Fidelity National Financial Inc (FNF) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FNFV 2015 first-quarter earnings call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions, and instructions will be given at that time.

(Operator Instructions)

And as a reminder, this conference is being recorded. I'll now turn the conference over to Treasurer, Dan Murphy. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us for our first-quarter 2015 FNFV earnings conference call. Joining me today are FNF Chairman Bill Foley, President Brent Bickett, and CFO Tony Park. Bill will begin with a brief strategic overview and Brent will then review our portfolio Company investments, and then we'll open it up for your questions and finish with some concluding remarks from Bill.

Please note that we are only focused on FNFV on this call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our expectations, hopes, intentions, or strategies regarding the future, are forward-looking statements. Forward-looking statements are based on management's beliefs, as well as assumptions made by and information currently available to management.

Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. The risks and uncertainties which forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our press release dated yesterday, and in the statement regarding forward-looking information, risk factors, and other sections of FNF's Form 10-K and other filings with the SEC.

This conference call will be available for replay via webcast at FNF.com. It will also be available through phone replay beginning at 2:00 p.m. Eastern time today through May 12. The replay number is 800-475-6701, and the access code is 357-916. Let me now turn the call over to Bill Foley.

Thank you, Dan. We again completed several monetization events during the quarter at FNFV. In February, we successfully monetized our investment in Cascade Timberlands, which we have owned for approximately eight years. We used the $63 million in cash proceeds received from the sale of Cascade, together with cash on hand to fund the $185-million Dutch auction tender offer that closed in March for FNFV to successfully repurchase approximately 12.3 million shares of its stock at a price of $15 per share. In addition, we also repurchased an additional 423,350 shares during the first quarter at a total cost of approximately $5.2 million.

We've also assisted Digital Insurance in securing a new stand-alone, five-year, $120-million revolving credit facility with Bank of America Merrill Lynch and JPMorgan as lead joint arrangers. Digital Insurance used $80 million from the credit facility to repay in full the FNFV loan with the Company. Digital Insurance plans to use the balance of the credit facility to fund new acquisitions and other growth opportunities.

We continue to work towards the tax-free distribution and the listing of J. Alexander's shares and are targeting a third-quarter completion of that transaction. Additionally, the lock-up provision with respect to $1.8 million of our $2.4 million share position in Fleetcor common stock expires on May 18th.

Fleetcor share price has risen by more than 20% since we announced the sale of Comdata in August of 2014, and our shares are worth approximately $380 million based upon recent Fleetcor trading levels. We continue to like our investment in Fleetcor and have not made any decisions to sell the Fleetcor shares when the lock-up expires.

Let me now turn the call over to Brent Bickett to review the portfolio Company.

Thank you, Bill. Ceridian generated first-quarter revenue of $208 million, a 5% decline from the first quarter of 2014. Cloud-based revenue in the first quarter increased by approximately 50% to $46 million in the first quarter, compared to the first quarter of 2014. EBITDA in the first quarter was $30.1 million, a decrease of 5% from the first quarter of 2014.

Ceridian continues to make significant progress in growing its cloud-based solution. During the first quarter, an additional 170 Dayforce customers were signed, and 100 went live on the cloud platform. In total, Dayforce has signed nearly 2,200 customers, with more than 1,500 of those customers currently live on the platform. We remain encouraged by the ongoing transformation of Ceridian into a cloud-based company and look forward to continued growth in Dayforce's customer signings and implementation throughout the remainder of 2015.

American Blue Ribbon generated first-quarter revenue of $308 million and adjusted EBITDA of approximately $18 million, an increase of 3% and 5% respectively over the first quarter of 2014. Adjusted EBITDA margin improved to 6% compared to 5.4% in the prior-year first quarter.

ABRH's big three brands of O' Charley's, Ninety Nine, and Village Inn generated first-quarter 2015 same-store sales increases of 1%, 7.3%, and 2.2% respectively, with Ninety Nine significantly exceeding the Knapp-Track US casual dining index by 480 basis points over the same period. O' Charley's, Ninety Nine, and Village Inn have recorded 6, 8, and 22 consecutive quarters, respectively, of positive same-store sales growth.

Bakers Square also had a very strong same-store sales performance in the first quarter, generating same-store sales growth of more than 5.4%, again, exceeding the sales track mid-scale family dining index of 4.7%.

For 2015, Village Inn expects to open three new corporate-owned and four franchise locations, while O' Charley's plans to open two new corporate-owned stores, and Ninety Nine one new corporate-owned location.

J. Alexander's generated first-quarter revenue of $57 million and adjusted EBITDA of nearly $8 million, an increase of 7.4% and 11.7%, respectively over the prior-year first quarter. Adjusted EBITDA margin improved to more than 13%.

J. Alexander's and Stoney River both generated same-store sales growth of approximately 6% in the first quarter of 2015. J. Alexander's financial performance continues to be impressive, and we look forward to the tax-free distribution and the public listing of the shares of J. Alexander's in the third quarter.

Digital Insurance generated first-quarter revenue of $27.9 million, an increase of 24% over the first quarter of 2014, and adjusted EBITDA of $6.7 million, an increase of 23% over the first quarter of 2014. Adjusted EBITDA margin for the quarter was 24%, essentially unchanged from the first quarter of 2014. Organic revenue growth in the first quarter was 7%.

Digital also continues to find attractive potential acquisition targets, and has built a strong pipeline of potential acquisitions that we hope to announce over the course of 2015.

At March 31, 2015, FNFV had approximately 80 million shares outstanding, and had a book value of approximately $1.2 billion, or $14.69 per FNFV share. This includes the $110 million in holding Company cash and a $10 million loan to J. Alexander's that we expect to get repaid in May.

Let me now turn the call back to the operator to take your questions.

Thank you.

(Operator Instructions)

Your first question comes from John Campbell with Stephens Inc.

Hello. Good morning.

Morning.

Hi John.

Just on the share repurchase, you guys did a fair amount in the quarter, both with the Dutch and outside the Dutch. So just curious, what is the authorization now?

Do you remember, Brent? I mean, we've got another--

It's big.

I think we have another $10 million offer.

Yes, I think we have just done -- I think we had $10 million and we bought back $400,000 out of that, had so I think we're at about $9.5 million roughly in authorization.

And we were blacked out in terms of the buyback during our -- during the pendency of the earnings. But now three days after the earnings call, we'll be able to start buying shares back again. Right now, that's one of the key uses of our free cash is to buy shares back.

Excellent. That goes in line with the second question. So on the holding Company cash, I think you ended it with about $110 million. First, just as you look at the build pipeline, are you far down the line with accessing anything or any new investment?

Then secondly, if not, would you consider returning that to holders in the form of maybe a special dividend or just sounds like maybe continued share repo?

We're actively monitoring new investments. And as we said last quarter, we just haven't found anything that we think is as attractive as our own stock. Until that dynamic changes, as Bill said, we will continue to look to buy back shares. We did use a significant amount of our cash flow, $185 million in the last quarter to buy back shares. I think that's pretty indicative of where we believe the value is.

Got it. That certainly makes sense. Last one, if I can squeeze it in, the Ceridian HR business, if you guys were just to use a baseball analogy, what inning would you say we're in on the Dayforce side of things? And then as you think about the value internally, give a little bit of help as far as the related public comp that you have come around?

I would have to say we're in the third inning. We've got a long ways to go with Dayforce, not in terms of the viability of the platform, but more in terms of getting deals processed and implemented. The receptively of the marketplace is very, very strong, but we're early on. And it's taken a long time to get to where we are, but now we are being very successful in terms of sales and implementation. Brent?

And just to add onto it, I agree. We're very pleased at the progress of the Dayforce platform. We keep adding more modules. As we sign new customers, they check more boxes, so they are adding more feature functions or getting more revenue. You saw that we had 50% growth quarter over quarter.

Now, the numbers are small. We had $46 million of cloud-based revenue in the first quarter, but that's recurring, that's largely recurring revenue. And the whole objective is to, over a multi-year period, to experience rapid growth in this product. And then you'll overcome your commission expense, your implementation expense, which we expense as incurred, rather than hanging it on the balance sheet.

So I think we're early innings, but this could be a long growth cycle for us for a lot of years. And you'll have an extremely valuable asset. There's a workday in the marketplace that sells for 15 times revenue. Now, I'm not saying that we'll get 15 times revenue, but there's a lot of attractive comps for rapidly growing cloud-based solutions and we're on the right trajectory.

Great. That's helpful. Thank you.

Thank you. Our next question will come from Jason Deleeuw from Piper Jaffray. Please go ahead.

Thank you and good morning.

With Digital Insurance, you guys talked about they may be looking at some other acquisitions. I'm wondering with Digital Insurance or maybe some of the other portfolio companies, would FNFV ever come along on any acquisitions to help out any of their investment-acquiring company?

Well, and that's what we've been doing. While we have not announced any net new acquisitions, we were the funder of all of Digital's acquisitions that they have done over the last couple of years since they acquired the business. We just put in a new stand-alone credit facilities where they repaid us those advancements, and that was $80 million.

Now, Digital is large enough that, A, it could get a high-quality bank facility from two of the top banks in the country, and it gives them the freedom to grow using their own means. So we don't anticipate FNFV having to help fund them on new deals if they could stand on their own.

Now, if a larger opportunity came along that we thought was attractive, of course we would help them out. Most of the acquisitions that are in Digital Insurance's world, however, are smaller businesses; $20 to 30 million would be quite large for them. That's not to say that larger opportunities don't exist. But we would, of course, help any of our portfolio companies, should an attractive opportunity come, because we would want to own more of the equity.

Keep in mind even on the restaurant companies, before we put in stand-alone facilities, we were -- it was FNFV and prior to FNFV that would help fund those growth. And we firmly believe that attractive acquisitions, with strong management where you take out costs, add scale, creates a lot of value. And we love those opportunities, especially when you trust your management teams and you invest in people that you believe in.

Great. Thank you for all that color. And then American Blue Ribbon, obviously you bought that asset at very attractive valuation and you've turned the business around, and the metrics continue to improve. So I'm wondering how you feel about positioning of that business and any update on a potential monetization time line.

I think every point that you made we would second. We are pleased with the progress of the business. O' Charley's continues its turnaround. It comped over a very strong quarter last year, where we significantly outpaced the marketplace, but we still had positive same-store sales growth. And we anticipate that to continue throughout the year, so we're pleased with where O' Charley's is. We're starting to get the development pipeline built up.

Ninety Nine is frankly killing it; they have just done a terrific job. Village Inn continues to experience same-store sales growth. You're right, that this is a mature investment. The margins are starting to move up. We're starting to get some pull-through of profitability. We expect that to get better as we roll through the year.

And, just we're focused on J. Alexander's, as we talked about in the -- at the beginning of the call. But we're considering similar types of options for ABRH.

Great. Thank you very much.

Thank you. We now have a question from Nathan Sheff with Pacific Growth Capital. Please go ahead.

Thanks. Another active quarter. I wanted to second the ABRH, and maybe just from a little different angle, which there are several facts out there and just seems to be a lot of acquirers for these types of businesses. I was just more wanted to get more color on what would the profile of a buyer like ABRH need to be? Or is there some orchestration into the different assets that need to go in different hands?

Well, if I understand your question, who would be interested in either ABRH or various pieces, what would be that profile?

Yes, exactly.

Okay. As we look at ABRH, it's really two big segments. They have the family segment and they have their casual dining segment. We do think there's a list of certain private equity firms that specialize in restaurant group acquisition. We do think that there might be an attractive acquirer to buy one of the segments, which is something we are thinking about and can consider.

One other item that we have to be mindful of, is as I think one of the prior analysts, Jason, might have mentioned, we do have very low basis in ABRH. We did buy it well. As you might recall, we did a leverage recap a couple quarters ago where we got back $75 million, which further reduced our basis. So we have to be mindful of the tax payment.

Also in restaurant land, unless you are strategic, there's certain limitations on the multiple of EBITDA that a financial sponsor can put on the business because of the required returns that they would be looking for. And so we know what that math is and are weighing that outcome versus potential other monetization outcomes.

Great. And then on Ceridian, I think this was one of the strongest cloud revenue quarters on a quarter-over-quarter basis. I'm curious, when is the tipping point of the free cash flow of that type of revenue stream? Have we already reached that inflection point where the deferred equity to billings is outgrowing the expense line, or have we not quite reached it yet?

If you looked at the cloud-based business on a stand-alone, no, it would still be losing a significant amount of current year earnings from that business, as we've mentioned in prior calls. The whole goal is it's like a land grab, so we're making the investment in sales, marketing, and in implementation to build up the customer base. Because once you have the customers, these are long-term contracts, recurring revenue, and so we look at that inflection point.

As you keep building up the snowball, if you want to think of it that way, we're hopeful that maybe late 2016 that you might hit that inflection point. Just for that business on a stand-alone business to cross over from its level of profitability from prior customers to cover current cost of operations plus the costs of new implementation, new commission expenses that you incur in expense, as incurred.

So it's probably sometime next -- probably sometime late next year, but we see what's going on. And again, we're encouraged by the progress that they are making. It's a hotly competitive area, but we have a terrific management team that's focused on that Dayforce product, and we think there could be substantial value created from their effort.

Great. And then sorry, just one final one. The free cash flow use of cash went down fairly dramatically. Wanted to get a sense for what was driving the improvement there, and should we expect free cash flow to be much stronger this year than years in the past?

Again, we have a series of investments here, as you know. You can't really look at it -- the GAAP reporting of these investments, because sometimes we own 90% of something, we own 40% of something, we own 55% of something. Some of these companies, we consolidate, some we don't. I hate to tell you it's just not all that meaningful.

What I would focus on and point you to would be the $110 million of cash that we have at FNFV that's available for whatever we want to do with it. We bought back obviously $185 million of stock over the last quarter. We expect to pull up another $10 million from J. Alexander's, so that would move the $110 million to $120 million.

We mentioned what we're doing with J. Alexander's, so that will be something we are focused on the next quarter, quarter-and-a-half to get done, and we could use that cash to make new investments, to buy back more shares or to hold. We don't expect to get any other significant repatriation of cash in the other businesses at this stage. I think we've done most of our repatriation already.

We did have some use of cash in the prior-year first quarter, to your point. We had some long-term incentive payments related to Remy and the restaurant group dating back a couple years that was actually paid out in the first quarter of 2014. So that's why you see a larger use of cash in the first quarter of last year relative to the first quarter of this year.

Great. Thanks very much and great job.

Thank you. We have a question from Bose George with KBW. Go ahead please.

Hey, this is actually Chas Dyson on for Bose. Just to follow up on the Ceridian questions, another question of monetization of that asset. I know you are progressing through the turnaround there and doing well in the Dayforce sales. But would you consider monetizing that investment before it reaches profitability on the Dayforce side?

Well, it depends on what scenario. If somebody offered an attractive price, you would have to consider it. But, no, we're -- our management team has their heads focused down and in, not up and out. They are operating their business. They are focused on customer acquisition, customer implementation. That's where the value creation's going to take place. So that's what we're focused on for the next two years.

Okay, got it. And then just a couple follow-ups there. On the $46 million of cloud-based revenue, you said, I think you said $155 million of cloud-based in 2014. If we annualize the $46 million and then compare that to the $155 million, should we think that pretty much all the incremental is recurring over that?

It's -- I don't have the exact percentage of the recurring revenue, but it's in the 80% to 85% zip code for that, because some of it's professional fees that you do get reimbursed on that are not recurring. And also, the other thing is that we can circle back to the customers that we have signed, as we add new modules and new product capabilities and feature function. You can go back to your install base and see if you could upsell priorly installed customers.

We're looking for continued growth in cloud-based. The Board and our partners at THL, we all made the decision to invest more in this business. We think that the market opportunity exists. It's a good use of our cash and the outcome, we're expecting it to be attractive.

Okay, and then just on the contracts themselves with Dayforce, can you talk about, a little bit about the structure of how they usually work, what the duration is, how you price them, and what customer set you're looking at?

No, we -- that's really more something for Ceridian to ask. We have not commented on their customer. I will tell you that they're multi-year contracts, recurring revenue. So once you sign them up, you have a very good sense of the customer profitability and ROI. But we have not yet commented on that.

Okay, and then just a couple more. One on the restaurants, the margin trends there seem pretty positive. So in ABRH, just wondering given there's a fair amount of reimaging and restaurant openings going, if there's a normalized margin, we should think about above the margin that you posted this quarter that you can work to. And then also on the J. Alexander's side, if the margin that-- it's a pretty healthy margin you posted this quarter is sustainable?

ABRH, we did 6% in the quarter; as a Board, we expect more. We have spent a lot of money refreshing and image-enhancing our concepts. We're still rolling through O' Charley's, but we're significantly through most of the other concepts that we have.

And Hazem's objective is to increase our margin, our EBITDA margin from 6% to over 10%. That would be 4 points of profitability on $1.2 billion of revenue, and that's what we're looking to get. So as we look at monetization initiatives, we want to make sure that we have a clear path to get the 6% up to 10%, because that's a lot of growth and a lot of value creation that could be had there.

And I think we have the right concepts and the right management team in place to get that. And we're starting to see some modest pull-through as we speak, and we'll look to see that in upcoming quarters.

J. Alexander's is performing exceedingly well, and we're very pleased with where they are. The Stoney River business last year really contributed nothing, and this year it's starting to contribute positive EBITDA. But it's still not at the combined 13% EBITDA level that J. Alexander's reported in the quarter. We expect Stoney River to continue to expand its margin, so you'll see J. Alexander's margin because of that increase even higher than 13% in the coming quarters.

Okay, and then just last one on the Fleetcor shares, I know you talked about thinking that's a pretty good investment and wouldn't mind holding onto it. Can you just give us the calculus and how you think about the decision-making process of whether to monetize or whether to hold on and what the factors are that you're weighing? Well, they are locked up until May 18th, so there's nothing that we can do until then. And we don't have any plan, as we've said, on what to do about them.

We do -- we think the management of Fleetcor is very, very strong and has the potential to really drive future value there. And we think the stock is still, relative to their opportunity, undervalued.

So we will have 75% of the shares get released on May 18th. We'll still have to -- we'll still be an owner of 25% of the shares structurally, because they will be put in escrow to cover indemnification -- potential indemnification claims under the contracts, so we'll be a long-term owner anyway. So our objective right now is to continue to monitor the business and see where the growth is, and we'll make decisions on what to do sometime in the future. Okay. Thank you very much.

Thank you. We'll go next to Geoffrey Dunn with Dowling & Partners. Go ahead please.

Thank you. My question was just asked and answered.

Okay. Thank you. Then we'll move on to Karan Ahooja with Eminence Capital. Please go ahead.

In terms of Fleetcorp, the big opportunity that you mentioned, is that Comdata specific, or is there something else that you're looking at?

Really, it's just the structure of the Company; it has terrific management. Comdata is a tuck-in acquisition that we know they are going to get significant synergies out of and they are getting synergies out of. So Comdata was just a great add. We just have a lot of faith in that management team at Fleetcor and believe that it's going to be a performing company for many, many years to come.

Then the investment decision is separate and apart from that. We just have to balance the amount of our investment and commitment to what we think the prospects are, just like any other money manager or investment advisor. That's where we are on Fleetcor, and the decision has not been made yet to take any action.

Got you. And then moving on to Digital Insurance, can you talk a little bit more about the value proposition for targets for them? And then also if an eventual sale would make sense to someone like a Marsh or an [aon] or how that, whether it be one year or two years down the road, what the potential monetization there is.

Digital continues to perform well. We try to pay attention to both their organic revenue growth, which was 7% in the quarter. Our objective is to try to get it higher in subsequent quarters and hopefully end the year high single-digit, like 9% or so would be nice. That's different, as you might note, from the Marshes or Aons to experience that type of growth, now granted, they are substantially larger businesses. So we have some pretty nice organic growth potential, which is nice.

Secondly, with acquisitions, Digital Insurance has a very efficient processing platform, and they are one of the better benefits-focused firms out there. So there's a lot of sub-scale benefits shops around the country. So our acquisition strategy has been focused on markets that are favorable to being a benefits broker. And then second, where there's lots of competition with the carriers, and we try to then find an established player in that marketplace. And then we build around it through tuck-ins and where there's attractive organic revenue growth.

The pipeline for deals is still strong. We did not announce any in the first quarter, although we have a few that we are hopeful to announce here in the second quarter. And the pipeline remains robust.

As we look at the business, we were at low 20s last year. We expect to be in the mid-20s this year of EBITDA. We see no reason, given organic revenue growth plus acquisition opportunities, to get to the 30s. Our opportunities to take it public are available to us.

I agree with you that, yes, I think it would be an attractive acquisition opportunity for strategic. Don't know if they could pay the type of multiple that we think the business is worth or not. But what we do know is that so long as you continue to grow your revenue, continue to grow your EBITDA, that we'll have all available monetization opportunities available to us.

Great, thank you so much.

Thank you.

(Operator Instructions)

We have no further questions, so I'll turn the call back to Mr. Foley for closing remarks.

Thank you. We again completed several monetization events at FNFV during the quarter, and we will continue to seek strategies to most efficiently monetize our existing investments in hopes of maximizing the value of each for the benefit of FNFV shareholders. Thank you for joining us today.

Thank you. And 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.