In his latest column EN guest editor Phil Soar says you can’t always believe what you read (unless it’s published in EN).
Don’t always believe what you read
I have been thinking recently about how you could measure the “best” exhibition companies– what factors to include in such a formulation. We could include profits, turnover, staff satisfaction, awards won, progress in sustainability and much more.
The most obvious starting points are probably size (turnover in pounds, shillings and pence) and profitability.
But it is with profitability that one runs very quickly into some frankly crazy numbers.
One of my several companies has recently produced accounts for 2021 – admittedly a pretty abnormal year. Anyone going to Companies House would perhaps be surprised that this seemingly very successful company had somehow lost £60 million in a single year. That is certainly what the official record shows. I noticed that Clarion declared a loss £227m in 2020 – a similar story. In 2020 Hyve (publicly quoted) announced a loss of £315m. Does this mean that our industry is in deep trouble? Inot, what does it really mean?
You might (reasonably) assume in my own company’s case that it means that over the 12 months costs were £60 million more than revenues. But that certainly wasn’t the case. Covid-19 made 2021 a tough year for all of us, but in those simple terms the company had a cash deficit of only around £3m – pretty good given that for three quarters of the year we couldn’t run live events.
Can you make any sense of company accounts?
You would expect that after a £60m loss we would be frantically looking down the back of the sofa for any spare cash – not true at all, the bank account shows a healthy eight figure number sitting there.
(And add to that the fact that the same company made a trading profit of over £5m in the first three months of 2022 whereas in the first three months of 2021 it lost £4m.).
So do these numbers tell you anything useful at all?
Well, first of all, companies owned by private equity always produce results which don’t appear to bear much relation to their “real” trading performance – this will be true of Clarion, Tarsus, Roar, Nineteen, CloserStill, Arc and several others.
This is because private equity companies borrow significant sums when they acquire trade show companies. It is important to stress that this is not money borrowed from a bank. In, say, a typical case of £100m borrowed to fund a purchase, only around £30m is typically borrowed from external banks.
Our trade show companies often borrow from their own employees
The rest is “borrowed” directly from the resources of the private equity companies themselves, and also from the directors and employees of the company – who “roll over” the value of the shareholdings that they have sold into what are called “loan notes” – and which is another form of debt. In the main case I have quoted, around £15-£20m of the borrowings have actually come directly from the employees themselves.
So let’s say that the interest rate on the whole £100m is 10% – so in a single year the accounts show a “cost” of £10m in interest. But in fact, only £3m has really gone to any outside bank. The other £7m has been paid to the shareholders of the company – the private equity house and the employees of the company.
So while the accounts suggest a “loss” of £10m, in reality the owners of the company have only paid out £3m.
Don’t even talk about amortisation
The far greater effect on profitability is “amortisation”. This is a complex subject, but, in a nutshell, if a company buys a trade show for, say £10m, then the auditors insist this is written off (or “amortised”) over a set period – let’s say 10 years. So, in this case, the company has to set £1m against its profits each year for 10 years and, technically at least, the profits are reduced by £m a year. (This is a very arcane area and there are many variations – if a show has done very well, then it can be “revalued” in the accounts at a higher number for instance).
There is no cash involved here – the £1m is simply a paper adjustment.
But the last two years have been exceptional. The big auditing firms – PWC, KPMG etc – are obliged to make an annual judgement on what the “assets” (in our case trade exhibitions) of the company are worth. Now “worth” is always a subjective judgement, and the likes of PWC have understandably decided that, whatever these trade shows were worth in 2019, by 2021 they were worth rather less – after all, they have not run for two years or even three years. And at 31 December 2021 it was not possible to know what the long term effects of the pandemic would be on the “value” of these shows.
Did you know that your shows could be “impaired”?
Hence the auditors will place an “impairment” of value on these trade shows we own. There is no simple formula, but we might reasonably expect that – in the eyes of the auditors – the shows might be worth 10% or 20% less than what they were worth pre-pandemic. The company thus has to calculate how much this is and treat it as a loss against profits (the detail actuality is rather more complex but for these purposes this suffices). This can add up to rather a large number – though it is just a “paper” transaction and no money changes hands. If a trade show group has made £500m in acquisitions, then 20% of that means that there is an automatic £100m hit to the profits.
Now you can see why one company can produce a set of accounts showing it lost £60m in 2021.
And why virtually all of our companies will produce similar accounts in the next few years. And also why these accounts tell us virtually nothing about how well or badly the business is doing.
You will have heard of the term EBITDA. This is the measure which is now used almost universally to judge how profitable a business “really” is.
So what is this mysterious EBITDA thing?
EBITDA means “Earnings before Interest, Tax, Depreciation and Amortisation”.
I have explained above how the cost of interest does often not reflect what really affects the shareholders (because they are paying interest to themselves).
Tax is straightforward – we look at profits before tax for a number of reasons. One is that tax rates can be very different in different countries. A second is that if a company makes losses in year one it can offset some or all of those losses against profits in year two. While it is a simplification, a loss of £60m can save you a lot of tax tomorrow when offset against future profits.
Depreciation is not very important in our business – but it covers writing off the costs of computer systems and the like.
Amortisation is a theoretical exercise which has significance but can create seemingly perverse results. What it does not do is tell you how well the company is performing.
Hence EBITDA is now the measure which is used to assess how well a business is doing – along with a very simple measure: “How much cash is in the company today compared with a year ago?” In other words, does the company generate cash?
You will have heard the phrase: “Profit is vanity, cash is sanity.” That applies in spades to the trade show business today.
Let’s do another quick one – our “biggest shows” – or are they?
For many years we were plagued by publications (not EN) outside the industry publishing spurious lists of “The Country’s Biggest Exhibitions” – this was common in a number of newspapers as well.
The two lists below are from 2013/14 (I combine two years so as to bring in all biennials). This was the last time it was possible to publish any such lists – whether they had any claim to accuracy or not. After this time companies had largely stopped auditing and there was little or no publicly available information.
But back in 2014 the claim was that the ‘biggest’ shows were those which had the largest number of visitors – or in some cases were the ones which took up the largest area.
Only two based on visitors were really in the top ten
The first list was the “Top Ten from 2014” – based solely on visitors – and carried the supposition that the number of visitors equated to size or turnover or whatever else the ill informed editor was thinking about at the time.
On the right hand side is where those “Top Ten” actually ranked at that time in terms of the turnover or revenue of the event – the only truly meaningful way to judge any of our events. As can be seen, only two of the “Top Ten” were among the 10 biggest revenue generators at the time, and four of them no longer exist.
Show Visitors Rank by Revenue
|Ideal Home Show||250,000||5th|
|Clothes Show Live||110,000||Gone|
|London Boat Show||101,000||Was 6th gone|
|Gadget Show Live||98,004||Gone|
|Top Gear Live||95,000||Gone|
|NCC Caravan and Boat||93,000|
|Grand Designs London||89,005|
|BBC Good Food Show||85,000|
And the biggest shows by size don’t really rank anywhere
If we look at a similar chart based on sold square metres (which was used in some Mash publications) we get a totally different picture –but not one which is ultimately that much more reliable.
Of the “top ten in square metres”, four are in the Top 10 by revenue and seven in the Top 15 by revenue. Only two of the ten are no longer with us. But what is notable is that square metres doesn’t necessarily tell you a great deal – Hillhead and Saltex were the two largest shows in the UK according to some sources, but neither featured in the Top 40 in terms of revenue.
So, in summary, the two “largest” shows in the UK according to some charts are not even in the Top 40 in terms of turnover. And of the four “biggest” shows by visitor numbers, only one was even in the Top 10 by turnover.
Lesson from this – don’t believe what anyone tells you about trade and consumer shows unless EN publishes it.