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Viad Corp. (NYSE:VVI)

Q3 2007 Earnings Call

October 26, 2007 9:00 am ET

Executives

Carrie Long - Director of Investor Relations

Paul Dykstra - President and Chief Executive Officer

Kevin Rabbit - President of GES Exposition Services

John Jastrem - President of Exhibitgroup/Giltspur

Ellen Ingersoll - Chief Financial Officer.

Analysts

John Healy - FTN Midwest

Troy Mastin - William Blair & Company

Clint Fendley - Davenport

Operator

Good day 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 of Investor Relations, Carrie Long.

Carrie Long

Good morning and thank you for attending our conference call. Before we begin, I'd like to remind everyone that certain statements made during the call, which are not historical facts, may constitute forward-looking statements.

Actual results may differ materially from those projected in the forward-looking statements, and additional information concerning business and other risk factors that could cause actual results to materially differ from those in the forward-looking statements can be found in our annual and quarterly reports filed with the SEC.

This conference call may not be recorded or reproduced in transcript without the expressed written permission of Viad, and during today's call we'll refer to tables 1 and 2 in our earnings press release, which is available on our website at www.viad.com.

With that said it's my pleasure to introduce, Paul Dykstra, President and CEO of Viad.

Paul Dykstra

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

As I discuss our third quarter results you may want to refer to tables 1 and 2 in the earnings press release. Overall, we had another solid quarter. Income from continuing operations was $8.6 million or $0.41 per diluted share.

Income before other items, which excludes the favorable tax resolution of tax matters of $1.9 million or $0.09 per share and impairment recoveries of $44,000 after tax was $6.6 million or $0.32 per share.

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

As expected, 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 at Exhibitgroup. A number of major trade shows that took place in the 2006 third quarter only occur every other year and we will service these shows again in 2008.

Third-quarter 2007 operating income was $13.2 million on revenue of $228.8 million. This compares to 2006 third quarter revenue of $230.5 million and operating income of $27.6 million. As Kevin will discuss in greater detail, the decline on operating results on relatively flat revenues was driven mainly by a change in the mix at GES and certain additional costs at GES.

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

Now let's move on to the individual operating segment results. You may want to refer to table 1 of the press release, which provides revenues and operating income for each of the operating segments. First, I'll turn it over to Kevin Rabbit to talk about GES.

Kevin Rabbitt

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

Operating results decreased from the 2006 quarter primarily due to negative show rotation and the expected operating loss at Melville on seasonably lower revenues. We also were impacted by an increase insurance claims expense and cost overruns on a few shows. I will discuss our challenges in these areas in just a few minutes.

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 two quarters of this year should more than offset the expected losses during Melville's seasonally slower second half. For the year we expect to realize an improvement in Melville's operating margins of about 180 basis points over 2006.

This reflects the efforts of the Melville team to implement the growth and efficiency initiatives that we identified during due diligence. To date we have ruled out activity-based labor planning models and developed targeted exhibitor marketing materials to capture more exhibitors' discretionary revenue.

During the fourth quarter we will complete another key efficiency initiative, the consolidation of several of Melville's facilities. Not only will this consolidation result in lease savings, it will also provide us with an opportunity to drive greater operating efficiencies.

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

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

Abu Dhabi is an important growing market for international exhibition and a great strategic fit for Melville and the GES worldwide network. The recent and planned development of a world-class exhibition center and surrounding hospitality tourism and business infrastructure of the capital center in Abu Dhabi make it an attractive exhibition destination on an international scale.

We also continue to see strength in our North American business with base same-show revenue growth of 10.9%. This marks our third straight quarter of double-digit growth. This growth is driven by the overall growth in the industry and by the efforts of our product and services group to increase penetration and exhibitor discretionary spending.

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

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

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

I want to reiterate that despite these costs, we were still able to produce inline results for the quarter by finding strength in other areas. Melville's exceeding our expectations and we have been successful in winning new business including the Chicago Auto Show and True Value, with contracts beginning in 2007, and Philadelphia Auto Show, which we will service for the first time in 2008. Additionally, we continue to drive strong base same-show revenue growth in our North American operations.

Now I'll quickly cover our revenue backlog before commenting on our outlook for the remainder of 2007. During the quarter, we signed over $170 million of future bookings; our total backlog for the rest of 2007 and beyond stands at $1.3 billion, and we have over 67% of our remaining 2007 forecasted revenue under contract.

Our revenue visibility is actually even greater than this percentage indicates because there's a certain amount of additional work that we can count on getting to do our leading market positions in some major trade show cities.

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

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

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

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

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

We expect 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 $1.5 million at Melville and compares to a loss of $2.3 million in the 2006 quarter.

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

Positive show rotation in 2008 is expected to be in excess of $45 million in revenue relative to 2007. 2008 should also bring stronger profits from Melville as we continue to gain traction from our initiatives to accelerate growth and drive margin expansion. Overall, 2008 should be a banner year for GES.

In the meantime, we will remain focused on delivering solid results for 2007 and positioning ourselves for continued success next year and beyond. Our underlying business is performing well. We're experiencing great success from our initiatives to drive revenue growth and productivity improvement. And while the pricing environment is somewhat challenging, the industry is holding its upward course.

Together, GES and Melville will continue to provide quality products and services along with best-in-class customer service at a great value to our customers. As always, 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 prior guidance range. Revenue was $26.8 million with an operating loss of $6.2 million. This compares to 2006 third quarter revenue of $32 million and an operating loss of $2.8 million.

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

The changes we've made on the sales side and our efforts to embrace a client-centered culture and consolidate our sales approach continue to drive our success. On the second quarter earnings call, I announced that we had already sold more new business this year than all of last year.

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

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

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

We are also focused on understanding the customers' marketing needs, goals and budget in order to deliver compelling solutions that maximize the impact of their budget dollars. This holistic approach was very instrumental in recent wins, including Topcon, Epson and SMART Tech.

As a trusted advisor, our goal is to proactively work with our clients to determine the optimal budget allocation that will generate the greatest impact toward the success of their trade show program.

And while we certainly like to see our clients build a new exhibit, a new build doesn't always fit within their current budget. By acting as a trusted advisor and offering the right mix of services at a fair market price, we are able to deliver the best innovative marketing solutions to our clients, thereby increasing client loyalty, longevity and enabling us to grow, develop and retain our clients.

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

The team we have put in place continues to mature and drive results around our client-centered culture. They are committed to providing compelling solutions to our clients’ needs, to leveraging our network and global presence as a unified team, and to performing at the highest levels of excellence at all times to drive our growth.

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

This compares to 2006 fourth-quarter revenue of $40.1 million and an operating loss of $339,000. For the 2007 full year, we expect an operating loss in the range of $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.

The revenue performance is slightly stronger than we had anticipated coming into the year, which is due mainly to our success in selling additional, value-added consultative show services and growth in international revenues.

While this work is relatively lower margins in exhibit construction, it is valuable work that enables our clients to realize greater returns on their trade show spending, thereby strengthening our client relationships. This is a critical part of our turnaround and repositioning effort.

Overall, we are happy with the 2007 performance to date and the progress that we have made in turning the business around. On a year-to-date basis, we've driven an 8% increase in revenue over 2006; we've nearly doubled our new business wins; we're strengthening our client relationships, and we're attracting great talent to the organization.

I'd like to thank the EG team for their talent, hard work and dedication to our clients and our mission. We have built some positive momentum and for 2008 we are expecting stronger revenue and operating results.

In order to keep our momentum going, we need to continue adding to and developing our talent and technology solutions, both of which are key success factors for us. As with 2007, these investments will be made a bit ahead of revenue, but only as we continue to see progress on top-line growth.

Going forward, we remain focused on providing compelling, value-added programs that help our clients achieve their marketing goals within budget. We are also identifying and implementing initiatives to improve efficiencies and capacity utilization across our network.

We will continue working to define EG as the market leader in face-to-face and experiential marketing services, and to grow our business by delivering the highest level of value and innovation to our client.

Paul, back to you.

Paul Dykstra

Thank you, 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%.

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

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

In addition to growth in the base operations, favorable foreign currency translation contributed to the increase over the 2006 quarter. 2007 is essentially complete for the travel and rec segment. Glacier Park's now closed for the season and Brewster is seasonally very slow during the fourth quarter.

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

For the 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'll now 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 $16.7 million 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 operating activities minus capital expenditures and dividends, was $30.8 million for the quarter versus $36.7 million in the 2006 third quarter.

Directionally for 2007, free cash flow is expected to approximate net income plus depreciation and amortization, minus capital expenditures and dividends. For the full year 2007 our working capital is expected to have a slightly negative impact.

At September 30, 2007, Viad had total cash 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 the quarter was $1.1 million versus $1.6 million in the third quarter of 2006.

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

Capital expenditures were $5.6 million in the third quarter of 2007 and this compares to $4.3 million in the third quarter of 2006. For the full year 2007 the forecast is expected to approximate $34 million to $36 million. Payment on Viad's restructuring reserves were $1.1 million during the quarter versus $587,000 in the third quarter 2006.

For full year, restructuring payments are expected to approximate $3.7 million in 2007. 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 $1.9 million and $10 million in 2007 and 2006 respectively. The tax rates excluding these items were 37.5% and 37% respectively.

And now back to you, Paul.

Paul Dykstra

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

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

Our fourth quarter segment operating loss is expected to be in the range of $3.2 million 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.

We expect 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 income before other items of $1.75 per share.

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

This increase reflects the expectation the continued growth in exhibitor discretionary spending, same-show growth in new business at GES will more than offset negative show rotation of about $30 million in revenue. The acquisition of Melville is expected to provide $87 million to $92 million in revenue and be accretive to earnings.

We expect total segment operating income to be in the range $66.2 million to $69.2 million, as compared to 2006 operating income of $67.2 million, reflecting negative show rotation and costs associated with initiatives to reposition Exhibitgroup for future growth.

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

In closing, we have produced solid financial performance and progress year-to-date and this is despite facing significant negative show rotation at GES and the cost of turnaround initiatives at Exhibitgroup.

We expect GES to overcome the impact of negative show rotation of $33 million in revenue and produce growth and operating income versus 2006. GES has realized three straight quarters of double-digit base same-show growth.

At Exhibitgroup, revenues up 8% year-to-date, indicating that our initiatives are working. The travel and recreation services segment continues to produce consistently strong operating income and margins. And we completed the acquisition Melville, which expands GES' global operations and provides a platform for further growth overseas. To date, Melville has outperformed our expectations.

Looking ahead to 2008, we just have an awful lot to be excited about. Show rotation turns in our favor and we expect it to positively impact GES's revenues by more than $45 million relative to 2007.

We also expect improved results at Melville in 2008, as we will have substantially completed our integration efforts and our growth initiatives continue to gain traction. Results at Exhibitgroup should also be stronger, as we begin to realize the benefits of our work to reposition the company.

Additionally, we are pursuing attractive strategic acquisition opportunities that could bolster growth. We remain extremely committed to driving growth and enhancing shareholder value.

With that we'll close and take your questions. Matt, can you open up the question line, please?

Question-and-Answer Session

Operator

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

John Healy - FTN Midwest

Quick question on the guidance of $1.72 to $1.78, I just want to make sure, that's going off the $0.32 number this quarter and includes the restructuring expense and the insurance recovery, right?

Paul Dykstra

That's correct.

John Healy - FTN Midwest

And a second question on Melville. Sounds like you are making some progress there and excited about next year. I know it's a little bit early, but in terms of 2008 margins for that business, are we approaching a point where those margins can be similar to GES margins? Hoping to get color on what to expect from that business next year.

Paul Dykstra

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

We expect to continue to improve margins. Our goal, I think, when we made the announcement of that acquisition, was that over a three year period, we would drive those margins more similar to what we have in the U.S. and North American operation. Kevin, can you add any color to that?

Kevin Rabbitt

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

We talked about, also, in the original acquisition that it was going to take us about three years to improve performance at that level. I'd say that we're slightly ahead of our plans of what we intended on doing there, but still have a lot of work to do.

And margins are lower than GES and we've got good plans in place to get that moving forward and up to the level we said it would be in the same time period we said it would be in.

Paul Dykstra

Just to add to that, too, John, I think Kevin also mentioned that we are doing some consolidation now and it's something similar to what we did in our Las Vegas operations in our ability to take a number of separate warehouses and combined them into one, which should drive some good efficiencies for us going forward as well.

John Healy - FTN Midwest

Sounds like that business is progressing well. On the acquisition side, the last two announcements you have made have been focused internationally. Is it safe to assume that acquisitions in the pipeline will continue to be more internationally focused?

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

Paul Dykstra

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

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

And then lastly and very critical too, is a good economic fit and that really boils down to paying the right price for these things. I'll tell you that we're seeing some really interesting things.

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

We'll also continue to buy back our shares from time to time as a secondary allocation of our capital.

John Healy - FTN Midwest

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

Paul Dykstra

Yes, I'll just make a quick comment and then certainly have John comment on that as well. Clearly, we're excited about some of the progress we've made on the sales side and some of the new wins are helping us build some momentum. John, you want 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 I would say the big thing is that we're being very proactive in terms of going to potential clients and trying to determine and show them that we can provide them a better solution. So, oftentimes, my hope would be that we wouldn't necessarily need to go through an RFP process.

Operator

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

Troy Mastin - William Blair & Company

I'm trying to understand your 2007 guidance a little bit better. You posted $0.32 in 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 the full year would come down $0.01, so that would imply that your fourth quarter outlook is $0.08 lower than it was last quarter.

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

John Jastrem

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

In order to hold the high end, GES' third quarter needed to be a little bit above the midpoint and that was missed due to insurance costs. So other than that, we have a little bit lower fourth quarter revenue guidance on GES, but there was some 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

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

Paul Dykstra

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

Troy Mastin - William Blair & Company

Then the 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-year EPS. 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 us tighten up our models a little bit in advance of guidance that I'm assuming you'll give next quarter.

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

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

Kevin Rabbitt

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

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

Troy Mastin - William Blair & Company

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

So I'm curious if there's anything different about the show rotation that we'll see in '08, the $45 million that would make that range of incremental benefit be different than we talked about last quarter?

John Jastrem

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

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

Some of it hits when we're extremely busy, which then stretches already stretched resources, and we don't get quite as much leverage as I think we would if it hit in other times of the year. Keep in mind, we have fairly extreme swings from quarter to quarter. We did, I think, $245 million in the first quarter of this year.

Guidance for the fourth quarter's about $150 million, And we certainly expect first quarter 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.

So we have fairly large swings in fairly short period of times that make it a little bit more difficult to manage our semi-variable cost. One of the advantages we have in this business is with our union work force, it's really 100% variable in that we hire people to set up the shows and we let them go when the show is over and we repeat that cycle throughout the shows.

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

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

Kevin, you want to add anything to that?

Kevin Rabbitt

I agree with everything you said there, Paul. Managing through these peaks and valleys and the swings, not just by quarter but by month, has been and will continue to be a big focus area for us. You're absolutely right. We do that through three things: through capacity planning, through regionalization and simplification when we can, and looking at our staffing levels nationally as opposed to by individual geography.

You hit on the example there, too. You said the service center, some carpet depots and the series of other depots that we have, and that not only variablizes costs, it also drives consistency of service that drives higher levels of service for our clients. So it will continue to be a focus for us and we'll continue 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 this year.

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

Paul Dykstra

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

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

Right now we're heading towards substantially improved results in 2008. Don't know exactly where we're going to shake out. We're probably a little short of break-even right now.

John, can you add anything to that?

John Jastrem

I think that's well said. We are basically going through and looking for every efficiency we can find and looking for every opportunity to continue to grow the business. And right now I think we're looking at trying to focus on trying to 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 we look out in 2009, I'm not sure if this has been asked or you've mentioned this before, but can you give us at least an early look at what we can expect in '09?

Kevin Rabbitt

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

Troy Mastin - William Blair & Company

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

Kevin Rabbitt

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

Operator

And we'll go next to Clint Fendley with Davenport.

Clint Fendley - Davenport

Thank you, good morning. Kevin, I wonder if you could comment a bit on the pricing at GES. You said that it's challenging. I mean how does that effect your work and as you look out into 2008, I guess especially considering the high level of revenue 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 of business that we have between our show organizer bucket and our exhibitor bucket.

It's like a lot of things it goes as the industry goes. Stronger industries have stronger shows that tend to be less price sensitive to weaker industries that are having weaker shows. Kevin, can you comment on what you're seeing out there?

Kevin Rabbitt

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

And we worked to help put a plan in place to partially offset those and have been able to be very successful on that front to partially offset those and then find best practices and other ways to be efficient to address them.

Challenges that I was relating in the comments relate to mix of business. I talked about some cost overruns on some certain shows. That came from show organizer work and show organizer work comes from when shows grow, when they expand, when they try to attract new exhibitors and new attendees and do special services, such as exhibitor lounges.

That leads to more work that's low-margin work and what we continue to do is find ways to overcome that challenge. Same things that we've always done to attack challenges is really understand the root cause and find productivity through best practices, continue to find other ways to grow, such as products and services and things that we're seeing at Melville, and some new technologies.

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

Clint Fendley - Davenport

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

Paul Dykstra

Yes, and I should have probably clarified that a little bit in that for the 2,000-plus events that we do, we cross an awful lot of industries. And we've got good visibility into the shows that we do, as Kevin mentioned, and the long-term contracts.

It is, as you would expect, certain industries that are struggling tend to have--not always--but tend to have shows that may struggle a little bit. Stronger industries tend to have stronger shows. But, again, we've got a really diversified portfolio.

We don't have exposure to any one industry or geography. Our commitments always take us more than a year out and we're very close to our clients in understanding what's happening within their shows.

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

Clint Fendley - Davenport

Would it be safer to say that maybe for some of these challenged industries--and you've already got the visibility pretty well into 2008--how does it begin to affect 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 we certainly do everything we can to help them be successful, is make sure they have good quality attendance at the next event because quality attendance then bodes well for signing new exhibitors for the following year's show.

So, strength in attendance and general economic conditions I think are leading indicators that we kind of watch. We're constantly looking for productivity improvements, service enhancements, things that again help our show organizers be very successful in throwing their events and drawing the attendees and the quality exhibitors that make them successful that ultimately helps us be successful.

Clint Fendley - Davenport

Okay. Thank you, that's helpful. Final question here, I guess like similar to the earlier caller, I may be a bit confused, still, on the guidance as well. I guess it would have made sense if I had heard you saying that the revenues had shifted between quarters, but instead it appears there's some unexpected non-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 fourth quarter 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 feel comfortable with the range that we've given. We had a little bit of exhibitor revenue shift from the fourth quarter of '07 into '08, and then everything else seems to be pretty much in line.

Operator

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

Paul Dykstra

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

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

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

And then the travel and recreation businesses are solid performers and we expect that to continue going forward. I want to reiterate, too, cash flow was very strong for the quarter and we were able to repurchase $0.5 million shares.

In summary, 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 value and we've got some terrific opportunities and feel very excited about our future.

I want to thank everybody for being with us today and we look forward to talking again on the fourth quarter call in February. Thanks very much.

Operator

And that does conclude today's conference call. Again, thank you for your participation and have a good day.

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