Fidelity National Financial Inc (FNF) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FNFV 2017 Second Quarter Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Dan Murphy. Please go ahead.

Thank you. Good afternoon, everyone, and thanks for joining us for our Second Quarter 2017 FNFV Earnings Conference Call. Joining me today are FNF Chairman, Bill Foley; and EVP, Brent Bickett. Bill will begin with a brief strategic overview and Brent will then review the portfolio company investments. We'll then open the call up 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 at fnf.com. It will also be available through phone replay beginning at 2:30 p.m. Eastern Time today through July 27. The replay number is (800) 475-6701 and the access code is 426237.

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

Thank you, Dan. We completed the sale of One Digital on June 2 for $560 million in an all-cash transaction. After repayment of debt, payout to option holders and a minority equity investor and other transaction-related payments, we received net proceeds of approximately $331 million. This represented a 4.6x cash-on-cash multiple on our original equity investment and a 41% IRR. With estimated income taxes of $112 million, we will have net proceeds of $219 million. We saw tremendous growth in One Digital in our 4.5 year ownership, and believe the sale was a great outcome for our shareholders.

After the sale and receipt of proceeds from One Digital, we began buying FNFV stock again. For that portion of the second quarter, we repurchased approximately 1.3 million shares for a total cost of $19.6 million.

Finally, we made significant progress on the FNFV exchange during the second quarter with several milestones achieved. We announced the receipt of the private letter ruling on May 10, filed preliminary Registration Statement on Form S-4 with the SEC on May 11, received comments from the SEC on June 6 and responded to those comments on June 22. We are continuing to work through the SEC review and are in the process of responding to additional comments received on July 14. Once the SEC declares the Registration Statement on Form S-4 effective, we can mail the proxy to our shareholders and then have our shareholder vote, at the earliest, 20 business days after the mailing. We still expect a late third quarter closing for the exchange of FNFV tracking stock for the new Cannae Holdings common stock that we plan to have traded on the NYSE under the ticker symbol CNNE.

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

Thank you, Bill. Ceridian HCM generated second quarter revenue of $177 million, a 6.3% increase over the second quarter of 2016. EBITDA in the second quarter was $15.2 million, a 60% increase from the second quarter of 2016. Excluding Ceridian's LifeWorks joint venture, Ceridian HCM generated first quarter revenue of $158 million, an 8% increase over the prior year quarter.

In the second quarter, cloud-based revenue was $94 million, a 38% increase over the second quarter of 2016 on a constant currency and float-interest rate basis. 173 DayForce customers were signed and 210 went live on the cloud platform during the second quarter. Nearly 2,700 are now live on the platform, up from just over 2,000 at the end of the second quarter of 2016.

Continued investments in product development, implementation processes and procedures are resulting in increased sales of the DayForce product suite and better efficiencies and implementation costs and time lines as evidenced by the increased cloud-based revenue and EBITDA growth in the second quarter. We are encouraged by the first half 2017 financial performance and look forward to continued improvement throughout the second half of the year.

American Blue Ribbon generated second quarter revenue of $287 million, a 2% decrease from the second quarter of 2016. EBITDA was approximately $10 million, with an EBITDA margin of 3.3% compared to EBITDA of $17 million and an EBITDA margin of 5.8% in the second quarter of 2016. Same-store sales in the aggregate declined by 1.6%, as Ninety Nine same-store sales increase of 0.6% was offset by an O'Charley's decline of 2.6%, a Village Inn decrease of 3.2% and a Bakers Square decline of 0.7%.

Ninety Nine same-store sales results outperformed the Knapp-Track and Black Box regional indices, and the company has now reported same-store sales growth in 16 of the past 17 quarters. While O'Charley's reported a 2.6% same-store sales decline, it was an improvement from the 4.3% decline reported in the second quarter of 2016.

The Village Inn and Bakers Square combined same-store sales decline of 2.5% was a 230 basis point improvement from the 4.8% decrease reported in the prior year first quarter.

Finally, at June 30, FNFV's book value was $1.02 billion or $15.70 per FNFV shares. This includes $354 million in holding company cash. Let me now turn the call back to our operator to take your questions.

(Operator Instructions) And we have a question from the line of Jason Deleeuw.

On the Ceridian margins, they were down from -- in the second quarter versus the first quarter. Just wondering if there was some seasonality there or onetime call-outs? And then just an updated view on the margin trajectory kind of going forward for the rest of this year and into 2018.

Thanks, Jason. Yes, on -- there is seasonality in the Ceridian business. In the first quarter, we do a lot of tax work on -- relative to tax filings. So we get a big boost in revenue in the second quarter, which would have a positive impact on margins. But on the -- as we look at the margin profile, it's improved year-over-year and it will continue to improve in Q3 and Q4, and we think significantly. What we're starting to notice is that the expenses are becoming relatively flat and revenue is increasing. So we expect a pretty strong flow-through of revenue in the upcoming quarters. Q3 is similar to Q2. And Q4 will be much stronger, and also have some seasonality impacts as well.

So from the revenue standpoint, it was 5% first quarter, 6% in the second quarter. It sounds like stronger going forward. I mean, can we be expecting double-digit revenue growth this year? Or is that still further beyond this year?

I mean, you've got to -- so when you exclude the LifeWorks joint venture, if you just look at the payroll business, so DayForce and our legacy bureau business, it actually grew 8% in total this quarter versus 6.7% on a year-to-date basis. So we're seeing revenue -- total revenue growth of our core business expanding. So again, 8% in the second quarter, 6.7% year-to-date. And yes, we do expect, whether it's Q3 or Q4, that, that should get into double-digit growth.

Great. And then you have a sizable war chest here of cash. Any updated thoughts on opportunities, investment opportunities?

Yes, we are. We've been -- we had a lot of success, as you saw, with our investment in One Digital and we've been spending a lot of time with our Triple Tree partners looking at many opportunities that we may have mentioned in prior calls in the health care industry. And it's one that we think is ripe for interesting investment opportunities with lots of add-on opportunities. So we've been seeking and have identified several that we think could be good platform companies so we can make an investment in and then have the opportunity to use our strength in mergers and acquisitions to add to that platform and kind of execute the game plan, not dissimilar to what we did with One Digital.

And next, we have a question from the line of DeForest Hinman.

Could you repeat those -- the cloud revenue number again for the second quarter?

Sure. $94 million, Q2 2017. Prior year was, on a constant-currency basis, about $68 million.

Some pretty meaningful growth. I mean, when -- well, we're still seeing, I guess, the decline in the maturation of the legacy business. And now I guess, this quarter, I guess, is the inflection point. I went back to my model, I think it's almost 13 quarters of negative year-over-year revenues. So are we really in a situation now where this is a business that's in a growth mode from a top line perspective?

Yes. And just to capture that again, the total business, including the cloud-based business and the bureau business, grew 8%. So that was a 37% increase evidenced in the cloud-based business, offset by an 18% decline in the bureau business. As you might recall, we've been obviously actively and aggressively marketing to our bureau customers to move them over to the DayForce business. So we're capturing some of that decline into the -- not all, but capturing some of that decline into the growth of our cloud-based business. If you look at it for the 6 months, we did $325 million in our core payroll business and $185 million of that was the cloud-based business. So we are really transitioning into almost -- it's becoming more dominated by the cloud-based revenue. And that trend will continue to accelerate as we get to Q3 and Q4.

Okay. In terms of disclosures, we don't have a ton of details on our filings. But now we actually have less businesses due to the transactions over time. J. Alexander's is not there anymore. Now Digital Insurance is not there. And we're looking to transition towards a common stock format. Does it make sense to change the way we're doing our disclosures to maybe add a little bit more color to the businesses that we own from a financial reporting perspective?

Yes, obviously, the One Digital sale, we -- that was just a price that we had to say yes to. We are very happy with that investment. Frankly, we could've held it longer if we wanted to do. But the price, when you get an offer like that, sometimes you have to execute on it. So your point is a good one that as we have declined in the number of investments, we would look to broaden the disclosure on a go-forward basis for the investments that we have on a post spin basis.

All right. And you may have said this, but just to clarify, is the new structure that we're looking for, is that going to be a C-corp?

Yes.

Okay. And then shifting over to the restaurant business. We continue to see some challenges there. Can you help us understand either some initiatives that you're doing at the specific chains or just more broadly in that group to kind of either alleviate some of that decline or move that towards growth?

You bet. I mean, if you break it down, Ninety Nine obviously is the strength of that brand. And it's still significantly outperforming its competitors, so it's doing fine. And as we mentioned last call, we are actively looking at ways to reduce our exposure to the restaurant industry and redeploy those proceeds into growth markets. But if you look at the second largest -- or the largest brand inside ABRH, it's O'Charley's, it's in the casual dining segment. And as you read, that segment's probably been hardest hit by competitors. What we try to help management with is really to, and we agree with their strategy, is to retain customers. So on a positive side, if you look year-to-date, their guest counts are flat year-over-year, which is -- which in casual dining is an outlier. So now we've given up some. We've been trying to get -- make sure we keep our guests, give them good food at a good price. So our average check is down. But at least we've maintained that and are seeing some plateauing I guess or bottoming and maybe we're getting a little cautiously optimistic that we got the right strategy in place to kind of turn it around. We have a new menu that we rolled out in our Tennessee market that's performing well. It's been over a year. It has fewer items and enables our kitchen to execute better and bring food out that's hot in a timely basis. So we have a lot of initiatives. But it's turning around the battleship in a highly, highly competitive market. Family dining has -- again, it's equally kind of hit in terms of the Village Inn and Bakers Square, but we're trying to return to basics. And it got hit hard, as you know, by McDonald's going All Breakfast and every other QSR concept following suit. And breakfast was always the strengths of those brands. But we feel we have a good legacy, strong position there that we're going to continue to exploit. So we have kind of a newer management team that's been there for the last year. They're starting to implement some procedures. So we hope to see some improvement there. The bakery division is doing fine.

Okay. And then a little unrelated. When we're looking at new investments, what type of return thresholds or IRRs are we using when we're looking at new investment opportunities?

Yes, I guess we're more a people of cash-on-cash returns. IRRs are, like on One Digital, I think are relevant when you measure it over a 4-year period. But we're looking for at least 2 to 3x. And frankly, hopefully, better on every investment that we make.

Okay. And then you spoke briefly about Triple Tree. I'm trying to remember, are those -- is that the home health business?

No. Triple Tree is a health care-focused merchant banking firm that we own approximately 28% of. They have deep domain expertise broadly in the health care industry. And they were the ones that originally helped us on the One Digital purchase. They've been -- we have them as a minority partner in that deal. They were very helpful strategically. So we work with them closely, have reviewed many different investment opportunities. Just that we haven't yet pulled the trigger on one of them.

Okay, so they're kind of your eyes and ears out there in terms of sourcing deals?

Particularly in the health care sector, yes. They have a terrific sourcing capability in that sector.

Okay. And then in terms, you talked about that platform deal. I mean, we've been seeing some things on our end. But what size do you think to kind of get credibility when -- to do more deals? I mean, how big of a deal do you need to do either from a purchase size perspective or maybe like a revenue size? Or if you can give both, that will be great as well.

Yes, I think enterprise value plus or minus $200 million as a starting point, to enable us to have excess capital to pursue attractive add-on deals.

Next, we go to the line of John Campbell.

This is Hayden in for John Campbell. I was wondering if there's any update on Del Frisco's. Was there any activity in the quarter? And has your appetite or intentions for that changed at all?

No. I think, Brent, we've disposed of almost all of our shares. We still own 1.5 million?

1.2 million.

1.2 million shares. The stock has weakened a bit but we're now free to sell those shares at any time. So we did monetize most of our investment, and we'll continue to look to monetize Del Frisco's.

Got you. And I guess, sticking with the restaurants. I guess just because there are some slightly different dynamics going on with the different brands and things like that. Are there any of those restaurant assets that you think are going to be worth holding on to and sort of weathering the storm so to speak? Or is the group as a whole sort of at a place where you guys are just ready to be rid of them?

We're going to have some announcements, I believe, in the next few months relative to, at least 1 or 2 of the 2 brands, the 2 chains. And we can't say much about it right now, but we're close to some transactions that will enable us to monetize and to refocus. And as I said in the last -- our last call, we're really interested in the health care space. 21% of the GDP in the country is health care related, and we have a great partner in Triple Tree to help us source transactions. So we're pretty far along on a couple of different transactions in the health care space. And we're also pretty far along on trying to have a solution for the restaurant chains.

And next, we'll go to the line of Bose George.

Just wanted to ask about the increase in the personnel costs in the corporate segment. Just curious what drove that.

Well -- this is Brent. I think it would probably be an accrual for the incentive payments as a result of the sale of One Digital.

And next, we go to the line of [Ryan Warren].

Forgive me if you touched on this because I joined a little late. But you had previously mentioned the possibility of selling a 10% stake to both FNF and TH Lee. I was wondering if you could up-to-date -- bring us up-to-date on sort of your thoughts around that or any other equity sales. And just secondly, going forward, Bill, you got a lot on your plate with hockey and with CF Corp. And I'm just wondering if you're going to be spending a reasonable amount of time on the FNF vehicle going forward? And if there are any conflicts in terms of where deals go when you find them?

No conflicts on where deals go. FNFV has a very specific strategy. I recently retired or resigned from the FIS board, so that's freed up a little bit of time. I'm looking at some other situations that I'm involved in to remove myself from those particular boards or companies. So I'm going to be spending time on CF Corp, which is kind of a single investment, fairly simple annuity and universal life company with a large investor portfolio. And then FNFV is now headquartered in Las Vegas, which is where I spend a good piece of my time. And I'm pretty active in FNFV. I'm just Chairman of FNF. I'm involved but the business is run by Randy, Mike and Tony. And Black Knight, of course, is being spun off. And I'm still involved with Black Knight, but it's become more of a maintenance situation. So that's kind of my philosophy. I am spending a lot of time on hockey, though, it's very important. We need to win that Stanley Cup.

Well, good luck with that. And just on -- the other question relating to the 10% stake for FNF or TH Lee. Could you bring us up-to-date on your thoughts there?

The thoughts are to try to get our cash up to a level that we could execute on the investment program that we want to do, to be able to buy 3 or 4 platform companies that would have -- give us the capacity to do some add-on deals. So we have just over $350 million of cash and we'd like to have, candidly, more, around $600 million or so that we feel would be comfortable once we separate from FNF. So we have all the approvals necessary, at least internally, to make those investments. But more details will come as we approach the end of the third quarter.

(Operator Instructions) And we have no further questions. Mr. Foley, I'll turn the call back over to you, sir.

Thank you. We will continue to focus on the growth, financial performance and monetization of our current investments while seeking out attractive future investments that will create value for our shareholders. Thank you for joining us today.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.