Pursuit Attractions and Hospitality, Inc. (PRSU) Q3 2017 Earnings Report, Transcript and Summary

Welcome, everyone to the Viad Corp Third Quarter Earnings Conference Call. At this time, all participants will be in a listen only mode until the question-and-answer session of today's conference. [Operator Instructions]. This call is being recorded and if you have any objections, you may disconnect at this time. May I introduce your speaker for today, Carrie Long. Please go ahead.

Good afternoon and thank you for joining us for Viad's 2017 third quarter earnings conference call. During the call, you'll be hearing from Steve Moster, our President and CEO; and Ellen Ingersoll, our CFO. Certain statements made during this call which are not historical facts, may constitute forward-looking statements. Information concerning business and other risk factors that could cause actual results to materially differ from those in the forward-looking statements can be found in Viad's Annual and Quarterly Reports filed with the SEC. During the call we'll be referring to certain non-GAAP measures. Important disclosures regarding these measures can be found in the table two of our earnings press release, which is available on our Web site at www.viad.com. With that, I'll turn it over to Steve Moster. Steve?

Thank you for joining us on today's call. We delivered another quarter of solid results with pursuit exceeding the high end of our prior guidance range and GES reporting inline results. Both business units continue to perform well and are benefiting from favorable industry dynamics. At GES, we continue to see healthy U.S. base same share revenue growth during the quarter of 4.2%, which excludes one event with reduced services due to a venue change. GES also benefitted from new business wins both internationally and in the U.S. When adjusting for the impact of negative share rotation and a low margin contract that we did not renew, GES's organic revenue growth was about 9% versus the prior year quarter. Our actions to position GES as the preferred global full service provider for live events continues to pay dividends. With a compelling set of offerings, our team is finding success in the marketplace by attracting new clients and enhancing the scope of existing relationships. During the third quarter, we helped launch a new biannual event, The North American Commercial Vehicle Show, aimed at bringing together truck and trailer OEMs, commercial component and part suppliers and large fleet managers. With strong global participation, this inaugural event was a great success and we look forward to producing it again in the future years. We are also finding cross-selling success by leveraging the strength of existing client relationships on the corporate exhibitor side. We have recently one new corporate event business from a number of existing clients. Additionally, Brightstar, a corporate exhibitor client that we supported at Mobile World Congress and CES. We will be expanding our scope of work in 2018 based on creative approach, strong execution and our ability to leverage our in-house audio visual technology solutions. Another example is the [Stelus] [ph] where our work at various conferences enabled us to secure the global pharmaceutical companies entire European exhibit program. To further position us as a preferred global full service provider, we continue to enhance our even technology platform and have combined our event registration solution with the Poken event engagement technology to offer measurable event insights to organizers, exhibitors and even sponsors. We continue to see steady interest in our event technology products. A noteworthy recent win is a global show organizer, [Clarion] [ph], who awarded us a multi-show contract for both even registration and the Poken engagement technology. Overall, 2017 is shaping up to be a strong year of growth and profitability for GES. Most of the business is executing at very high level and we continue to make progress against our long-term strategic growth initiatives to drive top line growth and margin expansion. One area that’s falling short of our growth expectation is the ON Services audio visual production business. It's revenue during the third quarter came in short of our expectation mainly due to lower than anticipated short-term bookings. Additionally, although we have realized some early revenue and cost synergies from this acquisition, we are finding that cross-selling and in-sourcing opportunities are taking longer to develop than we originally anticipated. As such, we reduced our 2017 full year expectations for ON Services. We are actively working to systematically improve our visibility into and the capture of both revenue and in-sourcing opportunity. As we continue to integrate ON Services in to GES, we remain confident in our ability to leverage its leading audio visual production services to gain share in the higher margin corporate event space. Overall, we remain encouraged by the health of our industry and the progress we are making towards our strategic goals. By adding complementary and higher margin services to our suite of offering, we are driving margin expansion and creating new revenue opportunity. Through the first nine months of 2017, GES has delivered year-over-year revenue growth of 7.6% and a 90 basis point improvement in adjusted EBITDA margin. Now let me switch gears and talk a little bit about Pursuit. Pursuit delivered third quarter results that exceeded the high end of our product guidance range. Revenue grew 9.8% and adjusted segment EBITDA margins increased by 570 basis points. During our peak season, we saw significant improvement in our key performance indicators. Same store passengers at our attractions increased 4.3% with revenue per passenger up 20%. At our hospitality assets, same store RevPAR increased 4.2%. These metrics would have been even stronger if not for the severe forest fire activity that impacted visibility and air quality in the Banff and Jasper markets and force the early closure of some of our properties in the Glacier National Park area. Fortunately, we did not incur any meaningful fire damage and the financial impact on our business was minimal. However, the fire activity in Glacier National Park disrupted our timeline for the previously announced RV Park development. We now expect to have a partial opening for the 2019 season. Despite many days of poor visibility due to smoke, I am very happy to report that the recently renovated Banff Gondola delivered exceptional results. Compared to the third quarter of last year, revenue increased 42% on a passenger increase of 3.2%. The significant upgrades we made to the Gondola's mountain top experience are garnering terrific guest feedback with strong Trip Advisor ratings. And with that enhanced guest experience we are capturing more revenue per passenger from ticket sales, dining and retail at this must do attraction. We are also seeing positive guest feedback and strong financial results from the upgraded dining operations at the Glacier Discovery Center, which serves as the starting point for our iconic Glacier Adventure and Glacier Skywalk attractions in Jasper National Park. Additionally, our recently acquired FlyOver Canada attraction in Vancouver is performing very well and exceeded our expectation during the peak third quarter. Our revenue management, sales and marketing efforts are successfully driving an increase in passengers and a higher effective ticket price. We continue to pursue opportunities to expand this high margin attraction into new geographies. Finally, our efforts to reopen the Mount Royal Hotel with an enhanced and upscale offering, are well underway. As I mentioned on our last earnings call, we finalized our insurance claim in July and have now received the full settlement of $36.3 million. We believe our efforts to upgrade this property will help us realize a higher ADR with continued strong occupancy when the hotel reopens in mid-2018. Overall, 2017 is tracking to be a very strong year of growth for Pursuit, which is a testament to the strength of our assets and the team, and the power of our Refresh, Build, Buy strategy in combination with our revenue management initiatives. Given our better than expected third quarter performance, we have raised our full year guidance for Pursuit for the second time this year. And now, I will turn it over to Ellen to provide more color on our financials. Ellen?

Thanks, Steve. As Steve mentioned earlier, our results for the third quarter for 2017 were in line with our prior guidance with strong than expected performance from Pursuit and in line results from GES. Our income before other items was $1.33 per share on revenue of $339.1 million, adjusted segment EBITDA of $64 million and adjusted segment operating income of $48.2 million. As a reminder, by definition, income before other items, adjusted segment EBITDA and adjusted segment operating income exclude restructuring and impairment charges or recoveries, resolution of tax matter and acquisition transaction related and integration cost. A reconciliation of these non-GAAP measures to net income can be found on table two of the earnings press release. As compared to the 2016 third quarter, consolidated revenue decreased $43.4 million, adjusted segment EBITDA decreased by $8.1 million and adjusted segment operating income decreased by $11.3 million primarily due to negative share rotation at GES. We also experienced an increase in corporate activities expense of $1.7 million versus the 2016 quarter, primarily due to higher performance based compensation expense driven by the increase in our stock price and TSR performance over the last few months. Moving on to the business group results. GES's third quarter revenue was $232.1 million, down 19.1% or $54.9 million versus the 2016 third quarter. On an organic basis which excludes the impact of acquisitions and exchange rate variances, GES's revenue decreased $65 million or 23.5%. GES U.S. organic revenue decreased $56.4 million or 25.4% primarily due to negative share rotation of approximately $63 million. Additionally, as we have discussed in prior quarters, we experienced a revenue decline related to a low margin contract for a portfolio of events that we did not renew. We were able to more than offset the impact of that contract with new business wins and same store growth. Organic revenue for GES's international segment decreased $8.3 million or 13.7% primarily due to negative share rotation of approximately $12 million, partially offset by continued new business wins. The acquisitions of ON Services and Poken contributed revenue of $19.2 million during the third quarter, which was $8.9 million more than ON Services contributed during its partial quarter of ownership in 2016. GES's adjusted segment EBITDA was $2.7 million, down $19.1 million from the 2016 quarter primarily due to high flow through on lower revenue from negative share rotation in both the U.S. and international segments. U.S. adjusted segment EBITDA for the 2017 third quarter also reflects a reduction in performance based incentive accruals due to lower full year expectations for ON Services that Steve discussed earlier, as well as a favorable contract settlement of $2.8 million. GES's adjusted segment operating result declined by $21 million to a loss of $5.7 million, including incremental depreciation and amortization expense of $1.7 million due to the ON Services and Poken acquisitions. At Pursuit, third quarter revenue was $107 million, up 9.8% or $9.6 million year-over-year. On an organic basis, which excludes the impact of acquisitions and exchange rate variances, Pursuit's revenue increased $3.2 million or 3.3%. When adjusting to exclude an $8.1 million decline in [travel claim] [ph] revenue due to our downsizing of lower margin packaged tours and a revenue decline of $2.1 million due to the fire related closure of the Mount Royal Hotel. Pursuit's third quarter organic revenue was up 15.9% or $13.4 million from the prior year. This growth was driven largely by increased revenue per passenger and passenger volumes that are high margin attractions. We also saw improved RevPAR across most of our hospitality assets. The acquisition of FlyOver Canada contributed incremental revenue of $4.2 million during the third quarter and favorable currency translation added another $2.1 million in year-over-year revenue. Pursuit's third quarter adjusted segment EBITDA of $60.2 million increased $11 million year-over-year primarily due to the strong revenue growth from our high margin attraction. Additionally, we recognized a business interruption gain of $1.1 million which represents lost profits from the Mount Royal Hotel during the quarter. Pursuit's third quarter adjusted segment operating income was $53.9 million, an increase of $9.7 million year-over-year, including incremental depreciation and amortization expense of about $700,000 from the acquisition of FlyOver Canada. And now I will cover some cash flow and balance sheet items before discussing 2017 guidance. Viad's consolidated cash flow from operations was $55.4 million for the 2017 third quarter, down from $61 million in the 2016 quarter primarily due to lower operating income, partially offset by favorable working capital. Of the $27.3 million of insurance proceeds we received during the quarter, $2.6 million representing business interruptions was included in our cash flow operations. The remaining $24.7 million representing impairment recoveries was recorded as cash flow from investing activity. Capital expenditures totaled $12 million for both the 2017 third quarter and the 2016 third quarter and at the end of the quarter our cash and cash equivalents totaled $53.5 million, debt was $186.3 million, and our debt to capital ratio was 28.4%. And now moving on to guidance. We expect full year revenue to increase by 7% to 8%, adjusted segment EBITDA is now expected to be in the range of $153 million to $155 million, as compared to our prior guidance range of $153.5 million to $157.5 million. As Steve noted, we have adjusted our guidance range downward to reflect reduced outlook for GES due to ON Services, partially offset by an improved outlook for Pursuit. We are also now expecting higher corporate expenses due to the impact of the appreciation and our stock price on performance based incentives and we have revised our tax rate forecast upward. As compared to 2016, both business units are expected to post meaningful growth in revenue and EBITDA. GES's full year revenue is expected to increase by 6% to 7%, with an adjusted segment EBITDA increase of about $7.5 million to $9 million. Pursuit's full year revenue is expected to increase by 12% to 14% with an adjusted segment EBITDA increase of about $14.5 million to $16 million. This year-over-year growth reflects strong underlying business performance as well as contributions from acquisitions that are furthering our strategic growth initiatives. Our full year cash flow from operations is expected to be in the range of $110 million to $120 million, and capital expenditures are expected to be in the range of $62 million to $66 million, which includes about $18 million related to the reconstruction of the Mount Royal Hotel. For the fourth quarter we expect a loss per share of $0.35 to $0.25 as compared to a loss of $0.11 in the 2016 quarter, primarily reflecting lower operating results at GES, interest income of $11 million received in the 2016 fourth quarter related to a favorable legal settlement, and an increase in corporate expenses of about $500,000, primarily due to higher performance based incentives driven by our recent stock price appreciation. For GES we expect fourth quarter revenue to be in the range of $250 million to $260 million, as compared to $246.2 million in the prior year quarter. This increase primarily reflects strong international revenue growth including favorable currency translation of about $4.5 million and continued U.S. same share growth partially offset by negative share rotation of about $5 million. GES's fourth quarter adjusted segment operating income is expected to be in the range of $2 million to $3.5 million, as compared to $7.9 million in the prior year quarter. The expected decline primarily reflects a less profitable mix of revenue with negative share rotation being offset by growth in lower margin geographies and lines of business, and higher overhead cost. Additionally, we expect an increase in depreciation and amortization expense of about $1 million at GES. For Pursuit, we, expect fourth quarter revenue to be in the range of $13 million to $15 million as compared to $10.3 million in the prior year quarter. The expected increase primarily reflects incremental revenue of about $2 million in the acquisition of the FlyOver Canada attraction on December 29, 2016 and continued growth from the recently renovated Banff Gondola. Pursuit's fourth quarter adjusted segment operating loss is expected to be in the range of $7 million to $5.5 million as compared to a loss of $8.2 million in the prior year quarter. The expected improvement primarily reflects higher revenue from FlyOver Canada and the Banff Gondola. Additional details regarding our 2017 guidance and the resolution of our Mount Royal Hotel insurance claims can be found in the earnings press release. Steve, back to you.

Thanks, Ellen. In closing, I am pleased by our performance today. Through the first nine months of 2017, our teams at both business units have done a good job of driving growth and profitability. Compared to the first nine months of 2016, our consolidated revenue grew 8.6% with a $25.1 million increase in adjusted segment EBITDA and adjusted segment EBITDA margins have improved by 140 basis points to 14%. We continue to see favorable industry conditions on both sides of our business. Our teams remain focused on delivering excellent service for our customers, driving strong results for our shareholders and executing on our strategic goals to enhance shareholder values in the years to come. I want to thank the entire Viad team for their commitment to our strategy and our customers, and with that we will open up the call for questions. Rex, can you open up the call please?

[Operator Instructions] Our first question comes from John Healy. Your line is now open.

Steve, just wanted to ask a question about the ON Services business. A little bit surprised to hear the commentary and was trying to understand, just help us understand that if that’s something that kind of just happened in the quarter or were you guys seeing some developments over the last, maybe two or three quarters that you know maybe if you feel less confident about some of the underpinnings of the business. And is it something that changed from a product standpoint? Is it changing kind of how you sell or package? Trying to understand kind of what the solution is there.

Sure. Thanks, John, for the question. First off, what I would say is, as a reminder corporate events have less visibility then say our exhibition line of business. Given that these tend to be one year contracts and they can change a lot in terms of location, timing and equipment needs. We came short of our expectations in the third quarter in terms of revenue growth. We still believe for the full year we have mid-single digit growth year-over-year within the ON Services line of business but short of our expectation for the year. And we feel that our management team has the right focus on driving these synergies and accelerating the realization of the in-sourcing synergies that we have talked about this year. So some of it is really due to the lack of visibility coming into Q3 and Q4 and we also though still firmly believe that this was a very strategic acquisition for us to do and one that we can accelerate the realization of those synergies.

Makes sense. And then I wanted to ask just -- when you talk about visibility, I have always felt like this year showed it dictates a lot of what happens at next year's shows. And when you are kind of working with the shows that are including -- you know you go into those war rooms, whether -- would there have been show space for next year and things like that. Is there any way to talk about kind of what you are seeing in terms commitments for 2018 shows? Are shows selling out like they normally have kind of a year out? Are you seeing any sort of change in exhibitor behavior as you look to '18.

Specifically, John, within the exhibition side of our business, that’s where you see, we have more visibility because they tend to be multiyear contracts. And you are absolutely right that usually at the close of an exhibition you are already booking the space for the next year. And so I would characterize the pace similar to what we have seen in the past. I have not seen or noted any significant change to the pace of bookings for future year exhibitions.

Okay. Great. And then just one final question on the show business. Is there a way to think about show rotation for 2018. I think you guys have said of a little bit of a headwind, but is there any way to get an initial view of 2018 and maybe 2019 in terms of how we might be building out our models for our show rotation.

Sure. As we have talked about before, in the U.S. market there is really three primary shows that are non-annual events and drive the majority of that non-annual revenue number. As we have talked about for 2017, you know we had a large event in 2017 that was really the largest one in North America. And so we saw a little bit of decline in non-annual revenue from 2016 to 2017. In 2018, we have one of those non-annuals taking place. So you will see another decline in our non-annual revenue. And then in 2019, none of the three occur in 2019. And as a reminder, they all occur in 2020. And as Ellen pointed out in her comments, even though we had a decline in the non-annual revenue and other sources, we were able to make up a portion of that through same store growth and new business wins.

Our next question comes from Marco Rodriguez. Marco, your line is now open.

I wanted to kind of come back around here on the ON Services. Your answer to the prior question kind of seemed to imply that ON Service was specifically targeting or better suited for corporate exhibits versus, I guess, your larger exhibits that move quarter-to-quarter. Am I understanding that correctly or is that a misinterpretation from me?

Let me just clarify a little bit. The audio visual acquisitions that we have made, so Blitz Communications in the U.K. and on services in the U.S. market. Our focus on the corporate event market and not on the exhibition market. And so with the exhibition market you tend to have three to five year contracts you have some good visibility into the revenue of those events. On the corporate event business they tend to be single year contracts and so that lends itself to less visibility about the location of those events. The timing of those events which is important from an inventory perspective and also less visibility into the equipment needs for those types of events. So those are, the AV business are more focused on the corporate event space.

Okay. So are you then not providing AV services to the exhibits?

We are. As we have talked about for a while. The rationale for us getting into the audio visual business is really two fold. The first is to grow market share within the corporate event space which, that we will do, acquiring these businesses will be a meaningful gain in market share in that space. And the second rationale is to be able to cross-sell that to our existing exhibition clients. And so we have made progress in that cross-selling opportunity.

So, I apologize, I am a bit confused here. So you have an internal team that is selling the AV services to the exhibits and the ON Services is being sold directly to corporate events and there is no moving back and forth. Is that correct?

No, Marco. What we did, we originally had a team that was selling audio visual services to our exhibition clients. When we did the acquisition of ON Services, we actually combined them under one company so that they could go after both types of clients. But the majority, the majority of the revenue associated with ON Services is tied to corporate events.

Okay. And is there any sort of focus or plan to where I guess their focus in equally split or is that always going to be more of a corporate exhibit focus.

We are going to focus on both the opportunities. We are going to focus driving more penetration of our existing organizer clients that are running exhibition but we are also very focused on growing our market share of the $3.5 billion corporate event business.

Okay. And then, in your prepared remarks you guys talked about a low margin contract that didn’t renew in the quarter. I seem to recall last quarter there was another contract that you tried to raise the prices on because there was a low margin. Was it the same one you are referring to or is this a different one?

Yes, Marco, it's the same contract with multiple events and so we are outlining the impact for this quarter specifically.

Got you. Okay. And then maybe if you could update us on GES and then on Pursuit, just kind of the acquisition landscape. The opportunities, what are they looking like in terms of numbers? Are they increasing, staying the same? And then if you could also provide some sort of commentary on the what the valuations look like? Are they stretched, are they reasonable? Are they very attractive? That would be much appreciated.

Sure. What I would say is we still have very active pipelines on both sides of the business. As a reminder on the GES side we are looking for other high margin services that we can add into our portfolio and really round out that full suite of services that we provide to our clients. On the Pursuit side, we are looking at other attractions and/or hotel assets that are an iconic definition. That have very unique experiences attached to them. So both pipelines are actually pretty full. From a valuation perspective, things are very similar to the way they were earlier this year and late 2016. We haven't seen any meaningful appreciation in the valuation that we are seeing in the marketplace.

Our next question comes from Steve O'Hara. Steve, you may proceed.

I was just curious, in regards to the Mount Royal, I guess, reconstruction or renovation. Can you talk about the positioning in the market? Maybe what was before and then where you expect it to be and then do you expect to maybe take market share. Is it going to be a similar to what it was before? If you could go into little bit more detail there on the plan.

Sure. I think that where we are focused on is moving to the upper midscale quality of hotel. In the past we have been kind of midscale market. The way to think about it also is if you just think about the rating or the stars of the property. We were in the three star rating previously, we will be on the upper end of the three star rating. We believe that we can actually command higher ADRs, higher RevPAR with a better experience with the renovated Mount Royal Hotel. So the team is very excited about the renovations and the talent [indiscernible] is excited about the re-launching of the Mount Royal Hotel and we are encouraged by where we stand right now and the strategy that we have for that hotel.

Okay. And then in terms of the additional services or whatever you might have within the property, is there anything that’s going to be added that you didn’t have before, or will be it additional room or any other amenities.

Sure. The full rooms and the whole building will be upgraded in terms of experience. But we are also offering. We are adding a rooftop experience. It's a lounge with views of the surrounding mountains. So there are some additional features or attractions to the hotel that we think will drive quite a bit of interest within the local market.

Okay. And then maybe hitting on services again. I mean it seems like you kind of know what you need to do in terms of getting it back on track. It's just going to take a little more time. Is that the case or is it more -- there is still some question about maybe what's going wrong or maybe what's going away from plan?

We understand what needs to get done and the team there is singularly focused on accelerating those initiatives. So it's transparent to us in terms of what we need to do and we are very much focused on bringing that business back in track with what we want.

We show no further questions on queue at this time. [Operator Instructions]

Okay. It sounds like there are no other questions. So I would like to thank everybody for the questions and the interest in Viad and we look forward to talking with you next quarter. Thank you very much.