美國電塔 (AMT) 2002 Q3 法說會逐字稿

Good morning. My name is Chrisy and I will be your conference facilitator. At this time I would like to welcome everyone to the American towers third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during that time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your telephone keypad. I would now like to turn the conference over to Miss Ann Alter, Vice President of Finance and Investor Relations and Brad Singer, Chief Financial Officer. Miss Alter, you may begin your conference.

Thank you. Good morning and thank you for joining American Tower's conference call regarding our third quarter earnings.

We'll begin with comments from Brad Singer our Chief Financial Officer, Jim Taiclet, President and Chief Operating Officer, and Steve Dodge Chairman and Chief Executive Officer. We also have other members of our senior management team with us for questions. We'd like to remind you this call will contain forward-looking statements that involve a number of risks and uncertainties.

Forward-looking statements include discussions about our quarterly and full year 2002 and 2003 outlook, statements regarding our goals, beliefs, strategies, objectives, plans or current expectations and other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's press release and those set forth in our form 10-q for the quarter ended June 30, 2002 filed with the SEC and other SEC filings. We urge to you consider these factors and remind you that we undertake no obligation to update the information contained this this call include forward-looking statements to reflect subsequently ocurring events or circumstances. Now I'd like to turn things over to Brad Singer.

Thanks, Ann. We continued our our solid execution in the third quarter. Total revenues for the third quarter decreased slightly to $267 million and EBITDA before structuring expenses increased 27% to 86 million from the same period of 2001 and almost 7% sequentially from the second quarter. Our net loss from it operations weres 287 million. Our third quarter results included a $271 million non-cash charge for impairment of assets primarily related to Vera star. I will elaborate on this charge later in the discussion.

On the difficult telecommunications market a revenue and cash flow growth on the same tower basis for the 11300 towers owned as June 30, 2001 was 15% and 24% respectively. We added 25 net anualized BVE on the 13,000 wireless towers owned during the third quarter of 2002 and ended the quarter with a average of 2.0 broadband equivalent across our entire portfolio of North American wireless towers. Tower revenues and operating cash flow were 141.7 million and 86.7 million. Increase of 18% and 33 percent respectively from the third quarter of 2001.

Tower revenues grew sequentially at 6.2 million from the second quarter of 2002 while the towers expense was decreased slightly during the quarter producing a sequential cash flow increase of 6.5 million. We converted 103% of our quarterly incremental revenue added to our towers and cash flows and improved operating margins sequential by 190 basis points to 61.2%. Looking back a year we grew tower revenues by over 86 million on a run rate basis between the third quarter of 2001 and the third quarter of 2002 and actually reduced expenses in absolute terms from 2001 to 2002 enabling us to convert the entire 86 million into revenue increases in cash 7 flow and increase our margins over 700 basis points over the last twelve months.

We signed an agreement to sell our headquarters building for 68 million consequent to the third quarter. The building has historically produced approximately 8 million in annual revenue and 5 million in annual cash flow for the rental and management division respecting net 30 million cash over the repayment of the 38 million mortgage and recognize a pretax gain of approximately 8 million on the transaction. We anticipate closing this transaction in the fourth quarter. We updated our fourth quarter revenue guidance to reflect our third quarter revenue run rates the reduction in new tower builds and anticipate closing of our headquarters building in the fourth quarter. We estimate fourth quarter revenues to range between 146 and 149 million. Given our continued improvements in operating efficiency we made no changes to the lower end of our cash flow guidance and reduced the high end to match with the tightening of our revenue outlook. The services division reported revenues of 67.7 million and cash flow of 6 million for the quarter. Our margin decreased sequentially reflect the challenging environment for services. However in the face of these pressures we believe we're doing a credible job maintaining cash levels at these levels. We remain cautious with our outlook as we move into the fourth quarter and anticipate our service revenue to range from 50 to 60 million in the fourth quarter and service cash flow to range from 6 to 7 million.

Various reported modest sequential revenue and cash decrease from the second quarter with 57.3 million revenues and 34,000 in cash. Vera star continues to experience a difficult telecom market resulting in continued churn in its smaller customer base and bankruptcy of several large providers. As a result there's a continuing difficult enviroment in which Vera star operates we're reducing our guidance for the the fourth quarter. We anticipate revenues of 50 to 55 million and cash flow 0 to 2 million in the quarter.

The company recognized an impairment charge of 271 million in the third quarter. The bulk of the charge was related to the write down of certain long lived Vera star assets whose value we do not expect to recover from our separation of the business. We've written down Vera star's assets net of liability such as capital leases down by 188 million to 50 million. We are also taking a 40 million dollar charge to reduce our construction progress inventory to reflect our significantly reduced future capital spending plan.

At the beginning of 2002, we maintained over 1,000 sites in our development inventory to meet our anticipate new built plan in the next two years. Based on decision to further reduce the scope of our development activities we've decreased our current inventory to slightly over 200 sites. We've also taken a 43 million charge related to the loss and or impairment on 400 non-core non-productive tower assets that have been or expected to be sold as we continue to actively focus on portfolio improvement. We believe the balance of our portfolio is reasonably valued based on current performance and gross prospect.

We continue to work hard on reducing corporate overhead as we sequentially reduced expenses by almost 1 million for the second quarter to 5.6 million and 2 million from the 12 third quarter of 2001. We believe we will continue to reduce our corporate expenses in the future.

Capital expenditures continue to decrease sequentially to 29 million from the quarter to 39 million in the second quarter. We've provided a breakout of cap-ex spending. We anticipate fourth quarter cap-ex to be around 30 million as we complete the last 7 million in new broadcasting site expenditures. Our free cash flow defined as EBITDA or for restructuring accrued cap-ex and interest was negative 9 million for the 3rd quarter. We expect to narrow this gap in the fourth quarter as we continue to March towards positive free cash flow in early 2003.

Having looked forward to 2003, we've provided our preliminary outlook for next year. We anticipate tower revenues between 610 and 640 million from tower cash flow between 390 and 415. Our tower guidance is based on the fourth quarter of our 2002 revenue outlook and anticipated revenue growth of 10 to 14%. Our tower cash flow anticipates capturing a vast majority of the incremental revenue was we continue to successfully control our tower cost structure.

Our rental and management outlook excludes the revenue and cash flows related to the building to be sold in the fourth quarter of 2002. We remain cautious in our 2003 services outlook with anticipated revenues from 175 to 225 million and cash flow ranging from 20 to 30 million. Our guidance excludes successful execution of our strategic divestitures that have not been announced today related to several non-core service operations. As a result of the difficult enviroment which Vera star operates we are cautious with regards to 2003 guidance for revenue and cash flow our revenue cash flow. Our revenue forecast of 200 to 220 million assumes minimal revenue growth and our cash flow of 10 to 15 million is the result of identified cost initiatives that we have and will continue to implement. Our 2003 capital expenditure level diminish significantly over 2002 levels due to substantial lowering of newly built towers, the completion of our broadcast built program and additional reductions in Vera star. We anticipate building approximately 100 to 150 new towers with minimal broadcast cap Ex in 2003. Our total management division cap Ex is between the range of 45 and 65 million, which is the combination of our new build cap Ex and our maintenance and redevelopment cap Ex.

We anticipate $2 to $5 million cap-ex spending in service division and between 8-10 million cap Ex at Vera Star. The combination of our strong and reduction in cap-ex is expected to enable us to become free cash flow positive in early 2003. For the full year based on the current interest rate environment we expect free cash flow to range between $50 million to $120 million. Our company continues actively manage its financial position.

As of the end of September we had 65 million in cash and have not borrowed since April on the revolving loan. As of the end of the third quarter our draws remained at $160 million. We have and expect to continue to deleverage sequentially in each future quarter. Our total debt to last quarter EBITDA decreased another three quarters to 10.5 times. We anticipate ending the year under 10 times total leverage. Based on our performance in relation to our bank covenance we have the ability to draw on the full undrawn $490 million remaining availability of our revolving loan as of the end of our third quarter.

Our total liquidity was 555 million which is a total of 65 million in cash and remaining 409 undrawn portion in the 650 revolving loan. Given that we expect minimal borrowings we believe we have more than sufficient resources to execute our current business plan based on our current financial position. Subsequent to the end of the third quarter, we amended our bank facility to provide additional performance in the future. We have also carved areas to facilitate a sale for Verastar. We believe both of these changes to our existing credit agreement provide us with improved flexibility through 2003 and beyond. We paid a 25 basis point amendment fee and increased our borrowing margin.

We continue to be focused on finding a solution for issues raised by a two and a quarter convertible note that may be put to us in October of 2003. We are pursuing possible several alternatives. First discussions with note holders, of potential exchanging in existing securities for new securities. We're also exploring new investment alternatives with the goal providing a solution and adding to the overall of our financial position.

As we evaluate our alternatives we remain mindful of the impact of any potential revolution on all of our stakeholders, to our senior notes and convertible investors to bank lenders. We remain confident in our ability to execute a solution in early 2003 as we have previously stated. American Towers President and CEO Jim Taiclet will provide several brief comments with regard to our operations.

Good morning. As Brandon described even in this very tough year we posted solid results in our four tower and related services business. Our executive team's attention has been riveted on revenue growth, cost reduction and cap-ex control. On the top line our tower leasing growth rate is consistently among the leaders in the industry and delivers this result on the largest tower base north America.

Our senior team has been personally involved in setting a solid contractual platform with each major customer and driving customer focus at all levels of our organization beginning with Steve and myself strengthening the corporate relations with our customers in the U.S. at the regional levels Stephen and his team have worked those relationships hard and perhaps most important our field organization led by twelve general managers on a daily basis with the engineers and real estate managers that make the day-to-day decisions on infrastructure. The result of our focus on the top line has been the consistent five to six million dollars of increases in tower leasing revenues each quarter and an 18% increase in the third quarter '02 revenue versus the prior year.

At the same time as we've described to you during previous conference calls, we've been implementing a cost reduction program in our towers and related services businesses that we launched last January . The key elements of this program and towers including reducing the number of regions in areas, eliminating layers of overhead, combining construction and tower operations and consolidating the back office have essentially been completed. As a result we expect our run rate of tower regional expense to continue to be reduced throughout 2003.

As Brad mentioned we have had similar success in reducing corporate expenses. An important enabler of expected expense reduction at corporate is stream line and simplification of the company to focus our our core tower business. In taking out the costs of increasing responsibilities of our best people we believe we've increased the crispness and quality of our decision making process on improving our level of customer service. On the cap-ex side we've completed a number of steps designed to place tight controls on capex this year as well as position the company for modest cap-ex requirements for 2003. Our objective next year is to build significant fewer but substantially higher quality to ours so we expect each of the 100 to 150 towers to have strong returns and excellent returns over time as we pursue only the most lucrative sites.

Our zoning team are bringing the toughest to zone and therefore the most valuable new sites to fruition. In addition redevelopment projects our efforts to strength the tower to accommodate additional tenants gets the same scrutiny as a new tower built. Stringent returns must be met through a combination of substantial increase revenues or or up front contribution by customers. Our proven ability to execute our core business gives us a lot of confidence we can continue to deliver solid financial results in the current environment. When the carriers begin to address their stress networks we'll be in a position to capitalize on that opportunity as well. I'd like to turn it over to Steve.

Thanks I'd like to touch on a range of topics that seem to be of interest to stake holders in this company. I'll try to be relatively brief on each one. The first is asset mix. We are rapidly becoming a pure tower company.

Year to date we have completed or announced sales of approximately $125 million of non-core assets including certain service companies, real estate and a limited number of core towers. We expect to add more than $100 million to this total during the next two quarters not including Vera star. We plan to reinvest a portion of these proceeds in high quality strategic tower assets with attractive economics. As a result of these actions we expect cash flow from towers next year to exceed 95% of total operating cash flow.

Our company will be more focused and more predictable. It will operate with much higher overall margins that will continue to expand. It will have significant liquid reserves. It should be the tower leader in North America for both wireless and broadcast towers. We expect this cash Florida flow to grow materially and sequentially each quarter just as our tower division has been doing for many quarters running. My second topic is business flow or sales. We have no reason to assume as we believe most of you do not that business conditions which affect our customer base will improve significantly in the near term. We are planning our revenue projections and resources accordingly.

However, it nonetheless true that a number of our large customers do have discretionary capital and continue to spend it in significant amounts on overburdened and out moded networks with substantial coverage gaps. Further our portfolio is diverse and we're continually improving it. It contains significant growth elements which may be unique to it including a substantial position in broadcast which is in the middle of a transition to digital and a large position in Mexico which remains an underdeveloped and potentially high growth market. With these factors in mind we are comfortable with our '03 guidance and would like to stress once again that we have been nailing our tower numbers for the past couple years.

Verastar. We expect to define our approach to the structural separation of this company from American Tower by the end of this year. We expect the separation to result in a reduction in the company's liability of not less than $115 million. This is in addition to the asset sale proceeds which I just described.

Leverage. By the end of Q4 we expect do have reduced our debt to EBITDA multiple by more than two and a half turns from its high in Q1 of this year ending the year with a ratio in the mid-9s. Almost all of this improvement will have come from increased EBITDA. We are aiming for two more improved terms from EBITDA in 2003. We expect to achieve absolute reductions in debt in '03 and beyond. This is because we will have free cash flow in '03 and there after. By way of validating our ability to do this it is important to note we have not borrowed under our bank revolver since April of this year nor do we expect to borrow under it in Q4 or for that matter next year.

We expect our cash account and revolver availability to remain healthy throughout. To be crystal clear, we are completely committed to rapid deleveraging and this process is well underway. It is very helpful that our weighted average interest cost is below 7.5%. It is also helpful that required capital expenditures in our company based on its asset mix are below 4% of revenues. This is not the cable business or the wireless business.

Bank relations. We received overwhelming support for the amendment we just completed the steps we are taking are intended to permit us to continue to earn that support. In the end process to protect all stake holders in the company.

The October '03 convert. We have said we'll deal with this by the end of Q1. We're still saying that and reserve the right to do it sooner.

Management motivations. I'd like to be really clear on this one. We are substantial shareholders in this company. Some of you have asked if we're going throw in the towel and make a new bed for ourselves. I have to work really hard to contain myself when answering this question. We firmly believe it is completely unnecessary to restructure this company's balance sheet. Obviously many of you do not agree. We find that to be very motivational. We have a very actionable and specific set of tasks to do. Each of which we have spoken to on this call. Simplify the company to its core, maintain a laser focus on operations and cost controls, deliver quarter by quarter, and shoot to convert in the head. It's really not that complicated and you should not underestimate the resolve or ability of this management to complete this work.

One last topic. There's a really nasty game that a number of investors like to play. It's called start a rumor, short the stock. Creativity can be impressive. One recent example really got our attention. I went like this. One or two wise guys posing phony links on a yahoo chat board alleging that our company has filed for bankruptcy which it has not not. The press perhaps not understanding how it is being used calls us for confirmation or denial. Brad went to Harvard. He denies. But of course the story line flies around the country. It has three memorable elements. Dow Jones, American Tower, chapter 11. This is really nasty stuff. All of our securities take a dive, our employees are destabilized, and our customers and suppliers take notice. If my mother was alive I'm sure she would have called. A number of my friends did. We normally don't like to trouble ourselves with this garbage because we have other things to do but this incident was carefully orchestrated and very damaging. We have filed a defamation suit against this yahoo chat board poster and intend to work with the SEC on the matter.

Let me be clear. We will vigorously pursue this and any similar future false attack on the reputation of this company. Sorry that we've been a bit windy today. There's a lot going on. We believe we're making tangible progress on a number of fronts and would like to make every effort to ensure you have complete and balanced information. Now we welcome your questions.

At this time I would like to remind everyone in order to ask a question please press star 1 on your telephone keypad. We'll pause for just a moment to compile the Q & A roster. Your first question is from John Benchy of Lehman Brothers.

Hey gang congratulations on a good quarter. Question for you is around going forward pricing. Are you at all worried that some of the people in new beds, if you will, to use your phrase, Steve, are going to mess up the environment for the other players?

John, we've been answering this question a lot lately. As you now it's a very customer sensitive question. But to try and put some meat on the bones to our answer we have looked at broadband pricing over the last eight quarters. And I am happy to report that it's virtually flat during that period of time. We come from the point of view that we believe our portfolios an important and essential part of our what customers are doing and what they will do in the future.

And we are with Jim's guidance and the work of a lot of other people I think forging very positive customer American Tower relationships better than we may have enjoyed two or three years ago. We are not inclined and do not believe we should be inclined to reduce pricing and in any event ever to address or change in anyway the incumbent lease platform that the company sits on today. So there's a lot of disinformation floating around on this topic. And I think that's as an objective and complete as answer as I'd like to give. It's topic that has many edges to you as you well understand but that is the way we're looking at the world in that area.

All right. To, Jim, on a comment you made about carriers and how long they'll let their networks go or degrade I think was the gist of the reference, what are you seeing out there? Because the carriers are trying to certainly bring down capital spending in '03 versus '02. Is it your sense that's going ab difficult thing for them to do?

I think it varies by carrier. Quality of the network you know you can listen from top to bottom we won't do that here. But there are some carriers that are having stress on their networks and are going need to make investments. This can be cyclical. Sometimes a carrier needs to roll out a new technology or do quality of service upgrades and the next year they may be less active of the some of those less active customers we think this year will probably come back and do a little more business next year.

I would add to that churn is expensive as you know. We think we're seeing a correlation between network performance and financial performance. I am sure that correlation has been noted by other companies and I think from our perspective that's a positive situation.

Great. Thanks. Keep up the good work.

Thanks, John.

Your next question is from Rick Prentice is of Raymond James.

Certainly Steve appreciate your straight forward. I don't think anyone can confuse the message you were putting out there. Let me ask a couple questions. First, on the head quarter sale and other asset sales you mentioned that you would reinvest some of those proceeds in new towers. Is that included in the cap-ex guidance of $55 to $80 million just being another source of funds or would that be on top of the 55 to 80 million cap-ex that guidance is out there for '03.

It would be on top. But I want to make it clear it's offset from the infolding dollars of assets sold. We're transitioning dollars from high risk low quality assets to low risk high quality assets that are relevant to our business. We're not planning to transfer all of those funds, I would say less than half. It's part of an overall process of trying to improve composition and reduce debt and improve liquidity.

Some would be kept around, some pay down debt, and some used for extra cap-ex.

Yes and I point out analytically to you and anyone else if you want to count the cap-ex you got to count the inflowing dollars as negative cap-ex.

Okay. Second question. Some what sort of the pricing environment. The question I've got is we've seen Pinnacle coming out of chapter 11 mention it's going to go chapter 11. What does that do to the pricing environment when you have carriers going through chapter 11 and just your general take on what you think happens in the tower industry.

We think Pinnacle's size makes it somewhat irrelevant to the market place, we think that Spectorsite is a smart company and we think they would agree there is no pay back in reducing prices. If we reduce prices by ten percent we don't expect to see an offsetting increment of ten percent in top line volume so there's no incentive from our point of view to do that. In terms of number of tower companies. Hard to predict. But we would subscribe to the beauty of a vision in which there were two substantial tower companies that had been formed out of the pieces that are out there today. And that they would have a nice looking balance sheet. We think that that's a vision that may play out.

Final question for you. Brad, back to your guidance. Verastar obviously is in the guidance. I think you said 10 to 15 million of cash flow in '03 with about 8 to 10 million of the cap-ex at Verastar. Given your thoughts that you'll at least I guess find what's going on with Vera star should we expect that on the fourth quarter call we'll strip numbers out of the guidance.

Yeah we'll update it when we have -- when we announce what we plan to do we'll update and quarterize the fourth quarter during the fourth quarter call.

Just not a discontinued operations at this point and time so it's still in?

It is not.

Okay. And the services businesses that you're attempting to sell those are also in the numbers right now. Both cash flow and cap-ex then I guess?

Yeah the way we approach the guidance in general if be don't have a signed deal with a purchase agreement not a letter of intent we will not put into our guidance because we want certainty out of what's going happen. So we will adjust for it as we consummate the deals or getting something signed.

If we look at the real estate transaction I thought it was interesting the $68 million cash gross proceeds with only $5 million worth of EBITDA obviously that's about a 13 times multiple of stocks trading much less than that. So you are able to delever with that would expect the future asset sales serves as business, Verastar, similar thing.

The combination of the mix of all those transactions will be delevering.

Okay. Thanks, guys.

Thank you, Rick.

Your next question is from Bob Krichef of Credit Suisse First Boston.

A couple quick questions. On the sale of the building could you give us an idea what your rent is going be going forward on that? Also I assume the 38 million was on balance sheet. And I guess lastly on the Vera star is the roughly $150 million, Steve, all of the liabilities that are affiliated with Verastar or is the number greater than that?

Want to take the real estate question.

I'll start the real estate. Our rent, Bob, will be a couple hundred thousand a year. We only use one floor of the 15 floors so it made sense from an efficiency point of view in terms of the sale of the building. With regard to the mortgage it's on our balance sheet as other debt. So it is on the balance sheet.

I tried to say 115 not 150. That represents capitalized leases. There is no other than the capitalized leases and normal trade payables there is no you know debt per se on the balance sheet of Verastar. None of the debt with the exception of a very small piece has recourse to American Tower.

Also I don't know if you guys have it handy this conference call but I t it might be something handy offline or one of your filings. Could you run through each of the asset sales that have actually taken place and what the cash flow is. Each of the ones that are signed.

Sure. The ones that have taken place year to date we've sold a little over $20 million in towers and actually those have been almost break even in terms of cash flow. With MTS we sold that for $30 million received $22 million or so to date in cash and we'll receive another $8 million over the next six months that has zero cash flow. So between those two we're around $50 million. The building is $70 million or $68 that had $5 million. So of ne $125 million we've had about around 4 to 5 million net net of cash flow.

On the bottom of the portfolio pile the $25 million of sale proceeds related to towers eliminated a $2.7 million negative cash flow.

Great. Thank you, guys.

Okay.

Your next question is from Naveen Fahmer of Deutsche Banc.

Couple questions. What is the steady state GNA what would the steady state GNA be post the Verastar separation? Want me to go through the rest of my questions.

We can go one by one. Steady state GNA the way we allocate directly to each operating division on what's left in corporate are shared. While there will be some reduction there won't be a lot. Because those are things like our legal department, our IT group, our taxes, our finance, the audit, things of that nature. So you might see a continued decrease in corporate expense but not dramatic if we separate Vera star.

Okay. You mentioned in the press release $7 million outstanding acquisitions. What are they and when do you expect those to close.

Those will be closing in this quarter.

Last question. What needs to occur for your bull case on your guidance and what needs to occur for the bear case.

The way our guidance is set up we take the run rate range in the fourth quarter then did a range of growth to whether you are at the high end or the low end of the fourth quarter. Range moving forward. So we had a 10 to 14% revenue growth and from the two ends of the fourth quarter range. If you translate that back to BVU which I think will be a common question it's between .2 and .3 BB prior to escalators that's how we set the range. If you're asking in a macro world I'll defer to Jim and Steve on this on what has to happen in the wireless world to move toward .3 my personal opinion we may differ, a lot of this while I think we need a need for the network expansion of each of the wireless carriers capital market drive is a lot of this too and we see our businesses coming from the new businesses coming from the well capitalized carriers and ones of financial strength. I think if the market strengthen that will make that case a little firmer towards the higher end.

I confirm the top end of the range is what from an engineering point of view the carriers should be doing next year is a .3 a reasonable solution for their networkings. But when you attenuate the financial piece of that maybe we're in the middle of our range. Brad is exactly right A. .3 would be what the engineering side of the carriers would say is of course the engineer minimum requirement but it will be what they put in then that might be attenuated by the financial requirements they've got.

It's important to understand too that whether we're at the lower end of Brad's rake of 10% or toward the higher end of it which is 14% in the course of next year the affect on next year's cash flow is not that pronounced.

It obviously is a factor going further forward but it is you know this is the function of the way the business works and the way the math works. We feel pretty comfortable with the ranges of guidance we've given you because it's frankly pretty difficult to miss them. And I'd like to also just you know we've sort of imagined ourselves as a function of what's happened with services and Vera star has struggled from time to time. Meeting its numbers. But we would like to be very clear in saying that we've really absoluting nailed every quarter over the last eight quarters on you know probably have done a little bit better in terms of margin performance in many cases with somewhat fewer towers. So we are at this point very familiar with our tower portfolio and very familiar with our customers. And frankly this is important very familiar with our people. We're much more consistent across the company.

So we're sitting here today with a lot more going into this year than we've had in the past in the way of we think being able to nail down future performance. And but really becomes as everybody's painfully aware a capital markets question. And I think what Brad led his answer is important. Which is that several of the larger companies do have capital and those are the guys spending the money today for the most part.

But we would also note that some real progress has been made inside of some of the other carriers one in particular which we think is -- has been tremendous and very positive and positive for the business overall and we would expect that company at some point to resume a level of spending which is higher than what it has been doing this year. No one in that company has told me that but that's a sense we get based on the progress they're making and we're very happy with you know to see that there's several companies out there that are doing pretty well. And that leads me to one final comment on this which is think you will see both within the tower industry and within the framework of our customers differentiated performance that is increasingly obvious. I think you'll see it on the customer side in ARPU and margins and return on assets and the tower side in sequential quarter growth and revenue and cap-ex controls and ultimately free cash flows. I think those differences will become more and more apparent and we welcome you know being drawn into those kinds of comparisons because we think we're going fair pretty well.

Okay thanks. Good job, guys.

thanks.

Your next question is from Chris Cook.

Hi guys. Just wanted to know what is the interest cost on the $115 million of leases at Vera star.

Approximately 10%.

Okay. I think that's it. Thanks.

Your next question is from Ray Schaefer of Thomas Weisel partners.

Just a quick question. We're hearing more news recently out of the FCC about a new spectrum auction by the end of 2004. Could you give us a sense of, you know, how you see that possibly affecting either the demands for services or for additional leaseups if that spectrum were to come out?

With all due respect I'm not sure that the FCC knows what it's going do in Q1 of next year let alone in sometime after 2004. This is a very difficult and complex regulatory environment. There are many pressures on them coming from companies and from political and even legal constituencies. And it's very, very complex picture. And as you well know there's a lot of spectrum inventory being tied up in various types of litigation. So it's difficult area to forecast with precision. We would expect having said that that and we've I think built this into our business planning that there will be two kinds of progressions that will help carriers mitigate their cap-ex needs.

We believe we'll be able to enhance their current spectrum position and we also believe there will be on-going improvements in technology which will improve the efficiency of their networks. While that's going on however there's still a very pronounced and real increase in overall minutes. And there is a very real migration whether people want to admit it or not towards high-speed IP packet networks that are carrying increasing amounts of data. People can debate how much and when and all that but those forces are very powerful. So we are imagining a somewhat steady correlation as there has been over the last several years between the number of cell sites and the number of subscribers served by those cell sites. But I don't think any of us could here I'm not sure anyone could frankly answer with precision exactly what's going happen and when with regard to spectrum issues.

That's great, thanks, Steve.

Okay.

Your next question is from Jim Ballen of Bear Stearns.

Thanks a lot. A lot of my questions have been answered. I wanted to just drill a little bit deeper the services side. With the drop in margin, is that coming from any particular part of your services business? And also can you talk about whether it's continued pricing pressure or more competition or does it have to do more with your cost structure. Thanks.

It came from two major reasons. First it was it sales mix. Our service group is a little different from the other tower companies. We have a large fabrication as well as you know large components businesses. So the mix generally is the number one thing that sets the margin. And we had it at a lot of low margin activities that came through in terms of what was very, very successful this quarter from a revenue perspective but not from a cash flow perspective. That what it was. I think the fundamental cost structures have been driven down pretty low and this came from a sales mix. We also were a little more conservative with bad debt that was one of the other items where we probably took a little bit more in to make sure allowances were adequate and reasonable.

We set these businesses to perform at above 10% in the worst conditions. And the conservatism on the bad debt we've decided to take this quarter but you'll see improvement on that over time.

We hope to render your question completely irrelevant in the near term. We're fairly far down the path of divesting all of these companies. The ones that we will keep are the ones that bear directly our on core business where we can manage revenues and margins much more efficiently because most of them are related to installation activities on our own towers. So you know this has been an area of concern historically. But I think, number one, Jim and his guys have done a tremendous job controlling costs in a difficult environment and have continued to preserve the profitability of these companies and have therefore set them up for us to be able to sell them successfully for good money. Look forward when we strip away the remaining service companies and are left with the ones we're going keep, you are going to see a contribution from services that will be you know quarter magnitude three percent of EBITDA next year. It's going to be almost irrelevant.

Supportive of the tower business. Anything that's not directly supportive we're going move out.

Terrific. Thanks a lot, guys.

Thank you, Jim.

Your next question is from Rachel Golder of Goldman Sachs asset management.

Yes thank very much. On Vera star is there anything that would keep you from just simply shuttering it? Would you have an ongoing obligation to existing tenants on that business that would be a cash outlay if you decided to just shut it down.

I think there's some people on this call that don't want to be shuttered. But I think let me sort of put a little flesh on the Vera star story. First of all we had some I cannot be specific because of disclosure reasons there was some very good news there that we received this week with regard to certain future business opportunities for the company. That news I think is going facilitate a process which has already been underway with regard to one or more than one potential strategic players for this company. In addition to that there is within Vera star an asset or two that have objective value that have positive cash flow. That can be sold if we should decide that was the right thing to do for the company. What we are trying accomplish here is a very clean situation in which American Tower has no residual obligation either legal or moral or otherwise to support this company if the company is able to support itself that our position in ownership would diminish to below 50% perhaps into nothing but in any event where we are a minority investor and have no on-going capital commitments. And where the company by virtue of its new relationships may have greater opportunity to express itself profitably. These guys and ladies at Vera star have been working really hard at incredible difficult telecom environment and I am very proud of them and I think that they have set the stage for what we think can be a successful transition for them, for Vera star and for American Tower. Bottom line, by one means or another we are going have clarity on this situation by the end of the year and we think that the outcome at the worst would be a reduction in liability of $150 million. But maybe we can do better than that we and hope we will.

You may still have a minority stake but one that wouldn't end up having cash flow implications for you going forward.

That's exactly right. Put a positive spin on that here is what Brad's eyes roll a little bit but I think that there may upside there. I would not make an I investment decision based on that at all but I think that I am still a believer in what this company can do with the proper alliance of strategic partners and whether or not we're involved in a shareholder mix I think that's the outcome we're trying to encourage. And it's one that we might be able to pull off. We'll see. But I think let me just be again as clear as I can be. One way or another at the end of the year this company will be separated from American Tower in terms of consolidation, in terms of our need to support it, in terms of any other asset we think should be of concern to investors.

Great. My second question is central and South America could you give us an update on how Mexico and brazil are performing and also with whether after the $7 million fees to sell in fourth quarter you see any further cash obligations in those markets?

We don't think of investments in Brazil as, I mean in Mexico as obligations. We think of them as opportunities. And we are however being very, very measured in how we're going about what we're doing in Mexico. It is a very, very good environment for us. We are the only tower company in Mexico as a function of that we have very high rates very low costs, very high margins and very high return on assets. It's very good environment one that we will seek to preserve our position. While there is occasional customer noise coming out of Mexico in the main we think that the business profiles of our customers in Mexico are very strong and frankly objectively as strong as they are and perhaps more so than in the United States.

Now that's a longer discussion but we like this asset very much. It operates from our perspective as if it were a region. Almost all of our contracts are dollarized and we are growing nicely in Mexico. If there is a better tower asset in the world anywhere in terms of the return on assets I don't know where it is. So that remains very much an environment that we believe in and will continue to seek to move forward to in.

Brazil is in a much different circumstance. Brazil is first of all very small. We've only a couple towers in Brazil. The return assets are those towers is very strong. Brazil is profitable. Brazil is well managed but they're obvious and significant issues in brazil which would affect our or most any company's willingness to make incremental investments on a significant scale so. We sort of view our position in brazil as having an option on the future if we should feel the financial position of American Tower and the circumstances that are specific to Brazil should result in our a decision to move prospect actively down there in the future.

For now I would ask all of you not view Brazil as an environment in which we would be putting significant money if any money incrementally. But an environment which under certain conditions in the future might deserve you know consideration once again. But it's not a management drain. It is not a capital drain. It's very profitable operation. Last comment about Brazil is you can't look beyond the currency issues and political issues but the underlying you know wireless dynamics down there are extremely positive of the there's a lot of activity there that is -- would lead you to believe if you owned towers you would put a lot of customers on them with very good economics. So that's sort of the way we look at that world. But they're very different Brazil and Mexico are very different environments.

That's great. One last if I may . Nothing concrete has happened since your last call on carrier consolidation. There have been more rumors but I just wonder if you could update your comments on what you think the implications for you on carrier consolidation would be probably unchanged but I'm curious.

I think it is. We've been saying for sometime we would favor any process that would result in a healthier, stronger customer base. And we continue to feel that way. So if by virtue of certain combinations you know capital efficiency would be improved, access to capital would be improved. The ability to complete these networks and transition them into a high-speed network environment. If that all were to happen I think that would be good for the tower business. But we are as interested in at the same time in some ways as frustrated as everyone else is trying figure out what's guy to happen here in the world changes seems to change very quickly. Frankly I don't think our visibility into this is any better than anyone else's. We hear the same rumors. We try to gather information. We try to measure specifically what it is that might happen to our businesses in specific circumstances.

In the main we're very silent and comfortable on this and some ways we encourage it. One last point. People may not realize there's a significant amount of sort of network sharing going between at least a couple companies from that from time to time may be in discussions with each other. And that has already had the affect that in some ways merger might have on the tower industry where they've already seen a change in the way capital is being deployed in certain markets. I think to some extent the spector of merge therefore is already in play in terms of the way the tower business is flowing. It's very complex topic again I don't mean to be so windy but that's the way we're look at it.

That's great. Thank you very much.

Operator we'll take one more question.

Your final question is from David Mentel of First Capital Markets.

Good morning. On the convert side is the issuance of more equity one of the solutions that are contemplated?

With regard to the convert itself and how we resolve them equity is one of -- a potential solution in the past we've brought in about a third of the issue by issuing equity. Where our shares trade today below two dollars equity is higher dilutive and we're trying to sensitive to equity holders as well as everyone else on the balance sheet. So even if we wanted to do some more 3 A 9 exchanges which was the methodology we employed in the past our dollar volume of shares doesn't enable us to do it efficiently. As a component of a potential solution equity is not one. It is not one right now but it looks like it's highly likely given where we are today to have a complete equity only solution. It could be part after component of something we do.

Thanks for taking the question.

Okay.

Thank you.

Thanks, everybody. Appreciate your time today.

Thank you.