Cannae Holdings Inc (CNNE) 2022 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Inc. Fourth Quarter and Full Year 2022 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded, and a replay is available through 11:59 p.m. Eastern Time on March 1, 2023.

With that, I would like to turn the call over to Jamie Lillis of SOLEBURY Strategic Communications.

Thank you, operator, and all of you, for joining us this afternoon. On the call today, we have our Chief Executive Officer, Rick Massey; Cannae's newly appointed President, Ryan Caswell; and Bryan Coy, our Chief Financial Officer.

Before we begin, I would like to remind listeners that this conference call and the Q&A following our remarks may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about Cannae's 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. The company undertakes 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 quarterly shareholder letter, which was released this afternoon, and in our other filings with the SEC.

Today's remarks will also include references to non-GAAP financial measures. Additional information, including a reconciliation between the non-GAAP financial information to the GAAP financial information is also provided in our shareholder letter.

I would now like to turn the call over to Cannae's Chief Executive Officer, Rick Massey, who will give a few brief remarks and then open the line for your questions.

Thanks, Jamie, and welcome to our fourth quarter '22 call and our full year '22 call. I'm Rick Massey. I'd like to introduce -- formally introduce our new President, Ryan Caswell. He's here with us. He is moving in, instead of David Ducommun who is moving on to FNF. We will miss him. He was a fantastic President. I think he's going to also add a great deal of value to FNF. I'm very excited to have Ryan as my partner, Ryan, as our new President. I think you will find him to be very straightforward and intelligent human being.

I'm just going to hit a couple of highlights from the quarter and then be happy to kick it open to questions. So we bought back in the fourth quarter -- the main highlight is we bought back 2.3 million shares. I think the average price was about $21.50. A little lower than that. Below $21?

Yes. $20.96.

$20.96. Okay. There we go. And that was $51 million of proceeds. So for '22, we told you we were going to buy back shares. And we bought back 10.8 million shares. That's 12% of the outstanding as of December 31, '21, which was when we really started accelerating our buyback program.

You may recall, we accelerated that after our conference in Las Vegas early -- or December of 2021. So since we've embarked on our repurchases, we bought back about 15.6 million shares. And that's 17% of the then outstanding and about a $400 million return to our shareholders. Unfortunately, the gap between our stock price and our liquidation value didn't close. We thought -- we had hoped that the gap would close significantly when we showed aggressive buybacks. But it just didn't happen.

But nonetheless, we returned a lot of shares, a lot of cash to shareholders. We closed the last leg of our AmeriLife transaction in November of last year. We still retained a 29% portion of AmeriLife, and we're booking that at $95 million. We are excited about that -- about AmeriLife going forward. And we obviously are very excited for the accomplishments where we received a MOIC of 2.7x our money. So -- and that was in really just about 3 years. So not a bad trade for us. Caswell is, and I assume, remains on the Board of AmeriLife. He's not -- doesn't reign on the Board. But it was still -- they did a nice job, and bringing in some new investors had a very nice valuation.

I guess it's kind of a sign of the times that we're bragging on selling one of our portfolio securities for a loss, but we did that. We sold Cannae shares for $27 million in cash. And as you know, there's been a split. So how many shares do we -- were they split? So how many shares did we sell?

We sold 19.2 million pre-split.

Okay. 19.2 million pre-split. And that's like 1.6 million. [Appears] 12 to 1, post-split.

Yes.

Okay. And that gave Cannae -- why did we do that? It was because we had gains. We were carrying tax gains -- taxable gains on the sale of AmeriLife and on some CDAY. And we -- it was just that we thought it would be bad portfolio management or not good portfolio management for Cannae to pay taxes when they had these fairly large unrealized losses on their balance sheet.

So we feel some of those shares often sold them. As a result, Cannae is not going to be a taxpayer in '22. And so we'll get a refund of our advances. The unfortunate problem for our partner Trasimene is that knocks a big hole -- that realized loss knocks a big hole in our ability to get carrying interest, which is how we get paid. And probably most portfolio managers wouldn't have done that for that reason. But we just -- we wanted to do the right thing here and not have Cannae pay -- it was silly for Cannae to pay taxes.

We sold 1 million shares of CDAY Ceridian for roughly about $78 a share. That is, believe it or not, a 13x multiple, given that we invested in like '07. So it's still a great return to -- for us. We own 5 million shares now of CDAY, for those who are counting.

We closed in November of '16 -- November 16, '22, we closed our investment in CSI or Computer Services. It's a really nice kind of a small bank core processor located in Kentucky. Bill and I both -- and Frank Martire, who sits on our Board, former CEO of Metavante and FIS, all coveted this business back in the day, but they would never sell. And finally, they decided to sell. And when they decided we were not front and center on it, but Centerbridge was. And Centerbridge was kind of nice to let us put about $86 million in the deal. We are excited about with our prospective returns on CSI.

There may be some opportunities to do follow-on investments as they look at some M&A, and they have some in their sights. So we could get to put a little bit more in. It will just depend on what the target is and how Centerbridge wants to value the business.

We -- as you are probably all aware, we invested 51.1% of the necessary equity to acquire an English Premier League Football Club, AFC Bournemouth. And that is -- we paid roughly 0.8x revenues on that. Way, way below the comps. One of the reasons for that is that the business had been, frankly, pretty -- the business side of the soccer team have been undervalued, undermanaged by the management team -- the then management team. And I mean ticket sales, gear sales, food sales, all the other hospitality stuff, there were just no attention paid to it.

And this company was performing on those areas well below its peers. And we are very confident that Bill and his team and Ryan, who's our partner dispatched on the project, will turn the business side around. And as you are probably aware, if you followed it, they bought -- Bournemouth bought -- signed up several new players in an effort to try to stay in the Premier League. And they're playing a lot better than they had in the past.

So we're knocking on wood they don't get relegated and this thing performs really well for us. This is not like a family, an heirloom deal, this is a deal as an investment. And we -- if you've seen any news about what people are paying for these teams now, you can see that we got a bargain, and we should be able to make quite a bit of money on it.

So Ryan will go into more detail if you're interested. But we've got the FNF credit facility that we used to buy back that -- essentially, we used to buy back 5% of the company during our buyback period at a deeper discount than we were paying in -- quite a bit deeper than we were paying in the market. And we essentially used the credit facility from FNF to pay for those shares. That's $85 million. And that's termed out. We're...

Yes. We can't borrow against...

We have to pay it back on an amortization schedule now. And then we've got a margin loan of $250 million that's fully available. And we've got $272 million in cash in short-term investments as of now. I don't think that's all available to go buy back shares or do deals because we've got expenses and some follow-on investments and so forth that we're probably going to need to do. So it's hard at this stage to tell you how much is really available for future purposes, but we'll know more by the end of the quarter.

I would -- I don't want to take up too much of your time going through our entire portfolio. Just a couple of highlights. Dun & Bradstreet reported their fourth quarter numbers. We are their largest shareholder. And they disappointed the market, although it didn't disappoint us. They were in the range of their guidance.

What really hurt them were really 3 things: one, foreign exchange was -- had a very, very substantial impact -- negative impact on revenues and EBITDA; two, the business lost a contract with the GSA, which probably cost it 1.5 points of organic revenue growth; and three, the marketing portion of Dun & Bradstreet is -- they're all under a little duress. All the marketing -- all digital marketing businesses, if you've been watching from Google on down, have been under a lot of stress because digital marketing budgets are some of the first to go as -- when management teams are looking to cut costs.

And so just -- we're just not seeing the budget, the expenses -- the budget expenses on these items, and I don't know how long that's going to last. That's -- that phenomenon is affected, as you'll see, affected System1 results. We own -- we have $272 million of bases in System1.

The other -- and the good news is, as I'm finishing, is Alight had a fantastic quarter. They announced it yesterday the stock at one time is up around 10%. They showed -- and probably, they're up because of their guidance for '23, which would show 11% to 12% revenue growth and 12% to 13% EBITDA growth and margin expansion. The -- and they announced several new big logos like: GE, all 3 GEs, they're splitting into 3; and Exxon; and quite a few others. So this company is really humming. We are very, very proud of the management team there. And there is no doubt that this is the most undervalued of all our stocks in our present portfolio.

And so there will be some secondary sales probably from some of the other holders, larger holders. But I don't -- Bill and I both don't -- have no intention of selling down at this depressed level.

So did I miss anything that I should cover, Bryan, or Ryan? Okay. I'm going to stop there and open up for questions. Thank you very much.

(Operator Instructions) And our first question is from John Campbell with Stephens Inc.

So first off, Ryan, congrats on the promotion. Looking forward to working with you. I saw you guys provided your cash balance as of yesterday, I think it was $272 million. Also saw where you guys have paid or maybe expecting to pay the $40 million for the Black Knight football commitment in the first quarter. Does that cash balance that you guys provided, does that include the payment? Or is that yet to hit?

The cash payment that's coming -- yes, we've already paid the one that was in the first quarter. That was first week of January. There's only one left that's in probably the third quarter of this year. That's about $40 million.

Okay, all right. I want to go maybe high level here. Just looking for some insights on your vision for both Black Knight Football and CSI. So maybe just starting off on Black Knight Football, if you could help frame up the type of returns you guys expect over time? And just Also, just how large do you envision this organization getting over the long haul?

I'll let Ryan go to that. I'll just say, we sort of view this as a pair of everything, sort of a multiple of money. And the forecast that we showed our Board to support the investment in Black Knight Football, we were looking at sort of a 3 to 3.5x MOIC in 5 years. On CSI -- I do want you to hear from Ryan on the football team.

On CSI, that's probably another 5-year hold. There's a lot of work to be done, a lot of little tuck-in acquisitions. And then we expect that, that the likely suspects would love to come in and buy this thing. So that, too, is kind of 3x your money in 5 years sort of deal.

Very, very low -- I mean not a lot of risk in this business -- in that business. And we think that demand for it will be -- will increase. So -- and Ryan is going to talk about the football team.

Yes. Just a little bit more details on how we think about that. As Rick mentioned in the opening, we think we got a really good price. We paid roughly GBP 100 million for the purchase price of small out -- if you look around the Premier League, kind of the next cheapest is kind of mid-200s, and then it's probably closer to GBP 500 million per team. So we think we're in a very attractive value.

As Rick mentioned, there's a lot of work both on the commercial side, infrastructure. We're also -- as you probably saw, we made an investment in FC Lorient, which is a Ligue 1. So the French team -- the first league in France, and we're looking at other leagues to really try and bring down the cost of players. And there's a lot of work around that, both in terms of how you put that together and how you effectively kind of get talent from those to the Premier League. I think an example is Bournemouth did buy a player in the transfer window from FC Lorient. You can kind of understand the pieces of how it works.

But look, we think there's a lot of work to do. But as Massey said, we think there's a lot of upside to it, but we got over time, keep the team in the Premier League as well as kind of build out all these ancillary revenue streams and investments.

Okay. That's helpful. And I've got one more and I'll hop back in the queue. I mean I've got a lot more work to do on kind of building out a valuation framework for club valuations. But with Bournemouth, it sounds like you guys presented a 5-year, multiyear kind of forecast of returns which you guys are expecting.

Just out of curiosity, how impactful is the relegation event for smaller EPL teams? I mean clearly, we're pulling for Bournemouth as they hit kind of the home stretch here, but if there's an event of relegation, how does that affect stuff?

There were existential comes to mind for me -- that may be a little.

As you might imagine, we did a lot of work on that. We think about -- we actually looked at different chance of the second level of championship. We looked at teams there. Frankly, we don't think our value is that far off even where some of those teams trade. But there's a bunch of work that you can do.

There's -- and again, I'm happy to talk to you some more detail, but there's basically parachute payments, which are payments that go to relegated teams that give you a very large advantage in the short term. So we think that given the work that we're doing, even if we were to get relegated, there's a way that we have advantage to bounce back up. But there's clearly a difference in value, but we believe we have the right people and kind of infrastructure in place to hopefully not get there, and if we do, to kind of mitigate that and bounce back within kind of a year or 2.

And our next question is from Ian Zaffino with Oppenheimer.

This is Isaac Sellhausen, on for Ian. Just another follow-up question on Black Knight Football, and congrats on the FC Lorient investment as well. Is there any option, I guess, in the agreement for Cannae to acquire more than the 50% in investment or ownership, I should say, in the Black Knight Football partnership?

No. We have the right to participate in any future offerings on a pro rata basis, as you probably would expect. But no, we didn't want to own more than 51%.

Okay. Got it. I guess, a bigger question. I guess what other areas of the market outside of sports league, either private or public look interesting at the moment for you guys? I guess like Computer Services investment was the most recent one in the technology space. But I guess is there anything in other sectors that you're looking at or have an eye towards?

Yes. Well, I mean, I'll just say kind of categorically, the -- there are quite a few technology software companies, I call them verticals, not enterprise software companies, but vertical software companies in the areas that we like, supply chain, health care, and so forth that are trading way below their IPO price.

And it's -- what's fascinating is you've seen an inversion of public valuations and private valuations, where the publics are substantially lower. And you're starting to see LBOs happening. And we see some opportunities -- without naming names, we see some opportunities in there, sort of smaller $1 billion to $2 billion, usually software or tech-enabled services companies in areas like health care with big, big market share. So we like those a lot.

The unfortunate problem is to make them work, you usually got to put some debt on the balance sheet, and the market there for high yield is still pretty haywire. So we're not -- we don't have anything imminent for that purpose -- for that reason. We're mostly just trying to keep stuff warm for when the debt capital markets come back somewhat.

Got it, okay. And then last question. Obviously, you guys have been active buying back stock. Just a quick question, what is the, I guess, remaining amount on the buyback authorization?

$9 million, close to $9 million. Is that right, Bryan?

Yes.

And our next question is from John Campbell with Stephens Inc.

It's me again. I got 2 quick ones here. How much of a commitment for FC Lorient, and I don't know if you guys disclosed the percent ownership?

We didn't disclose it. It's a minority, but it's a substantial minority. And we got the right to own more. And I think eventually, we've got the right to own control, correct? Something like that. Maybe, maybe not.

It's different liquidity options...

Yes. We've got different liquidity options.

Okay. Helpful. And then really good work on the successful AmeriLife monetization. It sounds like you guys are retaining about 5% that interest. Are there any lingering payments, any more proceeds you guys expect from here? Is that 243, the extent of it?

We're done. It was a great trade. Great trade.

And our next question is from Kenneth Lee with RBC Capital Markets.

Just one on Black Knight Football again. In terms of the LP interest, is there any kind of expected revenue streams in the interim? Or should we consider this as similar to either an equity kind of investments and also as well...

We don't expect a dividend or any sort of revenue streams out of that asset, at least not in the foreseeable future. They're going to need the capital for operations and players and so forth.

Got you. And just relatedly to any financial commitments or obligations otherwise?

With respect to Black Knight Football?

Yes, with Black Knight Football.

We've disclosed our obligation.

Yes. It's $40 million.

So if there's anything outside of disclosure, it's $40 million.

$40 million.

And that's due in the summertime. Other than that, there's nothing.

Got you. And one final follow-up. Given the ownership of FC Lorient and AFC Bournemouth, and I think you alluded to having a minority ownership in FC Lorient, but then that could be converted to a majority ownership down the line. Is there any kind of potential impact from the UEFA rules around multi-club ownership and participation, and I think the Champions League, things of that sort?

No. [We're ready to go]. That's the question of the day. You're going to stuff Caswell. That's right.

I like where that question is going more than the first one. As of now, given where the teams are, the Champions League ambition are probably a bit away. But obviously -- or maybe not obviously, if the teams -- you can only have one team that's playing in the Champions League. Neither of our teams are there today, Lorient is closer, and we don't -- as you said, we don't control it.

But I think it is something that we thought about the -- our teams need to perform quite a bit better before that something we really need to worry about. We hope that they do, by the way. It would be a high-quality problem.

There are no further questions at this time. I would like to turn the floor back over to Cannae Holdings management for closing comments.

Thank you very much, interested parties and shareholders in our story. We are working really hard to create some value for our shareholders. And never hesitate to give us a call if you've got more questions. Thank you very much.

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