Emerald Holding, Inc. (EEX) Earnings Call Transcript & Summary

Hey, everybody. Welcome to the fireside chat this afternoon. I'm pleased to be hosting Emerald Holding Incorporated. From the company, we've got Herve Sedky, Chief Executive Officer; and David Doft, Chief Financial Officer. Herve, David, thank you so much for joining us today. Really appreciate you guys taking the time.

Our pleasure. Thank you.

Great. So, maybe we just jump right into the Q&A. Now if we could get started with -- give us an overview of the services that you currently offer to your clients, obviously, you guys have mentioned it in the trade shows and the markets in which you're operating today?

Sure. We have 3 different areas where we operate today. We look at our business as a connections business. That's largely our events business, physical events, but we also have some digital and online events. Second part is our content business. And the third bit is our commerce or B2B e-commerce marketplace business, and we'll be sharing a lot more about this as we go on.

Okay. Great. Maybe one thing that I wanted to start off with was, if you could talk about some of the ways that you guys have seen business-to-business commerce change over the last year or so. Where do you see things going on from here? And how are you positioning Emerald for these developments?

Sure. So I would say kind of 3 key trends that we're seeing. The first one is around personalization. So how do we better leverage data which is a big investment area, focus area for ourselves to be more prescriptive, more precise in terms of the types of offerings we have and we serve our customers. The second we're seeing is obviously the change in demographic. There's a massive change. Millennials are now -- are in mid to senior management roles within a lot of our client companies. Generation Z are 24% of the workforce. And therefore, the expectations of new generation is changing, and we have to adapt the types of buying and selling and programs that we offer. And the last is not necessarily new, but I would say even more important today than it was before, which is the return on investments. We see budgets, marketing budgets as unlimited as long as we can offer, and companies like us can offer very strong return on investments. And so a much clearer link between the offering and the return is something that we're heavily invested in as well. So those are the 3 kind of big changes and dynamics that we see in B2B commerce of today.

Okay. Great. Thank you for that. And then broadly across the entire business, maybe, if we can talk about how this varies across the areas that you operate in. But could you walk us through the competitive landscape today and some of the key things that you're looking at there?

Sure. Competition in our industry is a very interesting phenomenon. The reality is that there are a large number of event organizers and other companies that offer the same types of solutions that we do. But the reality is that in our business, the relevance is actually the industry sector and the geography that you serve. And in that regard, we have very little competition. When you look at the various industry sectors that we serve in the United States, we are the leading provider of that solution in that particular industry sector in the US. And as a result, competition is -- well, there are a couple of areas where we compete with other show organizers, but they're really, really limited. So this really allows us to scale our organization, and that's really the path that Emerald is on. It's really building their scalable model that allows us to launch shows in growing sectors so that we can continue to grow our business and go after sectors that we see some large growth opportunities, but also look at strategic M&A opportunities and grow in that regard as well.

Okay, great. Definitely. We definitely come back to that M&A theme later on. Touch on this a little bit, but maybe you could kind of talk about how the trade show market has evolved over the pandemic as it's obviously very fragmented. What are some of the things that you guys are really focused on driving in order to capture share?

So our growth strategy is, clearly, we want to continue to grow the existing assets that we have. And that growth strategy is built on a customer centric approach. Customer centricity that's focused on how do we deliver even better return to our customers, superior levels of service, more differentiated pricing, pricing that allows customers to do business with us in ways that make sense for them. So they can participate at different levels with different price points which allow us more customers to do business with us at different levels and allows us to capture the value that we create even more so than we do today. The second key area is, as I briefly mentioned, our accelerator strategy or launch strategy. We are building assets. We've committed to launch somewhere between 6 to 8 shows a year over the course starting in the next year or 2, such that we're launching in areas where either the market is underserved or not served at all. And they are sectors that we feel have really good growth profile. And lastly, it's our M&A strategy. So we will continue to buy. We have in the past. And we will continue in the future to acquire either tuck-in acquisitions, so smaller events or media brands or different digital solutions that enhance the brands that we have today or larger scale assets that allow us to enter a new sector faster.

Ryan, I want to comment it from a different as well. I think -- we talk about share, when we assume we're talking about share of ratio. We're not -- we're talking about share of marketing budgets. And right now, trade shows get a piece, gets a sliver of those marketing budgets. But if they think about why people [ count ] inflations, they come for leads, right? People buy booth space to find new customers and to drive sales. So we're a lead generation business. And ultimately, we think there's a much larger opportunity for us to scale the number of leads that we can provide and thus scale our revenue to get a larger share of marketing but. That's why, Herve alluded to the fact that we think marketing budgets are infinite. If you return -- if you can provide return on investment for a lead, people pay for that instantly. It's true. It's why [ Google scan ]. That's why a lot of the emerging over the last 20 years, emerging digital media opportunities have gotten so large and taken so much share of the market. They're measurable. They provide leads and if they provides the return, people will throw more money at it. And so we think there's a better way to manage this business, because of the content assets we own alongside the event assets that we own, in a way that most of the people we compete with in trade shows don't have. Generally, people don't have those content assets. So part of what we're working on is aligning better the content assets with the event assets to be kind of one funnel of leads that we can provide across medium and scale those opportunities. And then we're talking about how we -- the investments we make, how to bring more leads into that funnel? How can we then optimize those leads by leveraging the data we have and the insights we have? And then ultimately with the investment we made in our technology business, drive the transaction through new comer, which then provides more data, which then can go back to the top of the funnel and optimize to lead some more. So we're in this really interesting inflection point around our ability to go after that much larger pool of marketing budgets than the narrow pool of trade show budgets where Emerald competed in before.

That's great. It kind of leads right into my next question. If you could tell us a little bit about the Emerald Discovery Engine and some of the other data and technology initiatives that you guys are working on? What level of investment in these activities do you view as required going forward in order to execute?

Sure. So I think, David did a good job of outlining the Emerald discovery engine. Ultimately, as to the bottom line of the Emerald discovery engine, it's that we're trying to create this in possibly easy way to meet, to learn and transact. That's really what we're creating here. It's a solution that crosses our connections business, the Events business, our content business, to David's point as well as e-commerce, B2B e-commerce. And with the outcome of providing year-round leads for customers. That is what this engine is about. And it's all built on the premise that visitors to our events, to our content are really looking for one key thing, and that is inspiration and discovery of new. That's really why they attend or why they engage with our content. And exhibitors and advertisers and sponsors, what they want are leads. And so what we're creating is this machine that brings these 2 things together. So it's a technology-based application across, that's a platform across all of our business that allows us to constantly generate leads. That's what we are building, and that's what we are calling the Emerald discovery solutions engine. David, [ you want to ]...

From an investment standpoint, we're absolutely investing in upgrading the technology backbone of the company, and we've been able to do this, is that to allow our systems to better talk to each other to better automate how our different businesses interact with each other. So in '21 and through '22, we'll continue to invest in operating that. This has a been very capital-intensive business, has an initial capex, the growth has been very well. It will run a little bit higher for the short term, but still fairly modest in the grand scheme of our overall leads.

Okay. Great. And so that was touched on you guys investing in the business in this regard. You talked about M&A a little bit. Can you talk about any other capital allocation priorities that you have more broadly kind of going into 2022? And how we should be thinking about those?

Right now, we continue to be very focused on the path of recovery of our business, the investment behind the evolution of our offering as we just talked about, and ensuring that we have a strong balance sheet throughout that, so that we can continue along that path. So we're looking at acquisition opportunities. For sure, I think we've been very vocal about our willingness to consider opportunities that, as Herve mentioned, strategic tuck-ins or scale entry into new industries, our growth industries. We can continue to drive overall growth of the business. We have moderately been in the market this year and buying that stock when it made sense. But ultimately, our goal is to keep a strong balance sheet on a decent amount of cash from the balance certainly while the pandemic continues to play out and put ourselves in a strong liquidity position over the next several years.

And I would just add on the M&A side that I'm very pleased with the pipeline and the opportunities that we have in front of us. And while the last 12 months have been a bit slower on the M&A front, largely because of government stimulus and other environments that really did not create an opportunity for sellers to sell. We believe that, that's changing as the pipeline shows that, that's changing. So I would expect that we will be more active in the M&A space in the next 12 months than we have in the last 12 months.

Okay. Great. And you guys mentioned you're currently looking at tuck-ins and open to larger acquisitions if they make sense for the business. Can you talk about for something larger? Is there kind of an upper bound on size or something that you would consider? How would you think about funding? You can start with that?

So I -- we want to be clear, in the near term, we don't envision a big platform play of coming with many incremental events. We're focused on individual properties that have strong strategic fit with what we're trying to do. I think ultimately, as we complete the investment in the platform and make it more scalable, we think we can accelerate that and digest larger things in the future. But that's not on the horizon right now. It is individual properties, which in and of itself kind of limits the signs of any individual opportunity. So it's kind of hard to put a number on it. But it's, I think, small to midsized opportunities are really what we're focused on in the short term. In terms of funding, we're sitting on a lot of cash right now. We feel we have ample amounts of cash to fund the strategy surely in the short-term and as well as allow us to maintain a solid cash position and core position to manage the risk through the pandemic.

Okay. Great. And then kind of sticking on the balance sheet theme. Over the next, call it, a year or 2, what do you think is the right level of leverage for the business? Is there a target that you have or a range that you'd be comfortable settling down in between?

Our goal longer term is to manage within the 3x net debt-to-EBITDA leverage ratio. I think given the cash generating power of this industry and this business model, historically, it's a very comfortable place for Emerald to sit. It gives us the wherewithal to fund an M&A strategy as well as the other growth investments we feel we need to make and still maintain that prudent balance sheet approach. It's a little bit lower leverage. And I think Emerald had operated at pre pandemic. But I think it's probably a strong place for us to sit as we look to kind of optimize the outcome for the business overall.

Okay. Great. I mean if you just shift gears towards kind of what you guys are seeing in the market right now. We're more than halfway through the fourth quarter. Can you provide any updates on what you're seeing in terms of forward booking trends go from there?

So, as we had discussed on our last earnings call, farther out, you look, the better properties are performing. Time is definitely our friend, given the world that we're operating in. As the vaccine has taken hold, as goods or shots have taken hold as infection rates have come down and really hospitality rates have really permitted, has been a big boost to sign-ups for our events. At the same time, the opening up of the international border is also a boost looking forward. It just happened. So it wasn't early enough to really benefit 2021 events, but we expect it can be a meaningful benefit to 2022 event. Many of our early year events have sizable international contingence, and we're beginning to see those sign-ups pick up now that the borders are open. So in -- so 4Q strengths versus 3Q on a relative to pre-COVID event basis, 1Q is trending better than 4Q, etc., right? For the further outlook, the better we're performing. The other -- I think it's proven to be a really strong catalyst for us. It's just staging the first event post the reopening itself, because it allows us to remind people the value of our events. Going back to the mindset that we're a lead generation business. The extent that we can reinforce that [ labilities ] are still the highest among the highest return on investment of your marketing dollars for lead regeneration, it percepts us really, really well. And so what we're seeing is, as first event we're stating, even though those events have been done on [ venues ] versus pre-COVID are really important catalysts through an acceleration of bookings for the next event in '22. And so we're looking forward to staging those first out of the box events that we haven't had yet. There's a few more to go early in the year. That will allow us to really have much stronger visibility to a full recovery thereafter.

Okay. Great. It's great to hear. On your recent earnings call, you guys also talked about how customer satisfaction of your shows has been off relative to where was that in 2019 prior to the pandemic. Can you just talk a bit about how you guys are monitoring that? And how you're thinking about it? And what's driving that increase in satisfaction? Do people just really miss it last year? Or is there more to it than that?

There's definitely a pent-up demand for face-to-face, and I think that's driving some of it. The largest driver, though is the ratio of attendees to exhibitors. And as we talked about on the last earnings call, the attendee to exhibitor ratio increased by more than 20%. I think it was about 22% that we talked about in our Q3 earnings call. And that dynamic is really interesting. So the exhibitors that are there, fewer exhibitors that were there are actually having outstanding experiences. We're able to see more customers than they had before. And as a result, it's driving the things that David is talking about, which is confidence then in rebooking and signing up early and making sure that they have the right place at the next events. That's another -- and that's probably one of the biggest drivers of our dramatic increase in Net Promoter Score.

Great. How are you thinking about that pent-up demand over say, the next several quarters to more than a year out? Like do you think that the normalized ratio of exhibitors or attendees is going to kind of return to where it was pre pandemic? Eventually or do you think it's going to be somewhere in between where it's been the last couple of quarters than pre-pandemic? Or how are you guys thinking about that?

I think it's difficult to say. However, I would say that it will normalize, it most likely will normalize as the significantly greater number of exhibitors return. So the reality is that, many exhibitors stand out because of reasons that David said they couldn't get into the country in some cases or they just weren't confident in travel, they had travel bans or they weren't confident that organizers like ourselves were going to actually bring enough visitors to the shows that they prefer to stay out and see. When they actually saw that visitors came back and came back in greater numbers than anyone had expected, they're signing up. And so I do believe that the ratio will normalize. But equally, the shows will be larger.

No, I think it's fair to say. What's very clear to us is the single biggest driver of customer satisfaction and loyalty among exhibitors is how many buyers they see, right? The attendees that show up until -- we're definitely tilting a lot of our marketing investment and growth strategies towards driving an increase in attendees and buyers coming to our events. And so while, in all things being equal, it may normalize back to pre-COVID levels. If we succeed in what we're doing, it won't, because we'll keep driving higher [ NDE ] levels that will drive better satisfaction of exhibitors and then ultimately lead to growth of the exhibitor basin growth overall.

And also drive additional solutions for them. They are there like more sophisticated matchmaking and other solutions.

Okay. Great. I was wondering if you guys can describe the cash collection cycle of your business for a typical event. And hopefully, not too many events were canceled going forward from here. But at what point when that occurred? Are you required to reimburse your exhibitors who made an upfront payment?

So a typical event [indiscernible] event, the sales for the next years a bit will kick off at this year's event. It's the biannual ones, if you -- or sorry, semi-annual event, it will typically -- historically has kicked off in the 6 months before that event we did right before, though we're moving to an annual pre book cycle as a way to drive better efficiency and visibility in our business and better planning and robust better floating. And so at sign-on, there's a deposit that's paid depending on the event, between 10% and 25%. And then there's a couple of thresholds through the year leading up to the event. And then ultimately, expected to be fully paid depending on the event also between 30 and 60 days before the event stages. You know 100% of the instances were fully paid before they go on the show floor or else they don't go on the show floor. So ultimately, that's what makes it a really wonderful working capital model, because it -- our events are prefunded by the deposits and payments of those attendants. And so that -- as we are selling a full slate of events, again, we're beginning to see the reemergence of that working capital by about [ one quest ] in the refinance side we did with cancellations. And we need to do a nice tailwind of free cash generation for the company. When events are canceled, there's actually no like defined base like we have to pay back on next day. Realistically though, we pay back customers, we can process it, but we can keep happy customers. And that's what we were able to do in 2020 and '21 when we did have to cancel, I think what ended up being almost 100 events where we ended up paying out almost $100 million of refunds. We -- unlike, I think, almost anyone else in the industry, we kept our customers whole. We paid back if they wanted to be paid back a refund, in many cases, customers rolled forward with the next event as deposit to keep their place in mind in their space. And I think we're grateful for that in partnership and worked with our customers to do that. And as I said, we're very focused on the customers and doing the right thing. If incremental cancellations come, we'll follow the same model in terms of providing other refunds and we roll forward to the next event based on the desires of our customers and go from here.

Okay. Great. Prior to the pandemic, you guys were at about 80% retention with your exhibitors. Where do you think you are today? Has that been challenging to monitor with all the cancellations that we've had over the last 1.5 years?

Ultimately, that metric is kind of out the window. The events that we staged in 2021 in the third quarter, as we disclosed, on average, we're down 50%, 60% versus pre-COVID. So by -- in terms of doing a straight math on that, the retention level was no higher than half of 80%, right, because the events were a lot smaller. The -- sorry, the -- ultimately, the, because of the high of NPS scores and satisfaction of the events we staged in '21, we actually think the retention of those customers into the '22 events is going to be substantially higher. And we're seeing -- we've had events where our rebook rate has been 95%, 97% off of the '22 event. Now we got to go -- of the '21 event, excuse me. Now we have to go sell all new. We have to win back people from pre-COVID to keep growing those events. And that's the plan, and we have a confidence level in that. But when you have -- you bring in the buyers, you have high customer satisfaction. Your retention rate goes up. And then that's kind of the plan from here. But the diminished events because of COVID, by its nature, brings that retention rate down given the definition of it.

Okay. That's great. The way you guys are thinking about it is what you've seen on the rebook things from the 2021 events to next year. Given that it's a credit conference, it's more quickly hit on credit ratings, how are you guys thinking about your credit rating over the next year or 2 and longer term? Is there -- we thought that you guys would like to target or end up that over time?

Sure. Ultimately, with our plan to manage to 3x or better net debt-to-EBITDA leverage ratio, not really sort of lead to improvements in our credit rating. We surely took a hit, we coded hit our business. I'll kind hard to argue with that. As you know, we capitalized the business with outside money on top of now the ongoing recoveries of insurance money has really put us in a strong position. I think as our business recovers, we stage the full slate of events and drive more free cash flow from operations of the business, not from outside sources. Our expectation is that our credit ratings will begin to improve. So I think our hope and plan is to get it up at least a couple of notches over the next 18 months or so. Ultimately, the pace -- probably of the business is probably going to be determined on that, but our plan to manage a strong balance sheet and a balance sheet and leverage that is lower than was managed pre-COVID, our belief should allow us to drive better ratings than the business had in the past.

That's excellent. Great. We're a little bit past time. So is there anything else you guys would like to comment on or highlight before we wrap up today?

Well, I don't mind focusing on something that we actually don't look at, which is our stock price. At the end of the day, I've got to tell you, I stop looking at it. I'm very confident in our future. I'm very confident in all the things that we're doing around managing a very strong balance sheet, making the right investments for growth, focusing on the customer and customer centric approach. So we're building, as we've talked about, a scalable platform that allows us to continue to grow and to manage that growth and to -- and therefore, we'll continue to reap the benefits of that. But that's -- those are my closing comments.

Great. Herve, David, thank you so much for your time today. Thank you for joining us. We really appreciate it.

Thank you.

Thanks so much. Have a good day.