Q3 2011 Loral Space and Communications Inc Earnings Conference Call

Nov 10, 2011 AM EST
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

LORL - Loral Space & Communications Inc
Q3 2011 Loral Space and Communications Inc Earnings Conference Call
Nov 10, 2011 / 04:00PM GMT 

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Corporate Participants
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   *  Wendy Lewis
      Loral Space and Communications Inc - Director of Communications
   *  Michael Targoff
      Loral Space and Communications Inc - Vice Chairman, CEO

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Conference Call Participants
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   *  Eugene Lee
      Regiment Capital - Analyst
   *  Howard Shainker
      Bow Street - Analyst
   *  Jeffrey Smith
      BofA Merrill Lynch - Analyst

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Presentation
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Operator   [1]
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 Good day everyone, and welcome to the Loral Space and Communications third quarter results conference call. (Operator Instructions). As a reminder, today's conference is being recorded. Now I would like to turn the conference over to Wendy Lewis, Director of Communications. Please go ahead.

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 Wendy Lewis,  Loral Space and Communications Inc - Director of Communications   [2]
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 Good morning, everyone. Thank you for joining us today. As we proceed with the call, some of the remarks we make about our future expectations, plans, and prospects will be forward-looking statements under the Private Securities Litigation Reform Act of 1995. As you know, actual results may differ materially from those discussed here as a result of a wide variety of factors and conditions. Please refer to the most recent 10-K and 10-Q forms that we have filed with the Securities and Exchange Commission for information on those factors and conditions.

 I would also like to point out that during this call, when we discussed EBITDAR, we are referring to adjusted EBITDAR as we regularly define it in our filings. Also note that Loral reports Telesat results in US dollars, so when we refer to Telesat results during the call they will be in US dollars and in accordance with US GAAP. Now I would like to turn the call over to Michael Targoff, Chief Executive Officer of Loral Space & Communications.

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [3]
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 Thank you, Wendy, and good morning to all of you. With me today are some of Loral's Senior Executives, including our CFO, Harvey Rein, our General Counsel, Avi Katz, our Treasurer, Richard Mastoloni and our Controller, John Capogrossi.

 Yesterday we filed our 10-Q and announced our financial results for the third quarter of 2011. As in the past, I would like to review the quarter with you, draw your attention to some important highlights and discuss our current status. As we did last quarter, I will not burden my remarks with a reading of our reported numbers. Please refer to the press release and the Form 10-Q that we filed yesterday for the specifics.

 We had good results in the third quarter of 2011, at both Telesat and SS/L. As expected, the results did not reflect the same dramatic growth that we had in the comparable period last year, however, we are on track with our plans. Telesat continues to deliver their predictable results that make it such a special business. SS/L's results continue to reflect the benefits of the cost efficiencies and long-term growth initiatives that we have implemented even though the comparative numbers are down from last year. I will discuss the results for both companies in more detail in my remarks later in this presentation.

 First I would like to discuss what I believe has been most pressing on our shareholders minds, that is the status of the strategic initiative that we have been considering. As Telesat reported last week, we have decided not to pursue a large recapitalization at this time. There are several reasons we made this decision, and some background and context are important to an understanding of our decision.

 When we decided not to pursue a sale of Telesat earlier this year, the credit markets while starting to soften still presented us with a very beneficial opportunity to recapitalize Telesat and return significant cash to the owners. However, in order for that to be attractive to Loral, it would have been necessary to structure the recapitalization of Telesat in a tax efficient way for Loral, particularly with respect to minimizing taxes on distributions to us in excess of our approximately $420 million of basis. Both Loral and PSP understood that the resulting structure would have entailed complications, but given the then favorable credit market conditions, both shareholders agreed to have Telesat explore the steps necessary to achieve the desired results.

 Two important things happened along the way. First and most obvious, the credit markets tightened significantly, and then for all practical purposes disappeared. As I have discussed in our last call, unless there was a return to a favorable credit climate it made little sense to further explore, imposing the complications of a new capital structure on Telesat.

 Months continued to go by without a return to those markets, and this created a second but no less important variable in our consideration. We always knew that any significant recapitalization would require the incurrence of substantial non callable debt and other complex structuring which could constrain our strategic options going forward.

 This might have been acceptable at an earlier point in time in light of very favorable credit markets. However, when we consider the impact of the passage of time on the progression of Telesat's business, binding Telesat with such restrictions began to outweigh the benefits of returning capital to shareholders.

 As you know, Telesat recently launched the Telstar 14R and is about to begin reaping the benefits of the Canadian payload on ViaSat-1. Also in 2012, Telesat will launch Nimiq 6 and Anik G1. Successful launches of these satellites will have a dramatic effect on Telesat's results.

 That positive impact along with the [expiring] of the non-call period on Telesat's $693 million of senior notes in May 2012 presents a very different backdrop to that which existed when we first explored the sale of Telesat earlier this year and when we initiated our recap planning. Accordingly, even over the next few months if the credit markets move toward their robust levels of earlier this year, it appears prudent for us to exercise some patience and allow ourselves to benefit from the flexibility to consider all strategic options, unburdened by the constraints that would be imposed by a large new recapitalization.

 Turning to SS/L we are moving forward with our plans for a spinoff. A condition of the spin is a resolution of the terms of the stock to be distributed to MHR with respect to their non voting shares. To that end the Board of Directors has formed an independent committee to negotiate this with MHR. I am still charting to effectuate the spin off early next year, subject to a resolution of this capital structure question in a way justifying the spin. Management and employees of Space Systems/Loral are excited about their prospects of functioning as an independent company and we are working through all the coordination issues to make it a smooth separation.

 With that said I will move to a discussion of the financial results beginning with SS/L. In the third quarter SS/L performed well on existing contracts and booked significant new orders providing management with confidence about the trajectory of the business. However, largely as a result of the extraordinary positives 17% margin realized in the third quarter of last year, both revenue and EBITDA for the quarter are lower this year. Apart from this comparison, the performance for the quarter was just fine. We achieved a 10% margin notwithstanding a mix of satellite work in the factory that was not particularly optimal. For the year as a whole, I still expect the fourth quarter to deliver revenue comparable to the fourth quarter of last year, and margins in the 13% to 14% range, resulting in a very good full year.

 I would like to reiterate that with only six to seven new contracts each year, even in a relatively good year, the timing of sizable awards and how they pass through the factory can have a meaningful impact on our quarterly results without necessarily be indicative of the long-term health of our business. Thus from a long-term prospective, a number of important indicators of SS/L's health remain strong. Our factory performance continues to shine. Our backlog is robust at $1.5 billion, SS/L's liquidity remains strong with $124 million in cash and equivalents and the availability of $150 million revolver which remains undrawn. Our large high powered high throughput platform continues to be well positioned for the demand, and therefore, I am very encouraged by our pipeline even in this year which appears to be a little soft industry wide.

 Specifically regarding bookings, in the third quarter SS/L received a contract award for two large powerful direct-to-home television satellites, which brought the number of satellite awards for the year to date to four. The contract is with our long term customer Intelsat and the satellites will be used by DIRECTV Latin America for service in this region of continuing economic growth. This order reinforces our belief in the advantages of our high-power platform once again. Also as I indicated, our pipeline for new orders continues to be strong, and we made much progress with another existing customer and expect to announce another order very shortly.

 In other positive news the SS/L built ViaSat-1 satellite was successfully launched on October 19, and is performing according to plan. We also completed a satellite for AsiaSat a month ahead of schedule and it is currently at the launch base scheduled to be launched later this month. This kind of performance supports our bookings outlook.

 A few words with respect to 2012. First I want to reemphasize that the strong margins that we had last year and into this year, are based on obtaining orders for large satellites in our sweet spot that sustain our factory loading and efficiency efforts. So even if we were to meet or exceed our goal of six to seven satellites for 2011, and we may, the delayed order intake and smaller average order size in the first half of the year will continue to impact 2012 revenue and EBITDA as I discussed with you last quarter.

 Based on our current outlook and assuming no unusual positive or negative events, I would expect next year to deliver EBITDA margin more likely in the 8% to 10% range versus the roughly the 12% I expect us to report for this year. Regarding the outlook beyond 2012, we do continue to see a healthy demand for our satellites. When you look at the replacement market and the incremental growth potential for satellite services that we believe will result in the adoption of high throughput broadband satellites, our bookings outlook for 2012 and beyond is encouraging. Given the current pipeline we expect margins to revert back to the 10%-plus range in 2013.

 Regarding Telesat, for the third quarter the six satellite services business showed the consistent dependable results that we have come to expect. In 2012 and 2013 when the satellites recently launched and those currently under construction begin to produce incremental revenue, we expect to see the growth that is associated with fleet expansion.

 The backlog at Telesat remains very strong at $5.3 billion and the Company has $189 million in cash with $146 million of borrowing availability under it's revolver. As I mentioned in my remarks about the strategic initiatives, there are a number of launches, recent and planned, that will drive growth at Telesat in the near term.

 Telstar 14R entered commercial service in August, and Telesat is making progress ramping it's utilization. While the [flare] of the north solar array will shorten the satellite life by about three years, this satellite still provides 20% more capacity than the satellite it replaced and it delivers much of that capacity in desirable markets. Offsetting the loss Telesat filed an insurance claim of approximately $125 million for the solar array anomaly, and expects that any proceeds received will be reinvested in new satellite CapEx.

 The next incremental capacity is in the Canadian payload on ViaSat-1, which I mentioned was successfully launched last month and is expected to enter commercial service at the end of the year. The portion of the satellite in Canada that Telesat has is fully leased to Xplornet for the 15 years, and will be used for broad band service in rural Canada. Nimiq 6 is expected to launch in the first half of 2012, and is fully leased to Bell TV for direct-to-home service in Canada. While it will replace Nimiq 1, it is still expected to nearly double the revenue from that satellite.

 Anik G1 is expected to be launched in the second half of the year. G1 is a multi-mission satellite that is contracted in large part to Shaw Direct for direct-to-home service in Canada, and it also will provide expanded service to Latin America and has a small fully contracted X band pay load as well. A small portion of this satellite is a replacement for 12 C-band transponders on Anik F1 and the rest will account for incremental revenue. We look forward to reporting on Telesat's growth as it ramps up in the coming year.

 In closing, I want to emphasize the long-term demand for satellite services have never been stronger. We have a worldwide culture that is proliferating digital content faster than the communications infrastructure can grow and no end to this is in sight. Terrestrial as well as satellite infrastructure must continue to expand and compliment each other in order to keep pace with this new world of social media, minute by minute communications and exceptional video experience. Loral is well positioned to benefit from these trends. With that I will turn the call over to the operator, so you can let us know if you have any questions.

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Questions and Answers
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Operator   [1]
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 Thank you. (Operator Instructions). Our first question comes from Douglas [Forths] from [Tiruvetta].

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Unidentified Participant - Analyst   [2]
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 Thanks. Can you just elaborate a little more on the challenges involving the voting and non-voting share classes at Loral and MHR's ownership as they relate to the spinoff of SS/L.

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [3]
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 Sure. We have a new charter that was the result of that lawsuit years back that provides on its face that in a distribution of SS/L stock -- it doesn't say it in these words, but I'm paraphrasing for you -- all of the shareholders would receive the same thing. The implications of that would be if we simply distributed voting stock to all the shareholders, MHR would get voting stock as well, which would take their voting stock to 60%.

 Needless to say, Delaware law has a lot to say about these subjects, and I have had discussions with MHR, and they are willing to work something out short of that. And under Delaware law that we've all learned all too well, and unfortunately in some respects, you need to have an independent committee to negotiate hopefully a resolution of that, or an alternative. So that's what we're doing, and it's in process.

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Unidentified Participant - Analyst   [4]
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 Got it, and can you give us a sense of timing, given the committee's work and how long that may take for this ultimately to come to a resolution?

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [5]
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 Well, I said in my remarks that I'm still expecting to have the spin effectuated in the first half of the year. Hopefully in the first quarter, but certainly in the first half. Obviously that's dependant on a successful resolution of the what I just said.

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Unidentified Participant - Analyst   [6]
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 Okay. Great. Thanks.

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Operator   [7]
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 Thank you. (Operator Instructions). We do have a question from Eugene Lee from Regiment Capital.

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 Eugene Lee,  Regiment Capital - Analyst   [8]
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 Hi, everyone. Just a question on the spin. Are there any circumstances under which you would not do the spin?

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [9]
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 Well, if MHR had insisted on getting voting stock, I think the Board would have to consider whether that was appropriate and could easily decide -- or the whole Board could decide that we don't want to go through the spin on that basis. The committee may decide there's some alternative. I don't know what it might be, but as I said, I'm very hopeful and confident that -- it's my view personally, that we'll have a spin in the first quarter or second quarter.

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 Eugene Lee,  Regiment Capital - Analyst   [10]
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 So I guess assuming that the committee is able to come to whatever is an agreeable resolution with MHR regarding the voting issue, there are no other business reasons you would not do the spin at this point?

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [11]
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 As I sit here now, there are absolutely no other business reasons that I would recommend to the Company that we not go forward with the spin.

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 Eugene Lee,  Regiment Capital - Analyst   [12]
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 And once the spin happens, can you just -- Loral itself will then have just at stake in Telesat. Are there any issues associated with just remaining -- just basically having just that interest alone?

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [13]
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 Well that is actually correct. We will have a few other miscellaneous things. The most important thing we'll have is our 56% ownership of XTAR, and that's very, very important from a tax planning point of view and hopefully assuring that the spin is tax free.

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 Eugene Lee,  Regiment Capital - Analyst   [14]
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 Got it. I know you mentioned early in the call that there were some kind of complicated restructurings associated with being able to effectuate a Telesat dividend. Does a successful spin of SS/L help in the future with respect to potential dividend down the line?

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [15]
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 They have nothing to do with each other.

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 Eugene Lee,  Regiment Capital - Analyst   [16]
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 Oh, they have nothing -- okay. Great. Thanks.

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [17]
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 Okay.

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Operator   [18]
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 Thank you. (Operator Instructions). We do have a question from [Jeremy Kahan] from Bow Street.

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 Howard Shainker,  Bow Street - Analyst   [19]
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 Hi, it's Howard Shainker, actually. Could we go back to the voting restriction again? I'm just a little bit confused how it works. Is the issue that MHR would have 65% of the spun SS/L business?

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [20]
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 No that's not the issue of how much they own. The number I think is closer to 60%. The question is, today they have 36% approximately -- 38% of their ownership of Loral in voting stock, and approximately 21% in non voting stock, and under Delaware law the threshold of 40% vote has some magic to it, I'm told by the lawyers. So the charter says -- and I'm paraphrasing here -- our charter says that effectively they get voting stock -- they get the same stock we give to everybody else.

 So I'm just going to repeat myself if I say anymore. But I think you understand the issues and the considerations.

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 Howard Shainker,  Bow Street - Analyst   [21]
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 I guess I'm a little confused. Because the issue would be that if they got too much voting stock that would create a legal issue for them or for the other shareholder? What would be the issue that gets --

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [22]
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 It would be an issue for the Company. Delaware law for a long time has imposed on a Board a host of obligations in connection with what they define as a, "obtaining of control by a shareholder", and especially a shareholder already has a large position. And I'm not going to give a recital, I could, and maybe privately I would be happy to do it -- a recital of how I understand that and what the implications of that are, and how it affects corporate America. Those of you who read the Delaware law decisions from time to time realize that some of the decisions impose obligations and constraints that some of us would think are overborne and unnecessary, but they do. And so that's the issue.

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 Howard Shainker,  Bow Street - Analyst   [23]
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 Can I ask one more question? It seems like this is an issue that would have been well telegraphed six months ago, before you announced the potential SS/L spin. Why didn't the Board take this up and establish a special committee? My question is around timing and some of the sequence of timing, and how you guys have thought about anticipating this problem in the past. Why is the committee being set up now as opposed to five months ago, or three or four months ago?

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [24]
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 It's a fair question. We probably could have started it earlier. We were doing so many things on the table. I'd say I wish we had started a little earlier, but there was a very recent decision in the last few weeks from Delaware that -- a new decision that turned things a little tipsy turvy.

 I thought for a long time that this didn't need a special committee. It seemed to me pretty clear that if I were just sitting with a sensible business person -- as they say in the law a thousand bishops -- you would find an easy solution here. But Delaware law requires a procedure, and we're going to do it, and I don't think it is going to delay us. We never wanted to do the spin before the first quarter of next year anyway, and I think we're pretty close on track to it.

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 Howard Shainker,  Bow Street - Analyst   [25]
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 Okay. Thank you.

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Operator   [26]
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 Thank you. (Operator Instructions). Our next question comes from Jeff Smith from Merrill Lynch.

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 Jeffrey Smith,  BofA Merrill Lynch - Analyst   [27]
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 Hi, would you consider talking about what you see the value in the different parts after the spin?

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [28]
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 Wow. Typically people think that sometimes when you spin a company off, the values of both components are highlighted in the total trading values would be greater than the combined value. I certainly think there's good reason to think that could happen here as well.

 You can look at SS/L and we have our reported numbers, and I've talked about what they would be for the quarter. Assuming they are in that range, you can look at the EBITDA run rate and even with a somewhat softer margin next year, get to a value that all of you can calculate. I don't certainly think it's appropriate for me to do that arithmetic, but that's one piece.

 And then you have Telesat, a run rate in excess of $600 million of EBITDA with the new satellites taking it up to wherever you want to project it. And you can look at the comparables in terms of SES and Eutelsat, and draw a conclusion. And I think at the end of the day if you do that analysis, you would probably agree that this spin off will probably trade in higher than the combined is today. But I'm not going to be anymore specific.

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 Jeffrey Smith,  BofA Merrill Lynch - Analyst   [29]
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 Okay. Thank you.

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Operator   [30]
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 Thank you. If there are no further questions, I would now like to turn the conference over to the speakers for any additional comments.

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 Michael Targoff,  Loral Space and Communications Inc - Vice Chairman, CEO   [31]
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 Thank you, everyone. This brings us to the end of our call today. We appreciate your participation and I look forward to our next opportunity to update you on our status. Thank you.

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Operator   [32]
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 Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.




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