Telesat Corporation

Q4 2023 Earnings Conference Call

5/11/2023

spk02: 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 first quarter 2023 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 Bolaido, Director of Treasury and Risk Management. Please go ahead, Mr. Bolaido.
spk04: 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 Telesat's actual results may differ materially from the results contemplated by the forward-looking statements as a result of known and unknown risks and uncertainties. For a discussion of known risks, see Telesat'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.
spk01: Thank you, Michael. This morning, I'll share some thoughts on our financial results and give an update on the business. I'll then hand over to Andrew who'll speak to the numbers in detail, and then we'll open the call up to questions. It's been just six weeks since we held our call for our full year 2022 results. so we don't have that many big updates to share with you today. Our Q1 numbers came in consistent with our expectations, and at this time, we can reaffirm the full-year guidance we gave in late March. When we released our full-year results, I noted the two biggest contributors to the decreases in revenue and adjusted EBITDA that we're forecasting this year. The first was the residual headwinds from the ANIC F3 dish renewal we secured early last year. which will show up in the first four months of this year. The second one we noted was an expected renewal with Bell for NMIC 4, which comes up for renewal in early October this year. We noted that we expected Bell to renew all the DTH capacity on NMIC 4, but at a materially lower rate than the current one, which is exactly where we've landed with Bell. Bell has renewed all the NMIC 4 DTH capacity for two years, with an option to extend for another year effective in October when the current term expires. As we noted on our last call, these two renewals, DISH and BELL, account for approximately half of our anticipated revenue and adjusted EBITDA decline for the year. I also want to flag that utilization at the end of Q1, while quite high at 88%, is down slightly from the 89% we had at the end of Q4. There were some changes in the fleet in Q1, with ANIC F2 going into inclined service, so we pull it out of the utilization calculation, and ANIC 4 coming into the fleet, so it goes into the utilization calculation. But those movements, net-net, had no real impact on utilization as a whole. We don't have any new update on light speed at this time relative to what we said on the call six weeks ago. I will say that we continue to make progress with the various parties we're engaged with. There's great enthusiasm within the company and our board about the prospects of the Constellation, and we remain optimistic that we're going to be able to move forward with the program, recognizing we're still not quite there yet, and it's not over till it's over. We hope to be in a position to provide greater clarity soon. Finally, as we noted in our press release this morning, we repurchased approximately U.S. $103 million in face value of Terraset debt since our last earnings call, which we believe strengthens our financial position and creates value for shareholders. So with that, I'll hand it over to Andrew and then look forward to taking any questions.
spk00: Thank you, Dan, and good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. During the first quarter of 2023, Telesat reported revenues of 183 million, adjusted EBITDA of 139 million and generated cash from operations of 63 million with 1.7 billion of cash on the balance sheet. In the first quarter of 2023 and compared to the same period of 2022, revenues decreased by 2 million to 183 million, operating expenses decreased by 11 million to 53 million and adjusted EBITDA decreased by 7 million to 139 million. The adjusted EBITDA margin was 75.7% compared to 78.4% in 2022. Between 2022 and 2023, changes in the U.S. dollar exchange rate had a positive impact of 7 million on revenues, a negative impact of 1 million operating expenses, and a positive impact of 5 million on adjusted EBITDA. When adjusted for changes in foreign exchange rates, revenues decreased by 9 million, operating expenses decreased by 12 million, and the non-cash expense relating to share-based compensation decreased by 15 million. The overall result was a decrease in adjusted EBITDA of 12 million. The revenue decrease was mainly due to a reduction in revenues from one of Telesat's North American DTH customers. This was partially offset by higher equipment sales to Canadian government customers. combined with increased services provided to the maritime customers. The decrease in operating expenses is primarily due to higher non-cash share-based comp incurred in the three months ended March 31st, 2022. Interest expense increased by 20 million during the fourth quarter when compared to the same period in 2022. The increase was due to an increase in interest rates in the U.S. term loan fee facility, combined with the foreign exchange impact and U.S. dollar denominated interest expense. This was partially offset by the impact of the repurchase of senior unsecured notes in 2022, combined with the impact of the maturity of one of the interest rate swaps in September 2022. In the fourth quarter, we recorded a gain on foreign exchange of $10 million, as compared to a gain of $36 million in the fourth quarter of 2022. The gain for three months ended March 31, 2023, was mainly the result of a weaker U.S. dollar, the Canadian dollar, compared to the spot rate as of December the 31st, 2022, with the resulting favourable impact on the translation of our US dollar denominated debt. Our net income for the first quarter of 2023 was 29 million compared to the net income of 61 million in the prior year. The variation of 32 million was primarily due to the gain on distinguished debt in the first quarter of 2022, combined with higher interest expense and lower foreign exchange gains, partially offset by higher interest and other income. For the period ending March 31st, 2023, the cash inflows from operating activities were 63 million. The cash flows used in investing activities were 25 million. In terms of capital expenditures incurred, they were related to our low Earth orbit constellation, Telesat Lightspeed, combined with our newly acquired satellite, ANIC F4. So looking at guidance, as Dan has mentioned, and as we set out in our airing release this morning, we maintain our previously provided 2023 guidance, This guidance assumes a Canadian dollar to US dollar exchange rate of 1.35. So TELESAC continues to expect its full year 2023 revenues to be between 690 million and 710 million. In terms of adjusted EBITDA, TELESAC continues to expect between 500 million to 550 million. In respect to expected capital expenditures, we continue to expect the 2023 cash flows used in investing activities to be in the range of 40 million to 70 million. And once we have greater visibility around the construction and financing of our Telesat light speed 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, we have approximately 1.7 billion of cash in short-term investments at the end of March, as well as approximately 200 million US dollars of borrowings available under a revolving credit facility. Approximately $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. And at the end of the first quarter, leverage is calculated under the terms of our amended senior secured credit facilities with 6.24 times to one. Telesat has complied with all the covenants in our credit agreements and indenture. As Dan has also highlighted this morning, that subsequent to the quarter end and up to May the 10th, we have repurchased debt with a principal aggregate amount of U.S. dollars 103 million by way of open market purchases at an aggregate cost of U.S. dollars 56 million. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 6K provides the inaudited interim condensed consolidated financial information in our MDA. The non-guarantor subsidiaries shown are essentially the unrestricted subsidiaries with some minor differences. So with that, we conclude our prepared remarks for the call, and we'll be very happy to answer any questions you may have. And with that, we will turn back to the operator. Thank you.
spk02: Thank you. We'll now take questions from the telephone lines. If you have a question in 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 one 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. The first question is from Arun Seshadri from BNP Paribas. Please go ahead.
spk07: Yes, thanks for taking my questions. First, on LEO, I know there's not much of a broad update that you guys have right now, but can you say whether they, can you provide any details in terms of either there's any new parties involved, discussions going on with the existing parties just continue to advance, any additional color you can add?
spk01: Yeah, hi Arun, it's Dan. Yeah, and it's true, I mean, we only, hello? So, we put out our full year numbers, what's just, six weeks ago, so we don't have big updates. So, no, the LEO discussions with the various parties are continuing. We're engaging with the parties that we've been engaging with. I think we're making headway. But, yeah, I'd say that's kind of where things sit.
spk07: Okay. Thanks, Dan. And then in terms of the IRIS II European project, Is there any way – are you guys – can you talk whether you're bidding, you're one of the bidders there at all, or just any other sort of – any details on that front?
spk01: We're not a bidder. I mean, the EU has been, I think, pretty clear that they're really focused on working with EU companies in that process. We've been tracking it. And my own guess is it will continue to evolve. We've, you know, saw the consortium that's come together. We pay attention to what the EU is saying in terms of what their objectives are and their timeframes and whatnot. We certainly think that with our activities with Lightspeed that there are things that we could offer in connection with the project that would be very beneficial But at this point in time, we're more just sort of tracking it and we'll kind of evaluate whether there's a good opportunity for us to participate at some point. But at this point, we're really just kind of on the sidelines.
spk07: Got it. Thank you. And is there any – are there any – can you talk about sort of what sort of things you could provide theoretically that could be beneficial to that project? Sure.
spk01: Well, I mean, certainly one of the things they're focused on is deploying a LEO constellation. And, you know, we're deploying a LEO constellation, too. And so there, you know, would be potentials in terms of working with a similar supply chain and leveraging kind of volume synergies, depending on, you know, an openness or fleet could be used to complement, backstop, expand, whatever constellation they ultimately deploy. It's just kind of, you know, those sorts of things. But, you know, there are already a lot of parties participating in the effort. And so, yeah, I think right now, we're just trying to monitor how it's developing. And if there's a good opportunity for us to be a constructive participant, yeah, we'd definitely be open to that.
spk07: Okay. Thanks, Dan. And one last question from me is, it's more in terms of the buybacks between the various securities. I assume primarily liquidity has driven the choice in terms of, you know, which securities to buy back.
spk01: That's right. I mean, we, you know... Some of these securities are more liquid than others. And, yeah, so we just kind of have to be opportunistic in terms of what we can do out there. And I think what we've been doing is, as I said in my remarks, it accretes value to the equity and strengthens our financial position kind of more broadly. But that's exactly right.
spk07: Are you able to buy back bank debt? according to your read of the indentures, I mean, sorry, of the credit agreement?
spk01: I'm no securities lawyer, but my general counsel is nodding yes. So, yeah, I think that we're able to do that.
spk07: Okay.
spk01: Thank you very much. Thank you.
spk02: Thank you. The next question is from Marcello Jermeski from Ares. Please go ahead.
spk03: Hey, guys. Thanks for taking my questions. Can you provide us what the latest update is on the cost to build Lightspeed? I know a year ago you were saying around U.S. $5.5 billion, but since then there's been some more inflationary pressures. And I guess what's the earliest you can get all 188 satellites launched and activated if you theoretically secure the remaining financing tomorrow?
spk01: Yeah, thanks, Marcello. We're not seeing at this time incremental inflationary pressures that have us alter the way we're thinking about the total cost, and as we've sort of been providing indications around that for, gosh, I don't know, roughly the last nine months or so. And then in terms of when we could get going, my recollection is I think, you know, maybe we start launching in 2026. sort of that kind of timeframe. So, but we'll certainly provide detailed updates when we're financed and get going on the program.
spk03: Could you provide like any update on supplier conversations? Like, do you think there's an opportunity to potentially switch to alternative vendors to reduce costs? Or at this point, are your switching costs too high with these suppliers?
spk01: You know, we've always said that we are working closely with Talus as our prime contractor, and they've got a really good track record, I think, in terms of building constellations and the like. Equally, we've said that we're not bound to Talus, and we have, as you would expect, continued to think about alternative ways that we could deploy our constellation in a way that allows us to meet all of our objectives. So that's certainly something that, you know, we continue to evaluate. And whether, you know, switching costs are prohibitive or whatnot, that's something that we would take into account. But it's certainly an opportunity that exists for Telesat and certainly something that, you know, we're – that we've evaluated over time to make sure that we have some optionality there.
spk03: And I saw in the 10Q release that Erwin Hudson is retiring next month. So who's going to be running Lightspeed, and do you think there's any impact to the project?
spk01: We have an embarrassment of riches in terms of super smart, capable, experienced employees. technical people at Telesat. I think it's one of the great strengths of Telesat. Erwin is a total rock star and has been a great colleague and has provided great leadership. He actually has stayed on quite for some time longer than we had anticipated, I should say, than he had anticipated. And I think that Erwin will continue to, I mean, Erwin's retiring. He's not going anywhere else. and I suspect that Erwin will continue to consult with Telesat on Lightspeed going forward. So, yeah, we've got a great technical team here. Erwin's been a great part of it, but it's not something that is a concern in terms of our ability to move forward with the program.
spk03: And lastly for me, In terms of the royalty payments that the GEO business pays to the LEO business per year for use of the IP and other assets, is that the $2.5 million of revenue you reported in the LEO business in the first quarter, or how does that royalty payment work?
spk01: I'm looking at my colleagues around the table here. Does anyone want to take that? Paul? Call him.
spk06: So the payments between the LEO and GEO are for a shared resources basis. This is not a royalty payment. Revenues usually come from the U.S. government services is what you're seeing.
spk01: On the LEO side.
spk06: On the LEO side. That was Paul Perkins, our controller.
spk01: Great. Appreciate it. Yep. Thank you, John.
spk02: Thank you. As a reminder, you may press star 1 if you have a question. The next question is from Brandon Karsh from Kennedy Lewis. Please go ahead.
spk05: Hi, thanks for taking the call. Good to hear that you got that bell renewal done. And I heard the commentary that that plus this or about half of the revenue declined this year. But there's a lot of moving pieces here. Can you just maybe help us get a better sense of what the full year annual run rate is of this bell renewal?
spk01: Gosh, I think we've provided... more insight than your average company about what it would be. There actually aren't that many moving pieces. I think we said on our last call that, you know, for the revenue decline, I should say the forecast revenue decline 2023 versus 2022, that, you know, Bell and Dish account for about half of that. The DARPA contract THAT WE RECOGNIZED, I THINK IT WAS Q4 LAST YEAR, ACCOUNTS FOR ROUGHLY ANOTHER, I DON'T KNOW, QUARTER OF THE ANTICIPATED REVENUE DECLINE AND THEN THE REST WOULD JUST BE A BUNCH OF, YOU KNOW, MORE CATS AND DOGS STUFF, LOWER RENEWALS, AND BY LOWER RENEWALS I MEAN MAYBE RENEWING A CONTRACT AT A LOWER RATE, THAT SORT OF THING. So I think that gives you a lot to work with and providing more than that just starts to, I don't know, we're starting to share just too much proprietary information on a public call like this. But I think you can kind of work it out or close enough.
spk05: Okay, thanks. Maybe we'll take this offline. And then With the Shaw-Rogers transaction closing, any updated thoughts on how that might impact the relationship with Shaw, if at all?
spk01: You know, we've known Canada as a big country, but in some ways it's kind of a small one. We've worked with both Shaw and Rogers a lot over the years, though we've done a whole lot more business with Shaw just because they had the DTH platform and I think we've said on prior calls, Shaw – I'm sorry, Rogers doesn't have a competitive DTH platform, and I think they've highlighted the fact that the Shaw platform gives them this kind of, you know, national reach is something that they regarded as a positive. So we don't believe that our kind of outlook with, you know, Shaw – And those business activities are adversely impacted by the fact that Rogers is now kind of taking over Shaw.
spk05: Okay, that's helpful. And are you able to share when that renewal would come up?
spk01: I think you can probably tell. I mean, it's mostly tied to the – and Shaw's on a couple of our satellites, so ANAC-F, So you can sort of, and they're mostly kind of end of life on both of those satellites. So, you know, for ANAC F2, that'll, you know, put you out in the 2024, 2025 kind of zip code. And for G1, you know, much, much longer still.
spk05: All right. That's very helpful. Thanks for the, taking the questions.
spk01: Okay. Thanks, Brandon.
spk02: Thank you. This concludes today's question and answer session. I would like to turn the meeting back over to Mr. Goldberg.
spk01: Okay. Well, operator, thank you, and thank you all for participating this morning. Again, it wasn't a whole lot of time that had elapsed since we held our last call, so we look forward to speaking with you again when we release our Q2 numbers. So thank you very much. Thank you very much.
spk02: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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