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Cannae Holdings, Inc.  (NYSE:CNNE)
Q2 2019 Earnings Call
Aug. 08, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Cannae Holdings Second Quarter 2019 Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions]

It is now my pleasure to introduce your host, Jamie Lillis, Investor Relations for Cannae Holdings. Please go ahead, Jamie.

Jamie Lillis -- Investor Releations

Thank you, operator, and good morning everyone. We appreciate your participation in our second quarter 2019 earnings conference call. Joining me today are Cannae's 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 15th, 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 Brent.

Brent B. Bickett -- President

Thank you, Jamie. Our team under Bill Foley's leadership continues to make process, positioning our portfolio for value creation that will ultimately benefit all of Cannae's stakeholders. A meaningful highlight is the progress being made on the execution of our strategy to improve Dun & Bradstreet. When we acquired D&B, our view was that the company had very valuable data and a strong competitive position. It was the company's management, culture and cost structure which were impeding D&B's success. We believe that with the right management team and organizational structure combined with a more streamlined cost structure that we could significantly improve D&B's profitability and return the company to sustainable organic growth. After five months into our turnaround, our team is more confident in our view.

Anthony Jabbour and Steve Daffron have made significant headway on our cost reduction plan having eliminated approximately $153 million of annualized expenses through the second quarter and remain on track to achieving their $200 million annualized expense reduction target by year-end 2019. Thus far, the focus has been on labor inefficiencies, high-cost professional fees and facilities consolidation.

Looking to the second half of 2019, we'll begin the second phase, which is focused on optimizing our IT infrastructure, additional facilities consolidation, process automation, offshoring and efficiency gains to the upgrade or retirement of legacy software platforms. Beyond expense reduction, we have also implemented a new organizational structure where we now have a General Manager in charge of each business segment who has P&L responsibility. This structure will drive much-needed accountability and transparency at the business segment level, which was previously lacking at the company.

As part of this realignment, we have also reorganized our sales structure to improve sales productivity while also reducing costs. We have moved our sales organization to an account manager structure where they are responsible for selling the entire suite of D&B solutions and utilizing product specialists when needed. By simplifying the structure, we can drive better cross-selling and improve overall output. Clear signs of the turnaround can be seen in D&B's results for the first quarter, where first quarter 2019 adjusted EBITDA increased by approximately 10% to $129.2 million as compared to adjusted EBITDA of $117.6 million in the year ago first quarter. We expect the year-over-year adjusted EBITDA growth rate to increase over the remaining quarters in 2019. As a reminder, we will be reporting D&B's results on a one quarter lag, which Rick will discuss in more detail.

We see real opportunities to utilize D&B's extensive and proprietary data to create new products and revenue streams to further accelerate growth. As part of this strategy, D&B completed the acquisition of Lattice Engines on July 1st. Lattice further enhances D&B's position as the leading provider of integrated data and analytics solutions for B2B marketing and sales professionals. We will continue to evaluate tuck-in acquisitions that could expand our customer's solutions, speed to market and improve long-term revenue growth.

Moving to Cannae's largest investment. Ceridian HCM Holdings remains a market leader in the payroll and human capital software sector, as evidenced by their second quarter 2019 growth rate of 27.1% in Dayforce revenues. The management team at Ceridian continues to drive meaningful growth in cloud revenue and has successfully executed upon their strategic plan, which we believe positions Ceridian for continued long-term growth and success.

During the second quarter, we made the decision to prudently rebalance our portfolio by selling 2 million Ceridian shares at a price of $50.50 per share. We received net proceeds of approximately $101 million, which we used to repay borrowings incurred to fund our investment in D&B, as well as increasing holding company cash. Currently, Cannae owns approximately 30.7 million shares of Ceridian common stock, representing a 21.7% ownership position.Based upon Ceridian's closing price of $50.42 per share on August 7, 2017, Cannae's stake in Ceridian has a market value of $1.55 billion. We remain very positive on the outlook for Ceridian's business, but will continue to prudently rebalance our portfolio with a near-term objective of repaying the remaining $175 million of borrowings incurred to fund the D&B investment.

Turning to our Restaurant Group. Our Ninety Nine brand continues to deliver a solid same-store sales growth of 1.5% in the first -- in the second quarter, which exceeded the Black Box New England Index by almost 200 basis points. While our Ninety Nine brand remains a jewel in our restaurant portfolio, we are starting to see the positive impact of our management team's turnaround initiatives at ABRH. Through the second quarter, the team has achieved more than $20 million in pro forma cost reductions, including the closure of 19 restaurants in the second quarter, bringing the total number of closures to 47 since the third quarter of 2018. Further headcount reductions, IT efficiencies and the closures of the family dining division's Denver headquarters and Legendary Baking's Santa Ana, California plants also led to these cost reductions.

In addition to these actions, we've also launched additional brand and operational initiatives focusing on new menus and optimizing social media and marketing channels to drive guest counts at O'Charley's, Village Inn and Bakers Square. Our Legendary Baking manufacturing efficiency and profitability are continuing to improve. As we look to the back half of the year, we will continue to be aggressively executing our plan to improve our brand's performance, profitability and cash flow in order to provide increased optionality for potential monetizations.

Turning to T-System. Bob Wilhelm has made significant headway with his initiatives, with an end goal of improving revenue and EBITDA growth. To this end, Bob realigned the sales and management functions and hired a new Chief Commercial Officer. As his initiatives are executed, the focus will then turn to looking at accretive add-on acquisitions in order to drive cross-sell opportunities while expanding product offerings.

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 second quarter revenue of $196.3 million, inclusive of both Cloud and Bureau solutions, which represents a 9.7% increase from the second quarter of 2018. First quarter adjusted EBITDA increased 22.6% to $44 million as compared to the year ago quarter. In the 2019 second quarter, cloud-based revenues, which include both Dayforce and Powerpay, grew 22.3% to $155.7 million as compared to $127.3 million in the year ago quarter. In total, 4,006 customers are now live on the Dayforce platform, up from 3,308 at the end of the second quarter of 2018. More detail on Ceridian's second quarter financial results, which were released last week on July 30th, can be found on the Investor Relations section of their website.

As Brent discussed, we are very pleased with the success that our team is achieving at Dun & Bradstreet, and we're optimistic on the outlook for the business. From an accounting perspective, we'll be reporting results using the equity method of accounting and we'll be reporting on a one quarter lag basis. As the acquisition closed on February 8th of this year, we are only consolidating a portion of Dun & Bradstreet's results for the first quarter.

For the successor accounting period on February 8th, 2019 to March 31st, 2019, Dun & Bradstreet generated total revenue of $174.1 million and net loss of $81.1 million. For the successor accounting period, February 8th, 2019 to March 31st, 2019, during which Cannae owned D&B, adjusted revenue was $196.2 million and adjusted EBITDA was $62.9 million. For the full quarter ended March 31st, 2019, Dun & Bradstreet generated total revenue of $352.8 million and net loss of $284.1 million.

For the full quarter ended March 31st, 2019, D&B generated adjusted revenue of $400.8 million and adjusted EBITDA of $129.2 million compared to revenue of $408.9 million and adjusted EBITDA of $117.6 million in 2018. The full quarter ended March 31st, 2019, adjusted EBITDA excludes the effect of purchase accounting, interest expense, transaction-related expenses and taxes of approximately $413 million. Approximately $320 million are one-time charges related to merger and acquisition fees, restructuring and severance, and pension settlement expense.

Turning to our Restaurant Group. American Blue Ribbon Holdings generated total revenue of $266.5 million in the second quarter of 2019 compared to $276.2 million in the second quarter of 2018. The decline in revenue is largely a result of planned store closures combined with an aggregate 1.4% decline in same-store sales for brands other than Ninety Nine. Of this total revenue of $266.5 million in the second quarter of 2019, our Ninety Nine brand delivered solid revenue performance of $82.1 million compared to $80.5 million in the same quarter of last year, achieving same-store sales growth of 1.5%.

American Blue Ribbon Holdings delivered second quarter 2019 EBITDA of negative $700,000, which compares to EBITDA of $8.6 million in the second quarter of 2018. The decline in the second quarter 2019 EBITDA compared to a year ago primarily related to higher non-cash charges of $3.8 million for the impairment of tradenames, $3.2 million in one-time charges related to severance and restructure charges, as well as approximately $2.2 million in higher labor rates. Of the second quarter 2019 EBITDA loss of approximately $700,000, Ninety Nine brand had second quarter 2019 EBITDA of $6.5 million or 1.9% [Phonetic] EBITDA margin compared to a year ago quarter of $8.8 million or 10.9% EBITDA margin. Ninety Nine's decline in EBITDA margin is primarily related to higher labor rates. As such, Ninety Nine management has already begun to roll out a time management system to better control labor cost.

During the second quarter of 2019, management has taken action on several initiatives to improve same-store sales and operating margins. To highlight, management has reduced the headcount at O'Charley's by 7, Village Inn by 28 and Legendary Baking by 7 for a total of 42 jobs that provides an annual savings of $5.1 million. And during the second quarter, closed 19 underperforming stores for a total of 47 stores since the third quarter of 2018, which increases store operating cash flows by $7 million annually. Additionally, management has improved operating efficiencies at Legendary Baking, which will increase cash flow and operating margins by $2.6 million. We expect to see our operating results positively impacted by these actions.

Turning to T-System. The Company generated revenue of $12.9 million and an EBITDA loss of $200,000 for the second quarter of 2019 compared to total revenue of $14.8 million and EBITDA of $2.6 million for the second quarter of 2018. The $2.4 million reduction in EBITDA margin is primarily related to the $1.9 million decline in revenue. As we highlighted 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. For example, application of ASC 606 reduced the documentation business segment's second quarter revenue and EBITDA by approximately $2.3 million, respectively.

On June 30th, 2019, Cannae's book value was $1,186 million or $16.42 per share as compared to $1,125 million or $15.58 per share on December 31st, 2018. We ended the second quarter of 2019 with $20.1 million of holding company cash, which is down from $308.2 million as of December 31st, 2018. The change in cash position is primarily related to increases from net borrowings of $150 million, $101 million from proceeds of the CDAY sale, $12 million from D&B syndication fee and decreases from the acquisition of Dun & Bradstreet for $529 million and the payment of taxes for $23.5 million.

To conclude, we are pleased with the progress that we continue to make across our portfolio of brands in order to position Cannae as a long-term driver of value for our shareholders.

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

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from John Campbell from Stephens, Inc.

John Campbell -- Stephens, Inc. -- Analyst

Hey, guys. Good morning. Congrats on the continued success with D&B.

Brent B. Bickett -- President

Thanks, John.

John Campbell -- Stephens, Inc. -- Analyst

Sure. It seems like you guys are a little bit ahead of schedule, I guess, with the $200 million of cost reduction this year. It sounds like you might have something in mind, I guess something specific around some cost takeout areas for next year. Any sense for how big that target might be for next year or is it just too early at this stage?

Brent B. Bickett -- President

John, this is Brent. Yeah, so we are on pace, we think, and we're pushing the management team to get to $200 million by year-end. We found in other transactions that we've done, moving more quickly on the cost side can then better focus people on the growth side. So we try to accelerate that and we've achieved that. Yeah, there's probably some line of sight to get north of $200 million, but it's too early for us to give a number.

John Campbell -- Stephens, Inc. -- Analyst

Okay. And just given the degree of success, I mean, any updated views around, I guess, both the possible timing of monetization and how that monetization event might look or if there's any way you can maybe broadly talk to whether that kind of time line has been pulled forward at all?

Brent B. Bickett -- President

Sure. Again, on the cost side we're -- on the good news, we're taking out the cost that we thought we can take. We are maintaining revenue, just a slight decrease on a year-over-year basis, but was better than what we had planned. The real thing for the -- that would dictate the timing as we would evaluate monetizations would be having that revenue growth get up into the low single digits, which we expect would take a little bit of time to turn the -- that big of an engine and get it into the growth mode, but we're seeing early signs that, that's starting to happen. So I would say in the two to three-year frame versus maybe earlier we would have said around three years.

John Campbell -- Stephens, Inc. -- Analyst

Great. Thanks for the update.

Brent B. Bickett -- President

You're welcome.

Operator

Thank you. Our next question today is coming from Jason Deleeuw from Piper Jaffray. Your line is now live.

Jason Deleeuw -- Piper Jaffray -- Analyst

Hey, guys. Good morning. Good job on Dun & Bradstreet. Just my line dropped, so -- on technical difficulties, so maybe I missed this, but I just wanted to make sure I understand the confidence. What's giving you confidence on the organic revenue growth acceleration that you're expecting for Dun & Bradstreet for the rest of the year? It sounds like you made a lot of good progress there, but are you already starting to see the benefits or are you just anticipating them? Just would like to kind of get a sense for that.

Brent B. Bickett -- President

What we saw in the first quarter and what we're seeing in the second quarter is EBITDA, obviously, accelerating because we're seeing the flow-through of the cost-save showing up in significantly higher EBITDA. And so it grew 10% in the first quarter and that growth rate which would accelerate as the year goes on, in terms of EBITDA growth rate. Revenues right now, as we said, on a year-over-year basis are modestly down, but modestly.

But what we're seeing on the positive side is we're starting to -- with the new sales realignment, we're starting to see some more focused sales efforts that are starting to show some interesting signs of growth that we could see as we roll through the year and get into next year. But that's what Steve and team is focused on now, is the go-to-market strategy. We're using tuck-in M&A to accelerate speed to market and capability where needed as well, but we're seeing just some early signs on the sell-side. But that will still take potentially rest of the year, early into next year, as we start to see the fruits of that effort.

Jason Deleeuw -- Piper Jaffray -- Analyst

Got it. And is a 3% to 5% revenue-growth target, is that still a good kind of long-term target to think about for Dun & Bradstreet?

Brent B. Bickett -- President

That's what we're pushing for. The timing of that will -- and we'll give more detail once we see it, but that's the objective. And once we see that, then we think monetization initiatives would present themselves.

Jason Deleeuw -- Piper Jaffray -- Analyst

Great. And then with Lattice Engines, just kind of like and maybe I missed this, but would like to get an update on the strategy and how it's going to help Dun & Bradstreet? Is this mostly on a revenue side? Is this a key component to getting to revenue growth? Just kind of want an update on the strategy there.

Brent B. Bickett -- President

Well, it's a way to -- we think there's a lot of growth in the advanced sales and marketing, and we were a partner with Lattice and had sold them data that they would then use and resell at a higher rate with higher customer satisfaction. So we were building out their type of artificial intelligence capabilities, their data ingestion, their data matching capabilities, but we decided to buy them because we could apply it across our enterprise more broadly. So the acquisition is not large from a revenue viewpoint, but it's very significant from a capability viewpoint that we think has high growth potential in the future.

Jason Deleeuw -- Piper Jaffray -- Analyst

Got it. And then with QOMPLX, can you just help us think about the strategy there? Is it also designed to help other investments that Cannae has in the portfolio?

Brent B. Bickett -- President

So Fractal is -- we were introduced to the founder of the company through our -- some of our partners in D&B. And we just think it's -- just a fascinating example and an exciting investment opportunity with their advanced AI-driven platform for cybersecurity, and particularly, cybersecurity in the insurance world. So yes, they also have very interesting capabilities for Big Data, so clearly there is some tie-over with the D&B team on how we can maybe use their platform to expedite our next-gen delivery systems.

Jason Deleeuw -- Piper Jaffray -- Analyst

Okay. And then just the last question on the adjusted EBITDA that was given for Dun & Bradstreet for the first quarter. I see you have to report it on a lag basis, but for the first quarter it was $129 million, and then the year ago, it was $118 million. Like, help us think about that growth there. How much of that was from cost saves and just kind of what are the puts and takes? I'm trying to get like -- kind of like thinking about the run rate or kind of a jump-off point on EBITDA after the first quarter?

Brent B. Bickett -- President

Right. And keep in mind that -- remember, we closed in February too. And so my comment was that in the second quarter, that growth rate, the 10%, will be significantly higher because you'll see greater flow-through. But I think the better way to look at it is we are at over $153 million through June in terms of cost saves that we realized on an annual -- that we had realized on an annual basis, and we expect to get to $200 million. So again, second quarter, you will see a larger growth rate, and we have to assume since revenues were modestly down year-over-year in the first quarter that it's almost all -- it's just more cost efficiency. So it's the effect of the synergies flowing through to EBITDA.

Jason Deleeuw -- Piper Jaffray -- Analyst

Sounds good. Thanks a lot.

Brent B. Bickett -- President

You're welcome.

Operator

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

Brent B. Bickett -- President

We look forward to updating you on our third quarter call in November. Thank you for your time today.

Operator

[Operator Closing Remarks].

Duration: 24 minutes

Call participants:

Jamie Lillis -- Investor Releations

Brent B. Bickett -- President

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

John Campbell -- Stephens, Inc. -- Analyst

Jason Deleeuw -- Piper Jaffray -- Analyst

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