Innovate Corp (VATE) 2009 Q2 法說會逐字稿

Welcome to the Primus Telecommunications Group Incorporated strategy update call. At this time all participants are in a listen only mode. Following Management's prepared remarks we'll hold a Q&A session. (Operator Instructions) As a reminder this conference is being recorded today, Wednesday, September 23, 2009.

I would now like to turn the conference over to John DePodesta, Executive Vice President and co-founder Primus Telecommunications Group. Please go ahead, sir.

Thank you very much, Regina, and good morning, ladies and gentlemen. Thank you for joining us today for Primus Telecommunications strategic update call. I'm John DePodesta and with me on the call are Paul Singh, Chairman and Chief Executive Officer, and Tom Kloster, Chief Financial Officer. The format for today's call is for Management to provide remarks and then conduct a question and answer session. This call is being webcast with an accompanying slide presentation that can be accessed at our website at primustel.com by clicking on the link located in the "in the news box" on the lower left hand corner of our homepage. A version of the slides for downloading is also available through that link. Please be advised that statements made by the Company during this presentation that are not historical facts are forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

These statements may include but are not limited to revenue and earnings projections, statements of business plans and objectives, and capital structure and other financial matters. Forward-looking statements may differ from actuality and relying on them is subject to risk. Factors that could cause forward-looking statements in this presentation to differ materially from actual results are discussed in the Company's Form 10-K and 10-Q and other periodic filings with the Securities and Exchange Commission. The Company is not necessarily obligated to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. I'll now begin Management's remarks.

When we issued our second quarter 2009 results in mid August, we stated that we wanted to hold this call to introduce the new Primus to our investor constituencies and other interested parties and today we will discuss with you our operating and financial strategies. Let's beginning -- begin by turning to slide three, Primus today. For those of you who may be new to the story, Primus is a facilities based integrated telecommunications service provider uniquely positioned to serve residential, business, and carrier customers in multiple geographic regions. We have an extensive network infrastructure with global reach that is highly scalable to support significant growth. Our strategy is concentrated on capturing market share through optimizing our product mix through a growth focus on broadband, IP based voice, local, wireless, data and data center services in our primary Australian and Canadian markets, while optimizing cash returns and other services and markets.

We are focused on positioning the Company for long-term growth, while enhancing free cash flow generation through strong day-to-day execution, implementation of a $10 million annual cost reduction program already in progress, and maintaining capital spending discipline that deploys support to our broadband and data initiatives in our primary markets. With a strengthened balance sheet and reduced debt service burden through an expedited prearranged Chapter 11 reorganization, we now have flexibility to begin aggressively executing on a focused long-term growth strategy, while assessing opportunities to improve further our capital structure. Slide four depicts essential elements of our global network footprint and multiple platforms. Primus owns facilities based network assets in each of our global markets, which in turn are interconnected by owned and leased terrestrial and underseas fiber capacity.

The network components include 18 carrier grade international gateway and domestic switching systems, 500 points of presence, and network and data centers supporting our global VoIP network that connect to our wholesale partners in over 150 countries. Primus also enjoys a concentration of owned facilities based network assets to support nationwide operations in our primary markets in Canada and Australia. The scale and capability of our network represents a significant investment over the past 14 years and now allows us to grow our business with small targeted investments that offer high incremental returns. Slide five shows our diversified revenue mix by service, geographic location and product type, as of the second quarter of 2009. As depicted by the pie chart on the left, 31% of our second quarter revenues were derived from growth services, which include broadband, IP based voice, local, wireless, data, and data center solutions.

These are the services that represent our areas of growth focus going forward. While our traditional voice and dial-up internet services are subject to declining usage and are being replaced by other services, they continue to generate very healthy gross margin contributions. Geographically, our primary retail businesses are located in Australia and Canada, which together comprise 70% of our retail revenues and 58% of overall revenue. Wholesale makes up another 26% of aggregate revenue and a predominantly retail businesses in U.S., Europe and Brazil contribute the remaining 16% of aggregate revenue. Our product mix is arrayed in the pie chart on the right. Currently, revenues derived from customers purchasing our growth services total 31% of sales as shown on slide six.

Primus launched its growth services initiatives during late 2004. Even in a cash constrained environment, Primus has been able to grow these services dramatically to their current annual revenue run rate now approaching $250 million. We believe that these growth services represent the most fruitful ground for continued expansion. With improved liquidity we are now poised to invest selectively to further increase our share of these high growth, high margin services. Additionally, as we continue to scale these businesses, we expect to derive incremental margin improvements as we further leverage available capacity from our network assets and as we extend the product portfolio and geographic reach in our primary markets in Canada and Australia. Our wholesale business functions as a global buyer for Primus' retail traffic, generating leverage for retail margins, as well as improving incremental margin on services provided to our carrier customers.

We are further differentiated in the global marketplace by being an established player, offering IP and TDM services over one of the most extensive global networks. As I mentioned, our traditional voice and dial-up ISP businesses are decreasing in usage, as customer demand shifts towards wireless, IP, and other growth services. Our objective, as Paul will discuss, is to manage these businesses to optimize cash flow generation. Now I'll turn the call over to Paul for a discussion of our strategy by country.

Thanks, John, and good morning, everyone. Let's turn to slide seven to discuss our Australian business. Primus is the fourth largest full service carrier in Australia with over 300 million Australian dollars in annualized revenue. Primus is a well established brand in Australia that stands for value, quality, and innovation. We successfully and consistently deliver on each of these brand attributes as a result of owning and operating an extensive nationwide domestic network connected with the Primus global network. Primus Australia has more than 250 DSLAMs with fiber backhaul that allows us to provide on-net broadband service coverage to over 40% of the population. We own and operate three data hosting centers with about 22,000 square feet of premium hosting space. Our existing long distance voice network covers more than 95% of the population through 66 points of interconnect with Telstra, the incumbent carrier. Our on-net service margins are approximately twice that of our off-net service margins.

We have a good opportunity to grow the non-voice revenue and margin by expanding the footprint of our existing broadband network, increasing capacity and data speed. This will give us a competitive edge in winning additional business and residential customers. The regulatory environment in Australia is turning positive after years of ineffective and unworkable regulatory framework. Last week, the Australian government entered this legislation in parliament mandating a structural separation of Telstra's wireline, wholesale and retail businesses. This is a long-term positive for Primus. In other countries that have adopted similar separation structures that support competition, the non-incumbent participants have generally gained market share. Other regulatory changes proposed in this legislation should also lead us to better price up certainty and less regulatory risks in the future.

We do recognize that passage of the proposed legislation and implementation of the regulatory proposals will take some time. Our strategy in Australia is to profitably grow the market share in the growth service area that John talked about, i.e. broadband, IP, hosting and wireless. In the residential market, our strategy is to broaden and strengthen our on-net service bundles by continuing off -- by continually offering higher broadband data speeds and adding wireless services to our bundle. We plan to modestly increase our marketing spend in an effort to reverse the current quarterly decline in our residential revenue. The new market spend will focus on acquiring more high ARPU broadband and bundle service customers. We are pleased that our business revenue unit continues to show slight growth even in this tough economic environment. This is because we continue to deliver the best value in the marketplace with high reliability of service and a full portfolio of voice data and hosting services.

We have been expanding our target business customer segment by moving up market to compete for larger size customers and in the last six months, we signed $1million plus contracts with three year terms with six large companies. Our network infrastructure allows us to customize our solution to meet the growing and specific needs of -- of our business customers in an economic and speedy manner. We plan to continue growing the data hosting capacity in Melbourne, where the business demand is high, the competition is less intense and where Primus has been a respected member of the business community for the last 13 years since establishing its Australia headquarters there. Let's move to slide eight to discuss Canada. Primus Canada is our most profitable business with adjusted EBITDA of more than 22% of revenue and with strong operational performance improvement driving adjusted EBITDA growth over the last year.

We are the largest non-incumbent full service provider in Canada with a strong brand name. Our service portfolio includes voice, broadband, wireless, IP, and hosting services for both consumers and businesses. In Canada, Primus' brand name means strong value in terms of price and quality. We have an extensive IP based network infrastructure with six gateway switches in major cities, 26 points of presence, 70 DSLAM exchanges for broadband, and seven data centers in five cities, all connected by a fiber backbone network. Our on-net service margins are generally 70% to 100% higher than the off-net service margins. Our residential growth strategy is based on profitably increasing our market share in wireless, broadband and local services. We just announced today a new expanded MVNO agreement with Argus Communications that significantly expands our current wireless offering beginning in spring 2010.

Our serviceable wireless footprint will increase by a third to cover 94% of the country and our product functionality will expand to include wireless data so we can begin selling smart phones. This agreement would -- will allow us to -- allow us to offer enhanced voice and text packages, web access, picture messaging and ring tones. The new agreement exemplifies our strategy to position ourselves in high growth, high margin services giving us the opportunity to grow our wireless market share in Canada. We would also expand our geographic coverage for broadband and bundled services nationwide, initially through the sale agreements with the incumbents. These can allow us to win new customers near-term and prove our future long-term capital investments that, assuming an acceptable return, can bring these customers on at a later time.

In the business market, we are counting on driving growth by selling more of our existing data hosting and hosted IPPBX services along with other voice and data products. Data hosting and IPPBX services are highly profitable and are expected to deliver more than 30% EBITDA margin on incremental revenue. We have recently added data storage and virtual server value-added products to our current hosting portfolio. In addition, our new wireless agreement with Argus is expected to help sales to business customers with the introduction of smart phones. Traditional LD voice remains an important service for a majority of our business customers and we expect the revenue from traditional voice services to continue being a significant part of our total business revenue. Let's move to slide nine to discuss our wholesale business.

Primus wholesale is a global business with over $200 million in revenue generated over the last four quarters. We presently serve over 400 wholesale customers, primarily in the wireline calling card and VoIP detail segment. Our global network accommodates wholesale customers requiring IP or TDM access. While it accounts for a small portion of the overall consolidated EBITDA, the wholesale business leverages its traffic volume to deliver a lower cost structure for our retail units. On the other hand, the size of our retail international voice business gives the Primus wholesale unit leverage to negotiate lower prices with its carriers. Our extensive global network assets, our own retail revenue base, and over 13 years of reputation for delivering high quality service has put us in the top ranks of the global wholesale industry.

The strategy of our wholesale business unit is to improve its profitability through new initiatives such as -- one, adding more established and growing wireless VoIP and cable customers to the current software base; second, increasing the mix of higher margin on-net terminating traffic; and third, developing new value-added services including database -- database based routing, SMS and MMS services for Next Generation wireless and VoIP providers. Let's move to slide ten to discuss our other businesses around the world. Primus -- Primus' U.S., European and Brazilian retail businesses generated combined revenue of approximately $120 million in the past four quarters and with positive EBITDA and cash flow. Through our focus on execution, the perform -- the operational performance of these business units is steadily improving.

Primus' U.S. business has been improving its operational performance and produces over a 13% EBITDA margin. About 40% of its revenue is derived from residential and business VoIP services, which has close to a 60% gross margin. The residential VoIP service is offered under this Lingo brand, using a world class BroadSoft platform. The other growth service areas for Primus U.S. is hosted IPPBX services which uses the same BroadSoft platform with services tailored to the business customer. In Europe we have approximately a $55 million per year revenue business, which is predominantly detailed voice. Primus has a fairly extensive European network with IP switches connected by a fiber backbone in which we own IOU capacity. Our business in France is growing profitably at a double digit rate per year and makes up 40% of European revenue.

Our Brazilian business consists of a data hosting center in Sao Palo and sale of VoIP services to businesses and resellers. As in other countries, data center services are in high demand in Brazil, while the supply is short. We recently won a hosting contract that would add about $1 million per year revenue in the year 2010. A common theme among these businesses is that in each of them Primus competes as a facilities based niche provider of telecom services to consumers and businesses supported by existing high quality network assets. Our strategy with these businesses is to continue improving their operational performance and manage them for cash flow contribution. Let's turn to slide 11 to touch on financial highlights.

Our 2009 priorities are to begin revitalizing the growth segments of our business through the following actions -- Modestly increasing sales and marketing; expanding our product portfolio and sales coverage; improving of our cost structure by executing on the $10 million cost reduction plan; maintaining a strict financial discipline on our capital expenditures; and undertaking a portfolio assessment of our business. We are managing our business to improve free cash flow, while positioning the Company for a long-term success. We significantly delevered our balance sheet through the organization, with net leverage today of 3.2 times the past 12 months adjusted EBITDA. This has put us in a stronger position of choice with suspect to operational, strategic and financial decisions going forward. Now I will turn the call over to Tom Kloster, our CFO, for a review of the financials and cost reduction initiatives. Tom?

Paul, thank you, and good morning, everyone. I'll pick up with slide 12 entitled financial summary. Here we have provided a snapshot of a few key financial figures from the first and second quarter 2009 financial results. It is important to note reported sequential revenue growth was driven by favorable foreign currency translation. Exclusive of the favorable currency effect, revenue decreased from Q1 to Q2 by $11.1 million or 5.7%. A little more than half of that $11.1 million decline, or $5.8 million, was from wholesale services and the remaining $5.3 million decline was from retail services. Our efforts in this area continue to be focused on enhancing the pace of increase in our retail growth services revenue, while moderating the decline in our traditional retail voice and dial-up ISP revenue. Reported adjusted EBITDA for Q2 as compared to Q1 also benefited from favorable currency translation.

Despite the revenue decline we were able to improve our ratio of adjusted EBITDA to revenue through improvement in our gross margins and from continuing our cost containment efforts. Also, the growth in adjusted EBITDA was accomplished while increasing by $1.4 million our advertising and sales and marketing spend. Our capital expenditures were $5.7 million in the first half of 2009 and are reflective of curtailed spending while involved in the reorganization process. Our free cash flow for Q2 benefited from the lack of interest accrual on the majority of our debt during the reorganization process. Let's now move to slide 13. As evidenced by Q2 results, foreign currency conversion rates can have a material impact on the U.S. dollar reported results. Slide 13 shows the sensitivity of our revenue and adjusted EBITDA for a $0.01 change in each of our major operating currencies. However, it should be noted that Primus, in general, enjoys a natural in country currency hedge in that our operating units collect revenue and incur expense in local currency.

Thus, currency movements affect us in translation of our foreign results into U.S. dollars for financial reporting, but do not affect our operating unit profitability. The more important effect currency movements have on Primus relates to the transfer of foreign generated cash back to the U.S. for use in servicing our U.S. denominated debt. Our current annual cash interest expense is $31 million, along with U.S. dollar annual debt principal amortization of another $12 million, which creates the aggregate need for $43 million to be brought to the U.S. from the foreign operating unit profits. Thus a 5% movement in currency rates have roughly a $2 million annual effect on our U.S. dollar cash needs. To date we have not chosen to hedge this exposure, as we have not found it to be economical. Let's move to slide 14 to discuss our cost reduction initiative.

Here you can see the detail of the recently initiated cost reduction effort now under way. This current effort is intended to reduce annual cost by $10 million. The pie chart on this slide depicts the savings we expect to realize by expense category, which includes both cost of sales and SG&A expenses. These savings efforts crossover all of our geographic operating units. We expect to substantially complete implementation of these cost savings actions by the end of 2009, with material benefit realized in Q1 2010 and beyond. However, we may choose to redeploy a portion of these savings into expansion of growth services in our primary operating units. Going forward, you can expect us to maintain a sharp focus on cost containment, as we look for additional ways to optimize our operations and maximize free cash flow. Let's now move to slide 15. The capital expenditures strategy outlined on slide 15 emphasizes investments in growth products in our primary markets, Australia and Canada, while investing to maintain the value and competitiveness of our other businesses.

Consistent with a financial covenant in our term loan, capital expenditures will not exceed $18 million in 2009 and $23 million in 2010. In the first half of this year, we have spent only $5.7 million, as we limited our capital spending to maintenance and success based purchases while in the reorganization process. Our strategy calls for investing in growth services in our primary markets where we can derive the greatest EBITDA from incremental capital deployment. The pie chart on this slide shows the expected allocation of nearly 80% of our capital spending for higher growth, higher margin services such as data center expansion, broadband and network infrastructure, and back office systems to support such services. Consistent with our strategy, about 90% of our 2009 expected capital spend will be in our primary markets of Canada and Australia. Let's move to slide 16.

Slide 16 shows our debt and interest burden pre and post reorganization. Primus emerged from reorganization with a significantly strengthened balance sheet. Debt has been reduced by 55% to $256 million, annual cash interest expense by 50% to $31 million, and the net leverage is 3.2 times the last 12 months adjusted EBITDA of $67.3 million. We have calculated net leverage using the post reorganization total debt of $256 million and the June 30th cash balance of $41 million. On slide 17, you can see our debt maturities and scheduled debt amortization. As previously mentioned, a key priority for Primus is to assess opportunities to further strengthen our capital structure, particularly focusing upon the 2011 maturities. Let's move to slide 18. Our financial objectives for the remainder of the year are straightforward.

One, assuming constant currency exchange rates and providing for increased sales and marketing expenses for growth services continue to track ahead of the plan of reorganization's 2009 adjusted EBITDA target of $66 million; two, manage the business to generate positive free cash flow exclusive of the payment of reorganization expenses; three, manage capital expenditures to not exceed the financial covenant of $18 million; and four, assess opportunities to further strengthen our balance sheet. That concludes my remarks. I will now turn it back to Paul.

Thank you, Tom. Let's turn to slide 19. In summary, our strategic priorities for the near-term are as follows. First, driving profitable growth by emphasizing in our primary markets high growth, high margin services that are in demand by consumer and business customers today and will be in greater demand as the global economy recovers. Second, rationalizing cost to offset the margin impact from the loss of traditional voice and dial-up internet services. Our $10 million per year cost reduction plan described by Tom is part of this ongoing cost rationalization strategy. We will continue to pursue a highly disciplined capital expenditure strategy that deploys capital to our growth products.

Third, undertaking an assessment of other assets and businesses in our portfolio that will consider a full range of alternatives, including incremental investment, harvesting and potential disposition with the objective to optimize performance and cash returns over the long run. And fourth, opportunistically accessing the capital markets to strengthen our balance sheet and refinance our debt. This concludes my prepared remarks. Operator, please begin the Q&A session.

(Operator Instructions) Our first question comes from Joe Stauff with CRT Capital. Please go ahead with your question.

Good morning. Two questions and I'll hop back in the queue, but your wholesale business, strategically, is it important to your Australian and Canadian operations and then I have one follow-up.

I think the wholesale business, it does -- it's important from the point of view of the international voice business, because it allows -- it gives them the leverage to -- to benefit from the global buying power of the wholesale business. On the domestic part it really doesn't.

Okay. And on the 14.25%, obviously the next coupon is due in November and a portion of that you are able to elect to pick it. Do you have any -- do you have any stated plans with respect to your -- your intention to pay the full interest on that or to pick a part of that coupon and I'll jump back in the queue.

I think of a plan right now is to pay the full interest.

Okay. Thank you.

Our next question comes from Chris Roberts with Tejas Securities. Please go ahead with your question.

Good morning guys. Thanks for taking my call. First, on 2009 EBITDA projection you're tracking well ahead of what was the $66 million outlined in the plan. What's changing now and then? Is most of that just due to reduced spending during the restructuring process?

I think -- Chris, this is John DePodesta. I think -- first of all, I think we have to sort of look at the context in which those projections were originally made. They were made back in March in connection with our plan of reorganization and at that particular point in time you were looking at a global recession, much of which still remains with us, but the prospects were fairly bleak and unsettled at that point. We were also at a point in time when the U.S. dollar was still relatively strong and it has weakened considerably since that time. And another major element is as we were entering into the reorganization process, there was an uncertainty that's reflected in those projections in terms of what impact the bankruptcy could have on our underlying business. Now from today's vantage point, I'm pleased to report that our underlying business emerged throughout that process with a great degree of stability, both in terms of top-line revenue and our ability to generate the EBITDA. So looking back from today's vantage point, that $66 million of a plan may be deemed to be somewhat conservative.

And Chris, just to kind of add a little bit on the currency side of it, which is a material effect to us. In the plan of reorganization financials the currency assumptions on our major currencies were for Canada $0.80 and for Australia $0.65. And where we sit today Canada is closer to $0.94 and Australia is around $0.87. So there is some material effect of currencies, but even exclusive of the currencies, we're tracking well favorable or well in line with that plan of reorganization.

I think I want to reinforce John's point of that there were businesses through the bankruptcy did perform, I would say, much better than expected. And this the credit goes to our local management and now that as we have restructured, I think this also puts up -- puts us in a more positive position as we kind of can negotiate cost with our partners because we went through that phase actually without disrupting any -- any of the relationships.

Okay, great. Thank you very much.

Our next question comes from Jiten Joshi with Pali Capital. Please go ahead with your question. Please check and see if your phone is on mute.

Good morning, gentlemen. This is Jiten Joshi from Pali Capital. Just to follow-up on the last gentleman's question. If you were to quantify the expected outperformance relative to the planned EBITDA for 2009 as a split between currency and better operating performance, how would you handicap that breakdown? In other words, what percent do you think is as being contributed by a weaker dollar and what percent is being contributed by better operating performance than was expected at the time the plan was put in place?

If you're looking at the adjusted EBITDA line, I would say you're getting a substantial benefit from the currency. In percentages, I'm not quite sure, but a substantial benefit is there from the currencies and if I was to pick a percentage I'd probably say that somewhere in the 75% of the benefit and 25% is from operations.

I appreciate that. You've chosen not to sort of update your 2009 EBITDA number, but given that we're through significant or most of the third quarter, are you able to quantify for us at all on a sequential basis how the Company is tracking, at least for the third quarter on revenue and EBITDA?

Yes, I think we've chosen not to put those numbers out, but we will be reporting our Q3 results in most likely early November, so I think we'll disclose that information at such time.

Okay, thanks. One sort of question on you talked about the refinancing initiatives and an ongoing effort to improve the balance sheet. As the maturities come due, and the credit facility and the Canadian facility comes due in 2011, might you explore it more regional approach to your senior secured financing needs and then possibly establish an Australian facility, as well as possibly a Europe -- a pan-European facility that will also help you match your currency a little bit better in terms of liabilities in your -- in your operating currencies?

I think the short answer to that is that all alternatives that could be realistic would be explored.

One last question on the business front. Wireless substitution has obviously been a very key issue in terms of eroding your legacy voice business. You seem to have strong MVNO agreements and services in Australia and Canada. However, I believe in the U.S. it's not as big a part of your business. Is there a possibility to expand the wireless offering in the U.S. and make it more robust than it has been to date?

Yes, I think that, yes, it is difficult because of the scale of the -- of a U.S. business, it's hard to find MVNO agreements that generate sufficient margin, sufficient margin to support the aggregative spend and growth of that business thus far. I think focus would be more on actually having wireless data services to resell with the -- with the wireless carriers here. I think that's one thing we're looking at, which again the idea is to strengthen the bundle first for our residential customers and for the business customers we more likely to look at smart phones and, again, for the data part of the services.

Great. Thank you very much, gentlemen.

Yes.

Our next question comes from Eric Shahinian of Kingstown. Please go ahead with your question.

Thanks for having the call guys. So, my first question is we touched on CapEx. Is there any that's being delayed into -- to -- into the second half that we should know about, kind of how you're thinking about that? I know it will be less than 18 but do you guys have some kind of indication of where that will end up?

We clearly think the CapEx spending that we incurred in the first half of the year, $5.7 million, was unusually low. So we managed our CapEx spending as we were going through the reorganization process and we're evaluating the opportunities that we have for expansion of the growth products during the second half of the year. So, we know we have a hard and firm target there that we can't exceed $18 million, but I think you would see our CapEx spending go up a little bit from the levels of the $5.7 million we incurred in the first half.

Okay. So you'll probably get pretty close. And then just -- .

And one thing I will mention that maybe didn't come across is on those covenants, there's a covenant of $23 million in 2010, but any under-spending in 2009 can be carried forward to 2010.

That's helpful, okay, thanks. And then my follow-up question would be on slide five you broke out growth wholesale and traditional revenue. I want to know if you guys could touch on perhaps EBITDA or gross margins for each of those, even roughly.

Well, on wholesale I think we've said that the EBITDA is relatively low and you see that on a different slide. The growth services and the traditional services a little bit more challenging to -- to spread the margins on those, but the traditional services do have healthy margins and -- and the growth services, especially with the data center business, which is very very high margins, and then some of the off-net services that we're offering still have very healthy margins on them. So, I'd say there's not a material difference between the margins on the two sets between growth services and traditional.

Okay.

I think what's important is in the data center business, first of all to develop space, it's a process of six to nine months that the capital expenditures have to be committed based on the demand forecast and the gross margins also on the different products increase over time. For example, the data center once you fill up enough capacity to cover the fixed expenses of the data center itself, after that the incremental EBITDA shoots up because you have all of the costs covered. So every incremental revenue now is basically falls into -- for all the gross margin falls to the bottom-line. So, some of these growth products, I think it takes time to get to, especially on the new facilities you set or new investments, take time to breakeven. After that one they have a huge, much higher profitability than our current EBITDA percentage, so they would be accretive to overall EBITDA.

Thanks.

Our next question comes from Peter Kim with ISI Capital. Please go ahead with your question.

Good morning. Most of my questions have been answered but let me just ask two. One is on the -- the portfolio management side, is there a certain low hanging fruit that in terms of businesses or markets that you're looking to for potential reallocation of your portfolio? I was thinking what your thoughts on the WiMAX spectrum in Canada or if there's any progress in terms of trying to monetize more of that spectrum. And then I have one quick clarification on the $10 million savings, what baseline is that from? Is that from the fiscal year 2008 level?

Peter, I think, as Paul described, the portfolio assessment is really intended to evaluate a broad range of alternatives regarding our businesses outside of the primary markets and those could include incremental investment, harvesting the cash from the businesses and potential dispositions. Again, with the overarching goal of how do we optimize cash returns. And with respect to your specific question with respect to the Canadian spectrum, WiMAX spectrum, I'm sure you recognize that about 18 months or so ago was a sale of some of the rural spectrum in Canada and we generated about CAD5 million in value for that transaction. That is one of the assets that would undoubtedly be a part of this portfolio assessment. And --but that process has been launched and is under way and we don't have the recommendations in hand yet.

And Peter, I'll follow-up on your question about the $10 million cost savings actions. Cost savings and cost reductions have been a -- become a normal part of our business and I think with our traditional services and as those change, we'll continue to focus on cost savings to match the change in our revenue streams. But the $10 million that we announced and specifically talked about is $10 million incremental to our current levels of spending. So it's not compared to 2008, but to our current levels of spending to reduce those down by $10 million annually.

I see, thank you.

(Operator Instructions) Our next question comes from [Baruk Baruki with Marquet Research]. Please go ahead with your question.

Good morning. On your slide 13, you show the impact of currency. I was just curious if that was year-over-year or sequential quarter?

No, that -- It's not tied to year-over-year or sequential. It's just meant to be based on our revenue today for our EBITDA today generated in those foreign markets how much a $0.01 change in that currency would affect either our top-line or our EBITDA. Does -- does that help?

Okay, for a year.

So it's -- if I took my second quarter revenue and converted it at a rate and take Australian dollars that was $0.01 higher, it would generate $3.1 million of additional revenue to be reported.

Okay, thank you.

Sure.

Our next question comes from Arthur Burns of Deltec Asset Management. Please go ahead with your question.

I noticed a flurry of 13 D and G filings and I presume, not having looked at them carefully, that the old bondholders who got stock are selling and A) is that the case and B) are you noticing people out there willing to accumulate? How does it look from where you sit?

Well Arthur, we don't really inquire of our -- of our base in terms of what -- what their intentions are. I think coming out of reorganization it was probably not surprising to know that once the -- once the equity was reaching certain levels that there may have been some who were not necessarily natural holders of equity which would take advantage of an opportunity to trade out and I think some of that has happened. But I think, correspondingly, we've also seen through these filings some accumulation of interest on behalf of some new investors and we welcome them and invite them to participate.

Thank you very much.

Our next question is a follow-up from Joe Stauff of CRT Capital. Please go ahead with your question.

Thanks, again. Tom, I think you had mentioned sort of the -- the CapEx allocations that you guys expect to make this year, you said 90% of them were directed to Canada and Australia. Is that correct?

That's correct, Joe, yes.

And -- and where in particular, as you think about most of the capital again sort of allocated in Canada and Australia, where are you directing that?

Well, it's -- it's going to a variety of our products, but -- but as we mentioned primarily focused on our growth products. So very little of that will end up being the traditional voice. We're spending very little capital on that, but on data center expansion, expansion of various services that we provide in our data centers, expansion of our networks to handle the IP growth products that we're selling, increasing the speed and the capacity of our IP network in Australia and in Canada.

Basically, in hosting and broadband and IP. Those are the three areas where most of the CapEx is going. I think in our voice network we do have excess capacity because our revenues have come -- come down over the years, so for there, obviously, general -- there's no capital investment needed other than the maintenance that may be needed.

And how do you think about, again, sort of the lead time associated with investing that capital, like you said, in those particular areas and when you think that could start accruing to incremental revenue and EBITDA.

Well, do you know what's interesting is, as John said, the -- our growth business on a total scale approaching $215 million is a fairly large business in these growth areas. And having been capital constrained, we still have been able to grow it and gradually invest as much as we could in these networks. So today, data hosting business, which we said is 4%, so that's about $30 million plus business. But if you looked at it in Canada where we are now becoming a general pretty good size player in terms of the square footage we have, we are in five major cities now and we are focusing in on making that as a growth business for us. The other characteristic of the data hosting business is that by itself is going global. And so as we compete with other players, we also have data centers in Australia and so that could become a sizeable business for us.

So as we look at putting investment, we want to make sure now we can strengthen our market position in that one and become a sizeable data hosting business. So we will look at investing in sales, investing in products, like I said, in the hosting business that we are now in addition to call over we have virtual storage, virtual servers. We are beefing up the organization so we are a world class player in terms of offering manage hosting. So all these efforts are being made to, for example, just grow that business, which obviously has -- is very valuable in the marketplace, but is also important for our business customers. That's just one example of how we would look at investing. And broadband, obviously, is key to the future as more of the television services, voice services would all reach the customer through the broadband connections. So in Australia and Canada, more investment would go to beef up the capacity, the data speeds and so on.

Fair enough. And then could you just give us a little bit more commentary in terms of the Australian market. Again, historically, it had been a weak regulator there and you had historically been hurt as a result of that and what is the view now again with respect to the regulator? Are they much more aggressive and what's sort of driving, obviously, the effort to break up Telstra?

I think the biggest -- the first benefit is just more clarity and direction. Like for last several years, last at least two -- yes, about two years, it was very difficult to make investment decision in the broadband infrastructure, because the government and the regulatory framework was not clear whether Telstra would walk away with general fiber to homes and disconnect all the copper connections and we could be left with stranded general investment. So now that is clear -- the timing is not clear but the direction is clear. So having the direction is a big help. So now when we say, hey, we need to -- we have customers in these areas, we want to invest in it, we know we would have sufficient time to get the return out of our investment and therefore we can make the investment. Last couple of years we had decided to actually not invest too much money in broadband network because of this regulatory uncertainty. So I think having certainty helps us to make the decisions based on what the market demands, rather than based on what regulatory impact make.

And, Joe, I would add to that that during this period, Primus has not been on the sidelines as a passive participant in this process. We have been very active in advocating, quite frankly, a policy positions that the government of the day is now annunciating as policy that they want to have enacted in Australia. We have been a founder of one of the major organizations in Australia among competitive access seekers and our general manager, Ravi Bhatia, there is an oft quoted and ever present figure in that public policy debate. Similarly here in the U.S. we've been very active in working cooperatively with the U.S. Trade Representative to weigh in on what we had perceived in the past as an anti-competitive regulatory environment.

And the U.S. Trade Representative has advocated positions involving structural separation, as well as a total overhauling of the regulatory framework. So it's clearly heading in the right direction. We hope that the law gets enacted. There will be implementation periods and we'll have to see how the regulatory philosophy emerges. But as Paul indicated in his early remarks, this is the high watermark for us in terms of our 14 year experience in Australia in terms of seeing the tide change and creating a conducive regulatory environment. With that, Regina, I'm afraid that we are going to have to take the last question.

And the next question is from Eric Shahinian with Kingstown. Please go ahead with your question.

Okay. So a couple times in the presentation you guys just mentioned best value, strong value and price. We've heard this before. I was wondering if you could put some numbers to it, kind of explaining the positioning from the customer standpoint and how you compare and how you kind of try and integrate the various offerings that you have.

In general, the pricing point compared to the incumbent, or what we consider to be close competitor in a particular service, the gaps range somewhere between 10% to15%. But other times, in terms of value, we may also give them, like on broadband, part of it lot more data capacity than the others may do. Unlike in the U.S. where we have all you can eat type of broadband connections, that's not the case in Australia and in -- in Canada. So we have been actually coming up with pricing packaging sort of innovation by giving them more for less. So between the pricing point and giving them more data, more kind of, like in Canada for example, in our broadband packages, in order to differentiate ourselves against the incumbent, we introduce for a small fee per month unlimited calls to 50 countries and that has, actually, got a lot of traction, but the idea was that the incumbents could not actually do that because of their market share. And so we do things where we could add services to it but net to net the pricing generally ends up 10%, 15% range.

That's very helpful, thanks. And then just one quick question. Cash on hand or kind of a 9-31 balance. Do you guys have any idea on that or kind of say where you're tracking?

Well, I think, comment we made on cash in our second quarter earnings release was we had about $41.5 million of cash as of June 30th. We did mention now that there was fairly high. We stated as a result of having not paid yet certain reorganization expenses that are getting paid out during the third quarter and even some will carry forward into the fourth quarter, as well as there's some other tax payments to be made in Canada, so that we had stated those working capital items, whether it's reorganization expenses or tax items, would generate about $16 million of payments so that the -- the way to think about the normalized cash balances of June 30 -- 30th was about $25 million. So that balance is probably the more likely balance to think about going forward on a normalized basis.

So you're tracking pretty close to that number?

Our operating results are tracking well.

Okay, thanks, appreciate it.

And that is all the time we have today. I'll turn the call over to Mr. Singh for any further remarks.

Thank you, everyone, for joining us today. We look forward to providing you an update on our third quarters conference call. Thank you.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.