FNFV Group (FNFV) Q2 2016 Results - Earnings Call Transcript

| About: FNFV Group (FNFV)

FNFV Group (NYSE:FNFV)

Q2 2016 Results Earnings Conference Call

July 21, 2016 11:30 a.m. ET

Executives

Daniel Murphy - Senior Vice President and Treasurer

William Foley - Chairman of the Board

Brent Bickett - Executive Vice President, Corporate Strategy

Anthony Park - Executive Vice President and Chief Financial Officer

Analysts

Chas Tyson - KBW

John Campbell - Stephens

Jason Deleeuw - Piper Jaffray

Operator

Ladies and gentlemen, thank you for standing by and welcome to the FNFV 2016 second quarter earnings conference call. [Operator Instructions] As a reminder today's conference is being recorded. I'd now like to turn the conference over to your host, Mr. Dan Murphy. Please go ahead, sir.

Daniel Murphy

Thanks and good morning, everyone and thanks for joining us for our second quarter 2016 FNFV earnings conference call. Joining me today are FNF Chairman, Bill Foley; Executive Vice President, Brent Bickett; and CFO, Tony Park. Bill will begin with a brief strategic overview and Brent will then review our portfolio company investments, and we'll then open the call for your questions and finish with some concluding remarks from Bill.

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 risk and other factors detailed in our press release dated yesterday, and in the statement regarding forward-looking information, risk factors and other sections of the FNF's Form 10-K and other filings with the SEC.

This conference call will be available for replay at fnf.com. It will also be available through phone replay beginning at 1:30 PM Eastern Time today through next Thursday. The replay number is 800-475-6701 and the access code is 396732.

Let me now turn the call over to our Chairman, Bill Foley.

William Foley

Thanks, Dan. We continue our efforts to selectively monetize certain investments and repurchase FNFV common stock during the second quarter. In June we completed the sale of our 15% minority interest in Stillwater Insurance Group for gross cash proceeds of $36 million and a pretax gain of $15 million.

Additionally, Ceridian Holding sold remaining shares of FleetCor it owned, almost all of which were being held in escrow. Total proceeds were $212 million of which $202 million will remain in escrow subject to be released equally in November 2016 and November 2017. We expect to receive 33.5% share of any proceeds distributed from Ceridian Holding.

Finally, we increased our investment in Ceridian by $17 million by buying out the shares of one of our fellow investors. We now own 33.5% of Ceridian. We continue to repurchase our own shares during the second quarter. In total, we bought back an additional 1.8 million shares for a total cost of more than $20 million, thereby reducing FNFV's share count to approximately 67.2 million shares. We have now repurchased a total of 25.5 million shares or approximately 28% of all the shares of FNFV that we distributed to FNF shareholders in July of 2014. We will continue to focus on the growth, financial performance and monetization of our current investments while seeking attractive future investments that will create value for shareholders.

I will now turn the call over to Brent Bickett to review our portfolio of companies.

Brent Bickett

Thanks, Bill. Ceridian HCM generated second quarter revenue of $167 million, a 1% increase over the second quarter of 2015, as the growth in cloud-based revenue continues to outpace the decline in the legacy core payroll business. This is a second straight quarter of total company revenue growth.

Adjusted EBITDA in the second quarter was $12 million, after backing out a trademark impairment charge from the sale of the U.K. business. A $7 million decline versus the second quarter 2015. In the second quarter, cloud-based revenue was $67 million, a 33% increase over the second quarter of 2015.

170 Dayforce customers were signed and 140 went live on the cloud platform during the second quarter. Live-to-date, over 2,900 customers have been signed and over 2000 have gone live on the platform. During the quarter, Ceridian sold its U.K. payroll business to SD Worx and then entered into a strategic partnership with SD Worx to deliver its cloud software throughout the U.K. and Europe which will provide Ceridian additional capital to develop, sell and implement its cloud-based solutions in North America and Europe.

American Blue Ribbon Holdings generated second quarter revenue of $292 million, a 1% decline from the second quarter of 2015, after adjusting for the sale of Max & Erma's. Adjusted EBITDA was approximately $18 million for an adjusted margin of 6.2% compared to adjusted EBITDA of $19 million and an adjusted EBITDA margin of 6.5% in the second quarter of 2015.

Same-store sales in the aggregate declined by 2.6% as Ninety Nine same-store sales growth of 2.4% was offset by a 4.3% decline at O'Charley's, a 4.7% decrease at Village Inn and a 5% decline at Bakers Square. Ninety Nine's performance exceeded the New England Black Box by 370 basis points and its same-store sales growth was its 13th consecutive quarter of same-store sales growth. The casual dining combination of O'Charley's and Ninety Nine in the aggregate also outperformed the Black Box index in a very difficult quarter for the casual dining industry.

As you may have read, the casual and family dining segments have been impacted by a weaker consumer market in Q2 and the family dining segment in particular has felt that impact from the emphasis of all day breakfast from some industry players. However, organizational and operational changes and continued cost cutting efforts in the quarter helped to limit the EBITDA margin decline to just 30 basis points despite the weakness in same-store sales.

Digital Insurance generated second quarter revenue of $36 million, a 31% increase over the second quarter of 2015 and adjusted EBITDA of $8 million, a 40% increase versus the second quarter of 2015. Adjusted EBITDA margin for the second quarter was 22%. Digital's organic growth revenue rate for the first six months of 2016 was 12%, approximately 200 basis points was due to the early receipt of carrier bonuses that normally flow into Q3. Digital completed three acquisitions in the second quarter that will add approximately $11 million in annual revenue. Digital's acquisition and partnership pipelines are strong and we remain excited about Digital's strong execution of their business plan.

At June 30, FNFV's book value was $940 million or $13.98 per share, based on a share count of [indiscernible]. This includes $106 million in holding company cash, down approximately $6 million from March 31, caused primarily by the receipt of $36 million on the Stillwater Insurance sale, offset by more than $20 million spent on share repurchase and $17 million from the purchase of additional Ceridian equity from another investor.

Let me now turn the call back to our operator to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from the line of Chas Tyson with KBW. Please go ahead.

Chas Tyson

I just wanted to ask on the buyback during the quarter, looked like it slowed down a little bit on both shares and dollar basis. Just want to get color and see if there's anything there, if you're marshalling cash for something you're looking at or what you're thinking there?

Brent Bickett

Yes. We bought back steadily 25,000 shares per day which is about the pace that we have been going on in 2016. And you are exactly correct, it's just is trying to balance, keeping cash on hand if we see an attractive opportunity versus trying to buyback our stock at what we think are attractive prices.

Chas Tyson

Okay. And then at ABRH, it's nice to see the margin growth despite the same store sales decline there. Do you think there's more, you can get more margin growth without revenue increases, or do you need more revenue to get more operating leverage?

Brent Bickett

Well, we would had more expansion, but you are hitting a strong point. As you hit a same-store sales decline, then you are not able to leverage as much as your labor cost against your sale. So we do need revenue growth in the brands to get continued margin expansion. I mean Ninety Nine's margins have expanded significantly as their same-store sales growth over the last 13 quarters continues to outperform. We need now those efforts at the other brands to get better margin control. We did take some cost controls, as I mentioned in the script, in Q2. Not a lot of that impact was directly felt in Q2, it will be felt more in Q3 and beyond, as we try to right-size the organization for the size restaurant company that we plan to run in the future.

Chas Tyson

Okay. Got it. So do you think there's more margin improvement to come without revenue growth or do you need revenue growth to get the margin growth?

Brent Bickett

It will be modest. But, yes, it would be more on the controllable cost where we are doing what we need to do to make sure that we are running as efficient as we can. On the operational side, we absolutely do need to get more same-store sales growth.

Chas Tyson

Okay. And then as you look at the portfolio, and I know you monetized Stillwater and got some cash out of that. Is there anything else that as you look at it, you think could be more of a near-term monetization, or is it kind of the same thought pattern as previous quarters, we're still looking for it to be opportunistic?

Brent Bickett

I think that was more opportunistic. We don’t see anything really in Q3 on the monetization efforts. We are still on Ceridian. That story is still evolving nicely and we think it will, the story will be even clear as we roll into 2017. The restaurants, while we do think we would be obviously open to monetization initiatives and have been pursuing various ones, we got to focus down and in and get them operating stronger to help open up those monetization efforts. But clearly that’s something that would be top of mind. Digital is performing exceedingly well. As they continue to roll through '16 and get their EBITDA on a run rate basis into the mid to high 30s and then with a good outlook into '17, there is always possibilities there. So it's still early. So nothing in the near-term for those.

Operator

And we do have a question from the line of John Campbell with Stephens, Inc. Please to ahead.

John Campbell

On the minority buyout for Ceridian, I think you guys are including growing your ownership share there. I think 33.5% is where you guys are now. But anything to read into that as far as the long-term ownership plans? If you guys can maybe just walk us through the rationale there and then any updated views on the long-term plans for Ceridian?

William Foley

Sure. Nothing real special. As you might recall, John, this investment was made in '07. We bought a third of it as it turns out, and THL bought a third of it, and then the limited partners bought a third of it. And some of those limited partners were hedge funds that are no longer in the business of making these types of investments. So an opportunity presented itself in one of those hedge funds and THL and Fidelity, we bought half each at what we think is a very attractive price. So it's just more opportunistic.

John Campbell

Okay. And then Ceridian as a whole can be a bit of a Black Box for the investment community, but it clearly looks like the compelling opportunity there is Dayforce. So if you guys can maybe just spend a little bit of time and maybe brief us on why that's winning market share? Is it a differentiated kind of value proposition or is it attractive pricing, or maybe sales force success?

William Foley

Well, it's just a movement on these HR information systems. So HRRS systems that instead of having point solution providers, now with the way this offer has developed, you could kind of eliminate several different systems. So our system not only has payroll but has recruitment training, workforce management, on-boarding. I mean just many different things that an HR and a company use to manage their employees and their human capital. So there seems to be terrific demand and we are experiencing it and some of our competitors are experiencing it, but we seem to have a product that when it matches off against it competition, is fairing off very very well.

We had a record sales quarter in Q2 and there was a record sales for the first six months of the year. We think our pipeline remains strong there. So, again a right product, it seems, at the right time. And I would agree with you that’s a story that does feel a little like a Black Box. But the company over the last couple of years, they have been divesting or selling or shutting down non-core businesses. And we are finally getting to the point where the go forward side is Dayforce. But we still have our legacy core payroll business. But that’s a good thing because we have a lot of customers there that we are converting over time on to the Dayforce platform. So we have an embedded customer base in addition to going out and making net new sales wins and you monitor both.

As I mentioned, we sold the U.K. legacy payroll business and we repatriated that capital back to the United States to give Ceridian even added financial resources to continue its investment in sales implementation and development resources to further take advantage of the opportunity in front of us. The first milestone that we saw was, that we as a board were looking at and as investors we were looking at, was to make sure the revenue growth in the cloud-base business was outpacing the decline in the core payroll business and that happened last year. And that growth has continued. As we roll into '17, what we now want to see because the more success we have on Dayforce the harder it impacts our EBITDA because we have to expense as incurred our sales and marketing and much of the implementation cost, as opposed to capitalizing those on the balance sheet.

So we expense all those before we get the opportunity to recognize revenue. So we think that the EBITDA story should bottom out in this year and then accelerate as we get into '17. And that’s the next milestone that we are looking at. So it's been a long journey for us but we see a bright light at the end of the tunnel and we now have the financial resources available to the team to help to execute on the opportunity.

John Campbell

Got it. That makes sense. And then if I just think about the cloud-based revs, that looks like it's, kind of annualized run rate of about $270 million or so. As you think about the total addressable market, clearly guys are going to look at that and maybe put a little bit more of a SaaS multiple just on that business. It's got some of the growth characteristics as some of the SaaS peers but as we think about total addressable market, how big is that market that they are playing into?

William Foley

Again, I would have to -- I don’t have an exact number but I remember talking to the management team, and it depends on how broad you want to define HRS systems and ERP systems. But $15 billion, I mean it could be even higher. All I could tell you that is that our pipeline remains very very strong. We expect the second half sales to remain -- of 2016 to remain strong. And keep in mind that this is all recurring revenue, so your retention on these customers are exceedingly high. So everything that you sell and implement is this kind of building the snowball for the future. But we are not too worried right now about the addressable market, we are worried about, continue to develop, continue to win sales, improve our implementation, reduce our time and cost of implementation, to improve the ROI of every deal that we sign.

John Campbell

Okay. That's helpful. And then last one for me. Del Frisco's stock has kind of been choppy. It seems like it's doing fairly well against some of its consumer peers, but any updated thoughts there? Do you guys look to maybe grow that position, or you just kind of holding steady? It is just optionality at this point?

William Foley

We are just holding steady. We are monitoring it as well. I mean we are attracted by the brand, we are attracted by the concept that they have. They seem to be holding their own and might even have some easier comps going forward for them. But right now at the current market price, we are just monitoring.

Operator

[Operator Instructions] And it looks like we do have a question from the line of Jason Deleeuw with Piper Jaffray. Please go ahead.

Jason Deleeuw

A question on digital insurance, the organic growth. I think I heard 12%. If you could just give us a little bit more color on what's driving that? My sense is there's some pretty meaningful market share gains. If you could just kind of talk about the market share gains and what digital insurance is displacing?

Brent Bickett

Well, it's also their execution, their business plan. So, yes, they experienced 12% growth which, frankly, far exceeded our expectations and, frankly, even their budgeted expectations. Some of that, as I mentioned in the script, was there was 200 basis points, so the 12% organic revenue growth was due to earlier than expected receipt of carrier bonuses. Digital is becoming more and more and more of a significant player to the carriers across the country, and we are a concentrated source of business and we receive certain bonuses from them that are typically felt a little in Q1 and more in Q2 and some spillover in Q3. A lot of that came in in Q2 which helped the organic revenue growth on a year-over-year basis.

But the other thing that they do quite well is, when we acquire a new hub in a particular geography, we do a very good job of pulling in other producers. It could be a single producer, two producer shops, without having to buy them. We are almost able to have those people come into our platform because of the efficiency of the technology, the efficiency of the processing and how we onboard and resign clients, we are able to basically keep all those people out there at same compensation level. Free up about 30% of their time to get more sales and then they actually start making even more money than they did under their own shop because of the efficiency of our platform.

We have also been very successful going to the larger brokers, again using the same platform to take over their small books of business because we could process those small books much more profitably than they can. So we can actually, some of these books might not be making money for these larger brokers but under our watch, we could share half the premium and we could still make 50% because of the efficiency of our technology platform.

We also have -- we are not just in employee benefits. We do have a risk analytics group that helps drive some incremental revenue opportunities. We also have a segment that focuses on the PEO side, the professional funding organizations, which are significant growers. And so we just have been hitting on a lot of positive opportunities.

Jason Deleeuw

That sounds great. And then in terms of the new investment opportunities that you are thinking about. What's the appetite there for new opportunities? Are there any areas that are more interesting to you?

William Foley

You know, we only have a bent towards financial services and that’s a pretty, obviously broad segment. But if you look at the success that we as a management team have had with FIS, with Black Knight, we have a fondness for both types of businesses. So things are pretty expensive out there so you haven't seen us really execute those things. It's not saying that we haven't looked at them, just we are pretty cautious on using our funds for that. But that would likely be an area that if we did anything of size, it would be in that segment.

Operator

And we do have a question from the line of [Jon Bock with Fedhen Capital] [ph]. Please go ahead.

Unidentified Analyst

Thank you so much for the color on Ceridian before in the prior question. It seems from the Analyst Day roll out in February, I believe, that the new UI and the 21st century interface is having some uptake in the market. I wanted to ask a question regarding any future growth initiatives within Ceridian. Specifically, it seems a lot of HCM players are lacking on big data and data as a service integration, especially now that Microsoft is rolling out with their Cortana platform. I was wondering if Ceridian is doing anything along that lines and what your discussion with management on that front is? Thank you.

William Foley

Yes. I can't really comment on that. We are very much fans of focusing on the opportunities that are right in front of you and we are experiencing, as you heard, a lot of sales wins. So we want to conquer and improve on our implementation cost which we began that last year to automate a lot of the processes to make it more efficient and those early results are looking very very good. We are still developing out the platform which we think is a priority to keep adding all these different elements and modules, if you will, to the platform. As we progress in some of our other business, new opportunities, to your point, have presented themselves on the data side, where some of this data resides in unique platforms and to combine that into a more common warehouse, if you will. Upon which then you could overlay some business intelligence tools and insights. So we are looking at that in some of our businesses but it would be down the road for Ceridian.

Operator

And we do have a question from the line of John Campbell with Stephens, Inc. Please go ahead.

John Campbell

Just one more, back on digital insurance. Clearly, I think you are starting to get to the scale that I would think makes you pretty attractive to some potential suitors out there, and also you've got suitable margins and it seems like the organic growth rate is above peer averages. Could you guys just maybe update us on maybe what the longer term plan is there? Is that something that you want to eventually potentially sell or potentially IPO?

William Foley

Well, I agree with your comment that it is performing well. We think it's organic revenue growth is pretty surprising and significantly higher than we see in many other companies out there. As I mentioned, they are executing well. I think we are generating a terrific return on equity every quarter that goes by. It was always a goal of ours to, and Adam and the management team, to let's get that EBITDA into the high 30s with a path towards 50. And whatever opportunity presented itself at that time, whether it's an IPO, if that’s something that markets would accept which I think would be a very attractive IPO candidate, or whether it was a strategic sell. We would sit down with the management team and figure that out. What we do know is that we can continue growing the business, getting the EBITDA margin, give it a little bit more scale in terms of size from a revenue and from an EBITDA perspective. I think we can have an attractive outcome.

Operator

[Operator Instructions] And it does appear at this time there are no further questions from the phone lines. I will turn the conference back to your host for closing remarks.

William Foley

We continue to repurchase our shares during the quarter and in the future we will focus on the growth, financial performance and monetization of our current investments while seeking attractive future investments that will create value for our shareholders. Thank you for joining the call today.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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