Telesat Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 11, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the conference call to report the Q1 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.

Operator

Please go ahead, Mr. Bolaido.

Speaker 1

Thank you, and good morning. This morning, we filed our quarterly report on Form 6 ks with the SEC and on SEDAR. 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 the company's press release.

Speaker 1

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.

Speaker 2

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 6 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.

Speaker 2

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 2 biggest contributors to the decreases in revenue and adjusted EBITDA that we're forecasting this year. The first was the residual headwinds from the Anik F3 DISH renewal we secured early last year, which will show up in the 1st 4 months of this year. The second one we noted was an expected renewal with Bell for Nimiq 4, which comes up for renewal in early October this year. We noted that we expected Bell to renew all on Nimiq 4, but at a materially lower rate than the current one, which is exactly where we've landed with Bell.

Speaker 2

That was renewed all the Nimiq 4 DTH capacity for 2 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 Dell, 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 or 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 Anik F2 going into inclined service, So we pull it out of the utilization calculation and Anak IV coming into the fleet, so it goes into the utilization calculation. That those movements net net had no real impact on utilization as a whole.

Speaker 2

We don't have any new update on Lightspeed speed at this time relative to what we said on the call 6 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 US103 $1,000,000 in face value of Telesat debt since our last earnings call, which we believe strengthens our financial position and creates value for shareholders.

Speaker 2

So with that, I'll hand over to Andrew and then look forward to taking any questions.

Speaker 3

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 Q4 of 2023, Telesat reported revenues of $183,000,000 adjusted EBITDA of $139,000,000 and generated cash from operations of $63,000,000 with $1,700,000,000 of cash on the balance sheet. In the Q1 of 2023 and compared to the same period of 2022, Revenues decreased by $2,000,000 to $183,000,000 Operating expenses decreased by $11,000,000 to $53,000,000 and adjusted EBITDA decreased by 7,000,000 €139,000,000 Adjusted EBITDA margin was 75.7% compared to 78.4% in 2022. Between 20222023, changes in the U.

Speaker 3

S. Dollar exchange rate had a positive impact of $7,000,000 on revenues, a negative impact of $1,000,000 operating expenses and a positive impact of $5,000,000 on adjusted EBITDA. When adjusted for changes in foreign exchange rates, revenues decreased by $9,000,000 operating expenses decreased by $12,000,000 and the non cash expense relating to share based compensation decreased by $15,000,000 The overall result was a decrease in adjusted EBITDA of $12,000,000 The revenue decrease mainly due to reduction in revenues from 1 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 Aeroh and Maritime customers. The decrease in operating expenses, but is primarily due to higher non cash share based comp incurred in the 3 months ended March 31, 2022.

Speaker 3

Interest expense increased by $20,000,000 during the Q4 when compared to the same period in 2022. The increase was due to an increase in interest rates the U. S. Term Loan B facility combined with the foreign exchange impact and U. S.

Speaker 3

Dollar denominated interest expense. This was partially offset by the impact the repurchase of senior unsecured notes in 2022 combined with the impact of the maturity of 1 of the interest rate swaps in September 2022. In the Q1, we recorded a gain on foreign exchange of $10,000,000 as compared to a gain of $36,000,000 in the Q1 of 20 22. The gain for 3 months ended March 31, 2023 was mainly the result of a weaker U. S.

Speaker 3

Dollar, the Canadian dollar compared to the spot rate as of December 31, 2022, with the resulting favorable impact on the translation of our U. S. Dollar denominated debt. Our net income for the Q4 of 2023 was $29,000,000 compared to net income of $61,000,000 in the prior year. The variation of $32,000,000 was primarily due the gain on extinguishment of debt in the Q4 of 2022, combined with higher interest expense and lower foreign exchange gains, partially offset by higher interest and other income.

Speaker 3

For the period ending March 31, 2023, the cash inflows from operating activities were 63,000,000 the cash flows used in investing activities were $25,000,000 In terms of capital expenditures incurred, they were related to our low earth orbit constellation, Telesat Lightspeed, combined with our newly acquired satellite, Anik F4. So looking at guidance, as Dan has mentioned and as we set out in the earnings release this morning, We maintain our previously provided 2023 guidance. This guidance assumes a Canadian dollar to U. S. Dollar exchange rate of 1.35.

Speaker 3

So Telesat continues to expect its full year 2023 revenues to be between €690,000,000 710,000,000 in terms of adjusted EBITDA, Telesat continues to expect between $500,000,000 to $515,000,000 In respect to expected capital expenditures. We continue to expect for 2023 cash flows used in investing activities to be in the range of $40,000,000 to 70,000,000 Once we have greater visibility around the construction and financing of our Telesat Bitespeed 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, approximately $1,700,000,000 of cash and short term investments at the end of March as well as approximately $200,000,000 of borrowings available under our revolving credit facility. Approximately $1,000,000,000 in cash was held in our unrestricted subsidiaries. In addition, we continue to generate a significant amount of cash from our ongoing operating activities.

Speaker 3

And at the end of the Q1, leverage is calculated under the terms of our amended senior secured credit facilities with 6.24x:one. Telesat has complied with all the covenants in our credit agreements and indenture. As Dan has also highlighted this morning that subsequent the quarter end and up to May 10, we have repurchased debt with a principal aggregate amount of US103 million by way of open market purchases at an aggregate cost of $56,000,000 A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 6 ks provides the unobserved interim condensed consolidated financial information in our NDA. The non guarantor subsidiaries shown are essentially the unrestricted subsidiaries with some minor differences.

Speaker 3

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.

Operator

The first question is from Arun Seshadri from BNP Paribas. Please go ahead.

Speaker 4

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 the Can you provide any details in terms of either there's any new parties involved, discussions going on The existing parties just continue to advance. Any additional color you can add?

Speaker 2

Yes. Hi Arun, it's Dan. Yes, and it's true. I mean, we only

Speaker 4

hello.

Speaker 2

So we put out our full year numbers, What just 6 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 yes, I'd say that's kind of where things are set.

Speaker 4

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?

Speaker 2

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 saw the consortium that's come together.

Speaker 2

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.

Speaker 4

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?

Speaker 2

Well, I mean, certainly, one of the things they're focused on is deploying a LEO constellation and we're deploying LEO constellation 2. And So there would be potentials in terms of working with a similar supply chain and leveraging kind of volume synergies depending on an openness, our fleet could be used to complement backstop, expand whatever constellation they ultimately deploy. It's just kind of those sorts of things, but there are already a lot of parties participating in the effort. And so, yes, 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, Yes, we'd definitely be open to that.

Speaker 4

Okay. Thanks, Dan. And then one last question for me is more in terms of the buybacks between the various securities, I assume primarily liquidity has driven the choice in terms of which securities to buy back?

Speaker 2

That's right. I mean, we some of these securities are more liquid than others. And yes, so we just kind of have to be in terms of what we can do out there and 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.

Speaker 4

Are you able to buy back bank debt according to your read of the indentures, I mean, sorry, of the credit agreement?

Speaker 2

I'm no securities lawyer, but my General Counsel is nodding yes. So yes, I think that we're able to do that.

Speaker 3

Okay.

Speaker 4

Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. The next question is from Marcelo Jarmoski from Ares. Please go ahead.

Speaker 5

Hey guys, thanks for taking my questions. Can you provide us like what the latest update is on the cost to build Lightspeed? I know a year ago, you were saying around US5.5 billion dollars But since then, there's been some more inflationary pressures. And I guess, once and what's the earliest you can get all 188 satellites launched and activated if you theoretically secured the remaining financing tomorrow.

Speaker 2

Yes. 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 9 months or so. And then in terms of when we could Get Going.

Speaker 2

My recollection is I think 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.

Speaker 5

Could you provide like any update on supplier conversation? Like do you think there is an opportunity to potentially switch to alternative vendors to reduce costs or at this point, are your switching costs too high with these suppliers?

Speaker 2

We've always said that we are working closely with Thales 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 Thales 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 we continue to evaluate and whether 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 we're that we've evaluated over time to make sure that we have some optionality there.

Speaker 5

And I saw in the 10 Q release that Irwin Hudson is retiring next month. So who's going to be running Lightspeed and do you think there's any impact to the project?

Speaker 2

We have an embarrassment of riches in terms of super smart, capable, experienced 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 that he had anticipated. And I think that Erwin will continue to I mean, Irwin is retiring.

Speaker 2

He's not going anywhere else. And I suspect that Irwin will continue to consult with Telesat on Lightspeed going forward. So yes, we've got a great technical team here. Erwin has been a great part of it, but we it's not something that is a concern in terms of our ability to move forward with the program.

Speaker 5

And lastly for me, in terms of the royalty payments that the GEO business pace to the LEO business per year for use of the IP and other assets. Is that the $2,500,000 of revenue you reported in the LEO business in the Q1 or how does that royalty payment work?

Speaker 2

I'm looking at my colleagues around the table here. Does anyone want to take that call?

Speaker 4

So the payments between the LEO and GEO are for shared resources basis. This is not a royalty payment. Revenues usually come from the U. S. Government services is what you're seeing.

Speaker 2

On the Leo side. On the Leo side. That was Paul Perkins, our Controller.

Speaker 4

Great. Does that answer

Speaker 2

your question?

Speaker 3

Yes. Yes. Thank you, John.

Operator

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

Speaker 6

Hi, thanks for taking the call. Good to hear that you got that Bell renewal done. And I heard the commentary that that plus DISH are about half of the revenue decline 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?

Speaker 2

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 for the revenue decline, I should say the forecast revenue decline 2023 versus 2022 that 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 bunch of more cats and dogs stuff, lower renewals. And by lower renewals, I mean, maybe renewing a contract at a lower rate, that sort of Thanks.

Speaker 2

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. So I think you can kind of work it out or close enough.

Speaker 6

Okay, thanks. Maybe we'll take this offline. And then with the Shaw Rogers transaction closing, any updated thoughts on how that might impact your relationship with Shaw, if at all?

Speaker 2

We've known Canada is 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 that we've done a whole lot more business with Shaw just because they had the DTH platform. 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 SHOP platform gives them this kind of national reach is something that they regarded as a positive. So we don't believe that our kind of outlook with Shaw and those business activities are adversely impacted by the fact that Rogers is now kind of taking over Sean.

Speaker 6

Okay, that's helpful. And are you able to share when that renewal would come up?

Speaker 4

I think you

Speaker 2

can probably tell, I mean, it's mostly tied to the and Shaw is on a couple of our satellites. So ANIC F2, ANIC G1. So you can sort of and they're mostly kind of end of life on both of those satellites. So for Anika F2 that'll put

Speaker 6

All right. That's very helpful. Thanks for taking the questions. Okay. Thanks, Brandon.

Operator

Thank you. This concludes today's question and answer session. I would like to turn the meeting back over to Mr. Goldberg.

Speaker 2

Okay. Well, operator, thank you and thank you all for participating this morning. Again, it wasn't a whole lot of time that it elapsed since we held our last call. So we look forward to speaking with you again when we release our Q2 numbers. Thank you very much.

Speaker 2

Thank you very much.

Operator

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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Earnings Conference Call
Telesat Q1 2023
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