Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings Inc. First Quarter 2022 Financial Results Conference Call. As a reminder, the conference call is being recorded, and a replay is available through 11:59 p.m. Eastern Time on May 16, 2022. With that, I would like to turn the call over to Rory Rumore of SOLEBURY TROUT. Thank you. You may begin.

Thank you, operator, and good afternoon. On the call today, we have our Chairman, Bill Foley; Chief Executive Officer, Rick Massey; Cannae's President, David Ducommun; and Bryan Coy, our Chief Financial Officer. Before we begin, I would like to remind listeners that this conference call and the Q&A following our remarks may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about Cannae's 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. The company undertakes 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 afternoon and in our other financial filings with the SEC. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information is provided in our shareholder letter. I would now like to turn the call over to Cannae's Chairman, Bill Foley, who will open with a few brief remarks and then open the line for questions.

Thank you, Rory. Within a quarter that presented a challenging equity market backdrop, geopolitical tensions and shifting macroeconomic conditions, our focus remains unchanged. We repurchased 2 million shares of Cannae in the first quarter of 2022. Our repurchase activity since we approved our share repurchase program in the first quarter of 2021 totaled 6.8 million shares or 7.4% of our outstanding shares. We will continue to take a balanced approach to capital allocation with a focus on repurchasing shares while also searching for private companies that fit our investment profile, and we'll continue to work with our management teams to help them execute. We are proud of our portfolio's performance against a very difficult economic environment with each company's strong fundamental performance in the first quarter. We are also excited about the potential for new private investments given the compression in valuations and pullback of risk appetite. I have seen many cycles through my career, and periods of volatility typically present the best investment opportunities. But we also remain committed to repurchase through our repurchase program and to creating value through our work with management teams to further transform our portfolio of companies. I'll now turn the call back to the operator to begin our question-and-answer session.

Our first question comes from the line of John Campbell with Stephens.

Bill, you talked to maybe what looks like a balanced approach to buybacks and kind of balancing that in with new potential private market investments. If there are no clear private company investments that kind of present themselves, how should we be thinking about the pace of buybacks from here?

Well, I mean, our stock price is really depressed. And so I'm going to emphasize buybacks. This is a good opportunity to take our share count down significantly at a strong discount to our fair value. So we're looking for different ways to invest in different companies. We have a couple of things pending regarding our two outstanding SPACs. But relative to other new investments, we're in early stages. So we're going to be allocating capital, buying shares back. That's our best use of our capital at this point.

Yes, that makes sense. The multiples in the public market have certainly become excessive. You have a significant portion of your investment portfolio tied to public investments, so you may not be eager to unload a lot of that. Could you discuss your debt capacity? It seems you drew down a bit on the margin loan. Please share your thoughts on your debt capacity and your willingness to utilize it for both buybacks and private company investments.

Yes. I'm not a big fan of taking on debt to make investments or to buy back shares. But we have drawn down about $60 million, I think, against one of our revolvers. We have about $33.5 million of holding company cash on hand. Our total gross liquidity totals $573.5 million. So I'll be talking to Rick, Brian, and Duke. We may just reallocate some of our available revolver capacity to buying shares back. I never thought we'd get to that point. But frankly, at $20, that's a pretty good investment.

Yes. You guys are sitting quite a bit below book at this point for sure. I imagine that looking very attractive for you guys. And then maybe for Bryan, just a kind of housekeeping question. What was the step-up in the corporate tax liability in the book value summary?

The step-up had to deal with the Dun & Bradstreet additional shares we got, you had a big change in deferred as well. The Ceridian sales shares that mark-to-market value dropped quite a bit from quarter-end, so that caused the deferred to go down as well.

And our next question comes from the line of Ian Zaffino with Oppenheimer.

Can you talk about just maybe System1 a little bit? Deal closes, you get some conversions and now I guess you reported about a 1.4 million share sale. Maybe like walk us through your thinking there as basic shareholders Cannae as far as your investment into System1 whether near term, medium term, or long term?

Yes, that's a good question. As part of this, we're locked up on System1 for the majority of our investment until late June, I think June 27 or so. However, we did have some unlocked shares that were a result of a final investment we made in the business when it was being taken public. That totaled about 6.1 million or 6.2 million shares. So I felt that with System1 trading above its $10 mark, and it actually traded quite a bit higher than that, we would take the opportunity prior to earnings release and prior to our lockup to sell a few shares to raise some capital. And so we did, we sold about 1.4 million shares over the last 20 days or so. So we're not in the market now because we are blacked out, and System1 released earnings, I believe, on the 11th or 12th. We like the investment. There's a terrific management team. You'll see when the first quarter numbers come out, its growth is really fantastic. The growth is also translating to strong EBITDA margins and strong EBITDA growth. So we like the investment. We don't intend to dispose of a large portion of that investment in the near future. So we want to ride System1 for a pretty good period of time. But from time to time, we may dispose of some additional shares once our lockup expires at the end of June.

Okay. Great. That's very helpful color. Bryan, this might be a question for you now, probably. Just to recognize losses, maybe walk us through it cash, noncash? Any color would be helpful.

Sure. We had two very significant noncash items in there. The Paysafe investment we wrote down by $236 million with the share price continuing to be depressed. The other was the Ceridian mark-to-market that was about $324 million, and that was offset by our cash gain on the Optimal Blue transaction which was $313 million the other way.

And our next question comes from Kenneth Lee with RBC Capital Markets.

Wondering if you could just further expand upon comments around potential opportunities in private companies just given the current market backdrop. Are you currently having some conversations right now? And any thoughts about private company valuations and whether there are meaningful gaps between what we're seeing on the public market side?

Yes, that's a very good question. I'm going to let Rick respond to this one as he has been heavily engaged in this effort over the last couple of months.

Okay. Two questions I heard from you. One was sort of what are we seeing out there in the market backdrop. I would say the juiciest area for investment in American Capital that I've seen so far are small-cap GARP type companies. Some of those went GARP, not crazy, but growth companies that actually have cash flow. They've been sold off, thrown out with the bathwater. We've seen a number of them trading at very attractive multiples in terms of return on invested capital. We like them a lot, but we don't have a lot of capital to put to work on those. We are planning on working on those and bringing in some help on capital. This would be something that Cannae and Trasimene would share like as general partners. And that's one option. Given that Cannae doesn't put a lot of capital in. In terms of what we're thinking and doing, as you heard Bill describe, we are in an unfortunate state where we've got to borrow because we are not excited about selling anything that we own. You heard him on SST, not Paysafe, but Alight and Dun & Bradstreet. They are way below where they ought to be, and it would be crazy to sell those and go do another deal. So selling some of those and buying back some shares might make sense. Did I answer your question?

Got you. Yes, you did. Very helpful. That's all I have for now. Thank you very much.

Our next question comes from the line of Chris Sakai with Singular Research.

Chris, welcome aboard. Thanks for following us. Welcome aboard.

Great. Okay. Thanks for that. Just to sort of piggyback on that last question, you mentioned that you could possibly borrow to acquire a company. Do you have any sort of idea how much you would borrow in that instance?

Absolutely. It absolutely would depend on the target. But also, the leverage part of the LBOs have gotten a lot more expensive over the past 60 days or so in the high-yield markets, which I'm sure many of you are well aware, are almost frozen. So I don't know that anybody is going to pull off a levered LBO anytime soon, except for the really highest quality stuff.

Can you discuss the revenue from the restaurant group? As the pandemic subsides, are you noticing improvements there?

Yes, we are seeing improvement. We had a very difficult January for the restaurant business in terms of a spike in commodity prices and really a shortage of labor, trying to keep our restaurants open and moving forward. But after January, we started to see some nice improvement in terms of restaurant operating margins and year-over-year same-store sales growth. We're anticipating in 2022, to despite the bad January and part of February, to have a strong restaurant year. We're happy. Over the last several years, we've reduced store count significantly in the Charlie system and in the 99 system. We sold off our baking company, the pie business, and our family dining business. The other two chains, Charlie's chain and 99 chain, are really doing fairly well. It's not fully reflected in the numbers that came out in the first quarter, but you will see some good improvements in those businesses during the balance of the year. We're actually, for the first time in many years, pretty happy with the restaurant business.

Our next question comes from the line of John Campbell with Stephens.

And Bill, I have a question that you might not appreciate. You made a lighthearted comment about this in Vegas, and I've received inquiries from investors regarding it as well. I've pondered it myself in the past. You personally selected all these portfolio assets, right? You chose these investments, and they aren't being valued correctly. Currently, you own 4% or 5% of the shares. You'll hopefully have a monetization opportunity with Black Knight in the future. At what point do you consider buying this yourself?

Well, there's still a bit too much money. However, you raise an interesting point, and that’s why we will be discussing using some of our lines of credit to start buying back shares more aggressively. At this moment, that might truly be our best investment. It's about taking advantage of the market dislocation and repurchasing a substantial number of shares. If the price drops to a low enough level, it might even become affordable for me.

John, that's what you get for asking the question.

Yes. Exactly, exactly. I'm sure you could find an investor cohort that could help match you on some funds on the way up. So all right. That's all I got.

Thank you. We have reached the end of the question-and-answer session. I will now turn the call back over to Bill Foley for any closing remarks.

Thank you, and thanks to everyone who joined our call today. While the market volatility may persist, we will remain focused on driving operational improvements across our portfolio, buying back our shares and finding exceptional investment opportunities and monetizing investments. We look forward to speaking with you again on our second quarter 2022 earnings calls. Thanks again today for your time.

This concludes today's conference call. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.