Viad Corp (VVI) 2014 Q2 法說會逐字稿

Welcome to the Viad Corp second-quarter earnings conference call. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect.

And now I'd like to turn the conference over to Mr. Joe Diaz. Sir, you may begin.

Good morning, and thank you for participating in the Viad Corp second-quarter 2014 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 the earnings press release, which is available on 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 & Events 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 joining us today. We greatly appreciate your continuing interest in Viad. We delivered strong financial results for the second quarter of 2014, and continued the momentum generated in the first quarter of the year.

Total revenue for the quarter was $256.4 million, up 4.1% from the 2013 second quarter, and came in above the high end of our guidance. Segment operating income of $14.1 million was up 23.4%, and near the high end of our guidance range. Both business groups posted stronger year-on-year results.

Marketing and events group's second-quarter revenue increased by $16.8 million, or 3.1%, to $226.3 million versus last year's second quarter, despite negative show rotation of about $12 million. Segment operating income grew by 10% to $9 million, and operating margin improved by 30 basis points compared to the second quarter of 2013. We are maintaining our focus to drive efficiencies, as we work our way to our 2014 operating margin goal of 4%.

US segment revenue grew by 8.6% to $168.8 million, with segment operating income nearly doubling to $5.1 million versus the second quarter of last year. This growth was driven primarily by a 4.9% increase in base same-show revenue, new show wins, and slight positive show rotation of approximately $1 million.

The international segment of our marketing at events group posted second-quarter revenue of $63.4 million, and segment operating income of $3.9 million. Excluding foreign exchange rate variances, segment revenue and operating income decreased by approximately $8.2 million and $1.8 million, respectively. This was primarily driven by negative show rotation revenue of approximately $13 million, partially offset by new business wins.

We produced a number of major trade shows during the second quarter, including the International Council of Shopping Centers RECon show, a global retail real estate convention that brings together more than 32,000 attendees and 1,000 exhibitors. This year's show encompassed all three halls of the Las Vegas Convention Center, and exceeded 1 million square feet.

Another major second-quarter event was the National Restaurant Association's Restaurant and Hotel-Motel Show. The show occupied more than 600,000 square feet at Chicago's McCormick Place, and reported 5.4% growth in square footage and 4.3% growth in exhibitors versus last year's show.

During the quarter, we were also successful in generating new business wins and extending relationships with existing customers. We signed a five-year contract renewal to produce the American Society of Cataract and Refractive Surgery symposium. This client of 30 years selected GES once again, due to our great team, high level of service, understanding of the show, and the innovative solutions we bring to the table.

We also signed several multimillion-dollar contracts with various big brand corporate accounts in industries as varied as pharmaceutical, defense, telecom, consumer goods, and business services. This is a testament to GES's ability to provide superior service and innovative solutions with a strategic approach that addresses each client's unique objectives.

Additionally, we continue to make positive strides with new wins internationally, and in our AV business. A recent audiovisual win was Solar Power International, which will be in Las Vegas this October. GES will provide all audiovisual equipment and production for the event, including the general session, breakout rooms, exhibits, and show management needs.

We are very proud that GES continues to be recognized as one of the world's live events providers. During the quarter, J.D. Power recognized the GES National Servicenter for call center customer satisfaction excellence for a sixth consecutive year. This achievement is a clear indication that a commitment to superior customer service is deeply ingrained in our culture. Our employees are the focal point of achieving these milestones, and I extend my sincere appreciation to the National Servicenter team on this well-deserved certification.

GES was also recognized for two projects by the American Business Awards, the nation's premier business awards program. GES and its client, Dermablend, were awarded a Gold Stevie Award in the Marketing Campaign of the Year category. We also received a Silver Stevie Award for our very own Art and Science of Engagement brand repositioning campaign.

These are important recognitions that acknowledge the creativity, passion, and effectiveness that we provide our clients in not only advancing the efficacy of their brands, but in successfully positioning GES itself as a leading creative agency. I thank the entire GES team for their commitment to excellence in serving our clients.

Moving on to the travel and recreation group, second-quarter revenue was $29.8 million, with group operating income of $5.1 million. Excluding exchange rate variances, revenue and operating income were up about 18% and 63%, respectively, as compared to the second quarter of 2013.

These significant year-over-year increases were primarily driven by strong passenger volumes at Brewster's attractions. Passenger counts were up by more than 20% at the Banff Gondola, the Columbia Icefield Glacier Adventure, and the Banff Lake Cruise. Our new Glacier Skywalk attraction, which opened on May 1, also surpassed expectations with a total guest count of more than 80,000 during its first two months of operation.

The Skywalk continues to generate great interest from the travel industry and media. On July 8, the Skywalk received national television exposure across Canada when it was featured as the starting point for season two of The Amazing Race Canada. Our Columbia Icefield Glacier Adventure tour was also featured on the show, which is the most-watched Canadian television series on record. The Skywalk is truly a world-class attraction, and we are thrilled with how well it's performing.

The strong results at Brewster more than offset some weather-related issues that impacted results at Alaska Denali Travel and Glacier Park. Significant rainfall in Denali National Park caused a creek that runs past our Denali Backcountry Lodge to overflow its banks. As a result of the flooding, we were forced to evacuate guests, and closed the Lodge from June 26 through July 4.

Fortunately, the closure lasted only nine days, and there was minimal property damage. The Alaska Denali team did a fantastic job to ensure our displaced guests were safe and well taken care of. And I'd like to thank them for that, and also for their great efforts to get the Lodge back up and running so quickly.

Glacier Park's peak season got off to a slower-than-expected start due to heavy snowfall that delayed the opening of the popular Going-to-the-Sun Road. The road had been scheduled to open on June 21, but did not open until July 2. We typically see a surge in park visitation once the road opens, and that was definitely the case again this year.

We are seeing strong numbers at all of our Glacier Park properties, including the newly acquired properties in West Glacier. We completed the acquisition of West Glacier Motel & Cabins, the Apgar Village Lodge, and related assets on July 1. These properties in the Glacier National Park area complement our existing assets by adding scale and additional location options that enhance our guests' enjoyment of this majestic area, and reinforce our position as the Gateway to Glacier.

With this acquisition, we now own properties that bookend the main entrances to the park along Going-to-the-Sun Road: the West Glacier Motel & Cabins on the west side, and St. Mary Lodge on the east side.

The Brewster and Glacier Park teams continue to do a great job at effectively managing and growing their respective businesses. Presidents Dave McKenna and Cindy Ognjanov see to it that we are providing a memorable experience for all of our guests while delivering strong results for our shareholders. I greatly appreciate the creativity and dedication of all of our travel and recreation associates in driving excellent results.

At this point, I will turn the call over to Ellen Ingersoll, our Chief Financial Officer, for a more detailed review of our financial results. And then upon the completion of Ellen's comments, I will have some concluding remarks and then open 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, and the business unit highlights sections of our earnings press release.

Our second-quarter income before other items was $0.44 per share, which was at the high end of our prior guidance range of $0.34 to $0.44, and up more than 25% from 2013 income before other items of $0.35 per share. By definition, income before other items excludes restructuring charges of $0.04 per share, impairment charges of $0.03 per share, and $0.02 per share related to favorable tax matters in the 2014 quarter.

The restructuring and impairment charges primarily relate to our decision to wind down registration services that are currently provided by GES within the M&E region, and includes severance and asset write-offs.

GES revenue and segment operating income for the quarter were $256.4 million and $14.1 million, respectively. As Paul discussed earlier, these results exceeded the 2013 quarter, driven by growth in both the marketing and events group as well as the travel and recreation group.

Paul mentioned a few items that affected year-over-year results during the quarter, and I'd like to give you a little more color on those items. Show rotation at GES negatively impacted second-quarter revenues by about $12 million versus 2013. For the third quarter, we expect positive show rotation revenue of about $45 million; and the fourth quarter is expected to be about $10 million negative.

Foreign currency translation had a favorable impact on marketing and events group revenue and operating income of approximately $3 million and $103,000, respectively, primarily due to strengthening of the British pound relative to the US dollar. Currency translation had an unfavorable impact on travel and recreation group revenue and operating income of approximately $1.2 million and $220,000, respectively, due to the weakening of the Canadian dollar relative to the US dollar.

For the full year, we expect currency translation to have a favorable impact on marketing and events group revenue of about $8 million, and an unfavorable impact on travel and recreation group revenue of about $5 million.

The Glacier Skywalk attraction added approximately $1.5 million of revenue to the travel and recreation group, at an operating margin of more than 50% during the second quarter.

For the full year, we expect revenue from Skywalk to be in the range of $4.5 million to $5 million, with $3 million to $3.5 million being generated during the third quarter.

The temporary closure of the Denali Backcountry Lodge due to flooding resulted in a revenue loss of about $220,000 during the second quarter and about $170,000 during the third quarter.

Now I will cover guidance for the third-quarter and full-year 2014, which can be found in the earnings press release and reflects our best estimates based on information available at this time.

For the third quarter, we expect Viad's income per share to be in the range of $0.91 to $1.01 as compared to the 2013 third-quarter income before other items of $0.53 per share. This reflects strong growth from both business groups.

Marketing and events group third-quarter revenue is expected to increase in the range of $60 million to $70 million, with an operating income increase in the range of $8 million to $11 million. This growth is expected to be driven by a combination of positive show rotation, new business wins, and same-show growth.

Travel and recreation group third-quarter revenue is expected to increase in the range of $4 million to $9 million, with an operating income increase in the range of $2 million to $4 million.

The July 1 acquisition of hospitality assets in West Glacier is expected to add nearly $5 million in revenue to the third quarter. This acquisition, along with the revenue contribution at the Glacier Skywalk and organic growth at Brewster and Glacier Park, is expected to be partially offset by unfavorable currency translation of about $3 million in revenue, and lower revenues at Alaska Denali Travel.

For the full year, marketing and events group revenue is expected to increase at a high-single to low-double-digit rate from 2013, primarily as a result of positive show rotation of approximately $60 million; same-show growth; and new business wins.

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 mid- to high-single-digit rate, from $108.4 million in 2013. This growth is expected to be driven by the West Glacier acquisition, the Glacier Skywalk attraction, and continued organic growth, partially offset by unfavorable exchange rate assumptions.

Travel and recreation group operating margins are expected to approximate 22%, up from 20.1% in 2013. Corporate activities expense is expected to approximate $9 million to $9.5 million.

Now I will cover some balance sheet and cash flow items before turning it back over to Paul.

Our balance sheet remains strong. At June 30, 2014, cash and cash equivalents totaled $40.2 million. Our total debt was $11.4 million, which consisted of $10 million in borrowing on our revolving credit facility, and $1.4 million of capital lease obligations. And our debt to capital ratio was 3.2%.

We repurchased approximately 450,000 shares during the second quarter at an aggregate cost of $10.6 million.

Cash flow from operations was an inflow of $3 million for the 2014 second quarter as compared to an outflow of $2.2 million in the 2013 quarter, primarily reflecting improved operating results and changes in working capital. And our full-year cash flow from operations is expected to be between $60 million and $65 million.

Capital expenditures were $7.9 million for the 2014 second quarter as compared to $7.4 million in the 2013 quarter. And we expect full-year capital expenditures of approximately $30 million to $35 million.

Depreciation and amortization expense was $7.1 million for the 2014 second quarter, which is consistent with the 2013 quarter. And full-year depreciation and amortization expense is expected to be between $28 million and $30 million.

Back to you, Paul.

Thanks, Ellen. In summary, we are pleased with our results for the first half of 2014, and are focused on delivering the strong full-year growth that Ellen just discussed.

As usual, we have some work to do in terms of securing unsold business over the remainder of the year. But we have good sales pipelines, great products and services, and talented people that are working hard to close deals, provide a great customer experience, and drive operational efficiencies.

Our third-quarter results will be much stronger than last year, as we'll benefit from significant positive show rotation at GES, as well as our unrelenting focus on margin improvement. We're also quite optimistic about the prospects for our travel and recreation business this peak tourism season, given the strong results thus far.

Additionally, we continue to execute against our strategic growth plans, which includes organic growth opportunities as well as acquisitions for both business units.

For GES, we are pursuing growth in adjacent services and geographies that offer strong operating margins and growth potential. As I discussed last quarter, audiovisual services is one of those adjacent services, and our new in-house AV team is seeing good traction. We also have a very active acquisition pipeline that fits our strategic vision of positioning GES as a full-service partner with the global live events market.

For the travel and recreation group, we continue to execute against our Refresh, Build, Buy initiatives to maximize the revenue and profit generation of our existing assets, and add scale to this high-margin business.

We expect to begin some remodeling work at the Banff International Hotel later this year. And we continue to work through plans for the redesign of the upper terminal of the Banff Gondola.

Additionally, we continue to pursue the acquisition of high-margin attractions and hospitality assets located in iconic natural destinations, with a focus on those that will provide additional scale in our current markets.

We have a very strong balance sheet with a sizable cash position and very little debt -- enables us to invest widely in the business and to return capital to our shareholders through a consistent dividend each quarter. We remain dedicated to improving our business and driving shareholder value in everything that we do.

With that, let's open up the call for your questions. Jane, if you could open up the question line, please.

(Operator Instructions). Steve Altebrando, Sidoti.

I just wanted to hit on the operating margin for the marketing events segment. Just looking at the third-quarter guidance that you provided, it looks like you'd need a pretty solid fourth quarter in what I think is negative show rotation. So is there something specific going on in fourth quarter that's unusual?

Steve, do you want to handle that one?

Sure. Our (technical difficulty) quarter revenue is actually pretty strong, primarily driven by wins that we've had across all of our business; so, new services as well. So we currently have the Commonwealth Games going on in the UK in the third quarter; a Mary Kay seminar; and also the Solar Power AV business. So, there is actually some new growth, as well as some same-show growth that's driving the revenue in the third quarter.

And if you look at that compared to our OI in 2013 in the same quarter, we were actually -- last year we had the sale of our New Jersey facility, which impacted our OI. That was part of our service delivery network, and so that's the reason for the comparison there.

Okay. But in terms of -- I guess the question really comes down to how confident you are in achieving the 4% operating target for the year, given what you think you are going to do for the first three quarters of the year.

Yes, I think we're still confident that it's a stretch goal for us, Steve, as we've said all along. In the fourth quarter, we've definitely got some work to do. Last year, Harry Potter was in transit, so we have that this year in the fourth quarter. We're working very hard, and doing everything possible to achieve those goals.

Okay, that's helpful. And then it looks like the travel and rec seems to be exceeding your expectations. Is that predominantly Skywalk-driven, or a combination of lodging or attractions?

I think it's all of the above. The Skywalk, we're very pleased with. As I mentioned in my comments, we had 80,000 visitors, which exceeded our expectations for May and June, which are slower months as we move into July and August. We are up 20% in all of our attractions, which we're very excited about.

From all indications, it's going to be a strong tourism season in Banff, and we're seeing good visitorship at Glacier Park. So I think we're still feeling very, very good about the travel and rec business; very excited about the Skywalk. It's everything we thought it was going to be. We continue to get terrific public relations, and our management teams and employees are doing a fantastic job servicing our guests.

Okay. And then just lastly, how do you guys think about the ramp of the Skywalk? Is it something along the lines of business probably elevated in the first year because it something new? Or is it -- do you expect revenue trends to accelerate going forward as the word gets out?

Well, we expect to grow this business. We had to be a little cautious in marketing to certain groups that are building these things into their itineraries, 12 to 18 months out. Now that we have success in this first season. we think it's going to be that much easier to market, and have groups include it in their itineraries. I think the word of mouth and the public relations we're getting is going to continue to drive traffic off the Icefield Parkway, which is another key goal of ours.

And, in general, we are just seeing the level of the lake rise in the area, which is helping our Icefield operation as well, Steve.

Okay, that's helpful. Thanks so much.

John Healy, Northcoast Research.

I wanted to ask a little bit about marketing events margins as we head into next year. I know show rotation -- I don't think it's going to be too much of a friend to you guys next year. But I was hoping to get some qualitative thoughts in terms of how you think about margins for that segment, relative to the stretch goal of 4% this year. Will it be difficult to sustain those margins, and would you think that we'd be near them or slightly above them? Any qualitative thoughts you could give us regarding what to expect for margins next year.

Sure. Good morning, John. We expect, as we said, negative show rotation, which will give us some pretty good headwinds. It will be more like 2013, so we do not expect to be able to achieve 4% margins next year. We feel that we will have a decrease mostly because of the revenue headwinds. At the same time, we continue to do a lot of things to become more efficient; continue to drive our initiatives to improve our direct margins; and do everything possible to manage our overhead in that space.

In 2016, though, then we enjoy significant positive show rotation. So, we're trying to move back to the 5% range by 2016, but 2015 will definitely present some challenges from a show rotation standpoint.

Is it reasonable to think, though, that the margins, given what you've done over 2013 and 2014 -- and I know you highlighted that show rotation would be similar to the 2013, I think that was a negative 60 -- is it realistic to think that the margins can be better than you saw in 2013, though?

Oh, yes. Yes, we definitely would expect that.

Okay. And then I wanted to get some more thoughts just in terms of -- if you can give us some color in terms of the customer response to the entrance into the audiovisual market, and how you feel that business can ramp. Can you talk to us how contracts are won and lost in that business? And maybe from a stairstep function, how we might see that business build itself over the next two or three years.

Yes, I'll make some comments, and then I'll ask Steve Moster to add to my comments, too. We're seeing very good customer response. We've got some successful execution under our belt, which then -- the more that that happens, I think the more momentum that we're going to build.

The pipelines are building nicely for 2015 and for 2016, as we look at all of our existing general service contract clients, and when their contracts might come up for bid on the AV side. We're seeing, I think, a $25 million pipeline already for 2015; and it's over $40 million for 2016, so the pipeline is ramping fast.

We're seeing continuing good responses from our clients, and we're trying to move this needle to have AV become 5% to 10% of overall GES revenues.

Steve, maybe you can comment on -- and add a lit bit more color to the client reaction.

Yes. Thanks, Paul. John, it's been very well received by our clients across the live events industry. And this represents a really big opportunity for us. In the US alone, we believe that the AV market exceeds $1 billion. As Paul mentioned, we are building our pipeline for 2015 and 2016, which is very strong, and we'll continue to focus on building that out.

Okay, and just to follow up on that. The comment you made, $25 million in the pipe for 2015, and then -- so I think you said $40 million for 2016, if I heard you're right. How do we think about the CapEx that's required to be in that business? Can you talk to how much step-up or step-down we might have to see there? And what is the useful life of this technology that you have to invest in?

Yes, right now, we're doing this in a CapEx-light fashion, in that there is providers that we can rent equipment from. So, we've had to invest very little as far as CapEx.

Over time, and as you ramp up in this business, it does make sense to invest in some of your own equipment, things that will get high turns, and that -- and then continue to outsource for things that are maybe higher-end or lower-turn types business.

So, right now, we're not seeing huge CapEx. I think as we get bigger, there will be some CapEx that we'll be talking about.

Steve, would you add anything to that?

Yes, that's our approach right now, is asset-light. When we get to scale, then we will need capital in order to fuel the business.

It will make sense at that point, John, because I think you can gradually push margins a little bit north by managing the right balance between ownership and rental.

And how long does this equipment need to be refreshed? Is this a five-year life for a lot of this stuff, or seven years? Or how do we think about it?

I would probably guess it's more in the 3 to 5.

Yes, it really depends on the type of equipment. If you go from screens, which can last quite a while, to some high-tech LED screens, which have a shorter life, it really varies. But I think Paul's accurate in the 3 to 5 years.

Perfect. Thank you, guys.

Luisa Lau, Singular Research.

My first question is for Ellen. If you wouldn't mind running through the impact of the weather-related issues again on the travel and rec for the second and third quarters.

Sure. It was related to Denali Backcountry Lodge. So the revenue lost is about $220,000 for the second quarter, and about $170,000 for the third quarter.

Okay. What about the Glacier Park road closures? Is that a nominal amount?

Glacier Park, we haven't quantified. I would say much smaller.

Nominal.

Okay. And second and third quarter?

Glacier Park would just be second quarter.

Yes, no impact to --.

Because it was due to the -- the roads opened on July 2.

Okay, got it. Okay, great. And the second question really is -- historically, the Company has had a very low amount of debt. I just wanted to perhaps hear a bit about the Company's willingness to perhaps take on some more debt in the event of some actional type strategic growth initiatives over the next year or two. Could you talk a little bit about the flexibility there, the willingness there, and whether or not there are any actionable potential ideas that you may see over the next year or two?

Sure. Good question, Luisa. This is Paul, and I will have Ellen comment on this, too. When we went through the strategic review, this was one of the areas that we looked at. We do believe that we will be taking on debt, especially as we look at some of the acquisitions that we're doing. We do believe that that is prudent and manageable.

Ellen, would you add to that?

Sure. And obviously how much debt, and what kind of debt we take on, will depend on the acquisitions. But through the strategic review, we're looking at a 30% debt, 70% equity, going through several scenarios. But as I said, it depends on what the acquisitions are, and what type of long-term debt we'll be looking at.

Are you open -- is there a focus more on either the marketing and events side, or travel and rec at this point? Or are you really just exploring both with the same zeal?

We would be, on the acquisition side, looking at both. And then the debt would be wrapped up -- it would be total Company debt.

Right, right. Okay. The question was basically, is there potential, graspable ideas that you see in the closer-term, in M&E or the travel and rec?

We have a very robust pipeline right now, and it would cover both businesses.

Okay. Okay, thank you.

Barry Haimes, Sage Asset Management.

You may have said it and I missed it, but could you just repeat the CapEx guidance for the full year? And then, secondly, could you remind us how much you have left under the share authorization, and whether you have bought some stock in July so far? Thank you.

Sure, I'll have Ellen handle it.

Ellen?

Sure. Full-year CapEx is expected to be about $30 million to $35 million. We have not purchased anything in July. We're in a quiet period. So really the end of June was our cutoff for share repurchases for this quarter.

And then how much remaining under the authorization?

We've purchased about 450,000, so we have about 550,000, 575,000 left.

Thank you.

(Operator Instructions). I'm showing no further questions from the phone lines at this time.

Okay. Thank you, Jane, and thanks to everybody on the call today. On behalf of the entire Viad team, I want to thank you for your participation. And we look forward to talking to you to again at the conclusion of the current quarter. Have a great day. Thanks, everybody.

That does conclude today's conference. Thank you for participating. You may disconnect at this time.