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Ambassadors Group, Inc. (NASDAQ:EPAX)

Q4 2013 Earnings Conference Call

February 06, 2014 11:30 AM ET

Executives

Stacy Feit - Financial Relations Board

Anthony Dombrowik - Interim CEO

Eric Anderson - VP of Marketing

Analysts

John Deysher - Pinnacle

Operator

Good morning, ladies and gentlemen, and welcome to the Ambassadors Group Q4 2013 Earnings Conference Call. Today’s call is being recorded.

I’d like to turn the call over to Stacy Feit. Please go ahead.

Stacy Feit

Thank you Melissa, good morning. 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. This press conference and related comments by Ambassadors Group’s Management will contain forward looking statements regarding actual and expected financial performance and the reasons of variances between period to period results which are included for the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995.

These forward looking statements include without limitation statements that relates expectations concerning matters that are not historical fact. 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, 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 anticipated sales efforts, expenses, the outcomes of contingencies such as legal proceedings, financial results and fluctuations in our current results of operations.

Although we believe the expectations reflected in these forward looking statements are based upon reasonable assumptions, we can give no assurance that expectations will be met. Forward looking statements may involve known and unknown risks, uncertainties, and other factors that may cause actual results and performance in future periods to be materially different from any future results performance suggested by the forward-looking statement in this press conference. Such forward-looking statements speak only as of today’s day and we expressly disclaim any obligation to provide public updates or revisions to any forward-looking statements in this press conference to reflect any changes in expectations or any changes in events. These another risks and uncertainties that could cause actual results to differ materially from anticipated results are discussed in great detail in the Ambassadors Group’s periodic report filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these factors and all related cautionary statements. And you are directed to refer to such periodic reports filed with the SEC for a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from anticipated results.

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

Anthony Dombrowik

Good morning and thank you for joining us. Today we’ll be discussing our fourth quarter and full year 2013 results. Following some brief introductory remarks I’d ask Eric Anderson, Vice President of Marketing to provide an update on our campaign metrics, sales and marketing initiatives. I will then review in a little more depth our year-end financial results and our 2014 guidance.

We will then open the call for questions. Lisa [next] our Senior Director of Finance and Corporate Controller will also be available for our Q&A session, as is Jim Kreyenhagen, President of BookRags.

To begin I want to reflect back on 2013, it was the year of significant change for our organization and a critical year in our turnaround effort as we continue to evolve into a true year around integrated multi-channel market and sales organization, while we still have ways to go and we realize it is going to take time and patience. We did make significant strides and took away some important learnings to shape our future activities. We’re also pushing hard to increase our pace of change and to learn fast from our mistakes and most importantly to replicate our successes.

The bottom line is that in 2013 we moved in the right direction and we continue to believe in our integrated sales and marketing strategy. Our key focus on high performing mail, in person information meetings, visual lead generation and a deep social presence is the right move.

To be clear, we are not satisfied with the extended progress. As you saw in the release last night at this point our enrolled revenue from all programs on a comparable basis is down 3.2%. We expected to be flat through 2013 at this point. The change has been primarily driven by weaker than expected retention patterns. We are taking actions to arrest that trend and to seek incremental enrollments beyond those already contemplated for 2014.

We will discuss those activities in a moment, but let me emphasize this is an area of critical importance to us. And while enrollments and retention are our media focus, I would be remissed, if I did not also mention two other important 2015 achievements. First, in 2013, we took many prudent actions that will strengthen our financial performance going forward. We reduced our operating expenses before special items by over $5 million which exceeded the high end of our expectations and that is on top of last year’s $5 million reduction when compared to 2011. We improved our overall direct margin to 37.5%. We restructured our in-country China operations and dissolved Discovery Student Adventures.

We seized our recurring dividend to allow for flexibility in working capital, removed the restricted financial covenants from our credit facility and reduced the total capital spends to just over $3.4 million. All of these actions put the company on a firmer financial footing going forward.

Second we are proud of our achievements in 2013 as they relate to our customers. In a challenging year, we did not lose sight of our mission. We traveled over 18,000 individuals safely to have amazing and unique people-to-people experience they we will never forget and we had our highest customer satisfaction scores ever. We achieved a 74 in the net promoter scale, which is quite an accomplishment and on par with some of the world's most recognized brands. I have to thank our team, our teachers and our worldwide partners for making that happen. We truly have some of the best student travel offerings in the marketplace.

So, when reflecting on 2013, we wanted to stabilize our delegate counts, spend smartly and stay close to our customers. We have done just that. We had a great travel season and we are aggressively working on strategy to provide stabilization going forward. Our top and bottom line results were within our guidance range and we made the tough calls for the health and longevity of the business and our program remained excellent centered on our relationship to the customer.

Turning to 2014, we continue to see positive results from our high engagement sales and marketing approach. With initial gross enrollments approaching expected levels with some variations due to the timing of our January and February sales effort. However, as I mentioned retention has been challenging, running similar to 2012 levels.

Financial constraints are still the number one reason given for [what’s raw from the] program. We are responding, working to improve retention and to supplement the counts with incremental enrollments. And it's important to call out, that due to modifications we have made to our cost structure, we are acquiring travels that are lower operating cost per delicate with the support of more profitable model going forward. As a result in the end we expect year-over-year growth in net income before any special items in 2014 as reflected in the gains we provided in the release.

So, now let me turn it over to Eric to dig a little deeper on 2014 marketing and further discuss retention and then I'll come back to review our financial results and 2014 outlook. Eric?

Eric Anderson

Thanks Tony and good morning everyone. Over the last year, we've been focused on involving to a true year end multichannel approach to customer acquisition. The guiding philosophy behind this evolution is to be where the customer is, enabling families to term about our programs and interact with us in the way it’s best suited to their preferences and busy lives at every point in their decision process.

The changes we have made to our lead sources, direct mail marketing tactics, digital strategy and conversion channels have significantly improved our engagement, visibility and efficiency in the short-term while laying the foundation for a more effective and scalable multichannel marketing program in the long-term.

Customer reception to our evolving marketing and sales strategy has been strong with gross enrolments approaching our forecasted level at an improved cost to acquire. However, as Tony discussed, we are currently confronting some unfavorable retention trends which are impacting our net enrolments for the 2014 travel season. Based on our tracking including a recent survey of over 400 withdrawn families, financial reasons remain the most pervasive factor for withdrawal, representing about 40% of cases. This is the only factor to see a statistically significant year-over-year increase, about 5% over last year.

Ongoing economic uncertainty remains a challenge. Consumer confidence took a dip this fall, particularly in our target market. We are working hard to combat this factor via a direct engagement with at risk families to explore options such as flexible payment programs, funding guidance and program alternatives. And as always, we continue to test the right mix of deposit, payment options and available tuition credits each year to find the best path for families to participate in our programs.

As you may recall, we ran our first significant spring campaign last year in support of the 2014 travel season. We set out and cover several critical long range insights in this test campaign. Among them whether the withdrawal impact of a longer enrolment cycle would be counter mandate by giving families more time to pay. Thus far we have seen higher than predicted withdrawal rates among spring enrollees but we won’t know until the second quarter whether the longer payment cycle has a significant counter effect on the overall retention of this group.

Nevertheless, we are exiting our learnings from last spring with the smaller spring campaign this year, optimize the resources that perform best as early enrolments. And we are modifying our delegate communication strategy in an effort to sustain excitement as we work to improve our retention rate.

Our customer experience team is focused on the identification and prioritization of our [reach] to delegates identify this at risk for withdrawal. We are doing this earlier than in prior years and across several functions within the organization. While we do not expect to completely reverse the withdrawal trend at the stage in our 2014 enrolment cycle, we believe that this pinpoint effort to engage at risk families around their specific needs will have a positive impact.

Finally, it’s also important to note that the point in time year-over-year enrolment comparison is partly impacted by the timing of our winter campaign relative to last year. We are about mid way through our winter campaign cycle this year, while it was largely completed this time last year.

This timing variance will obviously even out as we complete winter meetings this month. Looking ahead with our adoption of digital tools in the evolution of our sales capabilities, we are creating a sustained level of sales effort outside of our traditional fall in enrolment season, which continues to translate into long tail enrolments.

We are running consecutive winter and spring marketing campaigns, targeting enrolments for both 2014 and 2015 travel seasons. This is the first time in company history that we will be selling two seasons in a single campaign cycle. We expect to gain efficiencies from this process while further empowering choice for our consumers.

There are learnings from our winter and spring campaigns last year. We have successfully identified the customer segments and tactics that perform best in the respective campaigns. We implemented those tactics to deliver a more efficient winter campaign this year and we’re seeing positive results. The campaign is about 35% smaller in volume this year but is tracking within 15% of last year’s enrollment count. Thanks to improved targeting, segmentation, multi-channel support and successful message testing.

I’d like to close with the brief excerpt from one of hundreds of parent reviews we’ve generated in last year by activating our passionate brand advocates and asking them to share their stories in online forums. A parent wrote about the experience of her 12 year old daughter who traveled with her last summer. She wrote, it was a wonderful learning growing experience, should be traveling again this summer with the program to Australia. The life experience is she is having would stay with her the rest of her life and that shaping here into a global citizen. I am very pleased with the program and have recommended it to many friends.

In cases like this one, a positive brand experience led to repeat travel, word of mouth advocacy and direct referrals, exactly the kinds of activities that will drive the transformation of our business as we connect loyal customers with interested families around their shared interest in our life changing journeys.

Now, I will turn the call back over to Tony for a review of our 2013 financial results.

Anthony Dombrowik

Thank you Eric. And now I want to cover quickly our 2013 financial results and then discuss our guidance for 2014. We traveled 18,251 delegates in 2013 compared to 21,252 delegates in 2012. 2013 gross revenue from all sources declined 17% to $116.2 million, driven by the delegate decline. Although 2013 delegate counts were down year-over-year, we were able to grow our gross margin to 37.5% from 36.7%, due both to the careful management of our cost and the impact of foreign currency.

Moving down the income statement, our operating expenses comprised of both sales and marketing activities and general and administrative expenses, totaled $55.4 million compared to $51.1 million last year.

It’s important to note that as disclosed in the release, over the last few years, our results have been impacted by certain matters we consider to the special items. We believe these items impact comparability of our year-on-year operating results and that it is important to understand their impact in addition to the GAAP measures we provided in the release.

These special items reflect the third quarter impairment charges on our corporate headquarters which is listed for sale, restructuring charges associated with dissolving our China operations and Discovery Student Adventures product lines, and separate payments associated with management departures and a reduction in force.

On a full year basis for 2013, these items totaled of $11.4 million pretax of which $8.1 million were non-cash charges. After the effective income taxes, the impact on net earnings was $7.2 million in 2013. These balances are summarized in the table at the end of the earning release.

Excluding this cost 2013 operating expenses would have been $44 million, down $5.4 million or 11% from $49.4 million in 2012. Our goal at the start of the year was to reduce operating expenses by $4 million to $5 million and we exceeded that range as we continue to focus on managing the business in the most financially prudent manner possible. This was on top of last year’s reduction of over $5 million compared to 2011.

Now looking at the components of our operating expenses, 2013 selling and marketing expenses were $32.3 million, down $2.5 million or 7.3% from $34.8 million in the prior year period. These amounts include the impact of our cost shift to digital, social and other revenue channels to deliver travelling delegates for 2014.

Second, 2013 G&A expenses excluding the special items I mentioned earlier were $11.7 million compared to $14.5 million in 2012 or a decrease of $2.9 million. This reflects the impact of our successful cost cutting initiatives and our focus of our dollars away from non-administrative tax.

Looking at the bottom line, we reported a net loss of $7.1 million in 2013 compared to net income of $1.7 million in 2012. Excluding the special items and their impact on the income taxes, we would have posted $136,000 in net income for 2013 compared to $3.2 million in 2012.

Turning to cash flows, we generated $14.8 million in operating cash flow in 2013 compared to $2.2 million in 2012. The year-over-year change in cash flow from operations was driven primarily by a reduction in prepaid program cost related to airline deposits.

In 2013, we funded $3.5 million in CapEx, primarily related to technology supporting sales and marketing efforts as well as the development of content for our small internet subsidiary BookRags. We expect to invest approximately $3 million in CapEx in 2014.

In terms of our balance sheet at December 31st, we had $45.6 million in cash and short term available for sale securities. We had no debt outstanding and deployable cash which is defined in our earning release of $22.6 million.

Now, I would like to recap our initial outlook for 2014 provided in the earnings release. As of February 2nd, enrolled revenue for all 2014 travel programs was $120.2 million, down 3.2% from the same point last year, based on enrolled travelers of 19,162 compared to 20,139. These statistics are on a comparable basis between years as they remove the impact of our China operations and Discovery Student Adventures product line in our 2013 balances. Those operations ceased in 2013.

To focus on our Core Student Ambassador program enrolled revenue from that operation standalone is down 4% to $111.1 million compared to $115.7 million at this same date last year. This is based on enrolled travelers of 15,743 compared to 16,874 last year. Again, we had anticipated being flat year-on-year at this point and the 4% decrease is primarily the impact of higher than expected withdraw activity compared to the prior year.

So, based on current visibility for 2014, we are giving the following guidance for the year; consolidated gross revenues for all programs and operations to be between $110 million and $120 million, consolidated gross margin as a percentage of gross revenue for all programs and operations of 36% to 37% and net income before any special items of between $1 million and $3 million.

With approximately four months until the peak 2014 traveler season commences, we are focused on capturing incremental enrollments and improving retention. We are pushing hard to make 2014 a year of steady performance on the top-line for our core program, but irrespective of this, we are confident in our ability to drive bottom-line growth above 2013 levels. This underscores the progress we have made in our turnaround endeavor thus far, as we position ourselves for more stabilized long-term business.

We are encouraged by our progress year-over-year in developing the inside capabilities and sales and marketing tactics necessary to continue capturing enrollments well beyond our fall peak enrollment cycle. We will continue to focus on delivering improved financial performance, while carrying out our mission of creating global citizens and providing life changing educational travel experiences for our delegates.

Thank you for your continued interest in Ambassadors Group. And with that I will ask the operator to open the call for questions. Melissa?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And it looks like we do have a question from John Deysher with Pinnacle.

John Deysher - Pinnacle

Hi good morning.

Anthony Dombrowik

Good morning John.

John Deysher - Pinnacle

Just a quick question on the sale of the headquarters building, one is a currently listed for and I think it’s been almost two years since that property went on the market. What are the key hurdles to actually getting it sold?

Anthony Dombrowik

Yeah, the building is currently listed at least for $11.2 million and we've had it on the market with just a little over a year at this point. We changed brokers about four months ago. So it has been on the market all that long with the new broker and we moved to a national broker out of Portland-Cushman & Wakefield. They’re using the (inaudible) plus a national broker, that's got us more exposure. I will say the Spokane market is particularly challenging. There is a fair amount of square footage available in the Spokane market and similar space to ours, so it has not been something that’s been very active.

But we continue to have a listed for sale. We are looking at opportunities to sub-lease a portion of the building. We are opened to a lot of different things, but it’s not been anything that's we’ve had movement on the last quarter. We’ll let you know if anything we’re to change in that as soon as we can.

John Deysher - Pinnacle

What's the vacancy rate in the property now?

Anthony Dombrowik

The property right now, we occupied the entire building, we own the building out right and it’s about 133,000 square feet, we’re actually occupying and using roughly half of it. We probably need 50,000 to 60,000 square feet of space to operate and are looking for either space in Spokane and a fully serviced building in the Spokane area or just sub-lease half the building that we’re in, keep our space now.

John Deysher - Pinnacle

Okay. And finally that decision will be based on the parties you’re interested in possibly leasing it. In other words, are you making plans to vacate the property regardless or what’s the dynamic there?

Anthony Dombrowik

So, our plan is to occupy this until we have the financial workout for this building. I don’t want to occupy or commit to another building before we do that. Again there is no pressure; there is no [doubt] in the building. We owned it outright and there is no pressure there. So we’ll figure out what we’re doing from a go to location once we have a buyer for the building. Our preference is to sell the building outright.

John Deysher - Pinnacle

Okay. And then finally, how much longer are you going to give Cushman & Wakefield to get it sold?

Anthony Dombrowik

Well, I don’t know the answer to that. We’ve had them for about four months. I want to give him plenty of time. They certainly have done a much broader effort than we have before. But they warned us going into this -- Spokane is the tough market. So I don’t think it’s a Cushman factor, I think the factor is Spokane market.

John Deysher - Pinnacle

Thanks very much.

Anthony Dombrowik

Thank you.

Operator

(Operator Instructions).

Anthony Dombrowik

Okay. We’re showing no more questions in the queue. So with that, I want to thank everybody for their time and we appreciate it. We’ll talk to you next quarter.

Operator

That does conclude our conference for today. Thank you for your participation.

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