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Edited Transcript of SDA.AX earnings conference call or presentation 27-Aug-19 12:30am GMT

Half Year 2019 SpeedCast International Ltd Earnings Call

Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of SpeedCast International Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Clive Cuthell

Speedcast International Limited - CFO & Joint Company Secretary

* Pierre-Jean Joseph-Andre Beylier

Speedcast International Limited - CEO & Executive Director

* Sebastien Lehnherr

Speedcast International Limited - COO

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Conference Call Participants

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* Eric Choi

UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst

* Mitchell Sonogan

Macquarie Research - Analyst

* Neil Carter

IFM Investors Pty Ltd - Global Co-Head of Listed Equities

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Speedcast International Limited First Half Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Beylier, CEO. Please go ahead.

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Pierre-Jean Joseph-Andre Beylier, Speedcast International Limited - CEO & Executive Director [2]

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Thank you, and good morning, and welcome to Speedcast Half Year 2019 Results Conference Call. I am PJ Beylier, Chief Executive Officer. And with me this morning is Clive Cuthell, Chief Financial Officer; and also joining us on the call is Sebastien Lehnherr, our Chief Operating Officer.

Turning to Page 2. We provide a quick overview of our results on this page. Clive will cover off from the financial metrics in further detail later in the presentation.

The first half of this financial year was really challenging 6 months for Speedcast. Revenue came in at USD 357.6 million, reflecting a 17% increase on the last half with gross profit of $159.7 million, below our original expectations for the business.

Our underlying EBITDA of $66.8 million, includes the positive impact of AASB 16. And we have announced a goodwill impairment of $154.8 million. Excluding this impact, EBITDA was up 2.8% to $62.1 million, in line with updated guidance of $60 million to $64 million released to the market on the 2nd of July 2019.

Our cash conversion was significantly down at 36%, however, we are confident that this will return closer to our historical average by the full year results. Our leverage ratio of 3.6x is in line with prior expectations, but is expected to increase during the remainder of the financial year. The Board and the management team are disappointed with the company's financial performance, mainly the lower-than-anticipated contribution from Globecomm and slower organic growth. As we outlined in the coming slides, we are taking significant steps to address these issues and return Speedcast to profitable growth.

On Slide 4, we have outlined the key initiatives we have identified to realign the business for growth. These are focused on 4 areas, operational improvements, systems and processes integration, organic revenue and earnings growth and a reduction in the debt ratio.

Operational improvements are already underway with benefits beginning to be realized, and Sebastien will talk about this later in the presentation. We are addressing improvements in customer service through streamlining regional services, implementation of new IT management systems, service management systems and enhanced KPI monitoring.

We have made progress on our systems and processes, integration and consolidation with all non-Government business on a common enterprise resource planning IT system at July 1, 2019. Additionally, we are running a process improvement program to benchmark our systems and processes and ensure we are implementing best practice procedures across all divisions and across the entire organization.

In regards to organic revenue and earnings growth, we are targeting $20 million net annual cost savings with $10 million of annualized cost savings already realized. This is being achieved through reorganizing certain functions and procurement activities within each segment and each department to gain better operational efficiency. As announced earlier, we have increased our leverage ratio for our debt covenants in the short term, providing us with additional headroom. We are also working on lowering our leverage ratio through optimizing inventories, receivables and lowering CapEx. To further help with our deleveraging, we have indicated that we do not plan to pay a dividend during 2019.

Additionally, as outlined on Slide 5 and as announced to the market this morning, we have made changes to our Board and management team. As previously disclosed, the Russell Reynolds was appointed in July to undertake Board skill assessment and a formal global search process for additional non-executive directors to underpin Speedcast's leadership renewal process. As part of this process, the Board of Directors have determined that 2 current non-executive directors would resign and 4 new non-executive directors would be appointed. In line with this approach, John Mackay has resigned effective immediately, but John will remain on the Board as a non-executive director until the 30th of September 2019 to ensure an orderly transition to the new Chairman. Stephe Wilks has been appointed to the Board and elected Chairman, effective immediately. It is anticipated that another director will retire from the Board once a suitable replacement is appointed. The Board is well advanced on the search for 3 additional independent non-executive directors. Russell Reynolds will now progress this process in close consultation with Mr. Wilks to identify suitable candidates.

In addition to the Board changes, Clive Cuthell, our CFO, has resigned by way of mutual agreement, and will continue until the end of this year to allow for the orderly transition to a new CFO. Russell Reynolds is conducting a thorough global search for suitable candidates to replace Clive in his role.

I would like to take this opportunity to thank John Mackay for his guidance over the last 5 years as Chairman of Speedcast. Additionally, as I now hand over to Clive to take you through the group's financial results, I would like to acknowledge the strong contribution Clive has made to the business over the past 18 months. Despite the challenges we are addressing and changes we have announced, we see significant opportunities within the business to drive organic growth and deliver strong future outcomes for all stakeholders.

I will now hand over to Clive to walk us through the detail of the financial results.

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Clive Cuthell, Speedcast International Limited - CFO & Joint Company Secretary [3]

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Thank you, PJ. So turning to Page 7. This page summarizes our underlying results. And as you can see in the first line of the table, our revenue grew 17% to $357 million. That includes the benefit of the Globecomm acquisition without which our organic revenue declined by 5.8% for the reasons outlined further down the page. Our EBITDA for the 6 months was $66.8 million. This headline number includes the benefit of classification changes owing to the adoption of the new accounting standard on leasing. The details of that are set out in Appendix 3. But as you can see, the impact of that standard was to give rise to a benefit to reported EBITDA of $4.6 million. We've included a line to show the result without that, which as you can see indicates that our EBITDA increased from $60.4 million to $62.2 million or an increase of 3%. That includes the benefit of the Globecomm acquisition, as you can see in the table on the right, and a decline in the organic underlying results. And the reasons for that, that we highlighted in our July earnings update, are also set out at the bottom of the page.

The other thing that I would highlight from this page is that all of these results are underlying and they exclude the impact of the goodwill impairment charge that PJ mentioned earlier of $154.8 million. And there's some information on that also included in one of the appendices.

If I turn to Page 8 and look at the main driver of our cash flow, the working capital changes are set out on this page. As we said, this was a very disappointing result for the first half with adverse working capital development totaling $40 million. That included an increase in inventory of almost $12 million and an increase in receivables of $32 million. In receivables, $12 million of it was attributable to some specific situations in the Cruise industry, which we expect to reverse in the second half, but we also saw a significant increase in receivables across the rest of the business due to a number of other factors. We are very focused on executing a turnaround in the second half back to positive working capital cash flow. That includes a range of initiatives to improve the inventory situation and a stronger focus and a different approach to receivables, which is now being implemented.

If I look at the impact that this had on cash flow on Page 9, there's a chart that summarizes our overall cash flow. The core cash activity of the business generated a cash outflow of $25 million. And as I've indicated, the main driver there was the adverse working capital development, taken together with some other matters was a $43 million cash outflow. Finance costs were just under $19 million, higher than previously due to higher borrowing levels. Capital expenditure was $29 million, which is up a little bit on the prior year, but it's a significantly larger business with the acquisition of Globecomm. We are targeting CapEx for the full year of $50 million. The tax cash flow of $2 million is a significant improvement on the tax cash cost in the prior year, which was $12 million. We expect to see the lower level of tax cash costs continue through the year owing to the benefit of loss utilization in different jurisdictions.

It is important to note that our overall cash position included the impact in the first half of some items that are not expected to continue in the second half. These include nonrecurring cash costs of $12 million and the dividends for the 2018 year, which was paid during the half. The Board has decided not to declare the dividend for the first half and nor will -- is it expected that a dividend will be declared for the second half of the year. If I look at what this means for cash conversion on Page 10, this is a chart we've used for a long time and that indicates, as we've said, a cash conversion ratio of 36%. And as you'd expect, the main driver of this deterioration is the adverse working capital movement that I mentioned.

I also would note that the impact of the new leasing standard, which as we've discussed, due to classification changes, gives us a higher reported EBITDA, had only a minimal impact on cash -- from the cash conversion ratio. We do expect the cash conversion to return to levels more in line with historic averages in the second half given our strong focus on improving inventory and receivables. CapEx was 8% of revenue, which is down from the 10% we saw for the full year in 2018 and in line with our expectations. It is above the long-term trend of 6% as we've mentioned previously because of investment in corporate platforms. So as we've said, significant improvement in cash conversion is targeted in the second half in both working capital and CapEx.

If I turn to borrowings on Page 11, the net debt at June '19 was $625 million, and there's a reconciliation outlining net debt included in Appendix 6. We have amended the definition of net debt a little to ensure that it exactly aligns with the definition of net debt in our borrowing agreements, but the details are set out in the appendix. The biggest drivers of the increase in net debt are set out here and other things I've just mentioned.

As PJ mentioned, the covenant in our loan facilities, the leverage ratio covenant was increased from 4x to 4.5x, and that extends through to December and through to and including December 2020. At 30th of June, our covenant -- our leverage ratio was 3.6x. And as we've said before, we have a longer-term target of reducing that to 2.5x. We do expect the leverage ratio in December to increase due to changes more at the EBITDA level and the impact of pro forma EBITDA rather than changes in net debt, and our target is to remain below 4x. As we said, no dividend in the first half, no dividend expected in respect to the second half, and we'll be focused on working capital improvements. I would also comment that there is no significant debt maturity until 2025, but the company at the moment is working on increasing its revolving credit facilities.

With that, I will hand back to PJ, who is going to cover an update on the divisional and the operational matters.

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Pierre-Jean Joseph-Andre Beylier, Speedcast International Limited - CEO & Executive Director [4]

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Thank you, Clive. Looking at the high-level results for each division, we achieved a 12% increase in revenue for Maritime, 6.8% increase for EM (sic) [EEM], a 2.6% increase in Energy and 69.2% (sic) [69.3%] revenue increase for Government. The significant increase to Government revenue was driven by the acquisition of Globecomm. I will cover off on the organic revenue versus the Globecomm contribution on the individual division slides alongside the further drivers for the divisional results. Sebastien will then cover on the operational improvement update.

Now turning to Maritime to cover in more detail on Slide 15 -- 14, sorry. Maritime revenue increase of 12% was driven by Globecomm contribution of $14.6 million with a 2% decline in organic revenue. This decline was as a result of a few factors, including predominantly the previously communicated major contract loss and some decline in L-band revenue as migration to VSAT continues with L-band revenue declining by $2.3 million during the period. The decline in Equipment revenue was a result of a slowdown in implementing the backlog, but the backlog remains strong. Organic service revenue grew by 3.1% as Commercial Maritime churn was offset by some good growth in Cruise. Cruise is still performing well with both Service and Equipment revenue growing despite continuous technical difficulties with the Carnival rollout. However, on that front, we have now started a trial that is looking promising.

Enterprise & Emerging Markets revenue growth was heavily skewed by the acquisition of Globecomm, while organic revenue was down 21.4%. We have started seeing signs of a stabilizing market. We are indeed seeing growth within Latin America and Asia again for services revenue partially offset by the decrease in equipment and installation due to the phasing of the NBN contract. It's important to note that the phasing of the NBN contract has an important impact on our EEM revenue this year. Internet of Things or IoT is continuing to grow, and we now have 20,000 devices connected at the end of June 2019 with a current backlog of 24,000 additional devices to connect. We expect this division performance to improve as we move away from the installation phase of the NBN contract and start seeing positive momentum for services revenue in Asia and Latin America.

Government's revenue on Slide 16 increased 69% by $33 million -- sorry, a $33 million revenue contribution attributable to Globecomm, while underlying organic revenue was flat. The increase in Equipment & Installation was driven by one-off contract wins, including some Airborne Communications On The Move contract. We have several contracts in the pipeline to drive organic growth during the second half as we convert opportunities within the managed network service and professional service areas.

Moving on to Slide 17. The Energy division has stabilized in line with the overall oil and gas sector. Organic revenue is flat, excluding the Globecomm contribution. We've seen some delays, nevertheless, in the first half to some projects in Mozambique, which has pushed revenue out to the second half of 2019 and possibly into the first half of 2020. Overall activations in the first half exceeded revenue churn. The total number of active deepwater offshore rigs served by Speedcast has increased to 87 at the end of June 2019 from 73 at the end of December 2018. The global rig count started increasing in the first half, which is obviously a positive trend.

I will now ask Sebastien Lehnherr to speak to you about our operational performance and initiatives.

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Sebastien Lehnherr, Speedcast International Limited - COO [5]

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Thank you, PJ. I am now on Slide 19. Turning now to Speedcast operations. After over 15 years of expansion through growth and acquisition, Speedcast's teams' value proposition and benefits come from both its global footprint and the diversity of the technology across its divisions. Talking first about Speedcast footprint. Our 250 field engineers on the ground serve customers in over 140 countries, addressing a global market worth of $250 billion annually across global equipment -- across ground equipment and satellite services.

Beyond our field engineers, Speedcast operation relies on centralized system engineering and software engineering teams, state of the art global customer support centers and the network of teleport around the world, all of these distributed across 100 facilities. Leveraging this global operational scale as a differentiator and turning it into a competitive advantage is one of our operational focus area. Looking at Speedcast technology offering, we are now a strategic service provider to the largest enterprise CIOs around the globe, supporting them in the digital journey through a new diversified portfolio of capabilities for edge connectivity and applications.

Higher resiliency supported by a diversified network of providers at the same time as higher throughput is no longer only a requirement for corporate offices and facilities but also for remote location with the objective to enable digital operations supported by IoT, edge computing and cloud-based technology. This has now become a reality and a mission-critical need across the industry Speedcast delivers services to from Cruise to Oil & Gas.

Moving on to Slide 20. Let me talk now about how we are leveraging with global and diverse footprint to further contribute to the growth of our company. When I joined Speedcast in January this year, PJ and I wanted to quickly formalize with our executive team the mission and vision statement that will become the goal of every initiative of our operations group, preparing Speedcast for its next phase of organic growth in both size and revenue with a commission of the operation leadership team. For this, we are focusing on 2 main aspects: first, strengthening the foundation of our operating system in the company while driving further efficiencies through processing and standards, leveraging our global footprint to its maximum potential; second, becoming a data-driven and profit-driven organization in everything we do, most internally in our day-to-day management of our services to our customers as well as externally in the product and services we develop and deliver to our customers. Our vision is to ultimately use Speedcast's unique operating system as a differentiator and a dynamic engine or a catalyst for growth, relying on 4 pillars, our people skill and footprint, effectiveness in everything we do, efficiencies for best-in-class service quality and performance and technology to augment our capabilities through automation, for example.

To structure our approach to deliver and progress towards this vision, we have defined our several initiatives to the top building momentum across the business. These initiatives are regrouped across 4 key focal areas for 2019, and are: operating model excellence, which account for more than half of the initiatives for this year; new capabilities and offering, working closely with our product organization; team engagement and talent management, with the aid of human resources; integration, as our most recent acquisition required important focus and work to assure delivery of value and synergy efficiently.

Moving on to Slide 21. In regard to our initiatives, I wish to highlight some of the aspects of our operating model excellence areas. Specifically, our continuous focus on service performance and our data-driven approach around it to provide an indication of the kind of initiatives we are undertaking across the business. We want to be just to keep pushing the need of service performance in our industry. For this, we can utilize efforts started over the previous years as well as new initiatives. There are a few examples that I find relevant. As part of our standardization and system consolidation effort, we have completed our migration to a single service management platform in June 2019. This is an extremely important step to integrate our services as well as to manage and measure consequently and globally the performance of our delivery to our customers. Then as part of our acquisition integration work stream, we have been able to extract and generalize some of the best practices around certain aspects of operation processes. It has been the case, for example, for our service quality and program management practice within operations, which we have upgraded in the second quarter. Next, I already mentioned the importance of leveraging on global scale and footprint. Here I am highlighting 2 efforts we initiated in Q2 this year: first, the drive for an [adoption] of global knowledge management practice, which is an extremely important strength for a company of our size; second, the initiation of our One CSC program, aiming at developing new and larger operational hubs where our staff can grow and develop themselves locally through a panel of broader-positioned SKUs and competencies to acquire.

Finally, when it comes to performance, we want to make sure that each of our effort delivers measurable and quantitative results and that our operation organization become truly data driven from top to bottom. Therefore, we have developed in Q2 and released in June, our first set of operational performance and additive channel advisory dashboards. [This will reverse] not only in the organization to consequently drive our key operating-level agreement metrics globally, mean time to repair, mean time to assign and first call resolution. We naturally want to keep validating our quantitative approach through qualitative feedback from our customers. Therefore, customer surveys are occurring now on a much more regular basis to determine our net promoter score indicator and acquire more feedback to ultimately keep driving continuous improvement.

I am now on my last slide, Slide 22. While it is still very early, our end-to-end approach has started showing very promising results. Through our key initiatives supporting the delivery of our mission and vision for Speedcast operation, we are becoming every day a more data-driven organization, leveraging more consistent processes, delivering quantitative and qualitative improvement in our service level. The internal pickup rate and adoption of our operations, analytic and advisory dashboard from May to August speaks for itself as you will discover through the yellow bar chart in the center of the slide. The outcome is already a positive step change of 90% in our net promoter survey -- or Net Promoter Score, sorry, in Q2 in 2019 compared to Q4 2018. Naturally, this is still a very early trend, and we need to review and validate months on months. However, with the initiative progressing, the [strat] now in place and the level of visibility and control of performance, we have confidence over the fact that we will be able to deliver and sustain those improvements.

Thank you. I will now hand back to PJ.

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Pierre-Jean Joseph-Andre Beylier, Speedcast International Limited - CEO & Executive Director [6]

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Thank you, Sebastien, for the detail on the operational improvements and initiatives. I will quickly summarize what initiatives we have implemented from a systems and process integration perspective. As previously mentioned, we have been operating on a single ERP system since the 1st of July, following the Globecomm integration. This incorporates the integration of 81 operating entities, the consolidation of financial reporting, single ERP system for all global operations, billing, supply chain and accounting. Other milestones achieved include the global rollout of our service management systems, service management and problem management system. And our security posture and strengthened business continuity plan have been rolled out.

In the second half of this year, we are progressing on further improvements to our newly implemented ERP and intend to go live with our CRM upgrade in January of 2020. Additionally, we will be implementing a centralized customer reporting portal and further improvements to our data centers. I look forward to providing you with further update on these initiatives in coming periods. On Slide 25, we provide a quick overview of the contracts that we have won since January 1, 2019, and that have been publicly communicated. Obviously, this list is not exhaustive. As demonstrated on this slide, the business continues to experience strong demand for products and services across our divisions.

Moving on to Slide 26. We are providing you with an outlook for the Maritime and EEM divisions. We are targeting modest growth within the Maritime division. We expect this growth to come primarily from cruise ships due to bandwidth increases and equipment sales growth. We expect the second half for EEM to be stronger on the back of NBN moving into Phase 2 and thereby, increasing operational revenue. We have a strong backlog with recent wins in this division and some large systems integration opportunities to materialize during the second half. Due to the decline in NBN Installation & Equipment revenue versus 2018, we expect overall revenue to decline, but we still see organic service revenue increasing during the second half.

Turning to Slide 27. We expect revenue growth for the government sector to be in the mid- to low single digits for the full year. This will be driven by conversion of current pipeline and new sales. We expect the revenue mix to be weighted towards equipment and system integration as we will be addressing complex military satcom's requirements. We currently only have a 4% penetration rate in the U.S. market and see an exciting opportunity going forward to increase our market share as we combine the strengths of VSAT and Globecomm.

Energy will continue to grow in line with previous guidance at roughly 5% with the delays to some integration projects expected in the second half this year and next year due to some social unrest in Mozambique. We are well positioned as a market leader within the Energy sector to take advantage of further market growth within this segment.

On Slide 28, as mentioned earlier and during various communications during the month of July, we have implemented several key projects to help us achieve our 4 strategic objectives. On this slide, we outlined some cost-saving initiatives across the organization. This has included a comprehensive staffing review to streamline middle management positions and reinvest in areas which are critical to our customers' experience. Additionally, we have undertaken a targeted approach to cost optimization and reviewed our procurement procedures to drive further savings. Together, all of these initiatives are targeting $10 million in cost savings during the second half of 2019, and we feel confident that we will be able to maintain this level of expenditure going forward.

Turning to the outlook on Slide 29. For 2019, we expect moderate organic growth in the second half. And we expect EBITDA to be in the range of $150 million to $160 million, including the $10 million of leasing reclassification benefits. We expect Globecomm could -- to deliver EBITDA of approximately $21 million, which includes the $11 million of cost synergy savings outlined previously, excluding leasing reclassification benefits.

In addition, we continue to expect $18 million to $20 million of Globecomm cost synergies accumulated in 2020. We are on track to deliver $20 million in annualized savings as we progress through our key objectives as outlined in the presentation, and we have declared no dividends will be paid for the second half. As outlined on the slide, we are also targeting a total CapEx of $50 million for the year at the lower end of our previous guidance, and a leverage ratio below 4x at the end of 2019. With over 20 new and increased contracts announced during the first half, and we won many more than what was announced, we have a strong product and service offering and our strategic initiatives to improve operational performance will only -- will help solidify our market standing and set a strong platform for growth going forward. Having commenced laying out our plans, we have seen early positive results that we believe will underpin our expectations for the second half of 2019.

Thank you for your time this morning. We will now hand over to the operator to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Eric Choi from UBS.

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Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [2]

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I just had 3. Firstly, just on cash flow. Just wondering if that $20 million working capital drag from day sales outstanding, can you comment if that relates to a specific customer or a set of customers or a specific division? And then secondly, just on the Energy division, I guess we did flat revenues first half and then full year guidance sort of implies revenues kick up to 9% in the second half. So just wondering if there's any sort of specific contracts that we can point to. Or is it -- is that just sort of like a wider vertical rebound that we're sort of baking in? And then just lastly on Maritime. On Slide 14, very helpful, although the new information that you've given us. And I might be stuffing it up because I might not have the averages, but it looks like your number of L-band vessels could be increasing, but the L-band revenues are still falling. So just wondering if we're seeing price deflation in that segment.

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Clive Cuthell, Speedcast International Limited - CFO & Joint Company Secretary [3]

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Thanks, Eric. I might answer the receivables question first and then PJ will talk about Energy and Maritime. So on the receivables question. So we've said, a $30 million increase and which includes $12 million specific situations in crews and then the rest in other areas. It's the biggest element sort in the commercial Maritime business and the EEM business. These are the businesses that had the main ERP migrations during the period. Not that we had systems issues, but when you have a large project like that, it does consume a lot of management payment and can create distractions. So it's not particular to individual customers other than in the Cruise sector, but it's across the rest of the business and it's got a fragmented revenue base. So there's a lot of work going on, as we said, to reverse the increase that's happened in the first half and improves the cash flows in the second half. I might let PJ answer the question now on Energy and L-band.

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Pierre-Jean Joseph-Andre Beylier, Speedcast International Limited - CEO & Executive Director [4]

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Yes. Let me go to L-band first. As we migrate vessels from L-Band to VSAT, L-bands become the backup solution and the revenue decreases very significantly. So that's sort of being a primary communication network, it becomes a backup with much, much lower monthly revenue. On Energy, Eric, can you -- sorry, can you repeat your question?

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Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [5]

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I might have got the message wrong, but it looks like first half Energy revenues were flat, and then since we're guiding the 5% for the full year, it implies 9% growth second half. Just wondering if you can talk through the drivers.

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Pierre-Jean Joseph-Andre Beylier, Speedcast International Limited - CEO & Executive Director [6]

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Yes. I mean we had a similar trend last year, if you remember. We have a few drivers behind that. First, some significant projects that we've signed that have been a bit delayed in the first half due to the situation in Mozambique, which has now started improving. So we're going to see some lengthy systems integration revenue in the second half. And then the increase in the number of active rigs, which happened during the first half and in particular towards the end of the first half, will drive some revenue growth in the second half and those are the 2 main drivers.

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Eric Choi, UBS Investment Bank, Research Division - Director and Australian Telco and Media Lead Analyst [7]

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That's helpful. Can I ask one quick follow-up, Clive, on the cash flow? Just on a couple of slides, one of the slides sort of says second half free cash flow conversion to go back to historic levels, which is kind of like 90%? And on another slide, it sort of says positive free cash flow movement, which implies conversion above the 100%. Can I just clarify what we're guiding to in the second half?

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Clive Cuthell, Speedcast International Limited - CFO & Joint Company Secretary [8]

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The former.

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Operator [9]

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The next question comes from Mitchell Sonogan from Macquarie.

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Mitchell Sonogan, Macquarie Research - Analyst [10]

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Just wondering if you might be able to just run through a little bit more detail on the impairment you flagged, just -- it is a detail on what divisions maybe drove it? Yes, anything further would be great.

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Clive Cuthell, Speedcast International Limited - CFO & Joint Company Secretary [11]

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Sure. Mitchell, thank you for that. We've included an appendix to a slide on the impact of the impairment. So firstly, I'd like to highlight that this is obviously a noncash charge, it has no impact on underlying EBITDA or cash flow, and it has no impact on borrowing agreements or covenant compliance. The Board and the audit committee regularly review asset carrying values. And as part of that, following our most recent earnings update, we decided to write-down the carrying value of goodwill, as we've said, by just under $155 million. This is particular to the non-government part of our business, so that is Maritime, EEM and Energy. And it's -- and the write-down is to goodwill, which arises on the various acquisitions we've made in the past. It's not particular to any of these divisions. The test was conducted when you take these units together. I hope that helps answer the question. Mitchell?

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Mitchell Sonogan, Macquarie Research - Analyst [12]

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Yes. That's good. And just looking in the notes, I think, mentioned sort of 1% organic growth rate was used in those sort of calculations. Can you maybe just run through how it was performed and how that flows into it?

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Clive Cuthell, Speedcast International Limited - CFO & Joint Company Secretary [13]

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Sure. We looked at the organic growth history of the business, which has varied over different years in the past and there's been some significant cyclical drivers that have impacted the trends that we've seen in -- certainly in the last 3 to 4 years. So there are onetime factors. The other thing I would emphasize is that when we look at growth rates for the purposes of an impairment calculation, we do aim to take a very conservative approach because we want -- we don't want to have impairment being recorded every 6 or 12 months. So we have adopted a conservative position when looking at the growth outlook of the business for this purpose.

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Mitchell Sonogan, Macquarie Research - Analyst [14]

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Okay. Great. And then just a quick one on the, maybe guidance, the second half underlying sort of costs or the costs related to the Globecomm acquisition and your cost out program, it was sort of $12.7 million I think in the first half, can you maybe guide to what we should expect in the second half?

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Clive Cuthell, Speedcast International Limited - CFO & Joint Company Secretary [15]

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We think that the total amount will be something of the order of approximately $5 million. And this is less about Globecomm synergies and more about the cost out program that we've announced that is expected to realize $20 million of annual savings.

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Operator [16]

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(Operator Instructions) The next question comes from Neil Carter from IFM Investors.

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Neil Carter, IFM Investors Pty Ltd - Global Co-Head of Listed Equities [17]

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The -- there's a note in the accounts which says that on the 23rd of May, management will issue 3.6 million shares as part of the LTIP at a nil cost to exercise. There are some performance hurdles attached to those. Can you just give us a fair bit of color on what those performance hurdles are? And also I note in the going concern note to the accounts that your discussions are underway to secure additional liquidity. What does it cost to increase your leverage with your syndicate from 4x to 4.5x? Presumably, there was -- they exacted a pound of flesh for that. Can you tell us what you had to pay to extend that? And then what you're going to do to secure additional liquidity going forward?

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Pierre-Jean Joseph-Andre Beylier, Speedcast International Limited - CEO & Executive Director [18]

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Thanks, Neil. I'll let Clive answer first on the covenants increase and what we're doing to increase our RCF, revolving credit facility?

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Clive Cuthell, Speedcast International Limited - CFO & Joint Company Secretary [19]

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Sure. So on the cost of changing the covenant, and this was purely a discussion, Neil, with our revolving credit facility lenders, which is a small group of 5 banks. The approval for the covenant change required 3 over the 5 parties to approve it. It was not subject to the approval of the much wider group of Term Loan B lenders. So that means we were looking at a bank fee in the order of few hundred thousands, but not more than that. The -- in terms of our plans on the RC and -- on the revolving credit facility, we, as you know, have a $100 million facility at this time, and we're doing -- speaking to our banks to increase that facility. Now that we have announced our half year results, we will be continuing these discussions with banks and looking to put in place additional funding over the next couple of months.

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Pierre-Jean Joseph-Andre Beylier, Speedcast International Limited - CEO & Executive Director [20]

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On the LTIP. So first of all, we've increased the percentage of the performance hurdle versus the retention piece in the LTIP, so it used to be 50% performance based, 50% retention, meaning you just needed to be employed to receive that half of the LTIP. It's now 100% performance based for myself, for the CEO, and 70% performance based for the rest of the beneficiaries. The 2 key performance, although, our -- the biggest one is shareholder return, overall shareholder return, and the second one is around the organic growth.

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Operator [21]

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Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Beylier for closing remarks.

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Pierre-Jean Joseph-Andre Beylier, Speedcast International Limited - CEO & Executive Director [22]

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Thank you, everyone, for attending, and we look forward to seeing you over the next few days during the roadshow. Thank you, everyone. Bye-bye.

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Operator [23]

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Thank you. That does conclude our conference today. Thank you for your participation. You may now disconnect your lines.