Maxar Technologies Inc.
Q1 2010 Earnings Call Transcript

Published: 6 May 2010

[Operator:]

I would like to welcome everyone to the Macdonald Dettweiler and Associates Ltd. Q1 earnings conference call. (Operator Instructions) This conference call and webcast, which includes the business update first quarter 2010 results and the question and answer session, may contain certain forward-looking statements and information, which reflects the current view of Macdonald Dettweiler and Associates Ltd., MDA with respect to future events and financial performance. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, intend, anticipate, plan, foresee, believe or continue, or the negative of such term or variations or similar terminology. Any such forward-looking statements are based on MDA’s current expectations, estimates, projections and assumptions made in light of its experience and its perception of historical trends. Any such forward-looking statements are subject to risks and uncertainties and MDA’s actual results of operations could differ materially from historical results or current expectations. You are referred to the risk factors described in the MDA’s most recent management discussion and analysis, annual information form and other documents on file with the Canadian Securities Regulatory Authorities, available online at www.sedar.com or www.mdacorporation.com. And forward-looking statements and information contained in this release and the associated conference call and webcast represent MDA’s views only as of today’s date. MDA disclaims any intention or obligation to update or review any forward-looking statements whether as a result of new information, future events or otherwise, other than as required by law, rule or regulation. You should not place undue reliance on forward-looking statements. Mr. Freedman, you may begin your conference.

[Daniel Freedman:]

Good afternoon, ladies and gentlemen and thank you for joining us today for MDA’s first quarter 2010 conference call. With me is Anil Wirasekara, our Chief Financial Officer. I’d like to take this opportunity to discuss the strategic progress of the company since this time last year. Anil will then review our long-term financial performance and the Q1 results, and then we will open the line to answer your questions. We will be using a Power Point presentation during our discussion that can be found on our website under events in the investor section. This presentation follows last year’s annual general meeting presentation that we gave in Toronto. The black text represents words that have not changed since last year’s presentation and the blue text represents all the updated information. As we explained last year, through the economic slowdown we managed the business that were largely unaffected as we always have and those that were affected, we managed very differently. The presentation color-code unaffected businesses in green. These are our System business, and our Information Products Geospatial and Insurance businesses. The presentation color-codes the effected businesses in yellow, which include the Information Products Lending and Conveyancing businesses. We maintain this color scheme to report progress although we are now returning to manage all our businesses including the yellow business as we always have. Business as usual. Turning now to the presentation and Slide 1, for those of you who are on our website, you’re going to have to flip the slides. Those of you on the webcast, we’ll do that for you. Slide 1 has not changed significantly from last year. It shows Systems and Geospatial and Insurance as green which are businesses that were not dramatically affected by the recession and the Conveyancing and Lending as I mentioned in yellow. On the right hand side, you can see our operating and earnings. Anil of course is going to show you real numbers. I’m just showing you trends up. Up to 2009, you can see that we have a healthy trend on all the unaffected businesses for a long time including of course the last couple of years, and in particular 2009, and even better on Q1 2010. The Lending and Conveyancing business however, took a reset in 2008 during the year and came down as the conveyancing transactions in the markets we operate were decreased and since then we’ve stabilized and are moving ahead again. What I said last year was that we kept on managing the unaffected or green businesses the same way that we have in the past; namely with long term plans, long term strategic investment to deliver strong organic, predictable growth over a period of time and that has continued to happen although the growth as we’ll see later, is picking up quite nicely in that area. On the affected businesses to what I called last year managing through turbulent times. We focused on long-term goals, but we took a very significant sizing to the market reality, which was about half the volume. Having said that, we did continue to make significant investments in new opportunities and positioning ourselves for future rebound and you’ll see how that is playing out and will lead to growth once again in the yellow affected areas. All of those managing through turbulent times objectives have been met and as I just recently said, we’re kind of returning back to the normal mode of managing the business in the yellow area also. So what I’d like to do now is just walk through each of the businesses, go over the strategic position and strategy that I went over last year which is still in black because I haven’t changed it. I may modify it a little bit, as we go along, and then show you the progress against that strategy for each area. So moving on to Slide 2, our strategy in the Systems and Geospatial services area, and we group those two together because they are sold to the same customer and they work closely together in terms of strategy, have been to steadily grow that business by increasing the market and producing better product, but at the same time, by introducing disruptive advanced solutions, disruptive meaning to do something quite differently than the way it’s been done in the past, and of course allowing us to gain a significant new market and market share, and move forward. And it’s those disruptive type solutions that add growth to the business and increase our recurring revenue as we try to convert this business to a much more recurring revenue basis. So what I’m going to give you a report today is the progress that we have made in some of these more disruptive type introductions that are fueling our growth. We’ve made excellent progress in the last 12 months and that has led to many large bookings, and has really put us on a double digit rather than a more historical digit, double digit growth path for the foreseeable future, both with a record backlog, a record number of wins that are not quite in the backlog yet, and a very strong opportunities in a number of new areas. Walking through some of the major ones, I’m trying to keep my remarks short. One of the key things is that MDA is a long-term leader in surveillance from space in the Radar area. We did RADARSAT1. We’re enjoying the fruits of RADARSAT2 right now and we have been designing as the prime contractor for the Canadian government the RADAR constellation mission and during this last few months, the government committed an additional $500 million of funding to that program which means that we’ll be going forward in this area for the next many, many years, and that’s a solid foundation to our international business, to our data business and geospatial area and of course to our satellite business. So it’s a very good development for us an area we had some concern about a couple of years ago, and feeling good right now. The other area is our ground stations area where we are a leader and over the last year, we delivered a very significant number of RADARSAT2 ground stations and digital globe, which is the U.S. high resolution information system where we are their main contractor for ground stations, and that continues into this year, and of course we also reap the benefits on the RADARSAT2 side and to some extent digital globe because we do represent them in certain areas like Canada of the data field and the value added sales that we perform on that information. Moving on to Slide 3, a new area for us which has expanded very well and made a lot of progress in the last three months, is our unmanned vehicle service. This is just the same as anything else. It’s a surveillance business. We are in the surveillance business whether it be from satellites, from airplanes, from unmanned vehicles. You name it, our main market is surveillance. Of course, when there’s a disruptive technology like unmanned aerial vehicles introduced, we have to break into that and we used that to increase our position and our market share. We significantly advanced our capability there. We have increased our marketing efforts over the last half of last year and more significantly in the last couple of months. And we have proved a complete new service business model in this area both for ourselves and for the market in particular which is recurring revenue, a profitable model which is driving our growth and profitability and has had a good impact on Q1 for example. So that new area is moving along and the more marketing resource, we put on it, the more opportunities we find to go forward in the future. Another very significant area of progress since last year has been in our communications solutions business where we have traditionally been a second or third tier player. We’ve made some very significant inroads in being a strong second tier player and in one particular case to be a first tier player. We’ve expanded the scope of our solutions. We’ve broken into new markets like the Russian market which we were not in before booked a very significant amount of business there, and in fact, have a very, very strong pipeline of more similar type of businesses coming forward in that area. That work really got going in Q1 and to my surprise, we were able to ramp up as fast as my team predicted, but faster than what we’ve done in the past and that has been very good. We’re fully ramped up in that business in our Montreal operation and producing to those contracts. Finally, in the robotics area, since the last year we won the next generation robotics contract which puts us in a position to align ourselves to the next generation of all these robots. In the last couple of months, the United States has progressed towards committing themselves in this direction with the President’s speech. It still has to go through a number of loops, but it’s pointing in that direction which is right in our sweet spot in that area, and we have done a very significant amount of work on the investment which has all been expensed in our game changing on orbit servicing business plan and related infrastructure that we hope to build to do that plan. We have been in extensive discussions with both civilian and defense target customers discussing exact targets, satellites that they own that they need serviced and we have really taken that from a concept to something quite solid as we work our way through in finalizing that business plan and committing to a larger expense in the future. So these are some of the disruptive brand new areas. Of course, there’s a lot more going on in systems than geospatial, but these are some of the new areas that basically step up our growth and our business, and as I’ve explained in the past, in the systems business, you steadily go along, then you succeed in one of these new areas. You take a step up and then you go along again. If you look at our history, we’ve done that many times, but we’ve done one-step at a time. We are now of a size and a scope in the company that as you can see from what I just discussed, we’re taking several steps. Each of them of course are in a slightly different place and time, but by having lots of steps going on at any given time, we are now going to be able to move our growth rate up to another steady level higher than in the past and you’re starting to see that in our results. Moving on to Slide 4, and switching gears to Information products and to the Insurance side, here our strategy has been to show strong organic growth by making our solutions more and more relevant to the actual work flow of our customers and getting them embedded into the work flow of our customers. I think at this point, I’d like to step back and just talk about our product strategy in general and then fit in Insurance and lending and conveyancing in it, just to do a bit a review of how we develop our products business. The way we’ve gone about it and typically, it’s worked, is that we come up with a particular information product, and we set up a store, typically over the internet to sell that product. At first, that product is put together both electronically and manually, but over time it becomes more and more automated and it becomes more and more of an electronic product. But we are fundamentally on the web selling an electronic product. Our second step in our strategy is to go from being a store, to being a work place. So now the customer doesn’t just come to our website to buy an electronic product, they come to our website to actually work and get their job done. So in the insurance business for example, we host about 137 companies on our computers and on those computers is all our data, all our software and in many cases, some of their data and software that they have worked with us to move over to this platform. When the person comes from the company, they work on our platform. They do the claims adjustment on our platform. They do the underwriting estimation on our platform. We become the workspace for them. When you make the transition from selling a product to becoming a platform, you change the amount of revenue per customer dramatically. You also save the customer a lot of money, so that’s why they do it. The next step after that is to actually become completely embedded in their workflow. So one thing is to go somewhere to get a particular job done, but that might be a bit on the sideline of your main job. We want to be on the actual job every time a house is insured, every time a claim is adjusted, every time a home is conveyed, we want the work flow to go through our system, use our information to help our customer go through. So that would be the next step to get embedded into the workflow. And the step after than is to intelligently collect all that information and to help the customer improve his overall business by providing business intelligence information or the industry slang, analytics, where we actually use things to do that. So our products business are somewhere along this chain, this path as they move up from just selling a product to all the way up as I’ve described. Insurance products are the most advanced along this chain, but all our products are moving along this chain. As you move up the chain, you increase market share because as soon as people do work in your space, they require other people to do work in your space so they can talk to them, and therefore your market share goes up and of course you add more and more value and therefore you get more and more of the customer’s wallet. That’s how we grow our products business. The fundament engine for growth of our products business. So returning to Insurance, we are in the process here of transitioning to, we’re already in the customer’s workspace. We’re in the process of transitioning to be right completely embedded in the workflow. We just made a significant announcement a month or two ago that we’re going to team with a company that owns about 40% of the desktops of the agents, and get right into their workflow for example which follows on to the rest of the insurance workflow. We’re also heavily going into the business intelligence side. So over the last little while, last year, we have spent a lot of time strengthening our unique data assets. We have very, very unique data assets in this area which are second to none and of course, all the business intelligence we want to build, relies on very strong data assets. So as we move up to the business intelligence sector, we need to continue to enhance our data assets so we’ve put a lot of investment into that area both in the replacement cost side, on property characteristics and so on and we have expanded our unique data assets which is a major driver of value and margin of course for our business. We have expanded as I mentioned into the analytics business where we are helping our customers improve their business not just for claims adjustment process for example, but actually understand how that is happening, understand how to make that more efficient, understand how to help their contractors be more efficient and deliver a better service to their clients, get things fixed better. We have expanded into the government side of this. Traditionally we’ve been strictly residential, but the government is a big owner of a lot of building and those buildings need to be repaired and enhanced over time, and we are working in particular in the United States with a government organization in charge of all government buildings which is one of the largest owners of property in the world. So we’re trying to expand our business into that area. And finally, we spent a lot of effort, and we continue to spend a lot of effort on identifying about six organic growth initiatives for which we’re defining. We’ll get pilots underway and launching as we go forward. All of these are related to these progress areas that I’ve just discussed to help drive the growth. So that’s what’s been going on in the Insurance side of the house. Moving on to conveyancing and lending, which are maintained here as yellow, you can see from the – and I just took one representative measure – but you can see on the right hand side graph on Slide 5, the transactions per week. This is in England from 2007 to 2010. You can see the dramatic drop in ’08 as the market came down by a factor of two or so. But you can also see now a couple of years of pretty good stability, and in fact this graph was plotted a little more accurately, you could see March and April of 2010, you would see that those two months have a higher transaction per week than any other period since the 2008 fall. So we’re now stable at a level slightly higher than you can see on this graph here, was to manage through this turbulent time and improve our position through right size and of course trying to drive our market share and value added content up and that’s exactly what we’ve done over the last year. We’ve completely repositioned ourselves, completely resized ourselves but we kept on investing. We did not let the recession slow us down in investment at all. So today, we’re positioned as a very strong player. We are right sized and I want to emphasize that this wasn’t an exercise in saying oh, the volume of this is half so we’ve got to cut ourselves in half. This was an exercise in reinventing our business to be way more automatic and way more efficient. And you might ask why did you need to do that? Why didn’t you do that in the first place? And the answer is that this business is fairly new for us. It grew from nothing to half our company in a very short period. It grew both by organic means and acquisition means, and at one point, we had eight different operations for example, in the United Kingdom. They were very profitable and growing very quickly and our whole strategy was to keep up with the demand. We had a plan over three years to automate and make those operations more efficient. We implemented that plan in one year when the market downsized and we had spare resources and spare time to actually get all that done. So today, we have a much lower fixed cost base and variable cost base. We can operate at a much higher profitability level than we could have before when the market was high. Of course, the market is lower so you’re not seeing that yet, but it’s a very strong operation with very strong operating leverage. Even a 5% pick up in market, you can quickly see on the financial statements. Hopefully we’ll see that in the future. Having said that, I’ve also spent a significant amount of time preparing ourselves for the next transition. So this is in the U.K., still a store. By and large, all our businesses you come on our website and you order a piece of information and that piece of information is either delivered instantaneously or soon thereafter and it is still a store. We are now in the process of migrating this business from a store to a work place. We want to be the place in the United Kingdom where the conveyance and the lender come together to convey a piece of property, not just to buy a survey or to buy a search, but to actually work and share the documents to communicate, which is very difficult to communicate securely to avoid all the fraud that’s going on right now and to work in that electronic space on our website and we have a variety of very strong initiatives related to the whole secure information exchange between all stakeholders in the property transaction, and a workspace where they can create those documents and track those documents and keep them together and do the conveyancing. We are in parallel with that, trying to bring on a number of services from the U.K. land registry who has become much more open to doing business with commercial entities and to get their services out there, and of course we are connected to more solicitors than any other commercial entity in the United Kingdom, so we’re a perfect vehicle to bring those services forward. And last but not least, although our commercial property versus residential property is a smaller component, it is in dollars a very significant component of our, has not been affected by regulations for example, and we are trying to expand our growth in that area. So as these expensive new initiatives come to fruition, and we’re putting them together this year, trying to get into pilots by the end of this year and then rolling them out sometime next year, we are going to be converting our business from a store to a workplace and then we’ll go from there. That is our growth strategy. It’s always been our growth strategy in products. The only difference is that the new base line as you can see is 5,000 transactions versus 10,000 transactions but we know how to grow those transactions by gaining market share and we know how to grow the amount of money from those transactions. If the market were to return from five to six to seven or eight or whatever else, that would be an extra for us that we’re well positioned. But we will see growth even if the transactions stay at this level. That’s our plan. So that concludes the strategic update of our major areas and I will now ask Anil to go over the financial trends of our business, at the high level to kind of match this update and then go into Q1 and then we will summarize and open for questions.

[Anil Wirasekara:]

Good afternoon ladies and gentlemen. I will discuss the financial sections of this presentation which is divided into two sections. The first section discusses some of our long-term financial trends and the second section discusses quite briefly our first quarter financials. Just to recap, in the first quarter of this year, our overall business operations continued to perform at a very high level. We had solid operating results from every segment of our business, in particular from our Information Systems business and our insurance business that resulted in a 54% quarter over quarter growth in our operating earnings. Our backlog and pipeline continues to remain very strong and our liquidity and our balance sheet are extremely robust as we move forward through the rest of this year. If you look at the first chart, which is Page 7, is where we discuss our long term operating trends in net after tax consolidated operating income. What I have done is, I have divided this into two periods, 2005 to 2007 and then from 2008 onwards. And I’ve done this so that you have a better view of how the businesses have performed because in 2007, 2008 there was a contraction of the business like most people encountered. We reset the bar in 2007 and then we were on another trend from 2007 onwards. If you look at the years 2005 to 2007, we had 19% overall growth. The growth that we had during this time, the only drag on the earnings during this period was the new start up costs that we had in the U.K. getting ready for the introductions of HIPS. That was possibly the only drag we had on earnings between 2005 and 2007. If you go further back to 2004, 2003, growth is in the 20’s and if you go all the way back to 2000, when we initially went public, the compounded average growth until 2008 is over in excess of 25%. So we reset the bar. We reset the bar in 2008. The business contracted like most business were. Fortunately, we were contracted about 10% and we reset the bar and we made a pretty nice swift recovery in 2008, 2009 and this was even further demonstrated in the first quarter of 2010 where our growth quarter over quarter was 40% and certainly a step in the right direction to get back to our stated long-term growth objectives. So that’s kind of the purpose of this chart, just to reconfirm that we have consistently performed and operated at a growth that compounded growth in the high teens and the low 20’s. We continue to do that. We had to reset the bar in 2008, 2007, 2008 as most others had to do. We re-engineered the company. We repositioned the company and made a good, swift, strong recovery and this has been demonstrated in the first quarter of 2010 as well. Go to the next chart which is Page 8. In this chart, we look at the performance of our systems business. Your systems business as we’ve already said has been the backbone of our business and we are very much aware that for us to achieve double digit growth the way we have done since 200, where we have been, our businesses are sensitive to all the economic and business volatilities worldwide, we not only have to be diversified operationally, we have to be diversified geographically as well. On top of all that, we need to have a solid anchor business and the system business has been the company’s anchor throughout this period. And if you go back from 2005 to 2008 and 2009 and beyond, we’ve had pretty solid growth. Our operating earnings, our operating EBITDA over this period has been 13% and compounded basis. The same goals, if you go back to 2004 and 2003, we dropped down a little bit but still its double digit. I think along the 11% or 12% range. And once again, in the first quarter of this year, we made a tremendous stride in maintaining the momentum here where our growth quarter over quarter was 28%. So today, our systems business is very well positioned and would continue to be the foundation of our business and as I said, we made great progress this quarter. The third chart that I’m going to talk about is to do with cash flows. As a company, we are always focused on cash flows and this chart kind of confirms that our earnings are solid and real, and our earnings are supported by a consistent flow of free cash that we have been able to generate. Once again, if you go back in this to 2003, the compounded growth of our free cash flow generation is in the high teens. We moved from 15% to almost 19% if you go back to 2000. So we consistently generate cash. We pay down our debt significantly and the blip in 2007 that we had was pretty much the launch payment for RADARSAT2. We made a fairly significant payment for the launch of RADARSAT2 and that took our cash flows down. But we recovered well in 2008 and 2009 despite the recession and the economic slowdown, and once again, we made a great start to Q1 with strong cash flows from operations. So these are the three key measurements, financial measures that I wanted to share with you today that demonstrates good track record of long-term growth and cash flow generation. I will now discuss our first quarter financials. I’m sure most of you have seen our financials. If not I think, they’re on our website that you can download. Consolidated revenues for the quarter was $245 million. This is Page 11. Now I’m on Page 11. The consolidated revenues are $245.8 million compared to $271.9 million. Just a comment on our revenue number, especially the first quarter 2009. As I have talked about previously, we had revenue recognition changes between 2009 first quarter and 2008, and this impacts only revenue. It does not impact earnings at all. This was to adjust for BC online and exit to a gross to a net basis. That adjustment is approximately $26 million quarter over quarter since 2009 first quarter had about $26 million extra revenue on growth compared to Q1 2010. And we had about $16 million negative impact in foreign currency translation between 2009 and 2010. So if you adjust at the overall consolidated level for those two, $26 million for changes in accounting that did not impact any cash or earnings, and $16 million for foreign currency translation, we had revenue growth quarter over quarter of about 7% or 8% so I just wanted to highlight that. EBITDA was very strong on both sides of our business; systems as well as products. EBITDA growth quarter over quarter was about 21% up from 48$ to 58.4%. The more important measurement of our performance should be our operating earnings and why I say this is that we are reducing our quarterly interest payment significantly. We’re reducing our amortization and depreciation quarter over quarter significantly, so when you look at the performance quarter over quarter it’s kind of distorts the actual performance of our business, and that’s why operating earnings is a better measure to view the performance of the company than operating EBITDA. So on operating earnings, we were up 23.5% to3 33.5%, or 40% growth. We have two adjustments. These are once again non-cash timing adjustments, all mark to market adjustments on both stock-based compensation and foreign currency derivatives that we have for our systems business. The previous quarter we had an $829,000 pickup and this time it was $3.9 million loss. That’s because of the strong Canadian dollar. All these get eliminated over the life of the program, over the life of the contracts and end up at zero, and this is just a mark to market. There is no cash impact with respect to any of that. Our operating EBITDA once again is up from $0.58 per share to $0.81 per share. I will now talk to the next chart which is Page 12, and Page 12, we have segmented the operating performance of our business in home currency. So if you look at the first one, if you look at the U.K., on a revenue wide, and these revenues have been adjusted for the accounting changes. So the revenue here is adjusted for the accounting change. We went from 26.8 to 24.5, a slight decline, but really significant quarter over quarter than we’ve had in the previous quarters. On the revenue side, down about 5%, but on the operating EBITDA line, or the operating income line, up significantly from $254,000 to 1.2 million pounds. It’s important to note that the first quarter is kind of slow quarter in the U.K. for property conveyancing. Coupled with that, we had about a month because of the snow in the U.K. [technical difficulties] [technical difficulties]