Ambassadors Group's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.31.13 | About: Ambassadors Group, (EPAX)

Ambassadors Group, Inc. (NASDAQ:EPAX)

Q3 2013 Earnings Conference Call

October 31, 2013 11:30 a.m. ET

Executives

Stacy Feit – Financial Relations Board

Anthony Dombrowik – Interim CEO

Eric Anderson – VP of Marketing

Lisa Rowe – Senior Director of Finance and Corporate Controller

Analysts

Brandon Merrill - Merrill Brothers Investment Management

Operator

Good morning, ladies and gentlemen, and welcome to the Ambassadors Group Third Quarter 2013 Earnings Conference Call. Today’s Conference is being recorded. My name is Janine and I will be your coordinator for today. I would like to turn the call over to Stacy Feit, please go ahead ma’am.

Stacy Feit

Thank you, Janine. Good morning everyone. Joining us on the call today with some prepared remarks is Anthony Dombrowik, Interim Chief Executive Officer of Ambassadors Group, and other members of management.

Before we proceed into our prepared remarks, I want to highlight that as mentioned in previous calls and our GAAP financial statements, we report revenue from non-directly delivered programs net as pass-through expenses from third party operators. The remaining revenue streams are reported on a gross basis. For clarity, our comments today about all of our activities will focus on gross revenues and the related costs associated with those revenues, whether they are from directly delivered or non-directly delivered programs.

For your convenience, we’ve included a footnote in our earnings release that separately discloses gross revenue and associated costs for these non-directly delivered programs for you to better understand how they relate to our reported revenue.

In addition, I would like to make clear our Safe Harbor statement regarding forward-looking statement. Statements contained in this press conference and related comments by Ambassadors Group’s Management, which are not historical in nature, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements include without limitation, statements that relate to expectations concerning matters that are not historical facts.

Words such as projects, believes, anticipates, plans, expects, intends, estimates, and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements reflect our beliefs or current expectations with respect to among other things, trends in the travel industry, our business and growth strategies, our ability to integrate acquired businesses, future actions, future performance or results of current and anticipated sales efforts, expenses, the outcomes of contingencies such as legal proceedings, financial results and fluctuations in our current results of operations.

Forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These and other risks are discussed in greater detail in the Ambassadors Group’s periodic reports filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these factors and all related cautionary statements. We do not undertake any obligation to update any forward-looking statements.

And with that, I’ll hand the call over to our Interim CEO, Tony Dombrowik.

Anthony Dombrowik

Good morning and thank you for joining our third quarter 2013 earnings call. Following some brief introductory remarks I’ll ask Eric Anderson, Vice President of Marketing and to provide an update on our sales and marketing initiatives. I would then review our year-to-date financial results and update our 2013 guidance. We will then open the call for questions. Lisa Rowe [ph] our Senior Director of Finance and Corporate Controller will also be available for our Q&A session. As usual Jim Kreyenhagen, President of BookRags.

To begin our discussion we wrapped up our peak summer travel season in August and year-to-date, we have traveled 17,940 delegates across our programs. I think it is important to acknowledge the impressive program delivery this year. I want to express appreciation for this for the associate support teams, future leaders and worldwide partners that made it happen.

The quality of the travel experience is the essence of our brand which is why I would be remiss if I did not also mention our net promoter scores. As a reminder net promoters are widely adopted parameter of customer loyalty designed to gauge the customer willingness to recommend a brand to others.

In the year of significant change we are proud to have achieved the highest consolidated net promoters scores in our history, turning right now towards an average of 71 for the year. In fact this customer satisfaction metric was up year-over-year across everyone of our product lines. Adjustment to the broad reaching value that we provide to our travelers.

We are looking forward to continue in this chain of excellence with the slated winter programs that we are offering this year which as a reminder will contribute to 2013 enrollments and revenue. This is the small scale pilot offering, a handful of programs will take advantage of seasonal interest and provide flexible lower cost options to current lease.

Delegates will ring in the new year in London explore the mounts of Peru, get back to the children at Delhi and several of our delegates will even get to explore the remote landscape of Antarctica.

Now, I want to talk about the near term future. I ended our last call by outlining three core short-term goals I want to reiterate. First we want to shift to our multi-channel model to improve our delegate accounts. Second, we are right sizing our cost structure and third we will stay close to our customer to enhance our product and brand relevance.

Focusing for a moment on the first call, our peak selling season for 2014 travel began in earnest of the end of August. It is generated positive results we are integrated multi-channel approach. Our early looking enrollment revenue for 2014 is showing modest improvement for our Core Student Ambassador product up 5.8% over the same time last year. We believe we are beginning to see the fruit from our efforts to reverse downward trend in enrollments that we’ve experienced in last two years, this is an encouraging step towards more stabilized long-term business.

So with that in mind I would now like to turn the call over to Eric to discuss our sales and marketing initiatives in greater details, Eric?

Eric Anderson

Thanks Tony and good morning everyone. We began our 2014 peak selling season having made significant strides across the organization in support of the truly multi-channel approach to customer acquisition. The guiding philosophy behind this evolution is simply to be with the customer is, enabling families to learn about our programs and interact with us in the way it’s best suited to their preferences in busy lives.

We have moved away from what I would describe as a one in then approach, a single indication to a single and went through direct mail alone to an approach with a more effective reach in frequency across channels. We are now engaging our target customer across multiple type of points at each stage of the awareness, interest and decision cycle through direct mail, online advertizing, content marketing, social media, webinars, information meetings, increased telesales and more.

Our goal is to provide both the brand exposure and brand engagement necessary to help every family making informed purchase decision about our life changing travel programs.

For instance our social media presence is now the largest in the student travel space with daily engagement level surpassing all major competitors combined. At the hub of our social strategy our Facebook fan base approaching the 300,000 mark has grown by nearly four times from this time last year. These enthusiastic communities and brand advocates are playing an indispensible role and validating families’ decisions to respond our outreach attend information meetings and entrust us with the educational enhancement and safety of their children.

Our local information meetings remain a vital tool for driving enrolments. The energy, excitement and personal testament of our future leaders, parents in this setting have a profound impact on families waiting this important purchase decision. At the same time, we’ve made some significant advances toward improving the efficacy of these meetings.

With new technology for tracking attendants and follow up as well as increase to participation. As one example out of hundreds and awareness my first ever People-to-People delegation to Russia in early 50s recently addressed one of our information meetings. His children travelled on a program and now one of his grandchildren is slated to travel with us next summer. Stories like this go to the heart of our engagement strategy as variable to drawing the experiences of not only our reason [indiscernible] but also our proud legacy across multiple generations.

We’ve significantly altered our channel mix for the 2014 enrollment cycle with the 30% reduction in overall direct mail volume for spring and fall campaigns combined and a proportional increase in digital. Again, our goal is not to swap one channel with another, but rather to right size our direct mail investment to focus on high performing sources, improve its efficiency with multi-channel impressions well at the same time tapping other resources in digital. We also enhanced our convergent path providing choice to our customers in the form of in person information meetings, webinars and telesales.

We are seeing enrolments come through webinars and telesales as standalone channels, but webinars are also serving very effectively as an additional cut point in the lead neutral path for families who also attend information meetings.

We have experienced noted improvements across the board in our campaign performance metrics this fall including at response attendance and convergent rates. We believe these results validate our evolution toward a multi-channel model and we will continue to evaluate the inter play of various channels as we own in on the right mix of direct mail digital and other high touch moods of engagement.

As a reminder given campaign modifications we anticipate the environment cycle to vary from historical trends with a longer timeline for enrollments which should continue into the spring. Our adoption of digital tools coupled with our increased engagement visibility is supporting our shift to a year around sales and marketing effort in which we are creating sustained level of sales effort outside of our traditional fall enrollment season focused primarily on a fresh pool of qualified needs. Going forward we will continue to nurture and convert these existing leads, generate new leads and focus on retention in an effort to deliver 2014 enrollments at or above 2013 levels while achieving improved efficiency.

Now I will turn the call back over to Tony a review of our year-to-date financial results.

Anthony Dombrowik

Thanks Eric. Now I want to cover our year-to-date financial results talk a bit about some of the business changes we’ve made and update our guidance for the year. As I mentioned earlier we have travelled 17,940 delegates in the first nine months of 2013 compared to 21,089 delegates in the prior year period. Gross revenue from all sources to the nine month period declined 18% to 113.2 million driven by the delegate decline. Our 2013 delegate accounts were down year-over-year.

We were able to grow our gross margin to 37.3% from 36.4% due both to the careful management of our cost and the impact of the foreign currency during the period.

Moving down to income statement, our operating expenses comprise both of sales and marketing activities and general and administrative expenses total of $45.1 million compared to $38.6 million. It is important to note that as disclosed in the release, over the last three years, our results have been impacted by certain matters that we consider to be special items.

We believe these items impact comparability of our year-on-year operating results and that it’s important to understand their impacts in addition to the GAAP measures we provided in the release. Excluding these costs, year-to-date 2013 operating expenses would have been $34.3 million down $2.6 million or 7% from $36.8 million in the prior period.

Now I would like to take a moment to walk you through some of the special items. Long before I took over as an interim CEO, we have been evaluating all aspects of our operations for strategic fit, the efficiency and financial stability. Many of the changes last year particularly around our Citizen’s Ambassador program, leadership Ambassador program and both the marketing and cost structure changes to this core Student Ambassadors programs resulted from those discussions. This year we have continued to make those assessments in line with our second broad goal of being fiscally responsible. In that vein, we have made the decision to restructure the operations of our discover student adventure product line.

While this program has been an exciting and compelling offering, it just simply didn’t scale quickly enough under its teacher recruited structure to be a positive contribute to the overall business. Given the way that related royalty to discovery education, we couldn’t proceed near term returns necessary to continue to operate as standalone brand.

That is not intended to mean that we do not have significant learning from that venture and certainly the product was well received by our travelers. Knowing that we hope to maintain a strong relationship with the discovery education group and we are working with them on ways we can continue to partner for student traveler. But right now we need to focus on our core brand people-to-people.

We have also made the decision to restructure our operations in China. Again, it is a wonderful program, but it simply has not delivered the number of inbound delegates necessary to support the in-country infrastructure that we had put in place. Instead, for China inbound travelers, we will be moving to a more cost effective third party independent recruiter referral model, similar to what we have in another countries like Sri Lanka, South Africa and other locations. Those delegates will support our roamers for the leadership Ambassador program going forward.

In connection with closing out these two operations in their current form, we encore 1.8 million in pretax restructuring charges including 1.55 million payments to discovery education to close out their royalty of payment. In addition to these operational restructuring during the third quarter we also took the necessary reductions in the carrying value of certain fixed assets. The total amount of impairment recorded was approximately $6.5 million primarily related to the market conditions of our office headquarter building.

It also includes write downs of other operational assets including for RGSA and China product lines. As a reminder, our headquarter building is listed for sale and we recently reduced the asking price to $11.9 million and changed our broker to Cushman & Wakefield out of the Oregon area.

So in total special items on year-to-date basis including employees separation charges from earlier in the year and other net cost total $10.8 million before the impacted income taxes of which $8 million is non-cash asset impairments and recondition of stock based compensation. After the effective income taxes, the impact on net earnings was $6.9 million for the year-to-date period. These balances are also summarized in the table in the end of our earning release.

Now looking at the primary components of our operating expenses, year-to-date selling and market expenses were $25.4 million down $1 million or 4% from $26.4 million in the prior year period. As expected, sales and marketing cost EBITDA during the third quarter following the increase expenditures last quarter is for spring campaign. These balances include the impact of our cost shift to digital, social and other revenue channels for the fall of 2013 campaign to deliver traveling delegates to 2014.

Second, year-to-date G&A expenses excluding the special items I mentioned earlier were $8.8 million compared to $10.3 million in the same period in 2012 or a decrease of $1.6 million. This reflects the impact of our successful cost cutting initiatives. Combined our total operating expenses before special items were $34.3 million compared to $36.8 million in 2012 or down about 7%.

We are on track to reduce operating expenses excluding special items by between $4 million and $5 million in 2013 on top of last year's reduction of over $5 million compared to 2011. Looking at the bottom-line we reported a year-to-date net loss of $1.6 million compared to net income of $11.8 million in the prior year period. Year-to-date special items net of the effective income taxes total $6.9 million. Without these special items, and their impact on income taxes we would have posted a $5.3 million in net income for the 2013 period compared to a $13.4 million in the 2012 period.

Turning to cash flows we generated $9.3 million in operating cash flow year-to-date compared to a break even in the prior period. The change in cash flow from operations between periods was driven primarily by increase in participant deposits due to higher number of enrollments for future travel periods and the reduction in prepaid program cost related to airline departments. Year-to-date we funded $2.7 million in CapEx primarily related to technology screen sales and marketing efforts and it included development of content for our small internet subsidiary BookRags.

We expect to invest approximately $3.5 million in total CapEx this year. In terms of our balance sheet at September 30, we had $41 million in cash and short term available for sale securities. We had no debt outstanding in deployable cash which is defined in our earning release of $29 million.

Now I would like to discuss our updated outlook for 2013. We now expect the facility to gross revenues for all programs and operations to be between $115 million and $118 million. Consolidated gross margin as the percentage of gross revenue for all programs and operations of 36.5% to 37.5% and net income before any special items are between zero and 500,000. The fourth quarter typically is a seasonally slow revenue period for us with our main focus now in marketing for 2014. As such we want to give you a first look at our 2014 travel season. As of October 27, the enrolled revenue for all 2014 programs was $114 million up 5.9% from the same point last year based on road travelers of 17,298 compared to 17004. Enrollment revenue for our core student Ambassador program was about 5.8% to $106.2 million compared to $100.3 million at the same date last year.

This is based on enrolled travelers of 14,915 compared to 14,517 last year. While it's still very early in our initial 2014 our enrollment statistics are encouraging for this early measure. We are taking a step towards the more stabilized long term business and together these actions and outcomes demonstrate our commitment to the three core goals of executing our multi channel marketing strategy spending smartly and staying close to our customer. We are as committed as ever to our mission while managing the business in the most prudent manner possible to this turnaround and debt.

Thank you for your continued interest in Ambassadors Group. And with that, I’ll ask the operator to open the call for questions. Janine.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen, to give everyone an opportunity we do ask that you please limit yourself to one question and one follow-up. If you have any further questions, we welcome you to rejoin the queue. (Operator Instructions)

And we do have one question. We will hear from Brandon Merrill with Merrill Brothers Investment Management.

Brandon Merrill - Merrill Brothers Investment Management

Hi and thank you for taking my call. It is nice to see that the negative enrollment numbers have stabilized. How do you see – how do you view the preliminary 2014 numbers compared to your expectations? I know you had a good amount of expectations going forward and do you distribute that management in the marketing campaign in the efficiency that you gained?

Eric Anderson

Yes they were right. What we are anticipating is right on track and we have seen so far that we are seeing we are trying to get exactly where we wanted to be with the turnaround effort, with the shift into the multi-channel and yes we knew primarily attribute that to the efforts that we have made across the board in sales and marketing as well as the combined effect of having that multi-channel approach along with having the resources capabilities and tool sets within the sales and organization to be able to close those leads.

Anthony Dombrowik

Yes I think if you look at – we are on track on the – this is Tony, I think if you look at our 2014, we’re on track with the plan, again it's early and it's one positive indicator, but if you look at where are our targets are, we are on track to be flat a little bit better for 2014 in enrollments.

Brandon Merrill - Merrill Brothers Investment Management

That sounds great. Okay. I will jump back in queue. Thank you.

Operator

Thank you. (Operator Instructions)

Anthony Dombrowik

We will wait just a second for him to jump back in queue. He dropped off. There he is.

Operator

And we will hear again from Mr. Merrill.

Brandon Merrill - Merrill Brothers Investment Management

Okay. Thank you very much. Just a quick question on the discovery education, how many years do you left on that contract and how much money have you lost since you rolled out that venture?

Anthony Dombrowik

Yes so, discovery education was something we got into roughly about four years ago and it was always sort of an incubation project; getting into the teacher recruited model, getting into a different brand and people to people and we were excited about certainly the program itself was a success the net promoter scores and experience of the students had and the feedback we got from teachers was excellent. Neither James who ran the program nor myself will hear when we got into the deal of discovery, but it was a great idea and a good incubation project but the reality was it didn’t generate enough travelers to support the cost structure and specifically with the royalty cost structure with discovery. So over the lifetime of that royalty agreement which ran through 2015 travelers we had another year, another two years on the agreement that we will pay out to discovery. We would have lost another couple of million dollars that we are just not – that’s just not our focus right now. We need to focus on the people-to-people brand.

Brandon Merrill - Merrill Brothers Investment Management

Okay. I got it. So you are completely shutting the discovery basically after this year? You are basically done with it or you are going to kind of still have that relationship with it?

Anthony Dombrowik

Because the discovery product and the learning that we had on it were so positive, we want to maintain our relationship with discovery and they are amenable to that. We are working with them on figuring out what that looks like going forward but it won’t be under the DSA standalone structure. It would likely be a component or look at ways that we can partner with them through people-to-people.

Brandon Merrill - Merrill Brothers Investment Management

Got you. Okay. Well thank you for your time and good luck going forward.

Anthony Dombrowik

Thank you very much.

Operator

(Operator Instructions)

Anthony Dombrowik

Okay. It looks like we don’t have anybody in the queue. I appreciate your time today and we look forward to talking to you at the next call next quarter. Thank you very much.

Operator

And again this does conclude today’s investors group third quarter 2013 Earnings Conference Call. We thank you for your participation.

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