Cannae Holdings Inc (CNNE) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cannae Holdings Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to, Jamie Louise, Investor Relations for Cannae Holdings. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate your participation in our Fourth Quarter 2017 Earnings Conference Call. Joining me today are Cannae's president, Brent Bickett, and Chief Financial Officer, Rick Cox.

As a reminder, a replay of this call will be available through 11:59 p.m. Eastern time on March 22, 2018. Before we begin, I would like to remind you that this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our expectations, hopes, intentions or strategies regarding the future are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by an information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. The risks and uncertainties which forward-looking statements are subject to, include, but are not limited to, the risks and other factors detailed in our press release, dated yesterday and in the statement regarding forward-looking information, risk factors and other sections of Cannae's Form S-4 and other filings with the SEC.

Let me now turn the call over to Brent.

Thanks, Jamie. To start, I'm pleased with our results as we've made meaningful progress, executing our strategy as we strive to deliver value for our shareholders. On November 17, 2017, we completed the split off from FNF and Cannae's common stock began trading on the New York Stock Exchange under the ticker symbol CNNE on November 20, 2017. As a result, Cannae and FNF are now legally separate publicly traded entities. The establishment of Cannae as an independent company is an important milestone in our company's history, as it provides significant flexibility for our team to create value for our shareholders by monetizing existing investments and pursuing new investments in sectors that have attractive long-term growth potential.

Today, Cannae is comprised of 3 platforms, which are our Ceridian HCM business, our restaurant group and our tech enabled healthcare services platform T-systems. Ceridian continues to emerge as a market leader in the HCM software sector, and we are very pleased with how well Ceridian continues to execute its business plan. Given Ceridian's market position and growth trajectory over the past several years, it is the appropriate and right time for the company to go public. As such, Ceridian filed a registration statement with the SEC in January, which has not yet become effective. The proposed IPO is expected to commence, once the SEC has completed its review process, subject to market and other conditions. Securities in Ceridian may not be sold or may -- offers to buy the securities be accepted prior to the time that the registration statement becomes effective.

Turning to our restaurant group, in the third quarter of last year, we announced the proposed combination of Ninety Nine restaurants with J. Alexander's. Unfortunately, the merger was not approved by the requisite number of independent shareholders under the Tennessee merger statue. While we believe that the combination would have created substantial value for both Cannae and J. Alexander's shareholders, we're happy to retain Ninety Nine restaurants as it is a market-leading casual dining concept in the Northeast that generates substantial free cash flow while consistently outperforming its peers.

Additionally, American Blue Ribbon Holdings was not expected to be in compliance with certain financial covenants of the ABRH credit facility, as of December 31, 2017, and all outstanding borrowings under such facility were classified as current on our consolidated and combined balance sheets.

In response to this, on March 14, 2018, Cannae entered into an assignment agreement with ABRH's bank group, whereby, ABRH's credit facility was purchased by and assigned to Cannae. ABRH's credit facility has a balance of approximately $124 million as of March 14, 2018. Having Cannae purchase and assume the ABRH credit facility will give ABRH the financial flexibility to continue to pursue monetization initiatives that we believe will provide a more attractive return on investment for ABRH shareholders.

To that end, on March 12, 2018, Cannae Holdings and Newport global an approximate 39% owner of ABRH, signed a 9 bonding letter of intent to reorganize our respective equity interest in ABRH. This proposed reorganization transaction would lead Cannae and certain individual investors with a 100% ownership interest in O'Charley's and Ninety Nine restaurants, along with a 5% equity interest in family dining and Legendary Baking. The credit facility would remain with Ninety Nine in O'Charley's and Newport would own 95% of family dining and Legendary Baking. From Cannae's perspective, this proposed reorganization transaction would simplify our investment in ABRH, and enable us to focus our attention on ABRH's 2 largest restaurant concepts, which have similar market facing attributes. We would expect to close this organization transaction in the second quarter of 2018, subject to the negotiation and execution of definitive agreements.

Our third platform is T-Systems, which is a provider of clinical documentation software and coding solutions to hospital-based and freestanding emergency departments and urgent care facilities. We announced the acquisition of T-Systems for $200 million in cash during the third quarter and closed the acquisition on October 16, 2017. T-Systems estimates that its total addressable market is over $5 billion in size with approximately $1 billion addressable market for medical documentation software and over $4 billion addressable market for outpatient coding. We believe, T-Systems is well positioned to take share of this market with the expectation of continued organic growth, complemented with the addition of selective add-on acquisitions to broaden T-Systems' product capabilities and customer base.

Looking forward, we continue to see strong growth in the healthcare, technology and business services sectors, and we will focus our investment in these areas, as we look for additional platform company investments that allow us to further grow our company.

I'll now turn the call over to Rick Cox to review our portfolio companies in more detail.

Thanks, Bret. Ceridian HCM generated fourth quarter revenue of $203.4 million, a 7.4% increase over the fourth quarter of 2016. EBITDA in the fourth quarter was $31.3 million, a $6.1 million increase from the fourth quarter of 2016. Additionally, fourth quarter EBITDA grew 56% sequentially from the third quarter and EBITDA margins increased by 450 basis points sequentially. Excluding Ceridian's LifeWorks joint venture, Ceridian HCM generated fourth quarter revenue of $182.4 million, a 7.9% increase over the prior year quarters.

In the fourth quarter, cloud-based revenue was $116.3 million, a 30% increase on a constant currency basis over the fourth quarter of 2016, as a 146 DayForce customers went live in the cloud platform during the quarter. In total, more than 3,000 customers are now live on the platform, up from approximately 2,330 at the end of the fourth quarter of 2016.

Ceridian has continued to invest in product development and the implementation processes and procedures, which have contributed to another quarter of strong growth and DayForce product suite. Ceridian has also seen success through increasing efficiencies in implementation, cost and timeliness as evidenced by the significant increase in cloud-based revenue and EBITDA. We are encouraged by Ceridian's continued strong execution of its business plan.

American Blue Ribbon generated fourth quarter 2017 revenue of $299 million, approximately flat with the fourth quarter of 2016. EBITDA was $1 million with an EBITDA margin of 0.3% in the fourth quarter, which compares to EBITDA of $12.1 million and EBITDA margin of 4% in the fourth quarter of 2016.

Same-store sales in the aggregate increased by 0.4%, led by Bakers Square, which increased 1.9% and Ninety Nine restaurants, which increased by 1.2%, followed by diligent, which increased by 0.7%. The strong same-store sales trends in these concepts were partially offset by O'Charley's, where the same-store sales decreased by 0.5%. Importantly, Ninety Nine's same-store sales result outperformed the Black Box regional index, same-store sales decline of 2.5%, while O'Charley's outperformed the Black Box National index same-store sales decline of 0.7%. Additionally, Bakers Square and Village Inn outperformed the NPD mid-scale family index same-store sales growth of [2.2%.] While the operating environment remains challenging, we are encouraged with the trends in our restaurant group same-store sales growth. That said, we see significant room for important improvement and are working closely with American Blue Ribbons management team to drive operational enhancement, intended to reduce expenses, increase productivity and improve customer satisfaction levels across all our brands. We have also recruited additional management talent to assist in these turnaround efforts and are optimistic, that we will deliver improved sales growth and margin expansion over the balance of 2018.

Turning to our healthcare IT platform, we closed the T-System acquisition during the fourth quarter. As a reminder T-System organizes itself into 2 segments. The first is clinical documentation segment, which offers software solutions, providing clinical staff full workflow operations and drive documentation completeness and revenue optimization to more than 470 sites. In addition their patent to T-sheet is the industry standard for emergency department documentation with more than 800 customers.

The second segment is T-System's coding software and outsourced solutions area, which provide their full-service to outsourced coding solution as well as cloud-based SaaS solution for self-service coding. These offerings helped more than 90 customers optimize their revenue cycle, workflow and customer revenue reimbursement at over 320 sites through improved coding accuracy, compliance and productivity compared to in-house solutions.

Turning to the T-System's fourth quarter results. The company generated $12.9 million in total revenue, EBITDA of $2.2 million and EBITDA margins of 17.1%. As Brent discussed, we expect T-System to be a great platform for growth and the tech-enabled healthcare services market and are developing a pipeline of attractive add-on acquisition opportunities that we are currently evaluating.

To conclude, we are pleased with our results for the full year of 2017, as we grew Cannae's book value 18.6% to $1.06 billion, and grew our book value per share also by 18.6% to $14.95 at year-end 2017. Additionally, we created substantial value for our shareholders with our investment in One Digital, which we sold on June 2, 2017 for $560 million, representing a 4.6x cash on cash return multiple and 41% IRR.

We ended 2017 with $215 million in holding company cash. Looking forward, we will continue to seek attractive investment opportunities in tech-enabled healthcare services sector, as we evaluate opportunities for capital reinvestment.

Thank you again for your time today. I'll now turn the call back to the operator to take your questions.

(Operator Instructions) Our first question comes from the line of Jason Deleeuw with Piper Jaffray.

You've actually got Eric Robinson on for Jason here. Just wanted to start off by standing my congratulations on the successful spinoff. Just to start out here, in terms of the restaurant group, it was nice to see some stabilization in the same-store sales growth. The depending reorganization you guys highlighted here on the call, could you give us just a little more color on the strategy for monetizing Ninety Nine and O'Charley's? I believe those were the 2, that you guys were going to retain the majority ownership or the 100% ownership in.

Right. Thanks, Eric. This is Brent, I'll take that. As we are finding out, running 5 -- really 4 different concepts. We just found it a little bit complicated and we feel that there's a lot of commonality between Ninety Nine and O'Charley's. They both kind of target the casual dining sectors. Obviously, Ninety Nine has a very unique customer base, unique foot print in Northeast, but we also kind of share that -- shared services facility in Nashville. So as Bill and I and the rest of the team looked at it, just to be able to focus on our 2 large concepts. We think it gives us a lot more flexibility to own 100% of those effectively, and to be able to look at interesting strategies, whether we combine the 2 companies down the road in a potential public offering, potentially sell them independently or continue to run them. But we just think having them -- being able to focus on fewer, is going to be very good for us and for the restaurant company. A very similar for Newport having them focused -- get the opportunity to control and focus assets on their own will enable them to go -- pursue something that makes sense for their investment.

Okay, that's helpful. And then just shifting gears to T-System. Could you give us just a little more sense of the go to market and growth strategy that you guys are implying for the medical documentation and coding solutions? And then 2, just how are you guys thinking about the overall addressable market for these services?

Sure. So on the coding side, we typically do episodic coding and that's usually on the outpatient side. So that's both for emergency departments, freestanding emergency departments, urgent care facilities et cetera. And those areas are kind of growing on a same-store sales basis. We have a unique software that we deploy there that is -- that makes the coding more accurate the first time, so it reduces the back and forth, that often occurs on billing. It's more compliant and then it's more accurate and provides a higher return to the ED, if your coding the episode correctly. So using that software, it has proven to be kind of a differentiator in the marketplace. So they are organically growing rather rapidly. What we're trying to look at, to supplement their organic growth, is to find other complementary coding areas, like anesthesiology, oncology, some other areas where we think could -- we already have the customer base, we already have a trust relationship, that we could bring that other unique skill set. So we're looking at other coding opportunities, that again can complement what we have. And then on the software side, likewise, we basically -- again target the same, emergency departments. We do all the documentation as the patient goes into the facilities. We're looking again to find other solutions, particularly on more on the billing side, that we could cross sell into that customer base. So again, it's a combination of organic growth plus what we think would be complimentary acquisition, so we can bring new product capabilities and customers, that we can cross sell our products to. Kind of a very similar script to what we've done in other companies that we have grown over time. But think that the addressable market is about $5 billion, about $4 billion on the coding side, $1 billion on the software side. We think acquisitions could expand that addressable market. So again we're excited about what we have at T-System. There's a plethora of these add-on opportunities that we're sifting through and so just stay tuned and we'll see where we take it.

That's really helpful. And then again just on T-System, as we think about the EBITDA margin going forward. I think it was on the last call, we talked about a high 20% range approaching 30%. Looks like it came in around 17% here in the fourth quarter. Is there any seasonality considerations with T-System's we should take into modeling considerations or maybe there are some integration type expenses that were incurred?

There was some onetime things. The miss there was we -- they also sell their software on a license basis and we have a variety of DoD hospitals that we sell our services to. They put a moratorium out literally in October as we're rolling out the software to a few others. So we weren't able to recognize -- even we had to sign contracts, we weren't able to implement those. And those would've been 100% type margin deals. But on the other hand there kind of one time deal. So that's really -- but we do -- the margins of the business should be north of 25% on a consistent basis.

Got it. And then did see the commentary in your guys' press release about a growing pipeline -- acquisition pipeline. I imagine a lot of that is in this healthcare services and IT sector. Is that -- is there anything else, that you guys are potentially looking at, maybe still in the business services side or is it really just complementary assets to T-Systems and then what's kind of making that acquisition pipeline?

Right now we're focused on T-System's and add-on deals there. We -- tangentially we're looking at other platforms, but they're further off.

There are no other questions in the queue. I would like to hand the call back over to management for closing comments.

We appreciate your time and look forward to try to drive value for the shareholders. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.