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

Good morning. Welcome to the D9 2023 Annual Results Presentation. I am Diego Massidda, I'm the Head of Digital 9 Infrastructure, Triple Point, The Investment Manager. I'd like to say upfront that, as you know, some very significant events have happened during the first 4 months of 2024, which are very important for assessing the financial situation of the company. Clearly, I'm referring to the completion of the sale of Verne Global and the related deleveraging. For this reason, in the annual report, this morning's RNS as well as in my presentation today, we will also be providing post balance sheet updates through the most accounts to give a fair picture of the situation of D9. I would also like to clarify that I will not be covering the performance of the industry companies individually today, as I covered it in the trading update presentation for yourselves on 28th of February. However, of course, you can ask questions on the companies as well as any other topics that we'll cover today. The details of the performance is, however, also still present, of course, in the RNS and in the annual report. I will now get into the presentation. And at the end, I will be happy to take questions. 2023 clearly was an extremely challenging year for the company and our shareholders, particularly with the negative performance of the share price. However, there have been a number of highlights, which I think represents a very substantial improvement of the situation of the company found itself in -- at the beginning of the year. First of all, after the initial substantial repayment of the RCF, the rolling credit facility, in March 2024, this Friday, we will make a further GBP 47 million repayment and cancellation, so overall, achieving a reduction of more than 85% of the drawn amount on our RCF. Secondly, remaining assets delivered a robust performance in line with plan and valuation of the portfolio companies, excluding Verne Global, which has now been disposed, was down by only 3% overall versus 2022 as established by the Board on the basis of an external valuation, further enhanced by the scrutiny implied by all of the PwC, which has led to a slightly revised valuation to the unaudited valuations published back in March. I will cover this point in more detail later, of course. Following the suspension of the dividend, expected consultation, as you know, happened with shareholders and the strategic review was undertaken by the Board. And the Board proposed and 99% of shareholders voted in favor of a new investment policy aimed at execution and Managed Wind-Down of the company. This Managed Wind-Down will be executed, seeking a balance between maximizing net value on the one hand of shareholders and on the other hand, providing timely capital return. I'm pleased to inform you that the Managed Wind-Down process is already well underway. And the Board intends to use the proceeds to first pay down the remaining about EUR 53 million of RCF, which will be the level we will reach at the end of this week. And then to return capital to shareholders considering also the liquidity needs of the fund, of course, as a priority versus the repayment of the vendor loan note, which have been taken out for the acquisition of the Arqiva assets. This is because the D9 has attractive interest rates also with the option to pick. And it is not only a course D9 and moreover, has a loan maturity date of 2029, so the baseline would be repaid from future distribution for our Arqiva itself, although other options will be considered in due course. Now I'd like to move a little bit more detail to -- on the key points that I covered in terms of highlights, the sale of Verne Global, on the one hand and the next steps for the Managed Wind-Down regarding each of the remaining assets. As you know, in November, we agreed the sale of 100% of the Verne global group of companies to Ardian with a purchase price of up to $575 million, including an earn-out element of up to $135 million. After updating all the approvals, we completed a sale which was announced on the 15th of March, receiving an initial purchase price of $415 million. Then last week, we also received a deferred consideration of $25 million, which was initially linked to the signature of some power contracts for Verne. Additionally, as previously announced, we had ring-fenced GBP 23 million of the initial consideration for prudent balance sheet management, which is really to cover some indemnifications in the sale agreement. We have been able to ensure these risks to which the indemnifications refer and therefore, we now release this GBP 23 million to further enhance the RCF repayment, which will be happening in the end of the week. Therefore, as announced yesterday, we will make a further repayment and cancellation of the RCF, bringing to the outstanding drawn amount to around GBP 53 million, as I said earlier. We have calculated that the repayments made since March of 2024, we saved the company about GBP 28 million of interest from the RCF until its maturity in the first quarter of next year. So effectively, we can say to the Verne transaction and the related deleveraging have now completed -- they'll be completed on Friday, and we're retaining those assets, of course, in the future earn-out payments. As a reminder, this will -- this earn-out payment will be based on the run rate EBITDA of Verne Global in the year to 31st of December 2026. And of course, after this has been audited and agreed, will be paid in 2027. The earn-out will not pay out only if the achievement of the run rate EBITDA is 80% or less of target and will be 100% for an achievement of 100% of target or a little more in the sliding scale in between. Now a few more details on the Managed Wind-Down. The Board had decided to start safe process for outcomes and EMIC-1, which are expected to be sold together and also Elio Networks and SeaEdge UK1. All 3 sales purchases have commenced and outreached the prospective buyers has already begun. At this stage, of course, it's difficult to be precise and timing, but we -- I would say, we expect to receive non-binding offers and possibly short list of potential buyers in early summer. As to Arqiva, the only asset we do not fully own, as you know, with 48% shareholding, no sale process is being started at this stage as previously announced. However, options for the realization of value continue to be actively sought also in alignment of course to the other key shareholders. So this completes, what I believe are, the highlights of these results and the year. So let me move now to the key financial highlights. At the end of December 2023, our net asset value being estimated at GBP 686.3 million, which correspond to 79.3p per share. This is a roughly 28% decline versus December 2022 and 20% versus the latest valuation in 2023. I was to address upfront the further the completion of the audit process that has been a revision of GBP 41.5 million to the unaudited now, which we announced to the market on 28 March 2024. Before I discuss this, I think it's worth providing a bit more detail on how our valuations are derived. As previously, the main methodology utilized for the valuations is a discounted cash flow model. Cash flows used in the valuation are from Investee Company 5-year plans, which are updated annually, signed off by the respective Investee Company Boards, which are composed of the D9 presented but also independent directors. It is from the same plans that we evaluate both the company performance and assess the performance of Investee Company management, including their incentives. For the year ending December 2023, for the first time the Board instructed independent valuer to undertake the valuation exercise, both independent valuation process and the subsequent audit of the company's portfolio of assets, which has just concluded, involve the key inputs and assumptions for all operating models used in the valuation process, being revisited and challenged to arrive at the audited fair value figures. As a result of this process, the unaudited valuations for 2 of the company's assets, namely Aqua Comms and the Verne Earn-Out have now been revised to reflect a more conservative valuation. The impact of this revision is about GBP 5 per share. We announced back in March around 84p per share value [indiscernible]. For Aqua Comms, the discount rate utilized was increased for the Asian business to reflect the nascent nature of this business expansion into the Asian region, alongside with it's already well established transatlantic business. This more conservative approach has resulted in a reduction of the Aqua Comm valuation of 7% relative to the unaudited NAV published on 28th March 2024. For the Verne Earn-Out, as you can imagine establishing the fair value of contingent consideration presented a number of valuation challenges. A scenario-based technique, Monte Carlo Simulation was used by the independent valuer to produce their valuation and present to Board. This technique involved considering discrete scenario-specific cash flow estimates around Verne Global achieving its run-rate EBITDA targets at the end of 2026. These amounts were then probability weighted and discounted using an appropriate discount rate. This approach reflects the most recent updates to the American Institute of Certified Public Accountants guidelines for valuing contingent consideration and recognizes the immediate uncertainty around Verne Global's ability to meet future run-rate EBITDA targets, as the target we hit is pretty much 3 years out. And this, in turn, will determine the amount of the earn-out to be received by the company in 2027. After extensive consultation with the auditors and independent valuer, eventually the Board took a more conservative approach to the risk parameters which had been utilized versus the initial independent valuation, which have been published. Calculations were therefore adjusted, which reduced the earn-out valuation by GBP 25.9 million in the unaudited number previously announced, i.e., 49% reduction, bringing the value roughly to 1/4 of the potential maximum earn-out. I will talk everyone through the key drivers and movements in the portfolio valuation later. And I'll also run through how these valuations then bridge to the IFRS invested value of GBP 676 million which is held on the company's balance sheet. The company has an adjusted gross asset value of GBP 1.1 billion at December 2023. Later in the presentation, I will run through how our pro forma leverage metrics following the sale of Verne Global. Moving on, the company has an annualized ongoing charges ratio of CR of 1.33% in 2023, which is calculated in line with the AIC methodology, which excludes et cetera items and transaction costs. Should those be included, the OCR would be about 2% for the year. The company made a loss during the 12 months to December of 27.4p per share. Along with the valuation of regions I described earlier, this predominantly reflects the decrease in the valuation of the company's portfolio reducing from GBP 1.2 billion as of December 2022 to GBP 1 billion as of December 2023. During the first year, the company paid 1.5p dividend per share, was expected in the first quarter before the Board elected to withdraw the [ 6.0p ] dividend target. Additionally, 1.5p were paid at the beginning of the year for the Q4 2022 dividend. Finally, total return for the financial year based on NAV was minus 23.1%, mostly reflecting the decrease in portfolio valuation. If we step back a little, looking at the same metric since IPO, total return stands at minus 6.8%. Turning now to the P&L. The unrealized fair value loss of GBP 252 million represents a decrease in valuation across portfolio. There's a key driver for the 27.43p earnings per share loss at the bottom of this page. Federal distributions from investments, the second line, this includes dividends received from Elio Networks, lease income from our investment in the SeaEdge and also, cash received by the company as a result of the shareholder loan repayment made by Verne Global Iceland during the year. I think the rest is pretty straightforward, so I think I will move on now to balance sheet. Investments held at fair value, which is the company's holding its subsidiary, Digital 9 Holdco was GBP 676.1 million at the end of December 2023, down 27% from GBP 921 million at -- reported at December 2022 [indiscernible] decline in more detail in the next few slides. In addition to the investor value, there was GBP 14.8 million of cash retained by the company for working capital purposes. This takes a closing net asset value to GBP 686.3 million at December 2022. I'll run through liquidity and leverage in more detail shortly. Now we will have a look at the change in portfolio company valuation in December 2022 and December 2023. Although portfolio valuation overall has gone down by 14% over the period, it's fair to say most of the drop in valuation comes from Verne Global. Specifically, it is due to the fact that the transaction of sale of Verne Global including its earn-out element, which as I described earlier, is only valued fraction of its potential maximum payout and you see that on the right-hand side of the slide. Excluding Verne Global, the remaining portfolio valuation has been resilient and only gone down by 3%. Aqua Comms is [ down 5% ]. Despite some profitability challenges, the business has shown resilience and valuation update to its long-term business plans and continued access to growth opportunity. EMIC-1, it's still value at cost, as it has been historically. The increase in valuation, therefore, is simply flat, increased capital invested today. SeaEdge UK1 is down a bit reflecting the growth from an intrinsic valuation methodology, which we have used in the past to add market-based valuation using comparables. Elio Networks has also seen a moderate drop in valuation borrowing the reforecast of the business plan, particularly seeing increased cost of goods sold versus the [ 5-year ] plan. Finally, the Arqiva valuation, as you can see, is down GBP 355 million to GBP 341 million, which is 4%. In fact, this drop is actually magnified but Arqiva's relatively high leverage. In reality, Arqiva's enterprise value was only down 1% of the pivot, which shows how stable and resilient the business is. Now I'd like to move from the assets by asset valuation to the overall IFRS Holdco valuation. What you can see here in the red chart on this slide, is the buildup of the valuation of the company's portfolio as of December '23, and we have also provided clarity how this reconciles to the company's IFRS investment valuation held on its balance sheet at GBP 676.1 million on the right-hand side, which is still early. So starting on the left, Aqua Comms, which is valued at GBP 222.5 million. Then we have Verne, which we have aggregated together, and this is based on the safe proceeds, plus the valuation of the earn-out overall totaling GBP 372.2 million. Then we have SeaEdge, EMIC-1, Elio Networks and lastly, we showed the gross value of Arqiva at GBP 503.6 million and deductions -- of course, our share of Arqiva. And deductions for VLN initial principal GBP 163 million. Additional notes issued in June 2022, we picked interest of GBP 6.8 million. And lastly, the accrued interest to 31st of December '23 to land a total portfolio valuation of just over GBP 1 billion. This then reconciles to the IFRS valuation of GBP 676.1 million by adding the GBP 34.6 million of cash held across the group subsidiaries deducting more than GBP 373.8 million cash drawn on the company's RCF. And obviously, you need to make a deduction for other contents and assets across the group's unconsolidated subsidiaries. This brings to a GBP 676.1 million on the IFRS. Now the next slide, shows the net asset value bridge from December '22 on a pence per share basis. As I mentioned already, there were 2 revisions to the valuations following the conclusion of the audit process with respect to the unaudited figures the company announced on 28 March 2024. These were Aqua Comms and Verne Earn-out and resulted overall in about [ 5p ] per share reduction, as I said earlier, to 79.3p, which you see on the right-hand side. If you drive us to the fall in NAV during the year, our fair value movements on the company's investment 20.7p per share, which is the first 2 blocks and expected to down little further. We have, as you can see on the slide, adverse ForEx movements that equates to 3.8p per share. Then Verne Global represented 12.5p per share movement, predominantly as a result of only recognizing at this point in time, GBP 26.8 million in value for the earn-out, but as you know, this can move in the future depending on the performance of the company. The change in outcomes in our Arqiva contributes a further 3.2p per share with the balance attributable to the remainder of the portfolio. The financial costs of both the VLN and the RCF are 4.8p per share, and the payment of the dividend, it was 3p per share, as I said earlier, a halfway relating to '22 and half of it to Q1 '23. Also included our costs incurred during the year in relation to the strategic review and the [ VLN ] transaction totally -- totaling at 1.8p. This leaves us with a closing NAV, as I said, of 79.3p per share. I hope this is clear. Let's move on, therefore, to the leverage. On this slide, we have shown the leverage position to grow as at December '23 and also on a pro forma basis as the March 31, 2024 so that it could include the impacts of the initial deleveraging. The combined RCF and VLN represented 51% of our adjusted gross asset value at the end of December 2023, see at the bottom. Since the disposal, we have reduced this level significantly and now sits at 26%, which was one of the key objectives for the disposal. As I said earlier, this is a pro forma on the 31st of March. But at the end of this week in May, we will pay a further GBP 47 million of the RCF. So we expect this position to fall further to around 31%. Net debt over EBITDA has dropped to 1.3x from 2.5x when considering the RCF and the VLN. Looking through the adjusted net debt position, which includes also the leverage on the Arqiva companies level, net debt has dropped from 6.7x to 5.5x. Since the disposal of Verne Global, the only industry company, which has leveraged is now Arqiva and the GBP 744 million represents the amount of share of its debt. Finally, I'd like to cover liquidity, cash and the balance sheet today, the group has GBP 49.4 million of total cash, including GBP 14.8 million on the company's balance sheet and GBP 34.6 million, which were held in its consolidated subsidiaries. Around GBP 31 million was in the form of restricted funds, which were available for general use by the company. This was in the form of an interest reserve account, which is required under the terms of RCF and escrow account, which is there to fund an equal CapEx stage payments. Following the disposal of Verne Global, the company has delivered and stabilize its position from a liquidity standpoint. As you can see, as at 31st March in the middle column, the group had a total cash of GBP 66 million. Of this, GBP 38.7 million was restricted, GBP 37.1 million was unrestricted and available to the company. This GBP 38.7 million restricted included the cash, which had [indiscernible] funds which as previously mentioned, are no longer restricted, as we have insured we risk and this amount will be used together with other funds to further repay the RCF at the beginning of May. Now this concludes my presentation. And I am now happy to take your questions.

So let me just log on to system, and I will try to answer. I have two colleagues that will help me. So there are no questions so far. I hope it was because it was clear, but in any case, I will wait another minute, to think about which may have. I know it's a lot of material, we start this morning. So there's a lot of details in the annual report. So I'm sure that you will find a lot of the answers to the questions you may have there, but I will be happy to address any you have right now. [Operator Instructions] Right. Doesn't seem to be any questions. So thank you so much for spending this time with me, this half an hour. I hope it was useful. Oh, yes, just in time, Mark is asking question what our time frame for potential exits. As I said earlier, we are now engaged directly with potential buyers for the 3 fully owned assets, including EMIC-1 together with Aqua Comms. And we are sharing particularly about the company's, signing NDAs as a state, and we are expecting to receive no money offers in the next weeks, definitely the beginning of the summer and that the process will continue from that. Okay. There are more questions coming. It's from Marcus. Is there still an impact of RCF access of EMIC-1? So there is clearly a situation in the Red Sea and in the Middle East, which is not very benign, I guess, for the completion of a system like EMIC-1. So there clearly remains uncertainty in being able to lay the cable in the Red Sea. The alternative options are being assessed, that comes together with Meta and the other parts in the consortium that are building system. I think it's worth highlighting that most of the CapEx is being spent on EMIC-1. Most construction milestones have already been achieved. The only exception of the Red Sea segment. The buyer would realize the potential upside from future cash flows without having to contribute to capital to the project. There are currently options being explored, whose details I cannot really disclose, as this is confidential to the consortium. This could still result in an IFRS which is really for service date of 2025 being achieved. Even if this IFRS date was delayed, the product would remain to be value accretive to the cash flow profile of Aqua Comms, as I think there's no doubt that this cable we've completed at some point in the future. And the cash flow will be accretive at the later point in the future. So of course, as the situation has come on to hold the cables in the area, you can imagine that there is a very high demand for connectivity. So as soon as availability of capacity will be there, there will be a lot of interest. And in fact, Aqua Comms in 2023 in Q4 has already achieved a large presale on EMIC-1 from customers working to secure capacity on this cable even though it's not yet completed. Right. So let's move on. What is the endgame for the VLN, if not repaid. So the VLN is an agreement which has no records of D9. So it basically states that any distribution from Arqiva to D9 need to be used for the payment of the interest consumed also for the principal of the VLN and until the VLN has been completely paid off, no distribution can actually be upstreamed to D9. So as I said earlier, the natural expiration of this paper is 2029. So at the moment, the Board does not consider it is a priority to repay it because based on the business plans of Arqiva, there's a good probability that we will be able to repay the VLN from future distributions from the company. And we believe that it's not in the interest of shareholders to first pay down the VLN earlier than required. It is a very interesting perspective in terms of interest rates, given the current interest rate environment to [ 36% ] interest rates. And it is clearly something that in due course, if we are getting close to 2029, we could also refinance. In case for any reason, the Board decided not to repay and not to refinance it, and we wouldn't have enough distribution from our Arqiva to be paid, then the company that's provided the VLN would have a security our shares in Arqiva. How much transactional evidence was available to support independent valuation. I don't know if you want to answer this question?

Sure. Thank you, Diego. I'll take this one. So it is -- I understand the question because some of our assets are in niche subsectors, for example, subsea, there are not so many transactions happening, only once a year or once every 3 years at best. And same for some fixed wireless or broadcast. Those are not super common sectors. However, there are enough transactions either in this first similar transactions in similar markets that have been used by the valuers to support the transactions. I repeat what the Diego said earlier, all our valuations were based on free cash flows. However, they were all cross-checked with transactional evidence and there are definitely -- there was a pool of transactions in the report that was used to cross-check those valuations.

Okay. Well, thank you, Arnaud. Let me take the next one then. So adviser costs. So look, the costs we have already said [indiscernible] transaction cost for disposal and Verne Global were affected by the complex process that took place with particularly being 3 companies in 3 different jurisdictions with 3 different regulatory environments and requirements for clearance, plus a number of phases which went from initially minority syndication objective, which didn't turn out to be the best for shareholders. They're moving into majority sale and then finally -- and full sale and has required a number of changes of direction to make sure that the best outcome will be secured. So I don't think we should take that cost -- transaction costs as indicative for future. I think that the sale of Elio and Aqua Comms will have a lower level of costs than they were -- definitely should not pick that. Maybe it will be in line with similar transactions in the market. Now Sean is asking questions, but that I'm not sure I fully understand. Arnaud, can you make up. He says annual costs...

Yes, the annual cost of the GBP 981.6 million debt, so that -- this is our adjusted net debt number or consolidating all our net debt. I think it's fair to highlight that most of this debt sits on the Arqiva balance sheet so close to GBP 750 million is actually our share of the Arqiva debt that we do not pay with demand cash so this pool of debt at Arqiva is actually publicly available on the Internet. I don't have the number on my mind right now. However, if we want to look at a blended type of cost for that overall GBP 981 million debt, we have the OCF, which in that number corresponds to GBP 100 million. As Diego highlighted, this is going to drop to GBP 53 million by the end of the week. This debt is costing us close to 9% at the moment [indiscernible]. We have the vendor loan note of GBP 169.8 million, which is costing us 7% annualized [indiscernible] as I said, EBP 744 million is for Arqiva with overall blended cost around 7% as well.

Yes, which has paid as the cash flows of Arqiva...

Given the overwhelming part of this whole GBP 981 million comes from Arqiva, we could assume that the blended cost is around 7%.

Okay, right. I don't see any other questions. So with this, I will close this call. Thank you very much for your attention, and we are always available to answer further questions you may have once you have had time to go through the materials. Thank you very much.