Tarsus Group - Exhibitions & B2B Media - Interview Transcript

Here follows the transcription of the interview podcasted last week - for the audio click here.

We’re here today with Douglas Emslie, Chief Executive of Tarsus Group (LON:TRS) , £105m market cap company trading under the symbol TRS on the London Stock Exchange.  The company trades on a forecast multiple of just over seven times consensus 2011 earnings of 18p and is paying a dividend yield of 4.7%.  So Douglas, thanks for meeting with us today.  

The team at Tarsus has great previous success at the Listed Exhibitions Group at Blenheim, which was sold to United News and Media for £600m or so in 1996 and you’ve continued that success with Tarsus.  Can you tell a bit about your history and how that led to Tarsus starting up?

Absolutely, the history of Tarsus, you’re correct, goes way beyond the 12 years we’ve been in operation, it goes way back to Blenheim, and the businesses are totally different in that Blenheim was very much a feature of its time. It started in 1982 with Neville Buch and Laurie Lewis and had three or four fashion exhibitions in the UK, they built that up and floated it on the USM, as it was then, in 1986 on Big Bang Day.  They built Blenheim up by making a number of major acquisitions and at that time that was unique, people didn’t understand that exhibitions were brands that could be bought and sold, so Neville Buch, our Chairman, and who was the Chairman of Blenheim, really was the first person to recognise that and take advantage of that and Blenheim was an acquisition vehicle and it consolidated a lot of the fantastic brands in the world that will never actually be transacted again.  So it was unique but very much an acquisition - late ‘80s, early ‘90s - vehicle and, as you stated, it got taken over by United News and Media, or United Business Media (LON:UBM) as it is today, in 1996.  And as a result of selling Blenheim our vision and starting task was to do something different, we didn’t want to repeat what Blenheim had done.  Firstly we wanted to do something new and fresh and also we didn’t think it was possible to repeat that success story in such a way.  So what we wanted to do was to create something that was going to be smaller that was going to be more focused.  Blenheim had 350 exhibitions in 50 different markets, operating in 24 countries, so we wanted something that was going to be smaller, that was going to be focused on the growing markets but also that had in depth knowledge of its markets, it wasn’t just offering the exhibition opportunity which Blenheim did, Blenheim was purely an exhibitions group, but we would be a more integrated media group offering exhibitions, publishing, conferencing and, at that point in time, the new media, which we hear much about today.  So we wanted to go to our clients with a menu of opportunity and be real experts within a small number of industries.

Today what we’ve got is a group that’s operational in 19 different countries across, in depth, about six or seven market sectors and we run, in total, 80 exhibitions over 80 websites and about 20 different publications, so it’s a much more broader but smaller and focused vehicle.

So how has it grown to the point of being a £100m market cap company today? 

Well when we started off we took control of a shell company, called BBB Design, which had a very, very small amount of cash in it, and we built up Tarsus over the last 12 years by making four or five major acquisitions, so we’ve been very careful in investing.  The first one was the labelling division with Labelexpo and Labels and Labelling magazine; then we invested in Off-Price in America, which is discount clothing; then we built up a business in France - and France was always a market that we liked, in Blenheim it was the biggest market that we operated in - the French market is the second largest in Europe, it’s an open market unlike Germany, which is the biggest market, which is controlled by the cities and their exhibition halls, so we liked the French market, we were quite happy to go back in there; and then in the last three or four years we made a big acquisition in the medical field in America, in 2006; and in 2007 we bought one of the largest businesses in the Middle East, which owned, as part of their portfolio, Dubai Air Show.  

So our strategy has been to make infrequent, sensible sized acquisitions and then organically grow them by adding value in terms of... the sectors provide opportunities themselves in terms of growing the existing product... adding or niched products to it or taking some of those products geographically into new areas.

And how do you add that value?  Is that through the new media and print?

Well we add value in a number of ways - in terms of making sure that we are the industry leader. All of our exhibitions are the leader exhibitions, we want to keep that leader position by adding value, whether it’s in publications, whether it’s in the conferencing, so intellectually we’re leading it and taking the industry forward.  We’re not just there as a supplier selling space for exhibitions, we have got intricate knowledge of where this industry is going and where it wants to go and we’re helping to lead that.  Secondly, most of the sectors that we’ve gone into have an international aspect to it and our customers want to get exposure to the new growing markets.  Most industrial exhibitions are in decline in the major markets and they are in growth phase in the new countries, whether it’s China,  India.  So a lot of the strategy that we’ve been following is actually following those trends and where our customers want to go and providing them with the opportunity in those markets.

Your strategy does seem to be focused around, as you say, medical, labelling, aviation, discount clothing obviously, rather than property, energy and finance, which may have been more cyclicalrecently; so why those sectors specifically?

Well firstly we’ve been looking for sectors where we believe that they’re in a structural growth pattern.  Labelling has grown consistently for the last 30 years and the reason for that is that the end labelling product turns up on a supermarket shelf in terms of food, beverages, pharmaceutical products and there’s been lots of innovation in the last 10 years because of a number of things:  firstly, within Europe, the expansion of the European Union requires lots of different language and regulations in terms of what has to go on labelling - so that’s been a growth factor.  Secondly, with so many disperse media opportunities for the brands to market their products it’s become more important that they market their product at the point of sale - so that actually when you see the product on the supermarket shelf you buy it, so the decoration, i.e. the label, becomes more important in terms of the sale.  Thirdly, the growth of middle classes in the emerging markets have meant that that wealth wants to buy the same product that they can buy in Europe or America -  so there’s a growing demand there to buy the same consumer products.  So we’re seeing a dramatic growth in emerging markets with the increase in wealth.  Medical; it’s all focused round early detection and prevention of disease and in America they’re leading the way in that people are now more conscious of their health, what they can do to actually live longer, get more tests, if something is wrong they can do something about it, lots of lifestyle changes but most of our medical business is focused on areas like Alzheimer’s, dementia, cardiac, cancer, lots of things that are actually going to kill us but you can do something about in terms of managing that.

You appear to have a big event focus and your key event brands, such as the Dubai Air and Labelexpo, were much more resilient than the smaller events through the downturn.  Has that surprised you and does that impact your strategy going forward?

No it hasn’t surprised us.  If you look at every single recession that’s happened what happens with our big customers is that they cut their budgets, they freeze their budgets and, therefore, they have to prioritise.  What they’re going to do in those circumstances is allocate their budget to their major platform within the industry because that’s where they’re going to get maximum return, they’re not going to take risks and they’re not going to speculate on newer events and, therefore, they get cut.  So this is a classic consolidation of people focused on their return.

The aviation industry is quite an interesting one because the Dubai Air Show is also seeing growth in an industry that’s had a very difficult time but it’s having a very difficult time in the mature markets, whether that’s in Europe or America, but if you look at all of the buying that’s going on at this moment in time it’s coming from the Middle East and from Asia.  The last big air show in the industry that took place was a couple of months ago in Farnborough, the biggest order placed at Farnborough was by Emirates Airlines and similarly Etihad and some of the Asian carriers are also placing big orders.  So a lot of the demand is coming out of the Middle East and, therefore, what we’ve got with our show in Dubai is the buyers and, therefore, the suppliers always want to go where there’s buyers.  So that’s why our show is growing, whereas Paris and Farnborough are older, mature shows that are not really growing.

Do you see that you will be moving out of the smaller events and focusing even more on your big shows?

 I wouldn’t say we’d be moving out of the smaller shows, the smaller shows are important because the life cycle of an event is it takes up to 10 years for a show to become established as a major brand.  So you’ve got to be constantly looking at your portfolio and identifying the ones you think are going to come through and become major brands and if they’re not going to, ‘is there a strategic need for those shows?’ and if there isn’t you cut and we’re constantly managing our portfolio on that basis.  A very recent example of why that works is we’ve just had Labelexpo in America last week.  A very successful show, our attendance was up and it was a huge surprise and a huge positive surprise that the attendees that came were actually buying.  So very, very positive - and one of the major groups that was there in large numbers and buying was from South America and for the last five years we’ve run smaller events in Mexico and Brazil, which has been stimulating the market - we’ve been educating the market - and now they’re coming and they’re buying the capital equipment. So it’s part of a broader strategy.  So it’s not just a question of looking at a stand alone big event but it’s actually looking at smaller events to drive strategic change.

It’s good to hear some more anecdotal evidence of the recovering US economy. But there have been a few problems in France.  Now I know you did report that the problems in France had swung over into the first half of 2010 , why has it been challenging there, has that continued?

Well the French market went into recession later.  The US, UK went in quite quickly with the collapse in October of 2008 but that didn’t really impact our French business until about April of 2009, so they were about six months or so behind, so they went in later and what we’re seeing in France is a very domestic business, so it’s very much French selling to French, and the events there have had a very rough 18 months. In the first half of this year our business in France was down about 14%. Our bigger events this year take place in the fourth quarter and what we’re seeing there is a stabilisation so the business is overall flattish, which is a positive, so it looks like the French are beginning to bump along the bottom, and that’s definitely what we’re seeing in terms of our forward sales for the beginning of 2011. But France has been a very tough place, really reflecting the economy.

Your strategy has been moving away from these mature economies towards the emerging markets -  and it’s been noticed in some of your releases that you’re calling it the 50/13 Strategy - so maybe you’d like to take us through that?

You’re right, we’re very much focused on growing the emerging markets aside of our business because that’s where we’re seeing more opportunities, that’s where our customers want to go, that’s where the markets are going and with exhibitions, in terms of the industrial sector, they have a large history there and with all the manufacturing moving, as I said earlier, it becomes more important to be in those emerging markets.  So what we’ve communicated to the market is that at this moment in time about a third of our business comes out of the emerging markets -  and that’s all been built up over the last six years from a standing start -  and that we would like 50% of our business to come out of those markets by 2013, therein lies the name of 50/13, which we thought was a nice sort of catchy phrase.  That’s going to be a challenge because while our emerging markets business is growing, and growing fast, we’re seeing a recovery beginning to happen in Europe and so our European business is growing, America has been in recovery in terms of our medical business and our discount clothing business.  So it’s going to be a challenge because the existing business is also growing, so it’s not going to be an easy target for us to achieve but that’s not the reason why we said something to be easily achieved, it’s going to be difficult and it’s going to be quite an exciting next couple of years.

The growth in China is very strong.  I can’t remember where I saw the number but last Labelexpo there was up 46% in sales?

Correct and, again, that’s really reflecting the growth of the middle classes, their desire for the products but also when we went into that market in China, you know seven years ago now, there wasn’t really much of a market. I t was basically European companies coming to sell to Chinese buyers and now what we’ve got in China is an industry that’s been built up locally and we’ve gone from 100% European exhibitors to the last show where 75% were actually Chinese exhibitors.  So that’s what’s driving a lot of the growth is the industry is developing domestically.

 

Who do you see as your main competitors in the sectors you operate in and how do you see yourself as differentiated?

Well in most of the sectors that we operate we don’t tend to have direct competition, we’re the market leaders, and the thing about exhibitions is that the industries that have exhibitions tend to like to have one dominant exhibition to go to.  It’s like the London Stock Market, you know the brokers like to deal on one market, the last thing they want to do is to have lots of choice and the same is true with exhibitions because the buyers just want to know that they go to the Dubai Air Show every second November, that’s the place to do business, they don’t want to have ‘Well do we go to Bahrain or do we go to Singapore?’, they don’t want that because they want to go to one place and do business.  Similarly, the exhibitors don’t want to be working out where the buyers are going, the industry wants that one date in the calendar and so we don’t tend to have much direct competition.  We do have competition in terms of overlapping with other shows, there’s no one major competitor, but in terms of looking at exhibitions generically, we would have competition from our peer, if you like to call it that, or companies like Reed Elsevier, the biggest in the world -  but they demonstrate how fragmented the industry is because Reed are the largest but they only have a 6% market share.  Then comes United Business Media, who have got a 2% market share.  

So it’s  very, very fragmented.

Very fragmented.  In the public market you’ve also got Ite Group (LON:ITE) , who specialise in mainly the Russian and the former Soviet Union market.  You’ve got private equity companies like Emap, who are very much a UK orientated exhibition organiser, and Clarion (http://www.clarionevents.com/) again, that’s about 75% UK business, 25% international.  So it’s those types of companies who we would see more as peers rather than direct competitors.  We might cross swords occasionally but it’s very, very rare to have head to head competition.

Well I guess the most important thing investors should understand about Tarsus is that your revenues are weighted biennially and heavily weighted in the second half, especially this year, is that a challenge for you both operationally but I guess also in how you’re perceived by the market?

 It’s something that is a little bit of frustration because our business is reflective of when the exhibitions take place and that is really driven by the innovation within the underlying markets that we serve.  Where innovation is quite slow, like in labelling not much happens so, therefore, the exhibitions take place every two years.  Similarly with aviation that there’s an international circuit of Paris, Farnborough, Dubai over a two year cycle, you’re locked into your cycle of your markets.  So in terms of looking at valuation what investors have to look at is an average of a 24 month cycle rather than just - we look cheaper based on next year but we’re probably a little bit expensive based on 2010 - so on a blend we’re about an eight and bit times multiple, which against the market sector is low. But historically, if you look at how our share price performs it tends to perform stronger in the run in to our stronger year, so from now until Christmas and into next year investors say ‘Well this is a big year, we will get excited’, so I would expect to see that valuation change as a result of people beginning to focus on our stronger year.  I think, also, we’re lagging a little bit because of people are now beginning to wake up to the fact that business to business media groups are going to be more resilient and if you look at the last recession they were the best performers coming out of a recession, so if we are going to begin to come out of a recession you would expect the B2B media groups to perform well.  We’ve seen good performance from the companies like United Business Media, from Informa, so that the bigger cap stocks are beginning to perform better and eventually people will go down to the smaller caps.  So hopefully it’s a timing issue, both in terms of market re-ratings and people specifically looking at our 24 month cycle.

I guess most comparables would be on, in normal times, mid teens multiples, and historically you’ve been valued at up to 25 times. You’ve explained why, perhaps, it would be lower in some years but do you just see it as a legacy of the bear market that you’re not trading where perhaps in more normal times you might be?

I do, I think exhibitions tend to be later cycle because as people begin to get bullish, because our exhibitions are sold so far forward, it takes a little time to catch up.  So I think, at this moment in time, we are suffering a little bit from that late cycle nature of the business.  But in terms of the mid teens, it would be where we expect things to return to once we begin to see the confidence come back that we’re in recovery mode.

I’ll just move onto your dividend policy in a moment but as we’re talking about the PE multiple, I would think that would have an impact on your ability to make significantly earnings enhancing acquisitions - obviously the higher your multiple the more you can acquire things to the benefit of your shareholders.  So I guess if it does rise over the next six months or year do you have a lot of targets for acquisition?

The M&A market’s very interesting. If we look at historical multiples, historical multiples have ranged from anywhere between eight to 12 times.  Now multiples are more the sort of six to eight times and maybe if something quite unique comes on the market maybe 10 times - so the multiples have come down. But with those multiples and looking at our own multiple being quite low it’s quite difficult to do something that’s not going to be dilutive and obviously we’re not going to do something that’s going to be dilutive, so we’re biding our time.  I think I’m less worried about the multiple because it will take care of itself over time.  What is more interesting is actually finding the acquisition opportunities and I was at a conference for the top 100 Chief Executives of our industry, which happens early September every year, and we got asked the same question as we did last year in terms of ‘Are you looking to make an acquisition?’. 80% of Chief Executives are looking to make acquisitions but only 20% are looking to make sales, so there’s a classic supply/demand mismatch which will force prices up. So it’s quite important to have in mind that actually the opportunities to make big acquisitions are very limited, so even if we wanted to use paper to make a big acquisition it’s not really going to happen because there’s not really anything there.  What I do see happening is probably smaller, bolt on acquisitions in existing sectors, is more likely to be a way forward for us.

And those bolt ons, will they be to enhance your online presence or the print presence or just smaller conferences and exhibitions?

It’s going to be in the exhibition field and primarily I would see acquisitions being made in the emerging markets and all product that’s available in the emerging markets tends to be smaller and probably in America.  The American market is recovering, we’ve got good experience there, we know the American market well and the American market does, in many ways, behave like an emerging market because they’re quick to deal with their problems and they tend to come out quicker but at this moment in time America’s giving conflicting signs as to whether it is in recover or not, I think that’s why the market’s a bit jittery in terms of what really is going on there because you get good news one week, bad news the next, so it’s difficult. But the M&A market, I think, will be more active but I think it will be more active with smaller deals.

So just going back to the dividend, your company is a bit of income story too, the shares are currently yielding 4.7%.  What is your dividend policy and how safe do you see the dividend?

Well the dividend policy is for us to have cover between two and three times and with the bi-ennual effect we would see our cover going up in a strong year closer to three and in a slightly weaker year coming down towards 2, so that’s our policy.  We very much believe in the dividend, it’s a critical part of our story and that’s primarily because if you look at our shareholder register we have a number of big individual shareholders where the dividend is important and we also have a number of very large income institutional investors where the dividend is very important.

Have you seen that shareholder base change as the valuation came down and the dividend [yield] became larger?

We have, we’ve seen the income funds grow in terms of their holdings and for us it was quite an interesting experience over the last two years where we got a lot of pressure from some small shareholders and some potential shareholders and some analysts to actually bring our dividend down as other groups were -  and we took a totally different view in that the dividend is the covenant with our shareholders and we had said that we were actually going to have a policy of two to three times cover and we were going to stick to it.  A lot of other groups didn’t and I think, going back in history, people tend to remember the biggest sin of all, which is cutting the dividend, compared to other sins, so it would be the last thing that we would do in running our business to tinker with the dividend.

There’s a bit of debt on the balance sheet, have you found that the credit crunch has impacted financing terms, I think you’ve got a re-finance in 2011, so how has the credit crunch impacted things there?

I think, like all businesses, the balance sheet got a lot of focus about 12 months ago. Any company sitting with debt a lot of investors were jittery as to what was going on with the banks, fortunately we’ve got a very good relationship with our banks.  The major lender is RBS and KBC in Belgium and a small bank in America.  We took the view that our debt was a little higher than we wanted it to be but overall we had an objective in that we didn’t want the debt to be more than twice our EBITDA over the bi-ennual cycle, at this moment it’s slightly above that for the current year and it’s going to be quite a bit below that for next year, so on average we’re sitting at about twice cover, so we’re very much in line with our target.  We’d like that to come down over the next three years so that will give us some more capacity to do little bolt on acquisitions but we also proactively went to the debt market in July.  We concluded the deal to re-finance a year earlier than we had to because we felt that the debt market was going to get more difficult as we go forward, that the pricing of the debt market is going to get more expensive and that we were better getting it off the table quickly and we’ve done that and we’ve re-financed our debt with the Royal Bank of Scotland as a lead, along with the Bank of Ireland. so we’ve slightly changed the components of the debt but the debt is at probably the upper level that we want it to be but, you know, at twice EBITDA it’s very conservative compared to other groups but it’s no longer an issue like it was 12 months ago and that’s where we want to keep it.

So I think consensus forecast projects a profit over £16m?

It’s between £15m and £16m would be consensus for next year.

Are you comfortable with those forecasts? I guess you tend to get a bit of visibility as the year goes on, I believe you’re three quarters booked for this year?

Yeah, that’s correct, so we’ve got good visibility because people book at the current exhibition for the next exhibition, so we have a reasonable visibility.  A lot of businesses - you know we’re somewhere in the 80 odd percents now - would love to have that but for us, that’s as normal.  For next year the big drivers are the big bi-ennual events, being the Dubai Air Show and Labelexpo in September, those events are selling well, they’re positive, which gives us a confidence going into next year in terms of the consensus forecast.  The big question is what’s going to happen economically and are we going to continue to see this headwind that we’ve had over the last couple of years or are we beginning to see things relax and people begin to relax and let their budgets go up again.

So how do you forecast these things though?  Not many of us have a crystal ball that can really see the future too clearly, so how do you manage that?

Well we’re just starting our budget process for 2011 at the moment and the assumptions that we are working on is that we’re not going into double dip but what we are going to see is slow grind and the slow grind’s going to go on for a few years, so we’re not expecting any sort of wonderful V shaped recovery, it’s just going to be hard work and we’re setting ourselves conservative assumptions for next year.

Just to wrap up, what do you see as the most exciting opportunities for you over the next few years?  You’ve talked about emerging markets, is that really  the focus -  Asia, Latin America, is that the most exciting thing going on in the group?

Well I think we’ve got a number of exciting things going on in the group, the emerging markets has been the area that we communicated earlier this year to the market that we’re excited by and within that it falls into two areas.  The No. 1 opportunity is in the Middle East, we’re one of four dominant players in that market, we’re seeing lots of opportunities in the Middle East organically and also being creative and working with incumbent government institutions to grow our business, so there’s lots of opportunities we’re seeing there to be very accretive in terms of building value for our investors.  Asia and predominantly China I see more as medium term opportunity.  It’s slow to build there in Asia so we’re not going to see a dramatic one, two year, doubling up or tripling of our business.  If we look at United Business Media it’s taken them 15 years to start a business which is now turning over £100m, so it’s that sort of time frame but it takes a while to build but, you know, you can build good sized businesses there but it takes time.  So we’re excited by those two markets.

The other area that I’m personally excited by is our medical business in America, it’s been growing this year quite dramatically, we’re up double digit, stronger than that in the first half of this year.  That’s really been driven by the educational side of the business in that doctors are investing heavily in our training programmes, which are usually three year programmes which are costing them about $30,000, so there’s a major time and money commitment, and they’re looking for new areas to expand their practices, whether it’s into areas like stem cells, into neurology, heart attacks are the No. 1 killer in America primarily because of weight management issues, and so there’s new medical practices being set up to try and cope with those issues and as a result of those opportunities we’ve gone from holding eight events in America two years ago to this year, 23 and next year about 35 and that’s call coming, organically, from the market opportunity.  

So those will be the major areas that we’re excited by.

Well thanks very much.  Do you think there’s anything else that investors in Tarsus should be aware of over the next year or so?

No, I think the other point I would make in that a lot of the other groups have got similar strategies, people want to build their businesses in emerging markets, people want to focus more on the bigger exhibitions rather than the smaller exhibitions, so I think that’s going to create problems in terms of supply of opportunity, both in terms of emerging markets -  there’s not that much to buy and in terms of big exhibitions they don’t change hands very often.  So I think while the opportunities are exciting, I think one’s got to focus on building one’s business organically and to be patient and wait for the opportunity to come, and opportunities always come, so it’s not going to be a major acquisitions spree, it’s going to be careful, good, solid organic growth and when something nice comes along we will look quickly to execute it.

And do you see the opportunity to grow the group to the size, and beyond, of where Blenheim sold out?  £600m or so, I know it was a very different business but is that what the group’s ambitions are?

Our ambition is definitely to be a lot bigger than we are today.  I think the market is taking quite a sensible view of small caps, it’s either get bigger or get out and our strategy, very much, is to get bigger and we want to be bigger in the right areas, so we’ve got to be careful and disciplined that we’re not getting bigger for the sake of getting bigger and actually doing acquisition activity which is buying secondary product, which is very, very dangerous, we always want to be investing in primary assets, but we want to be a lot bigger than we are today in three years time.

Well thanks very much for talking with us today.

My pleasure, thanks Ed.