Viad Corp (VVI) 2013 Q2 法說會逐字稿

Welcome to the Viad Corp second-quarter earnings conference call. At this time, all participants are in a listen-only mode. After presentations, we will conduct a question-and-answer session.

(Operator Instructions)

This conference is being recorded; if you have any objections, you may disconnect at this time. I would now like to turn the conference over to Mr. Joe Diaz.

Thank you, and good morning, and thank all of you for participating on the Viad Corp second-quarter 2013 earnings conference call. I'd like to remind everyone that certain statements made during this call which are not historical facts may constitute 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 SEC. During today's call, we'll refer to Tables 1 and 2 in the Business Group Highlights section of the earnings press release, which is available on the Viad website at www.Viad.com.

Today, you'll hear from Paul Dykstra, Viad's President, Chairman and CEO; and Ellen Ingersoll, Viad's Chief Financial Officer. Additionally, Steve Moster, President of Viad's Marketing & Events Group; and Michael Hannan, President of Viad's Travel & Recreation Group, will be available for comment during the question-and-answer session at the end of the call. With that, I'd like to turn the call over to Paul Dykstra, Chairman, President and Chief Executive Officer of Viad Corp. Paul?

Thank you, Joe, and thanks to all of you for participating on today's call. We appreciate your continued interest and support of the Company. I'm pleased to report that our results for the second quarter of 2013 were in line with our prior guidance. Income before other items was $0.33 per share, up about 14% from $0.29 per share in the 2012 quarter, with consolidated revenue of $249.3 million and segment operating income of $10.9 million. Overall, both business units posted solid results.

Our Marketing & Events Group realized modest growth during the quarter, driven by positive show rotation, continued same-show revenue growth, and an ongoing focus on margin improvement. As we have discussed on past calls, we are targeting a full-year operating margin of 2.5% for the Marketing & Events Group. This is up 50 basis points from 2012 despite a significant revenue headwind from negative show rotation in the range of $55 million. In order to achieve this goal, we are focused on marketing and sales activities to generate new business and executing on our key initiatives to improve US margins through a more efficient service delivery network and rigorous labor management. Our service delivery initiative is aimed at reducing operating costs and invested capital by improving the efficiency and performance of our US operations. Specifically, we are rationalizing our facilities, inventories, and equipment in order to meet the demand patterns of our business in the most cost effective manner, while improving our already high service levels.

Through the end of 2012, we have reduced our US facility footprint by nearly one-third, and realized a net reduction in annual US facility costs of almost $7 million as compared to 2008. And we continue to make progress on this front. I had mentioned on a prior call that we were preparing our Atlanta facility to become our East Coast depot. I'm happy to report that it is now fully operational and successfully supporting cities in the East region with inventory and equipment when show production requirements exceed local storage set levels. By using a depot model, we will be able to improve turns and reduce overall stock levels, and therefore, warehouse space. We are also able to drive down space requirements by applying lean practices to improve the efficiency of our warehouse organization.

We are preparing for two fairly significant facility moves later this year that will enable us to reap the benefits of the depot model and more efficient warehousing, while also maintaining or improving our high customer service levels and providing a better work environment for our employees. During the third quarter, we will relocate our Baltimore-D.C. area operations into a more efficient facility in that same market. We are also finalizing plans to relocate our New Jersey-New York operations, which are currently housed in one of the few facilities that we own. As that facility does not meet our go-forward operational needs, we have found a buyer and expect to close on the sale during the third quarter. We have negotiated a lease-back through the end of the year that will enable us to complete a seamless relocation to a more efficient lease facility in the same market during the fourth quarter.

As compared to 2012, we expect the service delivery network changes to benefit US segment operating income by approximately $4 million this year. Excluding the gain on sale and move costs, the ongoing annualized run-rate savings are closer to $600,000 when comparing this year to 2012. We are pleased with the progress achieved in our US margin improvement initiatives to this point. We will continue to effectively manage our US cost structure for improved profitability in 2014 and beyond.

On the International side, our well-established operating infrastructure and broad scope of expertise provides us a competitive advantage that enables us to service iconic events. Two examples are the Paris Air Show, which took place during the second quarter, and the Coronation Festival celebrating the 60th anniversary of the coronation of Queen Elizabeth II that took place earlier this month at Buckingham Palace. Last month, GES UK was honored with two awards by the Association of Event Organizers, or the AEO, at their 2013 Excellence Awards event. GES UK won the very prestigious Service Supplier of the Year award and the Production Design of the Year award, which recognized our design, logistic and staging work at 27 of the venues that were part of the highly successful 2012 London Olympic games. Organizers of world-class events turn to GES as a trusted partner because they know they can rely on us to successfully execute their events.

In addition to the leading-edge work that GES does in staging and producing world-class trade shows and events, we are regularly sought out to apply our wide-reaching expertise to bring ground-breaking exhibits to life. One such project is the Rain Room Exhibit, which is attracting tremendous interest in New York's Museum of Modern Art. The Rain Room, which closes Sunday, features a 100-square-meter area of falling water that uses 3-D tracking cameras to sense a person's presence, allowing visitors to walk through the rain without getting wet. The creator of the concept, Random International, turned to GES for the installation and fabrication of the exhibit at the museum. Seamlessly coordinating 3-D camera technology and split-second plumbing system reactions to keep visitors from becoming drenched was enormously complex. After that, the temporary nature of the exhibit and the strict building codes in New York City that needed to be adhered to, the Rain Room truly exemplifies the skills and engineering sophistication that resides at GES throughout the world. With visitors routinely queued up for hours to get in, the Rain Room has become a cultural phenomenon, and we are pleased to have had a hand in this innovative exhibit.

Our own traveling exhibition, Harry Potter, remains extremely popular, having completed runs in seven cities worldwide, including Chicago, Boston, Seattle, New York, Toronto, Sydney, and Singapore. Harry Potter The Exhibition is currently on display at the Mori Arts Center Gallery in Tokyo. Since it opened there on June 22, over 100,000 guests have visited the exhibition, and we recently posted the single-highest daily attendance of any venue that has hosted it thus far. This is another example of the creative and engineering capabilities that set GES apart and why clients come to us to activate their brands. We have also been successful renewing key pieces of business, including E3, NAMA, and Microsoft, and winning new accounts like Mary Kay.

Now, let me switch gears to our Travel & Recreation Group. Our Travel & Recreation Group had a good quarter. It was on track to be a great quarter until June 20, when our Banff- and Jasper-based operations were impacted by extensive flooding in the Canadian province of Alberta. Major pieces of infrastructure in the province were affected, and many roads were impassable, which temporarily restricted or cut off access to Brewster's hotel properties and attractions in the area. Fortunately, the provincial authorities were able to restore road access to Banff for both commercial and private vehicles by June 26, ahead of the Canada Day holiday weekend. Now that the flooding has abated, visitation to the area is improving, and we expect to see more normalized occupancy and visitor traffic by August.

I am extremely proud of all the Travel & Recreation team members that responded to this crisis with great empathy, determination, and focus on the safety and comfort of our guests. Our team did a great job under difficult circumstances, and I could not be more proud and appreciative of their efforts. I would also like to commend the provincial authorities in Alberta for a magnificent job in effectively addressing the significant infrastructure issues and repairing roads throughout the affected areas to make them passable again in a very timely manner. Their fine work in conjunction with the efforts of the Travel & Recreation team assured the best possible outcome for our guests.

Aside from the affects of the flood, our Travel & Recreation group had solid performance. Glacier Park realized higher room occupancy than in 2012, particularly at its Grouse Mountain Lodge, which was recently updated and refreshed. The St. Mary Lodge, along with other properties in the area, also benefited from strong occupancy in the spring shoulder season. On June 22, our Glacier Park Lodge celebrated its centennial anniversary. Built by the great northern railroad in the rustic Swiss-alpine style, the Lodge opened to the public in 1913.

There are a total of 60 immense timbers, 40 feet in length that provide the structural support for the lodge. At the time those timbers were originally cut, they were approximately 500 to 800 years old. With 161 guest rooms, the Glacier Park Lodge is a grand and imposing structure that is iconic in every way. We are pleased to be the steward of this great national treasure, and I would invite all of you to experience this amazing venue at the foot of the Rocky Mountain front in Montana. We fully expect the next 100 years will make her even more majestic.

We expect this to be a great year for Glacier Park and Alaska Denali Travel. Advanced bookings are ahead of last year's pace for both businesses. And despite the flooding, Brewster is also expected to have a solid year. Let me now turn the call over to Ellen for a more detailed review of our financial results and forward-looking guidance. After Ellen's review, I will provide some additional updates, including an update on our strategic review, and then we will open up the call for your questions. Ellen?

Thanks, Paul. As I cover our second-quarter results, you may want to refer to Tables 1 and 2 in the Business Highlights section of our earnings press release. Our Marketing & Events Group results are in line with prior guidance and better than the 2012 second quarter. Revenue was $219.8 million with operating income of $8.2 million, up from 2012 second-quarter revenue of $216.9 million and operating income of $7.9 million. The improvements from prior year reflect positive show rotation in the International segment and continued US-based same-show revenue growth.

The Marketing & Events US segment revenue was $155.5 million with operating income of $2.6 million, down $10 million and $3 million, respectively, as compared to the 2012 second quarter. The lower year-over-year results were expected and driven primarily by negative show rotation revenue of approximately $6 million, and a lower level of short term bookings compared to the second quarter of 2012, which had the benefit of unusually strong short-term bookings. Revenue from base same shows increased 2.6% for the quarter, with base same shows representing approximately 40% of US segment second-quarter revenue. As a reminder, our base same-show metric is similar to a same-store metric. We define base same shows at shows that we produce out of the same city in both the current-year quarter and prior-year quarter. Our base same-show labor-to-revenue ratio, which is a measure of labor productivity, was relatively flat to the 2012 second quarter. On a year-to-date basis, we have realized an improvement of about 1 full point due to strong performance during the first quarter.

Marketing & Events International segment revenue was $68.6 million, up $13.9 million, or 25.5%, from the 2012 quarter, and operating income was $5.6 million, more than double 2012 second quarter income of $2.3 million. These increases were primarily driven by positive share rotation revenue of approximately $15 million, partially offset by unfavorable foreign exchange rate variances which negatively impacted revenue and operating income by approximately $1.8 million and $152,000, respectively, compared to the 2012 quarter. Travel & Recreation Group revenue of $29.5 million and operating income of $2.7 million were in line with both prior guidance and the second quarter of 2012. As Paul mentioned earlier, results for the 2013 quarter were affected by extensive flooding in late June, which we estimate had an unfavorable impact on second-quarter revenues of about $1 million. Results were also affected by foreign exchange rate variances which had an unfavorable impact on revenue and operating income of $342,000 and $74,000, respectively, as compared to the 2012 quarter.

Now I will cover some cash flow and balance sheet items. Free cash flow was an outflow of $11.6 million for the quarter as compared to an inflow of $6.9 million in the 2012 second quarter, primarily reflecting changes in working capital as well as higher dividend payments and capital expenditures. Capital expenditures were $7.4 million for the 2013 quarter versus $6.5 million in the 2012 quarter. Depreciation and amortization expense was $7.3 million, as compared to $8 million in the 2012 quarter. The payments on our restructuring reserves were $898,000 in the 2013 quarter, versus $1.1 million in the 2012 quarter. Our balance sheet remains strong. At June 30, 2013, we have cash and cash equivalents totaled $83.1 million, and our total debt at the end of the quarter was $1.9 million with a debt-to-capital ratio of 0.5%.

Next I will cover our guidance before turning the call back over to Paul. Marketing & Events Group full-year revenue is expected to decrease at a mid-single-digit rate compared to 2012, with low single-digit growth in US same-show revenues. Show rotation is expected to have a negative impact on full-year revenue of about $55 million. Marketing & Events Group segment operating margins are expected to reach approximately 2.5%, driven primarily by continued execution against our service delivery network and labor management initiative. Exchange rate variances are expected to negatively impact revenue by approximately $9 million versus 2012.

Travel & Recreation Group full-year revenues are expected to be comparable to 2012. Exchange rate variances are expected to negatively impact revenues by approximately $4 million versus 2012. Travel & Recreation Group operating margins are expected to be in the range of 19% to 19.5%, as compared to 19.5% in 2012. This is down from the Company's prior guidance of 20% due to the impact of the flooding in Alberta and unfavorable exchange rate variances.

Corporate activities expense is expected to approximate $7 million. Our full-year cash flow from operations is expected to approximate $35 million. We expect full-year capital expenditures of approximately $40 million to $45 million, and this includes an estimated $12 million to $14 million for construction of the Glacier Skywalk attraction. Depreciation and amortization expense is expected to between $28 million and $30 million.

For the third quarter, we expect Viad's income per share to be in the range of $0.54 to $0.64, as compared to the 2012 third-quarter income before other items of $1.01 per share. The expected decline reflects significant negative show rotation of about $75 million in revenue, partially offset by continued same-show growth and ongoing focus on margin improvement from the Marketing & Events Group. Revenue is expected to be in the range of $227 million to $242 million, as compared to $307.5 million in the 2012 quarter. And we expect segment operating income in the range of $20 million to $23.5 million, as compared to income of $34.2 million in the 2012 quarter. Additional details regarding our 2013 outlook can be found in the earnings press release. Now, back to you, Paul.

Thanks, Ellen. I would now like to update you on a number of important items that are currently in progress. First, construction of the Glacier Skywalk in Jasper National Park is progressing, and it is exciting to see the project coming to life. Much of the heavy iron is now in place, and it is fascinating to see the outcropping over the glacial canyon take shape. We believe that the Glacier Skywalk will be a very unique attraction and expect it to become a highly sought-after travel experience. As I have previously mentioned, we expect a soft opening at the end of this season to give select media and travel industry professionals a sense of the experience so they can help add to the excitement and anticipation of its grand opening in 2014.

With regards to the Glacier National Park concession contract, the National Park Service has acknowledged that there are multiple bidders and that a panel has convened to examine the bids. The recommendation of the panel requires approval by the Director of the National Park Service, Jonathan Jarvis. Additionally, because of the size of the contract, it must go before Congress for a 60-day review period by the House Resource Committee and the Senate Natural Resource and Energy Committee. The Park Service hopes to award the new contract by late August or early September. We remain optimistic about our prospects for winning the new contract.

Now, I would like to provide an update on our strategic review. On December 14, 2012, we announced that the Board of Directors authorized management to explore and evaluate opportunities to enhance shareholder value. This evaluation is a priority for our Board of Directors and for our management team. As our review is ongoing, there is limited information I can share with you at this time. That said, I do want to give you some perspective on where we stand.

The review is focused on evaluating levers that is could enhance shareholder value, including but not limited to -- a potential separation of the Travel & Recreation and Marketing & Events businesses; accelerated growth opportunities; a greater return of capital; and financing alternatives. We acknowledge that a greater return of capital through repurchases and/or dividends is something we can execute at any time. However, we believe that any significant return of capital could impair our ability to complete a transaction that could provide greater value. As such, we are holding off on decisions related to the return of capital as we work closely with the JPMorgan team to evaluate opportunities to change the composition of our portfolio of businesses through potential acquisitions, divestitures, or other transactions. Alongside possible transactions, we are reviewing capital structure and financing alternatives to insure they are aligned to optimize value creation.

Again, I want to highlight that no assurance can be made that this process will result in any transaction. And it is possible that our business portfolio will continue to include both Travel & Recreation and Marketing & Events. I am encouraged by the work being done and excited about our prospects. While we are not in a position to disclose additional details at this point, we will report back as soon as we are able to do so, and no later than the upcoming third-quarter earnings call.

In closing, we are executing well on both sides of the business and remain on track to deliver strong year-over-year profits. Advanced bookings for our Travel & Recreation properties are pacing ahead of last year, which is encouraging. As expected, same-show growth in our Marketing & Events group is lower than we experienced last year, but it remains positive, and we continue to gain momentum with our margin improvement initiatives. We have a strong balance sheet and are well positioned to continue to grow our business and generate enhanced shareholder value in the coming years. With that, let's open up the call for your questions. Marianne, can you open up the line, please?

(Operator Instructions)

Our first question comes from Steve Altebrando, of Sidoti & Company.

I just wanted to -- I am not sure if you can expand a bit about the portion about the dividends and share repurchases. You have about $80 million in cash. Generally your deals have been in the $15 million to $20 million range, but you mentioned wanting to hold back some. Is that implying you guys are considering deals that are more transformational than what has been done in the past?

I think what we said in the past is that we have been more focused on the Travel and Rec side of the business, Steve. You are right on the size of our past deals, but that we felt comfortable looking at things that are bigger. I think the main point there is that we feel that it is very important to complete the portfolio review first. Alongside with that is evaluating the capital structure and financing and that type of stuff because it is really contingent upon the strategic review analysis.

Okay. And then in the release, it mentions some weakness in the short term events booking. I am talking about in the Marketing and Events segment. Can you expand on that a bit, where that pressure is coming from?

Yes, I think part of it is we had a really strong second quarter last year, so the year on year comparisons are a little bit more difficult. I will ask Steve Moster to comment, as well, Steve. But we have seen a little slowing in the industry. We saw it in the back half of last year. We are still seeing growth in the industry, but it has been a little bit slower. Steve, would you comment on that?

Sure, thank you, Paul. Steve, the primary thing as Paul mentioned, we had a strong quarter last year, and to the year-over-year comparisons, it is more challenging. As you can see if you look historically at the growth, the same store growth we experienced from '11 to '12 to this quarter in 2013, we see some of that growth slowing down. And that is the primary reason for the difference from last year to this year.

Okay. And I think, Paul, you mentioned in the past you are seeing larger shows go out to bid than what had historically been the case. Are you seeing any potential for significant show wins that maybe you haven't seen in the past? I know maybe you talked before about opportunities you think you have seen to gain share?

Yes, I mean we are aggressively going after business where it makes sense. Certainly looking to capture additional market share both through new show wins and through new, what we call, program clients, which are major exhibitor programs. Steve, do you want to comment and add to that?

Yes, thanks. Again, there are a lot of large opportunities out there over the next couple of years. I think we are well positioned to take advantage of that from a creative perspective. I think we have some leading edge creative. I think some of our exhibitor solutions are top notch. And obviously the logistical expertise that we have in house is unmatched, so I feel well positioned to go after those as they come up.

I feel very focused on technology solutions and leveraging the creative people that we have in our organization which are second to none to help in the process of winning that new business.

Okay. That is helpful. And lastly, and probably for Ellen, the corporate expense is trending pretty well below your forecast. Is there anything meaningful in the back half that we should be aware of?

Yes. Some of it, Steve, is real reduction as performance based incentives are lower this year than last year, but some of it is also timing. We expect this whole year to end up around $7 million.

Okay. Thank you.

Our next question is from John Healy of Northcoast Research.

Hey, Paul. I wanted to ask about your view of how shows are performing right now, in terms of the success the show associations and the exhibitors are having at the shows. And when you look at your advanced bookings in terms for next year and how much space exhibitors are committing to. Any commentary you can give on that?

Sure, and I will again ask Steve to comment. Overall the trade show industry and the events that we do tend to track GDP with a little bit of a lag as we have talked in the past. I think we are seeing that now kind of with the great recession behind us that shows are trending again in a more historical pattern, tracking to GDP overall, but certainly performing better or more challenged based on the underlying industries that they serve.

So, I think what we see is quite consistent there now. I think there is still strong demand for face-to-face marketing and the continued experience of attendees and exhibitors' ability to kick the tires, to meet face-to-face, to build new relationships, to see what your competitors are doing. We see the ongoing need for face-to-face as very important in our Business. The CEIR, Center for Exhibition Industry Research, they do a forecast, and their forecast continues to predict growth for the business, albeit a little slower than I think we have seen in the last two years.

Steve, would you add anything to that?

Yes. I would just say we believe that there is solid growth that is happening in the industry, although not evenly spread across all industries as Paul mentioned. There's a couple like building and construction, home repair, consumer goods and retailer and the food sector have performed well recently. A lot of that, as Paul mentioned, is tied back to the specific growth within those industries, themselves.

Okay.

And the opposite, we have seen a fairly big slowing in government type shows due to changes in that environment.

Got you. Then I wanted to ask, as you think about show rotation for 2014, do you expect it to be a plus or a minus, and what sort of magnitude do you think that will be?

Show rotation in 2014 will be a pretty good sized plus as we have a couple of shows that come back in, CONEXPO in the first quarter of next year and IMTS in the third quarter of next year, and every three-year and every two-year show, as well as a couple of others.

And I wasn't sure if I heard it right. I was trying to write down all the things you were thinking about on the strategic review, but can you give me a timeline in terms of when you think you might have a more formal update relating to that?

We did not and haven't given a timeline, John. We are doing a comprehensive review and looking at every option. We are making this and have made this a priority, but we have not given an actual timeline or deadline for an announcement.

Okay. Thank you.

(Operator Instructions)

Our next question comes from [Louisa Liao] of [Singular Research].

Good morning, I was hoping you could share some of your thoughts on perhaps expanding your position in the international marketing markets given the higher margins you see over the ocean versus the US markets?

Sure. We have always looked at selectively expanding internationally. We are the leading provider in the UK with our GES UK operation. We are in Germany. More recently we have been in the Middle East as a leading provider in Dubai and Abu Dhabi. More recently, we opened up in Amsterdam in an effort to service some business on the continent, and we continue to look at those types of opportunities. We are open to other markets that make sense that we can enter and service our clients, as well as prospective clients on a profitable and good return basis.

Okay, great. Then I have a couple of questions for Ellen here. If you go through some of the financials specifically, would you be able to break out the net interest expense line between income and expense? And then, with respect to the minority interest, is that basically related to GES? It's unclear to me as to what that consists of.

I will take the minority interest one while Ellen looks for the interest question. The minority interest lead is -- we have a 20% owner of Glacier Park, so it is actually on the Travel and Rec side, and it is related to our Glacier Park operation and some of the properties there. That is the only minority interest we have.

Okay.

And the net interest expense of $186 for the quarter is interest expense of $323 and income of $137.

Great, thank you. I think I may have missed it, but your full year outlook for Capex?

Full year outlook was about $40 million to $45 million.

Great, thank you.

(Operator Instructions)

At this time there are no other questions.

Thank you, Marianne. I want to thank everybody for participating on today's call. We will look forward to talking to you again at the conclusion of the third quarter. Have a great day and great weekend. Thank you very much.

This does conclude today's conference call. You may disconnect your phones at this time.