EEX - NYSE

Good morning, and welcome to the Emerald Holding, Inc. Fourth Quarter and Full Year 2023 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 2024 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. The 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 the call will be available on the Investors section of the company's website through 11:59 p.m. Eastern Time on March 7. I'd now like to turn the conference over to Mr. Herve Sedky, President and Chief Executive Officer. Sir, please go ahead.

Thank you, Julie, and good morning, everyone. It's great to be with all of you today to discuss our fourth quarter and four-year results. I'll start with a high-level overview of our accomplishments, review our 2023 performance, and then give an overview of our strategy. David Doft, our CFO, will then provide more detail on our financials and outlook for 2024. I joined Emerald three years ago, and I'm incredibly proud of the work our team has delivered to date. Remember where we were three years ago. I joined Emerald in January of 2021 in the middle of a global pandemic that brought our business to a screeching halt. I knew then that this was a marathon, not a sprint. We needed to manage through the storm one day at a time thoughtfully and strategically, and we did. Since then, we've accomplished remarkable milestones, fostering moments of success that are paving the way for an exciting journey ahead. In 2023, we once again stayed true to our core, drove growth across the business, and remained committed to our strategic pillars of customer centricity, 365-day engagements, and portfolio optimization. Some of this past year's highlights include we saw the vast majority of our connections brands return to pre-pandemic levels of revenue performance and most importantly, higher levels of impact and growth in the communities we serve. In fact, just yesterday, I returned from KBIS, the kitchen and bath industry show where attendance has far surpassed any event in its history. Across our portfolio, our growth was meaningful, and we believe we are on a path for continued growth. Our efforts span various fronts, from introducing onsite rebooking and launching our first time exhibitor program, to expanding into the B2C event landscape with initiatives like NBA Con and Outdoor Adventure X. We implemented important strategic initiatives and investments that are crucial for our ongoing success with expansion of our Emerald Resource Hub in Manila, investments in new tools and resources, and the addition of lodestone events to the Emerald family. We launched several new events, co-locations, and strategic partnerships while we expanded our international sales reach and welcomed meaningfully higher levels of exhibitors and attendees from outside of the United States. Our content business underwent significant incremental digital transformation since we made the decision to run it as a standalone business unit through resource investment in editorial, advertising, lead generation, and other media-related services. As part of this effort, we launched our first pan-Emerald media property servicing small businesses called Small Business Exchange, which already has 400,000 newsletter subscribers. I urge you to check it out, actually, at www.smallbusinessexchange.com. Simultaneously, our commerce businesses' expansion into the kitchen and bath home market, adding brands like LG's, LG Builders, and Signature Kitchen Suite divisions, as well as

Thank you, Herve, and good morning. Starting this quarter, we have realigned our reporting segments to better reflect how our business is organized and managed. Our connections segment includes all of our live events, while the all-other grouping includes our media content assets as well as our software e-commerce assets. This follows the completion of a reorganization executed during the year where we focused leadership around the products and services we provide as opposed to the industries we serve. We expect this will allow us to better share best practices and increase the speed of innovation within Emerald. This has also had the added benefit of enabling us to streamline our executive team to become less top-heavy. For 2023, our connections segment accounted for 89% of total revenue and 97% of adjusted EBITDA pre-corporate expenses. A full breakout of segment performance is available in our earnings release, and our investor presentation posted this morning to our website provides some historical trending data for your models. Turning to our results, for the fourth quarter, total revenue was $101.5 million compared to $93.6 million in the prior year quarter. The increase was driven primarily by organic revenue growth and less so from revenue from acquisitions. For the full year 2023, total revenue was $382.8 million compared to $325.9 million in 2022, representing an increase of 17%. Organic revenue for the connections segment, which takes into account the impact of acquisitions and scheduling adjustments, was $87.5 million for the fourth quarter 2023, an increase of $5.7 million or 7% versus the fourth quarter of 2022. For the full year 2023, organic revenue for connections was $327.5 million, an increase of $47.7 million or 17% versus the full year 2022. Given the decline in our content business, organic growth in total was an increase of 14.5% for the year. During the full year 2023, we recorded $2.8 million of other income, which hit in Q3, reflecting the remaining insurance proceeds paid to us under our event cancellation insurance as a result of the disruptions during COVID. Recall that in 2022, we recorded $182.8 million of other income, representing a large portion of those insurance proceeds. At this point, we have no remaining COVID-related event cancellation claims outstanding. Fourth quarter adjusted EBITDA increased 43% to $35.8 million compared to $25.0 million for the same quarter last year. Full year 2023 adjusted EBITDA, excluding insurance proceeds, was $95.0 million compared to $56.8 million in the full year 2022, an increase of 67%. This also equated to an over 700 basis point improvement in adjusted EBITDA margin, excluding insurance proceeds, as our recovering revenue base leveraged our overhead as planned. One important item to note is the level of investment we have been making in the business, which we believe should pay off with higher, more profitable growth in the future. These include launching new events and building out our scaled e-commerce software solution. While these initiatives contribute revenue to the company, in aggregate, they dragged reported adjusted EBITDA margin by four percentage points in 2023. Fourth quarter free cash flow was $13.5 million compared to an outflow of $1.4 million in the prior year quarter, excluding the impact of the $25 million in taxes paid in 2022 related to last year's insurance settlement recovery. Full year 2023 free cash flow, excluding insurance, was $26 million compared to $6.9 million for 2022, as our increase in adjusted EBITDA was somewhat offset by higher interest expense and timing of payables. Turning to expenses, on a reported basis, fourth quarter SG&A was $36.1 million versus $17.4 million in the prior year quarter. The year-over-year increase is due largely to 4Q 2022's $24 million benefit from a reduction in estimated deferred acquisition consideration from historical acquisitions, which flowed through the P&L as a credit to SG&A, as well as other one-time items as described in Schedule 3 of our earnings release. For the full year 2023, SG&A was $168.3 million compared to $145.0 million for 2022, largely due to the same dynamic. Turning to the balance sheet, we had $204.2 million in cash as of December 31, 2023 versus $200.3 million as of September 30, after funding the $8.6 million dividend on our convertible preferred stock. Our total liquidity is $314.2 million, including full availability on our $110 million credit facility. We believe our balance sheet strength and cash flow generation support our ability to opportunistically invest in and grow our business, as well as optimize per share value of our stock. We expect to continue to balance capital allocation between acquisitions, investments in our own business, managing debt leverage, and opportunistic share buybacks. While we did not repurchase any common shares in the fourth quarter, for the full year 2023, we repurchased a total of 5.1 million shares at an average price of $3.34 per share. At year-end, we had $25 million remaining on our existing buyback authorization, which was reloaded by our board in November. In lieu of buybacks of common stock, we did fund the quarterly dividend on our convertible preferred stock in cash as opposed to in-kind now that we have the option to do so. We spent approximately $17.2 million on this in the second half of the year, thereby avoiding the issuance of incremental convertible preferred stock that could have converted into 4.9 million common shares at issuance, given the $3.52 conversion price. As of December 31, we had net debt of $209.1 million, leading to a net leverage ratio as defined in our credit agreement of 2.13 times our trailing 12-month consolidated EBITDA based on the definition in our credit agreement of $98.3 million. The terms of the convertible preferred stock also allow us to force mandatory conversion of all preferred shares if the price of Emerald's common stock closes at $6.17 or higher for 20 consecutive trading days. If we achieve the closing price requirement, we intend to immediately effect the conversion of the preferred shares, and our independent directors have already approved this. Yesterday's close represented the 14th straight day our stock has closed above the threshold. Should we close at $6.17 or higher for each of the six upcoming trading days through March 7, we would be able to execute the mandatory conversion, turn off the 7% dividend paid to the convertible preferred stockholders, and save over $34 million per year. We believe that the conversion of the preferred shares would substantially simplify our capital structure and moderately improve our trading liquidity, making Emerald more attractive to potential investors. Additionally, as some data providers have been treating the convertible preferred stock as debt in their market cap calculations, the conversion into common shares will make it easier for investors to calculate our market cap, which at current prices is approximately $1.3 billion on an as-converted basis. An overview of our capital structure and the effects of the potential conversion of the preferred shares can be found on slide 12 of our earnings presentation deck. Factoring in 62.9 million of common shares outstanding at December 31, and an additional 139.9 million common shares represented by the convertible preferred shares as of December 31, our total share count on an as-converted basis would be 202.8 million. As just noted, based on yesterday's closing price, this equates to a market cap of $1.3 billion on an as-converted basis. Adding in our net debt, estimated contingent consideration of $7 million on our balance sheet for prior acquisitions, and a deferred tax asset worth approximately $70 million, this leads to an enterprise value of approximately $1.5 billion. Turning to guidance, we are initiating full year guidance for 2024 in the range of $415 million to $425 million of revenue, and $110 million to $115 million of adjusted EBITDA. This guidance implies an adjusted EBITDA margin of approximately 27% and includes an over 300 basis point drag from continued investment in the growth initiatives I noted previously. We believe as our business continues to scale, and we leverage the investments we have made that we have runway to improve this number as we work our way back over time to the margins we saw prior to COVID. Thank you very much for your time. And with that, we will now open the line for questions.

Thank you. [Operator instructions] Your first question comes from Barton Crockett from Rosenblatt. Please go ahead.

Okay. Thanks for taking the question and good morning. I guess I just wanted to have a little bit of more granularity if I could on the variance here versus what you guys have been expecting. You gave a revenue guidance range for the year and repeated that in the third quarter and we came in a little bit below that for the year. You gave a EBITDA guidance range and we kind of came in at the bottom end. And I assume you were expecting better than that. So could you kind of break down what the biggest drivers of the variance were? That would be question number one and then kind of related question number two. You had 5% kind of organic growth in the fourth quarter. Your guidance would have your growth up 8 to 11% revenues. So a reacceleration. Can you talk about how much visibility you have into that? Is that reacceleration what you see in the first quarter and what gives you confidence that the acceleration will happen?

Sure, Barton. Thank you for the question. I'll take the first question in terms of the question on our performance in the quarter. So I would say there are three things. First, the content business. While it's a small part of our business, as you've seen and we've talked about, there are some declines in the quarter and it's been a difficult year for us and for the industry as a whole. The good news is that we do think that budgets have stabilized and we've made also some investments. We believe that combined efforts that both in terms of what we've done in addition to some of the processes, the product changes that we've made, as well as some hedges that, quite honestly, that we've built into the business in '24 will de-risk that business for '24. But in terms of '23 performance, that was one of the contributors. The second area is admittedly launches are hard and they're hard to forecast. So the initial revenue that comes from launches in the near term have some volatility. And while on the whole and in the long run, they're really exciting and they create some real meaningful opportunity. And as I mentioned, over time, we'll create a one to 2% organic growth for emeralds. They do on a short term basis create some variability and that was one of the impacts for us in the quarter. And third, there is some sector specific volatility for us on a quarter to quarter basis. And that's why our organic growth rates fluctuates quarter to quarter. So we had 7% organic growth rate, for instance, this quarter, but based on the sector mix that we have, as an example, in the first quarter of 2024, we expect organic growth to accelerate beyond that. So those would be the three areas that contributed to that. The content business, the impact of launches, and sector volatility.

Yeah, and I think just building on that and going to your second question about the reacceleration anticipated in the guidance we gave, it is that quarter to quarter sector specific performance. Our business, it's not one business. It's an aggregation of events that serve specific industries. And depending on the quarter, we have an event in some industries and another quarter we have events in other industries. And it's really the sector specific aspect of it that may lead to the changes in growth rates quarter to quarter. Where we sit right now, 1Q, we expect to have a nice reacceleration of revenue growth based on the industries we serve in 1Q. 1Q also happens to be typically the largest quarter of the year for Emerald, which gives us a tremendous amount of visibility into performance for the year. As Herve mentioned in his prepared remarks, sitting here today, we've already booked, contract signed, three quarters of the booth revenue at our events. Now, there are some other revenue streams around booth revenue, but booth revenue is a very strong proxy for us and highly predictive based on our analysis of the overall revenue performance of the year. So we're feeling really good where we sit right now and we're ahead of where we were last year at this point relative to the guidance we put forth to where we ended up in actuals last year. So there's lots of room for potential volatility from here. We hope we don't have it, but we've built into a plan that we have high confidence in.

Okay. Thank you for that. And again, on the outlook here, so there's no guidance for free cash flow. How should we think about the free cash flow conversion of this EBITDA that you expect to generate in '24? Any reason why it would be meaningfully different than '23 or any thoughts around that?

I think in 2024, I hope we have a better conversion of free cash flow than in '23. There was surely some volatility in '23 around working capital, particularly on the payable side with some one-off dynamics that we think will reverse and stabilize or be more normalized in the '24 year. And then at least in the traditional reporting of free cash flow of cash flow from operations minus CapEx, the changes in deferred acquisition consideration that flow through cash flow from operations but are really acquisition related lead to volatility on that front. If you strip out the deferred acquisition consideration changes, you actually would get a better free cash flow than the straight up definition of it. But we have to stick with that definition and so we do. Ultimately, in 2024, I think we're less likely to have surprises on interest expense. I think we took a meaningful hit on interest expense this year, not just from rising rates, but when we extended the maturity of our debt from a widening spread on those rates, which cost us almost $10 million of interest expense in the year relative to our initial expectations coming into the year. I think this year is going to be, I hope will be a bit more predictive on that front and hopefully we get surprised with better interest expense if the rate environment improves as many predict. Our initial forecast is for moderately lower CapEx in 2024 than 2023. We're talking low single digit millions, but it's surely incremental to the flow through of EBITDA to free cash flow going forward. As I said, we hope and believe the working capital dynamic will be more normalized in 2024. But one of the reasons we didn't give a formal guidance on it is because that working capital volatility has really not served us well by putting out numbers that we've had a harder time predicting. But I do think with that more normalized environment, we're looking for working capital to be at least neutral and hopefully additive to cash generation in the year.

Thank you, Barton. [Operator instructions] Your next question comes from Allen Klee from Maxim Group. Please go ahead.

Yes. Good morning. For your software business, can you talk a little about your plans to grow that and your thoughts on if this will be cash flow break even or one direction or the other for 2024?

Yes. As I mentioned in my remarks, one of the exciting things about our software business is that we've been able to expand the total addressable market by entering a new category. So we have been playing largely in the outdoor apparel sector for a long time, serving industries that are adjacent to some of our events like outdoor retailer and surf and so forth. Now, have entered the kitchen and bath and more of the indoor categories, if you will, and with a number of very large prominent signings, which is really exciting. So the opportunities for us to grow that business are really to enter new categories. And we're doing that in a very thoughtful, disciplined way by leveraging the relationships in the contacts and customers that we have in our business. And with that, we do foresee continued growth and profitable growth. I think very real time. I mean, Herve and I were at the kitchen and bath show, as he mentioned in his prepared remarks, that that is the new industry that Elastic has entered into with the wins that he mentioned. But those wins were announced at the event, and it opened a lot of doors of potential new customer opportunities, especially with the brand names that we've been able to initially sign with. They're well known in the space, and it leads others to look up and evaluate the efficiency opportunity they can get by adopting the Elastic technology. So it's a really exciting time. It's a very large market. In revenues, it's larger than the outdoor market, at least in revenues for the products. And we believe for the addressable market for the software, it's at least as large and maybe larger than the categories we've already served. And so we think it only extends the opportunity for very high growth at that business for a long time to come.

Okay, great. If I look at your guidance for EBITDA, you have margins going up in '24 versus '23. Could you talk a little about what's behind that? And also, you mentioned there's a 4% drag from new events and scaling in your software and different things. But when do you see those -- I mean, you could always be investing in new things, or is it something that you might -- when do you see that that 4% drag might become less?

Sure. So both your questions actually play into each other. So we're seeing continual leveraging of our cost base and our investments in 2024 that is driving incremental margin as we grow. I think you can break down the margin opportunity really in a couple of ways. One is as more and more of our events scale back to pre-pandemic levels -- and many have, but some still have a little bit to go -- we get very meaningful leverage of high gross margin revenue coming in that can leverage existing spend. And that's part of the natural cadence that we're looking at over the next couple of years as we look to bring margins back towards historical levels. The second is the investment areas. Now, a business like Elastic -- Elastic is already break-even on an EBITDA basis. It's a moderate drag on free cash flow. And we expect it to become profitable as it grows from here and have a meaningful flow-through of, again, high gross margin revenue to leverage its existing overhead to get to margins that are, I think, over time around where the rest of Emerald is. But that's going to take some growth from here because there is some investment for us to go into new industries. But when we go into new industries, we open up meaningful new revenue opportunities. On the launch side, again, they're largely events. Events at certain scale have fairly consistent and predictable gross margin. And so, as we get into years three, four, five of the launch plan, we start to turn the corner from that effort losing money to that effort becoming self-funding to that effort making money. And, you know, here they mentioned volatility on new event launches. It's true. They don't all work. And the ones that don't work, we stop doing them. And so, they stop losing money because we stop doing them. And then we go and we focus on what does work or we launch new opportunities to give us the optionality of growth. But in aggregate, it's a very high return way to drive incremental growth. And we'd rather launch a self-funding event than go buy one at six, seven, eight times EBITDA, right? It's a better return on our dollars and better value creation opportunity for our shareholders. So, it makes sense to do that. And so, you know, the reason we broke out that margin impact is because we want investors to understand where the margins are in the underlying business, let's call it the legacy Emerald business or the core Emerald business relative to the investment areas. And so, you know, if you take the implied 27% adjusted EBITDA guidance that we have and you add in the 300 basis points that we mentioned as the drag, the underlying business is at 30% in our plan for 2023. That's a lot closer to the historical margins than the reported numbers would otherwise indicate. And so, we're trying to give that visibility to investors on that front. Ultimately, with launches, if none of them work and none of them get to the point where they make money or self-funding, we can stop doing them. And it doesn't take away from the value of the rest of the portfolio that contributing margin at a very high level.

Thank you. My last question, maybe just going back to guidance, could you give us what you think of as the factors that might get you to the high end versus the low end of your guidance for 2024?

I think there's, as with a portfolio like ours, you know, there's probably four or five various factors. I think, you know, we have built in a range of views around the media business given the volatility of that business last year. We surely don't want to overshoot our expectation again. And so, we've put in appropriate hedges around a range on that front. Similarly, on the launch side of the business, you know, which can be volatile depending on in a given period how well launches do, that, you know, we put some range of outcomes there. And then we've just, we've left some room and range of outcomes on the core event business. You know, there are different components there. The booth revenue side tends to be fairly predictable. There are some events that monetize attendees. Attendees tend to sign up later. And so, that's a little less visible. And so, we like to leave ourselves some room on that front just in case, you know, one industry versus another may have different attendee performance at the end of the day. So, those are really the things we think about when we think about revenue, ranges of revenue and revenue hedges. On the EBITDA side or the expense side, you know, we then build a plan where we have different levels of spending and investment that's needed against different revenue levels. And so, we've become really good at managing expense in as real time as we can so that we could make sure that we're delivering on our overall plan.

Thank you, Allen. There are no further questions at this time. I will turn the call back over to Herve, for closing remarks.

Well, thank you all very much. And in closing, I want to thank you all for your time, for your participation. And as I said, 23 was a year of powerful growth as we grew revenue more than 17% and adjusted EBITDA by 67%. We're excited as we look ahead into 2024 and beyond to continue to realize the benefits of our strategy and investments to deliver greater value to our customers, opportunities for our people and expected strong growth to our shareholders. And with that, I wanted to thank you once again and goodbye.