Viad Corp (VVI) 2006 Q3 法說會逐字稿

Good day and welcome to this Viad Corporation 2006 Third Quarter Earnings Conference Call.

Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the Director of Investor Relations, Ms. Carrie Long.

Please go ahead, ma'am.

Good morning and thank you for attending our conference call.

Before we begin, I'd like to remind everyone 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 results to materially differ from those in the forward looking statements can be found in Viad's annual and quarterly report filed with the Securities and Exchange Commission.

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

During today's call we'll refer to tables one and two in our earnings press release, which can be found on our web site at www.viad.com.

With that, I'd like to introduce Paul Dykstra, CEO of Viad.

Good morning, everyone.

Thank you for being with us today.

On today's call you'll hear from Kevin Rabbitt, President and CEO of GES Exposition Services and Ellen Ingersoll, Viad's Chief Financial Officer.

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

The third quarter was another strong quarter for Viad.

Income from continuing operations was $22 million or $1.03 per share.

Excluding favorable tax settlements of $0.27 per share and net impairment losses of $0.01 per share, our income before other items was $16.3 million or $0.77 per share, which exceeds our prior guidance of $0.55 to $0.64.

These results are also significantly better than our 2005 third quarter income before other items of $8.4 million or $0.37 per share due mainly to positive [show] rotation at GES and Exhibitgroup and continued same show growth at GES.

The travel and recreation services segment also posted growth over 2005.

Revenue for the quarter was $230.5 million with segment operating income of $27.6 million.

As compared to the 2005 third quarter, this reflects an increase of $11.3 million in segment operating income on a revenue increase of $39.4 million or 20.6%.

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.

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

Kevin?

Thanks, Paul.

We had another great quarter and continued to realize significant growth over 2005.

For that I want to once again start with thanking all the hardworking, dedicated employees of GES for the outstanding service they provide to our clients.

Revenue for the quarter increased $32.1 million or 26.9% to $151.7 million as compared to the 2005 third quarter.

Operating income increased $8.1 million to $9.6 million.

Positive show rotation contributed about $27 million in revenue during the quarter and was a significant driver of our growth over 2005.

We also continued to realize strong same show growth and growth in distributor discretionary revenue driven by the products and services group.

International manufacturing technology show and the international woodworking fair which rotated into the 2006 third quarter realized good growth versus their last occurrences in 2004.

And our base same show growth was a healthy 6.2% in the third quarter.

This measure is down somewhat from prior quarters due to our seasonal mix of shows.

In general we are seeing very strong growth in the major industry shows, which tend to be fewer in number during the summer months.

As a reminder, base same show growth is a measure of growth in our shows that occur in the same city in the same quarter every year.

On a year-to-date basis, our revenue is up $46.8 million or 10% and operating income is up $5.9 million or 13.3%.

Show rotation had a net positive impact of $12 million on a year-to-date revenues.

When excluding rotating shows, our revenue is still up a very healthy 8.5% due mainly to same strong show growth.

We are able to realize this strong growth which exceeds overall industry growth rates because of our focus on continuous improvement and reinvention of our service offerings to best suit the needs of our current and potential customers.

Over the past several years we have invested in efforts to enhance our customer value proposition, increase penetration to exhibitor spending, drive productivity improvements through operations excellence.

These efforts have enabled us to capture additional revenue, sustain our 90% plus customer retention rate, mitigate the effective increases and direct costs and expand our competitive advantages.

The GES team has been relentless in addressing both challenges and opportunities.

And our results this year clearly demonstrate the outcomes of these strong efforts.

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

During the third quarter we signed nearly $90 million in future bookings.

We have over 60% of our forecasted fourth quarter revenue under contract and our total revenue backlog for the rest of 2006 and beyond stands at nearly $900 million.

We expect our full year 2006 revenue to be in the range of $615 million to $625 million, which reflects an increase of 8 to 10%.

Operating income is expected to be in the range of $47.5 million to $49 million, up from $43.6 million in 2005 with comparable operating margins.

For the fourth quarter we expect revenue to be in the range of 100 to $110 million with an operating loss in the range of 3 to $1.5 million.

Show rotation is not expected to have a meaningful impact on the fourth quarter.

Overall we expect 2006 to be a great year for GES.

As always, we'll continue to focus on driving growth and profits by controlling costs and delivering quality products and services and terrific value for your customers.

The GES team is committed to winning for all of our shareholders.

Thanks Kevin.

Now I'll cover results for Exhibitgroup/Giltspur and the travel and recreation services segment.

Exhibitgroup's third quarter revenue was $32 million with an operating loss of $2.8 million.

This reflects a $1.4 million improvement in operating results on a revenue increase of $4.7 million as compared to the 2005 third quarter.

These improved results were largely due to a positive show rotation from a European air show that occurred during the third quarter of this year as compared to the second quarter in 2005.

For the fourth quarter we expect revenue to be in the range of 34 to $40 million, down from $52.1 million in the 2005 fourth quarter.

Fourth quarter operating results are expected to be in the range of a loss of $1 million to income of 500,000 down from fourth quarter 2005 operating income of $4.6 million due to the revenue decline.

On a full year basis, revenue is expected to be in the range of 148 to $154 million with an operating loss in the range of $4 million to $2.5 million.

As we mentioned during our last quarterly call, our domestic revenue has been down due to the loss of a couple of significant clients as well as existing clients spending in 2005 that did not recur in 2006.

At the end of last quarter, we had a strong sales pipeline and believed that we could replace this revenue with new wins and other increases in client spending.

However, conversion of the RFPs in our pipeline has fallen short of the level we anticipated and we're not seeing a pickup in spending by existing clients.

As opposed to the budget flush that we experienced in the 2005 fourth quarter, we are seeing some clients defer spending into 2007.

We're also seeing reduced spending or tighter budgets for approved projects as compared to last year.

Large corporate exhibitors have been very focused on saving costs on their exhibiting programs and maximizing their return on investment.

And this has put a great deal of pressure on exhibit budgets.

One way that Exhibitgroup is addressing this is by revisiting in our cost structure to ensure that value is created along every step of the process.

The other is to find ways that we can add even more value to our clients by providing additional value-added services in order to capture a greater share of their overall marketing budgets.

We believe that Exhibitgroup's newly appointed CEO, John Jastrem, will be able to add substantial value in this area.

John comes to us from Omnicom, the world's largest advertising and marketing services company.

He has a great background in sales and marketing and is a proven leader who has driven successful revenue growth and operational improvements at various businesses.

During his eight year tenure at Omnicom John headed two of its subsidiaries, Rapp Collins Worldwide, Dallas, a leading direct response marketing and database management company, and The Marketing Arm, an experiential marketing services agency.

At Rapp Collins, revenues and profits climbed significantly during John's six-year leadership as Chief Executive Officer.

This was accomplished through organic growth by expanding service levels to existing clients and through new client wins.

In addition to his experience in sales growth and growth oriented strategic planning, John also has extensive experience in client satisfaction, employee recruitment and development and acquisitions and divestitures.

We believe that John is a great fit for Exhibitgroup and will prove to be an invaluable edition to the team.

Now I'll move on to travel and recreations services segment.

Third quarter revenue for the segment was $46.9 million, up $2.6 million or 5.9% as compared to the 2005 quarter.

Operating income was $20.8 million, up $1.8 million or 9.4%.

And operating margins were 44.5% as compared to 43.1% in the 2005 third quarter.

Brewster and Glacier Park both performed very well.

As compared to the 2005 third quarter, Brewster saw a growth in passenger volume at their Gondola and an increase in occupancy at its Mount Royal hotel.

Revenues from Brewter's Icefield attraction were also up due to an increase in revenue per passenger.

Glacier Park realized strong occupancy at its inns and lodges and an increase in room revenue over the 2005 third quarter. 2006 is essentially complete for the travel and recreation segment.

Glacier Park is now closed for the season and Brewster is seasonally very slow during the fourth quarter.

Overall 2006 is on track to be another good year for both Brewster and Glacier.

We expect full year revenue to be in the range of 78.5 to $80.5 million and we expect operating income to be in the range of 22 to $23 million with operating margins approaching 30%.

For the fourth quarter we expect revenue to be in the range of 5.5 to $7.5 million with an operating loss of 1 to $2 million.

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

Ellen?

Thanks Paul.

As shown in table two to the earnings release adjusted EBITDA was $30.1 million during the quarter versus $19.1 million in the third quarter 2005.

As also shown in table two, free cash flow defined as net cash provided by operating activities minus capital expenditures and dividends was $36.7 million for the quarter versus $20.6 million in the 2005 third quarter.

The increase was due primarily to higher net income and favorable working capital.

Directionally for the 2006 free cash flow is expected to approximate income from continuing operations plus depreciation and amortization minus restructuring payments, CapEx and dividends.

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

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

At September 30, 2006, Viad had total cash and cash equivalents of $197.2 million.

Viad's total debt at the end of the quarter was $15.3 million with a debt to capital ratio of 3.3%.

Net interest income for the quarter was $1.6 million versus 348,000 in the third quarter of 2005.

Depreciation and amortization for the quarter was $5 million compared to last year's third quarter of $5.6 million.

The full year 2006 forecast is approximately 19 million to $21 million.

Capital expenditures were $4.3 million in the third quarter of 2006 compared to $3.3 million in the third quarter of 2005.

The full year 2006 forecast is approximately 18 million to $20 million.

Payments on Viad's restructuring reserves were 587,000 during the quarter versus 791,000 in the third quarter 2005.

Full year restructuring payments are expected to approximate $1.4 million in 2006.

The 2006 income tax rate year-to-date was 23.2% versus 36.8% in 2005.

The 2006 rate reflects aggregate favorable tax settlements of $10 million as compared to $2 million in 2005.

The 2006 year-to-date tax rate excluding the tax settlements was 37.3%.

During 2006, Viad announced its intent to repurchase up to 2 million shares.

In the third quarter about 80,000 shares were repurchased at an aggregate cost of $2.6 million.

Year-to-date repurchases approximated 1.1 million at an aggregate cost of $34.4 million.

Now back to you, Paul.

Thanks, Ellen.

Before wrapping up my comments and opening the call to questions, let me give you some guidance for the rest of 2006.

We are increasing our guidance for 2006 full year income before impairment recoveries to $2.28 to $2.35 per share as compared to prior guidance of $1.96 to $2.07 per share.

The increase reflects our stronger than expected third quarter performance including favorable tax settlements of $0.27 per share.

It also reflects the expectation that we will receive approximately $1.7 million in insurance recoveries during the fourth quarter related to hurricane Katrina business interruption claims which will be recorded in GES' operating income when we receive it.

Partially offsetting these increases is a decreased fourth quarter outlook for Exhibitgroup due to reduced revenue expectations, which I discussed earlier.

Beginning this quarter, we're also providing guidance for income before other items, which excludes favorable tax settlements and gains on sale of corporate assets in addition to impairment recoveries or impairment losses.

Income before other items is expected to be in the range of $1.72 to $1.79 which compares to 2005 income before other items of $1.45 per share.

The guidance range for the 2006 fourth quarter assumes an effective tax rate of 39% and does not include the effect of any future share repurchases.

We expect full year revenue to increase by a low to mid single digit rate from the 2005 amount of $826.3 million and segment operating income to increase by a low to mid single digit rate from $64.2 million in 2005.

The improvements are expected to be driven mainly by growth at GES and the travel and recreation services segment.

Specific full year guidance for each of our operating segments was discussed earlier and can be found in the earnings press release.

For the fourth quarter we expect a loss per share in the range of $0.21 to $0.14.

This compares to income before other items of $0.04 per share in the 2005 fourth quarter.

Revenue is expected to decrease by up to 12% from the 2005 amount of $158.6 million due to the expectation of lower revenues at Exhibitgroup.

Segment operating loss is expected to be in the range of 5 million to $2 million as compared to segment operating income of $2.8 million in the 2005 fourth quarter.

Show rotation is not expected to have a meaningful impact on the 2006 fourth quarter.

In summary, we're having a great year despite the underperformance at Exhibitgroup.

Our full year guidance reflects an increase in income before other items per share of 18 to 23% and we expect free cash flow to increase by more than 50%.

Both GES and the travel and recreation services segment are on track to realize strong results in 2006.

Clearly we're very disappointed by Exhibitgroup's revenue decline this year.

But we now have a highly qualified full time leader in place for this -- for the business and we're taking action to improve its sales win ratio and reduce controllable costs.

We're confident that under John Jastrem's leadership, Exhibitgroup will be able to successfully grow its revenue and leverage its excellent cost structure to maximize profits.

On the acquisition front, we have a very active pipeline and we are currently taking a close look at some targets that could be very nice bolt-ons for GES and the travel and recreation businesses.

Good strategic acquisitions continue to be our first call in capital.

However, as we've discussed before, we are pursuing a balanced capital deployment strategy that also includes share repurchases.

We have been and will continue to be buyers of our stock from time to time.

We recognize that capital is precious and must be allocated with great discipline to ensure that value is created.

Overall, we continue to be on course to deliver growth and revenue, profits and free cash flow during 2006.

Be assured that all of our companies remain focused on profitable growth by providing quality products and services to our customers at a good value, while continuing to control our costs to maximize margins.

We are committed to winning for all of our stakeholders.

With that, we'll close and take your questions.

Melissa, if you could open the question line please.

[OPERATOR INSTRUCTIONS] We'll go first to Kartik Mehta with FTN Midwest Securities.

Good morning, Paul.

Good morning Kartik.

I wanted to ask you just a big picture question on Exhibitgroup.

Do you think that the fundamentals in this business have changed?

And I guess what I'm trying to understand is should top line growth expectations -- what should our top line growth expectations for this business be once you think things out, stabilize and what's the real margin potential in this business?

Clearly, we're working hard on the revenue side, Kartik.

We probably lost a little bit of momentum over the last couple of months due to the fact that we didn't have a full-time leader in that business.

But with John Jastrem on board, we're very excited that he can add a lot of discipline and new thinking to our sales process.

There's no one reason why we're not being as successful as we think we can be.

But there are a number of actions that we are taking to increase our win ratio, which will certainly impact our top line.

If you go back to the fourth quarter of 2005, you saw that when we are able to impact our top line, we can get good throughput on that revenue.

And that's job number one right now for John and his team going forward is to really attack the growth side of this thing.

And we've got to win more new business as well as work with our clients to capture more of their existing budget spend too.

And we think we have a number of opportunities to do that going forward.

It sounds like from your comments, if I'm interpreting them right, that the market is there.

And if we look at some of the other companies, there are some deals out there that are winning.

You just need to win your fair share of deals.

And if that happens, this business can provide maybe some decent growth and margin.

Yes, we certainly think so.

It's still a very competitive market out there, Kartik.

And exhibiting clients and exhibitors in general are looking at maximizing their return on investment and they're very focused on costs.

But again, we think we have the right cost structure and the right leadership team going forward as well as some fantastic products and good technology that maybe with a little different focus, we should be able to increase that win ratio.

A question on GES.

That business continues to do well.

And I'm wondering -- I know the consumer electronics show is coming up and that's usually one of your largest shows, if you could maybe give a early read on how that show is going and if that could potentially tell us how 2007 might be for that part of the industry.

Sure I'll take a quick comment on that and then I'll ask Kevin to comment as well, Kartik.

I think we've talked about in past years that consumer electronics show is kind of a good indicator for the trade show business in general.

Over the last couple of years it's been a very strong show for GES and for Viad overall, as Exhibitgroup has some large clients on that show as well.

All indications are that it will be another terrific year for that show and -- which should benefit GES and Exhibitgroup as well.

Kevin, do you want to comment on that?

I'd just echo what you said there.

It -- indications are that it should be another terrific show.

I would say we're cautiously optimistic that it will be another great start to our year.

With CONEXPO-CON/AGG out of the rotation, that's likely to be the largest show of 2007.

And the last question, Paul, from a -- can you comment on maybe potential server rotations for 2007?

If there are any large shows that won't repeat or if there are any large shows that might happen that will obviously have an impact on revenue in 2007?

Kevin, can you handle that one?

Sure, Kartik, we're still -- really still scrubbing the show list for '07 but when we -- preliminarily we look at it, we would expect rotation to have a negative impact on '07 revenues.

We're still expecting overall growth in our business.

But from a pure rotation perspective it should have a negative effect.

So it will be just what, organic growth of the shows that are out there?

Yes, organic growth, both from our industry as well as we're driving ourselves through products and services.

Well thank you very much.

Thanks, Kartik.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Tom Bacon with Lehman Brothers.

Good morning.

Morning, Tom.

Morning, Paul.

I was just curious.

In GES, I mean, it seems like you've done a very good job there in terms of penetrating the market and winning your share of discretionary services.

And what I'm wondering is as we look forward, is that an area where you can continue to gain share within the shows or as you start to lap your successes in the past year, I mean is, do you top out at a certain share or do you think you can continue to penetrate the market there?

That's a good question, Tom.

We think we absolutely still have a lot of room for further penetration in that market.

Kevin and his team have done a fantastic job in executing new strategies to capture more of the discretionary spend of the exhibitor.

We think there's still a lot of room with the systems that we've built and the product offerings we have and the terrific people that that company has that there should be substantial further growth in that arena and certainly that's an area that we're focused on.

Kevin, would you add anything to that?

Only thing I'd add to that is we continue to look on an ongoing basis at where there are additional penetration opportunities and that's where we focused our efforts.

So yes, I would agree with our comments, absolutely, Paul.

There's still substantial room to grow there.

Okay.

And then also on -- just on Exhibitgroup.

In the past, you guys have talked about the lifecycle, the exhibits and how most of them were getting sort of long in the tooth and you expected some replacement demands.

And obviously, you haven't seen that as yet.

And what I'm wondering is there any kind of secular shift in that market where -- dealing with the type of exhibits that you guys build are not the type of exhibits that are in demand or are more of these exhibitors taking their design services in-house?

I mean is there something -- is there a change in the market there that is leading to what's sort of the down cycle in that business?

I don't know that we're seeing anything different today than we did a year ago, Tom.

Certainly in the last five years, we've talked about exhibitors and exhibiting clients extending the use of their exhibit from probably a three-year life cycle to a five to seven.

I would suggest that we probably haven't seen that cycle shorten at all, but I don't think it's gotten any longer either.

So we still think there is a bit of demand.

And what we've got to do is go out and win a higher percentage of the available opportunities.

But is there any trend in the industry for exhibitors to take their design services in-house or anything like that?

No, I don't think so and certainly one of Exhibitgroup's strengths is its design.

And that's something that we want to get even more focused on in our efforts to capture new business.

Okay.

And as far as the -- obviously you've built up a pretty substantial amount of cash.

And you've said in the past that you would like to find a strategic acquisition.

And I was just wondering if you could update us on anything there.

I'll go back to my comments.

We do have a few things going on that would be closer to our core business.

They are small to medium-sized deals.

And these are things that would fit in with either GES or the travel and recreation services businesses.

So we think we have some great opportunities there, Tom.

Our first call to capital is to do deals that make sense for our shareholders.

And of course, from time to time we will be repurchasing shares.

I mean, obviously it's been two years since the reverse spin-off or a little more than that and you've built up a pretty substantial amount of cash.

And obviously you read in the paper every day about how all these private equity guys are out there throwing money around.

So I mean does there come a point where you say, okay, maybe we should start looking at something a little more drastic like a leveraged buyback or maybe going private or anything like that?

I don't think we've looked at that at all, Tom.

Again, we're trying to be very consistent in our capital allocation strategy.

And that's some good strategic acquisitions followed by periodic share buyback.

And we'll continue to monitor that very closely.

Okay.

And maybe just, Ellen, a little bookkeeping item.

What was the option expense in the quarter?

The option expense, hold on one second, it was a little under a penny, a share for the quarter.

Okay.

Do you know the absolute amount?

The dollar amount?

Yes.

The dollar amount was 160,000.

160,000, okay, great.

Thanks very much.

Thanks, Tom.

Sure.

[OPERATOR INSTRUCTIONS] At this time we have no further questions.

I'd like to turn the call back over to Mr. Paul Dykstra for any additional or closing remarks.

Thanks Melissa.

Just in closing here, we're very excited with what we've seen at GES.

Kevin and his team have just done a great job of executing and building momentum and finding ways to grow that company.

I'm also very excited about having John Jastrem as the new leader at Exhibitgroup and very excited to be working with him going forward to grow that company and maximize our opportunities.

And the travel and rec segment is doing well in 2006.

So we're very excited about the full year.

We've got a lot of focus on all of our businesses to make sure that we're maximizing shareholder value and we look forward to talking to you in three months.

Thanks very much.

Operator: Once again, that does conclude today's presentation.

We do appreciate your participation and you may now disconnect.