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Cannae Holdings, Inc. (CNNE) Q1 2019 Earnings Call Transcript

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Cannae Holdings, Inc. (NYSE: CNNE)
Q1 2019 Earnings Call
May. 9, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Cannae Holdings First Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

I would now like to turn the call over to host, Jamie Lillis, Investor Relations for Cannae Holdings. Thank you, you may begin.

Jamie Lillis -- Investor Relations

Thank you operator, and good morning everyone. We appreciate your participation in our First Quarter 2019 Earnings Conference Call. Joining me today are Cannae's Chairman, Bill Foley; President, Brent Bickett; and Chief Financial Officer, Rick Cox. As a reminder, a replay of this call will be available until 11:59 pm Eastern Time on May 16, 2019.

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 the statement regarding forward-looking information, risk factors and other sections of Cannae's Form S-4 and other filings with the SEC.

Let me now turn the call over to Bill.

William P. Foley -- Chairman and President

Thank you, Jamie. To start, our team continued to make significant progress positioning Cannae to deliver meaningful value for our shareholders through the first quarter, highlighted by the completion of the acquisition of Dun & Bradstreet on February 8, 2019. As a reminder this was done in partnership with Black Knight, Thomas H. Lee Partners and CC Capital Partners, with a total purchase price of approximately $7.2 billion, funded with $4 billion in debt, $1.1 billion in preferred stock and $2.1 billion in equity. Cannae's $500 million equity investment represents an approximate 24.5% equity interest in D&B. As executive chairman of Dun & Bradstreet's Board of Directors, I am working very closely with D&B's management team to unlock the substantial potential that we see in this company.

As we discuss our fourth quarter earnings call, I am working with Anthony Jabbour and Steve Daffron on the execution of three near-term initiatives, which include first D&B's organizational structure and leadership; two, our cost reduction plan; and three, enhancing revenue growth. Each of these initiatives designed to reinvigorate D&B and position the company to drive long-term value to its customers, employees and its new shareholders.

From the outset, we saw an opportunity to strengthen D&B's leadership and are already well under way with an outstanding team led by Anthony Jabbour, as CEO; Steve Daffron as President; and Kevin Coop as Chief Revenue Officer. Anthony and Steve are implementing a new organizational structure for D&B, whereby a general manager will be in charge of each of D&B's major business segments. This new structure is designed to provide greater transparency to the organizational performance and ensure accountability and P&L responsibility for D&B's major business segments.

The team is also moving quickly on the cost reduction plan where we've identified over $200 million in expense reduction opportunities. I am pleased to report that through early April, we've completed $124 million of net annualized expense reductions and are well on our way to achieving our $200 million goal on run rate basis by year end 2019. Thus far, we have primarily focused on reducing labor inefficiencies within the organization, as well as high cost professional fees and other non-personnel related spending.

We are now aggressively moving forward with Phase II of our cost plan. As evidence of the success of our plan, during the first quarter and the ending March -- and April 30, our EBITDA increased from $117 million in the first quarter of 2018 to $129 million in the first quarter of 2019. With respect to revenue growth initiatives, we have restructured D&B's go-to-market sales strategy, including an enhanced commission program, which should improve both productivity and sales growth over the balance of 2019 and beyond. While this strategic initiative may take several quarters to accomplish, we believe it will deliver a marked acceleration to revenue growth over the coming years.

From an accounting perspective, we will be reporting D&B's results on a one quarter lag basis. What I can say at this point is that our cost cutting efforts are quickly impacting D&D's performance. As I mentioned earlier, we achieved an improvement in first quarter EBITDA on a modest decline in revenues. Both of which were in line with our internal budget. While I am pleased with the team's performance, we have much more to accomplish in order to drive improved profitability and growth.

With that, I will now turn the call over to Brent.

Brent B. Bickett -- President

Thanks, Bill. Today Cannae is comprised of four primary businesses, which include Dun & Bradstreet, Ceridian, our Restaurant Group and T-System. Bill reviewed the success that our team has quickly achieved, restructuring Dun & Bradstreet and I'll focus on the balance of our portfolio.

To start, Ceridian HCM Holdings continues to emerge as a market leader in the payroll and human capital management software sector as evidenced by their strong first quarter results, led by a 27.6% year-over-year growth in DayForce revenues. David Ossip and his leadership team are continuing to execute their strategic plan, which should drive meaningful growth in cloud revenue for years to come.

Currently, Cannae owns approximately 32.7 million shares of Ceridian common stock, representing a 23.3% ownership position. Based upon CDAY's closing price of $49.83 per share on May 8, 2019, Cannae's stake in Ceridian has a market value of $1.63 billion. Over time, we expect to monetize our CDAY position with a near-term objective of repaying the $250 million of borrowings Cannae incurred to fund in Dun & Bradstreet investment and raising additional holding company cash.

Turning to our Restaurant Group. The industry continued to face challenges to the first quarter, largely as a result of adverse weather across the country and our brands were not immune. Despite a more challenging market backdrop, the ABRH management team continues to implement a wide range of initiatives to reduce expenses while increasing productivity, customer satisfaction and cash flow. Our focus is to accelerate the pace of margin expansion and cash flow improvement in order to create optionality for monetization. To accomplish this, we are rationalizing underperforming stores specifically at O'Charley's and Bakers Square reducing controllable expenses and pursuing a refranchising initiative at certain Village Inn Restaurants.

Importantly, the ABRH management team has made progress at our O'Charley's brand where same store sales are stabilizing and cash flows are improving. Our legendary baking brand is also seeing improved performance from the operating challenges that they encounter during the 2017 holiday season, which impacted their 2018 results. This improved performance can be seen in the strong year-over-year improvement in operating margin and cash flow on lower revenue due to Easter falling into the second quarter this year. Looking forward, we expect to make continued progress improving the profitability of our Restaurant Group over the balance of 2019, which will position our team to explore a wide range of monetization opportunities.

Turning to T-System, as we mentioned on our last call, we expect 2019 to be a transitional year as Bob Wilhelm implements a range of initiatives to improve revenue and EBITDA growth. As part of his plan, Bob has made leadership changes, hired a new Chief Commercial Officer and realigned the company's client service and sales organizations. T-System will continue to invest in people and product development to position the company for long-term sustainable growth. As these initiatives take hold throughout the year, we expect to selectively execute on a creative add-on acquisitions to expand T-System's product set and to drive cross-sell opportunities.

I'll now turn the call over to Rick to review the financial results of our portfolio companies in more detail.

Richard L. Cox -- Executive Vice President and Chief Financial Officer

Thanks, Brent. To start off, Ceridian generated first quarter revenue of $203.7 million, inclusive of both Cloud and Bureau solutions, which represents 7.9% increase over the first quarter of 2018. First quarter adjusted EBITDA increased 7.1% to $49.8 million as compared to the year ago quarter. In the 2019 first quarter, Cloud-based revenues, which include both DayForce and Powerpay grew 21.8% to $154.6 million as compared to $126.9 million in the year ago quarter. In total, 3,851 customers are now live on the DayForce platform, up from 3,154 at the end of the first quarter of 2018. More detail on Ceridian's first quarter financial results, which were released last week on May 1 can be found on the Investor Relations section of their website.

Turning to our Restaurant Group, American Blue Ribbon Holdings generated total revenue of $257.8 million in the first quarter of 2019 compared to $273.8 million in the first quarter of 2018. Our Ninety Nine brands continued to be the outperformer with the Restaurant Group delivering same-store sales growth of 0.5% during the quarter. Our other brands were negatively impacted by weather and the timing of Easter, ending the quarter with negative same-store sales, down 3.7% for O'Charley's, down 4.9%, for Village Inn, though franchisee same-store sales were up 1.6%, and Bakers Square down 5.7%.

Of note, Ninety Nine's same-store sales results outperformed the Black Box regional index same-store sales increase of 0.2%, while O'Charley's underperformed the Black Box national index same-store sales increase of 0.6% and Village Inn and Bakers Square underperformed the NPD mid-scale family index same-store sales increase of 0.8%.

ABRH delivered first quarter EBITDA of $2.6 million, which compares to EBITDA of $5.1 million in the first quarter of 2018. During 2019, we will continue to see the benefits from our initiatives that began in 2018 to increase same-store sales, increase customer guest counts and increase profitability. So that we can achieve long-term profit growth.

T-System generated total revenue of $12.2 million and break even EBITDA for the first quarter of 2019, compared to total revenue of $15.4 million and EBITDA of $2.8 million for the first quarter of 2018. Application of ASC 606 reduced the documentation business segment's first quarter revenue and EBITDA by approximately $3.1 million respectively. In addition, T System incurred approximately $1.1 million of non-recurring accounting fees and severance expenses in the first quarter.

For the first quarter of 2019, T-System's organic revenue growth in the documentation segment was flat year-over-year under the accounting guidance of ASC 605. While the coding segment revenues were down approximately 9%, principally due to a large coding customer, who transitioned from a full outsource solution to our SaaS coding software solution last year. As we highlighted last year or last quarter, while having no impact on cash receipts, implementation of ASC 606 has produced greater volatility in the revenue recognition for T-System's documentation segment.

On March 31, 2019 Cannae's book value was $1.154 billion or $15.99 per share as compared to $1.125 billion or $15.58 per share on December 31, 2018. We ended the first quarter of 2019 (ph) with $63.2 million in holding company cash, which is down from $308.2 million as of December 31, 2018. In February, we used $250 million of cash on hand to partially fund our purchase of Dun & Bradstreet.

To conclude, we are pleased with the progress that we continue to make across our portfolio brands in order to position Cannae as a long-term driver of value for our shareholders. I'll now turn the call back to the operator to begin our question-and-answer session.

Questions and Answers:

Operator

Our first question comes from John Campbell with Stephens. Please proceed with your question.

John Campbell -- Stephens, Inc. -- Analyst

Hey guys, good morning.

William P. Foley -- Chairman and President

Good morning.

John Campbell -- Stephens, Inc. -- Analyst

On D&B, it seems like a great start on the cost side. You guys are kind of came out of the gates pretty hot. On the rev side, can you just maybe talk to the shift in the go-to-market strategy that's something you guys kind of outline, maybe what you're doing there and what are you guys are seeing a pretty clear path to modest organic growth in time?

William P. Foley -- Chairman and President

Yeah. Thanks for the question. On the cost cutting side, we're really ahead of schedule. We're doing -- the guys are doing a great job. We've got our new management team in place and all of our business unit leaders in place. And D&B was organized not by product and everything really kind of rolled up to the CEO for final approval. And so no one was accountable in the entire system for their revenue or their profitability. And so we have basically matrixed the -- each business unit and then each supporting unit and we really feel like we're going to start seeing the benefits of this new matrix that we have established for our business units fairly quickly, but it may be a quarter or two. And the growth will start slowly that we have really significant opportunities in international, which they've largely ignored and they're also not very -- not as strong as we want them to be in analytics and on -- if you're marketing and selling the analytics attached to the data that you're providing, usually you get 2.5 to 3 times of revenue out of that kind of sale.

The other thing that we've done to enhance focus on revenue growth is that the entire commission system and program has been changed, so that our sales representatives are now focused on long-term recurring revenue models, five to seven years, as supposed to reselling the same customer and earning the commission each year on really this kind of the same business over and over. So it's a change of -- it's a streamlining of leadership, it's a streamlining of the organization and the employee base and then is putting the right people in the right jobs. And we've just done a lot of work and we're very confident that we can make Dun & Bradstreet into a -- once again, into a really good company and we believe that as the quarters is go by, you'll see continuing progress at Dun & Bradstreet that will probably be a little surprising.

John Campbell -- Stephens, Inc. -- Analyst

Great. That's great color. I appreciate all the detail. And I might have misheard you Bill, but did you say that Anthony is now the sole CEO? So there's no longer Co-CEO structure?

William P. Foley -- Chairman and President

No, he is the sole CEO, Steve Daffron is the President. Anthony splits his time between Black Knight and D&B, but Steve is really -- he's the day-to-day on-site.

John Campbell -- Stephens, Inc. -- Analyst

Got it. And then Bill, the last one for me. I know you've got skin in the game at both Black Knight and D&B, and I think you might have answered this earlier about kind of decentralization and kind of changing the org charge, but I don't think we've ever really heard your full take on Anthony, kind of sharing his time across both companies. How demanding do you think that is and do you see that as kind of a permanent arrangement?

William P. Foley -- Chairman and President

I don't want to say it's ever permanent, but Anthony is able to incorporate his duties at both companies fairly, easily. He's got a president at Black Knight in Joe Nackashi, who's been with the company for many, many years and he is very -- running the mortgage servicing platform business. And so now, he's running the entire organization.

And then, Daffron, is a data and analytics guy from his entire history. So we have the kind of this operational strength at both companies and if you could think about it, Anthony is kind of Mr. Outside in both companies. He's the guy that's going out and making sales calls and talking about how to cross sell Black Knight and Dun & Bradstreet products, how to improve the sales process. So, I'm keeping an eye on him to make sure he doesn't get overloaded. He's got a lot of capacity and I'm really happy with the job he's doing to date.

John Campbell -- Stephens, Inc. -- Analyst

Yeah. He's definitely a machine. So, I appreciate the time. Thanks guys.

Operator

(Operator Instructions) Our next question comes from Jason Deleeuw with Piper Jaffray. Please proceed with your question.

Nick -- Piper Jaffray -- Analyst

Hey, this is Nick (ph) on for Jason, he's out traveling right now. But, I just want a quick follow up with D&B and the revenue growth. It sounds like you said it's going to accelerate. Is there maybe a long-term growth target that you guys are looking at...

William P. Foley -- Chairman and President

Our long-term growth targets is 5% organic growth, not including acquisitions. So, that's our -- when I say long term, that our, say, two-year plan. And we were down about 1% in the first quarter, but that is consistent with previous first quarters over the last three or four years. They always seem to be down about 1%, because they have a very strong fourth quarter in terms of our sales cycle. So that's our goal, and we hope this year to be positive in terms of organic revenue growth, but it's not going to be significant because we're already halfway -- almost halfway into the year. And we're really been spending our time on cost cutting and achieving synergies.

Nick -- Piper Jaffray -- Analyst

Okay. So then on the cost cutting, it sounds like you guys are doing a great job, so you're a little ahead of pace even. So can we expect that accelerated pace continue or how should we look at the pace? And then maybe what are the additional sources of cost savings that you guys see?

William P. Foley -- Chairman and President

Well, the low hanging fruit has really been -- we've taken care of that with the $124 million, $94 million of which was audited and signed off by our external auditors and another $30 million into the process of being audited. And these are net synergies. So we have added people and added expense, but these are net-net synergies. We expect to have a run rate savings by year end of $200 million -- just over $200 million, about $204 million to be specific.

And then the next year and going forward, the synergies become a little more difficult, but we feel like there's another $40 million to $50 million that can be achieved or over say the next 12 to 15 months after this year. And those end up being in things like consolidation of data centers, aggressive consolidation and real estate and moving people from -- to new offices, getting rid of expensive leases that the companies has signed over the years.

And for example, the Company had two buildings in Short Hills, New Jersey neither one of which were fully occupied. We've moved out of, which we call, building A, everyone's now in building B and building A is up for sublease. So when we sublease it, that'll be another synergy. So that's the kind of process that we're going through, that's really rightsizing this company, frankly has been mismanaged for 50 years. So it looks like we're -- it's unbelievable what we're doing. It is aggressive and it's -- the guys are doing a great job, but they've made it a little easy for us.

Nick -- Piper Jaffray -- Analyst

That's great. Great to hear. And the last one for me. Moving over to T-Systems the last few quarters and you guys have talked about acquisitions, or M&A in the pipeline, maybe just update it if you guys are getting close to that and any update you have in the M&A pipeline for T-Systems?

Brent B. Bickett -- President

Sure, Nick. This is Brent. Yes, as I mentioned during my comments, Bob has -- when he came in, he did a strategic review of the Company and needed to make some operational changes and put the right leadership team in place. And from an M&A perspective, we've been patient with him to wait until the Company is prepared to do the add-on areas. The areas that we are specifically focused on is really kind of in the rev cycle to complement our coding operations. So we're looking at billing opportunities, denial management opportunities, but we are now in the phase where we can now face off, and that was the thesis that we began with that you have a company that has a good set of customers that you need additional products and services that you can cross-sell. So we are starting to gin up that that pipeline again and again. These are small -- smallish deals, but that was the T-System we're beginning to execute on it.

Nick -- Piper Jaffray -- Analyst

Great. Well, that's all for me.

Brent B. Bickett -- President

Thank you, Nick.

Operator

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back to Mr. Bill Foley for closing comments.

William P. Foley -- Chairman and President

To conclude, we're very pleased with the success we've already achieved, reducing Dun & Bradstreet's cost structure and are well on our way to achieving our goal of reducing D&B's expense base by $200 million by year-end 2019. Additionally, we have taken meaningful steps to reinvigorate Dun & Bradstreet's go-to-market strategy and are optimistic it will improve results and improve sales over the balance of the year. To be truly successful in this turn -- turnaround and unlock the value that we see in this investment for our shareholders, we need to not only reduce costs but also drive improved sales growth. We look forward to updating you further on our second quarter call in August. Thanks again for your time today.

Operator

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.

Duration: 26 minutes

Call participants:

Jamie Lillis -- Investor Relations

William P. Foley -- Chairman and President

Brent B. Bickett -- President

Richard L. Cox -- Executive Vice President and Chief Financial Officer

John Campbell -- Stephens, Inc. -- Analyst

Nick -- Piper Jaffray -- Analyst

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