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spk03: Good afternoon, ladies and gentlemen, and welcome to the Kenai Holdings Inc. Third Quarter 2023 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, this conference call is being recorded and a replay is available through 1159 p.m. Eastern Time on November 14, 2023. With that, I would like to turn the call over to Jamie Lillis of Solberry Communications. Please go ahead.
spk00: Thank you, Operator, and all of you for joining us this afternoon. On the call today, we have our Chief Executive Officer, Rick Massey, Kaniyia's President, Brian Caswell, 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 Kaniyia'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 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 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 and the GAAP financial information is provided in our shareholder letter. I would now like to turn the call over to Kani's CEO, Rick Massey.
spk07: Hey, thanks, Jamie. And thanks, everyone, for joining us on a third quarter conference call. As Jamie mentioned, Brian Coyer, CFO, Ryan Caswell, our president, they're both here with me. I want to remind you that we file online two things, one of which is our shareholder letter, which we filed about half an hour ago, hour ago or so. That's got a much more detailed discussion of our various portfolio companies, cash position, et cetera. And secondly, we file a, Brian dutifully files some of the parts, which essentially is our net asset value per investment, and then broken down on a per share basis, per can I share basis. We do that on a monthly basis. So if you, that's right? Yeah. So we, those, I recommend you check in on those. You'll get really more than I can tell you on this short phone call. So I'll be brief since all that information is out there public. We still believe that stock is our, our own stock is our best investment with our precious capital. We, as you may have noted from our shoulder letter, Our buyback authority was replenished by our board a couple of weeks ago, and so we have well over 10 million shares of authority. We bought back 2.7 million shares in the third quarter, which turns out to be about roughly 4% of the company in that three-month period of time. And since we started our little journey on buybacks, we've bought back almost a quarter of the company with about half a billion dollars. And we have no reason to discontinue that operation. As I said, everything, based on what we see out there, we don't see anything better than buying back our own stock. It's hard to turn down a double, essentially on liquidation value. that hits you and that's there instantly. I'll just mention a couple, three portfolio companies in alphabetical order. Alight had a really, really good quarter, 8.4% revenue growth, which excited the market. The 26% BPAS growth, that's their sort of comprehensive enterprise offering. that is really selling well and providing increasing margins to Alight. For those of you who are cash flow nerds like me, the most promising and encouraging news out of Alight was that they spiked their, they grew their EBITDA margin by about 175 basis points to nearly 20%, which is really good. and in my opinion, and they blew it out on cash flow. Their cash flow was a multiple of cash flow over the corresponding quarter. So they're finally getting the benefit of this restructuring that they're doing and the automation that's embedded within the movement of employees from call centers to mobile. Stefan mentioned on his earnings call that In the Q&A, he mentioned that they were able to – they're handling hundreds of thousands more – I don't recall the precise number – hundreds of thousands, maybe a million more employees during this enrollment period, and yet the number of calls and the number of call center people is flat. Their mobile uptake has tripled. over the past year, over the, over last year's enrollment period. So this is right up, right up the plan. You're starting to see the benefits of automation. The company's humming. The stock is way depressed, not for any reason other than the fact that there is a lot of PE overhang and, and when the, when that certain private equity firm is sold, they've sold it. They've really trashed the stock, uh, afterwards. We don't know where they are. They've gone off the board. They don't report their ownership anymore. They're below 10%. But we are certainly hoping that they're there. We see some excess volume there. So we're hoping that that's them moving out of the stock and maybe they'll be out shortly. D&B is another one that's woefully undervalued. This morning I did the math. They're trading at about a 40% discount to peer multiples, despite the fact that they're growing in line with peers. And revenue-wise, they grew 5.8% on a before FX basis. And the third quarter revenues over third quarter of 2022 and their margin expanded a little bit, and they are able to delever a little bit. So they do have a little bit too much leverage. We ought to be thinking about strategies to reduce that, and Alight has a little bit too much leverage, and we're thinking about trying to come up with some strategies to help delever those businesses. That we think will help. At least it will give them some buyback power. So Ceridian, as usual, just knocked it out of the park for the third quarter. I'll just note that UBS, I just was handed a report. UBS just picked up both I got it right here. Just picked up, Kevin who was covering a light at C.S., moved to UBS and just initiated on Alight and Ceridian, $10 price target on Alight and an $87 price target on Ceridian. So obviously pretty bullish on those. I'm going to turn it over to Brian to talk about a handful of things.
spk01: Sure. I wanted to briefly, and Massey referred to what we put out there monthly, just to demonstrate the discount in our net asset value. We started the year with an aggregate net asset value of $2.7 billion. which was about a 43% discount, you know, where our stock was at the time. We were trading at 2065. And as of today, we're still at a 2.3 billion aggregate net asset value against our stock price of 1780. So that comes out to 3179 intrinsic value per can I shares or 44% discount. So the discount has remained rather steady. That's why we have been dutifully continuing to buy our shares down month after month after month. You'll notice a little bit of a decrease in that aggregate fair value reflecting some of that we've sold off 20%, another 20% of our Sheridian shares. We've taken a couple of hits on fair marks. System 1, Dun & Bradstreet, Alight, Sheridian, all those are fair valued every month in there and tied to the stock price. This month in particular, we even took a further write down for book on System 1 reflecting the the market's opinion of the stock at the time, and we also took a rather large mark on Siteline. I'll talk about that one briefly. We discussed on our second quarter earnings call that Siteline's had a lot of challenges lately, ease in sign up for the act, acceptance rates from processors, product rollout has definitely been slower than anticipated, acceptance and rollout to other major strip operators. All those have kind of factored into a lot of their challenges, and in late Q3, we further questioned their plans and timings, and as a result, engaged a third-party firm to prepare a valuation of Siteline. That resulting valuation range was well below Kenai's recorded book value, as well as the fair value mark from a third-party investor from late 2022. And accordingly, we recorded about a $70 million impairment to its book value, and reduce the fair value by another $157 million on some of the parts. So the fact that we're still holding at $2.3 billion and a 44% discount has been pretty steady and validates us continuing to buy our own stock. Ryan, you want to?
spk07: We're going to turn it over to Ryan.
spk05: Yeah, I'll just quickly touch on Black Knight Football. We've continued to make good progress over the quarter year to date. Commercial revenues are up about 30% year over year, which shows what Jim and some of the new hires have been doing to both increase the sponsorship, increase hospitality, increase ticketing. That's positive. We also invested in some players as well as re-signed some of our top players to keep the contract value and the financial value of those players over time. Lastly, we did raise a little bit of capital at Black Knight. Kenai contributed about $25 million. We had third parties in the remainder, so we raised a little over $60 million in the quarter.
spk08: With that, operator, we'll turn it over to questions.
spk03: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are 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 the roster. And the first question comes from Ian Zafino of Oppenheimer. Please go ahead.
spk02: Hi. Thank you very much. Great detail. You got it, guys. So I wanted to ask you, as far as just kind of philosophy here of the company, are we going to see new investments on the horizon, or what's kind of your thoughts on investments, maybe selling down DMV, given kind of how big it is in your portfolio? And at what point does it maybe make sense to just kind of collapse the structure here instead of, you know, just buying back shares, buying back shares? How about just return everything to shareholders?
spk07: Okay. Great questions all. I'll see if I can deal with those generally. As I said, we are not – if I haven't said this, I'll say it today. We're not actively looking. nor have we been shown any interesting investments. We're not actively looking for investments. We are on a path to buy back our shares within the amounts, you know, within the limits provided by law. And yes, you could say It would be stupid and probably not even legal for us to telegraph what we're going to do with our publicly traded portfolio companies and our ownership there. But there are shares that we own that are below basis, so far below our basis, that will never catch up. And those would make really nice tax harvesting opportunities. structure, offsets, as well as giving us some cash to do more buybacks. So I'll let you go do the math on our portfolio, but I don't think I should get in much more detail about that. As to the collapsing of the structure and so forth, A, it's very tax inefficient. to do it that way. And a couple of reasons for that. The main reason being that if we buy back more than a certain number of shares, then we lose the availability of our capital loss carry forwards and carry backs. And so theoretically, we could take some capital losses today and reach back to prior periods, and we're thinking about this, reach back to prior periods and get a refund for taxes that we paid in prior years. If we were to have bought back over a three-year period a control of the company, then the availability of those carry-forwards, they're not going to be available. They'll be severely limited. that we are a C Corp. So those losses are important to avoiding sort of a double tax on distribution of assets. So we can't go a lot faster than we're going and preserve these very valuable tax assets. So except over time, our ability to buy is volume limited. Our daily volume can increase as we buy back more. It sort of snowballs, and we'll be able to accelerate our buybacks as we continue to do this. I think it's 25% of our average daily trading volume. Our average daily trading volume is about 425,000 shares-ish. And over time, we plan on it creeping up. So does any of that make sense? We've had quite a few people come say, why don't you just liquidate the thing and distribute the proceeds? Well, that's taxable to you. That's the main reason. And it could be taxable to us if we liquidate something for a gain. So we at least would like to not have a gain on the corporate, on the C Corp side. So hopefully that makes sense.
spk02: Yep, and then as far as maybe even raising more cash for even more buybacks, how do you think about O'Charlie and 99?
spk07: We think about bring us a bid. We'd love for Oppenheimer to be in the restaurant business, Ian. So I don't mean to be cute about it. 99 is an okay restaurant chain. O'Charlie's drinks cash. We're in a workout sort of mode to get down to a small number of restaurants that are going to generate cash, and we're going to sell all our fee property if we haven't already sold it, get out of a bunch of leases. But if you look around, there's not a lot of M&A going on in restaurants, and consumer discretionary in general. So we'd love to get a bid. We've actually... entertained a few, got a little bit down the road. There have been a couple of kind of roll-up, I don't know if you call it, just very acquisitive companies out there buying brands. They're not doing it anymore. So, yeah, look, we tried to sell our system one, but it's just there's not a market in it.
spk08: We're looking for cash in every possible spot.
spk02: Okay, I guess just one more. We're talking about Charlie. What kind of epitaph do you think that could eventually generate, or how do we actually – Post-restructuring, what would that be?
spk01: Post-restructuring, I think – Ian, this is Brian. I mean, post-restructuring, the combined restaurant group can do $15 million, $20 million a year annualized after you've gotten out of all these negative cash flow.
spk07: That includes 99?
spk01: Yeah, that includes 99. That's the whole group. I mean, they closed – including a couple of one-offs for 99. They've closed almost 80 stores in the last year, and most of them were the negative cash flow ones. So they've done a lot of work rationalizing that to get out of the real stinkers and then get that into the ones that are performing better.
spk02: All right, great.
spk08: Thank you very much. I appreciate that. Thank you. Good questions.
spk03: The next question comes from Kenneth Lee of RBC Capital Markets. Please go ahead.
spk07: Hey, Ken.
spk04: Hey. How's everyone doing? Thanks for taking my question. Sure. In terms of the book value impairment for System 1, could you just get into a little further detail in terms of what that was based on? Was it just simply based on the share price trading below a certain level? I just wanted to see what triggered that. Thanks.
spk01: Sure. Hey, Ken, this is Brian. It was a prolonged market value below where our recorded book value was. We usually will take down our equity method investment by the amount of their losses each quarter, but the market actually put a lower value on it than we had even in losses. So we mark all of our public ones effectively. If they get below our book value for an extended period of time, we end up taking a non-cash impairment charge to bring them down to the aggregate market value of our investment.
spk07: We did that with PaySafe.
spk01: Yeah, we did that with PaySafe a couple times in the past as well.
spk04: Okay, okay, gotcha. Very helpful there. And then in terms of the private investment valuations, as you look across the rest of the portfolio, and it looks as if, you know, you did some third-party valuation for the Sightline investment, How do you think about the rest of the private investments and their valuations? Thanks.
spk01: I don't think there's anything in there that we're not comfortable with, Ken. The numbers are not very big. As you can tell by the sum of the parts, I think the cost and value of everything else is sitting in the $50 million range, and that's made up of about a half dozen or so smaller investments. The only other one we have talked about, like Menden Mill, that was $50 million.
spk07: We just got into that one, so I think that one's going to definitely be... We paid a third of liquidation value for Menden, so it was sort of an exception to the we don't see a better deal out there because it was just such a screaming purchase. And The, you know, CSI is an $84 million investment. We're not in the lead on that. It's doing well, growing about 8% or 9% top line, expanding margins, doing all the stuff you'd expect a Frank Martiri-run company to do. That's going to do fine. But there's no liquidity event for that. We just bought it last, what, summer and a half ago.
spk08: a year and a half ago.
spk04: Gotcha. Very helpful there. And then just one follow-up. I think in the prepared remarks, you briefly mentioned that there was a $25 million capital raise for BKFE. Where can I participate? Could you just talk a little bit more about what the capital raise was for and the potential longer-term outlook for there? Thanks.
spk05: Yeah. So, so, uh, we raised about, um, $62 million for BKFE about 25 million of that was, was can I, um, you know, it, it was, there were, uh, there were some incremental opportunities to, to acquire some players, um, as well as, um, you know, some opportunistic capital. Um, so, uh, you know, we, we brought in a, We brought in Ryan Sports Ventures, who's an institutional investor that owns other teams and other sports properties. And we think we think they can be helpful as a longer term partner. So this was so it was, you know, it's a bit we got we got some additional players that we weren't, you know, that I'd say kind of were a little bit outside of where we thought as well as we want opportunistic capital for the business going forward.
spk04: Gotcha. Gotcha. And if I could just follow up on that one. Remind me again, in terms of the, for AFC Bournemouth, when it comes to the transfer budget, is the source of the funding capital from BKFE? Just wanted to get a little bit more details around that. Thanks.
spk05: You know, it's a mix of, It's a mix of basically being funded with the operating revenues of the business, you know, and then in certain instances, you know, we may put in additional capital to try and fund, you know, incremental or additional players. So it's kind of a mix. You know, I think going forward, we hope that it'll all be funded internally and as we start to sell some players, but today it's kind of a mix of revenue from the business as well as kind of what I'll call hold co-capital.
spk04: Gotcha.
spk08: Very helpful there. Thanks again. Thank you, Ken. Good questions.
spk03: Once again, if you would like to ask a question, please press star, then one. And our next question will come from John Campbell of Stevens, Inc. Please go ahead.
spk07: Hey, John.
spk03: Hey, guys. Good afternoon. Good afternoon to you.
spk06: Thank you. Rick, thanks for all the details on the buybacks. It sounds like you guys have definitely done all of your homework. You know exactly what you can and can't do. So no more questions there for us. We'll leave it at buybacks just basically continue to be a major focus for you guys. I think that's probably a fair statement.
spk07: But on... Let me just say... Let me just say... So at some point, our volume limits are going to permit us to buy back. So let me just do some rough math. And I'm not making promises, but if we were to buy back a maximum, which would be roughly 100,000 shares a day, 200,000, 20, I'm sorry, 20 million, say 200 trading days a year, which is probably a little high. Let's call it 20 million shares a I mean, that gets you down to $50 million. And continuing down our buybacks, you're going to buy back maybe 10% a quarter if you keep those volume levels up. So Ian asked earlier, can you go faster? If we keep going down this path, we're going to go faster. Right.
spk06: Makes a lot of sense. I mean, it seems like, I mean, I remember the commentary from Foley at your, you know, investor day two years ago, you'd buy it back. Right. Right. Sounds like you guys are kind of living up to that for sure. But on Bournemouth, just looking at the season thus far, I'm curious if you guys are starting to see the benefits from, you know, any of the operational improvements you guys have put in place. And Ryan, I know you talk, to the overall BKFE revenues being up 30%. So maybe if you could isolate Bournemouth, maybe in terms of, I don't know what the key metrics are, if it's revenue per match, average attendance, sponsorships, whatever you guys kind of look at, how are those metrics trending for you guys?
spk05: Yeah. So, so, so the, the, you know, I think on the business side and the commercial side, we've, we've done really well. I think we are, as we've talked about before, we're a bit constrained by just overall stadiums. But Jim and the team have done a great job of increasing, you know, I'd say the three things are there's ticketing, there's what I'll call hospitality, and then there's basically kind of broader sponsorship and commercial. And so in each of those categories, we're up a good amount. And ticketing, we're up probably north of 10%. And that's just on, you obviously can't, you know, stadium is a fixed size. So that's just on price increases. On hospitality, I would guess we're probably up close to 40% there. That's a combination of both price increases as well as converting parts of the stadium that were non-revenue generating areas to revenue generating areas. And in sponsorship, we're up a similar amount. And that's really from both pushing price on the existing sponsors as well as basically going out and finding new sponsors. They've changed the model around, you know, how they're looking at, you know, the regional sponsors versus more of national or international sponsors and where they're getting signage within the stadium. So, so the team's done a really good, good job around, you know, around all of that. So we're, we're very happy there and, And, um, you know, so, so, so we, we, we feel good about, about that part of the business and, and we'll look, uh, you know, we hope that the on-field performance follows suit.
spk06: Okay. That's helpful. And then you're kind of balancing, um, you almost took the line on majority investment there at 48% now, um, you know, moving forward, you know, I don't know if you guys have pinned or pegged out kind of an investment cycle, or if you're looking to, you know, inject further capital over the next couple of years, but, you know, are we assuming that, are you guys assuming that you'll continue to have a minority position anytime you raise from here? You'll do it alongside others and you'll kind of keep that minority position?
spk07: No, we're not. We're not planning on retaining this percentage necessarily. It's not hard-coded. And we're not sure there'll be any more need.
spk08: Okay.
spk07: And We went into this with sort of a five- to seven-year investment horizon, so we're still pretty early on in it. But our theory was that we would run it, we would get it, we would improve it, we would run it, and we would sell it.
spk08: Okay. That's very helpful. Keep up the great work. Thanks, guys. Thanks, John. Good questions.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Rick Massey for any closing remarks.
spk07: Thanks a lot for joining our call. You're all welcome to set up a side call with Brian, Ryan, me, any of the above in the subsequent days. We have quite a few calls lined up, but we could always take a few more. So feel free to reach out to us.
spk08: Thanks for your interest in Kenai Holdings.
spk03: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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