Fidelity National Financial Inc (FNF) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FNFV second-quarter 2015 earnings conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference Mr. Dan Murphy. Sir, please begin.

Thank you, and good morning, everyone. And thanks again for joining us for second-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 we'll then open it up for your questions, and finish with some concluding remarks from Bill.

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 our website at www.FNF.com. It will also be available through phone replay the beginning at 2:00 PM Eastern time today through August the 6. The replay number is 800-475-6701, and the access code is 362666.

Let me now turn the call over to our Chairman, Bill Foley.

Thanks, Dan.

We again made progress on our monetization efforts during the quarter at FNFV. In June, we sold approximately 885,000 shares of FleetCor common stock, and FNFV received about $135 million in gross cash proceeds and $107 million in net cash proceeds after-tax. We continue to indirectly own approximately 1.5 million shares of FleetCor common stock that is valued at approximately $230 million.

We also have continued to work towards the planned tax-free distribution of J. Alexander stock in the third quarter. We filed a Form 10 registration statement with the SEC on June 24, and received their comments on the filing last week.

We expect to respond to those comments as soon as tomorrow, and we are committed to an August distribution of the J. Alexander's common stock to FNFV shareholders. In anticipation of this distribution transaction, J. Alexander has repaid the entire $10 million loan with FNFV in May.

We have now made the decision to pursue a tax-free distribution of our equity interest in American Blue Ribbon Holdings to FNFV shareholders. American Blue Ribbon Holdings owns O'Charley's, 99 Steakhouse, Village Inn in Bakers Square and a pie manufacturing business. To that end, we are preparing to file a Form 10 registration statement for the distribution of the ABRH common stock to FNFV shareholders and hope to complete that distribution before year end.

While FNFV no longer has an equity ownership position in Remy, we did note that two weeks ago Remy announced that BorgWarner was acquiring the Company for $29.50 a share. At price, it was 44% higher than the closing price on the day before the announcement. We are excited about the value this transaction will create for FNFV shareholders who held on to those shares of Remy that were distributed to them in December of 2014.

Finally, we continue our share repurchase efforts in the second quarter. Buying back an additional 1.9 million shares of FNFV common stock for approximately $29 million. In total, we have repurchased since the formation of FNFV almost 14.9 million shares. We also ended the quarter with approximately $207 million in cash at the FNFV holding Company level.

I'll now turn the call over to Brent to review the portfolio companies.

Thanks, Bill.

Ceridian HCM generated second-quarter revenue of $197 million, a 7% decline from the second quarter of 2014. For the first six months of 2015, cloud-based revenue has grown by 41% or nearly $30 million. Excluding the impact of foreign exchange rates compared to the prior-year period.

EBITDA in the second quarter was approximately $27 million, a decrease of 25% from the second quarter of 2014. Ceridian HCM continues to make significant investment and progress in growing its cloud-based solutions. During the quarter, an additional 158 DayForce customers were signed, and 147 went live on the cloud platform.

In total DayForce has signed more than 2,100 customers with more than 1,500 of those customers currently live on the platform. Ceridian remains on track in its ongoing transformation into a cloud-based Company. And we look forward to continued growth in DayForce customer signings and implementations in the second half of 2015.

American Blue Ribbon generated second-quarter revenue of $318 million, and adjusted EBITDA of approximately $19 million, increases of 3% and 6% respectively over the second quarter of 2014. Adjusted EBITDA margin improved to 6%, compared to 5.7% in the prior-year's second quarter.

ABRH's big three brands of O'Charley's, 99 and Village Inn, generated second-quarter 2015 same-store sales increases of 1.3%, 5.1% and 2% respectively. With O'Charley's and 99 exceeding the Navtrak US casual dining index for the second quarter.

O Charley's, 99 and Village Inn have recorded 7, 9 and 23 consecutive quarters respectively of positive same-store sales growth. Bakers Square also had a solid same-store sales performance in the second quarter, generating same-store sales growth of 1.6%. Overall, ABRH continues to produce positive same-store sales growth and improving EBITDA margins.

J. Alexander's generated second-quarter revenue of $53 million, and adjusted EBITDA of $5.2 million. Increases of 7% and 4% respectively over the second quarter of 2014. Adjusted EBITDA margin was approximately 10%.

J. Alexander's produced same-store sales growth of 4.7%, and Stoney River generated 6.2% same-store sales growth for the second quarter of 2015. As Bill mentioned, we are planning to distribute the common stock of J. Alexander's to FNFV shareholders in August, and we are excited about the prospects of J. Alexander's as a public Company.

Digital Insurance generated second-quarter revenue of $27.6 million, an increase of 23% over the second quarter of 2014 and adjusted EBITDA of $6.1 million, an increase of 20% over the second quarter of 2014. Adjusted EBITDA margin for the quarter was 22%

In June, Digital acquired Compass Consulting Group, a nationally recognized leader in healthcare risk management. This acquisition represents Digital's largest acquisition to date, with $11.3 million of revenue and expected EBITDA of $4.3 million after synergies.

This acquisition provides Digital additional risk management capabilities that it can bring to its existing customer base. And expansion into the multi-employer PEO market, and enhanced capabilities in the large employer marketplace.

At June 30, 2015, FNFV's book value was approximately $1.2 billion, or $14.84 per FNFV share based on the June 30 share count of 78.2 million shares. This includes $207 million in holding Company cash.

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

(Operator Instructions)

John Campbell with Stephens Inc.

Congratulations on the continued monetization efforts.

Thanks, John.

I just saw on the FleetCor stock just an implied tax rate there. Is that something similar to what we should expect on any potential future sells?

Yes. So on FleetCor and Ceridian, that would be -- if we have gains on either of those monetization events in the future, we will be paying a tax rate of what you see there. And that would be consistent in the go-forward period.

Got it. And I know you guys are asked this every other day. But just thinking about your updated thoughts here, just post the decision, spinout, and all the restaurant stuff by the end of the year.

You've got pretty liquid FleetCor stock, you've got lots of cash at the holding Company, and you're basically just left with digital and Ceridian HR. So should we be expecting a pretty substantial share repurchase? Or just updated thoughts about what you guys view as the future for FNFV.

As Bill mentioned in his remarks, since inception, we've bought back almost 15 million shares. Including the tender offer and then buyback activities in the open marketplace. We continue to think that FNFV shares are attractive value, which is why we've been buying back the shares.

Now having said that, we're going to monitor the pace of our buybacks. We have $200 million of cash on hand, we have $100 million undrawn line of credit with Fidelity National that we could use.

We still view opportunities in the marketplace as being rich, which is why you're seeing us monetize more than buy. However, the pipeline of things we're looking at has been growing quarter over quarter. So we're going to be mindful of potential attractive deals that we might want to execute on, and balancing looking at FNFV shares and seeing if it makes sense to buy any more.

Got it. And then just the last one for me. So the Digital Insurance, the 26% year-over-year growth, how much of that was organic?

Their organic -- Digital's organic revenue growth has been around 7% or so. Some quarters it's higher, some it's a little bit lower. The last quarter was actually 2%, which is on the low side.

We expect in the third quarter for that organic revenue growth to get back up into that 7% plus range. So we've been really challenging that team, not only to continue these attractive acquisitions that we've been doing.

But also to make sure that operationally, that they can achieve that organic growth. Because we think the combination of attractive acquisitions, combined with strong organic growth will lead to even further multiples expansion when we decide to monetize that investment.

Just expanding a little bit on what Brent was saying too. We now have about four or five different transactions of various sizes that we're taking a good hard look at. And so we want to make sure we marshal our cash, continue to repurchase shares.

But we do have some -- we are going to move in a little bit of different direction in terms of maybe adding some assets to FNFV. And turning those assets around, so we then can create the same kind of opportunities we've created with the restaurant companies and with Remy.

Got it. That's helpful. So suffice to say, you guys probably have a pretty good pipeline for opportunities.

We have a good pipeline. There's a lot of things that are -- some are a little distressed, some are not distressed at all that are very interesting because they complement some of our other business. So we've spent the last year and a half or so really getting Black Knight organized and getting that transaction accomplished. And now we can spend time on FNFV in terms of growing the business.

And then, Bill, just I'm sorry last one here. So you mentioned on the FNF call about growing out some of that real estate brokerage offering. Would you potentially move that into the FNFV family if it was large enough?

We've really -- I think we have to balance between the corporate opportunity of FNF and FNF's desire to be in that business and what FNFV is better at. I won't say no, but I won't say yes either.

Got it. All right. Thanks, guys.

Geoffrey Dunn with Dowling & Partners.

Bill, I wanted to follow up on that. It seems like you got a bunch of cash at the holdco that well outpaces your buyback pace. And by the end of the year with the digital Ceridian there, it's an inflection point of is this thing worth remaining outstanding are not. Are you taking a near to midterm repurchase of FNFV by FNF off the table, and clearly indicating that you're going to move forward with new investments?

Absolutely. We went through the process, we've created the tracking stock, we're going to stay with the tracking stock. We like the reaction that the marketplace has given us relative to FNF being a title insurance Company with direct operations with the technology subsidiary.

And we want to keep FNF focused in the title operations side, acquiring the agencies. They may be acquiring the ancillary businesses that complement the title Company, but FNFV really becomes a financial sponsor in effect. And we continue to try and do attractive deals and then distribute them to our shareholders, or sell them and distribute cash to our shareholders.

Okay. And any updated thoughts on Digital? Obviously, your largest acquisition to date, due to developed scale. When is it worth looking at something to take action on for Digital?

And Digital is interesting. As we've said before, it always seems best if you get the company's -- get the EBITDA level to $30 million and above $30 million, I think opportunities to monetize it become attractive. Our current thoughts are, the public markets really does understand well insurance brokerage firms. And they're very steady growers, they have good cash flow, lots of acquisitions to do. And Digital is levered about 4 times. With this acquisition their EBITDA run rate would be about that $30 million level, maybe slightly higher.

So we're thinking about it. Maybe sometime next year, if the public markets are still attractive. That could be a real attractive traditional IPO, because they have a very good use of proceeds. They would pay down debt and then have the ability and the resources to go pursue more acquisitions around the country. So we're excited about where Digital is, this is a great acquisition we think for them. And it does potentially accelerate our thinking about maybe a public market activity for that company.

Great. thank you.

Jason Deleeuw with Piper Jaffray.

And I was wondering on the pipeline of opportunities that you're evaluating, how are you guys thinking about funding those opportunities if you were to pull the trigger on anything?

With cash on hand, borrowings that -- borrowing funds from a traditional lender for a portion of the purchase price. And then we have our line of credit with FNF that we can draw down, and repay, and draw down, and repay. So we're really not very interested in having more shares outstanding. So we wouldn't be, as a general rule, issuing stock. We like what we're doing in terms of reducing the overall share count at FNFV.

It always had bugged me to have too many shares outstanding, or so many shares outstanding. You can't move the needle when you have a particular acquisition or do a particular transaction. So that's why we're going to continue to buy some shares back at FNFV. But we'd be making these acquisitions with cash on hand, and then we have the embedded cash of FleetCor stock that we can always draw down on. And borrow, borrow some money, maybe it would be a 50% borrow on various acquisitions.

Got it. And is there anything that would preclude you guys from going along with other investors on deals? Could you potentially participate in a larger deal, is that something that FNFV would consider?

Absolutely. And we've had discussions with the financial sponsors about participation and looking at transactions together. We did look at one transaction that we passed on with one of our financial sponsor partners. And so we're definitely going to do that. But we have our relationship with TripleTree and our investment in TripleTree. They're bringing us opportunities all the time in the healthcare space. So we're now kind of refocused at FNFV to look at some acquisitions.

And would you be willing to be the minority investor in those things, or would you want to be the majority investor, or doesn't it matter?

As long as we're equal investors. And for example, when we bought Ceridian with THL back in 2007, we were equal partners. We were 50-50 partners. During the pendency of that deal, we each sold down pro-rata, so we each owned about a third of the business.

So we would not -- we would partner with somebody. And by partner, we'd be equal and have equal governance because we think that's very important. As we make investments, that we can have a say on how the companies run in their go-forward business strategy.

Got it. And then when you think about exit timelines, how are you thinking about that for new incremental investments?

Just as fast as we can turn them around, and in exit as fast as possible.

We could give you the example of Black Knight. Where we bought that in January 2014, and monetized it 18 months later at a substantially higher value. I could give you the opposite side of the coin with Ceridian that we've owned since 2007. So it all depends on the company, and what you could do with it.

Yes. Well you guys have done a great job so far with the FNFV investments and Black Knight obviously.

Thank you.

And then on Ceridian, I think I missed this. Did you guys give a number in terms of percentage of revenue that's now the SaaS-based? Could you guys provide that or talk about the growth on that?

We just talked about the growth. In the second quarter, total cloud-based revenue was about just under $50 million, and that compared to about $37 million in the quarter Q2 of 2014.

Interestingly, we have a lot of revenue in Canada and we have some revenue in the UK. So foreign exchange hit that business by almost $3 million, which is quite a bit. And year over year, the Canadian dollar is down 25%, and similarly for the UK pound, or not quite as dramatically.

But we have a lot of business in Canada. So we're getting hit pretty hard by the exchange rate there. But the business is growing well there, they're winning in the marketplace, the pipeline remains strong. So it's a continuing transformation.

Sounds good. Thank you very much.

Brian Warner with Performance Capital.

Couple of quick ones. Are you precluded in any way from liquidating more of your FleetCor shares? Is there a certain timeline on that? And what are your thoughts, to the extent you'd care to share them there? Did you comment on subsequent to the end of the quarter, whether the Company bought back any shares? And then just lastly I know you're J. Alexander's and I'm not sure we're of starting with a new format. Can you talk a little bit about your thought process there, and how the returns stack up against the existing formats?

Let's attack those one by one. I think that those will get released over the next couple year, but half of them are available to sell. Right now, we still view it as an attractive. We took about a third -- just over a third of our position off the table at a good price. So we're monitoring that investment. It's a great company with great prospects. So again, about half of the 1.5 we can sell, and the other half will be released to us over the next couple years.

The second question, share buyback. As Bill mentioned, in his opening remarks, we bought back another 1.9 million shares during the second quarter, following the tender offer where we bought back over 12 million shares. Collectively, we've almost bought back 14.9 million shares in total.

With respect to your question about J. Alexander's. We have 31 J. Alexander's, and we have 10 Stony Rivers. So the idea is to have a third brand that has the same look and feel and then great execution that J. Alexander's does to continue to grow. We're mindful of part of the Affordable Care Act was the potential to put calorie counts, et cetera on companies that are viewed as national chains. And so we're mindful of that, and trying to stay in compliance with that loss. But to have a third brand that we can now grow that can execute like Jay's is strategically important.

Thank you.

Nathan Sheff with Pacific Growth Capital.

I was wondering -- just wanted to confirm that the ABRH and J. Alexander's spins will be tax-free spins.

Yes. It will be tax-free to FNFV. And then upon the receipt of the shares, it's tax-free to the shareholders. And the only time you'd have a tax is if the shareholders in turn sell those shares.

Great. And then also, I just wanted to get a better understanding on why buyback in the open market versus doing another tender -- I guess when you look at the market values of the different assets. You're probably looking at something that's closer to $20 a share in market values, and doing a tender at these prices would seem to be pretty attractive. So I wanted to understand the open market versus another tender dynamic.

I think you've seen us be very I think aggressive over -- and we did do a tender offer last quarter. As Bill said, we have $200 million in cash, we think that's the right level. We're starting to see some interesting opportunities that we want to deploy, but that capital we think an attractive investment.

So we will still look at buying back shares. But we're not at this time, we don't have any intention of doing a tender offer we would just buyback as we've been doing in the open market. I'd also point out that we did buy back 1.9 million shares in Q2. So we're we know where the value is, as your indicating. And we clearly have been pretty darn aggressive buying back those shares.

Great. Thanks very much.

(Operator Instructions)

Devora Tindman with Waldhausen & Company.

I had a couple questions, and I may have missed this. Did you disclose what the dollar revenue from the cloud services were from Ceridian?

I did. For the second quarter, it was about $49 million. And that included about $3 million or $4 million of foreign currency headwind, so on the normalized basis it would've been like $52 million or so.

Okay. And looking at the disclosures that we've put out for the American Blue Ribbon. It doesn't look like they have very much to debt. You're saying you're going to do the spin -- spinoff in the fourth quarter. Can you give us any idea if you're thinking about putting in any leverage on that Company, and then potentially doing a dividend to FNFV? And then we get that cash pile even a little bit larger?

Yes. There's a few dynamics at work there. Yes, we just did a leverage recap in ABRH. That's why there leverage is where it is right now. They do generate a lot of free cash flow. We have been reinvesting significantly in the business in terms of image enhancing of our O'Charley's, and more recently our 99 concepts.

Restaurant companies are interesting. You've got a be careful of the gross leverage that you put on the companies, because there is cyclicality to those businesses. So we did do a leverage recap, and we repatriated $50 million to FNFV last year, it's a possibility we could do the same. One reason to have these companies go public, of course, we think there's attractive growth opportunities for them. But it's our belief that if you're looking at buying another business, that the ability to use some stock is very helpful and it derisks the transaction. And so having these companies be public and having some leverage capacity, I think could be attractive for ABRH and Jack's for that matter. Having these companies public and having a public currency to go after, and having access to debt capacity to affect those types of investment opportunities.

Okay, great. And help me and other shareholders or potential shareholders of J. Alexander's think about the valuation of the Company. What type of peers are you guys benchmarking yourselves against in terms of what type of multiple you should be trading at? Given that you seem to have some concepts that have pretty good growth trends, opportunities to continue to grow, and a pretty good margin profile.

We echo each of those three things. J's, it's characterized, 31 J. Alexander's, so we could do the new unit growth and get some good lift there. Their same-store sales are outpacing the market. Interestingly, Stoney River is also why we have 10 stores. That was a turnaround that the J's team has really executed well on. You're going to see margins -- it's really not contributing much EBITDA today. But we're way ahead of where we were last year, and it's going to be better as we go forward.

So if you look at the combination of factors high-growth, best in class we think or near best in class, same-store sales growth this thing should be afforded a double-digit EBITDA multiple in the marketplace You've got companies like Kona Grill, which is trading at like 17 times trailing EBITDA, it's a little less on a forward basis. They're smaller than we are, but they've dictated a strategy of trying to increase their store count by 50%. And so we think that J's will be afforded a very attractive multiple in the market, and if it doesn't trade at those levels, I would encourage you to buy some.

Okay. Thank you very much.

Bose George with KBW.

This is Chaz (inaudible) on for Bose. I just wanted to ask again, you hinted at it earlier and you talked about [J's] a little bit. But just on the ABRH monetization, I just wanted to chat through your strategy on the timing there. And thinking about where the margins are versus competitors, and how it gets value coming on of the marketplace.

I think J's should be afforded a superior multiple than ABRH, just given its growth profile and its better margins. Now interestingly, ABRH is incremental, but they are improving their EBITDA. And their objective is to get that 6%, honestly closer to 10%. Now it that's a aspirational goal. And that's like we have a lot of revenue, and that's a lot of built-in earnings growth that we could achieve their.

We own 55% of ABRH, and what that team is good at, they've done a nice job at integrating acquisitions. We can't really -- we don't really want to leverage the Company up, as I made a comment earlier, as we look at these type of opportunities. So having a public currency we think is attractive. Based on the comps that we see for multi-brand, it should be at around 8 times. It could be better. But we'll see.

But we think that again, having that public currency, giving that team a chance to maybe face off on some interesting acquisition opportunities using a combination of cash, stock, and some borrowings would be attractive. And the spinoff is -- it's the same thing that were looking at it J's. If we did a traditional IPO, we didn't have a very good use of proceeds. We're already reasonably levered at just over 1 times levered at ABRH. So we think that the best use is to spin it off, have a public currency. They have a lot of free cash flow that we could use for capital allocation purposes, like buying back shares hypothetically, buying other companies, So anyway, we're very excited about the prospects of ABRH being a public Company as well.

Okay. Is the idea for both ABRH and J. Alexander's to expand materially through an organic growth or acquisitions, or can you say on that?

J's is much more we think a longer-term focused on your main concepts. They have so much growth opportunity, and they have the free cash flow to invest. We're not going to -- we're going to grow appropriately and make sure we've picked the right spots, and the right sites, and we've seen some examples of restaurant companies put out too big of new unit growth targets and stumble. And so we're very cautiously opening up new stores, making sure they work.

So J's is going to be much more of an organic growth strategy. ABRH is already multi-brand. We have lots of experience with the family dining, casual dining. We've taken over some distressed companies, our management team there is good at that. So there could be some inorganic opportunities on that side of the fence.

Okay. And then lastly for me. When you're talking about the acquisitions that you're looking in your pipeline. Is there any color you can give on industries you're looking at or opportunities that you're thinking about? Are they fairly related to what you've invested in so far, or is it pretty different?

Some, as Bill said, is related to what we already have, where we already have some management teams. There's some healthcare opportunities that we've looked at from our relationship with TripleTree that we found interesting, just haven't found the right one yet to execute upon. But the thing we see a little bit as different, there's just more opportunities that we find attractive than we did six months ago.

Okay. Thanks.

I'm showing no further questions on the phone lines at this time. I'd like to turn the call back to fit Bill 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 the FNFV shareholders. Thank you for joining us today.

This does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.