Overview
Titan announced today that it would exit the International
telecommunications business. Titan will leave the industry by selling or
winding down this business segment. The Question and Answer session centered
on the overall impact of this move on the company's future. |
Key Data |
|
Announcement - Overview
|
|
Announcement - Operational Details
|
|
Announcement
- Financial Details |
|
Executive Summary
|
|
Question and Answers
QN: Steve Murphy
QC: CIBC Oppenheimer
Q: A few questions about restructuring wireless unit. You mentioned $4m loss, what was the revenue?
AN: Mark Sopp
A: Roughly $45m for the Q
QN: Steve Murphy
QC: CIBC Oppenheimer
Q: When you talk about cash impact of $13m, is that assuming you get this unit to break even in the 3Q and keep it there until it’s sold? Can you talk about the cost structure of the unit and what revenue run rate it runs at at break-even? Is there a chance $13m might not be sufficient?
AN: Eric DeMarco
A: What we are going to do is run that business at only positive gross margins. We had new routes we expected to open up in late May and June. When they did we had significant under pricing. We will have to eliminate any routes that have a negative gross margin as we wind down and try to sell the business. If the business cannot be very close to break even while we sell them, we may make some hard decisions to wind them down and shut them down quickly. We do not expect that $13m figure to be significantly higher at all because of the actions we are taking.
QN: Steve Murphy
QC: CIBC Oppenheimer
Q: So you have a significant or a reasonable portion of the revenue run rate on profitable routes now, which are on long term contracts?
AN: Eric DeMarco
A: No these contracts are not long term at all. We can exit these contracts very quickly. The revenue number may come down precipitously because we will manage it to only profitable routes to make the business break even. I believe the $45m revenue number may be lower in the Q. Because I don’t believe, as I see it, profitable routes generating that type of a volume.
QN: Steve Murphy
QC: CIBC Oppenheimer
Q: I was speaking more of the customer side about the contracts that are in place.
AN: Eric DeMarco
A: Theway these contracts re written today, these customers are free in a very short period of time to go to the provider that is costing the least.
QN: Steve Murphy
QC: CIBC Oppenheimer
Q: So your profit is not competition based?
AN: Eric DeMarco
A: Yeah.
QN: Steve Murphy
QC: CIBC Oppenheimer
Q: There is about $50m on balance sheet in category of long-term project receivable related to Benin. How is that handled and what is the expectation whether that will be collected?
AN: Eric DeMarco
A: The expectation from a cash standpoint, that's a government contracted entity. We are being paid, and we expect to go after and collect that. In addition to that we have approximately $30m of political risk insurance in the event there was any issue with the government there becasue our contract there is with the government-owned PTT.
QN: Steve Murphy
QC: CIBC Oppenheimer QN:
Q: Is there any change in the status of the SEA acquisition and when you expect to close? Will there be a renegotiation?
AN: Eric DeMarco
A: I believe there may be a slight renegotiation, hopefull this transaction will close in this Q
QN: Mike Crawford
QC: B. Reilly and Company
Q: Further to Benin, the receivable, and the insurance. How does that factor into the $13m net cash use expected from the whole wireless situation?
AN: Eric DeMarco
A: It does not. The revenue and net cash generated from that project is covering all operating expenses plus profit. Operating costs for that for Titan are very low because the network is complete and we are just co-operating it right now for the government.
QN: Mike Crawford
QC: B. Reilly and Company
Q: If you did collect the $50m how does that affect things?
AN: Eric DeMarco
A: It would offset it. The $50 would net the $13 and you would have a net of $37 positive.
QN: Mike Crawford
QC: B Reilly and Company
Q: What about some of your virtual product network business in Africa with banks and oil companies, Coca-Cola, etc?
AN: Eric DeMarco
A: We will be turning those over to our partners and affiliates as we exit the business.
QN: Mike Crawford
QC: B. Reilly and Company
Q: Is there any change in the status of the accounting for that business segment?
AN: Eric DeMarco
A: No, there are no issues like that. That business is solid as a rock
QN: Mike Crawford
QC: B. Reilly and Company
Q: When was the last time you had a government audit?
AN: Eric DeMarco
A: We like most government contractors are under a constant audit process. There are auditors on site. It is a continuing process.
QN: Mark Jordan
QC: A G Edwards
Q: With previous expectations for corporate overhead somewhere around $22m for next year, does backing out of wireless impact that number?
AN: Eric DeMarco
A: Over the next couple weeks, we are going to be going over corporate budget top to bottom. I imagine there will be some impact. Right now it is a little too early to say.
QN: Mark Jordan
QC: A G Edwards
Q: On Benin again, your assumption that there will be zero recoupments across the board, to the extent you do get payment back from Benin, which you do expect, and they are paying as we speak that would offset the current $13m cash loss that you would see?
AN: Eric DeMarco
A: Absolutely. Over next 12 months, excluding Benin we are going to have cash out related to this exit at $13m. I believe we will collect the $50m. The 50 will offset the 13 for a net positive 37.
QN: Mark Jordan
QC: A G Edwards
Q: Winding down would be a positive cash flow event from nothing else than Benin?
AN: Eric DeMarco
A: From a cash standpoint, yes.
QN: Mark Jordan
QC: A G Edwards
Q: Do you have a grasp of free cash flow generation of Titan systems and merging tech which be left for 03?
AN: Eric DeMarco
A: We just started working that this morning. We have not had time based on what we have done. I'd rather wait for the next call and be precise.
QN: Mark Jordan
QC: A G Edwards
Q: As you stated, Titan Systems, excluding the change on a wireless model, that systems was on budget, and there was nothing you would change in terms of the expectation you have laid out for the systems business over the balance of this year and next? Is that right?
AN: Eric DeMarco
A: They did a little better than we expected in Q2. We expect to be very solid going forward.
QN: Steve Levinson
QC: Gerard Klauer Mattison
Q: Can you give us an idea if the magnitude of improvement in DSOs was all related to collections on the defense business, or did it relate to other segments?
AN: Eric DeMarco
A: Collections. 99% in defense and government business and a little bit elsewhere. It was all cash collections.
QN: Steve Levinson
QC: Gerard Klauer Mattison
Q: Can you give us an idea based on your current understanding what sort of increases you expect to see in government outsourcing?
AN: Gene Ray
A: In general we see defense budget increasing. Segments that we are in, IT as well as some others, like the affordable missile are areas that are getting increased funding. Whether there is an increase in outsourcing or not, we believe the market we are in is getting larger. We believe we can get a larger penetration of our market, a greater market share
QN: Colin Gillis
QC: RBC Capital Markets
Q: Regarding the SureBeam spinout, do you think there might be any cross effects with exiting the wireless business that we should be concerned about?
AN: Eric DeMarco
A: There is nothing I am concerned with at all. It is on track.
QN: Colin Gillis
QC: RBC Capital Markets
Q: Is there going to be a lock up on the shares, the dividends?
AN: Eric DeMarco
A: No lockup
QN: Steve Murphy
QC: CIBC
Q: Given your mention of changing philosophy, more licensing of technologies rather than operations, will that have an impact on your current portfolio? Brief overview about the results for Titan tech in the 2Q about break-even.
AN: Eric DeMarco
A: On the business in the portfolio like Titan Scan -- non-food, non-flour, non-produce technology side that business is growing very well, is very profitable. We will continue to build that business because it is generating positive cash flow. We will look to monitize it when the valuation is appropriate. On new technologies that come out of our defense and government busienss. Under the new philosophy, we will probably provide some feed money as we do marketing studies, competitive studies, we may put some seed money in. However we will not be building a SureBeam in Titan Wireless where it takes tens of million dollars. Pivot (phonetic) place was sold to Intel for $500m. We openly gave up 90 or 91%, but we did receive a dividend of $40m. It will be more of that philosophy going forward, rather than putting at risk several millions of its own capital which can impact the predictability of our earnings stream.
QN: Steve Murphy
QC: CIBC
Q: Given the downsizing, you're with the model you want now?
AN: Eric DeMarco
A: I don't expect significant changes, but lets wait for 2Q and go through everything.
QN: Steve Murphy
QC: CIBC
Q: About how much was current receivables which was about $398m last Q was from tech wireless??
AN: Mark Sopp
A: Right around a $100m including the receivable from the government of Benin (phonetic).
QN: Adam Wiener
QC: CSFB
Q: What is the run rate of what you consider ongoing Titan wireless, like if you were to breakout revenue of $45m, how much of that is ongoing?
AN: (unidentified)
A: You mean for the services side?
QN: Adam Wiener
QC: CSFB
Q: From the whole (indiscernible) of long distance.
AN: Eric DeMarco
A: Approximately $40m
QN: Adam Wiener
QC: CSFB
Q: 40 of the 45m
AN: Eric DeMarco
A: Yes, approximately.
QN: Adam Wiener
QC: CSFB
Q: Going forward are you going to report these figures as continuing operations in the back half of the year?
AN: Eric DeMarco
A: We are working that issues with our accountants right now. It's very possible that run rate may drop participiously (phonetic) as we narrow it down to get ready for sale. That run rate could come down significantly as we streamline.
QN: Adam Wiener
QC: CSFB
Q: What was the net debt at the end of the Q?
AN: Eric DeMarco
A: Net debt was approximately $300m, cash on the balance sheet.