Maxar Technologies Inc.
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Good afternoon, ladies and gentlemen. My name is Leonie, and I will be your conference operator today. At this time, I would like to welcome everyone to MacDonald, Dettwiler and Associates Limited 2015 first quarter results conference call and webcast. [Operator Instructions] Welcome to MDA's Q1 2015 conference call. We would like to remind you that part of today's discussions, including responses to various questions, may contain forward-looking statements, which represent the company's estimates, future plans, objectives and expected performance as of today's date. These statements are based on current assumptions that the company believes are reasonable, but are subject to a wide range of uncertainties and risks that could cause actual results to differ materially from the forward-looking information. You are referred to the advisory regarding forward-looking statements contained in the first quarter earnings news release and in the company's most recent management's discussion and analysis and annual information form, both of which are available on the company's website or SEDAR. I would like to now turn the conference over to Mr. Dan Friedmann. Please go ahead.

[Daniel Friedmann:]

Thank you, Leonie. Good afternoon, ladies and gentlemen, and thank you for joining us today for MDA's first quarter 2015 conference call. With me is Anil Wirasekara, our Chief Financial Officer. I will be discussing some of the key events that have taken place in the past two months since our last call. Anil will review our financial results for the first quarter. And then we'll open the line to answer your questions. In the Communications sector, last week the THOR 7 satellite, build by the company for Telenor, a Norwegian satellite operator, was successfully launched. After completing post-launch maneuvers, which are going well, the satellite will provide broadband coverage over the North Sea, the Norwegian Sea, the Red Sea, the Baltic Sea and the Mediterranean for the maritime industry. It will also provide broadcast services in Central and Eastern Europe. In Canada, our Montreal operations received an authorization to proceed to provide multiple communication components for integration into SES-14 satellite. Bidding in the commercial satellite sector continues to be very competitive and at a very high level of activity. In the Surveillance and Intelligence sector, the company signed contracts to provide upgrades for the radar surveillance systems for Canada's Department of National Defense fleet of CP-140 Aurora aircraft. The CP-140 is Canada's intelligence, surveillance and reconnaissance aircraft. The radar surveillance system provides uses with high-resolution imaging capability that can detect, locate and classify land and marine-based objects, such as vehicles and ships. The company also booked contracts to provide further maintenance to support for Canada's broad-area surveillance system. In addition, a contract amendment was signed with the Canadian space agency to provide ongoing support for their Mobile Servicing System on the international space station until July 2017. The Mobile Servicing System is comprised of Canadarm2, the Special Purpose Dexterous Manipulator and Mobile Base System. These three robotic systems perform a variety of operations running from re-supply, maintenance and servicing test that are critical and essential to the ongoing operations of the space station. In the federal budget table, two weeks ago, Canada committed financial support to this space station until 2024. Moving on to the services business in the Surveillance and Intelligence sector, the company's strong booking activities included a six-year contract valued up to $29 million for the European space agency Copernicus program with RADARSAT-2 satellite imagery. This contract includes an initial front order of $14.5 million, with the remaining funds available as demand dictates. As well, we booked over $40 million of geospatial information contracts with undisclosed customers, located primarily within the United States. Finally, the company has recently performed a number of tests to ascertain the health of RADARSAT-2, a satellite owned and operated by MDA. At this point, RADARSAT-2 is achieving better results than RADARSAT-1 did after its launch. This bodes well for a long useful lifespan for RADARSAT-2, which is fueled to maintaining orbit for decades. That concludes MDA's operational highlights since the last report. I will now ask Anil to report our financial results.

[Anil Wirasekara:]

Thank you, Dan. Good afternoon and welcome, everyone. We appreciate all of you joining us today. Let me start with a summary of the company's key financial and operating results for this quarter. We achieved consolidated revenues of $534 million, operating EBITDA of $93 million with margins of 18%, and operating earnings of $55 million or $1.53 per share. Our businesses generated strong cash flows of $87 million from operating activity. And we ended the quarter with a fully-funded order backlog of $3 billion. These results establish a solid start for the company for the fiscal year 2015. Let's now review our first quarter financial results with a comparison year-over-year. Consolidated revenue for the first quarter 2015 were $534 million compared to $493 million for the same period last year. The Communications segment accounted for 73% of revenues or $389 million and the Surveillance and Intelligence segment accounted for 27% of revenues, $145 million. First quarter operating EBITDA increased by 10% year-over-year to $93 million. The Communications segment contributed quarterly operating EBITDA of $52 million with margins of 13.5%, a notable improvement from the margin percentage for the full year 2014. The Surveillance and Intelligence segment accounted for operating EBITDA of $41 million and maintained its solid margins of 28%. The geospatial services business performed very well in the quarter, as higher sales of RADARSAT-2 imagery increased margins in this segment. First quarter operating earnings in 2015 increased by 12% to $55 million or $1.53 per share. The effective income tax rate on operating earnings this quarter was 15%. We expect the income tax rate for the full year to stay in the mid-to-high teens. I remind everyone that operating EBITDA and operating earnings are non-GAAP financial measures and a reconciliation to GAAP measures is provided in our latest MD&A. First quarter net earnings in 2015 were $38 million or $1.06 per share compared to $25 million or $0.69 per share for 2014. The relative appreciation of the U.S. dollar versus the Canadian dollar year-over-year has impacted our operating results, both positively and negatively. The translation of revenues from our U.S. operations certainly benefited from a stronger U.S. dollar. Keep in mind, however, that we have significant operating expenses denominated in U.S. dollar, including interest and depreciation, which offset any translation gain to our earnings. Also, we record a mark-to-market adjustment on certain unhedged commitment with respect to the RCM launch, which resulted in a non-cash foreign exchange loss of $4 million this quarter. Now, let's turn our attention to cash flows and the balance sheet. During the quarter, our businesses generated positive cash flow of $87 million from operating activities, after changes to working capital. We continue to focus on managing our working capital while supporting growth. Investment of working capital is a fundamental in our industry, and given our commitment to growth and managing lead times in construction activities. We expect working capital account balances to remain inconsistent quarter-to-quarter. We efficiently fund our working capital requirements at the syndicated credit facility, which we have just amended. The changes include an increase of the revolving facility of US$100 million to US$700 million. A slight reduction in interest rate margins applicable to draws and undrawn borrowing, and an extension of the maturity date by 12 months to November 2018. We release the additional capacity, as required, to finance growth and working capital and to maintain our industry leadership. During the quarter, we repaid $59 million in long-term debt, including the final installment on a promissory note payable to Loral. The repayment to long-term debt, however, was obscured in the balance sheet by the effect of foreign currency translation. We also increased our dividend in 2015, and paid a quarterly dividend of $13 million and invested $16 million in capital expenditure. To recap, we are off to a solid start in fiscal 2015. First quarter operating earnings were $1.53 per share on consolidated revenues of $534 million. We achieved operating EBITDA of $93 million. And our margins improved 18%. We are making good progress on the enterprise improvement initiatives and the plans are on schedule. Our funded order backlog as of the end of March is $3 billion. Heading into the second quarter, we are optimistic about the volume of bids and proposals pending, and are confident about the range of opportunities in our pipeline. At quarter end our financial position remains strong. Our capacity to generate good levels of cash flow and our strong balance sheet, including our amended credit facility, will provide substantial financial flexibility to fund our growth initiatives and drive shareholder value. We have declared a quarterly dividend of $0.37 per common share payable at the end of June. That concludes my discussion. I will hand it back to Dan.

[Daniel Friedmann:]

Thanks, Anil. Anil and I are now ready to respond to your questions. Leone, could you please open the line to questions?

[Operator:]

[Operator Instructions] Your first question comes from Thanos from BMO Capital Markets.

[Thanos Moschopoulos:]

Dan maybe starting off with the Communications segment, can you provide us with some incremental color on how the pipeline has developed in your geo satellite business over the past couple of months? And an update in terms of what the competitive market is looking like a net area?

[Daniel Friedmann:]

What we discuss is the number of bids that are out at any given time, and that has stayed pretty steady in dollars from two months ago. There's been a couple of awards in the industry just last week or the week before, but there has been as many more bids out there. So the pipeline still stands at $1.8 billion, $1.9 billion. That's outstanding bids by us. Of course, the pipeline is much larger. There is lots of [ph] wrong quotes out there and so on, but pretty steady. Competitive wise, frankly, there has been no change for almost two years now. And it doesn't let up, it doesn't get easier, just hard work.

[Thanos Moschopoulos:]

And then as far as the LEO satellite opportunities that you talked about on the last call, any update you can provide us on that front?

[Daniel Friedmann:]

There is no fundamental update. We were hoping that by this call there'd be some announcements out there, but no. Everybody is moving along with their plans. And there hasn't been any significant milestone reached in the last two months.

[Thanos Moschopoulos:]

A question for Anil, maybe just to clarify. You mentioned a $4 million FX translation charge related to the launch liability for RCM. And so just to be clear, that's an item that would not be stripped out of your adjusted EPS?

[Anil Wirasekara:]

Yes. We haven't stripped it out of our adjusted EPS on the understanding that it's in the normal course of business. But yes, we did take a $4 million, not translation, it's just a mark-to-market non-cash adjustment on the RADARSAT-2 unhedged or the RCM unhedged launch across this.

[Thanos Moschopoulos:]

And so presumably it also affected the margins in the Surveillance and Intelligence business?

[Anil Wirasekara:]

Absolutely. We do that every quarter. This certainly was the biggest impact to us on this quarter by far.

[Thanos Moschopoulos:]

And then one last one for me. As far as the reduction in the tax rate, any particular items that are drive that?

[Anil Wirasekara:]

No. I mean it just depends on the mix of revenue coming from different jurisdiction, and it's 15% this quarter, it will be something else in the next quarter. We think that the yearned here is going to be in the mid-to-high teens. We don't see it going higher than that.

[Operator:]

Your next question comes from Steve from RBC Capital Markets.

[Steve Arthur:]

I just had a couple of questions. I guess first is on backlog, it seems surprisingly strong at about $3 billion again, after burning a quarter of revenue. And I don't recall any large orders through the quarter. Any sense of the nature, what was rebuilding that both the kind of the type of projects and the type of margins attached to those projects?

[Daniel Friedmann:]

There is a lot of small items. I mean, there is nothing -- everyday there are lots of contracts being booked and lots of contract extensions happening. It just happens in the normal course. Yes, we did -- there was no big notable $100 million bookings, but lots of little ones going on all the time.

[Steve Arthur:]

And I guess the blend of all those things will be kind of normal profit margins for each segment?

[Daniel Friedmann:]

Yes. I mean it's substantial

[Steve Arthur:]

Just changing gears a little bit. RCM, we haven't talked about that quite as much over the past while. I'm just wondering if there is any updates there, in terms of how that manufacturing is proceeding. And as well in the past we have talked about the potential of extending that program maybe with more partners to more than three satellites. Is there anything ongoing there?

[Daniel Friedmann:]

The program is proceeding very well. It's pretty well on budget and schedule within a few months, and we are retiring risk as we go along. And we will be completed with the payload manufacturing at the end of this year. And that will go into integration next year. So a very significant program, it's going well for us. In terms of extensions to more satellites, yes, I mean the basic requirement has always been six satellites, but there has been no significant progress. I can report that this funding for the next three or people are signed up for the next three, anything like that. So we continue to work it. But there is no obvious milestones that has been reached in the last few months.

[Steve Arthur:]

And just a final question, I guess just in terms of the manufacturing process optimizations in Palo Alto turned in very good margins it seems in the communication this past quarter. So I guess maybe just curious about the sustainability of those margins, as mid-13 is about what you would expect for the balance of the year and into next year? And then secondly, on these optimization moves, we've talked a lot about cost and margins. But I'm wondering if there is also some schedule implications there. If the schedule is compressing to build these satellites now as well, and how important that is from a customer's position?

[Daniel Friedmann:]

I mean our program to improve efficiency includes reducing cost, reducing schedule and reducing mass of the satellite. And we've made very good progress on all three of those. That program is a program that remains. I mean whatever we do is a permanent change. So whatever, we have 300 odd projects that are impacting those three things. And as we knock those projects up, get them done, that efficiency remains in the company. We continue to look at other efficiency improvement measures. We had a long discussion about this last week, where we are on Palo Alto. And so that's one major factor. Another major factor is volume. With a record bookings last year and higher volume that also helps the overall efficiency. And of course, there is the pricing in marketplace. And I don't think there is any significant trend there other than the fact that our competition is denominated in Europe. So all those things interplay together, as you go forward.

[Anil Wirasekara:]

And when you look at margin, Steve, I think it's important to look at it more on an annual long-term trend basis, and not things quarter over quarter. They can fluctuate, depending on the mix and depending on what the work you are doing. But as I said earlier, we don't see any permanent trend either way. It seems to pretty steady as we go.

[Operator:]

Your next question comes from Paul from Scotia Capital.

[Paul Steep:]

Dan, maybe you could talk a little bit more about some of the multinational efforts you've been putting in to sort of reposition the company longer-term. I guess, I was thinking particularly we talked a lot last call about Brazil and India and other opportunities. But maybe how you are thinking about that? And how you are organizing to go after those markets?

[Daniel Friedmann:]

I mean, I gave a big update two months ago. I don't have anything material to add to that. Organization-wise, we have our standard organization with our sales force and our pursuit teams. But in those particular markets the U.S., India, Brazil, we also have our corporate team, which is focused on building local capability side-by-side with a sales effort, so that we are able to execute the work locally, and therefore meet the requirements of the host country, as we go forward.

[Paul Steep:]

And then, I know in the opening comments you went fairly quickly just around Canada's, I believe it was around the ISS commitment. How are you feeling overall? I think we've called it robotics maybe two quarters ago now in terms of an area and we're looking hopefully to see some funds flow? I have one quick wrap-up as well.

[Daniel Friedmann:]

It's very problematic. I mean, Canada has basically passed on every single international corporation opportunity in robotics in the last year-and-a-half. We're out to pass 2024. Our role has been picked up by the Germans and the Japanese and so on. The ISS thing is good news. We get to maintain the existing robot. But there is no new plan development here. Our response to that has been to pursue business in the States. And the most significant opportunity, which is now out in the open, was not last call, it's called Cargo Resupply-2, CRS-2. And there was a press release by Lockheed Martin, where on their team that we are competing for that job is to follow-on to the current contract with SpaceX and Orbital to take cargo back and forth from space station, and the solution of our team is based on MDA robotics. That's going to be decided in the summer. And if we are able to win, our team is able to win, that would make a big difference to our robotics group, not just from the work from that program, but in what we will be able to demonstrate in terms of robotics in orbit.

[Paul Steep:]

And then just a follow-up. We talked a little bit about the enterprise improvement. How should we think about the cost? I know you guys are always taking cost to be a relatively small charge. This quarter is there a larger charge to come in Q2 or is that the bulk of a number?

[Daniel Friedmann:]

Nothing very significant. Most of the costs have already been factored in.

[Operator:]

Your next question comes from Deepak from GMP Securities.

[Deepak Kaushal:]

I just got a mix of questions here. Going back to RCM's follow-up. Dan, when you get to the stage of RADARSAT Constellation Mission, RCM, is that going to provide a source of supply for imagery for you guys? And does that change the margin, given that you will owning those satellites versus the RADARSAT-2 satellites?

[Daniel Friedmann:]

RCM will be producing more imagery. In general, our situation is, as I mentioned, now that we've finished the analysis that we have RADARSAT-2 available to us for the foreseeable future, and that's a main, main horsepower of radar imagery. Our hope would be to cut a deal with either the Canadian government on RCM or the German or Italian governments, so that we would have not just our own data, but data from the constellation I guess with Canada, so that we could for some customers supply data more often. So there are some applications where we don't think image is often enough for the customer, and that's the big advantage of it. So we will continue to primarily work-off RADARSAT-2, but we are looking to augment that with a number of possible constellations, including RCM, and we're in discussions with the Canadian government on how to do that.

[Deepak Kaushal:]

So just kind of exciting that into the geospatial business. You mentioned a crop of larger orders and that this would be a source of growth for you guys. Can you give us a sense of what the revenue was for geospatial in the quarter or the mix of services that's split between geospatial versus non? And what your growth exceptions are for the year?

[Anil Wirasekara:]

Geospatial for the quarter was approximately $50 million in revenue this quarter, and we expect that to be the current run rate.

[Daniel Friedmann:]

We are expecting a record year in bookings in geospatial, and we're off to a very good solid start. But a number of those bookings are long-term bookings. So like the one I mentioned is over five years, for example. And some other big ones that we are chasing are also over multiple years. So we see a growth, annual growth of course, but you have to take into account, which bookings are for the next three months and for five years. In general, we're seeing very strong demand for RADARSAT-2, as we continue to bring our applications and as we continue to explain to people that our satellite is here for a very long time. As you know, the lifetime of RADARSAT-2 officially expired, but we believe it's got many, many years left in it and that's getting communicated into the marketplace. And on the U.S. side, we have seen a hiatus for the last two years due to budget issues. And that seems to have broken, because we had a record booking in the last two, three months in the U.S.

[Deepak Kaushal:]

And on U.S. penetration, you mentioned the Cargo Resupply-2, you're competing for that as MDA. I mean, you're effectively a Canadian bidder into that U.S. project. Is this a type of project that handcuffs you in any way bidding for another Canadian company versus through SSL? How should we think about that?

[Daniel Friedmann:]

Well, first of all, when I say, we, I mean MDA/SSL. We do bid most of the stuff in the U.S. from the U.S., and do most of the work in the U.S. when we win it. So we're really an American company in that sense. But we are not bidding that directly. We are a small component of a very large bid by Lockheed.

[Deepak Kaushal:]

So you're partner with Lockheed on that bid?

[Daniel Friedmann:]

I mean if you do the research and you'll see some multi-billion dollar program.

[Operator:]

Your next question comes from Robert from Credit Suisse.

[Robert Peters:]

Just maybe taking into the backlog. Well, I was wondering if you might give us, I don't know if you can give us the actual breakdown between Communications and S&I. But at least maybe directionally can you talk about whether it was more weighted to Surveillance and Intelligence side of things, it sounds like it may be?

[Daniel Friedmann:]

It's about two-thirds, one-third. Communications is one-third. Geospatial, Intelligence and Surveillance together. Maybe 70/30.

[Robert Peters:]

And then maybe just touch on the Advanced Systems acquisition. I know when you'd last talked about it, everything was on track and you had highlighted that there was some potential synergies there. But I was just wondering if you can give an update on how that's going?

[Daniel Friedmann:]

That's still the same update, it's on track. It's bringing business in. We are going in front of customers with their customers and our customers with synergies, but we're talking about our U.S. government business. It takes years to build it, not months.

[Operator:]

There are no further questions at this time. Please proceed.

[Daniel Friedmann:]

Well, thank you, everyone, for attending our update. And we look forward to speaking you in the next quarter.

[Operator:]

Pardon me. We do have one last question. The question comes from Kris from National Bank.

[Kris Thompson:]

Dan, just on your outlook in terms of organic versus M&A, have you guys had any change in -- I know you're focusing more on your organic initiatives, but what's the market environment looking like? And do you think you might be able to advance some more meaningful M&A transactions over the next kind of 12 to 24 months, is that in your planning?

[Daniel Friedmann:]

As I think I mentioned last time, and at this point, we're frankly run-off our feet with organic initiatives. We talked about the LEO initiatives in United States. Our funnel in the U.S., I said last time, had grown to $1 billion. We have Brazil, we have India. We just have so much organic initiative right now that we have to stay focused on that. That's part of the reason we did the SSL acquisition, was to get to this point. And it would be irresponsible to not put everything we can into that. If you look six months down the road, I think we'll be kind of past of peak of some of those and more in run mode, as we've built things out. And we could go back to turning a little more attention to M&A. But today, we're only reactive to M&A. And a lot of these organic things are not simple. They are complex business deals and so on.

[Operator:]

Thank you. There are no further questions at this time. Please proceed. End of Q&A

[Daniel Friedmann:]

Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes your conference call today. We thank you for participating. And ask that you please disconnect your lines.