Cannae Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 8 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Inc. 3rd Quarter 2023 Financial Results Conference Call. During today's presentation, all parties will be in a listen only mode. Following the company's brief 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.

Operator

M. Eastern Time on November 14, 2023. With that, I would like to turn the call over to Jamie Lillis of Solberry Communications. Please go ahead.

Speaker 1

Thank you, operator, and all of you for joining us this afternoon. On the call today, we have our Chief Executive Officer, Rick Massey Cannae's President, Brian Caswell and Brian Coy, our Chief Financial Officer. Before we begin, I would like to remind listeners that this conference call and the Q and 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 For 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.

Speaker 1

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 that the GAAP financial information is provided in our shareholder letter.

Speaker 1

I would now like to turn the call over to Cannae's CEO, Rick Massey.

Speaker 2

Hey, thanks Jamie, and thanks everyone for joining us on our Q3 conference call. As Jim, you mentioned Brian Coyer, CFO Brian Caswell, our President. They're both here with me. I want to remind you that We file online 2 things, one of which is our shareholder letter, which we filed about half an hour ago, hour ago or so. That's got a much more detailed discussion of our various portfolio companies, cash position, etcetera.

Speaker 2

And secondly, we have we filed a Brian dutifully files some of the parts, Which essentially is our net asset value per investment and then broken down on a per share basis per Canacchere basis, We do that on a monthly basis. So, if you if that's right? Yes. Yes. So we, those I recommend You check-in on those, you'll get really more than I can tell you on this short phone call.

Speaker 2

So I'll be brief since all that information is out there public. We still believe that stock is our our own stock is our best investment With our precious capital, we as you may have noted from our shareholder letter, our buyback authority was replenished By our Board a couple of weeks ago. And so we have over well over 10,000,000 shares of Authority. We bought back 2,700,000 shares in the 3rd quarter, which Turns out to be about roughly 4% of the company in that 3 month period of time. And since we started our little journey on buybacks, we bought back almost a quarter of the company And with about $500,000,000 and we have no reason to discontinue that operation.

Speaker 2

As I said, everything Based on what we see out there, we don't see anything better than buying back our own stock. It's hard to turn down a double, essentially on liquidation value With your that hits you, that's there instantly. I'll just mention a couple, 3 portfolio companies In alphabetical order, Alight had a really, really good quarter, 8.4% revenue growth, Which excited the market. The 26% BPaaS growth, that's There's sort of comprehensive enterprise offering that is really selling well and providing increasing margins to Alight. For those of you who are cash flow nerds like me, the most promising and encouraging news out of Alight was They spiked their they grew their EBITDA margin by about 175 basis points To nearly 20%, which is really good and in my opinion, and they blew it out on cash flow.

Speaker 2

Their cash flow was a multiple of cash flow over the corresponding quarter. So they're finally getting the benefit of this Restructuring that they're doing and the automation that's embedded within the movement of Employees from call centers to mobile. Stephane mentioned on his earnings call That he in the Q and A, he mentioned that they were able to they're handling 100 of 1000 more, I don't recall the precise number, 100 of 1000, maybe a 1000000 more employees During this enrollment period and yet the number of calls and the number of call center people is flat. Their mobile uptake has tripled over the past year over last year's Enrollment period. So this is right up the plan.

Speaker 2

You're starting to see the benefits of automation. The company's humming. The stock is way depressed, not for any reason other than the fact that there is a lot of PE overhang. And when that Certain private equity firm has sold. They've sold it.

Speaker 2

They've really trashed the stock afterwards. We don't know where they are. They've gone off the board. They don't report their ownership anymore. They're Below 10%, but we are certainly hoping that there we see some excess volume there.

Speaker 2

So we're hoping that That's them moving out of the stock and maybe they'll be out shortly. DNB is another one that's woefully undervalued. This morning, I did the math. They're trading at about a 40% discount to peer multiples. Despite the fact that they're growing In line with peers and revenue wise, they grew 5.8% on an before FX Basis and the 3rd quarter revenues over Q3 of 2022.

Speaker 2

And their margin expanded a little bit, And they are able to delever a little bit. So they have They do have a little bit too much leverage. We ought to be thinking about strategies to reduce that as we and Allied has a little bit too much leverage. And we're thinking about trying to come up with some strategies to help delever those businesses. That we think will help.

Speaker 2

At least it will give them some Buyback power. So, Just knocked it out of park for the Q3. I'll just note that UBS, I just was handed a report. UBS Just picked up both I got it right here. Just picked up Kevin Gervais, who was covering Alight at CS moved to UBS and just initiated on Alight and Ceridian $10 price target on A light and an $87 price target on Ceridian.

Speaker 2

So, obviously pretty bullish on those. I'm going to turn it over to Brian to talk about a handful of things.

Speaker 3

Sure. Wanted to briefly, Massey referred to what we put out there monthly Just to demonstrate the discount in our net asset value, we started the year with an aggregate net asset value of $2,700,000,000 Which was about a 43% discount where our stock was at the time. We were trading at $2,065 And as of today, we're still at A $2,300,000,000 aggregate net asset value against our stock price of $17.80 so that comes out To $3,179 intrinsic value for Cannae shares or 44% discount. So the discount has remained rather steady. That's why we have been dutifully continuing to buy our shares down month after month after month That you'll notice a little bit of a decrease in that aggregate fair value reflecting some of that we've sold off 20% another 20% of our Sheridian shares.

Speaker 3

We've taken a couple of hits on fair marks. System 1, Dun and Bradstreet, Alight, Stridean, all those are fair valued every month in there and tied to the stock price. This month in particular, we even took a further write down for book on System 1 reflecting the market's opinion of the stock at the time. And we also took a rather large mark on Sightline. I'll talk about that one briefly.

Speaker 3

We discussed on our Q2 earnings call that Sightline's had a lot of challenges Lately ease in sign up for the act, acceptance rates from processors, product rollout has definitely been slower than anticipated, Acceptance and rollout to other major strip operators, all those have kind of factored into a lot of their challenges. And in late Q3, we further questioned their plans and timings and as a result engaged a third party firm to prepare evaluation That resulting valuation range was well below Cannae's recorded book value as well as the fair value mark from a third party investor that From late 2022. And accordingly, we recorded about a $70,000,000 impairment to its book value and reduced the fair value by another 100 $7,000,000 on some of the parts. So the fact that we're still holding at $2,300,000,000 and a 44% discount has been pretty steady and Validates us continuing to buy our own stock.

Speaker 2

Ryan? I'll turn it over to Ryan.

Speaker 4

Yes. I'll just quickly touch on Black Knight Football, we've continued to make good progress over the quarter. Year to date, Commercial revenues are up about 30% year over year, which shows what Jim and some of the new hires have been doing To both increase the sponsorship, increase hospitality, increase ticketing, that's positive. We also invested And some players, as well as re sign some of our kind of top players to keep the kind of the contract value and And the financial value of those players over time. Lastly, we did raise a little bit of capital at Black Knight.

Speaker 4

Cannae contributed about 25,000,000 We had 3rd parties in the remainder. So it's about we raised a little over $60,000,000 in the quarter.

Speaker 2

With that, we'll operator, we'll turn it over to questions.

Operator

And the first question comes from Ian Zaffino of Oppenheimer. Please go ahead.

Speaker 5

Hi. Thank you very much. Great detail. Thank you. You got it, guys.

Speaker 5

So I wanted to ask you as far as just kind of philosophy here of the company. Are we going to see new investments on the horizon or what's kind of your thoughts on investments Maybe selling down DNB given kind of how big it is in your portfolio. And at what point does it maybe make sense to just kind of Collapse the structure here instead of just this buying back shares, buying back shares,

Speaker 6

how

Speaker 5

does this return everything to shareholders?

Speaker 2

Okay. Great questions all. I'll see if I can deal with those generally. As I said, we are not if I haven't said this, I'll say it today, we're not actively looking Nor have we been shown any interesting investments. We're not actively looking for investments.

Speaker 2

We are on a path to buyback our shares within the amounts within the limits Provided by law.

Speaker 5

The

Speaker 2

and yes, you could say We it would be stupid and probably not even legal for us to telegraph what we're going to do with our publicly traded Portfolio Companies and our ownership there, but there are shares That we own that are below basis, so far below our basis that we'll never catch up And those would make really nice tax harvesting structure Offsets, as well as giving us some cash to do more buybacks. So I'll let you go do the math On our portfolio, but I don't think I should get in much more detail about that. As to the collapsing of the structure and so forth, a, it's Very tax inefficient to do it that way. And a couple of reasons for that. The main reason being that if we buy back more than a certain number of shares, Then we lose the availability of our capital loss carry forwards and carrybacks.

Speaker 2

And so theoretically, we could take some capital losses today and reach back to prior periods and we're thinking about this, Reach back to prior periods and get a refund for taxes that we paid in prior years. If we were to have bought back over a 3 year period a control of the company, Dan, we the availability of those carry forwards are they're not going to be available to be severely limited. That we are a C Corp. So we those losses are important to avoiding sort of a double tax On distribution of assets. So we can't go a lot faster than we're going And preserve these very valuable tax assets.

Speaker 2

So except over time, Our ability to buy is volume limited. Our daily volume can increase as we buy back more. It sort of snowballs And we'll be able to accelerate our buybacks as we continue to do this. I think our it's 25% of our average daily trading volume. Our average daily trading volume is about 425,000 shares ish.

Speaker 2

So and We know over time we know we plan on it creeping up. So does that makes does it any of that makes sense? We've had quite a few people come say why don't you just liquidate Distribut the proceeds, well, that's taxable to you. That's the main reason. And it could be taxable to us if we liquidate So we at least would like to not have a gain on the corporate on the C Corp side.

Speaker 2

So hopefully that makes sense.

Speaker 5

Yes. And then as far as maybe even raising more cash for even more buybacks, do you think about O'Charley and 99?

Speaker 2

We think about Bring Us A Bed. If you would love for Oppenheimer to be in the restaurant business, So I don't mean to be cute about it. We've 99 is an Okay restaurant chain. O'Charley's drinks cash. We're in a workout Sort of mode to get down to a small number of restaurants that are going to generate cash and we're going Sell all our fee property if we haven't already sold it, get out of a bunch of leases.

Speaker 2

But If you look around, there aren't there's not a lot of M and A going on in restaurants, and consumer discretionary in general. So we'd love to get a bid. We've actually entertained a few, got a little bit down the road. There have been a couple of Kind of roll up, I don't know if you call it, just very acquisitive companies that they're buying brands, they're not doing it anymore. So, yes, look, we tried to sell our System 1, but it's just there's not a market in it.

Speaker 2

We're looking for cash in every possible spot.

Speaker 5

Okay. I guess it's just one more. We're talking about Charlie. What kind of EBITDA do you think that could eventually Generate or how do we actually Post

Speaker 2

restructuring, what would

Speaker 5

that be?

Speaker 3

Post restructuring, I think Ian, this is Brian. I mean post restructuring the combined restaurant group can do $15,000,000 $20,000,000 a year annualized after You've gotten out of all these negative cash flow.

Speaker 2

That includes 99.

Speaker 3

Yes, that includes 99. That's the whole group. I mean, they closed Including a couple of 1 offs for 99, they've closed almost 80 stores in the last year and most of them were the negative cash flow ones. So They've done a lot of work rationalizing that to get out of the real stinkers and get that into the ones that are performing better.

Speaker 5

All right, great. Thank you very much. I appreciate that.

Speaker 2

Thank you, Heath. Good questions.

Operator

Next question comes from Kenneth Lee of RBC Capital Markets. Please go ahead.

Speaker 2

Hi, Ken.

Speaker 7

Hey, how's everyone doing? Thanks for taking my question.

Speaker 6

Sure.

Speaker 7

In terms of The book value impairment for System 1, could you just get into a little further detail in terms of what that was based on? Was Simply based on the share price trading below a certain level, just wanted to see what triggered that? Thanks.

Speaker 3

Sure. Hey, Ken, this is Brian. It was a Prolonged market value below where our recorded book value was, we usually will take down our investment our equity method investment By the amount of their losses each quarter, but the market actually put a lower value on it than we had even in losses. So We mark all of our public ones effectively. If they get below our book value for an extended period of time, we end up taking a non cash impairment charge To bring them down to the aggregate market value of our investments.

Speaker 2

We did that with Paysafe.

Speaker 3

Yes, we did that with Paysafe a couple of times in the past as well.

Speaker 7

Okay, okay. Got you. Very helpful there. And then in terms of the Private investment valuations, as you look across the rest of the portfolio and it looks as if you did some third party valuation For the Sightline investment, how do you think about the rest of the private investments and their valuations? Thanks.

Speaker 3

I don't think there's anything in there that we're not comfortable with, Ken. The numbers are not very big. As you can tell by the sum of the parts, I think The cost and value of everything else is sitting in the $50,000,000 range and that's made up of about half dozen or so smaller investments. The only other one we have talked about like Mendon Mill that was $50,000,000 We just got into that one. So I think that one's going to definitely

Speaker 2

be We paid a third of We paid a third of liquidation value for Mendon. So that it was sort of an exception to the we don't see a better deal out there because It was just such a screaming purchase. And CSI is $84,000,000 investment. We're not in the lead on that. It's doing well, growing about 8% or 9% top line, Expanding margins, doing all the stuff you'd expect a Frank Martiri run company to do, that's going to do fine.

Speaker 2

But there's no liquidity event for that. We just bought it last, what, summer a year and a half ago. Yes. Year and a half ago.

Speaker 7

Got you. Very helpful there. And then just one follow-up. I think in the prepared remarks, You briefly mentioned that there was a $25,000,000 capital raise for BKFE, where can I participate? Could you just talk a little bit more about What the capital raise was for and the potential longer term outlook for that?

Speaker 7

Thanks.

Speaker 4

Yes. So we raised about $62,000,000 for BKFE, about $25,000,000 of that was Cannae. It was There were some incremental opportunities to acquire some players as well as some opportunistic So we brought in Ryan Sports Ventures, who's an institutional investor that owns other And we think they can be helpful as a longer term partner. So this was so it was a bit we got some additional players that we weren't that I'd say kind of were a little bit outside Where we thought as well as we want opportunistic capital for the business going forward.

Speaker 7

Got you. Got you. And if I could just follow-up on that one. Remind me again in terms of the for AFC Bournemouth, When it comes to the transfer budget, is the source of the funding From BKFE, just wanted to get a little bit more details around that. Thanks.

Speaker 4

It's a mix of basically being funded with the operating revenues of the business And then in certain instances, we may put in additional capital to try and fund Incremental play or additional players. So it's kind of a mix. I think going forward, we hope That it will be it will all be funded internally, as we start to sell some players. But, today, it's kind of a mix of revenue from the business As well as kind of what I'll call HoldCo Capital.

Speaker 7

Got you. Very helpful there. Thanks again.

Speaker 2

Thank you, Ken. Good questions.

Operator

And our next question will come from John Campbell of Stephens Bank. Please go ahead.

Speaker 6

Hey, John. Hey, guys. Good afternoon. Good afternoon to you. Thank you.

Speaker 6

Rick, thanks for all the details on the buybacks. It sounds like you guys have definitely done all of your homework. You know exactly what you can and can't do. So no more questions there for us. We'll leave it at buybacks just basically continue to be a major focus for you guys.

Speaker 6

I think it's probably a fair statement. But on

Speaker 2

Let me just say, so at some point, our volume limits Are going to permit us to buy back. So let me just do some rough math and I'm not making promises, but if we were to buy back Our maximum, which would be roughly 100,000 shares a day 200,000 20,000,000 say 200 trading days a year, which is probably a little high. You'd call it 20,000,000 Shares, I mean that gets you down to $50,000,000 and continuing down our buybacks, You're going to buy back maybe 10% a quarter, if you keep those volume levels up. So Ian asked earlier, can you go faster? If we keep going down this path, we're going to go faster.

Speaker 2

Right.

Speaker 6

Makes a lot of sense. I mean, it seems like, I mean, I remember the commentary from Foley at your Investor Day 2 years ago, You

Speaker 5

buy it back from the

Speaker 6

last year? Buy it back from the last year. Right, right. Sounds like you guys are kind of living up to that for sure. But on Bournemouth, Just looking at the season thus far, I'm curious if you guys are starting to see the benefits from any of the operational improvements you guys have put in place.

Speaker 6

And Ryan, I know you talked To the overall BKFE revenues being up 30%. So maybe if you could isolate Bournemouth maybe in terms of, I don't know what the key metrics are, if it's revenue per match, average attendance, Sponsorships, whatever you guys kind of look at, how are those metrics trending for you guys?

Speaker 4

Yes. So the I think on the business side and the commercial side, we've done really well. I think we are as we've talked about before, we're a bit constrained by just overall But Jim and the team have done a great job of increasing, I'd say the three things are there's ticketing, There is what I'll call hospitality and then there is basically kind of broader sponsorship and commercial. And so in each of those categories, we're up a good amount. In ticketing, we're up probably north of 10%.

Speaker 4

And that's just on you obviously can't stadium is a fixed size, so that's just on price increases. On hospitality, I would guess we're probably up close to 40% there. That's a combination of both Price increases as well as converting parts of the stadiums that were non revenue generating areas to revenue generating areas And in sponsorship, we're up a similar amount. And that's really from both Pushing price on the existing sponsors, as well as basically going out and finding new sponsors. They've changed the model around How they're looking at the regional sponsors versus more of national or international sponsors and where they're getting signage within the stadium.

Speaker 4

So the team has done a really good job around all of that. So we're very happy there. And so we feel good about that part of the business and we'll look We hope that the on field performance follows suit.

Speaker 6

Okay. That's helpful. And then you're kind of balancing, Almost tipping the line on majority investment there, 48% now. Moving forward, I don't know if you guys have pinned Or pegged out kind of investment cycle or if you're looking to inject further capital over the next couple of years. But Are we assuming that are you guys assuming that you'll continue to have a minority position anytime you raise from here, you'll do it alongside others and you'll kind of keep that minority position?

Speaker 2

No, we're not planning on retaining this percentage necessarily. It's not hardcoded. And not that we're not sure there'd be any there'll be any more need.

Speaker 6

Okay.

Speaker 2

And We went into this with sort of a 5 to 7 year Investment horizon. So we're still pretty early on in it, but our theory was That we would run it, we would get it, we would improve it, we'd run it and we'd sell it.

Speaker 6

Okay. That's very helpful. Keep up the great work. Thanks, guys.

Speaker 2

Thanks, John. Great questions.

Operator

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

Speaker 2

Thanks a lot for joining our call. You're all welcome to set up a side call with Brian, Ryan, me, any of the above In the subsequent days, we have quite a few calls lined up, but we could always take a few more. So feel free to reach out to us.

Operator

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

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Key Takeaways

  • Share repurchases: Q3 buybacks of 2.7 million shares (≈4% of the company) and nearly $500 million deployed since inception, with board approval for over 10 million more shares.
  • NAV discount: Aggregate net asset value stands at $2.3 billion versus a $17.80 share price, implying a 44% discount that underpins the ongoing buyback strategy.
  • Alight performance: Q3 revenue grew 8.4% with 26% BPaaS growth, a 175 bps EBITDA margin expansion to nearly 20%, and cash flow more than doubled year-over-year.
  • Dun & Bradstreet valuation: Despite 5.8% revenue growth and margin improvement, shares trade at a 40% discount to peers, leading to discussions on deleveraging strategies.
  • Impairment charges: Noncash write-downs taken on System1/Ceridian positions after prolonged share price weakness and a $70 million impairment plus $107 million fair value reduction at Sightline due to slower rollout expectations.
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Earnings Conference Call
Cannae Q3 2023
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