Cannae Holdings, Inc. (NYSE:CNNE) Q1 2024 Earnings Call Transcript May 9, 2024

Cannae Holdings, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings Inc. First 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 PM 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.

Jamie Lillis: 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 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.

Bill Foley: 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 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 when appropriate, return 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 three pillars of our strategy. First, I would like to discuss the performance of our two 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 continue to build confidence in hitting their mid-term 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 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 HIG 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 Stephen for more than six 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 3x 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 eventually will 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 Juries have already achieved their highest premiere 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. We're in 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 is an effective use of capital, given the quantity of shares acquired in such a compressed timeframe. 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. We started our share repurchase program, we have repurchased approximately 34% of our common shares outstanding as compared to March 31st 2021, have 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 28th to provide an additional return of capital to our long-term shareholders. We initially will fund the dividends including the one next month through the sale of assets but overtime are looking to make cash flow generative acquisitions. There 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 2.55 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 business share buybacks and the dividend we expect to sell portions of our public holdings. This will all 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 three years. We felt this transaction was accretive for our shareholders, as it will reduce total management expense and further aligns Cannae management with shareholders given the majority of our compensation will now be in Cannae stock.

We believe overtime that this will also drive an increase in Cannae stock price. I'd like to now turn the call over to, Ryan.

Ryan Caswell: 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 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 D&B today, is 3.7 times debt-to-EBITDA which has moved down from four times, one 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 our 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 important step to improving Alight's business model attractiveness to investors and valuation. Lastly, I want to highlight that that Allied Board authorized the repurchase of up to an additional $200 million of the Company's Class A common stock and noted 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 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 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 the league one with two matches remaining and in the current position would be relegated to the lower we 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 F.C., a nearly 150-year-old Scottish Premiership Club based in Edinburgh. Hibernian is sitting in 7th place in the table with three 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 29th, 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 Hawthorne 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, the sidelines is not seeing 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 the 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 state vodka. High Ground has been reviewed and awarded an exceptional 94 out of 100 points by the Beverage Tasting 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 profitably-build businesses where we have knowledge of the sector, relationships with industry executives, and can we add value through our ownerships. 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. I will now turn the call over to Bryan to touch on our financial position.

Bryan Coy: 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 have been restructuring our restaurant group, having closed more than half of the O'Charlie's restaurants to focus resources on the more profitable locations. This restructuring is already producing positive results at store-level operating cash flow as the 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 to 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 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 three 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 shareholders. Our balance sheet and liquidity position remain 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 was $2.1 billion or $33.35 per share, reflecting the completion of our tender offer and returning $222 million to Cannae shareholders.

With that, I will now turn the call back over to the operator to begin our question-and-answer session.

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