Emerald Holding Inc (EEX) 2020 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Emerald Holding's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn this call over to Mr. David Doft, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. We appreciate your participation today in our third quarter 2020 earnings call. I'm very pleased to have Brian Field, Emerald's Interim President and Chief Executive Officer, with me here today.

As a reminder, 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 9, 2020.

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. We do not undertake any duty to update such forward-looking statements.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our 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 our earnings release.

Now I'll turn the call over to Brian.

Thank you, David. This afternoon, I will provide an update on the exhibition industry, and then discuss progress transforming our operations to position Emerald for a return to organic growth. David will review our third quarter results, and we will then open the call to your questions.

On today's call, there are 5 main points that I hope you take away. First, our survey work continues to affirm our customers' desire to return to live face-to-face events, given the value and importance of our marketplaces to their businesses. Second, third-party studies and recently stage shows across the world, both demonstrate the clear desire or a return to live in-person events. Third, we are also seeing this desire in our own portfolio as our IGES show, which is set to stage this week, has experienced 36% registered attendance growth as compared to last year's show. Fourth, we continue to implement our strategic initiatives designed to improve our execution and accountability across the company. Our goal is to deliver improved organic growth and profitability once the environment normalizes, and we are aggressively implementing our initiatives during this current time period. And lastly, we are well capitalized, given our insurance coverage and the completion of our preferred stock offering. This places Emerald in an enviable position. We now have the flexibility to invest in our business for the future and also take advantage of dislocations in the market as a result of the pandemic.

Of note, we are seeing opportunities today and believe there will be many attractive assets coming for sale at compelling values.

Turning to our trade shows. We have canceled all of our large events through year-end, with the exception of the international Gift Exposition in the Smokies, or IGES, which is scheduled to take place this week.

Additionally, this past August, we began to host several small showroom events in New York City, which, while small and scale, were down an average of only 9% from 2019 revenue levels.

Looking forward, our first quarter 2021 events are certainly at risk, given the continued restrictions at the state level combined with the potential for several venue facility closures due to COVID-related government restrictions and venue takeovers. We have already canceled some of our first quarter events and postponed others.

Despite the uncertainty that remains, our teams continue to actively plan for next year and are evaluating various scenarios for each event-based upon varying levels of attendance combined with the necessary protocols to ensure we provide a safe environment for our customers. We are often asked what levels of profitability we can achieve at varying show sizes as well as how we think about the path of the recovery.

From a business perspective, we can achieve the same level of margin at varying levels of attendance as long as we properly plan the event for that size and manage expenses accordingly. Additionally, as we've said before, our live event cost structure is typically approximately 70% variable and 30% fixed. But we can manage down the fixed portion of the events expense structure to maintain margin if we have adequate lead time.

As we look forward, our focus is on delivering successful events for both our exhibitors and attendees as our customer satisfaction remains our #1 priority. As the environment begins to normalize, we will then determine on an event-by-event basis, what level of attendance is necessary to stage a successful event.

What I can say with confidence is that many of our customers are eager to return to face-to-face events, given the ROI that they achieve and the importance of our live in-person events to their businesses. We see this through the survey work that we have ourselves completed as well as in industry reports like UFI's Global Recovery Insight's 2020 report, which was published on October 20 in partnership with Explori. By way of background, UFI is the leading global association of the World's Trade Show Organizers and Explori is a leading research and analysis platform focused on the events industry. This survey was designed to measure both exhibitor and attendee preference towards participating in live events. The study received more than 9,000 responses from 30 countries and clearly shows that both exhibitors and attendees overwhelmingly prefer live meetings taking place in a face-to-face format.

The survey noted that the social aspect of face-to-face events and the ability to make connections across their community is critical and cannot be achieved or duplicated in a purely digital medium. We are also seeing tangible proof of these findings as events slowly start to stage again across the world. Caravan Salon is one such show that we found very encouraging. This event is the largest RV trade show in the world and staged from August 29 to September 6 in Düsseldorf, Germany. The show covered approximately 762,000 square feet and drew 107,000 attendees comparing to 2019 show, which covered 2.3 million square feet and drew 268,000 attendees. This was clearly a smaller show given the necessary safety requirements, but it was the first show to stage in Düsseldorf post-lockdown. And local media noted that it was a major test for the trade show industry. In reports that we've seen, the show's organizers noted their exhibitors being pleased with both the quality of attendees and levels of sales achieved.

Another example is the Shenzhen International Furniture Exhibition, which stage from August 23 to the 25th in Shenzhen, China. Trade press reports indicate that exhibitors increased by 75% compared to previous addition of the show, while visitor numbers increased by nearly 40% to 216,000.

We've also seen this enthusiasm in our IGES show, which is set to stage this week in the Smoky Mountains of Tennessee. For those who are not familiar, IGES is the largest dedicated gathering of wholesale souvenir resort and gift buyers in the U.S. What is interesting is the surge in attendee registrations that we experienced when the show dates were finally confirmed. Even though exhibitors are down by about half, there appears to be significant pent-up demand. As I mentioned earlier, registered attendees are tracking up 36% versus last year's levels, which provides further confidence that our market participants are very eager to get back to in-person events.

While we're encouraged with the direction of these shows and remain optimistic that live face-to-face events will begin to reemerge next year, we are in parallel continuing to implement our growth strategies designed to improve the efficiency of our operations, accelerate organic sales growth and improve our profitability. Exploring new digital product offerings and revenue models designed to complement our live events and improve our customer engagement is one such initiative.

During the third quarter, we hosted over 90 digitally delivered events across a variety of formats and form factors and are exploring various subscription-based revenue streams as well for more recurring predictable revenue. Over time, we expect these digital initiatives will become important new revenue streams adding to Emerald's growth profile as face-to-face events return.

As I noted earlier, the consistent feedback that we received from our customers is that digital events are additive to, but not a replacement for our in person events. This feedback is encouraging. And leads us to believe that there is an emerging hybrid model for these digitally delivered solutions that complement face-to-face events over the year.

While we project a modest annualized revenue opportunity in the $5 million to $10 million range at a strong contribution margin in the nearer term, the more important value of these events is our ability to engage with our exhibitors year-round and to provide them with opportunities to engage their target buying audiences in today's environment. This, in turn, should allow our digital content and event platforms to serve as meaningful new customer acquisition vehicles, which, by example, together generated 62,000 new customer prospects for Emerald over this past quarter.

Another area of focus in the quarter was the continued progress on our unified data initiative that we call Smart Tech, which remains on track for delivery in the first quarter of 2021. This project will enable us to house and quickly access our customer information in one centralized customer data hub and allow us to develop a deeper understanding of our customers' interests and behaviors, what events they attend and what they do with those events. We believe this will provide us with greater insight to what our customers care about, which will allow us to be more targeted in how we market and sell solutions to them. We see a significant opportunity to provide incremental value and cross-sell to our vast customer base.

Our ability to strategically invest in our business and thoughtfully prepare for a return to live face-to-face events is possible because of our insurance coverage and recent capital raise. As David will touch on in more detail, we have submitted $146.2 million in claims for canceled events thus far and have received $64.3 million in interim prepayments through October. An additional $15.7 million in insurance claim payments were recently approved, and we expect to receive it in the coming days. We also expect to submit incremental event cancellation insurance claims for events that were scheduled to occur in the second half of the year.

In regards to capital, we completed the sale of our convertible preferred stock offering in the third quarter, which generated $130 million of incremental proceeds on top of those raised in Q2. At the end of the third quarter, we had approximately $327 million of cash, which, importantly, will allow us to take advantage of dislocations in the market that are likely to result from the pandemic as we believe many high-quality shows will come for sale at attractive valuations, representing opportunities for Emerald.

Now let me turn the call over to David.

Thank you, Brian, and good afternoon. For the third quarter, we reported revenues of $8.5 million, which compared to $75.6 million in the year ago quarter. The decrease is primarily due to the cancellation of 29 events due to COVID-19, most notably ASD August, New York NOW August, CEDIA Expo and Modern Day Marine.

Our adjusted EBITDA for the third quarter was a loss of $3.2 million as compared to $28.7 million in the same period last year. The decrease in adjusted EBITDA of $31.9 million was mainly due to the COVID-19-related event cancellations, representing prior year third quarter adjusted EBITDA of $46 million. This was partially offset by the recognition of $10 million in other income related to event cancellation insurance claim proceeds confirmed in the third quarter of 2020 as compared to the year ago quarter. Third quarter 2020 adjusted EBITDA also reflected a combined effect of lower organic revenues are offset by the continued cost savings measures that we are implementing, and which I will discuss further in a moment.

Free cash flow for the third quarter was a use of $20.9 million, which includes $37.5 million of customer refunds paid for canceled events and the decline in cash receipts due to the cancellations of upcoming events. This was partially offset by the receipt of $39.8 million in cancellation insurance proceeds and our close management of cash and expenses. The underlying business trends reflected approximately $33 million of cash outflows for expenses, including payroll, severance and prepayments for future events, offset by $14 million of cash collected for future events in media as well as the insurance proceeds I just mentioned.

At September 30, we have a refund liability of $25 million for canceled shows, which compares to $46 million at June 30, 2020. Additionally, we have an incremental $25 million of customer prepayments on hand for all future events, including many that are scheduled at the stage in 2021.

As Brian touched on, we have had 22 canceled events approved for reimbursement by our event cancellation insurance carriers and have received $64.3 million, plus $18.8 million approved with payment pending, of prepayments against the expected full clean value of approximately $117.6 million for those events. We have submitted an incremental the (inaudible) million of claims that are still pending approval for events through year-end and are fitter preparing insurance claims for canceled events in the fourth quarter, which we expect to submit over the near term. Upon submission of those claims, we expect to have in excess of $160 million of claim value pending. Given our success at cost avoidance through canceled events, we anticipate that all canceled 2020 events will fall within the $191 million coverage limit of our primary event cancellation insurance policy as well as a separate $6 million limit specific to our 2020 summer surface (inaudible).

And while the timing of insurance proceeds impacts cash on hand, at quarter end, we still had $326.7 million of cash, which reflects the full proceeds from our convertible preferred stock offering. Including the full access we have to our $150 million revolver, this brings our total liquidity at quarter end to almost $477 million.

We finished the third quarter with net debt of $199.9 million, representing a net leverage ratio of 1.5x our TTM consolidated EBITDA of $133.1 million per the terms of our credit agreement. As a reminder, our credit agreement has a springing total net leverage covenant of no more than 5.5x, which kicks in its borrowings under our credit facility exceeds 35% of our revolver capacity of $150 million. At September 30, we had no borrowings under our revolver and do not expect to draw on our revolver in the near term, given our strong liquidity position.

Turning to expenses. Our cost structure is made up of the direct cost needed to execute events and the SG&A or overhead needed to run the company and manage our portfolio of assets. Direct costs are largely variable, typically 70%, however, with enough advanced notice, almost all direct costs can be avoided, which you can fully see in our results this quarter. To date, we have avoided over $78 million of direct cost per events that we have had to cancel, and we are carefully managing commitments for those yet to stage in order to maximize our ability to avoid further costs given the current circumstances.

As we have discussed on prior calls, we have a very flexible expense structure that we have carefully reviewed as we work to optimize our operations and become a much more nimble company exiting the pandemic. As part of this, we have reduced our real estate footprint and headcount, consolidated departments to improve efficiencies and reduce costs and established the procurement department to ensure that we drive an expense disciplined culture across the company. This has contributed to a significant decline in our annual expense run rate, which we have reduced by almost $20 million year-to-date. We will remain focused as we further streamline our operations. Give the success that we have achieved reducing our expense base and raising capital, we feel that we have a long runway, both to invest in our business to drive organic growth as well as to explore potential acquisition opportunities given the attractive assets that we believe may come to the market for sale. While the environment remains challenging, I am pleased with the progress that we have achieved transforming Emerald, and I'm excited for the year ahead and for when the live event sector fully reopens.

With that, I will now turn the call back to Brian for his concluding remarks.

Thank you, David. As we exit the third quarter and begin to plan for the year ahead, I'm optimistic with the green shoots that we are beginning to see in the global trade show industry, combined with the demonstrated desire amongst our customers to return to our portfolio of industry-leading marketplaces. It is encouraging to see significant shows successfully staged once again, and we are very excited to host our customers at IGES this week. Taken together, these are early signals for our industry's recovery and healthy return.

As we've discussed this afternoon, we've been aggressively using this time to transform our operations to ensure we exit this difficult period of stronger and better performing company. We are exploring new digital business models, and making progress with our technology initiatives, which will allow us to better understand our customers' preferences, opening the door to what we believe is a significant cross-selling opportunity.

Further, our liquidity position is unique in the U.S. events sector, which positions our team to take advantage of dislocations to come in the market. We will be prudent as we look to thoughtfully expand our portfolio of industry-leading shows.

To conclude, I would like to thank all of our employees for their tireless work and dedication during such a challenging time. We remain committed to the health and safety of our staff and customers. Thank you again for your time today. Operator, please open the call for questions.

(Operator Instructions) Our first question comes from Seth Weber with RBC Capital Markets.

I wanted to ask about the comment you mentioned for the IGES show. I think I heard you say the exhibitor count is down about 50%, while registrations are up 36%. I'm wondering, do you have any sense for, if there's a portion of your exhibitors or attending companies that have kind of just been permanently affected or gone out of business over the last 6 or 8 months? Do you have any way to quantify that? Or if there's been kind of some sort of structural just impact on your -- on that base of exhibitor base customer?

Sure, sure, sure. Thanks, Seth. The -- a couple of things about IGES, which I think are really interesting. So first of all, this show typically takes place -- it's spread over 2 cities, so Pigeon Forge and Sevierville. Sevierville happened to have restrictions, limitations on mass gathering such that it was impossible for us to actually stage it there. So we had to consolidate into one venue in one city. So as part of that, that's certainly part of the halving of exhibitor numbers there.

There's certainly also, as you can expect, some trepidation from exhibitors who are from distant parts of the country. Some states still have some fairly stringent kinds of regulations around needing to either pre-COVID test or go into a quarantine when they get back. And for a lot of people being in quarantine for 2 weeks is kind of a nonstarter. So as you can imagine.

So a lot of the exhibitors are kind of local exhibitors. And for those that have come from farther away, they're really excited about being able to participate. I actually just got some message today from the move in because today, we're moving in exhibitors. And obviously, not a full survey of everyone who's there right now but the exhibitors that we talk to we're really pleased that we were able to put this show on and supporting them.

So as far as the number of customers that may be impacted and out of business, surely, a lot of our smaller customers, long-tail customers have an ongoing -- there's a cycle of small businesses that wink out and the barriers to entry are pretty low, and there are new customers that pop up. So we're not seeing a significant evaporation of big swaths of our customers, quite the reverse. I mean we're seeing a lot of loyalty to return to the events, coupled with the kind of safety protocols we're putting in place, giving them some assurance around, not just having a great show, in fact, 36% up in preregistration is quite remarkable, but also a safe show coupled with show that they're going to be able to do a lot of business during. And for that, they're really excited.

Okay. Yes. No, I mean, the 36% is quite -- is really pretty impressive and pretty surprising. So that's great to hear.

And then just -- you obviously alluded a couple of times to some potential dislocations in the market and your strong financial position and your capital situation. I mean can you just help us understand a little bit more how you're thinking about potential for incremental M&A? Are there certain categories or markets that are most appealing to you? Is it all domestic? Or would you look internationally? Is there anything that you would expand on that line?

Sure. This is David. So ultimately, I think we're not going to front run ourselves on getting into too much detail on categories. But we do have some strong presence across a number of different categories with Emerald that we think that we can leverage with incremental, not just events but other services that can help bring together and educate buyers and sellers in those markets.

At the same time, we're constantly looking to evolve Emerald's exposures to areas that are higher growth than it has had historically. And so we're also considering potential new categories that are natural extensions of where we are now, that could help tell us towards a better longer-term growth position.

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Thank you. Thank you, everyone, for your time today. As I mentioned earlier, we're really encouraged by the green shoots we're seeing in the industry globally and particularly enthusiastic about our IGES show this week as early signals of our industry's recovery and healthy return. We look forward to providing you all additional updates over the coming months. And thank you, once again, have a good afternoon or evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.