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spk03: Good afternoon, ladies and gentlemen, and welcome to the Kenai Holdings, Inc. First Quarter 2022 Financial Results Conference Call. During today's presentation, all parties will be in a 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, the conference call is being recorded, and a replay is available through 1159 p.m. Eastern Time on May 16, 2022. With that, I would like to turn the call over to Rory Rumor, of Sulbury Trout. Thank you. You may begin.
spk00: Thank you, Operator, and good afternoon. On the call today, we have our Chairman, Bill Foley, Chief Executive Officer, Rick Massey, CUNY's President, David Ducamin, and Brian 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 Kani's expectations, hopes, intentions, or strategies regarding the future, are forward-looking statements. Forward-looking statements are based on management's beliefs, as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from from those projected. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. The risks and uncertainties which forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our quarterly shareholder letter, which was released this afternoon and in our other financial 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 KNAI's Chairman, Bill Foley, who will open with a few brief remarks and then open the line for questions.
spk08: Thank you, Lori. Within a quarter that presented a challenging equity market backdrop, geopolitical tensions and shifting macroeconomic conditions, our focus remains unchanged. We repurchased 2 million shares of Kenai in the first quarter of 2022. Our repurchase activity since we approved our share repurchase program in the first quarter of 2021 totaled 6.8 million shares or 7.4% of our outstanding shares. We will continue to take a balanced approach to capital allocation with a focus on repurchasing shares while also searching for private companies that fit our investment profile and will continue to work with our management teams to help them execute. We are proud of our portfolio's performance against a very difficult economic environment with each company's strong fundamental performance in the first quarter. We are also excited with the potential for new private investments given the compression in valuations and pullback of risk appetite. I have seen many cycles through my career and periods of volatility typically present the best investment opportunities. But we also remain committed to our repurchase program and to creating value through our work with management teams to further transform our portfolio companies. I'll now turn the call back to the operator to begin our question and answer session.
spk03: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. And for any participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys. One moment, please, while we poll for questions. Our first question comes from the line of John Campbell with Stevens. Please proceed with your question.
spk05: Hey, guys. Good afternoon.
spk03: Afternoon, John.
spk05: Hey, Bill, you talked to, you know, moving forward. Yeah, with a balanced approach to buybacks and kind of balancing that in with new potential private market investments, if there are no clear private company investments that kind of present themselves, how should we be thinking about the pace of buybacks from here?
spk08: Well, I mean, our stock price is really depressed, and so I'm going to emphasize buybacks. This is a good opportunity to take our share count down significantly at a strong discount to our fair value. we're looking for different ways to different companies to invest in. We have a couple of things pending with regards to our two outstanding SPACs, but relative to other new investments, we're early stages. So we're going to be allocating capital by shares back. That's our, that's the best use for our capital at this point.
spk05: Yeah, it makes sense. And then on the, I mean, obviously the multiples and the public side have gotten, um, A bit insane. You guys obviously have a lot of your investment portfolio kind of tied to public investment, so I know you're probably not chomping at the bit to unload a lot of that. So maybe if you could talk about the debt capacity. It looks like you guys drew down a little bit on the margin loans. So just talk about your debt capacity and maybe your willingness to kind of draw into that to feed both buybacks and private company investments.
spk08: I'm not a big fan of taking on debt. to make investments or to buy back shares, but we are really, we have drawn down about 60 million, I think, against one of our revolvers. We have about 33.5 million of holding company cash on hand. And so our total, our gross liquidity totals 573.5 million dollars. So I'll be talking to Rick and Brian and Duke and we may just reallocate some of our available revolver capacity to buying shares back. I never thought we'd get to that point, but frankly, at $20, that's a pretty good investment.
spk05: Yeah, you guys are sitting quite a bit below book at this point for sure. I imagine that's looking very attractive to you guys. And then maybe for Brian – Just a kind of housekeeping question, what was the step-up in the corporate tax liability in the book value summary?
spk02: The step-up had to deal with the Dun & Bradstreet additional shares we got. You had a big change in deferred as well. The Ceridian sales shares that marked a market value dropped quite a bit from quarter end, so that caused the deferred to go down as well.
spk05: Okay, that's helpful. I'm going to get back in the queue. Thanks, guys.
spk02: Thank you.
spk03: And our next question comes from the line of Ian Zafina with Oppenheimer. Please proceed with your question.
spk04: Sure.
spk03: Thank you very much. Um, good afternoon guys.
spk04: Um, can you talk about just maybe system one a little bit? Um, you know, deal closes, um, you get some conversions and now, um, I guess you reported about a 1.4 million share sale. Um, maybe like walk us through your thinking there.
spk08: um you know as basic shelves or canine as far as your investment into system one you know whether near term medium term or long term thanks thanks that's a that's that's a good question as part of this we're locked up on system one for the majority of our investment until late june i think june 27th or or so however we did have some unlocked shares that were a result of a um a final investment we made in the business when it was being taken public. And that totaled about 6.1 or 6.2 million shares. So I felt that with System 1 trading above its $10 mark, and it actually traded quite a bit higher than that, that we'd take the opportunity prior to earnings release and prior to our lockup or prior to our blackout period to sell a few shares to raise some capital. And so we did. We sold about 1.4 million shares today. over the last 20 days or so. And we're not in the market now because we are blocked out, and System 1 released earnings, I believe, on the 11th or 12th. And we like the investment. It's a terrific management team. You'll see when the first quarter numbers are released, its growth is really fantastic. And the growth is also translating to strong EBITDA margins and strong EBITDA growth. So we like the investment, and we don't intend to dispose of a large portion of that investment in the near future. So we want to ride System 1 for a pretty good period of time. But from time to time, we may dispose of some additional shares once our lockup expires at the end of June.
spk04: Okay, great. That's a very helpful color. Um, Hey Brian, this might be a question for you on, you know, probably, uh, just the recognized losses and maybe walk us through it. Cash, non-cash, um, yeah, any color would be helpful. Thanks.
spk02: Sure. Uh, we had two very significant non-cash items in there. The pay safe investment we wrote down by 236 million with the, uh, the share price continuing to be depressed. And the other was the Ceridian mark-to-market. That was about $324 million. And that was offset by our cash gain on the Optimal Blue transaction was $313 million the other way.
spk04: Okay, perfect. Thank you very much. I'll let someone else hop on.
spk03: Thank you. And our next question comes from Kenneth Lee with RBC Capital Markets. Please proceed with your questions.
spk01: Hi, thanks for taking my question. I'm wondering if you could just further expand upon comments around potential opportunities in private companies, just given the current market backdrop. Are you currently having some conversations right now and any thoughts about private company valuations and whether it is meaningful gaps between what we're seeing on the public market side? Thanks.
spk08: Yeah, that's actually a very good question. I'm going to let Rick has been heavily engaged in this effort over the last couple of months. So, Rick, why don't you respond to this one?
spk07: So, Kenneth, yeah. Hey, Ken. How are you?
spk08: Doing well.
spk07: Oh, there you are. Okay. Two questions I heard from you. One was sort of what are we seeing out there in the market backdrop and the, I would say, the juiciest area for, you know, in in American capital that I've seen so far are small cap GARP type companies. Some of those that went GARP, not crazy, but growth companies that actually have cash flow. And they've been sold off, you know, thrown out with the bathwater. And we've seen a number of them trading at very attractive multiples in terms of return on invested capital. So we like them a lot. We don't have a lot of capital to put the work on those. But we're planning on working on those and actually bringing in some help on capital. This would be something that Kenai and Trasimene would share, like, as general partners. And that's one option. That's why Kenai doesn't, you know, that assumes Kenai doesn't put a lot of capital in. And in terms of what we're thinking and doing, as you, Bill, described it, we are in an unfortunate state where we've got to borrow because I don't think he's at all excited about selling anything that we own. You heard him on SST, not on Paysafe, but Alight and Dun & Bradstreet. They're way below where they ought to be, and it'd be crazy to sell those and and go do another deal. But selling some of those and buying back some shares might make sense.
spk01: Gotcha.
spk07: Did I answer your questions?
spk01: Yes, you did. Very helpful. That's all I have for now. Thank you very much. Thanks, Ken.
spk03: Thank you. Our next question comes from the line of Chris Sakai with Singular Research. Please proceed with your question.
spk06: Hi, good afternoon. Hey, Chris, welcome aboard.
spk07: Thanks for following us. Thanks. Welcome aboard.
spk06: Great. Okay, thanks. Thanks for that. Just to sort of piggyback on that last question, you know, what guys mentioned that you could possibly borrow to acquire a company, you know, do you have any sort of idea how much you would borrow in that instance? Absolutely. Absolutely.
spk07: Absolutely. It absolutely would depend on the target, but obviously the leverage part of the LBO, those have gotten a lot more expensive over the past 60 days or so, and the high-yield markets, which I'm sure many of you are well aware, are almost frozen. So I don't know that anybody's going to pull off a levered, LBO anytime soon except for the really highest quality stuff.
spk06: Right. Okay. Can you talk about, I guess, the revenue from the restaurant group? Are you seeing as, you know, the pandemic subsides, you know, how are you seeing that? Are you seeing things improving there?
spk08: Yeah, we are seeing improvements. We had a very difficult – it was a very difficult – January for the restaurant business in terms of spiking commodity prices and really shortage of labor, trying to keep your restaurants open and moving forward. But following January, we started to see some really nice improvement in terms of restaurant operating margins and year-over-year same-store sales growth. So we're anticipating in 2022 to, despite the bad January and part of the February, to have a strong restaurant year. And so we're happy. Over the last several years, we've reduced store counts significantly in the Charlie system and also the 99 system. We sold off the baking company, the pie business, and also our family dining business. And so the other two chains, the O'Charlie's chain and 99 chain, are really doing fairly well. It's not reflected perhaps in the numbers that came out in the first quarter, but you'll start seeing some pretty good improvements in those businesses going forward during the balance of the year. So we're actually, for the first time in a lot of years, we're pretty happy with the restaurant business.
spk06: Okay, great. Thanks for the answers.
spk03: Thank you. Our next question comes from the line of John Campbell with Stevens. Please proceed with your question.
spk05: Hi, John. Hey, guys. Thanks for letting me squeeze one more in here. And, Bill, you're probably going to shoot me for this question, but I think you kind of joked at this in Vegas, and I've had investors ask me this question. I've thought about it myself in the past, but you've hand-selected all these portfolio assets, right? You've hand-selected these investments. They're not getting valued appropriately. You own 4% or 5% of the shares today. You're going to have a monetization event for yourself, hopefully, with Black Knight here in the future. At what point does this just become something you look at buying yourself?
spk08: Well, it's still a little too much money. But you bring out an interesting point, and that's why we actually are going to really be talking about drawing down some of our lines of credit to start buying shares back and be really significant about it. Because at this point, that potentially is our best investment, is just taking advantage of the dislocation of the marketplace and buying back a lot of shares. And I guess if it gets down to a low enough number, maybe it's a number I can actually afford.
spk07: Hey, John, that's what you get for asking the question, John.
spk05: Yeah, exactly, exactly. I'm sure you could find an investor cohort that could help match you on some funds on the way up. All right, that's all I got. Thanks, guys. Thank you.
spk03: Thank you. We have reached the end of the question and answer session, and I'm going to turn the call back over to Bill Coley for any closing remarks.
spk08: Thank you, and thanks to everyone who joined our call today. While the market volatility may persist, we will remain focused on driving operational improvements across our portfolio, buying back our shares, and finding exceptional investment opportunities and monetizing investments. We look forward to speaking with you again on our second quarter 2022 earnings calls. Thanks again today for your time.
spk03: This concludes today's conference call. You may not disconnect your lines at this time. Thank you for your participation and have a great day.
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