Cannae Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Kenai Holdings First Quarter 2020 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Jamie Lillis, Investor Relations for Kenai Holdings. Please go ahead, sir.

Thank you, Operator, and good morning, everyone. We appreciate your participation in our first quarter 2020 earnings conference call. Joining me today are KNAI's Chairman, Bill Foley, Chief Executive Officer, Rick Massey, and Chief Financial Officer, Rick Cox. As a reminder, a replay of this call will be available through 1159 p.m. Eastern Time on May 14, 2020. Before we begin, I would like to remind you that this conference call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our 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. We undertake 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 press release which was released this morning and in a statement regarding forward-looking information, risk factors, and other sections of PNI's Form 10-K and other filings with the SEC. Additionally, during today's call, we will discuss non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. Thank you, Jamie.

Today our country and world, as all of you know, are in the midst of a significant battle against COVID-19, which has impacted all of us. Our first priority, of course, is the health and safety of our employees and customers across all our portfolio companies. We are working daily with our management teams as we adapt to this new environment in order to ensure that we minimize disruption while effectively maintaining the seamless operations of our businesses. During the course of my career, I have seen my fair share of challenging environments which have helped shape my investment philosophy. This includes the importance of having outstanding management teams, essential businesses with strong intellectual property and trade secrets, and most importantly, a fortress-like balance sheet to weather the storm and take advantage of market dislocations. Kenai's strategy remains unchanged. We continue to monetize our investments, nurture our portfolio companies, make new investments, and prospect for future investment opportunities. Our pipeline of potential investments has expanded during the market dislocation, and Kenai has ample capital to be opportunistic when the economy begins to stabilize. At Dun & Bradstreet, or D&V, we have made significant progress improving our operations in a short period of time. As previously announced, the management team completes its goal of achieving $200 million of annualized expense savings by year-end 2019, several months ahead of schedule, and have currently identified an additional $50 million in cost efficiencies that will be taken out over the course of 2020. The strength of D&B's competitive position is evident in the demand the company is experiencing as a result of the COVID-19 pandemic, particularly from the United States government. D&B's customers are more reliant than ever on D&B's data and analytics for strategic decision-making, reflected in the year-over-year first quarter adjusted revenue growth of 3% to $414 million. Additionally, the D&B team delivered first quarter year-over-year adjusted EBITDA growth of 17% to $151 million and adjusted EBITDA margin expansion of 440 basis points to 36.6% over the prior quarter. During the quarter, Kanai rebalanced his portfolio by selling 3.9 million shares of Ceridian at a price of $72.75 per share. This resulted in gross proceeds of approximately $283.7 million and we recorded a gain of $223.1 million. As of April 30, 2020, Kanai owns 19.7 million shares of Ceridian stock worth approximately $1.2 billion. Turning to AmeriLife, we closed our previously announced commitment to invest $125 million for an approximate 20% position in the company. AmeriLife is a large U.S. independent insurance marketing organization and has developed marketed and distributed life and health insurance, annuities, and retirement planning solutions to pre-retirees for nearly 50 years. We understand that the current environment poses challenges and, as I have commented, we have a very strong track record of acquiring significant companies in key markets during market dislocations. We have a strong network and our pipeline remains robust. As potential deals arise, we are well positioned to deploy our capital, continuing to deliver long-term value to our shareholders. We remain very optimistic to further grow Kenai. With that, I'll turn the call over to Rick Cox to review our financial results.

Thanks, Bill. On March 31st, Kenai had $398.7 million in holding company cash and an undrawn credit facility of $100 million. giving Kenai approximately $500 million of capacity to execute on future investments. Turning to D&B, we successfully repriced the $2.53 billion term loan B facility and realized a 100 basis point reduction in its interest rate with the ability to get a further 25 basis point reduction upon an initial public offering. Excluding the cost of the transaction, the lower interest rate will save D&D approximately $25 million in interest costs annually due to the maturity of the Term Loan B. During the first quarter, Kenai changed its accounting method for Ceridian and now recognizes the investment at fair market value for balance sheet purposes, as Kenai no longer holds a control position. The final balance was $993.4 million, reflecting a gain of $684.9 million. Dayforce Revenues was up $168.8 million, up 27.1% year-over-year, and up 27.3% on a constant currency basis, excluding float revenue, dayforce revenue, were $154.7 million at 31.7% year-over-year and at 31.9% on a cost-of-currency basis. Adjusted EBITDA at $55.2 million at 10.8% year-over-year, excluding float revenue, adjusted EBITDA at 39.6% year-over-year. Excluding float revenue, Total Serbian revenue was $203.1 million for the first quarter of 2020, an increase of 13.2% or 13.4% on a constant currency basis. American Blue Ribbon Holdings, which includes Village Inn, Baker Square, and Legendary Baking, voluntarily filed a petition for Chapter 11 on January 27, 2020, in order to accelerate the timetable for the restructuring of its operations. providing the management team with more flexibility as part of this process. Denied was provided up to $20 million in veteran possession financing. This filing does not involve or affect the business operations of O'Charlie's 499 restaurants. The consolidated restaurant group generated total revenue of $169.9 million in the first quarter of 2020 compared to $257.8 million in the first quarter of 2019. The total restaurant group adjusted EBITDA for the first quarter of 2020 with a loss of $3.5 million compared to a gain of $2.6 million in the year-ago quarter. While the decline in revenue is primarily due to the 60 store closures in quarter one, the mandate of dining room closures due to COVID-19 significantly impacted EBITDA margins. During the quarter, we opportunistically purchased 386,517 shares at an average price of $27.94. On March 31, 2020, Kenai's book value was $2.2 billion or $27.69 per share as compared to $1.1 billion or $18.72 per share on December 31, 2019. Amongst a challenging environment, Kenai delivered progress across our portfolio of brands. Tonight was built for sustained growth and is well positioned to not only withstand challenging times but to continue to prudently monetize our portfolio of investment, maximizing future opportunities while ultimately delivering value to our shareholders. I'll now turn the call back to our operator to begin our question and answer session.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from John Campbell with Stevens. Please go ahead.

Hey, guys. Good morning.

Thanks for asking my questions.

Hey. I wanted to check on D&D. You guys are doing a fantastic job of getting things going there. I wanted to check on some of the work they're doing amidst COVID. That sounds pretty interesting to me. It sounds like they got some irons in the fire with some of the government work. If you could maybe talk to what they're doing there and if that's impactful enough to move the needle on the top line.

Well, yeah, thanks, John. In terms of the U.S. government, DMV has been selected by the Department of Homeland Security and by FEMA to provide quite a bit of data and analytics and information to the U.S. government. And it's also involved in the providing of data and analytics to the COVID virus committee and the Office of the President. It's very encouraging that we were selected. Those revenues should help balance any diminution that we may face in DMV revenue growth over the next couple of quarters. The one thing to remember is, as we've stated publicly a number of times, is the DMV will be challenged in the second and third quarter in terms of revenue growth. Thank you for joining us. We'll have more to say at the end on our second quarter conference call with regard to D&B and government revenue. We'll have more clarity just about how significant it is.

Okay. That's helpful. On the restaurants, if you guys can maybe walk through some of the steps or some actions you're doing within this restructuring process. And then I wanted to also check – Given how challenging it is in the restaurant world these days, can you talk about the debt and how much of that is non-recourse?

Well, in terms of the debt, there really isn't any debt on the restaurant company. So we have leases, and the leases are recourse only to the particular entity that is operating those restaurants, in the case of Billy Gin and Baker Square. So there's no recourse on leases or other expenses back up to the holding company. So on the Billy Gin and Baker Square, we filed a Chapter 11 proceeding Anticipating that we'd be able to sell those closed restaurants, satisfy the Chapter 11 funding costs in terms of lease expense, and then sell the brands and also sell Legendary Baking. Unfortunately, with COVID-19, basically all the restaurants just closed, and a few are reopening now at 50% occupancy. But the problem with the Village Inn and Baker Square restaurants is the demographic is older, and we're just not sure those restaurants can ever recover. So we're just in the process of exiting that entire business at this time. The other restaurant chains, 99 is up in the northeast with about 106 restaurants. I know Charlie's is headquartered in Nashville, and it's primarily a southeastern-based chain. It's unfortunate because both of those chains were really starting to do well, comping positive, revenue growth was obviously up. Eva Da was significantly improved until about March 15th, and of course then everything collapsed. All the restaurants closed. So we're going through the process right now with O'Charlie's in 99 of evaluating various restaurant locations. and some of those restaurants may just never reopen at the time when we start coming back. The southeast is reopening to 50% occupancy, and assuming the virus doesn't re-engage, we'll get back to 100% occupancy in those Old Charlie's and the 99 restaurants. 99 may trail a bit because it's up in the northeast. But in terms of debt, there's no debt in the whole restaurant chain. We just don't have any. especially in the ones that were filed for Chapter 11. There's no current risk to the balance of the restaurant companies based upon outstanding debt or obligations. I kind of rambled a bit, but is that helpful?

No, that's very helpful. My main concern was on the operating leases and debt. Non-recourse back to the holding company is a great answer. So, One more for me. I'm going to hop in the queue. I don't want to take all the air time here. On the $400 million in dry powder, obviously you guys have a lot to play with. Just want to get updated on some buybacks versus M&A. And then, Bill, maybe if you could talk about kind of pricing or multiples you're seeing out there and how much that's changed kind of amidst the pandemic.

Yeah, so we're in the process now, and we'll have more to say in about two or three weeks with regard to a couple of situations that we're working on. The really good companies, and I'll give you an example that you're familiar with, is Black Knight. Black Knight was in the high 70s when the market started really cratering, and it got down into the mid-50s, and now Black Knight's back to $72 or $73. So a lot of the recurring revenue companies that we're involved with and that we know of and that we're tracking were really hit and then have now started coming back. And Ceridian is another example. It got back down to the mid-40s, and today I think it's around $65. And its high was about $79. So it's off from its high, but it's certainly up from its low. That is pretty characteristic of some of the companies that we're interested in. in that their multiples have come down slightly, but the ones that we're most interested in are companies that were potentially going public that have been put on hold, and there's some sort of monetization need in those businesses. So those are on our screens, and we're looking at those all the time. and then the other opportunities are really companies that are over levered and were, that are public but are over levered and suddenly their revenue streams have been impacted. So that's really what we're, those are the kind of companies we're looking at and it's primarily in data analytics, it's in processing, software, kind of the same businesses that we're already in. And we believe that we have an opportunity to raise significant additional capital through various third-party vehicles that we think we're going to have a very interesting summer and fall in terms of looking at different companies and having different opportunities. And there will be more to tell you about in about two or three weeks when we have a little more definition on some of the things we're working on.

Okay, great. That's helpful. I'm going to jump back in the queue, guys. Thank you.

Our next question will come from David Eller with Wells Fargo. Please go ahead.

Hey, good afternoon, guys. Thank you for taking the questions. I just wondered if you could talk about EBITDA margin at your Dun & Bradstreet entity. So it looks like, you know, like last quarter it was 41.8%. This quarter dropped over 500 basis points to 36.6%. I know historically Q1 has been the lowest revenue and margin quarter for that business, but it seems like maybe a larger sequential drop-off than I would have expected. Can you provide some color there? Maybe Q4 margins were better than they should have been, or maybe Q1 wasn't quite as good as it could have been?

We think we're right on track. We're up about 440 basis points from the year-ago quarter. You're correct. The first quarter is the most difficult quarter for D&B. You come off the previous fourth quarter in which It's contract signings that are all trying to be done by year end. And so then there's a little bit of a lag in the first quarter. But we think we're right on track. We improved year over year. And you'll see that EBITDA margin start working its way back up again as we go forward through the balance of the year. So there's really nothing to be concerned about.

Okay, great. And then you mentioned in your commentary that you thought Dun & Bradstreet was more necessary than ever. I've assumed utilization should be pretty strong for the trade credit product as customers need real-time credit risk updates. But then you talked about having challenging revenue headwinds in Q2 and maybe Q3. Is that all related to the call center, or what are you seeing on the trade credits?

The call center is the principal culprit in this scenario. However, the areas that are impacted, as you can imagine, we did a fair amount of consumer information going back to businesses, particularly in the hospitality area. and so hotels and restaurants. And that has, of course, completely dried up. So the government business that we've managed to attain has really sort of offset that drop. So it's It's not significant, but we need to get America back to business. The banks, of course, are still a very robust revenue picture and financial institutions, but some of the consumer-oriented... businesses that are really impacted by this virus. They've had an impact in terms of demand for our products. So we'll just see how fast we can get back to work. But the government business is really largely offsetting that diminution in kind of consumer-oriented data and analytics.

Got it. And then how do you feel overall about What was liquidity and covenants at Dun & Bradstreet and what was liquidity like at the end of the quarter?

Yeah, I don't have the exact number. I don't have that in front of me. But, you know, we have basically our entire and many more. take out the preferred and claw back a good piece of the subordinate debt, the 7.5% and 10.5% debt. Well, that IPO has obviously been deferred, and we'll just see when the market opens. We've submitted our second round of comments to the SEC on our S-1, and we're waiting for their response. We're going to drop in our first quarter numbers, and so we'll have an S-1 that can be executed against, I think it's all the way up until about August 11th. and then we'll have to update again. We've done a lot of work in terms of the S-1 and the public offering. There was robust demand in all of our early calls to various analysts and we felt very good about it. It's just the timing is not perfect. So if we don't go public until the fourth quarter or the first quarter of next year, we're in great shape. We have no capital constraints.

Okay. And then last question, I guess it's, you know, somewhat related to, you know, that last commentary you were making, but just overall, how are you advising them from a strategic standpoint? You know, many companies we cover, you know, have been assuming a more defensive posture, bolstering liquidity, cutting costs to get through to the other side of this virus. But then you got a very few number of companies that you see kind of leaning in, trying to Maintain current plans in order to take share, you know, throughout the virus or maybe on the other side of the virus. So how are you kind of advising them to operate in this environment?

Yeah, so we're maintaining our plans. What we have done is we've found – not uncovered, but we've executed against about another $50 million of synergies – Thank you for joining us. Not just a data company, but an analytics company. And that's what we're working very hard on. Because you sell data for X and you sell data with analytics for X plus X plus X plus X. So it's a big change. And that's where our revenue growth is going to come in the future. And so we're just in the early stages of this business transformation. It's only been, what, 16 months since we acquired the company.

Thank you for taking all my questions.

My pleasure.

Our next question will come from John Campbell with Stevens. Please go ahead.

Hey, guys. Two quick ones here. I haven't run the math on the Australian fair market value and the balance sheet. I know that changed for you guys. I think you maybe have a shortcut that. Is that just basically the closing, the last day of the quarter closing price of Ceridian? And does that also account for the PTIP payments and the LTIP payments and the taxes?

Yes, that's taking into consideration the share price at the end of the quarter and would also consider LTIP and taxes.

Okay. Okay. And then last one for me, Bill, when are the Knights going to be back on the ice?

Boy, you know, we have such a good team and this is so disappointing. The commissioner is very focused on awarding the Stanley Cup this year. And so I believe you're going to start seeing the players back in their practice facilities in small groups in about two weeks, two and a half weeks. Then we feel like there's going to be about a three-week training period to get back in shape and get ice ready. and then it's unclear whether the season will be finished or partially finished and playoffs will then start or whether we'll just move into playoffs with maybe an expanded round in the opening playoff round. But I'm very confident that by July 1st we'll be on our way to either finishing the season or be in a playoff scenario but without fans, unfortunately.

Well, any sense of normalcy would be great at this stage, so I hope that plays out. Thanks for taking the time, guys.

Yeah, let's just get some sports back on the air.

Exactly.

This concludes our question and answer session. I'd like to turn the conference back over to Bill Foley for any closing remarks.

Thank you. To conclude, we are very pleased with our first quarter results. Importantly, the management team at Kenai has weathered many challenging environments, and we are optimistic that dislocations in our economy will present attractive opportunities for our team. We remain well capitalized and will continue to nurture the growth of our portfolio companies while also vetting the deep pipeline of potential investments that we see today as we work to expand our portfolio and deliver long-term value to our shareholders. Please stay safe and healthy and thanks for your time today.

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