Crown Castle Inc (CCI) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Crown Castle International earnings 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 the star followed by the 0. As a reminder, this conference is being recorded Thursday, February 27, 2003. I would now like to turn the conference over to Mr. Steve Gray (ph), Managing Partner with DRG&E, please go ahead, sir.

Good morning, everyone. We appreciate you joining us for Crown Castle's call to review quarterly results and we would like to welcome our Internet participants listening to the call as it is being simulcast live over the Internet. Management has limited time today, therefore today's call will last approximately 45 minutes.

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 after noon, after market but occasionally there are technical difficulties experienced during these distributions. If you did not receive your release or you would like to receive future releases via fax or e-mail, please call our offices at DRG&E. 713-529-6600 and we will get one out to you or put you on the appropriate list.

Additionally, there will be a replay of today's call. You can go to the web cast section of www.crowncastle.com and it should be available there in a couple of hours. There will also be the usual telephonic replay available for the next seven days, 24 hours a day. 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 based on management's belief as well as assumption made by 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 files with the SEC. Should one or more of these risks materialize or should underlying assumption prove incorrect actual results may differ materially from those expected.

Additionally, Crown Castle's management will be in New Orleans for the CTIA on March 17th, 18th and 19th. If you plan on attending and would like to schedule a one-on-one with John Kelly and Ben Moreland, please contact DRG&E. Please mark Wednesday April 9th on your calendar, we are planning an analyst day in Pittsburgh from 10 a.m. to 3 a.m. More information will be forthcoming from us on Friday March 7th.

I'd like to turn the call over to John Kelly, Crown Castle's President and CEO.

Thank you, Steve and good morning everyone. Again, we do appreciate you joining us for a review of our fourth quarter results. Sitting next to me here is Ben Moreland our CFO. Ben's going to 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 straight to questions. Ben?

Thanks, John and good morning, everyone. We generated revenues of $228m during the fourth quarter. Tower revenues were $179m, up 15% from the fourth quarter of 2001. Service revenues were $48.7m, down from $82m in the fourth quarter of 2001.

Gross profit from site rental and broadcast transmission, defined as net revenues less cost of operations was $107.9m, up 16% from $93m for the fourth quarter of 2001. Free cash flow, which is defined as net cash provided by operating activities, after capital expenditures during the quarter was a source of cash of $86.6m, including the impact of favorable improvement in working capital.

For the full year, revenues were $901.5m, of which Tower revenues were $677.8m, or 18% growth over the year 2001. Demonstrating the operating leverage in our core tower leasing business, consolidated tower gross margin was $408m, or 21% growth over 2001, and finishing the year at 60%. We continue to expect margin expansion of 100-200 basis points per year and would remind everyone that with the revenue share in the U.K. on our new sites we're developing there at 35%, a 65% margin in the U.K. is in effect 100% incremental margins. So that gives you some explanation of the 100-200 basis point expansion per year.

For the full year 2002, free cash flow was a use of cash of $68m, down significantly from the use of cash of $550m in 2001, clearly big progress has been made here and we expect it to continue.

On a BBE basis, after churn, the co-location rate for the consolidated company was .19 tenants per tower across the 15,557 sites we owned -- or at beginning of the quarter, which includes all the sites we have acquired or built. Our U.S. BBE calculation of .11 was negatively impacted by approximately .05 BBEs from the termination of leases with XM Satellite Radio and Carolina PCS, for which we recognized a $2.3m settlement payment this quarter. This is unusual churn in that we got paid for future periods. Adjusted for this unusual turn, the U.S. BBE rate would have been .16 for the quarter.

Incidentally, we have already leased several of the Carolina PCS slots to other carriers, in essence doubling up on the revenue from the previous slot on the tower.

In the U.S., the average lease rate for new broadband tenants was $1,511 per month this quarter and in the U.K. it was 1,022, bringing our current annualized revenue per tower to just over $40,000 in the U.S, the highest in the industry and over $46,000 per site across the entire company.

During the quarter, 82% of the new leases in the U.S. came from big six wireless carriers. As of the end of the year, approximately 72% of our total recurring revenue stream was from investment-grade tenants. Less than 1% of our total recurring revenue stream comes from paging.

Of the new lease revenue added for the new tenants in the U.S., about 40% were additions derived from amendments or expansions to existing installations. In the U.K., amendments accounted for approximately 22% of new license revenue.

During the quarter we built 42 sites, 37 of which were in the U.K., four in the U.S. and one in Australia. All of these sites built in the U.K. were developed under our agreement with British Telecom to bring our cumulative BT sites developed to 648.

Capital expenditures during the quarter totaled approximately $40m. U.S. CAPEX totaled $2.2m. CAPEX in the U.K. and Australia totaled $37.8m. Apart from the timing of job closures and related reconciliations, the fourth quarter capital expenditures would have been approximately $13.5m in the U.S. and approximately $30m in the U.K. and Australia for an approximate total of $43m. On a normalized basis, this is down from $76m for the same period last year. Going forward, we believe CAPEX will be in the range of $30-40m per quarter with most of that going to growth-oriented U.K. builds or installations that meet our internal hurdle rates. Consolidated maintenance CAPEX is approximately $40m per year or 2% of our contracted recurring revenue stream for broadcast, and 3% for tower maintenance CAPEX.

Turning to some of the quarter-to-quarter changes in the income statement, total site rental and transmission revenue increased due to the launch of Freeview in the U.K.. New digital terrestrial television network that we launched on November 1st. During this quarter, we recorded approximately $8m of revenue from Freeview contracts and expect another $2m more revenue from contracts for the full first quarter, once it's fully in place. As we mentioned in the press release, this revenue has an approximate 80% incremental margin.

U.S. site rental revenue also benefited from the recording of approximately $2.7m related primarily to the settlement of payments remaining under the terminated leases with Carolina PCS and XM Satellite Radio. Site rental operating expenses in the U.S. were positively impacted by approximately $2m this quarter, primarily related to reimbursement of certain costs. On a normalized basis we would expect that site rental operating expenses will escalate about 3% per year. Taking into account the termination of the certain analog dispatch tenants we talked about on the last call, and the above payments, our current U.S. site rental revenue run rate for January 1st was approximately $104.5m as we opened the year.

[Audi Gap] per quarter and tower cost of sales was approximately $39m on a run rate basis or about a 63% gross margin in the U.S. Same tower sales, site rental revenue growth came in at 10.1% for the U.S. or about $3,500 per tower. The U.K. was right at 25% year over year, or just over $5,000 per tower, and Australia at about 19% on the full 15,116 sites we owned on December 31, 2001, which represents 97% of our total ending sites.

Over time this level of performance generates significant results. Since the integration of our last major tower acquisition in the U.S. in the fourth quarter of 2000, we've added over $10,000 of revenue per tower and just over $8,500 of gross margin per tower.

Cash and investments at the end of the quarter was approximately $632m, up from $571m last quarter after debt repurchases, and except for about $3m, these repurchases were announced in our Q3 earnings release.

Senior bank debt at the end of the fourth quarter totaled $1.1b, approximately 2.9 times fourth quarter's annualized run rate EBITDA or bank debt to net cash of about 1.2 times if you net the cash against the bank debt, 1.2 times annualized EBITDA. High yield debt totaled $2.1b for total debt at the end of the quarter of $3.2b. And the restricted group debt totaled $2.6b.

We have the ability to access approximately $477m under our senior credit lines at the end of the quarter bringing our total liquidity to over $1.1b. Net debt and Preferreds to Q4 annualized EBITDA ratio was nine times. We expect to be near eight times by the end of 2003.

For the years 2003 through 2006, we have debt amortization payments of approximately $14m this year, $55m next year, $232m in 2005, and $310m in 2006, totaling about $612m through year-end 2006, roughly the amount of cash we have on hand today. Thus, although we believe we have turned the corner and will generate significant free cash flow after the first quarter of this year, for those that focus on the negative, even if we do not produce any free cash flow through 2006, we believe we can meet all our required debt service obligations.

We currently believe we will generate substantial free cash flow during this period and also expect that a good portion of that bank amortization will be able to be refinanced at conservative levels in the bank market given that we are below three times our run rate EBITDA on total bank debt today. When one factors these items together, of cash flow and some level of refinancing, it appears to us that a substantial portion of our liquidity is available to be invested at returns consistent with our hurdle rates. This is not forecast in our cash from operating activities guidance. The investment of excess liquidity could accelerate our deleveraging and cash flow generation as these funds are put to work. Our first bonds mature in 2007, when we expect to have a consolidated leverage down in the five times range. Said another way, one might expect that cash flow from investing our liquidity could substantially offset the impact of the discount notes turning cash pay in 2004.

During 2002 we spent a considerable amount of time working to reduce or eliminate contractual capital commitments. Examples of this are concluding the Cingular and Verizon build-to-suit agreements. One of the remaining items relates to our agreements in the U.K. with British Telecom and Hutch 3G. As we mentioned on the call last quarter, we don't currently anticipate that H3G will require the total 4,00 sites contemplated in our [take or pay] agreement in the timeframe specified. As a result, we have entered into discussions with BT and H3G and believe that the outcome of these discussions may result in a reduction of the final site acquisition payment required to BT, and a reduction in the take or pay commitment from H3G.

Moving to our first quarter and 2003 guidance which is included in our press release, we expect site rental and broadcast transmission revenue of between $178-182m.

We expect first quarter net cash provided by operating activities to be between negative $15m and breakeven, which includes the effect of approximately $39m of working capital uses, including the timing and the effect of semiannual interest payments on our bonds. We expect total capital expenditures to be between $30-40m during the quarter excluding the final BT payment of $78m. And we expect the result from this will be free cash flow for the first quarter of between negative $125-110m, including the effect of the BT payment on March 31st.

As I've mentioned previously, we believe the relevant GAAP metric to measure our performance is cash flow after capital expenditures, as this measure of free cash flow includes cash interest, capital expenditures, and operating results. Implicit in the 2003 and 2004 outlook is the transition of paid in kind interest on our discount notes to full cash pay by August, 2004 on our senior discount notes and 12 and three-quarters convertible preferred.

This measure of free cash flow will not always lend itself to sequential quarter-to-quarter comparisons as significant fluctuations in accrued interest due to the timing of our semiannual bond interest payments or changes in working capital will occur, but these fluctuations are largely offset when comparing quarter to quarter or year over year. We believe a substantial portion of the working capital reductions we achieved in the fourth quarter of 2002 represent improved processes, particularly around accounts receivable and should be permanent reductions.

Our current guidance for 2003 projects total net cash provided by operating activities of between $140-200m. We expect 2003 capital expenditures to be between $170-200m, including the last required acquisition payment to BT of $78m. We expect to build less than 20 towers in the U.S. and the BT sites in the U.K. I would like to point out that we have lowered our estimate of sites built in 2003 and 2004 in the guidance issued in the press release yesterday by about 300 per year. This relates entirely to the development activity in the U.K. We did not adjust the CAPEX guidance because the impact in total was less than $15m per year. Recall that as we build U.K. sites, rooftop sites, the out-of-pocket capital cost initially is between $20,000-40,000.

For the full-year, we expect free cash flow between negative $35m and breakeven. However, excluding the final acquisition payment to BT on an operating basis, we will be $40-80m positive for the year. More detailed guidance for 2003 and 2004 is contained in the press release.

I believe the guidance we're providing is achievable. Looking at the key driver of our performance, tower and broadcast revenue, in order to hit $750m in 2003, which is the midpoint of the guidance, we would only need to add approximately 75% of the leases we added in 2002. That translates into about 10% organic revenue growth year over year. We are seeing signs U.S. leasing could improve compared to 2002 yet we remain cautious in our outlook.

I know some of you will ask what this implies for EBITDA in our outlook. We don't believe EBITDA is the most relevant measure for our business for a number of reasons, but in the spirit of transparency and predictability our guidance implies EBITDA, with all its obvious limitations, of approximately $90-93m in the first quarter 2003, and $375-400m for the full-year 2003. This EBITDA guidance includes the fact that we are deemphasizing the nonrecurring service business for which we derive little cash flow.

With that, I'll turn it back over to John Kelly.

Thanks, Ben. Before I turn the call over to questions, I'd like to touch an on a couple of items.

In reviewing our results for the quarter and the year, it struck me that in this most challenging year from a U.S. perspective, our business model has proven to be very dynamic and resilient. In response to the downturn in the capital markets, our U.S. customers reduced the number of cell sites they deployed by greater than 50% in the first half of 2002. As our U.S. customers hadn't forecasted this decline in new site deployment, we were not positioned for this downturn. As it was apparent to us that the downturn was not going to be short-lived, we took action to better align our cost structure with our new revenue forecasts. We reinforced our focus on organic growth in our core tower business, reinforced the need internally to achieve positive free cash flow, and worked very hard to eliminate contractual capital commitments.

These cost reduction initiatives were announced in the third quarter and were implemented throughout the remainder of 2002. The reductions were designed to take a little longer than maybe typical as we wanted to ensure that a number of internal and customer-focused initiatives that we had underway wouldn't be stranded as employees left the company under our restructuring program. The result, however, proves the resilience of our company. As Ben pointed out, we generate $86.6m positive cash flow in the fourth quarter, and for the full-year 2002 we were only negative $68m in free cash flow, after all operating and capital uses of cash. This is a marked change from the negative $551m in cash flow the business used in 2001.

This progress is even more notable when you recognize that were it not for our acquisition payment of $76m for the British Telecom sites in 2002, Crown Castle would have generated positive free cash for the entire year 2002 of around $8m.

Given that mid-year 2002 there were some who contemplated that Crown Castle would run out of cash, I believe our progress on achieving free cash flow generation is most important. Our ability to reduce the uses of cash as dramatically as we did demonstrates the responsiveness of our team and adapting to changing market conditions and the discretionary nature of our capital expenditures. As I've pointed out in prior calls, the fact that our revenue is contracted, ensures that we have a run rate of revenue we can bank on. As such, given our continued focus on operating cost containment and disciplined capital allocation, we believe we'll be able to generate positive cash flows this year, excluding the fact of the final BT payment which has been discussed, may be mitigated. I make this statement even though our guidance suggests less leasing activity than we experienced in 2002.

I think another attribute of the Crown Castle that bears reflection in the challenging year like 2002 was our geographic diversity. Despite the challenging new leasing conditions in the U.S, our U.K. customers have continued to invest in both their 2 and 2.5 G networks as well as beginning to deploying sites that can be used for 3 G. As indicated in the past, the density of sites deployed in the U.K. is more than twice than what you see in the U.S. and our customers in the U.K. have continue on that course. As such, the U.K.'s more robust leasing activity helped dampened the effect of the downturn in U.S. leasing in 2002.

In addition to the more robust leasing from our traditional customers in the U.K, I think it's also important to point out that our team in the U.K. opened up a new pool of customers that we can market to with the introduction of Freeview. Given the contribution Freeview is making, I think it's important to generally review the business model with you. You'll see that this business model is not so different from the shared tower model. As we've indicated in past calls, Freeview is the new digital terrestrial television service available to the majority of the households in the United Kingdom. Previously, households in the U.K. that did not subscribe to satellite or cable service were only able to receive about five free television channels using a rooftop or a set top antenna. Freeview digital technology allows those same customers to receive 24 digital television channels and 12 digital radio channels with a one-time nominal charge for the digital set-top box.

As you know this service was launched in November and by March it is estimated that 500,000 new Freeview set-top boxes will have been purchased. Interestingly, this number could have been even higher had it not been for a shortage of Freeview set-top boxes. People had underestimated the demand for this new service. Industry sources estimate that Freeview could be in one quarter of all homes in the U.K. in five years. That's more than 6 million households. And though the number of Freeview viewers does not impact Crown Castle's contracted revenue streams, for our customers of our Freeview service the number of end users on the Freeview service clearly makes a difference.

Now, Crown Castle naturally provides the tower space for providing Freeview service but in addition, we own and operate the shared electronics necessary to transmit these digital television signals to the viewers. The ability to transmit content for customers that don't hold broadcast licenses opened up a new pool of customers with whom we have entered into long-term, recurring contracts to transmit their television content to the U.K. viewers. We now enjoy a contracted relationship with companies such as [Viacom, B Sky B., Flex Tech and Emap], and these are in addition to our established relationship with the BBC. The combined revenue for these recurring contracts is between $37.5-$41m annually. Given that we are leveraging equipment we purchased for the old ITV digital service the incremental margins are approximately 80% or roughly the same as you would expect in the shared tower model.

The addition of this new recurring revenue stream is equivalent to adding approximately $11,400 in annual revenue on all of our 3,360 sites in the U.K. This, I believe, demonstrates the functionality of our network of towers for services that go well beyond traditional wireless voice services.

When reviewing our fact sheet for today's earnings call, a recurring question emerged again, how to treat the revenue streams from our Freeview customers when calculating BBE. As you are aware, the BBE metric was originally created as a measurement of recurring revenue growth during a time frame when tower industry acquisitions were rendering it difficult to calculate organic recurring revenue growth. Crown Castle however doesn't include in our BBE calculations revenues from sources like Freeview, despite the recurring long-term nature of those contracts. As such, the BBE metric can be misleading when used as a measure of recurring revenue growth as it negates recurring revenue growth from nontraditional sources.

In addition to the misleading assessment of total organic growth, the BBE metric has no common standard for calculation. Those companies that use this metric employ varying approaches for calculating the results which make the metric misleading as a comparative measure. For these reasons, we agree with others in this and other industries that going forward, the more appropriate methodology to report growth is to report actual year-over-year organic revenue gains on our towers. We will, of course, continue to provide all the financial information necessary to understand how our business is growing and performing.

So as we start a new year where is Crown Castle today? As I mentioned at the beginning, with the exception of the last remaining British telecom site acquisition payment, we believe we will be free cash fully positive on an annual basis from this point forward.

We have reduced the contribution of services to our consolidated gross margin. Services gross margin went to 22% via contribution in 2001, to 10% in 2002 and we believe that it will continue to drop into a range of approximately 5-8% of Crown Castle's total gross margin in 2003. This fact should make the business easier to forecast and more predictable.

With over $1.1b in cash and senior availability we have more than enough liquidity to meet the demands and opportunities in this business. In fact, through the efforts, we underwent in 2002 we believe our financial obligations are highly manageable for the next four to five years. In that time frame all of us at Crown Castle will be doing our part to continue to deliver the balance sheet by growing the business and investing appropriately.

We also start the year with a tremendous portfolio of assets built that have built over the last 20 years in the U.S. and Australia and over the last 40 years in United Kingdom. And though we sometimes lose site of the value of these locations and the infrastructure built there, I would ask you to answer this question for yourself. Imagine if you would, if all the towers Crown Castle owns in, we'll pick a country, in the U.S. were never built, do you believe you could build all 10,794 towers in the exact locations they are located in today in a three or four-year time frame for $275,000 per tower, which is the value of the financial community ascribes to these assets? Most people I talk to don't believe all these towers could ever be built, let alone for $275,000 per tower. As such, it will be our job to continue to demonstrate to you that there is additional value associated with these assets due to their unique characteristics for both today's and tomorrow's wireless and broadcast services.

Which brings me to my last point that we have forecasted leasing in 2003 to be nominally less than 2002. I'm beginning to see some signs that is our customers who had delayed site builds are committed to improving their networks this year by adding more sites this year than they did in 2002. With the prospect of local number portability coming at the tail end of this year, most of our customers agree that network quality will be a very important attribute in containing churn rates. Whereas it is still a little early in the year to know what the actual new site deployment rate will be, I'm getting positive signs from some customers. As we've discussed before, minutes of use continues to drive the need for more sites, and as we have all seen, this trend continues to be up. As such, we will continue to do our part to help our customers meet this need while helping them meet their return on invested capital objectives as well, through the deployment of shared infrastructure, the use of our 10,700 plus towers in the U.S., the 3,000 in the U.K. and the 1,400 in Australia.

Finally, in addition, though this will always start out small, we're getting inquiries from a number of new entrants to the wireless industry. These interested parties have solid financial backing. These are not overly levered institutions, and they are looking for the most cost effective and time efficient way to deploy their services. Now, I recognize that in most cases this is going to start small with test markets, which is what we're seeing, and clearly a number of their business plans will not extend beyond the test market. However, with the unique assets we own, this network of towers we have in the three countries we're deployed in, we believe that the fact that the consumers continue to enjoy the benefits of wireless services and that many companies out there are companies out there are looking at extending their services through the provision of wirelessly-enabled content, you shouldn't be surprised if we start talking about new users on our towers in the months to come.

I'm now going to turn the call back over to the operator to set us up for some questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question, please press the star followed by the 1 on your push button phone. If you would like to remove your question, please press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection. If you are using speaker equipment you will need to pick up your handset before pressing the numbers. Please ask one question and a follow up then re-queue for additional questions. One moment please for the first question.

The first question comes from Ric Prentiss. Please state your company name and your question.

Ric Prentiss, Raymond James. Good morning, guys.

Good morning.

A couple of questions. First, Ben, you mentioned when talking about the liquidity, your cash and equivalents balance that you have over $630m, signaling maybe that you would look at using that money to take care of some other items on the balance sheet, particularly as some of the items turn cash pay. Question on that is, what's the timing that could be involved there? And are there any bank restrictions on using the cash to do that? Then I'll come in with a follow up question.

Ric, let me answer the last part first. No, there are no bank restrictions on the use of that capital. However, on the timing, I think the timing on how we invest that capital, and I wouldn't focus solely on the balance sheet, you have seen we have taken a measured approach there last quarter investing $200m to acquire $400m of securities. We're very pleased with that return.

But not focusing solely on the balance sheet, I think we look at that capital as prospective investment either in our current business or extensions of our business or on the balance sheet. But nonetheless, imposing a very disciplined investment hurdle rate. And what we're using currently is sort of a 15% risk-free rate, which is a proxy for what we can do on the balance sheet today. So while I wouldn't venture to give you any specific time frames, I would just suggest to you that turning the corner on free cash flow is a significant milestone in the company, and it's one that we then focus very carefully on once you've accomplished that, which we have. Particularly if the BT payment were mitigated this year, clearly that capital that we have is completely discretionary at that point. And really the only point I wanted to make on that is that as you look at our free cash flow guidance, it is impacted negatively by the turning cash pay of all of the discount notes over the next year or so.

And I think it's important to point out that folks at their own level of acknowledgment need to give ourselves some credit for that capital that will be ultimately put to use. And I use a 15% rate, so pick whatever number amount of that capital you're comfortable using and attribute that to some level of free cash flow enhancement, particularly in 2004. So that's really the only point of the conversation, just to highlight that fact.

It's certainly a nice option to have, but usually Wall Street doesn't give you credit until you get close to doing it I guess.

Second question, Ben, and maybe John as well, you mentioned on the '03 guidance, basically it assumes 75% lease activity compared to the '02 lease ups. Is that differ by U.K. versus U.S. or Australia, as far as how you were kind of ballparking that assumption for '03 versus '02? And what are your assumptions then as far as what happens to lease activity as we move into '04?

Ric, the 75% applies essentially across the board. We looked at that as a reasonable assumption for pretty much all three countries that we're operating in. And as I pointed out, that's simply because as we sit here today, and as we were focused on what the numbers for '03 should look like, or would look like, it's difficult to be able to translate what we all understand are needs by our carrier customers into action on their part. And though it's entirely possible that the second half of the year could, in fact, be better than what we are forecasting, given that we don't have absolute visibility into the second half of the year, we felt it was more appropriate to guide, to budget essentially to a rate that was some 75% of what the total year leasing was in all three of the countries.

As we go forward into '04, we're roughly carrying that through into '04. As such, from where we sit, we are ensuring that we have a cost structure built into the organization that does not contemplate significant increases or acceleration in leasing activity but rather, keeps leasing at pretty much a steady state with what we saw at the tail end of 2002 for the next couple of years, ensuring that as an organization, we're keeping our costs in line with that reality so that we can in fact generate the free cash flows that we're forecasting out into those two years.

Okay. How soon does it take? You mentioned the second half of the year may be better than what you're forecasting. Given the time frame it takes to do search rings and to get carriers to commit to leases etcetera, when would we see that tail? How soon will you know if the second half is looking up compared to where you're forecasting now?

I think, Ric, we'll be able to give you a lot better visibility as we report to you the first quarter as results sometime in the midpoint of the second quarter. A lot of the work goes on around the selection of new sites. The search rings are released. We are seeing more search rings from a number of our customers than we did previously. But the issue is before that lease is signed, the customer has to feel comfortable at a regional level that they are not going to have their capital budget pulled back from them by their corporate entities because of something else that the corporate entity is attempting to achieve for the year. And that's what we were seeing in '02. It was very difficult to determine exactly what the rate of leasing would be in the U.S. because you would get a sense that there was some activity picking up but only to find that the budget wasn't deployed or wasn't committed, and as such they weren't going to be in a position to deploy electronics and why at that point lease a site where you couldn't derive any revenue from it?

I think we're going to have a much better sense as we look at the results of the first quarter, mid-part second quarter, as to what we think will occur then in the second half of the year. For the time being, what we're doing is forecasting a lease rate as mentioned in the call, nominally less than it was in 2002, but essentially continuing at the same rate you've been seeing to date. And I'll be pleasantly surprised if in fact a lot of the technology indicators around building out new sites in fact prove up and our customers start to deploy at a faster rate.

Thank you. The next question comes from Jonathan Atkin. Please state your company name followed by your question.

Jonathan Atkin with RBC. A bit of a follow on from the previous question. I was wondering if you could comment on particular regions of the country or for the U.K. as well as for the U.S, particular carriers where you're expecting a difference in site leasing demand versus last year?

Jon, you kind of tick on down through it in the U.S. side. What you're typically seeing is different by carrier, interestingly enough. Certainly you're seeing activities in the urban markets. There is a lot of activity in our Northeast area, in our Great Lakes area, in our Florida marketplace. Markets where you would expect carriers want to ensure that they have the type of quality network to ensure that they are providing their customers with what their customers are looking for and contain churn in that respect. U.K. is not a lot different in that regard. Where in effect what you see is the U.K. carriers focusing on the major urban centers, albeit with a significantly higher density of sites deployed than you typically see in this country, but that tends to be a big part of where their continued focus lies as well.

In the U.S. you've got some of the carriers out there that have continued on a very steady pace of new site builds, and we would continue to expect that that's going to occur this year, new sites deployed. Companies like Verizon, AT&T continue in that regard. I would think that we will see some additional activity from Nextel this year as they work hard to make effective their push to talk nationwide service this year. Continue to see improvements in network quality from people like T-Mobile. So, slight increases from some of them, steady state with others, but roughly, again, as we're otherwise forecasting here, pretty much the same rates as you saw in '02.

And from an U.K. perspective, about the same across the board. What the we've had throughout 2002, clearly, was quite a bit of activity from Hutch, which is going to tail off in the '03 timeframe as would naturally be expected. They will be launching their network here this year as they have publicly disclosed, with 3,500 sites. Interesting point there, in a country about the size of Wisconsin, that is a site density on a new launch that defies what you would see in any of the 50 U.S. States. So it really does point out the kind of focus on network density and network quality that a number of the carriers have overseas. As Hutch tails off a bit, they still contemplate deploying a number of sites this year but not at the pace of 3,500 a year. That's what would take down the U.K. numbers a bit. Other carriers are reacting to that 3G deployment, the [Vodaphones] and others continue to be focused on building out that type of a network. We expect them to be roughly at the same pace as they were in '02.

So in the U.K. Hutch tails off and the non-Hutch carriers pretty much stay even, and the U.S. you would be more optimistic for perhaps some upside in the site lease and activity?

I think that's a fair characterization.

Thanks very much.

Thank you. The next question comes from Jim Ballan. Please state your company name followed by your question.

Thanks a lot, Jim Ballan from Bear, Stearns. A few questions. One is obviously, the working capital was a pretty large source of funds in the quarter and Ben you mentioned that it's going to reverse to some degree in the first quarter. Can we expect working capital starting in the second quarter to be a relatively small number? Maybe a source, maybe a use, but relatively small going forward from there?

Second question is, on the lease buyouts from Carolina PCS and XM Radio, can you give us a little more color on what their thought process was around canceling leases?

And then the last question is a little broader. There's been a lot of talk about consolidation around the tower industry, and I just wanted to get your thoughts on is this something that you would consider participating in, and maybe just thoughts on how the industry would benefit from consolidation?

Thanks, Jim. Let me take the first one and I'll ask John to take the second two. On working capital, we're going to stick to our guns here. We really want to focus on GAAP measures, cash provided from operations and it will necessarily result in some fluctuation quarter to quarter, most particularly around our first and third quarter bond interest payments. While it is more challenging to stay with us on that, we think it's the right way to go. And so I'll try to point out to you every quarter sort of the fluctuations there. You saw us pick up $100m of working capital in the fourth quarter. We're going to give back $38m of it in the first quarter. But, that's a pretty good trade. We think that most of that difference is a permanent reduction, and rather than sort of go to a cryptic free cash flow metric which would be something like EBITDA minus cash interest minus CAPEX, to me that would sort of denigrate the work and the effort that our folks put in and the costs we incurred that ran through the P&L on head count and overhead that it took to make that happen. So we're going to stick to that number, and so you're right it will fluctuate. And to our guidance for the full year 2003, we assume that it is neutral.

Okay.

So it's negative in the first quarter, $38m, and then over time it will be positive in the second quarter, negative in the third, positive in the fourth quarter but net/net, we forecast zero for the full year.

But I appreciate that because it's something I wanted to hit with everybody and I appreciate everybody's patience in staying with us on this one because we do think it's the right measure and it results in cash in the checking account as you can see the balance going up this quarter.

John, I think the next question was on the Carolina and XM buyouts.

A little different on both of those, but to reinforce what Ben said in his prepared comments. What was tremendous about both of those situations, though it shows up as turn, and we incorporated that into that 0.11 number which I know a lot of people are going to focus on, it should be recognized once again that we were paid for those leases on a net present value calculated basis. So in effect, we got paid for the time frame that those customers were going to be on those towers.

Now, what was specifically occurring? In Carolina PCS's case is their markets were being purchased by others. Some of those sites, the purchasing party didn't need. In other cases, it's been pointed out we were already releasing some of those sites to other parties that go on as a new tenant and continue to pay for the space as any new tenant would, in effect having paid then us twice for the same space on that tower, which certainly isn't a bad situation.

In XM Satellite's case, as you know, they launched their satellite radio service with a combination of terrestrial ground repeaters and the satellite feed, and as any new network will, you design it on paper and then after you've deployed it, you essentially are looking for the optimization of what you've deployed. And in their particular case what they found is that they had more terrestrial ground repeaters in some places than they needed. They didn't have enough in other places. As such, what you saw here was, given the fact that the lease is a financial instrument and is a binding commitment between the two parties, we were paid for the termination of the 67 or so licenses that we have with them. We continue to have about 115 licenses with them, but as part of the dialogue that we had with them around the termination of the licenses, the reason why we work with them on that regard is because they are continuing to deploy new sites. That should probably be coming in the second half of this year, and what in effect is going to be happening is there's going to be a relocation of those licenses to a large degree, the 67 that were taken off.

So once again, what we do is we report it as churn and then when they come back in at the new location it will be reported as a new add. Should have been calculated differently given the fact we've gotten pretty good visibility as to where they are going to be going and the quantity of sites they are going to be using for us this year? The two net against each other but just to be true to that BBE metric we take it out as churn, which is what shows up then in that number of .11 and it will come back down in the future. It's those kinds of variations quite frankly that cause us to believe that the BBE metric isn't a really reliable metric as looking at measurement of recurring revenue growth and it's the reason why we've made the decision that we did as I discussed on the call.

The last issue, Jim, was the issue of consolidations. That question's come up clearly throughout '02 and I would submit to you that my sense was in '02 every company had a lot of work to do just basically to get all of their respective houses in order. But we now start a new year here in '03 and I will say that I do believe that the right consolidations could be helpful, absolutely.

There are duplicative costs that various entities in this industry do in fact share. If the right consolidations took place, those costs could be mitigated, could be reduced significantly, allowing the company to deliver, which improves the cost of capital to that company, which in turn then helps us provide the solutions that our customers are looking for as they continue to battle the conflicting objectives of improving network quality while also trying to improve their return on invested capital, which clearly is the whole benefit around the shared tower model.

So I think that the right combinations do, in fact, and are, in fact, helpful, and we'll have to just see what that means for Crown Castle specifically, but I would venture to say that you'll probably see some, I'm not sure who or when or what, but you'll probably see something as the months and quarters go forward.

Terrific. That's great. Thanks a lot, Gentlemen.

Thank you. The next question comes from Seth Potter. Please state your company name followed by your question.

Hi, Seth Potter with Punk Ziegel & Company. A couple other questions. One, cash interest pay for the quarter in '03 will be helpful, and also any detail on the Verizon joint ventures and any feedback from Verizon in terms of what they are going to do this year. Thanks.

Yes. Seth, on the cash interest, $50-52m is a good number quarterly, just on a run rate basis. That gives us a little -- 50 would be giving us a little credit for interest income. The easiest way to get there on the cash flow statement is to take the 72 in the reported minus the amortization of costs, 19, kind of get you to 53. So, somewhere in that vicinity. $208-210m for the year is sort of what that looks like to us. On the interest side.

On the Verizon issue, as we pointed out in the past the joint ventures were constructed in such a way that there were puts and calls on both sides after a certain both sides after a certain number of years. In effect, either party at this juncture could in fact dissolve the joint ventures on the Crown Atlantic side of the equation, and in another year we could dissolve the GTE joint venture at our option.

But what I would just indicate to you is like all capital calls, as Ben mentioned before, we are in discussions with all parties to determine exactly what they are interested in doing, and we have been having some discussions with Verizon to see exactly what they'd like to do, what their feelings are about these joint ventures, and what direction they want to go this year. We don't have any conclusions on that particular subject at this point in time so we can report to you as we get more information on future calls and let you know what their senses are and what we're going to do with those joint ventures.

Thanks. And one other follow up, on the BT payment, you've mentioned that they may be lower, possibly mitigated this quarter. What's the timing of getting more detail on that?

Seth, as you know, that is secured by the letter of credit that's due on March 31s,t so we are in active discussions right now with Hutch and BT, and with some luck, and some success there, we think we'll make some significant difference in the cash commitment there. And you can see the trade that I indicated on the call. It's really a three-party discussion between the take or pay arrangement, which then is the basis upon which we went forward in acquiring some of these sites, the commitment to acquire the sites, and then ourselves. It's really a tri-party type discussion going on right now, but we have reason to believe that we'll have some level of success in mitigating that payment. And we'll probably be able to come back to you in the range of 30 days or so with the solution.

Okay. Thanks an again.

Okay.

The next question comes from Steve Flynn (ph). Please state your company name and your question.

What we'll do is end with this question. I apologize in that we are short of time today, but please go ahead, Steve and proceed with yours.

Okay, great. Thanks. Good morning. Just two questions. First, can you give us the breakout of the cash and liquid investments that’s in the restricted group?

And second, I had questions on the Crown Atlantic joint venture. Number one, can you talk about the slowdown in the co-location there? It looks like actually you lost about seven sites at that JV in the fourth quarter compared to significant additions over the last few quarters. I didn't know if there was just a one-time issue there or if it was a slowing trend?

Then a follow up to the previous caller's question, it sounds like rate right now with the Crown Atlantic minority interest, you guys have the option right now to buy that from Verizon wireless. Is that something that you would potentially go ahead with or do you want to resolve that and the GT joint venture at the same time? Thanks.

I'll just probably hit the last one first because it kind of follows on Seth's question. I would just as soon have a resolution to both at the same time as opposed to looking at invoking our call right on the Crown Atlantic joint venture at this point. I think it's better for us and our shareholders if we have an understanding of what the final resolution of these joint ventures are going to be on both sides, GTE and Crown Atlantic going forward. That is the kind of discussion we have started engaging in with Verizon at this point it in time and we've got a very good working relationship with Verizon through a lot of the transactions we've done with them in the past. And I would say that we're having good solid discussions around what their interests are and what ours would be. And so as I mentioned before, in the coming months what we'll be able to do is give you a sense of what a complete solution is.

Relative to the Crown Atlantic tenant activity in the quarter, it could simply be that there was a disproportionate number of the XM Satellite/Carolina PCS, because that was with in a Crown Atlantic marketplace. It could have been there was a disproportionately larger number of those that came off in that particular area. I wouldn't read too much more into it, Steve, than that, because a number of the Crown Atlantic markets, of course, are in the Northeast area which is one of the areas that we're seeing some solid demand for our tower space. So I would venture that that was just a one quarter type of an aberration on it. We give you the breakdown.

Funny thing on the churn that makes it an abnormality and you can see in CCA, is these licenses didn't all come on in one quarter and yet we churn them all in one quarter, an example like this even though we got paid. It creates some wild fluctuations quarter to quarter. On the cash question, though, Steve, we have 340m in the restricted group, that would then be 290 in the unrestricted group and of the 290 in the unrestricted group, about 120 is in the U.K. entity. So that gives you some breakdown there.

Okay. I'm sorry. So the 290 and the unrestricted 120 is in the U.K. and the rest is either Crown Atlantic or [unrestricted] investment vehicle.

Exactly.

Great. Thank you.

All right. Well, again, we apologize if we've had to cut some of the questions short. We are unfortunately a little bit tight on time here, and I would like to say, however, that we appreciate all of your continued interest. I think there was quite a story here this past year in 2002, and we look forward to you joining us on this call as we go through 2003. And we give you an opportunity to hear about our results throughout this year. Thanks again for joining us, and hope you all have a good day.

Thank you, gentlemen. Ladies and gentlemen, this does conclude the Crown Castle International earnings conference call. If you would like to listen to a replay of today's conference you may dial (303)590-3000 with pass code 519944. Once again the dial-in number is (303)590-3000 with pass code 519944. We thank you for your participation today. You may now disconnect.