Viad Corp (NYSE:VVI) Q1 2013 Earnings Call April 26, 2013 9:00 AM ET
Executives
Joe Diaz
Paul B. Dykstra - Chairman, Chief Executive Officer, President and Member of Innovation & Marketing Strategy Committee
Ellen M. Ingersoll - Chief Financial Officer
Steven W. Moster - Group President of Marketing & Events and President of Global Experience Specialists, Inc.
Michael M. Hannan - Group President of Travel & Recreation and President of Brewster Inc - Sub
Analysts
Matt Madej - Northcoast Research
Stephen Altebrando - Sidoti & Company, LLC
Operator
Welcome to the First Quarter 2013 Financial Results Conference Call for Viad Corp. [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. Sir, you may begin.
Joe Diaz
Thank you, Mary Anne, and thanks to all of you for participating on the Viad Corp. First 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 will 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 will hear from Paul Dykstra, Viad's Chairman, President and Chief Executive Officer; 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?
Paul B. Dykstra
Thank you, Joe, and thanks to all of you for participating in today's call. We appreciate your continued interest and support of the company. We're off to a very good start in 2013. Both in Marketing & Events Group and the Travel & Recreation Group delivered solid results in the first quarter. Viad's consolidated revenue for the quarter increased 6.1% to $285.2 million and segment operating income more than doubled to $12.8 million.
The Marketing & Events Group performed at a high level during the first quarter, generating a 5.6% increase in revenue and a 67% increase in operating income. Operating margins for the Marketing & Events Group improved by 250 basis points to 6.7%. For the quarter, we were successful in driving improved flow-through on our incremental revenue.
These improvements were driven by our company-wide focus on driving operating efficiencies, including the efficiencies generated through our service delivery network and labor management initiatives, as well as positive show rotation and continued same-show growth. Our aim has been to optimize the utilization of inventory, equipment and labor across a streamlined network of warehousing facilities to reduce costs, operating costs and invested capital while continuing to enhance the service that we deliver to our clients. Overall, we have now reduced our U.S. facility's footprint by approximately 1.2 million square feet, and have realized annualized cost savings of nearly $7 million.
In addition, we continue to realize improvements in our labor-to-revenue ratio. Today, we have greater flexibility to adjust our cost structure to address the ebbs and flows of the business, with the goal of continued improvement in operating margins.
Having completed a successful first quarter, GES is nearly 1/3 of the way to hitting its revenue goal for the year and has delivered better-than-expected operating results, driven by solid day-to-day execution and an intense focus on expense control. It is important to note that these improvements were achieved at the same time that we were driving record highs in our customer service scores.
As it relates to the Travel & Recreation Group, we realized strong year-over-year revenue growth of 25% during the seasonally slow first quarter. This growth was fueled by both organic growth and a full quarter's contribution from the Banff International Hotel, which we acquired in March of 2012. Organic growth was driven by the successful sales and marketing activities and favorable weather conditions, which resulted in increased passenger traffic at our Banff Gondola and higher occupancy at our Grouse Mountain Lodge.
We also benefited from concerted effort to utilize our transportation assets during the slower winter season. And in that regard, Brewster generated incremental transportation revenue in the first quarter through increased charter business and a new 3-year contract with the Lake Louise Ski Resort to transfer skiers in and around the Banff area.
We are pleased with the operational and financial results of our 2 business segments for the first quarter. The entire Viad team continues to maintain a constant focus and discipline on delivering great client service, successfully executing our strategic initiatives and achieving our near and long-term financial goals. I appreciate everything the team does to deliver superior results for our customers and shareholders.
Let me now turn the call over to our Chief Financial Officer, Ellen Ingersoll, for a more detailed review of the first quarter's financial results and our forward-looking guidance. After Ellen's review, I will provide some additional background, and we'll open up the call for questions. Ellen?
Ellen M. Ingersoll
Thanks, Paul. As I cover our first quarter results, you may want to refer to Tables 1 and 2 in the Business Unit Highlights section of our earnings press release.
Our first quarter income before other items was $0.42 per share, higher than our prior guidance and up from $0.12 per share in the 2012 first quarter. The growth versus 2012 and upside to guidance were primarily driven by significantly improved performance from our Marketing & Events Group and lower corporate expenses. By definition, income before other items excludes restructuring charges of $0.02 per share in the 2013 quarter and $0.07 per share in the 2012 quarter. The charges primarily relate to facility consolidations and the elimination of certain positions in the Marketing & Events Group.
Viad's revenue for the quarter was $285.2 million, up 6.1% as compared to $268.8 million in the 2012 quarter. Segment operating income more than doubled to $12.8 million as compared to $5.5 million in the 2012 quarter.
Our Marketing & Events Group's first quarter results were higher than our prior guidance, driven by stronger-than-expected growth in certain nonannual events and base same-shows as well as strong execution by the GES team. Revenue was $276.8 million, with operating income of $18.5 million, up $14.7 million and $7.4 million, respectively, from the 2012 quarter.
Operating margins improved by 250 basis points to 6.7%. These results reflect approximately $10 million in positive share rotation revenue and continued same-show growth.
The Marketing & Events Group U.S. segment posted first quarter revenue of $218.3 million, up $11.5 million or 5.5% from the 2012 first quarter. U.S. segment operating income was $14.1 million, nearly doubling first quarter 2012 operating income of $7.2 million.
These improvements were primarily driven by positive share rotation revenue of approximately $7 million, base same-show revenue growth of 2.4% and continued focus on driving operating efficiencies. As compared to the 2012 first quarter, we realized a reduction of facility costs of approximately $450,000 and an improvement in the labor-to-revenue ratio of more than 100 basis points on our base same-shows.
International segment revenue was $60 million, up $2.3 million or 3.9% from the 2012 quarter, and operating income was $4.4 million, up $535,000 or 13.9% from the 2012 quarter.
These increases were primarily driven by positive show rotation revenue of approximately $3 million, partially offset by unfavorable foreign exchange rate variances, which negatively impacted revenue and operating income by approximately $1.3 million and $210,000, respectively, compared to the 2012 quarter.
Our Travel & Recreation Group met the high end of our prior guidance for its seasonally slow first quarter, with $8.4 million in revenue and a seasonal operating loss of $5.7 million. As compared to the 2012 first quarter, revenue was up $1.7 million or 24.9%, while operating results declined by $108,000.
On an organic basis, excluding January and February results from the Banff International Hotel, which we acquired in March of 2012, revenue increased by $1.1 million or 16% and operating results improved by $25,000. The relatively flat organic operating income on higher revenue primarily reflects cost related to planned resources needed to support our Refresh-Build-Buy growth strategy and to prepare our bid for the new Glacier National Park concession contract.
Foreign exchange rate variances had an unfavorable impact on revenue of approximately $100,000, with a negligible impact on operating results as compared to the 2012 first quarter.
Now I'll cover some cash flow and balance sheet items. Free cash flow was an outflow of $15.9 million for the quarter as compared to an outflow of $5.6 million in the 2012 first quarter, primarily reflecting changes in working capital, as well as higher dividend payments and capital expenditures. Capital expenditures were $8.3 million for the 2013 quarter versus $7.5 million in the 2012 quarter. Depreciation and amortization expense was flat to the 2012 quarter at $7 million, and payments on our restructuring reserves were approximately $1.4 million in the 2013 quarter versus $809,000 in the 2012 quarter.
Our balance sheet remained strong. At March 31, 2013, Viad's cash and cash equivalents totals $95.7 million. And our total debt at the end of the quarter was $2.5 million with a debt-to-capital ratio of 0.6%.
Now I'll cover our guidance for the second quarter and full year 2013, which reflects our best estimates based on information available at this time.
Marketing & Events Group full year revenue is expected to decrease at a low to mid-single-digit rate compared to 2012, with low to mid-single-digit growth in U.S. same-show revenues. Show rotation is expected to have a net negative impact on full year revenue of $55 million to $60 million. Marketing & Events Group segment operating margins are expected to reach approximately 2.5%, driven primarily by continued improvements in the U.S. segment profitability. Exchange rate variances are expected to negatively impact revenue by about $7 million.
Travel & Recreation Group full year revenue is expected to increase at a mid-single-digit rate from 2012. Exchange rate variances are not expected to have a meaningful impact on revenue. And Travel & Recreation Group operating margins are expected to approximate 20%, up from 19.5% in 2012. Corporate activities expense is expected to approximate $8.5 million. Our full year cash flow from operations is expected to be between $38 million and $42 million. We expect full year capital expenditures of approximately $40 million to $45 million, which includes an estimated $12 million to $14 million for the construction of the Glacier Skywalk attraction, and depreciation and amortization expense is expected to be between $30 million and $32 million.
For the second quarter, we expect Viad's income per share to be in the range of $0.27 to $0.37 as compared to the 2012 second quarter income before other items of $0.29 per share. Revenue is expected to be in the range of $245 million to $260 million as compared to $246.5 million in the 2012 quarter.
We expect segment operating income in the range of $10 million to $13.5 million as compared to income of $10.5 million in the 2012 quarter.
Additional details regarding our 2013 outlook can be found in the earnings press release. Back to you, Paul.
Paul B. Dykstra
Thanks, Ellen, for that review. At this point, I'd like to provide some additional background on a number of first quarter developments. In the Marketing & Events Group, we're continuing to see increased demand on the part of both show organizers and corporate brand marketers to execute their global events in a coordinated fashion with a single-event provider. They're looking for a seamless flow across borders with cultural and language capabilities, graphics expertise and operating experience in the various markets in which they choose to hold their events.
At GES, we're well positioned to provide this valued service with an established and leading global network. Last year, we not only produced projects on the major trade show venues in North America and Europe, but we also produced projects in 47 different countries, including places as varied as Azerbaijan, Iceland and New Zealand. Chances are, if there's a major exhibition venue, we have successfully delivered projects there. We support global companies by providing the best solutions no matter what region of the world they choose to activate their brands.
During the quarter, we provided cross-border services for a number of clients. We continued to support Dell's global event production with events in Las Vegas, Madrid, Kuala Lumpur, Beijing and Tokyo. And for our event organizer client, AUSA, we provided pavilions, exhibitry, furnishings, graphics and on-site support for U.S. Military suppliers at a major defense show in the United Arab Emirates, and we'll do so again later this year in Turkey.
In the upcoming months, we will produce events in Brussels and Paris for U.S. organizers diversified and IAPA. Our proven ability to execute events on the European continent was key to winning these pieces of business.
Just recently, our global capabilities also helped us win a significant new exhibition program management contract with a major pharmaceutical company. Beginning in the second quarter, we will provide a full range of exhibition program services, including program management, design, fabrication and measurement for all of these clients' events across North America and Europe.
Our relationship with United Business Media, a leading B2B exhibition and event organizer, continues to grow as they have appointed GES to be the exclusive supplier for all of the United Kingdom and much of Europe. This is in addition to work we do for UBM in the United States. The multiyear agreement, which began this past January, includes 30 shows in 6 different countries, including shows taking place in 17 different U.S. venues.
Since our acquisition of Melville in 2007, we have been the leading exhibitions and events producer in the U.K. We have fortified that position over the years through smart investments to expand the capability's gap between Melville and its competitors. And we have successfully used Melville as a beachhead to provide services in other European locations and the launch -- launched event contracting operations in the Middle East, Germany and most recently, Amsterdam. I'm happy to report that we have completed the transition of the Melville brand to Global Experience Specialists or GES, creating consistent branding for our seamless global reach.
And another important recent development, GES extended its capabilities this February through the acquisition of Resource Creative Limited, a premier graphics service supplier in the U.K. and Europe. This comes on the heels of securing a 10-year agreement with ExCel, London to supply graphics and be the preferred exhibition services supplier for all Congress and event work at this premier international venue. The acquisition of Resource Creative supports our growing London graphics operation and augments our presence in Europe.
Again, as organizers and exhibitors increasingly look to execute their global marketing events in a coordinated fashion, GES is well positioned to be that single point of contact. Our leading and well-established global network allows us to provide our clients a unique value proposition for the seamless production and management of their marketing events through the world -- throughout the world. We are excited about the opportunities ahead.
I'm also happy to report that we recently received word that GES will be ranked among the world's 50 largest agency companies by Advertising Age magazine for the fourth year in a row, and among the nation's largest experiential event marketing agencies and ad agencies in Ad Age's upcoming agency report. We're extremely proud of the recognition and many awards we received for our outstanding creative work.
Now I'll shift gears to cover some additional highlights for the Travel & Recreation Group. On April 16, we submitted our bid for the new 16-year concession contract at Glacier National Park in Montana, where we have been the concessionaire for the last 32 years. We believe we have submitted a strong bid and are well positioned to win the new contract. This contract covers about 1/2 of the rooms we have at our Glacier Park operation, as well as the red bus tours that we operate in and around the park. All in, we generate about $18 million in annual revenue under the current contract. Under the new contract, the park service is requiring a higher level of investment in the early years to cover certain deferred maintenance items. In the short term, this will negatively impact Travel & Recreation Group operating margins by about 1 margin point. However, over the 16-year term, the contract economics are attractive.
As we've discussed on prior calls, if we were not successful in securing the new contract, we will continue to generate revenue from our own properties located outside the park, and we will receive $25 million in possessory interest, plus an estimated $5 million to $6 million for our personal property used at the facilities covered by the contract. Although the park service has not stated when they expect to reach a decision, we expect it will be sometime towards the end of this season. We will let you know when we receive official notification.
On another note relating to Glacier Park, 2013 is the centennial anniversary of our Glacier Park Lodge. Located just outside the boundaries of Glacier National Park, the lodge was built in 1913 by the Glacier Park Company, a subsidiary of the Great Northern Railway. The lodge is a very popular family destination with a large number of repeat visitors on an annual basis. We're experiencing even higher demand this year, as loyal visitors hope to participate in our centennial celebration activities.
Additionally, our Grouse Mountain Lodge, located near Glacier National Park, and our Columbia Icefield Glacier Adventure Tour, located in Jasper National Park, were both chosen as the setting for the February 4 and February 5 episodes of ABC's reality television hit, The Bachelor. We're very pleased with the additional exposure to a broad new audience that The Bachelor brought to the lodge and our iconic Icefield attraction. We hope the program sparked interest in potential new visitors throughout North America to experience our unique assets and the unforgettable beauty and splendor of the parks in which we operate.
Let me now provide an update on progress at the Glacier Skywalk attraction being built in Jasper National Park. Construction restarted on April 13, and we are on track for a soft opening in the September, October 2013 time frame. This will allow us to introduce the attraction to travel industry professionals and appropriate media, and significantly add to the anticipation and excitement leading up to our grand opening next spring. We expect the Glacier Skywalk to be a must-see attraction that will draw visitors to the unique vistas and natural beauty of the park.
As I said at the beginning of my remarks, Viad is off to a good start in 2013. Both business segments operated efficiently and generated solid results. We are encouraged by the operating efficiencies that we have generated and the favorable impact they have had on the profitability of our Marketing & Events Group. As it relates to the Travel & Recreation Group, we are moving towards the peak season, with advanced bookings that are pacing ahead of last year. Overall, we are executing well and are hopeful that the macro-economy in the industries we serve will continue to exhibit favorable trends going forward. The entire team is focused on delivering our commitments for 2013 and beyond.
I'll wrap up my comments with an update on our strategic review. On December 14, 2012, Viad announced that the Board of Directors authorized management to explore and evaluate opportunities to enhance shareholder value, including a potential separation of our Travel & Recreation and Marketing & Events business. As we discussed last quarter, this evaluation process is a priority for our Board of Directors and management team. We are investing significant resources, both internal and external, to conduct a robust review process and evaluate all opportunities to enhance shareholder value. At this stage, no definitive decision has been made. However, I can tell you that our review is progressing, and I will report back as soon as we are able to do so. Though I want to highlight again that while we continue to explore alternatives, there can be no assurance that this process will result in any transaction.
With that, let's open up the call for your questions. Mary Anne, if you could open up the question line, please?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Matt Madej of Northcoast Research.
Matt Madej - Northcoast Research
I was hoping you guys could maybe talk about the competitive dynamics in the business domestically. I was just wondering if you could maybe walk through some of the competitive wins and losses that you've had, and maybe if you've seen any increased competition or any other bidders showing up in the bidding process for shows domestically.
Paul B. Dykstra
Yes, I'll make a couple of quick comments, and I'll ask Steve Moster to comment as well. I think one dynamic we are seeing is that we're seeing it more business go out to bid, maybe a little bit more than we've seen in the past. The pricing dynamics, I think, are relatively stable, although it's still a fairly competitive marketplace out there. Steve, would you add to that, please?
Steven W. Moster
Yes. What I'd say is, as Paul indicated, we're seeing more business going out to bid. Domestically, we don't see really new bidders coming into the market, as you had asked about. We do see the industry continuing to recover in a supporting price stability. A lot of the competition for business has shifted away from pricing and towards more capabilities. And as it continues to focus on that differentiation, things like creative design services, the breadth and depth of services and the strength of our worldwide network, we feel like we have a compelling value proposition in the marketplace.
Matt Madej - Northcoast Research
Great. That's helpful. And then maybe switching gears on the cost realignment side. This quarter, you guys showed pretty significant margin improvement in the Marketing & Events business. I was hoping maybe you could kind of give us a sense for what inning you think you're in, in terms of the cost adjustments that you're making, and then maybe what initiatives you're currently working on today to get to that 4% margin goal by 2014.
Paul B. Dykstra
Sure. I'll comment again and then ask Steve to add some color as well. So we're on track for our 2.5% margin goal for 2013. I think we're very pleased with the labor-to-revenue improvements we saw in the first quarter. We're also seeing the fruits of our labor in the -- getting more efficient with our service delivery network. And as I mentioned in my comments, we've taken 1.2 million square feet of fixed cost out of the network. And so we're starting to see the full benefits of that. That being said, we do believe we still have some runway. We're probably getting into the later innings now of those initial projects, but there's still opportunities left. There are some things we're going to be doing this year on the service delivery network on the labor side. We've got a lot of opportunities left to continue to plan better, execute to that plan and have more realtime tools to adjust labor on a regular basis so that we can continue to become more efficient. Steve, would you add anything to that?
Steven W. Moster
Yes. I think what I would add -- and again, the 3 primary drivers that we have are increasing the labor productivity that we have at show side, which is one of our major costs. And as Paul indicated, I think we're making significant progress as a result of our first quarter. But I think there's still further room for us to go. The second bucket is really around our facilities and our inventories, how we manage that. Part of it is facility reduction and optimization of the size, and part of it is optimization of how we utilize our inventory. That is an initiative that we've started several years ago, and I still believe there's room to improve that. But that's probably the area where we've made the most progress. And then the last third bucket is really just managing our discretionary spend and to keeping a tight look at how we spend our overhead dollars. And it's been successful for us in the last couple of years. I do believe there's still a runway for improvement.
Matt Madej - Northcoast Research
Got you. That's very helpful. And then lastly, I wanted to focus a little bit on the Travel & Rec business. Thank you for the update regarding the Glacier RFP. I was hoping maybe you could give us a sense for what you're seeing in terms of the acquisition pipeline in the Travel & Rec business. And then maybe if you talk about the Going-to-the-Sun Road this year, I guess any impact from the government sequestration? And then are we going to see any impact for potential opening dates for the Travel & Rec attraction there?
Paul B. Dykstra
Okay. I hope I captured that. Let me start with the Going-to-the-Sun Road. Parks is targeting June 21 to open the road. I just read something yesterday that said it was sort of a normal winter. So as they're beginning to plowing now, things just are quite typical, and the target date is the 21st, although that's subject to weather between now and then. From a sequestration standpoint, they have, I believe, all the budget dollars to make that happen. They did not take any money out of the plowing the road budgets. So I think we feel comfortable from that aspect. What was the first question?
Ellen M. Ingersoll
Acquisition.
Paul B. Dykstra
On the acquisition pipeline, yes, we continue to have a good pipeline. There are a lot of things that we've looked at, there are a lot of things we're looking at. In some cases, we have passed where the economics didn't fit what we thought were reasonable from a buyer's expectation versus a seller's expectation. But at the same time, we do continue to see some very good opportunities going forward to continue to make smart acquisitions, especially as it relates to Travel & Rec.
Operator
[Operator Instructions] Our next question comes from Steve Altebrando of Sidoti & Company.
Stephen Altebrando - Sidoti & Company, LLC
Considering how GES performed in the quarter and the flow through you're able to generate, do you think there could be some upside to the 2.5% operating margin target for the year?
Paul B. Dykstra
Well, we set a pretty aggressive goal given the headwinds we had from our show rotation challenges that we have this year. I think we're very excited that we saw a 1% improvement to our labor to revenue. We've targeted 50 basis points for the full year. So from that perspective, we're on track. I do believe we've got some aggressive goals in the back half of the year. We're going to work as hard as we possibly can to exceed the 2.5%. But that's certainly a commitment that we have for the rest of this year.
Stephen Altebrando - Sidoti & Company, LLC
Okay. In the Travel & Rec segment, you mentioned bookings being positive. Can you expand on that and to what degree -- and any color around that would be helpful.
Paul B. Dykstra
Sure. So our booking pacing -- so the rate at which we're seeing rooms being sold at all 3 of our properties is ahead of 2012. Now we've got limited inventory, especially as it relates to inside the park rooms at Denali and Glacier. But it's a very positive sign to see those bookings ahead of pace of last year, and it's by a good margin. Now you never really know are those because people are booking earlier, or are those increased numbers of rooms. But either way, we think it's very good -- a very good sign for us as we look at the upcoming season. So -- because it also may give us chance to firm up rates where we have that flexibility. Michael, would you add any color to that?
Michael M. Hannan
I think you captured it well, Paul. I mean, there is a limited amount of inventory, and we're really happy to see people booking a little bit earlier. Of course, there's still a huge walkup business at our attractions, and so there's a lot of work to be done to -- for the summer season to hit our goals.
Stephen Altebrando - Sidoti & Company, LLC
Okay. That's helpful. And in terms of the Glacier Park contract, are you seeing anything anecdotal or are you aware of how many bidders there are?
Paul B. Dykstra
No, we don't know who else may have bid. It's something that the parks keeps very quiet and confidential. Again, we do believe we submitted a very competitive bid. And in the event that we were not to retain the contract, we do have downside production with the possessory interest and sale of our personal property.
Stephen Altebrando - Sidoti & Company, LLC
Okay. And then just lastly, did you buy back any stock in the quarter?
Paul B. Dykstra
No, we did not.
Operator
And at this time, there are no other questions.
Paul B. Dykstra
Okay. Thanks for your questions and participating on today's call. Just to sum things up real quick, we're excited about the prospects for both business units and hopeful that the macroeconomic environment continues to hold its upward course, and we remain committed to delivering on our margin goals of 2.5% this year and 4% in 2014 at GES. We appreciate your continuing interest in Viad, and we look forward to talking again with you again after the end of the next quarter. Have a great day.
Operator
This does conclude today's conference call. You may disconnect your phones at this time.
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