Q3 2020 Emerald Holding Inc Earnings Call
Will be open for questions with introduction with instructions to follow at that time as their Minder. This conference is being recorded.
I would now like to turn this call over to Mr., David Doft Chief.
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.
Im very pleased to have Greenfield Emerald 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 web site through 11, 59 PM Eastern time on November nine 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.
Most recently filed periodic reports on form 10-K, and form 10-Q and subsequent filings.
We do not undertake any duty to update 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 us 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 the 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 todays call there are five main points, but I hope you take away.
First our survey work continues to affirm our customers desire to return to life 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 for a return to life in person events.
Third we are also seeing this desire in our own portfolio as our EPS show, which has set the 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 cancelled all of our large events through year end with the exception of the international gift Exposition in the smoking or EPS, 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 in 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 covert 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 that 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 offense for that size and manage expenses accordingly.
Additionally, as we've said before our lives 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 number one priority.
As the environment begins to normalize we will then determine on event by event basis, what level of attendance as necessary to stage the successful of that.
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 achieved and the importance of our life in prison defense to their businesses.
We see this through the survey work that we have ourselves completed as well as an industry reports like fees. The global recovery insights 2020 report, which was published on October Twentyth in partnership with exploring.
By way of background Goofy is the leading global association that the world's Tradeshow organizers and exploring is a leading research and analysis platform focused on the defense industry.
This survey was designed to measure both exhibitor and attendee preference towards participating in live events.
The study received more than 9000 responses from 30 countries and clearly shows that both exhibitors and attendees overwhelmingly prefer life 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 the community is critical and cannot be achieved or duplicated in a purely digital media.
We're 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.
This event is the largest RV trade show in the World and staged from August 29th to September six in Dusseldorf, Germany.
The show covered approximately 762000 square feet and drew 107000 attendees compared to 2019 show, which covered 2.3 million square feet and drew 268000 attendees. This was clearly a smaller show given the necessary safety requirements, but it was the first.
Showed a stage in dusseldorf post locked out and local media noted that it was a major test for the trade show industry.
In reports that we've seen the shows organizers noted there exhibitors being pleased with both the quality of attendees and levels of sales.
Another example is the Shenzhen International furniture exhibition, which stage from August 20, Threerd to the 25th in Shenzhen China.
Trade press reports indicate that the exhibitors increased by 75% compared to previous edition of the show well visitor numbers increased by nearly 40% to 216000.
We've also seen this enthusiasm in our ish, which has set the stage. This week in the Smoky Mountains of Tennessee.
For those who are not familiar I'd.
EPS is the largest dedicated gathering of wholesale souvenir resorts and gift fires in the U.S.
What is interesting is the surge in a tentative registrations that we experienced from 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.
Well, we're encouraged with the direction of the 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 in 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 offense across a variety of formats and form factors and are exploring various subscription based revenue streams as well for more recurring predictable revenue.
Overtime, we expect these digital initiatives will become important new revenue streams, adding to emeralds 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 with a strong contribution margin in the nearer term the more important value of these events is our ability to engage with our exhibitors new 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 in event platforms to serve as meaningful new customer acquisition vehicles, which by example, together generated 62000, new customer prospects for Emerald over this past quarter.
Another area of focus in the quarter was the continued progress on our unified data initiatives that we call Smart Tech, which remains on track for delivery in the first quarter of 2021.
This project will enable us to housing quickly access or customer information and one centralized customer data hub.
And allow us to develop a deeper understanding of our customers' interests and behaviors what events the 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 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 canceling events, thus far and have received $64.3 million in interim pre payments through October.
An additional $15.7 million an insurance claim payments were recently approved and we expect receipt 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 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.
During the third quarter, we reported revenues of $8.5 million, which compares to $75.6 million.
In the year ago corner deep.
Decreased primarily due to the cancellation 29 events due to confidently team.
Most notably ASCII August.
Now Andre CEDIA Expo in modern day annually.
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 cold 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 have been canceled.
In insurance claim proceeds confirmed in the third quarter of 2020 as compared to the year ago quarter.
Third quarter 2020, adjusted EBITDA also reflecting combined of while organic revenues offset by the continued cost savings measures were implemented in 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 refund Jade for canceled event and the decline in cash receipts due to the cancellation of upcoming this year.
Partially offset by the receipt of $39.8 million in cancellation insurance proceeds and our close management of cash and expenses.
The underlying business trend towards reflected approximately $33 million or cash outflows for expenses, including payroll separate some prepayments for future events offset by $14 million of cash collected for future events and media as well as the insurance proceeds I just mentioned.
At September 30, we had a leap and liability of $25 million or cancel shows which compares to 46 million warrants in June 32020.
Additionally, we have an incremental $25 million of customer prepayments on hand for all future events, including many that are scheduled to stage in 2021.
As Brian touched on we have had 22 cancer treatments approved for reimbursement by our cancellation insurance carriers and have received $64.3 million plus $15.8 million approved with payment.
Prepayments against the expected full clean balance of approximately $117.6 million those events.
We have submitted an incremental $28.6 million claims that are still pending approval for events through year end and are preparing insurance claims for canceled against in the fourth quarter, which we expect to submit over the near term upon.
Upon submission of those claims we expect to have in excess of $160 million of clean value pending.
Given our success at cost appointing some canceled the balance we anticipate that all cancel 2020 events will fall within the $191 million coverage limit of our primary event cancellation insurance policy.
While as a separate 6 million dollar limit specific to our 3020 summer so capex bargain.
And while the timing of insurance proceeds impacts cash on hand at quarter end, we still have $326.7 million of cash which reflects the full proceeds from our convertible preferred stock offering.
Including the full access we have to a $150 million revolver and 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 1.5 points, our TTR 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 5.5 times, which kicks and borrowings under our credit facility exceeds 35% 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 SGN overhead needed to run the company and manage our portfolio of assets.
Direct costs are largely variable typically 70% however with enough.
Almost all direct cost can be avoided would you can fully see in our results this quarter.
To date, we've avoided over $78 million of direct cost for events that we have had to cancel and we are carefully managing commitments for those next stage in order to maximize our ability to avoid further costs given the current circumstances.
As we have discussed on prior calls.
Very comfortable 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 that we have reduced our real estate footprint and headcount consolidated departments to improve efficiencies and reduce cost and established a procurement department to ensure that we drive and expense discipline culture across the company.
This has contributed to a significant decline in our annual expense run rate, which weve reduced by almost $20 million year to date, we will remain focused as we further streamline our operations.
Given the success, we have achieved reducing our expense base in raising capital we feel that we have a long runway both to invest in our business to drive organic growth as well.
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 we have achieved transforming emeralds and I'm excited for the year ahead and for wind alive and Dr. fully reopened.
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 am optimistic with the green shoots that we're 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 marketplace.
This is encouraging to see significant shows successfully stage once again and we are very excited to host our customers that EPS. This week.
Taken together these are early signals for industry's recovery and healthy return.
As we have discussed this afternoon, we've been aggressively using this time to transform our operations to ensure we exit this difficult period, a 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 significant cross selling opportunities.
Further our liquidity position is unique in the U.S. defense 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.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Far too if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the stark is one.
One moment, please while we poll for questions.
Thank you. Our first question comes from Seth Weber with ours.
<unk> capital markets. Please proceed with your question.
Okay.
Hey, guys. Good afternoon, good evening hope you're doing well.
I wanted to ask about the comment you mentioned for the IBG CES 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.
You know if there is a portion of your exhibitors were attending companies that have kind of just been permanently affected are gone out of business.
Over the last six or eight months do you have any way to quantify that or if theres been kind of some sort of structural.
You know just impact on your on that.
Pesos exhibitor based customer.
Sure sure sure sure. Thanks.
The.
A couple of things about EPS, which I think are really interesting so first of all.
This the show typically takes place it's spread over two cities, so pigeon forge and see Brazil.
See verville happened to have restrictions limitations on mass gatherings, such that it was impossible for us to actually stage. It there. So we had to consolidate.
Into one one venue in one city.
So as part of that.
That's certainly part of the.
The having.
Exhibitor numbers there.
Theres 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.
The kinds of regulations are routed needing to.
Needing to either pre covert tasks are going to a corn team when they get back and for a lot of people.
Being in quarantine for two weeks, it's kind of a non starter so.
As you can imagine so.
A lot of the exhibitors are kind of local local.
Local exhibitors and for those that have come from farther away there.
They are really excited about being able to participate I actually just done.
Got some message.
Today from the move then because today, we're moving in exhibitors.
And.
Obviously, not a full survey of everyone, who is there right now, but the exhibitors that.
We talk to.
We're really pleased that we were able to put the show on and supporting them. So as far as the number of customers that may be impacted and other business.
Surely a lot of our smaller customers long tail customers have an ongoing theres a cycle of small businesses that winco foods and the barriers to entry are pretty low and there are new customers that pop up.
So we're not seeing.
Significance.
Evaporation of swaths of our customers quite quite the reverse I mean, we're seeing a lot of loyalty.
To return to the events.
Coupled with the kind of safety protocols were putting in place.
Giving them some assurance around not just having a great show in fact.
36% up and Preregistration is quite remarkable option, but also.
Save show coupled with a show that they are 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.
It's really pretty pretty pretty impressive and pretty surprising. So that's that's great to hear.
And then just you obviously alluded to a couple of times to some dislocation the potential dislocations in the market and your strong.
Financial position in your capital.
[noise] situation me can you just.
Help us understand a little bit more were how you are thinking about potential for incremental M&A are there certain categories.
We are markets that are.
Most appealing to you is it is it all domestic or would you look internationally was or anything.
That you would expand on that.
On that line.
Sure David So.
All to me I think we're not going to front run ourselves on getting into too much detail on categories, but we do have some strong.
A strong.
Presence across a number of different categories with Emerald.
We think that we can leverage with incremental not just the 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 and molds exposures to areas that are higher gross.
And you had historically and so we're also considering potential new categories that are natural extensions of where we are now that can help tilted towards.
Better warmer term.
His position.
Okay guys I appreciate it thank you very much.
Thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to management for any closing comments.
Okay.
Thank you. Thank you everyone for your time today.
As I mentioned earlier were really encouraged by the green shoots were seeing in the industry globally and in particularly enthusiastic about our EPS show this week.
As you know early signals of our industry's recovery in healthy returns.
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.