Information Services Corporation (ISC) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the ISC Investor Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Jonathan Hackshaw. Please go ahead.

Thank you, Lisa, and good afternoon to everyone joining us today. Welcome to ISC's conference call to discuss the extension of our exclusive right to operate the Saskatchewan Registries until 2053, which we announced a short while ago. On the call today with me are Shawn Peters, President and CEO; and Bob Antochow, Chief Financial Officer. Shawn and Bob will take you through our investor presentation with some of the highlights of the extension before we open up the call to Q&A. Before we begin, we encourage everyone to review the news release issued earlier today in its entirety. The news release has full details relating to the transaction and is available on SEDAR as well as our website. I would also like to remind you that any statements made today that are not historical facts are considered to be forward-looking statements within the meaning of applicable securities laws. The statements may involve a number of risks and uncertainties that are described in detail in the company's SEDAR filings. Those risks and uncertainties may cause actual results to differ materially from those stated. Today's comments are made as of today's date and will not be updated except as required under applicable securities laws. Today's conference call is being broadcast live on the Internet and includes an investor presentation. The call, along with the investor presentation, will be archived for replay shortly after the call on the Investors section of our website. With that, I would now like to turn the call over to Shawn.

Thank you, Jonathan, and good afternoon to everyone joining us for today's call. Today, we're very excited to announce the execution of an agreement with the government of Saskatchewan to extend the term of our exclusive Master Service Agreement to manage and operate the land registry, land surveys directory and the corporate and personal property registries in Saskatchewan until 2053. The extension of our MSA to 2053 reflects our successful ongoing relationship with the province of Saskatchewan. This extension is highly strategic for ISC and unlocks the value in a high-quality infrastructure asset that will provide an additional 20 years of strong and stable cash flow for ISC beyond the previous expiry in 2033. As part of the extension, ISC will provide the province with both an upfront payment and defined subsequent payments, while at the same time, will generate new revenue starting this month and will meaningfully and immediately enhance our scale and financial profile. I'll ask Bob to talk a bit more about the financial highlights of the extension.

Thank you, Shawn, and good afternoon, everyone. As Shawn said, this is a very exciting day for ISC, and I will now take you through some of the transaction highlights of the extension. With respect to the investment we are making, ISC will pay $300 million in cash consideration to the province consisting of: an upfront cash payment of $150 million on or before July 28, 2023; and 5 payments of $30 million per year starting in July 2024, totaling $150 million. We will fund the $150 million upfront payment by drawing on our $250 million amended and restated credit facility and with cash on hand. Subsequent payments are expected to be funded with our robust internally generated cash flow. There is also a contingent payment mechanism between 2033 and 2053, which allows for the province of Saskatchewan to participate in the Saskatchewan Land Registry transaction volume growth up to 3%. ISC will retain all upside from long-term volume growth of greater than 3%. As part of this agreement, we've been granted the right to adjust the fees for certain transactions, which are expected to immediately generate estimated incremental annual revenue of approximately $17 million and adjusted EBITDA of approximately $16 million. Our pro forma net debt to last 12 months adjusted EBITDA leverage will be approximately 4x, which will be supported by ISC's resilient business model and significantly underlying cash flow generation. We expect to rapidly decline towards our long-term net leverage target of 2 to 2.5x driven by our significant underlying cash flow generation. We will continue to maintain a prudent capital structure with flexibility to fund organic and M&A growth as well as possible future dividend increases. As mentioned previously and as included in our news release, concurrent with the extension, we entered into an amended and restated credit facility. This $250 million facility consists of our existing $150 million revolving credit facility plus a new $100 million revolving credit facility. In addition, ISC will maintain access to $100 million accordion option, and the net funded debt-to-EBITDA financial covenant has been increased to provide additional balance sheet flexibility to ISC.

Thanks, Bob. As I mentioned earlier, this extension is highly strategic for ISC and it reinforces our position as one of Canada's leading registry operators. Securing an additional 20 years of operating the Saskatchewan Registries for a total of 30 years from today's date ensures we can continue to focus on our operational excellence for our registry users, and the strong free cash flow that we generate ensures we can continue executing on our growth strategy. The new revenue under the extension and the incremental cash flow that generates help drive accretion to our adjusted free cash flow per share and adjusted earnings per share metrics, which we'll talk about later. Successfully delivering services on behalf of government is core to what we do, and the extension of the exclusive right to operate the registries here in Saskatchewan is key to that. The Saskatchewan business comes -- or continues to be a high-margin, asset-light one, which generates significant cash flow, and this extension comes at a time when the macro backdrop in Saskatchewan is attractive. Saskatchewan was the fastest-growing economy in Canada in 2022 as measured by real GDP growth and is currently forecasted to be the second fastest in 2023.

As Shawn mentioned, the extension will immediately and meaningfully have a positive impact on ISC's revenue, margins and cash flow generation. We expect the new fees to take effect on July 29, 2023, and expect an increase to revenue and adjusted EBITDA of approximately $17 million and $16 million, respectively, on an annual basis. ISC's pro forma revenue for 2023 is expected to increase by 9%, and our adjusted EBITDA margins for 2023 are expected to increase to approximately 39%. The introduction of higher leverage and various accounting and tax impacts of the extension will reset some of our previously reported metrics, such as net income and earnings per share. To help understand the operational impact of the extension, we've included some metrics that adjust for those items, such as pro forma adjusted net income and adjusted free cash flow, which for 2023 are expected to increase by 7% and 18%, respectively.

This extension represents a highly attractive, long-term financial investment for ISC and is expected to create meaningful value for shareholders. The extension drives an increase greater than 30% in ISC's net asset value per share as well as immediate incremental cash flow from the fee adjustments. It's also expected that the extension will generate an unlevered return of greater than 10% on ISC's $300 million investment over the 30-year period from 2023, which we believe to be an attractive return to operate a high-quality infrastructure asset. In addition to creating long-term shareholder value, the new revenue will also be immediately accretive to our adjusted free cash flow per share and adjusted earnings per share. In addition to having compelling strategic merits on its own, the extension will also contribute to the continuation of ISC's long-term growth strategy. We've had a history of disciplined capital allocation, and that will continue as we focus on deleveraging, maintaining and growing our dividend and investing in growth. We know that the strong free cash flows that the business generates gives us flexibility to be able to continue executing against our growth strategy. As a company that has a long track record of successfully executing accretive acquisitions, we plan to continue to pursue our accretive M&A strategy. As well, as part of the extension, we'll be accelerating our investment in the Saskatchewan registry technology. The continued development of our world-class registry technology which we bring to the Saskatchewan Registries also supports our pursuit of new registry opportunities globally. Reinforcing Bob's earlier points, following the funding of the upfront payment, pro forma net leverage will be approximately 4x, and we expect to quickly delever towards our long-term net leverage target of 2 to 2.5x, while also retaining the flexibility to fund our ongoing organic and acquisition growth strategy. To do that, we'll retain approximately $42 million of available liquidity on our credit facility. And as mentioned earlier, we also have an additional $100 million accordion available, subject to our leverage covenants. Our capital allocation priorities going forward will be to focus on deleveraging towards our long-term net leverage target, maintaining and growing our dividend while also investing in accretive growth opportunities. This extension is really a win-win-win. It's a win for ISC shareholders in that it generates meaningful value for ISC right now and allows current and future shareholders to own a highly attractive infrastructure asset via our Saskatchewan business that now has stability of cash flows to 2053 combined with the growth assets in our other segments. It's a win for our users of the registry by ensuring the continued operation of the Saskatchewan Registries by a long-standing and trusted provider. And our investment in the registry systems will provide best-in-class technology, security, integrity and an enhanced user experience. And finally, it's a win for the province where the extension consideration can be used for the benefit of Saskatchewan. In summary, the extension of our Master Service Agreement with the province has been an important priority for us, and I would like to thank our partners in the Saskatchewan Ministry of Finance and Ministry of Justice for helping us arrive at a successful conclusion today. We look forward to continuing to serve the users of the Saskatchewan Registries for the next 30 years and our continuing focus on operational excellence for all of our customers. As always, we're excited about the future of ISC, and today's announcement is an important step in achieving that future. With that, I'll now hand the call back over to Jonathan.

Thanks, Shawn. Lisa, we'd now like to begin the question-and-answer session, please.

[Operator Instructions] And at this time, we have Stephen Boland of Raymond James.

Congratulations, everybody. Great announcement. Maybe could you just talk about the discussion? I mean, obviously, this didn't go out to RFP. So can you just talk about the process of how the extension came in? I mean it is years before the original MSA was going to expire. So I'm just wondering what -- how the process worked.

Yes. Thanks for the question, Stephen. I'll speak on that from our behalf. Obviously, we don't speak on behalf of the government of Saskatchewan. But from our perspective, as you said, we're about halfway through our current MSA, in a really good spot from a value perspective in terms of being able to create additional value by enhancing -- making a meaningful investment in the registries by ensuring that the user experience here is exceptional and as well, giving us a bit more of a runway to make that investment in the registries. So from our perspective, the timing was really ideal in terms of making an announcement and extending the contract with the government of Saskatchewan. So it's a good deal. As I said, a win-win-win for all parties, and that's really what we're focused on.

Did you always expect -- I mean, you've been running this for years. So did you expect that you would have to end up paying -- it's not -- it's $150 million. But was that always part of like the process that there was a dollar figure that was going to be agreed to for you to get the extension?

Yes. I think we've talked about this in previous calls that every concession or every agreement like this is different depending on the environment and the needs of the particular jurisdiction. In this case, in Saskatchewan, we always did expect that an extension would come with a payment and some sort of mechanism for the province. So that's entirely within our expectations.

Okay. I'll sneak one more in. Just in the release, it says -- and you talked about, obviously, the increased revenue -- EBITDA from new fees or the adjustment of fees. I thought that was always possible under the old MSA that you had like an annual review to adjust fees depending on what was happening, inflation, et cetera. Is that -- what's different about getting the extension and putting in a new fee schedule versus the annual review that you used to do or will still do?

Sure. Yes. That's a great one. I'll start maybe and toss it to Bob as well. So there's -- you're right, Stephen. There is a mechanism under the current MSA that allows for annual CPI -- Saskatchewan CPI increases that we've implemented every year annually. This is -- so that process still continues. This is a different adjustment to fees over and above that CPI mechanism. So an adjustment to the ad valorem fee, which isn't in the current MSA contract so that's a new provision, as well as some other adjustments within the fee structure. But that's in addition to our normal CPI fees.

[Operator Instructions] And our next question will be coming from Trevor Reynolds of Acumen Capital.

I'm just wondering, you guys mentioned the 10% IRR. Just curious about what's sort of cost of debt or if that changes at all with the new facility.

Trevor, I don't believe we said the IRR, but we've got our current credit agreement that's based on prime rate plus a certain margin. And that margin depends on where we are with our covenants. And so it fluctuates. It's basically a tiered system and fluctuates with where our covenants sit.

Okay. And then just in terms of -- are you able to -- like the run rate cash flow on the registry biz, can you -- are you able to provide that on kind of a trailing 12-month basis just so we have a sense of what that looks like with the built-in increase?

I think, Trevor, that's -- I think you're talking $17 million annually on the revenue and $16 million on EBITDA. I mean that's pretty consistent with our historical margins in this part of the business where we know that incremental dollars flow almost straight down to the bottom line. So from a cash flow perspective, it would be similar subject to, of course, the new debt that we've taken on.

Okay. And then last one here, just like what sort of requirements are there in terms of spending on -- you mentioned enhancing the technology on the registries. Just curious what sort of requirements or if there is any.

Yes. So we're always investing in our registries, and so that's sort of part of our normal operation and maintenance. As part of the extension, we'll be accelerating those investments to enhance the functionality and user experience. We haven't disclosed the value of an investment we'll make for competitive reasons, but that's been factored into the financials of the extension.

Yes. And I think just to expand on that, Trevor, I mean, as I said sort of in the opening question, we thought it was a great time for this extension for lots of reasons, one of which is that we wanted to make significant investments in the Saskatchewan Registries. And we saw this as a real opportunity and a vehicle and a mechanism to do that. And so as Bob said, we haven't disclosed those amounts specifically, but they will be focused on enhancing the registry technology, as we said, user experience, security and all those types of things. And so it will be a significant project for us over the next 2 or 3 years that we're excited about.

[Operator Instructions] And our next question will be coming from Scott Fletcher of CIBC.

Apologies if you've already been asked this. But do you have any information on the pace of deleveraging and how quickly you do expect to get down to the 2 to 2.5x range?

Yes. So we anticipate to get down there pretty rapidly within, assuming no M&A, within a couple of years. 2 to 3 years is sort of where we're focused on. And of course, that's all subject to any growth opportunities that come to us.

Okay. And I guess the natural follow-up is does this sort of -- should we expect a pause in M&A in the short term? I assume it would have to be a pretty compelling opportunity to sort of take leverage anywhere above where it is right now.

Yes, good question. I think that -- we're at 4x leverage, which we've seen in this business, the strong free cash flow can easily handle. And we've said for a long time, we'd be comfortable at that level and especially for the right deal, and this is clearly the right deal for us. I don't think it slows us down, Scott. We've always been very diligent in the opportunities that we go after, making sure that the right company at the right time and the right price and that we can add value. And those principles will still apply. We'll just always -- we always make sure that it's a compelling reason to do an M&A and to invest our capital, and we'll apply the same logic to it. If it's the right deal, we'll find the right way to do it. But in the meantime, we're focused on deleveraging, just getting that level down a little bit and then continuing the growth.

[Operator Instructions] Our next question will be coming from Stephen Boland of Raymond James.

One more for me. I just want to make sure the contingent payment -- the payments of $30 million, that's not replacing or adjusting any kind of payment that you do right now? Do you know what I mean? Like if you're paying 10 right now, that you're paying 30. I just want to make sure this is a new feature.

Yes. So Stephen, yes, just to clarify. So the consideration paid is made up of 3 items. So one is the upfront cash payment of $150 million a year -- sorry, $150 million payable on or before July 28, 2023. The second portion is 5 cash payments of $30 million per year, totaling $150 million, paid for the next 5 years starting in 2024. And then the third portion is annual contingent payments potentially payable after 2023 if volume growth for certain land registry transactions exceed predefined benchmarks, subject to maximum. So the contingent payments -- so the $30 million, it's 5 payments over 5 years, so totaling $150 million, so those are not contingent. The contingent payments are another payment stream, which would start in 2033.

It doesn't replace anything we currently pay. We don't pay anything right now. So this is all consideration for the extension.

Yes. I [indiscernible] That's all for me.

Thank you. I would now like to turn the call back over to Jonathan Hackshaw for closing remarks.

Thank you, Lisa. With no further questions, we'd once again like to thank all of you for joining us on today's call, and we look forward to speaking with you again soon. Have a good day. Bye.

Thank you, all, for joining the conference call today. You may disconnect. And everyone, have a great evening.