Fidelity National Financial Inc (FNF) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FNFV 2014 fourth-quarter earnings call. (Operator Instructions). As a reminder, this conference is being recorded. I'll now turn the conference over to Dan Murphy. Please go ahead, sir.

Thanks and good morning, everyone and thank you very much for joining us for our FNFV fourth-quarter 2014 earnings conference call. Joining me today are FNF Chairman, Bill Foley; President, Brent Bickett; and CFO, Tony Park. Brent will begin with a brief overview of our significant portfolio Company investments and we'll then open the call up for your questions and finish with some concluding remarks from Brent. Please note that we are only focused on FNFV on this call and will only take questions related to FNFV.

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 with forward-looking statements are subject to include, but are not limited to the risks and other factors detailed in our FNFV press release dated yesterday and in the statement regarding forward-looking information, risk factors and other sections of FNF's Form 10-K and other filings with the SEC.

This conference call will be available for replay at our website at fnf.com. It will also be available through phone replay beginning at 2 PM Eastern time today through next Thursday, February 26. The replay number is 800-475-6701 and the access code is 351179. Let me now turn the call over to Brent Bickett.

Thanks, Dan. We completed several monetization events at FNFV in the fourth quarter of 2014 and thus far in 2015. We completed the sale of Comdata to Fleetcor in November 2014 and FNFV currently indirectly owns approximately 2.4 million Fleetcor common shares currently valued at approximately $360 million, which we believe is an attractive investment in an innovative industry-leading payments company.

In December 2014, FNFV completed a tax redistribution of our interest in Remy International to FNFV shareholders in a distribution valued at approximately $350 million, which provided a very tax-efficient monetization event for our shareholders. We now intend to pursue a tax-free spinoff of J. Alexander's to FNFV shareholders. That will make it a publicly traded common stock that will provide liquidity and a market valuation for that business. J. Alexander's also distributed approximately $14.6 million in cash to FNFV in December, including $10 million in principal repayment and $4.6 million in accrued interest.

FNFV also announced a 10 million share stock repurchase program during the fourth quarter of 2014 and we have repurchased approximately 539,000 shares to date. On February 18, FNFV announced that we completed the sale of our investment in Cascade Timberlands. FNFV received approximately $63 million in total cash proceeds, which was equivalent to our book value as of December 31, 2014. FNFV currently has approximately $210 million in cash on hand, including the aforementioned cash proceeds received from the sale of Cascade Timberlands. We intend to use a significant percentage of this cash to pursue a Dutch auction tender offer with the goal to repurchase approximately 12 million shares of FNFV common stock. More details will be forthcoming at the launch of the tender offer.

Other monetization efforts we are pursuing in the first six months of 2015 include getting repayment from J. Alexander's on the remaining $10 million in debt outstanding to FNFV and arranging a third-party credit facility at Digital Insurance, which will enable Digital to repay the $78.5 million in debt outstanding to FNFV.

Now onto the portfolio Company investments. Ceridian HCM fourth-quarter revenue was $227 million, a 5% decline from the fourth quarter of 2013. EBITDA was more than $34 million for an EBITDA margin of approximately 15%. For 2014, Ceridian generated total revenues of approximately $869 million, a 5% decline from 2013 and EBITDA of $132.5 million. Ceridian HCM continues to rapidly grow its cloud-based solutions. Cloud revenue grew to $155 million in 2014, an increase of over 29% compared to 2013. As of December 31, 2014, Dayforce assigned nearly 2000 customers with more than 1400 of those customers currently live on the platform. All 2014 Ceridian figures are preliminary and unaudited.

Currently available Dayforce product modules include human resources, workforce management, payroll, benefits, recruiting and document management. In 2015, Ceridian HCM will increase its investment in sales, marketing and implementation resources, as well as continuing to develop new Dayforce product modules with the expectation of delivering long-term cloud-based revenue growth in excess of 25% per annum over the next several years.

American Blue Ribbon generated fourth-quarter revenue of $316 million and adjusted EBITDA of more than $22 million for an adjusted EBITDA margin of 6.8%. For 2014, ABRH generated total revenue of $1.3 billion and adjusted EBITDA of $75 million. ABRH's big three brands -- O'Charley's, Ninety Nine and Village Inn -- generated fourth-quarter same-store sales increases of 2%, 5.7% and 1.6% respectively with O'Charley's and Ninety Nine significantly exceeding the Knapp-Track US Casual Index of 1.5% over the same period.

O'Charley's, Ninety Nine and Village Inn has recorded 5, 7 and 21 consecutive quarters respectively of positive same-store sales growth. Village Inn opened three new locations in the fourth quarter of 2014 and O'Charley's opened a new franchise location in the fourth quarter, its first new restaurant opening since 2008. J. Alexander's generated fourth-quarter revenue of $53 million and adjusted EBITDA of $5.9 million for an adjusted EBITDA margin of 10.7%. J. Alexander's and Stoney River generated same-store sales growth of 4.8% and 5.2% respectively in the fourth quarter of 2014.

We are particularly excited about the same-store sales performance at Stoney River as the quality and operational improvement initiatives continue to take hold at that concept. Additionally, the Company opened one new J. Alexander's location in the fourth quarter and has plans to open at least one additional J. Alexander's and one additional Stoney River location in 2015.

As you may know, J. Alexander's filed initial IPO documents with the SEC late last year. After further review, we made the decision to slightly change course and pursue a direct spinoff of our interest in J. Alexander's to FNFV shareholders. We determined that J. Alexander's has the financial resources and access to capital to pursue its strategic objectives without the dilutive effects of raising expensive IPO proceeds. We expect to complete this spinoff by late spring or early summer of 2015 subject to receipt of necessary regulatory approvals.

Digital Insurance generated fourth-quarter revenue of $25 million, an increase of 28% over the fourth quarter of 2013. Fourth-quarter adjusted EBITDA was $4 million for an adjusted EBITDA margin of nearly 18%. For calendar 2014, Digital Insurance generated revenue of $94.6 million, an increase of 36% over 2013 and adjusted EBITDA of $20.6 million, an increase of 26% over 2013. Impressively, Digital Insurance had organic revenue growth of 8% in 2014. We expect similar organic revenue growth in 2015.

At December 31, 2014, FNFV's book value was approximately $1.4 billion, or $14.84 per FNFV share. That included$164 million in holding company cash and $88.5 million in loans to the portfolio companies, including $10 million to J. Alexander's and $78.5 million to Digital Insurance. Let me now turn the call back to our operator to take your questions.

(Operator Instructions). Bose George, KBW.

This is actually Chas Tyson on for Bose. Just wondering about restaurants in the fourth quarter. Seemed like there was a fair amount of improvement there, especially at ABRH. What are you guys seeing there in terms of a reimaging perspective at O'Charley's and Ninety Nine? And what should we be expecting kind of going forward there?

We'll start with Ninety Nine first. Ninety Nine had a terrific quarter. Its same-store sales growth we think led the Knapp-Track Index for the quarter. Certainly led it two out of the three months, so it really hit its stride. A little bit of commodity inflation impacted some margins, although they did pull through I think 100 basis points of margin improvement at Ninety Nine. So that concept is very solid. It has been for quite some time and we expect continued strong performance out of Ninety Nine.

Shifting to O'Charley's, the turnaround we think is well underway and we have been growing now for five consecutive quarters. We are starting to see some margin pull through there. I think in the fourth quarter we had a 130 basis point improvement in store operating cash flow compared to 2013. We expect -- we are getting smarter and smarter in how we spend our money in terms of the image enhancement programs, making sure that the managers and the locations are ready for those projects and that the food and staff is prepared. So we are getting better results from the image enhancement program. We expect more of the same in 2015. It is highly competitive out there in the casual dining area, but we seem to be taking share and we have a terrific management team running those concepts and we expect continued growth.

Okay, that's helpful. And then switching over to Ceridian, is there a way to think about the cloud versus non-cloud EBITDA margins there? And then just curious about the growth in terms of signing up customers. Is that mostly from existing non-cloud customers that are being transitioned over to the cloud product, or is that new customers or both?

I'll answer -- your first question was on EBITDA. Cloud-based business -- EBITDA margin for the cloud-based business is negative as you would expect. You have to expense in current periods your sales, marketing and your implementation costs. So while you are in fact making big investments to drive that substantial organic revenue growth and we actually made the decision to spend even more on sales, marketing and implementation resources in 2015 because it's like a snowball that keeps building up. So the investments we make today will really be impactful in 2017, 2018 as that snowball continues to grow because it is substantially all recurring revenue.

We expect -- eventually your growth in revenue will then outpace the expenses that you are making in sales, marketing and implementation, but we don't expect that to turn until late 2016, early 2017 on the cloud-based business. And from that moment on, you would still -- we expect revenues to grow 25% per annum for the next several years, which is obviously substantial growth and that's where we see the huge value of the business down the road.

We are also I think uniquely situated that we do have a lot of existing core customers that we obviously retain as best we can, but we also sell them the new Dayforce product, so we have our own customers that we can convert over to the Dayforce platform, as well as targeting net new customers, so we do both. We try to get net new customers, but we also move over existing customers that we have on our service bureau platform.

Okay, that's very hopeful. And then on the Dutch, I'm not sure if you mentioned timing there or if you have an idea and how much cash you think -- if you have enough cash right now post Cascade to do that, or if you would wait for maybe a refinance of the Digital Insurance loan, or what you are thinking?

Sure. Timing -- it's an initiative that we want to try to execute here in the first quarter, so stay tuned in terms of announcements and obviously with that announcement we'll be more specific in terms of dollar amount and size. We are thinking around 12 million shares and we have cash on hand we think that could clear the market price to take in around that many shares. As I mentioned in my script that we have over $200 million of cash on hand right now. That includes the $63 million that we received from the sale of Cascade Timberlands, so we think we have enough cash to accomplish that objective.

Okay. Thank you very much. Congrats on the great quarter.

John Campbell, Stephens Inc.

Looking at the cash on hand and you add in the Cascade proceeds, the Jack spin, the Fleetcor stock, I think you guys said that you will be releasing that over a three-year period, you guys are going to be sitting on a pretty good deal of cash for the next year or two. I know you guys are asked this every quarter, but just looking for an update on your thoughts or just kind of go-forward strategy for FNFV. Is it going to be a shell for future opportunistic investments or are you guys planning on letting investments roll off kind of one by one with cash-building and looking to do something like a large one-time special dividend?

As you know, with our management team, with Bill as our Chairman, we look at everything. Clearly by us announcing that we want to buy back this many shares suggest that we think the best use of our cash at this stage is to buy back our shares. We traffic in a lot of mergers and acquisitions and we see many opportunities, but to be candid with you, we have not seen any real attractive net new opportunities in this marketplace. Instead, we think that a better use has been trying to monetize certain of our investments and take advantage of what we think are attractive prices for certain of our assets. We still, of course, have the flexibility in our structure that if we do see a net new investment that we will pursue it. Just right now we see the best use of our cash is to buy back our shares. We are excited about the monetization events that we've accomplished and those that are going to be forthcoming.

Okay. I think that makes sense. And I might have missed this, was the $63 million for Cascade, was that before or after tax?

It approximated our basis, so we don't expect any material or frankly hardly any tax on that.

Okay, good. And then the 8% growth of Digital, that was really impressive. I think some of the top brokers in the space are barely doing mid-single digits, so curious about how aggressive you guys plan on being on M&A this year? I saw you did total I think revenue growth of a little above 20% or so with 8% of that organic, so it looks like you guys have done a fair amount in 2014. So just curious about your plans for 2015.

Yes, and that is one area that we have been using FNFV cash. As I mentioned in my comments, we have a $78.5 million loan to Digital. Now one of our plans is to put a third-party credit facility in place so FNFV can get that cash back, but still make sure that that credit facility enables Digital to continue to pursue its M&A opportunities. And there is a robust pipeline for those deals and we intend to continue to expand in markets that are good for employee benefits in states that are good where there is competition with the carriers. And so we have an active and robust pipeline there and we are going to continue to support Digital's growth so they can take advantage of the market opportunity.

Their organic revenue growth is -- I think you're right. It's higher than most of the companies that we follow. They have a very efficient platform and they are able to more cost effectively, particularly on small, medium sized customers, to run those programs for them and they are just very efficient at it. And we are able to pick up new producers that want to come to our platform because we can make those producers more productive, if you follow me. So they are able to sell more effectively under our leadership than they are independently. So we're getting a lot -- and that is organic revenue growth when people come and join you.

Absolutely. I think it makes a lot of sense. High single-digit organic growth, if you can get the margins up a couple hundred bps, that to me feels like it is pretty attractive on the M&A front. Have you guys been approached by any of the larger brokers?

We get some phone calls. We are not responding to those phone calls because we see an opportunity to continue to grow it and you are exactly right, we want to continue to get our organic revenue growth in that high single digit. We want to expand EBITDA margins and that type of business, as you well know, is very well known in the marketplace and our longer-term ideas would be that that could be an attractive IPO candidate because the market really does understand the economics of that business.

Excellent. Thanks for taking our questions.

Jason Deleeuw, Piper Jaffray.

I think I may have missed this, but, on Ceridian, when are you guys expecting the transition of clients to cloud-based format, when do you think that is going to end?

When do I think that is going to end? It's a long road. This could be a 5 to 10-year path out there. We are having a lot of success selling it externally and we're having a lot of success converting our existing customers over and we don't see that slowing down for the next several years.

So I guess what I'm trying to get at then essentially is when do you think we will start to see an inflection in some of the revenue growth in the margin numbers because you're paying all the expenses upfront, but eventually that is going to flow through and you are going to put up really good numbers, so when can we expect that inflection?

That's a great question. And as I mentioned, we and our partners at T.H. Lee made the decision to invest more aggressively given the market opportunity, so we're actually cannibalizing some of our EBITDA since we have to expense that investment for 2015 and into 2016. But you are right, there is that inflection point with the (inaudible) revenue and its EBITDA then overcomes the expense that you are paying for sales and marketing and implementation. As best we can tell that inflection point is probably a late 2016 event, maybe into 2017, but it is not that far off.

Great. And then on American Blue Ribbon, that continues to perform well and the margins are improving nicely and how much more operating turnaround work do you think there is? Are you getting close to getting it to where it needs to be from just an operations performance standpoint?

And really the focus would be on O'Charley's in that question and every quarter that goes by we get closer to doing that. The game is not over yet by any stretch. We still have to finish our reimaging program. We still need to pull through and expand margins there, as I mentioned. We improved margins in the fourth quarter by 130 basis points and we challenged [Pazim] and the team there to continue to get store operating cash flow expansion and it's tough with the commodity inflation and competition, but we think we have the right team and the right concept to do that. We are winning share in the marketplace. If we can continue to do that, we should be able to see the pullthrough on margin. We want to continue to roll through 2015 and monitor the business and see what opportunities might be available towards the latter half of this year.

Thanks. And on J. Alexander's, I guess I'm a little confused on the mechanics on how this tax-free spin is going to work. Will the tax-free spin occur, FNFV shareholders get the shares and they are automatically centrally publicly traded shares? If you could just help me understand that a little bit better.

You just summarized it. That's exactly right. So we form a holding company. We contribute our interest that we own in J. Alexander's to that holding company. We spin that holding company off in a tax-free manner that is registered with the SEC and viola, the FNFV shareholders have publicly traded shares of J. Alexander's.

And then one last thing on what is kind of the future with FNFV and you guys talked about maybe the valuations are not as opportunistic as when you bought some of your assets historically. But when I look around the economy, one sector that stands out is energy in terms of where valuations have come in. And I know your history has been to kind of stick with processing-oriented businesses, or businesses where there is history where you guys have expertise from an operating standpoint. But I'm not sure if energy would fit that bill, but what do you think -- is that potentially an industry vertical that you guys would be looking at, or not?

I would have to say that we are not energy experts and we have an investment in a small water purification business that is engaged within the fracking industry and of course, that business is doing terrible right now. There just are no new wells being drilled, so we are just sort of struggling with that, so I don't believe that energy is going to be an option for us. We just don't have the internal expertise. There are other restaurant chains that are interesting that could be rolled into ABRH to give it a little more mass. As Brent mentioned, we are going to continue growing Digital Insurance. We are going to be getting an independent credit line for Digital and we want them to continue to grow both organically and through acquisitions.

We are a partner in Triple Tree, a consulting, merchant banking, investment banking business that does make investments in the healthcare arena and so we are looking to Triple Tree to help us with some other investment opportunity. We've got quite a bit going on. We just don't have anything that is actionable at this particular time.

Thank you and congrats on the monetization progress.

Brian Warner, Performance Capital.

Actually most of my stuff has been answered. Not to beat a dead horse, but you guys have obviously been very actively monetizing assets and we all applaud that. I am just wondering how likely or unlikely is it that you actually will make an acquisition of any meaningful size that could move the needle on the Company because it seems like something -- that's something you haven't been really interested in and I recognize valuations are where they are, but maybe you could give us a little bit more color on your thinking in terms of going in that direction.

We love doing transactions. We are good at it. Under Bill's leadership, we grew FNF into its position and a company called FIS into its position, so it's in our blood. We just haven't seen the opportunities to execute on them. If we did, we would. And we would tell you about it at that stage. We like the valuation of where FNFV is, which is why we desire to use some of our cash to repurchase shares. But if something comes up, we will execute and we have the resources we believe to execute on those deals.

Great. Just a couple of quick follow-ons. Can you give us a sense of how large -- is there any way we could measure the opportunity at Digital Insurance in terms of acquisitions? Like what is out there?

There's a lot of fish in that pond. And we see the opportunities -- the same type of activity we have done in 2014 and 2013 we expect we should be able to execute in 2015 and 2016. There's just a lot of small employee benefits firms out there and then there's some independent significant players and those are the guys we try to find in key markets and key hubs and then we then recruit, if you will, all these smaller players to come join us so they can be more productive. It's a strategy that we implemented after we bought it. It accelerated in 2014 as you saw in the organic growth, and it's a key part of our M&A program going forward in 2015 and 2016. But there's plenty of opportunities out there. It is up to us to make sure we are disciplined, you do your due diligence, you buy them as correctly as you can and roll them into the platform.

Terrific. One last question, any change in your thinking on your existing $10 million share buyback post the Dutch?

No, not at this stage. If we are able to execute on the Dutch and take out that chunk of shares, we will keep the authorization open and opportunistically but them in.

Terrific. Thanks so much.

Nathan Sheth, Pacific Grove Capital.

I was wondering if you could, on the book value, walk us through -- I think the other category was 204 last quarter and now it is 111 and I understand there was a write-down of the energy services, but it just seems like a big delta for a bunch of assets that were I think last on the books at cost and then I think the FNF Imaging that went to Remy is also a component. Can you just walk through what that -- how that changed?

It is also possible we kept the loans that we had to the two restaurant companies in that other category and now we put them -- in the press release we put them into J. Alexander's and Digital Insurance respectively, so there's a total of $88.5 million that we moved into those two categories, $10 million at J. Alexander's, $78.5 million over at Digital. And so that's really -- yes, we did take -- as Bill mentioned, we did take a write-down on our investment in the water treatment entity just given what the current market conditions there. We are still bullish on the technology but you need a market and the customers to sell it to.

The other thing I think we should mention, Nathan, is that we had a deferred tax asset that has flipped and we moved that up into the investment with Ceridian and Comdata, so that was something that was down in that other that was not necessarily -- it was an asset. It now flipped with the sale of Comdata that we now have an accounting liability and we moved that up as part of the Ceridian/Comdata holding company book on top of what Brent just mentioned.

Okay, so I guess what is the magnitude of that accounting -- the deferred tax asset to liability accounting swing and I guess it just seems like an order of magnitude fairly large.

It was. If you look at the income statement and how we itemize the non-GAAP adjustments, you can see the gain on the sale of Comdata was $490 million. We got -- or rather Ceridian got about $1.1 billion in proceeds. Their carrying value of Comdata because of debt being pushed down to Comdata was negative $400 million, so the gross gain was about $1.5 billion of which we own about a third of that, so that's why you have a $0.5 billion gain there and then the taxes flipped from an asset, as Dan mentioned, to a liability. The tax impact was about $170 million, as you can see on page -- on the income statement.

Got it. And then so I guess the previous, the 204, I guess the confusing thing a little bit is that the debt seems to be included and separated out, so I guess I am just wondering is the other assets like the Triple Tree and the California Mortgage and Wine Direct*, so I guess I'm just trying to get a sense for what the actual value at cost of those underlying businesses is. Has that changed much and I guess --?

They have not. And as Tony mentioned, there's a lot of activity in the fourth quarter, which is why in the press release we put out a new scheduled book value summary and then I would refer you to that. I think it is pretty clear now in terms of the remaining investments what it's on our books for. The other category is now $111 million and to your point, national California Mortgage is $24 million of that. We have an interest in an insurance company that is $21 million of that and then Wine Direct and Triple Tree and some of our remaining real estate assets kind of fill in the balance.

Got it. Okay. And then on Ceridian, I guess I am just trying to think about or get an understanding of how you guys think about the value of the business there given that EBITDA has been depressed and I guess given the debt load, is there kind of a limit to which you can invest in sales and marketing and allow EBITDA to be undermined versus just needing the cash flow to service the debt?

Yes, we are obviously mindful of our covenants there. We are fortunate that we have a fair amount of runway that we can make these investments without tripping any of the debt covenants underneath Ceridian indebtedness. These cloud-based businesses -- and for those that follow -- they are extremely valuable. You are building up a snowball. We are growing ours at over 25% per annum and we see no reason why we can't continue to do that for the next several years. We expect that business, if you look at comparable companies, it is almost frightening to think of some of the valuations. I mean they trade at 15 times revenue or more. Now I'm not saying we are going to get that or not, but cloud-based businesses are very valuable in the market and as we look at the business -- the other question that we had, there is a transition that eventually you will grow your revenues fast enough to cover your investments, but you have such a good runway and visibility into your future revenue growth and profitability that we think that this is the way to best monetize -- not monetize -- but to get the most value out of the investment. So we are actually real excited about the path that the management team there is taking and are fully supportive of it.

Got it. And that's a longer-term transition, so I guess given all the other monetization events, how should we think about that kind of Ceridian being -- it seems like a much longer duration asset in terms of -- or path to realize than maybe some of the others?

I think you are exactly right. To get the value that we expect out of that business, we want to ride this out. We like the path that it is going, but it is out there a couple years, to your point.

Got it. Thanks.

Geoffrey Dunn, Dowling & Partners.

Thank you. Good afternoon. Hopefully I didn't miss this in the release, but can you break apart the carry value of Ceridian and the fleet shares and also, is that carry value on fleet equivalent to the cost basis or can you provide the cost basis for those shares please?

Yes, we have 2.4 million shares and I think it's about $131 ballpark per share for Fleetcor share and then the balance would be our carrying value for Ceridian.

Okay, so that $134, is that the carry value or the tax basis or both?

It has nothing to do with tax. It is just our GAAP carrying value, so of that 632, you could look at it and 2.4 million shares at about $131 a share would be reflected for Fleetcor and the balance for Ceridian.

And of course Fleetcor is presently selling for $154, so it's -- we did okay on that one.

Right.

Right, so I guess what I'm trying to figure out is when you do ultimately monetize some of those Fleet shares, I'm trying to figure out the tax implications for the net proceeds. So am I using the $134 or do I need another price?

Right now, this investment is combined and so our basis is combined and we have about $500 million of basis to go against those two investments. And so it is very tricky in terms of how you allocate tax basis if and when we sell the Fleetcor shares on how much of that $500 million we could attribute to the Fleetcor shares. And we don't have an answer for that yet.

Got you. All right. Thank you very much.

(Operator Instructions). Okay, we have no further questions in queue. Please go ahead with any closing remarks.

Thank you. We completed several monetization events at FNFV during 2014 and we will continue to seek all means to maximize the value of FNFV shares. Thank you for joining us this afternoon.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and choosing AT&T Executive Teleconference. You may now disconnect.