Viad Corp (NYSE:VVI) Q3 2023 Earnings Call Transcript

Viad Corp (NYSE:VVI) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Good afternoon. My name is Bailey and I’ll be your conference operator today. At this time, I would like to welcome everyone to Viad Corp’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] ‘Thank you. Carrie Long, you begin your conference.

Carrie Long: Good afternoon and thank you for joining us for Viad’s 2023 third quarter earnings conference call. We issued our earnings press release after the market closed today, along with an earnings presentation which are both available on our website at viad.com. We will be referencing specific pages from the presentation during the call as we discuss our business performance and outlook. I also want to point out that our earnings press release and presentation contain important disclosures regarding non-GAAP measures that we’ll be referring to during the call, including adjusted EBITDA and income before other items. During the call, you’ll be hearing from Steve Moster, our President and CEO and President of GES; Ellen Ingersoll, our Chief Financial Officer; and David Barry, President of Pursuit.

Before turning the call over to Steve, I want to remind everyone that certain statements made during the 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 our annual, quarterly and other current reports filed with the SEC. And with that, I’ll turn the call over to Steve, who will start on Page 4 of our earnings presentation.

Steve Moster: Thanks, Carrie and thanks to all of you for joining our call. I’m very proud of our performance across the company during an important third quarter. Both businesses posted strong results in line with our prior guidance ranges, driven by excellent execution and increased demand for international leisure travel and live events. For Pursuit, the third quarter is the biggest quarter of the year as leisure travel to our destination is at its peak during the summer months. And the Pursuit team was firing on all cylinders to deliver record levels of revenue and EBITDA with significant margin expansion. This strong performance and the trends we’re seeing give us high confidence in our 2023 full year growth outlook and good reason to expect continued growth in 2024.

For GES, the third quarter typically represents the slowest quarter of the year for annually occurring events. During the quarter, the GES team was sharply focused on cost management and delivering strong profitability from the events and projects that did take place while also preparing for a busier fourth quarter and keeping the pedal down on business development. I’m really pleased with the team’s execution and the continued growth we experienced in same-show revenue and new additions to Spiro’s client roster. We have great momentum at GES and a very bright outlook for 2024. Now, I’ll ask Ellen to review our financial performance and guidance, followed by an update on pursuit from David and then I’ll wrap up the call with additional GES updates.

Ellen Ingersoll: Thanks, Steve. As shown on Page 6, net income attributable to Viad was $41.3 million for the quarter, up approximately $3.2 million from the 2022 third quarter. And our income before other items was $43.3 million, essentially flat year-over-year, reflecting higher adjusted EBITDA, offset by increased interest expense and income attributable to non-controlling interest. Our consolidated adjusted EBITDA was $86.3 million which was approximately $4.3 million higher than the 2022 third quarter, primarily due to strong growth and margin performance at Pursuit. Our consolidated adjusted EBITDA was approximately $3 million above the midpoint of our guidance range. We delivered consolidated revenue of $365.9 million which was approximately $11 million above the midpoint of our guidance range.

The anticipated year-over-year revenue decline was due to the timing of major non-annual shows and the sale of our noncore audio-visual business which had a combined $64 million impact on revenue, partially offset by strong underlying growth. As shown on Page 7, Pursuit’s third quarter revenue grew 14% to reach a new high of $186.9 million. This growth was primarily driven by increased international tourists in Western Canada and Iceland as well as our investments to scale and elevate pursuits experiences through our refresh build by growth strategy. Attractions ticket revenue of $71.7 million grew 18% year-over-year on a 15% increase in visitors and 5% higher same-store effective ticket price. Visitation to our Canadian attractions was particularly strong during the quarter as international tourism to Western Canada increased.

Lodging room revenue of $48.7 million grew 15% year-over-year on a 10% increase in same-store RevPAR driven by both higher ADR and occupancy. Our Canadian hotels performed exceptionally well and with strong demand in the market, we benefited from the additional room capacity provided by the new 88-room Jasper hotel that we opened in August of 2022. Pursuit’s adjusted EBITDA increased to $91.8 million which is an improvement of $16.7 million year-over-year. The year-over-year revenue flow-through to adjusted EBITDA surpassed 70% and demonstrated the strong impact the incremental attraction visitation can have on profitability and margin expansion. Pursuit adjusted EBITDA margin improved 330 basis points to 49.1%. As shown on Page 8, GES delivered consolidated revenue of $179 million and adjusted EBITDA of negative $2 million during the third quarter which were both at the high end of our guidance ranges for GES.

As a reminder, the year-over-year comparisons for GES is challenging this quarter because of the timing of major non-annual shows and the sale of ON Services. Excluding the $64 million revenue decline from those factors, GES revenue increased about 16% year-over-year, reflecting strong underlying growth. And we’re pleased with the scaling of PES’ cost structure to deliver adjusted EBITDA that was nearly breakeven during the slower period of business activity. Spiro delivered $58.9 million in revenue and $0.8 million in adjusted EBITDA during the third quarter. Excluding the impact of major non-annual shows and ON Services which totaled about $19 million for Spiro, Spiro posted revenue growth of about 8% over the prior year, reflecting strong spending from existing and new clients.

GES Exhibitions delivered $122.1 million in revenue and negative $2.8 million in adjusted EBITDA during the third quarter. Excluding the impact of major non-annual shows and ON Services which totaled about $45 million for GES exhibitions, GES Exhibitions posted revenue growth of about 19% over the prior year, with same-show revenue growth of 14% from U.S. exhibitions. Now turning to our fourth quarter and full year guidance which is outlined on Page 9. Based on our strong third quarter performance and our expectations for the fourth quarter, we are pleased to be increasing the bottom end of our full year adjusted EBITDA guidance ranges. For Pursuit, we’ve raised the low end of the range by $6 million, making the new full year range of $91 million to $95 million.

For GES, we have raised the low end of the range by $4 million, making the new full year range $58 million to $62 million. We now expect full year consolidated adjusted EBITDA to be in the range of $135 million to $143 million as compared to 2022 adjusted EBITDA of $116.1 million. For the fourth quarter, we expect consolidated adjusted EBITDA to be in the range of $2 million to $10 million as compared to negative $2 million in the 2022 fourth quarter, reflecting improved results at both Pursuit and GES. For Pursuit seasonally slow fourth quarter, we expect adjusted EBITDA to be in the range of negative $10 million to negative $6 million as compared to negative $11.3 million in the 2022 fourth quarter, primarily reflecting anticipated revenue growth.

For GES, we expect fourth quarter adjusted EBITDA to be in the range of $16 million to $20 million versus $12.7 million in the 2022 fourth quarter, primarily reflecting anticipated revenue growth. Next, I’ll cover some balance sheet and cash flow items. We ended the third quarter with total liquidity of $201.3 million, comprising $106.3 million in cash and approximately $95 million of capacity available on our revolving credit facility. This high level of liquidity reflects the seasonally strong EBITDA and cash flows from Pursuit during the third quarter. Our consolidated cash flow from operations during the quarter was an inflow of approximately $78 million. And our capital expenditures totaled about $23 million, including approximately $13 million of growth CapEx at Pursuit.

At the end of the third quarter, our debt totaled $477.6 million, including $392 million on our Term Loan B, financing lease obligations of approximately $64 million and other debt of approximately $22 million. On October 6, we prepaid $70 million of the term loan B in connection with an amendment to our credit facility that also upsized our $100 million revolver to $170 million of total capacity. This action has a number of immediate benefits for us. First, it provides a lower cost source of debt with a credit spread that is currently 200 basis points lower than the spread on our Term Loan B. Additionally, it gives us flexibility to increase and decrease borrowings based on the seasonal nature of our cash flows, enabling us to run at an overall lower level of debt as compared to carrying term debt.

During the fourth quarter, we are expecting an operating cash outflow of approximately $37 million to $27 million and capital expenditures of approximately $20 million to $25 million, including growth CapEx of about $10 million. This puts our full year expectation of operating cash flow at approximately $80 million to $90 million and full year capital expenditures at approximately $75 million to $80 million which includes growth CapEx of about $40 million, primarily for FlyOver Chicago and refresh projects at Pyramid Lake Lodge in Jasper. Looking ahead to 2024, with the meaningful EDA growth we are anticipating, we expect very strong operating cash flow, particularly in the third quarter with Pursuit seasonal contribution and GES’ major non-annual shows taking place.

This should present us with an opportunity to reduce our level of debt while still selectively investing in growth at Pursuit to maximize long-term value for shareholders through our Refresh-Build-Buy growth strategy. Now, David and Steve will provide further insight into our business performance and the exciting growth coming our way at Pursuit and GES. David, over to you.

David Barry: Thanks, Ellen. Let’s dive into Pursuit starting on Page 11. At Pursuit, our mission is to connect guests and staff to iconic places through unforgettable inspiring experiences. And I’m incredibly proud of our team’s unwavering focus to support our mission throughout the peak summer season and deliver incredible third quarter results across 3 countries, 13 world-class attractions, 27 distinctive hotels, 50 restaurants and bars, 5 transportation products and 48 retail outlets. So starting first with attractions, Pursuit attractions are strong economic engines for the business. Our year-to-date ticket revenue grew approximately 23% to $123 million and this was primarily driven by increased visitation which was up about 20% year-over-year.

Our Canadian attractions were particularly strong as we’re seeing increased international tourism into Canada. While the group volume has not fully recovered yet, we’re seeing some offsets from strong demand from independent travelers. This year, we launched the Pursuit Pass to help maximize visitation from independent travelers by locking in advanced non-refundable commitments. The pass includes multiple high-quality attractions from our Banff Jasper collection in one product with a compelling value proposition. Sales of the Pursuit Pass exceeded our expectations for the year with more than 114,000 passes sold, equating to over $11 million of ticket revenue. I’m also very pleased with the performance of our newer experiences that have launched in recent years.

Sky Lagoon, FlyOver Las Vegas and the Golden SkyBridge all posted significant visitation increases over the prior year from stronger demand. So next on Page 12, our one-of-a-kind hotels and lodges, delivered 12% year-over-year room revenue growth driven by increases in both ADR and occupancy. And we’re fortunate to operate in markets with limited capacity and high levels of demand, particularly during the peak summer season. These market dynamics, along with the quality of our experiences, enable us to deliver strong RevPAR performance. For the year-to-date, our same-store RevPAR was up 10% from 2022. All of our geographies delivered growth in room revenue with Western Canada again standing out from a year-over-year growth perspective. And we’re thrilled with the Forest Park Alpine Hotel that we opened in August of last year.

This new property is allowing us to capitalize on the strong demand we’re seeing in the capacity constrained Jasper market. On Page 13, you can see our overall revenue growth trajectory. On a year-to-date basis, we’re up about 16% and set a new record of $308 million in revenue. We’re super happy with the performance of our attractions and hotels and equally impressed with the $9 million of revenue growth we’ve delivered from our integrated food and beverage and retail outlets this year. With such strong year-to-date performance, we have a high level of confidence that we’ll be able to deliver full year revenue growth of about 15% in 2023. So across our collection of iconic, unforgettable and inspiring experiences, we’re benefiting from increased international visitation, a continued ramping of our newer experiences, strong guest demand and pricing power.

The solid leisure travel trends with the shift in consumer discretionary spend to experiences over goods, physicians pursuit for continued growth. All right. So next, let’s look at Page 14 and discuss our adjusted EBITDA margin expansion which is primarily driven by increased visitation at our high-margin attractions. Our attractions are built for volume, meaning that profitability increases significantly when guest visitation is strong. Revenue from every incremental guest flows through at a high rate to our bottom line. With guests now able to enter Western Canada and Iceland without restrictions, the increased visitation is driving material year-over-year increases in our adjusted EBITDA margin. Additionally, staffing pressures have eased and we ratcheted back the extraordinary measures put in place in the prior year to address pandemic-related labor challenges.

For the year-to-date, our adjusted EBITDA margin improved by nearly 300 basis points as compared to 2022. So with the expectation that extraction visitation will continue to grow along with a diligent and careful focus on labor and expense management, we’re well on our way to achieve our 2024 target adjusted EBITDA margin of 30%. Pursuit is on an exciting growth journey, fueled by our refreshed build-buy strategy which is highlighted on Page 15. By strategically investing in attraction and lodging experiences with high margins and strong returns, we’re on a trajectory to more than triple Pursuit’s adjusted EBITDA by the end of 2024 relative to the $36 million we delivered when we started on this path in 2015. We operate in some of the most remarkable locations in the world with substantial barriers to entry and perennial guest demand.

This gives us a strong foundation for enduring success. In addition to our remarkable assets, our success is deeply rooted in our hospitality philosophy which starts first and foremost with team member satisfaction and engagement which leads to enhance guest satisfaction and loyalty while driving strong profitability and growth. Our iconic experiences combined with our hospitality profit chain is a winning formula that differentiates the guest experience, strengthens our competitive advantage and fuels meaningful growth. So just I finish my remarks, I just want to say thank you to the many team members across Pursuit for making the magic happen. Steve, back to you.

Steve Moster: Thanks, David. Now I’d like to provide some insight into the drivers of the GES business which includes both GES exhibitions and Spiro. Let’s start on Page 17 and talk about GES exhibitions, our global leading contractor for exhibition organizers. Exhibitions are viewed as a valuable investment for businesses that provide a powerful means to drive sales growth. Over the past 18 months, the exhibition industry has experienced a significant recovery. When we look at the 2 main drivers of revenue growth for GS exhibitions, pricing and event size, we see substantial improvement in both metrics. On a same-show basis, GS Exhibitions U.S. same-show revenue is now exceeding 2019 levels. And we’ve seen solid but not full recovery of show sizes.

This means that individual show pricing has increased faster than the growth of the event size. This also illustrates the incredible future growth opportunity for GS exhibition as trade shows and conferences continue to grow back to 2019 levels. Now let’s talk about Spiro, our global experiential marketing agency on Page 18. Corporate clients view experiential marketing as an important part of the marketing budget and a powerful channel to connect with their customers. This is a large and fragmented market that is forecasted to grow significantly and Spiro is well positioned to win as one of the few end-to-end global experiential marketing agencies, servicing a great client roster of Fortune 1,000 corporate clients. Spiro has developed points of differentiation like its global service network, forward-thinking strategy and creative and last mile execution that are driving top line revenue growth from expanded services with existing clients and winning new clients.

Since we rebranded and launched Spiro early last year, we’ve won 49 new clients. We believe in the long-term top line growth opportunities at Spiro and have built the foundation to deliver a much larger future revenue base. On Page 19, you can see GES’ overall revenue growth trajectory. Since early 2022, GES has experienced improving industry dynamics and steady underlying growth. Participation at trade shows and conferences continue to improve each quarter and the demand for trade show services is approaching 2019 levels. Notably, U.S. Exhibitions year-to-date same-show revenue grew about 21% and event sizes increased about 11% compared to the prior year. At the same time, corporate marketing budgets are exceeding 2019 levels as corporate marketers are finding new ways to engage with their target audiences through experiential marketing and we continue to gain share in this market and expand our marquee client base.

Both GES Exhibitions and Spiro are positioned for continued growth with these favorable trends. For the full year, we expect GES’ revenue to grow mid-single digits versus 2022 and more than offset the anticipated revenue declines from the timing of major non-annual shows and the sale of on-services which will impact year-over-year revenue by approximately $80 million. Excluding the impact of these factors, GES’s full year underlying revenue growth is expected to be about 15%. Looking ahead to next year, GES will benefit from about $70 million of incremental revenue from the timing of our major non-annual shows, including IMTS and Mine Expo in the 2024 third quarter. These large events, combined with our outlook for continued industry growth and new client wins at Spiro will provide a strong lift to EBITDA and free cash flow.

Now let’s take a look at Page 20 and discuss our adjusted EBITDA margin expansion. In addition to top line revenue growth, we’re focused on GES’ adjusted EBITDA margin expansion and are on track to achieve our target of greater than 8% by 2024. Historically, GES’ adjusted EBITDA margin has fluctuated between 5% and 7% with higher margins driven in years with strong incremental revenue from major non-annual shows. Over the past 3 years, GES has transformed the business’ cost structure and eliminated approximately $50 million in SG&A through lean productivity initiatives. TDS’ transformation has not stopped and we continue to focus on identifying additional efficiency gains. Today, GES has a robust multiyear road map of lean initiatives which will enhance our margin each year.

With a leaner, lower cost structure, GES should experience 20% or greater flow-through of incremental revenue to EBITDA next year. As revenue grows from increasing event sizes and winning new clients, we expect GES’s adjusted EBITDA margin will exceed 8%. We’re encouraged by the strong momentum in GES’ live events and experiential marketing this year and we’re excited about our growth prospects for next year. We remain committed to driving meaningful free cash flow through ongoing lean initiatives at GES Exhibitions and profitable growth at Spiro. In closing, we’re thrilled with our performance across Viad and the strength we’re seeing in our businesses this year as well as the bright future ahead. We remain committed to our strategy to create extraordinary experiences and strong returns for our shareholders.

I want to thank our hard-working and dedicated employees and our shareholders for your continued support in Viad. And with that, we’ll open up the call for questions.

Operator: [Operator Instructions] The first question today comes from the line of Bryan Maher from B. Riley. Please go ahead, Bryan. Your line is now open.

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Q&A Session

Bryan Maher: Thank you and good afternoon, Steve and Ellen and Dave. A couple of questions for me. Some a little bit more granular, maybe starting with Golden SkyBridge. We toured that property this summer and thank you for that. There was a significant amount of to be developed land at that location. What are you thinking about in the way of time line and cost to eventually develop that site out further?

Steve Moster: Yes. Early days for us as we work through it, looking at a variety of different opportunities, Bryan there. One is bridges are very popular. So there’s opportunities to expand bridges as they travel over the Canyon in various locations. Obviously, there’s some other things within the operation we would focus on as well. So we’re in the master planning phase as we look at it and we’ll have news as we develop new and interesting improvements to the site. We’ve had a terrific season really pleased with the visitation.

Bryan Maher: And that leads to kind of my second question. Were you able to benefit at all in Western Canada this year from an extended season at all due to better-than-expected weather? Or how does that play out?

Steve Moster: It was a beautiful fall. September was terrific. October was terrific. So we’ve enjoyed some beautiful weather. But I would say it’s just been continued visitation. We had a very strong third quarter and that continued right till the very end.

Bryan Maher: And I know the individual visitation has been strong to that market, the group has not quite got back to where you think it can be from international inbound. When you look out to 2024, how much can visitation do you think grow there in broad strokes? Is it 5%, 10%, 20%? I mean, what’s the thought process?

Ellen Ingersoll: Yes. It’s really early days and I’m loath to give a prediction on the traction visitation because there’s great chances healthy slightly wrong. But we’re encouraged by the demand that we’re seeing and I’ll start first with our tour and travel partners around the world. There’s strong demand for contracting into all of our various locations, not just Western Canada. Secondly, with Asia travel, it’s recovering, the recovery has begun. It’s not as robust on the group side as we would like it to be but it’s improving. The number of flights from Asia into Western Canada and the Western United States are improving as well. So we anticipate continued visitation growth. And we also have white space at certain times of the year where we’re working to expand and fill that white space with guests that can visit at that particular time of year.

So say, a group market is more price sensitive. We have opportunities in early season that are tremendously attractive and obviously less expensive than peak. So it’s not only filling in the peak season but it’s filling in the white space in the valleys that we see throughout the year.

Bryan Maher: Okay. And maybe just lastly for me and shifting over to GES for Steve. Your comments on the margins, EBITDA margins are quite welcome, 5% to 7%, growing to 8% next year, hopefully, in 2024. I suspect, though, that you wouldn’t want to stop there per se. And as we model out 25 and 26 numbers, how can that grow from the 8%? Is it kind of just lock step up 8 goes to 8.25%, 8.5%? Or is it more meaningful goes to 9% goes to 10%?

Steve Moster: The way we’re looking at it, we have a fair amount of room ahead of us in terms of margin improvement based on a lot of the lean initiatives that we have in place and are putting in place for future years. I would see it more as a step function type of change over time. We’re very excited about 2024 and hitting the greater than 8% target that we put out there. I do think there’s more room ahead for us and it’s really going to come from us continuing to improve efficiency. It’s also going to come from as the events continue to grow. Remember, the square footage is still less than what it was in 2019. As that comes back, that will have a significantly high flow-through. And then lastly, we will continue to win new clients at Spiro and that usually comes with pretty healthy margins as well. So across those 3 fronts, we’re really optimistic about ’24 and then even more optimistic as we look forward into ’25 and ’26.

Operator: The next question today comes from the line of Tyler Batory from Oppenheimer. Please go ahead. Your line is now open.

Tyler Batory: Steve, just a follow-up kind of on that last line of question with respect to GES. It’s nice to see the growth in that business with respect to the same show — U.S. same show. I mean, you talked about the square footage still being down quite a bit with 2019. Do you think you can close the gap on that next year? What sort of factors need to happen for that to get back to where it was?

Steve Moster: Yes. You’re going to — we’re going to certainly close some of that gap in ’24 but I don’t think we’ll close it entirely. There are still some sectors that haven’t fully recovered and are substantially lower than, say, the average of where we are. But I do think we’ll make meaningful progress in ’24 and ’25 and I would expect to close it at the end of ’25. So we see that as a really strong opportunity, both in terms of revenue but more importantly, in terms of profitability. As those events continue to grow, our underlying cost structure doesn’t change dramatically. There’s kind of incremental union costs and labor associated with it but it should have very strong flow-through as those shows continue to grow. So that’s what we’re looking for in ’24. And again, I think it’s more than a 1-year recovery.

Tyler Batory: Okay. And then quickly, just in terms of the Spiro business and the growth there, I think, 8% year-over-year when you make some of those adjustments. I mean I know you guys have made a number of investments in that business. Are those starting to bear fruit a little bit or maybe next year perhaps when you really start to see those even have a bigger impact to the revenue line?

Steve Moster: Yes. We put in — we made some investments in early 2023 into kind of middle of the year of ’23. Those investments are going to start paying off here in the tail end of ’24 and into 2024. So we expect significant growth going into ’24. And you see a little bit of it showing up in the fourth quarter of this year.

Tyler Batory: Okay. And then switching gears to Pursuit. I’m interested the visitation and business trends that the new experiences in the portfolio attendance visitors up 13% year-over-year. How are those attractions progressing against your expectations? I mean we kind of hit stabilization, so to speak? Is there even more upside? And when you look at those new experiences and potential growth from here, I mean, is it a little bit more visitation? Is it more pricing? Is it more margin improvement?