Cannae Holdings, Inc. Q2 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Inc. Second Quarter 2022 Financial Results Conference Call. As a reminder, this conference call is being recorded and a replay is available through 11:59 P.M. Eastern on August 15, 2022. With that, I would like to turn the call over to Jamie Lillis of SOLEBURY TROUT. Please proceed.

Thank you, operator, and all of you for joining us this afternoon. On the call today, we have our Chairman, Bill Foley; our 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. And 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 of 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 that 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 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 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 then we’ll open the line for your questions.

Yes. Thank you, Jamie. Through the second quarter, we focused on two main themes to prepare for inflation and the rising interest rate cycle. First, we used our excess liquidity to repurchase our shares, which we believe are trading at a meaningful discount to fair value. Second, we continue to simplify our portfolio by monetizing investments that were either less immune to an inflationary cycle or that helped optimize our tax position. Overall, we are very pleased with our portfolio companies and their ability to continue to generate growing profits in an inflationary environment. During the quarter, we repurchased 4.8 million Cannae common shares. Year-to-date, we have repurchased 6.8 million shares, representing approximately 8% of our shares outstanding. In total, we have invested $306 million to repurchase approximately 13% of our shares outstanding since we received approval from our Board for our repurchase program in 2021, as we continue to believe that our shares are not only undervalued but so too are the shares of our portfolio companies. At quarter end, we have completely extinguished the 2019 Board repurchase authorization and have only 2.7 million shares remaining on our 2021 authorization. As a result, our Board has approved a new 3-year, 10 million share repurchase authorization which further demonstrates our commitment to repurchasing our shares when they are trading significantly below intrinsic value like they are today. In June, AmeriLife announced an investment that values Cannae's stake at a significant premium to our original investment. As a reminder, Cannae invested $121 million for a 20% stake in AmeriLife alongside Thomas H. Lee Partners, or THL, in March of 2020. Over the past two years, we have worked in collaboration with THL and the AmeriLife management team to accelerate organic growth and expand through strategic M&A. We are very pleased with the results, and this has led to a strategic investment from Genstar Capital wherein they will take an equal ownership position with THL Partners. This transaction values Cannae's initial investment at $338 million, or a 2.8x multiple of our original investment made about two years ago. While we enter our investments from the perspective of a long-term holder, Cannae will monetize a significant portion of our position through two closings anticipated in the second half of this year. Dun & Bradstreet remains our largest investment and one where we remain very involved given the upside potential that we see in the company. We continue to work closely with Anthony Jabbour, the CEO, and the DNB leadership team as they execute their organic growth strategy while evaluating accretive tuck-in acquisition opportunities and broader strategic alternatives. To that end, DNB's first half organic revenue growth on a constant currency basis was 4.1%, which was in line with our guidance range of 3% to 5%. We believe that delivering and accelerating organic revenue growth is key to driving an improved valuation. We are also pleased that they will begin paying a dividend in September of $0.05 per share per quarter which will generate approximately $16 million per year in cash flow to Cannae and hopefully improve DNB's trading performance as all of its peers pay a similar dividend, and DNB continues to trade well below peer average. Subsequent to the quarter end, we did sell approximately 9.2 million shares of Dun & Bradstreet to minimize our tax obligations in the second half of this year. We continue to see significant upside in DNB shares. Alight is another important public holding for Cannae and one that continues to perform well, reporting second quarter revenue growth of 6.4% with 90% of their anticipated 2022 revenues now under contract. Importantly, Alight continues to transition to a Business Process as a Service or BPaaS model and recognized 36% year-over-year growth in their BPaaS revenues. The Alight management team continues to execute very well as they add products to their platform and clients to their roster as they transition to a BPaaS model, which we believe is not yet reflected in their valuation. In fact, given the discount to fair value, the Board of Directors authorized a $100 million share repurchase program. Management provided guidance for the second half of 2022 and reiterated full-year guidance which represents an increase in year-over-year revenue of 6% to 7% and an increase in adjusted EBITDA between 4.7% and 6.6%. In the second quarter, as noted earlier, we aggressively repurchased our shares and further simplified our portfolio. We will continue to work with our management teams to ensure that we help them successfully unlock the value that exists within their businesses. We will also look for new private investments like AmeriLife and Sightline where we can take control positions and apply our playbook to unlock substantial value for our shareholders. We are currently interested in several attractive investment opportunities. Lastly, we will be hosting our second annual Cannae Holdings portfolio conference on December 14 and 15 at the Wynn Las Vegas. Last year's inaugural conference was a constructive 2-day event filled with in-depth presentations and quality discussions with full executive management teams of our portfolio companies. This year will be a continuation of that same format. We believe that this was a great event and look forward to another successful conference in December. We hope all of you can join us in Las Vegas in December.

Our first question comes from John Campbell with Stephens.

Congrats on the positive development of AmeriLife, that was nice. It sounds like almost a 3x return. You mentioned plans for kind of monetizing that in the back half of this year. Any sense for what that timing looks like? And then maybe, I don’t know if it’s maybe something else.

Yes, John. Well, it looks like the first stage of the transaction would be a cash payment that will occur late August or early September and the second half probably about 30 to 45 days later. In our case, we're going to roll about 20% of our overall investment back into a continuing position in AmeriLife. We feel like we're going to, again, get another double or triple out of this investment over the next couple of three years, but we are going to take a fair amount of cash off the table.

Okay, that's helpful. And then as a reminder, I guess on AmeriLife, that's on the 10% performance fee, is that right?

I'm sorry, John.

On the LTIP, is it on the 10% fee?

AmeriLife is one of our...

It's all under Trasimene, John. This is our Trasimene portfolio.

Got it. And then back to the Textor and, I guess, the Eagle Football deal. I didn’t see any specifics mentioned. So I’m guessing you guys are probably still ironing out some details. It looked like there was a development maybe a couple of weeks ago that maybe the deal was going through or it was kind of, I guess, information. But any sense for what your ultimate commitment is going to be? And then maybe how you’re looking from a funding standpoint? And then I know it’s probably still too early there but thoughts on whether you’re going to roll that debt to equity over time.

Yes, John. We anticipate it's going to be about a $100 million commitment. If things come together. There's still a lot of loose ends with this transaction that we're trying to pull together. We have to ensure that the various football assets that John Textor is involved with can get a PCAOB audit that they can get that audit on a timely basis and that they can further fill the balance of the commitment that they need to acquire OL and then contribute other assets into Eagle Football. So it really remains a moving target at this time. We like the idea. We like the concept. And if it proceeds, it will be a roughly $100 million commitment.

Okay, very helpful. And again, I guess, probably too early but any sense for I don't know if there's any kind of framework on the returns. I've seen some figures out there, some targets they've put out as far as the revenue growth over time from Lyon in particular. But any sense for what kind of helping frame up the return potential?

We really need to consider that, John, at this moment. There are so many variables involved in this transaction that estimating returns right now is quite uncertain.

Our next question comes from Ian Zaffino with Oppenheimer.

Thank you very much for all the details. Just wanted to ask you on the Dun & Bradstreet at least we sold some of the shares there. What’s sort of the motivation of that sale? Maybe kind of your thoughts on the business or confidence in the business and the thesis playing out maybe the way you initially thought the process.

Well, I mean, we really like the investment. We like where the company is going. The 9.2 million shares that we sold happen to be shares that we acquired in the IPO at a value of around $21.60 or $21.65 and we were in a tough tax position in terms of having disposed of some Ceridian shares, incurring a very large tax bill. We thought, we just said that we all got together and thought, we own 88 million shares of this company. It's a significant position. If we were going to raise some cash for other investments, does it make sense to reduce our investment in Dun & Bradstreet and take a tax loss which, of course, for Trasimene is pretty hurtful because we obviously have to recover that loss before any distributions can be made. But we just felt like it was time to take some money off the table and we raised about $135 million or $140 million with that sale. And that money is currently in the bank. And we did that really to give us a bank role to repurchase our shares from time to time. We wanted to make sure we didn't have to go into a line of credit to repurchase shares.

Okay, great. Good. And then, also how are you thinking about sources of monetization? Is there anything that you’re going to immediately exit or you continue to exit? Just maybe a discussion about that.

Yes, we do not want to sell any more of our remaining Ceridian shares at this time. We believe Ceridian has just reported strong earnings and has a positive outlook for the future. We have been monetizing that investment for a few years now. We are quite enthusiastic about the rest of our portfolio companies and feel they are not being valued fairly in the market compared to many other companies. With the monetization of AmeriLife and the sale of Dun & Bradstreet, we find ourselves in a solid cash position, allowing us to make some investments while also prioritizing share repurchases.

And if I could squeeze in one more. Bill, your last point about that, when you look at like your buybacks and how aggressive you want to be, are you looking at maybe a spread of the MA base? And if you are like at what point does the spread become just so large that you have to act super aggressively or not? Maybe help us understand some of the thinking and the buyback and then how it relates to like the NAV discount in stock?

Yes. I believe you noticed what occurred in the first half when we took action by acquiring the FNF position, which they needed to sell before around November 1 of this year due to the five-year requirement to liquidate their shares from the spinout. We find that acquisition favorable, especially at around $17.70, which we consider a good value for our shareholders. We plan to purchase shares back at current levels and potentially at even higher prices, and if there's a significant downturn in the market that drives prices below $20 or $19, we would be much more aggressive in buying at that time.

Okay. And none of that thinking changes, if you're going to get bangs on taxes, just so that just pass in one of the houses and probably won't pass in other houses?

Yes. Well, we think we have our tax situation pretty much in hand with the sales that we’ve had in the past over this past year. And we don’t really feel like we’re paying taxes. I mean, because we liquidated Ceridian as an investment. We’re going to have a tax consequence on AmeriLife for a good portion of that investment. But we feel like we’re pretty well positioned right now relative to looking at inflation, looking at higher interest rates and then looking at our portfolio companies. A number of them are just sort of immune to inflation and interest rates, they’re recurring revenue models and they’re kind of all part of our playbook and what we like to look for and invest in, which are companies that can be strong in really good times and be very dependable in times when things get a little tougher.

Our next question comes from Chris Sakai with Singular Research.

I had a question on where are you seeing the best possible investment rather in either public or private markets? And why?

Yes. We are currently exploring two SPACs that have not been deployed yet. We are actively seeking SPAC opportunities, but it is challenging in the current market. Companies looking to sell are generally not very interested in partnering with SPACs. We have been conducting extensive screenings and evaluating companies that we could take private or those that are private and where we could either invest or gain control. Rick, would you like to add anything to that? Since you have more insights...

No, that’s all. Sorry. Go ahead, please.

I'm waiting for you.

We have identified some intriguing companies where we've engaged with management, and they will primarily focus on the bill model and subscription model. These are essential services that depend on customer engagement. We are exploring a few of these opportunities. While some might not surprise you if we succeed in finalizing them, a couple could be unexpected. There is a lot of exciting potential out there, and many companies are eager to collaborate with Bill.

Okay. And then, do you have an idea about how many new acquisitions or investments you’ve made?

We are aiming to invest in the range of $100 million to $300 million, depending on the monetization of various assets and our buyback program. Our objective is to make two or three of these investments each year to gradually build our portfolio, moving away from the previous SPAC acquisitions we had done with Alight and Paysafe. The current market is challenging, and we need to carefully navigate through it, considering inflation and interest rates.

Our next question comes from John Campbell with Stephens.

Maybe this is a question for Bryan. This is just a housekeeping question but it looks like you closed the quarter with $75 million in cash. I saw on the update letter, I guess, as of August 5, you guys had $190 million. If I add in that DNB monetization, I’m still coming up maybe a little bit short. Is there anything to call out that makes up the difference between those two?

Paid management fees at the end of the quarter but it should have been $75 million, plus like another $127 million on DNB less management fees should come out to exactly what we've got on the balance sheet now.

Okay, I understand the management fees. It seems like securing final combination partners is likely more challenging this year compared to last year at this time. Can you explain what the process involves if a partner is not found? I believe there might be a two-year timeframe, and what would the mechanics be? Would there be a return to cash from the trust, and what would that entail for your team?

Yes. You're exactly right. What happens after the 2-year point unless we get an extension from our investors is that money in trust is returned to the shareholders. It's too bad because these are a couple of good acquisition candidates that we have in place and we're working hard to find candidates to merge with. But as you can imagine, in this kind of environment, it's difficult. It's not easy. And Rick is working really hard with Duke and Ryan Caswell and we have several different candidates but they all are process-oriented. We're working on all of them every day.

Thank you. At this time, I would like to turn the call back over to Mr. Foley for closing comments.

Thanks, operator, and thank you to everybody who joined our call today. While the future path of the market remains ambiguous, we will remain focused on what we can control, which is driving operational improvements across our portfolio companies through our playbook, buying back our shares, given the steep discount to fair value and finding exceptional investment opportunities in monetizing investments. Overall, we will remain nimble and adept in our approach to the opportunities that we see in the market as we strive to create long-term shareholder value. We look forward to speaking with all of you again on our third quarter 2022 earnings call. Thanks again for your time today.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.