Cannae Holdings, Inc. Q1 FY2024 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings Inc. First Quarter 2024 Financial Results Conference Call. As a reminder, this conference call is being recorded, and a replay is available through 11:59 p.m. Eastern Time on May 16, 2024. With that, I would like to turn the call over to Jamie Lillis of Solebury Strategic Communications. Please go ahead.

Thank you, operator, and all of you for joining us. On the call today, we have our Chairman and Chief Executive Officer, Bill Foley; Cannae's President, Ryan Caswell; 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 filings with the SEC. Today's remarks will also include references to non-GAAP financial measures. Additional information, including a reconciliation between the 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 Bill.

Thank you Jamie. Since returning as CEO of Cannae in February, I have been focused on executing a strategic plan designed to both grow the net asset value or NAV of our portfolio and close our share price discount to NAV. Our strategy is 3 main levers, including improving the performance and valuation of our portfolio companies, making new investments, primarily in private companies that will grow NAV, and when appropriate, returning capital to shareholders, which until today was done primarily through Cannae share repurchases at a discount to NAV. I believe we're all happy with the continued success across all 3 pillars of our strategy. First, I would like to discuss the performance of our 2 largest holdings, Dun & Bradstreet and Alight, which continued to make progress throughout the quarter, and we believe will drive additional growth in NAV. I'll let Ryan get into more details on the specifics of each company's quarter, but I want to highlight a few key points. Dun & Bradstreet produced a 4.3% year-over-year organic growth, which is up from the first quarter of last year, but more importantly, Anthony and his team continue to invest in new products and build confidence in hitting their midterm target of 5% to 7% organic growth. This is quite a turnaround from a business that had negative growth when we acquired it. We continue to believe that there is significant upside in D&B's stock price, and we're encouraged by D&B's Board of Directors, of which I am the Chairman, authorized a share repurchase program for up to 10 million shares of Dun & Bradstreet common stock. In the first quarter, Alight announced the sale of their Payroll and Professional Services business to an affiliate of H.I.G. Capital for up to $1.2 billion. The sale values the segment at approximately 10 times its estimated 2023 EBITDA and 24 times its estimated unlevered free cash flow. We worked with Stephan for more than 6 months on this transaction, and we were excited to get it announced as it should greatly simplify Alight's business, improve profitability, reduce their leverage to less than 3 times debt-to-EBITDA and allow the company to buy back more shares. I'm confident in the leadership of both D&B and Alight. And, we look forward to their continued progress in 2024, which we believe will eventually translate into improving stock price performance and growing our NAV. I'm very proud of our work at AFC Bournemouth, our football club. In the first full season under our ownership, the Cherries have already achieved their highest Premier League point total in the 125-year history of the club and the season isn't over yet. Turning to capital returns to shareholders. We completed our previously announced Dutch tender wherein we repurchased 9.7 million shares of Cannae common stock, representing 13% of the shares outstanding for approximately $222 million at $22.95 per share. While we bought the shares back at a premium to where they are trading today, we believe it was an effective use of capital given the quantity of shares acquired in such a compressed time frame. However, our stock price performance post-tender illustrates that we also need to grow our NAV through increasing our portfolio to continue to close the NAV discount. Since starting our share repurchase program, we have repurchased approximately 34% of our common shares outstanding as compared to March 31, 2021, having returned more than $733 million in capital at a significant discount to NAV. Looking forward, we have approximately 13 million shares remaining on our buyback authorization, which we plan to utilize at a measured pace. Today, we announced a dividend of $0.12 per share per quarter payable on June 28 to provide an additional return of capital to our long-term shareholders. We will initially fund the dividends, including the one next month, through the sale of assets, but over time, we are looking to make cash flow generative acquisitions that will be a source of cash to fund the dividend. In the first quarter, we sold 10 million shares of D&B for approximately $101 million and 2.5 million shares of Dayforce for total proceeds of $177 million. We used the proceeds from these sales to fund the tender offer as well as for general corporate purposes. Going forward, when we need capital to fund potential investments, share buybacks, and the dividend, we expect to sell portions of our public holdings. This will also serve to gradually rebalance our portfolio away from public company investments towards high-return private investments, which we expect will maximize value for our shareholders. Lastly, in the first quarter, we announced the internalization and wind down of Cannae's management agreement with Trasimene Capital effective in July and occurring over the next 3 years. We felt this transaction was accretive for our shareholders as it will reduce total management expenses and further align Cannae management with shareholders given the majority of our compensation will now be in Cannae's stock. We believe over time that this will also drive an increase in Cannae's stock price. I'd like to now turn the call over to Ryan.

Thank you, Bill. I will now spend a few minutes on updates on some of our key portfolio companies and provide a bit more detail on potential new investments. For the first quarter, D&B reported revenue of $564 million, representing 4.3% year-over-year organic growth, which is an acceleration compared to 3.2% organic growth in the prior year's first quarter. The company generated 6% growth in adjusted EBITDA in the quarter, which equated to $201 million at a 36% margin. Importantly, D&B also improved free cash flow conversion. Leverage at DNB today is 3.7 times debt-to-EBITDA, which has moved down from 4 times 1 year ago, and management expects to be at 3.5 times by the end of 2024. We remain optimistic about the future for D&B as they are improving key metrics and investing in the right areas to achieve their midterm guidance, and we believe this will drive upside in the stock. Alight's first quarter results, unfortunately, were below expectations with continuing operations posting $559 million in revenue, representing a year-over-year decline of 4.6%, primarily associated with lower volumes, timing of large deals, and the wind down of Alight's hosted business. However, adjusted EBITDA increased to $116 million, representing a year-over-year gain of 4%, and total company operating cash flow increased nearly 39% to $100 million from the prior year. We are pleased to see the company now has nearly $7 billion of revenue under contract, of which over $5 billion is in 2024 and 2025. We remain confident that Alight's business will reaccelerate in the second half of the year. As Bill noted, we believe the sale of their Payroll and Professional Services business is an important step to improving Alight's business model, attractiveness to investors, and valuation. Lastly, I want to highlight that Alight's Board authorized the repurchase of up to an additional $200 million of the company's Class A common stock and noted it plans to be more aggressive and consistent in its return of capital to shareholders. Turning to Black Knight Football. We are excited about the progress we have made. Since our purchase of AFC Bournemouth in late 2022, our management team has worked to enhance the quality of Bournemouth's competitive position and on-field performance, improve the business operations of the club, and upgrade Bournemouth's facilities. In this first complete season under Black Knight ownership, the Cherries have 48 points, putting them in 10th place in the Premier League table. Our influence off the pitch is also evident as demonstrated by the 50% increase year-over-year in hospitality revenue, 40% increase in sponsorship, and a 13% increase in ticketing, all compared to the previous year. We believe AFC Bournemouth's success, both on and off the field, will ultimately drive significant value creation for our shareholders. We, unfortunately, have not had the same success at FC Lorient, where we own 40%. The team is currently in 17th place in Ligue 1 with 2 matches remaining, and in the current position would be relegated to the lower Ligue if the season ended today. While we are frustrated where FC Lorient sits, we would note that our put-call arrangement to buy the remaining stake had contemplated this potential scenario, and the valuation for the remaining stake is much lower if the team is relegated to the second division. Additionally, in the quarter, we closed on the 25% interest in Hibernian FC, a nearly 150-year old Scottish Premiership Club based in Edinburgh. Hibernian is sitting in 7th place in the table with 3 matches remaining. We are the first multi-club ownership group approved by the Scottish FA to own a stake in a team in the Scottish Premiership and are excited about the opportunities at Hibernian going forward. Computer Services, or CSI, has also continued to outperform. And their fiscal year ended February 29, the company secured 44 core banking deals across the U.S., a 33% year-over-year increase resulting in record sales, which should drive future revenue. Fiscal 2024 also included the acquisition of loan origination software provider, Hawthorn River, the launch of CSI's instant payment offering, and the closing of the previously announced new investment from which Cannae received a $37 million cash distribution. We remain very excited about our investment in CSI. Unfortunately, Sightline has not seen the same success. As we have discussed before, the company has experienced declining operational results in a challenged liquidity position given lower-than-expected uptake on certain of their cashless products, and as a result, has underperformed expectations. Management has refocused their efforts to improve the company's performance and liquidity position, including the sale of their mobile app engagement platform in the first quarter. We hope these actions drive improvement in their results and cash flow going forward. Lastly, I want to give a quick update on Minden Mill. We have made significant progress since we closed the acquisition in May 2023. We have completed some minor remodels around the facility, and the tasting room is open for the spring and summer season. We hired a master distiller with 20 years of experience, and last week, launched our first product, an ultra-premium vodka called High Ground Estate vodka. High Ground has been reviewed and awarded an exceptional 94 out of 100 points by the Beverage Testing Institute, and we are optimistic about the initial sales. The company also has multiple other products in the final stage of development, including a bourbon blend and coffee liqueur, which are expected to be ready for sale by the end of the year. While still early, we are excited about the progress to date. As Bill noted earlier, private company investments have been a driving force behind Cannae's success historically, and we believe a more efficient use of Cannae's capital. We are looking for new investments that will grow NAV and ideally provide operating cash flow to Cannae. We are focused on acquiring profitable businesses where we have knowledge of the sector, relationships with industry executives, and can add value through our ownership. We have been looking to source these acquisitions across our networks as well as in conjunction with our partners at JANA, which we discussed on the fourth quarter call. We are hopeful that we can find something over the next few quarters.

Thanks, Ryan. While we don't typically spend much time on specific income statement line items in our financials, given the dynamics around the accounting treatment for our investments, I did want to address a couple of key points. First, as discussed before, we've been restructuring our restaurant group, having closed more than half of the O’Charley’s restaurants to focus resources on the more profitable locations. This restructuring is already producing positive results at store level operating cash flow as a percentage of restaurant revenues has increased from 8.4% of restaurant revenues in the first quarter of 2023 to 10.0% in the first quarter of 2024 and is also the driver of the overall decline in our first quarter revenues from $154 million in the first quarter of last year to $111 million in the first quarter of 2024. We believe these changes will deliver cash flow to Cannae. Bill touched on the wind down of the external management agreement and the reduction in fees, and I wanted to provide additional detail. Management fees were $9.1 million this quarter and will be the same in the second quarter. Therefore, management fees for the trailing 12 months ending June 30, 2024, prior to the commencement of the wind down will be $37 million. Comparatively, annual management fees for the 12 months after July will be $7.6 million, and there will also be a $6.7 million termination fee payment. Both of these values will be fixed for the next 3 years, at which point they will be eliminated. Bill and Ryan will also receive compensation as Cannae employees, the majority of which is in Cannae stock. We believe the reduction in management fees and the majority of compensation in Cannae stock is a benefit to Cannae's shareholders. Our balance sheet and liquidity position remains solid. Cannae has $26 million in corporate cash today and $150 million in immediate capacity on our margin loan. The only outstanding debt presently is $60 million under our FNF note that matures near the end of 2025. During the first quarter of 2024, Cannae paid down $25 million of the note balance in exchange for a lower fixed interest rate, saving over $4 million annually. We also transferred our margin loan to a new bank, saving approximately $1 million annually going forward on rates and extending the maturity to 2027. At the close today, Cannae's aggregate net asset value is $2.1 billion or $33.35 per share, reflecting the completion of our tender offer and returning $222 million to Cannae's shareholders.

Our first question comes from John Campbell with Stephens.

Congrats on getting the dividend in place. A little surprising to us, but I totally get the rationale. It seems like that could be just another tool you guys could use to maybe close the discount to some extent. A two-part question here on that. But maybe if you could just start off, how long do you envision having that dividend in place?

Well, it's going to be in place for as long as we're around. And the goal, of course, is to start modestly, but it's well set per share per quarter dividend. And then as we've done with FNF, as you know, increased that dividend as cash flow allows. So we're committed to the dividend going forward on a consistent basis.

That makes sense. It aligns with what Ryan mentioned about seeking companies that can help generate free cash flow. The second part of my question relates to how you fund this. Bill, you noted that if necessary, you'd consider monetization efforts for funding. However, based on my calculations, it seems like there's currently a $30 million payout. You're saving about $15 million to $20 million from the Trasimene wind down, and Bryan listed several other areas for potential savings. It appears that you might not need to make significant adjustments and could maintain the dividend as it is now. Is that the correct way to think about it?

Yes, you’re correct. We have one more management fee payment in July, and then that will decrease significantly. We are in the process of selling some of our CDAY shares, which will help with cash flow if needed. I'm in the process of selling those shares, but we don't anticipate any significant cash flow risks for this dividend because we have saved money in other areas, including salaries and expenses. While we are not precisely at a $30 million or $31 million annual dividend payout, we are quite close, to be honest.

Yes. Makes sense. And I want to extend congrats on the Cherries, Ryan. You've created a bunch of Cherries fans over here in Lovelock. So congrats to you guys on the great season.

Thank you.

Our next question comes from Ian Zaffino with Oppenheimer.

Basically, if you could just give a higher level view here and ask, as you move more to private, is there going to be a theme in private that you're going to look for? I know you touched on JANA a little bit. Can you maybe give us a little bit more of a discussion on what you're seeing? What you've been surprised by? What has been top of the table? And any other color you could give us on what to look for maybe in a potential investment?

Yes, we are going to focus on our core strengths. Over the last 20 to 30 years, the history of FNF and our acquisitions have centered around the financial services and fintech sectors, particularly in relation to the real estate market in the U.S. Currently, we are exploring several opportunities, particularly those that are very affordable, especially in light of interest rate factors. We have a few promising prospects that are beginning to take shape. Each week, we review several transactions and typically eliminate most of them, but we do have one potential deal in progress for which we have issued a letter of intent. Additionally, there are a couple of other concepts that should materialize in the next couple of months. These will be conservative and generate cash flow.

That does help. And if you could also give us maybe an update on any potential deals on the European sports side? I know that's been a common area you talked about, maybe big synergies. You save on transfer fees. Any new developments on that front or? And how does that compete with capital versus kind of what I asked you in your first question.

Yes. So we are looking at a lot of different opportunities particularly in Europe, really not Africa or South America, but particularly in Europe, teams that could be feeder teams or development squads for one of our primary league teams such as Bournemouth or Hibernian or Lorient. And again, we probably see 2 or 3 different opportunities a week. And we're just being very careful. We want to make sure that whatever we buy or buy into, the cash flows are sustainable. It's not going to be an investment that requires additional capital infusions. And they need to be teams that are geographically placed so that they make sense from our multi-club model that we're trying to pursue. And they have to be in low-risk countries. So you're really talking about kind of Benelux, the Scandinavian teams, Eastern European teams in very stable situations, probably not a LaLiga team or a Serie A team. They're a little bit expensive, but we have seen opportunities in both of those leagues. So I'd say it's a very patient approach, and we're trying to be careful, and we want to develop our multi-club strategy and model so that these teams support each other, they'll play a similar style of football, and coaches can be developed at a more junior or a higher band team such as a band 5 or band 4, where Premier League is obviously band 1, and Ligue 1 is band 1 and Serie A is band 1 as well as the Deutsche League and LaLiga. So it's all the idea of trying to make things come together and work together. And we don't have anything pending right now, but we're looking. We're constantly looking, but we're being very judicious with our cash spend. We're being very careful. And we're also talking to outside investors that may want to invest with Black Knight Football Club and take an ownership position. And again, as we take in new investors, that will result in a mark to our valuation, which will be a positive. So that's kind of the football story. And Ryan and I really spent quite a bit of time on the football side, just looking at different situations.

Okay. Good. And then just one more question, if I could. If we look at kind of like Alight and post an asset sale of that? I mean should that be a standalone company you think or attractive strategic partner to another company? Or how do you think about that general? And I don't know if you can answer that, but again, I'd love to hear the answer.

Well, what I can tell you is that by disposing of the Payroll business and the Professional Services business, it has greatly simplified Alight. Alight is now a very significant benefits company, one of the largest in the country. And just as we responded to companies that were interested in our Payroll business and our Professional Services business, if someone develops or a company expresses interest in talking about the balance of Alight, then that's obviously something we'd discuss and we'd consider.

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

Thank you, operator, and I appreciate everyone's attention. I appreciate the questions, and we look forward to speaking to you next quarter. Thank you.

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