Digital 9 Infrastructure PLC (DGI9) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen and welcome to Digital 9 Infrastructure Plc's Company Update Presentation. Please note that this call is being recorded, and there will be an opportunity to ask questions in a written format via the webcast platform. And now I would like to turn the conference over to Ben Beaton. Please go ahead.

Thank you very much. Good afternoon, everyone, and a very warm welcome to this D9 shareholder update. I have lots of people on the call. So for those of you that haven't met me before, my name is Ben Beaton and I'm fund manager for D9, and I'm the co-managing partner of Triple Point. And I'm also joined today by my colleague, Arnaud Jaguin, who is Head of Investment on our digital infrastructure team and who will be available at the end to take any questions relating to the portfolio. I may provide a brief presentation, focusing on some of the key areas that we've been looking at over the last few months before then opening up to a Q&A. In March, earlier this year, we held a Capital Markets Day, which included presentations from the CEOs of Arqiva and Verne and the chair of Aqua Comms. And if you weren't at that day or haven't seen the recalling, I would urge you to visit the D9 website and watch the video it's quite hard to come away from watching that without a sense of the quality of the portfolio of companies that we've invested in and in particular, the quality of their management teams. But clearly, the current share price does not reflect that quality. Since the start of January, we have been working on a series of what we view as critical pathways which we think are essential to closing the very deep discount that exists. So these critical pathways are recruitment in particular, bringing in some world-class talent to complement our existing digital infrastructure team. Secondly, capital, focusing on how we can continue to support the considerable success of the portfolio companies; and thirdly, dividend cover. And in particular, how we optimize the balance sheet, to support a fully covered dividend from our existing portfolio. And as you can see from this time line, we have executed against a number of milestones over these past 6 months. And a clear focus for the next couple of months is the successful execution of the Digital 9 Infrastructure PLC Digital 9 Infrastructure PLC [Verne] syndication process. So if we just turn over to recruitment, first of all, I'll take each of those 3 pathways in order, so recruitment. We made an announcement at the start of June. It was a 3-part announcement, announcing some changes to personnel on the investment management team. If I take a step back as to why we've made these changes, back in January, we assess the needs of D9 and the business. And in light of the fact that the fund is fully invested into a great portfolio of companies backed by at the super high quality management teams, we decided to focus our search on industry experience. We felt that someone coming in with deep levels of knowledge and experience would help drive the asset value, ultimately, of the companies that we've invested in, we around the competitive process, and we're absolutely delighted to welcome Diego to the team. So Diego is -- well, it's an industry veteran. He was the CEO of Telecom Italia France and fiscally before then joining Vodafone for a 16-year career. He was CEO of Vodafone Hungary, present CEO of Carrier Services, which was responsible for the subsea and fiber optic services within Vodafone, clearly, highly relevant to what we do in D9. And lastly, he was the CEO of Partner Markets where he worked with the in-country CEOs of businesses that make use of the Vodafone services where they don't have a physical presence. Much like the role that we perform in working with portfolio company CEOs within the D9 portfolio. Although he doesn't officially join until the first of September, you've been in out of our office these past 2 weeks, and we're really excited about him joining the team in September. The second part of that announcement related to the promotion of Arnaud who is on the call. So Arnaud joined Triple Point back in March 2021 as part of the original D9 team having previously been involved with the Aqua Comms business, which, of course, was the [indiscernible] asset that we bought at the start. Arnaud has significantly stepped up his role and responsibilities over the past 7 months. And in June, he was promoted to the Head of investments within the [indiscernible] team. And the final part of that announcement was the appointment of Lauren Cook as a new operating partner. So Lauren joins our existing panel of operating partners which comprise Steve Andrews, the long career at BT, Alan Harper, long career Vodafone; and Simon Barris Wiley, who is the CEO of Imagination Technologies and was previously the CEO of Arqiva. So delighted to welcome Lauren She's hugely experienced. She was most recently at the IFC, which is the PE arm of the World Bank, which has a long history of digital infrastructure investments all over the world. And not only has she joins as an operating partner, but she has also joined the Triple Point digital infrastructure Investment Committee and has been working with us over the past month. So we very much feel that the critical pathway of recruitment has been fully resolved now. And we'll now turn it over to capital, which is the second critical pathway I mentioned at the start. So to recap on the capital challenge here. So going back to the trading update that we published in January, we noted a few things. So off the back of the war in Ukraine and the energy price volatility came as a result of that, and off the back of a much greater focus on sustainability and off the back of explosion in AI demand, Verne which is in our data center platform has had quite phenomenal customer success, driven by those macro factors and also in a large part driven by the world-class team [led by Dominic]. So from an original CapEx pipeline at the point of acquisition of the Verne businesses, which stood at circa GBP 90 million over the next 5 years. That opportunity has now grown from GBP 90 million over GBP 600 million. And usually, that would be, of course, for massive celebration that kind of customer success. As noted in January, it brings with it a challenge D9, taking into account that, of course, D9 is for the investors at the moment and is not able to raise fresh equity. So in January, we said we were going to explore 2 complementary forms of capital to help support the growth and development of the businesses. We said that we would look at both a portfolio company level debt raise and a potential syndication. So on the debt front, our debt capital markets team is led by Ralph [ Vicat ] run a competitive process, they went out to 11 banks. In March, at the time of our annual results, we announced to the market that we had received a term sheet for $100 million facility and that we expected to execute that in Q2, which we did. So that facility closed in June, about 6 or 7 weeks ago now. And they took the form of a $100 million green loan from a lender called Natixis into Verne Global. $24 million of that loan is being used for future CapEx. $26 million of that loan is being used to refinance a bridge CapEx loan that we took out at the end of March in anticipation of this larger facility closing. And $50 million of that lend is being used to refinance a CapEx shareholder loan that had previously been provided by D9 to Verne. Now the all-in cost of that facility was just over 7.1%, and those funds will be used to fund highly accretive CapEx that we expect will generate IRRs in excess of 15%. This -- the second work stream that we noted in January was a potential syndication. So we think a syndication achieves 3 things: number one, selling a stake in the Verne businesses demonstrate the value of the company, which I think is a really helpful thing to do in a market like this. The second thing it does is it generates, obviously, quite significant cash proceeds for D9, which initially, a large part of them will be used to pay down a significant portion of the RCF. D9's plan going forward is that -- at some point in the next year, probably the back end of next year, we very much hope that the equity markets will reopen generally and D9, and we can raise additional equity to fund the growth of Verne. And if the markets stay closed for longer than we would expect to redraw on the RCF and channel those funds into the growth of the Verne platform. And the third benefit of a syndication is the introduction of a new growth capital partner who can fund a pro rata share of the Verne CapEx going forward. And help support the business and executing on what is its exciting business plan over the next 5 years. So we have been working with the T&T team, a leading investment bank over the last few months. We've had considerable investor interest in the Verne platform and the syndication, and we expect to announce terms of that syndication at the end of Q3. Now it's a live process, so I won't say anymore on this call, but clearly, the successful execution will be a very positive step forward for the company. So I'll now turn to the third critical pathway being dividend covered. So the first point, I think it's a really important point that hasn't necessarily landed with the market as a whole. And that is -- we have already invested enough capital into the portfolio to support a fully covered dividend. To get to full cover, it doesn't require more funding, but it does require some time. And that's what I'm just going to spend a bit of time talking about now. So there's a very clear pathway for D9 through to full dividend cover. And there are 3 principal drivers. So number 1 relates again to the data center platform to Verne. And I'm going to start with you the figures that we shared at our year-end, so in March. As at the end of December, Verne had presold 13 megawatts of capacity to a range of customers. And it takes time for those customers to further utilize that presold capacity and for the revenue from those contracts to start flowing through. So roughly speaking, 1/3 of that capacity, we expect to be utilized by the end of this calendar year, so within 5 or 6 months, and the remaining 2/3 by the end of next December. Importantly, that relates to presale capacity that doesn't require further capital. And once those customer contracts are fully ranked, that will generate within Verne, an additional GBP 21 million of operating cash flow. And if you were to relate that to our dividend. It's equivalent to a certain 4.4x cover of the D9 dividend. The second contributor towards full dividend cover is 1 of our subsea cables that we have been constructing a cable that runs from Europe to India. We call it EMIC-1. We're partway through construction of that cable that cable requires further CapEx, but all of that CapEx has been set aside in an escrow account. So importantly, D9 does not need to raise new capital to complete that. And we expect the first IRU sales, so they're called indefeasible rights of use, IRU sales to be received in late 2024, if not early 2025. And that will contribute a further 0.4x cover. And then the third big driver, and this is the one we probably spent the most time talking about with shareholders over the last few months is Arqiva and the impact of ongoing high inflation. So as a reminder, times of high inflation, but good for Arqiva, and that was because a very large proportion of their customer contracts are linked to inflation. And we saw that play through into our year-end valuation as of the end of December. However, there is a onetime negative impact to the cash flows of Arqiva in the year in which high inflation takes place. And that is because of their inflation rate swaps. As many of you will know, because I've said it before, these swaps were taken -- take out 10 to 15 years ago. They expire in 2027. So we've got 5 more payments to come, 4 more from next June. There's a cash payment due in June of each year by reference to the March RPI figure. Now obviously, inflation was high, both this March and the previous March. And what that means is we're not anticipating generating any operating cash flow from Arqiva in the first 8 months of ownership. So we completed our acquisition in the back end of October last year. So for the period October through to June this year that's just passed we don't expect any cash flows from market even because of those swaps. However, what we've been saying to the market is we expect a material improvement from the first of July as a result of lower inflation next March. Now one of the fair challenges that we've had from shareholders over these last few months has been, well, we obviously can't control the inflation. And what happens if inflation doesn't fall? What does that mean for dividend cover? Our fallback point on that has been, well, that would continue to have an impact on our Arqiva's cash flows in the short term, but in the long run, that would be beneficial because, of course, the revenues are inflated and you carry forward that inflation into the following years. However, we had also been working very hard in the background with the Arqiva team. And in June, so again, roughly a month ago now, we announced the market that Arqiva had put in place a color on those inflation-linked payments. And that means that going forward, the inflation-linked swap accretion payments can't be any higher than what a 6% RPI rate would produce. And it's a really important point just to spend some time talking about because it means over the last few months, every time shareholders have read about record high inflation they've come away thinking that, that's a huge negative for D9 because of the existence of these swaps. By putting in place this color as it applies to the swap payments -- and importantly, the color does not apply to the revenue. So the revenue still fully benefit from the impact of inflation. By putting in place this color, we should have inverted that perception. So that now when you read about continued high inflation, the market should see it as a really good thing for D9 because revenues are going to inflate, but the downside has been capped. So we think it's this very clear pathway to dividend cover by the end of next year, which requires no more capital investment, which provides the confidence to continue paying the dividend at its current at current level as published in the RNS yesterday. And just before I close, and we go to Q&A, I'll just wrap up by saying we really believe that the share price grossly under values, the inherent value of the portfolio. We've set out 3 critical pathways underway since January to restore confidence in the D9 story. As we saw on the time line slide, we have been [indiscernible] executing against these goals over the past few months. And the pathways, particularly the complementary capital are already delivering material positive impact on the underlying portfolio performance. And together, the pathways allow us to strike the right balance between growth, financial leverage and total return, all dynamics which are underpinned by the structural tailwinds in digital infrastructure investment. And that's why we and the Board maintained strong conviction in the quality of the portfolio and the long-term growth trajectory of the assets we manage including the considerable investor interest in the syndication of the minority stake in Verne received to date. Thank you very much for listening to that monolouge. We'll now just take a moment to assess the questions that come in and move to Q&A.

Thanks, Ben. We're now happy to open the Q&A session. [Operator Instructions] Okay. So the first question, can you shed any light on the statement last week at Sitstreet do not intend to make not of the no?

Yes, I thought we might get that. So as a matter of policy, we do not comment on speculation of that kind.

Okay. So we have a couple of questions that are quite similar here. Take why has the communication to sell a part of the rather than Arqiva?

Yes. So that's a question that -- we got asked quite a lot actually in past meetings. Certainly, people have commented that Verne is the crown jewel of the D9 portfolio and why would we sell a tick in that business rather than selling a stake somewhere else and funneling that cash into Verne. So if you just take a step back again on why we are syndicating Verne, phenomenal customer success a hugely increased CapEx opportunity from GBP 90 million to almost GBP 600 million now. And we need the capital to fund that growth. Now a technical point here, D9 is subject to a 25% investment concentration test. That means not more than 25% of its assets can go into a single investment. And Verne Global, the Icelandic business currently sits at circa 24%. So even if we were to sell another part of the portfolio or indeed raise fresh equity into D9. We couldn't funnel that capital down into Verne Global. And that's the neat thing about the syndication by selling a minority stake. D9 reduces its holding from 24% to a lower percentage, obviously. It receives capital that it can then reinvest in the business, which we can then use to fund this CapEx. And of course, you're introducing a new capital partner who can also funnel a pro rata share of that CapEx requirement in the company. So -- sorry, that's the answer to why are we syndicating Verne and not Arqiva or some other business in the portfolio.

Great. Again, couple of similar one. So a bit of a combination of the 2 questions, but can you provide an update on the performance of the portfolio and give any more detail on what the CapEx will be used for?

The update about the portfolio. So our portfolio companies are performing well, very much in line with budget and expectations. I count it too specific with financials at the moment. We're currently going through our numbers with auditors. And as usual, we prefer to comment on figures that have been fully reviewed and signed off. D9 disclosed half your financials interim results in September. A detailed financial and operational update will be provided at that point. I can still provide a bit of color about our main assets, our performing. So for Aqua Comms, the main news in recent months has been the start of the new CEO, Jim Fagan. He has really hit the ground running. Bringing a lot of positive energy to the company. Sales pipeline is very healthy and there is a strong commercial operational momentum. For Verne Global, recent news have been dominated by the debt raise and the syndication that Ben discussed. However, the company also continues to perform strongly, very good commercial momentum with some nice wins recently. And also the company continues to execute a bit on deployed CapEx at pace. For Arqiva big news include the recent debt refinancing, which delivered a very good outcome in challenging market conditions. After the January 5 that took place last year on the inflation color, another sign that the company is very focused on optimizing its balance sheet. There is also good commercial momentum with some big wins in recent weeks. The company has been performing well generally on benefiting from the fact that a lot of its revenue are indexed to inflation.

Thanks, Arnaud. Can you remind us why the initial CapEx is seen the acquisition has jumped significantly from GBP 90 million.

Yes, I will cover that again. So it's all customer-led. The one of the big benefits of situating a data center in Iceland is the certainty over power costs. And over this last year or last 18 months, that is power price volatility that has, in particular, led to a much greater focus for customers wanting to have their operations in Iceland and Finland. It's also a much greater focus by enterprise customers on sustainability. And thirdly, it is an explosion in the demand from AI customers. So it's 3 or macro drivers that have led to an increase in customer demand, which really underpins the increase from that original GBP 90 million.

You say the company will pay dividends from operating cash flow by December 2024. Is this the same as a cash cover dividend?

That's a good question. So we report dividend cover on an operating cash flow basis which is looking at the operating cash flow generated at a portfolio company level, and I ran through some of the figures as they relate to turn and as they relate to subsea and as they relate to Arqiva. It is then the company's decision or obviously, in the case of Arqiva along with the other shareholders. As to whether or not it wants to extract our operating cash flow back up into Plc actually funds the dividend or if it's better to leave those operating cash flows within the investee companies to help support the growth and development of the businesses. So that's the difference between operating cash flow and pure cash. There's a capital allocation decision for the company to decide how a cash on dividends going forward.

Your RNS mentions other initiatives being perceived to delever the company, what are these?

Well, we're very focused on optimizing the balance sheet of D9 and supporting the growth of the other businesses within the D9 portfolio. We did note in the RNS on this call, we wouldn't be providing any new information at this point. So I want to expand on that to the time being.

A couple of questions in relation to the progress of the syndication. And a follow-on question that is, what is the impact of dilution with syndication for shareholders? .

So again, as noted during the talk, it's a live process. So I won't comment any more than what I've already said, safe to say that we expect to announce the terms at the end of Q3. As for dilution, we've had that question in the past. I think the important thing to note is that -- this does not dilute D9. This syndication is not dilute D9. What D9 is doing here is it's selling a stake in a business for cash for value? And then going forward, it will fund or the pro rata base as the future growth of that business. And we very intentionally picked that as the -- I guess, the chosen path through here both because it doesn't dilute the D9 shareholder, but also importantly, it brings the capital requires to grow.

Thank you. What is your assessment of TP, Triple Point performance and actions since the departure of previous management?

Well, I would go back to what have we set out to achieve since January. There's a clear focus on the D9 balance sheet, how it funds the portfolio of companies going forward in a market where it can't raise fresh equity and importantly, how it can generate a cover dividend from the existing portfolio of companies. We've had a very clear plan in place since January to address recruitment, pay capital and dividend cover. And if we if I refer back to that time line that we put up at the very start, we have just methodically been executing against that plan. And there is absolutely still more to go. There will clearly be a lot of interest in the result of the syndication because that goes a long way to resolving some of those critical pathways. But I feel that we've executed according to plans at the start of the year.

When you talk about dividend cover, is this net cover, i.e., after fund expenses?

Yes it is. So in March, we published a table that really breaks down -- it gives a bridge of dividend cover from EBITDA through to net adjusted operating cash flow. And within that table, you can see we take off fund level expenses, RCF expenses, the impact of the inflation-linked swaps and other items. So very short answer is yes.

What is the cost of implementing the inflation qualities?

There are no arrangement fees associated with that color. As noted in the RNS, there was a small margin attached to it.

What will DA [indiscernible] be when he joins in September.

Okay. Yes. So what we told shareholders is that towards the back end September, we expect to do a roadshow taking around the interim results, which will be published in September as they relate to the June end. And those -- that presentation that interim roadshow will be led by myself and by Arnaud but we expect Diego to join us on that. It will be his first chance to get to meet shareholders for him to tell them why he's joined D9, why he joined Triple Point and give everyone a chance to get to know him. His focus when he comes in will be very much getting to know the portfolio companies getting to know the management teams and really helping us drive the growth environment of the businesses.

Okay. So there are a few different questions here in respect of this indication and other options that were considered and the respective advantages as this advantage to space. Can you provide any comment?

I think I'll pull back on what I said just a moment ago, which is it's a live process. And because of that, we won't say any more at this time. .

Has the Board considered share buybacks given the large discount now?

Our short answers, yes. Of course. It's part of the policy, discount control policy within the prospectus. If the -- in the discount is greater than 10% to more than 6 months, it clearly has been that the Board will actively consider it. The short answer at the moment is that there isn't a cash to do share buybacks but the Board are very aware. But it's obviously one of the mechanisms with which to manage the discounts and could be considered if the cash validity changes.

Why did you decide to put more in at Verne?

Well, I guess to clarify, we didn't put more of that, we just put debt into Verne. Prior to that, the only leveraged company in the portfolio. Arqiva, of course, within the borrowing policy, we expect us, we'd say that we will look to bring in appropriate levels of leverage to the portfolio companies, particularly where it's accretive to returns. Going back to what I said at the start, Verne had huge customer success, has got a growing pipeline and a debt raise was a very, I think, sensible step to take in order to continue funding the growth environment of that company, particularly when you look at the kind of the all-in cost of 7% against the type of IRRs that we expect to generate from the CapEx.

Thank you. So I think we've just run past time actually. So we'll conclude the Q&A portion of the presentation, and I will pass back to Ben. .

Thank you. So thank you very much indeed for joining this call for listening to the story. As ever, we're more than happy to do one-on-ones with investors. So I would like to arrange one, please do get some contact. But for now, thank you very much for your time, and have a great afternoon.

Ladies and gentlemen, this concludes today's conference. Thank you very much for joining. You may disconnect now. Have a pleasant day. Goodbye. This presentation has now ended.