Fidelity National Financial Inc (FNF) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

I'll now turn the conference over to your host, Treasurer Dan Murphy. Please go ahead, sir.

Thank you, Kathy; and thanks for joining us this afternoon, everyone, for our fourth quarter 2015 FNFV earnings conference call. Joining me today are FNF Chairman Bill Foley, Executive Vice 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 up the call for your questions.

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 FNF.com. It will also be available through phone replay beginning at 2:00 PM Eastern Time today through next Thursday, February 18. The replay number is 800-475-6701 and the access code is 383825.

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

Thank you, Dan.

2015 was a year of numerous monetization events at FNFV. In September, we completed the tax-free distribution of J. Alexander's shares. FNFV shareholders received 0.17272 shares of J. Alexander's for each share of FNFV they own. J. Alexander's now trades as a public company under the ticker JAX, J-A-X.

In three separate transactions, we sold approximately 2 million shares of Fleetcor common stock for net after-tax proceeds of approximately $232 million. We continue to own approximately 440,000 shares of Fleetcor common stock, with 220,000 shares scheduled to be released from escrow in November 2016, and another 220,000 shares in November, 2017. We also received approximately $100 million from the repayment of loans from Digital Insurance and J. Alexander's during 2015.

Lastly, we sold Cascade Timberlands in February 2015, generating cash proceeds of approximately $63 million.

A significant amount of the monetization proceeds were spent on stock repurchases in 2015. We closed on a Dutch tender transaction in March 2015, repurchasing 12.3 million shares for $185 million. We also consistently repurchased shares throughout the year, repurchasing another 8.2 million shares for approximately $103 million. So in total, we repurchased approximately 20.5 million shares in 2015, or 22% of the shares of FNFV common stock distributed in July 2014, for a total of more than $291 million.

During the fourth quarter, FNFV purchased approximately 2.2 million shares of Del Frisco's Restaurant Group common stock for approximately $32 million. We have continued buying the shares in early 2016 and currently own approximately 2.9 million shares at a total cost of nearly $42 million. We are now Del Frisco's largest shareholder, at approximately 12.4% ownership stake.

During 2015, FNFV worked on and helped lead the debt restructuring of Colt Defense, the iconic American gun manufacturer. In connection with Colt's emergence from bankruptcy in January, 2016, FNFV made an aggregate $22 million investment in the first and third lien debt of Colt Defense.

Finally, we have elected to postpone the spin-out of ABRH, as we continue to monitor brand performance and evaluate alternative monetization strategies. We did complete and close on the sale of Max and Erma's on January 25, 2016, and that concept is no longer a part of the ABRH family.

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

Thank you, Bill.

Ceridian HCM generated fourth-quarter revenue of $205 million, a 2% decline from the fourth quarter of 2014. EBITDA in the fourth quarter was more than $29 million, a 15% improvement over the fourth quarter of 2014. Ceridian HCM continues to make significant investment and progress in growing its cloud-based solutions. For the full year 2015, cloud-based revenue was $204 million, a 45% increase over 2014. In 2015, 720 Dayforce customers were signed and 495 went live on the platform. In total, Dayforce has signed more than 2,550 customers, with more than 1,700 of these customers currently live on the platform. Ceridian remains on track in its ongoing transformation to a cloud-based company, and we look forward to continued growth in Dayforce customer signings, customer implementations, and cloud-based revenue in 2016.

American Blue Ribbon generated fourth quarter revenue of $320 million, a 1% increase over the prior year; and adjusted EBITDA of approximately $25 million, a $3 million increase, or 14%, over the fourth quarter of 2014. Same-store sales in the aggregate increased by 0.6%, led by Ninety Nine, Bakers Square, and O'Charley's, with same-store sales growth rates of 2.9%, 1.6% and 0.6%, respectively; offset by Village Inn's same-store sales decline of 2.8%, breaking Village Inn's streak of 24 consecutive quarters of positive same-store sales growth. Ninety Nine has now recorded 11 consecutive quarters of positive same-store sales growth and has significantly outperformed the Knapp-Track Boston and Black Box New England indices.

Digital Insurance generated fourth-quarter revenue of $31 million, an increase of 24% over the fourth quarter of 2014, and adjusted EBITDA of more than $6 million, a 44% increase over the fourth quarter of 2014. Adjusted EBITDA margin for the fourth quarter was more than 20%. For the full year 2015, Digital generated $117 million in total revenue and $26 million in EBITDA, for an EBITDA margin of approximately 22%. Digital had solid organic growth of 5% in 2015 and completed acquisitions that added more than $20 million of annualized revenue. The pipeline for acquisitions and partnerships remains robust as Digital enters 2016, and we remain excited about Digital's execution of their business plan and contribution to the value of FNFV.

At December 31, 2015, FNFV's book value was approximately $969 million, or $13.43 per FNFV share, based on a year-end share count of 72.2 million shares. This includes $245 million in holding company cash.

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

(Operator Instructions)

Our first question will come from John Campbell with Stephens, Inc.

Hello, guys. Just on Del Frisco, you quickly bought your way towards that 12% ownership. I guess first just broadly, what's so intriguing about Del Frisco's for you guys? And then secondly, as a follow-up to that, if you can share what your longer term plans are, if you are planning stock picker and eventually looking to monetize that, or is Del Frisco something you'd like to maybe see eventually in the FNFV family?

Well, as you know from our filings, we are an investor, but we reserve the right to get more involved with management and with Del Frisco's, as we have increased our ownership position. We like the brands. They have three really good brands. The stock has been really hammered over the last six or eight months. They haven't quite met some of their expectations relative to revenue growth, and the Del Frisco's Grill concept has not met expectations in certain locations.

So I guess what I would say is we view it as a very attractive investment. We feel like we're not novices in the restaurant business and that we have the ability to help restaurant companies improve their performance, although we have not yet contacted management or nor have we talked to the company in any fashion. But we do like the investment and we feel like the concepts are good, solid concepts.

Got it. That's helpful. And then can you just remind us again on the Fleetcor stock, just a timeline there when you can sell and how much you can sell over time?

Sure. Thankfully, we were able to liquidate the shares that we could at very attractive prices before Fleetcor shares recently collapsed. I think we've sold at an average price of almost $150 a share. What's remaining today is around 440,000 shares.

Half of those -- they're all in escrow right now -- and half get released in November, 2016 and the other half gets released in November, 2017. So we have no choice right now but to be patient shareholders and hope that their business does get impacted by oil. They are big into, obviously, fleets and Comdata was big into the energy sector, as well. So we still own 440,000. We have no choice but to sit around. We still think it's a fine company, but they have some headwinds, just given the commodity issue.

Got it. And then just last one for me. Obviously, FNFV trades pretty materially below book at this stage. So it seems like a pretty good investment opportunity there. Would you guys consider another Dutch, if the opportunity is right?

Well, as Bill mentioned in his comments, we've been buying the stock back pretty incredibly. So even though we said last quarter we are going to pause, we didn't. We bought another 3.4 million shares -- 3.6 million shares for [$39] million in the fourth quarter, and we're going to continue to repurchase shares. So we're being aggressive on the share repurchase. Your point is not lost on us. We think that it's a good buy. You'll see us continue to buy those shares. Right now, we have no plans to do a Dutch auction, however.

Okay.

We are cognizant of the fact that the book value of the stock is $5 higher than the level the stock is trading. So we feel like every 1 million shares we buy back, we're making our shareholders, our remaining shareholders $5 a share. So sometimes stock prices going down actually works to your benefit.

Absolutely. Thanks, guys.

Thank you. Our next question will come from Chas Tyson with KBW.

Hello, guys. Good afternoon. Wanted to ask first question on the Ceridian Dayforce, or cloud revenues. It looks like the growth rate decelerated there, if I'm doing the math right, from Q4 last year versus what you guys have put up in the first nine months of this year. Can you give a little color there, if there's anything to read into that or if that's just one quarter or what?

The product is winning in the marketplace, which is great. In fact, it's the first time that we finally hit one inflection point that we as shareholders and as members of the Board have been waiting for, that the growth in the cloud-based revenue has exceeded the decline in their legacy core processing, payroll processing business. And that trend we expect to continue in 2016 and frankly, accelerate in 2016.

So not only is the cloud revenue increasing by a significant amount, total contract value on new sales are exceeding expectations, as well. We had a plan for 2015 and the team significantly outperformed, not only in the revenue but in the sales of the cloud-based solution.

So as we look into 2016, one financial issue, of course, is that the more success you seem to have with the cloud, you kind of hit your P&L, as I've been mentioning, rather hard. We get expensed on the marketing costs, the sales commission costs, all those are written off as incurred. Do the more success you have, sometimes it doesn't really show up in your operating results as well as you'd like it to. But the snowball is building. It's building rapidly.

I think as we roll through 2016, I think you could expect to see some continued significant growth in the cloud-based revenue and importantly, the recurring revenue underlying that success. So as Board members and investors in the business, we're pleased with where that product is going.

If we have one issue, it's really the implementation of the sales and putting the resources behind that sales process so we can get faster implementations and move through this backlog we have in terms of customers. And we're addressing that with our other partners. We're working on a quicker implementation solution, which may be a great short-term pain relative to our financials, but will create long-term gain.

And as to evidence that, as I mentioned in my comments, Dayforce has signed 2,550 customers. But 1,700 of those are live, leaving a backlog of over 850 customers. So as we keep improving -- and the team has done a great job year-over-year in terms of their implementation efficiency -- but as Bill mentioned, there are strategies in place to significantly improve that further, which will only further the growth of the business.

And also on Ceridian, taking a step back, it seems since August or September, it seems like the debt has traded off materially for that company. And obviously, there have been some major macro trends in the high yield market. But at this point, there's a pretty big difference in where the debt is trading versus where it's marked on FNFV's books, from an equity perspective. But I was wondering if you could just add color on how you're thinking about that investment from that standpoint, as well as how you're thinking about the leverage in that going forward.

Well, yes, there's a lot of fundamentals with Ceridian and the high yield market that, to your point, I think have impacted the price of the bonds. But we as shareholders, as I mentioned, are still obviously bullish on the business. We have made comments before that the shareholders likely will make an equity investment in the business to further it, as well, which is further evidence of what we believe the end results of the company will be.

But to your point, it is highly levered. The story's playing out as we've been talking about, but the milestones that we've been looking for since 2014 and 2015 are now being met. The next milestone is really now to accelerate EBITDA growth as you transition from 2016 to 2017, so the growth in EBITDA from the past implementations will then start overcoming the expense that we're experiencing in terms of the commission expense and marketing expense.

Okay. Makes sense, and last one on that. Is there a way to think about how you guys target normalized leverage there? Do you just grow into it and you have a debt to EBITDA target, and if you could just answer that, as well?

Well, I think that it's really more growing into it. And I think the growing into it part, there will be some growing into it in 2016, we're hopeful. But really, the growing into it more materially based upon the build up of the recurring revenue from the cloud-based solutions would really be more of a 2017 phenomenon.

So it's going to be more of a growing into it. And as we grow into it, obviously we're paying very high rates of interest on that, which is eating up a substantial amount of our free cash flow. So we're looking forward to a future where we could properly refinance it, but that's 20 to 24 months down the road. But we have to grow into knocking down that leverage ratio.

Sorry, just one more, actually. In terms of the equity contribution that you mentioned, how are you guys thinking about that? Is there a way to think about size? And also in terms of use of proceeds, would that purely be for growing or funding growth of Ceridian, or would you possibly use it to take down some leverage, considering where some of the debt trades?

We haven't discussed yet the size. But in our minds, it would be enough to get the business through to where it doesn't need any more, sort of a one-and-done type of a concept. Use of proceeds would be, frankly, to continue to invest in the business.

It's a market share game right now and we're, again as Board members and investors, we're very pleased with how this product is stacking up against any product in the marketplace. And there's just lots of opportunities to continue to implement, and we think the best use of proceeds is to continue to invest in the cloud-based solutions.

Okay. Thank you very much. Appreciate the thoughts.

You bet.

Thank you. We have a question from Jason Deleeuw with Piper Jaffray.

Yes, thank you very much. A question again on Ceridian. It continues to sound like the business is doing a lot better. The accounting is still, it sounds like, masking some of the progress that's been made. So when I think about this year, when will overall Ceridian revenue growth potentially inflect the positive? How much more heavy lifting do we have cycling through and with the accounting stuff, can we expect that in 2016 the overall revenue could inflect and have positive growth?

Well, in 2015, we did divest some of what we've called our legacy businesses, the health and welfare business and the COBRA business. So again, one point that we've been looking for was the growth in cloud-based solutions to overcome the loss of our legacy payroll systems. That's happened. I do think that 2016, I'm not giving guidance, but as Board members and investors, we're hopeful to what you just said, that 2016 is a year where overall revenue grows and it's going to be paced by the cloud-based revenue is going to outpace the decline in the other revenue.

Thanks. And then for American Blue Ribbon, the spin-out postponed, what are your latest thoughts on your plans for American Blue Ribbon?

Sure. As we look at the marketplace, and clearly in the fourth quarter and then more recently rolling into here, the equity markets have been clearly displaced. We could be patient. We're relatively unlevered. I think we're under one times net leverage right now.

We have multiple brands. They are held in LLCs. We have the ultimate flexibility in how we pursue monetization strategies.

At one point, there was a thought to have a multi-brand strategy, but we're coming to the belief that maybe more focused family dining and casual dining in their own segments might be a better way. But the good news is we're not under any pressure. We have modest leverage on the business. We're still making investments in terms of image enhancements of the restaurants.

We're going to spend 2016 focused very directly on brand performance and making sure we're running the business as efficiently as we can. So that's going to be the focus of us as owners of the business to get these things running even better than they are now, and we'll see what happens with the equity markets. But the good news, we're not under any time pressure. The business are on solid financial footing. But I think we could make some investments and do even better in terms of our margins.

And then for the investment in Colt through the debt. What is your thinking there? Is this similar to Remy, where eventually maybe turn into the equity, or what are the plans there for Colt?

Well, I appreciate you bringing up the Remy reference, because I was going to mention the same thing. As you know, we do have a lot of history in terms of -- and we're value investors at heart, right? And that's why we've been so cautious in 2015 and even late 2014 in making any net new investments, because the market prices for assets we thought were just too high.

One area that we've had success across our business enterprises have been going through the restructuring process. As you know, we bought Remy that way that you mentioned, where we bought a piece of the debt and took a large role on the committee and led the restructuring of Remy. Likewise, in our Core Title business, we bought Land America through a 363 sale.

We originally bought American Blue Ribbon, the original foundational company for that, the Village Inn, Bakers Square and Legendary again through the bonds. It's a great way to get into the business.

Now with Colt, it's only a $22 million investment. We have $11 million in the first lien, which is a 10% cash instrument. That's money good. It will be refinanced or something will happen down the road.

And then an $11 million position in an 8% pick third lien that has a lot of equity carry associated with it, and so that's an interesting instrument for us. I expect it to get repaid. But if for some reason it doesn't, then that would be the fulcrum security that could lead to an even more interesting transaction, potentially.

But we think we got in well. We partnered with Newport Group, who we partnered with in the past on our restaurant business, and they're our existing partner on ABRH. And it's an iconic company, it's one of the best brand names in that type of industry in the world. And the world is a dangerous place right now. And so we feel pretty good about the investment, but it's a typical value investment that we like to pursue.

Thank you very much.

Thank you. And we'll go next to Alex Zuckerman with Canyon Capital.

Hello, guys. Just on Ceridian, to continue, you said that you were, I believe your words was you were likely to make an equity investment there. I wanted to explore, when you say likely, is that dependent on the rate of cash burn or is that dependent on other uses of capital for FNFV? How do you think about what determines whether you make that investment or not?

I would probably characterize it we will make an investment. We're quantifying the amount to do it, because we kind of want to do -- this is we as a Board, not just FNFV. Remember, we own about 32% or so of Ceridian.

But we want to make sure that it's a one-and-done, as we look at the progress that the business is making to get them through to where they can cover themselves. So the Board will be convening in the next couple weeks and we'll probably make a decision at that time. So the quantum and the amount and use of proceeds will be disclosed once all those decisions are made. But we do anticipate making an investment in it.

Got it. And given the trajectory of Ceridian and the cash burn, when would you expect that, what would the timing be?

I would assume it's potentially first quarter.

So in the next couple months?

Correct.

Okay. Thank you.

Thank you. Our next question is from Doug Rothschild with Scoggin Capital.

Hello. Thank you. Could you guys talk a little bit about the other assets. I saw it went down $10 million. There are about five assets in there. Is there anything that we should be excited about or that you could give more disclosure on?

We're excited about all of our assets. I don't have the break out in front of me on why the $5 million difference in those. I mean, we had a small investment in a mortgage fund that has been paying back, so that could have been part of it that we received some distributions from that.

As we look through the other investments, we have an investment, we own 15% of an insurance company. That actually has performed quite well for us. We own a piece of an investment bank that we think is a fabulous business that's sitting in the Other. We have some real estate assets that are also sitting in there, and those things sometimes we make investments in them to further their businesses and will probably continue to make modest investments on the real estate side that's in the other stuff.

You know we kind of look at it from a book value that it's by and large representative of fair value. We think there's certain assets that might have potential to exceed book value, but we think right now that book value as we look at our $13.00 and change overall, that just call that at par.

Okay. And besides the other assets, the $13 in general, are you implying you think fair value for everything is equivalent to book value or is just that historical book value accounting number?

It's just the historical accounting for book value. And what we try to do for the significant investment is break out how the companies, how the investments are doing from a revenue, EBITDA perspective and try to get some perspective where comparable companies are trading, so investors can make up their decisions on which investments might be higher than our carrying costs for that.

For example, we have Digital Insurance sitting there at $72 million of value. We own 95%, approximately, of the business. Its EBITDA is pushing through on a run rate basis, anyway, if you annualized acquisitions made in years, over $30 million. We feel extremely comfortable that that's above book value, as one example.

Thank you.

Thank you. Our next question is from Howard Rosencrans with VA.

Hello. The color is great, guys. Thanks very much. Just wanted to get a little deeper color as to, you did comment and you certainly have been prescient in suggesting that the environment has been pricey and that things have certainly changed, and it's great to see you deploying capital as successful, or on the way to being, we presume, as successful as you've been in the past. Just trying to get a little more of your feel as to how you feel about the market environment in general and the magnitude of you're cash rich, you're asset rich, you're a fraction of your book value.

If you really saw a lot of good opportunities, what sort of leverage ratios would you be comfortable undertaking at the corporate level and is a high priced restaurant chain really the most attractive in an increasingly challenging environment? Thank you.

Well, in terms of leverage at FNFV, what we would attempt to do as we acquired companies is insure that the companies we acquired had the cash flow to service the debts, would have some way, would be taking dividends out or we would have mirror notes down at the target, and we might have partners on some of these acquisitions or they might just be acquisitions by FNFV. So we wouldn't be having putting leverage on FNFV if we had an acquisition that could cash flow and pay back, could be pay back that debt, I think that's a great approach, so that way we preserve some capital of FNFV, but we've got some leverage on the assets we're acquiring.

The restaurant, we know the restaurant business and we really have a good feel for how to help companies improve their performance in the restaurant business. So as I said, we haven't had any conversations with DFRG and we're going to, at some point, we probably will sit down with management or their Board and have a discussion. But we don't have any plans to do that at this time. Right now, it's just going to be carried as an investment.

We have a number of different opportunities that we're looking at which are the prices are now coming back in line in the healthcare area, because that's where Triple Tree, the investment bank that we own part of, is very active in. We then have the investments in financial services that we have a lot of knowledge about, and we're not arrogant about it, but we do think we have a good background in financial services, real estate services, real estate information technology. So we're looking at just a lot of different transactions.

We actually increased our M&A staff, which was very small. We were killing the two guys that were doing it, so we've actually added two people in our M&A staff. But we've also created a good legal and accounting group that we're all together in one spot now.

So I believe that over time, you're going to see us with some interesting acquisitions. They might be a little bit out of the box, like the Colt investment is, but that's what FNFV is all about.

Did you tell us how much -- that's fantastic color and thank you so much for that -- did you provide the number as to what you got for the Max and Erma?

It was almost nothing. It was $7 million. The restaurant chain had really been underperforming, had been under managed. We went through an entire auction process. We went through a go shop process. And it wasn't, it really was not, it was not a great transaction on behalf of the Company in terms of cash received, but it was all, it was the only bid we got.

And as it still stands as one of your larger investments, and obviously, the window seems to have closed to make the rest of the restaurant group, the ones you do own, a public entity, is it possible that there would be, or do you continue to explore the potential for private buyers for the remaining, I guess it's three entities?

We have a situation of having a very low tax basis in these three restaurant chains. But that doesn't mean that we can't create a situation that we merge with another entity, a public entity or a private entity. And so all things are on the table with these three restaurant chains.

We saw the performance of the J. Alexander's stock. And J. Alexander's is a fine restaurant chain, well run, great EBITDA growth, opening a modest number of restaurants per year, all of them are performing well. But by doing the spinoff, it's become a little bit of an orphan.

And so when we saw the way J. Alexander's performed in the market, which was a little different than the Remy performance, we just decided not to do an IPO or not to do a spinoff of these individual restaurant chains, but to look for other alternatives, and in the meantime, see if we can't carve expenses out in terms of some corporate overhead.

So that's kind of the story on the restaurants. They are all great chains. They have improved a lot. They are, Ninety Nine in particular, is showing same-store sales growth of 4% to 7%. So they're doing fine. It's just the market is not quite right.

And just to point out, too, Max and Erma's was maybe 3% of the aggregate EBITDA of the Company. So it was more of unfortunately more of a distraction, and we weren't making investments in it either. So this will free up some management bandwidth to continue to focus on the go forward brands. But Max and Erma's was a very small piece of the pie.

Great. Thank you again and keep buying the stock like a banshee. Thank you. (Laughter)

(Operator Instructions)

Gentlemen, we have no one else queuing up.

Thank you. We again completed several monetization and investment 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. Thanks for joining us today.

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