Cannae Holdings Inc (CNNE) 2018 Q4 法說會逐字稿

Greetings, and welcome to Cannae Holdings Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to Jamie Lillis, Investor Relations for Cannae Holdings. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate your participation in our fourth quarter and full year 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 March 21, 2019.

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 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 was 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.

Let me now turn the call over to Brent.

Thanks, Jamie. To start, we are pleased with the progress that we have achieved in positioning Cannae for future growth and value creation, as highlighted by the completion of the acquisition of Dun & Bradstreet Corporation on February 8, 2019, in partnership with Black Knight, Thomas H. Lee Partners and CC Capital Partners. The total purchase price was approximately $7.2 billion and was funded with $4 billion in debt, $1.1 billion in preferred stock and $2.1 billion in equity. At closing, Cannae invested $500 million in equity, representing a 24.5% equity interest in Dun & Bradstreet. To fund our equity contribution, we borrowed $150 million from our $300 million margin loan facility, drew down $100 million from our revolver and used $250 million of cash on hand. At closing, our Chairman, Bill Foley, was appointed Executive Chairman of Dun & Bradstreet's Board of Directors and is overseeing 3 near-term initiatives to reorganize D&B and position it to drive long-term value to its customers, employees and its new shareholders. The first initiative is to strengthen D&B's leadership team, and we are already well underway with Bill being appointed Executive Chairman; Anthony Jabbour as CEO; Steve Daffron as President; and Kevin Coop, as Chief Revenue Officer. Anthony and Steve are evaluating internal executive talent and are actively recruiting external executives with a focus on implementing a new organizational structure designed around general managers to ensure accountability and P&L responsibility for D&B's major business segments.

The second initiative is to reduce D&B's cost structure. We have identified a broad range of expense and redundancies that can be eliminated. And as discussed previously, we are targeting approximately $200 million of achievable cost savings. We have moved quickly to improve D&B's margins. The third initiative is to reinvigorate D&B's sales force, enhance product delivery and bring to market new product capabilities. Dun & Bradstreet is a global leader in business insights and unmatched data and products. We see an opportunity to improve how D&B goes to market, how they align their sales force and how they sell their products. While this may take several quarters to accomplish, we believe it will deliver a marked acceleration to revenue growth over the coming years. The operational expertise that Cannae and our investment partners are providing to Dun & Bradstreet is a key aspect of the company's turnaround, as the initial assessment phase, organizational realignment and implementation of cost-saving initiatives are now underway.

Today, Cannae is comprised of 4 primary businesses, which include Dun & Bradstreet, Ceridian, our Restaurant Group and T-System. With respect to Ceridian, we made the decision to prudently rebalance our portfolio by selling 4.4 million CDAY shares for $152.5 million in the fourth quarter. These proceeds were used to partially fund the D&B investment. Cannae currently owns 32.7 million CDAY shares, representing a 23.7% ownership stake, now worth $1.62 billion based upon CDAY's closing price of $49.67 on March 13, 2019. Over time, we expect to monetize our CDAY position with a nearer-term objective of repaying the $250 million of borrowings Cannae incurred to fund the D&B investment and raising additional holding company cash.

Turning to our Restaurant Group, ABRH's management team continues to implement a range of initiatives designed to reduce expenses while increasing productivity, customer satisfaction, and ultimately, cash flow. Within these initiatives, we are also rationalizing underperforming stores, particularly at the O'Charley's and Bakers Square brands, while seeking to convert certain of our Village Inn markets to a franchise model, which will generate cash and drive higher royalty-based fee income. The ABRH management team will continue to rationalize the portfolio with a focus on our stronger location and brands, reduce expenses and invest in the customer experience to deliver customer satisfaction and brand relevance. We were also pleased to complete a restructuring of the Restaurant Group on November 6, whereby Cannae now beneficially owns 65.4% of ABRH on a direct basis and 88.5% of Ninety Nine Holdings on a direct and indirect basis. Ninety Nine remains a standout performer in the Restaurant Group as it continues to outperform in the market and generate strong free cash flow. These attributes, when combined with Cannae's increased ownership percentage, provides additional optionality to create value for our shareholders.

Turning to T-System, the company is comprised of 2 segments: The first is their clinical documentation segment, which offers a full suite of software solutions, 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 SaaS solution for self-service coding. Bob Wilhelm, who joined T-System as CEO in the third quarter of 2018, has completed a strategic review designed to provide a road map for actionable initiatives to improve sales efficiencies and growth as well as operational efficiencies in both the documentation and coding divisions. Bob is realigning the management structure of the company and actively recruiting additional executive talent in order to position the company to build long-term sustainable growth and selectively be able to acquire and integrate tuck-in acquisition targets.

As Rick will discuss in greater detail, application of ASC 606 for revenue recognition, while having no impact on cash flow, has reduced the amount of revenue and EBITDA T-System can recognize from its documentation business, principally related to software contracts sold to our hospital system customers. We expect 2019 to be a transitional year for T-System as the management team implements the organizational changes and makes incremental investments in personnel and product development to position the business for sustainable growth in subsequent years.

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

Thanks, Brent. To start off, Ceridian, which includes both Cloud and Bureau solutions, generated fourth quarter revenue of $200.3 million, which represents a 9.8% increase from the fourth quarter of 2017. Fourth quarter adjusted EBITDA increased 22.2% to $43.5 million as compared to the year-ago quarter. In the 2018 fourth quarter, cloud-based revenues, which include both DayForce and Powerpay, grew 27.5% to $148.3 million as compared to $116.3 million in the year-ago quarter. In total, 3,718 customers are now live on the DayForce platform, up from 3,001 at the end of the fourth quarter of 2017. More detail on Ceridian's fourth quarter financial results, which were released on February 6, can be found on the Investor Relations section of their website.

Turning to our Restaurant Group, American Blue Ribbon Holdings generated total revenue of $298.5 million in the fourth quarter of 2018, flat as compared to the fourth quarter of 2017. Legendary Baking's third quarter revenues were up 18.1% or $6 million above the year-ago quarter. This increase was offset by a $6 million decline in the restaurant sales, largely the result of the closure of 21 underperforming restaurants, which decreased revenues by $5.1 million. Our Ninety Nine brand continues to outperform within the Restaurant Group, delivering same-store sales growth of 2.5% during the quarter and with Bakers Square producing same-store sales growth of 0.3%. This strong performance was offset by O'Charley's, which declined by 2.4%, and Village Inn, which declined by 1.2%. Of note, Ninety Nine's same-store sales result outperformed the Black Box regional index same-store sales increase of 1.7%, while O'Charley's underperformed the Black Box national index same-store sales increase of 1.3%, and Village Inn and Bakers Square underperformed the NPD mid-scale family index same-store sales decline of 1.8%.

ABRH delivered a fourth quarter EBITDA loss of $43.8 million, which compares to EBITDA of $1 million in the fourth quarter of 2017. The fourth quarter 2018 EBITDA loss of $43.8 million included noncash charges of $26.7 million, $14.8 million and $13.6 million related to the impairment of goodwill, a facilitation fee paid to Cannae and the impairment of fixed assets. The management team at ABRH is in the midst of a strategic overhaul, which is designed to improve profitability. While 2018 has been a year of significant changes, in 2019, we are already beginning to see the benefits from our efforts as we move toward our goal of achieving long-term profit growth and drive increases in same-store sales and guest counts.

Lastly, Ninety Nine closed on a new bank credit facility on December 21, the proceeds of which were used to repay Cannae's remaining $33 million of debt at Ninety Nine. For the fourth quarter of 2018, T-System total revenue, adjusted for ASC 606, was $13.6 million compared to $15.3 million under ASC 605. The company generated fourth quarter EBITDA of $2.6 million, which is reflecting an EBITDA margin of 19.1% compared to $4.3 million of EBITDA or 28.1% under ASC 605. For the fourth quarter of 2018, on a pre-ASC 606 basis, T-System's organic revenue growth remained relatively flat year-over-year for both businesses, with an underlying increase in the mix of offshore coding helping to improve coding gross margins by 500 basis points. As we highlighted last quarter, while having no impact on cash receipts, implementation of ASC 606 has produced greater volatility in revenue recognition for T-System's documentation segment. The delay in scheduling our earnings release and call, and ultimately, the filing of our Form 10-K, resulted from continuing review and refinement of our accounting for T-System's revenue recognition under ASC 606. On November 16, 2018, Cannae completed the sale of 4.4 million shares of Ceridian common stock as part of a secondary public offering. The offering price at $36 per share, with Cannae receiving $34.70 per share after underwriting discounts, with proceeds of $152.5 million. At December 31, 2018, Cannae's book value was $1.125 billion or $15.58 per share as compared to $1.06 billion or $14.95 per share at December 31, 2017.

We ended the fourth quarter 2018 with $308.2 million in holding company cash, which is up from $148 million as of December 31, 2017. In February, we used $250 million of cash on hand to partially fund our purchase of D&B, and currently have approximately $65 million of cash on balance sheet. To conclude, we are pleased with progress that we are making in positioning Cannae to continue to drive long-term value for our shareholders.

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

(Operator Instructions) Our first question is from Nick Johnson with Piper Jaffray.

I just want to start with the cost synergies at D&B, if there is an update there? I know it's been -- it's pretty new in the process, but just any update on the $200 million in cost savings and how they are coming along versus expectations?

Sure, Nick. Thanks for the call. This is Brent. So as -- we had a fair amount of time to prepare for the closing. We brought Steve onboard, our new President, back late last -- in the fourth quarter. So -- and he's been on site up in Short Hills since late December, early January. And so he and Anthony and the rest of our team and the rest of our partners have done a lot of preparatory work to properly identify those areas of cost saving and the staging of getting those things out. Approximately 65% of the savings would be in people over a period of time, and that usually would be kind of a first-year thing to try to rightsize the ship, get your team in place and get the organization pointed in the right direction. So those have all been identified and we're very confident in our ability to get the $200 million.

Okay. So the 65% from the people will be in the first year, how about the other 35% and timing?

Candidly, it's going to be pretty quick. And I'll -- I'd say, we should be on a run rate of that by the end of the first year.

All right. That's very helpful. And with the cost savings coming through, do you anticipate there being any impact on revenue?

So Anthony and Steve, one of the first things they've done, they've hosted town halls for the employee constituents. They've also gone on roadshows, both domestically and internationally to meet with our major customers. And that -- and you're right, that is the trick to make sure that we don't disrupt the revenue, yet take the cost out, and then even further, start making sure the organization is realigned with a more effective go-to-market strategy. And then, candidly, also identify areas where we might need some M&A help potentially on any product gaps or technology gaps. So all those things are going on right now with the company, but the objective is to hold the revenue. We think we can do it and still take out the cost.

Great. And then you kind of mentioned it, but just how are things going with the management at D&B, the relationship with Anthony and Steve?

Well, Bill is Executive Chairman of the company. So -- and that was important for us to make sure, as the largest single investor, that we have the ability to have good management control, because we're -- we've done this before in 4 other very large acquisitions to be able to properly take out cost, install new management, hold onto revenue and then reposition the company for growth. So we're kind of taking the same script that we've done several times in the past and we have -- we think we have the right leadership team to do it. The most important thing, candidly, is to -- the organizational design they had was very inefficient and ineffective, and we're trying to change that to be accountable and transparent. And also their culture there, as we observed it, it was accepting of that mediocrity and we're trying to change that to become a winning team. And not surprisingly, as we -- we did remove most of the senior leadership team at closing as we brought in the new team. And on the positive side, we are finding some terrific talent inside that organization that's looking for a way to be successful. Everybody wants to be a winner. So it's well underway. We would expect by next quarter to have a little bit more detailed update to give you, and with Steve's commentary.

Okay. And then lastly from me, in regards to T-System, thank you for giving the organic revenue number. And then is there any update on the M&A strategy for T-System?

Your first -- Nick, your first question was organic -- on organic revenue number?

Well, I think I caught that, you said it was flat -- about flat year-over-year? Correct?

Yes. On a -- certainly, on an ASC 605 basis. As Rick said, it just is extremely complicated on this ASC 606. And as you might know, other companies that are in the software business, particularly that sell on premises, are having some of the same issues. But yes, on a -- from what we have looked at before under the 605 rev rec, it was relatively flat. I'd point out though that the coding side, which had about $8 million on a 605 basis of revenue, which is relatively flat, they moved one of their large customers from an outsourced solution to a SaaS. So the revenue was probably down a $0.5 million, but because the software business is so -- the margins are very profitable, our profitability actually went up. So they -- the coding side probably had organic revenue growth, all told, of just around 10%, if on an apples-to-apples basis.

Okay. That's helpful. And then in terms of M&A strategy, any update there?

So as I mentioned, Bob's done his strategic review of the company. And as people that have done a lot of M&A on our side of the fence, and he agrees, we're waiting to make sure that the team is ready to do this distraction of what M&A is. So we are still waiting -- we have our pipeline, we've been working with Triple Tree, we have it identified. Largely, it's going to be in the coding side and the revenue cycle management side of the business. We have a pipeline. We're candidly just getting -- making sure that we have a team that's going to be able to not only run their current business effectively, but also successfully integrate an acquisition, understanding from our experience how distracting that is. So we have a pipeline, we are -- it's probably, candidly, more second half '19 that we'd start executing against it.

Ladies and gentlemen, we've reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

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

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