Crown Castle Inc (CCI) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Crown Castle International second quarter conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star followed by the 0. As a reminder, this conference is being recorded today, Thursday, July 29th of 2004. I would now like to turn the conference over to Mr. Jay Brown, Treasurer. Please go ahead, sir.

Good morning, everyone, and thank you for joining us as we review our second-quarter 2004 results. With me on the call this morning is John Kelly, Crown Castle's Chief Executive Officer; and Ben Moreland, Crown Castle's Chief Financial Officer.

This conference call will contain forward-looking statements and information based on management's current expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, and information about the potential risks factors that could affect the Company's financial results are available in the press release and in the risk factor sections of the Company's filings with the SEC. Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary significantly from those expected.

In addition, today's call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow. Tables reconciling such non-GAAP financial measures are available under the Investors section of the Company's website at crowncastle.com. Further, due to the previously announced agreement to sell our UK subsidiary, the results from the UK have been classified as discontinued operations, and the numbers we will discuss this morning include results only from our continuing operations comprised of our U.S. and Australian business units.

With that, I will turn the call over to John. John?

Thank you, Jay. And good morning, everyone. We appreciate you joining us for a review of our second quarter 2004 results. We had another solid quarter, second quarter, here in the U.S. and Australia, as our carrier customers continue to lease space on our sites at an accelerated pace, and we converted a very high percentage of that revenue growth into gross margin and free cash flow.

In addition to reviewing these results this morning, you will hear us articulate the disciplined approach we will have towards using the proceeds from the anticipated sale of our UK operations and the ongoing cash flow we expect this business will generate. I will have a few comments after Ben goes through the financial results, but as he reviews the results, I would have you focus on the robustness of our core business during the last 8 quarters. The revenue and gross margin growth on our existing assets is truly remarkable.

It is this performance to date, coupled with the proprietary demand tool that we have developed and we have shared with many of you at our analyst days and prior conferences, this demand tool measures the demand for our towers on a tower-by-tower basis and it's the performance coupled with the demand tool that gives us the ability to measure investing in our own towers, via stock buybacks, against any other investment opportunities. It also gives me confidence in the long-term prospects of this business and our own ability to make decisions that will maximize free cash flow per share. More on that after Ben reviews our results.

So with that, what I will do is turn the call over to Ben to walk you through our second quarter results.

Thanks, John, and good morning, everyone. First, I am going to review the results for the second quarter, and then discuss our plans for the use of the proceeds from the anticipated sale of the UK business, and our plans to configure our new balance sheet. I'll remind you that because the UK is recorded in discontinued operations, cash from operating activities and, thus, free cash flow are not really meaningful measures right now until after the interest expense can be reduced accordingly from application of the sales proceeds. Note that cash from operating activities and free cash flow are not in our remaining 2004 guidance, but are in the full 2005 guidance and remain important measures once the sales proceeds are applied.

During the second quarter, we generated 148.7 million in total revenue, site rental revenues were up 13.6 million to 130.2 million or 12% increase from the second quarter of last year. Service revenues were 18.5 million. Gross profit from site rental revenue, defined as tower revenues less the cost of operations, was 89.5 million, up 12.9 million or 17% from 76.7 million in the second quarter of last year as nearly all of the recurring revenue growth fell to the gross profit line. Adjusted EBITDA was 72.7 million for the quarter.

Capital expenditures during the quarter were 12.7 million, which were spent predominantly around our existing assets. Maintenance CapEx totaled approximately 3.5 million, and revenue generating capital expenditures were approximately 9.2 million. I should point out again those are discretionary revenue-generating expenditures associated with additional revenue largely on existing sites.

During the quarter, we built 6 new sites all in the U.S. This looks to be about the run rate we expect for both maintenance and discretionary spending and is consistent with our guidance of 40 to 50 million for 2004 in total CapEx which we have raised slightly to account for the 25% increase in leasing demand we are seeing this year on our U.S. assets. As we have said before, these discretionary expenditures typically come with additional revenue and involve approximately a 1-year payback.

Turning to some of the changes in the income statement, site rental revenue growth comparing the second quarter of last year to the second quarter of this year was 12% for the consolidated Company, that's 54 million annualized run-rate growth or over $4,500 per tower. These revenue results approximate same-tower sales growth as substantially all of our sites were in operation as of the second quarter last year. While we use GAAP-reported revenue figures as the proxy of same-tower sales growth, we will remind you that from time to time we have revenues not associated with the run rate, which will introduce some volatility to this measure quarter-to-quarter.

For housekeeping purposes and to remind some of you of what those one-time items were last quarter and this quarter, I will make a couple of comments. This quarter we had approximately 2 million of positive impact on adjusted EBITDA from an out-of-run-rate tower revenue item in Australia, positive. We had negligible out-of-run-rate items this quarter in the U.S.; however, recall that last quarter out-of-run-rate items had an approximate 3 million positive impact on tower revenue and approximately 4 million positive effect on adjusted EBITDA.

We are very pleased with our organic consolidated revenue growth as it exceeds our long-term expectations and definitely exceeds our earlier view this year of what we would be posting this year. During the last 8 quarters across the same tower base, we have grown annualized site rental revenue $82 million and annualized tower margin $71 million. Obviously, gross margin percentages continue to expand meaningfully. During the last 2 years, total G&A has increased by less than 3% while we have staffed decentralized offices, developed the demand tool that John mentioned earlier, and continued staffing a few complementary new business initiatives.

Turning to the balance sheet, senior bank debt at the end of the second quarter totaled 1.5 billion, 1.3 billion of which will be repaid with the anticipated proceeds from the sale of the UK subsidiary. High-yield debt totaled 1.7 billion, for total debt at the end of the quarter at 3.2 billion, again, before the proceeds from the sale. At June 30, we had approximately 232 million in cash and cash equivalents.

Moving to our outlook, we expect site rental revenue for the third quarter of between 134 and 136 million. We expect maintenance capital expenditures to be between 2 and 3 million, and revenue-generating capital expenditures to be between 13 and 15 million for the third quarter. We increased our guidance slightly for the full-year 2004 site rental revenue to between 525 and 530 million. We expect 2004 capital expenditures to be between 40 and 50 million and comprised of maintenance capital expenditures of between 7 and 10 million and revenue-generating capital expenditures of between 33 and 40 million.

We expect site rental revenue for the full-year 2005 to be between 565 and 575 million, which is about 42 million of recurring revenue growth compared to the 52 million of additional recurring revenue growth expected this year. We expect 2005 net cash provided by operating activities to be between 225 and 245 million. We expect 2005 capital expenditures to be between 30 and 40 million. Maintenance CapEx of that would be, again, about 7 to 10 and revenue-generating capital expenditures, 23 to 30 million. And we expect the result of this will be free cash flow for the full-year 2005 of between 195 and 215 million or about 87 to 96 cents per share, again, after all capital expenditures, both maintenance and discretionary.

Our 2005 outlook includes the anticipated sale of the UK subsidiary and our expected interest savings that may be achieved through refinancings and further debt reductions. We continue to focus on recurring cash flow per share as the best proxy for earnings in this business, due to the mismatch of depreciating the assets in earnings per share as comprised -- as compared to the minimal amount of required maintenance capital expenditures included in recurring free cash flow per share. Our outlook implies adjusted EBITDA of 70 to 73 million for the third quarter of 2004, 280 to 287 million for the full-year 2004, and 310 to 320 million EBITDA for the full-year 2005. Our adjusted EBITDA expectation reflects the volatility and seasonal effects of our services business.

Looking ahead, needless to say, we are excited about the opportunity to reconfigure this new balance sheet. There are 2 capital structure goals that we are going to be working towards after the anticipated closing of the UK transaction. The first goal is to lower the overall cost of debt. As we have discussed on the call last month, under the terms of our existing operating Company debt facility, we are required to repay the entire balance of 1.3 billion at the anticipated closing of the UK. The remaining 740 million of proceeds is available for other debt reduction or permitted investments. We do anticipating replacing this credit facility with approximately 2 to 3 turns of EBITDA, with some form of other senior indebtedness that we are evaluating today, using the proceeds along with the remaining UK sales proceeds, again the 740, to eliminate higher coupon debt.

Let me be a little more specific. In addition to the 4 stub pieces of senior notes that have approximately 50 million remaining outstanding, previously tendered last year and approximately 50 remain, there are 3 high-coupon securities in the capital structures -- in the capital structure that we will now likely eliminate. They are the 10 3/4 senior notes, the 9 3/8 senior notes and 8 1/4 convertible preferred stock, which has a conversion of about $27 a share and is callable. Our targeted, weighted average coupon on the new balance sheet is expected to be approximately 6% or less, with a mix of approximately 80% fixed rate and 30% floating rate interest exposure.

The second goal is to increase our flexibility, to use our internally generated capital for the highest returning investments. Our current bond covenants restrict our ability to invest free cash flow generated by the restricted group and to share buybacks and dividends until such time that we have achieved an investment grade rating. As currently written, this covenant perversely encourages us to invest in assets that may have lower returns than investing in our own assets, ie, our shares which we have no interest in doing. We believe there is a reasonable solution to this restriction that may claw bond covenant amendment that we will be exploring as part of our balance sheet work this fall to give us the flexibility we are seeking. We expect the results of this work to leave us with approximately 1.6 billion of total debt and preferred securities or about 5 1/2 times debt-to-EBITDA with annual interest and dividends of approximately 90 to 100 million annually. We hope to complete both of these goals by the end of the year.

With that, I am pleased to turn the call over to John. John?

Thanks, Ben. As I mentioned up front, we had another good quarter of results. As we continue our unwaivering focus on our 4 key initiatives, which I would like to review with all of you once again quickly. First I said we will focus on increasing recurring revenue on our existing sites. Consistent with our comments at our Investor Day in April and our comments on our first-quarter call, the number of new executed U.S. leases continues to be ahead of our prior expectations. Based on our already executed leases and our lease pipeline, it appears that we will add approximately 25% more new leases to our U.S. towers in 2004 than we did in 2003. Our U.S. carrier customers continue to make a concerted effort to deploy new cell sites to meet the growing subscriber and minutes-of-use demand. We are excited about the anticipated prospects to come in the U.S. wireless market, which represents the lowest wireless voice subscriber penetration of any large developed country in the world. So there is quite a bit of growth to come in the U.S. on the carrier side of the equation.

As I indicated previously, we spent a considerable amount of time developing our propriety demand tool. Our data suggests that there is an indicated need to deploy significant new U.S. cell sites over the coming years for voice quality alone, to close the gap of service quality that exists between the U.S. and other parts of the world. Specifically, across our towers, we expect that incremental demand would take our recurring annual revenue in the U.S. up approximately $95 million. Which would be just over $54,000 of annual recurring revenue per tower. This, before the benefit of the contracted escalations on our existing recurring revenue and the expected additional growth of voice minutes of use, which I will remind you are growing at approximately 30% per year in the U.S.

Further, while our business plan is not predicated on the launch of wireless data services, the recent announcements about U.S. wireless data deployments would indicate another driver of demand for our essential wireless infrastructure. Just 2 days ago, many of you will have noted that Verizon announced that wireless data contributed 4.2% of their total wireless data revenues, up from 1.7%. Once again, looking to our demand tool, it would indicate there is another approximately $200 million of U.S. recurring revenue growth across our towers from data service deployments. Needless to say, I believe that our Company will benefit greatly from the wireless deployments to come.

Our second key initiative has been to expand our recurring margins. And comparing the second quarter of 2004 to the second quarter of last year, we dropped nearly all of the recurring revenue growth to the gross margin line. In the past year, we've added $52 million of annualized recurring gross margin on $54 million of annualized recurring revenue. And once again, consistent with last quarter, we have held G&A levels to the same level of last year, all the while continuing to invest selectively in some new business initiatives that I believe are good investments.

Our third key initiative is to invest our internally-generated capital wisely to achieve high incremental returns with low risks. We use the term "internally-generated capital" to describe the combination of the free cash flow of the business, plus the financing capacity that is generated by leveraging our growth in a given year at our targeted leverage ratio.

Let me put some numbers around this concept. Pro forma for the sale of the UK, we expect to generate -- we expect to create $400 million of internally-generated capital in 2005. That's comprised of approximately $200 million of free cash flow, plus approximately $200 million of debt capacity when you lever the expected growth of $40 million that Ben discussed in our outlook for '05. So some $400 million of internally-generated capital in '05.

The anticipated sale of our UK subsidiary and the balance sheet repositioning that Ben discussed, marks a new day for this Company, and I want to be very clear this morning about how we will look at investing capital that we expect this business will generate going forward. Given that on a pro forma basis, we will have achieved our targeted leverage ratio, we will be investing free cash flow in something other than debt reductions as has been the case for the last 2 years. Now we will be investing every dollar of our internally-generated capital in what we believe will generate the most value for our shareholders. We believe the best measure of that value is recurring free cash flow per share, and this will be our guide when reviewing possible investments of free cash flow, including tower builds, acquisitions, share buybacks, investments in our complementary businesses, or any other investments.

In terms of the mix of these investments, what the mix of these investments will take, I can't say for certain today. However, as we discussed in our call a couple of weeks ago, given our current cost of equity, relative to the expected growth of our core business on a risk adjusted basis, purchasing our own shares is an attractive investment. Therefore, the expected return on the use of our internally-generated capital for share buybacks becomes the hurdle rate or benchmark against which we will judge on a risk-adjusted basis all other investments. Once we complete the anticipated sale UK and complete our planned capital structuring efforts that Ben alluded to earlier, you can be sure that it is with this discipline towards growing recurring free cash flow per share that we will proceed.

I am keenly aware that this new day raises new questions for our shareholders, as they must now determine if we have the ability to make smart decisions with the internally-generated capital where previously our only option was to reduce debt. I can assure you that this management and our Board, all of whom are shareholders, are completely focused on this initiative, to invest capital wisely to grow recurring cash flow per share, and thus create shareholder value. Further, I am committed to delivering for those shareholders who are investing with this Company and this management team for the long term as we execute this plan.

Some of you are asking if we will look at acquisitions, consolidations and other investments. You bet we will. And you should expect a good management team to do exactly that. But you should also expect that before we spend any capital, we will convince ourselves that it will further this initiative of investing capital wisely to maximize recurring cash flow per share.

Lastly, our fourth key initiative is to capture new revenue opportunities around our existing assets. And as we discussed before, we are engaged in a few activities in that regard. As you all know, we are taking measured steps to capture additional revenue streams around the essential infrastructure we own. One of these initiatives that we continue to work on is creating value from our nationwide spectrum license, which we acquired last year for about $12.5 million, as well as from several other prior investments that we've discussed with you on previous occasions. As I mentioned and I will remind you, however, investments in these new opportunities are absolutely measured against the benchmark I just discussed.

In summary, the outlook I believe continues to be very positive. We believe we will be able to grow recurring revenue 8 to 10% per year, and free cash flow per share at least 20% annually for the foreseeable future. We are working hard to complete the closing of the UK transaction and begin the process of configuring our new capital structure to reduce our overall interest expense and increase our investment flexibility. And while the anticipated sale of our UK subsidiary may change the look of our Company, the strategy remains the same. Maximize recurring free cash flow per share.

With that, operator, I will turn the call over for 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 decline from the polling process, please press the star followed by the 2. Please ask 1 question and 1 follow up and re-queue for any additional question. If you are using speakerphone equipment, you will need to lift the handset before pressing the numbers. One moment please for our first question.

Our first question is from David Small, please state your company named followed by your question.

Goldman Sachs. Good morning, guys. I just have a quick question on the cost side of the business. It looks like SG&A was down about $1 million sequentially. Now with the UK business being sold, is there additional opportunities there to reduce that further? And where do you think you can get that to as percentage of sales in the future?

David, one thing I will mention about G&A, what we are looking at is sequential sort of quarter-to-quarter, year-to-year. And since 2001, the remaining business, which again is comprised of the U.S. and Australia, is down from a high of about 103 million and run rate today is about 88 or so. So continuing to decline and over the last 12 months then roughly flat as we noted in the -- in the prior comments. The -- the UK business was relatively self-contained in terms of its own level of G&A. So there wasn't a whole lot of overhead in the U.S. associated with the -- with the UK business. So it is self-contained. You know, those 640-odd employees or so are certainly going with that business, but otherwise, run rates of G&A that you see here posted this quarter are pretty well what we would expect to deliver going forward, and we will certainly look for places where there is room to make further savings, and potentially even we may have a few small adds to accommodate some of the growth we are seeing in the portfolio in terms of leasing facility, but not significant. And so right now that looks to be about 15% of total revenue, and that's about, you know, roughly broken out about 9.5% in the U.S. operating Company, about 3% from corporate, and 2.5% or so from other business initiatives.

Okay. Let me ask you one other question on the pricing side. Are you seeing -- with your escalators, are you seeing that new leases are coming in at roughly the same price that your escalators are? Or are your escalator prices a little higher than new leases?

Yeah, David, I'll see if I can answer the question this way. The pricing on new leases is essentially flat with what it has been in prior quarters. And so, you know, in that regard remains strong and stable. I am not entirely certain where you were headed with the question about escalators and so forth, however. So I mean just the base answer is that it's flat on a new -- on a new lease basis with what it has been in prior quarters.

I guess where I was going is I just wanted to see if there was a real disparity between if you think about the leases that have been escalating over 3 or 4 years and then new leases, is there kind of a big -- is there a wide delta in pricing there.

I wouldn't describe it as a wide delta in pricing. You know, certainly, you know, as the lease continues to escalate at whatever the contracted escalation is, if you allow a number of years to run, it is possible that that becomes a higher price than an initial new lease coming in, but not by a wide margin.

It is really site-by-site specific. I mean, again, as we have said on this call before, each site is sort of the unique proposition and depends on what the competitive alternatives are for that site.

Okay. That's great. Thanks, guys.

Sure, David

Thank you. Our next question is from Jonathan Atkin. Please state your company name followed by your question.

RBC Capital Markets. My question would be for your guidance for 2005, can you give us an idea of what site leasing gross margins would be? I didn't quite catch that from your comments or from the release.

John, we haven't given specific guidance on gross margin, but the way to think about it is, this year it looks like we are running about 43 million up from last year. If you were to run -- if you said, okay, I think our revenue growth is about 42, is the midpoint, and, remember, when you -- this year we are going to do about 50 to 54 higher revenue growth portends higher incremental margins, so if your revenue growth is in the 40 to 45 range, you're probably not going to deliver 100% or 95% incremental margins, so if you just assumed 90% on that, gross margin is in the range of about 38. OpEx and G&A growth, probably fair to model about continuing sort of 3% annual increases at the OpEx line and G&A line. So our target would be, you know, gross margin in the range of sort of 38 to 40 is sort of what we are looking at.

It may -- you may ask the question -- I will just jump on it early. Why would we -- it looks like we are posting 50 to 54 or so of growth in top-line revenue and our guidance would suggest, you know, 40 to 45. Why the -- why the discount? I think it is somewhat consistent with this management team's approach to be a little conservative. That's about 80% of this year's activity. And we think that, you know, delivering 38 to 40 million of recurring growth in this business is absolutely more than adequate to deliver the kind of results that we are talking about and grow free cash flow greater than 20% per year. If it is higher than that, terrific. You can bet we will capture all the demand that we possibly can.

And then the follow-up would be on strategic initiatives, whether it's Spectrum that you own or other initiatives, can you give us sort of an update?

Sure, Jonathan. In every one of these particular strategic initiatives, and as we described before, it is -- it is the Spectrum initiative. We have a measured investment in a company that provides backhaul and we are also deploying distributed antenna system networks in certain spots around the U.S. These are all measured small investments at this juncture, and as I indicated, absolutely as we continue investments in them, we look at the returns against our benchmark hurdle, which are the returns that could be earned, generated by investing in our own stock. And at this juncture, we are quite positive about all of these particular initiatives. On the backhaul initiative, we are seeing significant new demand from additional carriers by virtue of their desire to have both an alternative option available to the local exchange carrier for diversity reasons when they backhaul the traffic from a particular cell site to their switching stations, as well as the ability on a cost basis to get what is a more efficient solution on the distributed antenna systems. We have found that there are communities, and on a case-by-case basis, these are reviewed by us, that allow us to otherwise build wireless coverage in areas that have not been covered for the past 20-plus years. A good example of that, at this juncture for those of you up in the New York area, is we just turned up and anchored with one of the carriers. I am going to allow that carrier to particularly let you all know that they are the first on that particular area, but the Hutchison River Parkway has been a perennial problem for those of you who commute in and out of the city, and we have launched a distributed antenna system that covers the stretch of the Hutch that has been a major problem. First carrier is up on that system, and others are coming up in -- in the months ahead. In addition to that, as Ben mentioned to you, we did deploy 6 new sites in this past quarter. 4 of those were down in Disney World. We built out a system down there that effectively is anchored with 4 wireless carriers day one. And as you can imagine, we are very pleased with the returns that will be generated from that particular activity.

And then finally, on the Spectrum initiative, we are just taking that very sequentially. At this juncture, we have had a lot of support, and participation from major equipment manufacturers, as well as transmitter manufacturers, and we have launched a 3 -- launched -- we have deployed a 3-site test system in Pittsburgh that we are just working through right now, bringing up the various different sites. We have an opportunity to share with wireless carriers and content providers what that particular service can in fact do for them. It is a mobile media-like service, and we are receiving significant interest from content providers certainly, and also the preliminary discussions we are having with wireless carriers are likewise. We would anticipate that we will be partnering with these types of entities going forward as we progress beyond what is essentially a field trial at this point in time into something more than that. But, again, all of this will be done sequentially and we'll be giving you further updates as we go further down the road. They all have great promise, but at this point by virtue of the measured investment construct that I mentioned to you, certainly none of these are material from the standpoint of contribution or detraction from the Company's results. This is something that has a future payoff and we'll continue to keep you advised as we continue to make progress with each one of these businesses.

Thanks a lot. I got one more but I will get back in the queue.

Okay, thanks, John.

Thank you. Our next question is from Rick Prentiss with -- please state your company name followed by your question.

Yeah, it's Rick Prentiss, Raymond James. Good morning, guys.

Good morning.

A couple of questions for you. First, glad to hear you improved the network down here in Florida. We can always use better coverage down here. And glad to hear you guys really hammering home -- I think I counted about 8 times John said, "free cash flow per share." Glad to hear you folks are doing that as you know we do. Sounds like your definition is a little bit different. We do the valuation free cash flow which excludes nonmaintenance CapEx from the calculation. Ben, when you were giving the number, I think you were using your definition which includes both maintenance CapEx and revenue-generating CapEx, is that right?

It does.

And you talked about using the potential for a stock buyback kind of as a hurdle rate. Can you talk to us a little bit about the revenue-generating CapEx? Why you have seen a slight bump-up in that and what kind of the hurdle rate is and what you are doing with those revenue-generating CapEx sites?

Sure. First of all on the potential different or new measure, it is something we debate right now, and we have not launched any new measures, because with the UK sale pending we have got enough balls moving around in this press release, not to confuse everyone, but you raise an excellent point, which is going forward in an environment where, I think, balance sheet issues are diminished. We need to be able to articulate really the recurring free cash flow from the business, and that has been done in other industries in the form of funds from operations or adjusted funds from operations, which is essentially taking out this maintenance CapEx concept. I think, Rick, in your work you use valuation free cash flow, which again just subtracts maintenance CapEx. Just to point out the inconsistencies. For example, we can spend $1 buying a share of stock or $1 investing in building a new tower and those get treated quite differently in that free cash flow definition as we have it today, and that inconsistency, frankly, is probably not helpful. And so while we will always give you all the numbers and people can certainly get to that -- our definition of free cash flow and we will still publish it, I think it is probably more meaningful going forward to come up with a recurring measure and so we are sort of -- we are taking input and thinking about what that probably best represents, whether it is funds -- you know, cash provided from operating activities minus maintenance CapEx. Again, we are working on that and we will likely come out next quarter with an additional measure to help people sort of think that through. And remove this inconsistency about where you spend discretionary capital and how it gets treated.

As we think about new builds or discretionary spending, the majority of the spend is still going on existing assets, with about a 1-year payback, and if you actually subtract the maintenance CapEx, it is actually about a 9-month payback on the capital we are spending associated with additional leasing. So as you -- as we have seen a 25% pickup this year in leasing over last year, naturally, and we were a little bit conservative. You remember in April at our Analyst Day that many of you attended, we were very clear that we had forecasted guidance through the first half of the year and the second half the year we were waiting to see. As of this call today, we are sort of taking a full-year view, and as a result of that full-year view, we have had to bring CapEx up just a little bit. And so that's -- that's what you see there and that's, again, fairly linear relationship there and one that has tremendous payback and one that we are going to do.

Now, the last part of your question is, how do you establish your hurdle rate and your benchmarks? And to that I guess I would ask you to refer back to John's comments around this demand tool. It's imperative that in order to establish a view of value on these assets, the ones we currently own or any others that we will look at acquiring or building for that matter, would you develop a very clear view of future demand for those sites. Until you have that view with a pretty high level of confidence of what the future revenue growth on that will be, you can't really have a representative or a good view of long-term value relative to how something is valued today. It is because of our ability to look into the future and assess the demand on these sites, again, on our sites or on anything else we might look at, that we can come to what we think is a very credible view of value of our existing assets, how they are being valued in the market relative to what we think the future value of the sites will be as we continue to lease them up, you know, in accordance with some of the revenue numbers that John was giving around the indicated demand. Approximately 100 million, improving voice quality, potentially another 200 million just to accomplish data deployments around the sites. These are, again, measured indicated need around our sites.

And so I am sorry for being a little bit long-winded on this one, but until you can develop that future profile and come up with a future value, and then discount that back at a reasonable rate, you really are shooting in the dark. You really are just looking at a static point in time on a current valuation with a current multiple in the marketplace. And so we have the benefit of looking at our own work and our own data and that's what gives us the ability then to make an informed decision about, do we spend some of this internally-generated capital on our own sites, ie, our own share buyback program or do you invest it in other sites, and which yields the highest return. And, again, one cryptic way to look at that is -- and the way I think about it is, if we are convinced we can grow free cash flow per share 20% or greater going forward, then I would say the levered return sort of hurdle higher around here would be at least 20% before you risk adjust it. And that's how we are thinking about it.

I just want to punctuate one point, Rick, that Ben was making relative to the demand tool. You know, we worked on this now for the last couple of years, and what has been particularly interesting to us at this juncture is, we are able to take a look at what we had predicted in the way of demand against all of the applications, the search rings and so forth that we have also been receiving here recently, and we are constantly able to refine that demand tool to basically pin-point for us on a tower-by-tower basis what the demand profile is for that tower and it is that one very key point that Ben makes that I believe is -- is a differentiator. We are very comfortable as we look forward on the demand profile for each one of these towers with the database that we have. And this isn't data that you can buy from someone, though there are drive tests that people can buy from others. It's a question of what you do with that data that ultimately is what we believe gives us the ability to forecast with greater accuracy what the demand around our tower assets are.

Then very -- a very quick follow-up question. Ben, you had mentioned on a previous question about the top-line guidance might have suggested 50 to 54 million. Your official guidance is 40 to 45 million, I think that was incremental recurring revenue. Can you talk -- it sounded like you were implying that, you know, you guys want to keep that conservative slant out there. Could you address that? And then also just quickly, have you assumed any data explicitly lease-up in '05 kind of piggy backing on what John had mentioned was a data demand of 200 million on your towers over time.

Just to be real clear on what I said earlier, the 50 to 54 million would be 2003 to 2004 site rental revenue growth. So at the 530 level, which is high end versus the 476 last year, that's about 54 million of growth. So that's what we are saying with the 54. Going forward then into '05 from '04, that is the 40 to 45 million. Yes, it is a little bit lower. Yes, we are naturally a little bit conservative, but what we have said repeatedly is, visibility in this business is about a couple of quarters out and that's about all you can really see, and despite the indicated demand that we've just talked about on this question, what it doesn't tell you absolutely is when it comes, when it occurs, and so, is there data implicitly in some of those numbers? Sure, there is. We are getting applications for amendments on sites that involve EvDO applications. Specifically how many and where they are located? It is difficult to say out into 2005 with certainly. We are beginning to build a pipeline for '05 but again, it is still mid-year 2004. So that's sort of where we are.

I guess what we focus on, Rick, is the bottom line, which is, you know, what do we have to deliver to grow this free cash flow at least 20% per year and from there the upside will take care of itself, and fortunately, we think we are in a position where if we deliver about 80% of this year, we will be fine.

Okay. Good luck, guys.

All right, thanks

Thank you. Our next question is from Jim Ballan. Please state your company name followed by your question.

Jim Ballan from Bear Stearns. My -- the is a question I've got is, you mentioned on your call when you announced the -- the sale of the UK business, that you were going -- that you were, you know, happy to be focused on the U.S. business and that you wanted to focus on being in the largest markets there. Can you talk a little bit about how you are planning on furthering that strategy, you know, given that you will have opportunities there as well. What those opportunities might be.

I think relatively speaking, Jim, what -- what we were trying to convey was that on a number of different attributes, the U.S. has a greater growth profile associated with the future than we felt comparably the UK did. The UK is a great area clearly, but from a U.S. perspective, larger country, greater population, significantly less wireless subscriber penetration and that is a key issue. Where we are as a country, and we have talked on prior calls, is significantly behind certainly the UK and other European countries in the buildout of what is, you know, the level of quality on -- on a wireless network that consumers are looking for on the voice side. And, you know, I am convinced that all of our U.S. wireless carriers are absolutely focused on network quality. Certainly, it has been a big point of discussion with some of these wireless carriers that they are -- they are doing remarkably well on the basis of wireless quality. And all carriers I am convinced based on what we discussed with them, are focused on doing exactly the same. So you've got that, number one. And -- and the dynamic around a reduced wireless subscriber penetration in the U.S. means that as you are trying to improve voice quality on your base network, all the while the subscribers are growing and then the minutes of use are growing in the U.S. as well, it just simply provides greater opportunity for us on an organic leasing basis, leasing on our existing towers, and we were -- we were, you know, excited about being able to focus on this market. Then, once again, as I mentioned in the earlier comments, we have the whole data initiatives, you know the UK is in the process of deploying third generation at this point. The U.S. is just starting, you know, the first carrier to go out of the chute with that was Verizon. So they had a couple of markets that they have launched. We now see AT&T Wireless, of course, with their announcement on 4 markets and Sprint announcing now they will be deploying EvDO, but you had more carriers farther along in the UK than you do in the U.S., and we are all aware of what that was doing from a leasing perspective in the UK, and we are excited to be at the very front end of the activity here in the U.S. So I think it's with that in mind we were talking. It isn't so much -- if where your question was going was, well, it is the whole question of consolidation and acquisition and things of that sort in the U.S. Now, that wasn't what we were describing when we talked about U.S. opportunities.

On our base of 10,600 towers in the U.S., we are very excited about the prospects for growth on those facilities, and it's that that we were really referring to, and anything else will be really, quite frankly, measured against our ability to generate returns for our shareholders, the free cash flow per share metric by buying our own towers back as it were, ie, share buybacks. We will be looking at that if there are other investment alternatives, other acquisitions that were to come up. But it wasn't a notion on my part at least or anyone else in this Company that -- that the U.S. opportunities were only available through acquisition.

Great. I appreciate that, John. Just one short follow-up. The -- the services margin in the business was -- was obviously very good and actually significantly contributed to EBITDA, you know, maybe for the first time in a while this quarter. Was there -- was there -- can you just maybe tell us what -- you know, what happened in the quarter and is this sort of, you know, a one-time thing? Or what -- what should we think of the margin going forward?

I would encourage you not to think about it, is what I would encourage you to do.

Okay, that's fine.

It is not a significant generator of free cash flow, as we've talked about.

Yep.

It will have EBITDA margins occasionally because our managers are being very wise in the jobs they are taking on in this quarter, actually we did a little better than usual, but there's also capital expense required, which we talked about before.

Yep.

And it doesn't contribute a significant amount of free cash flow, and so I would ask everyone to please don't sort of fall into the trap of trying to follow or predict the gross margin in the service business, because it is very, very challenging and, frankly, doesn't tell the whole story when -- again, our focus is on cash flow, and that cuts through all of that noise, and we would encourage you to think about it in the same way.

Great. Thanks, Ben

Okay.

Thank you. Our next question is from Vance Edelson. Please state your company name followed by your question.

Thanks a lot. Vance Edelson at Morgan Stanley. Good job on the quarter. I just want to follow up on the data discussions. You had obviously gained some valuable 3G in Europe that indicated the strong potential upside for the tower demand. With the early EvDO and UMTS initiatives of Verizon Wireless and AWE here in the states that are now underway, have you had much involvement and are your early experiences similar to what you saw in the UK from an operational side, say, in terms of equipment needs on the towers or cell site density required. Does it look comparable to what you saw in the UK? Thanks.

Yeah, Vance, it does, but we are at the very early stages in the U.S. Because there was -- there was a precondition in the UK that really doesn't exist in the U.S. at this juncture, and that was that in the UK, the wireless carriers had been building greater density in their network to accommodate higher quality of voice -- wireless voice delivery. And as such, as they started to deploy 3G, whereas they increased the density. They were increasing it off of a level of density that was greater than we have in this country at this juncture. What we are seeing to date in the case of the U.S. is deployments for the most part of -- of high-speed data, EvDO, on existing sites, sites clearly that were designed for today's level of voice-quality coverage and not specifically for a density required for high-speed wireless data, and so it is a first phase. It certainly adds incremental revenue from the standpoint of antennas being added to the -- to the towers, additional cabling and so forth. And not all carriers deploy in exactly the same way, so it is different by carrier, but that -- that's what we are seeing today in the U.S. The big next step is going to be increasing the density associated with providing high-speed 300 to 500 kilobit per second data rates, and fortunately I think from a carrier perspective, as you are increasing the density to support high-speed wireless data, you are also improving your ability to deliver high-quality voice services, and that, of course, is an initiative that all the wireless carriers in the U.S. are interested in as well. So what we are seeing at this very early stage in the U.S. is consistent with what we would have expected from our experiences in the UK, but there is quite a road to go from a U.S. wireless data deployment basis which, of course, is very exciting from our standpoint, because there is a lot of opportunity ahead.

Okay. That's good color. Just to follow-up on the network services. I am not going to focus on the cash flows, but if we look at the U.S. network services revenues, it kind of jumped back to where it was throughout 2003. Was -- was first quarter just abnormally low, such as the second-quarter amount is a better run rate going forward? Or what do you think we should do there?

I mean, there is obviously some seasonality involved in that business, so second and third would typically be better in terms of revenue. But, again, when you look at -- when you look at total revenue in this Company, including including services, it really does sort of not represent what -- what the core is about, which is growing the sequential recurring revenue. Again, that is what we talk about and what we focus on. So -- and because we are focused on free cash flow, and for those of you trying to model valuations, we would encourage you to think about free cash flow. It really matters little what you put in for service revenue or service gross margin because after -- after the capital spend required -- the -- after the spend required to be capitalized on our sites, because again, we are doing improvements on our sites when we are doing the installation, it is very little contribution to free cash flow.

I mean, the one thing I would say, Vance, is the reason why we have remained in this business has been to help facilitate the deployments of our wireless carrier customers. And as they ramp up their deployments, 25% increase in the number of leases '04 versus '03 on our towers, they do look for companies to help provide them the services necessary for them to get installed and deployed on a site. And whereas in prior years, there may not have been as great a volume, and, therefore, there wasn't -- there wasn't -- there wasn't a lack of companies able to provide these -- these services. What we do find is that this year there is greater demand, as Ben pointed out to Jim's question, you know, we are very disciplined in the jobs we will take. We are interested in helping our customers, but certainly if they have an alternate approach that they would like to use that they believe is even more cost effective, that's fine, but if on the other hand they need us to provide the job, and it is at a value that makes sense from our standpoint to do the job, we are happy to help in that particular regard. That's what you are seeing more of I think at this juncture. Net-net, however, Ben's point stands. If you look at the value of this business, it is around that core recurring revenue-generated site rental that it -- that is important and services will, in fact, be a more volatile component of our -- of our revenues.

Okay, that's great. Thanks a lot.

Yep.

Thank you. Our next question is from Ned Zachar. Please state your company name followed by your question.

From Thomas Weisel Partners. Thank you very much for taking the call. I guess a lot of my questions have been answered, but I will just hit a couple. Ben, the -- with regard to -- I want to make sure I get this right. Last quarter there was about $3 million of one-timers in the revenues for U.S. and there's not any in this quarter, is that correct?

That's correct.

Secondly, if you look at the guidance, the revised guidance for 2004, it looks -- it implies pretty flattish, possibly even a little bit down EBITDA in the second half of the year. Are the things going on, expenses that we should be thinking about that would suggest that there's, you know, just things we might not be aware of that are happening in the second half of the year?

Remember you had the one-timer. So you had the 3 last quarter -- actually 4 at the EBITDA line last quarter. Then there was 2 this quarter in Australia. So, you will be treading, you will be pedaling hard to sort of make that up in the third and fourth quarter if you don't otherwise have any -- and we don't expect any -- sort of one-time similar events. And so, there is absolutely nothing going on in the core growth that -- that is obscured -- that is not happening. It is growing -- continuing to grow in the U.S. sort of 2 to 3 million a quarter, which is what we just saw. Australia has a similar rate, their own rate, but it is just the fact that we had in the first half a total of 6 one-time, and so, again, that's why it looks more flat in Qs 3 and 4. Absolutely nothing happening around the core that would be concerning.

Fair enough. And then the last question. How should we think about -- you gave us some numbers as far as -- as far as average rates, I think in 2005. Or when the UK transaction was closed. Were you thinking in terms of -- from a dollar amount perspective, I guess we are thinking about somewhere in the $80 to $90 million range for interest expense in 2005?

Yeah, what I had said was -- and I think about it including convertible preferred dividends and would encourage you to think that way as well. Unfortunately, that is not in our free cash flow guidance because definition of free cash flow is just interest expense.

Okay.

Cash from ops minus CapEx. But we think about it as convertible preferred. And so when I was making the comment trying to get everybody on the same page with the balance sheet with us, we think at the end of all of this mix, and changes, we will have about 1.6 billion of debt and convertible preferred likely taking out the 8 1/2 -- or 8 1/4 convertible preferred moving that into debt, so then you would only have the 6 1/4 remaining, the 300 million, 6 1/4 remaining. So roughly speaking, 1.3 billion of debt and 300 million of convertible preferred, and the overall blended cost on that entire 1.6 billion on the balance sheet we think is 6% or less. And I get there by obviously taking out the more expensive coupons, the 3 that we talked about. 10 3/4, 9 3/8, and the 8 1/4s and then an appropriate mix of sort of bank debt or perhaps even a commercial mortgage-backed security. I am not sure exactly where we are going to go there, but either way, you get to those numbers. And that's what we are evaluated right now this process.

Terrific. Thank you very much Okay. You bet.

Thank you. Our next question is from Steve Flynn. Please state your company name followed by your question.

Good morning, Steve Flynn from Morgan Stanley. Question for Ben. Ben, can you talk a little bit about your thoughts with regard to stock repurchase or maybe one-time dividend if you did not receive an amendment from the 7 1/2 indenture, what sort of capacity would you have with regard to your restricted or unrestricted cash, sort of restricted payments capability to deal with a one-time dividend or share repurchase for UK asset sale close if you did not receive an amendment.

Very limited, and thanks for the question, Steve. I think it is a good point we need to highlight. Our ability to do a significant share repurchase is limited today to essentially the cash that we have in the unrestricted group, which is about $70 million. And so from time to time we have been in the market over the last 2 years, customarily buying shares out of the market or repurchasing shares issued for dividends on the convertible preferred to offset that dilution. We have done that recently, we would expect to continue to do that, but beyond that sort of 70 million basket, absent a consent, has very little capacity to do that today. And so you can hear in my comments earlier, we are beginning to make the case for those that might be listening, that it is a little bit of a perverse outcome here with a balance sheet that will be 5 times leveraged, and the only real use of proceeds we will be permitted to use will be, as John alluded to, the 400 million of internally-generated capital. We would, as currently written, be forced in the short term to make outside investments and not invest in our own assets, which to us makes very little sense, and I am pretty confident we will come to a reasonable solution there to resolve that.

Great. Thank you.

Okay.

Thank you. Our next question is from Anthony Clarman. Please state your company name followed by your question.

It's Deutsche Bank. And I just wanted to be more clear, I guess, on the '05 free cash flow guidance of 195 to 215. Does that assume application of the full $2 billion proceeds towards debt reduction or is it just the 1.3 billion so that if you did use the 740 to take out the higher coupon debt there might be some slight upside to that free cash flow number going forward?

No, that assumes the application of that cash on the higher coupon securities. And the way we think about that is, we are going -- and we are being pretty clear. We're going to take the cash and we're going to pay down, either through open market or tenders, this higher coupon debt and that will be with the full extent of that 740. It makes eminent sense to us. Even if we were to elect to make an investment in a new business initiative, new assets or what have you, you would certainly want to capitalize that with newly priced debt at more reasonable coupons than carrying 10% or better. And so my estimation is is that it's a high likelihood we are going to go ahead and take out those higher coupon notes, and then from there, as John alluded to, look at where we are and see what that internally-generated capital will buy us, frankly, in terms of value.

So off of that new capital structure, I guess how do you guys weigh what the appropriate level of leverage is or free cash flow relative to total debt? Because based off of those numbers, you will be generating well in excess of 10% free cash flow as a percentage of total debt which would seem to be able to amortize off, you know, all the debt on a 10-year non-call-life basis, on a bond basis. Does this give you the room to relever the U.S. entity slightly as look at, you know, some of the tower assets that are out there for sale, whether it is Sprint or some of the other towers that might be available.

Anthony, you hit on a great measure or metric, I hope that somebody from the agency might be listening, but the 10-year metric is something they have focused on before and we'll well be exceeding that, as you point out. Our view towards leverage right now is that we are going to generally stay in the 5 to 6 times range. Could it spike in a short period? Could it go to 6 1/4, 6 1/2 if there was something we needed to do? Yeah, I don't think we will lose too much sleep about that. I would very quickly come back inside of 6 just based on the core growth in the business. But generally, it's our contention that 5 to 6 times is sort of the place to optimize the cost of debt, and overall optimize the cost of equity. You know, we could be proven wrong on that over time. There are some, I think even on this call, that would suggest we ought to carry more leverage than that, but we are -- we are content with sort of that 5 to 6 times range. In our modeling as we run our forward cases out and use the demand drivers we talked about, the demand tools, it makes very little difference, the difference between sort of the 6 times, 5 1/2 times and if somebody were to suggest 7, very, very little difference. And I think just from a headline exposure level that 5 to 6 times feels a little bit better for us.

Great, thank you.

You bet

Thank you. Gentlemen, I would now like to turn the conference back over to you for final comments.

Okay, thank you.

Well, thank you. And again, ladies and gentlemen, thank you for joining us here this morning. We absolutely appreciate your continued interest in this Company. And we are going to go back to working for all of you right now this afternoon, and wish you well and look forward to talking to you on the next call. Thank you.

Thank you. Ladies and gentlemen, this concludes the Crown Castle International second quarter conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 11003229. Once again, thank you for your participation. Have a pleasant day and at this time, you may disconnect.