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

Hello. I'm Erik Carneal from Deutsche Bank, and today, we have Herve and David from Emerald, CEO and CFO, respectively. Very happy to have them in attendance at our conference. Today's format will be we'll ask some questions and let the management team provide some answers.

So for the first question, for investors that are not familiar with Emerald, can you provide an overview of the business? What is your core value proposition?

Sure. Well, thank you for having us, Erik. Good to be here, and good afternoon. Well, we're a leading -- we're the leading U.S.-based trade show company. So the main activity that we have is events. We have 140-plus brands largely in the events, but we also have 20-plus content properties, and we also have a commerce business. And we'll talk a little bit more about that. But essentially, what we do is we're in the business of providing leads. We're providing, and I'll talk more about this, but high level, strong ROI to our customers, to our B2B customers, when they attend our events, when they interface with our content and our media publications and when they interact with our commerce applications.

Terrific. Thank you. Can you speak at a high level to the broader market dynamics and, I guess, more specifically, provide an overview of Emerald's event portfolio and associated end markets?

Sure. So we have 7 different and distinct sectors that we operate in. And those are industry verticals. The 7 sectors, while they're distinct, the interesting thing about the portfolio that we have is that they're highly diverse and also, there's diversity inside of the sectors themselves. So I'll give you an example. Within the design vertical, which is one of our verticals, one of our largest verticals, while design, in and of itself, is one vertical, we have diversity inside of that vertical. So we have hospitality, we have events and content brands in the hospitality sector; we have health care, we serve the health care sector inside of that design sector; furniture, we serve the senior care facilities; kitchen and bath. So we've got diversity across the portfolio as well as diversity inside of each one of our sectors. One of our core strategic growth pillars is portfolio optimization. And so while we have these 7 sectors, one of the things that we have been doing over the course of the last few years is to continuously diversify the Emerald portfolio. So what we are doing is to continue to look for either tuck-under assets that we can continuously add to the existing sector but, more importantly, to look for assets in high-growth sectors that we can add to our portfolio. And that is a very important part of our growth strategy through either M&A or by launching. And we've been fairly successful in doing that. We've had a number of acquisitions over the course of the last few years and a number of launches as well in the event space.

Great. Given the seasonality in your reporting, can you discuss the cadence of the current show calendar and how the year plays out in the various businesses?

So we try to be transparent on the timing of our events and our event calendars on our website, and the reality is the accounting for our business is we recognize the revenue when the event stages. And so there is seasonality to our year that's really disconnected from potentially the month before, the quarter after, et cetera, depending on which event is staging, and which quarter, and what industry that serves. And we run a portfolio, as Herve indicated, that's diverse across a lot of sectors. And some sectors are doing better than others, which means some are not doing as well as others. And so we tend to have some volatility of our growth rates and performance based on when events in some sectors are staging versus others. Our first quarter and our fourth quarter are our largest quarters in size because we run more events and larger events in those quarters. And our second and third quarters are smaller and somewhat similar in size in terms of the cadence. But we also tend to have our stronger performing events in the first and fourth quarter. So they're larger, but they're also growing faster right now than the middle 2 quarters. That could change over time based on the dynamics of the portfolio. And as we acquire and launch and sometimes subtract, it continues to shift the seasonality of the business, but that's what it looks like right now.

One of the things I want to add to the business that we have is really why do people attend our events. And the exhibitors that come to our events attend mainly, as I mentioned earlier, to get leads. And the attendees really attend to be inspired, to discover new. And that's really at the core why people come to events. And one of the things that I wanted to share are really interesting studies that have been shared recently from Gartner and Deloitte and McKinsey and Boston Consulting Group because there's a changing dynamic, which is really interesting where we're witnessing a significant shift away from digital advertising, because there's a diminishing return, because of the algorithmic complexity, the AI-powered blockers that's going on. And Gartner, for instance, in a CMO study that was recently published on CMO budget reallocation, said, "marketing budgets allocated for digital channels are increasingly being reallocated toward experiential marketing, including trade shows and direct engagements, where businesses report a clear return on investment." Deloitte had a CMO survey that said, "post pandemic, 64.5% of CMOs reported increasing their investment in in-person events as a way to improve brand loyalty and customer engagements." McKinsey said, "in-person events, particularly in B2B sectors, are seen as significantly more effective for building trust and generating qualified leads compared to digital channels. This is reflected in the 70% preference for hybrid and in-person experiences among B2B buyers, underscoring the value of face-to-face interactions post pandemic." And BCG Global said, "with the rise of AI-driven ad blockers, privacy regulations and algorithm changes, 87% of CMOs report that traditional digital channels, like e-mail campaigns and display ads, are delivering diminishing returns. As a result, CMOs are reallocating spend toward more effective channels like events." And so we, at Emerald, have been spending a significant amount of time over the course of the last couple of years really investing in how do you leverage data and digital at our events in order to create that experience, a highly effective experience, so that we can provide these tools to CMOs, to our customers, to provide them with these leads as highly effective as possible in a face-to-face environment but then leveraging the content business to continue that experience on a year-round basis. And so that's where we're investing. And the surveys and the customers are telling us that that is the most effective use of their marketing spend. 45% of small businesses in America participate in at least 1 trade show per year as a stat. And so it's a highly, highly effective use of marketing dollars. We're seeing it. We're certainly seeing it post pandemic in terms of the return, in terms of attendance at events. And that's where we're spending a lot of time in terms of creating that next-generation experience at events.

So in the context of this compelling value proposition and these market developments, how should investors think about your growth profile today? More specifically, what initiatives have you instituted over the past 3 or 4 years to support your growth?

So from a growth perspective, our growth pillars are customer centricity, 365 days of engagement and portfolio optimization. And the three work together. So from a customer-centricity perspective, we have really invested in making sure that the customer is at the core of what we do. One example, for instance, is our pricing strategy. It's extremely customer-centric because we're pricing for value, and so we're doing business on our customers' terms. We are creating value and we're making sure that we get compensated for the value that we create. We are delivering value through this added technology, through digital and data that I mentioned, that we deliver at our events, matchmaking technology, lead-generating technology, et cetera, as an example. And then we make sure that we get compensated for that. So we make sure that we understand what customers' needs are. That's the customer-centric approach and then, from a growth perspective, that we get compensated for that value. We are maniacally focused on really understanding what our customers are looking for from an experiential perspective. Some customers, particularly the ones that are new to exhibiting, had a harder time understanding how to exhibit. We're holding their hand. We've invested in resources to hold their hand when they exhibit for the first time. And therefore, we've improved the retention rate of first-time exhibiting customers, as an example. We have also invested in direct revenue initiatives like bringing importing customers from outside of the United States. While we're largely a U.S.-focused company, there is a lot of opportunity to bring customers from outside the U.S. So we created an international sales group, and this international sales group is U.S.-based, but it is working at creating a network of agents across the world, with about 50 agents or so now across the world, to bring customers, mostly exhibiting customers but also some visiting customers, to our events in the United States. That also is a large revenue driver for us as we change our mix from domestic and international, and it has increased our international revenue quite significantly. We've invested in a role that is cross-selling across the Emerald platform, something that we had not done before because Emerald was largely run as independent events. In the last couple of years, 2, 3 years, what we've done is we're really running Emerald as a platform. And we're running Emerald as a platform where, while the events have their unique sales and marketing teams, and we want to continue that and maintain that uniqueness at the event level, there are a number of things that we are running at a corporate level. One of these things is selling across the platform, so very large brands that we can sell, that are non-endemic brands, across the platform, and we have some early successes there. We can sell them across all of our events or multiple events. We have started to do that. Those are some examples of that. So that's our customer-centric approach. Our 365 strategy is all about continuing that experience from events to beyond the events. That's leveraging our content business and our commerce business, our media business and our commerce business. So our media business where we have webinars, we have publications and we have a number of other tools where we are able to continuously communicate with customers as well as provide leads for our customers, and commerce where they're able to buy and sell the products on a year-round basis, that's our 365-day solution experience. And portfolio optimization, as I mentioned earlier, is all about diversifying the business and growing through diversifying the business. And that is through M&A as well as launching new capabilities and new events and products.

In the context of portfolio optimization, you just mentioned the M&A, the launch, is giving you more exposure to higher growth markets. Can you comment a little bit on how you think about pruning unprofitable events?

Yes. That is something that we've also done where there are a small number of events that are not profitable. And they're really not contributing to our growth rate. They're not contributing to EBITDA. And as a result, we've taken the opportunity, now that the dust has settled from COVID, to not run them again. And we've started to do that earlier this year, and it's a strategy that we will continue. And I think it's a healthy way to run a business, to constantly look at the portfolio, to continue to prune the portfolio, now they're small, it's a very small part of our business, but to continuously look at these very small assets that are not adding any value.

Yes. Makes sense. So turning to the balance sheet, we saw that S&P recently upgraded Emerald debt to B+ from B. How should investors be thinking about your balance sheet? And where might you take leverage and/or what is your target leverage for the business?

So we're really fortunate that we work in an industry that has low capital intensity and negative working capital, so it generates very meaningful free cash flow, especially as we grow. And that allows us really to run a levered balance sheet in order to optimize value creation. We don't think too levered, and so we're currently running at about 2x net debt to EBITDA. We think it makes sense to run the business sub-3x net debt to EBITDA, and that's our formal financial policy. And so we do have a little bit of flexibility right now to continue to invest in the growth of the business, and we're constantly looking at ways to optimize overall value. And so we've balanced use of cash across acquisitions that we can buy at accretive multiples as well as use our scaled platform to drive both cost synergies on the operations side as well as revenue synergies where it makes sense. We've used it to do opportunistic share buybacks as well as reinitiate a dividend, which we had prior to the pandemic, we had paused during the pandemic, and we're very pleased now that we're back to normal seat to be able to bring that back in the last quarter. Even with all of that, given the cash-generating power of the business, there's lots of room to operate within those leverage targets.

And with the Fed's recent interest rate cut and what you just talked about in terms of capital allocation priorities and financial policy, how does the new interest rate environment impact your business? And does it change at all how you think about capital allocation?

So it's an immediate boost to free cash flow as with others who have floating rate debt. It was unfortunate that our last maturity was coming up just coming out of the pandemic where our business hadn't fully recovered. Our TTM EBITDA was well below current levels, and we were in the crosshairs of some of the other kind of orphaned LBO debt that was stuck on balance sheets that led for a difficult market for other issuers. And so our spread widened from 250 over to 500 over. Now that our TTM EBITDA is up 50%, 60% from a couple of years ago, recognized by S&P in their upgrade, and now that our business has a more predictable and visible profile going forward, I don't think much are worrying about whether our business will scale back post pandemic anymore like they were a couple of years ago. We think we're in a really good position. And combined with the Fed beginning to lower rates, it's just incremental cash flow to our bottom line. We've got $400 million of term loans. So every point reduction, $4 million of incremental cash flow, surely a good thing for our equity holders and good added fuel for investing in different initiatives to drive value.

On the Q2 earnings call, you discussed runway with regard to margin improvement, can you discuss what Emerald is doing to improve margin to pre-COVID levels and what you think would be a reasonable goal?

So in 2019, the business ran with 35% EBITDA margin. Last year, we were at 25%. Our guidance this year implies about 27% margin. And there's a couple of key differences between 2019 and today. One is not all of our events are back to their 2019 size. And so there is a bit of a scaling back into the margin that we had before. We don't have a large fixed cost business, but there is some fixed cost, about 30% of the cost is fixed. So as revenue continues to scale back, we get leverage on that. But as Herve alluded to before, the business before ran very differently. It ran as a more decentralized federation of brands as opposed to one consolidated platform. And so with that work, we've put in place a scalable infrastructure that as we add more events, as we acquire, as we launch, as we scale existing brands, we get very significant incremental flow-through to the bottom line. And the different growth investments that we've made add even more operating leverage to the business. So the effort to build out an international sales capability with agents around the world was an investment we've made over the last 18 months, that we are on the cusp of realizing the benefit of which will pay for that investment and then some. Our investment in acquiring and building our commerce division, which is a SaaS software business, was made and we were running that business, which is about 5% of revenue in 2023 at a loss. This year, it's turned the corner and will be moderately profitable. And as we scale into that investment, we expect it to be additive to margin. And so going forward over the next few years, we think we can drop about $0.60 of every incremental dollar of revenue to the bottom line in order to bring margins from the current mid-high 20s up to 35%.

Turning to AI, can you help us understand how Emerald is utilizing AI to enhance the customer experience and leverage your wealth of first-party data?

Sure. We have a number of tests that are in market at the moment across largely our content and our marketing teams. And we're excited about some of the early results, now there are early results that we've seen, but we fully expect that we'll be rolling out some of the benefits of the testing that we're doing now into 2025. But some of the examples are, in fact, using some of the proprietary first-party data to better personalize some of the messages to our readers and also to better market our shows and to do it more quickly, more efficiently. And another, for instance, example is to use AI for copywriting, for subject lines, for landing page copy, for e-mail copy, those types of things. We've also worked with different vendors and some of their AI applications, which allows us to reduce our costs. We're testing in terms of reducing some of our freelance costs to transcribe webinars, as an example, to create images. So there are a number of tests that we have right now in the business, and the early successes are positive, and we look forward to scaling these.

Yes. I think from my standpoint, there's two, I think, big opportunities around the early tests. One is we built out this international sales force, but we didn't have localized materials or websites for our events. And so we're leveraging AI to translate into many new languages, so that we could have localized materials and hopefully should help us increase our hit rate in those new markets. The other one, Herve talked about personalization of marketing, and those who are familiar with where marketing technology has gone, you can get meaningful improvements in your conversion rates on marketing if you personalize. At the same time, we have an almost unmatched database of intent of buyers for the categories that we serve. We know what articles people read. We know what conference sessions they go to. When someone registers for an event, we actually ask them why you're coming and what types of products you're interested in, so that we can get a sense that we can service you best and recommend using an automation engine, who you should see to make your time as efficient as possible. We can leverage all of that data to finally personalize the newsletters that come to you, the marketing messages that come you to around our events, which we think can meaningfully drive improvements in registrations and attendees at our events as well. And so we're really excited about rolling these tests out more fully over the course of 2025 and what they could do for our business.

So sticking with innovation, can you discuss new events such as Hotel Interactive and, just in general, the success you're seeing in expanding your shows?

Sure. Hotel Interactive is a recent acquisition that we did. It's what we call a hosted buyer type event or a group of events. And hosted buyers are a unique type of events. They're not trade shows. They literally are one-to-one type events where you bring buyers and sellers together in a highly, highly curated environment and you create that unique personalized experience for them. And we had, prior to buying Hotel Interactive, one of the leading hosted buyer events in the United States. And so adding Hotel Interactive to the platform is a very, very nice complement to the existing CPMG business that they already have. Hotel Interactive have 15 events all in the hotel and hospitality and a little bit in the health care space as well. And it's a model that we look to continuously expand. It, as I mentioned, adds a ton of value to our customers. And it also brings value where you can build on top of existing large events, so it could stand on its own or it could be a run adjacent to large events. So a lot of opportunities for us to scale that across the entire Emerald portfolio.

We're really high on the hosted buyer model. It's the highest NPS score of the events that we deliver. Now the combined Hotel Interactive and CPMG business is events a year. And part of it is because the attendees are really raising their hand. They're saying, "I'm in market right now. I want to meet vendors." At the same time, we put them in an environment where they are meeting with peers and learning best practices. And so it's a combination of a conference networking and real intense marketplace with a small group of people. And so by servicing the hand-raisers who are in market, obviously, they're happy to meet the vendors and learn because they're looking to learn, the vendors are getting entirely a new set of live leads who are in market at that time. And it's proven to be really valuable. And we do see meaningful extensions of this and think it's going to be a key part of our launch strategy over the coming years as we continue to extend this model into new niches.

And a clarifying question around events, what is the nature of your sales cycle with event?

So events are sold a year in advance. So the way that we sell events, events start the selling process at the actual events. And a very large part, somewhere around 2/3 to sometimes 90% of the event is sold at the actual event.

For the next year.

For the following year?

Yes. And so that's a beautiful thing about the business model, but it also allows the sales organization to work with their customers all year, to also find new customers, to continue to build on that experience and to look for other ways to grow the business. So that's the nature of the selling process within the events business.

And that's been a very important process change for Emerald coming out of the pandemic. Pre-pandemic, about 20%, 25% of our events sold in this way. And the rest waited for their event to end, took customer feedback, set price, set floor plan, ended up going to market 3 or 4 months after their event. We worked really hard in order to move that whole process up where our floor plan and price were set for the next event before the current event, so that they can go to market with contracts and get them signed. And the carrot for the customers is that there's very high perceived value on their space on the show floor. And so by signing up early, they're first in line to pick the spot of where their booth is on a trade show floor. And that incentivizes, as Herve said, 2/3 to 90% of people to sign on site. They're signing contracts, they're paying deposits, and it also allows us to pull forward cash from a working capital standpoint into the business.

And we touched earlier on margin, what are your long-term views on top line growth?

So we believe we can be a mid- to high single-digit organic grower as a business and then hopefully acquire a few percent more every year. Ultimately, we think about the price-versus-volume component of revenue. Given all the initiatives that Herve spoke about before, we think we could be at least a low single-digit square footage grower or a footprint grower of our events. And given our initiatives around value-based pricing, at least a mid-single-digit improvement in yield annually at our events. And then with the new launch activity that we have, add another 1 to 2 points a year from that. Now immediately, that all adds up to double digits and then we hedge it back down because not everything works perfectly, and we're gunning for mid- to high single digit. And so when you combine that with the investments we've made in the core operating structure of the business, that's where you can start to see the meaningful margin leverage that we talked about before.

Great. Last question, is there anything you believe to be misunderstood or underappreciated about the Emerald business today?

Well, I think it goes to your sales cycle question. I think the visibility of growth and how recurring the revenue streams are is not a well-understood part of our business and of our industry. I think the diversity of the Emerald portfolio is not well understood. I think the diversity, not only of, as I mentioned, when we started the 7 different sectors that we operate in but, more importantly or equally importantly, the diversity inside of each one of the sectors, there's immense diversity there. In the 150 brands that we have, there's immense diversity inside of each one of the sectors. And that allows us to weather storms, weather the different economic cycles that invariably companies and industries go through. And in general terms, our industry is resilient. And then we've got some really good, strong characteristics. We're really effective. And as David mentioned earlier, cash generative and asset-light and negative working capital, we've got really strong dynamics as a business and stronger ROI to customers, more importantly.

Right. Right. We've got about 1.5 minutes, any questions from anyone in the audience? Okay. Thanks, everyone, for coming, and thank you very much, Herve and David. That was great. Appreciate it.

Thank you.

Thank you, everyone.