Description

Thesis: Viad is a combination of two excellent, high compounding, but very different businesses, with a near term opportunity to separate/sell one of them. The current valuation only values one, providing for a 100%+ upside within a few years and a low (-25%), margin of safety backed, downside.

Business Description (via CapIQ)

Viad Corp operates as an experiential services company in the United States, Canada, the United Kingdom, continental Europe, and the United Arab Emirates. It operates in two business groups, GES and Pursuit. The company offers event planning and production, look and feel design, layout and floor plan designs, furnishings and carpet, show traffic analysis, marketing and strategy, electrical distribution, cleaning, plumbing, overhead and booth rigging, and material handling services; and signage products and common area structures. It also provides creative design and strategy, integrated marketing and pre/post event communications, data analytics and insights, event surveys, return on investment analysis, online management tools, attendee/exhibit booth traffic analysis, staff training, logistics/transportation, storage/refurbishment of exhibits, installation and dismantling labor, and tradeshow program management services. In addition, the company offers custom exhibit design/construction, portable/modular exhibits and design, and graphics and signage products; event technology services, including event accommodation solutions, registration and data analytics, and event management tools; and audio-visual services, such as video and lighting production, digital studio, entertainment and talent coordination, projection mapping, and computer rental and support services.

Further, it owns and operates hotels and lodges, recreational attractions, food and beverage, and retail facilities; provides ground transportation services comprising sightseeing tour, airport shuttle, and seasonal charter motor coach services, as well as offers corporate and event management services for meetings, conferences, incentive travel, sports, and special events. The company was founded in 1914 and is headquartered in Phoenix, Arizona.

Couple of notes before we get going:

-        -The GES business is very steady but as it hosts some big conferences some of them happen only every two or three years showing misleading bumps in the road. For example 2018-2019 are off show years, while 2020 is expected to be a huge year with most of the conferences hitting that year. So business is steady, revenues are now. Its best to look at that business on a 2 year stack basis.

-        -In the past, and per management’s direction, I always assumed the Pursuit business would be spun off but I actually believe now it might be GES and Pursuit will stay as the much better business

-    - The company is very granular and for a change I'd recommend checking out their presentation to see assets/more detail than I provide here

HiHistory of Viad/Background

As background, Viad was one of the last conglomerates from the 80s/90s where they owned things like Greyhound, Dial, Moneygram, etc which they’ve actively spun out or sold over the years. In the end, Viad was left with GES and Pursuit, two very different businesses which they’ve committed to separating when Pursuit reaches about $250mm in revenues. Despite being a $1b+ company, its low deal flow and mostly self funding growth has the company with only two (I think) sell side analysts covering it, and on the industrials side when half of its profits now comes from lodging and attractions meaning the coverage doesn’t really understand the true value of the two businesses. The company is very granular about its results, guidance and acquisitions on a per segment, per country, organic/acquired/same show basis which over the years I’ve found to have built up a lot of credibility with the management team.

Segment Descriptions

GES: GES is a global, full-service live events company offering a comprehensive range of services to the world’s leading brands and event organizers.

It has 30% share in the US, 55% share in the UK and 45% share in Canada. 3 of the top 5 global event organizers use GES as do 14 of the top 25.  Downside is despite 24% market share in exhibitions ($2.6b market), it has low penetration in higher margin Corporate Events (3% share in $3.4b market) and Conferences (14% in $1.8b market). Most contracts are 3 to 5 years and have a 90%+ renewal rate across a very diversified array of industries and customers.

All known U.S. competitors and most international competitors are privately held companies that provide limited public information regarding their operations. The primary competitor for GES within its Core Services is The Freeman Company (a privately held, U.S. headquartered company); however, there is competition from a large number of service providers in the other categories of service offerings.  Freeman is bigger, in that it has 7,000 employees to GES’s 3,000 and about $2.3b in revenues (per Hoover’s), however that is very limited information. On a revenue per employee basis (in 2017 when was the last time I looked or wrote about this) of about $350,000 for both this seems to bear out. Freeman has about 2,000 employees internationally so it seems to be more of a domestic competitor to GES given GES’s low 30% market share domestically. From what I understand via channel checks/due diligence with customers, at the size of events that these guys host, its less about price sensitivity, and more about reliability, experience and capital which create a barrier to entry which is not insurmountable but significant enough to prevent serious competition from coming in. The stable market share and retention rate numbers published by Viad over the years seem to bear out the oligopoly thesis in the key markets.

Results:

Revenues: 2019: $1150mm 2018: $1,111mm 2017: $1,133mm; 2016: $1,056mm; 2015: $978mm, 2014: $958mm

Same Show Growth: 2019: 3% 2018: 2.8% 2017: 4.8% 2016: 4.1%; 2015: 8%, 2014: 6.4% 2013: 3.1%, 2012: 6.5%

EBITDA: 2019: $80mm 2018: $77mm 2017: $88mm; 2016: $80.4mm; 2015: $54.8mm; 2014: $54.9mm

EBITDA margin: 2019: 7% 2018: 6.9% 2017: 7.8%; 2016: 7.6%; 2015: 5.6%; 2014: 5.8%

ROA (OI/Avg Segment Assets): 2018: 7.8% 2017: 10% 2016: 11.1%, 2015: 7.2%; 2014: 7.9% (Cap Ex is about $30mm or 3% of revenues on average)

*lower revenues in 2018-2019 are due to negative show rotation which is expected to bounce to $100mm in revenues in 2020 with strong flow through to the bottom line which I approximate to be over 30%.

In the last few years GES has tried to get more into event services such as audio visual and event logistics and has made a number of acquisitions which have higher margins (27%) and ROICs than GES’s current business, which explains the rise in both.  The last 4 acquisitions cost $113mm, provided $20mm in EBITDA (15% EBITDA margin) in 2018 (implied multiple 5.6x) and provide 17% IRR (per company 2018 presentation and excludes a recent acquisition of ON Services).

Final Points of GES

• Solid and consistent mid to high single digit grower, with over $1.1b in high recurring revenues and low average double digit ROICs. Somewhat capital intensive (about $518mm in assets in 2018) and economically sensitive, though no indication per management, of any slow down with at least a 12-month lead time.

• Will likely continue to grow in mid to high single digits, with more opportunities for margin expansion via providing higher margin services. I believe the recent acquisitions position GES better to move into more lucrative corporate segments.

• FCF conversion is about 3.5% to 4% of revenues

• Short term expectations: 2020: $1.25b in revenue and $100mm to $110mm in EBITDA, $75mm in FCF

• Likely near term valuation multiples at forward 8x to 10x EBITDA or $800mm to $1,100mm and $1250mm on 2021 ($40 to $62 per share). No real comps other than its own purchases, but consistent FCF generation lends to $70mm growing at 4-5% CAGR with 8-10% cost of capital will get you the same valuation numbers via a DCF without needing heroic assumptions. 

Per my conversation with management which I tend to have a couple of times a year, and THIS IS JUST A GUT FEELING NOT INSIDER INFO, I believe that this is probably the segment that is likely for sale. I use to think it was Pursuit, but I got the sense they would rather keep Pursuit and sell of GES going forward and I know a few i-bankers have been circling.

Pursuit : Pursuit is comprised of attractions, hospitality, transportation and travel planning services that work together, driving economies of scope in iconic destinations of Vancouver, Banff, Jasper, Glacier, Waterton Lakes, Denali and Kenai Fjords National Parks in US and Canada.

 Personal Note: I really love this business. Having owned a few hotel REITs in the past (and we’ll get into valuation more later) I think this is a cream of the crop business and could be a good REIT or MLP candidate. The hotels (lodges) are in stable, and less-than-metropolitan-areas-economically-sensitive-environments (a mouthful).  National park travel has been on the rise (http://www.latimes.com/travel/la-tr-nps-crowds-20170228-story.html) and is a cheaper and more fun alternative than going on more expensive vacations. I’d venture to say this business could actually do better in a recession as people opt for cheaper vacation packages (but this is conjecture). The attractions (and more on those in a bit) are an excellent, high ROIC, natural monopoly businesses and create a higher margin tailwind for Pursuit relative to other hotel REITs. Attractions and Lodging account for 80% of revenue mix and are a higher margin business segment, with lower margin Transportation and Package Tours (20% of revenue mix) being de-emphasized going forward. I believe the correct way to look at this business segment is a standalone which it should become in the next 18-24 months when it would reach $250mm in revenues. I use to place a lot of weight in the REIT conversion thesis, however, with tax reform/some Canadian asset issues I no longer consider this the most efficient route. On the other hand, with comps still trading at high mid teens EBITDA multiples its not really as important.

A)     Lodging – Solid business. Mostly seasonal. Mount Royal Hotel had a fire in 2017 which put it out of commission until late 2018. The new version rebuilt and upgraded with insurance proceeds looks amazing, with 30% increase in EBITDA. Companywide RevPAR is growing well ($129 vs $124 2018 to 2017), and its not out of hand expensive, relative to other hotel REITs. The properties are located in somewhat constrained areas in small towns. Competitive dynamics are such that, while possible to build new properties, its likely that on the ground players like Pursuit, will have first mover advantage if they see the demand picking up.

B)     Attractions – I think this is the key differentiator for Pursuit as a justification for higher premium valuation. They are higher margin, recurring revenue businesses with opportunities to deploy capital toward high ROIC improvement projects as recent Glacier Skywalk and Banff Gondola projects have shown. The company has shown consistent passenger and Revenue Per Passenger growth though I would imagine these are more consumer/economically sensitive properties.

Recent examples of two successful attraction projects, are the opening of the Glacier Skywalk ($20mm in investment into $6.5mm of annual EBITDA) and Banff Gondola revamp ($22mm investment into a$9.5mm), per company presentation.

The biggest “hidden asset” the company has is the FlyOver brand. Having been on the ride in Mall Of America (they don’t own that one but it shows their FlyOver Canada film) it’s a great 15-20 minute experience. It’s a giant seat plank hanging over a 3-4 story sized screen showing a helicopter style ride through national attractions, with occasional mist thrown in for effect. Its incredibly popular and they’ve acquired FlyOver Vancouver in 2016. Since then they’ve expanded into Iceland and LasVegas as organic growth projects. The beauty of it is, the more locations you have the more shows you can show i.e. I can do FlyOver Iceland and Canada on the LasVegas strip. There are many international and domestic locations available. These are not very capital intensive assets which should be under $5mm-$10mm cap ex (the filming is surprisingly expensive) but I believe in high volume areas like the LV strip can generate high double digit IRRs.

Additionally, the company is an active acquirer in the space for both lodging and attractions. The company made 11 acquisitions between 2014 and 2018 that cost $335mm that provide $41mm in EBITDA (implied price 8.2x) and provide 19% IRR (per company presentation).  The company’s hurdle rate is a 15% and is always evaluated against re-purchasing shares and they usually pay 7x to 10x EBITDA multiple, depending on cross selling opportunities.

Results:

Revenues: 2019: $216mm 2018: $185mm 2017: $174mm; 2016: $153mm; 2015: $112mm, 2014: $120mm

Growth: 19/18 17% 18/17: 6.3% 17/16: 14%; 16/15: 36.7%; 15/14: -6.8%

EBITDA: 2019: $80mm 2018: $69mm 2017: $66mm; 2016: $49.8mm; 2015: $36.4mm; 2014: $29.1mm

EBITDA margin: 2019: 37% 2018: 37.2% 2017: 38%; 2016: 32.5%; 2015: 31.9%; 2014: 30.2%

ROA (OI/Avg Segment Assets): 2018: 13.9% 2017: 15% 2016: 14%, 2015: 13.8%; 2014: 14.3% (Cap Ex is about $10-15mm or 10% of revenues on average)

Final Points of Pursuit

• Great business with great assets. High margins and returns, lots of opportunities for organic and acquisition based growth.

• As a standalone, income generating asset, currently has an inefficient capital structure with value created through a potential recapitalization (sale, spin off, internally with a special dividend) either via Viad or a Private Equity acquirer.

• Solid Free Cash Generation/ROICs of this business as well as lack of leverage within the current structure should command a premium relative to the current hotel comp set (more in valuation).

• Short term expectations: 2020: $250mm in revenue and $100mm in EBITDA with $65mm in FCF

Management

I’ve really enjoyed owning this company in the hands of Steve Moser. He has doubled the EBITDA and stock price, grew ROIC, and made some shrewd acquisitions.  This has been a “beat and raise” (guidance) management, very granular and transparent about expectations. Management long term compensation is based on Total Shareholder Return (ROIC, EBITDA and Relative TSR) and short term compensation is based on mostly Operating Income and Operating Margin.

 •   The CEO compensation of $3mm to $4mm a year for a $1.2b market company is probably ok and Steve Moster deserved it. He is probably one of my favorite CEOs in my investment experience

•  The board has separated the CEO and Chairman role, a rare but welcome step

•  Mr. Moster owns $5mm of stock, a significant amount, more than than his annual salary which is about $1.5mm higher than two years ago, and management and board as total, own about $27mm.  Notably the CFO, Ellen Ingersoll, owns almost $10mm worth of stock.

•  The stock is owned primarily by institutional investors (90%), with a little too much index fund concentration (Black Rock at 15% and Vanguard at 6.1% and DFA at 8.0%) but also significant 5%+ holdings by GMT and Moab Capital Partners at 7.4%. Moab has been in it longer than I have (4 years).

Capital Structure

At the current share price of $61.5 and 20.3mm shares outstanding the company’s market capitalization is $1,230mm.  The company has $312mm in debt, and $44mm in cash for ~$270mm in Net Debt and $1,500 in Enterprise Value. Relative to an expected $160mm in EBITDA in 2019, the debt levels are below 1.7x of EBITDA and 18% of total enterprise value. 

The company has a $450mm revolving credit facility which can be increased an addition $250mm under certain circumstances. Additionally, it has a $44mm revolving credit facility specifically tied to Brewster Assets under Pursuit. The rate paid is tied to LIBOR and is approximately 3%. Currently the company has about $180mm ($430) in maximum borrowing capacity available under the current credit agreements and ~$33mm in cash for additional “dry powder” capacity of $460mm.  The company is in compliance of all covenants. Finally, the company has a small ~27mm pension obligation which does not seem constraining.

Valuation – Price Target: $120

Since these are two pretty different businesses that will eventually be separated I believe it makes sense to value them as stand-alone businesses on a Sum Of The Parts basis.  Additionally, I think looking at them 2 years from now would also makes sense using various scenarios at approximately 2021 or on a forward looking basis two years from now.  The valuation thesis is predicated on Viad eventually selling one of the two businesses, which I now believe will be GES.

Key Takeaways

•   Downside Case Price Target of $45 (7x 2021 of $160mm), Base Case Price Target of $120 (12x 2021 of $220mm), Best Case Price Target of $170 (14x 2021 $250mm EBITDA)

•  Downside is approximately down 25% in a recessionary scenario. I believe the quality of the assets, international diversification, low leverage and attractiveness to financial sponsor institutions keeps the valuation above 6.0x EBITDA. The recent sell off in 2018 kept the stock in the 40s.

•   Base case return is 100% from today’s price, making VVI a compelling 4-1 risk reward ratio.

•   Best Case is almost a 190% return from today, a possible though maybe not highly probable scenario

•   Even today’s fair value of $90.00 is 50% above today’s stock price.

Notes

•   GES is difficult to value given lack of comps. However, given oligopolistic position, high renewal rates, recurring nature of revenues, double digit ROICs and at least mid to high single digit growth rates EBITDA multiples in the 8.0x range are not wildly optimistic. My 2021 Free Cash Flow estimate of $80mm with a 10% cost of capital and 3% terminal growth rate would get you a conservative $1.15b Terminal Value valuation (7% Free Cash Flow yield).

•  I am not including a corporate expense here. Its approximately $10mm a year and a lot of it is non-cash equity compensation.  The rest of the corporate expenses seem to be allocated between the two segments.

•  Pursuit comps can be broken down into two parts: Attractions and Hotel REITs, though both have similar trading multiples of 10x-14x. It should be noted that Pursuit’s EBITDA margins of high 30s are significantly above most of the industry low 30s in addition to stronger growth prospects. I am using 13x which is close to Vail who may be a natural acquirer of this business.

•    Additionally, Pursuit is unlevered.  My 2021 EV Estimate for Pursuit of $1,450 is an equity valuation. A shrewd financial player can certainly lever it up and pay out a special dividend, making this an attractive play for financial sponsor type institutions.

Risks:

•   This is based on an eventual separation of the two businesses so that value can be recognized In this case the EBITDA multiples are likely to be in higher single digits than the 12-15x multiples used here.

•   Both business segments are in somewhat economically and consumer sensitive areas. A prolonged downturn can really impact results, more so than my implied bear case scenario.

•  Given the acquisitive nature of VIad’s management acquisition integration, such as the recent difficulty with ON Services, can impact the results.

•  My conclusions are probably not the same as yours. This is what makes a market.

Catalyst

- Separation of two businesses/Sale of GES

- 2020 Guidance from Management of over $200mm which would be 25% growth from 2019, likely missed by market due to lumpy nature of GES results

- More lucrative aqusitions