Emerald Expositions’ Quarter and the Trade Show Environment

It’s a hell of a time to be in the business of putting on trade shows in the active outdoor business.  Reed Exhibitions has “postponed” the January Agenda show in Long Beach and is planning to evolve it towards a consumer-oriented show.  After last January’s show, I wrote that I didn’t think I’d be back to Agenda next January.  Apparently, I was right.

Meanwhile, the word from Emerald’s first November Outdoor Retailer winter market show in Denver is not too positive.  People I spoke with as well as this article from SGB Media made clear there are some concerns.

The people at Snowsports Industries of America must be thrilled at having sold the Snow Show to Emerald for $17 million about a year and a half ago.  They’d never get that price now.

Emerald (symbol EEX) went public April 28^th, 2017 with its stock price closing that day at $19.50.  At the end of trading on November 28^rd, 2018 it closed at $12.46 having declined 36% since going public.  The decline was particularly bad on November 1^st (17.9% on three times normal volume) when they announced earnings.  Earnings weren’t that different from what was expected, but they also unexpectedly announced that President and CEO David Loechner was retiring and would be gone in a week.

That not the way it usually happens at a public company.  It would be typical for there to be a transition period with the new CEO announced in advance and the old one around to help with the transition.  In this case, he announced his retirement at the start of the conference call, turned it over to CFO and now acting CEO Phil Evans and was gone.  The board of directors has announced a search for a new CEO, so it sounds like this was a surprise.   We don’t know what happened, but it doesn’t feel like a standard “retirement.”

Emerald has a great cash flow model because its customers pay it long before it has to lay out money.  This leads to a strange looking balance sheet with a negative current ratio, but that’s largely because of all the cash it collects and carries as deferred revenues until the shows happen.

For the quarter ended September 30, revenue rose 2.7% from $100.4 in last year’s quarter to $103.1 million in this year’s (for the nine months ended September 30, 88.9% of revenues were from trade shows).  “Organic trade show revenues declined approximately 2.0% over the prior year after adjusting for $6.5 million in other income related to insurance proceeds received for two shows that were affected by Hurricane Irma in the third quarter of 2017 and a $2.8 million timing difference related to a show that staged in the third quarter of 2017 and the fourth quarter of 2018.”

Their cost of revenue fell from $27.2 to $25.9 million, or by 4.8%.  SG&A expenses, at $29.7 million, rose $300,000.  Operating income fell 8.4% from $39.4 to $36.1 million.  Interest expense was up from $6.7 to $7.3 million.  Pretax income declined 11.9% from $32.7 to $28.8 million.

Emerald operates more than 55 trade shows, “…as well as other numerous other face-to-face events.”  It characterizes itself as “…a leading operator of business-to-business trade shows…” The industry, it says, is “highly fragmented” with the three largest companies, of which it is one, owning only 9% of the total.

It expects to continue growing both organically (bringing more business to its existing shows) and by acquiring additional shows.

Here’s how they talk about organic growth.  Sorry about the long quote.

“We are also focused on generating organic growth by understanding and leveraging the drivers for increased exhibitor and attendee participation at trade shows.  Creating new opportunities for exhibitors to influence their market, engage with significant buyers, generate incremental sales and expand their brand’s awareness in their industry builds further demand for exhibit space and strengthens the value proposition of a trade show, generally allowing us to modestly increase booth space pricing annually across our portfolio. At the same time, our trade shows provide attendees with the opportunity to enhance their industry connectivity, develop relationships with targeted suppliers and distributors, discover new products, learn about new industry developments, celebrate their industry’s achievements and, in certain cases, obtain continuing professional education credits, which we believe increases their propensity to return and, consequently, drives high recurring participation among our exhibitors. By investing in and promoting these tangible and return-on-investment linked outcomes, we believe we will be able to continue to enhance the value proposition for our exhibitors and attendees alike, thereby driving strong demand and premium pricing for exhibit space, sponsorship opportunities and attendee registration.”

This description of organic growth is consistent with the traditional role of trade shows and the ways in which trade show operators try and grow theirs revenue.  But the traditional role of trade shows is changing.  We seem to agree there’s a bigger consumer component emerging (at least in our industry), that shorter shows are okay, that the internet and technology has taken over part of what used to be trade show functions, that consolidation means larger companies are bypassing the shows for some functions or altogether and that are either too many or the wrong kind of shows.

What, then, for Emerald, is the new model for trade shows that permit this organic growth and what is the evolving role of trade shows?  We’re all trying to figure that out.

In the conference call, acting CEO Phil Evans talked about recent shows.  Four had declining revenue and two, rising revenue.  Summer OR, their third largest show, had “…mid-single digit percentage revenue growth…”  He also noted that “…two of our planned fourth quarter launches did not make it to market…” because the “…event did not gain enough market traction to be successful first events.  So we deferred their launches to get more time to prepare their respective markets for the new events.”  I wonder how you prepare a market that was apparently not receptive.

It feels like companies and retailers have less urgency to spend as much time and money on shows than they used to.  Even if Emerald does everything right, organic growth may be harder to come by.

Emerald’s next source of growth is acquisitions.  That’s a good way to diversify across industries, which they already are.  But even as an industry leader, where the top three companies together control just 9% of the trade show market, they are hardly a dominant player.  It would not surprise me to learn that part of the reason for going public was to use their stock to make acquisitions.  That’s harder to do when the stock has declined.  Sellers will want more of it and may be reluctant to accept it.  And while Emerald has a solid balance sheet, they aren’t in a position to pay cash for significant acquisitions unless they take on more debt.  That gets tougher as interest rates rise.

Meanwhile, it’s harder to figure out how any acquired show is going to perform given the changes underway.  I’ve always thought of Emerald as running their business well.  But buying a trade show and making it more profitable now requires more than improving systems and procedures of a show that had not been run well.  You have to anticipate how the acquired show’s market is evolving.

The good news for Emerald is that I can imagine shows getting cheaper to purchase- especially if the economy is weakening.

In Emerald, we have a profitable company with a pretty solid balance sheet and good cash flow model in a market that could use some consolidation and, even though it’s changing, isn’t going away.  Because they are public, we can watch to see if they can figure out how the market will evolve.