Cannae Holdings, Inc. Q2 FY2024 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Inc. Second Quarter 2024 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the company’s prepared remarks, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded, and a replay is available through 11:59 p.m. Eastern Time on August 15, 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 Ryan Caswell, Cannae's President; and Bryan Coy, our Chief Financial Officer. But 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 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 Ryan.

Thank you, Jamie. Good afternoon, everyone, and thank you for joining us on our second quarter conference call. First off, I want to note that Bill is unable to join the call today as he is traveling. He will be back on the call next quarter. Consistent with past earnings calls, we will provide some high-level commentary on strategy and key events during the second quarter before turning to a more detailed discussion of some of our portfolio companies and finish with some financial details. We continue to focus on executing our strategic plan designed to grow both the net asset value or NAV of our portfolio while also working to close our share price discount to NAV. Our strategy has three main levers, including: improving the performance and valuation of our portfolio companies; making new investments, primarily in private businesses that will produce cash flows and grow NAV; and providing capital returns to our shareholders through our recently introduced cash dividend or share repurchases. We believe the combination of these three strategic pillars will close the value gap between our stock price and NAV. We remain optimistic about our portfolio companies and have spent considerable time this quarter working with the management teams of each to enact strategic transactions, improve operations, and drive additional cash flow. For example, Alight was able to close on the sale of their Payroll and Professional Services business for up to $1.2 billion of consideration. This required significant time and effort from Alight's management team and board, and we appreciate all of the work from each to get such an instrumental transaction over the line. With regards to D&B, Bill and the D&B Board continue to work with the management team to drive revenue growth, improve free cash flow conversion, and consider strategic transactions, which we believe will drive shareholder value. We also spent considerable time this quarter with the management team of the Restaurant Group and Minden Mill focused on refining their strategic plans with regards to sales targets and optimizing their respective expense basis, which we believe will maximize cash flow and increase their valuation and Cannae's NAV. Unfortunately, not all of our portfolio companies performed to expectations. And during the second quarter, we took a $141 million impairment on the book value of our Sightline investment. Sightline has been unable to achieve the expected market adoption of its key products, and while management remains optimistic about the future, we believe that given the results to date and the cash position of the company, we were required to impair our investment. Moving on to our investment pipeline. We continue to look for new attractive investment opportunities that we believe will increase our NAV. We are primarily focused on platform investments in the private markets. As stated before, we plan to fund any new acquisition through redeploying capital from the sale of some of our public company investments. I would now like to provide a bit more detail on our partnership to date with JANA Partners and resulting potential investment opportunities. Since the announcement in Q1, we spent considerable time with the team at JANA looking for undervalued public companies where there is a specific catalyst to unlock value, and Cannae can participate in that catalyst as an acquirer or capital solution. Cannae's participation as a potential capital source provides JANA an additional tool to push for change at the target company while at the same time creating potential investment opportunities for Cannae. In certain situations, Cannae may take a position in the target company stock as we see how the process plays out and if there are any potential larger capital investment opportunities. In Q2, we made our first investment alongside JANA. While I don't want to discuss the specifics of that situation given its public nature, we remain optimistic that our partnership with JANA will produce attractive acquisition opportunities for Cannae. I would now like to discuss capital returns to shareholders. On September 30, we will be paying our second dividend of $0.12 per share. We also bought back 300,000 shares in the second quarter following the 9.7 million shares we bought back in our tender in Q1, bringing our year-to-date purchases to 10 million shares. Between the dividend and share buybacks, we have returned over $235 million of capital to our shareholders in 2024. Turning to our portfolio companies. Our largest holding, Dun & Bradstreet reported second-quarter revenue of $576 million, representing 4.3% year-over-year organic growth, which is an acceleration compared to the 3.9% organic growth in the prior year second quarter and the fourth consecutive quarter of mid-single-digit growth. The company generated 5.7% growth in adjusted EBITDA in the second quarter, equating to $218 million at a 37.8% margin, up 60 basis points compared to the year-ago second quarter. Leverage at D&B today has moved down to 3.7 times, and management expects to be at 3.5 times by the end of this year. On Monday, D&B issued a statement acknowledging that it has received inbound interest from third parties and has retained advisers to assist with those inquiries. We will not make any comments on this matter going forward. Our second-largest holding, Alight, announced Tuesday that Stephan Scholl will step down as CEO and a member of the board effective after the Board names the successor. We want to thank Stephan for his commitment and vision and for the impact he has made as CEO. Post closing of the sale to the previously referenced Payroll and Professional Services business, Alight used $740 million of the proceeds to repay debt, bringing Alight's net leverage down to 2.8 times. The company repurchased $80 million of Alight shares in the second quarter, and announced a $75 million accelerated share repurchase in mid-June leaving $93 million of share buyback authorization. We believe this transaction is positive for Alight and that the remaining business is a simpler public equity story that will have more recurring revenue with higher EBITDA margins. This is evidenced by management comments that they already have 97% of the 2024 revenue under contract, and the company forecasts a second half 2024 adjusted EBITDA margin range between 25% and 26% for the full year and reaffirmed a mid-term adjusted EBITDA margin target of 28%. Looking at Alight's second-quarter results, which exclude discontinued operations, the company generated $538 million from continuing operations in the 2024 quarter, down 4% from the $561 million in the prior year. Second-quarter 2024 adjusted EBITDA from continuing operations was $105 million, representing a 19.5% margin compared to the $119 million or a 21.2% margin in the 2023 quarter. Turning to Black Knight Football. In our first full year of ownership at AFC Bournemouth, the team finished in 12th place in the Premier League table and earned 48 points, the most the Cherries have earned in a Premier League season. This success is translating to revenue growth for AFC Bournemouth as revenue for the 12 months ended June 30, 2024 grew to approximately $203 million, a 19% increase from the $170 million in the corresponding period ended June 30, 2023. The uptick was primarily driven by improvements of more than 40% in both sponsorship and hospitality revenue as well as higher Premier League income from Bournemouth's higher placement in the table. Looking forward, we continue to see positive momentum, both from the commercial and sporting perspective. At FC Lorient, where we own 40%, the club finished in 17th place and was relegated to Ligue 2 for the upcoming season. While we are frustrated with the results, we believe the team has the resources and talent to quickly return to Ligue 1. Furthermore, our put-call arrangement to buy the remaining stake at FC Lorient contemplated this potential scenario, and our valuation for the remaining stake is reduced while the team is in Ligue 2. Hibernian FC, which we have a 25% interest in, finished the season in 8th place out of 12 clubs in the Scottish Premier League. We continue to also build out the BKFC holding company given our belief that an interconnected multi-club ownership model can best deliver improved sporting outcomes, create better player pathways, enhance fan and community experiences, and improve commercial revenues and profitability across the group. As part of that strategy, in June, we announced that Tim Bezbatchenko has been hired as BKFC's first President. Prior to BKFC, Tim enjoyed tremendous success in leadership roles within Major League Soccer. Tim will work with our portfolio clubs to standardize and improve player recruiting and development, enhance player pathways, and optimize commercial opportunities across the group. Lastly, I would like to provide a few updates on Minden Mill and the Restaurant Group given the work during the previous quarter. We continue to make progress at Minden Mill and it released its first product, an ultra-premium vodka called High Ground Vodka, which was well-received by the market. The distillery is on track for a fourth quarter release as Minden Mill bourbon, rye, and American single malt whiskey brands from inventory acquired in the May 2023 acquisition. And has already begun a more scaled development of additional brown liquors that require four plus years of aging. Moving on to the Restaurant Group. Following the strategic reduction in store locations discussed last quarter, we have continued with our realignment and are reducing corporate overhead. This quarter, we laid off approximately 20% of the corporate employees and are in the process of reducing third-party spending and downsizing the group's headquarters. Our work has already produced positive results as second-quarter 2024 adjusted EBITDA was more than twice that of the prior year second quarter. Our management team is focused on improving cash flow and increasing the guest counts at our locations, which is key to long-term profitability at the store and corporate levels. We believe the actions at both Minden Mill and the Restaurant Group will improve cash flows and increase their respective values. I will now turn the call over to Bryan.

Thanks, Ryan. I'll briefly cover the P&L, balance sheet, and liquidity. Second-quarter 2024 operating revenues were down $35 million or 23% compared to the prior year quarter, reflecting a 27% reduction in the number of restaurant locations year-over-year. Same-store sales on the remaining locations were down slightly with lower guest counts offset by higher average checks. Cost of restaurant revenues fell at a greater pace than revenues, dropping to 85.6% of restaurant revenues in the second quarter 2024 compared to 88.4% in the second quarter '23, a 280 basis point improvement resulting from the reduction of 4-wall or on-site costs. The remainder of operating expenses comprised personnel costs, depreciation, and other operating expenses. These expenses, which include the restaurant, real estate business, as well as Cannae corporate, increased by $4.8 million in the aggregate or approximately 11% quarter-over-quarter. The drivers for this increase include an SIP bonus related to sales of Dayforce shares during the 2024 quarter. Notably, on which Cannae realized a $27 million gain over the pre-IPO basis as well as higher stock comp and termination fees. These were offset by significant decreases in the Restaurant Group impairments and expenses as well as reductions in professional fees at the Cannae corporate level. Recognized losses of $145 million in the second quarter reflect a non-cash impairment charge to the book value of Sightline, while decreased losses from equity method investments related to the prior year write-down of System1. I'll also give you a little bit more detail on the impairment of Sightline and the rationale behind it. The lack of traction with their legacy products, combined with investments in completing the development of a new product, has caused further pressure on their operational results and liquidity through the second quarter. In light of continued negative cash flow from operations, uncertainty in future financial and operational forecast and a challenged liquidity position, we had a valuation of the company prepared. And based on those results, we recorded an impairment charge to the book value of our investment. With that said, we're hopeful the company begins to see better results, and we'll continue to work with the Sightline management team. Cannae's balance sheet and liquidity position remain solid. Since March 31, we've sold 1 million shares of Dayforce for gross proceeds of $57 million, and we're now down to 500,000 shares remaining out of the 37.1 million shares we held at Dayforce's IPO. We'll use this capital for new investments, investments in the growth of our existing portfolio as well as capital returns to our shareholders. Cannae has approximately $29 million in corporate cash today and has nothing drawn on its margin loan leaving $150 million of immediate capacity on that facility. The only outstanding debt presently is $60 million under the term note that matures near the end of 2025. Cannae also notably has $1.3 billion of marketable securities that could be utilized for future liquidity. At the close today, Cannae's aggregate NAV was $2.1 billion or $32.90 per Cannae share, compared to today's closing price of $19.95. With that, I'll now turn the call back to the operator to begin our Q&A session.

Thank you. We will take our first question from John Campbell with Stephens.

Hey, guys. It's Jonathan Bass on for John. Thanks for taking my questions. So I know you can't comment directly on the D&B takeout rumors. So I'd love to hear just at a high level a refresh on your investment thesis for D&B and why you guys view the valuation is so deeply discounted here. Thanks.

So I understand the investment thesis we had when we made the investment and how we perceive the current valuation. Is that what you’re asking about? I apologize.

Yeah, that's right. Can you share your investment thesis for D&B and maybe why you have that perspective?

Thanks for the clarification. When we initially invested in the business, we believed it was undervalued and had strong data assets along with significant market penetration. We identified several clear cost-saving opportunities in the business as well as areas where we could invest in products to boost revenue growth. We believe that Anthony and the team have successfully implemented many of those strategies. Since our deal, EBITDA has grown, and they have transformed what was a flat revenue business at the time of acquisition into a business with 4.3% organic growth. That said, we are frustrated with the current market valuation of the business. However, we believe the team is on the right track and is taking the right steps to create additional value at D&B.

Got it. Thanks. And then turning to Bournemouth here. They had a really nice season finishing at the mid-level of the table, which is a solid improvement from the prior year. And it seems like your guys' strategy is playing out nicely there. So I wanted to touch on two things here. One, could you just speak to the level of investment you guys expect over the course of the next year and as the club looks to start its new season here shortly? And then maybe after that, at this point, given what the club has done, would you guys consider taking some ownership off the table?

Regarding the first question, we are currently in the transfer window, so the specific capital requirements for the club are still being assessed, particularly given the significance of buying and selling players. We need to finalize the squad composition before we can accurately determine the club's capital needs. Therefore, we will have to delay providing a clear answer. I do expect some level of investment at Bournemouth throughout the season, but the specifics will depend on developments over the next month during the window. As for the possibility of selling ownership, I don’t foresee that happening in the near future unless an exceptional offer comes along. We believe there are many more opportunities to enhance shareholder value at Bournemouth and across Black Knight Football.

Thank you. And we will take our next question from Ian Zaffino with Oppenheimer.

Great. Thank you very much. Maybe on Alight here, like you've said, management change, you got the payroll sales. The potential strategic sale of this, like still something you might consider? I guess the way I think about it is if you look at the TMV news and then you look at this, maybe to take that money and then with that capital, do as you please. Any thoughts there? Thanks.

I'll respond to that in two parts. Regarding a specific sale, as a public company, there is always a daily market price. If individuals are interested, they can reach out directly. When it comes to our overall approach to capital allocation, as highlighted in our earlier remarks, we recognize the need to reallocate capital from some of our public investments to support new investments or to return value to shareholders. Dun & Bradstreet and Alight represent significant holdings for us. Depending on the timing of these decisions, we will need to consider all the various factors involved in capital allocation.

Okay. Thank you. And then I guess the other follow-up would be capital allocation. I guess you're buying back stock but is there a read into that as far as maybe there might not be as many opportunities? Or how do you kind of prioritize buying stock versus returning capital to shareholders? Thanks.

We have returned a significant amount of capital to shareholders in the first two quarters through the tender offer and the dividend. We appreciate implementing the dividend because it provides a consistent return to shareholders every quarter. In the first quarter, we repurchased about 9.7 million shares, which is a substantial amount for us. We're allowing that to settle before assessing our next steps. We believe that reducing the discount involves a strategy that includes returning capital to shareholders through share buybacks and making investments that will enhance net asset value. We think these investments will mainly be in private companies, reallocating capital from public companies to those. We don’t have a specific allocation strategy; it’s more of a case-by-case evaluation based on our investments and how our stock is performing, which will guide our capital allocation decisions. We see it as a blend of both approaches.

Okay. Thank you very much.

Thank you.

Thank you. And we will take our next question from Kenneth Lee with RBC Capital Markets.

Good afternoon. Thank you for taking my question. I have a follow-up on the previous inquiry. I understand you can't share too much about the D&B strategic review. However, if there were a significant opportunity to monetize your public portfolio holdings, would you prefer to return most of that excess cash for stock repurchases or allocate it toward new investments given the current environment? Thank you.

Look, I think we have to think about that when something actually comes up and kind of what is going on. But in general, we believe it's a combination of both kind of the share buybacks and the dividends as well as kind of investments in businesses. So what the percentage allocation is and all of that, I think we'd have to think about that when the situation arises, but it's a combination of those two things.

Got you. Okay. And then for my follow-up, and this one is about the JANA partnership here. More broadly in the context of the partnership. What's sort of the playbook here? What could we expect in terms of a potential transaction or investment going forward? And I realize you can't talk too much about the Rapid7 investment. But is this sort of like we could see potential co-investment where Cannae makes investment in equity along with some other investment firms? Just want to get a better sense of how future investments or transactions could emerge.

Thank you. I believe our capital base is versatile, and the size of the business we consider plays a significant role. Ideally, we would focus on acquisition opportunities, but we are open to other capital solutions as well. Depending on the scale of the opportunity, we might collaborate with various firms, similar to our past partnerships with D&B and other private transactions. The specifics of our strategy will take shape as our partnership evolves, but we rely on JANA's expertise to drive change while using Cannae as a capital source and potential acquisition partner to identify appealing investments.

Got it. Just one last quick question, if I may. Regarding the impairment charge you took for Sightline this quarter, it seems that the specifics driving the impairment were related to a lack of progress in developing a new product. Were there any changing industry conditions or factors affecting potential adoption that also contributed to the impairment? I want to understand this better. Thank you.

I can address that, Ryan. It's somewhat counterintuitive, Ken. The issue is that some of their legacy products weren't gaining the traction they hoped for. While they are working on a new product, the combination of these factors has significantly impacted their cash flow from operations and short-term profitability.

Got you. okay. Helpful. I think that’s it. Thank you very much.

Thanks, Ken, again.

Thank you. And it appears that we have no further questions at this time. I will now turn the call back to Ryan Caswell for closing remarks.

Thank you, operator. To conclude, we have taken significant steps through the first six months of the year to position Cannae for success, which we believe will lead to NAV growth and a narrowing of our share price discount. We remain confident that we are on the right path and are excited with the opportunities that we have in front of us to create value for our shareholders. Thank you again for your time today.

Thank you. This does conclude today's Cannae Holdings second quarter 2024 earnings call. Thank you for your participation. You may disconnect at any time.