Crown Castle Inc (CCI) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the California third quarter conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given to the question-and-answer session. If anyone needs assistance at any time during the conference, please press star followed by the zero.

As a reminder, this conference is being recorded today, Friday, November 15, 2002. I would now like to turn the conference over to Lisa Elliot, vice president of DRG&E. Please go ahead.

Thank you, and good morning everyone. We appreciate you joining us for Crown Castle's call to review quarterly results. We would like to welcome the Internet participants listening to the simulcast online.

Before I turn the call over to management, I do have the usual housekeeping details to go through. You could have received a press release via e-mail and/or fax yesterday afternoon aftermarket, but occasionally, there are technical difficulties experienced during these distributions. So if you didn't receive your release or you would like to receive future releases, via fax or e-mail, please call our offices at DRG&E. The number is 713-529-6600, and we'll get one out to you or put you on the appropriate list.

Additionally, there will be a replay of today's call at -- you can go to the web cast section of www.crowncastle .com and it should be there in a you believe conform hours. There will also be the usual telephonic replay available for the next seven days, 24 hours a day. The pass code and access number for that is in the press release.

As you know, this conference call will contain forward-looking information and statements that are based on management's beliefs, as well as assumptions made by management, and information currently available to management. Although the company believes that the expectations reflected in 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 the potential factors that could affect the company's financial results are available in the press release, and in 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 underlying assumptions prove incorrect actual results may vary materially from those expected.

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

Thank you, Lisa, and good morning everyone. We appreciate you joining us for a review of our third quarter results. With me on the call today is Ben Moreland, our Chief Financial Officer, and he will first review our financial and operational results and I'll follow up with some of my perspectives on the quarter and then we'll go to questions. Ben?

Thanks, John, good morning everyone.

We generated revenues of 227.4 million for the third quarter. That breaks out to be tower and broadcast revenues of 166.3 million, up 13.7%, from the third quarter of last year, and service revenues of 61 million. Gross profit from site rental and broadcast transmission define as net revenues less cost 95.8 modification up 9.6% from 86.4 million in the third quarter of 2001. This growth was despite the fact that we lost all of the ITV Digital revenue in this quarter compared to last year's third quarter.

Free cash flow which is net cash provided by operating activities after capital expenditures during the quarter with a use of cash of 25.6 million, below our guidance, primarily due to the impact of an unfavorable change in working capital. On a BDE basis, after churn, the collocation rate was .25 tenants per tower across our entire 15,291 sites owned at the beginning of the quarter, which included all the sites we have ever built or acquired. This breaks down by segment to .18 BBEs in the U.S., consistent with last quarter's level and .57 BBEs in the UK.

We've included in the fact sheet on the back of the press release, the effective escalations of our existing revenue base to help make these comparable with our industry peers. In the U.S., the average lease rate for the new broadband tenant slightly increased to $1,592 and in the UK, $1,192. This brings the current annualized revenue per tower to about 38,900 per annum in the U.S., the highest in the industry. During the quarter, 85% of the new leases in the U.S. came from big 6 wireless carriers. Of the new lease revenue added for new tenants in the U.S., about 40% were additions to existing leases through amendments and in the UK, about 10% were from amendments.

During the quarter, we built 94 sites. 25 sites were completed in the U.S., and 69 were completed in the UK. In the UK, all of the sites completed related to the BT rooftop sites in the BT reach agreement, bringing the total accumulative BT sites developed to 609.

Capital expenditures during the quarter totaled 38 million. In the U.S., capex was 14.2 million, down 23 million from last quarter, and down 95.8 million from the third quarter of last year. Capital expenditures in the UK and Australia totaled approximately 23.8 million, the largest part of that being for the development of the BT sites sites.

Turning to some of the quarter changes in the income statement, total site rental and transmission revenue declined as a result of the loss of ITV Digital contract in the UK, which was approximately 6 and a half million dollars of revenue lost this quarter. However, as of November 1, we have now replaced 100% that have revenue in cash flow with our new digital television offering, Freeview, with some additional capacity remaining. We'll talk more about Freeview later on.

Rental and operating expenses in the U.S. were negatively impacted by the recognition of $2 one-time expenses related to seasonality of repair and maintenance expenses, increase in bad debt recognition. On a normalized basis, we would expect that site rental operating expenses will continue to escalate at about 3% per year, making the fourth quarter run rate somewhere between 38 and a half million and 39 million quarterly.

The service business continued to be slow in the U.S., but improved in the UK in both revenue and gross margin. Total G&A expenses improved largely due to the one-time items that negatively impacted the second quarter from the ITV Digital bad debt write-off. Same tower sales growth came in at 18.6% year-over-year on the sites we owned was a September 30 last year, which represents 95% of our total end ending sites. Specifically in the U.S., same tower sales grew 13% and in the UK, 22% year-over-year. During the last 12 months, we've added approximately $4,500 of revenue per tower in the U.S., and the UK.

Cash and investments at the end of the quarter was approximately 713 million, senior bank debt at the end of the fourth quarter totaled 1.1 billion, approximately 3.2 times this quarter's annualized EBITDA. During the quarter, we paid down our crown Atlantic credit facility by 50 million with internally generated funds from that joint venture. High yield debt to 2.3 billion for a total at the end of the quarter of 3.4 billion.

In the restricted group, debt totaled 2.8 billion. We have the ability to access approximately 433 million under our senior credit lines at the end of the quarter. As you've seen from our press release, we do average our balance sheet during the last three months through open market repurchases of our senior notes, our senior discount notes and convertible preferred securities. We are able to eliminate more than 402 million of face amount of debt and preferred securities with the use of 200 million in cash, nearly a 22% return on our investment. Annual interest expense and dividend savings will be approximately $38 million in cash savings of that will be 13.7 million and 27.6 million in 2003, and 24. I would point out that for the full year 2002, we have reduced our capital expenditures by more than 250 million from our original guidance in January, 50 million more than we've now spent on these repurchases.

Pro forma for the repurchases, we maintain a substantial level the liquidity. Approximately $1 billion. Pro forma cash after all repurchases is approximately 575 million. Pro forma for the repurchases in October and the freeview contracted EBITDA that is on the air today, our net debt and preferred EBITDA ratio is 9.1%. -- 9.1 times, excuse me.

Moving to Q4 and 2003 guidance, which is included in the press release, we expect the fourth quarter of 2002 net cash provided by operating activities to be between 50 and 60 million, assuming that new tenants are added to the existing towers at the rate of .2 to .3 tenants per tower, during the quarter with the U.S. coming in below that figure and the UK coming in slightly above. Implicit in the guidance this quarter is a decrease in working capital of approximately $12 million, which we didn't get in the third quarter and we're not done trying. We expect total capital expenditures to be between 35 and 45 million during the quarter and we expect the result of this will be free cash flow for the fourth quarter of between 15 and $25 million. We believe the relevant GAAP metric to measure our performance will increasingly become cash flow after capital expenditures as this measure includes interest, capital expenditures and operating results.

Implicit in the 2003 and 2004 outlook is the transition of our pick interest to full cash pay by August of 24. This measure will not always lend itself to quarter to quarter comparisons as significant fluctuations in accrued interest and working capital will occur, but these fluctuations are largely offset which comparing current quarter to the same quarter of the prior year. We do recognize that it may make it more difficult for some of you to model our business because -- and because the purpose of this guidance and metrics is not to hide or mask our expectations, you may find it helpful to know that our outlook implies total EBITDA in the fourth quarter of between 85 and $90 million.

Our guidance for 2003 projects total net cash provided by operating activities of between 140 and 200 million for the full year. These expectations assume collocation rate of .2 to .4 tenants per tower across the entire company and EBITDA of between 370 and 400 million as we remain cautious on the outlook and lease of our U.S. business. Included in our collocation guidance is churn that we expect from some analog dispatch tenants on on acquisition we made in 1995, equivalent to approximately 150 BBEs such churn will occur in the first quarter of 2003.

We are also monitoring the bankruptcy proceedings of Devin PCS in which we have approximately 200 BBEs, but understand there are discussions underway where other carriers may acquire Devin's networks. We expect 2003 capital expenditures to be between 170 and 200 million, a reduction of previous guidance based on lower expected leasing and building activities in the U.S.

2003 expected capital expenditures includes the last required acquisition payment to BT of 76 million. For the full year, we expect free cash flow of between negative 35 million and break clean the even. More detailed guidance is available in the press release.

As I mentioned, quarterly results will vary, but-over four quarters the strength our business model can be seen. We expect even at this level of leasing, year-over-year incremental margins will be at least 75%. For the full year of 2002, we forecast that we will produce incremental margins of 84%. In the U.S., despite the reduced let'sing, we expect to finish this year with a 64% tower gross margin, which is a 200 basis point improvement over 2001, and we would expect similar trends to continue in 2003. In the UK, including the loss of ITV digital, we expect to grow EBITDA 15% year-over-year 2002 over 2001, with expectations of accelerating growth next year.

Our view of the service business is that it is a tool to increase the recurring tower revenue in our business, and will only provide an insignificant amount of gross margin, less than 5% of total gross margin going forward. Overall, we are targeting to grow EBITDA approximately 10 to 15%, year-over-year, which should substantially deleverage the balance sheet and deliver significant free cash flow in the future.

With that, I'll turn the call back over to John.

Thanks. Before I turn the call over to questions, I'd like to review the progress we're making on the four key priorities that we established at the beginning of the year. The first key priority is to grow our revenue base organically. While we're experiencing the effects of a reduction in the capital expenditures by our customers in the U.S., an important point to remember, and which I indicated on the last call, is that this does not negatively impact our starting tower rental revenue figure.

As I indicated last quarter, the great part about this business is that the tower rental revenue we end a quarter with doesn't need to be resold in the next quarter. It is long-term contracted revenue. As such, when we assess the impact wireless carrier capex reductions, we are assessing the rate of growth of additional revenue. As has been indicated, our release in the third quarter was .25 BBEs after churn which continues to demonstrate our ability to grow the revenue base organically. This metric can be difficult to benchmark given that it is not a GAAP measure but if you look to GAAP measures, tower revenue grew approximately $4,500 per tower over the Lisa year in both the U.S. and the UK, which is approximately 14% growth. As such, I am confident that Crown Castle is adding as much recurring revenue to our assets as anyone in this industry.

Some of you have expressed concern that the leasing has slowed in the U.S. of the however, even at the recent levels, we would expect to grow tower level 10% annually, which I believe is respectable in this environment. As I look at our U.S. business, a couple of data points are important. The recent CTIA survey confirmed what we have been experiencing, which is that U.S. wireless operators added approximately 3,850 cell sites in the first half of 2002, compared to approximately 13,500 sites in the second half of 2001. That was a 72% decline in new cell sites added when comparing those 26-month periods. During the same period, we saw a decline of approximately 30% of new tenants on our sites. It's consistent with what we're seeing in the macro industry here in the U.S. This slowdown however is in the addition of new sites is against a new backdrop in the increase of wireless minutes, an increase of nearly 48% year-over-year.

I would point out again as I have in the past, recent third-party analysis would suggest there is a correlation between subscriber churn on a wireless carry's network and their quality. The technical drivers remain the same, subscriber additions, minutes of use growth, quality of network desired, and wireless data deployment. Whereas I don't plan for carrier capital expenditures in the U.S. to crease in the near term, the rate at which they are vesting in their networks provides us with reasonable organic growth prospects.

Turning to the UK, which is 33% of our total business, we continue to see the positive effects attributable to wireless carrier data network deployments. The third quarter leasing was again positively impacted by Hutchinson's generation of their network, which is expected to launch 3,500 sites by the end of the year. While we are pleased with the level of activity seen with that launch, we would know that neither Hutchinson or MMO 2 are releasing the number of sites during the time period contemplated. Furthermore, it's likely that Hutchinson and MMO 2 will not need the full number of sites in the time frames originally contemplated. We're working with both of these carriers to seek a satisfactory resolution of this issue. When we look at our other customers, we are seeing indication that is our other UK customers are investing in their own 3 G strategy in order to have a competitive offering.

Second key priority we established earlier this year was to grow EBITDA margins by driving efficiencies in our existing business and you will have noted that responding to the reduction in U.S. volume we recently announced a reduction in force which we expect to reduce annual G&A cost by approximately 11 million to 13 to $14 million. Further, I expect that these changes in the U.S. will enhance our ability to execute for our customers through a more focussed field organization. As Ben alluded to in his comments, I expect that by growing revenue in our continuing expense management, our tower growth margins will continue to expand.

Our third priority is allocating capital to projects that achieve higher returns with lower execution risks. As we previously discussed, we have imposed a 20% hurdle rate on discretionary investments. In the U.S., this traffic lights into completing only about eight towers in the fourth quarter. As a result, this quarter's total company capex of $38 million is down 75% from the capex spent in the third quarter of 2001. This is a decrease of $114 million from the same quarter last year. Through our debt buybacks, we are demonstrating a rational approach to allocating capital, having realized in our judgment the highest risk adjusted return available to the company company. Going forward, we will continue to allocate capital on a rational basis without compromising the liquidity and flexibility unique to Crown Castle. To enhance our flexibility, we are making a concerted effort to reduce or eliminate nondiscretionary cash calls in our liquidity as demonstrated by the winding down of the build-to-suit obligations.

Lastly, the fourth priority we established earlier this year was extending our revenue model around our existing assets at high incremental returns on capital. And I'm very pleased to indicate once again that on October 30, along with our partners the BBC and B sky B, we launched Freeview, a new digital service in the UK. This network was launched using the infrastructure we already owned as a result of our previous contract with ITV digital. We that our new contracts with content providers will more than replace the cash flow generated from ITV digital, along with significantly improving the credit quality of that cash flow stream. Unlike the failed ITV digital, Freeview has no monthly subscription fees and requires only a digital set top box which costs approximately $150 to receive the signal. There are about 15 million households in the United Kingdom that only receive five analog broadcast channels. With a nominal one-time cost, these households can receive 24 digital channels, digital television channels plus 12 digital radio channels. That would suggest our ability to rapidly replace the revenue and cash flow which ITV digital went into administration and launch the network again, receipt rates the valuable nature of our infrastructure and our people.

I'm pleased with the progress we're making on our four priorities, and with that, what I'd like to do is turn the call over to you for questions. Operator?

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 you would like to decline from the polling process, please press star followed by the 2. You will hear a three-tone prompt acknowledging the selection. If you are using speaker equipment, you will need to lift the hand set before pressing the numbers. Please ask one question and one follow-up question at this time. Our first question comes from Naveen Sarma with Deutsche Banc. Please go ahead.

Hi, guys. Actually, I was going to ask two questions, but let me try to do this. With regard to the UK bank facility, when do you expect to have that finalized? And the second question has to do with the services in the UK. What do you think the run rate revenue is? We've had pretty big swings in revenue quarter over quarter?

Yeah, Naveen this is Ben. Thanks. The UK bank facility is nearing completion. It's been a longer process than anticipated, but we're getting good support from the people assembled and we're hopeful of having it in this 10 Q filing but we didn't get there. I expect in the next few days we will close it and file an 8 K. We anticipate a 120 million-pound facility, will be about, oh, 100 or somewhere between 90 and 100 drawn at closing and really have no expectations of further drawings under the line. Due to the fact that the UK business is substantially free cash flow positive today. Your second question around the services activity in the UK, you recall last quarter, because we're not on a percentage of completion method, we were unable to get a number of sites completed and in the revenue stream in the second quarter. And, therefore, we sort of had a pushout into the third quarter of a number of sites, principally related to Hutchinson. Now that we sort of suffered that one-time trough, the run rate looks pretty good going forward. I would suggest that give or take, this run rate is pretty good, this level.

Okay, thanks. And congratulations on the buyback.

Thanks.

Our next question comes from Mark Drewsy from Raymond James.

Actually it's Rick Prentiss my voice came back. I'll echo that, glad to see you do the buyback of the debt, good use of funds. Ben, could you clarify a little bit for me? On the 50 million that you did buy back in the crown Atlantic venture, you said you used that from cash from the venture?

That's correct. Crown Atlantic and the UK are two unrestricted subsidiaries, and and as such, the cash that is generated from those entities is only available to be reinvested in the entities. It's trapped in the entity, if you will. And in connection or in agreement with our partner Verizon there, agreed that as we generated free cash flow in that entity, as the capital spending has come down, that we ought to be using it to repay debt. So we've done that in this last quarter and would expect to continue to do that in the future. It's likely we'll do the same in the UK, for the same reason. So that's -- you should see more of that to come.

Clearly the point there, Rick, is that that entity generated 50 million of free cash flow that was then used to pay down the debt within that entity.

That was just within the quarter, that 50 million?

No, no no, it's running roughly 65 or so in EBITDA, and you take out interest and now minimal capex, and so you're generating, you know, in the vicinity of 40 million or so, 40 to 50 million annually of free cash flow in that entity today. So that cash built up over time.

But look for at that kind of run rate, 40 million free cash flow on an annual basis could be used?

Just to editorialize a little bit more on that, you saw in my comments, on a run rate basis, the bank debt combined is about 3.2 times run rate EBITDA to date. We have a goal of getting all three facilities by maybe next summer, you know, substantially below three times. And the UK will be there at closing of this new facility, will be basically at two and a half times. But I think that, you know, getting all three facilities in the range of three times or below will provide us even enhanced flexibility from where we sit today.

And the follow-up question on tower cash flow, you mentioned lots of items in there, seasonality, bad debt, winding down the BTS, bad debt, you then came back to talking about Devin issue. Where have you taken bad debt to as far as a dollar value goes and what are you seeing on the churn basis?

In the U.S. business, we're at about 13 million in provision today, and it's a level we feel very comfortable with today. We are making substantial progress on working through the receivables and frankly, it's a reconciliation process much homeowner a -- more than a collection or credit issue. That is making great progress in the U.S. business. On the run rate, I wanted to make sure we got out what we think the actual run rate is of the I know it's hard to get to, but it looks to us like the spike this quarter worked clearly about 2 million of 1-time items items, a combination of these items that we talked about. So if you take, you know, the 39.7 and back out the 2 million and sort of a normal escalation of 3%, that gets you to sort of 38.5 or 38.7. We think that's the good run rate going forward, don't expect to be spikes or bouncing around of the numbers as we have this year.

Okay. And the churn side?

The churn would look -- it bounces around a little bit, Rick, and what we've typically always seen is around 1%. But with some of these bankruptcies that we're looking at, it could be anywhere between one to 3% on an annualized basis for a quarter, depending upon whether or not there has been a liquidation of a particular carrier that we have out there. So we've mentioned, you know, the two specific situations that we're watching at this point, the one is the analog dispatch customers associated with one of those acquisitions we did back in '95 and the other one is watching the Devin PCS. The unique as aspect of them is they haven't launched the PCS networks yet as you know. They don't have an operating subscriber base. That puts it in a somewhat unique category as compared to a lot of the other wireless carriers out there that might have certain financial challenges. They typically have subscriber bases and operating systems which we would expect find themselves in a restructured environment, still continuing to operate. In Devin's case, we're watching it closely because we hear there are other carriers interested in picking up their markets. As such, the leases that they entered into with us, would certainly in our view be protected. But the question will be is that the final outcome. We're watching that, and will keep you informed as we see what happens there.

Thanks, John.

Rick, just one last point on the margins. I think the best way to think about our tower margins is really over sort of a rolling four-quarter period. I mentioned last year, we were at 62%, this year we think we'll finish the full year at 64%. I think next year, 65 or 66. It will bounce around quarter-to-quarter. This business, with so many moving parts, 8700 ground leases and all the different things we manage doesn't happen every quarter exactly on a string. You can see that in our incremental margins. Earlier in the year, we ran ridiculous numbers and one-time cost savings that got to be 150% incremental margins, things like that. Quarter to quarter, this quarter it dropped way down. Incremental margin over the four quarters, it's been 80% trailing, I think it will be 75 on the go-forward, that's the way we manage the business, maybe that's helpful to you.

It is, thanks.

Our next question from John Bench with Lehman Brothers.

Hey John and Ben, nice quarter. Looking out to the '03 guidance, it looks like you brought the midpoint of your net cash from operating activities down by about 35 million. I guess I should add the 13 million of cash interest savings as well to that to look at what the real move is in organic, which looks like it's down by about 48 million. You know, versus your sort of rough revenue forecasts for for '03. I guess I'm somewhat puzzled this, this big hit to EBITDA margins because your co-low rate is unchanged in terms of guidance.

It's really the flow-through effect of this continuing, you know, slow leasing environment in the U.S. and the lack of being able to compound the new tenants over time. We had a view earlier in the year that we would see this turn around. And that's just clearly not the case. It's why -- hopefully it's helpful to you, this time we've given you what the expectation is for EBITDA, 370 to 400 million next year, company-wide. You know, we do expect, as you've seen the guidance on capex to come down, this would imply the savings on the interest, the cash excellent, of 13 million. We feel like we'll be very close to fully loaded, break-even cash flow next year.

Ben, I guess I just don't understand. Your BBE collocation rate hasn't moved. House the slowdown in the U.S. manifesting itself in the numbers?

I guess you would say our expectation has now moved in terms of guidance. We had previously had higher expectations for the back half of the year, which would have been translated into further revenue that you're now compounding off of in Q3. Run rate is for everything in these forward forecasts and so we're reasonable not going to finish where we originally thought, and there by affecting the third quarter guidance -- I mean 2003 guidance.

Thank you very much.

Next question comes from Jim Ballan with Bear Stearns. Please go ahead with your question.

Thanks a lot. Aid question about the DTT contracts. As I recall, there were more than one multipleplex or a number of multipleplexes, some of them were with the BBC, and there were others you were looking to lease out to other providers. Is the guidance you're giving on the uses all of those multiplexes, or is there further upside on the DTT side? And the other question I had was the -- I mean, just following up on what John is saying, and you have fairly wide range of lease up guidance for the next couple of years. Could you talk about, you know, what would lead you to the bottom end of the range on the top end of the range? What would have to happen? Maybe you could talk about the U.S. and the UK. Thanks.

Jim, on the DTT side, you're right, we have two of the three multiplexes that were licensed by the UK independent television commission. On the one that we don't have, that's -- that was licensed to BBC, and we are contracted by from them to offer them the transmission services associated with the transmitting their content. On the two multiplexes that we have, and just for all those on the call, each one of these multiplexes can handle around four television channels, 4 TV stations. And so cumulatively, we have eight channels that we would otherwise be looking to contract with content providers. Of those eight, we have now contracted with seven, and we've got remaining capacity of one more channel. We're in discussions with some folks right now about taking that one last channel on the last multiplex. It kind of converts to 37 and a half million dollars on an annual basis, that is contracted today, and when it fills up, could be up to about $41 million annually on the DTT. But at the rate we're at today, we have replaced the ITV digital revenues that we had under that particular contract. Then as relates to the guidance, I think your question was around leasing and kind of the range. It is a broad range clearly, Jim, in that for '03 and '04, we're suggesting .2 to .4. A lot of it really gets to a question I've heard a number of you ask in other venues, you know, when does the -- when does the capital expenditures on network change? I mean, I just to repeat that statistic that I was providing a little earlier, the wireless carriers added 13,000 sites thereabouts in the second half of last year, and in this year, you know, about 3800 sites. That's a huge reduction. And yet, their minutes of use are going up significantly on a year-over-year basis. So the question clearly typically is: So when do wireless carriers have to continue to add to their network? This is to a degree, the $64 million question. I think we're paving some new ground here. The traditional engineering metrics that a wireless carrier would have used are not being universally applied at this juncture in terms of minutes of use being handled by a specific site. That is, to some degree, manifesting itself in degraded network and at some point that will have to turn. The real question is when. And, you know, given the capital markets constraints, some of the macro environment, that tend to explain why on the low end of the range, we contemplate what we're seeing today, certainly in the U.S., just continues at this rate. We're not planning on any increase. But it is possible that it does increase because the macro environment improves, and the wireless carriers focus on enhancing their network quality to cover the increases in MOUs and their increases in subscribers.

I would just add, I think Jim, it's important that all of us sort of keep a proper perspective. You know, none of these businesses are growing at the rates that we once did, unfortunately, nor are the valuations what they once were obviously. But I think it's important to keep the proper perspective, that even at these lower ends of the lease up range, you're still growing organic revenue 10 to 12%. And I think we're going to basically work real hard to turn that into 15% EBITDA growth. And that's not bad. I mean, that will drive substantial free cash flow, it will deleverage the balance sheet and create a tremendous amount of equity for shareholders. That's what we're to focussed on. If it's higher, our view is the upside will take care of itself. But even the low ends of the ranges, I think there's nothing to be embarrassed about at those levels.

That's terrific. Thanks a lot.

Our next question comes from Sean Butson with Legg Mason. Please go ahead.

Thanks. I have a couple of questions. I guess the first is, I was taking a close look at the U.S. business and it looks like the new rent per tenant was up pretty nicely. I tried to back into the average rent per tenant. It looked to me it was down about 10 bucks, not a lot, but I couldn't figure why the new rent would be up but the average would be down on a sequential basis. And to get the average rent, I'm just taking your site rental res divided by average tenants kind of on a monthly basis. Then the follow up is, how much of your current liquidity position, how much is available for additional debt buybacks? Thanks.

Yes, Sean, on the issue of the rental rates, both new versus the average, that slight discrepancy there is simply a question of when the leasing starts up. And so if there's a delay in when some of the leasing starts up, the average will be a little lower than what the current new rental rate is established at, you know, at this particular time frame. So I think that's really what's explaining that, I think you indicated in your math was a $10 difference between the new rental rate and the average. To the question --

Yeah on the question, Sean, on the available cash going forward, we have cash available in the both unrestricted and restricted groups, of about $435 million of our total liquidity of $575 available for really any purpose. I would say that there's one caveat there, the unrestricted group would be available for any purpose. The restricted group cash can only be used to buy debt securities.

Okay. Just regarding the tenant rental, have you seen this, obviously some rumors throating around about some of these smaller wireless carriers pressing the tower companies for rental concessions. I've never seen why you will you would do that. Is that good, if there's a carrier that looks like it could get liquidated unless you give them a concession, is that something you would consider?

I don't want to get into a whole lot of pricing discussions, Sean, but I would suggest, as I've indicated in the past, the fundamental focus that we have always used in terms of our pricing has been the substitution, what would that carrier do otherwise. And quite frankly, you know, regardless of a particular financial challenge that might be faced, you know, the issue we have to look at from a business perspective are what are the alternative that is that carrier may face. And I would suggest to you that really it wouldn't make a whole lot of sense for us to entertain the kind of proposition that you're otherwise suggesting could be asked for by some of the smaller carriers, so you know, with that, I guess I'll leave the pricing discussion.

Okay. Thanks.

Our next question comes from Steve Flynn with Morgan Stanley. Please go ahead with your question.

Good morning. As a follow-up to Sean's question, with regard to the cash for buying back the securities, it looks like most of it came from the Crown Castle Europe entity. I'm wondering if that is correct, and post third quarter, is that entity funding most of the buybacks?

It's been -- we've got it there in the disclosure, the mix that it's been. You know, to the degree we're buying junior securities, convertible preferred, those funds have to be used coming out of the unrestricted group, which is largely the European account that you're talking about. To the degree that you're buying back high yield, that can be the restricted funds in the holding company. So the mix, it's all -- we've disclosed it all in the Q yesterday.

So for -- for CCIC funds, it can be only bond.

That's correct.

But the Europe can be unrestricted.

That's right.

Second question, your capex forecast for '03 and and '04 has been reduced, however, your bids are still the same. I assume most of the builds are the UK exchange sites, but wondering where you're seeing the capex savings if it's not in the builds?

Well, you're right. The forecast going forward on the tower builds is, in fact, predominantly UK. And the reason for the reduction in capex is it's a lot less expensive for us to develop these British telecom central office sites, the rooftop sites. Versus a raw build of a new tower. So in essence, that would explain the reduction in the -- kind of the capex from the standpoint of a build in terms of what we're spending there. And then the last issue is, you know, leasing in the U.S. has been down and we're just simply frequenting that through the the '03 '04 kind of time frames in terms of capex.

Okay. Great. I'm sorry, just one final question also. It looks like the rate in the UK -- I'm sorry, in Australia dropped significantly, that just jumped out at me, I'm wondering what's the cause there? It looks like according to the release that the average lease rate was $6.50 U.S. in the second quarter and then it drop dropped to $3.24?

That was essentially a mix issue. What we did in this particular quarter, which may or may not be an anomaly, I'm not certain, I haven't had a real thorough review that have particular issue with the Australian team down there, but the genesis was a mix issue between narrow band installations, which essentially is a carrier adding a microwave dish or something hike that, versus a full installation. We get less revenue as you can imagine for a simple microwave dish installation than we do for a new installation. That's what created the rate reduction in Australia versus prior two quarters.

Okay. But that has no impact on revenues, it's just the calculation?

That's correct.

Okay, great. Thank you.

Our next question comes from Alex Regal with Friedman, Billings, Ramsey. Please go ahead with your question.

Thank you. Two quick questions. Number 1, in the UK, the average monthly lease rate has been growing nicely. Can you talk about that trend, where you expect it to go over the next few quarters. And secondly, can you comment on whether or not you have an interest or contemplating any asset divestitures and/or sales sales?

Well, with respect to the rate in the UK, again, just trying to be cautious in terms of discussions about pricing and pricing looking forward, the rate has grown. That is reflecting the, essentially the third generation pricing that we have discussed some year ago as we were moving into into that particular new phase of technology deployment in the UK. I would suggest that the rate of range is not going to be as great going forward simply that more of what we're doing today is third generation oriented than would have been the case previously. But equals to to say -- to say that it's not going to decline from current levels either, and that the -- the installation activities that we're doing, if the new leases we're doing continue to look like what we've seen to date, it's going to be roughly the same kinds of rental revenue per month that you're seeing today. Relative to the --

Asset sales?

Oh, asset sales and so forth, there's nothing that we are contemplating that is, you know, of any material import.

Thank you.

Our next question comes from Rachel Golder with Goldman Sachs. Please go ahead.

Yes, good morning. I was wondering, on the ongoing securities repurchasing, whether, in fact, you've considered discussions to do debt for equity swaps and pointing out that although there may be any delusion in companies likes next tell and tell action have had a positive impact on share price performance?

Rachel, thanks for the question. We have considered it, we have had folks approach us as to whether we would be interested in that. We have not done any to date. You know, I guess just like we talked about in the opening remarks, you know, we'll look at whatever drives the maximum amount of shareholder value. It's not our intention at all to dilute shareholders. To the contrary. We have been, as you you a, buying for instance telecom shares last summer. We bought a handful this last quarter under $2 a share. The purpose is not to support the price, the purpose is to mitigate the dilution from issuing shares and the dividends for the convertible preferred. So we are extraordinarily sensitive as shareholders around issuing any new shares. Albeit I realize the implied price, at some of the prices of the securities could be quite attractive, while you've got the level of liquidity that we have and the flexibility, we haven't gone down that road yet. And I really don't want to comment on sort of where we might go in the future. You've seen us act pretty rational, I think that's what we'll continue to do.

Sure, I understand. I just to emphasize in many cases, it actually has a beneficial effect on the share price when you're not using up liquidity and managing to deliver at the same time.

I understand.

A point I want to add is that what we did here in the third quarter, and extended into the first part of the fourth quarter, was really, you know, the rational capital allocation that we have discussed on the call, the 20% hurdle rate on discretionary investments. As we go forward, our focus is on allocation of capital on the same rational basis. But we're very focussed on not compromises liquidity and flexibility. As such, what we do going forward will be reviewed and analyzed on a continuing basis to make sure it makes sense from a company perspective.

I think we in the investor community are very much appreciated hearing the new focus on capital efficiency and balancing liquidity and returns. Thank you very much.

Thank you.

Our next question comes from Greg Lindberg with Morgan Stanley. Please go ahead with your question.

Good morning. One thing that jumps out in the U.S. was obviously the 300 basis-point sequential drop in the site rental gross margins. This was the first downtake in a long, long time. I wanted you to go into a little more detail on what costs specifically showed up this quarter, and is this a seasonal issue as a portion that have one time? What's going on on that margin line?

Yeah, Greg, I'll take another crack at that. Back into Rick's question. There is -- there are costs there that are one-time. Some of these are adjustments as related to the unwinding of the build-to-suit arrangements that we've had with both BellSouth, Cingular and Verizon. Others were some true ups of expense run rates that are some one-time catchups, not significant. If you think bit, we incur 150 million or about 90 million in ground lease expense a year and 150 million total to run the towers. And, you know, occasionally you're going to go in and reconcile accounts and find true ups that need to be made. Some of that are these types of items this quarter. It's why we were careful to give everybody where we think the normalized run rate is. Don't expect these types of fluctuations to be usual, but they did occur in this quarter because some of the unwinds on the build-to-suits and some of the reconciliations that go on periodically just across the general ledger that are appropriate. Delays, I might mention, some days we find credits as well. So it doesn't happen on a string. As much as everybody would like to believe it does when you're running this many assets, there are things that move around -- move around a little built. It's why it's helpful to look at this on more than a quarter-to-quarter basis.

Well, on a quarter-to-quarter basis of the 4 million increase in the third quarter was the build-to-suit component --

Well, let me remind you one other thing. We sort of had it going both ways this time. In the second quarter as we talked about in the last call, it was abnormally low by a $1.21 million-time benefit we had from some reduction in utilities on a one-time basis, on a credit. So there's some things that made the run rate step go down last quarter, and then look abnormally higher than the one-time items this quarter. The real run rate last quarter was about 36.2, and the go- go-forward for Q4 it's in the 38.5 and change range, and that's kind of where we think we'll be.

Thanks.

The next question from Charles Ulrich.

Yes, I believe this is a follow-up to the last question. Just to get some clarification here on the restricted group and you're showing that site rental operating expense is up 3.5 million quarter over quarter. Is this attributable to the one-time item you expressed?

Yeah. That was -- exactly right. That's what Ben was just reviewing here in terms of what some of these were.

Right. Okay. And so we would see a normalized rate probably maybe a little bit higher than the previous quarter on a site rental operating expenses?

Yeah, the normalize rate would be about 38.5 in the fourth quarter, and then in essence, that should grow at around three, three and a half percent annually. You know, the cost components in that area tend to be things like the ground rinse, property taxes, utility bills and so forth and so on. So it should be fairly normalized on a three and a half.

Most of it occurred in the restricted group. Was that your question?

Yeah, the restricted group saw three and a half million dollars.

Most of it was in the restricted group because that's why the U.S. assets reside.

I understand. Okay. Thank you.

Our next question comes from Romeo Reas with Jeffries. Please go ahead with your question.

Good morning. I have a couple of quick questions. I'm trying to figure out how you -- I understand how you're delivering the whole company, but how do you deliver the restricted group? Based on the run rate numbers, I'm looking at the basically the fact that it has 2.8 billion of debt, 200 million of preferred, some of which are going to go cash pay. The demand it seems that to the restricted group is only going down a little bit. You know, the BBEs, the lease-up rates have gone from .37 in the fourth quarter last year to .33, .22, .16 sequentially, .16 is last quarter. I'm trying to get a sense of how the restricted group is going to get delivered if demand is not, number 1 going down, and number 2, the cash at the other entities, the unrestricted entities is [INAUDIBLE] those entities. Thank you.

Yeah, it's certainly a great observation and one that's not lost on us or our large bond holders.. The way we operate the company and think about leverage is on a consolidated basis. We have significant flexibility around the capital structure where the cash resides. However, as you point out, the restricted subsidiaries -- the unrestricted subsidiaries are, in fact, ring-fenced and this is why as we talked about earlier, we're using that cash generated there to retire their own internal obligations. Because that's really the only cash -- the highest and best use of the proceeds if you're not otherwise investing in capital projects. Now, at some point, you know, just to sort of hypothesize about the future, at some point that will bet to a point of sort of diminishing returns. Look at the UK business which will be two and a half times debt to EBITDA, I mean, you're not going to sit there and pay off the debt completely. So you have to figure out how to do further investments within that entity or ultimately get some kind of dividend put in place so you can upstream cash back into the restricted group. Or as we talked about for a long time, ultimately rolling it into the restricted group. The only reason for not doing that is we've got a fairly significant make-hold premium on the bond issue down there, we haven't found any value in paying. So that's where that is. And again, we focus on the business as a consolidated leverage, a consolidated balance sheet management and with the knowledge we can always roll it up if we ever needed to.

Can you give us guidance for the '03 and '04 numbers for the restricted group alone? Maybe just on EBITDA and capex?

No, not really. The easiest thing to do would take the U.S. assumptions that we've talked about this morning and model that into the restricted group and come out with your expectation.

Okay. One last question: How much of the revenue of the UK subsidiary comes from the Hutchinson 3 G venture?

I can get you a round number. It's going to be about -- this year, somewhere in the vicinity of $10 million on a run rate basis. I'm sorry, 10 million pounds on a run rate basis.

What percentage of total would be be? Relatively small?

Very small.

Okay. Thanks a lot.

Okay.

Our next question comes from Stuart Caminski from John Lesson. Please go ahead with your questions.

I may have missed this earlier but could you tell us what the breakdown is for cash between the restricted group and unrestricted as of today?

Sure. In the unrestricted group, we have -- well, let me just walk through some components for you. In the restricted group, cash available for buybacks is -- that we talked about earlier, which is really cash, about 250 million. In the unrestricted group, above the UK entity, again, out of the entity where the borrower is, we've got about 190 million. Within the UK entity itself, which is ring fence, there is about 120 million. And then within our Crown Atlantic and GTE joint ventures is another 20 million, and that ought to just about put the 575 million that we talked about pro forma for all the --

For all the buybacks?

Yes.

Okay. Thank you very much.

Our next question comes from Will Davis with UBS Warburg. Please go ahead with your question.

Hi, thanks for the call. I had a couple of questions. The first one is if your 3500 cell site figure from Hutchinson, I was wondering how it's changed over the last six months from what your original expectations were. Second question is when you analyze what current guidance is for mobile operator capex in the fourth quarter among the big six operators in the U.S., if they spend what they say they're going to spend, capex will be up 55% sequentially. And I'm not really looking to see whether you think it's going to be up 40% or 50, or whatever the number, but directionally, is that too extreme? Just wanted to get your thoughts on that level of growth and how you actually see that playing out. Thank you.

Relative to the -- I guess I'll start with the second question first which is the capex. The difficulty clearly is that when we are analyzing the carrier capex forecasts, I'm not necessarily convinced that a carrier spending at whatever they have forecasted wins them any particular andco laids. I think that in this environment, what they are striving to do is ensure that they have spent just as much as necessary to ensure that they are performing for their customers, meetings their customers' expectations. And as such, it's possible that they will come in underneath what they have otherwise forecasted going forward. And you know, the trends as I described earlier, in terms of actual new sites that have been developed and deployed, would suggest that to a degree they are underspending and clearly what we have seen from a number of vendors in the first three quarters, if that's the case, to underspend what they had originally forecast. So when looking at the capex numbers going forward, relative to whether or not that percentage growth is appropriate or not, it's -- and whether or not it will happen or not, is difficult for me to answer. Because our experience this year would suggest that it isn't necessarily going to flow consistent with what the carrier's original guidance would have been. Relative to the issue of H 3 G and their 3500 sites deployed this year, when we entered into our agreement with them, you know, we started the negotiations on that in the latter part of year 2000. And at that point in time, there were a number of different assumptions that clearly they were making as far as what they were going to need in their network, and where they were going to need all those particular sites. I don't recall whether or not they had specifically indicated to us at that juncture that they had planned on launching with 3500 sites. My suspicion in thinking back to that point in time is that they did not. As such, whether or not the 3500 is consistent with what we thought or not, you know, in essence, we were only really given that additional visibility this year. It is a solid number, it does indicate that the quantity of sites necessary to launch. We have -- they have indicated that they will continue to expand into the new year, contemplating ending with a material number of additional sites at the end of '03. But, you know, in essence as I mentioned in my particular prepared comments up front, the rate that we have seen them leasing from us is slower than what we and they had originally contemplated when we entered into the agreement. And that's the issue that we're discussing with them to try to establish what we do about that and whether or not there's any near-term corrections that might take place.

Thank you, sir. Ladies and gentlemen, this concludes today's question-and-answer session. I would now like to turn that's true conference back to over to management for any concluding remarks.

No, at this point, I would just like to say again thank you all for joining us on the call and we look forward to reviewing would you the full year results, and quarter results on the next call. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes today's Crown Castle third quarter earnings conference call. Three dial 3,035,903,000 followed by access number Number 502509. Once again, if you would like to listen to a replay, please dial (303)590-3000 followed by access number 502509. We thank you for participating and you may now disconnect.