Crown Castle Inc (CCI) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Crown Castle International second quarter conference call.

At this time, all participants are in a listen only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press star followed by the 0. As a reminder, this conference is being recorded today, Friday, August 9th, 2002.

I would now like to turn the conference over to Mr. Ken Dennard, Managing Partner of Easterly Investor Relations. Please go ahead, sir.

Thank you, Bobbie, and good morning, everyone. We appreciate you joining us for Crown Castle's conference call reviewing quarterly results. We'd like to welcome our internet participants from around the world as the call is being simulcast live over the web.

Before I turn the call over to management, I have the normal housekeeping details to go through. You could have received the press release via e-mail and/or fax yesterday afternoon, after market, but occasionally, there are technical difficulties experienced during these broadcasts. If you didn't receive your release, or you would like to receive future release via fax or e-mail, please call our offices at Easterly Investor Relations, that number: 713-529-6600, and we'll get a release out to you, or put you on the appropriate list, whatever you need. Additionally, to listen to a replay of today's call, you can go to the web cast section of www.crowncastle.com, and it will be available a couple of hours after the call. There is a telephonic replay available, as usual, for seven days, 24 hours a day, and the pass code and access number are in today -- in the press release.

As you know this, conference call will contain forward-looking information and statements that are based on management's belief, as well as assumptions made by, and information currently available to, management. Although the company believes that the expectations reflected is such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks and uncertainties and assumptions. Information about potential factors that could effect the company's financial results are available in the press release, and are even greater detail in the risk factor section of the company's filings with the SEC. Should one or more of these risks materialize, or should underline any assumptions prove correct, actual results may vary materially from those expected.

Now, I'd like to turn the call over to John Kelly, Crown Castle's President and Chief Executive Officer. John.

Thank you, Ken, and good morning, everyone. We appreciate your joining us for a review of our second quarter results.

With me on the call is Ben Moreland, our Chief Financial Officer. Ben will first review our financial and operation results, and I'll follow up with some of my perspectives on the quarter, and then we'll go to questions.

But before Ben starts, I'd like to point out one thing: That we face challenges this quarter, with the demise of ITV Digital in the UK, and the capital market effect on leasing in the U.S. I'm pleased about specific aspects of our financial and operational performance in the second quarter. What you will see as Ben reviews our specific results, is that rationale behind investing in Crown Castle remains strong.

Our primary revenue stream, power site rental revenue stable, recurring, and growing. Whereas wireless carriers will modify their network expansion plans from time to time, this does not negative impact our starting tower rental revenue figure. The tower rental revenue we end the quarter with does not need to be resold in the next quarter. It is long-term contracted revenue. This fact makes the baseline results of our core business very predictable, and gives us the confidence to project when we will achieve positive free cash flow.

I'll turn the microphone over to Ben at this point, and come back with more thoughts later in the call. Ben.

Thanks, John, and good morning, everyone.

For the quarter, we had revenues of $225 million, power revenues of $172 million, up 23% from the second quarter of last year, service revenues at $53.6 million. Gross profits from site rental and broadcast transmission, defined as net revenues less cost operations, was $106 million, up 32% from 80 million in the second quarter 2001. Precash flow, which is defined as net cash provided by operating activities, after capital expenditures during the quarter, was a use of cash of $72 million. Net of anchor tenants on built towers and, churn on a BBE basis, the co-location rate per tower was .27 across the 15,291 sites we owned at the beginning of the quarter, includes all the sites we have acquired or built.

In the U.S., consistent with last quarter, the average lease rate for new broadband tenants was $1528, and in the UK, it was this $1,160. This brings our current annualized revenue per tower run rate to $38,500 in the U.S., and just over $77,000 in the UK. During the quarter, 85% of the new leases in the U.S. Came from the big six wireless carriers. Of the new lease revenue added for new tenants in the U.S., about 35% were additions through at least amendments. In the UK, these amendments were about 5%.

During the quarter, we built 171 sites. That's 56 sites in the U.S., as we continue to tail off our build activity in the U.S., but apply very strict financial controls on the new build activity in the U.S., and 115 sites in the UK, principally related or entirely related to the British Telecom site take down around the 3G deployments we're seeing in the UK. We have now developed, cumulatively, 540 of the BT sites in the UK.

Capital expenditures during the quarter totaled $126 million. U.S. Capital expenditures were $37.7 million, down $14 million from last quarter, and down $85 million from second quarter of last year. Capital expenditures in the UK and Australia totaled approximately $88.6 million, combined, including the $73 million payment that we made to BT this quarter for the acquisition of 500 sites. You recall that's the second of the three payments we make there.

There are a number of items on our income statement that I think merits an explanation this quarter. Normally we refrain from such detailed information, but I believe, this quarter, some explanation is required to assist everyone with the normalized run rate in our business.

First, site rental revenue in the UK was impacted favorably by nearly $6 million from the recognition of some initial revenue items related to 3G rollouts and the recognition of previously deferred revenue from ITV Digital, which will not be recurring.

During the third and fourth quarter, we will experience a decrease in transmission services revenue of approximately $7 1/2 million per quarter from the loss of ITV Digital. Thus, our consolidated quarterly run rate for site rental and broadcast transmission revenue, as we enter the third quarter, is approximately $158 million. That's before the relaunching of the ITV Digital network, as we will talk about later.

Services revenue decreased from the prior period, primarily due to the timing of the completion of a significant number of installs in the UK. We are recognizing install revenue on a completed contract method, and, therefore, do not see income statement impact as we reach interim milestones in the process. This resulted in a timing shift of approximately $7 million of revenue from the second to the third quarter.

Next -- next impact was the cost of operations in out site rental business increased from the prior quarter, primarily due to the approximately 35% revenue share in the UK associated with the additional revenue, this one-time revenue we booked in the UK around -- around the 3G rollouts. And the seasonality we experience, typically in the summer months, in the spring and summer months with warmer weather.

And then finally, and perhaps the one that sticks out the most on our P&L, is the significant increase in GNA expenses. That was not John, or any of us, not paying attention to GNA in the business. That was, in fact, a provision for bad debt expense of approximately $4 million in the UK, related primarily to ITV Digital's loss. And as discussed before, in the second and fourth quarters, we have an extra payroll period that impacts us $1 1/2 million in those quarters.

In total, EBITDA for the quarter was negatively impacted approximately $4 million from the unusual items.

Hopefully that's helpful, and sorry for the minutia.

Same tower sales growth for the quarter, year over year, was 20.3% on 14,594 sites we owned on June 30 last year, which represents 94% of our total ending sites. Specifically, in the U.S., same-tower sales grew 16%, and the UK, 23%, year over year. I would point out that in the U.S., this growth occurred off of a base a year ago of two tenants per tower. The strong growth in same tower sales, combined with cost controls, has increased tower gross profit by 32% from the second quarter of 2001 to the second quarter of 2002. Tower gross margin increased by 420 basis points from 57.4% last year to 61.6% this last quarter, and we expect the trend to continue.

Before I turn to the balance sheet, I'd like to summarize and review the U.S. single-tower economics that we have delivered over the last year. This is how we managed the business. I think it's perhaps the most instructive at the unit level.

We've grown per tower revenue to $38,500, up $4100 per site, or 12% year over year, after delusion from newly built sites, or 20%, as we said, on a same-tower basis. At the same time, direct costs have grown 2%, resulting in 18% growth in tower cash flow per tower, after GNA. So, across the whole U.S. portfolio, that's 12% revenue growth, 18% cash flow growth per tower.

These compelling economics are why we have confidence in the tower business model: significant organic growth, recurring revenue, operating GNA cost that should rise only with the rate of inflation. Significantly, on an operating basis, after all cash interest and capital expenditures, except the acquisition of the BT payment -- the BT sites for 500 sites, we were free-cash flow break even for the second quarter, evidencing our progress individuals this goal. We draw the distinction between the BT acquisition payment versus other capital expenditures, since the BT acquisition payment will occur only in this quarter and in the first quarter of 2003, pursuant to the 3-year BT site acquisition arrangement.

The guidance provided in our press release demonstrates that we expect to be free cash flow break even for the balance of 2002, and positive thereafter, but for the final BT payment of $76 million next year.

Cash and investments at the end of the quarter were just over $845 million. Senior bank debt at the end of the second quarter totaled $1.2 billion, high-yield debt totaled $3.2 billion, for total debt at the end of the quarter of $3.5 billion. In the restricted group, debt totaled $2.8 billion. We have the ability to access approximately $478 million under our senior credit lines at the end of the quarter. When combined with our cash, this gives us total liquidity of $1.3 billion currently. We expect net debt to EBITDA to be in the range of 7 1/2 times by the end of the year.

As you have seen from our press release, we are dramatically revamping the way we give guidance. We want to emphasize free cash flow as the relevant metric to measure our performance against, and highlight the fact that we expect to be free cash flow from this point forward, excluding the final BT payment, as I mentioned. Clearly, non-cap measures, such as EBITDA, have fallen under stiff criticism recently. While we believe EBITDA is a valid measure, if properly explained and understood, we have chosen to increase our emphasis on gap numbers that come from the base of our financial statements. Particularly, we will focus on the net cash provided from operating activities that is found on our statement of changes, and from that figure, subtract capital expenditures to get free cash flow, a measure that includes cash interest, capital expenditures, and operating results. We will continue to report the historical information that we've always provided in tables attached to the press release. But going forward, the focus of our comments will be discussions around gap numbers and free cash flow.

Moving to our Q3 and year 2000 guidance, which is included in our press release, as you see from the press release, we expect the third quarter 2002, net cash provided by operating activities to be between 40 and $50 million, assuming that new tenants are added to existing towers at a BDE location reality of between .25 and .35 tenants per tower during the quarter. This should enable everyone to continue to model the revenue assumptions [ indiscernible ] of the modeling of the business.

We expect total capital expenditures to be between 45 and $50 million during the quarter. This results in break-even cash flow for the third quarter.

Our current guidance for 2002 projects total net cash provided by operating activities of between 160 and $180 million for the calendar year 2002. These expectations assume a co-location rate of .25 to .35 tenants per tower across the entire company and lower service revenues as we remain cautious on the outlook of the services business in the U.S.

We expect 2002 full-year capital expenditures to be between 215 and $235 million, which is a reduction from our previous guidance, based upon lowered leasing and build activities in the U.S. 2002 capital expenditures will also include the previously mentioned $73 million payment to BT.

For the full year, we expect free cash flow of between negative 120 and negative $130 million. That, again, occurs in the first two quarters of this year, and break even for the balance of the year.

More detailed guidance for 2002-2004 is contained in the press release. We believe the guidance now corresponds to the focus we have in managing the business to maximize free cash flow. I am confident managing the business to these issues will re-enforce what our employees already understand, that every dollar matters, whether it's an operating expense, working capital, or capital expenditure. The strength of our core tower business is evident in the growth rates posted, even in this challenging environment, and is capable of generating significant free cash flow.

We get questions, from time to time, about carrier consolidation, and its potential impact on Crown Castle. We have looked at all the combinations and want to share with you an interesting statistic. The combination with the highest combined site rental revenue, it would be Verizon and Nextel, among the big six, with $34 million annually in site rental revenue on those sites where they coexist. If you want to assume in such a combination that one of the networks ultimately has migrated off and churned off of the sites, when those leases expires, which we don't believe, by the way, would be the case in such a combination, hypothetically, our exposure would then be half of the $34 million or $17 million, or 2 1/2% of our annual site rental revenue. I just wanted to frame for people, you know, what the -- what the highest potential combination and the impact could be to us, should that occur. We get that question often.

During the most recent quarter, we adopted the new accounting and financial disclosure requirements required under FAS 142. After completing the initial impairment test, as required, we have determined that we have no impairment losses with regard to implementation of FAS 142. John and myself will file fines certificates with the U.S. Securities and Exchange Commission affirming the SEC filings made by Crown Castle in 2002, as required under the Sarbanes-Oxley act on 2002.

On July 16, 2002, Crown Castle received a letter from the SEC staff requesting certain clarifications to Castle's most recent 10-K and 10-Q filings. Such clarifications has been have been completed and will be filed, shortly, with the SEC, along with such management certifications. The amendments of the 10-K and 10-Q will be filed with the SEC -- that will be filed with the SEC contain the clarifications and enhancements to the footnotes, and management discussion and analysis, but do not restate Crown Castle's basic financial statements.

With that, I'd be happy to turn it back over to John.

Thank, Ben.

Before I turn the call over to questions, I'd like to share some of my perspectives on the quarter. As I mentioned in the opening, we face some interesting challenges this quarter. Our second largest broadcast customer filed for bankruptcy protection. And wireless carriers in the U.S. slowed their rate of network expansion to better align with the current capital markets; however, as I look closer, I'm comfortable with what I see ahead.

We were clearly impacted by the loss of ITV Digital in the United Kingdom. When we reported this event to you, we indicated that the UK government was intent on quickly relicensing the frequencies that had been used by ITV Digital, and at that time, Crown Castle had already been solicited by parties interested in resuming digital terrestrial television service. We're obviously very pleased with the efficient process the UK independent television commission ran in relicensing these frequencies, and the fact that the Crown Castle BBC consortium was awarded these licenses. As we reported in July, Crown Castle reached preliminary agreements with the BBC and Rupert Murdoch's BSkyB for transmission of roughly 2/3 of the digital television capacity we were licensed. We're also in serious discussions with major media players for the remaining 1/3 of the remaining digital television capacity we have.

In all, we expect that will have replaced all of the lost ITV Digital revenue by the start of the new year with these new contracts. This is very positive for Crown Castle, as substantially all the operating costs to support the new contracts with the BBC and BSkyB have continued to be incurred by Crown Castle after ITV failed. To ensure that everyone is clear, the majority of the new revenue will flow directly to our bottom line. This is further evidence, in my mind, of the valuable nature of Crown Castle's infrastructure assets.

As you've seen from the press release, we have adjusted and widened the ranges for our 2003-2004 guidance because of the affect on our U.S. carrier customers of the uncertainty in capital markets is having on their willingness to invest in their networks. We have seen our U.S. customers reprioritizing their network expansions and holding back capital expenditures in the short term. However, the technical drivers for network expansion remain the same: subscriber additions, minutes of use growth, quality of network desired, and wireless data deployment.

Subscriber growth on the wireless carrier side, in the second quarter, was, for the most part, consistent with analyst projections. Despite that, however, the U.S. wireless penetration continues to lag Europe and Scandinavia by a full 20 to 40%.

The most important statistic, coming out of our customers, is the continued in the in the subscriber minutes of use. This metric has continued to grow to the point where the measurement is in hours and not minutes. The average across all wireless carriers is approximately 6 1/2 hours of use per month. Amazingly, however, some of our customers are reporting 11 hour and even 20 hour per month average usage rates for their customers. Over the last five years, Americans increased the usage of their wireless phones an average of 67% per year. The TIA, the wireless carrier trade association, reported that minutes of use across the whole U.S. wireless industry, for just the last six months of 2001, were more than for all of 2000. Once again, because I think it's a staggering statistic, the minutes of use across the entire U.S. Wireless industry, for just the second half of 2001, exceeded the minutes of use for the entire year 2000. And this trend, as reported by our customers, is continuing into the current year. As Sprint PCS's president, Chuck Levine indicated, on their earnings call a couple of weeks ago, when asked if the decline in their growth rate of new subscribers will allow them to reduce their network spending, he said, "Capex is not driven by the number of subscribers that we have, rather it's driven by the number of minutes used on the network."

The exponential increase in usage by wireless consumers absolutely results in increased wireless carrier network utilization. When coupled with the desire to improve the quality of network coverage, which some wireless carriers are appropriately focused on, the need for new sites, and expansions to existing sites, is clear. Unfortunately, this increased network demand comes during a profound disruption in the capital markets. Our wireless carrier customers have been managing their capital expenditures down in the short run. I believe, however, that regarding then let their networks degrade in the long run, and risk increasing their customer churn, the carriers will continue to look for cost-effective ways to expand their networks; and sharing existing sites is a good way to accomplish that.

Our UK business continues to demonstrate the positive effects attributable to wireless carrier data network growth deployments. Once again, our second quarter losing was positively impacted by Hutchinson's continued development of their third generation network. They've publicly stated that they are on track to launch a network of broad UK coverage by the end of this year, and we're assisting them in every way possible to realize this goal. In the second quarter, Hutchinson represented 37% of our UK leasing. While significant, our other UK customers represented 63% of the leasing in the quarter. This leasing consists of sites for 3G migration as well as continuing investments in their wireless networks to support increased 2G, and 2 1/2G demand.

The activity supporting wireless data in the UK appear to be making their way across to the U.S., as well. Sprint appears to be on track to launch their 2 1/2G wireless data network this summer, and other carriers are also in various stages of deploying high speed wireless data services in the U.S. As was evidenced in the UK, the trend towards adding wireless data services increases the burden on wireless networks.

As such, the need to expand the capacity of these networks becomes more critical. As very few new towers are being built, and permitting continues to be challenging, the issue of too much capacity being available in the tower industry is not a problem. Clearly the demand for cells site is not coming to an end. Towers in the right locations will continue to add new tenants for the foreseeable future. I believe that the capital markets have over reacted to a slower, yet still healthy level of tower rental top-line growth in the last several quarters. I'd be remiss if I didn't point out that, in our U.S. business, even if you were to look at a lower lease-up rate of something of .15 BBE, coupled with our existing lease escalators, run-rate revenue would still grow approximately 10%, and cash flow 15% annually, resulting in approximately $32 million of additional annualized cash flow. And that's if leasing were to slow from where it is today.

The challenge for my management team and the organization is to continue to grow free cash flow through, what I believe is, a temporary disruption in the pace of new leasing. And the way we do that is with vigorous discipline around both operating and capital costs, and a focus on free cash flow, as Ben talked to you about in his statements. I believe this company, its senior team, and all the employees are up to the task.

We have been, and expect to continue to be, impacted by the reduction in our installation activity and the changing mix of services in our U.S. business. As we've discussed before, Crown Castle assists our customers with deployment services of the value added offering. The services piece of our company is the small part of the overall business, and we will continue to evaluate the strategic importance of this business, and how we can best assist our customers.

I'd like to end on this note: I'm a firm believer in the wireless industry and Crown Castle. The issues this industry is facing do not dilute the fact that more and more people in this country, and in our UK and Australian operations, use wireless phones at rates few had forecasted. There is significant consumer demand for quality wireless services. We recognize that in a tight capital market, investors are looking for companies to turn free cash flow positive. In fact, as you have seen, Crown Castle's diligent focus on prudent capital allocation, and a company wide focus on operating cost reductions, accelerated the time frame in which we achieved this goal.

And on a final note, I would like to just point out a number of my senior managers and myself have continued to invest our personal funds in Crown Castle's equity. To answer a common question, these investors were not made with loans from Crown Castle, but instead with our personal funds, funds earmarked for things like college education and retirement many, many years down the road. We strongly believe that we can and will improve the results for our shareholders.

And now, I would like to turn the call over to the Operator for questions. Bobbie?

Thank you, sir.

Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star, followed by the 1, on your push-button phone. If you would like to decline from the polling process, please press star followed by the two. You will hear a three-tone prompt acknowledging your selection. If you're using speaker equipment, you will need to lift the handset before pressing the numbers. Please ask one question and one follow-up at this time. And you may requeue for any additional questions.

Our first question comes from John Bensche. Please state your company name, followed by your question.

Hi, Lehman Brothers. Good morning, gentlemen.

Morning.

Question for you, Ben first, on guidance in '04, you're forecasting net cash from activities to be below '03, and I'm somewhat puzzled as to why you would forecast that number to decline?

And then secondly, are there principle payments coming due? If you could spell those out for '02, '03, '04, that would be great, as well.

John, thanks for the question. That's a great question. And it does look odd if you look at the guidance across 2003 - 2004.

You'll recall that several of our bonds, I guess, are still in the accretion stage, or in the pick enter stage, and starting at the end of this year, and then in '03, and then in '04, they convert to full-cash pay. And so, that results in about -- of our total interest expense today of something that approaches $300 million, about $200 million is cash, and about $100 million is pick, or accretion. So over the course of the next two years, that burns off and it turns cash pay. And so, because that net cash provided by operating activities included all cash interests, you can see, then, that we're continuing to -- to be free cash flow break even for positive, even after accepting the cash burden of those bonds going full cash pay.

So that's the reason that that number does sort of stay at one level, actually, on the downside level, below, and on the upside level, sort of flat in '04. But at that point in time, in '04, we'll be on a full cash pay on all the debt securities.

And second, your question around amortization. I don't have the number in hand. It is not significant.

The major --

Okay

-- the first -- the first -- it's in the 10K. The first maturities that we have, under the bond securities, are in '07. But if you look at the long debt, you know, out 2004, I believe the amortization table is about, minimal this year, about 40 million next year, and 100 million the year after that in principle amortization. As you know, principle amortization typically does not go into net cash provided by operating activities.

Great, and maybe John, one follow up on European UMTS. There's been a lot of carriers announcing slowdowns, or pullbacks, in their deployment schedules, and a lot of seeking of relief from governments, around build out requirements. Could you apprise us whether any of that is taking place in the UK?

What's very interesting, John, is the difference that we see in the UK from what we read about what's happening on the continent in Europe, because it is very different. We see a lot of the same reports, and yet do not see any of that in the United Kingdom.

Our prime 3G deployment customer, Hutchison, is well on their way to launching their network by the end of this year. They have made a confirming public statement here, a few weeks back, that they will in fact launch that network by the end of the year. We are very -- we are working very closely with them, so we have a good sense of exactly where they are on the deployment. And, it all looks reasonable, from our perspective, that they will, in fact, reach that goal. In the discussions with them, as well as the operating system, as you know, on the Isle of Man, where we've had an opportunity to see exactly how these 3G UMTS systems are working in practice. We're quite excited about what we see coming, and are looking forward to Hutch's launch at the end of the year.

Given the fact that they continue to move forward, and there is evidence of that in the marketplace, the other UK carriers, we believe, are taking notice. And that was the reason, in our view, that some 63% of our leasing activity in the second quarter continued to be from our other customers, as a number of them are continuing to get prepared for the launch of their own 3G networks by expanding density of sites throughout the UK. And then, some of the others are still just focused on enhancing their 2G and 2 1/2G quality, recognizing that in building out those particular sites, they will be better prepared for the 3G deployment, as they deem appropriate, in their planning horizon.

So what is interesting, is the UK is not acting like the other -- like some of the other European countries. It continues to move forward, at a steady pace, towards the goal of launching a broad coverage third generation network by the end of this year.

Thank you very much.

Our next question comes from Richard Prentis. Please state your company name, followed by your question.

Yeah, hey. Rick Prentis, Raymond James. Good morning, guys.

Good morning.

Obviously some disappointing EBITDA, but we do like the capex cuts you have announced today, and, obviously, a good cash position, as well. A follow-up on Johns question, there, and then a follow-up question on BBEs. Do you guys expect, given that $840 million cash position you're in now, and the free cash flow path that you laid out in your guidance, to need to access any of those additional liquidity debt availability you talked about? And related to that question, in 2004, is there any change on the preferred note that is out there, changing the cash pay.

Rick, first of all, on the cash pay, on the pick preferred -- the 12 3/4 pick preferred. That cash payment, while it's technically a dividend payment, it is in the cash, we consider it interest. And when it turns cash pay, we have it, in this guidance, as cash interest.

When is that?

It's at the end of '03.

Okay.

Okay -- your other question?

The other question, on that related front, was, do you expect to need to access any of your available liquidity and your credit facilities?

In the U.S., the answer is no. We don't expect to borrow again under our senior bank lines. The $700 million drawn against the billion 2 facility in the operating company, or the Crown Atlantic facility, we actually have surplus cash there, and likely will be paying it down some.

In the UK, and that brings me to a point I didn't mention, as you recall, we had a technical termination when we had the ITV Digital -- situation, the liquidation of ITV Digital. We're in the market with the redo of that bank financing today. We've taken the opportunity to really reset the covenants and push out the -- the amortization another two years, and actually believe we'll be successful in accessing additional capacity. We're going to take it from 150 million to 175 million pounds, albeit around a 3 1/2 covenant, maximum. So it's, as you may recall, that's very lowly levered enterprise: 3 1/2 times debt to cash flow.

That additional capacity we will access sparingly. But it will provide the UK with it's ability to be completely self-financing, including this last BT payment we've talked about, $76 million next year.

So the cash that we've actually got securing the letter of credit, for the benefit of BT on that last payment, will actually, we contemplate, be released back to the holding company. And the UK will be self-financing for its own needs, from this point forward, but not significantly, you know, drawing much more on that line, except for the BT payments.

Okay.

A follow up question, John, maybe better for you. The -- the BBEs in the U.S,. this time, were disappointing, at 0.19. Can you talk a little about, first, the visibility they have in that number. How soon, based on the carriers, capex plans, and building plans, do you know when it's turning around?

Associated with that, we heard yesterday, on the American Tower call, that they felt that there was a lot of leases rear-end loaded this quarter. That a lot of them came in to the -- for their company, at least, came into the June month. Did you see something similar in your area?

And just a final piece of color: when we're on the AT&T wireless, and the Sprint PCS call, they did have a low amount of cell sites that they put so far in this year. Each one had only done, say, 300 to 400 cell sites. And yet AT&T and Sprint are saying they need to do another 1700 in the second half of the year. So they seem to be saying they want to do it. They kept doing it, even in this difficult capital market. When does the visibility show up? When do you guys get comfort it's going to happen?

Rick, it's an excellent question. And clearly, we are guiding and forecasting a BBE rate that is lower than what we have historically contemplated, simply because of the effects that we see the carriers realizing of the capital markets.

You know, the question is to when you get absolute visibility. The carriers have, at every one of their regional locations, a multi-page list of sites that they know they need to build, either for capacity relief or for new coverage. The big question that continues to be weighing on the minds of each one of our wireless carrier customers, is the pace at which they're going to be able to fulfill the build out of that list. And it's all based on what their corporate finance professionals believe is prudent. in light of today's capital markets. And as such, there is a -- there is a demand profile that we can see as we speak.

The real fundamental issue is, and we see this with the regional wireless carrier personnel themselves, they're not always certain from, quarter to quarter, whether or not they will continue to be given authority to spend at what was a budgeted level of capital, or whether or not they will be asked to restrict that capital. I mean, here of late, one of our carrier customers, in fact, issued a temporary order to cease build out while they were evaluating exactly how much of their 2002 build out they were going to complete, and how much they were going to defer into the new year. And those kinds of things have been what have been occurring at this point in time.

You know, there is clearly no doubt that there is a large number of new sites necessary, and the carriers are expressing, at this juncture, a desire to build out at an increased rate in the second half of the year versus what they did in the first half of the year. The real question on our minds, Rick, is, you know, are we seeing enough of that right now in place at the regional levels?

And the answer to that is -- is, that there still appears to be a disconnect between what we're hearing the -- the corporate business professional saying at the carriers, and what we're seeing the regional personnel able to actually do. And it's that reason why we have been more cautious in our BBE forecast going forward for the rest of the year.

Now, if, in fact, all of the carrier corporate announcements, in fact, are realized, this will be a very heavy back-end loaded year, because there is a lot of work that will have to be done to realize the kind of -- of projection some of the carriers are making as far as -- as far as Capex and site deployment. We just don't know whether or not that is going to be actually what occurs, and that's the reason why we have built the business, essentially, around a -- a -- a lower leasing number. To ensure that we're not relying on a top-line growth that would be in excess of what actually ends up happening, given, once again, the capital markets.

Okay. And when do you guys book the -- the lease? Is it on on -- on lease signing? Is it on installation? When does it start showing up, as far as the BBE, and as far as revenues?

We book it on lease signing. And then there is, I guess we've discussed previously, a lag of when the revenue actually starts to flow, you know, some 90 days, thereabouts, as the installation takes place. The rent commences after the installation is completed, but the lease, though, is -- is recognized to book at the time that the lease is signed.

So the rent revenue shows up at install?

The rent --

Or shows up at lease signing?

Yeah -- No, the rent revenue starts to occur at install.

At install.

Yes

Okay, so even though you get the lease, it could be a little bit of a lag before you get it install.

Exactly. Exactly. And that's historically been the case, Rick, I think ever since this industry was formed. There is always -- there's a slight lag between when the lease is signed, and we talk about the BBE, and when -- and when the rental revenue starts flowing.

One more quick one, I know you want to move on. But just real quick. What -- in the UK, Hutchison has been doing a lot of 3-g stuff. Any activity at BT or other carriers in the UK, spending going on with 3G?

Yes, and I'm going to -- I'm going to be careful about protecting their, you know, their strategic plans here, Rick, but the short answer is yes. Some are more aggressive than others. One is -- is definitely more aggressively pursuing third-generation preparation than the rest of the incumbents.

So, as you point out, we know that Hutch's deployment is specifically for 3G They have no legacy systems.

But one of the incumbents is, in fact, staying very well prepared, by deployment of additional sites and then the other three to varying degree. They continue to invest in the networks from a 2 1/2G perspective, some a little bit more aggressively than others, but there is very definitely other 3G deployment activity taking place, beyond just Hutchison in the UK.

Okay, thanks, guys.

Our next question comes from Naveen Sarma. Please state your company name, followed by your question.

Thanks. Naveen Sarma, Deutsche Banc. Good morning, guys.

Good morning.

Kind of wanted to get an idea. You have significant cash position, and you've defined your operating cash needs. What options are you looking at for deploying that cash?

Well, Naveen, as we've talked about before, and we continue to invest, you know, that cash as appropriate, and we look at -- we look at opportunities in our business, we are continuing to invest significant sums in our business, albeit, now, it will be largely out of cash flow, going forward.

But it's nice to have flexibility in this environment. We have tremendous flexibility, given our, now, free cash flow position, or break even, if you will. So I think we have a lot of options, and we'll continue to put that cash to work in the best way we believe creates shareholder value.

When do you think you'll have a better idea on, you know, on those options?

You know, I think it's an ongoing discussion. It's an ongoing discussion about growing the business, and what other opportunities may come our way over time. And, you know, so, we'll just continue to evaluate where we are.

I think the point, Naveen, clearly, is the fact that we are uniquely positioned with the great deal of flexibility.

And, what I would suggest, as Ben is indicating, is we are absolutely focused on those things are going to create the most shareholder value. And, we continue to discuss what those alternative ways are. And, we'll let you know as soon as we're making decision in that regard.

Okay, thanks.

Our next question comes from Jim Ballan. Please state your company name followed by your question.

Thanks, it's Jim ballan from Bear Stearns. I wanted to ask a little bit about the Capex, and specifically the tower builds. The new guidance that you have for tower builds is still somewhat higher than what I had been expecting. Could you talk, a little bit, about whether you see the possibility of that coming down further?

And, also, my understanding of it was, that the previous guidelines was, that the BT exchange sites, the development of the those sites, would be done by the end of 2003. Is that still the case. Thanks.

Jim, thanks for the question.

The vast majority of the build in the guidance, here, is in -- particularly in '03 and '04 -- result in the development around the BT sites in the UK. There will be continuing pressure and diminishment of builds in the U.S. Business.

You saw we did 56 that we completed the last quarter. We continued to scrutinize every single one of those, as you would expect us to, for leasing and demand and committed leases, on every site that we build, that would have an appropriate return. And we continue to step that bar up, to the point where discretionary builds in the U.S. really have to have about a 20% going-in yield, or else we're not interested at this point in time.

So, most all of that build in '03 and '04, 5 to 600 and 4 to 500, will be around the build out of those 1500 sites that we have with BT. I mentioned we have built, to date, 540, so you can see by the numbers if you have 1500 to do, that virtually all of them are around the UK build.

Okay, so you foresee that there going to be '03 and '04, that you'll probably do 500 a year for the next couple of years?

In that vicinity. You know, it's paced by how our own capabilities to go as fast as we can, and, yet, take down the right sites, that are going to have the most co-location potential. And then, obviously, with customer needs, and as we see other 3G networks begin to take shape over there. So that's our expectation.

Okay, are you -- are you seeing -- I mean, I guess you talked about this, to some degree, but, do -- are you -- do you have a number of sites, or is it a significant number of sites, where you have more than one UMTS tenant on a particular site? Or is that still -- or is it most -- is most of the UMTS still coming from from Hutch'? And, well, I guess that's the question.

Well a significant -- we've taken down a number of sites we already have two sharers on the site.

Now, you can't necessarily assume that both of them are going to be 3G installations. You very well could have a carrier upgrading their network at a 2 1/2G level that elected to go on a rooftop site that we had developed around the Hutch' build.

A number of them do have two sharers on the site, going forward. And we continue to think those will be very valuable sites as we go through this build out.

Great. Thanks a lot then.

Our next question comes from Steve Flynn. Please state your company name, followed by your question.

Good morning, it's Steve Flynn with Morgan Stanley.

First, a clarification. When you talked about the UK site leasing revenues declining in the second half of this year, you mentioned the $7 1/2 million number. Is that quarter over quarter, or declined $7 1/2 million from where we were in the second quarter to the third quarter, and grow from this there?

Yes, Steve, thanks. I know that was complicated. We tried to make it as painless as possible.

That is $7 1/2 million per quarter, and that's broadcast revenue we spread, you know, it's site rental and broadcast revenue. And so, in the UK, what that is, is that is the absence of the ITV Digital network operation for the quarters of the third quarter and the fourth quarter. And, we expect to be, you know, relaunching the new service in the fourth quarter, not exactly sure of a date, exactly, we decided to assume January 1 for modeling purposes. And, so, for this balance of the year, Q3 and Q4 will be $7 1/2 million below, in each quarter, the run rate that we had in Q2.

Is all the receivables from ITV, now, reserved? You talked about the bad debt provision. Have you provisioned for all the receivables? [ multiple speakers ]

Yes, it's completely gone at this point.

Okay.

And then my final question. The $845 million in cash and investment, can you out the break -- give us the breakout between restricted and unrestricted? And let -- was there any movement of cash from unrestricted to restricted this quarter, and it plans, in the future, to move cash from restricted to fund -- I'm sorry, from unrestricted to fund restricted group?

There's about $512 million of that 845 that is unrestricted cash.

That is -- let me break that out for you. That's the funds that would be in Crown Atlantic, that's the funds that would be in the UK business, and then that's about $360 million that would be in the unrestricted group that came back from the -- remember the funds were originally earmarked for an investment last year that came back to us. So that's the total of all of that.

There hasn't been any movement from the unrestricted group back to the restricted group at this point in time, save about $4 million, that we use to pay cash dividends on some of the preferred last quarter, and the $18 million that we use to buy the stock from -- from [France] Telcom, two weeks ago, that we announced. -- The last 8 1/2 million shares of their fairly aggressive selling profile there. So, that's really it.

Okay, and now, the reason that has come out of that completely unrestricted investment subsidiary, the cash for the $4 million, $18 million, so it looks like that balance is coming down.

Yeah, it went down a bit.

Okay. Alright, great. Thank you.

Our next question comes from Jonathan Atkins. Please state your company name, followed by your question.

Jonathan Atkin, RBC.

On the U.S. lease-up trends, I'm just trying to get a sense of whether the already well co-located towers saw slower lease-up, and the lest co-located towers saw faster lease-up. How did the lease-up in the U.S. differ by level of co-location on tower?

It's really around where the carriers are active in their deployment for overlay activities. As so, as we look across the portfolio, it was skewed towards those areas of the country where we're seeing overlays.

And in our case -- and the amendment -- in our case, that was, I think, you know, certainly Cingular and Verizon are very active in the U.S. Market. And so we can sort of draw our activity level to areas of the country where they have the most dominant networks, and really not -- It really has nothing to do with what the level of occupancy, or tenancy, on the towers are today, nor has that ever really been a driving factor.

You remember, John, in, you know, in the Pennsylvania market, we've had a lot of sites with a lot of tenants, and that's just not seeming to be a predictor of lease-up.

And, what would you expect, roughly, kind of a lease-up level, just in the U.S., to be, kind of in the third and fourth quarters, based on your current visibility?

Well, as we have given out, I mean, we have modeled the business, you know, on a consolidated basis. We'll report it to you separately, as we always have, but, I think, to get into that level of granularity is not real productive.

I mean, I think, we're looking at -- we've got on the street here, you can see the numbers .25 to .35, you've seen the skewing of roughly .2, and then, you know, substantially higher between the U.S. and the UK. And I'd say, basically, you know, that is essentially where we would -- John's comments earlier, in response to one of the questions, you know, we have basically assumed that the level of activity stays about at these levels for the balance of the year. Lots of things could change, as John mentioned, on the positive side, but that's what we're doing today.

Thank you.

Our next question comes from David Wells. Please state your company name followed by your question.

Thank you, Lehman Brothers.

I wanted to get back, a little bit, to the discrepancy between your rental revenue and your lease-up rate. The lease-up rate was a little bit low, but your rental revenues actually well exceeded your guidance from last quarter. You had guided from 161 to $164 million, and the sentence in your press release says that assumes a lease-up rate of .35 to .45, which you came in well below. I mean, how close is that linkage? Is the .27 mean your rental revenue growth will be slower in future periods? And why did you beat the high end of your guidance, which was so low, this quarter?

Yeah, David, that was part of the reconciliation that I attempted to do for everyone. [ indiscernible ] to level set, kind of where the normalized run rate of site rental and broadcast revenue is.

You know, the one number there that sticks out is, this quarter, we had about $6 million in revenue, in that number, in the quarter, in site rental and broadcast, that is nonrecurring. It relates to, basically, you know, lease recognition as we go through this, and rental payment recognition as we go through this fairly massive build and initiation of the leases under the Hutch' agreement, and so, what you'll see, is, that'll be now back down to a more normalized rate of about, you know, it ought to grow about $2 million a quarter, from this point forward. So I felt the need to, kind of, back that out to get you to more of a run rate number.

And then we talked about the $7 1/2 million earlier.

We had -- we had some, in terms of the decrease in Q3 and q4, you know, along with that, within that $6 million, was also a -- sort of a perverse thing, is that, we had some deferred revenue on the balance sheet, that when ITV Digital went away, we had to go ahead and recognize into revenues. So, that was another contributing factor to that, that made the number look funny this quarter.

Okay, thanks.

Uh-huh.

We'll take one more question, I think.

Our final question comes from Sean Butson. Please state your company name followed by your question.

Thanks, Sean Butson from Legg Mason.

Hey, guys, just picking up on a question earlier about uses of the cash. How do you think about spending cash on buying back maybe some of your debt preferred, that's trading cheaply, and how much money do you have available to do that?

Sean, I think the way we thought about it, and we talked about this with lots of people publicly before, I think the most useful thing we can as for the company, is to manage the business based upon the cost of capital that being priced in the marketplace, and today that is very expensive, as you well know. I would assess our cost of capital at 20% or more.

And so, internally, we have imposed a discipline where we look at the cost of capital as depicted by the levels in the bonds, and kind of implicitely, in the stock price, and that's the level of discipline that we're holding ourselves to, and when we make discretionary investments in the business. And as you can imagine, if you hold yourself to that level, and you're intellectually honest, you're not going to find a whole lot of things you want to invest in in this business, in this current environment, with the risk profile and the lease-up challenges that we've described.

However, I think we have tremendous flexibility by having that cash, and, I think, you know, we evaluate, and continue to evaluate and discuss at the board, what is the most effective way to convert that cash into shareholder value. It may include looking at securities, it may include looking at assets, it may include, you know, a number of other things. And so, I think, right now, in this environment, having the liquidity is a unique benefit.

Unfortunately, I'm not certain that we've gotten much credit for it, but it is a nice flexibility that we have, and we're going to, you know, whatever do we're not going to compromise the liquidity and the flexibility that the company has. And I think that is of paramount importance. Before you would do anything, you would satisfy yourself that you are, in fact, free cash flow positive, you got a handle on the business, and your capital spending, and that you're very confident that nothing -- no action you would take with those funds would jeopardize, you know, the liquidity position of where you are.

Absolutely, and I agree with you on not getting credit for the liquidity position.

If you -- just hypothetically, if you wanted to spend money on doing something like this, would it -- the amount that you could spend, would that be the 512 unrestricted? I'm assuming some of the cash you wouldn't be able to use to buy back securities.

Exactly. I couldn't get the money out of Crown Atlantic, the money that's down in that entity, and we couldn't get the money down in the entity of the UK. When you back those out, you're actually looking at about 350ish, in that range, that would be available to, really, any purpose, and those were the funds, as we mentioned, that we used on the share we repurchased the other day.

Let me just comment on that real quickly. I don't -- we didn't, certainly don't intend to spook anybody. Buying back common stock, while, you know, it might be fun for a while, and at these levels, it's certainly not an objective of the company today. That was a one-off transaction, in a privately-negotiated sale, from a seller that needed to get out, and we felt like it was the right thing to do in that one discrete instance. But buying back common stock is not, in our view, you know, the highest and best use for those funds today, given, not withstanding the fact we think it's attractively valued, given know where we are, just from a liquidity and balance-sheet issues.

Great, thank you.

You bet.

If you will give some closing -- closing comments, please.

All right, well, once again, I'd just like to thank all of you for taking time out of your day to join us for our review of the second quarter. We hope that the information has been helpful to you in evaluating the company, and we look forward to talking to you again on our next earnings call. Thank you.

Thank you.

Ladies and gentlemen, this concludes the Crown Castle International second quarter earnings conference.

If you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 483699. Once again, if you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 483699.

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