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Loral Space & Communications Inc. (NASDAQ:LORL)

Q2 2008 Earnings Call Transcript

August 12, 2008 2:00 pm ET

Executives

Wendy Lewis – Director of Communications

Michael Targoff – Vice Chairman, President and CEO

Analyst

Nicole Hiracarat [ph] – Babson Capital Management

Tim Lash – Third Point

Adam Mirschters [ph] – CIC Capital

Marti Murray [ph] – Branson Capital Management [ph]

Operator

Good day everyone, and welcome to the Loral Space and Communications 2008 second quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Wendy Lewis, Director of Communications. Please go ahead.

Wendy Lewis

As we proceed with the call, some of the remarks we will 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 what is 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 SEC for inform on many of those factors and conditions.

Now, I would like to turn the call over to Michael Targoff, Chief Executive Officer of Loral Space and Communications.

Michael Targoff

Thank you and good afternoon. With me today are some of our Senior Executives including our CFO, Harvey Rein; General Counsel, Avi Katz; Treasurer, Richard Mastoloni; Vice-President and Controller, John Capogrossi; and Assistant Treasurer, John Stack. Yesterday, we announced our second quarter earnings and solve [ph] our 10-Q for the quarter. I'd like to take this opportunity to draw your attention to some of the important highlights and then we'll take some of your questions.

Our second quarter showed improvements over the first quarter in terms of EBITDA. On the satellite services side, the Telesat, our performance was steady in keeping with the expectations we have shared with you ever since the acquisition. At our satellite manufacturing division, SSL, although the margins are still lower than what we would like, I'm quite confident that we are laying the strong foundation for future growth. We are encouraged by our program backlog, as well as our current opportunities and continued evidence of the market demands for our satellites in spite of the challenging economic times that we are in.

Since the end of the quarter, SSL has been awarded two new satellites procurement contracts and there had been four successful launches of SS/L spacecraft. In April, we signed a contract with DISH Network for EchoStar 15. This is the eighth satellite that we will provide to EchoStar and DISH. In July, we also signed a contract with Hisdesat for Hisdesat 1A, which will provide Spanish and Portuguese language programming in Europe, the Americas, and North Africa. This is our second contract this year with a European operator and we are pleased to see the continue momentum for expansion for SS/L in this geographic region.

Having achieved in the first seven months of this year, the same number of award as we totaled in 2007, we remain optimistic that the full year number will be – will demonstrate the initial evidence of the growth that we contemplated when we embarked upon our capital expansion plan. In this second-quarter and in July, we saw SS/L satellites built for ICO, Intelsat, Prostar, and DISH Network successfully launched. And in July 30, we shipped another satellite to launch space for an Intelsat satellite. With the delivery of these spacecrafts, which are all performing according to plan, our customers are able to move forward with their business plans and SS/L opens up capacity in its manufacturing facilities for the new orders we received and expect to receive.

With respect to our program for increasing our capacity and efficiency at SS/L, we also hope to minimize our dependence on subcontractors from importing subsystems and components. And, we have taken important steps in that direction. We have completed the first phase of construction of a new high-bay dedicated to the integration and test of our satellite bus platform and we are nearing completion of substantial expansion to our RF manufacturing test facility.

SS/L's EBITDA for the quarter was $10.2 million, which is up from the $4.7 reported last quarter, but down from the $12.8 for the same quarter of 2007. As I repeat every time we have one of this call, it's very important to note that our numbers reflect increased – voluntary decisions we made to increase our spending for future growth and profitability. Specifically in the second quarter, we had a $6 million increase in research and development expenses for improvements to our satellite control systems, and product payload systems, and in addition we incurred $2 million of increase cost from marketing and sales due to the prospects that we have before us. Telesat has three satellites – excuse me.

Turning to Telesat. Telesat has three satellites that will be added to its fleet in the near term. Nimiq 4 is fully leased and is scheduled for launch next month. Telestar 11N should be launched late this year or at latest early next year. And Nimiq 5 which is fully leased is scheduled to launch in the end of 2009 or more likely early 2010. The completion and launch of these satellites, it is important to emphasize, do not require any additional funding at Telesat. Telesat revenues for the quarter increased to $172 million from $167 in the first quarter, and EBITDA reflecting that increase, and the continued achievement of the synergies that we planned, increased to $106 million from the $99 million recorded in the first quarter.

Switching to corporate questions. And another topic, I know there's been a number of inquiries regarding our intention to raise capital and I wanted to give an update on that effort. We are currently in advance discussions to establish a revolving credit facility of approximately $100 million for SSL. Once this is established, the SSL business plan should be fully funded without the need for any additional capital to execute that plan.

At the parent company level, however, while we have no imminent plans, we may pursue later this year equity type financing to fund the additional growth opportunities that we believe will be available to us and not currently in our plan. We are mindful of the concerns repeatedly received from some of you about the impact of an equity race at this current stock market pricing levels and we will take that into consideration before we embark upon any financing to serve that requirement.

Regarding the Delaware share litigation. The case has been fully tried and argued and we are waiting the court's decision which we will expect in the next few months. I will not predict or speculate on what the result of that case would be but as disclosed in detail in our 10-Q, the relief requested by the plaintiffs would be for the benefit of the Loral shareholders as opposed to costing Loral a loss.

In closing, I would like to reiterate that despite the impact of the difficult times for capital markets, Loral's outlook, I believe, is quite positive. We continue to benefit from the fact that most of our backlog and prospects even for the new initiatives that we see, with the customer base that includes well established strategic industry players with their own strong backing to accomplish their business plans. With that, I'd like to turn the call over to the operator to accept some of your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We'll pause for a moment to give everyone an opportunity to signal. We'll go first to Marti Murray, Babson Capital Management.

Nicole Hiracarat – Babson Capital Management

Hi, guys. It's actually Nicole Hiracarat [ph], Babson Capital. My first question deals with what your synergies are to-date that's included in your EBITDA number when you first you did the Telesat transaction, I believe, it was CAN$55 million with the run rate that you thought you didn't achieve. I just want to sort of get an update on what's been realized thus far and sort of whether that's still the target?

Michael Targoff

We disclosed that we would hope to achieve the vast bulk of the synergies within 18 months of the close and we are, as you know, about little more than nine months, I guess, into the close. We're making good progress. We still believe that target is very achievable and we see no evidence that we won't get to the place we speculated – that's more than speculated – the place we plan to be by the 18 months.

Nicole Hiracarat – Babson Capital Management

Okay. This quarter, corporate expenses were down quite a bit, I think, about $1.5 million and there were about $6 million or so year-to-date. What should we be looking at as sort of run rate corporate expense. I know you guys have been taking out cost. Are there any more cost to come out or they're one time items in this corporate expenses?

Michael Targoff

There's very real cost to come out yet. I think your numbers are off. Our run rate at corporate expense will be down about $14 million, that's between $10 million and $14 million when we're all done. Some of those expenses, of course, are picked up by some of the capabilities being absorbed at SS/L. But from measuring the corporate expense, you'll see that number down between $10 to $14 million.

Nicole Hiracarat – Babson Capital Management

Okay, I'm sorry. Instead, my numbers – it's not $1.5 million without your corporate expense for the quarter?

Michael Targoff

Well, that was. That was for that reflects items that will not expect to be ongoing. I think, our corporate expense are in forward basis per quarter would be more, in the 3-sh, 3 to 4-sh range.

Nicole Hiracarat – Babson Capital Management

I see. Okay. That was – thanks. That's helpful. Next, if you could just turn to your cash used for the quarter, I think its roughly $180 million. And I guess there's a general breakdown in the 10-Q but if I can just go a little deeper as to sort of what the specific uses of cash and what their affiliate – associate numbers are, that would be really helpful.

Michael Targoff

Yes. The biggest use is working capital at SS/L, and that's for freeze accounts receivable and customer advances and of the $180 million, excuse me – of the $180 million, that represents expenditures of about $140 million. We have some tension expenses, we have some investment in Via Sat satellite, Via Set1, and we had some two ups with PSP and the Telesat acquisition, but the big number is the SS/L number for working capital and the expenses there, and that reflects the status of the contracts and the difference between our pending [ph] money to achieve the milestones and the timing of the customers' payments.

Nicole Hiracarat – Babson Capital Management

Okay. So, is that – I guess as I look at the manufacturing business, even though it's generating, I guess, on an LTM basis, close to $30 million of EBITDA. You seems to be burning quite a bit of cash right now. So, I'm just struggling with sort of how to look at the value of that business or maybe if you could you give us sense of timing of when it's going to not be generated—not be using so much cash?

Michael Targoff

Well, I think I said a few minutes ago that we would hope that with a $100 million-ish revolver, SSL would not need to access capital markets or require funding to achieve its business plan not just for this year but for the years ahead. What happened at SSL, first of all, we have this expansion Apex and catch up Apex that we've been talking about for, I don't know, for the last year or so which comes to an end when we get to steady run rate of about $25-$30 million. And then we have the build up of overall receivables which the more successful we are until the extent that on average, approximately 10%, hopefully some years it's less, some years are maybe more, but approximately 10% of our revenue, it goes into a long-term receivable. That asset – we're building our financial asset. So, while we're burning cash to build it, it's really like investing the cash to build it. But, within the- with that $100 million, we would not expect to need anymore money.

Nicole Hiracarat – Babson Capital Management

So, let's say you got that $100 million from today, that would be the extent of future term required.

Michael Targoff

No. We have a cold cash available right now. You can see, cash on hand right now is $152 million. That includes the $58 million received from Rainbow and some other receipts on another Bank that we received about $7 million. If you take that money and you add $100 million of a revolver to SSL, that we will need to raise any more money to fund Sols business requirements to allow us to make the investments in Via Sat One that were planned to make some other investments that we believe we're – we'll be attracted to us in a which I'm not going to give any details on it until we've decided about it and to lease sufficient contingency to run a billion dollar plus business. And that is why, with all that spoken for us, so to speak, to the extent, I believe, and we share with our board and the board makes the decision, that Loral has opportunities to increase shareholder value to additional Via Sat One type investments. I knew that generically not as a specific that we would look toward raising some equity capital.

Nicole Hiracarat – Babson Capital Management

Okay. Sorry, just one clarification. The $158 million that's on the balance sheet include the $58 million you receive from the Rainbow litigation?

Michael Targoff

When you say balance sheet, you have to –you're talking about the June 30 balance sheet. No, right this minute –

Nicole Hiracarat – Babson Capital Management

No, that's understood. And you got sounds like, six contracts to-date. Do you have an estimate of serve – what the number of contracts going to be up until proven, for the year? Are you still expecting, I think, 7 to 11 with the range you have given?

Michael Targoff

We've got five to-date. We're in negotiations on some. We have prospects that are looking positive on others. We're disappointed if we got one or two more. And, there's an outside chance of getting a little more than that. But, when I say 5, I'm really including these Sateen authorization to proceed. We really have four full contracts so far.

Nicole Hiracarat – Babson Capital Management

Four full contracts?

Michael Targoff

Yes. The Sateen authorization to proceed is – ultimately we hope and expect will lead to a funded contract. But, at this point we know Canada has a real booking.

Nicole Hiracarat – Babson Capital Management

Okay. How many of large satellites Loral satellites do you have out to bid right now?

Michael Targoff

I'm not going to share that information. We have a full plate. We've increased on marketing expenses as I've said. There are ample opportunities.

Nicole Hiracarat – Babson Capital Management

Can you give just an update on how things are going with European [ph] alliance? What are they doing in terms of getting government business?

Michael Targoff

When we have something to announce, we will. We're pleased with the alliance. There's nothing specific we have to announce.

Nicole Hiracarat – Babson Capital Management

Okay. And then, I guess just my last question.

Michael Targoff

Can you – if you have another question please ask it and let's move on.

Nicole Hiracarat – Babson Capital Management

Yes. This is my last question. It's just on EchoStar. Just hoping for an update there based on their loss [ph] that there are just about negative EBITDA right now. So, I'm just sort of wondering how the business was?

Michael Targoff

Prospects, there are some prospects there. But, you're right, its nothing exciting and nothing new to report. We're hopeful but not – we have no evidence to support it.

Nicole Hiracarat – Babson Capital Management

Okay.

Operator

We'll go next to Tim Lash, Third Point.

Tim Lash – Third Point

Hi, thanks for taking my question. Yesterday, Telesat mentioned plans for two replacement satellites 8 to be awarded around for the next six months. Is that factored into your one or two incremental award and comment?

Michael Targoff

They said that they had two that they would consider. Their plans are as – I believe has been you may clear in a very thorough filings, including replacing one of those satellites in their plan and not both, but they may into start to replace both, and if they do, we would hope that at least we with one of them, Loral would be a likely candidate for the award, the other one is questionable because of some regulatory restraints.

Tim Lash – Third Point

Got it. And with respect to the funding that you're contemplating. Is that three for that visual of a blind pool, or would that be tied to a specific investment event? And then, as of follow-up to that, would you perhaps take a different approach to fund raising this time around than you took in 2006?

Michael Targoff

Well, the first question is. I wouldn't call it a blind pool, that would be – but I understand your question and it is – we would not think that we would have a specific opportunity that we would be targeting for when we raise the money. It was quite clear to us in the Telesat transaction that the – that our obtaining the $300 million was crucial in our being able to be in a position to compete for and will not, important acquisition. I want to be in the same place at Loral where, when we have an opportunity to participate in something, at the early stages, we're credible.

The second part of your question was that, delay into the form of which we might raise the money and I think we might raise some money and I think we repeated over the recent past that we understand the concerns especially now with the stock where it is that we would look to do transactions in the best interest of all the shareholders.

Tim Lash – Third Point

Got it. Anything on the investor relations front? I mean, associated with that, I mean, would be anymore of outgoing late effort there? You articulate the store, those streets, in that context? I mean, it's easy. It's hard to raise money when you don't go out and tell your story.

Michael Targoff

If we're in the process of raising money in a way that people traditionally go out and do road shows choose and tell the story, we would certainly do that. Our position has been that we have been very, very thorough and explicit in rating disclosures. If you look at the disclosures on the most important thing we've done in the years and the Telesat acquisition, you'll see extraordinary deck of disclosures. There had been any activity going on at Loral almost since the moment of mine taking on these positions that have been very, very important skeletons in the closet that would prevent me from having a dialog with people that would not be misleading to them unless I disclose our telephones which I couldn't do. So, we're mindful of the request and we're mindful of our obligations and we would honor them.

Tim Lash – Third Point

Okay. Thank you.

Operator

(Operator instructions) Our next question is from Adam Mirschters [ph], CIC Capital.

Michael Targoff

Hi, how are you?

Adam Mirschters – CIC Capital

Hello. Can you give me an idea of what kind of level of capacity you're operating at now? Is that a reasonable question?

Michael Targoff

It is a very good question if the answers hard. The answer's hard because when you examine the when you examine the capacity, when you're about extra cells we're talking about SSL manufacturing capacity and the expansion program that we've embarked with will allow us comfortably to do nine large, not huge, but large satellites, the kind that which we excel. If you mix them, large ones and small ones, you might get a to as many as 12 or 13. Right now, we are pretty full but we have time on the factory that would allow us to book satellite. If I told you we could book satellites in this month and still honor our obligations to those four customers for delivery and the expected delivery time, I will be misleading. The satellite come in at a normal historic pace, we can accommodate additional awards to approaching nine or more this year. But is has to come in not along in the same day.

Adam Mirschters – CIC Capital

Great. What – so right now you have that capability, right? You don't have to spend anymore money to get there?

Michael Targoff

No. We're completing the spending to get there. It's not completed yet.

Adam Mirschters – CIC Capital

Okay.

Michael Targoff

That's the plan that we embarked upon last year.

Adam Mirschters – CIC Capital

Okay. And could you give me a sense of when that expansion plan will be done? And how much more spending is there? I apologize if I my questions are duplicative.

Michael Targoff

No, no, it's fine. The time will be done, more or less by the end of the year. And we're talking about – total expansion plan was about $30 odd million. And as I indicated earlier in my remarks, I think, in the to a question, we have some catch up C Apex arising from the titan grains upon the company during its bankruptcy, all that will be done in – commencing next year, more or less depending on whether we complete the planned expenditure but more less where on a $30 million range going-forward.

Adam Mirschters – CIC Capital

Got you. And is it based upon what you said that the – ultimately the – your main stature and capabilities are your nine large satellites and three or four smaller ones. How much revenue, if you guys are operating at full capacity do you think that would generate.

Michael Targoff

Well, the typical large satellite can be from anywhere from $150 million to – over to $200 million. It depends on the mix you get. If we had nine big satellites we wouldn't be able to do anymore, likely unless the timing were uniquely perfect. So you can do the arithmetic depends on whether book a supply for 150, or 130 sometimes, or 220.

Adam Mirschters – CIC Capital

And what is the cost of said smaller ones? And how much would those be?

Michael Targoff

What ? –Probably not competitive for satellites that are less than $120 million? $110 million to $120 million.

Adam Mirschters – CIC Capital

Okay. So it's seems just fair to say that you could operate at a billion plus of revenues when this expansion is done, and things are going well?

Michael Targoff

Oh absolutely.

Adam Mirschters – CIC Capital

Okay. And could you give us a sense of what do you think ultimately is your operating efficiently EBITDA margins could be?

Michael Targoff

We would hope to improve the margins. This closure statement in bankruptcy, the public statement had a margin contemplation of approximately, I'm thinking about the 8% to 10% range. And I would – we haven't achieved that. We're doing a lot of things internally to drive the business to that, and I would hope we would get there.

Adam Mirschters – CIC Capital

Okay. Are you still comfortable with that 8% to 10% over some period of time?

Michael Targoff

As a target, yes. I'm not seeing sufficient evidence of the performance to tell you that I'm confident we will get there in the near term, but we're going to push to get there.

Adam Mirschters – CIC Capital

Okay. So its something to shoot for, you're not there yet and maybe somewhere between where you are now and that target is maybe more achievable over the near term.

Michael Targoff

Probably. I would hope we would seek constant progress towards improving our margins.

Adam Mirschters – CIC Capital

Okay. And those margins are all pre-corporate. Is that correct?

Michael Targoff

Yes.

Adam Mirschters – CIC Capital

Okay. I appreciate your help. Thanks very much.

Operator

And, we will take our final question from Marti Murray [ph], Branson Capital Management [ph].

Marti Murray – Branson Capital Management

Hi, Mickey, this is Marti Murray.

Michael Targoff

Hello.

Marti Murray – Branson Capital Management

Hi. I want to just make sure I understand the kind of big picture here in terms of the SS/L becoming self-sufficient and then the capital raise at the corporate level. So I think what I heard you say, is that if you take the $150 to $200 million in cash that's currently on the balance sheet?

Michael Targoff

$150 million, Marti.

Marti Murray – Branson Capital Management

Okay. $150 million that's currently on the balance sheet and you add $100 million revolver, that makes manufacturing self-sufficient?

Michael Targoff

Yes.

Marti Murray – Branson Capital Management

So that the $500 million that is contemplated under the shelf is for investments at the corporate level?

Michael Targoff

No. The $500 million shelf is – I have indicated that we were never talking about equity raise right now with $500 million. The shelf – all of you know shelfs are filed to contemplate contingencies and give you an opportunity to do what might arise if you had the occasion to require it. But we do not contemplate on equity raise anything like $500 million.

Marti Murray – Branson Capital Management

So what are you contemplating?

Michael Targoff

I think I've indicated in the last call that somewhere between $50 and $150 million depending upon opportunities, events, and timing.

Marti Murray – Branson Capital Management

Okay. Also in the shelf, there was a mention of MHR shares and their ability to sell those shares. Are they intending to sell any shares?

Michael Targoff

We have a contractor requirement to put that in, that's why it was there. I have no information that suggests they're thinking of selling anything.

Marti Murray – Branson Capital Management

Okay. So, then you said at the corporate level, I think you mentioned something about potentially another Viasat type transaction?

Michael Targoff

I used the words a little differently. What I was talking about is that kind of generic transaction.

Marti Murray – Branson Capital Management

And just to refresh us, how would you describe the important element of that transaction so we understand what you're referring to?

Michael Targoff

It's a minority type investment in a trend – in a business opportunity where because of our satellite expertise and our involvement in the program as a manufacturer or otherwise, we see an opportunity to invest at the early stage and participate in the business growth that we think our satellite technology and capability will provide to the service provider.

Operator

Ladies and gentlemen, that does conclude the question-and-answer session today. At this time, I'll turn the conference back to management for additional or closing remarks.

Michael Targoff

Thank you very much all of you. Appreciate your interest and participation and look forward to talking to you again soon.

Operator

And that concludes today's conference. Thank you for your participation.

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