Fidelity National Financial Inc (FNF) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the FNFV 2016 second-quarter earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, Mr. Dan Murphy. Please go ahead, sir.

Thanks, and good morning, everyone, and thanks or joining us for our second-quarter 2016 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 of Company investments and we will then open the call for 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 at FNF.com. It will also be available through phone replay beginning at 1:30 PM Eastern time today through next Thursday. The replay number is 1-800-475-6701, and the access code is 396732.

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

Thanks, Dan. We continue our efforts to selectively monetize certain investments, and repurchase FNFV common stock during the second quarter. In June, we completed the sale of our 15% minority interest in Stillwater Insurance Group, for gross cash proceeds of $36 million and a pretax gain of $15 million.

Additionally, Ceridian Holdings sold the remaining shares of FleetCor it owned, almost all of which were being held in escrow. Total proceeds were $212 million, of which $202 million will remain in escrow, subject to be released equally in November 2016 and November 2017. We expect to receive 33.5% share of any proceeds distributed from Ceridian Holdings.

Finally, we increased our investment in Ceridian by $17 million, by buying up the shares of one of our fellow investors. We know own 33.5% of Ceridian.

We continue to repurchase our own shares during the second quarter. In total, we bought back an additional 1.8 million shares, for a total cost of more than $20 million, thereby reducing FNFV's share count to approximately 67.2 million shares. We have now repurchased a total of 25.5 million shares or approximately 28% of all of the shares of FNFV that we distributed to FNF shareholders in July 2014. We will continue to focus on the growth, financial performance, and monetization of our current investments, while seeking attractive future investments that will create value for shareholders.

I will now turn the call over to Brent Bickett to review our portfolio of companies.

Thanks, Bill. Ceridian HCM generated second-quarter revenue of $167 million, a 1% increase over the second quarter of 2015, as the growth in cloud-based revenues continued to outpace the decline in legacy core payroll process. This is the second straight quarter of total Company revenue growth.

Adjusted EBITDA in the second quarter was $12 million after taking out a trademark impairment charge from the sale of the UK business, a $7 million decline, versus the second quarter of 2015. In the second quarter, cloud-based revenue was $67 million, a 33% increase over the second quarter of 2015.

170 DayForce customers were signed, and 140 went live on the cloud pet platform during the second quarter. Life to date, over 2,900 customers have been signed, and over 2,000 have gone live on the platform. During the quarter, Ceridian sold its UK payroll business to SD Worx, and then entered into a strategic partnership with SD Worx to deliver its cloud software throughout the UK and Europe, which will provide Ceridian additional capital to develop, sell, and implement its cloud-based solutions in North America and Europe.

American Blue Ribbon Holdings generated second-quarter revenue of $292 million, a 1% decline from the second quarter of 2015, after adjusting for the sale of Max & Erma's. Adjusted EBITDA was approximately $18 million, for an adjusted EBITDA margin of 6.2%, compared to adjusted EBITDA of $19 million and an adjusted EBITDA margin of 6.5% in the second quarter of 2015. Same-store sales in the aggregate declined by 2.6%, as Ninety Nine same-store sales growth of 2.4% was offset by a 4.3% decline at O'Charley's, a 4.7% decrease at Village Inn, and a 5% decline in Bakers Square.

Ninety Nine performance exceeded the New England black box by 370 basis points, and its same-store sales growth was its 13th consecutive quarter of same-store sales growth. The casual dining combination of O'Charley's and Ninety Nine in the aggregate also outperformed the black box index, in a very difficult quarter for the casual dining industry.

As you may have read, the casual and family dining segments have been impacted by a weaker consumer market in Q2, and the family dining segment in particular has felt that impact from the emphasis of all-day breakfast from some industry players. However, organizational and operational changes and continued cost-cutting efforts in the quarter helped to limit the EBITDA margin decline to just 30 basis points, despite the weakness in same-store sales.

Digital insurance generated second-quarter revenue of $36 million, a 31% increase over the second quarter of 2015, and adjusted EBITDA of $8 million, a 40% increase versus the second quarter of 2015. Adjusted EBITDA margin for the second quarter was 22%. Digital's organic revenue growth rate for the first six months of 2016 was 12%. Approximately 200 basis points was due to the early receipt of carrier bonuses, that normally flow into Q3.

Digital completed three acquisitions in the second quarter that will add approximately $11 million in annual revenue. Digital's acquisition and partnership pipelines are strong, and we remain excited about Digital's strong execution of their business plan.

At June 30, FNFVs book value was (multiple speakers). $940 million, or $13.98 per share, based on a share count of (multiple speakers). This includes $106 million in holding Company cash, down approximately $6 million from March 31, caused primarily by the receipt of $36 million on the Stillwater Insurance sale, offset by more than $20 million spent on share repurchase and $17 million from the purchase of additional Ceridian equity from another investor.

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

(Operator Instructions)

Chas Tyson, KBW.

I just wanted to ask on the buyback during the quarter, looked like it slow down a little bit on both shares and dollars basis. Just want to get color and see if there's anything there, if you're marshalling cash for something you're looking at, or what you're thinking there?

Yes, we bought back steadily 25,000 shares per day, which is about the pace that we've been going on, in 2016. And you are exactly correct, it's just trying to balance, keeping cash on hand, if we see an attractive opportunity, versus trying to buy back our stock at what we think are attractive prices.

Okay. And then at ABRH, it's nice to see the margin growth, despite the same-store sales decline there. Do you think there's more, you can get more margin growth, without revenue increases, or do you need more revenue to get operating leverage?

We would have had more expansion, but you are hitting a strong point. As you hit a same-store sales decline, then you are not able to leverage as much as your labor costs against your sales. So we absolutely do need revenue growth in the brands to get continued margin expansion.

Ninety Nine's margins have expanded significantly as their same-store sales growth over the last 13 quarters continues to outperform. We need now those efforts at the other brands to get better margin control. We did take some cost controls, as I mentioned in the script, in Q2. Not a lot that impact was directly felt in Q2; it will be felt more in Q3 and beyond, as we try to right-size the organization to the size restaurant company that we plan to run in the future.

Okay. Got it. So do you think there's more margin improvement to come, without revenue growth, or do you need revenue growth?

It will be modest, but yes, it would be more. On the controllable costs, we are doing what we need to do, to make sure that we are running as efficient as we can. On the operational side, we absolutely do need to get more same-store sales growth.

Okay. And as you look at the portfolio, and I know you monetized Stillwater and got some cash out of that. Is there anything else that, as you look at it, you think could be more of near-term monetization, or is it the same thought pattern as previous quarters, we're still looking for it to be opportunistic?

I think that was more opportunistic. We don't see anything really in Q3 on the monetization efforts. We are still, on Ceridian, that story is still evolving nicely, and we think the story will be even clearer as we roll into 2017.

The restaurants, while we do think that we'd be obviously open to monetization initiatives and have been pursuing various ones, we have got to focus down and in, and get them operating stronger, to help open up those monetization efforts. But clearly that is something that would be top of mind.

Digital is performing exceedingly well, as they continue to roll through 2016 and get their EBITDA on a run rate basis into the mid to high 30s and then with a good outlook into 2017, there's always possibilities there. So it's still early though, so nothing in the near term for those.

Okay. Thanks a lot.

John Campbell, Stephens Inc.

On the minority buyout for Ceridian, I think you included growing your ownership share there, I think 33.5% is where you are now. But anything to read into that, as far as long-term ownership plans? If you can maybe walk us through the rationale there, and any updated views on the long-term plans for Ceridian?

Sure, yes, nothing real special. As you might recall, John, this investment was made in 2007. We bought a third of it, as it turns out, and THL bought a third of it, and then the limited partners bought a third of it, and some of those limited partners were hedge funds that are no longer in the business of making these types of investments. So an opportunity presented itself from one of those hedge funds and THL and Fidelity, we bought half each at what we think is a very attractive price. So it's just more opportunistic.

Okay. And Ceridian as a whole can be a bit of a black box for the investment community, but it clearly looks like the compelling opportunity there is DayForce. So if you can maybe spend a little bit of time, and maybe brief us on why that's winning market share? Is it a differentiated value proposition, or is it attractive pricing, or maybe sales force success?

Well, it's just a movement on these HR information systems, so HRIS systems, that instead of having point solution providers, now with the way the software is developed, you can eliminate several different systems. So our system not only does payroll, but does recruitment, training, workforce management, onboarding, I mean, just many different things that an HR and a company uses to manage their employees, and their human capital.

So there seems to be terrific demand, and we are experiencing it and some of our competitors are experiencing it, but we seem to have a product that when it matches off against its competition is faring off very well. We had a record sales quarter in Q2, and it was a record sales for the first six months of the year. We think our pipeline remains strong there, so it's again, the right product, it seems, at the right time.

And I would agree with you that the story does feel a little like a black box, but the company over the last couple years, they have been divesting or selling or shutting down non-core businesses, and we are finally getting to the point where the go-forward side is DayForce. But we still have our legacy core payroll business. So that's a good thing, because we have a lot of customers there, that we are converting over time into the DayForce platforms, so we have an embedded customer base, in addition to going out and making net new sales wins, and we monitor both.

As I mentioned, we sold the UK legacy payroll business, and we repatriated that capital back to the United States to get Ceridian even added financial resources to continue its investment in sales implementation and development resources, to further take advantage of the opportunity in front of us. The first milestone that we saw was that we as a Board were looking at, as investors we were looking at, was to make sure the revenue growth in the cloud-based business was outpacing the decline in the core payroll business, and that happened last year, and that growth has continued.

As we roll into 2017, what we now want to see, because the more success we have on DayForce, the harder it impacts our EBITDA, because we have to expense as incurred our sales and marketing, and much of the implementation costs. As opposed to capitalizing those on the balance sheet, so we expense all those before we get the opportunity to recognize revenue. But we think that the EBITDA story should bottom out in this year and then accelerate as we get into 2017, and that's the next milestone that we are looking at. So it's been a long journey for us, but we see a bright light at the end of the tunnel, and we now have the financial resources available to the team to help to execute on the opportunity.

Got it. That makes sense. And then if I just think about the cloud-based revs, it looks like it is annualized run rate of about $270 million or so. As you think about the total addressable market, clearly guys are going to look at that and maybe put little bit more of a SaaS multiple, just on that business. It has some of the growth characteristics as some of the SaaS peers, but as we think about total addressable market, how big is that market that they are playing into?

Again, I would have to -- I don't have an exact number, but I remember talking to the management team, and it depends on how broad you wanted to define HRS systems and ERP systems. But $15 billion, it could be even higher. All I could tell you is that our pipeline remains very, very strong. We expect the second-half sales to remain -- of 2016, to remain strong.

And keep in mind that this is all recurring revenue. So your retention on these customers are exceedingly high. So everything that you sell and implement is just building the snowball for the future, but we're not too worried right now about the addressable market, we are worried about continue to develop, continue to win sales, improve our implementation, reduce our time and cost of implementation, to improve the ROI of every deal that we sign.

Okay. That's helpful.

Last one for me, Del Frisco's stock has been choppy. It seems like it's doing fairly well against some of its consumer peers. But any updated thoughts there? Do you look to maybe grow that position, or you just holding steady? It's just optionality at this point?

We are just holding steady. We're monitoring it, as well. We are attracted by the brand, we are attracted by the concept that they have. They seem to be holding their own, and might even have some easier comps going forward for them, but right now we're at the current price, we're just monitoring.

Okay. Thanks.

(Operator Instructions)

Jason Deleeuw, Piper Jaffray.

A question on digital insurance, the organic growth. I think I heard 12%. If you could just give us a little bit more color on what's driving that? My sense is there's some pretty meaningful market share gains. If you could just talk about the market share gains, and what digital insurance is displacing?

So, it's also their execution of their business line. So they experienced 12% growth, which frankly far exceeded our expectations, and frankly, even their budgeted expectations. Some of that, as I mentioned in the script, was there was about 200 basis point of the 12% organic revenue growth was due to earlier than expected receipt of carrier bonuses.

Digital is becoming more and more of a significant player to the carriers across the country, and we're a concentrated source of business, and we receive certain bonuses from them, that are typically felt a little in Q1, more in Q2, and some spillover in Q3. A lot of it came in Q2, with Chelsea organic revenue growth on a year-over-year basis.

The other thing that they do quite well is, when we acquire a new hub in a particular geography, we do a very good job of pulling in other producers, could be a single producer, two producer shops, without having to buy them. We are almost able to have those people come into our platform, because of the efficiency of the technology, the efficiency of the profiting, and how we on board and re-sign clients, we are able to basically keep all those people at their same compensation level, free up about 30% of their time to get more sales, and then they actually start making even more money than they did under their own shop, because of the efficiency of our platform.

We've also been very successful going to the larger brokers, again using the same platform, to take over their small books of business because we could profit those small books much more profitably than they can. So we can actually, some of these books might not be making money for these larger brokers, but under our watch, we could share half the premium, and we can still make 50% because of the efficiency of our technology platform.

We also have -- we're not just in employee benefits. We do have a risk and analytics group that helps drive some incremental revenue opportunities. We also have a segment that focuses on the PEO side, the professional employment organizations, which are significant growers. And so we have been hitting on a lot of positive opportunities.

That sounds great. And then in terms of the new investment opportunities that you are thinking about, what's the appetite there for new opportunities? Are there any areas that are more interesting to you?

You always have a bent towards financial services, and so -- and that's a pretty broad segment. But if you look at the success that we as a management team have had with FIS, with Black Knight, we have a fondness for those types of businesses. So things are pretty expensive out there. So you haven't seen us really execute those things, not saying that we haven't looked at them, just, we are pretty cautious on using our funds for that. But that would likely be an area, that if we did anything of size, it would be in that segment.

Right. Thank you.

Jon Bock, [Feedhan Capital].

Thank you so much for the color on Ceridian before in the prior question. It seems from the analyst day roll out in February, I believe, that the new UI and the 21st century interface is having some uptick in the market. I wanted to ask a question regarding any future growth initiatives within Ceridian. Specifically it seems a lot of HCM players are lacking on big data, and data as a service integration, especially now that Microsoft is rolling out with their Cortana platform. I was wondering if Ceridian is doing anything along that lines, and what your discussions with management on that front is? Thank you.

Yes, and I can't really comment on that. We are very much fans of focusing on the opportunities that are right in front of you, and we are experiencing, as you heard, a lot of sales leads. So we want to conquer and improve on our implementation costs, which we began that last year, and to automate a lot of the processes to make it more efficient and those early results are looking very, very good.

We're still developing out the platform, which we think is a priority to keep adding all these different elements and nodules, if you will, to the platform. As we progress, and some of our other businesses, new opportunities, to your point, have presented themselves on the data side, where some of the data resides in unique platforms, and to combine that into a more common warehouse if you will, upon which you could overlay some business intelligence tools and insights. So we are looking at that in some of our businesses, but it would be down the road for Ceridian.

Thank you very much.

John Campbell, Stephens Inc.

Just one more, back on digital insurance. Clearly, I think you are starting to get to the scale that I would think makes you pretty attractive to some potential suitors out there, and also you've got suitable margins, and it seems like the organic growth rate is above peer averages. Could you just maybe update us on maybe what the longer term plan is there? Is that something that you want to eventually potentially sell? Or potentially IPO?

I agree with your comment, that it is performing well. We think its organic revenue growth is pretty surprising and significantly higher than we see in many other companies out there. As I mentioned, they are executing well. I think we are generating a terrific return on equity, every quarter that goes by.

It's always a goal of ours, and Adam and the management team, to let's get that EBITDA into the high 30s with a path towards 50. And whatever opportunity presents itself at that time, whether it's an IPO, if that's something that the markets would accept, which I think it would be a very attractive IPO candidate, or whether it was a strategic sale, we'd sit down with the management team and figure that out. But what we do know is if we continue growing the business, getting the EBITDA margin, getting a little bit more scale in terms of size, from a revenue and from an EBITDA perspective, I think we can have an attractive outcome.

Okay. That's helpful. Thanks.

(Operator Instructions)

It does appear at this time, there are no further questions for the phone lines. Let's turn the conference to your hosts for closing remarks.

We continue to repurchase our shares during the quarter, and in the future, we will focus on the growth, financial performance, and monetization of our current investments, while seeking attractive future investments, that will create value for our shareholders. Thank you for joining the call today.

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.