Fidelity National Financial Inc (FNF) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, today's conference is being recorded.

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

Thank you. Good afternoon, everyone, and thanks for joining us for our third-quarter 2016 FNFV earnings conference call. Joining me today are FNF Chairman Bill Foley; EVP Brent Bickett; and CFO Tony Park. Bill will begin with a brief strategic overview and Brent will then review our portfolio Company investments, we'll then take 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 expectation, past or 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 with 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 our website at www.FNF.com It will also be available through phone replay, beginning at 2:30 PM Eastern time today, through November 10. The replay number is 800-475-6701 and the access code is 403310. Let me now turn the call over to our Chairman, Bill Foley.

Think you, Dan. It was quite a quarter on the monetization front for FNFV, however Ceridian continued its evolution into a cloud-based company as third-quarter cloud revenue of $75 million grew 39% over the third quarter of 2015. We believe that Ceridian will ultimately be a strong investment for FNFV shareholders.

Digital Insurance continues to execute its business plan, and should exit 2016 approaching $150 million in annual revenue, and EBITDA in the low $30 million range. ABRH is managing its operation to making operational improvements in a tough economic environment for family and casual restaurants. We will continue to focus on the growth, financial performance, and monetization of our current investment, while seeking attractive future investments that will create value for our shareholders.

We also continued to repurchase shares during the quarter. In total, we bought back an additional 455,000 shares for a total cost of approximately $5.7 million, thereby reducing FNFV's share count to approximately 56.6 million shares. Since the formation of FNFV in July 2014, nearly 26 million shares or 29% of all FNFV shares distributed in 2014 have been repurchased for a total of approximately $350 million. We slowed down our share repurchase program during the third quarter, as we felt we had an acquisition that was of interest, but that acquisition has since moved away from us. I will now turn the call over to Brent Bickett to review the portfolio companies.

Thanks, Bill. Ceridian HCM generated third-quarter revenue of $170 million, a 2.4% increase over the third quarter of 2015. Importantly, total cloud-based revenue, plus our payroll service bureau revenue, which excludes LifeWorks and discontinued operations grew 6% in the third quarter over the prior-year period. EBITDA in the third quarter was nearly $6 million, a $9 million decline from the third quarter of 2015, driven primarily by incremental investment in sales, marketing, and implementation resources from the Dayforce products fleet.

In the third quarter, cloud-based revenue was $75 million, a 39% increase over the third quarter of 2015. 155 Dayforce customers were signed and 135 went live on the cloud platform during the third quarter. Life to date, nearly 3,100 customers have been signed, and in over 2,150 have gone live on the platform. Ceridian continues to make progress on improving implementation processes and procedures, thereby reducing backlog and improving customer return on investment and customer satisfaction.

American Blue Ribbon generated third-quarter revenue of $272 million, a 1% increase from the third quarter of 2015 after adjusting for the Max & Erma's bill. Adjusted EBITDA was approximately $11 million for an adjusted EBITDA margin of 4%, compared to adjusted EBITDA of $11 million and an adjusted EBITDA margin of 3.8% in the third quarter of 2015. Same store sales in the aggregate declined by 1.9% as Ninety Nine same-store sales growth of 2.5% was offset by a 2.8% decline at O'Charley's, a 5.3% decrease at Village Inn, and a 3.8% decline at Bakers Square. Ninety Nine same store sales continued to outperform the Black Box Index, while O'Charley's and the family dining brands are trailing their respective Black Box indices. The casual dining industry as a whole continues to experience challenging economic and competitive pressures, while the family dining brands continued to be impacted from the emphasis on all-day breakfast from some industry players.

Digital Insurance recently rebranded itself as OneDigital Health and Benefits to better reflect its expanded suite of services, including health and benefits brokerage, large-employer consulting, pharmacy management, ACA compliance, and multi-employer and PEO risk management services. OneDigital generated third-quarter revenue of $37 million, a 23% increase over the third quarter of 2015. Organic revenue growth for the first nine months of 2016 was 10.7%. Adjusted EBITDA was $7.4 million for the quarter, a 10% increase versus the third quarter of 2015. Adjusted EBITDA margin for the third quarter was 20%.

For the nine months ended September 30, 2016, OneDigital generated almost $110 million in revenue, and $24.4 million of EBITDA, representing 28% and 25% growth, respectively, over the prior-year period. As Bill mentioned, OneDigital is now on pace to generate approximately $150 million in annual revenue and EBITDA in the low $30 million range for FY16. We look forward to a strong finish for OneDigital in 2016, and another year of strong execution of its business plan in 2017.

At September 30, 2016, FNFV's book value was approximately $923 million or $13.85 per FNFV share, based on a share count of 66.6 million shares. This includes $99 million in holding company cash, down approximately $7 million from June 30, caused primarily by the repurchase of shares in the quarter.

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

Thank you.

(Operator Instructions)

One moment for the first question. Our first question comes from the line of Chas Tyson with KBW. Please go ahead.

Good morning. I just want to ask on Ceridian, we have seen the inflection there in revenue. Just wondering when do you think we might see an inflection in EBITDA growth?

And then on the customer side, it looks like that might have been down a little bit year over year. Just want to get some color on how the sales trends are going and what you guys are seeing in that business.

Sure. Comments on Ceridian. The cloud revenue plus the payroll service bureau business is growing, and it seems like the growth rate is expanding, which is a metric that we have highlighted a couple of quarters ago, and that continues to move favorably.

The more growth that they get, and the more winds that they get, it does impact EBITDA. As we said that that inflection point we feel should happen.

I don't think it is going to be Q4, but we should start seeing that inflection as the EBITDA should start growing year over year as we roll into 2017, as the benefits from the implemented business, and the financial results of those outweigh the cost of sales marketing and implementation for the new guys coming onto the platform. We still expect that inflection point to hit. It's maybe one to two quarters away, but we are seeing signs that that is going to happen.

Commenting on sales, sales are up 14% for the nine months ended September 30, they are up 14% over the prior year, so sales are going very strong. We just had two mega clients just sign in October. We were hoping that they signed in September, which would have boosted that even further, but since they signed in October we are going to have a very good sales quarter for 2014, for the fourth quarter of 2016.

We are winning in the marketplace. Those two big clients that I can't tell you the names, but it went against the who's who of competitors, so we're very confident that the product is winning in the marketplace. They are also making significant investments and improvements in their implementation processes, so that will help us bring on more customers more quickly at less cost, and improve customer satisfaction.

Okay, and can you talk about the trends in American Blue Ribbon? Obviously same store sales down in a couple of those chains. And it seems like from the presentation, there might have been a management change at that sub, I'm just wondering if you could give some commentary there.

You bet. On the management side, back in I think it was March, it was quite some time ago, we moved to try to give more autonomy to the division presidents to run their perspective businesses, so that move was made quite some time ago. And to give them more ability on a shared services basis to control their G&A.

Those initiatives took place earlier this year. I think we're on pace to deliver about $6 million or so of annualized savings there, but more importantly, to give the brand presidents more ability to run their businesses.

Going through each of the brands, as we mentioned, 99 is still killing it. They are taking shares, they are doing well, they are executing their plan, and that brand is characterized by a very strong leader that's been there quite some time, has executed consistently on its business plan, and we're trying to do the same for the other two brands.

I would say in the family dining side, we got hit pretty hard by the McDonald's going all-day breakfast, and then the competitive response to McDonald's, meaning every other QSR out there, or other quick service eateries have impacted our family dining, which we do have a very large breakfast day part there.

So, we've refocused the Management team there to make those operational improvements and be responsive to those things, but we experienced some weakness over the last two quarters, which we are addressing. On the O'Charley's side, we made a lot of progress over the last couple of years, but we still needed to do some more to the restaurants to make sure that we could deliver to the customer hot food in a timely manner of good quality, and so we have Eddie Hall, the division president there, he is doing a good job, but we are also trying to wean ourselves off of the heavy discounting and some of the other things that we were doing in the prior period.

It's a work in progress there. It is highly competitive in that market segment. We like what we have going on, but it is just going to take a little bit of time to see further improvement.

Got it. Thanks, guys.

Thank you. Our next question comes from the line of John Campbell with Stephens Inc. Please go ahead.

Hey, guys, this is Hayden Blair in for John. A quick one on your Del Frisco holdings.

Casual dining space has obviously been a big challenge. So, I guess, where do you stand with that current position and would you potentially be looking to take advantage of any pullback there, or are you happy with it?

We really have anticipated with Del Frisco's that we were acquiring the shares at a very attractive price, but about this time we finished acquiring the shares, which was maybe a year ago or so, and we were trying to work our way up toward 14%, 14.5%. There is a whole kind of upscale casual market that started moving away from us, and so we own the shares, we have thought about whether or not that is a good long-term holding for us or not. We have not made a decision yet, but we're sort of holding the shares at this point.

It is an interesting group of companies. They have good concepts, but the market is moving away from upscale casual right now, and it surprised us a little bit. We're planning the same thing over at J. Alexander's.

J.'s is doing a bit better this quarter and is outperforming its competitors. This is having a more difficult time in terms of its presence in the marketplace, and of course J.'s has been dependent and spun off from FNFV a year ago or so.

I don't really have a definitive answer for you. It is an investment that we have that we're holding onto for the time being.

Got it. That's good color. I appreciate it.

And maybe quickly on buyback activity. How did your appetite change as the stock gets closer or farther away from where it would be on book value, or is that even how you guys look at it from a buyback perspective, and is that buyback plan, are you able to be opportunistic with that, or is it on some sort of (inaudible) plan?

You are exactly correct. We are selling at $10 a share or $11 a share a deep discount to our book value and we feel like our book value is understated based upon the value of some of our holdings. We are aggressive, and we kind of, we really bought back shares.

Now our stock price is trading for a bit more. It is closer to the stated book value, so we pull back. We also had an acquisition that we came very close to doing in the third quarter that moved away from us, and it was the very interesting acquisition that we determined we wanted to retain cash at that point, and make sure that we could execute against that particular acquisition. It just didn't work out.

In terms of the buyback, we're just going to be opportunistic. Anytime we can buy shares back for less than book value, we think it is attractive. The deeper the discount, the more attractive it is.

Okay, thanks, Bill.

Thank you.

(Operator Instructions)

Our next question comes from the line of Jason DeLeeuw with Piper Jaffray. Please go ahead.

Great, thanks for taking my call. Digital Insurance growth continues to be very good, but the margins were down year over year. Just wondering if there was some impact there from the acquisition.

And then also, if you could just update us on your thoughts on Digital Insurance and monetizing that. Are we getting closer to an event and what would that event look like?

Would it be IPO or M&A? Any color you can provide there.

Sure, Jason. I will answer. It is now OneDigital, so we are learning internally to call it OneDigital, as well.

If you look to year over year, you may have noted that OneDigital's organic growth was 10.7%, which is by far the highest that we've experienced since owning the Company, and frankly, it is higher than almost anything we've seen in the brokerage industry. So, what the team did starting late last year, they started investing more in sales and marketing resources, and so, I think you are seeing that investment paying off in higher sales, but remember, these sales, they filter in over time, so I think if you annualize the benefit of the new sales, the margins would be right where we would expect them to be.

It is more a function of that than a function of buying something that was less than, that had less margin. We encourage the Company to make those investments in sales and marketing resources, because we think that's going to be an important driver of value as we do look to monetize the investment.

As Bill mentioned in his comment, we're going to exit this year likely in the low $30 millions of EBITDA, and that does not include the annualization of new business that came on during the year, nor acquisitions that were done during the year. The exit EBITDA is higher than, obviously, that low $30-million range. There are a few good hubs that we are looking at to continue to expand the geographic footprint of digital, which we hope to execute in early 2017.

It's always been our belief that opportunities for monetization become more attractive as we have light and views towards getting $50 million or so of EBITDA. The Company is quickly getting there.

I think 2017, depending on the success of closing on a couple of these important acquisitions, the continued growth in organic revenue as we get mid in 2017, we might have line of sight toward those high 40s, low 50s of EBITDA, and I think opportunities to either sell the business to a strategic acquirer or financial sponsor, or frankly going public, because these businesses are quite easily understood by the public marketplace. I think all of those are all opportunities available to ourselves, so, we are excited about where it is. The EBITDA growth is accelerating our return on equity on our investment, since we are not, it's not using any of our capital, is expanding rapidly. So, we think we are in a very nice position as OneDigital continues to execute its business plan.

To also supplement that with the -- when we spun out with J. Alexander's shares, we really kind of created an orphan company. We didn't have an IPO in conjunction with the spinout, so we didn't have the sponsorship on J. Alexander's, despite the fact that they are very strong, well-run company that's growing, adding restaurants, the restaurants are performing well.

I would say that on Digital, the monetization event would be IPO related and spinout related or distribution related. We don't want to create an orphan. We learned our lesson on that one.

Brent is exactly right. As we move through 2017 and the acquisitions start being assimilated at the EBITDA from those acquisitions start flowing through, and we can get a run rate that we can demonstrate to bankers what that run rate is, something should happen with Digital. It is a really well-run good company, and it's well understood by the marketplace.

That's great. Thanks for all that. And it sounds like in acquisition moves away from you guys.

What about new investment opportunities, and would any of those be big enough to move the needle in terms of the return prospects of the portfolio and kind of how investors look at FNFV? And would you ever be against raising equity to potentially purchase something that was bigger through your FNVF equity? Just kind of your thoughts around that.

All I can say is give you a little bit of perhaps color on what we did look at to give you a lens into our thought process. We had a relationship with a financial sponsor that had a very interesting company in its investment portfolio. It was in an older fund, so the sponsor did not have the ability to put new capital in, and a lot of these sponsors cannot put the new fund capital into an old fund type of deal, so we were going to be the equity on a strategic acquisition that this portfolio company was executing on.

What we liked about it was there's substantial synergies, because it was a strategic buying another strategic, so we like those types of deals, it reminds us of deals that we do at the FNF side of the world, where you could pull synergies, and this had not only cost synergies but also some very interesting revenue synergy. We also like it, because since it was a late investment in their portfolio that the prospects for getting it monetized were nearer term, meaning potentially an IPO or even a sale in one to two years, versus your typical viewpoint of a holding period of four to five years. It met a lot of our criteria, and the check might have been around $100 million, and we think that that would've been at least 2.5 times our money over a period of time, is what we were modeling it at.

I think if you look at that and answer your question about the return, if you can turn $100 million into $250 million, that is a good deal, and then divide that by 66 million shares, you have created some value for the Company. We participate in the diligence, the CEO and the Company I thought did an excellent job evaluating the opportunity, and it was actually the CEO of our Company that we were going to invest in the pulled away, because he saw some things that weren't quite what he wanted.

But that was indicative of something that we took a look at that we thought was very intriguing. And I guess we haven't yet seen anything besides requirement yet that would require us to issue equity. No, that has not really been in our viewpoint as we face off on opportunity.

Okay. That's very helpful. Thank you very much.

Thank you. At this time, there are no further questions. Please continue.

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

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