Fidelity National Financial Inc (FNF) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FNFV 2015 third-quarter earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Dan Murphy. Please go ahead, sir.

Thanks. Good morning, everyone. Thanks for joining us for our FNFV third-quarter 2015 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 the portfolio Company investments, and then we will open the call 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 being available for replay available via webcast at the FNF website at FNF.com. It will also be available through phone replay beginning at noon Eastern time today through November 4. That replay number is 800-475-6701 and the access code is 370126. Let me now turn the call over to our Chairman, Bill Foley.

Thanks, Dan. We again were successful in completing several monetization events during the third quarter. On September 28, we successfully distributed the common stock of J. Alexander's to our shareholders of FNFV at a rate of 0.17272 shares of J. Alexander's for each share of FNFV. J. Alexander's began trading as an independent public company on September 29. We have terrific evidence that the J. Alexander's management team will create value for FNFV shareholders that continue to hold onto their ownership in J. Alexander's.

In September, we indirectly sold approximately 912,000 shares of FleetCor common stock, and in October, FNFV received approximately $136 million in gross cash proceeds and $108 million in net after-tax cash proceeds. We now own approximately 600,000 shares of FleetCor common stock that are valued at approximately $85 million. Those shares are being held in escrow, with 200,000 shares scheduled to be released in each of November 2015, 2016, and 2017.

We are currently reevaluating our timing on the planned spin-off of American Blue Ribbon Holdings given market conditions. We also considering separate spin-offs of our family and casual restaurant segments. As we move through this process, we will provide updates on our decisions and progress as we are able.

Finally, we also continued our share repurchase efforts in the third quarter, buying back an additional 2.3 million shares of FNFV common stock for approximately $33 million. Since the formation of FNFV, we have repurchased a total of 17 million shares at a cost of approximately $253 million. We ended the third quarter with approximately $176 million in cash at the FNFV Holding Company level. The $108 million that FNFV received in October from the sale of FleetCor shares is not included in that $176 million quarter-ending figure. Including the FleetCor net sales proceeds received in October, we had approximately $284 million in cash as of October 26. Let me now turn the call over to Brent Bickett to review the portfolio companies.

Thanks, Bill. Ceridian HCM generated third-quarter revenue of $186 million, a 3% decline from the third quarter of 2014. EBITDA in the third quarter is approximately $15 million, essentially flat with the third quarter of 2014. Ceridian HCM continues to make significant investment in progress towards growing its cloud-based solutions.

For the third-quarter ended September 30, 2015, cloud-based revenue was $52 million, a 34% increase over the prior-year period, adjusted for changes in foreign exchange rates. For the first nine months of 2015, cloud-based revenue increased by 43% compared to the prior-year period; again, that's adjusted for changes in foreign exchange rates. During the third quarter, an additional 206 Dayforce customers were signed and 104 went live of the cloud platform. In total, Dayforce has signed more than 2,350 customers, with more than 1,600 of those customers currently live on the platform.

During the quarter, Ceridian sold its health and welfare and [COBRA] businesses, as it continues to strategically rationalize its product portfolio to focus investments and Management time on the cloud businesses. Due to the structure of the sale of these businesses, Ceridian incurred a loss from discontinued operations and associated write-off of goodwill totaling approximately $47 million. In a summary, Ceridian remains on track in its ongoing transformation into a cloud-based company. We look forward to continued growth and Dayforce customer signings and implementations in the fourth quarter of 2015 and into 2016.

American Blue Ribbon generated third-quarter revenue $289 million, a 5% increase over the prior year, and adjusted EBITDA of approximately $11 million, a $3 million decline from the third quarter of 2014. Same-store sales increased by 1% in total, with Ninety Nine leading the way at 3.9% same-store sales growth. Bakers Square and Village Inn also produce positive same-store sales growth of 0.6% and 0.4% respectfully. O'Charley's same-store sales growth was flat compared to the prior-year period, breaking a string of seven consecutive quarters of positive same-store sales growth. Ninety Inn and Village Inn have recorded 10 and 23 consecutive quarters, respectively, of positive same-store sales growth. American Blue Ribbon is looking forward to a seasonally strong fourth quarter, both in the restaurants and in the pie operation.

J. Alexander's had a strong third quarter, generating revenue of over $49 million and EBITDA greater than $4 million. J. Alexander's will release detailed third-quarter results at the close of the market on Thursday, November 5, and host an investor conference call on Friday, November 6, at 10:00 AM Central Time.

Digital Insurance generated third-quarter revenue of $30 million, an increase of 21% over the third quarter of 2014, and adjusted EBITDA of nearly $7 million, a 29% increase versus the third quarter of 2014. Adjusted EBITDA margin for the quarter was 22% and organic revenue growth was 5%. For the nine months ended September 30, 2015, Digital generated $86 million in revenue and $19.6 million in EBITDA, both approximately 23% of the prior-year figures. Year-to-date organic revenue growth was 4%. In summary, Digital continues to perform to our high expectations.

At September 30, FNF's book value was approximately $1 billion, or $13.37 per FNFV share, based on a September 30 share count of 75.8 million shares. This includes the $176 million in Holding Company cash. As Bill mentioned, FNFV had approximately $284 million in cash on hand as of October 26, following the receipt of $108 million in after-tax proceeds from the FleetCor share sale earlier in October. Correspondingly, the book value of FNFV's investment in Ceridian and FleetCor was reduced by the same $108 million from $501 million as of September 30, 2015 to approximately $393 million as of October 26, 2015.

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

(Operator Instructions)

John Campbell, Stephens Inc.

Hey, guys. It is Hayden Blair sitting in for John. Just a question on Digital Insurance. What do you guys need to do to hit that 10% organic growth rate? Do you guys expect that to step up meaningfully in the fourth quarter and what are the main drivers there?

Sure. If you look at the insurance brokerage industry in general, from what we've seen, organic revenue growth for most of the companies are in that 2% to 3% range. We're 4% year-to-date, which is a little bit below our target and below our Management's plan.

We hit 5% in the quarter and we do expect that to increase. I don't know if it will get to the double-digits, but we do want to get to at least double the industry average, so mid- to high single-digits would still be strong. The way that they do it -- we open up hubs in markets in which we want to compete, and with our platform and how efficient it is, we are very good at essentially attracting for no acquisition [cross] new producers to come onto our platform. And we are able to offer these producers essentially the same compensation arrangements that they have owning the business without the burden of these people having to do the administrative side of the business. Imagine that you go into a market and effectively recruit companies to come join you for free. It is really because of our efficiencies that we are able to do that.

We are also able to go to typical P&C brokers in the market, and there's many of these companies, and we are able to work out an outsourcing arrangement, if you will, for us to manage their small -- either their entire employee benefits program or certainly their small business employee benefits program. So that is another source of organic revenue growth for us. So we could process those deals and still offer a fee split, which is generating more profit to that P&C company. Those conversations have turned into a fair amount of business and we still have a strong pipeline of other similar outsourcing deals. Those are the unique elements of our organic revenue growth that differentiate Digital from its competitors.

Got you. Thanks for that color. Real quick, you may have mentioned, but there were a lot of numbers there, what was the current backlog of Ceridian HCM clients?

We didn't mention backlog, and they have their own earnings release where they might give some more detail. What we try to say is how many customers that they have signed. There's 2,350 customers, with more than 1,600 of those currently live on the platform.

The other brighter bit of news there is that their sales are exceeding plan. They're winning in the marketplace, which gives us as owners, confidence in the plan going forward. Their sales are exceeding their own budget and we seem to be taking share in the market, so we are happy to see that.

Excellent. Thanks for the questions.

Chas Tyson, KBW.

Hey, guys. Just wanted to get a little bit more color on the ABRH holding back on that. Is that purely market conditions or does it have anything to do with performance and comps or how are you guys thinking about that?

As we started analyzing the ABRH, we really had three distinct businesses. We've got 99 northeast restaurant chain, which is 99 steakhouses. We have the O'Charley's business. We have Max & Erma's, which we're in the process of disposing of, and we finally have our family business, which is Village Inn, Bakers Square, and the pie business.

As we work through our J. Alexander's spin-off, we started thinking more about ABRH, and should it really be distributed in the form of one company, or should it possibly be three companies, that are more akin to their own characteristics. Family dining has a set of characteristics, and O'Charley's is casual, but it is in the southeast and midwest, and then 99 is a northeast chain.

So we are really evaluating whether or not we want to do three transactions, one transactions, two transactions. The other complicating factor is that if we were to do three transactions, we need to have three years of audited statements for each company. So it is three or two, Brent?

Right.

We need a three years of audited statements, so we have to go back and reconstruct those audited statements. Right now, we were audited, but we were audited on a consolidated basics. That's the timing, is to get these audits done, and then to keep on going through this evaluation process of what makes the most sense for our shareholders and what will give them the most value.

We know that when we do spin these companies off and distribute them, they are going to going through a flat period, just like J. Alexander's is going through. Despite the fact that J. Alexander's is a high-performing upscale dining concept with a fine steakhouse concept associated with it being Stoney River. It has gone through a little bit of a lull, because we distributed it around $10, or $10.50, and it's just under $10 as the market stabilizes, and people recognize the quality of J. Alexander's. Those are all things that are in our thought process.

Okay. So is it fair to say that it is more strategic considerations from your end as opposed to anything the market is dictating to you?

Yes, I would say it is strategic because these would be tax-free spin-offs to our shareholders. And the more stock we buy back, the more shares each shareholders gets, so we're continuing to buy stock back.

I wanted to ask about that, as well. Obviously, you guys have been amassed a pretty significant amount of cash at this point with the FleetCor sale coming after the quarter. What are you thinking about in terms of usage for cash and how should we expect the buyback to trend?

We've been buying back roughly 70,000 shares a day.

Maxed out.

We are maxed out, so that's our volume restriction. We are continuing to do that. We do have a few acquisitions we're looking and investments that may have an impact on how quickly we buy stock back. But for the time being, we are continue to buy stock back, because our book value is, we believe, is around $13.37 and the stock is trading just over $11. So every time we buy a share back, we figure we're giving our shareholders $2.20 right now, so why not?

Makes sense. Thanks.

Jason Deleeuw, Piper Jaffray.

Thank you. For American Blue Ribbon, would it make sense to try to sell the three business rather than try to spin the businesses, sell them through strategic or maybe a private equity buyer?

That's obviously, always a possibility and something that we would look at. We have a little bit of a -- I don't know if you want to call it a high-class problem. But we bought these businesses well and we've done a dividend recap already, so if you look at our tax basis in these businesses, it is extremely low.

So you have got to think about, from a value realization perspective to our shareholders is, if I have to take 0.6[%] of whatever a strategic or financial sponsor would buy one of our businesses for, versus what might be within the marketplace, we're highly confident that we could realize more value by distributed these businesses rather than paying the government 40% of our gain. While we are still clearly open to the idea, and certainly we've had some inquiry with respect to that, it's going to be a high hurdle to have to pay -- lose 40% of your gross proceeds to the government.

Understood. Getting back to the cash then, you have got $280 million right now, it sounds like, and then you're going to have some more FleetCor shares being released, so even more cash coming. How are you thinking -- do you plan to just stick with the 75,000, buy back shares like how you guys have been buying them back, just stay with that strategy?

Yes. As Bill said, we indicated in the last quarter that we were going to, frankly, really slow down on the repurchases, but we saw where the stock was trading and still bought back 2.3 million shares during the quarter. So I'm always a fan of looking at the past as the best indication of the future.

So I don't think you'll see us do anything like we did earlier this year about a Dutch auction. But we are mindful of where the shares are trading and we're pretty good stewards of where is the best place to put our cash.

And then you guys also mentioned that you are looking at some other investments. Is there any color you can give us on what you're looking at? Are these new types of businesses to the portfolio that you already have or would these be possibly strategic acquisitions that could help existing businesses that you have? If you could just help us understand that?

I will take it in reverse order. As our portfolio companies said today, each of them -- the acquisitive one has been Digital. We, earlier this year, as you might have recall, we put an independent capital structure at Digital so it has to live on its own and fund its deals on its own. That's not to say that if a bigger deal came down the pike, that we wouldn't facilitate it if we thought it was important for the business. But thus far, the transactions that Digital has been executing on, they have been able to live within their third-party credit agreement.

Likewise, our other two businesses, ABRH and Jack's, have their own capital structures, and likewise -- and they are very, frankly, unlevered, so they have the ability to execute on transactions as they see them. So we don't see any of our money really going into those portfolio companies.

We'll see on Ceridian, as it continues to have success on the Dayforce side, it costs a lot of money, as we've have articulated. You have to expense and pay for sales commissions, for marketing costs, implementation costs, and we think it's very important for our investment to continue to do so. We highlighted that there's likely going to be an investment necessary in that business, so we'll make sure that we keep some firepower for that.

With respect to new opportunities, we've looked at, and frankly, were pretty close on one, but we ended up backing off because of price on a company that was very similar to one of our existing portfolio companies. We've also looked at some healthcare companies and opportunities that were very interesting, but again, for a variety of reasons and that's the nature of the deal business, we did not pull the trigger.

So, as we indicated at the last call, we are seeing more interesting opportunities, and if we get to the finish line, we will execute against them. But it has to be right and we are being very diligent and careful on where we are putting that money to work.

All right. Thank you very much.

Howard Rosencrans, Value Advisory.

Hi, guys. Thank you. Just one quick question on the Digital. The organic growth in Digital -- that's not really my question -- but what was that number that you quoted?

5% for the quarter, year-to-date 4%.

Okay. And regarding the Ceridian and the Dayforce, the EBITDA margin, is that just the contraction there, is that just a commentary on increased investment in the Dayforce business? And certainly the values that, while they are not great, that are being at least presently ascribed to some of the restaurants, or to Jack's; the values that are being described for the comp for Dayforce being Workday, are excellent. Are you doing something to move that towards a monetization at some nearer time frame? Thank you.

We're obviously, very much aware of where comparable companies are trading and we are giving statistics. And when Ceridian gives their earnings release to their bondholders later in November, there will probably be more color there. But we had -- the cloud business is growing as expected and we see opportunities to invest and to grow it further.

The Company has taken actions of this year to better streamline the business and we are winning in the marketplace. Those statistics are getting out. Our competitors certainly know about them. So we're getting a lot more visibility in terms of the strength of the product and the success that we're having in the marketplace.

You are seeing, finally, an inflection point, and we highlighted this earlier this year, that as we roll into 2017, what we would like to see, and as an investor in the business, you guys should pay attention to, as well, is will the growth in the cloud business outpace the decline in the harvest business? The harvest business means that we have a lots of payroll customers that are sitting on our service bureau platforms and we've been converting those to Dayforce, as well as getting net new customers.

But we are starting to see, as we speak, the growth of the cloud is outpacing the decline in the harvest business, so as we roll through 2016, opportunities start presenting themselves a little bit better. It's still too early today, but we are seeing good progress there and the sales that we are getting in Dayforce our encouraging. So we'll stay tuned to 2016 and see what happens.

The margin compression that we saw in the quarter in the overall business, is that likely to be sustained for a little while, or--?

Keep in mind that the Q3 is a seasonally slow for Ceridian. Q4 is seasonally strong, Q1 seasonally strong, so we just rolled through the weakest quarter. But yes, the accounting impact of the cloud business, as you probably know, is to expense your sales and marketing costs.

In some of our other businesses, if you win a new customer, you're able to basically hang on your balance sheet as deferred acquisition cost, the cost of -- your sales commission costs, your implementation costs, conversion costs, et cetera, and you typically then amortize those over the life of the contract. We are typically -- we're doing a very modest portion that would, under GAAP, be capitalized, but we're expensing nearly all of it.

So you do hit your P&L quite hard in this business, but we're looking at recurring revenue growth. And so our annual recurring revenue growth has really been accelerating, as well. Our ability to forecast the business in subsequent years, when you have this snowball that is building up, becomes easier.

The trends are moving in the right direction. Some of the noise of some of these other businesses that Ceridian had, the health and welfare, and the COBRA businesses, with those being gone, as we roll into 2016, it will be a much cleaner looking story in terms of the growth of the cloud and where the business is going.

The color was very helpful. Thank you.

Nathan Sheth, Pacific Grove Capital.

Can we just talk about against how big the health and wellness business was for Ceridian and did the proceeds go to pay down debt or was that carried in cash on the balance sheet?

It was actually deferred consideration, which is why they had to take the write-off of -- move it -- a loss into discontinued operations and then they had to do a trademark impairment test on the brand. I would say that those two businesses both were in attrition, given the nature of those businesses, and so it was the right business decision to sell them. We don't expect to get terrific proceeds. It's really more of a matter of focusing our Management time on what is going to drive value, which is the growth of the Dayforce and cloud businesses. We do expect to get some proceeds that will -- as we roll through this year and into next year, but it is pretty modest in the scheme of things. It is really more of a strategic alignment to focus on what is going to drive value for this investment.

Got it. And then same question for the Max & Erma's, which is in the process of being sold, just the overall size of that relative to the rest of ABRH?

It is the tiniest business that we have in ABRH. It's just one -- it sits in a lot of markets that compete against some of our other brands, and from a Management bandwidth and other situation, we just made the decision as a Board to dispose of it, and focus our Management effort on the brands that are really driving value for ABRH, which is 99, O'Charley's, and then obviously, the family segment.

It is going to be modest for ABRH, either way. It really wasn't doing anything from our EBITDA perspective, or modesty helping EBITDA, and we will get some proceeds out. But we have some restaurants inside Max & Erma's, when we bought it we inherited some -- the way that the deal worked back then is that we inherited some leases that are too expensive for the type of restaurants that are being run there, so we're going to have to use those proceeds really to get out of some leases that are not very favorable.

Got it. That is hopeful. And then finally, can you just help expound on why another tender, especially at these types of prices, is not attractive relative to being maxed out in open market purchases?

We feel very comfortable where we are in the open market purchases. If we feel differently and we wanted to be above what we are legally allowed to do in the open markets, we will consider a tender. But as I said, we didn't think we would by 2.3 million shares in Q3, but we did.

So again, I will reiterate that past is always a good indication of the future, so we see where things are trading and we are mindful of that. We put our money where our mouth is in Q3, and as you know, since inception, we've bought back 17 million shares. But we are also being mindful, too, of other investment opportunities that we find attractive. So we are balancing both.

Got it. Thanks very much.

Karan Ahooja, Eminence Capital.

Hey, guys. Just a few questions. In terms of Ceridian, you said it would inflect in 2017. Was that on EBITDA or what exactly was that comment?

It's on revenue growth. So as you may have seen, Karan, over time, that there has been a decline in what call the core business. Part of that is, is that we have been converting those legacy payroll customers over to Dayforce.

So that's good. Some of those we've lost to competitors, as well, but the growth of our Dayforce business and the revenue growth that we are experiencing is now starting to outpace the decline in that core business. Meaning, on a consolidated basis, revenue should grow, and that's what I was trying to highlight.

That's happening sooner than a 2017 event, correct?

Yes. It's starting to happen now. So no, it would be -- we are starting to see the inflection as we speak, so certainly in 2016, that's what we're looking for.

Got you. The question was asked earlier in terms of the Dayforce valuation, and when you do look at Ultimate and Workday and there are a few others, obviously, the valuations seem sufficiently high that I'm still a little confused why it doesn't make sense to take advantage of that now and just make sure that, that opportunity is not lost, particularly at a Company that obviously, does have a decent bit of leverage?

Yes. We and our partners at T.H. Lee know where the market is for these type of assets. We also know that what is going to help us achieve those types of, hopefully those types of valuations would be continued strength in this business, which is what we have been focusing and having the team focus on. As you know, we had the issues earlier in 2015, with -- we had some of the sales that our implementation backlog was challenging.

The team has done an excellent job loosening up that's bottleneck and we're doing a lot better on implementations. One of our FNF Board members just told us, who runs a bank in Arkansas, moved to Dayforce and said it was terrific. The implementation went smoothly. They are very happy. So that was an unsolicited positive response that we received.

As we get into 2016, you mentioned our leverage, that is something that we have to be mindful of, too, if we look at a public market execution. But we're winning in the marketplace, we know where these things trade, we having those types of discussions, but no decisions have been made.

Got you. Then just shifting to Digital for a second, what are the thoughts on maybe doing a little more in terms of disclosure there, because that really seems like a crown jewel that people see the numbers, they see the growth rates, and they see the margins, but it isn't necessarily clear exactly what they are doing. Some of the things you guys say make a lot of sense but having a little more, particularly ahead of an IPO, might be helpful?

We will take that under advisement. It is a good business and they are executing and we are happy with where it is going, and we will consider that.

The last couple for me. Just as it relates to the share count, the diluted share count, it seemed to go up, can you just talk about what exactly happened there?

It shouldn't go up. FNF has a bond, a convertible bond, that is the responsibility of the FNF Group. Part of that convertible bond has a some attribution to the FNFV, but it is an FNF responsibility. So there's 75.8 million shares outstanding right now, which includes the restricted stock that we have. The other stuff is really FNF's responsibility. If FNF settled its bond with FNF shares and some of FNFV shares, it would have to go into the market and buy those shares, hypothetically. But it is just the way our accountants allocated that, so that extra dilution that you see there is really not an FNFV responsibility or burden.

Got you. That's very helpful to know. The one last one for me, in terms of the buyback, do you factor in how illiquid the stock is in terms of doing that? Is that play into the decision in what you want the FNFV vehicle to look like?

Rephrase your question?

Meaning, obviously, this is not a very liquid vehicle, in terms of how much FNFV trades in a given day, and by buying back stock, obviously, it is getting potentially even more illiquid. I'm just curious if you care about that at all or it is just more, this thing is cheap, book is $13, fair value might be $17 or $18 as we look out over the next year or two, and we are buying it at $11.

It is more the latter (laughter). It's more the latter. A good place to put our money and you'll see us continue to buy some back.

Makes a lot of sense. Thanks a lot, guys.

You're welcome.

(Operator Instructions)

At this time, it does appear there are no further questions from the phone lines. Please continue.

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 the hopes of maximizing the value of each for the benefit of the FNFV shareholders. Thanks for joining us.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.