Cannae - Q2 2024

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to the Cannae Holdings, Inc.'s 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 15th of 2024. With that, I would like to turn the call over to Jamie Lillis of Solebury Strategic Communications. Please go ahead.

Jamie Lillis (Managing Director of Investor Relations)

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. 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.

Ryan Caswell (President)

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 either 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 bases, which we believe will maximize cash flow and increase their valuation and Cannae's NAV. Unfortunately, not all of our portfolio companies performed to expectation, and during the second quarter, we took a $141 million impairment on the book value of our Sightline investment.

Sightline has been unable to get the expected market adoption on its key products, and while management remains optimistic about the future, we believe that given the results to date and 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, and 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 30th, 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, and which is an acceleration as compared to 3.9% organic growth in the prior year second quarter, and the fourth consecutive quarter of single-digit growth.

The company generated 5.7% growth in adjusted EBITDA in the second quarter, which equated to $218 million at a 37.8% margin, up 60 basis points as compared to the year ago second quarter. Leverage at D&B today has moved down to 3.7x, and management expects to be at 3.5x 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 advisors 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 a 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 of 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 2.8x. 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 a 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. 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 $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 also translating to revenue growth for AFC Bournemouth, as revenue for the 12 months ended June 30th, 2024, grew to approximately $203 million, a 19% increase from the $170 million in the corresponding period ended June 30th, 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 result, 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 of FC Lorient contemplated this potential scenario, and our valuation for the remaining stake is reduced while the team is in Ligue 2. Hibernian FC, in which we have a 25% interest, 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 of 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 4+ 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 2x that of the prior year's 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.

Bryan Coy (CFO)

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 2023. A 280 basis point improvement resulting from the reduction of 4-wall or on-site costs. The remainder of operating expenses comprise personnel costs, depreciation, and other operating expenses.

These expenses, which include the restaurant and the real estate business as well as Cannae Corporate, increased $4.8 million in the aggregate, or approximately 11% quarter-over-quarter. The drivers for this increase include an ISIP 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 reduction 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 relate 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 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 forecasts, 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 Sightline management team. Cannae's balance sheet and liquidity position remain solid.

Since March 31st, we've sold 1 million shares of Dayforce for gross proceeds of $57 million. And now 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.

Operator (participant)

Thank you. And at this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star and two. And we will pause for a moment to allow questions to queue. And we will take our first question from John Campbell with Stephens.

Jonathan Bass (Equity Research Associate)

Hey, guys, it's Jonathan Bass on for John. Thanks for taking my questions. So, you know, 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, you know, why you guys view the valuation as so steeply discounted here. Thanks.

Ryan Caswell (President)

You know, what, so I get the thesis when we made the investment or to kind of how we view valuation today? I'm not— Is that— What are you trying to get at? I apologize.

Jonathan Bass (Equity Research Associate)

Yeah, that's right. Just what your thesis was when you got into D&B and, you know, maybe just why-- not why, maybe just your thesis if you could.

Ryan Caswell (President)

Yeah. No, so, thanks for the clarification. You know, when we initially invested in the business, we thought it was an undervalued business that had kind of great, great data assets, great market penetration, and we believe that there was some, you know, obvious cost savings that we can enact in the business, as well as we could invest in product to improve the revenue growth. We think we have done a lot of the—we or we think Anthony and the team have done a lot of those things.

If you look at the growth in the EBITDA since our deal, you know, as well as kind of the, they've turned what was, at the time of the acquisition, was kind of a flat, revenue business to 4.3% organic growth. With that all being said, you know, we're, we're frustrated where the business is, you know, where the business trades. But, you know, we think the team is on the right path, and they're doing the right things to create additional value at D&B.

Jonathan Bass (Equity Research Associate)

Got it. Thanks. And then turning to Bournemouth here, you know, 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 want 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, you know, at this point, given what the club has done, would you guys consider taking some ownership off the table?

Ryan Caswell (President)

You know, so I'll on the first question, you know, we're still in the middle of the transfer window. So kind of the exact capital needs for the club, given the importance of buying and selling players that you know so we're still, it's still kind of we need to determine kind of the exact squad makeup before I think we have a real view of what kind of the capital needs or the capital position of the club will be. So I think we'll have to hold off on that.

I do think there will be at Bournemouth, there will be some amount of investment over the season. But what that is, you know, we're still trying to figure out based on what happens over the next month of the window. And then in terms of taking ownership off the table, you know, I don't think in the near term we are looking to do that, you know, unless obviously if someone came up and offered us an incredible price. We would think about it. But we think there are a lot more changes, there are a lot more things that we can do at Bournemouth, and Black Knight Football more broadly, to create shareholder value.

Jonathan Bass (Equity Research Associate)

Got it. Thank you, guys.

Operator (participant)

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

Ian Zaffino (Managing Director)

Hi. Thank you very much. You know, maybe on Alight here, you know, we, we've—like you've said, management change, you got the payroll sale. You know, is a potential strategic sale of this, like, still something you might consider? I guess the way I think about it is, if you look at, like, the D&B news, and then you look at this. You need maybe to take that money and then, you know, with that capital, do what you please. Any thoughts there? Thanks.

Ryan Caswell (President)

I'll answer that in two ways. In terms of a specific sale or, you know, something like that, I mean, I don't—it's a public company. Obviously, there's a price out there every day for it. So I, you know, if people are interested, obviously they can come talk to them. But in terms of how we think about, you know, capital allocation more broadly, I would say that, you know, we clearly, as we mentioned in some of the prepared remarks, you know, as we think about new investments, we have to reallocate capital from some of our public company investments into those investments or into returns of capital to shareholders.

Clearly, you know, Dun & Bradstreet and Alight are, are some of the biggest positions. So just kind of depending on the cadence and when that is, we'll have to think about kind of all the different things that are going on, as we think about allocating that capital.

Ian Zaffino (Managing Director)

Okay. Thank you. And then I guess the other follow-up would be, you know, 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, you know, or how do you kind of prioritize buying stuff versus returning capital to shareholders? Thanks.

Ryan Caswell (President)

Yep. Look, I think we've been-- we've returned quite a bit of capital to shareholders over the first two quarters, between the tender and the, and the new, and the dividend. I think we like to... We like, we like instituting a dividend because it's consistent capital, it's returned to shareholders on every quarter. And obviously, in the first quarter, we bought back about 9.7 million shares. So we're, we're, you know, which is, which is a big chunk for us. So we're, we're letting that kind of, I'll, I'll say, settle out and, and see how that, you know, see, see kind of where we are.

But we believe that the strategy that closes the discount is both a combination of, you know, capital returns to shareholders, including share buybacks. As well as basically, investments that are growing NAV. And we believe those are most likely private company investments, where we can reallocate some of the capital from the public companies into those. I, I don't have a specific view on the allocation. It's more of, I think we, we look at it on a case-by-case basis as we have investments and as we look at kind of where, where our stock is trading, and we, we, we make a decision on how we want to allocate that capital. But we believe it's a combination of both of those things.

Ian Zaffino (Managing Director)

Okay, thank you very much.

Ryan Caswell (President)

Thank you.

Ian Zaffino (Managing Director)

Thank you.

Operator (participant)

Thank you. And once again, if you would like to ask a question, please press the star and one on your telephone keypad now. And we will take our next question from Kenneth Lee with RBC Capital Markets.

Kenneth Lee (VP and Senior Equity Analyst)

Hey, good afternoon, and thanks for taking my question. Just one follow-up on the previous question there, and perhaps just to put a finer point on it. And once again, I realize you can't talk too much about the D&B strategic review. But if there was a potentially sizable monetization of your public portfolio holdings, at this point, you know, would you lean towards returning the bulk of that excess cash towards repurchases or allocating towards newer investments, just given the current environment? Thanks.

Ryan Caswell (President)

Look, I think we'd have to think about that when something actually comes up and kind of what is going on. But in general, you know, we believe it's a combination of both, 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 comes up. But it's a combination of those two things.

Kenneth Lee (VP and Senior Equity Analyst)

Gotcha, okay. And then for my follow-up, and this one is about the JANA partnership here. More broadly, in the context of the partnership. You know, what's sort of like the playbook here? You know, 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 a potential co-investment where Cannae makes an investment in equity, along with some other investment firms? Just want to get a better sense of how future investments or transactions could emerge there.

Ryan Caswell (President)

Yeah.

Kenneth Lee (VP and Senior Equity Analyst)

Thanks.

Ryan Caswell (President)

No, I think that. I mean, look, I think, I mean, you are—you know, you understand our capital base. I mean, so it kind of depends on the size of the business that we're looking at. You know, what that business needs, whether it's a, you know, ideally, it would be an acquisition opportunity. But could it be another capital solution? And then, depending on the size, we would look to partner with different firms. Similar to what we've done with D&B, or other take privates of businesses in the past. So again, how the exact playbook and how it plays out is a bit TBD, given the early stage of the partnership.

But it's relying on the skills of JANA to enact change, and utilizing Cannae as a capital source and a potential acquisition partner to find attractive investments.

Kenneth Lee (VP and Senior Equity Analyst)

Okay. Okay, gotcha. And just one last quick one, if I may, and this regards to the impairment charge you took for Sightline in the quarter there. And in terms of the specifics driving the impairment, it sounded as if there was a, if I got it right, a lack of progress in terms of development of a new product. Was there any kind of changing industry conditions or anything that changed in terms of potential adoption by the industry that also drove the impairment? Just want to get a better understanding there. Thanks.

Bryan Coy (CFO)

I can take that one, Ryan, if you want. It's a little bit backwards, Ken. It's more of some of their legacy products were not getting the traction that they wanted while they're developing. They've got a new product in development as well. But the combination of those two put quite a bit of pressure on them as far as, cash flow from operations and, and profitability in the short run.

Kenneth Lee (VP and Senior Equity Analyst)

Gotcha, gotcha. Okay. Helpful there, helpful. I think that's it. Well, thank you very much.

Ryan Caswell (President)

Thanks, Ken.

Bryan Coy (CFO)

Thank you, Ken.

Operator (participant)

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

Ryan Caswell (President)

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 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.

Operator (participant)

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.