Q3 2024 Cannae Holdings Inc Earnings Call
and the others.
Speaker Change: Good afternoon, ladies and gentlemen, and welcome to the Kainai Holdings third quarter 2024 financial results conference call. During today's presentation, all parties will be in a listen-only mode.
Speaker Change: Following the company's prepared remarks, the conference will be open for questions with instructions to follow at that time.
Speaker Change: As a reminder, this conference is being recorded and a replay is available through 1159 p.m. Eastern Time on November 26, 2024. With that, I would like to turn the call over to Jamie Lillis of Solberry Strategic Communications. Please go ahead.
Jamie Lillis: Thank you, Operator, and all of you for joining us. On the call today, we have Ryan Caswell, KENAI's President, and Brian Coy, our Chief Financial Officer. But before we begin, I would like to remind listeners that this conference call and the Q&A following our remarks may contain forward-looking statements.
that involve a number of risks and uncertainties.
Jamie Lillis: Statements that are not historical facts, including statements about Kainai's expectations, hopes, intentions, or strategies regarding the future, are forward-looking statements.
Jamie Lillis: forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management.
Jamie Lillis: Because such statements are based on expectations as the 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.
Jamie Lillis: whether as a result of new information, future events, or otherwise.
Jamie Lillis: 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.
Speaker Change: Additional information including a reconciliation between the 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.
Thank you, Jamie, and good afternoon, everyone.
Speaker Change: On our first call this year, Bill outlined a strategic plan designed to increase the net asset value, or NAV, of our portfolio and close our share price discount to NAV.
Our strategy has three main levers.
Speaker Change: including improving the performance and valuation of our portfolio companies, making new investments primarily in private companies that will grow NAV, and returning capital to shareholders.
Speaker Change: I believe that we are making progress on all fronts, and I will highlight a few items relating to each.
Speaker Change: As I did last quarter, I will then discuss the results of several of our portfolio companies in more detail.
Speaker Change: We are working to rebalance our portfolio away from some of our public company investments and into new private company investments.
Speaker Change: As part of this strategy, in October, we announced the acquisition of a 53% stake in the Watkins Company.
Speaker Change: Watkins was founded over 150 years ago and has a strong market position and brand recognition within the fragmented spices, seasoning, and extracts category, one of the highest growth categories within the overall US food industry.
Speaker Change: We are excited about the deal structure as the existing owner, one of only two owners in the history of the company, is partnering with us and will own approximately 40% of the business.
Speaker Change: Additionally, we are partnering with KDSA, an investment firm focused on founder-led and family-owned businesses in the food and beverage sectors.
Speaker Change: We believe the company has a substantial opportunity to grow distribution across existing and new retailers, expand into other ancillary products, and could be an attractive platform for future acquisitions.
all of which will accelerate the company's growth and profitability.
Speaker Change: Furthermore, we believe this business will provide cash flow to Kainai through preferred dividends and equity distributions.
Thank you. Thank you.
Speaker Change: As part of our portfolio rebalancing, we sold the final shares held in Day Force this quarter.
Speaker Change: This concludes an incredibly successful investment for Kainai from first investing in Dayforce, then known as Ceridian, 17 years ago when it was a large service bureau-based business.
Speaker Change: Over the years, we applied our playbook to improve the company's management and operations, conduct accretive M&A, and drive synergies and efficiencies across the business.
Speaker Change: We sold Comdata in 2014 and subsequently IPO'd the remaining business in 2018.
Speaker Change: Since that time, Kaniyia has sold 37 million shares of Dayforce, realizing $2.8 billion from the sale of those shares and distributions.
Speaker Change: I would like to thank Dave Osip and his entire management team for all the success and partnership over the years.
Speaker Change: I now want to spend a few minutes discussing how we are improving the value of our portfolio companies as it relates to Black Knight football.
Speaker Change: We continue to invest time and capital into building out Blackknife football and although still early in the investment cycle, we believe we are starting to see the impact of these actions on value creation.
Speaker Change: As we discussed previously, last season AFC Bournemouth achieved their highest Premier League point total in the 125-year history of the club.
Speaker Change: We also noted on previous calls that we believed our capital investment in players was starting to create valuable player assets, and this came to fruition with the sale of Dominic Solanki to Tottenham for up to £65 million, or $84 million.
Speaker Change: First off, I want to thank Dom for all of his achievements in Bournemouth and wish him continued success as he moves on in his career. Dom's transfer is the largest in the Cherries' history and the second largest in the Premier League during the summer transfer window.
Speaker Change: More importantly, despite the sale of one of our best players, we continue to have success on the field. The team currently sits in 12th place in the Premier League, but only three points or one win from seventh, and recently beat Manchester City.
Speaker Change: the previous Premier League champion for the first time in Bournemouth's history and it was Man City's first defeat in their last 32 Premier League matches.
Speaker Change: We believe this, in conjunction with our activity across the other Black Knight clubs, is evidence that our actions are building a valuable platform, teams, and brands within global football, which should create value for our shareholders.
Speaker Change: Lastly, we have returned significant capital to our shareholders this year.
Speaker Change: Through the third quarter, we have returned $243 million of capital to our shareholders through a combination of share buybacks and dividends.
Speaker Change: In December, we will pay a third quarterly dividend of 12 cents per share, which provides a consistent capital return to our shareholders as we continue to execute our strategic plan with the goal of increasing our share price.
Speaker Change: I will now spend a few minutes on updates on some of our portfolio companies.
Speaker Change: First, the DNB. The company posted revenue of $609 million, representing constant currency organic growth of 3.4% over the prior year's third quarter, and 3.9% constant currency growth year-to-date.
Speaker Change: Adjusted EBITDA was $247 million for the third quarter representing growth of 5.1% over the prior year's third quarter.
Speaker Change: The adjusted EBITDA margin also expanded 60 basis points to 40.6%.
and free cash flow conversion continue to improve.
Speaker Change: Net leverage was maintained at 3.7 times and the team expects that to be down to 3.5 times by year-end.
Speaker Change: Anthony Jabbour also noted on DNB's third quarter call that the board continues to work with their advisors to evaluate inquiries received from both strategic and financial buyers.
Speaker Change: Beyond that, we will not provide further comment today on DNB's potential strategic alternatives.
Speaker Change: Moving to Alight. My financial discussion will focus on the continuing business given Alight closed on its 1.2 billion dollar sale of its professional services segment and payroll and HCM outsourcing in July of 2024.
Speaker Change: The continuing business total revenue was $555 million for the third quarter 2024, down 0.4% from 2023.
Speaker Change: Adjusted EBITDA was $118 million for the third quarter, a 3.5% increase from 2023.
Speaker Change: Adjusted operating cash flow for the nine months was $199 million, or 53% of adjusted EBITDA.
Speaker Change: Furthermore, Alight's net leverage was 2.9 times, which reflects a $740 million paydown in conjunction with the sale of the business noted above.
Speaker Change: Alight also announced it would begin paying a four cents per share quarterly dividend.
Speaker Change: We believe Elite's remaining business will be more attractive to public shareholders given the higher percentage of recurring revenue, higher EBITDA margins, better cash flow conversion with lower leverage, and now a quarterly dividend.
Speaker Change: Computer Services, or CSI, continues to perform well. After posting a record number of core banking deals in 2024, the company has now generated record growth in the first half of fiscal year 2025.
The company has also been an effective acquirer.
Speaker Change: In the prior fiscal year, CSI acquired loan origination software provider Hawthorne River and has already increased Hawthorne's River customer base, expanded its software seat, and secured new core deals.
Speaker Change: This year, CSI announced the acquisition of Velocity Solutions, which currently services more than 30 million consumers and business owners, and CSI is optimistic about the prospects of that business.
Speaker Change: We continue to work with JANA partners on situations involving undervalued public companies where there is a specific catalyst to unlock value and KANI can participate in that catalyst as either an acquirer or capital solution.
Speaker Change: While nothing concrete to report yet, we are extremely pleased with the partnership to date and optimistic about its prospects.
Speaker Change: Jana has also seen strong underlying business performance since our investments.
Speaker Change: Lastly I'll spend a little more time on Watkins financial profile and deal structure.
Speaker Change: During the last 12 months the company generated about 75 million of net sales and has historical revenue growth in the mid to high single digits and strong EBITDA margins and free cash flow.
Speaker Change: Kenai invested $80 million to acquire approximately 53% of Watkins on a fully diluted basis, including $20 million structured as a convertible preferred investment with an 8% annual dividend.
The deal was also financed with $56 million of debt.
Speaker Change: We believe that our stake was acquired in an attractive valuation given the growth profile, given the growth, margin, and cash flow profile of the business.
when compared to public comparables and precedent M&A transactions.
Speaker Change: Going forward, we believe this business will provide cash to the holding company.
Speaker Change: In conclusion, we are optimistic about our portfolio companies and will continue to look for new investments that will grow NAB. I'll now turn the call over to Brian to touch on our financial position.
Thank you.
Brian Coy: Thanks Ryan. Kenai's third quarter 2024 total revenues were $114 million compared to $144 million in the prior year, primarily comprising our restaurant revenues.
Brian Coy: The change in revenues is largely in line with the reduction of store locations, as the 2024 3rd quarter results reflect 35 fewer locations than the comparable period in 2023.
Brian Coy: Our restaurant brands continue to work hard on improving guest traffic and growing revenue, including a focus on value-oriented bundling and price reductions, particularly at our O'Charlie's locations.
Brian Coy: While the third quarter was tough across the casual dining industry from a guest count perspective, we are starting to see guest counts improve through the first few weeks of the fourth quarter with the strategy of targeted offerings.
Brian Coy: Third quarter 2024 operating expenses were 132 million, down 33 percent from the prior year quarter, driven by restaurant items and lower external manager fees.
Brian Coy: The cost of restaurant revenue in the current year quarter was $93 million, which is a 20% decrease from the 2020 third quarter attributable to the lower locations.
Brian Coy: The cost of restaurant revenue was higher as a percentage of restaurant revenue, a few percentage points, due to the bundling and pricing activities.
Brian Coy: The guest count strategies discussed above are having the intended effect of increasing traffic, but have also increased Interim margin performance as the cost of restaurant revenue contains certain fixed components such as rent and management labor
Brian Coy: We believe this can be offset when the other cost rationalization measures that we've put into place are realized in the first half of 2025.
Brian Coy: And the team has also identified other cost efficiencies in the supply chain or menu offerings and brand support.
Brian Coy: While we are not where we want to be from a growth and profitability perspective at Restaurant Group, we're encouraged by what we're seeing and the dedication from the team members.
Brian Coy: Separately, the 2023 third quarter also included 31 million of non-cash charges that were related to locations and lease agreements closed.
Brian Coy: And finally, the fees to the external manager were $3.7 million in this year's third quarter, approximately $6 million lower than the nearly $10 million in the prior year as a result of the amended management agreement and wind-down schedule.
Brian Coy: Lastly, Kenai recorded $23 million in recognized gains for the third quarter 2024 compared to $130 million of losses in the prior year.
Brian Coy: The 2024 net gains were primarily non-cash, fair value pickups relating to day force and pay safe shares, while the prior year losses were non-cash impairments of System 1 and SiteLine.
Brian Coy: One post-quarter item that we wanted to flag was with regard to sightline payments.
Brian Coy: While senior management has been rationalizing their cost and employee base while concurrently advancing development of its embedded banking product and looking for additional capital, the company faces a challenging liquidity situation post-quarter end.
Brian Coy: As a result, in the fourth quarter, we wrote off the remaining book value recorded for sightline and this is reflected in the sum of the parts table published today and going forward.
Thank you.
Speaker Change: Kaniyia's balance sheet and liquidity position remain solid following the Watkins transaction and additional investments in Black Knight football. Kaniyia has $40 million in corporate cash today, $49 million of capacity in our margin loan, and holds the listed securities with a gross fair value in excess of $1.4 billion.
Speaker Change: With regard to leverage, Kenai has $101 million outstanding on our margin loan and $60 million under our FNF note that matures near the end of next year.
Speaker Change: At our close today, Kenai's aggregate net asset value was $2.1 billion, or $34.29 per Kenai shares. That means today's closing price of $21.63 represents a 37% discount to its intrinsic value.
Speaker Change: With that, I'll now turn the call back to the operator to begin our question and answer session.
Thank you. Bye.
Speaker Change: We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.
Speaker Change: The first question comes from Kenneth Lee from RBC Capital Markets. Please go ahead.
Kenneth Lee: Hey, good afternoon and thanks for taking my question. Just the first one on on BKFE.
Kenneth Lee: What's the outlook for additional capital or investments for BKFE, and could you perhaps just give us a little bit more detail in terms of...
Speaker Change: We're actually very close to being through that that and that should be open I believe it's in the first quarter I think February timeframe.
And so that that is really the only capex. We continue to look at a stadium in the future, but that is but that is further out and it will be we will either finance that on the balance sheet or we may look to raise third party capital, but that's much further and we will give you more visibility as we have more visibility in how that play.
Speaker Change: That.
Speaker Change: Gotcha very helpful. There and then just one on the Jana partnership Oh, It looks like there was nothing to report there, but just wanted to get a.
Speaker Change: A little bit more color around the outlook for potential private investments.
Speaker Change: What are you seeing in your pipeline there and do you see a potential acceleration in terms of potential transactions, especially given the current.
Speaker Change: Current macro backdrop. Thanks.
Yeah. Thanks, Ken So we continue to have very constructive discussions with the Janet team around potential opportunities, where we can partner together.
Speaker Change: You know they will once we once we identify an opportunity it will take time to play out.
Speaker Change: So I.
Speaker Change: I wouldn't I wouldn't expect you know in the next couple of months there'll be anything but we are we are very excited and optimistic about the relationship.
Speaker Change: We think that both parties them through their expertise and us through our capital.
Can can uncover.
Speaker Change: Some very attractive situation for <unk> shareholders.
Speaker Change: Got you and if I could just squeeze one more in just relatedly. If there were to be any kind of new private investments are with that partnership.
Speaker Change: What kind of financing sources or capital sources could you look would you consider ever raising equity capital as part of the options there. Thanks.
Okay, Yeah no problem.
Speaker Change: I think you know I think the most obvious.
Places that we would look to create capital for new investments or through the sale of our public securities.
Speaker Change: You know, we've talked about transitioning out of those public securities into private investments.
Speaker Change: So that would that would be option number one.
Speaker Change: We could potentially look for some other debt financing I do not believe.
Speaker Change: Especially at the current prices that we would be looking to do any form of equity offering if that's what you're referring to is capital.
Speaker Change: We would initially we'd be looking to redeploy capital from our public investments into into whatever new investments we fine.
Speaker Change: Gotcha. Thank you very much guys.
Speaker Change: The next question comes from John Campbell from Stephens. Please go ahead.
John Campbell: Hey, guys good afternoon.
Speaker Change: Ryan just going back to the strategic focus on shifting away from the private portfolio you guys have made steady progress over the last probably year or so I'm curious about your sense of urgency. There obviously, you've got the Dnb development youre not going to comment on that but on the other public investments I'm thinking mainly where you've got a sizable ownership you've got fundamentals seem to be.
Speaker Change: On better footing I think a light is probably the Shining example, there, but if you can't get the public markets have recognized the value of at what point do you feel compelled to push for strategic sell and it doesn't have to be just in light.
Speaker Change: Have any of the entities.
Speaker Change:
Speaker Change: Look I think our strategic sale of any of those is obviously up to the board of that entity.
Speaker Change: So I believe that we're going to think about it just more in terms of you know what what is the what are the near term investment opportunities that that we have and how do we get liquidity through this is the securities that we own right and so we.
Speaker Change: We may start selling down.
Speaker Change: Certain public positions to create liquidity for can I, but in terms of in terms of full company sales or things like that we obviously believe there are attractive businesses, but that question is a much better directed at the board and the management teams of those businesses.
Speaker Change: Okay Fair enough I guess, you'll still get a Christmas card from them this year.
Speaker Change: On the Black Knight football investment, obviously, you guys have the momentum going I think that's really clear to see at had borne mirth, but within the can I stock I, just don't think you're getting any credit for that value created.
Speaker Change: It's probably too small to do a whole lot with right now it doesn't seem like Bill's gonna have really look to monetize that anytime soon so I mean, a couple of these international clubs do have stopped you know publicly traded stocks. So I'm just curious if there's a way or if you've explored a way to create a tracking stock or maybe spin out a portion of that value and so we can get a public <unk>.
Speaker Change: Value and tie it back to can I.
Speaker Change: I think it's a really good idea John.
Speaker Change: Now we are I mean, I think we will think about all different ways to create value.
Speaker Change: Or get value recognized for our securities.
Speaker Change: And so I don't know, if there's a tracking stock or what what the specific would be but but you can.
Speaker Change: We agree with you and we want we want to be able to find a mark for the company and whether that's through a third party investment whether that's through a tracking stock whatever it may be but trying to find.
Speaker Change: Ways to to demonstrate the value that we're creating will be very helpful for the business and four can ice stock.
Speaker Change: Yeah agreed there and then last one for me just wanted to circle back on the 12 cent quarterly dividend just how are you feeling about the sustainability of that level of commitment and then how much of that you're able to actually source through free cash flow versus kind of dipping into the capital pool.
Speaker Change: Yeah. So right now we are dipping into the capital pool, we do believe its sustainable and I think one of the interesting things around Watkins. We've also talked about some of the stuff we're doing around the restaurant group.
Speaker Change: We are starting to get some businesses.
That are that are producing cash flow for the holding company of can I and the goal is to get enough of those that it that it fully covers the dividend.
Speaker Change: And so we're that we're not dipping into our capital pool.
Speaker Change: But that that will be a progression.
Speaker Change: And so so today again, we're dipping into the capital pool, but hopefully you know six months 12 months from today, we'll be dipping much less so.
Speaker Change: That makes sense thanks, guys.
Speaker Change: Thank you.
Speaker Change: As a reminder, if you have a question please press star one.
Speaker Change: Our next question comes from Ian is.
Speaker Change: Does that Pheno from Oppenheimer. Please go ahead hi.
Speaker Change: Great. Thank you very much guys.
Speaker Change: Sure.
Speaker Change: Wanted to ask you on.
Speaker Change: Kind of philosophy on the portfolio construction right.
Speaker Change: When you go into the market and you're looking for deals or deals come to you.
Speaker Change: You know what deal size are you kind of looking at you know if we if you had your wish how many positions that you have how larger they would be and I just think I kind of look at some of the parts. You know thanks, Brian for updating this is just kind of all over the place you know things that are worth less than a dollar per share.
Speaker Change: And I just don't see.
Speaker Change: The focus here and so maybe you can kind of help me understand you know.
Speaker Change: What are you trying to achieve as far as position size number of positions et cetera. Thanks.
Speaker Change: Hey, and thanks for the question.
Speaker Change:
Speaker Change: I do think that we have.
Speaker Change: Theres, probably some outsized positions in our portfolio. Some of those are the amount of capital we invested some of those have grown.
Speaker Change: You know I would think going forward.
Speaker Change: Investment size would be.
Speaker Change: And.
Speaker Change: Cost.
Speaker Change: No.
Speaker Change: $100 million plus type of range, I think we invested $80 million and Watkins.
Speaker Change: That seems like a pretty.
Speaker Change: Good starting point I do think we will look at some bigger stuff.
Speaker Change: But I don't believe that Youll have some.
Speaker Change: Some of the larger deals that we did historically like I think we will continue we will continue to be a bit smaller in scale than that given the capital base that we have today.
Speaker Change: It is how I is how I think about the portfolio construction.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Kind of violent you said, maybe 2025 position something along those lines.
Speaker Change: It's probably less than that but I think you. Yeah. You just did kind of that at 100, I think it is call it $100 million to $300 million type position. So so it'll be I think it'll be less last securities in that and obviously all of that is dependent on our ability to sell down some of the some of the bigger <unk>.
Speaker Change: Patients that we have and reinvest that capital.
Speaker Change: Okay. Thanks, and then also on the.
Speaker Change: Sire soccer side.
Can you just maybe.
Speaker Change: Maybe some of the synergies youre seeing there between the teams.
Speaker Change: Desire to get bigger there maybe.
Speaker Change: Let me talk capacity improved performance.
Speaker Change: Just thinking both on and off the deal. Thanks.
Speaker Change: Yeah. Thanks, Ian Yes, we've actually we have been spending a lot of time at what I'm going to call. It a holding company.
Speaker Change: And trying to create more synergies across the business both on the kind of the football side or the soccer side as well as on the commercial side.
Speaker Change: We announced on our last call, we hired Tim beds bids Genco who's now the president of Black.
Speaker Change: Black Knight football.
Speaker Change: Under him we've started to hire additional people.
Speaker Change: And really are building out.
Speaker Change: The kind of the specific recruiting processes commercial processes.
Speaker Change: Sport sporting performance processes.
Speaker Change: So that we that we are leveraging the expertise and the best practices across the business.
Speaker Change: And so we believe this is an area of a lot of opportunity that we're just kind of scratching the surface.
Speaker Change: We think that probably the biggest and most important point will be on net player acquisition.
Speaker Change: And just creating different teams with different purchase prices of.
Speaker Change: Of players that we can ideally sand through the system.
Speaker Change: So so we're again I think we are early in where were trying to get to but we're spending we're spending a lot of time in trying to build this out such that it becomes a real competitive advantage across each of the different clubs.
Speaker Change: Alright, Thank you very much.
Speaker Change: Thanks.
Speaker Change: Okay.
Speaker Change: This concludes our answer is no.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Ryan <unk> for closing remarks.
Speaker Change: Thank you operator, we will continue to work hard to drive value for our shareholders and look forward to speaking with you again on our fourth quarter 2024 earnings call.
Speaker Change: Thank you again for your time today.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.