Cannae Holdings Inc

NYSE:CNNE

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, ladies and gentlemen. And welcome to the Cannae Holdings Inc. First Quarter 2023 Financial Results Conference Call. During today's presentation, all parties will be in listen-only mode. Following the company's brief prepared remarks, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded and a replay it is available to 11:59 pm Eastern Time on May 16, 2023.

With that, I would like to turn the call over to Rory Rumore of Solebury Strategic Communication. Please go ahead.

[Rory Rumore, VP, Solebury Strategic Communication, IR]

Thank you, operator and all of you for joining us this afternoon. On the call today, we have our Chief Executive Officer, Rick Massey, Cannae's President, 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 an information currently available to management. Because such statements are based on conditions 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 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 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 Cannae's Chief Executive Officer, Rick Massey, who will open with a few brief remarks, and then open the line for your question.

[Rick Massey, CEO]

Hey, thanks, Rory. It's Rick Massey, thank you all for joining the call. I'll try to be brief, but I'm going to stand on a soapbox here for a second. We are not in -- everybody on these calls are including us listen to a lot of earnings calls. And we've heard a lot of management prognostications on the market and the economy and all that. And we're not dumb enough to get out and start making guesses about where, where the economy is headed. I'll say talking to the CEOs of the companies that we deal with, there's a lot of uncertainty out there.

What we are convinced of is that our portfolio, almost to a company is grossly undervalued. And I'm going to go through just a few examples. And of companies have recently reported our largest holding for an example is Dun & Bradstreet, we've got 79 and change million shares. It's trading at a very low multiple of EBITDA, enterprise value to EBITDA, they reported a overall organic growth of 3% that may or may not disappoint you, but if you look at their peers, you'll see that there are two peer court -- there to U.S. peers in the consumer credit business, now the closest peers to Dun & Bradstreet one of them had revenues -- revenue growth at 2% and one had revenue shrinkage of 4.5%

Those two companies trade at almost twice the EBITDA multiple of Dun & Bradstreet we're a little clueless about that. Dun & Bradstreet does not have that much more debt than some of its peers. It has a better margin. And like I said, it has better growth than its peers have shown. And what you'll see if you look under the cover on Dun & Bradstreet is they Anthony and the team there have done a an incredible job of turning around their marketing services divisions by using a essentially a data management platform where customers can can use their own data third-party data and Dun & Bradstreet data to perfect their account-based Marketing. It's going like gangbusters.

Hoover's had a 60% churn rate. That is a 40% customer retention rate just a few years ago, when they said about to fix Hoover's. And it has a retention right now in the 80s. So stunning turnaround for Dun & Bradstreet. And yet the market is -- it's they're selling it off. And it's really disappointing to us that we wish that more attention to be paid to Dun & Bradstreet because they've done a really nice job under the covers fixing a very broken company, they got it back to growth and growth faster than peers. And yet they've not been rewarded for that peers trade, like I said twice the multiple. I said I'd be brief, I'll try to be a little quicker.

All right. Reported today 15% revenue growth in the first quarter 15%. Their bypass which is sort of their enterprise offering multi-application offering. Their sales rep, speed pass sales were up 50%, their bookings were a little soft, but that's because they have had all these giant jumbo contracts to that they've signed and are now in execution mode like Exxon and GE and others.

So ADP, the closest comp to Alight grew at 9%. This company Alight, one of my favorites in the whole universe of stocks at 15. And Alight trading at about half the multiples of ADP of go figure. It's a little depressing. We know that the market was disappointed that Stephan and the team at Alight didn't forecast or upgrade or forecast for '23.

And I would just ask all of you and those investors to listen to a number of calls that have been made in the first quarter and see how many companies who beat their guidance actually, for the first quarter actually came out and raised for '23. In my own anecdotal experience, it's a very low percentage because of the uncertainty in the end the markets out there and who can blame Stephan in and Katie for not sticking their necks out and forecasting, increasing growth in a choppy sort of economy.

Look at CDAY. CDAY beat the market substantially in terms of its guidance, and the stocks down 15% since their earnings call. You go figure it doesn't make it makes no sense. It's trading in like the mid=50s now. And in our last sale, we sold the [Indiscernible] fan 78 bucks, and that was a good trade. And we probably would sell another million at 78 bucks if it ever gets back there. But at 55 it's dumb, it's just a really dumb price.

Paysafe, everybody's, whipping child. Paysafe actually turned down high-single-digits revenue growth, flat EBITDA growth, which is pretty amazing given the mess that that Bruce, and the team inherited. The stocks up a little bit, but they did this as a business to get $420 million of EBITDA in '22 and on track to do even better than that in '23. So it's kind of been thrown out with the bathwater, too.

So this quarter, we are -- we're looking at a lot of things. But we are not sure it's timely given the all the noise in the capital markets, especially the debt capital on the markets and all the uncertainty in the economy on the back half of the year. So, don't be surprised if we don't strike at something in the second quarter and don't be surprised if we do. We are not -- we did not buyback any shares in the first quarter and it's principally because we don't have a lot of extra capital to do so. And in order to raise that capital, we're going to have to sell one of those aforementioned holdings at a very disappointing price. And we're just not that dumb.

Doesn't make sense to sell Dun & Bradstreet at 10 bucks when it's worth 15. And so that you can go buy your shares back at a deep discount to, it just doesn't make sense to me the math doesn't work. So, you may be disappointed some of our investors may be disappointed. We didn't buy back any shares. But we think it's prudent -- it's just prudent portfolio management.

Ryan Caswell is our President. He's been busy with our Black Knight Financial, I know there will -- there may be some questions about that. Where we sit in house has Bournemouth doing and what did they -- are they out of the dead zone and what's your view?

[Ryan Caswell, President]

I think we talked about last time we spent some money in the transfer window. And the team has performed much better. So it looks like we are very close if not out of the relegation zone, which is a great outcome. And we're doing a lot on the business side from a commercial perspective in terms of increasing sponsorships thinking about optimizing ticketing revenue. And so we're very pleased with the football performance to hopefully stay up in the Premier League which will allow all of the other stuff in the multi-cloud strategy to perform much better.

[Rick Massey, CEO]

We think we got a steal on Bournemouth, our bill got a steal. He's and Ryan and where's it wormed their way into the process and got a deal. We paid 0.8 times revenues. The comps are now probably double what they were at the time, maybe five times. You're seeing people pay five times for small EPL teams. So that's going to turn out to be a really good win for us. And we're excited about it.

I don't have anything else. Did I miss anything, Bryan? No. Okay, Bryan Coy are CFO is here with us. Unless you have anything to report, we'll just go to questions.

[Rory Rumore, VP, Solebury Strategic Communication, IR]

Questions operator?

[Operator]

Thank you. We will now begin our question-and-answer session. [Operator Instructions] The first question comes with Ian Zaffino with Oppenheimer. Please go ahead.

[Ian Zaffino, Oppenheimer]

Hi, thank you very much. How are you guys?

[Rick Massey, CEO]

Good. Great.

[Ian Zaffino, Oppenheimer]

Thanks for all the commentary, this is helpful. And so just throw that out there, I'm going to press you a little bit on this. You basically almost have 100% upside if you buy back your stock, right? And so I mean, my argument is bird in the hand, if you buy back your stock versus, one two in the bush. So help us understand this, right, because if I'm sitting here, I would rather buy back something that's worth half the price right now as opposed to sitting and waiting kind of like what your prepared remarks indicate. So just square that and push a little bit on your thinking there. Thanks.

[Rick Massey, CEO]

I think the underlying assumption is that we are buying back at a 50% discount to book value. It's not clear that buybacks have any index, any effect on market value. And I'll say we ran a grand experiment in '22. And we bought back I don't know 12% or 15% of our company. And the stock actually declined.

So it doesn't seem, yes if you buy our stock at 20 bucks, and then tangible book -- what the net book value per share is 40 bucks it's a theoretical double. But it's a theoretical double the book value per share, and clearly we don't trade on book value per share. And I would rather we think that the market for our stock is depressed, not because we don't buy back enough shares. But because the poor our portfolio companies are poorly valued. And that's why our strategy is, that's just before we go sell something, let's wait for it to hit the target price, the price that we sort of thought about when we went into the deals in the first place.

I don't know, that surprise you or not. But when the assumption behind the -- it's a double, it's an instant double is only in the case of a liquidation. And we're not in liquidation. And, yeah, we could buy it, we buy it at '20. And if we liquidated tomorrow, we'd get 40 a share. So these are rough, I don't know what our actual stuff is, but it's 40-42 or whatever, what is it?

[Bryan Coy, CFO]

35 bucks I would say.

[Rick Massey, CEO]

35. So, but that's only in the case of a liquidation. We're not in a liquidation. If our shareholders want us to liquidate, we'd be glad to listen to that. But even then liquidating at these values would be, it seems to me to be pretty dumb. And we're not naturally sellers at the discounts. So

[Ian Zaffino, Oppenheimer]

Okay, understood. And then maybe a little bit in the same vein here, you kind of throw out the straw man of selling Dun & Bradstreet. And this kind of dovetails into the next question as you sold some CDAY, but why not more CDAY? Why talk about selling Dun & Bradstreet and why not talk about selling CDAY or more CDAY or maybe just your thinking is different on CDAY?

[Rick Massey, CEO]

Well, so Ian great point. Great question. And I appreciate you're pushing us on these because we our credibility is everything stretch not to say. We sold a million shares, we've got 5 million year left. I'm not going to say we can't, and shouldn't say one way or another. We're going to deal with that inventory, but it wouldn't surprise me for us to sell more.

I think we'd prefer to sell it back in the $78 range versus the $55 or $56 range. And you might forgive us if we hold out a little bit to see if it doesn't bounce back to that. It's sort of an -- if you look at the chart, it's really interesting. Because they're -- they blew out their numbers and their stocks down 15% since May 3 when their numbers got out, didn't make any sense at all.

[Ian Zaffino, Oppenheimer]

Okay, great. Thank you very much.

[Operator]

Sure. Thank you, Ian.

[Operator]

Thank you. The next question comes with John Campbell with Stephens Inc. Please go ahead.

[John Campbell, Stephens, Inc.]

Hey, guys, good afternoon.

[Rick Massey, CEO]

Hey, John.

[John Campbell, Stephens, Inc.]

Hey, Rick, you're on fire with the valuation run downs on your soapbox. We agree with your stance there yet a lot of puzzling kind of disconnects across a handful of these public investments. So we hear you there. On Bournemouth, I mean, obviously great kind of run of things of late, several points above that relegation lines. It does seem like you guys are in a good spot. But you'd mentioned last call that I think you were kind of tongue in cheek but mentioned existential threat if you were to go in the relegated so that's a good outcome so far.

[Rick Massey, CEO]

No, it was an existential threat for Bryan. And I was just for Ryan Caswell, who's sitting here with us.

[John Campbell, Stephens, Inc.]

Heard that. But, you know, in the past calls, you guys have talked to maybe three to four times your investment and Bournemouth and you're talking about maybe a five-seven-year type horizon. And then Massey I think you've repeated twice that implied takeout or the implied value was about 8.8 times revenues.

So a really good price. We look at menu stock, I'm not close enough to that to determine whether that's pure apples to apples. But that one's at about five times revenues. And, Rick, I think you mentioned your perceived peer groups about five times. So that seems to kind of checkup. If you guys were to get that on Bournemouth, I mean, that's, pretty substantial. I think it's about $1 per share of incremental value for you guys about --

[Rick Massey, CEO]

We're just doing the math in my head. Yeah, I think you're in the right range, John.

[John Campbell, Stephens, Inc.]

Yeah. So that seems to be a pretty meaningful opportunity. I mean, obviously, as we assess the portfolio, there's -- the lion's share of the value is kind of tied to public assets. We can see the price, day-to-day on private side, that's where there's maybe a little bit of extra torque, Bournemouth seems to be the clear opportunity here. So my question here after that rambling is, what do you think the steps you guys need to take to juice the revenue to get things going where you think you can eventually be awarded that five times valuation?

[Rick Massey, CEO]

Ryan will handle that.

[Ryan Caswell, President]

Yeah, I mean, I think when we took over when we took over Bournemouth if you looked at the camera initial side of the business, it wasn't run, as well as, as we would have hoped or as well as we think that we can do it. So we believe that was a big opportunity. We've hired some people over there specifically focused on that. Clearly part of the thesis is you have to stay in the Premier League to get that valuation, which we think we're doing.

We also believe that they're building out the multi-club model, which started with our investment in Lorient. And we're looking at a few others, we think that further cements and helps the value because it helps create quite sort of additional sponsorship to build to make your brand. Look more like some of the clubs if you look further up the standings or the table.

So look, I don't think it's -- we'd sell it. I don't think we're looking to sell it tomorrow. I think there's some work that we need to do. But we think we're very much on the way in terms of one requalification for the Premier League. Secondly, building out all of the commercial side of the business, and then really taking the learnings from the Vegas Golden Knights and kind of super, excuse me, enhancing what they were doing. But I don't think it's -- I don't think we could flip it today, John. But I think we are creating the value to get to those comparable transaction multiples that you mentioned earlier.

[Rick Massey, CEO]

John, we were kind of thinking of this as five to seven year hold. And kind of three-four times our money as sort of a baseline IRR. I'm not making, I'm not promising that, but that's what we were thinking. It's going to take a while. And but you've got the best, Bill brought, what's the guy's name? Jim Prowolla [ph] over there from the Knights?

And according to Bill, he's already working magic and growth Prowolla was -- ran with the business side. I mean, I don't know you call it the tickets, sponsorships, concessions, food, beverage, all that stuff. And they were more at mine -- they were unmanaged over there So there was a long, if there's a long way to go on the downside, but there's a lot of upside.

[John Campbell, Stephens, Inc.]

Yeah, makes sense. That's seems like a very promising opportunity. So we'll be keeping tabs on that. And this is one just kind of minor housekeeping item. But I noticed in the shareholder letter last go round, I think you guys said a 50.1%. So a majority ownership position in BKFE. It looks like on the April update, and also in the shareholder letter things 49%. Obviously, not a big difference. But --

[Rick Massey, CEO]

Yeah, I just I took those extra shares and put them in my pocket, John. Now what happened was the company established, as with all companies that were associated with a management incentive plan with equity for people like Prowolla. And we were slightly diluted by that, and we wrote a check this week, to get us back. It was at $3.5 million to get us back to 50.1%. Good catch. During that stuff, we appreciate it.

[John Campbell, Stephens, Inc.]

Yeah, absolutely. And then the last one here, and this is another housekeeping item with $133 million commitment you guys have called out for BKFE. Does that includes both Bournemouth and Lorient Right?

[Rick Massey, CEO]

Yes. And there's -- in there that we have to pay the seller of Bournemouth another check, one or 20 for staying in a Premier League.

[John Campbell, Stephens, Inc.]

Okay, and that incremental to the 40 that's already planned for you?

[Rick Massey, CEO]

No, that's included.

[John Campbell, Stephens, Inc.]

Okay, included. All right. That's all I got. Thanks, guys.

[Rick Massey, CEO]

Thank you, John. Appreciate your answers.

[Operator]

The next question comes with Chris Sakai with Singular Research. Please go ahead.

[Chris Sakai, Singular Research]

Hi, good afternoon.

[Rick Massey, CEO]

Hey, Chris.

[Chris Sakai, Singular Research]

Just wanted to ask about potential investments. Where are you seeing better valuations now in public or private investments?

[Rick Massey, CEO]

I don't think the mark-to-market adjusted it's valuation expectations to where you see a lot of publicly traded companies trading right now. And all I have to do is refer to our portfolio discussion that I had at the outset. Those are public companies, and they've just been crushed. And we don't think the internal valuations that TE have gotten anywhere near that.

[Chris Sakai, Singular Research]

Okay, --

[Rick Massey, CEO]

Likely to see, you're likely to see us and let me work. There's some privates out there that we're looking at. But you're likely to see as probably tilt toward the kind of go private model or investing in public companies at these depressed prices versus the kind of prices that are that we're still seeing with the -- but I want to emphasize, those prices depend on the debt capital -- a functioning debt capital markets, and that's not going on now. They're just not --nobody's doing. Nobody's doing deals now. It is totally dead.

[Chris Sakai, Singular Research]

Okay, yeah, thanks for that. And then can you mention or provide some color on where you're looking for your next investment?

[Rick Massey, CEO]

Not without getting to getting specific enough that -- we're still -- I'll just say we're still Ryan and Bill are definitely looking at building out the multi-club strategy. And I like the idea of building a multi-sport business under Bill and Ryan's leadership. And there, so that's one area, that I know that there's been a lot of time on.

I'm kind of spinning my time on the traditional, I'd call it traditional Bill Foley companies, Chris, utilities, tech-heavy, tech services are just pure software. And another thing is, we start our investment approaches at home. And it may be that some of the best investments we make over the next year could be in our -- in some of our existing portfolio companies.

[Chris Sakai, Singular Research]

Okay, great. Thanks for the answers.

[Operator]

Thank you. This concludes our Q&A session, I would like to turn the conference back over to Mr. Rick Massey, Chief Executive Officer for any closing remarks. Please go ahead.

[Rick Massey, CEO]

I want to make sure that we've not miss operator, we've got another RBC will usually have RBC on the call. I don't want to drop off if they have a question. So can I just -- can we have a moment of silence for our group there and see if they want to ping in on us? And if not, we'll I'll say thank you. Thanks for joining us. Thanks for your interest. I hope you see the value in our stock and in the portfolios that we have -- portfolio that we have, it's it's clearly there. And we're excited about maximizing that.

[Operator]

All right. I see here that we do have another questioner. Okay, so it comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

[Kenneth Lee, RBC Capital Markets]

Hey, guys. Good afternoon, and thanks for taking my question.

[Rick Massey, CEO]

We knew you'd probably be on the call. And we didn't want to just you know hanging up without giving you a chance to badger us one way or another.

[Kenneth Lee, RBC Capital Markets]

Absolutely, absolutely appreciate the time. Just one on the FC Bournemouth. As you look out further and perhaps this also goes with the other clubs as well. How dependent are the profitability of club ownership -- how dependent is going to be upon the enforcement of UEFA Fair Play regulations. Just want to get your thoughts around that. Do you need to have fairplay strongly enforced or? Or are your projections pretty able to handle it without strong force. Thanks.

[Rick Massey, CEO]

Yeah. I mean, I think there's a few different components of the UEA fair play. But in general, a lot of that stuff is a aimed more at the big clubs and people who are spending a lot of money to try and get into European competitions? I think it's a little bit less focused, obviously, on the same regulation, but less focused on the smaller teams. And frankly, I think it probably helps the competitive balance for smaller teams on the margin. So we've definitely thought about it. It's definitely incorporated in our projections. And I don't -- I think there are other teams that are going to have bigger issues with it than Bournemouth.

[Kenneth Lee, RBC Capital Markets]

Got you. Very helpful there. And then, one follow up, if I may. Is there any thoughts around the legacy restaurant business? What are your longer term thoughts there? Can we potentially see some either some actions or view around that business? Thanks.

[Bryan Coy, CFO]

Ken, this is Brian. I mean, the one thing I'll say is that our Restaurant Group has just done a yeoman's job in the last 24 months. They've faced a pandemic, they've faced great labor crisis, they faced commodity and late literal inflation, inflation. They've done a great job. We've closed -- just year-over-year they closed 17 restaurants that were underperforming and had a drag on the business, and its had great effects. Average guest check, they've raised prices average guest checks up 9%. I think they're doing a yeoman's job and in an industry that just had unprecedented obstacles in his past a couple of years.

We like the business. I don't know that we're going to be in it long term. But with what's been going on in the last couple of years, it's definitely not been the right time to think about moving in. But we're very happy with the way that they have managed through that.

[Kenneth Lee, RBC Capital Markets]

Got you. Very helpful. And one last question.

[Rick Massey, CEO]

You ask all the questions you want. All time is yours. Sure. We appreciate your interest.

[Kenneth Lee, RBC Capital Markets]

Really appreciate it again. Just looking at a high level, just based on other comments earlier on the call, would you say that further monetizations within the portfolio? Is that going to be predicated upon improving valuations, or would a deeper discount in your own shares, cause you to review it further. I just want to once again gauge what could be the potential catalyst down the line in terms of further portfolio monetization? Thanks.

[Rick Massey, CEO]

That is a really good question. And the answer from Bill may have a different point of view, but our job is to manage the portfolio of companies that we have. And it's really hard to work on a dual track where you're watching out for your own shares, and the discounts there. We think we get paid to maximize the value of the portfolio, not the shares.

And so our -- I would say that vast -- the answer to your question is yes. It's like, but I would say it's like 70% then if this was me. 75% of that dependent on about portfolio valuation, and 25% stock valuation. So that's kind of the way we look at it. We just doesn't make a lot of sense to sell shares of Dun & Bradstreet at $10 at down here at half the multiple that its comp straight, so that we can buy our shares back or do our sit on cash or do whatever else there is with it doesn't make sense or making other investments doesn't make a lot of sense.

We think that the market is going to eventually reward both Cannae and Dun & Bradstreet with Dun & Bradstreet. And we think it's going to reward both Cannae and Alight and hopefully they'll happen together and we won't have to choose.

[Kenneth Lee, RBC Capital Markets]

Got you. Very helpful there. Thanks again.

[Rick Massey, CEO]

Well, that was a helpful question. And it's you are helping us sharpen the way we think about this. And this is hard. These are hard questions that we have to answer. These are hard. Right now it just feels dumb to sell any of these things anywhere near that prices that we're talking about.

[Operator]

And with that, we conclude our question-and-answer session. I would like to turn the conference back over to Mr. Rick Massey, for any closing remarks. Please go ahead, sir.

[Rick Massey, CEO]

Okay. I think already does, but thanks a lot. Thanks for your interest. And we look forward to speaking with you again next quarter. Obviously, any of you want to have some side chats with us work through Rory and Bryan and to set something up. We'd be happy to talk. So have a good rest of the day.

[Operator]

This concludes today's conference. Thank you for attending today's presentation. You may now disconnect. Have a good day.