Maxar Technologies Inc.
Q2 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Good afternoon. 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 Ltd. 2015 Second Quarter Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] 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 second 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 Web-site or SEDAR. I would now like to turn the call 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 second quarter 2015 conference call. With me is Anil Wirasekara, our Chief Financial Officer. I will discuss some of the key business events that have taken place since our last call, Anil will review our financial results for the second quarter, and then we'll open the line to answer your questions. In the Communications sector, the Company signed a contract for a communication satellite ordered by the Broadcasting Satellite System Corporation, a leading satellite operator in Japan. The satellite will provide direct-to-home television service. This is our fourth satellite contract award for the Japanese market in the past two years and our first for the Broadcasting Satellite System Corporation. Bidding activity in the commercial satellite sector continues to be very competitive and at a heightened level. The Company completed the construction of a communications satellite designed and built for Embratel Star One, a subsidiary of a leading telecommunications company in Brazil. The satellite was successfully launched and is performing post-launch manoeuvres. The satellite will provide direct-to-home television service in Brazil and will expand Embratel Star One broadcasting services to other Latin American countries and to the United States. The Company also completed construction of a communication satellite for Intelsat. The satellite will provide television distribution and direct-to-home television for the Western hemisphere with specific focus on Latin America as well as broadband for maritime and aeronautical companies serving the busy North Atlantic routes. This will be the 50th satellite the Company will deliver to Intelsat. In Canada, our Montreal operations received a contract and authorization to proceed for communication subsystems for three satellites from two new customers. The final orders are expected to total around C$26 million. Finally, the Company will provide a communication subsystem to be integrated in the rover plant for the 2018 Mars mission of the European Space Agency. The subsystem will allow the rover to communicate with mission control on earth. A similar communication subsystem is being provided for the 2016 mission to Mars. In the Surveillance and Intelligence sector, the Company signed two contracts for aviation solutions, the first contract with the U.S. Air Force for a total value over five years of up to C$63 million. Under this contract, the Company will support the Air Force with a high-precision flight path safety system allowing pilots to safely navigate in and out of airfields. Deployed worldwide, the system supports the U.S. Department of Defense and Operations. The second contract was a multiyear contract with an undisclosed commercial customer to provide an information solution to support flight operations at airports and airspace immediately around airports. The Company also signed a contract with Natural Resources Canada to provide in-service support to maintain and operate Canada's National Earth observation ground station infrastructure. The Company will also be the exclusive supplier of hosting services to satellite operators wishing to install and operate antennas at the Inuvik Satellite Station Facility for control and data reception from their satellites. And finally, a contract was signed with the Malaysian Remote Sensing Agency to provide RADARSAT-2 ground station. In the Robotics area, the Company signed three contracts. Two are with the Canadian Space Agency to support the International Space Station. With Canada's commitment to the International Space Station through 2024, the Company has been contracted to design and develop upgraded camera systems for the station. The new camera systems will provide superior illumination and viewing for critical robotic operations like capture of visiting spacecraft, maintenance and inspection of the station. The Company will also provide ongoing support for the Mobile Servicing System which supports a variety of operations ranging from resupply, maintenance and servicing tasks that are critical to the ongoing operations of the station. The third contract is with the U.S. Defense Advanced Research Projects Agency to further develop and test the Payload Orbital Delivery system. This system is a standardized mechanism onboard a host spacecraft to carry a wide variety of self-contained small satellite to orbit where they are ejected for independent operation. The contract is for installation of this system onboard the SSL standard communication satellite enabling SSL to become a leader in lower cost delivery of small missions to geosynchronous Earth orbit. Moving on to the Services business in the Surveillance and Intelligence sector, the Company signed a five-year contract to provide RADARSAT information to the Netherlands Space Office. RADARSAT-2 has unique ability to regularly monitor subsidence of large regions. The Netherlands is densely populated country, close to sea level with constantly monitor of subsidence caused by various geological factors as well as man-made factors such as gas extraction. Early detection of land subsidence is critical to prevent and mitigate damage to infrastructure such as buildings, docks, roadways and waterways. The Company also signed a contract with the Malaysian Remote Sensing Agency to provide RADARSAT-2 information and book contract amendments to three existing long-term RADARSAT-2 customers who use RADARSAT information for flood, ice, environmental and agricultural monitoring and for disaster management, natural resource management and maritime surveillance. Finally, MDA booked C$19 million of geospatial information contracts with undisclosed customers within the United States. That concludes the operational highlights since last report. I will now ask Anil to report on the financial results. Anil?

[Anil Wirasekara:]

Thank you, Dan. Good afternoon and welcome everyone. As always, we appreciate your time and interest in MDA. We continue to post solid quarterly operating results. In the second quarter we achieved record high operating earnings of C$57 million or C$1.56 per share on consolidated revenues of C$524 million. We also achieved record high quarterly operating EBITDA of C$95 million and solid operating margins overall of 18%. The strong U.S. dollar against other currencies has certainly helped our top line, but consolidated revenues for the three and six months ended June 30, 2015 also included lower levels of flow-through items compared to prior periods. The impact of the strong U.S. dollar to the bottom line is mixed as we have significant expenses denominated in U.S. dollars including manufacturing cost, interest and amortization. We ended the second quarter with funded order backlog of C$2.6 billion. This gives us great visibility into revenues and cash flows for the medium-term. While our bidding activity in the communication satellite markets remained very active, order intake in the industry overall including MDA has been lower than anticipated during the first half of this year after a strong second half of 2014. Further, the strong U.S. dollar particularly against the euro has put additional pressure on our competitive position as a significant portion of our manufacturing operations are based in the United States. Let's review our year-to-date results with the comparison to prior years. Consolidated revenues for the first six months of 2015 were C$1.1 billion, on par with last year. Revenue from the Communications segment increased to C$771 million compared to C$735 million for the prior year, mainly due to the impact of foreign currency translations. Revenues from the Surveillance and Intelligence segment were C$287 million compared to C$310 million for the prior year. Decrease reflects lower levels of activity on the RCM program in 2015 compared to 2014. The Geospatial Services business is performing well with revenues driven higher on strong booking activity. Operating EBITDA for the year increased to-date to C$188 million compared to C$176 million for the prior year. The Communication segment contributed operating EBITDA of C$108 million and margins of 14%, which improved than the margin percentage of 12% for the first six months of 2014. The increase reflected lower levels of flow-through items in the current period. Also, we are making good progress on the enterprise improvement initiatives and cost reduction plans are on schedule. The Surveillance and Intelligence segment contributed EBITDA of C$80 million and continued solid margins of 28%. It's important to note that year-to-date operating EBITDA for Surveillance and Intelligence included a non-cash foreign exchange loss of C$4 million for a mark-to-market adjustment on unhedged commitments with respect to the RADARSAT RCM program launch contract. Operating earnings for the first six months of 2015 increased by 8% to C$112 million or C$3.09 per share, compared to C$103 million or C$2.87 per share for the same period last year. The effective income tax rate on operating earnings for year-to-date was 16%. We expect the income tax rate for the full year to remain in the mid to high teens. I remind everyone that operating EBITDA and operating earnings are non-GAAP financial measures and reconciliations to net earnings is provided in our latest MD&A. Net earnings for the first six months of 2015 were C$82 million, up from C$61 million for the comparative prior year period. Discussing our cash flows, we were somewhat neutral in terms of cash flow from operating activities during the first six months of 2015. As a priority, cash generated from operations was and will continue to be invested in working capital. Investment in working capital is fundamental in our industry and given our commitment to growth and managing lead times in construction activity. We expect working capital account balances to remain uneven. We efficiently fund our working capital requirements with the syndicated credit facility which was extended in the second quarter with increased capacity and at a lower rate. Total long-term debt as at 30th June was C$861 million net of cash balances. Almost half the increase from the balance at the end of 2014 was attributed to foreign currency translation as most of our debt is dominated in U.S. dollars. Our net debt to bank EBITDA ratio as of the end of June was 2.6 which leaves us with considerable room in our credit facility to operate effectively and to pursue growth and investment strategies. For year-to-date, we invested C$28 million in capital expenditure. This is down from C$37 million at the same time last year when construction of the second thermal vacuum test chamber was being completed. We paid C$37 million in dividends in the first six months of 2015. To recap, we achieved record high quarterly operating earnings of C$1.56 per share and operating EBITDA of C$95 million under a challenging business and operating environment. We continue to execute a balanced capital allocation strategy with dividends to our shareholders, investments in working capital, technology and infrastructure to support future growth. We are in a good financial position. With our amended credit facility and ready access to the capital markets, we have substantial financial flexibility to fund our growth initiatives and continue to drive shareholder value. We have declared a quarterly dividend of C$0.37 per common share payable at the end of September. That concludes my discussion and I will hand it back to Dan.

[Daniel Friedmann:]

Thank you. Anil and I are now ready to take your questions. Leonie, could you please open the line to question?

[Operator:]

[Operator Instructions] Your first question comes from Steve from RBC Capital Markets. Please go ahead.

[Steve Arthur:]

Just want to start with a bigger picture industry perspective, I mean as you mentioned, new order flow for the satellite industry has been a little bit lower than usual so far this year. When you look at the overall demand drivers out there for the industry and I guess more specifically when you look at your bid pipeline, are you seeing anything that indicates any longer-term industry demand being weaker or anything that changes your view of kind of 20 to 25 satellites per year on average over the mid to long-term?

[Daniel Friedmann:]

At this stage, no, we don't see any issues. As you know, last year there were about 25 satellites ordered. We thought we would get to about 20 this year. That's still our feeling although a lot of those satellites are bunched into the last quarter and therefore might slip into next year, and the first half has been weak. There's only seven new satellite constructions that have started. I know others have been announced but sometimes these things get announced without funding, so satellites being worked on the seven which is definitely lower than we had expected for the first half. But if you look at last year even, it was very bumpy the quarters. We had half the satellites in one quarter, the third quarter, last year. So we could still have a strong end of the year but it's hard to predict at this point. Having said that, our pipeline of bids, and this is not the total pipeline but outstanding bids, is at the high end of what it was since we've owned SSL. So we are at the high point in terms of outstanding bids.

[Steve Arthur:]

Are there any specific reasons why some of these issues, some of these orders are being delayed at this stage, was it the situation with the launch providers or financing capability or is it just business plans progressing through at their own pace?

[Daniel Friedmann:]

I think there's a lot of issues, launch failures definitely don't help. People need to launch satellites, so if they don't order them they can't launch them. There is uncertainty there. EXIM financing is a critical component of a number of satellites. That has been an issue with orders. Export control rules have been fluid, especially with an election here in the United States and in Canada, and we have a few contracts that are stuck on that. And I think you've seen our customers report their challenging business environment which of course makes it harder for them to close their business plans at a fast rate. In addition to that, some of the newer players that we had expected or had talked about getting into the market came in and asked for a little work to be done by all of us in the industry and haven't procured and have actually delayed some of the procurements as a result of that work. So there's been a lot of small items that I think have added up to several satellites being pushed out but nothing super-unusual.

[Steve Arthur:]

Okay. I guess just on your competitive positioning more specifically, you touched on the euro situation, obviously it's weakened by around 20% over the past year. So that gives your peer competitors some advantage. I guess the question is, just how do you respond to that? Presumably you're continuing to bid very aggressively to maintain market share but then what kind of further actions can you take on the cost side and process improvement side to defend margins in this environment?

[Daniel Friedmann:]

So as you know prior to the euro issue we had two initiatives. One we talk about a lot which is our efficiency enhancement program which has gone very successfully, it's still continuing, it concludes early next year, but that is on track and that has given us the results we have. We also have another program which we don't talk about very much but we are dramatically enhancing our satellite in competitiveness both in terms of what it does, how fast we can deliver it and for what price we can deliver it, and that program is very advanced at this stage and should provide us a strong competitive element into next year with bidding. Having said all that, we did not anticipate that our European competitors will get an overnight advantage in the teens percentage-wise. We have since initiated, for lack of a better name, the euro project and we are looking at a number of things, we've already done a number of things, we have in terms of our supply chain half of what we deliver we buy from others and we have tried to pass down as much as possible that portion of the problem to them by either going to foreign suppliers instead of U.S. suppliers or having the U.S. suppliers deal with their piece of the problem. Having said that, we are still left with our half and on that half we are revisiting all kinds of activities including moving production out of Silicon Valley or out of the U.S. and a number of other initiatives which are still not completely baked but we hope to get that sorted out in the third quarter of this year so that we can be responsive. Having said that, that is not affecting our bidding, the prices are set by the marketplace, this is only affecting our costs as we go forward.

[Steve Arthur:]

And just final one just related to that, very high margins in the Communications segment in Q2, I guess for the first half, I guess looking ahead I've been kind of thinking more in the 12% to 13% range. Is that closer to a more reasonable expectation for the next couple of quarters?

[Anil Wirasekara:]

Yes, I would think so. I mean as we had a huge amount of orders last quarter of 2014 and those would be ramping up and those had some of the impact of the euro in it. So we try hard to try and maintain consistent margins but 12% to 14% is a good benchmark to have.

[Daniel Friedmann:]

You also have to be aware that a couple of customers here buy launch services through us where others don't and when the launch service revenue goes through we get a bump-up in revenue and everybody thinks that's great but we get a decrease in bottom line. This particular period of time we didn't have the launch services. So the margins look higher and the revenue looks lower but…

[Anil Wirasekara:]

Overall, we expect it to range in that 12% to 14% or we work very hard to make sure that that's where it will end up.

[Steve Arthur:]

That's good. Thanks so much. I'll pass the line for now.

[Operator:]

Your next question comes from Thanos from BMO Capital Markets. Please go ahead.

[Thanos Moschopoulos:]

Dan, you talked about the challenges with the U.S. dollar. On the flipside, are you getting some benefit in your Montreal operations from the weak Canadian dollar or not so much because the currency has been more stable relative to the euro in that regard?

[Daniel Friedmann:]

I mean our main market for Montreal is European and the Canadian to euro exchange has a few bucks here and there but it's more or less on par. But I did report that we booked about C$26 million of orders from new customers and new satellites in Montreal. Those were all U.S. orders and I'm sure that dollar helped.

[Thanos Moschopoulos:]

Okay, it's helpful.

[Daniel Friedmann:]

It was certainly more competitive when they looked at make versus buy decisions and buying from somewhere else.

[Thanos Moschopoulos:]

Okay. Maybe turning to the Geospatial business, it sounds like you're continuing to see very strong growth in that area and can you just remind us some of the drivers, is that primarily coming from the U.S. government market or is it more broad-based customer set?

[Daniel Friedmann:]

No, it's a very broad-based. Both our Canadian operations which are Canada and international, mostly international, and our U.S. operations are tracking very nice growth, Canada with record bookings. The way this Geospatial business works is that it takes a long time to come up with turning a pretty picture into something that's useful to a customer. Most of the companies in this business have been trying to do that for 20 years, we have too, and we've had a number of products that are succeeding in the last few years and gaining traction, but it's a slow buildup process like our old products business, one step at a time, one customer at a time. With RADARSAT-2 being arguably the most advanced radar satellite out there, we finally have developed applications that people can use operational every day and I must say that our bookings being a record are in spite of the fact that one of our biggest single customer segment is oil and gas which have tanked. So we are in spite of that downhill trend, we are going uphill. On the U.S. defense side, I think for the last year or two we talked about our change detection and capabilities and when the government returned back to normal if you can call it that, those kinds of products are very competitive and proprietary and in fact satellite independent, we can anybody's satellite for it. So that's working. So it's just a combination of a lot of hard work for a lot of years with a very good product that's meeting the customer demand as we go forward.

[Thanos Moschopoulos:]

And then in terms of the Earth observation construction market, I mean you obviously have RCM, you have held the satellites for Skybox. What does the pipeline look like in that area? Are you seeing demand to further opportunities?

[Daniel Friedmann:]

Yes, there is a lot of people trying to build Earth observation constellations. I've never seen anything like it. We're working on most of them but all of them except Skybox and DigitalGlobe are unfunded and it's unclear as to whether they will get funded or not. We normally have a policy of trying not to work on things that are unfunded, but in this case we have to break the policy. So, yes, we're working on some of those constellations, we've been selected on some of those constellations, but will they get funded? There's certainly way more constellations in those market, so something has to give. So, yes, we have a pipeline but it's not a funded pipeline, by and large in that area. On the other hand in terms of in general LEO satellites, we have some funded pipeline. Skybox is planning to build more satellites. Other people are planning to build more satellites that have money. There's people that obviously have money in communications like OneWeb and O3b and those pipelines are healthy as we pursue those prospects. So we have a fair funded pipeline of LEO type opportunities, the majority not being an Earth observation but being other areas. And then we have some unfunded and the LEO side in the Earth observation side.

[Thanos Moschopoulos:]

Okay. And then one quick one for Anil, you mentioned there's been a C$4 million year to date impact with respect to your FX translation on the launch cost liability. What was the number for the quarter specifically?

[Anil Wirasekara:]

For this quarter it was about C$1 million. For the first quarter it was almost C$3 million.

[Operator:]

Your next question comes from Paul from Scotia Capital. Please go ahead.

[Paul Steep:]

Dan, maybe we start I guess with RCM and just maybe a quick update as to where we are in terms of the project overall in terms of completion and time through the process?

[Daniel Friedmann:]

RCM is more or less on schedule, it's on budget and the technical risks, the major technical risks are being retired very nicely, it's a very successful project for us and our customer, but we are well into the construction. The majority of the MDA component on that construction is in the space part of that construction, is in Montreal facility, and that winds down pretty quickly towards the end of this year. It's already winding down as we speak and we've actually had to have some layoffs. So the construction is finishing. In terms of the ground segment which is being done in Richmond, that is not peaked yet, it lags behind the sunlight. So we're seeing strong growth in our Richmond facility. In fact we're short on almost 40 people today because of that and because of the aviation bookings which by the way are 100% MDA value-added. So they are very significant with aviation bookings I discussed and there is no pass-through in them. But getting back to RCM, we are definitely on the wind down, downhill part of that curve in completing that project which is good news in terms of the project getting done but we obviously need to win other business to come after it.

[Paul Steep:]

The one thing we've went over the years and we actually really haven't ever touched on these calls is the aviation systems and maybe some or any of the opportunity there. I'm just curious what there is. You've won a number of contracts as I can recall over the last maybe three or four years at least with the FAA, what's the bigger opportunity in that market? Clearly there's a refresh cycle there that's potential and you're with the leading agency.

[Daniel Friedmann:]

We are a major supplier to the FAA and in fact most of our recent work is to the U.S. Air Force. So we're not only deployed in all the continental U.S. but we're deployed on almost every Air Force base around the world with our systems and there's an ongoing maintenance and enhancement opportunity there which just goes on for a very long time, nice recurring revenue, but the U.S. is grappling with their next generation system so there will be a significant enhancement related to that. And for the first time in the undisclosed commercial customer which for competitive reasons does not want to disclose the name but we have now gone into the commercial aviation and business jet type aviation market with our product which makes flights and everything else more efficient, and in that area we are not just doing our normal contracts but we are taking a share of the success on it. So there's possibility for margin improvement if our product does what we say it does. And we're seeing other opportunity as we go forward, we've explored other growth areas like China but marred with other export issues and it is a market that is growing at this stage for us and we've very focused on it and it's very large value-added for us.

[Paul Steep:]

Great. Last one for me, always maybe talking a little bit about M&A and what you're thinking at this point in terms of advancing on some type of an M&A strategy or pushing down that path? We talked about it last quarter but would be worth revisiting now.

[Daniel Friedmann:]

Good question because we have changed gears there. My answer I think to that question for the last couple of quarters if I recall has been, I'm focusing on organic growth and that is correct and we have focused very heavily on our strong organic growth pipeline especially in new areas and we've made good progress on that pipeline to the point that we can now spend some energy back on M&A and in fact have a better idea of what best fit. So over the last three months since May, we have begun to look again at M&A and particularly a large game-changing M&A for us and we're working through some possibilities there. Don't have anything advanced at this stage but we're actively pursuing a couple of things.

[Operator:]

Your next question comes from Deepak from GMP Securities. Please go ahead.

[Deepak Kaushal:]

Just a couple of follow-ups. Dan, first on the commercial satellite market for Geos, we did see in the order so far this year several go to some of your U.S. competitors. Just wondering if, I don't know, if currency has been impacting them as well, but what are some of the factors other than currency that have contributed to some competitive losses so far this year?

[Daniel Friedmann:]

In terms of why we have won more, is that what you mean?

[Deepak Kaushal:]

I'm just wondering if there were any other factors that contribute to competitive disadvantage or the loss.

[Daniel Friedmann:]

First of all, it doesn't matter whether a North American or a European competitor win, if it's a competition we have to go to the European price and then we might still win of course or Boeing might still win. So everybody has got the European price pressure.

[Deepak Kaushal:]

I mean is this a case of you guys walking away from deals that you didn't feel were profitable enough or is there technology difference? I know couple of those orders were for electric propulsion.

[Daniel Friedmann:]

We have no issue with electric propulsion, we have very good electric propulsion technology, well proven, tested in space, and so on. So I don't think there's been any significant electric propulsion awards this year. There has been some in Europe but those have been government-supported. So in terms of – yes, we have walked from a situation where it wasn't sure whether people were selling satellites or giving them away. It doesn't happen too often but it did happened this quarter. And the other thing is that you have to realize that the so called market share for MDA is very segment and customer specific. There's a set of customers for which we have 50% market share and a set of customers for which we have 7% market share, and when you look at the average buying pattern over the last three years, that has averaged to 30. But on any given quarter you can get a very significant discrepancy. So if you look at 2014, in the first quarter we won zero out of two satellites, in the second quarter five out of eight, in the third quarter two out of ten, and in the fourth quarter two out of three. And when you look at the 2 out of 12 in the third quarter, that quarter saw a lot of the 7% guys buy, and when you look at the five out of eight, saw a lot of the 50% guys buy. The first half of this year has been a very 7% oriented market for us. So, no excuses, we should always win more satellites but you cannot average this out over short periods of time. There's all kinds of other factors going on.

[Deepak Kaushal:]

Okay. And so from a technology perspective, nothing's changed from your perspective in terms of the competitive dynamic?

[Daniel Friedmann:]

No, the only thing that's changed is that there have been several, now going back to last year, several government subsidized awards in Europe, and technology or no, I cannot bid against governments, I can't win against government subsidized awards, even if I have the technology.

[Deepak Kaushal:]

Okay, that's helpful. I wanted to go back to the U.S. government market, particularly the non-geospatial business with U.S. government. After you guys acquired SSL, you gained some critical mass and an opportunity to win more U.S. government contracts. Initially if I understand correctly you were looking to do this as a prime contractor and subsequently you decided you would be better placed to win more as a subcontractor. How is that pipeline looking, has it grown, has it shrunk, has it timelined and pushed out to the right or is it coming in, how should we think about growth in terms of non-geospatial U.S. government business?

[Daniel Friedmann:]

Sure. So in our brilliant timing, once we bought the facility, U.S. government shut down for two years. It just reopened for business recently which you're seeing in geospatial immediately because the sales cycle there is three months not three years. We have a good pipeline and we've actually won programs but they never went forward in the last two years, and frankly the U.S. government spending on equipment is still very, very challenging. So we have spent a lot of effort on more commercially oriented pursuit like the Skybox and the OneWeb and so on, some other ones which are confidential. And I reported that that pipeline last quarter stood at about C$1 billion and it still stands at C$1 billion today but it slips through the right and it includes commercial pieces in the pipeline not just government pieces. So it's hard to tell at this stage, we're going into an election in the United States, it's unclear as to whether these programs will move forward and on what speed. Certainly the large players in the U.S. are not optimistic of these programs moving forward quickly. So we continue to focus more on commercial for our growth pipeline.

[Deepak Kaushal:]

Okay, so when you line up uncertainty somewhat in the commercial satellite market, uncertainty in the U.S. government market and some good momentum in the Geospatial business but that's a much smaller business on a relative basis, how do you think about growth over the next 12 to 18 months for the overall top line for MDA?

[Daniel Friedmann:]

It's a very challenging time but it's very difficult to tell, and if we have some very good opportunities and if we win them, we'll grow well and if we don't win them we'll shrink a little bit. We're around the zero line and it just depends on whether things move forward at a certain speed and what proportion of that we take, and I don't think it's easily predictable by anybody how fast these satellites will go forward and how many we will win and so on, but you do have to take into account in your statement that the pieces that are doing well, like Aviation and Geospatial, have margins that are many times the margins of the pieces not doing well. So you might think they are small but they're not small on the bottom line.

[Deepak Kaushal:]

Got it. Okay, thanks. That's very helpful context. I'll pass the line.

[Operator:]

Your next question comes from Steven from Raymond James.

[Steven Li:]

Dan, the reason that you tell us that Universal Quantum with flexible payload, is this a new trend given also [indiscernible] more flexible payload and how is that the sub-position?

[Daniel Friedmann:]

There's a couple of things going on and we've all had seen the terrestrial advances on digital technology and that hasn't manifested itself in space by and large for a variety of technological reasons, but we're now at a point where a lot of that digital technology can move into space. At first that was introduced as certain flexibility for very high-end satellites like the EPIC series which by and large other people could not afford. But as we go forward, more and more of that technology is going to make itself to space and the quantum announcement which was last December, it played up again now but it was last December, it is one of those situations and it's one of those subsidized situations I spoke about. From our perspective, and I don't want to talk a lot, but we have as I mentioned earlier a major program to redo our satellite which includes very advanced payload technology for all power levels, not just for like the Quantum announcement which is for low power levels which is not what the main market is, for all power levels, where [indiscernible] was retired the technical risk, a lot of that we are fully funded, fully supported by our Board, we have a significant program team in place, we are working with several customers in tandem on that and we are developing our new satellite and I'm not going to say anything more about it and I'm sure that others are doing something to some extent in that area, we hope we are doing more than the rest but we don't know.

[Steven Li:]

And so if you look at today's bid pipeline out there, what would you see, what's the percentage about how flexible payload, like less than 20%?

[Daniel Friedmann:]

Yes, around 20% have about a flexible payload requirement, most of it for something not very large in terms of flexibility, and we have flexible bids outstanding as we speak ourselves. But as you go forward, it could be a higher percentage and we will be ready for that.

[Operator:]

Your next question comes from Rob from Credit Suisse. Please go ahead,

[Robert Peters:]

Just maybe circling back into RCM, I was just wondering when you think about the demand you've seen for the RADARSAT to geospatial data, when you complete RCM and that gets launched, just wondering how you guys feel about comparing RADARSAT-2 data to what's going to be capable with RCM? And I know in the past you had talked about maybe getting access to that data. I was wondering if there might be an update on that.

[Daniel Friedmann:]

So RADARSAT-2 is a more capable satellite in every way than any of the RCM satellites, but where RCM gives you, we're having three satellites, is more repeat coverage of the same area which for a percentage of our customers, in the few tens of a percent, is important although today we achieved some of that market by teaming with our competitors from the competitors from Europe which have added RADAR satellite to achieve that. So that's the main advantage of RCM. The other main advantage of RCM for us where it was essential was that because of the lifetime of RADARSAT-2, but we now believe that RADARSAT-2 is going to last as long as the full lifetime of RCM bearing of course an accident. So we don't have a lifetime issue, and yes, we are very interested in doing a deal with the Canadian government to our mutual benefit but that has been very slow with the changes there and unfortunately I think with an election call which is eminent probably this weekend it will be a little slower, but we have a very good product to go forward, it's in high demand and hopefully we'll be able to do some kind of mutual benefit deal with the Canadian government. We are negotiating parallel with other governments that have assets because we just can't wait for Canada and we'll do the first deal that makes sense.

[Robert Peters:]

Perfect. Thank you very much. And maybe actually, I know, Dan, I think you had mentioned this, there was the larger contract that you are working with Lockheed Martin. I believe that got delayed into the fall but I was wondering is there any kind of update on the progress on that side?

[Daniel Friedmann:]

You mean the cargo resupply for station?

[Robert Peters:]

That's correct.

[Daniel Friedmann:]

Yes, that has been delayed but unfortunately we are not looking good.

[Robert Peters:]

Okay, perfect. Thank you. And maybe just one last question for Anil, I know this is kind of my favorite one of the quarter, when we think about the backlog, can you guys give us the breakdown between S&I and Communications?

[Anil Wirasekara:]

So it's about two-thirds one-third.

[Operator:]

Your next question comes from Kris from National Bank. Please go ahead.

[Kris Thompson:]

Just on the Communications segment, can you give us the current mix between satellites and antenna subsystems right now?

[Anil Wirasekara:]

I would say satellites would be 80% and subsystems 20%.

[Kris Thompson:]

Okay, and what capacity are you running at right now at SSL?

[Daniel Friedmann:]

Under. We need more satellites.

[Kris Thompson:]

Under. Got it. And I'm just trying to get a handle on based on the wins you have in hand right now, how should we think about that capacity utilization into late 2016 and I guess early 2017 and how should we think about that also with your margins?

[Daniel Friedmann:]

I think you need to think that on average we need to bring in seven satellites a year. We did nine last year, so we ended up with two ahead for this year. So that puts us at three where the one we booked was okay and now we need to book a few more in the next few months and everything's fine. If that gets delayed, then we have overcapacity and if we book more in a fresh year than it gets tight again but we now have an integrated way to overflow into payloads into Montreal so that we can comfortably do nine as we have been. So we can certainly take on more satellites. That's not an issue.

[Kris Thompson:]

Okay, that's good. And if you have overcapacity, I mean what steps would you take?

[Daniel Friedmann:]

We'd have to reduce staff.

[Kris Thompson:]

Anil, just on the FX, can you give us the amount of impact on your revenue and EBITDA?

[Anil Wirasekara:]

On what?

[Kris Thompson:]

Foreign exchange.

[Anil Wirasekara:]

So let's look [indiscernible] for the first six months of the year which is an easier number to calculate. On the bottom line it works out to about C$0.18 which is purely translation offset by the additional interest that we have to pay in U.S. dollars. So that takes into account pretty much everything. What it doesn't take into account is the fact that extra manufacturing cost at SSL when we are manufacturing because these are all U.S. dollar manufacture. So we don't take that into account. So you need to think about that as well. And on the revenue side about this quarter, the revenue side was as I said about C$40 million for this quarter.

[Kris Thompson:]

Okay, I missed that. And when we look at your segments in Australia and Asia and South America, what's your functional currency in those…?

[Anil Wirasekara:]

The U.S. dollar.

[Kris Thompson:]

The U.S. dollar?

[Anil Wirasekara:]

Yes. In Australia it is Australian, most of it is Australian dollars but we have hedged it into Canadian, so that there is no impact there, but on all other it is U.S. dollars. In all our satellite contracts in Asia it's all U.S. dollar contracts.

[Kris Thompson:]

And in Europe, what's the mix there between I guess pound sterling and euro?

[Anil Wirasekara:]

It's all euros, we don't have anything in pound sterling.

[Kris Thompson:]

Okay. And just last for me, is there any update on the Brazil multimillion or billion-dollar Navy contract you guys are working on?

[Daniel Friedmann:]

No, we went through a week of excruciating orals after submitting our bid which I think I spoke about last time and the customer is now going to declare a shortlist of two or three proponents and issue a new RFP based on combining the best and then allow us to bid on that. So we just continue on ahead slowly but surely.

[Kris Thompson:]

Okay, Dan, on the CRS contract, qualitatively you said it's not looking good for you. How do you feel about the Brazil opportunity?

[Daniel Friedmann:]

I think we're one of the top few bidders, so I'm feeling good about that, but I have to see the new RFP when they come out and I'm less concerned about winning than I am concerned about the program surviving given the Brazilian economy.

[Operator:]

Your next question comes from Richard from Cormark Securities. Please go ahead.

[Andrew McGee:]

This is actually Andrew in place of Richard. I just wanted to quickly touch on the comments about acquisition and the possibility for even doing a transformational deal. What is the order of magnitude that you potentially look at, or maybe a better way to ask the question is, what would be the capacity to do a deal?

[Daniel Friedmann:]

I don't think capacity is a constraint. Sure it's not going to be C$10 billion but if the strategic fit is there, we will certainly look at it and pursue it aggressively. So we won't say that we're not going to do something because it's large. I don't know, C$100 million to C$2 billion is fine.

[Operator:]

[Operator Instructions] We do have a question. Our next question comes from Rob from Credit Suisse. Please go ahead.

[Robert Peters:]

Sorry I just figured I'd circle back with one more. Dan or Anil, you mentioned the EXIMBANK in your opening remarks I believe and I think at this point it's been delayed at least until the fall in terms of getting reauthorized. I believe in the past you've done a satellite finance through the Export Bank in Canada. I'm just wondering if you can kind of talk about that, is that maybe something where you have a little bit of an advantage there or you can use that facility?

[Daniel Friedmann:]

We have financed satellites with both EXIM and EDC. We have some EXIM deals going through this time which are an issue in the sense that EDC is open and EXIM is not open, it might be a short-term advantage against somebody else but COFACE of course is open in Europe. But in general it's not good. I mean the capacity does not exist to finance the satellites without EXIM. So without EXIM there won't be enough money in the market to finance all the satellites.

[Anil Wirasekara:]

Especially all the launches as well. We need to finance launch, it's not only the satellite.

[Daniel Friedmann:]

Yes, we need SpaceX finance, SpaceX doesn't have the launches.

[Anil Wirasekara:]

It's going to be huge for SpaceX.

[Daniel Friedmann:]

Issue. So those things are not good and they are certainly contributing to some satellites not been announced in the last month or so, some of which hopefully would have been announced for us. So it is definitely an issue.

[Anil Wirasekara:]

So even if you can get the satellite financed both with equity and let's say EDC or COFACE but if you want your launch financed as well, which most people do really, with EXIM not reauthorized that makes it that much more challenging, so everything gets pushed back.

[Robert Peters:]

Perfect. Thank you. And maybe if I could just follow up on that, if EXIM does get reauthorized in the fall, do you think then that might be a catalyst to see some more awards come back into the market?

[Daniel Friedmann:]

Yes but you have to realize that it's a slow process and there's going to be a big hole. It doesn't recover overnight.

[Operator:]

Thank you. There are no more questions at this time. Please proceed.

[Daniel Friedmann:]

Thank you everyone for your attention and we look forward to updating you next time.

[Operator:]

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