Viad Q3 2007 Earnings Call Transcript

Oct.26.07 | About: Viad Corp (VVI)

ViadCorp. (NYSE:VVI)

Q32007 Earnings Call

October 26, 2007 9:00 am ET

Executives

CarrieLong - Director of Investor Relations

PaulDykstra - President and Chief Executive Officer

KevinRabbit - President of GES Exposition Services

JohnJastrem - President of Exhibitgroup/Giltspur

EllenIngersoll - Chief Financial Officer.

Analysts

JohnHealy - FTN Midwest

TroyMastin - William Blair & Company

ClintFendley - Davenport

Operator

Goodday and welcome to the Viad Corp 2007 third quarter and year end earnings call.Today's call is being recorded. I'll now turn the call over to the Director ofInvestor Relations, Carrie Long.

Carrie Long

Goodmorning and thank you for attending our conference call. Before we begin, I'dlike to remind everyone that certain statements made during the call, which arenot historical facts, may constitute forward-looking statements.

Actualresults may differ materially from those projected in the forward-lookingstatements, and additional information concerning business and other riskfactors that could cause actual results to materially differ from those in theforward-looking statements can be found in our annual and quarterly reportsfiled with the SEC.

Thisconference call may not be recorded or reproduced in transcript without theexpressed written permission of Viad, and during today's call we'll refer totables 1 and 2 in our earnings press release, which is available on our websiteat www.viad.com.

Withthat said it's my pleasure to introduce, Paul Dykstra, President and CEO ofViad.

Paul Dykstra

ThanksCarrie. Good morning everyone. Thank you for being with us today. On today'scall you'll also hear from Kevin Rabbit, President of GES Exposition Services;John Jastrem, President of Exhibitgroup/Giltspur, and Ellen Ingersoll, Viad'sChief Financial Officer.

AsI discuss our third quarter results you may want to refer to tables 1 and 2 inthe earnings press release. Overall, we had another solid quarter. Income fromcontinuing operations was $8.6 million or $0.41 per diluted share.

Incomebefore other items, which excludes the favorable tax resolution of tax mattersof $1.9 million or $0.09 per share and impairment recoveries of $44,000 aftertax was $6.6 million or $0.32 per share.

Thiscompares to our prior guidance of $0.21 to $0.29 per share and 2006 incomebefore other items of $16.3 million or $0.77 per share. Relative to our priorguidance, these results reflect solid, in-line performance at all of ouroperating companies, as well as lower corporate expenses and taxes.

Asexpected, the decline from 2006 was driven by negative show rotation of about$44 million in revenue, including roughly $34 million at GES and $10 million atExhibitgroup. A number of major trade shows that took place in the 2006 thirdquarter only occur every other year and we will service these shows again in2008.

Third-quarter2007 operating income was $13.2 million on revenue of $228.8 million. Thiscompares to 2006 third quarter revenue of $230.5 million and operating incomeof $27.6 million. As Kevin will discuss in greater detail, the decline onoperating results on relatively flat revenues was driven mainly by a change inthe mix at GES and certain additional costs at GES.

Duringthe quarter our free cash flow was $30.8 million and we used $17.7 million ofthis to repurchase just over 0.5 million shares of our stock. This brings ourtotal repurchases since January 2006 to 2.3 million shares.

Nowlet's move on to the individual operating segment results. You may want torefer to table 1 of the press release, which provides revenues and operatingincome for each of the operating segments. First, I'll turn it over to KevinRabbit to talk about GES.

Kevin Rabbitt

Thanks,Paul. Our results for the quarter were in line with our prior guidance andoverall, we had a solid quarter. Revenue was $151.6 million with an operatingloss of $2.7 million. Revenue was comparable to the 2006 quarter, despitesignificant negative show rotation of about $34 million in revenue, which wasoffset by $20.4 million of revenue from Melville and strong based same-showgrowth and new business at our North American operations.

Operatingresults decreased from the 2006 quarter primarily due to negative show rotationand the expected operating loss at Melville on seasonably lower revenues. Wealso were impacted by an increase insurance claims expense and cost overruns ona few shows. I will discuss our challenges in these areas in just a fewminutes.

First,let me hit some of the highlights from the quarter. I'll start with Melville,which continues to be a terrific story. Melville's profits in the first twoquarters of this year should more than offset the expected losses duringMelville's seasonally slower second half. For the year we expect to realize animprovement in Melville's operating margins of about 180 basis points over2006.

Thisreflects the efforts of the Melville team to implement the growth andefficiency initiatives that we identified during due diligence. To date we haveruled out activity-based labor planning models and developed targeted exhibitormarketing materials to capture more exhibitors' discretionary revenue.

Duringthe fourth quarter we will complete another key efficiency initiative, theconsolidation of several of Melville's facilities. Not only will thisconsolidation result in lease savings, it will also provide us with anopportunity to drive greater operating efficiencies.

Overall,we're extremely pleased with Melville's performance to date, which has exceededthe targets that we based the acquisition on. When we announced the acquisitionof Melville, we not only saw opportunities for margin improvement and growth inbase operations, but we also stated that it would provide us with a platformfor further international expansion.

Iam happy to report that Melville recently reached an eight-year agreement toprovide venue services at the new Abu Dhabi National Exhibition Center, which will span nearly 600,000 square feetwhen phase two of construction is completed next year. These services includeelectrical distribution and rigging, among others.

Abu Dhabi is an important growing market for internationalexhibition and a great strategic fit for Melville and the GES worldwidenetwork. The recent and planned development of a world-class exhibition centerand surrounding hospitality tourism and business infrastructure of the capitalcenter in Abu Dhabi makeit an attractive exhibition destination on an international scale.

Wealso continue to see strength in our North American business with basesame-show revenue growth of 10.9%. This marks our third straight quarter ofdouble-digit growth. This growth is driven by the overall growth in theindustry and by the efforts of our product and services group to increasepenetration and exhibitor discretionary spending.

Asa reminder, base same-show growth is a measure of growth in our U.S. shows that occur in the same city and the samequarter every year. Base same-shows represent 45% of our third quarter revenue.

Asmentioned in my opening statements, we did have some challenges during thequarter, one of which was unanticipated increase in insurance-related costsrelative to 2006. Given that we service over 2,000 events and issue over 20,000W-2s annually, safety is a top priority for us. However, even with a significantfocus on safety and risk management policies and procedures, accidents happen.

Unfortunately,we were hit with some large claim expenses this year. We also experienced somecost overruns on a few shows. The additional costs were driven mainly byadditional show organizer work for shows that expanded or changed venues, whichresulted in new graphics, structures and carpet to be produced.

Iwant to reiterate that despite these costs, we were still able to produceinline results for the quarter by finding strength in other areas. Melville'sexceeding our expectations and we have been successful in winning new businessincluding the Chicago Auto Show and True Value, with contracts beginning in2007, and Philadelphia Auto Show, which we will service for the first time in2008. Additionally, we continue to drive strong base same-show revenue growthin our North American operations.

NowI'll quickly cover our revenue backlog before commenting on our outlook for theremainder of 2007. During the quarter, we signed over $170 million of futurebookings; our total backlog for the rest of 2007 and beyond stands at $1.3billion, and we have over 67% of our remaining 2007 forecasted revenue undercontract.

Ourrevenue visibility is actually even greater than this percentage indicatesbecause there's a certain amount of additional work that we can count ongetting to do our leading market positions in some major trade show cities.

Forthe 2007 year, we continue to expect to realize growth in revenue and operatingpressure despite significant negative show rotation of about $33 million inrevenue and increased insurance costs. And for that, I want to think thehard-working dedicated employees of GES.

Atour North American operations, we expect to realize single-digit revenuegrowth, as strong same-show growth and market share gains more than offset theimpact of negative show rotation. In addition to this organic growth, Melville isexpected to provide another $87 million to $92 million in revenue.

Full-yearoperating income is now expected to be in the range of $50 million to $52million as compared to our prior guidance of $52 million to $54 million. Thischange reflects the higher insurance costs incurred during the third quarter,as well as slightly reduced revenue outlook for the fourth quarter.

Whilewe now expect the fourth quarter to fall a bit short of our stretch revenuetargets, we're still expecting a near-record fourth quarter in North Americanoperations. For the quarter, we expect revenue to be in the range of $140million to $155 million as compared to $107.9 million in the 2006 fourthquarter. Included within this revenue range is the expectation that Melville willgenerate between $17 million and $22 million in revenue.

Therefore,excluding Melville, we expect revenue to increase by $15 million to $25 millionfrom the 2006 quarter, driven by positive show rotation of about $8 millionrevenue, new business wins and continued same-show growth.

Weexpect our fourth quarter operating results to be in the range of a loss of$1.5 million to income of $500,000, which includes a loss of $1 million to $1.5million at Melville and compares to a loss of $2.3 million in the 2006 quarter.

Whileour growth was constrained in 2007 due to negative show rotation, I would liketo reiterate the rotation will be significantly in our favor in 2008. Severalof our large shows that did not occur in 2007 will take place in 2008, includingthe CONEXPO-CON/AGG and IFPE, the international manufacturing technology show; MINExpoand the International Woodworking Machinery and Furniture Supply Fair.

Positiveshow rotation in 2008 is expected to be in excess of $45 million in revenuerelative to 2007. 2008 should also bring stronger profits from Melville as wecontinue to gain traction from our initiatives to accelerate growth and drivemargin expansion. Overall, 2008 should be a banner year for GES.

Inthe meantime, we will remain focused on delivering solid results for 2007 andpositioning ourselves for continued success next year and beyond. Ourunderlying business is performing well. We're experiencing great success fromour initiatives to drive revenue growth and productivity improvement. And whilethe pricing environment is somewhat challenging, the industry is holding itsupward course.

Together,GES and Melville will continue to provide quality products and services alongwith best-in-class customer service at a great value to our customers. Asalways, the GES team is committed to winning for all our stakeholders.

Paul Dykstra

Thanks,Kevin. Next I'll ask John Jastrem to comment on Exhibitgroup/Giltspur.

John Jastrem

Thanks,Paul. Our results for the third quarter came in at the high end of our priorguidance range. Revenue was $26.8 million with an operating loss of $6.2million. This compares to 2006 third quarter revenue of $32 million and anoperating loss of $2.8 million.

Asexpected, the declines versus 2006 were due to negative show rotation from theFarnborough Airshow, an every-other-year show that will occur again in the 2008third quarter. Despite the negative impact of show rotation of about $10million in revenue, our third-quarter revenues declined by only $5.1 million,reflecting growth in our domestic and other international revenues.

Thechanges we've made on the sales side and our efforts to embrace aclient-centered culture and consolidate our sales approach continue to driveour success. On the second quarter earnings call, I announced that we hadalready sold more new business this year than all of last year.

I'mhappy to report that as of September 30th, our year-to-date sales of newbusiness are now nearly double the amount of new business sold in all of 2006,and we have realized a significant increase in productivity per salesrepresentative.

Wecontinue to work to increase exhibitor share of mind to ensure we are in moreand larger opportunities as we refine and improve our offerings.

AsI discussed on our previous call, we are no longer just designing and sellingthe best exhibit. We are offering a more holistic approach, working with ourclients to put together a successful trade show program that combines powerfulshow-for presence with pre- and post-direct marketing and program measurement.

Weare also focused on understanding the customers' marketing needs, goals andbudget in order to deliver compelling solutions that maximize the impact oftheir budget dollars. This holistic approach was very instrumental in recentwins, including Topcon, Epson and SMART Tech.

Asa trusted advisor, our goal is to proactively work with our clients todetermine the optimal budget allocation that will generate the greatest impacttoward the success of their trade show program.

Andwhile we certainly like to see our clients build a new exhibit, a new builddoesn't always fit within their current budget. By acting as a trusted advisorand offering the right mix of services at a fair market price, we are able todeliver the best innovative marketing solutions to our clients, therebyincreasing client loyalty, longevity and enabling us to grow, develop andretain our clients.

Wecontinue to make organizational changes that best insure we meet and exceed theexpectations of our clients. In connection with the organizational changes, andas I discussed on the last conference call, we recorded a severance-relatedrestructuring charge in the third quarter of $458,000 after tax, in addition tocontinue to hire talented people who will help drive our strategic direction.

Theteam we have put in place continues to mature and drive results around ourclient-centered culture. They are committed to providing compelling solutionsto our clients’ needs, to leveraging our network and global presence as aunified team, and to performing at the highest levels of excellence at alltimes to drive our growth.

Now,let me give you some guidance for the rest of 2007. For the fourth quarter weexpect revenue to be in the range of $39 million to $44 million, with operatingresults in the range of a loss of $200,000 to income of $800,000.

Thiscompares to 2006 fourth-quarter revenue of $40.1 million and an operating lossof $339,000. For the 2007 full year, we expect an operating loss in the rangeof $6.5 million to $5.5 million, and we expect revenue to be in the range of$162 million to $167 million, reflecting an increase of 5% to 9% from 2006.

Therevenue performance is slightly stronger than we had anticipated coming intothe year, which is due mainly to our success in selling additional, value-addedconsultative show services and growth in international revenues.

Whilethis work is relatively lower margins in exhibit construction, it is valuablework that enables our clients to realize greater returns on their trade showspending, thereby strengthening our client relationships. This is a criticalpart of our turnaround and repositioning effort.

Overall,we are happy with the 2007 performance to date and the progress that we havemade in turning the business around. On a year-to-date basis, we've driven an8% increase in revenue over 2006; we've nearly doubled our new business wins;we're strengthening our client relationships, and we're attracting great talentto the organization.

I'dlike to thank the EG team for their talent, hard work and dedication to ourclients and our mission. We have built some positive momentum and for 2008 weare expecting stronger revenue and operating results.

Inorder to keep our momentum going, we need to continue adding to and developingour talent and technology solutions, both of which are key success factors forus. As with 2007, these investments will be made a bit ahead of revenue, butonly as we continue to see progress on top-line growth.

Goingforward, we remain focused on providing compelling, value-added programs thathelp our clients achieve their marketing goals within budget. We are alsoidentifying and implementing initiatives to improve efficiencies and capacityutilization across our network.

Wewill continue working to define EG as the market leader in face-to-face andexperiential marketing services, and to grow our business by delivering thehighest level of value and innovation to our client.

Paul,back to you.

Paul Dykstra

Thankyou, John. Now I will cover highlights for the travel and recreation segment.The travel and recreation services segment had a very strong third quarter,with operating margins of 43.9%.

Revenuefor the quarter was $50.3 million, up $3.5 million or 7.4% from the 2006quarter. Segment operating increased $1.3 million to $22.1 million. Brewsterand Glacier Park both performed very well.

Brewsterrealized growth in passenger volume at its gondola and an increase in roomrevenue at its Mount Royal Hotel, driven by strong occupancy and an increase inaverage daily rates. Glacier Park realized strong occupancy at its inns and lodgesand an increase in room revenue over the 2006 third quarter.

Inaddition to growth in the base operations, favorable foreign currencytranslation contributed to the increase over the 2006 quarter. 2007 isessentially complete for the travel and rec segment. Glacier Park's now closed for the season and Brewster is seasonally very slowduring the fourth quarter.

Overall,2007 is on track to be another good year for both Brewster and Glacier. Weexpect full-year revenue to be in the range of $82 million to $84 million andwe expect operating income to be in the range of $22.2 million to $23.2 millionwith operating margins approaching 30%.

Forthe fourth quarter, we expect revenue to be in the range of $5.8 million to$7.8 million with an operating loss of $1 million to $2 million.

I'llnow ask Ellen Ingersoll to discuss some financial highlights for the quarter.

Ellen Ingersoll

Thanks,Paul. As shown in table 2 to the earnings release, adjusted EBITDA was $16.7million during the quarter versus $30.1 million in the third quarter of 2006.As shown in table 2, free cash flow, defined as net cash provided by operatingactivities minus capital expenditures and dividends, was $30.8 million for thequarter versus $36.7 million in the 2006 third quarter.

Directionallyfor 2007, free cash flow is expected to approximate net income plusdepreciation and amortization, minus capital expenditures and dividends. Forthe full year 2007 our working capital is expected to have a slightly negativeimpact.

AtSeptember 30, 2007, Viad had totalcash and cash equivalents of $147.7 million as compared to $131.9 million at June 30, 2007. Viad's total debt at the end of the quarter was$14.4 million, with a debt-to-capital ratio of 3%. Net interest income for thequarter was $1.1 million versus $1.6 million in the third quarter of 2006.

Depreciationand amortization for the quarter was $6 million compared to last year's thirdquarter of $5 million. The full year 2007 forecast is approximately $22 millionto $24 million.

Capitalexpenditures were $5.6 million in the third quarter of 2007 and this comparesto $4.3 million in the third quarter of 2006. For the full year 2007 theforecast is expected to approximate $34 million to $36 million. Payment onViad's restructuring reserves were $1.1 million during the quarter versus$587,000 in the third quarter 2006.

Forfull year, restructuring payments are expected to approximate $3.7 million in2007. And the 2007 income tax rate year-to-date was 34.5% versus 23% in 2006.These rates reflect aggregate favorable resolution of tax matters of $1.9million and $10 million in 2007 and 2006 respectively. The tax rates excludingthese items were 37.5% and 37% respectively.

Andnow back to you, Paul.

Paul Dykstra

Thanks,Ellen. Before wrapping up my comments and opening the call to questions, let megive you some guidance for the 2007 fourth quarter and full year. So, thefourth quarter we expect a loss in the range of $0.14 to $0.08 per dilutedshare as compared to a loss before other items of $0.17 per share in the 2006fourth quarter.

Theimprovement over 2006 reflects stronger revenue and profits at GES driven bypositive show rotation, new business and continued same-show growth. For thefourth quarter, Viad's total revenue is expected to be in the range $186million to $208 million, including $17 million to $22 million from Melville.

Ourfourth quarter segment operating loss is expected to be in the range of $3.2million to $200,000 including a loss of $1 million to $1.5 million at Melville.This compares to 2006 revenue of $154.3 million and segment operating loss of$3.9 million.

Weexpect 2007 full year income to be in the range of $1.72 to $1.78 per share.This compares to our prior guidance of $1.72 to $1.80 per share and 2006 incomebefore other items of $1.75 per share.

Thenarrowing of the upper end of the guidance range reflects a reduced 2007outlook for GES, which Kevin discussed earlier, partially offset by lowercorporate expenses and taxes. Excluding Melville, we expect full year revenueto increase at a mid single-digit rate from 2006 revenue of $856 million.

Thisincrease reflects the expectation the continued growth in exhibitordiscretionary spending, same-show growth in new business at GES will more thanoffset negative show rotation of about $30 million in revenue. The acquisitionof Melville is expected to provide $87 million to $92 million in revenue and beaccretive to earnings.

Weexpect total segment operating income to be in the range $66.2 million to $69.2million, as compared to 2006 operating income of $67.2 million, reflectingnegative show rotation and costs associated with initiatives to repositionExhibitgroup for future growth.

Specificfull year guidance for each of our operating segments can be found in theearnings press release. Our 2007 guidance range assumes an effective tax rateof 37% to 38% on income before other items, as compared to the 2006 effectivetax rate on income before other items at 37.2%.

Inclosing, we have produced solid financial performance and progress year-to-dateand this is despite facing significant negative show rotation at GES and thecost of turnaround initiatives at Exhibitgroup.

Weexpect GES to overcome the impact of negative show rotation of $33 million inrevenue and produce growth and operating income versus 2006. GES has realizedthree straight quarters of double-digit base same-show growth.

AtExhibitgroup, revenues up 8% year-to-date, indicating that our initiatives areworking. The travel and recreation services segment continues to produceconsistently strong operating income and margins. And we completed theacquisition Melville, which expands GES' global operations and provides aplatform for further growth overseas. To date, Melville has outperformed ourexpectations.

Lookingahead to 2008, we just have an awful lot to be excited about. Show rotationturns in our favor and we expect it to positively impact GES's revenues by morethan $45 million relative to 2007.

Wealso expect improved results at Melville in 2008, as we will have substantiallycompleted our integration efforts and our growth initiatives continue to gaintraction. Results at Exhibitgroup should also be stronger, as we begin torealize the benefits of our work to reposition the company.

Additionally,we are pursuing attractive strategic acquisition opportunities that couldbolster growth. We remain extremely committed to driving growth and enhancingshareholder value.

Withthat we'll close and take your questions. Matt, can you open up the questionline, please?

Question-and-Answer Session

Operator

(OperatorInstructions) We'll go first to John Healy with FTN Midwest.

John Healy - FTN Midwest

Quickquestion on the guidance of $1.72 to $1.78, I just want to make sure, that'sgoing off the $0.32 number this quarter and includes the restructuring expenseand the insurance recovery, right?

Paul Dykstra

That'scorrect.

John Healy - FTN Midwest

Anda second question on Melville. Sounds like you are making some progress thereand excited about next year. I know it's a little bit early, but in terms of2008 margins for that business, are we approaching a point where those marginscan be similar to GES margins? Hoping to get color on what to expect from thatbusiness next year.

Paul Dykstra

Letme take a stab at it, and then I'll certainly ask Kevin to comment as well. Ithink in Kevin's comment he mentioned we were able to improve margins by 180basis points so far this year.

Weexpect to continue to improve margins. Our goal, I think, when we made theannouncement of that acquisition, was that over a three year period, we woulddrive those margins more similar to what we have in the U.S. and North American operation. Kevin, can you addany color to that?

Kevin Rabbitt

Absolutely.As I mentioned in my comments, I think Melville's overall a terrific story. I talkedabout the operating efficiencies and the products and services, discretionarygrowth opportunities as well as the international expansion opportunities.

Wetalked about, also, in the original acquisition that it was going to take usabout three years to improve performance at that level. I'd say that we'reslightly ahead of our plans of what we intended on doing there, but still havea lot of work to do.

Andmargins are lower than GES and we've got good plans in place to get that movingforward and up to the level we said it would be in the same time period we saidit would be in.

Paul Dykstra

Justto add to that, too, John, I think Kevin also mentioned that we are doing someconsolidation now and it's something similar to what we did in our Las Vegasoperations in our ability to take a number of separate warehouses and combinedthem into one, which should drive some good efficiencies for us going forwardas well.

John Healy - FTN Midwest

Soundslike that business is progressing well. On the acquisition side, the last twoannouncements you have made have been focused internationally. Is it safe toassume that acquisitions in the pipeline will continue to be moreinternationally focused?

Andif that's the case, is that something you're seeing here in the U.S.? Maybe you're not seeing the quality propertiesout there and we're just hoping to get your thoughts if you are continuing topursue acquisitions here in the U.S.?

Paul Dykstra

Yes,I would say it's both, John. We're seeing some great opportunities, bothdomestically and internationally. And again, what we're looking for in ouracquisition strategy is a good, solid strategic fit, close to the corebusinesses that we operate in.

Certainlyone of the key criteria that we've always talked about is having acquisitionsthat are a good cultural fit and we spend a lot of time with the management ofthose companies making sure they'll be a good fit with us.

Andthen lastly and very critical too, is a good economic fit and that really boilsdown to paying the right price for these things. I'll tell you that we'reseeing some really interesting things.

There'snot a lot else that we can comment on right now, but we're certainly going tocontinue to keep the discipline that we've always had with our capitalallocation and we're not going to do deals just for the sake of doing deals. Wethink there is some very interesting things out there for us.

We'llalso continue to buy back our shares from time to time as a secondaryallocation of our capital.

John Healy - FTN Midwest

Andjust last question on the EG business. Was hoping to get some thoughts on whatyou're seeing in RFP activity as you head into 2008 with show rotation beingbetter. Hoping to get your thoughts on what kind of RFP activity growth youmight have seen year-over-year.

Paul Dykstra

Yes,I'll just make a quick comment and then certainly have John comment on that aswell. Clearly, we're excited about some of the progress we've made on the salesside and some of the new wins are helping us build some momentum. John, youwant to talk about what we're seeing in prospecting activity?

John Jastrem

Yes,I mean the RFP's are obviously one source of opportunities to win new clients,not the only source. We see activity overall being up in the marketplace, and Iwould say the big thing is that we're being very proactive in terms of going topotential clients and trying to determine and show them that we can providethem a better solution. So, oftentimes, my hope would be that we wouldn'tnecessarily need to go through an RFP process.

Operator

(OperatorInstructions) We go next to Troy Mastin with William Blair & Company.

Troy Mastin - William Blair &Company

I'mtrying to understand your 2007 guidance a little bit better. You posted $0.32in this quarter. The middle of your guidance range prior was $0.25. So, at$0.07 ahead, you took $0.02 off the top of the range so the midpoint for thefull year would come down $0.01, so that would imply that your fourth quarter outlookis $0.08 lower than it was last quarter.

I'msure, maybe you don't think about it this way, but I just want to understand ifthe insurance issue and the cost overruns at GES, which seems to be the onlything that's changed between last quarter and this quarter, is accounting forthat much of a decline in your EPS outlook for the fourth quarter or if youlook at it a different way I'd be interested to hear that?

John Jastrem

Ithink, how we're looking at it is we lowered the high end $0.02. GES' guidancehas come down a little bit, mainly due to some of the higher costs that we'veseen and certainly don't expect those to continue going forward.

Inorder to hold the high end, GES' third quarter needed to be a little bit abovethe midpoint and that was missed due to insurance costs. So other than that, wehave a little bit lower fourth quarter revenue guidance on GES, but there wassome exhibitor revenue that shifted a bit from '07 to '08. Other than that,though, I think things are pretty solid.

Troy Mastin - William Blair &Company

Ijust want to understand if there was some revenue or some profit that may havefallen into the third quarter you expected in the fourth quarter, since youexceeded expectations here? Or just it seems look a more dramatic shift in theEPS for the fourth quarter than I think some people would have expected.

Paul Dykstra

Idon't think so Troy. We gave a range. We refined the range a little bit, andother than that I think things are where we thought they would be.

Troy Mastin - William Blair &Company

Thenthe source of upside in EPS in the third quarter versus your mid-point of$0.07, is that explained just by strength in travel and rec and EG?

Paul Dykstra

Yes,and to lower corporate costs.

Troy Mastin - William Blair &Company

Okay.I guess I would have expected those to have a positive effect on the full-yearEPS. That's kind of what I'm driving at and I just don't see it.

Paul Dykstra

Yes,I think they're being offset by a little bit of the higher costs at GES.

Troy Mastin - William Blair &Company

Okay.Next I want to look forward a little bit into 2008 and maybe you can help ustighten up our models a little bit in advance of guidance that I'm assumingyou'll give next quarter.

Onthe GES side, your same-show growth has been between 6% and 12% over the lastthree years, I think in that range, just about every quarter if not maybe alittle stronger at times.

Momentumhas been building lately. Now you've got three quarters in a row of same-showgrowth over 10%, and then you've been making investments as well. And I guessI'm first curious, is there any reason to think 2008 we wouldn't still seesame-show growth in that type of range for GES?

Kevin Rabbitt

Troy, I'd say that we remain cautiously optimistic onthe growth perspective. We do have the three quarters in a row of double-digitsame-show growth. You look around the overall economy and certainly gives usreason to make sure we keep a close outlook on the industries that arestruggling in the overall economy.

Butwe've got good visibility into that, we've got a very resilient industry andgot commitments that are made at least a year out in advance for space, and avery high-value, high-return marketing. So I do remain very cautiouslyoptimistic that we'll continue with that same type of same-show growth movingforward.

Troy Mastin - William Blair &Company

Okay.And then we talked about this last quarter regarding the incremental operatingprofit benefit or detriment from show rotation and I think the number that I'dthrown out on the call was 30% to 35% operating profit on show rotation.

SoI'm curious if there's anything different about the show rotation that we'llsee in '08, the $45 million that would make that range of incremental benefitbe different than we talked about last quarter?

John Jastrem

Wethink the range is probably more in the high teens to 20. Part of the reason isyou've got to keep in mind, Troy,the time of the year that the show rotation hits. So some of it hits in thefirst quarter when we're extremely busy and we have less excess capacity totake in.

Someof it hits in the third quarter, which will be beneficial, and it's offset bynegative show rotation in the fourth quarter next year when we have a lot ofcapacity. It would help if our show rotation hit more in the fourth quartertimeframe when we have most of our capacity.

Someof it hits when we're extremely busy, which then stretches already stretchedresources, and we don't get quite as much leverage as I think we would if ithit in other times of the year. Keep in mind, we have fairly extreme swingsfrom quarter to quarter. We did, I think, $245 million in the first quarter ofthis year.

Guidancefor the fourth quarter's about $150 million, And we certainly expect firstquarter next year to be better than the $245 million we did first quarter of'06, also helped by the fact that we have CONEXPO - CON/AGG that hits in March.

Sowe have fairly large swings in fairly short period of times that make it alittle bit more difficult to manage our semi-variable cost. One of theadvantages we have in this business is with our union work force, it's really100% variable in that we hire people to set up the shows and we let them gowhen the show is over and we repeat that cycle throughout the shows.

Onthe semi-variable line, where we have account managers and operations managersand even finance people and order processing and everything else, we don't havethe ability to ramp down as fast or ramp up as fast when we have those types oflarge increases or decreases in the business just because we've got to havethat talent level.

Sowhat we've been doing over the last three, four years is centralizing andregionalizing. So we've been regionalizing graphics, we have a regionalizedcarpet depot, we centralized our call center, and all those are in attempts tosmooth our expense base out a little bit and make that less impactful when wehave the show rotation.

Kevin,you want to add anything to that?

Kevin Rabbitt

Iagree with everything you said there, Paul. Managing through these peaks andvalleys and the swings, not just by quarter but by month, has been and willcontinue to be a big focus area for us. You're absolutely right. We do thatthrough three things: through capacity planning, through regionalization andsimplification when we can, and looking at our staffing levels nationally asopposed to by individual geography.

Youhit on the example there, too. You said the service center, some carpet depotsand the series of other depots that we have, and that not only variablizescosts, it also drives consistency of service that drives higher levels ofservice for our clients. So it will continue to be a focus for us and we'llcontinue to find ways to improve upon that area.

Troy Mastin - William Blair &Company

Okay,good. And then on Exhibitgroup, you've got good, strong growth here, I think,if you were to strip out the show rotation effect you probably grew about 22%in the quarter. You're talking about improving results next year versus thisyear.

Howlong will it take before you can get this business back to break-even on afull-year basis, do you think? Is that a reasonable objective for '08 or isthat going to be longer before you can do that?

Paul Dykstra

We'restill scrubbing the plans for 2008, Troy. I'm very excited with the progress that John andBryson and Bill Doolittle have made with Exhibitgroup. We've worked very hardto turn this thing into a client-centric organization.

Andas John calls himself the Chief Client Officer of that group it's allowed usget closer to our existing business, get a lot smarter about the new businessthat we go after, and win more of that new business that we go after.

Rightnow we're heading towards substantially improved results in 2008. Don't knowexactly where we're going to shake out. We're probably a little short ofbreak-even right now.

John,can you add anything to that?

John Jastrem

Ithink that's well said. We are basically going through and looking for everyefficiency we can find and looking for every opportunity to continue to growthe business. And right now I think we're looking at trying to focus on tryingto break-even somewhere in the mid 180s.

Troy Mastin - William Blair &Company

Okay.And then finally one last one and I'll let someone else on. Show rotation as welook out in 2009, I'm not sure if this has been asked or you've mentioned thisbefore, but can you give us at least an early look at what we can expect in'09?

Kevin Rabbitt

Wetalked about this year being a large decline and next year being substantiallylarger. We haven't really fully flushed out 2009 at this point in time, butobviously got to overcome the rotation that's positive in '08 that we lose thatgoing into '09, So I'd say that we're looking at not as big a swing as thepositive spin in 2008, but still got a lot of work to do to flush out wherewe'll be in '09.

Troy Mastin - William Blair &Company

Isit probably fair to say it'll turn negative again given the shows that areoccurring in '08 that won't occur in '09?

Kevin Rabbitt

That'sa very fair statement. You lose the ups and offset it by some other things.

Operator

Andwe'll go next to Clint Fendley with Davenport.

Clint Fendley - Davenport

Thankyou, good morning. Kevin, I wonder if you could comment a bit on the pricing atGES. You said that it's challenging. I mean how does that effect your work andas you look out into 2008, I guess especially considering the high level ofrevenue visibility you have here?

Paul Dykstra

Kevin,maybe you can comment on the petroleum surcharge, too and how that's working.We're watching this very closely, especially as it relates to the mix ofbusiness that we have between our show organizer bucket and our exhibitorbucket.

It'slike a lot of things it goes as the industry goes. Stronger industries havestronger shows that tend to be less price sensitive to weaker industries thatare having weaker shows. Kevin, can you comment on what you're seeing outthere?

Kevin Rabbitt

Absolutely.Challenges are certain to arise at any point in time and we actively work toaddress them. Paul had mentioned petroleum surcharge. The good example we hadchallenges related to petroleum-based products.

Andwe worked to help put a plan in place to partially offset those and have beenable to be very successful on that front to partially offset those and thenfind best practices and other ways to be efficient to address them.

Challengesthat I was relating in the comments relate to mix of business. I talked aboutsome cost overruns on some certain shows. That came from show organizer workand show organizer work comes from when shows grow, when they expand, when theytry to attract new exhibitors and new attendees and do special services, suchas exhibitor lounges.

Thatleads to more work that's low-margin work and what we continue to do is findways to overcome that challenge. Same things that we've always done to attackchallenges is really understand the root cause and find productivity throughbest practices, continue to find other ways to grow, such as products andservices and things that we're seeing at Melville, and some new technologies.

We'vealready rolled out a new exhibitor manual that increases service but alsoincreases productivity and efficiencies in the back office. We're in theprocess of rolling out some new graphic printers that, again, increase thequality of the graphics and also increase productivity. So it's really a mix ofbusiness challenges and ones that we're actively working to address.

Clint Fendley - Davenport

AndPaul, I think you characterized some of the industries out there being weakindustries or weak shows. Would this be the usual, typical suspects here? Imean housing, those type of industries, anything else?

Paul Dykstra

Yes,and I should have probably clarified that a little bit in that for the2,000-plus events that we do, we cross an awful lot of industries. And we'vegot good visibility into the shows that we do, as Kevin mentioned, and thelong-term contracts.

Itis, as you would expect, certain industries that are struggling tend to have--notalways--but tend to have shows that may struggle a little bit. Strongerindustries tend to have stronger shows. But, again, we've got a reallydiversified portfolio.

Wedon't have exposure to any one industry or geography. Our commitments alwaystake us more than a year out and we're very close to our clients inunderstanding what's happening within their shows.

Aswe look forward again, with some economic uncertainty, we still feel prettygood about the industries that we're in and again we have good visibility thathelps us with that comfort level.

Clint Fendley - Davenport

Wouldit be safer to say that maybe for some of these challenged industries--andyou've already got the visibility pretty well into 2008--how does it begin toaffect 2009 or is it too early to say?

Paul Dykstra

Yes,it's too early to say. One of the things that show organizers will do, and wecertainly do everything we can to help them be successful, is make sure theyhave good quality attendance at the next event because quality attendance thenbodes well for signing new exhibitors for the following year's show.

So,strength in attendance and general economic conditions I think are leadingindicators that we kind of watch. We're constantly looking for productivityimprovements, service enhancements, things that again help our show organizersbe very successful in throwing their events and drawing the attendees and thequality exhibitors that make them successful that ultimately helps us besuccessful.

Clint Fendley - Davenport

Okay.Thank you, that's helpful. Final question here, I guess like similar to theearlier caller, I may be a bit confused, still, on the guidance as well. Iguess it would have made sense if I had heard you saying that the revenues hadshifted between quarters, but instead it appears there's some unexpectednon-recurring charges in the form of insurance costs that hit this quarter.Does that mean that there's really conservatism on your part about the fourthquarter or is there something else going on here?

Paul Dykstra

No,I think it impacted where we ended up in the range for the third quarter.Ultimately we think we have that built in now going forward and we feelcomfortable with the range that we've given. We had a little bit of exhibitorrevenue shift from the fourth quarter of '07 into '08, and then everything elseseems to be pretty much in line.

Operator

(OperatorInstructions) We have no further questions. I'd like to turn the call back toPaul Dykstra for any additional or closing comments.

Paul Dykstra

Letme just close and recap things. GES had a solid quarter. It could have beenbetter if we'd have been able to avoid a couple of accidents and cost overrunson certain shows, but despite that, it was a solid quarter.

TheMelville integration is going very well and our same-show growth continues tobe strong. And as we were just talking, we think we have good visibility intonext year and the general economic uncertainty we don't feel like is going tohave a major impact on us.

Very,very excited about the progress we made at Exhibitgroup. Our top-line growth isvery encouraging and our initiatives are taking hold. John and his team havebrought in some terrific people and really starting to see some progress there.

Andthen the travel and recreation businesses are solid performers and we expectthat to continue going forward. I want to reiterate, too, cash flow was verystrong for the quarter and we were able to repurchase $0.5 million shares.

Insummary, it was a good quarter. We always think that things could be better.We're working extremely hard to make sure that we're driving shareholder valueand we've got some terrific opportunities and feel very excited about ourfuture.

Iwant to thank everybody for being with us today and we look forward to talkingagain on the fourth quarter call in February. Thanks very much.

Operator

Andthat does conclude today's conference call. Again, thank you for yourparticipation and have a good day.

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