Cannae Holdings Inc (CNNE) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cannae Holdings First Quarter 2018 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the call over to Jamie Lillis, Investor Relations for Cannae Holdings. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate your participation in our first quarter 2018 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 May 17, 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 and 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, we made meaningful progress executing our strategy as we strive to create value for our shareholders by monetizing our existing investments and pursuing new investments in sectors with an 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-System. Ceridian has emerged as a market leader in the payroll and HCM software sector, and we are pleased with their continued strong financial performance.

Given Ceridian's market position and growth over the past several years, it was appropriate and right time for the company to go public. As most of you are probably aware, Ceridian priced its initial public offering of 24,150,000 shares of common stock at a price of $22 per share on April 27, 2018. Ceridian stock trades on the New York Stock Exchange under the ticker symbol, CDAY.

At the time of the IPO, Cannae participated in a concurrent $100 million private placement whereby Cannae purchased an additional 1,521,030 shares of common stock of Ceridian at the IPO price of $22 per share.

Cannae currently owns 37,135,921 shares of Ceridian common stock, representing a 27% ownership position in Ceridian. Based on CDAY's closing price of $32.95 per share on May 8, 2018, Cannae's stake in Ceridian has a market value of $1.2 billion.

Turning to our restaurant group. As we discussed last quarter, we entered into a nonbinding letter of intent with Newport holdings on March 12, 2018 to reorganize our respective equity interest in American Blue Ribbon Holdings. The proposed reorganization would leave Cannae with an approximate 94% ownership interest in O'Charley's and Ninety Nine restaurants, along with a 5% equity interest in Family Dining and Legendary Baking while Newport would own 95% of Family Dining and Legendary Baking. We expect that this transaction will close in the second quarter of 2018, subject to the negotiation and execution of definitive agreements. This proposed reorganization will simplify our investment in ABRH and enable them -- our management team to focus their attention on our 2 largest restaurant concepts, which have similar market facing attributes.

As Rick will discuss, we see significant opportunity to improve O'Charley's operations. Recall that in order to enable this reorganization, Cannae entered into an assignment agreement with American Blue Ribbons bank group during the first quarter, whereby, ABRH's credit facility was purchased by and assigned to Cannae for its outstanding balance of $124 million.

Turning to T-System. We are pleased with the company's result in the first quarter of 2018, which showcased strong organic revenue growth of 12% in the first quarter of 2017, driven by new customer wins and a documentation software division and high-volume flu season which benefited their coding solutions division.

T-Systems first quarter results helped to support our belief that the company is a great platform for growth in the tech-enabled healthcare services market. This is underscored by the total addressable markets, which T-System estimates as in the 5 -- is in excess of $5 million comprised of roughly $1 billion addressable market for the medical documentation software and a roughly $4 billion addressable market for outpatient coding.

Moreover, within this fragmented space, T-System is clearly well positioned to produce organic growth and we are also continuing to evaluate attractive add-on acquisition opportunities, which will help to broaden the company's product offering and deepen customer relationships over time.

Looking forward, we are continuing to seek attractive investment opportunities and platform company investments to further grow our company and create value for our shareholders.

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

Thanks, Bret. To start off, Ceridian HCM and Lifeworks together, generated first quarter revenue of $208.9 million, which represents an 11.7% increase from $187 million in the first quarter of 2017. Ceridian HCM, which includes both cloud and bureau solutions, delivered first quarter revenue of $187.2 million, which represents an 11.8% increase or $19.8 million over the first quarter of 2017.

HCM adjusted EBITDA in the first quarter was $43.6 million, a $12.4 million increase or 39.7% over the first quarter of 2017. In the first quarter of 2018, cloud-based revenue grew 38% to $125.2 million compared to $90.7 million in the first quarter of 2017.

In total, more than 3,154 customers are now live on the platform, up from 2,480 at the end of the first quarter of 2017. Ceridian will host a conference call on May 22, 2018 at 8 a.m., Eastern Time to discuss their financial results for the first quarter of 2018 in more detail.

Turning to our restaurant group. American Blue Ribbon generated revenue of $273.8 million in the first quarter of 2018, up from $272 million in the first quarter of 2017.

EBITDA was $5.1 million, represented an EBITDA margin of 1.9% in the first quarter, which compares to EBITDA of $8.2 million and an EBITDA margin of 3% in the first quarter of 2017.

Despite poor weather conditions in Q1 resulting in a negative impact on same-store sales, we are delighted that in the aggregate same-store sales increased 0.1% in the first quarter led by Bakers Square, which expanded by 2%, followed by Village Inn, which improved by 1.9% and Ninety Nine, which increased by 1.4%. These strong performances were partially offset by O'Charley's, which declined by 1.6%.

Importantly, Ninety Nine same-store sales results outperformed the Black Box regional index same-store sales decline of 1.4%, while Bakers Square and Village Inn outperformed the NPD midscale family index same-store sales growth of 0.4%. Meanwhile, O'Charley's underperformed the Black Box national index same-store sales decline of 1.1%.

We see significant room for improvement in free cash flow performance by better consolidating and/or renegotiating supply chain agreements, managing personnel related cost, optimizing our IT expenditures, driving manufacturing efficiencies and eliminate the cost of unnecessary assets.

Turning to T-System, the company organizes itself into 2 segments. The first is its clinical documentation segment, which offers a full suite of software solutions through their EV platform providing clinical staff, full workflow operations and drive documentation completeness in revenue. In addition, their patented T-Sheet and T-Sheet evolved to the industry standard for emergency department documentation. The clinical documentation segment services over 1,000 customers.

The second segment is T-System's coding and software, an outsourced solutions area, which provides a full service outsource coding solution as well as a cloud-based SaaS solution for self-service coding. These offerings helped more than 110 customers optimize their revenue cycle, workflow and customer revenue reimbursement at over 370 sites through improved coding accuracy, compliance and productivity compared to in-house solutions.

The first quarter of 2018, T-System revenue increased 12% to $16.9 million from $15 million in the first quarter of 2017. EBITDA of 14. -- excuse me, EBITDA of $4.3 million remained flat compared to first quarter of 2017.

March 31, 2018, Cannae's book value was $1.06 billion and our book value per share was $14.95. Additionally, we entered the first quarter of 2018 with $104.3 million in holding company cash, which is down from $215.4 million as of December 31, 2017, and largely reflects the assignment and purchase of the ABRH credit facility.

As Brett pointed out, looking forward, we are continuing to seek attractive investment opportunities in the tech-enabled healthcare services sector and we evaluate opportunities for capital reinvestment.

I'll now turn the call back to the operator to begin our question-and-answer session.

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

Question on the organic revenue growth rate for T-System, 12%. Any sense you can give us like how much the flu impact was? I'm just trying to get a sense of kind of a sustainable organic revenue growth rate that we should expect for T-System?

Yes, and we're figuring that out too, Jason. And it should be in that double-digit, low double-digit organic revenue growth. And they did benefit from it. And we did not calculate it, but it was a heavy flu season, and certainly that we benefited from more coding opportunities than the prior quarter. But we also had more customers that were coding for as well. One more point about it. We are -- on the documentation side, we're still implementing the new rev rec 606, which will have fluctuations over the prior year but we'll try to normalize that as we move forward throughout the year.

Helpful. Thanks for that. And then, when we think about the clinical or the documentation software, there's 1,000-plus customers. What should we think about in terms of growth there from just the existing clients? Are they growing? Are you getting revenue -- or is there revenue from them? Is that growing? And then how much of the revenue growth is from having to add new clients?

The T-Sheet's business, I mean there's a lot of small customers that use the T-Sheets, and now are using the T-Sheets evolved. And I think collectively, that's -- Rick, how much about 800 of their customers?

Yes, we would anticipate about 6% growth rate in the documentation business year-over-year, that's generally where we're headed.

Got it. And then for the coding business, I think there's opportunities there on the billing side to expand that. Could you just talk about that, is that's a strategic opportunity that you're pursuing?

Yes, I mean that one is very adjacent to what we're doing. It's the same customer. It's the same sales point person. We just need the capability. So in our acquisition pipeline, we have several billion entities that we've looked at, have not yet executed on. In the meantime, we're also building up our organic capability to offer billing as well. And while we continue to pursue an acquisition, we're not going to wait and just make sure that we could do it ourselves too, but from one of our bigger coding customers, we think it's a 4x to 6x revenue opportunity. So if we're doing $1 million of coding for one of our customers, it could be $4 million to $6 million of additional revenue to us. And we think an attractive margin. So we're going down 2 paths, looking at the acquisitions and then secondly, working with our offshore partner on developing our own billing capability.

Great. And the last one, the margins for T-System that 25% in this first quarter, is that kind of a good number that we should use going forward, or is there some seasonality or some margin expansion that's coming?

So I would look to increase that margin coming out of what happened in Q1. We had slightly higher margin about 29% compared to where we were at Q1 2018. The big difference -- there's 2 primary drivers to that decrease in the first quarter EBITDA margin. The first one is that we add about $500,000 adjusted related to ASC 606 for rev rec. The second driver, which is the significant driver related to the margin pertains to bringing on new customers in the rev rec cycle that had lower margins at the back end of 2017. And the cost for the lower margin there related specifically to doing onshore process of the coding as we -- throughout 2018, as we transition that process overseas or offshore, we'll see an increase in those margins getting back to like a more normalized 29% to 30% EBITDA margin.

Our next question is from the line of DeForest Hinman with Walthausen.

Had a couple of questions. Now that we've had the Ceridian price, can you give us an update on your thinking regarding that portfolio asset in terms of further monetization or distribution to existing shareholders? And is there any tax implications related to that for the shareholders? And let me stop there for now.

Sure, this is Brent. I'll take that. We just took it public. Obviously, we're subject a 6-month lockup. We own 27% so what we view in the monetization down the road would be, and we don't have any plans to do this, but it would be eventually to sell the stock. There's not really a strategy to distribute it or be taxable, both to Cannae and to the shareholders. So the path would be to sell it for cash. There would be a tax implication for doing so and that's at about 21% federal rate. But we're very pleased with Ceridian. Obviously, the market receptivity to that IPO was quite strong. We think their market that they're facing and their position in that market is attractive to say the least. And so we think this stock has -- we're happy shareholders and want to see where the company goes. So we have no current plans to do anything, other than to continue to assess the company and its growth plans.

Okay, and just to further clarity on the taxation. I know in the past, I think we were able to distribute the Remy ownership in a fairly tax efficient way, but I might be misremembering that. Is there anything that would preclude us from distributing the shares in a more tax efficient manner? Or is there no way to do that?

There's -- in terms of Cannae holdings, there would be no way for us to distribute our 27% interest in Ceridian on a tax-free basis to the shareholders. We owned over 50% of both Remy and J. Alexander's, and that's what helped enable us to do those 2 spin-offs.

Okay. And then, when we made the transaction to change the ownership structure of the restaurant group businesses, can you help us understand the thinking with that investment on a go forward basis in the past there have been -- couple different things that have been talked about, a public offering, then we tried to do a transaction with another public company that was not completed for part of that investment. So we've made some changes. Can you help us understand maybe some of the goals over the next year or 2 we're going to try to achieve, and what the thought process is around that holding over the next year or 2? And how we're thinking potentially about monetization there or a structure, I guess?

Okay. And you're right, we've own these for a long-term, and we have pursued various monetization strategies. And what we're trying to do now with Newport is to let them have 2 concepts that belong together in terms of the family dining, and then we would get the 2 concepts that belong together in terms of the casual dining and the larger of the 2 businesses. We think that Ninety Nine has potential to be monetized. It's very attractive, it continues to significantly outperform its competitors and the wildcard is candidly is O'Charley's. If we can get that operation back to its growth profile, it's just taking longer than we anticipated. You would have an attractive company with near -- with a mid-700s of revenue that we think could be attractive IPO candidate, if we were to take it public or to sell it combined or individually. But we -- this reorganization is going to help us, I think, just to be able to focus our efforts on just 2 of the concepts rather than candidly 5 concepts. But it is objective for us to, at the right time, to monetize it as we try to do in the past.

And you talked about some initiatives to improve results there. Are we willing to give any benchmark or trying to achieve in terms of EBITDA margin? And if so, how quickly do we think we can achieve that?

So, this is Rick. Obviously, coming out of Q1 with a 1.9% EBITDA margin, that's not something to go brag about. But generally speaking, we're generally pretty excited about the restaurant group for Q1. We had a couple of things that happened in terms of inclement weather issues and some other one-timer costs, which I'll explain. But aside from all, we've done really well compared to where we are at in Q1. Let's put it this way, we're above gross revenue in Q1 compared to Q1 of 2017, despite bad, bad weather. From an EBITDA margin perspective, we really had 3 -- 4 drivers that impacted our EBITDA margins. The first thing is, we had some insurance self accruals that we had to book. One of them was approximately $1.6 million that related to a spike in health insurance claims that were not anticipated. So that's the first thing. We also had an increase in the minimum wage, which impacted our EBITDA margin as well too. Now having said that, we're adjusting our EBITDA -- our price per play to get our margins in line on personnel. So we're working through that currently. And then, we're going through our supply chain and renegotiating our terms, and then looking at our IT infrastructure to reduce our costs there. And then lastly, when it comes to legendary baking side, we're going through and looking at our manufacturing efficiencies to figure out how we can reduce costs and then sell off some of our unwanted restaurants to get some money in the bank.

Okay, that's helpful. And then in terms of areas of opportunity for capital deployment in the past, we had talked about $100 million type platform investments. I think there'd been some updated commentary on the more recent call. Can you give us an update on where those areas of opportunities are? And are we still looking to make platform investments or is it going to be kind of focused on bolt-ons with the T-System transaction we made?

The near-term focus is really the bolt-on acquisitions for T-Systems continuing to work through as we discussed the restaurant reorganization. But we're still evaluating other platform opportunities. And those are typically be candidly in more than $200 million-plus range to get a company that we could then build upon. But that's a tertiary focus. So the near-term is the restaurants and on T-Systems.

And then one additional question on capital management is, where is share repurchase fall at this time? Is it somewhere off the table or is it still in the mix?

Right now, in the short-term, it would be -- unless there's a dislocation, would be off the table. We have just over $100 million in cash. We want to kind of keep that powder available for those opportunities that we discussed. But we'll continue to monitor the stock and see where it is relative to what we feel the fair value is.

Our next question comes from the line of John Campbell with Stephens.

It's actually Jeff coming on for John. I just had a couple of questions specific to the fundamentals at Ceridian. So (inaudible) for customers has growing 5% in each of the past 2 years. Is that being driven more by winning larger customers or by expansion and up sales of additional modules into the base? And then I guess, do you expect that 5% increase to continue moving forward?

Jeff, thanks for the question. On Ceridian, because there is a gap, now they're public. As Rick mentioned in his opening remarks, that Ceridian's going to have their conference call on May 22. And so, with other than the information that we disclose, we're going defer questions on Ceridian to their call on the 22, if that's okay.

(Operator Instructions) The next question is from the line of Brian Warner with Performance Capital.

Most of the stuff has been touched upon. But can you give a little more color on the sort of the acquisition pipeline what you might -- in terms of sort of the candidates for T-Systems maybe? And somewhat related question, roughly 9 months ago when Cannae was sort of in the constructing stage, I recall you sort of contemplating a war chest of maybe $600 million, $700 million or $800 million and you sort of, as you mentioned before, you were talking about maybe $200 million bytes in terms of the acquisitions, and I guess I'm just wondering if you have a satisfactory amount of cash and/or any capital plans to keep that up?

Sure, Brian. Yes and -- so to answer the question, yes. That was one of Bill's comments, having $600 million feels about right. That would give us a flexibility to pursue more than one opportunity. And that $200 million zip code again feels about right for the size of company that we think that we can then grow more quickly. But where we're focused shorter term is on the add-on opportunities for T-Systems, and one area is billing, where we're doing the coating, it's a very natural capability that we can bring to our customer. It's a same customer, it's a same relationship at the customer, we just need the capability. And so, we've looked at several candidates. We passed on 2 of them, but we have -- there's several more. It's a very deep pound in healthcare. But in the meantime, we're also building up our own organic capability that we can then bring -- just bring that ability to market. The M&A side, obviously, would be attractive because you'd arguably get more -- get the capability and you'd get customers as well, but we're going down a dual path there. And then also on coding, we're looking at other opportunities on those episodic coding like anesthesiology or oncology and other niche areas of coding that we think are very complementary to what we do. On the documentation side, we're just -- we're looking at potential areas to kind of further our growth, whether we're pursuing, it's an urging care or more on the hospital ED sides to see. But it's really -- most of the M&A we're focused on right now it's been on the coding side of the business.

Got you. And then any capital plans? You've got about $100 million right now, which contrast to some of the comments, I guess that (inaudible) made about maybe $600 million?

Yes, so we used $124 million. So we own the debt of our restaurant group. And so we would expect that to flip back to us over some period of time. So that's -- we had over $200 million but why we work to this reorganization with our partners at Newport. That's going to be -- that'll be trapped there for a period of time, but once the dust settles, we look to refinance that and get that back. And then, the other areas to get our cash up to that higher level would likely be Ceridian over a period of time. But again, as I mentioned, we have no plans to do anything there we think it's a terrific company and think that the appreciation potential is great. So we're going to be happy shareholders and continuing to try to help steward the company with their management team to continued success.

At this time, I'll turn the floor back to Brent Bickett for closing remarks.

Thank you for your time today, and we look forward to speaking with you next quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.