Cannae Holdings, Inc. Q4 FY2020 Earnings Call

Good afternoon ladies and gentlemen and welcome to the Cannae Holdings Inc. Fourth Quarter and Full Year 2020 Earnings Conference Call. During today’s presentation, all parties will be in listen-only mode. Following the company's brief prepared remarks, the conference will be open for questions with instructions to follow at that time. This conference call is being recorded. I now turn the conference over to Shannon Devine, Investor Relations for Cannae Holdings. Please go ahead.

Thank you, operator and good morning everyone. We appreciate your participation in our fourth quarter and full year 2020 earnings conference call. Joining me today are Cannae’s Chairman, Bill Foley; Chief Executive Officer, Rick Massey; President, David Ducommun; and Chief Financial Officer, Bryan Coy. As a reminder, a replay of this call will be available through 11:59 P.M. Eastern Time on March 1st, 2021. Before we begin, I would like to remind you that 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 quarterly shareholder letter, which was released this morning and in the statement regarding forward-looking information, risk factors, and other sections of Cannae’s Form 10-K and other filings with the SEC. Let me now turn the call over to Bill.

Thank you, Shannon. Earlier today we released our fourth quarter and full year 2020 results in the form of the shareholder letter. Today, I would like to make myself and our senior management team available to answer your questions. Our portfolio companies saw continued growth and our new investment efforts finally became visible to the market in Q4 and early Q1 of 2021. Specifically, Cannae announced definitive mergers of Foley Trasimene Acquisition Corp. II with Paysafe Group Holdings Limited and Foley Trasimene Acquisition Corp. I with Alight Solutions. Both target businesses are examples of companies that serve multi-trillion dollar industries which offer tremendous potential for future growth through continued scale and transformation led by technology initiatives. We expect the pace of investments in the SPAC market to continue, most recently evident in our intent to invest $50 million and $125 million respectively in Austerlitz Acquisition Corp. I and Austerlitz Acquisition Corp. II and participate as an anchor member of the sponsor group of each. Our efforts are focused on high-quality companies with defensible profitable business models. We are confident in our approach to sourcing transactions, demonstrating our discipline, value-based approach which we believe ultimately delivers superior long-term returns to our shareholders over market cycles. I would now like to turn the call over to the operator to open up the line for Q&A.

We will now begin the question-and-answer session. The first question comes from John Campbell of Stephens Inc. Please go ahead.

Hey, guys, good afternoon. Hey, kudos to whoever got the Hannibal artwork on the front of the shareholder letter. That's a nice touch. But yes, speaking of Hannibal, I think he probably had an easier time scaling the Alps than you guys have had, I guess, closing the kind of big discounts at NAV. It's been a little surprising to us to actually see that kind of widen off-late. I'm sure that's not lost on you guys. But I just wanted to get your latest thoughts on the discounts; ways you think you might be able to insert yourself to close it. And if investing directly into the CNNE stock buyback, if that's risen up to kind of pecking order, if you will, off-late.

Yes, John, that's a good question and good comment actually for the two you just made. We had deferred stock buybacks other than when we had the dip in the market. When the stock got down to the $20s, we did buy some shares back at that point in time. We've been trying to accumulate capital to support some of the investments we've been making. However, now we're at the point that with our Dun & Bradstreet investment, the lockups having expired, we have no lockups on the Ceridian investment. And fairly soon we're going to have public company stocks, shares, and both Paysafe and Alight and we have some other monetization events that are going to be occurring in the next six months. So, I am actually very open to share repurchases. I just want to do it thoughtfully so that we're not going to inhibit our ability to continue to make some of these great investments that we've found over the last six months or so.

Okay, that's great color. And kind of related to that, you guys have a lot of SPAC activity. It's super exciting. You got Austerlitz obviously on the way; you got Trebia still kind of pending. But you guys did participate in the pipes, I guess, for both Foley Trasimene I and II, just wanted to get your appetite, I'm guessing that maybe it was what you were hinting at, but your appetite for the pipe of the remaining SPACs? And then if I'm doing my math right here, with the cash that you closed the quarter, you've got core logic monetization there. I think you can get all the first three SPACs, maybe the forward purchase agreement with Austerlitz I with that, it looks like you've got about AUD600 million or so deck capacity. But if you can maybe help bridge us out where additional funds come from and kind of how you're seeing the world kind of shake out over the next couple of months?

Well, I'm not anxious to dispose of any Dun & Bradstreet shares, although we can do that at this point. I really feel like there's a lot of upside in that stock. What the company has to do is really start showing real revenue growth over the next 12 months. And we believe that will begin occurring, particularly with the Bisnode acquisition, not only in organic revenue growth, but we also believe there's going to be growth in terms of the sale of products and services by Dun & Bradstreet into the regions that Bisnode operates in. So, we are not anxious to -- that'd be my sort of last resort would be to dispose of some Dun & Bradstreet shares. We continue to have 14 million shares of Ceridian; obviously, we're not engaged and involved with management of that company any longer and we just want to be timely about sales of Ceridian shares. And again, not be the guys or the company that sold shares at $90 and the stock three months later was $130. So, those are really kind of the primary sources of capital we have coming in. We have a couple of minor investments that are going to be monetized. But they've been within the company for many years; one in Colt war we own debt and it looks like Colt is going to have a monetization event sometime in the next four or five months, and a couple of other smaller investments that will be disposed of in the next six months or so. So, we've got our cash flow pretty well figured out and organized. In terms of pipe participation, we thought it was important in these very large transactions to support the transaction by participating in the pipe. And one of the advantages that we have at Cannae is the partnerships from not only our own investment ability, but also the partnership we have with Fidelity National Financial, which is always trying to increase its ROI on its investment portfolio, which, frankly, is very short-term and it's primarily invested in money market funds and short-term bonds. So, we like the idea that we can provide capital for these pipes to demonstrate our support of the various acquisitions that we're concluding. One thing I would say is that I wouldn't expect to see large pipes again; they're complicated, they end up taking a lot of time, they could be spent really looking for companies and improving the business operations of the company. So, the pipe of $2 billion on Paysafe was just a real grind to get that raised and then the pipe on Alight was much easier, but still was a $1.3 billion pipe at the end of the day. So, we're really trying to look at pipes in a more modest fashion. In Trasimene II, our goal would be to perhaps have a $0.5 billion or $600 million or $700 million pipe on our next acquisition. And with Austerlitz I, there would be even a smaller pipe. The Trebia SPAC is fairly far along in negotiating and concluding that transaction. We expect that to be announced sometime in the next 45 days or so. That pipe, again, will be a small pipe; it won't be a large pipe. So, we don't want to get stressed out by the pipe investing and we want to make our pipe investments smaller in size. Did I cover everything, John, or have I missed a bunch of stuff?

No, that was very helpful. That’s exactly what I was looking for.

Hey, John.

Yes, go ahead Rick.

I was just going to -- sorry, I was just going to say Bill's modest. That $2 billion pipe that he pulled off in Paysafe was the largest equity pipe ever. So, it was -- he was right, it was a slog for him. I don't know how many dozens and dozens of calls. So, pretty amazing. And it's all done on Zoom.

Yes, changed the game for you guys, I'm sure. No doubt about it. Last one I got on the SPAC, and I'm going to hop back in the queue. Though it sounds like that there's maybe your SPAC appetite, if you will, you've done five in kind of short order, it seems like it's not quite quenched yet, is there -- I mean it feels like you've got some other things in the works longer term?

Well, as you know, John, once you've signed a term sheet on a particular acquisition, you've got to put the microphone down or the Zoom line down in terms of companies you've been looking at and wait till you have another vehicle to acquire a business. So, but during that period from November, December, and January, we investigated and looked at and talked to many different management teams in many different industries and many different companies. Our model now is what has always been is to invest in utilities, invest in companies that have uniqueness in their particular marketplace. But now we're really focused on management, we want to invest in companies that we have confidence in the management team because my own group of managers are really pretty well engaged in whether it's Black Knight or Dun & Bradstreet or Paysafe or Alight. So, we need to buy companies with management that have demonstrated management teams that we can rely upon and we don't have to worry about doing the management makeover that we did at Dun & Bradstreet. So, our focus has not changed in terms of the companies we're looking for. We're value investors; we want to have companies that are a fortress with a moat, their utilities in their industry in some fashion or another. That we have confidence that we can push through transformation, and also generate synergies. But we've got to do it with -- we're more now much more focused on existing management and working with existing management.

Makes sense. Thanks guys.

The next question comes from Ian Zaffino of Oppenheimer. Please go ahead.

Hi, great. Thank you very much. Bill I know you talked about Optimal Blue a little bit as far as pricing increases. Can you give us just a little bit more color there? Maybe what's Optimal Blue's value proposition to the customers you're able to push through pricing? I don't think you lost any customers at all. What's sort of their secret sauce there? And what type of pricing are you actually getting?

Well, they are increasing pricing. I think Duke had actually addressed the specifics of Optimal Blue a little better than I can. We did a pro forma on Optimal Blue before we invested with THL and with Black Knight, and basically, it was going to be a 20% revenue drawer and EBITDA expanding by a much larger percentage. It actually has overachieved in the first full quarter of ownership. So, we really believe that Optimal Blue, the goal been with Black Knight to start penetrating what I've called the small and medium sized business operators in terms of the mortgage space where they have penetrated, but Black Knight is not necessarily penetrated with its loan origination products that's more of an LME playground. So, Optimal Blue is the access point for Black Knight to really penetrate that smaller mortgage space as opposed to just the very large mortgage providers that we normally do business with at Black Knight. The other positive, though, is that Optimal Blue is now being sold into the empower base. It's been very successful and well received. So, it's a unique product set that Black Knight did not have access to, had portions of the products but not the Optimal Blue PPE products. Optimal Blue is really working out as a terrific investment that's really performing. And of course, as I believe, as I know, you know, we do have a put-call arrangement with Optimal Blue that deployed three years are invested in can be called at fair market value or double our investment, and that's three to five years, and a four to six years, we can put the investment on the same basis to Black Knight and actually move out of the investment and Black Knight would be the sole owner of Optimal Blue. We feel like we have an exit strategy. It’s a great company. It has been well run by Black Knight, but it does have its own set of financials that we're making sure that all the revenue and all the EBITDA appropriate to Optimal Blue stays at Optimal Blue. It doesn't get mixed into Black Knight. And Duke knows a little more about this specific – about the specifics of Optimal Blue.

Yes. I would say the value proposition to their customers is its new technology. It's slick, it's easy to use, the better mousetrap, and it has the most number of integrations. So it integrates into your mortgage insurance, your rate locks, kind of all the different products that an originator or trader would use. You can use your Optimal Blue calculators to get prices immediately. And it's linked to more people. So, it's a better marketplace, to kind of once you're the market share leader, those advantages only snowball. It's integrated into all the different LOS systems, especially in the lower middle market. Right now their customer base is doing really well, which is an opportune time for Optimal Blue to get higher prices. Given how reliant their customers are on the product to produce mortgages or trade mortgages, it's really a small piece of the profit pie for them. So I hope that that answered your question.

Yes. That was very helpful. And I guess the second question that Bill, I -- you know, you talked about your appetite for pipes. Does that or lack of appetite? Does that mean Austerlitz is made to the last SPAC we see given that you don't really want to deal with the whole pipe process behind it? And then, you know, if you were to do that, or not do that? Does that mean all your investments will be in existing public equities out there, as you look for more opportunities to deploy capital?

Well, they're going to be private investments in private companies. For example, Optimal Blue and AmeriLife are both examples of that. And then where we were at 20% or 25% owner of those businesses. Maybe I didn't express myself very well; we like the pipe concept as a way to really leverage the initial investment in a SPAC and be able to buy a larger company. I felt like with Trasimene, Trasimene II that we pushed the envelope a little bit in terms of having a $9 billion investment and having to raise a $2 billion pipe; it was really complicated, it was pressing the marketplace. So, I'd rather see pipes in the form of Austerlitz one or two, more or less equal to the initial investment made by the people that buy this stock at the initial public offering. So I like pipes as a way to buy a larger company with a fixed amount of capital. It allows you to return a reward to some of your initial public company investors that invested in Austerlitz one or two. So it drops the dilution they're faced with by being a SPAC investor. As they come in and invest in the pipe for an amount equal to what they invested in the original transaction for the original IPO, they basically drop the dilution from 20% to 10%. I like that; it makes us more competitive in terms of being an alternative to an IPO process. A long drawn-out IPO process allows us to really go to the financial sponsors and talk to them about key assets that they have that they're thinking about taking public. But we definitely like pipes; we think it's a great way to reduce dilution to our original investors. We just don't want to, I mean, if the pipe is twice the size of the original IPO, that's really pushing the envelope. We found that out from about to have another experience with Trebia. The pipe idea with Trebia is much smaller than the first two pipes we did.

Got you. Got you. All right. That's really helpful. If I could ask one just final question. In your opinion, as you look at the fact you just did, Alight has had -- I guess, from a stock price perspective, has not performed as well as Paysafe. Is there something in the market that's missing, anything that you think you shouldn't -- that you should point out to sort of maybe fix this information gap with the street and maybe the actual business?

So, Alight is really a terrific company. It does business with 70 of the Fortune 100 and half of the Fortune 500. It has moved itself from being just a services provider to really being a process provider. That transformation is ongoing as we speak and has been very, very successful. The thing that Alight needs to do, and that Stephan and his management team are working on, is the conversion of customers, for a large customer takes a year to implement. That implementation process has got to be halved, and then halved again, as the same situation we saw at Ceridian where initially it was taking us a year to implement a customer. Now we're down to about six to eight weeks. So, you don't have all that deferred revenue that is waiting to come on, that you can't recognize because you're in the implementation process. I think that's one area that Alight is working on, and that we're working with the management team to really shorten that implementation period. Other than that, Alight has gotten its M&A ready target-rich environment for Alight in many different ways. We're already looking at, we have our top 10 targets that have already been developed. You'll see some interesting transactions with Alight once we conclude and get through our F4 filing, which actually has been filed and get through our comment period, then do our de-SPAC. Once that happens, and we have a public security with a much lower debt to capital ratio, you'll see some interesting things in Alight that we're very confident about.

Very helpful. Thank you very much.

[Operator Instructions] And the next question is a follow-up from John Campbell of Stephens. Please go ahead.

Hey, guys, thanks. One more on the SPAC, Bill, you've kind of hit on a couple of these. But could you just give us a broad, sweeping update on the timing, maybe the de-SPAC of WPF and BFT? And then it sounds like with Trebia maybe a 45-day kind of window, what we should be looking at. And then anything else on Austerlitz, just mainly major milestone dates we should be thinking about?

Yes. So on the first one, BFT, we've now gone through, and we just finished our third round of comments on BFT. We're hopeful that we'll be going effective with the SEC sometime in the next 10 days or so. Then the shareholders, the proxy we file will go through the shareholder vote and de-SPAC. Our target date, for that if we hit our milestones, and who knows, sometimes you get hung up on various things, is Paysafe should be or BFT should be de-SPAC sometime before the 31st of March. Alight is about 30 to 45 days after that to get through the whole shareholder process, the whole vote process, and then to conclude the transaction and have WPF traded as Alight. Trebia is again, because we haven't announced a transaction, we're working hard on one particular transaction and we've got to get our audits completed, file the F4, go through the comment period, respond to the SEC, and then do the same thing again. The Alight -- Trebia is probably early June, it's kind of our target date. On the two Austerlitz companies, because they're just now getting through the SEC, we're starting our marketing of those two SPACs. We are not allowed to talk to potential companies that we would be buying; we've got to wait until our IPOs are finished. Because we had three SPACs available, we've been talking to a lot of different companies in many different industries, and we're very excited about the potential we have available to us. We just can't conclude anything because obviously, in the SPAC process, you can't really speak to a target until you've already had your IPO.

Okay. Makes sense. And then the last one I've got, Bill, you know, I got to carry on the tradition of asking you about the Knights, but you know, the taco setting was pretty awesome. The sun obviously wasn't your friend that day, but did you stay up till midnight to catch the conclusion of the longest game in NHL history?

I didn't go back at 9 o'clock and watch the last two periods. I actually watched it from a friend's house and it was really cold. It was really, really cold. But at the setting though, I'm sorry, the game wasn't -- couldn't proceed with the second and third periods in the afternoon because it was an unbelievable setting with the lake. We had a lot of fans that were on kayaks and little boats waving VGK flags. It was really a fun experience. The boys really liked it; they thought it was great. The game didn't turn out the way we wanted it to turn out, but the setting, I hope they do more of these in settings like this. It was really fun.

Yes. Good experience for sure. Okay, great. I appreciate all the time, guys. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Foley for any closing remarks.

Yes. Thank you very much. And thanks, everybody, for taking time out of your busy schedules to listen to our story again. We've gone to the shareholder letter as opposed to a presentation over the phone. We have a lot of great information in the shareholder letter about our performance over the last 90 days and over the past 12 months. Thank you for your time. I look forward to speaking to you again after the first quarter during the second quarter. Thanks everybody.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.