Emerald Holding, Inc. (NYSE:EEX) Q1 2023 Earnings Call Transcript

Emerald Holding, Inc. (NYSE:EEX) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good morning, and welcome to the Emerald Holding, Inc., First Quarter 2023 Earnings Conference Call. At this time all lines are in listen-only mode. Following the presentation, we’ll conduct a question-and-answer session. [Operator Instructions]. 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 of 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 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 the 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 website through 11:59 p.m. Eastern Time on May 10.

I would now like to turn the call over to Mr. Hervé Sedky, President and Chief Executive Officer. Sir, please go ahead.

Hervé Sedky: Well, thank you Colin and good morning everyone. It’s great to be with all of you today to discuss our first quarter results. I’ll start with an overview of the trends we’re seeing so far this year and then give an update on our growth strategy, focus on customer centricity, 365-day engagement and portfolio optimization. Then our CFO, David Doft, will provide more detail on the financials. I’m extremely pleased with Emerald’s start to the year. Each quarter, we see more encouraging signs that the post-COVID recovery in live events is progressing at a rapid pace, putting us on track for another year of significant revenue and EBITDA growth. More importantly, this recovery still has plenty of room to play out.

So we expect to see higher than historical growth into 2024 and beyond as we benefit from the return of international attendees and improvements in our customers supply chain, lead times in addition to the benefits of our strategic initiatives and investments. When you look at our business today versus pre-COVID days on an apples-to-apples basis, we are approaching pre-pandemic levels of event revenues. However, that’s only part of the story. The bigger picture is that we’ve grown Emerald meaningfully since 2019, both through strategic investments in our capabilities as well as acquisitions that have substantially contributed to our revenue. This means that we’re a much larger company than we were pre-pandemic with a stronger growth trajectory.

Despite these positive achievements, we don’t believe this value is reflected in our stock price today, which is why during the first quarter, we repurchased approximately 5.1 million shares or 7.5% of our common stock outstanding. At these levels, we firmly believe buying back shares is a highly attractive vehicle for us to deliver greater per-share value to our shareholders. Over time, we think that the market will recognize the valuation gap between where our business is now, where it was valued pre-COVID and where the market is valuing other trade show platforms. We believe the reality is that the trade show industry is stronger than ever, evidenced by the record attendance and revenue at many of our shows last year and into the first quarter.

The trade show industry has always been a stable, growing industry with excellent cash flow generating characteristics. And we think our current revenue trajectory, combined with the near-term margin improvements as we scale will enable the market to begin to see the full value and potential of the business. You have already seen signs of this in recent M&A transactions within our industry where peers were acquired for attractive multiples, and we believe our shareholders will be rewarded for their patience. As a reminder, our long-term growth plan post full recovery is to deliver run rate organic growth in the mid to high single digits combined with growth from acquisitions in the mid to high single digits, contributing to double-digit annual revenue growth overall.

In the near term, we expect to see even higher growth rates given the recovery tailwinds. Moving on to our first quarter results. We saw another significant step forward in attendance, which increased 24% year-over-year as we cycled past the Omicron impact of the first quarter of 2022. During that same period, square footage at our events in the quarter grew 18% and exhibiting companies increased 19%. This led to overall revenue growth of 24% year-over-year. On the M&A front, we acquired Lodestone and its Overland Expo consumer events in Q1, extending our Action Sports franchise and expanding our consumer offering in addition to our core B2B focus. Given the timing of Lodestone’s Event calendar, it generated no revenue for Emerald in the quarter while we absorbed its run rate overhead costs in our results.

Nevertheless, adjusted EBITDA, excluding insurance proceeds, grew even faster than revenue at over 42% year-over-year as we leverage our existing cost structure to drive margins higher. Strategically, we continue to remain focused on our three pillars of value creation: Customer centricity; 365-day engagement; and portfolio optimization. In customer centricity, we’re continuing our efforts to enhance the customer experience with our road map that calls for reducing friction in our attendee and exhibitor interactions as a result of leveraging data and technology. Our progress on the data front is key to this, in addition to our efforts to increase the actual and perceived value of Emerald’s offerings in all of our products across events, content and commerce.

The goal is to provide Emerald’s customers with a clearer picture of the return on investment they receive from the marketing dollars that they put to work across Emerald’s platform. This improves our stickiness with customers, incentivizes them to deploy more marketing dollars with Emerald and ultimately should help drive higher revenue per customer. Our second pillar, 365-day engagement is geared toward providing multiple entry avenues to the customer engagement cycle through trade shows, conferences, webinars, media content and our e-commerce platform. Trade shows and conferences offer valuable in-person meeting to make connections, build the sales pipeline and stay on the cutting edge of industry changes. Through media content and webinars, our platform allows advertisers to reach our audiences in 20 different industry sectors where we have events to share knowledge, industry innovations and new products outside of the trade show environments.

Our ecommerce platform gives buyers and sellers a technology platform for year-round selling. Our third pillar of value creation is portfolio optimization, which includes both new show launches and acquisitions. Our Emerald Xcelerator division is dedicated to launching new shows in high-growth industries where we believe there’s an opportunity for Emerald to establish an industry flagship event and scale it up in a cost-effective manner. In September of this year, we’ll be launching the first edition of Cocina Sabrosa, a Latin Food and Beverage Expo, serving the B2B restaurants, grocery and supplier industry within the growing Latin Food business segments. Emerald has also recently entered a partnership with a major U.S. professional sports league to launch new fan-based initiatives as we build on our efforts to expand into business-to-consumer offerings.

Further details will be forthcoming in the weeks and months ahead. We’ve also remained active on the acquisition front, acquiring Lodestone Events and their Overland Expo series in January. We continue to evaluate a large pool of potential acquisitions within the highly fragmented B2B events and media industry, leveraging our scale and expertise to compete for deals and drive returns by implementing go-to-market best practices and operational efficiencies. While we face an uncertain economic environment, we have seen how trade show industry has been economically resilient over the decades. Our shows represent a central element of customers’ marketing budgets with a demonstrable return on investments, and as a result, they are among the most easily justified costs for many organizations.

In addition, since our exhibitors booked their spots up to a year in advance and pay deposits in the year leading up to the show, they have no incentive to cancel. As a result, often any impact we see from the economic moderation tends to be smaller in size as compared to the broader economic trends, in particular given our belief that the end markets we serve are quite resilient. Most importantly, we believe the ongoing post-COVID rebound in trade show industry provides a strong tailwind that would likely more than offset moderation in the economy. To conclude, we’re pleased with the trends we’ve seen so far to start the year. We think there’s a lot of room left for post-pandemic recovery to play out, which we believe should allow us to keep delivering substantial year-over-year revenue and profit growth as we work our way towards surpassing our pre-pandemic levels.

This combined with our favorable working capital dynamics of our business as we continue to scale up positions us well for powerful free cash flow generation into the future. With that, let me turn the call over to David Doft.

David Doft: Thank you, Hervé and good morning. Our first quarter revenue was $122.3 million compared to $98.5 million in the prior year quarter. The increase was primarily due to 17% organic revenue growth as events continued to rebound. Organic revenue, which takes into account the impact of acquisitions and scheduling adjustments was $122.1 million for the first quarter 2023, compared to $104.4 million in the prior year quarter. First quarter adjusted EBITDA was $36.5 million compared to $25.6 million, excluding insurance proceeds in the prior year quarter. The increase in adjusted EBITDA was primarily driven by flow-through of organic revenue as we leverage the fixed cost of running events as well as prior investments. First quarter free cash flow was $5.2 million compared to $6.1 million, excluding insurance proceeds in the prior year quarter.

Last year’s first quarter meaningfully benefited from the ramp-up of deposits following the pandemic shutdown. Historically, Q1 has been a cash outflow quarter due to the timing of cash collections at the end of the prior year and outflow of payables as the seasonally busy Q1 events take place. This year, however the first quarter was the beneficiary of the delayed collections from the fourth quarter, which we highlighted on the last call. This puts us firmly on track for our full year free cash flow expectations. Turning to expenses, we continue to effectively manage our cost structure in this inflationary environment. First quarter SG&A was $48.8 million versus $46.6 million in the prior year quarter, an increase of less than 5% despite the three acquisitions we’ve closed since that time.

As we outlined on our last call, we’ve made significant improvements to our cost structure at the corporate level, including by rationalizing our real-estate footprint and opening an offshore hub in Manila to ramp support for a number of functions, including telemarketing, sales support and data management. As for the balance sheet, we had $217 million of cash and marketable securities as of March 31, 2023, versus $239 million as of December 31, 2022. Our total liquidity is $327 million, including full availability on our $110 million credit facility. The quarter end cash balance accounted for the free cash flow I just discussed, offset by the $9.5 million initial consideration paid for the Lodestone acquisition and the $16.9 million we spent to buy back stock in the quarter.

As Hervé mentioned, the trade show industry has historically performed relatively well through economic cycles, given the long lead times and customer deposits for booking shows. As markets face widespread uncertainty, we are fortunate to be in a B2B segment that is considered essential to company’s marketing budgets and where we are making progress on more explicitly outlining the return on investment that Emerald offers to customers. We believe that as we progress beyond the Fed’s current rate type cycle, some of the economic and market uncertainty may begin to abate and companies will get more comfortable with making larger and longer-term dollar commitments to marketing, providing another boost to the ongoing recovery in live B2B events.

Our balance sheet strength and cash flow generation support our ability to opportunistically invest in and grow the business. We plan to continue to balance capital allocation between acquisitions, investments in our own business, opportunistic share buybacks and debt reduction to execute on opportunities where we see the greatest value for shareholders. To that end, as Hervé mentioned, in Q1, we repurchased 5.1 million shares of common stock at an average price of $3.34 per share or a total cost of approximately $17 million. We have $3 million remaining on our share repurchase authorization. As of March 31, we had gross debt of $415 million and net debt of $198 million. This leads to a net leverage ratio as defined in our credit agreement of 1.9 times, our trailing 12 month consolidated EBITDA of $102.9 million.

Briefly, an overview of our capital structure can be found on Slide 11 of our earnings presentation. Factoring in $62.8 million of common shares outstanding at March 31 and additional $137.5 million common shares represented by the convertible preferred shares as of March 31, our total share count on an as converted basis would be 200.3 million shares. Based on yesterday’s closing price, this equates to a market cap of $729 million. Adding in our net debt, estimated contingent consideration on our balance sheet for acquisitions and deferred tax asset worth approximately $70 million. This leads to an enterprise value of $1.0 billion. In our full year guidance for 2023, as we stated on our last earnings call, we continued to expect in excess of $400 million in revenue and over $100 million of adjusted EBITDA.

This guidance reflects a more than 76% increase over 2022 EBITDA, excluding insurance proceeds. Our guidance implies an adjusted EBITDA margin of approximately 25%, and we believe we have considerable runway to continue improving on this number as we work our way back to the 35% plus margins we saw prior to COVID. We also continued to expect free cash flow in 2023 of over $60 million before accounting for the benefits of working capital inflows. This would bring our net debt to adjusted EBITDA ratio closer to 1 times, assuming no incremental M&A. Thank you very much for your time. And with that, we’ll now open the line for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Allen Klee from Maxim Group. Allen, please go ahead.

Operator: Your next question comes from Barton Crockett from Rosenblatt. Barton, please go ahead.

Operator: There are no further questions at this time. I’ll turn it back for closing remarks.

Hervé Sedky: Very good, Colin. Thank you all very much for joining us today. As I mentioned, I’m extremely pleased with Emerald’s start of the year, our continued quarter-over-quarter improvement, putting us on track for another year of significant revenue and EBITDA growth. Thank you very much for your participation and engagement today and look forward to speaking to you next quarter. Take care.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.