Q3 2023 Cannae Holdings Inc Earnings Call

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Good afternoon, ladies and gentlemen, and welcome to the Canine Holdings, Inc. Third quarter plenty twenty-three financial results conference call.

During todays presentation, all parties will be in a listen only mode.

Following the Companys brief prepared remarks, the conference will be opened 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 14 2023.

With that I would like to turn the call over to Jamie Lillis Salisbury Communications. Please go ahead.

Thank you operator, and all of you for joining us this afternoon.

On the call today, we have our Chief Executive Officer, Rick Massey.

As President Bryan Caswell, and Brian <unk>, 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 <unk> 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 our.

And 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 at the GAAP financial information is provided in our shareholder letter I would now like to turn the call over to <unk> CEO, Rick Massey Alright, Thanks, Jamie and thanks, everyone for.

Joining us on our third quarter conference call as Jamie.

Dan You mentioned, Brian Coyle, CFO, Ryan casual our president.

Are they are both here with me I want to remind you that our we were you file online two things one 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 disc.

A discussion of our various portfolio companies, our cash position et cetera.

And secondly, we have a we file a Brian dutifully file some of the parts.

Which essentially is our net asset value per investment and then broken down on a per share basis for can I share basis, we do that on a monthly basis.

So a few yeah, that's right yeah. Yeah. So we are those I recommend you you check in on those you'll get really more than I can tell you on a short phone call.

So.

I'll be brief since all of that information is out there public we still believe that stock is or our own stock as our best investment.

With our precious capital.

We as you may have noted from our shareholder letter or a buyback authority was replenished by our board a couple of weeks ago.

And so we have over well over 10 million shares of all authority. The we bought back two 7 million shares in the third quarter.

Which turns out to be about roughly 4% of.

The company and that are in that.

And that three months period of time.

And since we started our.

Or a little journey on buybacks, we've bought back.

Almost a quarter of the company.

And with about half a billion dollars and we have no no reason to discontinue that operation 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 debt.

Got you that's fair instantly.

I'll just mention a couple of three portfolio companies are in.

In alphabetical order are light had a knock on a really really good quarter eight 4% revenue growth.

Which excited the market.

<unk>, a 26% B pass grow batch there there's sort of a comprehensive enterprise offering that is really selling well and providing increasing margins to a lie.

For those of you who are cashflow nerds like me the most promising and encouraging news out of a light was that they they spiked there. They grew their EBITDA margin by about 175 basis points.

To nearly 20%, which is really good and in my opinion and they they blew it out on cashflow their cash flow as a multiple of cash flow over the corresponding quarter. So theyre finally, getting the benefit of this restructuring that you're doing and the automation that's inherent.

Embedded within that movement of employees from call centers to T mobile.

He stfan mentioned on his earnings call.

That he and the Q&A he mentioned that they were able to.

They they're handling.

Hundreds of thousands more I don't I don't recall, the precise number hundreds of thousand maybe a million more employees. During this enrollment period and yet the number of calls and the number of call Center people.

It's flat.

Our mobile uptake has tripled over the past year over over last year's enrollment period. So this is right up right up the plan youre starting to see the benefits of automation. The companies I mean, the stock is way depressed not for any reason other than the fact that there is a lot.

P overhang and and when that when that certain private equity firm is so they've sold but they've really trash the stock afterwards.

Oh wait where we we don't know where they are they they've gone off the board. They don't report their ownership anymore theyre below below 10%.

But we are certainly hoping that there there that we see some excess volume there. So we're hoping that that's that's them moving out of the stock and maybe there'll be out shortly.

D&B is another one that's woefully undervalued.

This morning, I did the math they are 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 a five 8%.

On before FX.

The basis and the third quarter revenues over third quarter of 2022.

And their margin expanded a little bit.

And they are able to delever a little bit so they have that they do have a little bit too much leverage.

We we ought to be thinking about strategies to reduce that as a light handle with too much leverage.

And we were thinking about trying to come up with some strategies to help delever those businesses that we think will help at least it will give them some buyback power.

So.

Ceridian.

Yeah as you know as usual just knocked it out of park for the third quarter I'll. Just note that UBS I just was handed a report UBS.

Just kicked up both.

Oh I got it right here just pick that if Kevin you re who was covering a light at C. S moved to UBS and just initiated on a light and ceridian $10 price target on our life and $87 price target on ceridian. So.

Obviously pretty bullish on those.

I'm going to turn it over to Brian to talk about a handful of things sure.

I wanted to briefly Umass eat measure you referred to the what we put out their monthly just to demonstrate the discount in our net asset value. We started the year with an aggregate net asset value of $2 7 billion, which was about a 43% discount.

Our stock was at the time, we were trade at 2065 and as of today, we're still at a $2 3 billion aggregate net asset value against our stock price of 17 80. So that comes out to 31, seven benign intrinsic value per can I, ishares or 40%, 44% discount.

So the discount has remained rather steady while we have been due to fleet continuing to buy our shares down a month after month after month that youll notice a little bit of a decrease in the in that aggregate fair value, reflecting some of that we've sold off 20% another 20% of our ceridian shares.

And we've taken a couple of of hits on the fair remarks system, one Dun and Bradstreet Alights rating all of 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 the book on system one reflecting.

The market's opinion of the stock at the time and we also took a rather large mark on sight line.

I'll talk about that one briefly we discussed on our second quarter earnings call that Sightlines had a lot of challenges lately with ease and sign up for the App 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 we further question their plans and timings and.

As a result engaged a third party firm to prepare evaluation of sightline.

That resulting valuation range was well below can is recorded book value as well as the fair value Mark from a third party investor.

In late 2022, and accordingly, we recorded about a $70 million of impairment to its book value and reduce the fair value by another $157 million on some of the parts.

So the fact that we're still holding at $2 3 billion and 44% discount has been pretty steady and validates us continuing to buy our own stock.

Brian I'll turn it over to Ryan Yeah, I'll just quickly touch on our Black night football. We've continued to make good progress over the quarter you know year to date commercial revenues are up about 30% year over year, which shows what what Jim in some of the new <unk>.

<unk> has been doing to both increase the sponsorship increase hospitality increased ticketing. That's positive we also invested in some and some players.

As well as re side some of our some of our kind of top players to keep the kind of the the the contract value and financial value of those players over time lastly, we did raise a little bit of capital that Black Knight can I contributed about $25 million and we had third parties.

And the remainder so it was about we raised a little over $60 million in the quarter.

With that operator, well turn it over to questions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the key.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

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

Yeah. Thank you very much.

E Mail.

Yeah.

I think you got it guys.

So wanted to ask you as far as just our philosophy here.

Of the company.

See you.

No new investments on the horizon or what's kind of your thoughts on investments.

Maybe selling down D M b, given kind of how big it is in your portfolio.

And at what point does it maybe make sense just kind of collapsed the structure here instead of you know this.

Buying back shares buying back shares.

How about just return everything to shareholders.

Great Great questions, all Oh, 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 today, we're not actively looking.

Nor have we been shown any interesting investments, we're not actively looking for investments.

We are on a path to buyback our shares within the amounts.

Uh huh.

Within the limits provided by law.

The Oh and yes, you could say.

We you know 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 on our ownership there.

But there are there were there were shares that we own that are below basis.

So far below our basis that will never catch up and those would make really nice.

Tax harvesting.

Our structure.

Offsets as.

As well as giving us some cash to do more buybacks. So I'll, let you go do the math on what you know.

Our portfolio, but.

But I.

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.

Oh I can do it that way.

B and a couple of reasons for that.

The main reason being that if we if we buy back more than a certain number of shares then we lose the availability of EVAR.

Are a lot of our capital loss carry forwards and carry backs.

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 and yet you don't get a refund for taxes that we paid in prior years. If we were to have bought back over a three year period, a control of the company.

Then we are the availability of those carrier carryforwards are our oh, 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 on distribution of assets.

So.

We can't go a lot faster than were going and preserve these very valuable tax assets.

So I accept overtime.

Our ability to borrow volume limited our daily volume can increase as we buyback more and sort of snow balls, and we'll be able to accelerate our buybacks. If we continue to do this I think are it's 25% of our average daily trading volume our average daily trading volumes of about 425000.

Chairs ish.

So and we know over time, we plan on it creeping up.

So does that makes it any of that make sense. We've had quite a few people come and say why don't you just liquidate the thing of distributed distribute the proceeds realized taxable to you.

The main room.

And it could be taxable to honestly, if we liquidate something for a game. So are we at least would like to not have a gain on a on the corporates on the C Corp side.

So hopefully that makes sense.

And then as far as maybe even raising more cash for even more buybacks. How do you think about how Charlie and 99.

We think about bring us a bid if we'd love for Oppenheimer to be in the restaurant business.

So I don't mean to be I don't mean to be cute about it we will.

99 is a okay.

Restaurant chain, Oh, Charlie's drinks cash ran a REIT, 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 to sell all our fee property. If we haven't already show a bit.

Get out of a bunch of leases.

But if you if you look around there aren't there's not a lot of M&A going on in restaurants.

And consumer discretionary in general.

So we'd love to get a bed.

Actually entertained if you got a little bit down the road there been a couple of kind of a roll up but I don't know if you call them very acquisitive companies that they are buying brands that they're not doing it anymore.

So yeah look we tried to sell our system one, but it's just there's not there's not a market in it.

We're we're we're looking for cash.

And every possible spot.

Okay, I guess, just one more I know we're talking about are Charlie.

On the EBITDA do you think that could eventually.

Generate or how do we actually Uh huh.

Yes.

Oh sure restructuring I think Ian this is Brian I mean post restructuring the combined restaurant group can do.

Got it.

$20 million a year annualized after you've gotten out of all these negative cash flow that includes 99, yes that includes 900, that's the whole group I mean, they they closed including a couple of one offs for 99, they've closed almost 80 stores in the last year and most of them were the negative cash flow. One so they've done a lot of work rationalizing that to get up.

Out of the gate.

Out of the real stinkers and get that into a into the ones that are performing better.

Alright, great. Thank you very much I appreciate it thank you and good questions.

Our next question comes from Kenneth Lee of RBC Capital markets. Please go ahead, Hey, Kent.

Hey, How's everyone doing thanks for taking my question sure.

In terms of the the book the book value impairment for for system one could.

Could you just get into a little further detail in terms of what what that was based on what was just simply based on the share price trading below a certain level I just wanted to see what what triggered that thanks.

Sure Hey, Ken This is Brian it was a prolonged market value below where our recorded book value was you know, we usually will take down our invest where 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 ended up taking a noncash impairment charge to bring them down to the aggregate market value of our of our investment we did that with the peso, but yeah. We did that would pay you save a couple of times.

As well.

Okay. Okay got you very helpful. There and then in terms of the the private investment valuations as you look across the the rest of the portfolio and it looks as if you.

You know you did some third party valuation for the satellite investment.

How do you think about the rest of the private investments and their valuations.

I don't think Theres anything in there that we are that we're not comfortable with him and the numbers are not very big as you can tell by the sum of the parts I think the the cost and value of everything else is sitting in the $50 million range and that's made up of about.

Half dozen or so smaller investments.

The only other one we have talked about like Minden mill that was the demand. We just got into that one so I think and I think that one's going to going to definitely be repaid a third a we paid a third of liquidation value for them and and so.

You know it was sort of an exception to the we don't see a better deal out there because.

It was it was just such a screaming.

Ah Ah Ah purchase.

And.

The CSI is.

$84 million investment.

We're not in the lead on that it's doing well.

<unk> grown about eight or 9% topline.

Expanding margins doing all the stuff you'd expect a Frank Martire run company to do that is going to do fine.

But there's no there's no liquidity event for that we just bought it last what summer December September and a half ago, yeah, youre at year and a half ago.

Gotcha very helpful. There.

And then just one follow up I think in the prepared remarks, you briefly mentioned that there was a $25 million capital raised for KFC, where can I participate. It could you just talk a little bit more about.

What what the capital raise was for us.

And then the potential longer term outlook for that thanks.

Yeah. So so we raised about $62 million for BK I see about $25 million of that was was can I you know it was.

There were there were some incremental opportunities to acquire some players.

As well as some opportunistic capital.

So we.

We brought in a we brought in Ryan Sports ventures, Who's our institutional investor that owns other teams in other sports properties and we think we think they can be helpful. As a longer term partner. So this was so it was a bet. We got we got some additional players that we werent.

You know that.

I'd say kind of were a little bit outside of where we thought as well as we want it opportunistic capital.

For the business going forward.

Gotcha, Gotcha, and if I could just follow up on that one.

Remind me again in terms of the four for AFC born but when it comes to the transfer of budget.

It is the source of the funding.

<unk>.

Capital from BK, a fee just wanted to get a little bit more details around that thanks.

You know, it's a mix of a it's a mix of basically being funded with the operating revenues of the business and then and then in certain instances.

We may put in additional capital.

To try and fund.

Incremental play our additional players.

So it's kind of a mix.

I think going forward, we hope that.

That it'll be it'll all be funded internally.

Start to sell some players, but but but today, it's kind of a mix of revenue from the business as well as kind of what I'll call a holdco capital.

Gotcha very helpful. There. Thanks again.

Thank you Ken good question.

Once again, if you would like to ask a question. Please press Star then one.

And our next question will come from John Campbell of Stephens, Inc. Please go ahead, Hey, John.

Hey, guys good afternoon.

Good afternoon.

Thank you.

Rick Thanks for all the details on the buybacks. It sounds like you guys have definitely done all of your homework.

And you know exactly what you can and can't do so no more questions. There for US we'll leave it at you know buybacks just basically continue to be a major focus for you guys. I think that's probably a fair statement, but on.

Yeah, Let me just say, let me just say so.

So at some point our volume limits.

Arent going to permit us to buy back. So let me just do some rough math and I'm, not making promises, but if we worried a buyback.

Our maximum which would be you know roughly 800000 shares a day 200000.

A 240, I'm, sorry, 20 million say 200 trading days, a year, which is probably a little high at call it $20 million share.

Shares I mean that gets you down to 50 million.

And and continuing down our buyback youre going to buy back you know maybe 10% quarter.

Yep, you keep those volume levels out so where Ian asked earlier can you go faster.

If we keep going down this path, we're going to go how we're going to go faster.

Right.

A lot of sense I mean, it seems like I mean remember the commentary from fully at your Investor day, two years ago. He buy it back.

Sure.

Alright, it sounds like you guys are kind of.

Living up to that for sure.

But on formats.

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 and Ryan I know you talked to the overall BK FTE revenues being up 30%. So maybe if you could isolate born with Nike in terms of I don't know what the key metrics or if its revenue per match average attendance sponsorships whenever you guys kind of look at how are those metric.

It's trending for you guys.

Yeah. So.

The.

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 stadium, but Jim and the team have done a great job of.

Increasing.

Yeah, I'd say the three things are there's ticketing, there's 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 probably north of 10%.

And that's just on your you obviously can't stadium is the fixed size. So that's just on on price increases on.

On hospitality.

I would guess, we're probably up close to close to 40%. There. That's a combination of both hum price increases as well as converting part of the stadium that were non revenue generating areas, two two revenue generating areas and and and and sponsorship.

We're off to 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 a national or international sponsors and where theyre getting signage within the stadium.

So the team's done a really good good job around them.

Round all of that so we're very happy there.

And you know so so so we feel good about about that part of the business and we will look at you know we hope that the on field performance followed suit.

Okay. That's helpful and then you're kind of balancing.

Almost have been relying on majority of investment there at 48% now.

You know moving forward you know I don't know if you guys have turned.

<unk> out kind of an investment cycle or if you're looking to inject further capital over the next couple of years, but.

Oh are we assuming that are you guys assuming that you'll continue to have them on a minority position anytime you raise from here.

You'll do it alongside others and you kind of keep that minority position.

We're not we're not we're not planning on retaining this this percentage necessarily.

Yeah, its not not its not hard coded and.

Not that we're not sure there'd be any there'll be anymore.

Oh, Okay, if at all and.

You know we went into this with sort of a.

Five to seven year <unk>.

Investment horizon.

So we're still pretty early on.

But you know our theory was that we would run it we would get it would improve it would run it and we sell it.

Okay. That's.

That's very helpful keep up the great work. Thanks, guys. Thanks John.

Good questions.

This concludes our question and answer session I would like to turn the conference back over to Rick Masih for any closing remarks. Thanks, a lot for joining our call you're all welcome to set up a sidecar with Brian Ryan me any of the above.

And the subsequent days, we have quite a few calls lined up but we can always we can always take a few more so feel free to reach out to us. Thank you for your interest in kind of holdings.

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

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