Earnings Call Transcript - EEX Q3 2021

Operator, Operator

Good morning and welcome to the Emerald Holding, Incorporated Third Quarter 2021 Earnings Conference Call. Before we begin, let me remind everyone that this call may contain 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. 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, in 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. A 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 November 8, 2021. I would now like to turn the call over to your host, Mr. Herve Sedky, President and Chief Executive Officer. Please go ahead, sir.

Herve Sedky, CEO

Thank you, Rob, and good morning, everyone. This is a very busy time here at Emerald and I’m excited to be here today to provide an update on our recently staged shows through the third quarter as well as our expectations for the continued recovery of our business as we look to the year ahead. David Doft, our CFO, will review our third quarter results in detail, and we will then open the call for your questions. I would like to start by thanking our employees for their hard work and tireless efforts as we executed one of the busiest calendars in Emerald's history through the third quarter. Our teams staged 33 live events, serving more than 92,000 attendees and 5,200 exhibiting companies. Key brands that staged include ASD, Outdoor Retailer, NY NOW, SURF Expo, COUTURE, and Hospitality Design. Our best performing events during the quarter had attendance levels approaching pre-COVID levels, while other events serving more adversely impacted industries remain challenged in the current environment. Overall, the execution was superb. Our exhibitor satisfaction was very high with strong attendee turnouts. The ratio of attendees to exhibitors increased by more than 22% as compared to the 2019 levels on average across all of our events during the quarter. This has led to a significant increase in average exhibitor Net Promoter Scores compared to the same events staged in 2019 and has accelerated our forward sales bookings looking to the year ahead. While our third quarter was successful in that we were finally able to stage a meaningful number of events again, we were, of course, not operating at our full potential. Nonetheless, many of the headwinds that impacted attendance for our third quarter shows, such as the international travel bans and the rising infection rates caused by the Delta variant, look to be improving. Of note, the Biden administration announced that beginning November 8, 2021, foreign travelers will be permitted to enter the United States with proof of vaccination. Historically, we’ve generated approximately 10% of our exhibitor revenues from international exhibitors, so this is a meaningful development in the recovery of our business. Additionally, rising vaccination rates are leading to a decline in new Delta variant cases. While supply chain issues in many industries remain a real challenge, the overall environment for live events continues to improve, which enhances our visibility for future events and a full recovery in the fundamentals of our business. We're also seeing enthusiasm from across the industry as our peers in the tradeshow sector are having success staging large in-person events. Asia has been a good leading indicator through the pandemic, as the region has typically led the U.S. by several months. Along those lines, we're seeing very encouraging signs of the enthusiasm that exists by both exhibitors and participants to get back to business. The China Beauty Expo is one such example that we found encouraging. The show staged from July 9 to 11 in Shanghai, China, covered approximately 754,000 square feet and drew 479,000 visitors according to data released by the organizers. That compares well to the 2019 China Beauty Expo show that covered approximately 853,000 square feet and drew over 521,000 professionals. Another example is CBME, which is a leading platform for the baby and maternity industry that staged from July 14 to July 16, also in Shanghai. The show covered approximately 872,000 square feet and drew over 95,000 visitors compared to its 2019 edition that covered approximately 951,000 square feet and drew 108,000 visitors. As you can see, these shows are approaching their pre-pandemic levels and provide optimism on a continued recovery of our industry here in the United States and into the future. Overall, Emerald's third quarter show attendance was about half of pre-pandemic levels, while exhibitor satisfaction markedly increased. Some events came within 10% of pre-pandemic attendance levels, while others were more impacted. We believe this demonstrates a clear path to recovery and supports our expectation that our portfolio of industry-leading shows will begin to return to its pre-pandemic levels looking out to 2023. As I said on last quarter's call, our focus has been on delivering the highest quality events that exceed our customers' expectations as we focus on our shows, brands, and the value that our customers achieve by attending. We delivered on that goal in the third quarter and believe that if we continue to maintain the quality of our shows and the value that we deliver to our customers, we should continue to build towards a pre-pandemic attendance environment as we look out towards the second half of next year. We expect a more fulsome recovery to emerge through 2023 and expect our revenues will recover to pre-pandemic levels as long as we maintain the quality of our shows and the value that we deliver to our customers. We remain confident in our ability of our events to deliver a strong return on our customers' marketing investment and are pleased to see this confirmed in the very strong satisfaction levels that we have seen in our third quarter post-event surveys. This is also being confirmed in the strong acceleration that we continue to see in our forward bookings calendar. Looking to the fourth quarter, we have another strong slate of events to stage. Those are seasonally fewer than last quarter, including EDspaces, which we acquired last year, JA New York FALL, ICFF, and BDNY, amongst others. At this point, exhibitor pacings for fourth-quarter events are moderately better than what we saw in Q3 when compared against their pre-pandemic editions. More importantly, we're not standing still. We are aggressively transforming Emerald through the implementation of our stated strategic initiatives centered around customer-centricity, delivering 365-day customer engagement, and portfolio optimization. Our initiatives are designed to improve our customer satisfaction with our products, accelerate organic growth, and expand our margins. While the investment community is focused on when the exhibition industry will return to 2019 revenues and earnings, we see 2019 as a starting point. Our aspirations are far greater as we strive to transform our business. Three immediate goals I'd like to emphasize. Firstly, our customer-centricity initiative includes conducting surveys for all events, continued efforts to streamline customer interactions with Emerald, experimentation with new pricing models and bundles, and the rollout of matchmaking at all of our large events. Our experience shows that adding matchmaking, which helps bring together buyers and exhibitors in their specific areas of interest, is a meaningful driver of customer loyalty, as more scheduled introductions are a strong catalyst for tradeshow return on investment. Secondly, our 365-day customer engagement strategy continues to deliver solid progress. We have, for example, hired a new pan-Emerald content lead with significant experience in building modern digital media businesses to optimize our planning and execution across all of our content assets. We have also stepped up investments in the Elastic B2B e-commerce platform development to add key drivers of value for our customers, and have developed a plan for better integration of our tradeshow and content’s online presences with new web templates expected to be rolled out over the coming months. Elastic, which is the go-to-market brand of our recent PlumRiver Technologies acquisition and the online marketplace platform with which we're supplementing our live events, is building momentum with an accelerating number of new client wins relative to last year and is in the early days of extending into new industry categories. Lastly, our portfolio optimization efforts include numerous new event launches planned for 2022 as we accelerate organic show growth as well as continue efforts to strategically grow the portfolio via acquisition. We maintain ample liquidity as we ended the third quarter with more than $300 million of cash on our balance sheet and are starting to see the positive dynamics of our business model play out as forward bookings accelerate driving cash generation through negative working capital. Importantly, our business requires little in the way of CapEx investment and generates strong free cash flows. As we begin to book customers for our upcoming shows, we are receiving deposits in advance, which can be seen in our strong positive free cash generation this quarter. We are beginning to build cash on our balance sheet, which should have a long tail as we gradually return to pre-COVID levels. This places us in a flexible and opportunistic position where we can strategically allocate capital to attractive acquisitions, organic growth initiatives, and share repurchases. When we see our stock trading well below what we view as intrinsic value, such as where it has traded throughout the third quarter despite the improving fundamentals that we continue to experience. Now let me turn the call over to David to review our third quarter results.

Operator, Operator

Ladies and gentlemen, we are experiencing technical difficulties, please remain online. Your conference will resume momentarily. Please remain online. We are experiencing technical difficulties and your conference will resume momentarily. Thank you.

Herve Sedky, CEO

Hi, we're back. Sorry about that. Operator, can you let me know where we cut off?

Operator, Operator

I think it was, why don’t you just start off, David, at the beginning for your portion.

Herve Sedky, CEO

Okay, thank you.

David Doft, CFO

For the third quarter, we reported revenues of $76.5 million, which compares to $8.5 million in the year-ago quarter. After reporting six consecutive quarters of significant revenue decline due to the pandemic, I am thrilled to be able to talk about revenue increases again. Organic revenues for the third quarter were $12.1 million, a decrease of $1.6 million as compared to organic revenues of $13.7 million in the third quarter of 2020. The decrease was due primarily to lower revenues generated by several events that staged in the first quarter of 2020 but were postponed out of the first quarter to the third quarter in 2021 as a result of COVID-19. Note, our definition of organic revenue only includes events that staged both this year and in 2020, and thus excludes events that did not stage last year due to pandemic-related cancellations. When looking at all events as compared to their previously staged editions, irrespective of year, average event revenue declined approximately 60%. Despite this decline, we were able to run our events profitably and generate free cash flow in the quarter, even excluding insurance recoveries. Our adjusted EBITDA for the third quarter was $9.4 million as compared to negative $3.2 million in the same period last year. The increase in adjusted EBITDA of $12.6 million was mainly due to profits generated by the live events that staged during the quarter, partially offset by a lower amount of confirmed or received event cancellation insurance claim proceeds compared to the prior year. We recorded $1.1 million of other income during the third quarter of 2021 as a result of event cancellation insurance claims proceeds related to events canceled in the second half of 2020, which compares to $16.1 million of other income recorded during the year-ago third quarter as a result of event cancellation insurance claims proceeds related to events canceled in the first half of 2020. Looking at our event cancellation insurance in more detail, we have submitted $243 million in claims to date for impacted or canceled events previously scheduled to take place in 2020 and 2021. We also continue to work on finalizing claim submissions for several more canceled, postponed, and otherwise impacted 2021 events. These claims represent the net amount of budgeted gross revenues less avoided costs for impacted or canceled events previously scheduled to take place in 2020 and 2021. To date, we have received insurance claim payments totaling $184.3 million, or 76% of submitted claims, of which $89.1 million was received in 2020, $35.4 million has been received in the first nine months of 2021, and $59.8 million was received in October and not booked in the third quarter. We expect to recognize the monies received in October in the fourth quarter. We are actively pursuing collection of the remaining unpaid amounts of submitted insurance claims for our canceled 2020 and 2021 events that currently total an incremental $58.4 million and we'll continue to submit additional claims for impacted 2021 events in due course. Turning to our events schedule, and as Herve discussed, we are in the midst of planning, selling, and executing a very aggressive calendar and our results through the third quarter and into the fourth quarter have been positive with enthusiastic feedback from our customers, albeit with lower levels of attendance and revenue in general, relative to their pre-pandemic conditions. As Herve mentioned, we have been very pleased with the execution of our third quarter shows and have been very focused on delivering an outstanding customer experience which can be seen in our improved pace for future shows. While the execution has been outstanding and the customer response strong, our shows have underperformed their pre-COVID levels, which we have expected. That said, we have policies that provide up to almost $200 million of event cancellation insurance for the full year 2021, which helped us to insulate our results from certain adverse effects of the pandemic. Turning to free cash flow in the third quarter, we experienced a net inflow of $7.7 million, which compares to an outflow of $20.9 million in the year-ago third quarter. We are experiencing strong positive net cash inflows as our shows begin to stage and we receive customer deposits. The impact of this is best seen in the increase in deferred revenue from $48.6 million at year-end to $83 million at September 30. While this is down from the second quarter, it is consistent with the seasonality of our business, given the lighter schedule that typically occurs in the fourth quarter, which is the case again this year. Importantly, this improvement in deferred revenue and its benefits to our free cash flow should have a long tail as we look to ramp our events back to pre-COVID levels over time. We have ramped investment in technology, both in the ElasticSuite business acquired with PlumRiver and within Emerald's core tradeshow and content business, which has led to a moderate increase in capital expenditures in the quarter and which you should expect for the coming year. That said, our business model is still a capital-light model and our CapEx runs at very low levels. In the third quarter of 2021, we spent $1.9 million as compared to $0.8 million in the year-ago third quarter. We ended the third quarter of 2021 with $303.6 million of cash as compared to the second quarter 2021’s cash balance of $302.8 million. This is before receiving the incremental insurance proceeds of $59.8 million, which came post-quarter close. Additionally, we have full availability of our $110 million revolving credit facility. Our strong liquidity and balance sheet with more than $300 million of cash combined with our 2021 insurance coverage provides us with the flexibility to be opportunistic in the current environment. Along those lines, we repurchased almost 1.2 million shares of common stock at an average price of $4.69 per share for a total cash use of $5.6 million in the quarter. Year to date, we have repurchased 2.9% of common shares outstanding. We plan to continue to allocate capital to our share repurchase plan, and to that effect, our Board has authorized a reload of our share buyback authorization to $20 million and extended it to the end of 2022. While I am talking about the balance sheet, I want to highlight the Form 8-K filing we released prior to our earnings release this morning, which indicates a restatement of our 2020 and year-to-date 2021 financials. This is due to an error we determined was made in the booking of the Series A convertible preferred stock issued last year when we capitalized the balance sheet to protect the business during the height of the COVID breakout. Initially, we booked the security as permanent equity due to the fact that existing holders of the Series A preferred stock do not currently have an ability to redeem the security for cash. We consulted outside experts in this determination, which makes this situation all the more frustrating. However, given the fact that in certain though currently unlikely change of control situations as defined in the terms of the preferred stock, the holders can require that we redeem their shares as a result of circumstances outside of the company's control. Even if those conditions do not exist today, we are reclassifying the convertible preferred stock to temporary equity on the balance sheet between liabilities and equity. This is a noncash adjustment and has no impact on our revenues, EBITDA, operating cash flows, or free cash flow and minimal impact on EPS as a result of technical differences in accounting for accreted preference on the Series A shares. As you can see, our strong balance sheet combined with our attractive business model, which is set to drive free cash flow growth as the industry continues to recover, positions Emerald to be opportunistic. We will continue to take advantage of attractive acquisition opportunities like PlumRiver and Sue Bryce Education, which are key steps towards engaging with our customers 365 days a year. We will also continue to invest in these businesses to expand them across our brands as well as make other strategic growth investments in our business as we work to position Emerald for a return to organic growth.

Herve Sedky, CEO

With that, I'll now turn the call back to Herve. Thank you, David. To conclude, we successfully staged 32 live events in the third quarter while our customer satisfaction with our shows increased markedly versus 2019. This clearly demonstrates not only the importance of our industry-leading shows to our customers but also the path of recovery that we're tracking. We are working diligently to bring our shows back to their pre-pandemic levels, while also aggressively working to drive change across our organization, designed to deliver improved growth and profitability. I'm very encouraged with where we stand today and filled with optimism for the future. Thanks again for your time today. And Rob, please open the meeting up for questions.

Operator, Operator

Our first question comes from Annick Maas with Exane. Please proceed with your question.

Annick Maas, Analyst

Hi, good morning. So my first question is just I think you seem to suggest that exhibitor pacing for Q4 is better than Q3. Can you tell us what that is driven by? Is that you think driven by the fact that now you have international attendance as well? The second one is just going back on Q3 and the events that actually were canceled throughout Q3, what was the commonality around these events? Were they in the same month, were they in the same industry, were the events that are typically having more international attendance? And then my last question is just with regard to forward bookings. Can you tell us whether you have changed the share of the first installment you are charging these days versus pre-pandemic? Thank you.

David Doft, CFO

Thanks, Annick. I'll address all the points. Hervé, feel free to add if I overlook anything. Regarding Q4, we believe the improvement is mainly due to a few factors. First, several events successfully took place in Q3, boosting confidence among exhibitors and attendees about future events. Second, vaccination rates in the United States have risen, and the decline in infection rates has been a significant factor. To address your second question, I'll combine the two. Some Q3 cancellations occurred during heightened concern about the Delta variant, leading us to believe those events wouldn’t be successful, prompting their cancellation. The pandemic's impact also played a role; events with a higher proportion of international exhibitors faced more challenges in Q3, and some of those were among the canceled events. However, it is still early to assess the effects of international exhibitors’ bookings for Q4 since changes were only finalized in the last few days. We remain optimistic about potential improvements moving forward.

Herve Sedky, CEO

The final question was … David Doft: In terms of … Pricing.

David Doft, CFO

In terms of our bookings, we have not changed our pricing or deposit strategy related to future events. And so it's very important to us that we protect and maintain the integrity of our contracts, which allow us to effectively plan these events to have the best experience for our customers. And so we have stuck with our historical practices around that.

Annick Maas, Analyst

Super. Thank you very much.

Operator, Operator

Ladies and gentlemen, we reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to management for closing comments.

Herve Sedky, CEO

Great. Well, thank you, Annick, for your question and thank you all for your time today and attention today. Much appreciated. Goodbye.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.