Viad Corp (VVI) 2006 Q1 法說會逐字稿

Good day and welcome to the Viad Corp. 2006 first quarter earnings call.

Today's call is being recorded.

I would now like to turn the call over to the Director of Investor Relations, Ms. Carrie Long.

Please go ahead.

Thank you and good morning.

I would like to thank everyone for attending our conference call this morning.

And I would like to remind you that certain statements made during this 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, 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.

And during today's call, we will refer to tables one and two in our earnings press release.

That press release is available on our website at www.Viad.com.

Now, I would like to introduce Paul Dykstra, our President and CEO.

Good morning, everyone, thanks for being with us today.

I also have with me today Kevin Rabbitt, who is President and CEO at GES Exposition Services, and Ellen Ingersoll, Viad's Chief Financial Officer.

As we announced at the end of March, Kim Fracalossi has resigned as President and CEO of Exhibitgroup/Giltspur and I have taken over her responsibilities until a permanent CEO is named.

Now for the first quarter results.

As I discuss our first quarter results, you may want to refer to tables one and two in the earnings press release.

We had a good first quarter.

Income before impairment recoveries was $13.2 million or $0.60 per diluted share.

These strong first quarter results were driven by great performance at GES and gains from the sale of certain assets.

The gains added $0.10 per share to our earnings.

And we also realized favorable tax settlements of $0.05 per share.

Excluding the gains and tax settlements, our income before impairment recoveries would have been $0.45 per share, which is better than our prior guidance of $0.35 to $0.43 per share.

The impairment recoveries we recorded in the first quarter related to insurance proceeds received for assets that were damaged as a result of Hurricane Katrina, and amounted to $508,000 after tax or $0.02 per share.

The final resolution of our claims associated with Hurricane Katrina remains pending with our insurance carriers.

And the amounts of additional recoveries, if any, remain uncertain.

Including the impairment recoveries, our first quarter income from continuing operations was $13.8 million or $0.62 per share.

Our revenue for the quarter was $233.8 million and segment operating income was $17.7 million.

This compares to 2005 first quarter revenue of $249.5 million and segment operating income of $22.8 million.

The declines versus 2005 were due to negative show rotation at GES and lower revenues at Exhibitgroup.

Now let's move on to the individual operating segment results.

Again, you may want to refer to table one of the press release which provides revenues and operating incomes for each of the operating segments.

Now I'll turn it over to Kevin Rabbitt to discuss GES.

Kevin?

Thanks, Paul.

We had a great first quarter.

Our revenue was $194.1 million and operating income was $22.4 million with operating margins of 11.5%.

Both revenue and operating income came in better than our prior guidance as a result of solid execution and stronger than expected growth in our portfolio of shows.

Despite negative show rotation of $18 million, our first quarter revenue decreased by only $4.2 million from the 2005 first quarter due to very strong same-show growth.

Our base same-show growth during the first quarter was 10.8%.

To put the strength of this growth in perspective, our base same-show growth for 2005 was 6.8%, which was also very good.

As a reminder, base same-show growth is one performance measurement that we use and it refers to revenue growth in our shows that occur in the same city and same quarter every year.

Our strong same-show growth continues to be driven by overall growth in the industry and by the efforts of our products and services group to increase penetration and to exhibitor discretionary spending.

We also saw an increase in our exhibitor exclusive revenue, mainly from increased trade show electrical revenue on a few shows and a slight increase in material handling revenue.

Although the products and services group continues to be a key driver of our same-show growth, our overall revenue from exhibitor discretionary services was actually down 9.4% from the 2005 first quarter due to negative show rotations.

There were a couple of large shows that rotated out of the 2006 first quarter that were big for us in terms of products and services revenue in the 2005 first quarter.

While our absolute dollars of exhibitor discretionary revenue were down, due to show rotation, we still saw strong growth in this revenue stream from our shows that occur every year in the first quarter.

As I mentioned earlier, we're also doing a very good job executing high quality service and increasing efficiency.

We continue to make good progress in rolling out our petroleum surcharge program, our other effective price increases.

Through our efforts here, we are able to partially offset the impact of increased petroleum prices.

We also continue to work very hard to drive productivity improvements through the implementation of Best Practices and utilization of new technology.

As a result of the good traction we are realizing from initiatives to drive profitable growth through our pricing and productivity improvements, we are expecting an increase in performance-based incentives for 2006 as compared to 2005.

Because of this, we increased our accrual for such incentives as compared to 2005 first quarter.

This year-over-year increase, as well as negative show rotation, led to lower operating income in the first quarter as compared to the 2005 first quarter.

As I'll discuss later, we do expect 2006 full year operating income to increase over 2005.

Now I'll quickly cover our revenue backlog before commenting on our outlook for the remainder of 2006.

During the first quarter; we signed $80 million of future bookings, we have over 60% of our remaining 2006 forecasted revenue under contract and our total revenue backlog for the rest of 2006 and beyond stands at $886 million.

The second quarter, we expect revenue to be in the range of $165 to $175 million and operating income to be in the range of $16.5 to $18.5 million.

Our second quarter guidance reflects the impact of positive show rotation, which is expected to benefit revenue by about $9 million.

The third quarter is also expected to be positive by about $24 million.

And the fourth quarter show rotation is expected to negatively impact revenue by about $7 million.

On a full year basis, show rotation is not expected to have a meaningful impact on our revenues.

The positive rotation in the second and third quarters is expected to be offset by the negative in the first and fourth quarters.

The net impact is about $8 million of positive rotation for the year.

Overall, for 2006 we continue to expect full year revenue to increase in the mid to high single digit rate and we're expecting operating margins to approximate our 2005 margins.

We remain optimistic about our outlook for 2006.

We continue to see improvement in the exhibition and event industry and growth in our portfolio shows.

Exhibitors seem increasingly willing to spend a bit more on trade show activities than they have in the recent years.

And the slight improvement in material handling revenue that we saw in the first quarter was also encouraging.

However, it is too early to determine if this is the beginning of a trend or simply the result of strong performance on certain shows.

Internally, our focused efforts to address the specific challenges we face to drive incremental productivity improvements and profitable revenue growth are paying off.

As always, we will continue to do a great job controlling costs where we can in order to deliver quality products and services and great customer service at a terrific value to our customers, enabling us to generate strong returns for our shareholder.

The entire GES team is committed to winning in 2006 for all our stakeholders.

Thanks Kevin.

Next, I'll cover Exhibitgroup/Giltspur and the Travel and Recreation Service segment before giving some guidance for the rest of 2006.

Exhibitgroup/Giltspur's first quarter revenue was $34.7 million, which is at the lower end of our prior guidance range and down $11.7 million from the 2005 first quarter.

As expected, the decrease in revenue was due primarily to three factors that we mentioned during our last call.

First, in the 2005 first quarter we benefited from client spending to exhibit at ConExpo/ConAg, which is one of the largest trade shows in North America.

This show only takes place every three years so we won't see that benefit again until 2008.

Second, we also experienced a shift of some client spending out of the first quarter, based on our client's planned trade show programs and marketing schedules for 2006.

We expect to realize revenue from these clients later in the year.

And third, our first quarter 2005 included revenue from a couple of clients that we did not resign during 2005.

Exhibitgroup's first quarter operating loss was $3.0 million, down $1.2 million from the 2005 first quarter loss of $1.8 million.

This decrease was primarily due to the revenue decline.

First quarter operating results also fell a bit short of our prior guidance, due to a slightly lower mix of construction revenues than we had expected.

However, the mix was still in the range of 20 to 25% of revenues, which is what Exhibitgroup has been averaging over the past few years.

As we have discussed before, we do not have good visibility over the mix of construction revenue.

For example, in the fourth quarter of 2005, Exhibitgroup's construction mix was roughly 30%, much stronger than the 23% that we had expected for that quarter.

This poor visibility is due to the fact that most companies typically don't build a new exhibit every year, so we enter the year knowing that we will need to replace much of the prior year's new exhibit construction spending with spending from other clients.

What we don't necessarily know is which clients will spend on new exhibits and when they will do their spending.

Now, while we didn't see as construction revenue in the first quarter as we had hoped, it's still early in the year.

As Kevin discussed earlier, the industry overall has seen some growth and we continue to see signs that exhibitors are willing to spend more.

We're working very hard to win profitable exhibit construction business.

And we're still cautiously optimistic that we can hold the line on our construction mix for the year.

For the second quarter, we expect Exhibitgroup's revenue to the in the range of $42 to $48 million.

And we expect operating results to be in the range of a loss of $500,000 to an operating profit of $1.5 million.

This compares to second quarter 2005 operating income of $2.0 million on revenue of $58.5 million.

As we mentioned during the last call, Exhibitgroup's second quarter revenue will be affected by negative show rotation from a major European air show that took place during the 2005 second quarter, but will take place during the third quarter this year.

The air show provides us with roughly $10 million in revenue each year.

Overall, we continue to expect 2006 to be another profitable year for Exhibitgroup.

Since the end of March, I have been working closely with the Exhibitgroup/Giltspur team to ensure we continue to maintain the momentum gained in 2005.

The first quarter got us off to a slightly slower start than we would have liked, particularly on the construction side.

But with continued improvement in the industry, an efficient infrastructure and a talented team of people that want to win Exhibitgroup is well-positioned to drive profitable growth in 2006.

Our biggest challenge right now is driving incremental revenue through the business and this is where efforts are focused.

We are continuing our efforts to identify the right person to take the helm at Exhibitgroup.

And given all the improvements in Exhibitgroup's infrastructure that we have driven over the past few years, we believe the Company is ready to enter a new phase in its life cycle.

We're ready to shift from internal improvements to organic growth.

We want a strong leader with a strong background in sales and marketing that can drive revenue growth in the business to capitalize on its significant leverage.

Our goal is to grow the business profitably to win for all of our stakeholders.

Now let me move on to Travel and Recreation Services segment.

Travel and Rec Services segment revenue for the first quarter was $4.9 million, up slightly from $4.7 million in the 2005 first quarter.

The first quarter operating loss for the segment was $1.7 million, improved from a loss of $2.2 million in the 2005 quarter.

Due to its seasonal nature, the Travel and Recreation Services segment generates less than 10% of its full year revenues during the first quarter.

As a result, our main focus during this time is on cost containment.

The fourth quarter is similarly slow.

The third quarter is the segment's strongest quarter, providing roughly 55 to 65% of full year revenue and the second quarter provides about 20 to 30%.

Early indications remain positive for continued modest growth at both Brewster and Glacier Park in 2006.

As we mentioned on the last call, our concessionaire contract with the National Park Service at Glacier Park has been extended through the end of 2006 and will likely be extended for another two years.

For the second quarter, we expect revenue to be in the range of $20 to $22 million, up from $18.1 million in the 2005 second quarter.

Which expect operating income to be in the range of $4.5 to $5 million as compared to $4.2 million in the 2005 quarter.

For the full year, we expect modest improvements in both revenue and operating income, and continued strong operating margins and cash flow.

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

Ellen?

Thanks, Paul.

As shown in table two to the earnings release, adjusted EBITDA was $26.1 million during the quarter versus $27.1 million in the first quarter 2005.

As also shown in table two, free cash flow, defined as cash from operations less capital expenditures and dividends, was an outflow of $1.2 million for the quarter versus free cash flow of $6.3 million in the 2005 first quarter.

The decrease was due primarily to lower operating income quarter-over-quarter, more capital expenditures in the 2006 quarter and the change in working capital.

Directionally for 2006, free cash flow is expected to approximate net income plus depreciation and amortization minus restructuring payments, Cap Ex and dividends.

Free cash flow would also exclude gains on sales of assets.

For the full year 2006, our working capital is expected to have a slightly positive impact.

At March 31, 2006, Viad had total cash and cash equivalents of $154.7 million.

Our debt at the end of the quarter was $17.1 million with a debt-to-capital ratio of 4%.

Net interest income for the quarter was $1.4 million versus $150,000 in the first quarter 2005.

About $450,000 of the 2006 amount represented net interest refunds related to prior tax years.

Depreciation and amortization for the quarter was $4.8 million, compared to last year's quarter of $6 million.

The full year forecast is expected to approximate $20 to $22 million.

Capital expenditures were $6.1 million in the first quarter 2006 compared to $3.5 million in the first quarter 2005.

For the full year, we are expected to approximate $20 to $22 million in Cap Ex.

Payments on Viad's restructuring reserves were $351,000 during the quarter versus $792,000 in the first quarter 2005.

We expect to make restructuring payments of approximately $1.6 million in 2006.

The first quarter 2006 income tax rate was 36.7% versus 39.6% in the first quarter 2005.

Stock option expense for the first quarter 2006 was approximately $330,000 after tax, which is nearly $0.02 per share.

The impact over the next three quarters is expected to approximate $0.01 per share per quarter.

And during the first quarter 2006, Viad repurchased 414,400 shares at an aggregate cost of $13.3 million.

And now, back to you, Paul.

Thanks, Ellen.

Before I wrap up my comments and open the call to questions, let me give you some guidance for the 2006 full year and second quarter.

We are increasing our guidance for the 2006 full year to reflect the first quarter gains of 10% -- $0.10 per share, the favorable tax settlements of $0.05 per share and $0.06 per share related to the effective share repurchases during the first quarter and an increase in interest rate expectations.

We now expect full year income per share to be in the range of $1.70 to $1.81 versus our prior guidance of $1.49 to $1.60.

This compares to 2005 income before impairment losses of $1.66 per share, which included $0.21 per share of favorable tax settlements.

The guidance range for 2006 assumes an effective tax rate of 39% for the remainder of 2006.

We continue to expect full year revenue to increase by a mid single digit rate from the 2005 amount of $826.3 million.

And segment operating income to increase by a mid to high single digit rate, from $64.2 million in 2005 due to improved results at all of our operating companies.

As we discussed earlier, show rotation is not expected to have a meaningful impact on full year 2006 revenues.

For the second quarter, we expect income per share to be in the range of $0.52 to $0.60 per share.

This compares to income from continuing operations of $0.50 per share in the 2005 second quarter.

Revenue is expected to be comparable to or slightly higher than the 2005 amount of $227 million.

Segment operating income is expected to be in the range of $21 to $24.5 million, as compared to $22.3 million in the 2005 second quarter.

Positive show rotation at GES is expected to offset negative share rotation at Exhibitgroup.

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

Just to summarize then, before we go to questions -- overall, the first quarter was a good start to 2006.

We're very encouraged by the strong same-show growth at GES and continued success of the products and services group.

Exhibitgroup continues to be the wild card.

After finishing 2005 with two consecutive quarters of growth in the mix of construction revenue, we experienced a softer than expected construction revenue mix in the first quarter of 2006.

While this is a bit disappointing, we continue to see a good strength in the exhibition event industry and signs that exhibitors are willing to spend more.

The team at Exhibitgroup is working hard to win profitable new exhibit construction business and we are cautiously optimistic that we can hold the line on the construction revenue mix for the year.

Given the productivity improvements that Exhibitgroup has realized, we should have great upside if we can drive more revenue through that business.

We just don't have good visibility over when that revenue will materialize.

All our companies remain focused on cost control and profitable growth in order to provide quality products and services at a good value to our customers and strong returns to our shareholders.

We continue to look for acquisition opportunities that make good sense from a strategic perspective.

We will only acquire, though, if we can buy the right company at the right price.

Our goal is to continue to carry the momentum we gained in 2005 into 2006 to win for all of our stakeholders.

With that, Jaime, can we turn it over to Q&A, please?

Absolutely. [OPERATOR INSTRUCTIONS] We will take our first question from Tom Bacon with Lehman Brothers.

Yes, I was just wondering -- as far as the share repurchase, what's left on the capacity there?

Good morning, Tom.

Hi, Paul, how are you?

I'm good, thank you.

We can go up to a million shares.

Our guidance doesn't reflect any additional purchases, but we do believe that stock is still a good value.

And at its current trading price, we intend to continue purchasing from time to time, up to a million shares.

Okay.

Is that pretty easy to increase if you so feel the need?

Do you need board approval or whatever?

Yes, I think so.

Okay.

And just Ellen, one question on the corporate expenses there.

It looked kind of low in the quarter, is there something in there that offset some of the expenses or -- ?

No, Tom, it's pretty much timing.

It's a lot of little things.

For the year, we expect corporate expenses to approximate last year.

Okay.

So it's really timing in the first quarter.

And as far as the search for somebody new to run Exhibitgroup -- I mean are you pretty far along in that process?

When would you expect to complete that process?

We're actively recruiting for a new CEO for Exhibitgroup.

As I mentioned in my comments earlier, Tom, we're really looking for somebody now with a strong sales and marketing background to lead the growth phase of Exhibitgroup and take advantage of the cost structure that we have put in place over the last couple years.

We are very active in that search.

I can't really tell you when that's going to be completed because we're going to take as much time as necessary to find the right person.

But we certainly think that there are great candidates out there.

And that we hope to wrap that up as quickly as possible.

And also, just -- maybe Kevin could comment a little bit about the petroleum cost in GES.

I know you guys put in a surcharge last year.

Is that something you're going to increase?

Or how is that received by customers?

Maybe if you could give us a little color there.

Sure, Tom.

The -- as I've mentioned, we're right on track to where we thought we would be in the implementation of that.

We actively monitor the cost of the petroleum-based products that we have.

We have always said that if there's sustained petroleum price increases, we would have to look at adjusting.

If there's a decrease, we have to look at adjusting down.

At this stage in the game, it's more actively monitoring and working with our clients to implement something that makes sense.

Have the clients been pretty understanding in that respect?

As I said on the last call, I think that they understand the cost of petroleum going up -- they see it at the pump, they see it at their home heating oil.

It's a conversation that we're able to have.

And one we work together with partners to implement and they have been understanding to that extent, yes.

Okay, thank you.

[OPERATOR INSTRUCTIONS] We will take our next question from John Healy with Midwest Research.

Good morning guys.

Morning John.

Just a couple quick questions.

GES put up another strong quarter of growth for you guys. 11% same-show growth number seemed pretty strong to us.

Wanted to get a little bit of color behind maybe the strength of that number.

And if that's a number we should kind of look for around 10, 11% for the remainder of the year.

Let me comment real quick John, then I'll turn it over to Kevin.

I think we're seeing the benefit of a lot of the actions that we have taken, especially with implementation of the products and services group.

And then putting great people in charge of leading the effort to better penetrate our existing exhibitors, mostly on our shows, but certainly on competitive shows as well.

Kevin, you want to comment on kind of how we see, going forward, the growth?

Sure.

I think you're dead on there Paul, we have got great people running those businesses.

We continue to get more and more sophisticated on how we attack the opportunities.

John, I wish I could predict the future on it.

I would remain cautiously optimistic that we can continue seeing strong same-show growth, but a lot of that depends on exhibitor's budgets and what they have available to spend.

Because I know our products and services, from an offering standpoint, are up there with anybody in the industry.

That makes sense.

Then a question on Exhibitgroup -- you broke out the three reasons for maybe being a little softer than what you thought that business might come in for the quarter.

The part of the question I was curious to know was, how much did those two lost contracts kind of account for, in terms of maybe revenue last year, that could have taken place this year?

Hang on one second, John.

I'm not sure that we have that in front of us.

We don't really have that in front of us.

Was that a competitive loss or was that more of just, they didn't spend this year?

Those were competitive losses.

Okay.

Is there anything new kind of on the competitive landscape on Exhibitgroup that we should be keeping our eye out there for?

No, I think we are seeing things similar to what we have talked about in the past.

What's great with Exhibitgroup is, even on the down revenue, we did see good strong margins at the direct level.

Which again, validates that we think we have got an excellent cost structure.

Now that we can find a way to get more revenue going through that, we have got a lot of upside.

Great, thanks so much guys.

Thanks John.

[OPERATOR INSTRUCTIONS] And we have no further -- actually we do have one question coming from Carter Newbold with Rutabaga Capital.

Good morning.

Morning, Carter.

Clarification on the share repurchase -- do you have a remaining one million authorized or do you have up to one million authorized?

We have up to one million.

I'm sorry for that lack of clarification, Carter.

Okay.

And then I wondered -- you made some comments about your -- sorts of acquisitions that would be of interest to you.

I think on a couple of prior conference calls you all have mentioned transactions that you wanted to advance due diligence on, then lost out on or walked away from because of valuation.

Does that continue to be an issue for you?

And how would you describe your pipeline, in general terms?

We're certainly still very, very actively looking for deals that make the most sense.

As we have said before and we will continue to say, strategic acquisitions continue to be our number one call for capital here, followed by share repurchases.

The two things that we have talked about before that still remain very true in what we're looking for is, we have to find businesses at the right price, but also that are a good cultural fit.

As we have looked at things in the past, we have had both of those issues require us to pass.

And we have been very disciplined in setting prices that we walk away from and then do so.

That's about all I want to say right now, other than we do remain very, very active in looking at deals and looking for something that makes sense to our shareholders.

Great.

One last small issue.

The renewal on Glacier Park -- I think you all indicated a couple times that you have a high degree of confidence that you will get an extension of a year or two -- what's the timetable for that decision?

We're pretty confident that, because of the notice period in our contract, that we have got, obviously, '06 under contract and '07 is under contract.

And because of the notice period, we feel very comfortable that '08 will also be included.

Great, thanks very much.

Thank you.

And Mr. Dykstra, with no further questions, I would like to hand the call back over to you for any additional remarks or closing comments.

Again, thanks very much for being with us this morning.

I think we had a good first quarter.

We have still got plenty of work to do and -- but we have got a lot of people at Viad and all the operating companies that want to win for all of our stakeholders.

So look forward to talking to you again at the end of the second quarter.

Thanks very much.

Ladies and gentlemen, this does conclude today's teleconference.

You may now disconnect and have a great day.