Cannae Holdings, Inc. Q3 FY2024 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings Third 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 November 26, 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 and GAAP financial information, is provided in our shareholder letter. I would now like to turn the call over to Ryan.

Thank you Jamie, and good afternoon everyone. On our first call this year, Bill outlined a strategic plan designed to increase the net asset value or NAV of our portfolio and 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 companies that will grow NAV, and returning capital to shareholders. I believe that we are making progress on all fronts and I will highlight a few items relating to each. As I did last quarter, I will then discuss the results of several of our portfolio companies in more detail. We are working to rebalance our portfolio away from some of our public company investments and into new private companies’ investments. As part of this strategy in October, we announced the acquisition of a 53% stake in the Watkins Company. Watkins was founded over 150 years ago and has a strong market position and brand recognition within the fragmented spices, seasoning, and extracts category, one of the highest growth categories within the overall U.S. Food industry. We are excited about the deal structure as the existing owner, one of only two owners in the history of the company, is partnering with us and will own approximately 40% of the business. Additionally, we are partnering with KDSA, an investment firm focused on founder-led and family-owned businesses in the food and beverage sectors. We believe the company has a substantial opportunity to grow distribution across existing and new retailers, expand into other ancillary products, and could be an attractive platform for future acquisitions, all of which will accelerate the company's growth and profitability. Furthermore, we believe this business will provide cash flow to Cannae through preferred dividends and equity distributions. As part of our portfolio rebalancing, we sold the final shares held in Dayforce this quarter. This concludes an incredibly successful investment for Cannae from first investing in Dayforce, then known as Ceridian, 17 years ago when it was a large service bureau-based business. Over the years we applied our playbook to improve the company's management and operations, conduct accretive M&A, and drive synergies and efficiencies across the business. We sold COM data in 2014 and subsequently IPO'd the remaining business in 2018. Since that time, Cannae has sold 37 million shares of Dayforce, realizing 2.8 billion from the sale of those shares and distributions. I would like to thank Dave Ossip and his entire management team for all the success and partnership over the years. I now want to spend a few minutes discussing how we are improving the value of our portfolio companies as it relates to Black Knight Football. We continue to invest time and capital into building out Black Knight Football and although still early in the investment cycle, we believe we are starting to see the impact of these actions on value creation. As we discussed previously, last season AFC Bournemouth achieved their highest Premier League point total in the 125 year history of the club. We also noted on previous calls that we believed our capital investment in players was starting to create valuable player assets and this came to fruition with the sale of Dominic Solanke to Tottenham for up to £65 million or $84 million. First off, I want to thank Dom for all of his achievements in Bournemouth and wish him continued success as he moves on in his career. Dom's transfer is the largest in the Cherries history and the second largest in the Premier League during the summer transfer window. More importantly, despite the sale of one of our best players, we continue to have success on the field. The team currently sits in 12th place in the Premier League but only three points or one win from seventh and recently beat Manchester City, the previous Premier League champion, for the first time in Bournemouth's history and it was Man City's first defeat in their last 32 Premier League matches. We believe this, in conjunction with our activity across the other Black Knight Clubs, is evidence that our actions are building a valuable platform, teams, and brands within global football which should create value for our shareholders. Lastly, we have returned significant capital to our shareholders this year. Through the third quarter, we have returned 243 million of capital to our shareholders through a combination of share buybacks and dividends. In December, we will pay a third quarterly dividend of $0.12 per share, which provides a consistent capital return to our shareholders as we continue to execute our strategic plan with the goal of increasing our share price. I will now spend a few minutes on updates on some of our portfolio companies. First to D&B. The company posted revenue of $609 million, representing constant currency organic growth of 3.4% over the prior year's third quarter and 3.9% constant currency growth year-to-date. Adjusted EBITDA was $247 million for the third quarter, representing growth of 5.1% over the prior year's third quarter. The adjusted EBITDA margin also expanded 60 basis points to 40.6% and free cash flow conversion continued to improve. Net leverage was maintained at 3.7 times and the team expects that to be down to 3.5 times by year-end. Anthony Jabbour also noted on D&B's third quarter call that the Board continues to work with their advisors to evaluate inquiries received from both strategic and financial buyers. Beyond that, we will not provide further comment today on D&B's potential strategic alternatives. Moving to Alight, my financial discussion will focus on the continuing business given Alight closed on its $1.2 billion sale of its per professional services segment and payroll and HCM outsourcing in July of 2024. The continuing business total revenue was $555 million for the third quarter 2024, down 0.4% from 2023. Adjusted EBITDA was $118 million for the third quarter, a 3.5% increase from 2023. Adjusted operating cash flow for the nine months was $199 million, or 53% of adjusted EBITDA. Furthermore, Alight's net leverage was 2.9 times, which reflects a $740 million paydown in conjunction with the sale of the business noted above. Alight also announced it would begin paying a $0.04 per share quarterly dividend. We believe Alight's remaining business will be more attractive to public shareholders given the higher percentage of recurring revenue, higher EBITDA margins, better cash flow conversion with lower leverage, and now a quarterly dividend. Computer Services or CSI continues to perform well. After posting a record number of core banking deals in 2024, the company has now generated record growth in the first half of fiscal year 2025. The company has also been an effective acquirer. In the prior fiscal year, CSI acquired loan origination software provider Hawthorn River, and has already increased Hawthorn River's customer base, expanded its software seat, and secured new core deals. This year, CSI announced the acquisition of Velocity Solutions, which currently services more than 30 million consumers and business owners, and CSI is optimistic about the prospects of that business. We continue to work with JANA Partners on situations involving undervalued public companies where there is a specific catalyst to unlock value, and Cannae can participate in that catalyst as either an acquirer or capital solution. While nothing concrete to report yet, we are extremely pleased with the partnership to date and optimistic about its process and prospects. JANA has also seen strong underlying business performance since our investments. Lastly, I will spend a little more time on Watkins' financial profile and deal structure. During the last 12 months, the company generated about 75 million of net sales and has historical revenue growth in the mid-to-high single digits and strong EBITDA margins and free cash flow. Cannae invested $80 million to acquire approximately 53% of Watkins on a fully diluted basis, including $20 million structured as a convertible preferred investment with an 8% annual dividend. The deal was also financed with $56 million of debt. We believe that our stake was acquired at an attractive valuation given the growth profile, the growth margin, and cash flow profile of the business when compared to public comparables and precedent M&A transactions. Going forward, we believe this business will provide cash to the holding company. In conclusion, we are optimistic about our portfolio companies and will continue to look for new investments that will grow NAV. I'll now turn the call over to Bryan to touch on our financial position.

Thanks Ryan. Cannae's third quarter 2024 total revenues were $114 million compared to $144 million in the prior year, primarily comprising our restaurant revenues. The change in revenues is largely in line with the reduction of store locations as the 2024 third quarter results reflect 35 fewer locations than the comparable period in 2023. Our restaurant brands continue to work hard on improving guest traffic and growing revenue, including a focus on value-oriented bundling and price reductions, particularly at our O'Charley's locations. While the third quarter was tough across the casual dining industry from a guest count perspective, we are starting to see guest counts improve through the first few weeks of the fourth quarter with the strategy of targeted offerings. Third quarter 2024 operating expenses were $132 million, down 33% from the prior year quarter driven by restaurant items and lower external manager fees. The cost of restaurant revenue in the current year quarter was $93 million, which is a 20% decrease from the 2023 quarter, attributable to the lower locations. The cost of restaurant revenue was higher as a percentage of restaurant revenue by a few percentage points due to the bundling and pricing activities. The guest count strategies discussed above are having the intended effect of increasing traffic but have also increased interim margin performance. As the cost of restaurant revenue contains certain fixed components such as rent and management labor, we believe this can be offset when the other cost rationalization measures that we've implemented are realized in the first half of 2025. The team has also identified other cost efficiencies in the supply chain, our menu offerings, and brand support. While we are not where we want to be from a growth and profitability perspective at Restaurant Group, we're encouraged by what we're seeing in the dedication from the team members. Separately, the 2023 third quarter also included $31 million of non-cash charges that were related to locations and lease agreements closed. Finally, the fees to the external manager were $3.7 million in this year's third quarter, approximately $6 million lower than the nearly $10 million in the prior year as a result of the amended management agreement and wind down schedule. Lastly, Cannae recorded $23 million and recognized gains for the third quarter 2024 compared to $130 million of losses in the prior year. The 2024 net gains were primarily non-cash fair value pickups relating to Dayforce and Paysafe shares, while the prior year losses were non-cash impairments of System 1 and Sightline. One post-quarter item that we wanted to flag was with regard to Sightline payments. While senior management has been rationalizing their cost and employee base while concurrently advancing the development of its embedded banking product and looking for additional capital, the company faces a challenging liquidity situation post-quarter end. As a result, in the fourth quarter, we wrote off the remaining book value recorded for Sightline, and this is reflected in the sum of the parts table published today. Going forward, Cannae's balance sheet and liquidity position remain solid following the Watkins transaction and additional investments in Black Knight Football. Cannae has 40 million in corporate cash today, 49 million of capacity in our margin loan, and holds listed securities with a gross fair value in excess of $1.4 billion. With regard to leverage, Cannae has $101 million outstanding on our margin loan and $60 million under our FNF note that matures near the end of next year. At our close today, Cannae's aggregate net asset value was $2.1 billion or $34.29 per Cannae's shares. That means today's closing price of $21.63 represents a 37% discount to its intrinsic value. With that, I'll now turn the call back to the operator to begin our question and answer session.

The first question comes from Kenneth Lee from RBC Capital Markets. Please go ahead.

Hey, good afternoon and thanks for taking my question. Just the first one on BKFC. What's sort of the outlook for additional capital or investments for BKFC? And could you perhaps just give us a little bit more detail in terms of any near-term outlook in terms of investments such as physical plan, CapEx, or player acquisitions? Thanks.

Thank you for the question, Ken. The transfer windows are key for player acquisitions and sales, with the next one happening in January. We don't anticipate needing any capital before that, but we'll have a clearer picture of the budget for the rest of the year at that point. There may be some capital investment needed for the latter half of the year, but we won't know for sure until the transfer window closes. Regarding capital expenditures, we're nearing completion, particularly at Bournemouth with the training facility we've mentioned previously. We expect that to be operational around February. This is our primary capital expenditure at the moment. We're also considering a stadium for the future, but that's a longer-term project, and we'll provide more updates as we have more information on that.

Got you. Very helpful there. And just one on the JANA Partnership. Looks like there was nothing to report there, but just wanted to get a little bit more color around the outlook for potential private investments. What are you seeing in your pipeline there? And do you see a potential acceleration in terms of potential transactions, especially given the current macro backdrop? Thanks.

Thank you, Ken. We are having positive discussions with the JANA team about potential partnership opportunities. Once we identify an opportunity, it will require some time to develop. Therefore, I don't anticipate any immediate updates in the next few months, but we are very enthusiastic and hopeful about this relationship. We believe that combining their expertise with our capital can reveal some attractive situations for Cannae's shareholders.

Got you. If I could just squeeze one more in. Just relatedly, if there were to be any kind of new private investments with that partnership, what kind of financing sources or capital sources could you look? Would you consider ever raising equity capital as part of the options there? Thanks.

Okay. Yes, no problem. I think the most obvious places that we would look to create capital for new investments are through the sale of our public securities. We've talked about transitioning out of those public securities into private investments. So that would be option number one. We could potentially look for some other debt financing. I do not believe, especially at the current prices, that we would be looking to do any form of equity offering, if that's what you were referring to, as capital. We would initially, we'd be looking to redeploy capital from our public investments into whatever new investments we find.

Got you. Thank you very much there.

The next question comes from John Campbell from Stephens. Please go ahead.

Hey, guys good afternoon. Ryan just going back to the strategic focus on shifting away from the private portfolio. You guys have made steady progress over the last probably year or so. I'm curious about your sense of urgency there. Obviously, you've got the DMV development. You're not going to comment on that. But on the other public investments, I'm thinking mainly where you've got sizable ownership, you've got fundamentals that seem to be kind of on better footing. I think Alight is probably the shining example there. But if you can't get the public markets to recognize the value, at what point do you feel compelled to push for a strategic sale? And it doesn't have to be just a light, but of any of the entities.

Look, I think a strategic sale of any of those is obviously up to the board of that entity. So I believe that we're going to think about it just more in terms of what are the near-term investment opportunities that we have and how do we get liquidity through the securities that we own? Right. And so, we may start selling down certain public positions to create liquidity for Cannae. But in terms of full company sales or things like that, we obviously believe they're attractive businesses. But that question is much better directed at the boards and the management teams of those businesses.

Okay, fair enough. I guess you'll still get a Christmas card from them this year. On the Black Knight football investment obviously you guys have the momentum going. I think that's really clear to see at Bournemouth. But within the Cannae stock, I just don't think you're getting any credit for that value you've created. It's probably too small to do a whole lot with right now. It doesn't seem like Bill's going to really look to monetize that anytime soon. So, I mean, a couple of these international clubs do have stocks, publicly traded stocks. So I'm just curious if there's a way or if you've explored a way to create a tracking stock or maybe spin out a portion of that value so we can get a public market value and tie it back to Cannae.

I believe that's a great idea, John. We are considering various methods to create or recognize value for our securities. While I’m not sure if a tracking stock is the solution, we share your thoughts. Our goal is to find a way to represent the company's value, whether through external investment, a tracking stock, or other means. Identifying ways to showcase the value we are generating will benefit both the business and Cannae stock.

Yes, agreed there. And then last one for me, just want to circle back on the $0.12 quarterly dividend, just how you're feeling about the sustainability of that level of commitment and then how much of that you're able to actually source through free cash flow versus kind of dipping into the capital pool.

Yes, so right now we are dipping into the capital pool. We do believe it's sustainable. I think one of the interesting things around Watkins, we've also talked about some of the stuff we're doing around the restaurant group. We are starting to get some businesses that are producing cash flow for the holding company of Cannae. And the goal is to get enough of those that it fully covers the dividend. And so that we're not dipping into our capital pool, but that will be a progression. And so today, again, we're dipping into the capital pool, but hopefully six months, 12 months from today will be dipping much less.

So. Okay, that makes sense. Thanks, guys.

Thank you.

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

Hi, thank you very much, guys. I wanted to ask you on kind of philosophy on the portfolio construction, right? When you're going to the market and you're looking for deals or deals come to you, what deal size are you kind of looking at? If you had your wish, how many positions would you have? How large would they be? And I just think I kind of look at the sum of the parts. Thanks, Bryan, for updating this. It's just kind of all over the place. You have things that are worth less than a dollar per share, and I just don't see the focus here. And so maybe you can kind of help me understand, what are you trying to achieve as far as position size, number of positions, etcetera. Thanks.

Thanks for the question. I believe there are some significant positions in our portfolio. Some are due to the capital we've invested, while others have appreciated in value. Looking ahead, I anticipate that investment sizes will be in the range of over 100 million. We invested 80 million in Watkins, which seems like a good benchmark. I do expect to consider larger investments, but I don't anticipate pursuing the larger deals we have in the past. I think we will continue to focus on smaller-scale investments compared to those historical deals, considering our current capital base.

Okay, so I guess to kind of define what you said, maybe 20, 25 positions, something along those lines.

Yes, it's probably less than that, but I think you just did kind of the. At 100, I think it's called 100 to 300 million type positions. So it'll be. I think it'll be less securities than that. And obviously all of that's dependent on our ability to sell down some of the bigger positions that we have and reinvest that capital.

Okay, thanks. And then also on the football side, can you talk about maybe some of the synergies you're seeing there between the teams' desire to get bigger there, maybe talk about some of the improved performance, I guess maybe both on and off the field. Thanks.

Yes, thanks, Ian. We have been focusing on fostering more synergies within the holding company, both in football and commercial aspects. As we announced on our last call, we hired Tim Bezbatchenko as the President of Black Knight Football. Under his leadership, we have begun hiring additional team members and developing specific recruiting, commercial, and sporting performance processes to take advantage of our expertise and best practices across the business. We see significant opportunities in this area and believe we are only starting to explore them. A key focus will be on player acquisition, creating various teams with different player purchase prices that we can effectively integrate into our system. We are in the early stages of this endeavor, but we are dedicating considerable time to ensure it becomes a real competitive advantage for our clubs.

All right, thank you very much.

Thanks.

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

Thank you, operator. We will continue to work hard to drive value for our shareholders and look forward to speaking with you again on our fourth quarter 2024 earnings call. Thank you again for your time today.

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