Cannae Holdings Inc (CNNE) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cannae Holdings Third 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 Third Quarter 2018 Earnings Conference Call. Joining me today are Cannae's Chairman, Bill Foley; 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 November 15, 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, which we released this morning 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 as well as our ability, together with the investment consortium, to close the acquisition of Dun & Bradstreet, including our ability to fund and/or sell down our equity commitment pursuant to the definitive agreement entered into in connection there with.

Let me now turn the call over to Bill.

Thank you, Jamie. To start, I am pleased with the progress that we have achieved positioning Cannae to deliver continued growth and value for our shareholders through the third quarter.

Ceridian HCM Holdings, which is our largest investment, has emerged as a market leader in the payroll and human capital management software sector, as evidenced by their strong third quarter results released last week. Currently, Cannae owns approximately 37.1 million shares of Ceridian common stock, representing a 27% ownership position. Based on yesterday's closing price of $39.25 per share, Cannae's stake in Ceridian has a market value of $1.46 billion.

Turning to Dun & Bradstreet. Cannae entered into a definitive agreement in partnership with an investment consortium, including CC Capital and Thomas H. Lee Partners, to acquire the company on August 8, 2018, in a transaction valued at approximately $6.9 billion. The investment consortium has committed a total of approximately $2 billion in equity, with Cannae making a $900 million equity commitment. Of note, Dun & Bradstreet stockholders approved the acquisition yesterday, and we are currently in the process of obtaining the remaining regulatory approvals and with an expectation to close the transaction during the first quarter of 2019.

Cannae and our co-investors have made significant progress in syndicating the D&B equity commitment. Our current expectation is that Cannae will syndicate $400 million of our $900 million equity commitment, of which we will receive a 3% syndication fee. As a result, we will invest $500 million of equity into D&B, representing an approximate 25% equity position. Importantly, Cannae will be the largest single individual -- we will be the largest single individual equity investor in Dun & Bradstreet, post-closing. We expect to fund our equity investment using a combination of cash on hand and borrowings available under our undrawn lines of credit.

Looking forward, we believe that Dun & Bradstreet's insight-driven business model and inter-connectivity across industries has positioned the company for continued success. We see a significant runway to grow the company and increase operating productivity while improving the D&B experience. This is an ideal company for Cannae to make a considerable investment in and to partner with like-minded investors that we know well. As we execute on our strategy, we believe the value of D&B will be enhanced and value will be delivered to our shareholders.

I'll now turn the call over to Brent.

Thank you, Bill. Currently, Cannae is comprised of 3 primary businesses, which include Ceridian, our Restaurant Group and T-System. Bill reviewed the success that we have achieved with Ceridian and the progress being made in closing the D&B transaction. I will review our remaining businesses, then turn the call over to Rick to review their financial performance in more detail.

Turning to our restaurant group, we are pleased to report that Cannae and the other equity investors in Fidelity Newport Holdings, the parent entity and 100% owner of American Blue Ribbons Holdings have entered into a debt restructuring plan for the restaurant group. In connection with the debt restructuring plan, Cannae transferred $133 million of debt it held at Fidelity New Port holdings to 99 Holdings, and subsequently converted $100 million of the debt for a direct 66.7% equity interest in 99. The remaining 33.3% of 99 is owned by American Blue Ribbons Holdings.

Cannae was paid a facilitation fee in the form of additional equity interest in Fidelity Newport Holdings as part of the reorganization. Following the reorganization, Cannae now owns 65.4% of Fidelity Newport Holdings on a direct basis and 88.5% of 99, both directly and through our ownership interest in Fidelity Newport Holdings. Lastly, 99 expects to close on a new bank credit facility in mid-November, the proceeds of which will be used to repay Cannae's remaining $33 million of debt at 99.

We are pleased that we were able to materially improve the restaurant group's financial profile and increase our ownership interest in both Fidelity Newport Holdings and importantly, in 99, which continues to deliver industry-leading performance.

While the restaurant sector remains challenging, we continue to work closely with ABRH's management team to implement a broad range of initiatives designed to reduce expenses; increase productivity; improve customer satisfaction; drive traffic; and improve cash flow. Under Craig Barber's leadership, we have seen significant improvements to our cost structure. To that end, a strategic review is underway of specific support functions for optimization in order to benefit from ABRH's scale, and we will continue to make changes within the structure of the organization through the end of the fourth quarter.

Rick will discuss the restaurant's financial results, but one highlight to note this quarter is 99, which delivered a 5.9% increase in same-store sales for the third quarter, which outperformed the Black Box, Casual Dining New England Index by 270 basis points. 99 remains a standout in the group as well as in our restaurant portfolio, and we see continued opportunity to grow the concept.

Turning to T-System. The company's comprised of 2 segments. The first is their clinical documentation software segment, which offers a full suite of software solutions through their EV platform, providing clinical staff full workflow operations that drive documentation completeness and revenue.

The second is their coding software and outsourced solutions segment, which provides a full service outsourced coding solution as well as a cloud-based software-as-a-service solution for self-service coding. With each of these segments, we believe there is room for expansion and are excited to have Bob Wilhelm join the company as Chief Executive Officer on August 24 of this year. Bob brings the right experience, having spent over 20 years in leadership positions in the technology-enabled health care services industry, including notable market leaders, Cerner and Trizetto.

Since coming onboard, Bob has initiated a comprehensive strategic review of the business, designed to produce actionable initiatives to improve sales efficiencies and growth as well as operational efficiencies in both the documentation and coding divisions. We are working with Bob and the T-System team through the strengths and areas of needed improvement for the company and are also actively reviewing potential acquisition candidates to further enhance T-Systems' capabilities while also creating cross-sell opportunities.

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

Thanks, Brent. To start off, Ceridian, which includes both Cloud and Bureau solutions, generated third quarter revenue of $179.6 million, which represents a 9.8% increase from $163.5 million in the third quarter of 2017. Third quarter adjusted EBITDA increased 28.2% to $36.4 million as compared to a year-ago quarter.

In the 2018 third quarter, cloud-based revenues, which include both Dayforce and Powerpay, grew 29.1% to $133 million as compared to $103 million in the year-ago quarter. In total, 3,465 customers are now live on the Dayforce platform, up from 2,855 at the end of the third quarter of 2017. More details on Ceridian's third quarter financial results, which were released on October 29, can be found on the Investor Relations section of their website.

Turning to the restaurant group. American Blue Ribbon Holdings generated total revenue of $269.3 million in the third quarter of 2018, down $0.7 million as compared to $270 million in the third quarter of 2017.

Legendary Baking's third-party revenues were up 24.8% or $4 million above the year-ago quarter. This increase was more than offset by a $4.8 million decline in restaurant sales, largely the result of the closure of 13 underperforming restaurants, which decreased revenues by $4.3 million.

The highlight of the quarter was our 99 brand, which continued to perform well, having delivered same-store sales growth of 5.9%. This strong performance was more than offset by O'Charley's, which declined by 4.7%; Bakers Square, which declined by 2%; and Village Inn, which declined by 1.2%.

Of note, 99 same-store sales results outperformed the Black Box regional index same-store sales increase of 3.2%, while O'Charley's underperformed the Black Box national index, same-store sales increase of 1.4%, and Village Inn and Bakers Square underperformed the NPD mid-scale family index, same-store sales decline of 0.2%.

ABRH delivered a third quarter EBITDA loss of $5.8 million, which compares to an EBITDA loss of $5.7 million in the third quarter of 2017. As Brent discussed, the management team at ABRH has been going -- undergoing an overhaul of its strategic initiatives designed to improve profitability, free cash flow and ultimately, same-store sales.

For the third quarter of 2018, T-System total revenue, adjusted for ASC 606, was $14.1 million as compared to $15.4 million in the third quarter of 2017. The company generated third quarter EBITDA of $3 million, which was a decline of 26.7% as compared to $3.8 million in the year-ago period. EBITDA margins were 21.3%, representing a 3.3% decline as compared to the year-ago quarter.

For the third quarter of 2018, on a pre-ASC 606 basis, T-System recorded organic revenue growth of approximately 18%, led by the coding segment's 26% revenue growth from a third quarter of 2017. As we highlighted last quarter, while having no impact on cash receipts, implementation at ASC 606 has produced greater volatility in the revenue recognition of T-Systems' documentation segment. At September 30, 2018, Cannae's book value was $1.09 billion or $15.18 per share as compared to $1.06 billion or $14.95 per share at December 31, 2017. We ended the third quarter of 2018 with $58 million in holding company cash, which is down from $148 million as of December 31, 2017, and largely reflects the assignment and purchase of the ABRH credit facility, which consumed $124 million of cash and the cash portion of the LTIP incentive payment that was triggered by the successful Ceridian IPO in April.

Subsequent to the quarter-end, we received $49.5 million in cash proceeds from the sale of our interest in Lifeworks and expect to receive the remaining $6.6 million later this month, which will put our holding company cash at approximately $114 million.

Yesterday, Cannae entered into a margin loan facility that allows Cannae to borrow up to $300 million at an initial rate of LIBOR plus an applicable margin. The facility is secured by 25 million shares of our CDAY common stock and matures 3 years from the closing date.

To conclude, we are pleased with our results for the third quarter of 2018, as we've made strong progress positioning the company for continued growth and value creation for our shareholders.

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

(Operator Instructions) Our first question comes from Jason Deleeuw, Piper Jaffray.

Just want to go through the sources of capital to fund the $500 million for D&B. It looked like there's roughly -- with the receivable, there's about $120 million of cash, and then there's the $300 million margin facility on the Ceridian Holdings. And then there's a line of credit, too. So I guess, can you just help us understand like how much cash needs to be kept at the Holdco? How much are you kind of thinking, to the extent that you can, in terms of drawing down in the margin facility and in the line of credit?

Sure, Jason. This is Brent. Yes, so we have -- we do have the ability to fund our $500 million sitting today with the sources that you described. The undrawn margin loan facility, the FNF line of credit and cash on hand. We do expect to get some more cash back this quarter, as I highlighted from the restaurant group. So that will be another $33 million. And then, Rick mentioned that we'll get another $6 million from Lifeworks. And so we do have the funding. And again, this transaction looks like it will close sometime in early January. So there likely could be other sources of cash between now and then.

Yes. But can you just help us, like how much cash do you need at the holding company level, just kind of help us think about that?

We're probably planning on having about $20 million at the holding company.

And then on the syndication, the $400 million, and that brought down the capital commitment to kind of the high end of the original range of $300 million to $500 million. So just any color we can get on kind of the syndication, why not do more? You could have done more. I guess there was a range there. So just looking if there's any color on kind of how you thought about the syndication effort?

Well, Jason, what we really were thinking about was trying to -- making sure that we were the largest and in effect -- although, we have a minority position, we're really the controlling shareholder. And we are in partnership with 2 entities that we know well and that we've been -- we've partnered with in the past.

We have -- the transaction is actually oversubscribed. And so we have the opportunity, if we choose to, to move down our total commitment, and we'll kind of go through that decision-making process between now and closing. We have another investor that's coming in that's going to help us with operations. And they're making a significant investment as well. So we're still going through the analysis process.

We want to make this be a significant investment for our company, as we believe the upside of D&B is significant, particularly, with the management group that we're going to be placing within the company. So while we can sell down an additional amount, we're constantly talking about it, whether we should or not. And if we did sell down, we might sell down another $50 million or $75 million, but it wouldn't be anything more than that. But we really want to make a significant investment in this company.

Cool, that's good to hear. It's very helpful. And then just the last one for me. Any high-level -- it might be a little early, and I understand if it is, but any high-level D&B strategy thoughts and kind of thinking about the value creation opportunity here? Is it going to be mostly on the cost synergy side, or do you see revenue synergies? Just kind of any thoughts on those items.

We feel there's significant revenue opportunities. So this is a cost synergy. We're going to take out significant cost out of this company. However, the data that this company has is significant. And the manner in which they're presently marketing their products are really a little bit antiquated. So we're going to take the same approach we took with Black Knight, which is to ensure that products are cross-sold, that there's a single driving sales effort at the top -- from the top down. And we believe, we're going to get some significant revenue opportunities. It may take us a few months, 6 months or maybe a bit longer to really execute on the revenue side, but we're very encouraged by the level of -- by the quality of the data this company has and what we can do with it.

(Operator Instructions) Our next question comes from DeForest Hinman, Walthausen & Company, LLC.

A couple of miscellaneous questions. With the new structure for American Blue Ribbon, does that make it more likely that we look to transact that business through a sale? Or does it make it easier for us to operate that business and look to improve operating results?

Sure. This is Brent, I'll answer your question. We -- 99 is a standout entity. And so increase in our ownership up to just under 90%, we think is important just to give you a sense of it. It does over $300 million of revenue and EBITDA of around $28.5 million. And it has kind of a mote of competitiveness up in the Northeast. So we think we have the best segment, and it's probably the most sellable asset that we have.

With respect to the rest of the brands, as we highlighted during the call, Craig Barber, who's our CEO of the business, has taken a number of initiatives to reduce costs and to put the other restaurant brands on firmer footing, in addition, to get Legendary Baking, which is a -- historically, a strong company back to its historic level of profitability. So we do believe that the monetization efforts obviously become more available to us once those other brands start performing the way that we expect they will under Craig's leadership. So it is taking more time than what we thought. We have owned it for a long time. It would be our desire to eventually monetize and focus on kind of the big 3 of D&B, Ceridian and T-System. But it's taken us a little bit longer than expected.

Okay. Just a little bit more color on that one if we could get it. Is it likely that we would transact all those businesses at once? Or would it -- is it increasing likelihood that we would transact the brands separately if we were to sell them?

It is more likely than not that it would be separate. And they're logical groupings. We have the 2 family dining concepts in terms of Village Inn and Bakers Square, which are joined at the hip. And then we have O'Charley's and 99. But -- And then the baking -- the bakery division is, obviously, not a restaurant, it's a baking division. So we do think it would be separate. We've had, over the past number of years, efforts to monetize them, as you might know, and it is a desire of the management team to monetize it, as I said, and move on, but we have to make sure the performance of the underlying businesses are there so we can get some value.

Okay. That's helpful. And then shifting to T-Systems. We continue to look at deals, can you help us understand the deal funnel and maybe help us understand some adjacencies where we need to add size of deals and valuation multiples, any of those things would be very helpful to understand.

Sure, I'll tackle that one as well. So Bob Wilhem's our new CEO, he came in, in August. And his first thing that he's doing, he's doing a whole assessment of the team and the company, its operational readiness, both to run its existing business lines as well as operational readiness, if you will, to seek -- to pursue an M&A transaction. We had a, and do have a pipeline of deals, but we're waiting for Bob to make his call. Those deals are in immediate adjacencies. So on our coding side, we're looking at revenue cycle management companies where we can provide billing capabilities to our coding clients. It's an immediate adjacency, that's something we think we can cross-sell and can make some meaningful organic revenue growth. But again, we're waiting for Bob, and it's coming up that we will make sure we have the operational readiness to be able to absorb a new company while still executing on the organic growth, particularly, that we're seeing in the coding side.

On the documentation side, we actually are under letter of intent with an entity, but we're doing our due diligence phase, and we're being very careful to make sure because we just know from our prior experience that buying companies is distracting, and we want to make sure our core business is in the right foundational footprint to continue to execute while we integrate a potential third-party target. Size of transactions generally kind of range in the $20 million, $30 million range. You will not see us do a significant transaction. We want to see how they would do on the first one before we would give them more capital to do larger ones. And the more they execute, the more comfortable we'd be to give them more rope on doing things. So you would see us do a next deal kind of in that size category.

On a kind of post-synergy basis, I think -- well, pre-synergies in terms of multiple ranges, these companies are not cheap, as you might know, particularly those that are characterized by recurring revenue entities, so they kind of are in the 8 to 12x, but we would expect to maybe cost synergies but more importantly, the revenue -- organic revenue opportunity through cross-sell to kind of buy down that multiple into the high single digits.

Okay. That's a very helpful overview. I had a little background with LPS and followed the transaction as it moved through to become Black Knight. I saw a lot of parallels with that transaction when Dun & Bradstreet was announced. You've kind of echoed some of the thoughts I had in my mind, which is certainly encouraging, but one of the things that stuck out to me as well was that the contract structure with -- that Dun & Bradstreet had pursued, and then I was thinking about it in context with Black Knight. Is there an opportunity to shift some of those customers or all those customers into a multiyear contract model? And the reason I asked that is because it would seem that the need for credit analytics is not something you only need on a short-term basis. It's kind of an ongoing part of a business need, and it made me think that a multiyear contract setup would not be an abnormal ask from those customers. And does that make it a business model that could be showing a very high increase in deferred revenue or contracted revenue, which is a very attractive number to have at a very high level if that company came back public?

Well, that is part of our plan, to really make D&B a recurring revenue model like Black Knight is. And the customers that D&B have are consistently using the same products year-after-year. So that's one of our strategies and our strategy is also to cross-sell various products. Our strategy is to maybe move toward a -- more of a consumer portal. So we have a lot of different ideas, but we don't own the company yet, and we first have to really get in there and understand everything they've been doing and how they're doing it. And we are doing that right now. We intend to hit the ground running, the day we close, we intend to really be -- have done a lot of homework and a lot of background work. But you've hit on something that's -- that we're interested in. We're interested in converting that revenue model to a recurring revenue model. So you're correct.

Okay. That's very helpful. And then last question, I don't know if we can answer it, but I'm going to ask it. On the accounting side for this transaction, you mentioned we would be a minority owner, but we would be a controlling entity of the Dun & Bradstreet transaction from a GAAP accounting perspective. Does that mean we would be consolidating those results into Cannae, or would that be reported as a -- like an investment line item?

We would report it exactly the way we do Ceridian today. It would be picked up as an equity investment, and we would report our share of the earnings to our below the line operations, similar to Ceridian.

Okay. And then just any thoughts on, given the size of that transaction, would we be disclosing some financial line items related to that business at all on a quarterly basis once closed?

This is Brent. We -- historically we did with Ceridian, so even though we owned a minority piece, we would give a quick of overview of their performance for the quarter, and it's more likely than not that we would do the same here.

Yes. We'll have that disclosure in our press releases similar to what we have with Ceridian today.

Our next question comes from Stephen Velgot, CTFN.

My question is -- and this may be known to others, but I wasn't sure. If you've ever said what the longer-term plan is with your stake in Ceridian. And then just I had a follow-up after that.

Sure, Stephen. So, I mean, obviously, our journey with Ceridian peaked when we took it public just over 6 months ago. Stock has performed well, we're extremely pleased with David Ossip and his leadership team and where they're doing and some of the moves that they're making. We think the stock has tremendous upside potential. But as we look through our past experience owning large chunks of companies, we do realize that as the company continues to perform well, that it will be logical to get more shares out there, and there's a clamoring for that amongst the investor base. So you would probably see us over the next couple of years. I mean, it would be logical for us to slowly wind down our position. But we -- again, we like where the company's going, we think the company has a lot of momentum, and we kind of want to continue to ride what we think will be a very attractive investment over the next couple of years.

Okay. And then a follow-up question, just concerning the close of the D&B transaction. I know that you're currently not able to repurchase stock, but is that something that you think will be revisited by the time you close the D&B transaction?

Well, again, I think what we would do is -- and what we always do, we'll close -- when we close the D&B transaction, we'll see what our liquidity is at that stage, and we'll see where Cannae is trading at and what type of discount that it might be at and certainly evaluate it. But we do -- our mindset is to, obviously, close the D&B deal, have some capital left over to do these add-on acquisitions for T-System and then see where Ceridian goes over, over that period of time. Over time, that would be the largest source of cash that we have that could then hypothetically be used for share repurchases, but that would be down the road.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I would like to turn the call 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.