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

This is Erik Carneal from Deutsche Bank. Happy to have David Doft from Emerald, CFO, joining us today. And we will walk through a series of questions in a fireside format and save some time at the end if there's any questions.

So David, for investors that are not that familiar with Emerald, can you provide an overview of what you do, what's your core value proposition, et cetera?

Sure. Good afternoon. Thank you for having me here. So Emerald is a B2B marketing business. We are the largest producer of trade shows in the United States. We run around 140 events per year. And we're the owner operator of those events. And so we own the brand names. We -- the customer list we sell and market those events and bring those audiences together, which is ultimately a kind of mass-to-mass meeting of industries where commerce takes place. And that's a really key component of what we do is we drive commerce within the industries that we serve. And so because of that, we tap into the lead generation marketing budgets of our customers. The event itself are around 85% of Emerald's revenue. Another 10% of revenue or so is from a content business. We own a B2B trade media across most of the industries in which we have trade shows, and it allows us to engage with those audiences year-round. And so we are the go-to source for business news and trends of what's going on in those industries. And then the third component of the business is a software business. It's an e-commerce platform that helps brands sell in the B2B environment in a more efficient way. And ultimately, helps -- it allows us to then help bring them new customers and drive them to a transaction and ultimately take that data to optimize those interactions going forward to drive improved performance for our customers over time.

Great. I guess more specifically, can you walk through how you are revolutionizing the trade show model? And then a couple more questions on that after you get through that explanation.

So historically, trade shows have been a very analog endeavor. And in fact, they've been around for thousands of years. Our CEO likes to say that the ancient Egyptians had trade fares, and that's true. And it's been around because it works. It's had -- it's high ROI, it's a highly efficient way to bring buyers and sellers together in one place at one time. But it doesn't mean that data and technology can't make it better and more powerful. And with Emerald's unique combination of assets across events, across content and across the commerce platform, we're able to drive a much deeper level of interactions over the entirety of the year, not just the once or twice a year that the event happens, so that we can create deeper profiles of customers, drive more intent-based leads to our customers and ultimately help them grow their businesses, which then allows us to tap into increased share of wallet of their marketing budgets. And so -- and with that investment in data and technology, we're driving -- making it easier for customers to work with us. Historically, attending a trade show has been difficult on the setup side. You're dealing with multiple vendors. We're cleaning that up to have single interface. Your -- we're adding tools to allow you to interact with customers ahead of time to set appointments with customers, so it's not happenstance that they stumble upon your booth, but it's on purpose. We're driving -- coming up with incremental ways to provide value and optimize the experience overall.

Great. So at a high level, can you speak to the sort of the broader market dynamics? And then more specifically, an overview of Emerald's event portfolio and the associated end markets?

Sure. So one of the great things about Emerald as a platform is that it is a highly diversified and scaled platform in the space. As I mentioned before, we're the largest producer of events in the United States. And with that, it gives us significant advantages in our ability to deliver events efficiently, ability to onboard new events, whether it's new launches or via acquisition and bring them to market. But that scale and diversity also gives us benefits in our ability to optimize portfolio performance over time. So we're not exposed to any one industry. We're exposed to a diversity of industries. Our core exposures are in kind of design renovation and construction of facilities across many industries, gift and home, sports and outdoor, technology, industrial and food. And within those, there are subcategories that further diversify the exposures. And so for example, in design and renovation, we were exposed to the build and renovation of hotels, in the hospitality sector, of medical facilities, health care facilities, hospitals, in the health care sector, senior living facilities, educational facilities and schools. And all those have different dynamics of what drives budgets for those sort of projects. It could be municipal bond offerings. It could be -- it could be multiyear renovation schedules at hospitality companies that give it a lot of stability going forward and not necessarily impacted by the day-to-day of short-term cyclical factors. And so that diversity allows more consistent, stable performance over time. And I think it's a huge edge for us relative to smaller operators.

Great. So how should investors think about Emerald's growth profile today versus the pre-pandemic period? And a related question, what initiatives have you put in place coming out of COVID?

So prior to the pandemic, Emerald was a kind of 2% to 4% grower in the 5, 6 years before the pandemic hit on average. But we think we can grow the business more mid- to high single digits organically going forward. And the reason is because we put in place a number of specific growth initiatives that we're investing behind that we're looking to drive improved performance on. There's a slightly different philosophy on how to run the business of the current team versus before. Emerald had been run as more of a decentralized federation of brands. And with that, I was looking to really maximize margin and profitability in the short term, where we're looking to more optimize growth investment, growth over time and margin and have consolidated the platform, which has driven a lot of efficiency in how we operate, but allowed us also to better leverage best practices across the portfolio, better leverage investments in technology and other areas going forward. And so just an example of some of the areas where we're looking to drive incremental growth. As I said before, trade shows are fairly steady performers over time, surely at the portfolio level, but even at the individual level. And what we find is that there's 80% to 85% retention of customers year-over-year. But that retention is much higher for customers who've been at events for 3 years. And while we're for new customers who are trying to figure out how to navigate a trade show and get the most value out of it. And so we're doing simple things like investing in new customer onboarding, training sessions on how to navigate a trade show, how to drive value out of a trade show to try to increase the retention rate of new customers, which overall should increase our growth rates. We've improved our process around rebooking customers, to do rebooking on-site at the current trade show for next year's trade show. And so our sales team is no longer chasing renewals for 3 months. They're happening all at one time within 2 to 3 days, and it frees up sales time to focus on hunting for new customers. We're adding incremental value. We're big believers in NPS scores. By investing in the sort of matchmaking I mentioned before around setting appointments ahead of time with buyers who are in market with customer -- with sellers who sell the products that those buyers are looking for. There's a lot of ROI in that and can help us drive performance. And then the last one I'll highlight is we've invested in an international sales force. And we believe we've been under monetizing the international opportunity for Emerald and did not have a dedicated focus on building out sales relationships overseas and working with trade commissions in foreign countries to help bring those businesses to trade shows in the United States. And so between all of those, on top of the new launches that we have, we're pretty confident that we can drive better growth in the business than we have before.

Great. Terrific. In prior presentations, you've talked about the 3 pillars of value creation. Can you walk through those?

Sure. So we're pretty focused. And I think any employee at Emerald could repeat back to you what our 3 pillars are because we talk about them constantly, but they're customer centricity; 365-day engagement; and portfolio optimization. And starting with customer centricity, it's to make sure we're improving customer experience, and that every initiative we have should drive incremental value to the customer. And as I just said, we're very focused on NPS scores as a measure of that. And so by adding on those incremental services that I mentioned, by investing in front-end technology and the user interface to make it easier for customers to do business with us is -- are all key aspects of having repeatable, loyal customers for our events. From 365-day engagement standpoint, as I mentioned, we have the content assets and the commerce, the software assets and ultimately driving better integration of those with the events. And we think by doing so, we can actually make the event more powerful because it's the data that gets created by the year-round engagement allows us to produce a better event, allows us to bring the right people to that event, and allows us to make their time at the event of highly efficient to get -- which will ensure that they come back over and over again. But ultimately, the content business at Emerald had been run, like everything else, very decentralized. And so we've also consolidated the oversight of the content business so that we can benefit from consistent platforms and best practices. We've driven all the editorial staff to report in to one newsroom so we get better leverage of content and can produce at a higher volume with more strategy behind it. And we're already seeing the benefits of that. Just in having this in place for 9 months, we're already seeing traffic on our sites up over 20% year-over-year. And we're just at the beginning of peeling back the onion of the opportunity of that. And ultimately, we think will lead to higher revenue opportunity out of that business as well. As I mentioned also, the e-commerce software business is a very high-growth area for us. It's been growing 20% plus since we acquired the business at the end of 2020 and allows us to engage with customers at a new level where we're actually helping them drive actual sales, and with that, have visibility into incremental data points that could help us optimize the experience overall. Portfolio optimization, it's a really simple concept. I'm a former Wall Street guy. And we run a portfolio like investors run a portfolio, and we need to constantly think about how do we optimize that portfolio. So for us, it's how do we tilt the portfolio more towards growth, more towards growth industries. We can do that by launching new events into areas of high growth or acquiring events into areas of high growth or into existing strategic areas of strength. And M&A is a real opportunity for us because it's a very fragmented industry. While we're the largest in the U.S., we're only 2% to 3% market share in the U.S., so there's lots of opportunity for tuck-under acquisitions in order to scale our platform and drive growth both to top and bottom line.

And you've got an initiative called Xcelerator. Can you do a little deeper dive on that initiative?

Yes. So part of portfolio optimization is launching new events, and they don't happen by accident. And one of the learnings that we've had is that in the past, very few launches were taking place at Emerald because there was no one specifically focused on it. And so you're asking people who are working on an existing brand, who have a full-time job, to come up with ideas for new brands and then launch that. It's -- there's not a high success rate when you do that. So we made the decision to invest behind building a dedicated team. That team includes a research function where we're constantly ideating new opportunities that bubble up out of the existing teams or from that team or from senior management. And then we're doing deep dive research into those areas: Competitive landscape, what are the growth opportunities? Kind of if it's an industry that doesn't have a trade show, can it support a trade show? Is it large enough? Is it -- is there enough buyers and sellers to bring together to create that sort of opportunity? We have a gating process where we're constantly reviewing the plans over time before we give go ahead for a launch. It also warrants investment because even launch is in year 1, you shouldn't expect to make money because we're trying to invest behind an experience that will then drive more scale going forward. And so we've set aside part of our budget, mid-single-digit millions of dollars for the launch strategy. In the last 2 years, we've launched 9 brands. But the key part of -- and this goes back to thinking like everyone here thinks. The things that don't work, you need to sometimes cut your losses. So we have launches that don't work. And so we turn them off and then we focus on the next launch. But we do expect, in general, each launch should get to profitability in year 3. And it not only drives revenue growth for us, but it drives incremental asset value at very little initial investment. And so we're really excited about Xcelerator. We think it could add at least 1 to 2 points of organic growth and drive meaningful incremental value for Emerald shareholders going forward. Just one example that I'll mention out of this several is the partnership we signed earlier this year with the NBA to launch a series of consumer events for the NBA fan base. That kicked off with NBA Con in July in Las Vegas this past year, and we're working towards plans for next year and beyond, and ultimately believe we can build a strong asset through that partnership as well as others that we're looking at.

Yes. No, that's very exciting. Capital allocation. So can you walk us through your capital allocation priorities? And does the current interest rate environment change in any way how you think about acquisitions, dividends and/or buybacks?

So we're really fortunate to have a fairly solid balance sheet. We have about $415 million of debt. We have a couple of hundred million dollars of cash and are comfortably within our target leverage of sub 3x net debt to EBITDA. And so we do have flexibility from a capital allocation standpoint. And we do focus on the areas you mentioned. And I'd say, outside of organic investment, M&A is surely at the top of the list if we can find the right opportunities. Because of the fragmentation of the sector, we are typically able to have a pretty strong pipeline and have been able to buy businesses in the mid- to high single-digit EBITDA multiple range where we trade higher than that, and so on its face accretive. Because we're the scale operator and we have, I think, favorable contracts with vendors, we typically can run those events a little more profitably than they run as standalones. And because we typically structure our acquisitions as asset deals, we typically create a tax asset that also brings down the implied multiple of those acquisitions. And so we're pretty thoughtful M&A model and are actively looking at opportunities. We typically buy smaller businesses, $10 million to $30 million checks. Every now and then, something larger comes along. But our organization is very experienced at acquiring and integrating those sort of businesses and driving incremental value going forward, working with the entrepreneurs who have built and sold us those assets. After that, we have been opportunistic in buying back stock in Emerald. Since the beginning of 2021, we've bought in 10.5 million shares out of a 70-plus million share base before that. So a pretty high percent of shares outstanding. And the reality is the market has not been giving us value for the assets we have. Obviously, the pandemic was a disruptor for our equity price, and we had the capacity and flexibility in order to take advantage of that to drive incremental long-term value for those shareholders who stayed with us. At the same time, we do have a convertible preferred security outstanding that when the pandemic hit, in order to protect the balance sheet and live to fight another day, we raised capital. And beginning July 1, we now have the option to pay the coupon on that convertible preferred or the dividend in cash. It had been a pick. We did exercise that option in the third quarter, which we view as another de facto share buyback because if the convertible preferred converts at $3.52 a share and our stock is trading in the 4s, then we're able to essentially buy the stock in at a discount. And so we did. We do get to choose each and every quarter whether to pay in cash or in kind for that, and that becomes another potential use of capital going forward. And then the last one is debt reduction. And we did pay down $100 million of term loan in December of 2022. It is something that is an option for us if the right acquisition opportunities aren't there or if we don't deem share buyback at that time to be worthwhile or all of them because this is a highly cash-generative business, and it keeps replenishing the bank account, so to speak, as long as we spend smartly and wisely. And so we constantly balance all of those opportunities in order to try to drive as optimal an outcome as possible.

Great. A follow-up on M&A. It sounds like you will continue to evaluate opportunities. Are there any areas that you would highlight as where you may go next or at least illustrate where you may go next?