Wendel (MF) Earnings Call Transcript & Summary

Thank you very much, and good afternoon, everyone, and good morning to our U.S. partners. Before we start this presentation, let's note that ACAMS is currently owned by Adtalem, a U.S.-listed company. We cannot interfere with their own financial communication and we will focus on Wendel's own aggregates, computations and forward-looking performance expectations in the following discussion. So if I'm turning to Slide 2 of our presentation. We announced this morning the signing of a binding commitment to acquire ACAMS, the Association of Certified Anti-Money Laundering Specialists, which is a global leader in training and certification for anti-money laundering and financial crimes prevention professionals. The company was founded roughly 20 years ago, and it has developed a unique knowledge of global financial crime activity and of the corresponding regulatory framework that help clients remain at the top and forefront of compliance regulations. ACAMS' key certification called CAMS, Certified Anti-Money Laundering Specialist certification, is recognized as the gold standard by institutions, governments and regulators worldwide. The company serves public and private sector organizations in over 175 countries, primarily banks and other financial institutions, with roughly 40% of its revenues derived from outside the U.S. Scott Liles, current ACAMS' President and Managing Director, will become its CEO upon closing. I'm now turning to Slide 3 to talk a bit more about the transaction and how we ended up here today. We did identify the company almost a year ago through a very proactive screening of potential acquisitions after the acquisitions of CPI, you remember back in 2019. We did approach its owner and quickly realized that it was to be -- if it was to be put for sale, it would be in a larger group of assets. We then approached Colibri, who appeared to us as a natural parent company for the reminder of the financial service group of Adtalem. They had synergies and the financial means to be our partner. We, therefore, worked together as a consortium, diligencing the assets together and bidding together on various species of the group. There will be a very limited relationship between ACAMS and its sister's company that Colibri will acquire, Becker and OnCourse. The deal that we are announcing today will be financed with equity from Wendel, roughly USD 355 million and from debt with leverage slightly over 7x LTM September bank EBITDA of $21 million. I am now turning to Slide 4. As you can see here, this acquisition is a great example of the collection of leading companies we are building. You can see this company has tremendous growth, a pretty good resilience through the crisis and the recession. And its value creation is on the back of pretty strong ESG tailwinds. It's a leading business. It has good barriers to entry. The long-term organic growth prospects seems pretty strong, and we have identified some profitability improvement opportunities as well. The cash flow generation is strong. We estimate that it's around 75%, and we feel the leverage we are putting on this acquisition is adequate. This is a controlling investment. We are going to have roughly 98% or 99% of the equity with an equity investment in the range we disclosed to market. We believe we can uniquely contribute to the growth of these assets with our past experience in CPI, our global understanding of certification and compliance issue and our ESG expertise. So this acquisition is a perfect fit for what we want to do. And I'm happy to introduce you to our U.S. colleagues -- our U.S. team colleagues who are going to present the assets in more detail. Thank you.

Thanks, David. Good afternoon, everyone. This is Adam Reinmann, CEO of Wendel North America. Just to build on what Dave was saying on Slide 6, we tried to lay out what we think are sort of the core tenets of our investment thesis in ACAMS. And we start by -- this is really the global leader in what's a growing and increasingly international market and a pretty sizable and increasingly dynamic sort of societal problem that's being faced by countries all over the world, regulators, law enforcement and certainly, the increasing regulatory burden on financial institutions. And as the world generally is increasingly trying to grapple with the changing face of financial crimes, ensuring strict adherence of regulatory standards that are consistent across financial institutions globally has been an important part of tackling that problem. And ACAMS really serves as the de facto trade organization and trusted partner to people fighting that issue around the world. So the industry has been growing quite consistently and globally for sometime. It's been increasing in other areas -- as cryptocurrency has developed and other areas of threat start penetrating the issue globally, ACAMS' service has become more important. The business provides basically certification and professional training and through that really acts as sort of a global membership organization for this group around the world. It's an attractive business model, which is characterized not just by the recurring membership revenue model and the regulatory-driven demand that I mentioned, but an increasingly large installed base, 20% plus EBITDA margins. And the company's growth strategy is really focused on several levers, including the continued expansion internationally, entry into adjacent markets, including financial technology firms and other companies and industries increasingly subject to any money laundering and financial crime regulation. The introduction of new products to service some of the expanded threats. And we do think that, as is often the case when a division of larger companies are independently capitalized and resourced, that there will be additional value creation levers that the management team at ACAMS can pursue as an independent business. It's worth noting as well that we do think there is earnings upside to the business, which as the revenue generated from the company's trade show conferences rebounds after its decline during the -- temporary decline during the COVID period. And I would mention as well, two last things at the bottom. One is the cash flow dynamics in this business, as David alluded to, are very strong and particularly given the fact that the membership fees are collected in this business upfront such that the cash earnings are actually better than the reported accounting earnings. And then the last point, obviously, consistent with Wendel's values and our strategy, but also really critical and similar to the dynamics in CPI. The mission-oriented nature of the business, we think, is a really critical element to what propels the people inside the organization and the global membership and also an important investment trend for us as well. On Page 5, rather -- sorry, on Page 5, we have the basic business model. And just to simply say, we described sort of the nature of the trade organization. The company derives its revenues from three primary sources: One is offering advanced certifications to compliance professionals and professionals in -- mostly in financial institutions, fighting financial crime around the world. Their flagship certification is called the CAMS certification, which you can see details on the left. That's about 40% of the revenue during normalized times. The expanded membership contribute through annual fees that give them access to all of ACAMS' programs, webinars, knowledge base, et cetera, that's about 1/3 of the revenue. And then the conferences, which we mentioned, of which there are several around the world every year, generate about 20% of the company's revenue in more normalized times. So with that, I'll turn it over to Harper, who can walk us through the next couple of slides.

Good afternoon or good morning, everyone. This is Harper Mates with Wendel North America. I'm on Page 7 now. As Adam mentioned, the ACAMS' business reported September LTM revenue of $83 million. And while still part of Adtalem, we would expect under our ownership on a stand-alone basis, it would report about $18 million of EBITDA or 20% plus margins going forward. The -- our growth strategy for the business from this point forward is largely to continue what the company is already doing and benefit from increased regulation and spend in compliance services. And that would include the introduction of new programs, which they've been doing historically successfully and finding new ways to enhance membership engagement. On Page 8, we provide a view of the historical revenue growth through the pandemic period. And I think the key takeaway here is they've demonstrated their ability to grow, but for the impact of COVID and then quickly rebounded after that. In the bar chart, we have here, we show about a 10.5% CAGR all-in, including the impact on COVID on the conferences or 14.5% excluding conferences. On Page 9, a lot of this is public knowledge, but we really think there's a compelling opportunity ahead of ACAMS given the vast amounts of money being laundered each year and the significant expense of noncompliance, both economically, reputationally and on society and ACAMS is directly benefiting their customers and helping to address this. And then finally, on Page 10, ACAMS is a really global diverse -- has a global diversified revenue base, about 60% of revenue is outside of the U.S. and no single customer accounts for more than 6% of revenue. So their penetration across the world and across their client base is quite strong.

Thank you, Harper. It's David Darmon again. I'm moving now to Slide 11. As you can guess, there is probably some work ahead of us to transition this company to a standalone business. Part of these back-office functions are today integrated in the global Adtalem. We do not expect any changes in ACAMS' leadership and organization to remain in place. We don't expect any disruption of the customer relationships or the member engagement either. And while certain administrative services are going to be provided by Adtalem during the transition, we don't expect these positions to last for over a year. Wendel has a track record in managing complex carve-outs. In the past, we worked on complex organizations when we acquired Editis or CSP Technologies or Deutsch, for instance, where we had to set up complete central functions when needed, and we've done that successfully. I'm now turning to Slide 12 before opening up to questions. Just to state the obvious, this is the type of business where we can both achieve good financial returns while having a positive impact on our society. ACAMS is a key player in fighting against potential funding of illegal activities such as terrorism, human trafficking, cyber ransomware and illegal wildlife trading. In developing this group, we are increasing the fight against those crimes and that's a great combination that we really like and we hope you share as well. So I'm now opening the floor for questions.

[Operator Instructions] We'll now take the first question. This is from the line of Joren Aken, Banque Degroof Petercam.

I've got a few. I'm just trying to understand a bit of the business model. So if I understand correctly, basically a client comes and in the first year, for example, they go for the certification and the training, so they get in the 40% category of revenue. And after that, they pay annual fees, so they arrive in the 30% membership segment. Now the question basically was -- what is the retention rate that you get? How many people are actually convinced to move to the membership or are people just leaving after 1 year, let's say. And then maybe a question on the partners. Do you have, for example, large partnerships or large companies that really choose ACAMS as a reference for those certifications. And maybe also a bit of information on what the closest competitor would be for the company?

So regarding your question on large partners, and then I will leave the floor to my colleagues, Adam and Harper, on the business model, knowing that this is still a part of a U.S. listed company, and we cannot disclose information which they have not disclosed in the past. So the company, obviously, has some large partners. Mainly, most of the largest financial institutions use ACAMS as a partner and as a service. But that being said, none of them account for more than 6% of the company's revenue. So the company deals with large and small institutions, but with no lack of diversification. I think your last question was about the closest [ course ], if I heard correctly? Competitor listed companies. So maybe, Adam and Harper, while answering on the business model can give you the name of the -- of two other large institutions as well.

Sure, happy to. The business model what you described is relatively accurate. As they said, they approach the market, both directly to customers, individuals as well as through enterprises and do have those large partnerships with enterprises as well. And depending on the type of customer, they incur revenue through [ logo ] certifications and then ongoing training, webinars, et cetera. Retention, I don't believe that is publicly reported, but I think you should expect [indiscernible] retention to be very high and consistent with this type of business model that we see in CPI and others. And on competitors, the largest competitor globally is a company called ICA, which is based in U.K. And there's also a very small player in the U.S., that's a division of another company and that competitor is called ACFCS.

Harper, your line was broken up when you mentioned the U.K. competitor.

I apologize. The U.K. competitor is a company called ICA, which is a division of Wilmington based in U.K. There's also a very small competitor in The U.S., which is part of the business [ Verify ] and the competitor's name is ACFCS.

Move to the next question. This is from the line of Geoffroy Michalet from ODDO BHF.

I have a question on the business you are not acquiring, i.e., Becker Professional Education and OnCourse Learning. Why wasn't it of interest for you? That's my first question. And my second question, you mentioned a lot of upside on the margins -- EBITDA margin. Could you help us to quantify the kind of upside and where it would come from? We understand it would be from the conferences, but are there also, let's say, non-catch-up levers to improve the margin?

So the two assets you mentioned are addressing very different end users and have different content and different business models with different financial trajectories. So they are very different in nature. And so we saw limited synergies in keeping the assets together. While the -- our partner, Colibri, has some synergies and it makes much more sense for them to do the assets.

And on the margin lever to improve?

So on the margin, while we were dividending the company, we realized that they have invested a lot recently. And we believe that with the growth to come, these recent investments they made in the structure is going to be growing at a lower pace. And so we do expect to see some benefits from scaling the company with the costs growing at a lower pace than the top line.

Okay. That's very clear. And could you quantify it? I mean, could we reach, I don't know, 25% EBITDA margin? Is it the kind of target you would expect?

We are not communicating on a long-term margin prospect, but it's higher than 20% for sure, but we are not communicating on that.

The next question is from the line of Alexandre Gérard from CIC Market Solutions.

Congratulations for that transaction. A few questions on my side. Can you be a little bit more specific regarding the type of growth rate that you target for the -- on average for the next, let's say, 5 years. And maybe more specific regarding the -- when you comment on the -- when you say geographical expansion out of The U.S. Can you be a bit more specific on that? So that's my first question. Second question, regarding the growth drivers also going forward. Are there any acquisitions in the pipe? I mean is it going to be fueled by M&A? Or is it going to be purely organic? And maybe my last question would be on the type of return that you target on that asset, let's say, the rate of return over the next 5 or 10 years?

Okay. That's a lot of ground to cover. So on the growth targets, we believe that the company could achieve high single-digit sales objectives. Hopefully, we will manage to beat that number, but that's what we have in mind. In terms of geographic expansion today, you saw it's a global company, and we expect growth to come from every part of the planet. There is very strong prospects in Asia, in Europe and The U.S. as well. Regarding acquisitions, this is not an acquisition company like [ Allied ], which is going to pile up acquisitions month after month. This is not what we have in mind here. So far, they built a company mainly organically over the last 5 years. I don't think they have closed any acquisitions, so this is what's purely organic. That being said, there are a few assets here and there of smaller scale that we have identified and then we'll look with the management team to see if they make sense to add to the portfolio of content. So it is on our list, but there is a lot of wood to chop in the near term, and so we'll focus on organic growth first. In terms of return, this is the typical type of returns we have in mind for this asset, so low double-digit IRR.

All right. Maybe can I ask you two additional questions? The use of the cash flow of the company, if there is no acquisition in sight. How fast are you -- is the company going to deleverage its balance sheet from 7 or 8x EBITDA? First question. And second question, that acquisition was made through a competitive process or were you [ load ] bidding for the company or how...

So yes, there will be some deleverage, but in the combination of the cash flow generation and the growth of the EBITDA at the same time. So we do expect significant derivative over the next few years, clearly. And I don't know if Adtalem has actually communicated on the process they run to get this outcome. So I don't want to speak for themselves, but you can expect that for this type of high-quality assets, there was a lot of appetite.

The next question is from the line of Mourad Lahmidi from Exane BNP Paribas.

Yes. I was wondering what's the biggest cost item for the company. So I guess it starts with just double checking here. Also, is there a big difference between EBITDA and the operating profit? And finally, when you mentioned that you want to grow this company at high single digit over the next few years, it seems that you've already achieved that in the past few years, including a sharp decline in conferences. So with the conferences bouncing back, seeing that this target is kind of cautious?

Adam and Harper, do you want to comment on the cost structure and the customer acquisition costs?

Yes, we can do that quickly. So without giving specifics at this point. You're right, the staff is the disproportion [Technical Difficulty]. The sales force is really the largest component of that globally. What was the other question? I apologize.

So the difference between EBITDA and operating profit? I think Adam's earlier comment was on the EBITDA and the cash EBITDA, so more on the cash flow. And I think what he wanted to express was the difference between the accounting EBITDA and the cash EBITDA with deferred revenue -- with prepaid revenues where the companies were actually collecting sales before having the cost. And so -- when you go through the cash flow line, the cash flow is actually higher because of this positive net working capital item. I guess part of your question was as well to understand the capital intensity of this business. This is not a number which is disclosed by the current owner, so we are not going to comment on it. But we did put in the presentation that EBITDA minus CapEx over EBITDA is over 75%, which gives you a rough idea of the CapEx intensity, which is low. And then your last comment on our forecast. Well, we don't make forecasts. So your previous colleague asked for an indication of where we felt the growth was. We wanted to give a ZIP code, but don't see the high single digit as a public forecast on this company. We don't provide forecast.

We have no further questions from the phone lines at the moment. So I'll now hand over to Olivier Allot to manage the questions from the webcast.

Yes. Thank you. So first question from the web. Can you elaborate on value creation plan and targets post acquisition, say, over the next 3 years, any focused areas over the near term?

Adam and Harper, do you want to take this question on the priority and the value creation?

Yes. So as I mentioned earlier, it's largely what the business has already put into place. One is introducing new products to existing customers. Two is expand geographically and further penetrating their existing markets as demand increases. And then what [Technical Difficulty] those were the two largest.

Harper, we do not hear you well.

Sorry, can you hear me now?

Can you hear us?

Yes. So what I was saying is that the 2 main focused areas are introducing new products similar to what they've been doing in the past. So the first is introducing new products to their existing customer base. And then two, is expanding geographically and further penetrating their existing markets.

Okay. Thank you. The next question, do you expect all the revenue, i.e., seminars and webinars to increase relative to other revenue streams?

So conferences, when you take Slide 8, account for roughly 10% of sales. We do expect this percentage to grow and to take a lot of share of the total revenues of the company.

So yes. Can ACAMS be held responsible if a member company is fined for noncompliance?

A member company, like you mean a client?

A customer, yes.

Adam and Harper, you want to respond? I think the answer is a plain no, but if you want to comment on this?

That's correct. No is the answer.

Okay. One more question. Can you let us know the market share in the top three countries, please? And what are the CapEx plans for international expansion?

Adam and Harper?

Yes. So Adtalem does not provide that information, so we can't provide specifics on market share. But suffice it to say, they are the largest player in the CapEx or international expansion consistent with what they've invested in the past.

Thank you. I have no more questions from the web.

[Operator Instructions] And we have a question on the phone. This is from the line of Alexandre Gérard from CIC Market Solutions.

Three additional ones on my side. Firstly, can you comment quickly on the management of the company, who is running the company, [ the high take off ] with that company for how long have they been managing that asset. Second question, regarding the volatility of markets in the past, I'm not talking about the optimal level of EBITDA margin in the future. But I mean were margins stable, very stable, at what level? Can we have an idea about that? And my last question is regarding your stake in the company. Do you intend to keep 99% of the equity for yourself? Or will it be possible for you to syndicate a part of that investment?

So the company today is run by Scott Liles. Scott joined in November 2020. He has quite an international background, graduating from the University of Cape Town and the London Business School, and while in the U.S., he initially joined McKinsey for a time and after serving different roles, he joined Nationwide Insurance, where he led 2 of their business units growth including the turnaround of Nationwide Pet Insurance, which is a $500 million market leader in pet health insurance. Adam and Harper, you want to take the following questions?

The question around margins, the answer is no. I think the profitability on the business has been relatively consistent, but for the impact, obviously, as you noted, of the declining conference revenues over the past couple of years. And then, David, I think the last question was around the intention to retain our full stake versus syndicate?

Yes. The intention to retain our full stake of 99% or any plans to syndicate down?

We might have one of our lenders who is eager to take a very small equity and passive stake, and we are in discussion, but we do intend to keep this investment on our books.

We have a last question on the web. What is the expected agenda, i.e., acquisition closed, growth and exit?

Well, I think on acquisition, we discussed about that, that there is a lot to do organically and we'll focus on that, but there are a few potential targets out there. So we'll be in an opportunistic way looking at them. But for the first few months or first few quarters, we need to focus on the transition out of Adtalem first. So that's -- the plan is clearly to put the company on a good trends of organic growth before looking at M&A. And we have not even closed the acquisition. So we are not in the mindset of talking about the exit. We do believe there is a long road ahead of us in terms of growth. So that will come in -- the two discussions will come in due time.

So it's André François-Poncet. Just to wrap up, this is a company that we've been looking at for a while that our team went and found as part of the screening based on the successful investment we've made in CPI and our interest in the education certification sort of space. We feel that the transaction itself was relatively clever because we found the ideal match with somebody who had synergies for the other business, which we felt distinguished us from quite a number of potential buyers here. We feel that the company has a growth avenue, which is quite obvious to all of us in finance who are pestered, but are positively all the time reminded of all the various obligations, and that requires a lot of training because it's a moving target constantly. It's a global business, which has both opportunities in product and by geography. And it's a very significantly leader -- a very significant leader, although we didn't give market shares, it is significant. It's the biggest player in the space by quite a bit, maybe not everywhere, but in general. So we think that once they become an independent company, they will have also all the opportunities that come from that, and we fully intend to give them our support with a perspective of the medium to long term. So thank you for your attention.