Viad Corp (VVI) 2014 Q1 法說會逐字稿

Welcome to the Viad Corp first-quarter earnings conference call. At this time all participants are in a listen-only mode.

(Operator Instructions).

Today's conference is being recorded. If you have any objections you may disconnect at this time.

I would like to turn today's meeting over to Joe Diaz. Thank you, you may begin.

Thank you, Carolyn, and good morning and thank all of you for participating in the Viad Corp first-quarter 2014 earnings conference call. I'd like to remind everybody that certain statements made during this call which are not historical facts may constitute forward-looking statements. Additional information concerning business and other risks 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 will refer to the earnings press release, which is available at the Viad website at www.viad.com. Today you'll hear from Paul Dykstra, Viad's Chairman, President and CEO and Ellen Ingersoll, Viad's Chief Financial Officer. Additionally, Steve Moster, President of Viad's Marketing and Defense Group will be available for comment during the question-and-answer session at the end of the call.

With that I would like to turn the call over to Paul Dykstra. Paul?

Thanks, Joe, and thanks to all of you for participating on today's call. We greatly appreciate your continued interest in Viad.

The first-quarter 2014 was a solid one for Viad and that bodes well for the rest of the year. Total revenue came in at $285.6 million with segment operating income of $13.4 million which were at the higher end of our guidance range and in line with 2013 first quarter.

The marketing and events group delivered first-quarter revenue of $277.8 million and segment operating income of $18.2 million which were comparable to last year's first quarter despite the loss of CES. During the quarter we produced the largest tradeshow in North America, CONEXPO-CON/AGG and IFPE which set new records for both exhibit space and number of exhibitors. We also continued to experience growth in our annual shows with a 3.9% increase in US-based same-show revenue.

Our US segment continued to drive margin improvement posting a 70 basis point increase in USA segment operating margin as compared to the 2013 first quarter with a 12% increase in US segment operating income. These efficiencies in conjunction with positive show rotation are important as we work our way to our 2014 operating margin of 4%.

We also continue to make solid progress on the business development front with some key wins and renewals during the quarter. We recently won the contract to produce Sibos 2014 in Boston. Sibos is a premier business forum for the global financial community that rotates through North America every three years.

Our successful production of the 2011 event in Toronto helped to secure the 2014 contract. This is an important win for GES and we look forward to a great event.

Our execution on past events and our ability to provide creative designs and sustainable solutions have led to increased business with Microsoft. During the quarter we produced Microsoft Build 2014 corporate event at the Moscone Center in the San Francisco. We have produced many events for Microsoft and this was our first Tier 1 event for them demonstrating their increasing confidence in us to make their events successful.

We also renewed our contracts with the Chicago Auto Show and with True Value for an additional four years. GES works closely with both of these clients to ensure that the branding and the look and feel of their events deliver maximum impact and effectiveness.

Internationally our relationship with global organizer UBM continues to expand. UPM Asia awarded as a three-year contract to provide full services for the Jewellery & Gem Fair Europe commencing with its inaugural event in Freiburg, Germany earlier this month. The show was delivered with precision planning and was very successful. Additionally, UBM France awarded us a three-year contract to provide core contracting services for SSA, a leading healthcare industry event that will take place in Paris in a couple of weeks.

With our broadly developed infrastructure in North America, the UK and the Middle East and our extensive global reach we are able to service our clients' requirements wherever they may come up in the world with a very high level of customer service. We are uniquely positioned to execute live events on a global scale while providing consistent as well as customized brand messaging where required.

During March we participated in the Exhibitors Show, a leading event for tradeshow exhibitors and brand marketers. Our exhibit showcased GES's new brand positioning, the Art and Science of Engagement, by featuring our leading edge experiential and event capabilities including our new audiovisual offering. The show was a great success for us and we were honored with best-of-show award for our booth.

We are also proud of the recognition GES is receiving as one of the world's leading live event providers. Event Marketer magazine recognized GES as one of the Fab 50 citing the strength of our global footprint and operational support.

The magazine stated that, although about 47 of the companies on the Fab 51 won't admit it, there is a certain type of program, size, budget, global schedule that only a company like GES can handle. They went on to say that GES is focused on a continued push to evolve its capabilities and that they continue to be impressed by the vision.

We also recently received word that GES will once again be ranked among the nation's largest experiential agencies and among the world's 50 largest agency companies by Ad Age. This will be the fifth straight year we have earned these important acknowledgments.

I want to thank Steve Moster and the entire GES team on a global basis for a job well done in maintaining a strong focus on growing the business, increasing our capabilities and improving efficiencies. And doing it in a way that has garnered the respect of our existing clients, potential clients, our industry peers and trade media.

Moving on to the travel and recreation group, revenue was $7.8 million with an operating loss of $4.8 million for the seasonally slow first quarter. These results were in line with both our prior guidance and the prior year.

We are looking forward to a strong 2014 season that will celebrate the opening of the breathtaking Glacier Skywalk attraction on May 1. The Skywalk has received several design and engineering awards and very positive reactions from travel industry professionals and the travel industry media. We are excited to open it to the public next week.

Presidents Dave McKenna and Cindy Ognjanov have done a great job leading the travel and recreation teams during the off-season to get our properties, attractions, transportation assets and employees primed for a successful high season. We look forward to providing a world-class experience for all of our guests and delivering strong results for our shareholders.

At this point I'm going to turn the call over to Ellen Ingersoll, our Chief Financial Officer, for a more detailed review of our financial results. And upon the completion of Ellen's comments I will discuss our strategic review and then open the call for your questions. Ellen?

Thanks, Paul. As a cover our first-quarter results you may want to refer to tables 1 and 2 in the business units highlight section of our earnings press release. I also want to highlight that all revenues and expenses related to the expired concession contract for Glacier National Park including prior year operating results and current-year proceeds have been classified as discontinued operations.

Table 3 of the earnings release provides a comparison of 2013 results as previously reported to the reclassified result. Our first-quarter income before other items was $0.36 per share, which is at the high end of our prior guidance range of $0.28 to $0.38 but down from 2013 income before other items of $0.44 per share primarily due to lower corporate activities expense and a lower tax rate in the 2013 quarter.

By definition income before other items excludes restructuring charges and $0.10 per share related to favorable tax matters in the 2014 quarter. Viad's revenue and segment operating income for the quarter were $285.6 million and $13.4 million respectively, both of which were in line with the 2013 quarter.

During the first quarter our marketing and events group posted revenues of $277.8 million and operating income of $18.2 million. These results were comparable to last year and at the high end of our guidance range driven by continued improvement within our US segment, offset by an expected decline in the international segment.

Marketing and events group US first-quarter revenue increased $3.1 million to $221.4 million reflecting positive share rotation of approximately $38 million and base same-show growth of 3.9%, which more than offset the loss of CES. Operating income increased $1.7 million to $15.9 million and operating margin improved by 70 basis points to 7.2% driven by our continued focus on driving operating efficiencies and lower accruals for performance-based incentives.

Our labor-to-revenue ratio on base same-shows increased versus the prior quarter. This was expected and was primarily driven by changes in scope of work and shortened move-in schedules on three shows.

Excluding these three shows labor to revenue would've been flat for the quarter. For the full year we are targeting a 30 basis point improvement in labor to revenue.

Our international segment's first-quarter revenue was $58.7 million as compared to $60 million in the 2013 quarter, and operating income was $2.3 million as compared to $4.4 million in the 2013 quarter. Foreign-exchange rate variances had a favorable impact on revenue and operating income of approximately $1.1 million and $48,000 respectively compared to the 2013 quarter. Excluding exchange rate variances revenue decreased by $2.4 million primarily driven by negative share rotation of approximately $3 million.

Operating income was lower than 2013 by $2.1 million excluding exchange rate variances. This decline is expected and driven by changes in the mix of business.

Our travel and recreation group performed well during the seasonally slow first quarter with revenues of $7.8 million and an operating loss of $4.8 million. This compares to 2013 first-quarter revenue of $8.4 million and an operating loss of $4.9 million. Foreign-exchange rate variances had an unfavorable impact on revenue of approximately $614,000 and a favorable impact on operating results of $243,000 as compared to the 2013 first quarter.

Now I'll cover some cash flow and balance sheet items. Free cash flow was $19.7 million for the quarter as compared to an outflow of $13.9 million in the 2013 first quarter primarily reflecting changes in working capital. Capital expenditures were $5.59 for the 2014 quarter, down from $8.3 million in the 2013 quarter due to the completion of the Glacier Skywalk build. Depreciation and amortization expense with $6.8 million as compared to the 2013 quarter of $6.9 million and payments on our restructuring reserves were $1.9 million in the 2014 quarter consistent with the 2013 quarter.

During the quarter we declared and paid a special dividend of $1.50 per share, or $30.5 million in the aggregate. As previously announced this dividend was funded primarily by the $25 million of possessory interest proceeds that we received in connection with the expiration of our contract to provide concessions within Glacier National Park.

Our balance sheet remains strong. At March 31, 2014, Viad's cash and cash equivalents totaled $47.3 million. And our total debt at the end of the quarter was $1.7 million with a debt-to-capital ratio of 0.5%.

Now I'll cover our guidance for the second quarter and full-year 2014 which reflects our best estimates based on information available at this time. Marketing and events group full-year revenues expected to increase at a high single-digit to low double-digit rate from 2013 primarily as a result of positive share rotation of approximately $60 million, same-show growth and new business wins, partially offset by the loss of CES as we have previously discussed.

US-based same-show revenue is expected to increase at a low to mid single-digit rate. Marketing and events group segment operating margins are expected to reach approximately 4% driven primarily by higher revenue and our continued focus on margin improvement initiatives.

Travel and recreation group full-year revenue is expected to increase at a low to mid single-digit rate from $108.4 million in 2013. This growth is expected to be driven by the Glacier Skywalk attraction and continued organic growth partially offset by unfavorable exchange rate assumptions which are forecasted to negatively impact travel and recreation group revenue by approximately $6 million as compared to 2013.

Travel and recreation group operating margins are expected to approximate 21% to 22%. This is up from 20.1% in 2013.

Corporate activities expense is expected to approximate $9 million to $9.5 million. Our full-year cash flow from operations is expected to be between $60 million and $65 million. We expect full-year capital expenditures of approximately $30 million to $35 million and depreciation and amortization expense is expected to be between $28 million and $30 million.

For the second quarter we expect Viad's income per share to be in the range of $0.34 to $0.44 as compared to the 2013 second-quarter income before other items of $0.35 per share. Revenue is expected to be in the range of $237 million to $251 million as compared to $246.2 million in the 2013 quarter. We expect segment operating income to be the range of $11.5 million to $15 million as compared to income of $11.5 in the 2013 quarter.

Additional details regarding our 2014 outlook can be found in the earnings press release. And back to you, Paul.

Thanks, Ellen. Finally this morning I would like to discuss the conclusion of our strategic review. I will provide a summary of the process and what we learned as well as our go-forward plan for enhancing shareholder value.

Since announcing our intent to explore strategic alternatives in December 2012, management, the Board of Directors and our advisors have thoughtfully and carefully evaluated options to enhance shareholder value. These options included but were not limited to the following -- one, a wide range of business combinations and separations with various domestic and international parties including the potential separation of the travel and recreation and marketing and events businesses; two, opportunities for accelerated growth; three, greater return of capital; and four, alternative capital structures.

Two important objectives were paramount in our evaluations. First, transactions must clearly enhance shareholder value and second, any business left to stand on its own had to have bright prospects for long-term success.

Given these two objectives we determined that a separation into two public companies would not be optimal at this time. Either business would be on the small side of the standalone public company and its current state and would risk being under followed, removed from key indexes and undervalued.

We also spent considerable time and effort evaluating a range of transaction opportunities for both business units to be part of a larger business including mergers, acquisitions and divestitures. After careful review with our advisors, we concluded the best course for maximizing shareholder value at this time is to focus on our strategic plans for Viad's travel and recreation and marketing and events groups. The prospects for both business groups are very strong.

With respect to travel and recreation, we considered the meaningful tax expense that would be incurred in a sale transaction due to the low tax basis in our assets as well as the range of values we could reasonably expect to realize at this time from the sale of travel and recreation and the resulting value from GES as a standalone public company. Taking these factors into account, the implied value creation was not compelling.

Looking ahead we continue to be very bullish on the travel and recreation group. We've been executing our Refresh-Build-Buy growth initiatives and will selectively continue to do so.

2014 is an important year with both the grand opening of the Glacier Skywalk attraction and our first year operating the Glacier Park business without the park concession contract. We have invested significantly in the Glacier Skywalk and feel that having financials that reflect its operating performance, as well as a strong performance at Glacier Park, will benefit any future process we might undertake.

Our assets in this business are truly unique and the experience is gratifying for our visitors. We have tremendous confidence in the future prospects of the business.

As it relates to our marketing and events group we have made significant progress in the past few years and expect that progress to continue. We believe that GES can be a $1 billion revenue business and we expect to deliver 5% or better operating margin by 2016.

In addition to the continued growth of the base business we anticipate growth in margin expansion to be fueled by an expanded product mix and continued gains and operational effectiveness. Regarding expanded product mix, we see, for example, a substantial opportunity for growth in the audiovisual business. A/V is a key complementary service that our show organizer and corporate market clients already purchased from other vendors that can be seamlessly offered by GES.

The recent launch of our in-house A/V services further allows us to drive increased share of the show floor on GES's events. While we are in the early stages of our entry into the A/V market, many of our existing customers have indicated they are pleased that we have entered this space. This is a large opportunity with a market size exceeding $1 billion annually in the US alone and operating margins in the range of 6% to 12% making them nicely accretive to GES's margins.

The second primary lever of profit growth for GES is our ongoing efforts to enhance our operational effectiveness. We continue to make meaningful strides in controlling variable labor costs, negotiating labor agreements that are constructive for both sides and managing our service delivery network as cost efficiently as possible.

We also remain focused on doing what we do best in this market, bringing products and process innovation to everything we do. We have made measurable progress and we see significant opportunities for further efficiencies.

We are also evaluating geographic expansion. This includes opportunities to bolster our positions on the European continent and in the Middle East as well as entering new high-growth markets in Asia and possibly South America.

In summary, the future is bright for both travel and recreation and marketing and events. We are dedicated to continuing growing both business units in a way that raises the value of our shareholders' investments. We look forward to keeping you updated as we execute on our long-term growth strategy.

We also remain committed to prudently managing capital. Since we began the strategic review we have returned $81.3 million in capital to our shareholders through special dividends paid in November 2013 and February 2014, totaling $4 a share.

During this time the Board also authorized the repurchase of up to 1 million shares. And now that we have concluded the strategic review we are in a position to act upon that authorization and intend to do so prudently.

With that I will turn the call over to the conference operator to begin the Q&A. Carolyn, can you open up the Q&A lines, please?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions). John Healy, Northcoast Research.

Thank you. Paul, I was hoping you could give us more color on the conclusion of the strategic review. Is there a way to comment on the type of interest you may or may not have received from strategic partners, maybe what side of the business was maybe more attractive or less attractive and relative to what basis did you judge creating shareholder value?

Was it the common stock price, was it some sort of return measure you wanted to achieve? I was hoping you could try to provide us with more detail on how you determined that a separation or a sale or other items might not have met whatever threshold you had established.

Sure, thanks, John, and good morning. We did evaluate transactions with numerous parties. Those parties included domestic and international firms and spanned from strategics to private equity.

The transactions we explored were either not optimal or not viable for a number of reasons. In some cases it was incompatible strategic direction or just wasn't the right timing. In some cases it was somebody's inability to take on sufficient leverage.

When we looked at how we compared the different opportunities we compared everything to our strategic growth plans but we also compared them to comparable transactions, public company valuations and other types of metrics, John. We did a ton of homework here, we think we did not leave any stone unturned.

We continue to believe strongly in our strategic growth plans for the existing businesses and we think we have great opportunities moving forward. So when we compared that to some of the opportunities that we had we thought that was the best path forward.

And on the travel and rec side, you kind of highlighted that the tax basis item, is there a way for us to understand that if it's complete, maybe what the tax basis is of that business and maybe how that complicated the process?

Sure, let me ask Ellen to comment on that.

Sure, hi, John. On the travel and rec side the tax basis is about $150 million. So it has a fairly low basis from a tax asset perspective and we use that in our analysis.

Okay, great. And then I wanted to ask about the corporate activity lines that you kind of highlighted, the $9 million, $9.5 million in spend.

Is there a way to think about how that number may fluctuate generally in 2015? What type of spend that lingered or maybe comes out because of the special review, maybe what kind of drag that has been on the P&L?

I would expect 2015 to be fairly comparable to 2014, actually John.

Okay.

2013 was low for a number of reasons, probably the largest of which were the low non-performance-based incentives. So 2013 was low but I would say 2014, the $9 million to $9.5 million is probably pretty comparable for 2015.

Okay.

We will continue to focus on doing everything possible to reduce our overhead and that's always in our DNA. So I think we will continue to take a very sharp eye on that, John.

Got you. And actually just one final question, the 5% goal by 2016, that seems like a reintroduction of that target. Is there a way to think about maybe how 2015 sits in the middle there?

Would you expect us to progress towards that or does show rotation, things like that, cause things to kind of pause out? I was just hoping some qualitative comments. I know it's probably too early to give a detailed plan but directionally how maybe you see show rotation and margin cadence in 2015.

Sure. 2015 as we've said before it's a negative show rotation year more similar to 2013. That will put some pressure on our margins so we will probably see margins a little bit lower in 2015 and then as we add things like A/V and some of the growth opportunities that we see as well as our ongoing focus on efficiency and productivity marching towards the 5% in 2016.

So 2015 will be a little bit more difficult year especially because of show rotation. We will continue to do everything possible during that time on our overhead structure, on our labor to revenue and some of the other key cost buckets augmented by some of the opportunities we see in higher-growth in higher-margin opportunities like A/V that will help us as well.

Okay, great. Thank you.

Steve Altebrando, Sidoti & Company.

I wanted to see if you could talk a little bit about the M&A environment on the travel and rec side given that you still do have pretty considerable dry powder. And if the strategic review was holding you back at all, it's been a couple of years since Banff, I guess was the last deal, or is it just a matter of nothing has been out there that has really met the return criteria?

We have continued to invest in travel and rec. We have not made an acquisition in that space since the Banff International.

We have, however, invested significant capital in the Glacier Skywalk, for example, and some of our other refresh projects that we've talked about, the lower terminal of our Banff Gondola. We put a Starbucks in and that investment has been has worked out well.

We continue to see opportunities in travel and rec and we will continue to evaluate those on a one-off, one-by-one basis and we will be very very careful in our use of very precious capital. I think we also see some opportunities maybe that we haven't talked about in the recent past on the GES side. We do believe that that business is heading in the right direction and we see very very good opportunities to maybe make some prudent acquisitions on the GES side now as well.

Okay, that's helpful. And then in terms of the hotel assets your Glacier Park, are you committed to holding those? Given the scale that you are now at, does it make sense from a financial perspective or --?

We will always review all of our assets, Steve. We have looked at that. We are still a very large player in the Glacier Park market despite the loss of that contract.

Our rooms outside the park are of decent scale. We are operating those this year for the first time, as I mentioned in my comments, without the Park Service contract. We think we've got good plans there and good growth opportunities but we will continue to evaluate that on a regular basis.

Okay, and then just a couple of more. If you can comment on the feedback you are seeing from agents on the Skywalk, how advanced sales are looking. I know it's probably a little more short term but any color on that would be helpful.

Sure, we are getting fantastic public relations on the Skywalk. We will be on the cover of WestJet magazine for example coming up.

We are opening that next week. We've gotten architectural and design awards. We've gotten great PR from some overseas newspapers lauding this attraction and the destination.

We've got great support from Parks Canada and from Travel Alberta and Banff Lake Louise, so we are very excited. We think it's going to be a great attraction.

We've seen good attendance so far at our other attraction that we think all of the things combined bode very well for a very successful opening of the Skywalk next week and a strong season. It really starts to get busy more around July 1, kind of when Canada Day hits there, but we are very very excited to have this on board.

Okay. And then just lastly, I noticed you are packaging the skywalk with some of your lodging assets. Are you seeing any lift on the lodging side that you suspect is partly attributable to the Skywalk?

That's a good question, Steve. I don't know that I can say for sure that we are. We are definitely planning on lift in some of our other areas.

It's adjacent to the Columbia Icefield operation and we also have leases with gift stores and things like that. So we definitely think there's going to be lift in other parts of the business as a result of the skywalk and we do think it will help draw overall attendance into the destination.

So I'm not sure I can point specifically to our Banff properties. We do have a small hotel out there, the Glacier View Inn, that I am sure is benefiting from it in some way. But we think it's going to raise the level of the lake in other areas.

Okay. Thank you.

(Operator Instructions). Luisa Lau, Singular Research.

Good morning, yes, if I could trouble just go through your key wins and renewals again that you, I think I might've just missed a couple, but also talk a bit about the wins you have received, I believe you mentioned the Sibos Boston event. When does that start, the one with the three-year rotation?

Sure, and I'll ask Steve Moster to comment on this as well. Sibos, it's an annual show but it only comes to North America once every three years, so we last produced in Toronto.

If I remember correctly it was in Tokyo and I don't remember the other destination in between North America. It's a very nice piece of business and we are very excited to produce that show. Steve, maybe you can comment a little bit on some of the win environment?

Sure, thanks Paul. We have also renewed our agreements with the Chicago Auto Show and True Value.

We've extended both of those annual events out for four years. Those have been long-term GES clients and we are excited to continue our relationship.

More on the international side, Paul had mentioned earlier about our relationship with UBM and how we continue to expand that relationship. So UBM's Asia group has awarded us a three-year contract for the Jewellery & Gem show in Europe, which will start in Freiburg this year.

And then also UBM France awarded us a three-year agreement for some of the core contracting services on SSA, which is a leading healthcare industry event that takes place in Paris in a couple of weeks. So, overall I feel very good about the environment for renewing our existing contracts and clients but also expanding into new prospect clients. We've seen the ability to take share both domestically and internationally.

Okay, now the 2016 goal, 5% operating margin, is that basically -- 5%, right, 5% basically that's the US market, correct?

That's total GES, Luisa, so that would be overall GES.

Okay, thank you.

(Operator Instructions). Ohi Akhigbe, Advisory Research.

Hey, guys. I just wanted to get a little more detail around capital allocation now that the strategic review is over. How should we think about the percentage of free cash flow that goes to dividends, share buybacks and acquisitions?

Yes, let me make a general comment and then I will ask Ellen to expand on the comment as well. In general, our capital allocation is we try to be very balanced.

As you know we have returned a lot of our excess cash. We have returned our excess cash to $81 million in the special dividends. We did increase our quarterly dividend 150% to $0.10 a share and then we also have the authorization for 1 million share repurchase.

We have to balance that then with some of our organic capital needs for both businesses and then we do see some opportunities on the acquisition side, things that are very strategic and great opportunities for us. Certainly we would have to take on some debt in some of these deals, and likely most of these deals, so there would be some leverage required in order to do that. Ellen, would you add to that?

Sure, and I'll just really reiterate, Paul, we have always looked at from a capital allocation perspective organic growth acquisitions, dividends and share repurchases. And all four of those are still part of our go-forward capital allocation with the growth strategy.

So as Paul said, we are looking at strategic acquisitions on both sides of the businesses. But we will continue with the dividends, which we evaluate quarterly with our Board and the share repurchases, which we have announced the million shares that we intend to purchase from time to time going forward. So all four of those, Ohi, actually will still continue going forward.

Great, thank you.

(Operator Instructions). I'm currently showing no questions or comments at this time.

Okay, thanks Carolyn and thanks everybody. On behalf of the Viad team and our Board of Directors I want to thank you very much for your participation in today's call. Our first quarter got us off to a strong start for the year and we expect to deliver significant growth and full-year profits.

We are also pleased to have concluded the strategic review and we are now squarely focused on delivering greater value to our shareholders by executing our strategic plans for both business units. Although the formal strategic review process has concluded, rest assured we will never cease to evaluate all opportunities available to us to enhance shareholder value as we move forward. And we are very very steadfast in that commitment to you.

We look forward to talking with you again at the conclusion of the second quarter. Thank you very much again and have a great day.

That concludes today's conference call. Thank you for your participation. You may disconnect at this time.