Emerald Holding, Inc. (NYSE:EEX) Q2 2022 Earnings Conference Call August 8, 2022 4:30 PM ET
Company Participants
Hervé Sedky – President and Chief Executive Officer
David Doft – Chief Financial Officer
Operator
Good afternoon, welcome to the Emerald Holding, Inc. Second 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 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. 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 Web site through 11:59 p.m. Eastern Time on August 15, 2022.
I’d now like to turn the call over to Mr. Hervé Sedky, President and Chief Executive Officer. Sir, please go ahead.
Hervé Sedky
Thank you, Scott. And good afternoon, everyone. I’m very pleased to be with you all today to discuss our second quarter results. We delivered another solid performance this quarter and continue to see a nice recovery in the business as more in-person events have been staged. But before going into further detail on this quarter’s operational performance, I’m pleased to announce that on August 3 2022, Emerald reached an agreement with our insurance underwriters to settle outstanding litigation relating to our 2020 and 2021 event cancellation insurance policies for $149.25 million.
As a result, the company expects to record $148.5 million as part of other income nets during the third quarter of 2022. Payment is expected to be received in the third quarter of 2022. And when added to the $223.6 million of claim payments already received, it will bring the total aggregate payments from insurers to approximately $372.9 million. This incremental cash will further improve our already strong liquidity and flexibility and importantly, the settlement removes a large distraction for our leadership team that can now focus all of its attention on building our business.
Now back to our core operations. We have 29 events in the quarter, which together attracted 61,600 attendees and 3,600 exhibiting companies, and we continue to see consistent growth in overall show participation.
We also project that over the next few quarters on average, our events will increasingly close the gap to pre-pandemic levels of qualified attendee and exhibiting company participation. This is a tremendous validation of our business model and the value that in-person events bring to our customers. Trade Shows remain an integral part of our customers marketing budgets, and provide a high return on investments, as they’re often the biggest selling events of the year for companies that exhibit. We found in our performance validates that physical interaction is critical for new business lead generation and sales.
Emerald has continued to supplement its in-person shows with digital and data driven value added components included including contents, and B2B SaaS e-Commerce offerings. This strategy is designed to drive scale and year round customer engagements while elevating the value provided to customers by turning leads into actual buyers. You will recall that last quarter, I highlighted three specific growth levers that make us excited about the future and they’re worth reiterating today.
First on average, event revenues are returning to and at times exceeding pre pandemic levels, highlighting the sustained demand for our events. Second, we’re launching new products and services that are complementary to our core business to better support our customers year-round. And third, we’re continuing to generate substantial cash flow supported by low CapEx requirements and a strong balance sheet.
With respect to event revenues, the trajectory of our recovery is largely on pace with expectations and supports reaffirmation of our 2022 guidance and preliminary expectations for 2023, which David Doft, our CFO will discuss in further detail shortly. We expect nearly a quarter of our 2022 events to surpass pre-pandemic revenues as exhibitor counts and space rates continue to track upwards. Importantly, fewer events have fully rebounded to pre-pandemic square footage levels, which means that we have a lot more upside revenue leverage given our pricing as the recovery continues. As I mentioned earlier, customers highly value in-person events. And we’re seeing them move past pandemic concerns more decisively than any point in the past two years.
Exhibiting companies and attendees alike, are eager to get back to trade shows and their desire to reserve and maintain the best spaces at exhibitions has driven them to rebook and rebook early. During the pandemic, we planned for and subsequently implemented on site rebooking across almost all of our events. This is where exhibitors can sign up for the next iteration of an event during the current version, and was a feature that didn’t exist company wide before the pandemic. This has been well received by our customers and allows us to have a much stronger forward-looking view of how our business will perform over time while also freeing up our sales team to pursue potential new customers and help grow our events.
We are currently selling exhibit space for events as far out in some cases as third quarter of 2023. While our operations are still seeing an impact from broader macro conditions, including lockdowns in China, international travel restrictions and supply chain issues, we remain confident that we can manage through these transitory challenges as we continue to execute on our strategy. We feel confident in this since most of our events staged in the United States, with exhibitors, predominantly from domestic companies.
Importantly, we also see these pre-pandemic related headwinds that give us further runway once they’re eventually removed. Our cell spacing data also offers us good visibility into the continuation of the recovery into the first half of 2023 and our ability to garner price increases in line with a value that events generate remain strong. Space rates at our shows are higher than pre-pandemic levels, meaning that if we can get back to 2029 aggregate net square footage, we’re a much larger revenue company now than we were back then, there is meaningful upward leverage here.
With respect to new products and services, we’re making targeted investments in our capabilities that will produce benefits across the Emerald platform, a great example of this is our ongoing efforts to operationalize our customer database. In order to better understand our customers behavior across the enterprise, and provide them with more relevant recommendations and opportunities for lead generation, we consolidated over 50 plus disparate sources into one. Not only will our modernized and highly efficient database improve our ability to cross sell, and upsell to customers who are natural fits for multiple trade shows and content brands, it also provides Emerald with opportunities to leverage our substantial data assets related to building and consumer spending.
In addition to our technology investments, we’re executing against strong strategic growth plans for our legacy portfolio brands, as well as extending our reach into high growth markets through new show launches and M&A. I’ll touch on this in greater detail in a moment. All of these efforts support Emerald’s substantial free cash flow generation. At our current share price and guidance level, we have an attractive double-digit free cash flow yields on an as converted basis based on an expected $70 million of free cash flow in 2022 before the benefit of any insurance proceeds. To further enhance our business and accelerate growth, we’re leveraging these initiatives alongside our three pronged growth strategy where our focus is on portfolio optimization, 365 day engagements and customer centricity.
While I have provided details on these areas before, let me take a few minutes to discuss our progress and our path forward. Starting with portfolio optimization, we continue to enhance our brand portfolio through both organic growth and acquisitions. On the organic growth side, we’ve announced several new event launches for 2022 and 2023 targeting fast growing industries. Through our Accelerator business unit that we announced earlier this year and expect we’ll add one to two points to our organic growth, we’re developing new brand experiences that leverage Emerald’ unique capabilities and brand network to deliver leading events in emerging and high growth markets, including upcoming events in the areas of mental health, and decentralized finance.
For example, in the mental health space, we’re launching Mentara, a community platform for creating relationships across a mental health ecosystem. It will serve as a B2B event and a content platform fostering connections between mental health innovators and corporate leaders seeking solutions for their organizations and employees.
As I’ve shared previously, we plan to launch Mentara in 2023. We’re also launching an offering dealing with breakthrough medicines in topics such as psychedelic therapies for mental health. This will kick off at this November’s MJBizCon as a colocation with our leading events for the cannabis sector. Psychedelics have attracted billions of dollars of institutional capital and is ripe for long-term sustainable growth. Furthermore, we’re talking to a decentralized finance space with a new launch branded as Decentralized Deciphered or D2. Launching in October in New York, D2 will provide an educational platform that bridges business and Web3 innovation. The show is geared towards an audience of C-Suite financial and technology executives who are looking for a trusted source to learn about and leverage decentralized solutions for their businesses.
In addition to new launches, acquisitions are another component of our portfolio optimization strategy, where we’re improving our business mix through the addition of businesses in high growth industries. Our acquisition of MJBizCon earlier this year added the Nation’s largest B2B cannabis trade show to our portfolio, along with related content brands that are now adding to our 365 Day engagement efforts.
In the second quarter, we also announced our acquisition of Advertising Week, a best-in-class global events and content platform focused on marketing, media, technology and culture. Today, Advertising Week has more than 100,000 annual attendees at its hybrid events, over 3,000 speakers per year and produces more than 1,000 video content hours. It has resiliently served the advertising, marketing, media and technology communities throughout the pandemic, while diversifying its offerings into virtual and hybrid editions. Through this acquisition, Emerald will build on its prominent position in the B2B marketing sector and gain broader exposure to Advertising Week’s blue chip customer base along with new entrants in the online advertising, including streaming.
We’re very excited to be partnering with the Advertising Week team and to combine Emerald’s existing platform and capabilities with their thought leadership and expertise in the advertising media and technology space, an area where we have existing events and content properties. Finally, subsequent to quarter end, we announced the acquisition of Bulletin, a wholesale online marketplace connecting over 3,000 independent and emerging brands with over 2,600 retailer buyers, 26,000 excuse me retailer buyers.
We are thrilled to have the opportunity to partner with the innovative and dynamic Bulletin team and believe the robust and fast growing community in the gift, home and accessory space will bolster New York now with its impressive scale of emerging brands. As a result of our portfolio optimization efforts, we’ve continued to increase the scale and diversification of our platform. Today, no single customer is more than 1% of revenue and our largest trade show is in the single digits percent of revenue.
We will continue to look to be opportunistic and identify acquisitions that complement our current portfolio and also introduce us to new high growth industries and diversified revenue streams.
Moving to the second prong of our growth strategy, our 365 Day engagement initiatives are designed to support our customers year round while driving steady high margin cash flows for Emerald through the growth of our capabilities in both content and commerce. Our Elastic, e-Commerce, SaaS platform is continuing to gain traction delivering organic revenue growth of over 20% in the quarter, net revenue retention of 105% up from a 102% last quarter, and increase the number of customers subscribing to our platform over the last 12 months by 31%. That platform provides an attractive opportunity to generate additional recurring revenue, and is a critical component to accomplishing our goal of an all access 24/7 digital environment for buyers and sellers to transact.
Our e-Commerce software offerings are highly complementary to our in-person shows. By getting customers opportunities for year around selling and robust lead gen solutions. We expect to expand its capabilities and roll out to other industries that Emerald serves. As it stands, elastic has, on average over 1 billion per month of wholesale growth merchandise value flowing through its system from over 200 manufacturers.
With a content platform we’re providing advertisers with the ability to leverage Emeralds extensive global audience for new, advertising, and sponsorship offerings. Within our content business, we did experience a small hiccup related to an email distribution issue that impacted site traffic and newsletter delivery in the quarter, which you can see in our other marketing services line. We were able to correct the distribution issue, but this business is not moderately behind plan. Fortunately, we were able to make up the delta in the performance of the rest of our business lines and expect our contents business will be back on plan in the fourth quarter.
Our final growth pillar, it’s focused on customer centricity that technology investments that I previously described are improving the customer experience and driving incremental value creation. Net promoter scores have also increased, meaning that our customers are more loyal and engaged in the work that we do, and serves as further evidence that our strategy is working.
Finally, before I turn things over to David, I want to offer a few high level remarks. I’m pleased with our performance this quarter and believe we are well positioned for success. We have a market — we have market leading events portfolio in diverse industries that has proven to be highly durable throughout cycles, and that is continuing to benefit from the COVID recovery.
Our excellent liquidity position and strong free cash flow provides us a foundation to continue investing in our business to stay ahead of the industry and drive incremental returns to shareholders. We have multiple growth vectors including organically through new events, and product launches in high growth industries and externally through M&A as we work to position ourselves as a consolidator of choice with the ability to leverage our unparalleled scale, technology, and data advantages. And finally, our investments are contributing to higher quality earnings with improving margins and better ability to scale.
With that, let me turn the call over to David.
David Doft
Thank you, Hervé and good afternoon. As Hervé said, we’re very pleased with our results this quarter and year-to-date, and believe they point to a robust recovery in the live event space. Before we review the financials, I want to highlight the recent settlement of our insurance lawsuit and briefly address the recently filed Q1 restatement and revision to correct for an accounting item related to prior insurance collections.
As discussed by Hervé Emerald has reached an agreement with our insurance underwriters to settle outstanding litigation relating to our 2020 and 2021 event cancellation insurance policies for $149,250,000. Payment is expected to be received in the third quarter of 2022. As a result, the company expects to book $148.5 million of other income net during the third quarter of 2022. Once received, this settlement payment is expected to bring total payments from insurers to approximately $372.9 million.
The repayment went to account for a portion of the insurance payment proceeds on one of our events totaling $5.1 million that was due to a third-party in the first quarter of 2022. And the revision was to account for a portion of the insurance payment proceeds of one of our events totaling $1.6 million that was due to another third-party in the fourth quarter of last year. We have no further liabilities on the $223.6 million of insurance payments we’ve collected to date and minimal payment obligations to third-parties when the settlement proceeds are received likely in the third quarter. As shown in the filings, the restatement and revision do not impact the underlying operations of Emerald.
Now, moving on to our second quarter results, second quarter revenue was $71.4 million as compared to $15 million in the prior year quarter. The increase is primarily due to events which stays this year, but were canceled last year due to COVID. Adjusted EBITDA was $15.6 million in the second quarter, as compared to negative $13.6 million in the prior year quarter. The increase was due to the large number of events staged in the second quarter of this year, as well as the recognition of income related to insurance claim proceeds received or confirmed. Excluding insurance proceeds, adjusted EBITDA would have been $7.5 million as compared to negative $15.9 million in the prior year.
Free cash flow in the second quarter was $10.5 million, as compared to $23.8 million in the prior year quarter. Excluding insurance, free cash flow would have been $2.5 million as compared to $19.1 million in the prior year quarter before adjusting for taxes. The higher free cash flow in the second quarter of 2021 is the result of a working capital related spike in customer deposits. As the world reopened and events started to sell again after being dormant for over a year. We continue to benefit from our CapEx light business model in generating strong free cash flow.
On the expense side, we continue to prudently manage our cost structure in this inflationary environment. Our largest exposure is labor costs, 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 margin. Looking ahead to currency exposure, while our brand portfolio operates globally, we are fortunate to be U.S. based with minimal exposure to currency fluctuations. Our Elastic business generates some revenues and has 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 $232 million of cash and marketable securities as of June 30, versus $245 million as of March 31 of this year, in order to optimize interest income against our substantial cash balance. As the interest rates began to rise, we initiated the strategy of purchasing some longer maturity bank products, leading us to break out the marketable securities line, given that they mature in slightly more than 90 days. With the pending receipt of $149.25 million related to the settlement of our lawsuit against the insurers, which Hervé and I just reviewed, our pro forma cash balance would be approximately $380 million.
We have full capacity in our revolving credit facility. And as of quarter end, our total liquidity was $342 million, or $490 million pending receipt of the insurance settlement payment. We do not expect to draw on our revolver in the near-term. We’ve 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 acquisitions. Investments in our own business, managing our leverage and opportunistic share buybacks, which have been attractive. We repurchased 1 million shares of our common stock in the quarter, and an average price of $3.38. Brings our total repurchases since the beginning of 2021 to 3.7 million shares. As a reminder, we have $13.8 million remaining in our current buyback authorization.
As of quarter end, we had net debt of $285 million and a net leverage ratio of 3.5x our trailing 12 month consolidated EBITDA of $84 million as defined in our credit agreement. Pro forma for the insurance settlement payment net debt drops to $137 million, with a leverage ratio well below 2x.
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 our business. At quarter end, we had 69.8 million shares outstanding of common stock on average in the quarter or $69.3 million at quarter end, as well as $71.4 million shares of convertible preferred stock outstanding. The convertible preferred shares have a liquidation preference per share of $6.44 as of June 30, 2022, while accreting on 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 the each share of convertible preferred stock being convertible into approximately 1.83 shares of common stock. When multiplied by the total number of shares of convertible preferred stock outstanding as of June 30. It equates to 130 point 6 million shares of common stock on an as converted basis. Net debt was 69.3 million shares of common shares already outstanding and Emerald has a total of 199.9 million shares of common stock outstanding on an as converted basis as of June 30, 2022.
As of Friday’s closing price on our common stock, this converts to a market cap of approximately $631 million. This compares to our expectation of at least $70 million in free cash flow available for equity this year before considering any insurance receipts. We have an estimated contingent consideration on our balance sheet of $39 million for acquisitions made in the past three years, as well as a deferred tax asset worth over $70 million discounted the present value based on the tax treatment of certain of our acquisitions. This leads to an enterprise value of $878 million given our net debt outstanding, pro forma for the pending receipt of the insurance settlement, our enterprise value would be $730 million. 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 exceed $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. We expect adjusted EBITDA of over $50 million, which is net of $10 million of projected investment in growth initiatives on our Elastic SaaS product and new show launches in new verticals. Free cash flow is expected to be $70 million. Importantly, this guidance excludes our substantial insurance recoveries. 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’re encouraged by the positive trends across our brand portfolio as live events continued to stage a comeback. In the meantime, we’re not sitting still, but rather taking advantage of the opportunity to expand our capabilities with complementary products and services that offer great value to a growing universe of customers, while diversifying our revenue streams.
We’re targeting our expansion towards high growth industries, and investing in technologies that will create efficiencies across the entire Emerald platform from live events to content to our embedded B2B e-Commerce platform. The result is that we’re building Emerald into a much more valuable business with multiple growth levers and highly durable cash flows. Given today’s economic uncertainty, we’re happy to be in a business that has withstood multiple cycles and bounce back every time, while continuing to grow.
As an industry leader, and a premium organizer of live B2B events. We strongly believe Emerald will exceed our industry’s growth as we execute on our strategies and unlock additional sources of shareholder value. Thank you very much for your time today.
And with that, Scott, please open the lines for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. One moment please for the first question. [Operator Instructions]. And there are no questions at this time. I’ll turn the call back to management for closing remarks.
Hervé Sedky
Very good. Well with that I just wanted to thank you all for your time today and look forward to speaking with you next quarter. Goodbye.
Operator
That concludes the call for today. We thank you for your participation. Ask you to please disconnect your line.
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