Telesat Corporation

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All participants, thank you for standing by. The conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the conference call to report the third quarter 2022 financial results for TELESAT. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of TELESAT, and Andrew Brown, Chief Financial Officer of TELESAT. I would now like to turn the meeting over to Mr. Michael Bolaitho, Director of Treasury and Risk Management. Please go ahead, Mr. Bolaitho.

Thank you and good morning. This morning we filed our quarterly report on Form 6K with the SEC and on CDAR. Our remarks today may contain forward-looking statements. There are risks that TELUSAT's actual results may differ materially from the results contemplated by the forward-looking statements as a result of known risks and uncertainties. For discussion of known risks, see TELUSAT's annual and quarterly reports filed with the SEC. Telesat assumes no responsibility to update or revise these forward-looking statements. I will now turn the call over to Dan Goldberg, Telesat's president and chief executive officer.

Okay, thanks, Michael. Good morning, everyone. This morning, I'll share some thoughts on our results and give an update on the business. I'll then hand over to Andrew who will speak to the numbers in detail, and then we'll open the call up to questions. Q3 came in very much in line with our expectations, and we continue to expect to exceed the revenue and adjusted EBITDA guidance we gave at the outset of the year. The overall operating environment feels pretty stable from a demand and pricing perspective, and I was pleased to see our capacity utilization tick up slightly in the quarter. We disclosed last quarter that we have an anomaly on our ANAC F2 satellite that reduces its station kept lifetime from 2025 to more like the end of this year. We noted that ANAC F2 represents approximately 8% of our total revenue and that absent finding ways to provide continuity of service for our customers using the satellite, we anticipated revenue could be reduced by roughly one-third versus what we previously expected it to be for next year, 2023. We noted also that we were working closely with our customers to evaluate and implement measures to offer them continuity of service and mitigate the adverse revenue impact on the company. I'm pleased to say that our team, working hand in glove with our customers, has developed a range of plans to continue to support the services now provided on ANAC F2. These plans include making changes to antennas, communicating with the satellite in order to extend service, relying on other telesat and third-party satellites, and even purchasing an existing in-orbit C-band satellite from another satellite operator that's expected to be repositioned and co-located with ANAC F2 in the coming months. Assuming all of these things occur as planned, we now anticipate that we'll retain over 90% of the revenue we originally expected to recognize from ANAC F2 next year. Although there are some additional operating expenditures associated with leasing third party capacity for some of the customer requirements, as well as the capital expenditures associated with purchasing the third party satellite and making other investments in ground infrastructure. We'll provide a further update when we release our Q4 numbers. And I do want to applaud the combined efforts thus far of the Telesat team, our customers, and other partners as everyone works hard to provide continuity of the important services supported on ANAC F2. Turning to Telesat Lightspeed, on our last call I mentioned that we were in discussions with certain additional financing sources to cover the increased costs of the program and that we expected to have a better sense of where we stood on the financing around the end of this year. We noted that the contemplated financing would be at the light speed unrestricted subsidiary level and would be subordinate to the ECA lenders and the government of Canada and Quebec investments. Since our last call, I'm pleased to say that we've made tangible progress in connection with securing this financing and in addition, have had regular and sustained engagement with the ECA lenders as we seek to finalize the financing. We remain extremely bullish about the opportunity Telesat Lightspeed gives us to grow our business. We have a highly disruptive and robust constellation design, over $750 million in contractual backlog, and over $4 billion in financing arrangements, and the strong support of government partners at the federal and provincial levels here in Canada. Lightspeed represents a compelling investment opportunity, and although there's no assurance of the advanced discussions we're having with our various financing sources will come to a successful conclusion. Our overwhelming focus is on completing the financing and commencing the full-scale construction of the program. Lastly, I noted on our last earnings call that we repurchased in the first half of this year US $160 million face value of our 6.5% unsecured notes, and further, that our board had authorized us to repurchase up to an additional US $100 million face value IntelliSat debt. As we've said previously, we think our debt's trading below fair value, which is why we've repurchased it in the past and why we continue to believe that doing so makes sense for the company. And although we have the authority to repurchase up to an additional US $100 million of debt, Given everything else that's going on at the company right now, including the discussions we're having on securing additional Lightspeed financing, we decided to hold off on further repurchases last quarter. We'll continue to closely monitor how the debt's trading and, as required, provide updates on any repurchases we might make. With that, I'll hand over to Andrew and then look forward to addressing any questions you have.

Thank you, Dan. Good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. In the third quarter of 2022, Telesat reported revenues of $180 million, adjusted EBITDA of $137 million, and generated cash from operations of $92 million, with $1.7 billion of cash on the balance sheet at quarter end. For the third quarter of 2022, compared to the same period in 2021, revenues decreased by $12 million to $180 million, Operating expenses decreased by $4 million to $56 million, and adjusted EBITDA decreased by $19 million to $137 million. The adjusted EBITDA margin was 76%, compared to 81.1% in 2021. Between 2021 and 2022, changes in the U.S. dollar exchange rate had a positive impact of $4 million on revenues, a negative impact of $1 million on operating expenses, and a positive impact of $3 million on adjusted EBITDA. When adjusted for the changes in foreign exchange rates, revenues decreased by $16 million for 2022 compared to 2021, operating expenses decreased by $5 million and adjusted EBITDA decreased by $22 million. The revenue decrease was primarily due to a reduction on renewal of a long-term agreement with a North American DTH customer and revenues from short-term services provided to another satellite operator in 2021, which did not recur in 2022. This is partially offset by higher revenues from mobility customers and the NASA communications services project program. The decrease in operating expenses was primarily due to lower long cash share based compensation, partially offset by higher wages. Interest expense increased by 6 million in the third quarter compared to the same period in 2021. The increase is due to an increase in interest rates on the US term loan B facility combined with the foreign exchange impact on the conversion of U.S. dollar denominated debt. This was partially offset by the impact of the repurchase of senior unsecured notes in 2022. Just to note, and as discussed in quarter two, we repurchased notes with a principal amount of U.S. $160 million. These repurchases resulted in the gain in the first six months of Canadian $107 million. These notes have been retired and also represent an annual interest savings of approximately $10.4 million. In 2022, we recorded a loss in foreign exchange of $249 million during the third quarter, compared to a loss of $68 million in the third quarter of 2021. The loss for the three months ended September 30th was mainly the result of the stronger U.S. dollar, the Canadian dollar, compared to the spot rate as of June 30th, 2022, with the resulting unfavorable impact on the translation of our U.S. dollar denominated debt. Our net loss for the third quarter of 2022 was $229 million compared to the net loss of $52 million in the prior year. The variation of $176 million was principally due to a higher non-cash foreign exchange loss compared to the same period in last year. For the first nine months of 2022, the cash inflows from operating activities were $161 million and the cash flows generated from investing activities were $18 million. Included was $65 million by way of receipt of the remaining Phase 1 U.S. C-band clearing proceeds. In terms of overall C-band proceeds, we have received approximately U.S. $85 million and expect further proceeds of approximately $260 million. In terms of the capital expenditures made to date, virtually all are related to a lower orbit constellation, tell you that at light speed. As you will also have noted in our earnings release this morning, and as Dan has mentioned, we have reiterated our increased guidance, which we provided with the release of our second quarter results on August the 5th, 2022. Teleset expects its full year revenues to be between $740 million and $750 million. Also, as we stated before, included in our revenues is our expectation that we will recognize a significant hardware sale and the provision of related services to DART related this year as part of the U.S. $18.3 million contract. In terms of adjusted EBITDA, TELISAT expects to be between $545 million to $560 million. Also, as a reminder, we don't expect any adjusted EBITDA from this hardware sale, as the expected expense associated with this contract is more or less equivalent. And note our guidance still reflects the Canadian dollar to U.S. dollar exchange rate of 1.3%. In respect to expected capital expenditures, we now expect our 2022 cash flows used in investing activities to be in the range of $50 million to $75 million, including capital expenditures to further advance our Lightspeed program. Once we have got greater visibility around the construction and financing of our program, we will provide a further update on our anticipated capital expenditures for the year. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, with approximately $1.7 billion of cash in short-term investments at the end of September, as well as approximately $200 million of borrowings available under a revolving credit facility. Approximately $1.1 billion in cash was held in our unrestricted subsidiaries. In addition, we continue to generate a significant amount of cash from our ongoing operating activities. At the end of the third quarter, leverage was calculated under the terms of the amended Senior Secured Credit Facilities, with 6.17 times the one. Calisat has complied with all the covenants in our credit agreement and indenture. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. The 6K provides the unaudited interim condensed consolidating financial information in the MDA. The non-guarantor subsidiaries shown are essentially the unrestricted subsidiaries of minor differences. So that concludes our prepared remarks for this call, and I'll be very happy to answer questions that you may have and we will turn back to the operator. Thank you.

Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may answer your question at any time by pressing star 2. Please press star 1 at this time. If you have a question, there will be a brief pause while the participants register for questions. Thank you for your patience. First question is from Walter Pichik from LightShed. Please go ahead.

Yeah, hi. This is Joe on for Walt. A couple questions, please. Is there any more color you can provide about the process with the ECAs and the suppliers? Kind of like any details. Maybe are there specific parts or components that are available now that weren't before that maybe give Pallets a little better visibility? And then second, the OPEX for LEO, appears that it was effectively flat quarter over quarter. And when should we expect that to ramp? And are any expenses for Leo being capitalized currently? And then finally, you know, Amazon showing some progress. OneWeb has been launching. And then there's some smaller startups that seem to be having some progress. Do you feel like Telusat is getting behind a little bit given the delays? Thank you.

All right, it's Dan. Joe, I'll try to, so there's sort of a three-part question. Let's see, so the first part was about, do we have any more insight on kind of where TALIS is from a, you know, supply perspective and whatnot? No, there nothing's changed. We've said, I think, on our last couple of calls that You know, we did a whole lot of work with Talos, and they did a whole lot of work with their supply chain over the past year to sort of update the program, update schedule, update pricing. And all of the work that we did in connection with that, with Talos, and that they did with their supply chain, it all still holds. We're not hearing anything different from Talos about... Yeah, their expectations around supply chain, schedule, anything else. So that's that. And on the lenders, we said, I think, on our last call that we were engaged with them, that we're hoping to have a much better sense of where things stood by around the end of this year. And that remains to be the case today. well I'd say since the last earnings call we hosted we've had a lot of engagement with the financing sources that that we've been talking to with the lenders I should say including with the lenders lots of intense sessions trying to move the ball forward so that's all taking place right now and that continues and then On the last questions around light speed, I think it was OpEx and whether things are being capitalized. Oh, actually, you also had a question about kind of the competitive environment. So I'll answer the competitive environment one, and then maybe, Andrew, you can talk to the LEO expense one. No, we're not seeing anything out there in terms of the competitive environment that makes us think differently about our ability to be successful with Lightspeed. Certainly, you know, OneWeb is getting their program back on track in that they had to pause their launch campaign because of sort of Ukraine-Russian activities, so we're seeing that, but there's nothing that they're doing, or you had mentioned Amazon, that we're seeing Amazon doing that changes the way we think about our ability to be successful with Lightspeed. I mean, we continue to engage with the customer community very closely on Lightspeed. We continue to see a huge amount of enthusiasm from the customers about the value proposition that we'll be bringing with Lightspeed. And yeah, there's nothing that we're seeing that changes our thinking about that. So Andrew, do you want to talk about that?

Yeah, on the question on the OPEX. And that obviously, as you see, what are high margins of almost 78%, that we control the OPEX very, very tightly. And so as we're advancing our discussions with the ECA and other sort of investor support, We're very focused on hiring and OPEX and expanding, so we manage that very, very closely. Obviously, when the program gets going, then, of course, we would expect to see an increase coming from that. And just in terms of the capitalization, that's typically what you would do with a capital program, that you would indeed capitalize those costs. So that's where we are.

Okay, so we shouldn't... Like, will some of the OPEX lead ahead of the actual... finalized program before you're actually implementing it? Will it ramp up a little more?

That's what I'm trying to... Yeah, we would expect it to ramp up more. I mean, we have, going back until we got the delays at TALIS, you know, obviously with our engineering and support teams, in terms of design and dealing with TALIS, et cetera, that we indeed have put in the appropriate people we need to get going. But once we have the supply chain delays, then obviously with that ramp, we actually sort of held back on, as you would expect us to do. But once, indeed, we get going, then we will look to see where are other areas that we need to, you know, provide support to the program.

Okay. Got it. Thanks, guys. Sure.

Thank you. The next question is from Dan Debono from Invescor Credit Management. Please go ahead. Hey, gentlemen.

Good morning, and thanks for taking the question. I'm looking at the segment information, item 5, which is on page 10 of the supplement, and I would love to get some color on the enterprise side for the quarter. I'm looking at growth rates and thinking of where we're running. It's a pretty diverse segment. If you could talk a little bit about some of the wins and losses and how you feel about that for the next couple of quarters. That would be helpful. Thank you.

I'm looking at my colleague, John Flaherty. I'll make a start at this. I mentioned in my opening remarks that, yeah, the operating environment has been, yeah, I'd say kind of on the one hand consistent with our expectations for this year, too favorable. You know, I've been pleased that we've been able to grow the utilization of the fleet over the year. I think in particular so far this year we've seen strong interest, particularly from the mobility segment, that would be aeronautical and maritime. A lot of that was predictable. I mean, those were the sectors that were kind of held back during COVID, and as the restrictions have eased and more and more people are traveling again, it was predictable that those sectors would come back, but but they came back probably even stronger than we expected. I think if we have a problem kind of taking advantage of the opportunities there, it's mostly because of capacity limitations in the areas where the most demand exists. That would be sort of key maritime routes, places like the Med, the Caribbean for the cruise market, some of the key flight paths for the aero segment. So, yeah, I don't know. And then just thinking regionally, where we've seen harder conditions like Africa, like Latin America, I'd say those markets continue to be challenging, but no more challenging than they were, frankly, over the past couple of years. And I think, particularly in Latin America, we're doing a nice job getting renewals, winning business, maintaining utilization, and the like. So in any event, that's some off-the-top observations. And John, I don't know if you'd add anything. No, I think you pretty much hit all of the major points, Dan.

Okay, thanks, gentlemen.

Thank you. The next question is from Brandon Karsh from Kennedy Lewis. Please go ahead.

Hi, thanks for taking the questions. I was wondering, just following up on the last question with the mobility gains, are you seeing any significant new business wins there, nor just recovery or any kind of other organic expansions of existing customers not related to COVID-19?

Certainly in the first half of the year, we had capacity come back into inventory when DISH just did the partial renewal with us. And we were really pleased that almost overnight we took that capacity and put it to work in the mobility market. There was that. And we had another big win earlier in the year With another customer, that was more on the aero side. And then, as I mentioned, beyond that, it's more like, I don't know, singles and doubles, just given the capacity constraints that we have. Yeah, that's what it feels like.

Okay, that's helpful. And with all the headlines around the potential Shaw and Rogers merger, do you anticipate any impact in your business from that on the broadcast side or elsewhere?

We don't think so. No, we don't think so.

Okay. And then on the LEO side, is it possible to provide maybe... any more detail in terms of what types of financing you're looking for? Are you fully focused on private financing? Are you talking to government agencies about further financing? And if you're unable to secure it given market conditions over the next couple months, is there a point where you think that maybe you're too far behind and that this bill maybe becomes untenable after already scaling it back?

So on the financing side, you know, there are sort of two... paths that we're active on right now. One is trying to complete the discussions and the financing with the export credit agencies, and I mentioned that there's been a lot of activity with them over the past quarter, and we're focused on driving all those negotiations to a successful conclusion. And then we mentioned on our last call that we're looking at securing some additional financing just given some of the increases in the program costs coming from the combination of inflation and just kind of a longer schedule and the incremental costs that come with that, and coupled with the fact that we had always said that we were going to need some incremental financing as part of the program. At one point, there was some consideration potentially to you know, doing something now that we're public, that was always certainly a path that we could consider in the past, issuing some equity if we needed to. But given where the markets are trading right now and where Telusat's trading right now, which we believe is below fair market value, we're sort of less interested in that. So we mentioned on our last call that we're, you know, looking at some other financing sources. We talked about that as being kind of at the LEO kind of subsidiary level and making sure that that was all subordinated to the ECA lenders who were very focused on being senior in the capital structure over on the LEO side and making it subordinate to the investments that we're getting from the government of Canada, and the government of Quebec, and making sure that as we seek to secure it, that it's accretive to the overall kind of company profile. And so that continues to be our focus. I've mentioned that we're making progress on that front, mentioned that we're in advanced discussions right now, but I don't think we'll add anything beyond that at this stage.

Okay, then I guess the last part of my question that I had asked was if you're unable to secure... Oh, right.

Yeah, yeah, yeah. You know, right now, we're not asking ourselves those questions right now. We're very focused on closing up the financing that we need. in the timeframe that we've telegraphed to everyone. So yeah, that's the focus right now. And fundamentally, we've said this consistently, we got a great program, we got a great consolation, we got an enormous amount of support from our shareholders, our board, an enormous amount of support from our government partners here in Canada, got a significant amount of backlog already on the constellation and are having really good discussions with the customer community. So that's our focus, is finishing the financing, getting the program going, and getting out there in the market with Lightspeed.

All right, that's all from me. Thank you. Thank you.

Thank you, Your Honor, for the questions. At this time, I would like to turn the meeting back over to Mr. Goldberg.

Okay. Operator, thank you very much, and thank you all for joining us this morning. We look forward to chatting when we issue our Q4 and full year numbers. So thank you very much. Thank you very much.

Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.