Emerald Holding, Inc.

Good morning, ladies and gentlemen, and welcome to the Emerald Holding Incorporated Second Quarter 2023 Earnings 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 Legislation 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 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 forward 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. The reconciliation of these non-GAAP measures to the most comparable gap measures 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 1159 p.m. Eastern Time on August 9th. I would now like to turn the call over to Mr. Arve Sedghi, President and Chief Executive Officer. Sir, please go ahead.

Well, thank you, Vanessa, and good morning, everyone. It's great to be all of you today to discuss our second quarter results. I'll start with an overview of the trends that we're seeing so far this year, and then give an update on our growth strategy focused on customer centricity, 365-day engagement, and portfolio optimization. David Doft, our CFO, will then provide more detail on the financials. We continue to see strength in the recovery of live events as post- COVID demand is driving meaningful year-on-year growth in our business. We expect this trend to continue into 2024 and beyond as we see the return of international attendees and further improvements in our customer supply chain lead times, as well as the impact of some of our strategic initiatives focused on enhancing customer experience and the tangible value we deliver to them. When you combine these underlying fundamentals, With the improvements we've made to drive operational efficiencies and advantages of scale over the past few years, it's easy to see how Emerald is becoming a platform for multi-year outsized growth. Our success in centralizing key functions, such as pricing and purchasing, over the last couple of years has unlocked even greater efficiencies. We believe this provides us with strong operating leverage as we continue to grow the company both organically and through strategic acquisitions. Our business has several features that make it resilient even in uncertain economic environment. First, we provide a tangible ROI to businesses for their marketing budgets. For many businesses, trade shows are their number one selling event of the year and a big part of our ongoing efforts has been to clarify this value proposition and make the ROI more transparent by developing value added tools and metrics that we believe will deliver an even better trade show experience to both the exhibitors and the attendees. The result is that our customers view our shows as an investment rather than a cost. Second, we have solid visibility on revenue through next year. We've been successful in encouraging customers to pre-book their space for the following year at this year's events. This not only provides our returning customers with the opportunity to reserve their ideal space on the floor, but also frees up our sales force to pursue new business rather than re-bookings over the coming year and increases our overall visibility on revenues up to 12 months into the future. Third, We have a diverse portfolio that serves industries with different behaviors during economic cycles. And while it's true that some of our events serve in markets that are softer in the current economic environment, others are thriving given non-correlated factors driving demands. For example, our ASD franchise is a key marketplace for value and discount retailers of all sizes, while our design portfolio, which makes up approximately a quarter of our revenue, has diverse exposures to various sectors such as healthcare and senior living that have secular growth characteristics and educational facilities which have government funding giving us visibility into purchasing activity. Because of these dynamics and the ongoing post-COVID recovery, we expect our business to hold up well even if some companies' advertising budgets may be restrained in the short term. As such, we continue to work towards our previously provided financial goals that are represented in our guidance and performance to date. In a year where corporate earnings in many sectors will be under pressure, our guidance reflects a more than 20% year-on-year increase in revenue and a more than 75% year-on-year increase in adjusted EBITDA X insurance. In addition, we believe we have plenty of room over the next few years to bring our margins up from the 25% adjusted EBITDA levels implied in our 2023 guidance this year to 35% plus margin that this business achieved before the pandemic, based on the operating leverage I referenced earlier being supported by us already having built an infrastructure to support a much larger revenue base. Taking all the pieces together, the organic growth in exhibitors and attendees, as well as the improvements in pricing, the post-COVID tailwinds, the M&A opportunities and the new show launches, the scale efficiencies and the value of our e-commerce software platform, which is not yet fully reflected in our valuation, it's not hard to believe that Emerald can become a significantly bigger and more valuable company in the next few years. We are more than the sum of our parts. That's in large part due to our strategic vision. We believe that longer term, Post full COVID recovery, we could deliver run rate organic growth in the mid to high single digits combined with growth from acquisitions in the mid to high single digits to contribute to double-digit annual revenue growth overall. In the near term, we expect this will be even higher given ongoing post-COVID trends. Moving to our second quarter performance. In May, we announced an exciting partnership with the National Basketball Association and the launch of NBA Con, a first-of-its-kind fan event that Emerald hosted in collaboration with the NBA. We held the first NBA Con event in Las Vegas in July with over 100 current and former players in attendance, along with musicians, fashion brands, and fans. We anticipate growing this collaboration to several events per year over time. While 2023 will be a net investment year for this project as we fund its startup costs, we expect the bottom line benefits of our partnership with the NBA to begin ramping up in 2024. In the meantime, the successful launch of NBA Con is already providing intangible benefits to Emerald, as it demonstrates to our existing customers our ability to unlock new audiences across new event types on an organic basis. We also hosted the first edition of Overland Expo West since our acquisition of the brand earlier this year when we bought Lodestone in January with record attendance at the June show in Flagstaff, Arizona. This was followed by the Strong Overland Expo Pacific Northwest event in Redmond, Oregon in July. Together, the Overland Expos and the NBA events represent a previously untapped market for Emerald in the consumer live event space that we believe can grow into a more meaningful share of our business over time and complement our B2B portfolio by offering our customers the ability to interact directly with large consumer audiences on the Emerald platform. Looking ahead, we remain focused on our three pillars of value creation that I'll briefly recap. Our first pillar is customer centricity. This means delivering greater value to customers in the form of add-on services, actionable data and insights, and a clearer picture of the return on investment they receive from the marketing dollars that they put to work across Emerald's platform. We believe that this improves our stickiness with customers, incentivizes them to deploy more marketing dollars with Emeralds, and ultimately should help drive higher revenue per customer. Our second pillar, 365-day engagement, means that we provide multiple entry points to the customer engagement cycle through trade shows, conferences, webinars, media content, and our e-commerce platform. Our e-commerce platform, called Elastic, provides buyers and sellers with a specialized digital marketplace for year-round selling enabling significant time and cost savings while providing customers with an easier way of buying in the wholesale market. Our third pillar is portfolio optimization, where our goal is to continue to expand Emerald's portfolio and build exposure to even higher growth and markets by acquiring complementary businesses and launching new events in high-growth sectors. Our MBA partnership is one example of this, Looking ahead into the remainder of the year, we're excited to launch the first edition of our new Cocina Sabrosa Latin Food Show, entering a fast-growing and untapped food market for wholesalers, retailers, and restaurants. Over time, we expect new event launches through our accelerator unit to contribute at least one to two percentage points of annual revenue growth. On the acquisition side, We continue to evaluate a diverse pool of potential acquisitions with the ability to bring Emerald's scale and operational efficiencies to shows within our highly fragmented industry. To conclude, we've been focused on building Emerald into a powerful platform that can only benefit from the ongoing COVID recovery, but also build on that momentum for years to come. We expect to see those benefits play out in the near term as our operating leverage enables us to add more shows, grow existing brands, and drive increased revenue by delivering value to our customers' marketing budgets. If you'll allow me a moment of reflection, I'm very pleased with where we are now and where Emerald is heading. When times were tough in the midst of COVID, we came up with a bold vision. One, that was both grounded by the realities of the collapse of live events and inspired by the opportunities to envision the industry differently, more creatively, better adapted to our customers' individual experiences. I think we're at a pivotal moment in our industry, one where we may look back 10 years from now and think, yes, that was the moment when the industry reimagined itself. With that, let me turn the call over to David Doft, our CFO.

Thank you, Hervé, and good morning. Starting with the top line, our second quarter revenue was $86.5 million compared to $71.4 million in the prior year quarter. The increase was almost entirely due to organic revenue growth as well as some modest revenue from new acquisitions. Organic revenue, which takes into account the impact of acquisitions and scheduling adjustments, was $79.2 million, an increase of $7.9 million, or 11.1%, versus the second quarter of 2022. Year-to-date, our organic growth was 16.6%. As a reminder, the second and third quarters are seasonally slower following the busy Q1 trade show calendar. Our acquisitions have slightly shifted the seasonality dynamics compared to our historical performance. In general, from a revenue standpoint, we expect Q2 to represent just over 20% of our annual revenues, Q3 to be slightly smaller, Q4 to be our second largest quarter and Q1 to be our largest. Second quarter adjusted EBITDA almost doubled to $14.6 million compared to $7.5 million, including insurance proceeds, in the prior year quarter. The increase in adjusted EBITDA was primarily driven by flow-through of organic revenue as we leveraged the fixed cost of running events as well as prior investments. Year to date, adjusted EBITDA excluding event cancellation insurance proceeds has increased 54.4% to $51.1 million, reflective of the operating leverage in the business. Second quarter free cash flow was $4.6 million compared to $2.4 million, excluding insurance proceeds in the prior year quarter. Turning to expenses, we continue to effectively manage our cost structure in this inflationary environment. While second quarter SG&A was $41.8 million versus $32.3 million in the prior year quarter. The increase was due to the fact that last year's SG&A benefited from a negative $10 million offset due to a markdown of estimated earn-out payments and due to the initial SG&A in 2023 as a result of the acquisitions of Advertising Week, which closed at the end of Q2 2022, Bulletin, which closed in July of 2022, and Lodestone, which closed earlier this year. Excluding these items, SG&A was flat to down. As for the balance sheet, we had $204.7 million in cash as of June 30, 2023, versus $217.3 million as of December 31st. Our total liquidity is $314.7 million, including full availability on our $110 million credit facility. In June, we completed the extension of our term loan facility to May of 2026 with an outstanding balance of $415.3 million as of June 30th at a rate of SOFR plus 500 plus a 10 basis point credit spread adjustment for the transition from LIBOR to SOFR. There are numerous financial impacts in the second quarter financials as a result of the term loan extension transaction. Given the nature of the term loan extension, it had certain accounting impacts that led to the costs related to the transaction to be accounted for in numerous places. First, we recorded a $2.3 million loss on extinguishment of debt as an expense in our income statement, which is an allocation of a portion of the original issue discount we paid on the term loan. We also recognized $2.1 million of third-party fees related to the financing transaction in interest expense in the quarter, and as a result, impacted our free cash flow. The remainder of the cost of the transaction were capitalized on the balance sheet. Without these term loan extension-related costs, free cash flow would have been $6.7 million in the quarter. We believe our balance sheet strength and cash flow generation support our ability to opportunistically invest in and grow our business. We will continue to balance capital allocation between acquisitions, investments in our own business, and opportunistic share buybacks. we have $3 million remaining on our current share repurchase authorization. As of June 30th, we had net debt of $210.6 million, leading to a net leverage ratio as defined in our credit agreement of 1.9 times our trailing 12-month consolidated EBITDA based on our credit agreement of $110.3 million. One balance sheet related item I'd like to highlight is that as of July 1 of this year, the company now has the right to choose to pay the quarterly dividend of our convertible preferred stock in cash or PIT. Up until now, we were required to pay in kind. The company also has the right to choose each quarter how it would like to pay. Given the conversion price of the convertible preferred stock of $3.52 as compared to the current share price, the independent members of our board have approved management's decision to pay the upcoming September 30 payment in cash. The total payment this quarter is $8.6 million, which means that we are avoiding the issuing of 2.4 million shares on an as-converted basis. This is an option we will carefully consider in our capital allocation analysis going forward. With respect to our capital structure, an overview can be found on slide 11 of our earnings presentation deck. Factoring in 62.9 million of common shares outstanding at June 30th, and then an additional 139.9 million common shares represented by the convertible preferred shares as of June 30th, our total share count on an as-converted basis would be 202.8 million. Based on yesterday's closing price, this equates to a market cap of $982 million. Adding in our debt, estimated contingent consideration on our balance sheet for acquisition, and deferred tax asset worth approximately $70 million, this leads to an enterprise value of approximately $1.1 billion. In our full-year guidance for 2023, as we stated on our last earnings call, we continue to expect in excess of $400 million in revenue and over $100 million of adjusted EBITDA. This guidance reflects a more than 75% increase over 2022 EBITDA, excluding insurance proceeds. Our guidance implies an adjusted EBITDA margin of approximately 25%, and we believe we have runway to improving on this number as we work our way back to the 35% plus margins we saw prior to COVID. We also continue to expect free cash flow in 2023 of over $60 million before accounting for the benefits of working capital inflows. As we move forward, we will continue to closely monitor the one-time financing and acquisition related costs that I outlined earlier in my remarks and keep you abreast of any relevant updates in the coming months. Thank you very much for your time. And with that, we'll now open the line for questions.