Loral Space & Communications Inc.
Q2 2019 Earnings Call Transcript

Published: 4 Aug 2019

[Operator:]

Good morning ladies and gentlemen. Welcome to the conference call to report the Second Quarter 2019 Financial Results for Telesat. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of Telesat and Michel Cayouette, Chief Financial Officer of Telesat.I would now like to turn the meeting over to Mr. Michael Bolitho, Director of Treasury and Risk Management. Please go ahead, Mr. Bolitho.

[Michael Bolitho:]

Thank you and good morning. Earlier today we issued a news release containing Telesat’s consolidated financial results for the three and six months period ended June 30, 2019. This news release is available on Telesat’s website at www.telesat.com under the tab Investor Relations.We also filed our quarterly report on Form 6-K with the SEC this morning. Our remarks today may contain forward-looking statements. There are risks that Telesat’s actual results may differ materially from the results contemplated by the forward-looking statements as a result of known and unknown risks and uncertainties.For additional information about known risks, we refer you to the risk factors section of our Annual Report on Form 20-F for the fiscal year ended December 31, 2018 filed with the SEC on March 1, 2019.The information that we are discussing today reflects our expectations as of today and is subject to change. Except as required by securities laws, Telesat disclaims any obligation or undertaking to update or revise this information whether as a result of new information, future events or otherwise.I will now turn the call over to Dan Goldberg, Telesat’s President and Chief Executive Officer.

[Dan Goldberg:]

Thank you, Michael. This morning I’ll discuss our second quarter financial results and give an update on the business. I’ll then hand over to Michel, who will speak to the numbers in more detail and then we will open the call up to questions.Adjusting for foreign exchange rate changes, revenue in the second quarter was 8% higher than the same period last year. Adjusted EBITDA was 9% higher and our adjusted EBITDA margin was 85.2%.The revenue increase was principally due to revenue contributions from our Telstar 19 VANTAGE and Telstar 18 VANTAGE satellites, which entered commercial service respectively, in August and October last year, combined with an increase from short-term services provided to other satellite operators.Looking up the first half of this year relative to the same period last year, revenue and adjusted EBITDA were both slightly higher and the adjusted EBITDA margin was 84.7%, up from 84.1% last year.The revenue increase was primarily due to revenue related to the Telstar 19 VANTAGE and Telstar 18 VANTAGE satellites, offset by lower short term services provided by other satellite operators, lower equipment sales and lower revenue from certain customers in the resource sector.Turning to some key metrics, backlog at the end of the second quarter was $3.5 billion and fleet utilization was 85%. Broadcast represented approximately 49% of total revenue in the quarter, enterprise services 48% and consulting another 3%. And on a geographic basis for the quarter, North America accounted for 80% of revenue, Latin America 8%, EMEA 8% and Asia 4%.As highlighted in the earnings release, last week we made an important announcement with the government of Canada regarding our planned Low Earth Orbit satellite constellation. Specifically we announced that we signed a memorandum of understanding with the Canadian government to ensure access to affordable high-speed broadband connectivity across rural and remote areas of Canada using the Telesat LEO Constellation, an arrangement we expect will generate $1.2 billion in revenue over a 10 year period, $600 million of which due to the contribution from the Canadian government.Additionally the government will contribute $85 million for Telesat through its Strategic Innovation Fund to support the development phase of the Telesat LEO constellation. These announcements underscore the strong interest and support we are seeing for a planned LEO Constellation and further underpin our business plan.With that, I’ll hand over to Michel and then look forward to answering any questions.

[Michel Cayouette:]

Thank you Dan and good morning everyone. During the second quarter of 2019 and compared to the same period in 2018, revenue increased by $19 million to $231 million. Operating expenses increased by $2 million to $38 million and adjusted EBITDA increased by $19 million to $197 million.Between the second quarter of 2018 and the second quarter of 2019, the changes in the U.S. dollar exchange rate had a positive impact of $3 million on our revenue, a negative impact of $1 million on our operating expenses and a positive impact of $3 million on our adjusted EBITDA.When adjusted for the changes in the U.S. exchange rate, revenue increased by $16 million during the second quarter when compared to the same period in 2018, operating expenses increased by $1 million and adjusted EBITDA increased by $16 million. The increase in operating expenses during the second quarter was mainly due to higher non-cash share based compensation; higher fees associated with professional services and higher consulting expenses. The increase was partially offset by lower rent expense.During the first half of 2019 and compared to the same period in 2018, revenue increased by $9 million to $454 million, operating expenses increased by $3 million to $77 million and adjusted EBITDA increased by $11 million to $384 million. Between the first half of 2018 and the first half of 2019, the changes in the U.S. dollar exchange rate had a positive impact of $8 million on our revenue, a negative impact of $2 million on our operating expenses, and a positive impact of $6 million on our adjusted EBITDA.When adjusted for the changes in the U.S. dollar exchange rate, revenue increased by $2 million during the first half of 2019 when compared to the same period in 2018. Operating expenses increased by $1 million and adjusted EBITDA increased by $5 million.The increase in operating expenses during the first half of 2019 was mainly due to higher non-cash share based compensation, higher fees associated with professional services and higher consulting expenses. The increase was partially offset by lower rent expense.Depreciation and amortization increased by $8 million during the second quarter and increased by $16 million during the first half of 2019 when compared to the same period in 2018. The increase was mainly due to depreciation on our Telstar 18 VANTAGE and Telstar 19 VANTAGE Satellites, which began a commercial service in October 2018 and August 2018 respectively.Interest expense increased by $8 million during the second quarter and by $14 million during the first half of 2019 when compared to same period in 2018. The increase was mainly due to higher interest rates on our senior secured credit facility and a decrease in capitalized interest, combined with the unfavorable impact related to the transition of U.S. dollar denominated interest expenses into Canadian dollar equivalent. The increase was partially offset by higher net interest received on our interest rate swap.In 2019 we recorded a gain on financial instrument of $23 million during the second quarter and a gain on financial instrument of $80 million during the first half of 2019. The gains on financial instruments reflect changes in the fair value of our interest rate swaps, interest rate floor on our senior secured credit facilities and the prepayment option on our senior notes.In 2019, we also recorded a gain on foreign exchange of $58 million during the second quarter and a gain on foreign exchange of $129 million during the first half of 2019. The gains on foreign exchange were mainly related to the change in the exchange rate used to translate our U.S. dollar denominated debt into Canadian dollar equivalent at the beginning and the end of each period.Tax expense decreased by $5 million during the second quarter and decreased by $20 million during the first half of 2019, when compared to the same period in 2018. The decreases during the second quarter were mainly due to losses on the interest rate swap, partially offset by higher operating income, gains on foreign exchange. The decreases during the first half of 2019 were mainly due to lower operating income and losses on interest rate swap, partially offset by gains on foreign exchange.During the second quarter of 2019, the cash inflows from operating activities were $78 million and the cash outflows used in investing activities were $14 million. For the first half of 2019 the cash inflow or operating activities were $196 million and the cash outflows used in investing activities were $31 million.The majority of our investing activities in 2019 were related to capital expenditure for the development of our planned LEO Constellation. To meet our expected cash requirements for the next 12 months, including interest payments in capital expenditures, we had $886 million of cash in short term investment at the end of June, as well as approximately $200 million U.S. dollars of borrowing availability under our revolving facility.In addition, we continue to generate a significant amount of cash from operating activities. At the end of the second quarter, we were in compliance with the covenant in our credit agreement and indenture. A reconciliation between our financial statements and the financial covenant calculation is provided in the quarterly report we filed this morning.That concludes our prepared remarks for this call, and now we will be happy to answer any question you may have. Operator?

[Operator:]

Thank you [Operator Instructions]. And the first question is from Mike Pace from JPMorgan. Please go ahead.

[Mike Pace:]

Hi, good morning. Thanks for taking the questions. If you don’t mind may be I’ll just jump right into the LEOs here and start with the MOU that you have with the Canadian government.Dan, maybe can you just explain the $1.2 billion that we see in your release and saw in the press last week, is that – what kind of number? Is that what you expect you think the LEO Constellation can generate in Canada only for maybe world broadband, and then put that with the, up to the $600 million which is included a $1.2 million that you would receive from the government of Canada. How does all of this work? And it sounds like to me this is not an anchor tenant type of a structure, but maybe more of an anchor partner if that's a better way to think about it.

[Dan Goldberg:]

Yeah, thanks Mike. The first thing I’d have to say is so we announced this somewhere [inaudible] government last week will enter into a full sort of definitive agreement with them and some of the details will get flushed out in that.But fundamentally what we are doing with the government is we Telesat are agreeing to create a bandwidth pool using our LEO Constellation, so it's a pool of bandwidth, it will be probably you know measured in multiple gigabits of capacity. It won't be all the capacity that our consolation will have at sort of Canada, but will take a pool of capacity. We will make that pool of capacity available to Telcos and ISPs, specifically to server the world broadband market in Canada.The government of Canada will make that $600 million contribution to Telesat. They will pay that to us over a 10 year period and in exchange for that, we will agree to make that pool of bandwidth available in the market at a sort of below market rate, and sure, when we get to the $1.2 billion, $600 million will come from the government of Canada and the other half of that, the other $600 million to get to the $1.2 million will come from the Telcos, the ISPs, who will be buying this below market capacity to server the world broadband market here.

[Mike Pace:]

But, I guess that ratio will want to – it sounds like a 50/50 split. So if I’m misreading that let me know, but this is not, you don't have to hit $1.2 million and then to get $600 million. This is on an ongoing basis.

[Dan Goldberg:]

Yeah, no that’s right. They are agreeing to pay us $600 million over this 10 year period. We’ll price that full capacity at a very attractive rate. We fully expect that telcos, ISP's maybe even some municipal governments and others will take that capacity up we think pretty quickly. My own expectation is that will probably already have taken-up pre-launch and when you take the $600 million and you take the revenue, we expect to get from that pool of, you know attractively priced capacity.You know it will equal up to the $1.2 billion, that’s a Canadian dollar number, $1.2 billion to Telesat, and then we’ll still have lots of incremental capacity to serve the Canadian market. So that $1.2 billion in our minds is in no way a cap of the kind of revenue that we expect to receive from the Canadian market, broadband, government services, energy market, you know all the other verticals that we serve, but we expect the $1.2 billion will get generated in connection with that deal that we announced with the government.

[Mike Pace:]

Okay, and then moving to the $85 million contribution from the government, I recall reading somewhere that there may be a requirement for you to invest $200 million plus in R&D of your other items. So when I think about that on a standalone basis, it doesn't feel like a very good trade for you unless you were planning on doing some or all of that anyway. So what would you think of that or do I have to look at this holistically with the $600 million as well.

[Dan Goldberg:]

No I think the $85 million, you know we are moving forward with our LEO Constellation. There's a very significant sort of R&D in what we should call development phase as part of that. Part of the development phase is just launching you know the first, you know a dozen satellites or so. These will be the same satellites that you know will occupy the whole constellation. But those first ones, we’ll launch and sort of rigorously test and put through all the pieces before we launched a hundreds of others.So that's sort of all considered by us and the government to be part of the development phase. So yeah, that’s the government's making a contribution to that phase of our LEO constellation. We will be making significant investments just in terms of rolling out and developing the constellation and the government's contribution will offset some of those expenditures that we’ll have.

[Mike Pace:]

And then given what you just said that you are moving forward and I've noticed a change in language in your quarterly reports as well with LEO, and I'm wondering if maybe at this point you are willing to frame a little bit and expressing rounding is very encouraged her, right, the size of this project, the timing of the spend, funding, potential partners or go it alone. So can you maybe give us some more color today that maybe you haven't given us in the past?

[Dan Goldberg:]

Yeah, I mean what I can say is that our expectation is by the end of the year we’ll be announcing sort of supplier contracts. You will be building the consolation and the like. In terms of financing, I think we said before that you know it's going to be through a combination of equity and debt. I think we've said that on the debt side are focus is mostly what we are thinking about. This is due to project financing; we are focused on the export credit agencies to be lenders in connection with the debt side of this, so I think we said all that.In terms of the magnitude of the investment, we've you know to-date said multiple billions will still stay there for the time being until you know we get further down the road in terms of things that we’ll be getting from supporters when we have more details from them about you know exactly what the overall capital investment profile would be.As far as partners and the like, you know we've said that our focus on the LEO Constellation, even though will be a very disruptive offering in the market, we’ll still you know be providing you know broadband connectivity services. So our focus is to continue to be a wholesaler, focusing on the back home market, the aeronautical markets, the maritime market and the government services market.Our expectation is that we're going to be working with and serving all of the same customers that we serve today in each of those verticals. We are open to having partners along the way, but you know we've been doing this for 50 years now. We're pretty confident of our ability to commercialize this constellation in the market.I think Mike that addresses the different questions that you posed.

[Mike Pace:]

Sure. Maybe just another quick one more, maybe another quick answer, but the strategic advantages that you think you have in LEO versus others, then will that be orbital slots or spectrum that you have that others might not. And then just for Michelle, has any other additional cash moved over from the restricted group to the unrestricted group since the first quarter of last year. Thank you.

[Dan Goldberg:]

I’ll take the first one. So for strategic advantages you mentioned Spectrum and that's certainly one of them. So Telesat has priority rights to you know 4 gigahertz of Ka-Band spectrum and that you know is important when you are providing satellite services or frankly any wireless service, that's important.I’d say in addition to that, we're serving all these markets today with our geo-consolation; we know the markets, we know the customers, they I believe have a higher regard for Telesat in confidence and our ability to not only look after their existing requirements, but to bring something forward as revolutionary that helps each of them remain competitive in the different markets that they serve.I think we've got you know the best engineering satellite, engineering team in the world. So I think that the constellation that we designed is extraordinarily advanced and compelling. It's going to represent an extraordinary value proposition in the market and is going to allow us to provide a quality of service that is just unmatched in the market today and even what anyone else sort of has on the drawing board, and it’s going to allow us to do that at the price points are that will be extraordinarily competitive and still allow us to achieve the kinds of investment returns that we need to achieve to make a project like this make sense financially.So anyway, I'd highlight all of those things as compelling reasons why we think this is not only going to be a great value proposition for the customer community and frankly for governments around the world that are very focused on you know solving the conundrum of a rural broadband connectivity, but it will be a great proposition for our shareholders and the lenders as well.

[Michel Cayouette:]

On your second question, the answer is no. We had nothing, no additional funds from Telesat Canada to the unrestricted subsidiary after your first investment.

[Mike Pace:]

Great! Thanks for the answers guys.

[Dan Goldberg:]

Okay, thanks Mike.

[Operator:]

Thank you, Mr. Pace. [Operator Instructions]. The next question is from Jason Kim from Goldman Sachs. Please go ahead.

[Anna Chen:]

Hi, this is Anna Chen for Jason Kim. So focusing on the MOU again, the Canadian government contributed $85 million in Canadian dollars, but which entity are you receiving that investment and are they being made in the unrestricted subsidiary. And then any other updates on your existing capital structure as we link the eight and seven-eighths notes that are becoming called later this year. Thanks.

[Dan Goldberg:]

Okay, so the $85 million is based on the amount of expenses in CapEx and OpEx related to the deal project. Most of it will be in the unrestricted subsidiary. So the $85 million will probably be received by a combination of sub-Canada and the unrestricted subsidiary, but we expect most if it will be from the unrestricted subsidiary.With regards to the notes and capital structure, we know that we have the first call date of our notes is on November this year, but we still – this is a note that matured in 2024, so we continue to monitor, to look at the market, evaluate the market and will be opportunistic if there is an opportunity, we’ll look at it. But as you know, there is a seasoned premium to be paid, but this is one of the option we have, but if we are optimistic, if we sense opportunity we’ll – we don’t have any plan yet.

[Anna Chen:]

Got it, thanks. And then I have a question in C-band. So the CBA recently made comments that it's prepared to make a voluntary contribution, a member of the CBA. Just curious to get you’re thought on that aspect of the proposal, and also is it fair to assume that any contribution that CBA may make will be separate for any tax implications that Telesat may have on the C-band proceeds.

[Dan Goldberg:]

Yeah, so you know Telesat’s a member of the CBA. We are e fully aligned with what CBA is doing. No, I don't have anything sort of more to add about what the CBA has said about the willingness to make a contribution. I think the CBA is really clear that there is a willingness to do that, but until we have a better sense for exactly how the entire proceeding is going to play out, it's a little bit premature right now to speak about exact quantum's and the like. In terms of Telesat and taxes, yeah that would be separate and apart I believe from what the CBA is referring to in terms of making a contribution to the treasury.

[Anna Chen:]

Okay, that's all I have today. Thanks.

[Dan Goldberg:]

Okay, thank you.

[Operator:]

Thank you. There are no further questions registered at this time. I'd now like to turn the meeting over to Mr. Goldberg.

[Dan Goldberg:]

Okay operator, thank you, and thank you all for joining us this morning and we look forward to speaking again when we release our third quarter numbers. So thank you very much.

[Operator:]

Thank you. The conference is now ended. Please disconnect your lines at this time. We thank you for your participation.