Maxar Technologies Inc.
Q3 2010 Earnings Call Transcript

Published: 1 Nov 2010

[Operator:]

Good afternoon, my name is Christina. I'll be your conference operator today. At this time I would like to welcome everyone to the Macdonald Dettwiler & Associates Ltd. Q3 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). This earnings conference call and web cast which includes a business update third quarter 2010 results and question-and-answer contains certain forward-looking statements and information which reflects the current view of Macdonald Dettwiler & 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 terms or variations of them 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. The risk that could cause actual results to differ from current expectations include but are not limited to, inherent risk in the information systems market and in the information products market including general, economic, regulatory and competitors changes, changes in government priorities, funding levels, contract regulation, susceptibility of customers and property trends faction related industry, failure of third parties and sub contractors for long-term construction contracts of which the company is the prime contractor. Failure to recruit required management and employees and other factors described in the MDA's most recent annual management discussion and analysis. Annual information form and other documents on file with the Canadian Securities Regulatory Authorities, available on SEDAR or www.sedar.com or www.mdacorporation.com. The forward-looking statements and information contained in this earnings conference call and webcast represent MDA's views only as of today's date. MDA disclaims any intention or obligation to update or revise 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 third quarter 2010 conference call. The good news is I think my speech is a little shorter than the forward-looking statements there. With me is Anil Wirasekara, our Chief Financial Officer. I will be discussing some of the key business events that have taken place in the past months, Anil will review our financial results for the third quarter and then we'll open the line to your questions. In the surveillance and intelligence sector, MDA continued to progress according to plan on the design phase of the RADARSAT Constellation Mission. Looking at the RADARSAT II business, MDA signed a multi-million dollar contract to supply digital alleviation products derived from RADARSAT-2 for the government of Indonesia. Also in this area, MDA signed two contracts with CLS, a French company providing value added radar information services. Under the first contract, MDA will provide another RADARSAT ground station solution, the third such solution to the same client and the second quarter extends the provision of RADARSAT-2 information that began in 2008 and until mid 2012. This information is used to detect illegal and regulated and unreported fishing ships in the South Indian Ocean. In the United States, the US Army Geospatial Center awarded MDA a contract provide a demonstration system to use MDA's RADARSAT-2 and Digital Globe's data using a very small practically deployable mobile ground station. In future, the Army may procure multiple units for international and domestic deployment. MDA also signed a contract to provide RADARSAT-2 data information to the United States National Oceanographic and Atmospheric Administration NOAA. The administration requires MDA to deliver the information within three to six hours of acquisition in order to enhance its maritime monitoring and forecasting capabilities. MDA's unmanned aerial vehicle service business continues to perform well, both our Canadian and Australian customers continue to log extra surveillance hours above the base contract level. Moving on to the advanced technology sector, in the communications area the work on our advanced technology solutions for the Russian AM5 and 6 satellites is proceeding well. Preliminary design reviews for the customer were successfully completed in August and we have commenced the detail design space. The Ukrainian satellite program is also advancing in its early stages albeit somewhat slower than we had expected due to frequency coordination issues with neighboring satellites which remained to be finalized by our customer. During the quarter, MDA signed a quarter to provide advanced technology solution that will be integrated into a satellite that will provide increased broadcast capacity for the Americas and Europe and add new capacity support maritime and aeronautical services. In the space exploration area, MDA's US operation concluded a four year program to design and deliver to NASAs jet propulsion laboratory and advanced solution for use on a Mars science laboratory Rover, the upcoming mission to Mars. In addition MDA's Canadian operation signed a contract worth $6 million with the Canadian Space Agency. MDA will lead a team that will design, build and test our Mars Exploration and Science Rover Prototype. The work will result in the development of key enabling technologies for future space exploration missions and terrestrial spin-off applications. This is the fourth advanced technology solution developed by MDA to operate on Mars. Also in this area MDA received a $6.4 million contract from NASA to continue the sustaining engineering services in support of the Canada arm and its inspection boom on the space shuttle as well as our robotic work station on the international space station. Their work is currently authorized until the end of 2010 with options extending in the future. In the terrestrial application area of the advanced technology sector, MDA's robotic solution has successfully inspected critical components inside the Calandria Vault at the Pickering A Nuclear Station in Ontario. The 14 meter robotic arm navigated through obstacles within a four storey nuclear reactor in a very controlled and precise manner to check for possible corrosion and degradation. Finally, in the area of on-orbit satellite servicing, the company continues to try to obtain a major customer commitment prior to committing the significant expenditures. Moving to the financial services sector in North America, our sizeable property insurance information business continued to perform well, in particular, our business to assist property insurance underwriting, in evaluating their book of business. In addition, the company secured contracts with two leading home restoration vendors and a leading United States bank. Phase was maintaining and repairing increasing numbers of foreclosed or aging properties. MDA's building cost estimation solution enables better visibility and cost control when dealing with these properties. Expansion to Canada continues to progress well. MDA signed a contract with one of top Canadian insurance companies for a proven commercial building valuation solution. MDA also signed an agreement with Canada's large provider of rating software to insurance broker. This new partner will provide approximately 40% of Canada's insurance brokers with direct access to MDAs residential fielding valuation solution. In our mortgage lending information business in North America MDA's business with key customers have increased based on its strong delivery performance and as a result of recent new requirements by Fannie May for an updated credit check just prior to closing a conveyance. In British Columbia, BC OnLine continued to perform as expected and the company is progressing on its multi-year program to modernize the land title and survey authority registry and back office systems. In August, MDA launched a new service in BC that provides real estate agents and lawyers with electronic access to a central database of strata related information sourced from property managers. MDA has also introduced an online conveyancing case management solution to notaries and lawyers, to electronic force management, the solution improves the business processes associated with conveyance of property in BC. Looking now at the financial services sector in the United Kingdom and Ireland. In England and Whales, the number of analyst channel searches increased to 3,500 per week as compared to 3,200 per week as last reported, and personal search volumes continued to remain low. Since it was cancelled earlier this year, our primary customer base of conveyances has once again become the main search customer, and we have intensified our marketing efforts to the conveyancing community across the board. The company's main focus is on solicitors who do multiple conveyances each month and are still using over-the-counter manual services, since they represent the largest [amped-up] market. Since last report, the company signed up more conveyances and a number of contracts with leading conveyancing panel managers in the industry. These new customers are being converted to electronic services through a combination of one-stop offerings, bundled pricing, tailor training and customer service. As for Scotland and Ireland, these operations continue to be stable and profitable. That concludes MDA's operational highlights since last report. I'll now ask Anil to report on our financial results.

[Anil Wirasekara:]

Thank you, Dan, and good afternoon ladies and gentlemen. I am very please to report our financial results for the third quarter. Our overall business operations continue to perform on target and our diversified businesses have held up very well over the past several quarters and continued to generate solid growth and profitability. Operating earnings in the third quarter of 2010 were 35.6 million or $0.87 per diluted common share. This is up considerably year-over-year when compared to $0.68 for the third quarter of 2009 and $0.83 in the second quarter of 2010. Consolidated operating EBITDA for the quarter increased 14% to 65 million, up from 57 million for the same period a year ago. Consolidated revenues for the quarter amounted at 263 million. This is ahead of the 258 million in revenues of the second quarter and $17 million more in revenue when compared to the third quarter of 2009. Year-to-date revenues were 767 million, compared to 763 for the same period last year. Net GAAP earnings for the quarter was $38 million or $0.93 per share. This once again is significantly higher than the 29 million or $0.70 in net GAAP earnings for the third quarter of 2009. Year-to-date, GAAP earnings was 95 million or $2.31 per share, compared to 78 million or $1.93 per share for the same period last year. Year-to-date, operating earnings was 103 million or 251 per share. The year-to-date operating EBITDA was 184 million. These results are significantly higher than the operating earnings of 80 million or 197 per share and operating EBITDA of 154 million for the same period last year. Now I will turn your attention to the operating performance of our segments. Third quarter from our Information Systems business increased $30 million for the quarter to 142 million. Operating EBITDA increased 16% over the prior period of 28 million, from 28 million to 32.5 million, resulting in an EBITDA margin of 23% for the quarter. Year-to-date, Information Systems' revenue was 85 million or 26% to $416 million. Year-to-date, operating EBITDA increased 26% to 98 million, resulting in an EBITDA margin for the systems business of 23%. Backlog as of September 30, 2010, continued to be very strong and was at an all time high of 1.193 billion. This compares favorably to the 759 million in September 2009 and 928 million as of June 30, 2010. Information Products revenue for the third quarter 2010 was 121 million, compared to 134 million for the same period last year and 117 million for the second quarter of 2010. As discussed previously and in our previous quarters, the year-over-year decline in revenue can be primarily attributed to the changes in accounting on revenue recognition in our UK and BC online business and also the strong Canadian dollar. Information Products operating EBITDA for the second quarter increased 11% or 3 million to 32.5 million or 27% of revenue. The growth can attributed to the stabilized UK property information business, increasing the profitable US property information business and the continued strong performance from our insurance and Geospatial Services business. Operating EBITDA for our Products business for the nine months this year was 87 million versus 76 million for the same period last year. I will now discuss our Information Products operations by region. The property information business in North America in US dollars had revenues of 56 million for the third quarter, compared to 55 million in the second quarter and 48 million in the third quarter of 2009. Operating EBITDA in US dollars was 20 million. This is a significant improvement compared to the 17 million in the second quarter this year and 14 million in the third quarter of 2009. Property information businesses in Europe recorded revenues of 23 million pounds, compared to adjusted revenues of 31 million pounds in Q3 2009. Operating EBITDA was 1.7 million pounds this quarter, compared to 2.1 million pounds in the second quarter of 2010 and 3.7 million pounds in the third quarter of 2009. The HIP shadow we anticipated post cancellation of HIP is the primary reason for this decline. We expect to move out of this shadow by the year end. In our Geospatial Services business revenues from this quarter was 25 million and operating EBITDA, $9 million. This represents an increase of 6 million in revenues and 2 million in EBITDA over the same period last year. Year-to-date revenues increased 6 million to $64 million this year versus 58 million last year. Operating EBITDA for the nine months ended this quarter was up 20% of 4 million higher at $23 million when compared to 19 million for the same period last year. Turning now to our balance sheet and cash flows as of September 30, 2010, total assets employed was approximately 1.4 billion. Trade accounts receivable was 97 million, and unbilled account receivable and long-term construction contracts was 116 million, compared to the previous year's balance of 115 million. All receivables are closely monitored as part of our cash flow management process. The effective tax rate for accounting process for the three and nine months ended 30th September was 27%. As we have discussed in previous quarters, our consolidated cash tax rate is significantly lower. For nine months ended 30th September 2010, the company generated over $316 million from operations, after changes to working capital and funding interest expense, compared to $108 million for the same period in 2009. Our strong cash flow from operations has enabled us to steadily reduce our debt obligations over the past twelve months. As a result, our interest expenses this quarter and year-to-date have reduced considerably. Financing and investment activities for the nine months include $15 million in capital expenditure and $1.6 million in acquisition related settlements. In the last nine months long-term debt, net of cash and cash equivalents decreased by almost $290 million to 37 million as of the end of quarter. As of September 30, we had approximately 200 million in long-term debt and approximately 165 million in cash and cash equivalents. We currently have over $800 million of unused potential debt capacity. To a recap this quarter operating EPS is up considerably from $0.68 a year ago to $0.87 on strong sales and continued margin improvements across most of companies. Our backlog and liquidity is at an all time high and coupled with a diversified business model, and operating leverage continues to give us confidence in our long-term growth and stability. I will now hand it over back to Dan.

[Daniel Friedmann:]

Thanks Anil. We will be happy to answer your questions now. [Christine], can you please open the line for questions?

[Operator:]

(Operator Instructions). Your first question comes from the line of Steve Arthur of RBC Capital Markets, your line is open.

[Steve Arthur:]

Very big jump this quarter, first can you explain the $150 million working capital change? Was that primarily prepayments in the Russian and Ukrainian contracts and then frankly, most broadly just any development (inaudible) you're thinking on how to put that cash flow to work in the future?

[Anil Wirasekara:]

Yes I mean that's exactly what it is, it is advance payments we received or milestone payments we received primarily on the Ukrainian contract but yet we had a little in the two Russian contracts as well and you know we'll work a major part of them over the next 24 months, so these are operational requirements but its not immediate.

[Steve Arthur:]

And just bigger picture in terms of cash and future cash flow coming in, acquisition dividends, those types of things. Any change at all in thinking over the past quarter?

[Anil Wirasekara:]

Yes, I can give you an update on that. As you know we have been pretty busy dealing with a financial situation in the world for last couple of years but in the last six months we have refocused back onto growth in all our businesses with a number of organic initiatives and we are very focused on our trying to generate our third division. As we know we're going forward to achieve 20% plus growth. We want to open up some new avenues and our fundamental strategy remains unchanged. Our strategy is to lever our core strength and competencies which are very large to penetrate, mostly commercial markets that have sustainable revenues, where we can establish a very strong presence, that's exactly how we built our property information business in the last 10 years. More recently the same way we built our commercial satellite communications business through an acquisition followed by significant organic growth. I think we're going to double that business in the next 12 months and we plan to keep doing that so we're looking at some very strong commercial markets where we can do some M&A and some significant organic strengths to bring that forward, don't have anything cooked enough to announce at this stage but we're very focused in all that and that's how we plan to deploy our cash. Having said that, the company has grown to a certain level of cash flow that we're feeling pretty confident. About the dividend, we haven't made that final decision but it's imminent.

[Steve Arthur:]

And just to be more specifically, Geospatial had a very strong quarter both revenue and margins, anything in particular behind that?

[Daniel Friedmann:]

Just there is some short term and some long term issues. We have talked about Geospatial for the last few quarters. We told you that there had been a kind of a change in contracting vehicle with the US of course that's all sorted out now but we have for the last year and a half or so being implementing some new strategies. You can see some of those in my speech where we are bundling ground stations with data and operational small systems and so on to get the volume up. We have been marketing our RADARSAT-2 capabilities to the US surveillance customers for many years. We have developed a much stronger US presence in the intelligence market and we have also been working on some strong algorithm developments which we're not at liberty to discuss and so I have some very proprietary algorithms. And all of these things are now coming to show off on the revenues. So we are in a process of stepping up in Geospatial which was what we've been trying to do for a while. As we go forward, this quarter was of course aided by that and the future will be aided by that more, however unfortunately for the world this quarter was also aided by the oil spill in the Gulf. We have been operationally providing information, not imagery but actual imagery also but actually information into the Gulf situation. Some of that can be looked at that as a one time effect but actually it's been a fantastic opportunity for MVA because we've been able to prove that we can provide operational data on a regular basis and our customers has taken notice of that. And I think we're going to turn that into a recurring business may be not at the level of the last three months but into recurring new business for us as we go forward and that's starting to happen. So we're on to a kind of a new era in Geospatial as these things move forward.

[Steve Arthur:]

And I know you mentioned the HIP shot, just to clarify, you mean there are the timing gap between the search at the beginning of the process with the HIP in the end now. And that should normalize in the next quarter or two?

[Daniel Friedmann:]

I think a lot of people are asking about this and I can pick a minute to explain it. While HIPs was a requirement, a search was required before you listed a home. Their market at the time was also refreshing some of those searches at the close. The moment HIP was stopped, their requirement of the search at the beginning of the process was no longer there so that volume went to zero overnight. However there are still HIPs in the market that we have provided searches for the last many months and therefore the requirement for the closing search was still being fulfilled in part by those HIPs. The law is that the maximum you can wait is six months, so we have this kind of shadow of maximum length six months, of course some of the HIPs were not done on the last data, we had done it earlier, whereby the market doesn't require as many searches as it would normally. And that is ending with you saw that our searches per week have gone up, that's just recent, the numbers during the quarter, do not reflect the numbers I'm telling you now. The numbers I'm telling you now are from the last three weeks and our searches keep increasing. And there is two factors, one is that we estimate that by the middle of November the HIP shot will be over. And the second factor is that as the market returns to back to the conveyors as the main decision maker. There is a shift towards the official search which is what we're strong at, we provide all the searches but we are the strongest at official searches. And the other big effect that we will see more early next year because the shadow goes on for another few weeks is that when the searches at order at the end of the process instead of the beginning of the process, the solicitor buys all the searches not just a particular one search that was brought for the HIP and since the solicitors are buying back from us. We are selling more of those other searches on top of the official search and what we call a search step and that should make a big difference to margins so you will see searches go up but you will see margins going up significantly more as we work our way through. That's assuming a flat market. Obviously the market goes up, it's better if it goes down as worse.

[Steve Arthur:]

But just last very good point, there was lots of discussion last week around a Bloomberg story that was owed in, the press was pretty clear, there was nothing to disclose. You didn't mention earlier so I assume that there is no further comments about there and nothing new to disclose as it relates to the products businesses there.

[Daniel Friedmann:]

The only thing we have to disclose is a great quarter.

[Operator:]

Your next question comes from the line of Thanos Moschopoulos of BMO Capital Markets. Your line is open.

[Thanos Moschopoulos:]

Hi good afternoon. With respect to the on-orbit servicing initiate, you mentioned that discussions remain ongoing. Can you provide a bit more color as to how those are proceeding and types of customers you are focusing on and maybe the timeframe for which you might have more of an update for us?

[Daniel Friedmann:]

They are proceeding well, anytime you are doing a large space program that's going to change the way people run their businesses, it turns out to be more complicated than you think. We're well engaged. I have personally participated in the discussions at length. But it is a complicated complex thing to resolve and for people to get their minds around. I have a hard time predicting when we'll get to a significant multi hundred million type commitment. And if we'll get there I am hopeful, it's hard to predict the timing. We are having discussion with commercial and defense customers.

[Thanos Moschopoulos:]

Okay that is helpful and then with respect to the Ukraine satellite, you mentioned that there is a potential delay on that front. Any expectation as to when that may be resolved, might that be an issue that could slow down the project and impact revenues or would you except for the resolve fairly promptly?

[Anil Wirasekara:]

It's our customers issue, it's not our issue. Of course we are working very hard with the customer and providing all the help we can, it's a regulatory situation. We are making good progress. Many of the program elements continue on track. Some of the program elements have to be slowed down to await that decision. We don't expect any issues unless brought on drugs for a while, which is not our expectation, and we are proceeding along.

[Thanos Moschopoulos:]

Now can you remind us from a cash flow perspective when the next payments would be due on that project and on the Russian project as well?

[Daniel Friedmann:]

Which payments coming into MDA?

[Thanos Moschopoulos:]

Yes.

[Daniel Friedmann:]

Well, they are two completely different programs. On the Russian program I believe we have some milestone payments due early next year, and also on the Ukrainian program we've got milestone payments due early next year if I am not mistaken.

[Thanos Moschopoulos:]

What about late next year?

[Anil Wirasekara:]

There are some small payments due.

[Daniel Friedmann:]

Yes, we don't carry those in our minds.

[Thanos Moschopoulos:]

And from a broader perspective looking at the raw system business and assuming that the Ukraine issue gets resolved fairly quickly, should we expect to see then progressive improvement in the coming quarters, notwithstanding the standard Q4 seasonality, that was not what you expect?

[Daniel Friedmann:]

Yes, I mean as we said, there is different aspects you have to take into account. We are on a new growth path in systems because we have broken into some new markets and some new service type businesses and so on. However, we are also on a step up, and that step up is happening as we speak, that doesn't continue on forever. And then you have the pass-through validations from quarter-to-quarter, they don't have a huge effect on the bottom-line, but they have a bigger effect on revenues as we go forward. We are expanding our facilities, we have hired over 100 people in the last three months, and we are marching along and we got a good pipeline to go on, on top of that.

[Operator:]

Your next question comes from the line of Paul Lechem of CIBC. Your line is open.

[Paul Lechem:]

Just on the last point on the satellite business, when all your major satellite programs that you have right now are hit full stride, how much above current revenue run rate should we expect it to be?

[Daniel Friedmann:]

Sorry, I missed the part after when.

[Paul Lechem:]

So, you are still ramping up the Ukrainian satellite, I am just wondering when all your major satellite programs that you are working on, the Russian, the Ukrainian, the RADARSAT constellation, when they all hit for the maximum stride, how much above current levels would your systems revenues be?

[Anil Wirasekara:]

It's impossible to predict. I mean the Russian thing is peaking any day now. The Ukraine is peaking nine months for now, the RADARSAT constellation, phone the government, I don't know when it's going to peak and we have another 50-yard contract and a big pipeline. We just don't look at it that way.

[Daniel Friedmann:]

It's impossible to predict. We just don't look at it that way.

[Anil Wirasekara:]

It's impossible to predict, especially because on the under revenue side, with all the flow-throughs that pass through, it's kind of difficult to predict exactly what the peak is going to be. We are going out for the pursuable future.

[Paul Lechem:]

Back on to the satellite refueling. I mean you mentioned it's a complex discussion you are having. Are there any major sticking points that you are having with the customers, is there a technology question? Is it an insurance question? Is it first of a kind, kind of issues? Can you give us some sense about what exactly are the major sticking points, is that pricing?

[Daniel Friedmann:]

It's primarily a first of a kind issue. We know how to do the technology and make it work. We solved the insurance problem way back. That was a pre-requisite. Its how the business is going to run, what is it going to do and what is it going to mean economically to the customers versus what we need economically to make it a success. There's always a price issue and there is always an operational issue. You have to rethink your business model and there is all kinds market forces going on at the same time in terms of as you can see from our own bookings, this is a very hot area right now and the market for our customers is changing quite dramatically as they go from primarily TV and telephone to internet and other services. So it's a dynamic place and a complex problem that everybody has to work their way through it.

[Paul Lechem:]

Given that you need a government's customer to be one of the first customers. Is it too difficult for a commercial customer to step up here at this point?

[Daniel Friedmann:]

We hope not. We hope our first customer will be commercial, but we are working both sides.

[Paul Lechem:]

And you mentioned I think in the last couple of quarters, that you would hope to have had a decision in each of those quarters and it obviously is extending beyond that. Obviously, you are still hopeful enough that you will get something done, but is there a cut-off point that you say it's best to put it on the backbone and look elsewhere?

[Daniel Friedmann:]

You know, it's turned out to be more complicated that I thought. That's for sure. And the way we work at MDA is that we have a lot of initiatives going when we can see our way to get one done, we work on it pretty hard. When we can see our way to get it done, we keep it percolating it along and then we work on it again some time later. At the moment we are still working this one pretty hard. We might at some point decide that it's the wrong timing and put it to sleep for a while and pick it up another time, that's our normal course of operation, but at the moment we are working it hard.

[Paul Lechem:]

And just to give us some final parameters around that, can you give us a sense of how many satellites are there that could potentially make use of this service? Could you even give us a guesstimate on that?

[Daniel Friedmann:]

I don't think that's super useful because we are still trying to figure out exactly in what conditions it would be used and how many satellites and so on and so forth. In our business plan we had a scenario where most satellites could use it, but that's not necessarily the way it going to go in the future as people try and figure how to run there businesses on this. So, I don't have those figures which we've been basically focusing on the first couple of years and making sure we have enough sales volume to get going at the moment.

[Paul Lechem:]

So just to clarify, you said you are trying to figure out how exactly or in what scenario you might you use it. Can you give us any more detail on what you mean by that?

[Daniel Friedmann:]

Well, it's pretty simple. Just think of your own car, when it get used, do you put some more money into it and keep running it or do you buy a new car, and if cars are not changing it's pretty straightforward, you just put a bit more money on it and you keep using the same old car. But if you have an SUV and now every new car is electric. You might change your mind. So there is of lots of trends like that going on. The world's moving much faster today than it was when we started this business plan. And we are trying to wrap our minds around those issues. At this point we are actually engaged with real people running real satellites rather than market studies. And we just have to work through that and I just don't know the answers. We are working through that, it is not something you do in a couple of weeks.

[Operator:]

Your next question comes from the line of Paul Steep of Scotia Capital. Your line is open.

[Paul Steep:]

One quick one, just on ITG in the US, maybe you can talk a little bit about what the key driver was for the improvement profitability and where we sort of see that going over the next couple of quarters? Thanks.

[Daniel Friedmann:]

There are several things, on the insurance side we have a number of initiatives to penetrate deeper into our customer, which is our standard business plan and given the economic situation of the last couple of years, customers are more amenable and have the time to look at these initiatives, because all these initiatives are around improving our own customers operations and profitability. And when the world is busy people are busy taking orders and not so busy improving profitability. When the world is not so busy like the last year, people get busy trying to figure out how to improve their operations and that is good time for us. So, there is a number of initiatives that are going well and making good progress in terms of penetrating our customers more deeply. And as you know, on insurance side we have a very strong market position, so we already have the customers. The question is of the billions and billions of dollars of the customers spend and they might spend a million and ask can we make that million, million and a half, or 2 million next around by helping them save money and do things so it's a fertile ground for us to grow in that we're in the customer site all the time and we have all kinds of ideas on how to make the life easier and more efficient. So though things go forward we're growing nicely. On the property side, as I mentioned we have been through a period due to the financial situation where a lot of suppliers have left the market, where the customers are only interested in buying from national suppliers, not regional suppliers. We're one of the few national suppliers and where customers are cutting arrangements with several companies and buying from all of them at the same time to not be depended on one of them since last time they were depended on one or two that they might have gone under and at that point, its whoever is best, gets the most business. So if we meet our work obligations on time and do a good job and keep everybody happy, we'll get more work and that's what's happening. So we are having despite the market being what it is, we're having a good time of our operational efficiencies and processes as we go forward. So all those elements are contributing to a significant improvement when compared to this time last year and some improvement compared to the past quarter.

[Paul Steep:]

Okay fair enough. And the last one for me, just on divestitures, little surprise. I guess that's the when I think back likely the second divestiture you have done in the last six or seven years at least last week in the UK. How do we think about that, formally there is a very measured in making any changes, little surprise to see it so may be some context around why now, why in the UK, because there re -contracts you have run for five years plus.

[Daniel Friedmann:]

Our situation there is that our business plan in the UK is to be the electronic conveyances of the country and we have a number of initiatives work towards that goal, our search business be one of the major ones. Many, many years back, we thought in our best interest to modernize, to help local authorities modernize and we could bring to bear the strengths of our systems group to do that, we went out there. We want a number of contracts over half a dozen because of the financing and how they happened, it turned out to be what's called a managed service which means that you build the thing and then you run it and operate it for the customer. We did that successfully, we took the systems revenue at the time and we made a decision, quite a while back, I think you'll see that there has been no press releases on winning new lamps. It was for somebody else to go modernize all these local authorities, the sudden cost and the time to convince them, it's more than the revenue from modernizing on it and it wasn't a requirement for our products business which is our main focus. So we continue to run those contracts but they take management attention and they don't significantly contribute to the bottom line and during the last year or so we looked for somebody to take that on who was interested in going on to future contracts and we were able to get better value for our shareholders than by keeping the contract. So that just happened to conclude this past week, put a little bit of extra cash didn't affect anything strategically at all. It's a business that we have basically discontinued two years ago.

[Operator:]

Your next question comes from the line of Sera Kim of GMP Securities. Your line is open.

[Sera Kim:]

I just wanted a clarification on the systems file in the past when you had the pass through components of a larger contract margins came down. So I am just wondering with the Ukraine and Russian contracts, as you get more pass through works. Should we expect margins to gradually turn lower or given the size would it be a more of a step function?

[Anil Wirasekara:]

No, there could be quarters where the margins could be a couple of percentage points lower. It just depends on how much and how large those pass-throughs are but you could certain quarters expect it to go down a couple of percentage points. I wouldn't expect it go materially down to the mid-teens or anything like that, but it certainly could go down a couple of percentage points and then recover the next period.

[Daniel Friedmann:]

The best way to think about it is that most of our margins are made on a value added for obvious reasons. Our value added is growing as we go forward, so in dollars you should see that now, if we do a huge launch payment on a particular quarter where we have no value added, and a percentage wise it will go down but not on a dollars wise or EPS wise.

[Sera Kim:]

And I guess just earlier in the prepared remarks you talked about M&A as being part of your growth plant. Would you be able to talk more about I guess switch operating division, you are focusing your M&A efforts on and I guess where what types of acquisitions you are interested in?

[Anil Wirasekara:]

First of all, we conduct a normal M&A in our existing divisions, but I was trying to address a longer term growth plan and what I have said is we have a lot of competencies, most of them are in our systems business because that's our 30 year old business where we do a lot of R&D and we're trying to lever those into new commercial markets. At this point, it's pretty mature to talk about which ones. We have our targets, but we need to get to something actionable that we can actually make happen, not just a business plan. So it's a little premature. But it's the kind of markets where we are succeeding. We have done a lot of business in the past 12 months in the oil and gas area from a number of surveillance products not just from satellite. And obviously that's a huge market with a tremendous potential for our kinds of capabilities from satellites to UAV to robots. So we'd like to get a lot deeper into that market and our strategy when we wanted to do that in products 10 years ago was to try and find somebody that's actively involved in the market and has customers and has problems because we have solutions if people have problems. And that's an example. We've done a lot in agriculture in the last few years, it's another market we looked at. I talked today about the nuclear market. We did a world first there with this robot. People are very excited talking to us about it. It could change the industry. We've done a number of things in the mining area and we have a number of products in the mining area but we just don't have the capability at the corporate level to look across a mine and a mine management situation to bring more of that product in as you have seen from all the accidents safety is a core issue there. Our subsidence type products from RADARSAT are the answer, but we need a way to get them to market and so on. So, we are looking at these markets. We are looking for actionable M&A situations whereby we can bring our core strengths to and make one plus one more than two.

[Sera Kim:]

Okay and just question, do you have any indication of when the Phase B of the RCM will be awarded.

[Anil Wirasekara:]

That's a very good question for the government and when you ask them, please ask them when they are going to award Phase C.

[Sera Kim:]

Okay, Phase C we'd have to get, okay.

[Anil Wirasekara:]

Our intention to proceed on Phase C which expires in three weeks.

[Sera Kim:]

Okay, and so typically just so that I understand with I know in the past key situations I can think of, they went straight to Phase B. So that happened or would make sure that Phase B finished before we started to build phase.

[Anil Wirasekara:]

Well what needs to happen if we're going to get this thing built and do our things that our Prime Minister is talking about is, we need to finish the contract Phase C. We are having (inaudible) to proceed. We need to get by the end of year some significant authorization of Phase D because they are long made items. So of course you finish Phase C before you start Phase D in terms of engineering work. But to start that work, you need to order materials and these are serious materials. So there is tens of million of dollars of long made items required to be got under contract towards the end of this year if we're going to stay and shed there for Phase D. So my understanding is the government is moving at full speed to get Phase C finalized and to get our Phase D long laid items plan put in place and then eventually to go to Phase D next year.

[Operator:]

Your next question comes from the line Scott Penner from TD Newcrest. Your line is open.

[Scott Penner:]

Just on the North American business, with the EBITDA up call it 3 million quarter-over-quarter can you break that down between what have been the growth of the insurance versus lending and BC OnLine.

[Anil Wirasekara:]

Not in real time, I might be able to do it before the end of the call but I don't have that level of detail with me on this but I can say that about two thirds of that, yes you're talking about the whole products, US products or…

[Scott Penner:]

Just the North American business, just worrying what the quarter-over-quarter drivers of EBITDA were over others.

[Anil Wirasekara:]

On the proper information side?

[Scott Penner:]

Yes.

[Anil Wirasekara:]

I will get back to you before the call's over.

[Scott Penner:]

Okay, while you are [severing] away on that, Dan just wondering, does your announcement on any sort of dividend policy necessarily follow conclusion on the on-orbit servicing or are they two different streams you're thinking?

[Daniel Friedmann:]

Well our first thought and I think what I'd be hinting at in the past was that we have to get to a conclusion on that. Our current given the stabilization in our products business and continued growth there and the strengths of our systems backlog and our pipeline is so we can make the decision independent of final answer on-orbit servicing. So, we're working towards getting that concluded in the coming weeks.

[Operator:]

Your next question comes from the line of Jeff Rath, Canaccord Genuity. Your line is open.

[Jeff Rath:]

Thanks guys, a lot of questions have been asked. Just on the system side, Dan I know you don't break it out but you did call it out in your remarks the UAV business had some strength in the quarter. Are you able to share with us how material that business has become on a sort of a revenue contribution standpoint to the overall systems business? Any context on the size of that opportunity and how we need to think about it in going forward would be helpful? Thanks.

[Daniel Friedmann:]

I don't want to break out bottom lines and things like that, but it's a business that's approaching $100 million a year, and it's a business whose profitability is volume dependent. It doesn't look like our systems business, it looks like our products business. We have fixed cost of equipment and personnel on site and we have variable hours, and our performance is such that we are overachieving in terms of the hours on a consistent basis now for months and we have a material positive variance on our bottom line, which is a significant contributor to us being ahead of our own projections, let alone yours. So that's the kind of business it is. I think I spoke that going forward we have a number of prospects in the same area and the same conflict. We have strengthening commitments from our existing customers to longer and longer term situations, especially Australia, and we have recognition around the world that UAVs and surveillance from UAVs have become a really important component of the military. And we are seeing more prospects for other areas of the world and just for general equipment, whether you are in conflict or not to have this. And as I mentioned we are also seeing some commercial opportunities, quite frankly right now, we have so many opportunities we are unable to process the commercial ones which are less urgent. But at the moment we are very excited about that business.

[Jeff Rath:]

And just some financial questions for Anil. Anil, obviously you are going to discuss dividends when you are ready, but can you share with us just your own thoughts on sort of an optimal capital structure, you generate tremendous cash flow here over the call it, nine, 12 months, but on a go-forward basis when you start to think about your capital structure. How do you think about it? Do you think of it as a multiple of EBITDA or any thoughts you can share would be helpful?

[Anil Wirasekara:]

Our optimal capital structure is to put some leverage into the business. We have always been comfortable with about two times leverage, I think that's what we have predominately had at least over the last 15 to 20 years leverage. We have never in the last 25 years at least gone back to our shareholders and ask them for any equity. We've always grown our business from internally generated cash flows and the leverage we have applied to that cash flow. So we believe that for an optimal capital structure we need to put some leverage on our books. And that's kind of what we would look at doing and I go back to what Dan said that we are spending some time looking at how we can grow the business. We got tremendous amount of resources, our liquidity is great and we just need to figure out a way as to how we deploy this capital to continue to create shareholder value.

[Jeff Rath:]

Great, thanks very much.

[Anil Wirasekara:]

I suggest a follow-up on the question that Scott asked me. The real estate side of the business in the US is about 3 million, the growth, and the insurance is little over 1.5 million, so that would be predominately the increases in EBITDA quarter-over-quarter.

[Operator:]

Your next question comes from the line of Naser Iqbal of Salman Partners. Your line is open.

[Naser Iqbal:]

Just had mainly clarification questions. Just on the report that came out, they talked about the currency hitting revenues by $42 million. Was that $42 million for the quarter or for the nine months? I'm referring to page 5, the first paragraph.

[Anil Wirasekara:]

That would have been mostly year-to-date.

[Daniel Friedmann:]

That is year-to-date.

[Naser Iqbal:]

And then I guess just following up on page 6, you've talked about direct costs, there was a 5.4 million gain, so is it that direct costs would have been about 200 million versus the reported 195, if we exclude that gain in the quarter?

[Daniel Friedmann:]

On page 6?

[Naser Iqbal:]

Yes, third paragraph from the bottom. Should we treat that 5.4 as a one-time gain in the quarter that should repeat going forward?

[Daniel Friedmann:]

I wouldn't say these are one-time gains because so many foreign exchange contracts that we have in these, I mean some when we are in mind hedges we make profits and somebody make losses. But this particular quarter we had a $5 million gain, last quarter we had $4 million loss. This is all part and parcel of our business. I don't think that it could be taken as one. It's certainly not one-time. And it's all to do with all these inter-company. We've got a lot of inter-company balances that gets translated and that's basically what it is.

[Naser Iqbal:]

I guess someone already, but on the Q4 typically it's a modest decline, but I think so should think though that this year could be different because if you do like have some kind of step up from the different businesses and the near and the Ukrainian contracts, I mean could this year be different?

[Daniel Friedmann:]

I don't think so. Our value-added is depending on people and in December we shutdown.

[Anil Wirasekara:]

Yes, I mean the second half of December we shutdown Montreal and Brampton both, they both shutdown from about the 12th I think of December.

[Naser Iqbal:]

And just Anil, on the cash increase on the deferred revenues, $159 million you talked that reversing over the 24 months. Is that how…

[Anil Wirasekara:]

I said most of it would reverse, not all. I think about two-thirds of it will reverse.

[Naser Iqbal:]

Over 24 months.

[Anil Wirasekara:]

Over the next 24 months, yes.

[Naser Iqbal:]

And just so I understood correctly, when you made that comment about doubling up on the commercial side, I mean is that in the information system area in which you were referring to?

[Daniel Friedmann:]

No, I was just giving an example, in the summer communication side of things Montreal operation, because of those major bookings and some other bookings we are really growing that sector.

[Naser Iqbal:]

I know this question has been asked many times, so but just again just to clarify that we are hearing you correctly in terms of use of cash; first would be in organic initiatives in the company; second, would be any kind of acquisition and third could be something along shareholder either that can buyback or a dividend, would that be correct?

[Daniel Friedmann:]

Yes, not necessarily in that order.

[Operator:]

Your next question comes from the line of Blair Abernethy of Stifel. Your line is open.

[Blair Abernethy:]

Just two quick things, Anil, on the managed service contract that you announced last week that you are exiting, is that going to be a Q4 accounting event and what's the revenue tied to that?

[Anil Wirasekara:]

There is no revenue tied to that. It's a Q3 event it was a receivable that we had or it was uninvoiced accounts receivable that we had that we just got off our books. It's a cash transaction

[Blair Abernethy:]

And then, Dan, one area you haven't really touched on very much is the robotics side of things, and can you just give us an update on what sort of opportunities you see for growth on that segment of your systems business given the space shuttle program winding down and some of the other NASA programs at least being pushed off by Obama.

[Daniel Friedmann:]

Sure. That is the only area in the company where we see actually shrinking in 2011 on the assumption that we don't do SIS. If we do SIS of course we will grow. It's not a severe thing but its concerning. We have a situation whereby there is no significant new development on the space side. We have been the beneficence of certain Canadian money that was put in during the financial crisis, but we will run out in the next six months and there is no new significant exploration programs going forward; and of course the shuttle is ending. Having said that, the space station which is the main source of our revenue is continuing on for the foreseeable future, the modest type things, smaller but still significant at continuing on. We are doing well on our commercial diversification in mining, in medical and booking some significant multi-million dollar contracts in the medical area for next year, but having said all that the main stay of their division is to develop new technology for space. At the moment Canada has not come up with anything there and of course other countries will only work if Canada does. Everybody wants to be in this business in there own country. So we are the government, taking some leadership going forward in robotics. We have got problem. So we are going to shrink there next year, we are going to have some layoffs but the rest of the business is growing significantly, and you won't notice it in the consolidated statements. We are going to have a fantastic year, but that's one area where we are weak.

[Operator:]

There are no further questions. I will turn the call back over to you, Mr. Friedmann.

[Daniel Friedmann:]

Okay, well thank you very much for your questions and for staying late. And we look forward to talking to you next quarter.

[Operator:]

This concludes today conference call. You may now disconnect.