Fidelity National Financial Inc (FNF) 2016 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Dan Murphy. Please go ahead.

Thank you, and good afternoon, everyone. And thank you for joining us for our fourth-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 portfolio company investments. We'll then 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 be available for replay via webcast at our website at FNF.com. It will also be available through phone replay beginning at 2.30 p.m. Eastern Time through next Thursday, February 9. The replay number is 800-475-6701, and the access code is 414839.

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

Thank you, Dan. 2016 was an eventful year on both the monetization and investment front for FNFV. On the monetization side, we completed the sale of our minority interest in Stillwater Insurance in June for gross cash proceeds of $36 million, and in November we received approximately $37 million of cash from the sale of the Fleetcor shares held in escrow.

On the investment side we made a $22 million investment in the debt of Colt Defense in January and added to our ownership position in Del Frisco's common stock, bringing our total investment in DFRG to $44 million. In March, we made a $47 million additional capital investment in Ceridian to fund the continued growth of the Dayforce product line. We will continue to focus on the gross financial performance and monetization of our current investments while seeking attractive future investments that will create value for our shareholders.

We also continued to repurchase our own shares during 2016. In the fourth quarter we repurchased 220,000 shares for a total cost of approximately $2.7 million, thereby reducing FNFV's share count to approximately 66.4 million shares. In total, for 2016, we repurchased nearly 5.7 million shares for approximately $62 million.

Finally, in December we announced a tax-free plan in which we intend to redeem all FNFV tracking stock shares and exchange those shares for shares of common stock of FNFV. After completion of the exchange, FNFV will be a standalone, publicly-traded common stock. We recently filed a private letter ruling request with the IRS and are working through the transaction documentation to meet a third-quarter 2017 closing.

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 $189 million or 2.2% increase over the fourth-quarter 2015. This is the fourth straight quarter of total Company revenue growth and consistent with the 2.5% revenue growth generated on a year-over-year basis.

EBITDA in the fourth quarter was just over $25 million, a 9% decline from the fourth-quarter 2015, driven primarily by incremental investment in sales, marketing, and implementation resources for Dayforce.

In the fourth quarter, cloud-based revenue was $88 million, a 35% increase over the fourth-quarter 2015. For the full-year 2016, cloud-based revenue was nearly $300 million or a 33% growth over full year 2015.

225 Dayforce customers were signed and 190 went live on the cloud platform during the fourth quarter. Live to date, 3300 customers have been signed and 2340 have gone live on the platform. Demand remains strong for the Dayforce product suite, and recent investments in implementation processes and procedures are resulting in significant efficiencies in implementation costs and timelines.

2017 is a pivotal year for Ceridian, as we expect total revenue growth to accelerate compared to the prior year and EBITDA to show marked improvement over 2016 as Ceridian gains more scale in its cloud-based business.

American Blue Ribbon generated fourth-quarter revenue of $298 million, a 7% decrease from the fourth-quarter of 2015. Adjusted EBITDA was approximately $13 million for an adjusted EBITDA margin of 4.3% compared to adjusted EBITDA of $25 million and an adjusted EBITDA margin of 7.6% in the fourth-quarter of 2015. Same-store sales in the aggregate declined by 5%, as Ninety Nine same-store sales growth of 0.1% was offset by an 8.3% decline at O'Charley's, a 4.7% decrease at Village Inn, and a 4.3% decline at Bakers Square.

Ninety Nine did generate a 15th consecutive quarter of positive same-store sales growth, while O'Charley's continues to struggle in a difficult environment for casual and family dining concepts, and the family dining brands continued to be impacted by the emphasis on all-day breakfast from some industry players.

OneDigital continues to post strong results, generating fourth-quarter revenue of nearly $39 million and adjusted EBITDA of $7.8 million, representing 25% and 26% growth respectively over the fourth-quarter of 2015. Adjusted EBITDA margin for the fourth quarter was 20.4%.

For full-year 2016, total revenue was $148 million, and adjusted EBITDA was more than $32 million. Organic revenue growth for 2016 was a healthy 9.7%.

OneDigital also continues to execute on its strategic acquisition program by closing 11 transactions in 2016, including expansion into new markets such as Minneapolis, St. Louis, Houston, and Maryland. Building on the success of 2016, we expect OneDigital to continue its strong revenue and EBITDA growth trajectory in 2017.

Finally at December 31, 2016, FNFV's book value was approximately $916 million or $13.78 per FNFV share based on a share count of 66.4 million shares. This includes $129 million in holding company cash, an increase of approximately $30 million from September 30, caused primarily by the receipt of $37 million in cash from the sale of FleetCor shares held in escrow at Ceridian, and the $3 million spent on repurchase of shares in the quarter.

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

Thank you.

(Operator Instructions)

We'll go to the line of Chas Tyson with KBW. Please go ahead.

Hello, guys. Good afternoon. First question is on the restaurants. Just wanted to get a little more color on the weakness there at O'Charley's and Ninety Nine coming down from its prior stronger growth rates in the first three quarters of the year. What do you guys see there during the quarter and how are you guys thinking about it into 2017?

It was interesting. We really hit a pothole. I think the industry did in a large part, but particularly family dining and casual dining in the November/December time frame. I think it caught our operators a little bit by surprise. They were anticipating it being a little bit stronger.

Ninety Nine did weather the fourth quarter far better. They did experience positive same-store sales, and their performance has been obviously stronger than anybody that we've seen up in that region of the country. So Ninety Nine is going strong.

We started making some changes. As we looked at O'Charley's there was a lot of, what I would say, short-term decisions that were made that benefited the Company, the brand, in the short term but were not beneficial longer term in terms of the ability to continue to attract and get the customers that came into the store to have them come back. So we are going through the basics to develop a long-term successful, foundational base of delivering great food at a great price, but it's going to be a little bit more of a haul than we anticipated based upon some of the decisions that were made in the past.

Family dining is still being hit very competitively because Village Inn and Bakers Square, they are known for breakfasts. And that breakfast segment, once McDonald's jumped in, everybody else decided that was a great idea and decided to jump in as well. So we think we could battle there and compete very well for that customer base. It's our core competency, so we have a good management team in place, and we anticipate getting that back to where it was.

As you might recall, prior to this year, it had experienced same-store sales growth rather consistently. So we're just bringing it back to what we do best, which is delivering great pancakes, great eggs and bacon, and get that core customer back. But it's a challenging environment for casual dining and family dining brands as we look at it today.

Okay, and then for 2017, how are you guys thinking about the monetization plan? Are there any opportunities you see in your current portfolio? I know that ABRH and OneDigital are ones you've talked about in the past about potential opportunities, but not sure if you see anything on the calendar this year.

If you walk through each of them -- Ceridian is hitting exactly what we expected in 2016. Its first milestone was growing total company revenue growth. Second milestone was making sure we have all of the businesses that we want to invest in and grow on a go-forward basis and sell and dispose of those that didn't fit that profile. So those have been accomplished and the revenue growth is there.

The next element that we're seeing, and we're seeing a lot of positive developments inside the Company that we'll see this to fruition, is getting total revenue growth now to accelerate; because the cloud-based business is growing so rapidly that it's finally getting the scale to help better cover the expensing, the implementation costs, and sales and marketing costs that we incur and expense on an as-incurred basis. So as we look at 2017, we think it's going to be a massive value driver once we're able to demonstrate that A, total company revenue growth is accelerating, i.e., the growth in the cloud-based business is far out-pacing the attrition of the payroll bureau business. So total revenue growth would be substantially higher than what we experienced in 2016. So that's one element, as investors, we're looking for.

The second is to have EBITDA, as we just look at the cloud-based business, to get from being negative, which it is today for the items I described, to see that later in the year potentially -- and it would be a third-quarter to fourth-quarter event -- to see that flip to positive and total EBITDA to accelerate from what we think is the bottom that occurred in 2016.

So we're optimistic as investors. They are winning in the marketplace. They are improving their MPS scores, so I think that it's an important time for us as investors to continue to ride this, demonstrate those value points that I've just described, and see what happens towards the end of the year.

We are winning some pretty interesting customers against the who's who of competitors. And as an M&A guy by background, that typically gets attention of your competitors. And so we're pretty optimistic on where the business is trajecting right now, but we're going to likely hold.

Then if you move down to Digital, you know, obviously performing extremely well. Our return on equity is phenomenal. As we've mentioned in prior-quarter calls, we kind of had a benchmark of getting this business up to a $50 million EBITDA trajectory. We finished 2016 at $32 million, but a lot of the acquisitions that I mentioned were weighted in the latter half of the year.

So as you annualize those and look at some organic revenue growth, we're pretty optimistic. We're going to have, with no acquisitions in 2017, a pretty impressive growth year. But we have a pretty decent pipeline of M&A deals, as well, that we think can get us towards that trajectory of $50 million, which I think opens up very attractive monetization opportunities, whether we choose to look at the public markets on the one hand and/or strategic alternatives or sales alternatives on the other hand.

So again, I think it's a good investment for us to hold as we look through 2017. EBITDA is accelerating rapidly. We're making a terrific return on investment, so it might be a pretty quiet year on divestitures.

I'll also add we did announce that FNF is going to distribute the shares of the tracking stock in exchange for public company shares, so there will be really no impact to FNFV shareholders. But we got to be a little bit cautious because we have to get audits done, and we have the filings with the SEC that we need to do, so we don't necessarily want to do any big corporate transactions that might push that time frame further out than it needs to be for us to affect that transaction.

Okay. Thank you so much, guys.

Next we'll go to the line of John Campbell with Stephens Incorporated. Please go ahead.

Hello, guys. Good morning.

Good morning.

Just wanted to run through the Ceridian business. Is it as simplistic as -- I guess just thinking about Dayforce and the cloud business versus the rest of the legacy business, is there a way that you could break that out and potentially could that be sold as a standalone? Could you IPO just the SaaS side of it? Seems like there's pretty tremendous value there.

Well, they are linked together, so I think the answer is really, no. We wouldn't and have not conceived of separating them. They feed off each other.

There's been a lot of migrations from the bureau to the cloud-based business, and we expect that to continue. And in some ways to look at it as a built in customer base as well, so no, we think it's a combined piece, and the bureau business will have legs. We don't see a scenario in the near term where that business -- there always will be a base of business that will be attractive for us to own.

Okay, that makes sense. And then the DFRG stake, it looks like you guys came down off of that a little bit. What are your plans there? Are you just being opportunistic?

Exactly. We came in at 2014, and when we bought in, the restaurant stocks were under some pressure. We thought things might actually even deteriorate further to give us more of a buying opportunity, but they sort of bounced back off those levels, so we just thought it prudent just to trim a little bit of the position.

That's helpful. And then just last question, on the digital insurance side you mentioned that some of the M&A was back-half loaded. Can you maybe size up a little bit of the EBITDA contribution you expect to roll over into 2017?

It's probably in the $5 million range, roughly. Maybe a touch more.

Okay, great.

If you would have annualized all of the transactions, so it's in that ballpark.

Okay, excellent. Thank you, guys.

You're welcome.

Next we'll go to the line of Jason Deleeuw with Piper Jaffray. Please go ahead.

Yes, thank you. So on OneDigital just following up on that, I think total revenue growth in 2016 was like 28%. Organic was about 10%. It sounds like there's still a healthy pipeline, and then there's still some rollover from the M&A activity in 2016, so just trying to think about the revenue growth on OneDigital and trying to get to that $50 million of EBITDA target. Are we going to need some margin expansion to get to that $50 million? Can we anticipate that, or is it just growing the revenue from here?

Well, the Company did, and with our encouragement, spend some more on sales and marketing starting in 2015 and 2016. And I think the strong organic revenue growth we experienced of 9.7% in 2016 is reflective of the success of those efforts. But that did have a negative impact somewhat on our margins from 2015 of 22.2% to 2016 at 21.8% EBITDA margin.

Going forward, however, now that we've absorbed those sales and marketing costs and as revenue and EBITDA accelerate, we do expect margin expansion on the core business in 2017. So I think you'll see both continued healthy revenue growth and EBITDA growth, probably not just so much what we've seen in prior years, but on a larger base. And you'll see some margin expansion, too.

Okay, thank you. That's helpful. And then on Ceridian, it sounds like we're going to get an inflection point here on the top line growth in 2017. Also looks like we're going to get expanding margins, but I think as an outsider, it's a little bit difficult to expect what type of margin expansion we can get. Is there any help you can give us?

You came in at 9.5% EBITDA margin in 2016. It was a little over 9% in 2015. It was kind of low teens, I believe, before that. Are we trying to get back to the low teens, or are the aspirations even higher?

So as you know, we don't give guidance in that business, although I would again reiterate that 2016 we think was the low point of EBITDA and therefore EBITDA margin. So we are as a board and as investors expecting EBITDA margin to expand in 2017, mostly because of the significant growth in the cloud-based revenue that's covering more and more of those implementation costs.

So yes, you'll see EBITDA margins, I think, expanding healthily in 2017 and, frankly, going forward. So we will continue to report that as we roll through the quarters this year.

You might supplement it, Brent, with the idea that -- what you mentioned -- that every time we implement a cloud-based customer, we expense all of the implementation cost. And so we've just gotten to the point where the cloud-based revenue is exceeding the implementation costs, and therefore we are moving to positive EBITDA on the cloud-based revenue.

So with 2200 or 2300 customers converted and another 900 or so in the queue, and we're selling the product like crazy, the whole business is not unsimilar to Black Knight in that we can now start looking and projecting at what is going to be converted, when it's going to be converted, how much it's going to cost, and then how much our EBITDA margins will start expanding.

So we have high expectations for the EBITDA margins expanding. But while they are going to expand significantly in 2017, the big turn is going to be in 2018 and thereafter.

Got it. Thank you. And then just as the last question, just what's the outlook for new investment opportunities? I know given what the markets have done the last few months, evaluations have moved in the opposite direction that you would want. But just would like to get your thoughts on what you're seeing out there for opportunities, new investments, or does it just make sense to keep investing maybe make some more investments in the existing portfolio?

We have a couple of opportunities we're looking at. As Brent said, with the spinoff in process, we have to be a little careful about the financial statements that are being prepared and being submitted to the IRS.

You're right that things have moved up in valuations. We're particularly interested in the healthcare side because of our relationship with Triple Tree, our merchant bank, investment bank and investment partner. And they continue to give us opportunities that are not early-stage but kind of mid-stage companies, almost like Digital was when we bought that three or four years ago.

And we have about $120 million of cash. We've liquidated a bit of the DFRG, so that raised a bit more cash, and we have some potential cash infusions that we're looking at. So we're trying to get to the point where we have $300 million or $400 million of cash on hand to make three or four significant investments with leverage. That's kind of our goal, but we have to be a little cautious right now since we're in the middle of the spinoff.

Thank you very much.

(Operator Instructions)

We'll go to the line of Geoffrey Dunn with Dowling & Partners. Please go ahead.

Thank you. My question was along the lines of the last one, so it's more of a follow-up. But to date -- I know you did Colt and Del Fresco's, but it seemed like FNFV has been more of a disposition vehicle. And some of the most attractive investments have been buying its own stock. So number one, did FNF seriously consider buying this in? And number two, is there any way we should be thinking about the strategy going forward, including could we ever see external money raised here and a bigger push on this venture cap effort?

I think you've got it, Jeff. Once the spin-out is effectuated, we would anticipate raising some third-party money and actually creating a larger base of cash on hand to make various investments. That's one of the reasons we want to get FNFV out from the FNF tracking stock umbrella, which in retrospect maybe we should have created the Company and spun it out to start with because all we did was make sure we couldn't be index-qualified by doing the tracking stock.

So we are anxious to get this spin-out accomplished, to let FNF be in a position that it could move into at least the S&P 400 index. And FNFV is going to be an investment vehicle, but it's going to own controlling interest because we don't want to be an investment company. I think over the next year, year and a half we're going to have some very interesting things happen at FNFV.

Okay, great, Thank you.

At this time, I'm showing no questions in the queue. I'll turn it back to Mr. Foley, for any closing remarks.

Thank you. We will continue to focus on 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 us today.

Ladies and gentlemen that does conclude your call for today. Thank you for using AT&T Executive Teleconference Service. You may now disconnect.