Information Services Corporation (TSX:ISV) (“ISC” or the “Company”)
today announced the execution of an extension agreement (the
“Extension Agreement”) with the Province of Saskatchewan (the
“Province”) to extend the term of its exclusive Master Service
Agreement (the “MSA” and, together with the Extension Agreement and
certain ancillary agreements collectively the “Agreements”) until
2053 (the “Extension”). This means that the MSA between ISC
and the Province will continue for the next 30 years to 2053, for a
total of 40 years, which is in keeping with a concession of this
nature.
The Agreements extend ISC’s exclusive right to
manage and operate each of the Saskatchewan Land Registry, the
Saskatchewan Land Surveys Directory, the Saskatchewan Corporate
Registry and the Saskatchewan Personal Property Registry
(collectively, the “Saskatchewan Registries”).
Extension Terms
- The Agreements extend ISC’s
exclusive right to manage and operate the Saskatchewan Registries
to 2053.
- The consideration to be paid by ISC
to the Province consists of:
- An upfront cash payment of $150
million (the “Upfront Payment”), payable on or before July 28,
2023;
- Five cash payments of $30 million
per year, totaling $150 million, commencing in July 2024 with the
final payment expected to be made in 2028 (the “Subsequent
Payments”); and
- Annual contingent payments
potentially payable after 2033 if volume growth for certain land
registry transactions exceeds pre-defined benchmarks, subject to a
maximum (further described below).
Financial Highlights
- Immediate
new revenue enhances ISC’s scale and financial profile:
- Under the Agreements, ISC has been
granted the right to introduce and/or enhance fees on certain
transactions with applicable fee adjustments expected to go into
effect on July 29, 2023.
- Fee adjustments are expected to
result in estimated incremental annual revenue and Adjusted EBITDA1
to ISC of $17 million and $16 million, respectively.
- Accordingly, the Company expects
the impact to 2023 revenue to be an increase of $7 million and 2023
Adjusted EBITDA1 to be $6 million.
- ISC intends to formally update its
annual guidance for 2023 when it reports its financial results for
the second quarter of 2023.
- The
Agreements are expected to generate attractive economics to ISC’s
shareholders:
- Strong +10% unlevered internal rate
of return5 for a high-quality infrastructure asset that is already
operated by ISC.
- Compelling +30% accretion to ISC’s
Net Asset Value per share (“NAVPS”)2.
- Immediately accretive to Adjusted
Free Cash Flow Per Share (“Adjusted FCFPS”)1 and Adjusted Earnings
Per Share (“Adjusted EPS”)1.
- ISC will
continue to maintain a prudent and flexible capital
structure:
- Following funding of the Upfront
Payment, ISC will have pro forma Net Debt / LTM Adjusted EBITDA3 of
4.0x4 (prior to the Extension, Net Debt / LTM Adjusted EBITDA was
0.6x as at March 31, 2023).
- Rapid deleveraging towards
long-term net leverage target of 2.0x – 2.5x.
- ISC has a history of disciplined
capital allocation and will continue to focus on deleveraging,
maintaining and growing its dividend, and investing in growth.
- ISC will
make meaningful investments to enhance core registries:
- A registry
enhancement plan will leverage ISC-built technology to offer
best-in-class technology, security, and user experience.
- ISC’s continued
development of world-class registry technology supports the
Company’s pursuit of new registry opportunities globally while also
benefitting the Saskatchewan Registries.
- The
contingent payment structure allows ISC and the Province to share
in volume growth:
- ISC and the
Province to share in growth through annual contingent payments
potentially payable by ISC to the Province between 2033 and 2053 if
cumulative annual volume growth for certain Saskatchewan Land
Registry transactions falls within a pre-determined range,
calculated in any given year as follows:
- 25% of any revenue associated with
long-term volume growth between 0% - 1%
- 50% of any revenue associated with
long-term volume growth between 1% - 3%
- ISC to retain unlimited upside on
any incremental volume growth in excess of 3%.
The MSA has also been amended and restated to,
among other things, implement certain incremental terms and
conditions, the objectives of which are to enhance security
features and protocols for the Saskatchewan Registries, contemplate
emerging and future technology enhancements for the Saskatchewan
Registries and the services provided pursuant to the MSA, refresh
and clarify governance practices and structure, adjust the registry
fees chargeable by the Company, and provide flexibility for change
over the life of the extended term.
Shawn Peters, President & CEO commented,
“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.”
Peters continued, “This Agreement is beneficial for all
stakeholders including the Province, the people of Saskatchewan and
ISC’s long-standing and extremely supportive shareholders. We look
forward to continuing to serve the users of the Saskatchewan
Registries for the next 30 years, while executing our long-term
growth strategy for the company overall.”
Deputy Premier and Minister of Finance Donna
Harpauer noted, “ISC’s history in our province of providing quality
services to people and businesses drove the extension of this
Agreement. Our Government has confidence in ISC, a home-grown
success story, and a company that will help our province continue
to grow and move forward.” Harpauer continued, “The payments we
will receive from ISC and the ability to participate in the
company’s growth will help our Government continue to invest in the
priority programs, services and infrastructure Saskatchewan people
value.”
Compelling Strategic
Rationale
- Reinforces
ISC’s position as a leading registry operator:
- Strategic extension
of the MSA keeps a successful public-private partnership in the
hands of a proven management team with a best-in-class operational
track record.
- Unlocks
value of the Saskatchewan Registries:
- The Saskatchewan
Registries are a valuable, high-quality infrastructure asset that
ISC has the exclusive right to operate until 2053.
- Provides
ISC with strong, stable, long-term free cash flow:
- Predictable,
high-margin revenue supported by an asset-light model drives
substantial cash flow generation.
- New revenue
meaningfully enhances ISC’s scale and financial profile:
- Immediate fee
adjustments significantly enhance ISC’s revenue, Adjusted EBITDA1,
Adjusted EBITDA margin1, Adjusted Net Income1, and Adjusted Free
Cash Flow1.
- Attractive
transaction economics create significant value for ISC’s
shareholders:
- Robust
risk-adjusted returns5 with low execution risk underpinned by
meaningful NAVPS2, Adjusted FCFPS1 and Adjusted EPS1
accretion.
- Long-term
growth catalyst:
- Significant
incremental cash flow generation enables ISC to accelerate its
long-term organic and acquisition growth strategy.
1 Adjusted EBITDA, Adjusted
EBITDA Margin, Adjusted Net Income and Adjusted Free Cash Flow are
not recognized measures under IFRS and do not have a meaning
prescribed by IFRS and, therefore, they may not be comparable to
similar measures reported by other companies. For more information,
please refer to section 8.8 “Non-IFRS Financial Measures” and
section 2 “Consolidated Financial Analysis” for a reconciliation of
Adjusted Net Income and Adjusted EBITDA to net income in
Management's Discussion and Analysis for the quarter ended March
31, 2023. Additionally see the “Non-IFRS Performance Measures”
section below for descriptions and historical reconciliation of
these measures. Adjusted Earnings Per Share and Adjusted Free Cash
Flow Per Share referenced in this news release are calculated by
dividing Adjusted Net Income and Adjusted Free Cash Flow by the
average number of shares outstanding, respectively. 2 Net Asset
Value is a supplementary financial measure and represents the
estimated fair value of each of ISC's business segments, less its
long-term debt, short-term and long-term lease liability,
Government of Saskatchewan liabilities, plus cash. Net Asset Value
per share represents the Net Asset Value divided by the number of
shares outstanding3 This financial ratio is a non-IFRS ratio used
by management to evaluate borrowing capacity and capital allocation
strategies. Pro forma Net Debt/ LTM Adj. EBITDA is defined as pro
forma Net Debt divided by pro forma LTM Adjusted EBITDA. Pro forma
Net Debt includes total bank debt plus lease obligations and the
present value of the commitments payable to the Province of
Saskatchewan pursuant to the Agreements, and certain
transaction-related expenses less cash. Pro forma LTM Adjusted
EBITDA is calculated as ISC’s net income plus net finance expense,
depreciation and amortization, taxes, share-based compensation,
acquisition, integration and other costs as well as an adjustment
to give effect to management's estimates of the annualized EBITDA
generated by fee adjustments offset by incremental expenses.4 This
is pro forma as at March 31, 2023.5 Unlevered internal rate of
return is a supplementary financial measure which represents the
rate of return by considering the present value of future cash
flows related to this agreement extension excluding the cost of
financing.6 Total shares outstanding at June 30, 2023 are
17,701,498.
Transaction FinancingISC is
well-positioned to fund the Extension with its strong balance
sheet, cash flow profile and access to capital. In connection with
the Extension, ISC has entered into an amended and restated credit
agreement (the “Amended and Restated Credit Facility”) with its
syndicate of lenders. The aggregate amount available under the
Amended and Restated Credit Facility has been increased from $150
million to $250 million and will consist of ISC’s existing $150
million revolving credit facility plus a new $100 million revolving
credit facility. In addition, ISC will maintain access to a $100
million accordion option, providing the flexibility to upsize the
aggregate revolving credit facility up to $350 million, and the
Consolidated Net Funded Debt to EBITDA financial covenant has been
increased to provide additional balance sheet flexibility to ISC.
The expiry date of the Amended and Restated Credit Facility of
September 2026 remains unchanged. Royal Bank of Canada acted as
Administrative Agent with RBC Capital Markets and Canadian Imperial
Bank of Commerce serving as Joint Lead Arrangers and Joint
Bookrunners for the Amended and Restated Credit Facility.
ISC intends to fund the Upfront Payment and
other related transaction costs by drawing on its Amended and
Restated Credit Facility and with cash-on-hand. The Subsequent
Payments are expected to be financed using internally-generated
cash flow.
Special Committee of the Board of
Directors and Fairness Opinion
To evaluate and approve the Agreements, the
Board of Directors (the “Board”) formed a special committee
comprised exclusively of elected independent directors (the
“Special Committee”). RBC Capital Markets provided a fairness
opinion to ISC’s Special Committee to the effect that, as of the
date of the fairness opinion, subject to the assumptions,
limitations and qualifications contained therein, the consideration
to be paid by the Company pursuant to the Agreements is fair from a
financial point of view to the Company. The Special Committee
reviewed and unanimously approved the execution of the
Agreements.
Advisors and Counsel
RBC Capital Markets acted as financial advisor
to ISC. Stikeman Elliott LLP served as counsel to ISC.
Note to ReadersThe Board
carries out its responsibility for review and approval of this
disclosure through the Special Committee, which is comprised
exclusively of independent elected directors.
Conference Call and WebcastISC
will hold an investor conference call on July 5, 2023 at 5:30 p.m.
ET to discuss the transaction. Those joining the call on a
listen-only basis are encouraged to join the live audio webcast
which will be available on our website at
www.company.isc.ca/investor-relations/events. Participants who wish
to ask a question on the live call may do so through the ISC
website or by registering through the following live call
URL: https://register.vevent.com/register/BI3deaa146cfac4effaef057c05ca5a254
Once registered, participants will receive the
dial-in numbers and their unique PIN number. When dialing in,
participants will input their PIN and be placed into the call. The
audio file with a replay of the webcast will be available about 24
hours after the event on our website at the link above. We invite
media to attend on a listen-only basis.
About ISCHeadquartered in
Canada, ISC is a leading provider of registry and information
management services for public data and records. Throughout our
history, we have delivered value to our clients by providing
solutions to manage, secure and administer information through our
Registry Operations, Services and Technology Solutions segments.
ISC is focused on sustaining its core business while pursuing new
growth opportunities. The Class A Shares of ISC trade on the
Toronto Stock Exchange under the symbol ISV.
Cautionary Note Regarding
Forward-Looking InformationThis news release contains
forward-looking information within the meaning of applicable
Canadian securities laws including, without limitation, those
statements related to payment of the transaction consideration,
including the upfront payment, subsequent payments and contingent
payment structure, anticipated fee adjustments, our future
financial position and results of operations including anticipated
changes in revenue, Adjusted EBITDA, Adjusted Net Income and
Adjusted Free Cash Flow, expectations for value creation and
economics to ISC’s shareholders, capital structure changes and
anticipated accretion of the transaction, growth opportunities,
technology enhancements and continued development of registry
technology and capital allocation strategy. Forward-looking
information involves known and unknown risks, uncertainties and
other factors that may cause actual results or events to differ
materially from those expressed or implied by such forward-looking
information. Important factors that could cause actual results to
differ materially from the Company's plans or expectations include
risks relating to ISC’s payment of the upfront or subsequent
amounts, changes in the condition of the economy, reliance on key
customers and licences, dependence on key projects and clients,
securing new business and fixed-price contracts, identification of
viable growth opportunities, implementation of our growth strategy,
competition and other risks detailed from time to time in the
filings made by the Company including those detailed in ISC’s
Annual Information Form for the year ended December 31, 2022 and
ISC’s unaudited Condensed Consolidated Interim Financial Statements
and Notes and Management’s Discussion and Analysis for the first
quarter ended March 31, 2023, copies of which are filed on SEDAR at
www.sedar.com.
The forward-looking information in this release
is made as of the date hereof and, except as required under
applicable securities laws, ISC assumes no obligation to update or
revise such information to reflect new events or circumstances.
Non-IFRS Performance
MeasuresIncluded within this news release is reference to
the following non-IFRS performance measures. These measures, which
are reconciled below are reviewed regularly by management and the
Board of Directors in assessing our performance and making
decisions regarding the ongoing operations of our business and its
ability to generate returns. In connection with the Extension,
management has made the decision to add Adjusted Net Income and
Adjusted Free Cash Flow as new financial measures that exclude
certain items outside the normal course of business and are
believed to be useful to management and the market in reviewing
ISC’s performance. They are not recognized measures under IFRS and
do not have a standardized meaning under IFRS, so may not be
reliable ways to compare us to other companies.
Below, information is presented on the non-IFRS
measures used by ISC, why we use them, how they are calculated, the
most comparable IFRS financial measures and a reconciliation of the
measures as at December 31, 2022. Where new reconciling items exist
following this Extension that did not exist before, a line is
included in the reconciliation however the historical values
presented are nil.
Non-IFRS Performance Measure |
Why we use it |
How we calculate it |
Most comparable IFRS financial measure |
Adjusted Net IncomeAdjusted Earnings Per Share, BasicAdjusted
Earnings Per Share, Diluted |
- To evaluate performance and profitability while excluding
non-operational and share-based volatility.
- We believe that certain investors and analysts will use
Adjusted Net Income and Adjusted Earnings Per share to evaluate
performance while excluding items that management believes do not
contribute to our ongoing operations.
|
Adjusted Net Income;Net Income AddShare-based compensation expense,
acquisitions, integration and other costs, effective interest
component of interest expense, debt finance costs expensed to
professional and consulting, amortization of the intangible asset
related to the Extension and amortization of registry enhancements
required by the Agreements, accretion on the liability to
Government of Saskatchewan and the tax effect of these adjustments
at ISC’s statutory tax rate.Adjusted Earnings Per Share,
Basic;Adjusted Net Income divided by weighted average number of
common shares outstandingAdjusted Earnings Per Share,
Diluted;Adjusted Net Income divided by diluted weighted average
number of common shares outstanding |
Net IncomeEarnings Per Share, BasicEarnings Per Share, Diluted |
Adjusted EBITDAAdjusted EBITDA Margin |
- To evaluate performance and profitability of segments and
subsidiaries as well as the conversion of revenue while excluding
non-operational and share-based volatility.
- We believe that certain investors and analysts use Adjusted
EBITDA to measure our ability to service debt and meet other
performance obligations.
|
Adjusted EBITDA:Net Income add (remove)Depreciation and
amortization, net finance expense, income tax expense, share-based
compensation expense, and acquisition, integration and other
costsAdjusted EBITDA Margin:Adjusted EBITDA divided byTotal
revenue |
Net Income |
Free Cash Flow |
- To show cash available for debt repayment and reinvestment into
the Company on a levered basis.
- We believe that certain investors and analysts use this measure
to value a business and its underlying assets.
|
Net cash flow provided by operating activities deduct
(add)Net change in non-cash working capital, cash additions to
property, plant and equipment, cash additions to intangible assets,
interest received and paid as well as interest paid on lease
obligations and principal repayments on lease obligations |
Net cash flow provided by operating activities |
Adjusted Free Cash FlowAdjusted Free Cash Flow Per Share |
- To show cash available for debt repayment and reinvestment into
the Company on a levered basis from continuing operations while
excluding non-operational and share-based volatility.
- We believe that certain investors and analysts use this measure
to value a business and its underlying assets based on continuing
operations while excluding short term non-operational items.
|
Free Cash Flow deduct (add)Share-based compensation expense,
acquisition, integration and other costs and registry enhancement
capital expenditures required by the Extension |
Net cash flow provided by operating activities |
Reconciliation of Adjusted EBITDA to Net
Income
|
Year Ended December 31, |
|
(thousands of CAD) |
|
2022 |
|
|
|
2021 |
|
Adjusted EBITDA |
$ |
64,390 |
|
|
$ |
67,815 |
|
|
|
|
|
|
|
|
|
Adjust: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
(14,735 |
) |
|
|
(13,778 |
) |
Net finance expense1 |
|
(3,177 |
) |
|
|
(2,673 |
) |
Income tax expense |
|
(12,249 |
) |
|
|
(12,003 |
) |
Share-based compensation expense |
|
(1,483 |
) |
|
|
(6,060 |
) |
Acquisition, integration and other costs |
|
(1,981 |
) |
|
|
(1,225 |
) |
Gain on disposal of property, plant and equipment assets |
|
4 |
|
|
|
2 |
|
Net income |
$ |
30,769 |
|
|
$ |
32,078 |
|
|
|
|
|
|
|
|
|
_______________1 Net finance expense includes interest income
net of interest expense and includes interest on lease obligations
and the effective interest component of interest expense.
Reconciliation of Adjusted Net Income to Net
Income
|
Year Ended December 31, |
|
(thousands of CAD) |
|
2022 |
|
|
|
2021 |
|
Adjusted Net Income |
$ |
33,350 |
|
|
$ |
37,409 |
|
|
|
|
|
|
|
|
|
Adjust: |
|
|
|
|
|
|
|
Share-based compensation expense |
|
(1,483 |
) |
|
|
(6,060 |
) |
Acquisition, integration and other costs |
|
(1,981 |
) |
|
|
(1,225 |
) |
Effective interest component of interest expense2 |
|
(72 |
) |
|
|
(18 |
) |
Amortization of the intangible assets related to the extension of
the MSA with GoS |
|
- |
|
|
|
- |
|
Debt finance costs expensed to professional and consulting |
|
- |
|
|
|
- |
|
Accretion on Liability to Government of Saskatchewan2 |
|
- |
|
|
|
- |
|
Amortization of Registry Transformation Intangible Assets |
|
- |
|
|
|
- |
|
Tax effect on above adjustments3 |
|
955 |
|
|
|
1,972 |
|
Net Income |
$ |
30,769 |
|
|
$ |
32,078 |
|
|
|
|
|
|
|
|
|
Reconciliation of Adjusted Free Cash Flow to Net Cash
Flow Provided by Operating Activities
|
Year Ended December 31, |
|
(thousands of CAD) |
|
2022 |
|
|
|
2021 |
|
Adjusted Free Cash Flow |
$ |
44,394 |
|
|
$ |
47,310 |
|
Adjustments: |
|
|
|
|
|
|
|
Share-based compensation expense |
|
(1,483 |
) |
|
|
(6,060 |
) |
Acquisition, integration, and other costs |
|
(1,981 |
) |
|
|
(1,225 |
) |
Registry enhancement capital expenditures required by
extension2 |
|
- |
|
|
|
- |
|
Free Cash Flow |
$ |
40,930 |
|
|
$ |
40,025 |
|
Adjustments: |
|
|
|
|
|
|
|
Cash additions to property, plant and equipment |
|
574 |
|
|
|
10 |
|
Cash additions to intangible assets |
|
890 |
|
|
|
2,217 |
|
Interest received |
|
(463 |
) |
|
|
(140 |
) |
Interest paid |
|
2,902 |
|
|
|
2,547 |
|
Interest paid on lease obligations |
|
403 |
|
|
|
354 |
|
Principal repayment on lease obligations |
|
2,137 |
|
|
|
2,014 |
|
Net change in non-cash working capital |
|
(3,837 |
) |
|
|
14,185 |
|
Net Cash Flow provided by operating activities |
$ |
43,536 |
|
|
$ |
61,212 |
|
|
|
|
|
|
|
|
|
_______________2 This Extension will result in new adjustments
that have not occurred historically. These new non-IFRS
adjustments, are expected to be incurred in the future and have
therefore been included with nil values in these historical
reconciliations.3 Calculated at ISC’s statutory tax rate of 27.0
per cent.
Investor ContactJonathan HackshawSenior
Director, Investor Relations & Capital MarketsToll Free:
1-855-341-8363 in North America or
1-306-798-1137investor.relations@isc.ca
Media ContactJodi BosnjakExternal
Communications SpecialistToll Free: 1-855-341-8363 in North America
or 1-306-798-1137corp.communications@isc.ca
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