Earnings Transcript for EEX - Q3 Fiscal Year 2022

Operator: Good morning, and welcome to the Emerald Holdings Inc. Third Quarter 2022 Earnings Conference Call. Before we begin, let me remind everyone that this call will include certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans and prospects. In particular, the company's statements about projected results for 2022 and 2023 are forward-looking statements. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's most recently filed periodic reports on the Form 10-K and Form 10-Q and subsequent filings. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, management will discuss non-GAAP measures, which it believes can be useful in evaluating the company's performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. The reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in the company's earnings release. As a reminder, this conference is being recorded, and a replay of this call will be available on the Investors section of the company's Web site through 11

Hervé Sedky: Thank you, Paul, and good morning, everyone. I'm pleased to be with all of you today to discuss our third quarter results. We produced another strong quarter, focusing on our core services of live event connections, alongside content and commerce, as our business continues to progress towards pre-pandemic levels. Our story is simple, we produce industry-leading live business-to-business events and trade shows, which are complemented by our content and SaaS e-commerce offerings, adding to our customers' return on investment. We have several growth levers at our disposal, including

David Doft: Thank you, Hervé, and good morning. As Hervé mentioned earlier, we are very pleased with our results this quarter and year-to-date and believe they point to a robust recovery in the live event space. Jumping right into our results. Third quarter revenue was $62.4 million as compared to $76.5 million in the prior year quarter. As Hervé mentioned, an important piece of context for our year-over-year comparison is that we faced significantly more shows than usual during the third quarter of last year as shows that were originally scheduled for the first half of the year were pushed into Q3 given COVID-related timing delays that uniquely affected 2021. This year, events were back in their normal time slots, which means many events that staged in 3Q last year staged in the first half of this year. To provide a better comparison, we have given the breakdown of organic revenues, a non-GAAP measure that takes into account the timing shifts as well as the impact of acquisitions in our earnings release. It also includes our content and e-commerce subscription software businesses. On that basis and adjusting for the scheduling mismatches between 2022 and 2021, organic revenues for the third quarter of 2022 were $56.6 million, an increase of $14.2 million or 34% as compared to organic revenues of $42.4 million in the same period last year. Ultimately, the 34% organic growth in the quarter and 42% year-to-date is the best indicator of the continued recovery of the business. And while our commerce software business continues to contribute mid-20 organic growth, our content business has reduced overall growth somewhat, largely due to the technology issues we discussed earlier in the year. Adjusted EBITDA was $149.7 million in the third quarter as compared to $8.6 million in the prior year quarter, reflecting the impact of the insurance proceeds received in September. Excluding insurance proceeds, adjusted EBITDA would have been negative $1.3 million as compared to $7.5 million in the prior year, with $13.3 million of the decline attributable to the timing of trade shows, as I previously described. Therefore, on a normalized basis for this scheduling issue, adjusted EBITDA in Q3 of last year would have been negative $4.7 million. Year-to-date, which absorbed the bulk of the calendar shifts just discussed, we generated adjusted EBITDA, excluding insurance proceeds, of positive $31.7 million as compared to a loss of $23.8 million in the first three quarters of last year. So a $55 million improvement through the first 9 months of 2022. As Hervé noted, we received final proceeds from our insurance litigation settlement of $149.25 million in the third quarter, bringing total proceeds received to $372.9 million. Of the $149.25 million, $148.54 million is recognized as other income. You will notice that we have a $28 million tax payable on the balance sheet. This relates to the expected tax payment for the profits earned from the insurance proceeds received. Free cash flow, including insurance in the third quarter, was $150.9 million as compared to $7.7 million in the prior year quarter. Excluding insurance and other items, free cash flow would have been $6.2 million as compared to $8.2 million in the prior year quarter, again, impacted by the timing of events in 2021. As we move back toward a normal cadence of event bookings, our working capital has varied from quarter-to-quarter given that we received booking deposits up to a year ahead of when we recognize the revenue for events staged. Historically, given the heavy calendar of events in the first quarter, we’ve seen a meaningful swing in working capital in our favor during the fourth quarter, which flows through the cash flow. We continue to benefit from our CapEx light business model in generating strong free cash flow. However, I note that as a result of rising interest rates and the impact on our interest expense due to our floating rate debt, we now expect to generate free cash flow of between $60 million and $70 million, excluding insurance and one-time items in 2022 versus our prior estimate of $70 million. On the expense side, we continue to prudently manage our cost structure in this inflationary environment. Our largest exposure is labor cost, either through our own FTEs or full-time equivalents, or via contractors on-site at our events. In general, we expect to maintain the ability to utilize value-based pricing to offset cost increases, which, combined with our procurement efforts, should allow us to protect margins. Looking ahead to currency exposure. While our brand portfolio operates globally, we are fortunate to be a U.S.-based company with minimal exposure to currency fluctuations. Our Elastic business generates some revenues and had some expenses in euros, which could have a net impact in the low six figures over the course of the year if the U.S. dollar maintains its strength. Turning to the balance sheet. We had $366 million of cash and cash equivalents as of September 30 versus $232 million in cash and marketable securities as of June 30 of this year. To optimize interest income as interest rates begin to rise, we continue to hold some longer maturity bank products. However, this quarter, none are over 90 days, so we no longer have any marketable securities noted on the balance sheet as they have all been shifted to cash. We have full capacity on our $110 million revolving credit facility. And as of quarter end, our total liquidity was $476 million. We do not expect to draw on our revolver in the near-term. We have historically sought to maintain a strong balance sheet, supported by our cash flow generation, which should allow us to continue funding our strategic growth initiatives in any economic scenario. We will continue to thoughtfully balance our capital allocation between debt reduction, acquisitions, investments in our own business and opportunistic share buybacks, which have been attractive at these levels. We repurchased 1.6 million shares of our common stock in the quarter at an average price of $3.74, bringing our total repurchases since the beginning of 2021 to 5.3 million shares. We are also pleased to announce that our Board has approved an extension and expansion of our share repurchase program to allow for the repurchase of $20 million of common stock through December 31, 2023. As of quarter end, we had net debt of $149 million and a net leverage ratio of 2.07x our trailing 12-month consolidated EBITDA of $72.0 million, as defined in our credit agreement. At this time, I'd like to briefly review our capital structure so that those who are new to our story can more easily value the business. At quarter end, we had 67.6 million shares of common stock outstanding, as well as 71.4 million shares of convertible preferred stock outstanding. The convertible preferred shares have a liquidation preference per share of $6.55 as of September 30, 2022, while accreting at an annual rate of 7%, which compounds quarterly. When you divide that liquidation preference by the initial conversion price of $3.52 per share, it equates to each share of convertible preferred stock being convertible into approximately 1.86 shares of common stock. When multiplied by the total number of shares of convertible preferred stock outstanding as of September 30, it equates to 132.9 million shares of common stock on an as-converted basis. Add to that the 67.6 million common shares already outstanding, then Emerald has a total of 200.5 million shares of common stock outstanding on an as-converted basis as of September 30, 2022. As of yesterday's closing price on our common stock, this converts to a market cap of approximately $722 million. We have an estimated contingent consideration on our balance sheet of $36.4 million for acquisitions made in the past 3 years as well as a deferred tax asset worth over $70 million discounted to present value based on the tax treatment of certain of our acquisitions. This leads to an enterprise value of $838 million given our net debt outstanding. As a reminder, we have the right to force conversion of the convertible preferred stock starting on June 29 of next year if our common stock price exceeds $6.16 for 20 consecutive trading days. Concluding with our guidance. We continue to be on track for full year 2022 revenues in excess of $300 million, as first guided at the beginning of the year. We expect adjusted EBITDA of over $50 million, which is net of over $10 million of projected investment in growth initiatives, on our Elastic SaaS product and new show launches in new verticals, also consistent with our original expectations. We now expect free cash flow to be in the range of $60 million to $70 million, largely due to the impact of higher interest rates. As a reminder, this guidance excludes the proceeds received from event cancellation insurance this year as well as the litigation settlement. Our free cash flow guidance also excludes several onetime items included in the other items line of our EBITDA reconciliation. Looking ahead to 2023, we continue to progress against our objective of meaningfully improved margins and adjusted EBITDA of over $100 million. With that, I will now turn the call back to Hervé.

Hervé Sedky: Thank you, David. To conclude, we are very pleased with the trends in attendance and space rates we are seeing across our events. These provide a solid foundation for revenue growth as we continue to make investments in our business in strategic acquisitions to expand on our advantages as the leading platform for B2B events and content in the United States. Our balance sheet strength, supplemented by the proceeds from our insurance litigation settlement, gives us the ability to continue funding these investments in any economic scenario. We are evaluating a large set of promising external growth opportunities where we can leverage our scale and operational efficiencies to drive more and more events and brands onto the Emerald platform. We are very pleased with how we are positioned heading into the end of the year, and we look forward to delivering on our initiatives to drive further margin expansion and value for our shareholders. Thank you very much for your time today. And with that, we will open the line for questions.

Operator: [Operator Instructions] And we have a question from Allen Klee [ph]. Your line is open.

Unidentified Analyst: This is Derek Greenberg on for Allen. My first question is if you could just provide a little more color maybe on the level of presenters and sponsors compared to pre-pandemic maybe on a percentage basis, and if you see potentially further recovery there.

David Doft: Well, I think the best way to look at it is probably net square feet at our events because we generate the bulk of our revenue from exhibitors at the events as opposed to sponsors and speakers. And while revenues overall are tracking 70% to 75% of pre-pandemic, because of price increases, NSF is tracking more like 65%-ish or two-thirds to pre-pandemic. So what that means is there's actually a significant amount of incremental leverage to the recovery for us versus just looking at revenues relative to pre-pandemic.

Unidentified Analyst: Okay, great. And I was also wondering, with your recent acquisitions of Ad Week and Bulletin, maybe if you could just provide some color on the annualized financial impact you expect from those?

David Doft: We haven't, at this time, disclosed the impact of that. The -- I think as we go into 2023 and present the formal full year guidance for 2023, we will give more color on the pro forma impact of the acquisition.

Unidentified Analyst: Okay. And for some of your newer events in emerging areas, just how those are progressing and maybe the difficulty in building interest from scratch from sponsors and attendees, just the process involved with that.

Hervé Sedky: Yes, the launches of events is really largely due to the creation of the Xcelerator business unit, which we announced last year. So we have a dedicated team that identifies opportunities and sectors for us to enter. And we are very, very pleased with the performance of that team, not only for the launches that we've already announced, but a number of others that are under consideration and will be announced in the future.

Unidentified Analyst: Okay, great. With your non-trade show segments compared to trade shows, how do you see the margins at scale between the two?

David Doft: The trade show business is a really powerful financial model. And historically, as we run EBITDA margins of 35% to 45% at Emerald, depending on the year, we expect that the incremental offerings that we've added over time will be equivalent margins to the trade show margins, though the higher end of that historical margin range we don't think is reasonable because we prefer to optimize margin versus growth. And we invest in the business, in new launches, for example, that in year 1 and year 2 don't really make money or lose money. So -- but it's key to building long-term value for the business and for our shareholders. So we think we could operate 35% to 40% margins in time. We need to build back towards that, of course, given the pandemic impact on the business. And the other offerings we have should be equivalent to that.

Unidentified Analyst: Okay. That's very helpful. And then if you could maybe just discuss some of the actions you're taking to grow organic growth rates by 1% to 2% a year?

David Doft: Well, I want to clarify, we expect to grow organic growth mid single digits or better as we normalize once we recover fully from the pandemic. Obviously, as you can see, we are growing at a much faster rate this year, and we would expect to grow at a much faster rate next year. The 1% to 2% is just for new event launches. And the other components of organic growth will be driven by the other initiatives that we talked about in customer centricity and driving retention and value-based pricing, which gives us leverage on both of our events, in addition to net square footage and on the 365 engagement strategy, which is providing other means to provide value to our customers and thus monetize for Emerald.

Unidentified Analyst: Okay. Thanks for clarifying that. I just have two more. The first is related to just the M&A environment, maybe some areas you would look to add potential accretive acquisitions to. And maybe just how you view valuations in the financial criteria you apply. And then maybe just how you integrate those acquisitions once the deal is done.

David Doft: So I think we prefer not to talk about where we are looking at M&A because that's competitive in many cases. So we will announce them as they come. But we are open about the fact that, given our strong balance sheet position and given the incremental value we can provide to an acquisition, given our scale and our platform and our technology and data and our resources, that we are active in the marketplace looking at opportunities. So we will be clear about that. But where, we prefer to keep to ourselves for now. In terms of multiples, it really does depend on the size of the business, the growth profile. Generally, we are looking at mid to high single-digit EBITDA multiples, which, given our potential opportunity for synergies and driving incremental value, we think we can bring those multiples down quickly once we own businesses. But that seems to be the marketplace. But it is a wide range initially and because there's a wide range of types of businesses that we're looking at that would warrant that. In terms of integration, one of the real benefits of the Emerald platform is we do have scale in areas like operating live events. We have scale in areas like marketing technology, in data around our customer base and across sectors and businesses in our sales organization. And all those things allow us to bring value to businesses we bring in. Some are great at those things. And not all of them get incremental value from every service we offer. But there's always something somewhere where we could have best practices, we can leverage the scale of our resources and drive better utilization and less margin. We surely, based on our scale, have better contracts than most. And we can often get incremental savings by consolidating vendors into our vendors, et cetera. So there's a number of ways that we can add value as a business and ultimately drive incremental growth and value for our shareholders.

Hervé Sedky: The two things I'd add to David's comments are, one, we are building a proprietary database of opportunities, which is really important as we look to invest and grow through acquisitions. And also, the reverse impact of what we can benefit, how the Emerald platform can benefit from acquisitions, there are some best practices that acquired companies have that we are quickly able to look at, review and integrate and benefit across the entire Emerald portfolio.

Unidentified Analyst: Okay, great. Thanks for the color. And I think just my last question is what you plan to use your proceeds from cash on hand. And maybe the insurance reimbursements, how they [indiscernible]?

David Doft: Sure. As we indicated in the script, there are four areas that we balance in use of proceeds and with the, frankly, the strong cash that we expect to generate from the business. Well, surely, given the current environment, looking at our debt levels and whether debt reduction makes sense, we have a share buyback program that we've been active with. And given the trading liquidity of our stock, it is hard to buy a lot on that front, but it's really an arrow in our quiver. We are looking at acquisitions, for sure, in terms of the business, as we said about. And we are looking at organic investments into the business, in areas like Xcelerator, that might be a use of capital in the short-term, but creator of the value. And we literally, as we said before, yes, we are paying mid to high single digits for assets to acquire. But if we can successfully build those businesses ourselves. We can build it at 1x or 2x the EBITDA that will deliver in the last 3, 4 years from now, which is a great return for our shareholders and surely would be really attractive if we can find more opportunities to do that. And so we've definitely allocated, and we will continue to allocate some capital to that.

Operator: [Operator Instructions] And we have no further questions in queue.

Hervé Sedky: Okay. I wanted to thank you all for joining, for your interest, and I look forward to speaking with you next quarter. Have a very good day.

Operator: That concludes today's conference call. Thank you for attending, and have a pleasant day.