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Cannae Holdings, Inc. (NYSE:CNNE)
Q2 2018 Earnings Conference Call
Aug. 13, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Cannae Holdings Second Quarter 2018 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened 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 Cannae Holdings. Please go ahead, sir.

Jamie Lillis -- Head of Investor Relations

Thank you, operator, and good morning, everyone. We appreciate your participation in our second quarter 2018 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 through 11:59 p.m. Eastern Time on August 20, 2018.

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 dated 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, as well as our ability together with the investment consortium to close the acquisition of Dun & Bradstreet including our ability to fund and/or sell down our equity commitment pursuant to the definitive agreement entered into in connection therewith.

Let me now turn the call over to Bill.

William Foley -- Executive Chairman

Thank you, Jaime. To start, we have made meaningful progress executing our strategy as we strive to create value for our shareholders by monetizing our existing investments and pursuing new investments and sectors with an attractive long-term growth potential.

Ceridian has emerged as a market leader in the payroll and human capital management software sector, and we are pleased with their continued strong performance. Ceridian's impressive growth over the last several years combined with their market position in the HCM sector positioned the company for a successful initial public offering in April. Currently, Cannae owns 37.1 million shares of Ceridian common stock, representing a 27% ownership position. Based on CDAY's closing price of $35.19 per share this past Friday, August 10, Cannae's stake in Ceridian has a market value of $1.31 billion.

I am also pleased with our announcement on August 8th of our entry into a definitive agreement in partnership with an investment consortium including CC Capital and Thomas H. Lee Partners to acquire Dun & Bradstreet. The deal was valued at $6.9 billion and Cannae's investment commitment is $900 million.

Importantly, we have agreed to use our reasonable best efforts to syndicate between $400 million and $600 million of our equity commitment of which we will receive a 3% -- for which we will receive a 3% syndication fee. We anticipate owning between $300 million and $500 million of DNB and expect to fund the commitment with cash on hand, availability in our line of credit and potentially with sales of Ceridian stock dependent on market conditions.

Looking forward, we believe that Dun & Bradstreet's insight-driven business model and interconnectivity across industries has positioned the company for continued success. Of note, we see a significant opportunity to grow the company, increase our operating efficiencies and improve the DNB customer experience by providing enhanced business solutions. This is a terrific opportunity for Cannae to make a scale investment in partnership with like-minded investors that we know well. As we execute upon this strategy, we believe that we will enhance the value of DNB and deliver value for our shareholders.

I'll now turn the call over to Brent Bickett.

Brent Bickett -- President

Thanks, Bill. Today Cannae is comprised of three businesses, which include Ceridian, our Restaurant Group and T-System. We will review the success that we have achieved with the Ceridian IPO and the subsequent trading performance of CDAY. As part of the IPO in April, Ceridian distributed its equity interest in its Lifeworks joint venture to its shareholders. On July 9, 2018 Lifeworks announced the sale of the company to Morneau Shepell for $325 million in cash, and the transaction closed on July 27. Cannae expects to receive approximately $56 million in cash for its interest in Lifeworks later this month.

Turning to our Restaurant Group, as you'll recall, we entered into a non-binding letter of intent with Newport Holdings in March to reorganize our respective equity interests in American Blue Ribbon Holdings. Currently the reorganization discussions had been put on hold. Despite the delay, we continue to work with ABRH's management team to improve the profitability and cash flow generation of the Restaurant Group's operations. As Rick will discuss in more detail, we see significant room to drive operational improvement which we ultimately believe will be a key to drive value for our shareholders.

Turning to T-System, we announced in August 1st that Bob Wilhelm was named T-System's new Chief Executive Officer. Bob brings the right experience having spent over 20 years in leadership positions in the tech-enabled healthcare services industry, including notable market leaders Cerner and Trizetto. Most recently, Bob served as CEO of Adreima, which is a revenue cycle management services company, where he successfully scaled the business into a full-service partner to healthcare organizations. Bob has the right skill-set to build upon T-System's established documentation and coding businesses as we work to accelerate the company's organic growth and execute upon our acquisition strategy to expand T-System's capabilities.

As a reminder, T-System organizes itself into two segments. The first is its clinical documentation segment, which offers a full suite of software solutions through their EV platform, providing clinical staff, full workflow operations to drive documentation completeness and revenue. In addition, their patented T-Sheet and T-Sheets EVolvED is the industry standard for emergency department documentation. The company serves 254 customers at 512 individual sites on the software platform solutions while serving 441 customers at 688 sites under T-Sheet and T-Sheets EVolvED platform.

The second segment is T-System's coding software and outsourced solutions area, which provides a full service outsourced coding solution as well as a cloud-based software as a service solution for self-service coding. These offerings helped more than 79 customers optimize their revenue cycle workflow and customer revenue reimbursement at over 412 sites through improved coding accuracy, compliance and productivity as compared to in-house solutions.

For the second quarter of 2018, T-System recorded organic revenue growth of approximately 11.8% led by the coding segments over 40% revenue growth from the second quarter of 2017. This growth was driven by higher same site revenue, reflecting an increase in patient visitation and the addition of two large coding customers toward the end of 2017. We look forward to working with Bob Wilhelm and the rest of the T-System management team to continue to organically grow the company, and pursue attractive add-on acquisitions to pursue -- to expand the company's product breadth and customer reach.

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

Richard Cox -- Chief Financial Officer

Thanks, Brent. To start off, Ceridian, which includes both Cloud and Bureau solutions, generated second quarter revenue of $179.3 million, which represents a 13.8% increase from $157.5 million in the second quarter of 2017. Adjusted EBITDA in the second quarter was $33.6 million, an $11 million increase or 48.7% growth over the year ago quarter.

In the 2018 second quarter, cloud-based revenues grew 35.5% to $127.8 million as compared to $94.3 million in the year ago quarter. In total, more than 3,300 customers are now live on the platform up from the 2,690 at the end of the second quarter of 2017. More details on Ceridian's second quarter financial results, which were announced this past Thursday, can be found on the Investor Relations section of their website.

Turning to the Restaurant Group, American Blue Ribbon Holdings generated revenue of $276.2 million in the second quarter of 2018, as compared to $287.6 million in the second quarter of 2017. The $11.4 million decline was primarily related to a 4.3% decline in revenue of Legendary Baking, the closure of 10 underperforming restaurants, as well as an overall decline in same-store sales of 1.5%.

Our Ninety Nine brand continued to perform well having delivered same-store sales growth of 0.9%. This strong performance was more than offset by O'Charley's which declined by 2.8%, Village Inn was declined by 1%, and Bakers Square was declined by 4.2%. Of note, Ninety Nine same-store sales results outperformed the Black Box regional index, same-store sales decline of 1.6%. O'Charley's underperformed the Black Box national index same-store sales increase of 0.5%, while Village Inn and Bakers Square underperformed the NPD midscale family index same-store sales decline of 0.7%.

ABRH delivered second quarter EBITDA of $8.6 million, representing an EBITDA margin of 3.1% in the second quarter of 2018, which compares to EBITDA of $10.6 million and an EBITDA margin of 3.7% in the second quarter of 2017. Of note, second quarter EBITDA margins expanded by 120 basis points from the first quarter of this year on relatively flat sales.

As Brent highlighted, ABRH's management team is implementing a broad range of strategic initiatives designed to improve profitability, free cash flow and ultimately same-store sales. These initiatives include consolidating and/or renegotiating supply chain agreements, managing personnel and related costs, optimizing our IT expenditures, driving manufacturing efficiencies, and eliminating the cost of unnecessary assets. The implementation of these initiatives are starting to have a real impact on our results and we see continued room for further improvement.

For the second quarter of 2018, T-System total revenue increased 11.8% to $16.4 million in the second quarter of 2018 from $14.74 million in the second quarter of 2017, post-ASC 606. The company generated second quarter EBITDA of $4.2 million, which was an increase of $490,000 as compared with the year ago quarter. EBITDA margins were 25.99%, representing a slight increase of 23 basis points as compared to our year ago quarter. Overall, we are pleased with T-System's second quarter results, and look forward to growing our market share while improving our margins.

At June 30, 2018, Cannae's book value was $1.08 billion and our book value per share was $15.03. We ended the second quarter of 2018 with $67 million [ph] in holding company cash, which is down from $148 million as at December 31, 2017, and largely reflects the assignment and purchase of ABRH credit facility, which consumed $124 million of cash and the cash portion of the LTIP incentive payment, that was triggered by the successful Ceridian IPO in April. The Ceridian LTIP payment totaled $67 million and was paid with $47 million in cash and 991,000 shares of Cannae common stock.

To conclude, we are pleased with our results for the second quarter of 2018, and we will continue to strive to optimize our operational results while enhancing shareholder value.

I will now turn the call back to the operator to begin our question-and-answer session.

Questions and Answers:

Operator

At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of John Campbell from Stephens. Please proceed with your question.

John Campbell -- Stephens -- Analyst

Hey guys, good morning.

William Foley -- Executive Chairman

Good morning, John.

John Campbell -- Stephens -- Analyst

Hey, so if take the book value of everything outside of Ceridian, if I add in the tax effect that I guess the market value of the CDAY position, I get to around $24 of share value, stock -- the CNNE stock here at $17 and change that's almost a 40% premium. So first, are we thinking about that right? And then secondly, I know you have got to set aside some capital for the DNB deal, but what are your updated thoughts on the buybacks, just given that implied discount to your stock?

Brent Bickett -- President

This is Brent, John. Yeah, your math is right on 37.1 million shares x Ceridian price, we have about $390 million or so in tax basis, we have a 21% federal rate. So, that allows us to -- around $15, $16 per share after tax, and you add in the other stuff and it does get up to about $24. So, yes, that discount is there. In terms of buying back the shares, it's obviously something that we would look at. We found a terrific deal in Dun & Bradstreet that we think can drive great future value for us. So, we are going to set aside our capital to pursue that transaction.

John Campbell -- Stephens -- Analyst

Okay, that makes sense. And then on T-System, can you guys just give a broader update on the outlook, just with regards to the revenue growth, can you carry that kind of low double digit growth rate. And then anything to call out as far as margins and how that might look next year, you're looking for any kind of expansion in margins as you're getting into 2019?

Brent Bickett -- President

Yeah, importantly, on T-System, we announced that we put in the new CEO. We wanted somebody who's going to be with us for the next five years, three to five years, however long this journey takes us to go. So Bob is settling in into the company here in August, and we typically work in tandem with our CEO and the management team to pursue it.

So, yes, they're going to continue to organically grow. But as we said, we believe this is a strong platform that we could look at some add-on M&A to really accelerate the business, which was our thesis when we bought it. But we need Bob to get in the saddle and evaluate the company, and with his leadership help him to accomplish those objectives. But we still think the company is positioned for organic growth, but again, we see a lot of attractive add-on opportunities and we'll work with Bob to try to execute on those.

John Campbell -- Stephens -- Analyst

Great. Thanks, guys.

Operator

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

Jason Deleeuw -- Piper Jaffray -- Analyst

Thank you. Good morning, and congrats on the DNB deal. I just want to make sure I kind of understand all the funding sources. So first of all, how much cash on hand does Cannae have right now after Lifeworks, and how much do you think is needed just to kind of keep on the balance sheet just for Cannae that cash that couldn't be used for -- to fund DNB?

Brent Bickett -- President

Yes, let me keep it in perspective that this transaction, probably closes in February or March of next year. By the time, we're through with the go-shop, filing a proxy, need it approved by the SEC during our shareholder meeting, and finally closing. We anticipate other cash resources coming forth during this next six or seven-month period. So we've have always maintained enough cash to keep a decent amount of liquidity.

What we really intend to do is, we intend to sell down our $900 million commitment to somewhere between $300 million and $500 million. So the funding required is not quite as -- is not quite steep a hill as you might otherwise think. And we have several hundred million dollars of expressed interest already in terms of buying down our position. So we're not -- we're really not concerned about the sell down piece. We also earn a 3% fee on that portion that we sell down. And so that's another source of cash.

We also anticipate having some resolution to the restaurant situation over the next six months and generating some cash. And then finally, we have three or four different alternatives relative to the CDAY stock whether just to sell it out right, to do a forward sale, to do a convert where we basically sell stock and take it, and sell a convert and receive about 130% of the proceeds to the value of the shares. So honestly, we are not really very concerned about the cash raise to accomplish the $500 million equity commitment to DNB.

Jason Deleeuw -- Piper Jaffray -- Analyst

Okay, thanks for all that, and it sounds like there are enough sources of funding here where you could pretty easily be able to fund this without raising additional Cannae equity. Is that a fair way to think about it? I mean, and the Cannae equity raise would maybe just be as part of an option, but it seems like there is enough alternatives here to give you plenty of capital to take down your commitment?

Brent Bickett -- President

Yeah, we actually like our cap structure in terms of shares outstanding. It's fairly low, it's around 71 million, or 72 million shares outstanding. We really don't want to issue any more shares. It just isn't part of our game plan. We'd rather self fund these kind of acquisitions and we feel fortunate that we -- this one came our direction. We've been working on it about six months, five months, and it came together very quickly at the end based upon the desires of DNB to have a transaction that they could depend upon to be closed. And fortunately for us at the time that we were negotiating the other -- the competition that there was if you call it that sort of stepped aside, because of the short time frame that we are involved with. So a long answer to question, we don't intend to issue more equity as part of this.

Jason Deleeuw -- Piper Jaffray -- Analyst

Thank you. And then there's a long history with the management team being good operators and driving a lot of value for shareholders on these acquisitions by just smart in improving the operations, will Cannae be involved in the DNB operations?

William Foley -- Executive Chairman

Cannae is actually -- the present plan is that I would be Executive Chairman. We're going to bring -- they don't have a CEO, they have a temporary CEO, acting CEO. We will bring in a CEO and some other individuals. So we're going to have a pretty robust management team that will look a lot like the Black Knight program when we got that going.

Jason Deleeuw -- Piper Jaffray -- Analyst

Got it. And then just a last one, the DNB opportunity we've kind of little bit of color in the press release and in the commentary today, and maybe there is not much more you can say, but is there anything else you can add in helping investors kind of think about this opportunity with Dun & Bradstreet?

William Foley -- Executive Chairman

Well, we just think, if you look back at the Black Knight acquisition or LPS acquisition, this is a company that's similarly situated. Their sales efforts are siloed as opposed to be cross selling within -- they have had a series of CEO's over the last seven or eight years. So, leadership has been a little bit of an issue with the company. And I just believe that we can bring some focused leadership to the organization. We'll generate fairly significant synergies as part of our acquisition. And then, another key element is to grow the business, and get the business growing at 3% to 5% a year. But we believe we've spent enough time in the company that we're confident we can get all those things accomplished.

Jason Deleeuw -- Piper Jaffray -- Analyst

Thank you for all that.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Bill Foley for closing remarks.

William Foley -- Executive Chairman

Thanks very much for joining us today. We appreciate your time, and we look forward to talking to you next quarter.

Operator

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

Duration: 23 minutes

Call participants:

Jamie Lillis -- Head of Investor Relations

William Foley -- Executive Chairman

Brent Bickett -- President

Richard Cox -- Chief Financial Officer

John Campbell -- Stephens -- Analyst

Jason Deleeuw -- Piper Jaffray -- Analyst

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