that was in line with our prior guidance of 50 to 58 cents.
Revenue is not quite 250m, up 20.2 from the 2004 first quarter, and revenue was up across all of the segments.
The largest increase, though, was at GES which had its biggest quarter ever.
Total segment operating income was 22.8m, up 40.5 percent from 16.2 end of 2004 first quarter, and segment operating margins were 9.1, up 130 basis points from 7.8 in the first quarter of ’04.
Operating results were hampered somewhat by a legal costs incurred at Exhibitgroup, which Kim will talk about more later.
But overall it was a terrific quarter.
GES had a record quarter, and Exhibitgroup’s results reflect substantial YOY improvements in their core operations.
Now, let’s move on to the individual operating segment results.
And, again, you may want to refer to table one of the press release, which provides revenues and operating income for each of the operating segments.
And so with that, I’ll turn it over to Paul Dykstra to talk about GES.
Paul.
Paul Dykstra - President and CEO of GES
Thanks, Bob.
Good morning, everybody.
We had a great first quarter, at 194.8m in revenue this was GES’ largest quarter in history.
It was larger than any quarter we had prior to 9-11 including our peak revenue year of 2000.
The first quarter is typically a seasonally strong quarter for us.
This level of revenue was much stronger than we anticipated.
As compared to the 2004 first quarter revenue was up 34.8m or 21.3 percent.
About 22m of this was due to positive show road rotation, but it’s important to note that the results of the shows rotating in were much stronger than their prior occurrences, due in large part to increased discretionary revenue penetration.
We also benefited from continued improvement in the industry and strong growth in discretionary revenue across our portfolio of shows.
One way that we evaluate our business is to look at shows that occur in the same quarter of every year in the same city.
These shows had revenue growth of 7.5 percent versus the first quarter of 2004.
We attribute this mostly to our growth in discretionary revenue which increased to 29 percent of 2005 first quarter revenue, up from 26 percent in the 2004 first quarter.
Discretionary sales are driven through the GES products and services group which is really gaining traction in its second year of operation.
We also saw a strengthening of the business fundamentals although freight weight growth was minimal.
During the quarter we serviced three shows that are expected to be in the 2005 top 10 North American shows.
CES, the Consumer Electronics Show, CONEXPO-CON/AGG, and [Magic].
Successfully managing such a heavy first quarter show schedule required considerable planning, resources, and effort, particularly because the revenue was highly concentrated in our Las Vegas and Orlando operations.
And although the increased activity did stretch our internal resources and some of the union, labor partner pools that we draw from, our operating results were very strong.
First quarter operating income was 26.8m, up 6.2m or 30.1 percent from the 2004 first quarter, and our operating margins were 13.5 percent, up from 12.6 percent in the first quarter of 2004.
These results could have been even better if not for record rainfall in Los Angels and Las Vegas that impacted productivity on several of our large shows, and we even had some snow in Las Vegas during CES.
We also felt the pinch from higher petroleum costs, which we estimate increased our costs by about a half a million over 2004.
While pushing the limits of our capacity is certainly a nice problem to have, especially considering the state of the industry over the past few years, it is nonetheless a problem we plan to do something about.
Today, we announced the creation of a chief operating officer position at GES.
This new position will own all of operations and service for GES and be responsible for capacity planning and resource deployment across the entire system so we can optimize our revenue throughput.
Because of the lumpiness and variability of our show schedule we need to be able to flex up and down at different times of the year and across various cities without losing efficiencies.
This is something we do fairly well already, but we believe that placing company wide ownership under a COO will take us to the next level.
In this regard, [Kevin Rabbet] has been appointed as Executive Vice President and Chief Operating Officer.
Kevin has been with GES since 2002, and has been instrumental in driving a lot of the great work we’ve done on cost reductions, and most recently in the development of the Products and Services Group.
Prior to his tenure at GES, Kevin was a Senior Consultant with [Bane and Company].
He also served as the President and Chief Operating Officer of the Texas Ice Stadium in Houston.
He has an extensive background in operational review, service, and process improvement, and best practice implementation.
I’m very confident that Kevin will make a significant positive impact as our new COO.
During the quarter we signed 230m in future bookings, and better than 65 percent of our remaining 2005 forecasted revenue is under contract, and our total backlog for 2006 and beyond stands at 685m.
The first quarter got 2005 off to a great start for us, and we’re on track to deliver full year revenue that’s comparable to or slightly improved from 2004 with comparable margins.
This revenue outlook includes the expectation that show rotation will negatively impact our full year revenue by about 10m.
The positive rotation we saw in the first quarter is expected to be more than offset by negative rotation of about 34m in the third quarter.
For the second quarter we are expecting continued growth in products and services revenue and improvement in the industry to drive a moderate increase in both revenue and operating income.
Show rotation is not expected to have a meaningful impact on the second quarter.
In closing, we’re very excited about the improvement in the industry and GES’ ability to drive new discretionary spending through the Products and Services Group, and we are confident that the actions we are taking to improve our capacity planning and resource deployment will have a positive impact on our margins.
The GES Team is committed to winning for all of our stakeholders.
Bob, I’ll pass it back to you.
Bob Bohannon - Chairman President and CEO
Okay.
Thanks, Paul.
Kim, would you now take us through Exhibitgroup, please?
Kim Fracalossi - President and CEO Exhibitgroup and Giltspur
Yes, thanks.
I’m pleased to report that our first quarter revenue increased 15.9 percent, or 6.4m to 46.4m as compared to the 2004 first quarter.
This reflects overall improved activity including some revenue attributable to clients exhibiting at the CON/AGG CONEXPO Show, which occurs every three years.
Our operating results improved 1.2m to a loss of 1.8m.
This loss includes 2.5m in legal costs that we incurred to defend and protect certain intellectual property rights, which I’ll talk more about in a little bit.
Excluding these legal costs we would have posted an operating profit of 674,000, up 3.7m from a loss of 3m in the first quarter of 2004.
Our underlying operating performance was actually extremely good this quarter.
Our gross margin improved substantially from the prior year resulting in better throughput on our revenue, and we increased the hours to our shop improving absorption.
I mentioned last quarter that the competitive pressures in the key osks market were the major driver of our fourth quarter revenue decline.
This competition is primarily from one company whose founders, we believe, are unfairly and wrongfully competing, by among other things producing copies of a proprietary and copyrighted design in violation of our intellectual property rights.
We are currently engaged in various legal proceedings to defend our rights and to protect this business.
We have already been granted a preliminary injunction by a Federal district court, and we’re moving rapidly towards June trials to enforce our rights and to recover our damages.
Our pursuit of a just result in these cases has required interviews and depositions of many witnesses, the gathering and review of a great deal of documentary and electronic evidence, and the hiring of a number of expert witnesses.
Needless to say, there is a significant cost to this effort, but we can’t stand by and allow this wrongful and damaging behavior to go on.
While we can’t be certain of the outcome of these cases, we do anticipate that it will be twofold.
First, that we’ll be successful in protecting our key osk business and in recovering damages.
And, second, that we will deter future violations of Viad’s intellectual property rights, or other unlawful behavior against Viad, by setting a precedent of aggressively protecting our rights and pursuing legal remedies for violations of those rights.
This case is ongoing and we expect to incur additional legal expenses in the range of 2m in the second quarter, which is reflected in our guidance.
On the new exhibit construction side, the stabilization of the overall business that we began to see in the 2004 fourth quarter continued into the first quarter.
While we’re certainly encouraged by this, the true test will come when we get into the seasonally slower summer months.
Pricing may get more aggressive during that time as exhibit houses compete for fewer available jobs.
Also, I do need to point out that we are beginning to see signs of contraction in trade show spending by some of the pharmaceutical companies.
We recently exhibited at the 2005 Exhibitor Show.
This is a key trade show for the trade show industry.
This is a venue for us to market Exhibitgroup’s Giltspur’s capabilities and service offerings to our customers.
The Show was a great success for us.
Compared to the 2004 Show there were many more decision makers in attendance, and we doubled the number of what we call ‘A quality’ leads that we received.
The creativity of our booth design really set us apart from the other exhibitors and increased traffic flow through our booth.
We also won ‘best booth staff’ for the second year in a row.
This award demonstrates the quality, knowledge, and professionalism of our client facing personnel.
This Show was a big win for Exhibitgroup Giltspur from every perspective, from design, construction, install and dismantle, and most importantly sales leads.
So far, we are executing well on our initiatives to increase throughput on our show service offering, and we plan to show continued improvement as the year progresses.
We entered this year targeting a breakeven point at 180m in revenue with the same business as last year.
And if you exclude the legal fees we’re expecting to incur associated with the litigation I spoke of earlier, we are making good progress on achieving this goal.
We continue to do a good job in bringing down [stick] and semi-variable operational costs, and we’re doing a great job in increasing our revenue throughput.
We’re seeing the payoff on the improvements in our infrastructure and our processes that we’ve been working on for the past two-and-a-half years.
We have a ways to go, but I’m pleased with our first quarter progress, and I am incredibly proud of the whole Exhibitgroup Giltspur Team for their efforts so far.
For the second quarter we expect revenue to be in the range of 50m to 55m, relatively flat to 2004.
This reflects the expectation that additional revenue from the rotation of a European air show into the second quarter will be mostly offset by reduced spending by certain clients in the pharmaceutical industry and other anticipated shrinkage in show budgets from existing customers.
Including estimated legal fees, we’re expecting an operating loss in the range of 500,000 to 1.5m, compared to essentially breakeven performance in the 2004 second quarter.
Looking ahead, we continue to see signs of improved market conditions, but as I said before, we just don’t know whether or not these positive signs will translate into more construction dollars for us in 2005.
The good news is that we’re getting stronger every day by continuing to drive efficiencies, to improve client satisfaction, and to win good, profitable business.
And we remain well positioned to take advantage of any market rebound.
And if the market doesn’t turnaround we have the capability and the wherewithal to get even more productive.
Thank you.
Back to you, Bob.
Bob Bohannon - Chairman President and CEO
Okay.
Thanks, Kim.
Now, let me please cover some highlights from the travel and recreation segment.
As you know, the first quarter is seasonally very slow for the Travel and Rec segment.
The quarter generates less than 10 percent of the segment’s full year revenue.
For the quarter revenue was 4.7m, as compared to 3.9m in the 2004 first quarter, and segment operating loss was 2.2m as compared to a loss of 1.3 in ’04.
Brewster and Glacier are both very seasonal businesses, typically the first and fourth quarters each provide less than 10 percent of the segment’s full year revenue.
The third quarter is the strongest quarter, providing roughly 55 to 65 percent of full year revenue.
And the second quarter provides about 20 to 30 percent.
For the 2005 second quarter, revenue for the segment is expected to be in the range of 19m to 21m, up from 17m in the 2004 second quarter, and segment operating income is expected to be in the range of 4.5 to 5.2 as compared to 4.7 in 2004.
Early indications are good for continued growth in the Travel and Rec segment in ’05.
Passenger volumes on Brewster’s gondola are looking better than last year, and the ice field just opened for the season and is off to a great start.
And advanced bookings for Brewster’s tours and charters are also encouraging.
And at Glacier Park the reservation pays is ahead of last year’s pays, and last year was a record visitation year for Glacier.
It’s still very early in the year, but so far this segment appears to be on track to deliver good results in ’05.
And now, with that, I’ll ask Ellen Ingersoll to take you through some financial highlights for the quarter.
Ellen.
Ellen Ingersoll - CFO
Thanks, Bob.
As shown in table two to the earnings release, adjusted EBITDA was 27.1m during the quarter versus 19.3m in the first quarter of 2004.
As also shown in table two, free cash flow defined as cash from operations less capital expenditures and dividends was 6.3m for the quarter versus 2.9m last year.
And directionally for 2005 free cash flow should approximate net income plus depreciation and amortization, minus restructuring payments, CapEx, and dividends.
In 2005 our working capital is expected to have a slightly negative impact on free cash flow.
At March 31, 2005 Viad had total cash and cash equivalents of 128.9m.
Viad’s total debt at the end of the quarter was 18.5m with a debt to capital ratio of 4.8 percent.
Net interest income for the quarter was 150,000 and this is versus net interest expense of 341,000 in the first quarter of 2004.
Depreciation and amortization for the quarter was 6m, compared with last year’s first quarter of 5.4m.
The full year 2005 forecast is approximately 22m.
Capital expenditures for the quarter were 3.5m, compared to 3.9m in the prior year’s first quarter.
And the full year 2005 forecast is approximately 22m to 26m.
Payments on Viad’s restructuring reserves were 792,000 during the quarter versus 2.5m in the first quarter of 2004.
We expect to make restructuring payments of approximately 3m in all of 2005.
And the income tax rate for the first quarter of 2005 was 39.6 percent, this is versus 43.3 percent for the 2004 quarter.
And back to you, Bob.
Bob Bohannon - Chairman President and CEO
Okay.
Thanks, Ellen.
Before wrapping up comments and opening the call to questions, let me give some guidance for the rest of ’05, please.
The guidance for the 2005 full year remains unchanged.
We continue to expect income per diluted share to be in the range of $1.23 to $1.36, and segment operating income is expected to increase by mid single digits to mid teens rate from the 2004 balance of 53.4.
Now, while our full year guidance remains unchanged, we are revising our quarterly guidance.
We are decreasing our second quarter guidance and increasing the third quarter.
Fourth quarter remains unchanged.
For the second quarter we are now expecting income per share to be in the range of 44 to 52 cents, down from our prior guidance of 54 to 60 cents, but up from 42 cents in the 2004 second quarter.
The decrease in the second quarter guidance reflects a reduced outlook for the Exhibitgroup which is based primarily on an expected increase in legal fees related to the litigation that Kim spoke about.
We’ve also reduced outlook for the second quarter revenue at Exhibitgroup based upon expected reductions or delays in previously anticipated client spending.
The income per share improvement relative to the prior year is expected to be driven mainly by revenue growth of GES.
Second quarter revenue is expected to increase at a single digit rate from the 2004 amount of 207.4m, and the segment operating income is expected to be in the range of 18.9 to 21.9m as compared to 18.9m in 2004.
Specific second quarter guidance for each of the operating segments can be found in the earnings press release.
Now, for the third quarter, we’re now expecting income per share to be in the range of 27 cents to 33 cents, and that’s up from the prior guidance of 22 cents to 27.
Our increased guidance for the third quarter reflects the improved outlook across all segments.
And as I mentioned, there’s no change to the fourth quarter guidance.
Let me summarize and say that we began 2005 with increased optimism about continued improvement in the trade show industry, and so far this is what we’re seeing.
Shows are generally increasing in size, number of exhibitors, and number of attendees.
Trade show spending seems to be picking up somewhat but our customers are still very focused on cost, which means using lighter weight exhibits and refurbishing existing exhibits rather than building new.
We continue to see positive signs for an increase in new exhibit construction, and we remain hopeful that as the year progresses Exhibitgroup’s mix of construction business will improve over ’04, though, as Kim mentioned, and I remind you the visibility there is still very cloudy.
We’re also hopeful that the key osk litigation will be brought to resolution quickly and in our favor, of course.
Now, all of our companies continue to work very hard on driving productivity gains and profitable revenue growth.
I’m especially proud of the great work Exhibitgroup is doing to improve their gross margins and productivity.
And at the corporate level we’re still on track to reduce expenses by about 2m to 2.5m from the 2004 amount.
We continue to look for acquisition opportunities in the marketplace.
There are a few that we’re taking a look at now, but we’re not close on anything.
During the first quarter we did take a very hard look at a particular company, but backed out of the bidding process because the price exceeded what we believed we should pay.
It’s also easier of course to deploy capital.
The real challenge comes in in employing it wisely to ensure an acceptable return and we’ve always thought of that as being our job number one.
So, we’ll keep looking very hard, and we think there’s some good opportunities out there, it’s just the issue of finding them at the price we feel we should pay.
So, with that, I’ll close and we’ll open the call up for q and a.
Operator
[OPERATOR INSTRUCTIONS]
We’ll take our first question from Kartik Mehta, MidWest Research.
Kartik Mehta - Analyst
Good morning.
Bob Bohannon - Chairman President and CEO
Good morning.
Kartik Mehta - Analyst
A question on the – I was wondering, I wanted to get a little bit more detail on getting leverage out of the business.
You know, you had a great quarter from a revenue perspective.
I thought you’d get more leverage from an operating standpoint.
I know Paul said that maybe a lot of shows happen at once, and that kind of strained this business a little bit.
And I was wondering if that was the primary cause, or is there any pricing, or any other issues that might have hampered you from getting more leverage out of the business?
Bob Bohannon - Chairman President and CEO
Yes, Kartik, I’ll turn it over to Paul in a second.
But, you know, Paul mentioned on the call, we were absolutely plagued out West in the first quarter, on the, a lot of rain in California.
Paul mentioned the snow in Las Vegas and the rain.
And when that happens, you know, we have, we use a lot of flatbeds and those markets where you have little rain, and you end up having to cover-up the equipment, that type stuff, and that hurt.
And the higher fuel cost also did not help Paul at all.
So, Paul, you want to pick-up from there?
Paul Dykstra - President and CEO of GES
Yeah.
And those were two factors.
And certainly we’re continuing to see a mix shift in our business, as we step on the gas on the products and services side.
And the last thing Kartik, and we’re going to get a lot better at this, is the capacity that we have here was strained a bit by the size of the quarter.
And we had our biggest quarter ever, and we were capacity constrained in some places, especially Las Vegas and Orlando where the bulk of our revenue hit for the first quarter.
Kartik Mehta - Analyst
Paul, would that imply that you just did a lot better than you even anticipated in your internal projection had even suggested?
Paul Dykstra - President and CEO of GES
Yeah, I think, if you remember in my opening comments, the quarter was very strong and it was even a bit stronger than we expected, Kartik.
Kartik Mehta - Analyst
On the Exhibitgroup, Kim, could you talk about what your new breakeven point is?
I know the legal expenses kind of hurt this quarter and are going to hurt at least in the next quarter.
Where are we in terms of breakeven point and mix of business?
Kim Fracalossi - President and CEO Exhibitgroup and Giltspur
Yeah, if the mix stays the same as it was last year, which is sort of construction, this is like real construction in the 20, 25, 26 percent range, then we should be a breakeven around 180.
Kartik Mehta - Analyst
And one last question, Bob.
You know, the balance sheet continues to remain strong.
I think about $5 in net cash on the balance sheet.
I know you indicated there are some acquisitions out there.
I was wondering, you know, any thoughts on share repurchase or will you continue to look for acquisition.
And is that the number one priority for the cash?
Bob Bohannon - Chairman President and CEO
Yeah, we, I mean acquisitions, if we can find the right deals is number one.
On the other hand, if we can’t do that then we’re going to be in position for some share repurchases.
So, I mean we hope to find things to grow, things you’d be proud of, and working very hard to do that.
But, if not, then share repurchase would be the second call on that capital.
Kartik Mehta - Analyst
Thank you very much.
Bob Bohannon - Chairman President and CEO
Thank you.
Operator
[OPERATOR INSTRUCTIONS]
There are no questions at this time.
I’ll turn it back over to our speakers for any additional or closing comments.
Bob Bohannon - Chairman President and CEO
Well, we appreciate everyone being with us today.
Again, we think we had a strong first quarter.
Were looking forward to a real good year.
And no doubt there will be some challenges, but we see a lot of opportunities across all of the business lines of the segments, and we’re looking forward to working hard to drive towards those things.
So, thank you very much for being with us.
Bye.
Operator
That does conclude today’s conference call.
We thank you for your participation, and you may now disconnect at this time.