Viad Corp (VVI) 2005 Q2 法說會逐字稿

Thank you for standing by.

Good day everyone, and welcome to the Viad 2005 second quarter earnings release call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Carrie Long, Director, Investor Relations.

Please go ahead, ma'am.

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 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 forward-looking statements can be found in Viad's annual and quarterly reports filed with the Securities and Exchange Commission.

This conference call may not be recorded or reproduced in transcript without the explicit written permission of Viad.

During today's call, we'll refer to Tables 1 and 2 in the press release.

Our press release is available on our Web site at www.viad.com.

And with that, I'll introduce Bob Bohannon, the CEO of Viad Corp.

Thanks Carrie.

Hi everyone and good morning.

Thanks very much for being with us today.

On today's call, you'll hear from Paul Dykstra, President of GES, Kim Fracalossi, President of Exhibitgroup/Giltspur, and Ellen Ingersoll, our Chief Financial Officer.

As I discuss the second quarter results, you may want to refer to Tables 1 and 2 in the earnings press release.

Second quarter net income was $11.1 million, or $0.50 per diluted share in line with the prior guidance of 44 to 52.

As compared to the prior year second quarter, EPS was up 19%.

Revenue increased 9.5% to $227 million, and that reflected growth across all of our operating segments.

Segment operating income increased 18.1% to $22.3 million.

And segment operating margins were 9.8%, up 70 basis points from 9.1 in the second quarter of 2004.

This year we have improvements over the result of solid growth at GES as well as positive show rotation and significant margin improvement at Exhibitgroup/Giltspur.

As expected, our operating results were hampered somewhat by legal costs incurred at Exhibitgroup which Kim will talk about more later on.

But overall, it was another terrific quarter.

Let's move to the individual operating segment results and again, you may want to refer to Table 1 of the press release which provides revenues and operating income for each of the operating segments.

So let's start now with Paul Dykstra at GES.

Paul?

Thanks Bob and good morning everybody.

GES had another solid quarter with good revenue and operating income growth, both in line with our prior guidance.

Revenue increased 9.5% to $150.4 million.

Operating income increased 14.4% to $16.1 million, and operating margins improved 40 basis points to 10.7%.

This year-over-year growth was driven mainly by increased sales from our products and services group and continued improvement in the exhibition and event industry.

During the quarter, show rotation did not have a meaningful impact.

One of the ways that we evaluate our business is to measure based same show growth, and we define this as revenue growth in shows that occur in the same of quarter every year in the same city.

For the second quarter, based same show revenue growth was 6.4%.

This same show growth was driven in part by continued success in increasing our penetration into exhibitor discretionary spending through the products and services group.

Products and services revenue grew nearly 11% in the second quarter, outpacing overall revenue growth.

This group has been a great success for GES.

Also during the quarter, we signed $158 million in future bookings and we have better than 70% of our remaining 2005 forecasted revenue under contract.

Our total backlog for 2006 and beyond stands at $784 million.

Overall, we have had a very strong first half of 2005.

Year-to-date revenue was up $47.8 million, or 15%, and operating income is up $8.2 million, or 23%.

I remind you that $22 million of the revenue increase was due to positive show rotation in the first quarter.

During the third quarter, we expect show rotation to negatively impact revenue by about $34 million.

And for the full year show rotation is expected to have a net negative impact of about $10 million.

Despite this, we expect full year revenue to be slightly improved from 2004 due to continued strong results from our products and services group and growth in the industry in general.

We expect our full year operating income to be comparable to 2004.

While the exhibition and event industry is benefiting from attendance and square footage growth, GES is continuing to experience challenges with respect to pricing and freight density as show organizers and exhibitors look for ways to reduce their costs.

We've made some headway in realizing reasonable price increases.

But we've seen dramatic increases in certain costs, especially petroleum based commodities.

We're also working on improving our economics through creative packaging of various services and products to drive revenue and margin.

As I mentioned last quarter, we created a Chief Operating Officer position to own all of operations and service for GES.

The primary objective for our COO is to enhance margins while ensuring we continued to deliver quality products and great services to our customers.

We continue to do a good job controlling costs where we can and we're working hard to drive incremental productivity improvements.

In closing, we're excited about the revenue growth we're realizing and we remain focused on maximizing our margins and producing strong cash flow.

I want to thank the outstanding employees of GES for their commitment to winning for all of our stakeholders and we're committed to doing that on a go forward basis.

With that, I'll pass it back to you, Bob.

Okay, thanks Paul.

I'm now going to ask Kim Fracalossi, President of Exhibitgroup, to take us through their results for the quarter.

Kim?

Thanks Bob and good morning to everybody.

I'm happy to report that our second quarter results were much better than we expected.

Revenue was $58.5 million, up $5.9 million or 11.1% from the 2004 second quarter and operating income, increased $1.9 million, to $2 million.

As expected, our operating results included $2.3 million in legal expenses relating to defending our intellectual property rights in the kiosk business.

Excluding these fees, operating income would have been $4.3 million.

We realized great throughput on our revenue.

This is a direct result of significantly improved growth margins, driven by our many cost savings and our process and quality service improvement initiative.

Consistent with what we've been saying, the leverage provided by these cost savings will become even more apparent as we generate additional revenue.

We're executing very well on our initiatives to increase the profitability of our show service offerings and we're much more efficient in our shops.

We are truly seeing the payoffs on the improvements in our infrastructure and our process and those improvements have been working - the improvements that we've been working on for the past few years.

And if you exclude the legal fees that we incurred to defend our intellectual property rights in the kiosk business, we're making good progress on achieving our targeted break-even point on a $180 million in revenue.

We have a ways to go, but I'm pleased with our progress today and I am incredibly proud of the whole EG team for their efforts so far.

With respect to the legal fees that we incurred during the quarter, these related to our TL Horton kiosk business.

As discussed last quarter, we brought legal proceedings against one company whose founders we believe were unfairly and wrongfully competing with us by, among other things, producing copies of our proprietary and copyrighted designs in violation of our intellectual property rights.

I am happy to say that we've now settled that litigation.

We have issued a press release regarding the settlement which is the only public statement that we can make.

In the release, we report that consent judgments have been entered into in which the other party recognizes the validity and the value of Viad's intellectual property rights.

In addition, the release reports that Viad has agreed to grant a license to this company with respect to a limited number of our copyrights, which will permit the competitor to sell certain Retail Merchandise Units or RMUs in exchange for the payment of royalties.

All terms and provisions of the settlement are confidential.

Our revenue growth in the second quarter reflected the benefit of a European air show that rotated into the quarter and provided approximately $10 million in revenue.

This was partially offset by reduced spending by certain clients in the pharmaceutical industry which negatively impacted our mix of construction revenue.

With the exception of these pharmaceutical clients, we actually had some fairly good construction activity in the quarter.

We're also seeing very good RFP activity and our sales pipeline remains strong.

We're winning a lot of good profitable business.

Now we just need to see those wins translate into spending in 2005.

For the third quarter, and consistent with our previous guidance, we expect show rotation to negatively impact revenue by approximately $10 million.

This negative show rotation is the result of the European air show that I just mentioned moving from the third quarter of 2004 to the second quarter of 2005.

Let me also note that the third quarter is seasonally slow for exhibit construction, and pricing could become very aggressive as exhibit houses compete for fewer available jobs.

All in all, we expect third quarter revenue to be in the range of 28 to 33 million, reflecting a decrease of 5 to 10 million from the 2004 third quarter.

We expect a third quarter operating loss in the range of 5 to 6 million, which is flat to down about $1 million from the 2004 third quarter loss of $4.9 million.

Looking ahead, we have increased optimism.

Not only are we beginning to benefit from the improved market conditions, but we're also seeing much better throughput on our revenue thanks to the hard work of the EG team that they've done over the past few years.

We're pleased to see that our sales initiatives are starting to pay off, too.

We're seeing growth in the number of our RFPs, our backlog is greater than it has been in over three years and we have a strong win ratio.

Our win ratio greatly exceeds the market share.

We remain well positioned to take advantage of any market rebound.

And, as we continue to demonstrate, if the market does not turn around we have the capability and wherewithal to get even more productive.

Back to you, Bob.

Okay, thanks Kim.

Let me spend a couple of minutes please, covering the highlights for the travel and recreation segment.

For the quarter, revenue was $18.1 million, as compared to $17.3 in the 2004 second quarter.

And segment operating income was $4.2, as compared to $4.7 in 2004.

These results fell slightly short of our prior guidance due to record-setting rains in Alberta, Canada during June that had a negative impact on passenger volumes on Brewster's Gondola and Ice Field tours.

Despite lower volumes at these higher throughput attractions of travel and rec, the segments still produced strong operating margins of 23% during the quarter.

Brewster and Glacier Park are both very seasonal businesses.

The second quarter provides about 20% or 30% of the segments Annual Revenue and the third quarter is the strongest quarter, providing roughly 55% to 65% of full year revenue.

Typically, the first and fourth quarters each provide less than 10% of revenue for the year.

With the exception of a softer than expected June due to heavy rains, Brewster has performed well.

Through the end of May, year-to-date passenger volumes were more than 7% at the Banff Gondola and 3% for tourists onto the Columbia Icefield.

As a result of the June rains, most of these year-over-year gains were lost by the end of the second quarter.

Gondola passengers have picked back up in July.

However, the Icefield passengers continue to be down slightly, mainly due to decreased group tours.

We're hopeful, obviously the group tour volume will pick up as we progress into the peak summer months.

Glacier Park opened for business at the end of May.

It is off to a very strong start, as compared to '04, which was a record year for Glacier.

Year-to-date is up slightly for the end of the second quarter, and the reservation pace is ahead of last year's pace.

Overall, the travel and rec segment appears to be on track to deliver good results in '05.

With that, I'll now ask Ellen Ingersoll, our Chief Financial Officer, to cover some of the other financial highlights.

Thank you, Bob.

As shown in Table 2 to the earnings release, adjusted EBITDA was $25.5 million during the quarter, versus $19.7 million in the second quarter of 2004.

Also shown in Table 2, free cash flow, as defined as cash from operations less capital expenditures and dividends, was an outflow of $9.1 million for the quarter versus free cash flow of $13.5 million in the 2004 second quarter.

This decrease quarter over quarter and the outflow in the 2005 quarter, are the result of decreases in customer deposits and accounts payable, which are attributable to the timing of tradeshow activity this year.

The timing of income tax payments as well as the level of capital expenditures during the quarter also contributed to the outflow.

The negative working capital impact was expected to turn positive in the third quarter.

Directionally for 2005, free cash flow is expected to approximate net income plus depreciation and amortization, minus restructuring payments, CapEx, and dividends.

For the full year 2005, our working capital is expected to have a slightly positive impact.

At June 30, 2005, Viad had total cash and cash equivalents of $120 million.

Our total debt at the end of the quarter was $17.9 million, with a debt to capital ratio of 4.5%.

Net interest income for the quarter was $262,000, versus net interest expense of $265,000 in the second quarter of 2004.

Our depreciation and amortization for the quarter was $5.4 million, this is the same as last year's second quarter.

The full year 2005 forecast is approximately $22 million.

Capital expenditures for the quarter was $7.2 million, compared to $2.1 million in the prior year second quarter.

This increase is primarily due to the acquisition of new charter buses to be used in the Brewster operation.

The full year 2005 forecast is approximately $22 million to $24 million.

Payments on our restructuring reserves for the quarter were $475,000, compared to $2 million in the second quarter of 2004.

We expect to make restructuring payments of approximately $2.7 million in 2005.

And the 2005 income-tax rate year to date was 41.3%, vs. 38.6% year to date in 2004.

And with that, Bob, I'll pass it back to you.

Okay, thanks, Ellen.

Before wrapping up my comments and opening the call to questions, let's talk about guidance for the rest of '05, please.

Third quarter '05, the guidance remains unchanged.

We continue to expect income per diluted share to be in the range of $0.27 to $0.33.

This compares to income before impairment losses of $0.57 in the 2004 third quarter.

The decrease in income per share relative to the prior year is expected to be driven mainly by the negative show rotation at GES and Exhibitgroup as Paul and Kim mentioned earlier, and that's about $44 million in revenue.

Third quarter revenue is expected decrease by 15% to 20% from the 2004 amount of $218.6, and segment operating income is expected to be in the range of $13 million to $15.5 million, as compared to $23.5 in 2004.

Third quarter guidance for each of the operating segments can be found in the earnings press release.

For the full year, our guidance for '05 has changed slightly.

We now expect income per diluted share to be in the range of $1.23 to $1.34.

This reflects a decrease of $0.02 on the high end of the range.

The expectation that Exhibitgroup will continue to experience reduced exhibit spending, by some of its pharmaceutical clients, has caused us to slightly reduce our fourth quarter guidance to a loss of $0.05 to $0.10.

And this compares to the previous guidance of a loss of $0.04 to $0.08 in the fourth quarter, and a prior year loss from continuing operations before impairment losses of $0.27 in the 2004 fourth quarter.

We continue to expect full year revenue to increase at a low single digit rate from $786 million in 2004, and segment operating income is still expected to increase by mid single digits to mid teens rate from the 2004 amount of $53.4 million.

With the first half of 2005 behind us, we are well on our way toward realizing a meaningful earnings growth this year.

Even with the significant legal expenses incurred to protect our intellectual property, our guidance range reflects EPS growth of 15% to 25%.

We're also seeing better strength in the industries that we serve.

And we're seeing better execution internally, especially at Exhibitgroup/Giltspur.

And as usual, are wild card is Exhibitgroup.

I'm very proud of the work that the EG team has done to strengthen the company and drive gross margin improvement.

And as Kim pointed out, all the signs are better.

But we know that clients must pull the trigger on a new exhibit construction and we are hopeful that that will see that sooner rather than later so that we can benefit in the back half of '05.

Heading into the second half of the year, we look for continued strengthening of the overall trade show industry with some reduction in spending by pharmaceutical companies.

And certainly, we continue to face many of the same old challenges, but all of our companies are working hard to provide quality products and services to our customers that are superior to the the competition.

To control cost and become more efficient, trying to drive growth and to provide opportunities for employees and good returns for our shareholders.

And year to date, for the second quarter, we are succeeding.

So, Amber, with that, I'll stop and ask you to open the call up for the Q&A portion, please.

Thank you. [OPERATOR INSTRUCTIONS].

We'll first hear from John Healey (ph) with FTN Midwest Securities.

Good morning.

Good morning, John.

Hey, how are you guys?

Good, thanks.

How about yourself?

Well, thanks.

First question, on the GES side of the business.

You guys talked about fuel cost as being a little bit of a drag on results this quarter.

In terms of percentage of sales, what does fuel represent right now?

And what would it have represented maybe a year ago?

Paul?

Good morning, John.

Good morning.

I don't have that right in front of me.

It's a significant expense in that we've got a pretty big fleet of trucks and forklifts and things like that.

But overall it's an expense that we can manage over time.

It's also impacted the cost of our carpet and our, what we call Visclean(ph) which is what we cover the floor with during move-in .

And I'm sorry I don't have that number right in front of me.

Okay.

You also mentioned price competition.

Is that something more coming from the trade show associations or is that coming from other players in this space?

Give a little more color on the price competition.

Sure.

Really what it is is exhibitors continuing to monitor their spending pretty closely and looking for ways that we can help them reduce their costs.

They pass on those types of comments through the show management and so what we have been doing is working to, obviously, get more efficient and control our expenses, but also find things that we can do differently within the show and combining some of our products and services and new packages and things like that in order to manage growth and margins.

Okay.

And then, maybe a question for Kim on the exhibit side of the business.

Where are we at in terms of - I know the goal is to get the break-even point down to 180.

Is that something we might see by the end of the year?

Or is that something we should maybe expect to see more in 2006?

For us, if you exclude the legal fees, we should be very close this year.

Okay, terrific.

Maybe just refresh us on what the incremental margins could be for new creation refurbishment beyond that $180 million?

We have given guidance in the mid-20s, though we are performing today better than that.

But typically, if it's a regular mix of business, we should see it in the low to mid-20s.

And that's for both refurbishment and new creation?

Correct.

And maybe just one last housekeeping question.

We modeled probably -- a little bit of a lower tax rate than you guys had anticipated -- performed with.

What should we anticipate for the full year?

Ellen?

Right now, the estimate for the full year is the 41.3%, and that was a little bit higher due to adjusting the state tax effective rate in 2005.

But as the year goes on, any settlements we might have would affect that amount as well.

But s of right now, we are projecting 41.3.

Okay, terrific.

Thank you guys so much.

Thanks John.

[OPERATOR INSTRUCTIONS].

We'll take a question from Rob Matan (ph) from Schneider Capital.

Good morning.

Good morning Rob.

I was just wondering if you could comment on the pipeline of acquisition opportunities and, I guess, whether you're any more inclined to consider repurchase of stock as a use of cash if the opportunities aren't there?

Rob, thanks.

We said that we spun off last July 1 and we said that look - we said we were going to look very, very hard and see what we can do in the first 12 to 18 months.

If opportunities are not there, then the second call on cash would be the repurchases of shares, and we still have that position today.

I'll tell you that we have looked very aggressively.

We found a lot of opportunities, but some of those to date have just not worked from a price that we felt we could afford to pay and earn a good adequate return for our shareholders.

We're still looking very aggressively.

And, obviously, if it makes good sense, we would like to obviously do it that way.

If not, again, though we will do the share repurchase.

That probably is about all I should say on that.

I hope that's responsive to your question.

Okay, thanks.

Thank you.

And we'll now hear from Louie Sikes of Penant (ph).

Hi, good morning guys.

Good morning Louie.

How are you?

Good, how are you?

Good, thank you.

Just a couple of quick questions, on the pharmaceutical client where were you think reduced spending, can you elaborate on that a little bit?

Is that an industry trend?

Or are these sort of client specific issues or what is going on there?

Kim?

Yes.

It's both of those answers.

If you look at capital expenditures on a year-over-year basis, you can see that one of the place - there is a little bit of spending for -- many of the segments capital spending has gone up.

And the one place that it's gone down is the pharma industry.

So I think that a lot of the things that the pharmaceuticals are looking at, just given the environment that they're in both regulatory as well as new-product pipelines and things like that, some of it has to do with those.

A lot of spending happens when you have new products, and depending upon the pipeline and where that falls, maybe some of these drugs didn't get approval yet, likely will get approval, but - so that -- it's just a flow of their pipeline as well as some of the things that they have going on within their companies.

Okay.

And the - client specific issues?

Not really.

Okay, I thought it was both.

And then on -- just to clarify on the tax rate, what was the assumption for the tax rate when you guided previously in the first quarter?

Do you remember?

Ellen?

What was the tax rate in the first quarter?

No, what was the tax rate that you baked in to full year guidance when you guided in the first quarter?

It was right around 40.

Okay, thank you.

Thank you.

And there are no further questions.

Mr. Bohannon, I'll turn the conference back over to you for any closing or additional remarks sir.

Thank you.

Thanks everyone for being with us on the call today.

We'll push hard in the second half and do the absolute best that we can possibly do.

Thank you very much.

Bye.

And that concludes today's conference.

We do appreciate your participation.

Have a great afternoon.

Thanks, Amber.

You're very welcome.