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

Okay. Good afternoon. We'll get started. We're very pleased to welcome Emerald Holding to our conference today. Joining me from the company are Herve Sedky, President and CEO; and David Doft, Chief Financial Officer. So Herve and David, thank you so much for being here.

Thanks for having us.

So coming off of a very strong results in the first quarter as the recovery continues to gain momentum, can you set the stage for recapping some of the highlights and trends you started during the quarter? I also understand you have a video to share to start. So you can go with that.

Jason, I thought what we would do is to start by showing you a video that we actually created for our own employee base, so it's an internal video, where we wanted to paint the picture in a clear way in terms of where we're headed, where we're going, where is Emerald going to be in a few years. And so if you don't mind, we'll start with that, and then I'll -- we'll go back, David and I will go back and answer some of the questions. [Presentation]

So as you see in the video, we really took the last year plus to rethink what business are we in? What is -- what are our customers? Why do they come to events? They come to events because they want to be inspired. They want to discover what's new. That's why really, they come to events. They engage with our content for the same reasons. And so we took the year to say, how do we build that at scale and even bigger scale than where we are today? How do you bridge the events with the content business? We also acquired over a year ago, 1.5 years ago, a transaction marketplace. And so the future of Emerald, where we're headed is to link this together so that we can continue to create a massive platform for discovery and inspiration for the people that are visiting our events, engaging in our content, but also create leads for our exhibitors, our sponsors, our advertisers, those -- the paying customers. And so that's where we're headed. And so we've spent the past year, 1.5 years, really thinking through this vision and what are the pillars that we need to build in order to get there. And back to your original question, we reported our first quarter results, and we're proud of the -- of what we've done so far. We had a good quarter. We've posted 31 events, 141,000 attendees, 5,700 exhibiting customers. So strong return to the full schedule of events that we had prior to the pandemic. We have implemented on-site rebooking across all of our events, which is work that we did during the pandemic. While we were not hosting events, we were able to clean up some of our processes, look at some best practices, scaled them across all of our events. We've done that. That allows us to have a much stronger forward-looking view of how our business will perform over time. Our Net Promoter Score, which is something that I speak about a lot, has increased significantly, which means that our customers are more loyal, they're engaged with the work that we do, and that's largely driven by the number of attendees that are coming to our events are coming back at a faster rate than exhibitors. So we have more attendees that are coming back than exhibitors. And so the exhibitors that are attending and participating are benefiting from more buyers, more attendance, but also giving us optimism around how that will continue to grow over time. So overall, a good strong first quarter and gives us confidence in the guidance that we've given for the year.

Maybe taking a step back a little bit. Over the long term, what are the areas you're both -- you're most focused on as a growth engine for the company?

There are 3 areas. So the first is portfolio optimization. And these areas we've talked about now for over a year, we are very focused on growing in high-growth sectors, and we're going to continue to do that through M&A, and we'll do that through launches. So we purchased -- as an example, we entered the cannabis space through the acquisition of MJBiz, high-growth sector. We looked at whether we build versus buy, in this particular case, the largest, strongest event in the sector was MJBiz, very difficult to compete against. We put it on our radar for acquisition. We're fortunate that it became available, and we competed for it and won it. We're very excited about adding that to our portfolio. We'll continue to do that across multiple sectors that are high-growth sectors. And then we also recently introduced Xcelerator, which is a new business unit within Emerald and it's a business unit that's focused and dedicated to building, building brands. And so those brands are also to enter new high-growth sectors, and they'll either be stand-alone events in new sectors, or they'll be smaller events that are attached to existing sectors where we're competing. So strategy #1, portfolio optimization. Strategy #2 is all about 365-day engagement with the video went into in a little more detail. And that is, how do you bring best practices that exist in industry around content so that we can deliver a much bigger, more robust, lead-generating solution to our customers? And how do we also incorporate the transaction marketplace into this so that now our customers -- we can offer our customers a closed-loop solution around visiting events, being inspired, discovering new engaging with content and also buying and selling? And so that's the 365-day engagement strategy. And the third, very importantly as well, is our customer centricity strategy. And that really is underpinned by a number of things, having very clear business operating plans or brand operating plans for each one of our brands. We've invested in creating a pricing unit. We have a new Head of Pricing that comes from a different industry that really is helping us think about the dynamic of how we can price for value in a slightly different way that we've done in the past, as an example. We are also looking at an event of the future strategy within our customer centricity, which is to make it really easy for customers to do business with us, to engage with us all around driving additional customers and driving improvements in Net Promoter Score. So those are the 3 key strategies that really underpin our growth strategy.

Makes sense. And it's hard to generalize, but are there any particular areas of strength that you've seen as the recovery continues? So perhaps as particular verticals that are stronger than others or types of events. And then for your first quarter results, can you share some stats about the percentage of the attendance recovery versus pre-pandemic levels, both attendees and the number of shows that are back online?

So I think we manage our portfolio. We have a number of events in the quarter and the year. And obviously, some are stronger than others, as more of the portfolios are determining to experience the same results. The ones that are stronger right now are in sectors that are very strong secular growth industries or are sectors that benefited from the pandemic. And those are the sort of events that we're already seeing exceeding pre-pandemic levels in terms of return to their events. The ones that are lagging right now are ones that are more impacted by the pandemic. They might have greater exposure to attendees from China. China is in a lockdown. Obviously, they can't get here. That shows to be a little bit more impacted, ones that are a little bit more manufacturing-based and thus might have supply chain issues impacting the exhibitors. And so they're pumping and waiting until next year to come back. But irrespective of where they sit in the spectrum of already exceeding pre-pandemic or maybe taking a little bit more time to get there, the underlying dynamic is the same, is that we're seeing the communities coming back strong. We're seeing very high ROI coming out of our events with strong attendance levels. And as Herve noted, we need higher Net Promoter Scores, which is a great indicator of looking ahead. And as we've rolled out on-site rebooking at all of our events and pre-pandemic, only about 25% of our portfolio rebook the next event on-site at the existing event. Now we do that at all of our events. We're seeing that in the take-up rate going forward, which is pretty exciting for us and helps us see the trajectory in our bookings and our sales pacings of how the business should recover going forward. As for relative to pre-pandemic, on average in the quarter, we're about 70% of pre-pandemic. We've seen meaningful improvement from the events that we staged last year. And so on our earnings call, we pointed out that the 1Q events have improved 7 to 10 percentage points relative to pre-pandemic from 4Q events. 4Q events improved 10 to 15 points versus 3Q events. And that as we look out over the course of the rest of '22, in the way our sales are pacing, we continue to see that trend playing out with incremental improvements quarter-over-quarter for the rest of this year. And so that's a pretty exciting trajectory for us as we demonstrate the value of our events and bring the full schedule back.

So at a high level, can you talk about what you think are some of the more permanent shifts in the industry versus more transitional? So the economy continues to reopen, we're all here back together, in-person conference, which is great, and we're evaluating these in-person experiences. Is it your view that the recovery in your business is largely cyclical in nature and coming out of the pandemic, and therefore, over time, will get back to the pre-COVID levels? Or do you see some fundamental changes or shifts that you look at to capitalize on from Emerald's perspective?

Let me start. I think it's both. I think -- first of all, if you take a look back, the whole concept of face-to-face and fairs and so forth is not a new one. Ancient Egyptians had them and ancient Chinese had. So the whole notion of coming together to buy and sell, to see people that make the products, to see the people who make them, but to also cushion them and to touch it and feel it and test drive, it has been around for tens of thousands of years and will be around for tens of thousands of years. So some things are not going to change. However, there are some things that are changing. So of course, there's a changing demographic. Generation Z, which comprises, I think, about 24% of the workforce today, are, when questioned, they prefer face-to-face as a means of communications in business. So there are some changes, and I think there are different generational shifts that are happening that will continue to impact [indiscernible] this one in a very positive way. There is, of course, the impact [indiscernible] in the case of our business, travel is a big component, of course, it's the number of trips that our customers have to take overall. So if they're able to be a lot more efficient by attending a trade show, they can see so many more customers and vendors and so forth. So there's a very positive impact that our business can have on sustainability as an example. Diversity is a changing phenomenon that we need to be on top of it. I mentioned the generational bit, but there's a lot of diversity across multiple sectors where we need to be a lot more on top of diversifying our audiences and talking to them in different ways and being a lot more -- and providing a lot more solutions to different types of people. So there are a lot of structural changes that are impacting our business that we are addressing, but equally some fundamental things that we don't think will change.

I think I'd add one key thing to that strategically is, I think one of the evolutions that we've made at Emerald is how we think about what we do. Ultimately, well, yes, the majority of our revenues come from producing trade shows, the reason that our customers pay us to come to our trade shows is to get new business suites. And so we're a lead generation marketing business at its core. That's the budgets we tap. And the reality is that lead generation marketing budgets are a lot larger than the trade show budgets that we tap into. And if we could scale the number of leads, we deliver our customers, we can significantly increase the amount of dollars we can go after on our customers' marketing budgets. And so when we talk about things like 365-day year engagement, really, what's behind that is leveraging the media assets we already have, elevating them to a level where we drive more volume of leads through the funnel. Can we then have potential buyers read articles of interest around -- industry trends around products? Can we identify who those people are and what they're interested in and then see how they interact at our trade show, what booths they go to, what conference sessions they might attend? Can we then help drive more intent-based leads to our customers that are a lot higher value and monetize that for us while delivering a much higher return on that investment to our customers? And then with the transaction engine with Elastic, our e-commerce platform drive to transaction and then ultimately see how customers move through from research online to research at the trade show level to actually buying something and then help optimize the overall performance. And so I think that we've been naive to think that the events don't need to evolve. And the way that they're going to evolve is to make them a more year-round experience, elevate the number of leads to our customers. And that in itself should allow Emerald to grow at a much faster rate.

It's very interesting. What kind of impact are you seeing from inflation? And are you looking to put through some price increases in your business? And how are you mitigating these cost pressures given the environment that we're in today?

I think everyone could read the press or see their own pocketbook and see inflation is out there. What we're seeing at the most is on the labor side. And we are essentially a labor-based business in what we deliver. A lot of our vendors, our contractors that help us deliver on the events, and we're managing that fairly aggressively. I think we're fortunate in some way in that over the last couple of years, we went through an evolution in Emerald. We centralized purchasing and created a procurement department and began to leverage the scale of all our events to deliver more efficient pricing with the vendors we have, and that's definitely helped us dampen the effect of inflation as it's begun to emerge. At the same time, because of the high value we deliver to our customers, we've maintained pricing power. And so we've also been able to offset any increases with price increases on our side in order to protect our margin.

Can you remind us your cost structure real quick in terms of how much is fixed versus variable in the typical year?

So historically, we've had about 70% variable costs and about 30% fixed. And what we mean by variable, at least at the event level. We book a venue. We book a space. We're committed to that space. And there's marketing dollars that gets spent along the way that tend to be a bit more variable, which is outside of people, our biggest cost is sales and marketing. And as long as we're ahead of things, we can avoid some of those costs. And then there's the on-site expenses that happen when the event happens. And where we got really good during the pandemic before it became clear that everything was going to be canceled when it was still stops and starts in the early days is being able to manage against firm commitments and we're staying flexible on what we spend. And so ultimately, when it comes to an individual event, if we can react early enough, 100% of the cost becomes variable because we haven't committed yet based on what we see. And so that's allowed us to change the way we behave as things have come back to keep some agility in how we operate so that when -- or if there are impacts on the business again from things like the pandemic or something else, we can react quickly and protect the bottom line.

More recently, you have been more active on the M&A front. Can you talk about what areas you have been most focused on? And maybe you can comment on the general market environment for M&A in the space. How far apart are the bid-ask spreads now? And what kind of multiple are you paying for these assets?

So in terms of the sectors that we're looking at, as I mentioned, we're looking at high-growth sectors. So we're very focused on different industries that have the characteristics, the growth characteristics. The pipeline is very rich. It's actually one of the strongest pipelines that I've seen. So we're very pleased with the pipeline. The pipeline is across a number of areas. We have large-scale assets that are the leading events, as an example, or content business in a particular field, or they could be much smaller, independently owned, but they're really good tuck-ins to a large other brands that we have that would complement it well. And there are also some association given that the associations own a large percentage of the trade shows in the United States, the vast majority, there are some association shows that either the association is looking to divest or we're looking at that particular sector and interested in that particular opportunity. So a big pipeline and -- but very focused on growth assets. Go ahead.

No, I was going to pivot to the valuation side. Ultimately, I wouldn't say there's a bid-ask spread per se on multiple. I think where it comes down to is -- there's a bit of a bid-ask spread on what's the profitability that the multiples applied to. We're definitely in an environment where our sellers want to look at pre-pandemic profitability as the basis to sell their business, and we want to look at where it is now and how it's progressing from here. So that's where there's tension in the market. And what you've seen with us is the pivot to more earn-out deals. So we're happy to pay a multiple as long as the bottom line has proven out over time. I think we haven't been shy. We've paid between 5 and 9x for businesses depending on scale, depending on the growth profile of the business, and sometimes have tied that to future performance in order to earn the full evaluation and prove out the progression of the business back towards pre-pandemic levels. And if that -- if it can be proven, we're happy to pay it.

And to be clear, this is 5 to 9x is EBITDA multiples?

Right.

EBITDA. Yes.

And then is that driven by synergy or cost synergies as well? Or is the rationale more centered around the revenue that [ ratification ]?

So the -- we're buying things strategically. And so it is about building businesses in growth areas. Our portfolio optimization concept, that leg of the strategy that Herve alluded to, it's a really simple concept. If we have trade shows in industries that are growing, those trade shows will grow, and our portfolio will grow. And if we have trade shows in industries that are declining, it could be hard to grow that trade show. And so why should we buy that? So it's simple, buy in areas that are growing, and then within our own industries that we already have exposure to, build in areas that are growing and where we have strategic heft. Now that's where the synergies can come in is that if we're in an industry where we're strong, to bring in another tangential show into that industry, we actually can leverage our customer base. We can leverage our existing sales and marketing. We can leverage our expertise in that space in order to help grow the overall portfolio. So I'll give one example is a little over a year ago, we bought a business called EDspaces. It's a trade show around the design and construction of educational facilities. Schools, universities, training centers are the buyers that come. And the sellers are furniture makers, floor coverings, wall coverings. And a lot of those overlap with our hospitality design show, our boutique design show, our health care design show. So we have design and construction shows, even our kitchen and bath industry show, that are servicing different niches of buyers, but there's some overlap of the sellers. And so we can bring new buyers into existing sellers. We're providing more leads. We can then monetize that and scale and drive some synergy for ourselves while providing a whole lot of value to the customer base.

Makes sense. Another avenue for growth for the company is developing and launching new shows. So what are the opportunities to continue to create these shows? And how should we think about the level of investments that's needed to launch a new show?

We just introduced the Xcelerator business unit within Emerald and the fact that we will launch 4 shows this year and we've approved 3 for next year. So we're very excited about that opportunity. In essence, what it is, is hiring an incredibly talented team. This talented team has a really methodical approach to investigating a particular sector and looking at basically build versus buy. So if we're going to build, what is it going to take? We also have created the concept of an executive in residents. So we have experts, top experts in a particular field. In one field, for instance, we have a former secretary of the Obama Administration advising us. So we really have created a machine, if you will, to investigate a sector, to have a disciplined 3-gate review process as to whether we should get into that space. And if so, is there receptivity from the market and what does it look like? And then all the way to the end, which is a really clear brand strategy. And so that's what Xcelerator business unit is. We think that over time, we expect it to deliver somewhere around 2 to 3 points of growth to Emerald. So we're very pleased with having launched that unit and have high expectations for it over time.

Yes. And I think when you compare that to the buy scenario, right, we said we pay 5 to 9x, in the hotter growth areas, it tends to inch towards the 7 to 9x, if we can build effectively, we can build at 1x or 1 to 2x and have a very fast payback and create a whole lot of asset value. And we have -- on the earnings call, we announced the next 2 launches. So just as an example of industries, we're talking about we're launching an event called [ Mentara ] into mental health space, very top of mind. Corporations like ourselves that were used ourselves as an example are investing in significant incremental resources to provide mental health resources to our employees. There's a big emerging market there of a B2B market around mental health that we're going after. The second one we announced is around decentralized finance. And so it's a bit of a different take on crypto in that it's, again, the target are people like me. How do companies adopt decentralized technologies to improve their businesses? What does it mean for a company, the emergence of these sort of technologies in the world? And there's a lot of companies that have emerged that are servicing that world. And so it's meant to educate C-suite leaders, as well as from a conference standpoint, as well as provide them access to tools and technologies that might help them improve their business. So like our view is we should be launching into these new sectors that we know how to run events. We can do it in a more economic way than letting someone else launch and buying it from them a few years down the road.

That's great. We're about out of time, but I do want to ask a balance sheet question. So your liquidity position is very strong. The business is now generating free cash flow. So this allows you to have different set of options with respect to your capital allocation strategy compared to 2020 and 2021. So talk about how you see your strategy evolving here. What do you see as the most attractive uses of your capital? And then on the balance sheet side, you do have a term loan coming due in '24, so still a couple of years out in terms of maturity. But the rates are starting to rise, and the capital markets have become more volatile. So how do you think about that maturity going forward?

Sure. So historically, Emerald has run a levered balance sheet. And I think heading into the pandemic was north of 4x EBITDA. We don't believe that makes sense going forward. And our intention is to run the business at sub-3x leverage. I think that's prudent, especially given the lessons learned with the pandemic and will allow us to better manage the risk going forward. In the meantime, we do have our term loan outstanding, but we have a substantial cash balance, over $250 million at quarter end, and expecting to generate meaningful cash this year, both from the operating business as well as continuing to pursue recoveries under our event cancellation insurance policy that we fortunately had in place during 2020 and 2021. And that allows us flexibility to manage the risk while still pursuing acquisitions. As far as the term loan goes, obviously, we are thinking about it. We -- as our business ramps up and we prove out the free cash-generating aspects of our business again, I think we'll look to be opportunistic to address that for the long-term and look forward to those conversations down the road.

Great. It's a good place to end. Herve and David, thank you very much for joining us.

Thank you, Jason.