Consolidated Communications Holdings Inc (CNSL) 2005 Q2 法說會逐字稿

Welcome to the Consolidated Communications second-quarter 2005 earnings call.

At this time, all participants are in a listen-only mode.

Following management's prepared remarks, we will hold a Q&A session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded today, August 24, 2005.

I would now like to turn the conference over to Steve Jones, Vice President-Investor Relations of Consolidated Communications.

Please go ahead, sir.

Thank you, Judy, and good morning and thank you to everyone for joining us today on our Consolidated Communications' second-quarter earnings call.

As Judy mentioned, I'm Steve Jones, the Vice President-Investor Relations.

With me today on the call is Bob Currey, our President and Chief Executive Officer, Steve Childers, our Chief Financial Officer, and several members of the senior management team.

I will review the Safe Harbor provisions for this call and then turn it over to Bob for opening remarks.

This call may contain forward-looking statements within the meaning of the federal Securities laws.

Such forward-looking statements reflect, among other things, management's current expectations, plans and strategies and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause actual results to differ materially from those expressed or implied by these forward-looking statements.

Many of these risks are beyond our ability to control or predict.

Please see the Risk Factors section of our prospectus for greater detail.

Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements.

Furthermore, forward-looking statements speak only as of the date they are made.

Consolidated Communications does not undertake any obligation to update or review any such forward-looking information, whether as a result of new information, future events or otherwise.

I will now turn the call over to Bob Currey, our CEO, for his opening remarks.

Thank you, Steve.

I'd like to extend my welcome and thank all of you for participating today.

The second quarter marked a major milestone for Consolidated Communications, as we prepared for our initial public offering, which we completed late in July, followed by our debt recapitalization, which will be completed later this week.

As a result, we raised net proceeds of $73.1 million that will be used primarily to redeem 65 million of our high-coupon senior Notes, lowering our going-forward interest obligations.

Steve Childers will provide greater detail about these transactions.

Our rationale for becoming a public company included, one, the ability to access public markets for lower cost of capital; two, to continue to delever and improve our overall balance sheet health; three, to create a currency for growth and acquisitions; and fourth and finally, to initiate a dividend policy that matches the strong cash flow characteristics of our business.

We are well aware that long-term success as a public company requires management to deliver solid operating results and to sustain and grow our cash flow over time.

Our remarks today will highlight our strategy and plans for future growth and our second-quarter and six-month operating and financial results, during which we were still a private company.

For those not familiar with us, Consolidated has properties in two states, Illinois and Texas, which makes us the 15th largest rural local exchange carrier.

We acquired the Illinois property on January 1, 2003, and added the Texas property, known as TXU Communications, just over a year ago on April 14, 2004, which in effect tripled the size of our company.

Our strategy is to increase average revenue per user, known as ARPU, with great customer service and bundled service offerings while driving operational efficiencies and margin improvement.

I am pleased with our progress.

Revenues and adjusted EBITDA were stable and consistent with historical norms.

ARPU increased to just over $92 for the six months ending June 30.

Digital subscriber lines, or DSL, grew 56% year-over-year, and the number of customers with bundles grew 24% year-over-year.

We reported revenues of 78.3 million and adjusted EBITDA of 32.7 million for the second quarter.

Also during the quarter, we generated 14.7 million net cash from operating activities, bringing the six-month total net cash provided by operations to 29.3 million.

We believe our cash position -- our cash flow generation supports our dividend policy, which was initiated in conjunction with our IPO.

Our first dividend is anticipated to be paid on or about November 1 to shareholders on record as of October 15.

The initial dividend, pro rata for our time as a public company, will be nearly $0.41 per share, and we intend to continue to pay quarterly dividends at an annual rate of just under $1.55 per share for the first year following the IPO.

Our integration of the two states is focused on operating efficiencies to drive adjusted EBITDA margins and is on plan.

During the quarter, we continued to make progress in improving operating efficiencies while maintaining great customer service.

Let me take just a moment to describe some recent examples of these initiatives.

We closed the Irving, Texas office on June 30, which will result in future operating-expense reductions.

As the integration has progressed, we have reduced headcount by 43 in this quarter, and since acquiring TXU in April of 2004, we have reduced headcount by a total of 163 employees in both Texas and Illinois.

In the second quarter, we amended the Texas pension and other employee benefit plans for our salaried employees.

We have been restricted by the TXU sales and purchase agreement from addressing what we consider to be above-market benefits and certainly well above our employee benefits in Illinois.

As a result of these actions, we recorded a 7.9 million, one-time non-cash pension-curtailment gain in the second quarter and expect a cash savings of approximately 2 million for the second half of 2005.

Based on our current run rate, we expect the pension and OPEB's plan amendments will generate cost savings of approximately $4 million annually.

We also made great progress on our last major integration project, which is consolidating our retail billing systems in each state to a common platform.

We just completed, on time and on budget, Phase I of our billing integration.

This billing integration is a three-based project scheduled to be completed in late 2006.

We believe all of these initiatives on integration and consolidation of our two-state operations into one company with common systems, processes and workgroups will position as well for increasing our operating margins going into 2006.

Another area that I'd like to comment on is we are using (ph) to create opportunities is our advanced network.

When determining the best architecture and technologies for our network, we've reviewed long-term market trends and chose an Internet Protocol, IP, backbone, giving us the most robust and flexible network possible.

We have been investing in this core IP backbone in SoftSwitch technology since 2003.

Now, we are at the forefront of the next generation of technology with an advanced network infrastructure that is over 90% DSL-capable.

Our plant is well invested, is in great shape, and our investment in our IP backbone will be mostly behind us by the end of 2005.

Our future capital expenditures are estimated to be approximately two-thirds maintenance and one-third growth on a going-forward basis.

Our DSL is a great example of how our investment in our advanced network is paying off.

Our speed provides great power to our subscribers.

We announced, earlier this month, that speeds for all our DSL customers increased with over 82% of our customers now receiving upwards of 6 megabits.

We believe these improvements continue to position us well against future competition from cable and wireless.

For the second quarter, DSL increased 56% versus a year ago.

During the first quarter of 2005, we ran promotions that resulted in over 3,300 net new DSL adds, the highest quarter in our company to date.

We believe these promotions entice people to subscribe to DSL faster, creating pull-forwards from the second quarter.

But regardless, the second quarter followed with solid growth and DSL was up sequentially 7%.

This brings our year-over-year increase to 56% and our DSL market penetration to 13.4%.

Our quality broadband network also enables digital, video service delivery, what we call DVS.

Our digital video service launch in select Illinois markets is going very well, and we intend to continue rolling out it to markets throughout our Illinois service territory later in 2005.

While currently not a significant revenue contributor, we are excited about the early results and our customers' reactions.

In combination, these services -- these new services riding our IP backbone, are giving us an edge in our markets and creating excellent opportunities to build bundles that will appeal to our customers.

At quarter's end, we reached approximately 33,300 bundles, representing a 24% increase year-over-year in the number of customers taking our bundles.

Let me now turn it over to our CFO, Steve Childers, for a financial review.

Thanks, Bob, and thanks to everyone on the call this morning and today.

We very much appreciate your time and ongoing support of Consolidated Communications.

As Bob said, we're delighted to be operating as a public company and we look forward to the many advantages of being able to access the public markets as we execute our business plan.

I'm going to review the financial results for the second quarter and six months ended June 30, 2005 and highlight some of the subsequent events relating to our IPO and debt transactions.

First, I will review the second quarter ended June 30, 2005 compared to the second quarter ended June 30, 2004.

Revenues were 78.3 million compared to revenues of 72.5 million.

At the TXU Communications Ventures acquisition, or what I will refer to as (indiscernible), had been included for the full period, the revenues for the second quarter would've been 81 million.

In the second quarter of 2004, we recognized prior-period subsidy settlements of 1.5 million compared to the same period in 2005 when there were no (indiscernible) periods.

In addition to the decrease in prior-period subsidy settlements, the year-over-year change reflects the declines in local services and network access, which were slightly offset by increases in data and Internet as well as other services.

Cellphone operations contributed 88% of revenues compared to 87% for the same period last year.

Cost of services were 24.4 million compared to 22.4 million last year, and if Texas had been included for the full period, cost of services would've been 24.6 million.

During the quarter, general and administrative expense recorded as one-time, non-cash $7.9 million curtailment gain associated with the freezing of the Texas pension and other post-employee retirement benefit plans for salaried employees.

We realized $800,000 in expensive savings in the quarter and as Bob said, we expect to realize another $2 million over the last half of the year in expense savings.

SG&A also includes our non-recurring integration costs, which all adds back (ph) to our adjusted EBITDA in the bank agreement.

Integration costs were 2.3 million in the second quarter of 2005, compared to 1.1 million in the second quarter of 2004.

For the quarter comparison, depreciation and amortization is up 1.9 million due to the purchase accounting and fair value studies associated with the Texas acquisition.

As a result, income from operations was 19.9 million compared to the second-quarter 2004 income from operations of 12.5 million.

If Texas had been included for the full period, second-quarter 2004 income from operations would've been 9.8 million, which included non-recurring expenses of 5.3 million, severance for Texas employees and 1.8 million in transaction-related costs with the Texas acquisition.

Other income for the second quarter of 2005 included the following -- a $2.1 million net reduction of interest expense and also $2.8 million in net proceeds from a Keyman (ph) life insurance policy.

As a result, net income for the quarter of 2005 was 7.2 million compared to a loss of 107,000 for the second quarter of 2004.

If Texas had been included for the full period, the second-quarter net loss would have been 3.8 million.

Dividends on redeemable preferred shares were 4.4 million for the second quarter of 2005, compared to 4.0 million for the same quarter in 2004.

Net income applicable to common shareholders increased to 2.7 million from a loss of 4.1 for the second quarter of 2004.

We provide adjusted EBITDA, which was referred to as bank EBITDA in the prospectus, as management believes adjusted EBITDA is useful and a means to evaluate our ability to pay estimated cash needs and pay dividends.

In addition, our adjusted EBITDA is also a component of the restricted covenants and financial ratios contained in our bond indentures and in our amended and restated credit agreement.

Adjusted EBITDA was 37.2 million, compared to 35.3 million for the second quarter of 2004, which included $585,000 in cash distribution from cellular partnerships, as well as the $1.5 million in prior-period subsidy settlements that we previously mentioned.

We generated 14.7 million in net cash provided from operating activities in the second quarter of '05, compared with 32 million for the same period last year.

For the six months ending June 30, 2005, compared to the six months ended June 30, 2004, revenues were 158 million compared to 106 million -- (technical difficulty) -- prior year.

If Texas had been included for the full period, revenues would have been 160.5 million.

The year-over-year change reflects declines in local services, network access and long distance, which were partially offset by increases in subsidies and in data and Internet services.

Net income was 7.9 million compared to 1.7 for the same period in 2004.

If Texas had been included for the full period of '04, net income would've been 3.4 million.

Net loss applicable to common shareholders for the six months ended June 30, 2005 was 1.3 million versus a loss of 4.6 million for the comparable period in 2004.

Net income applicable to common shareholders represents net income after payment on dividends (indiscernible) redeemable preferred shares of 9.1 million and 6.3 million for the six months ended June 30, 2005 and June 30, 2004, respectively.

Net cash provided by operating activities was $29.3 million for the six-month period and we ended the quarter with 18.1 million cash on the balance sheet.

Capital expenditures were 14.8 million for the six months ended June 30, 2005.

For the remaining portion of 2005, we expect CapEx to be approximately 18.7 million.

Thus, we expect total capital expenditure for 2005 to be approximately 33.5 million.

Subsequent to our quarter end, we completed our -- in July, we completed the IPO and initiated a number of debt transactions in August.

Pre-IPO, we issued 15.7 million shares of common stock priced at $13 per share.

Of these 15.7 million shares, the Company issued 6 million shares and existing shareholders total an additional 9.7 million shares, which raised 73.1 million in net proceeds that will be used primarily to redeem $65 million of our senior Notes.

We expect to conclude the bond reduction by the end of this week.

As a result of this and we repayment and rollover of our $425 million term loan facility, the Company decreased expected 2005 interest expense by approximately $6 million Pro Forma for these transactions being completed as of January 1, 2005.

Net cash interest expense is expected to be approximately 20.5 million for the second half of 2005, excluding a redemption premium on the senior Notes.

(indiscernible) post-IPO capital structure, we have lowered our total debt to 3.9 times over the last 12 months adjusted EBITDA.

Upon consummation of the offering, the balance of 177.1 million in redeemable preferred shares was converted into 13.6 million shares of common stock.

This also eliminated roughly $60 million per year and increased dividends on the preferred shares.

In addition, effective with the IPO, we will place $5 million in SG&A expenses in connection with the termination of two Professional Service permits for management fees to the pre-IPO shareholders.

On August 2, an additional 2.4 million shares of common stock were sold by selling shareholders under the exercise of the underwriter's overall over-allotment issue.

Total number of common shares outstanding as a result of this is 29.7 million.

Lastly, on August 22 on this past Monday, in an effort to minimize future interest rate exposure, we executed $100 million of interest rate hedges for the remaining variable-rate portion of our term loan debt.

The new interest rate swaps would become effective September 30 -- our six-year agreement to increase our fixed position on term loan debt from 50% to 72% (ph).

I'm told that the 79% of our debt will be fixed.

Now, I'll spend a few minutes just on some operating metrics for the quarter.

At June 30, 2005, total connections were 280,316.

Total network access lines were approximately 247,260, representing a loss of approximately 7,950 lines in the first six months. 60% of the line loss -- of access line loss was due to one-event taxes.

During the first and second quarter, MCI Metro, an Internet Service Provider, regroomed their network in Texas and converted 4,708 ISP lines from (indiscernible) from PRIs, or primary rate interface, and a local T1 facility, to Interconnection Trunk.

The inside Metro lines do not generate long distance access or subsidy revenues.

Revenue loss associated with the migration is approximately 1/5 the impact of the same number of commercial access lines.

The migration of the MCI Metro line in Texas was completed at the end of the second quarter.

The remaining decline of approximately 3,200 local access lines reflects market and economic conditions, which we think are in line with industry trends.

Without the effect of the MCI Metro regrooming, we would've experienced positive line growth for our business access lines and total positive connection for the quarter and year-to-date.

DSL continued to post strong growth and reached 33,058 subscribers.

DSL and bundling and drives revenue and increases our customer acquisition while maximizing ARPU.

In addition, we are converting dial-up customers to a more profitable DSL option.

As noted, during the first quarter, we achieved the highest number of DSL -- new DSL adds in the quarter, and during the second quarter, we grew DSL 7% sequentially, which brings the year-over-year increased to 56%.

We are pleased with these results and believe there's considerable headroom to continue growing DSL -- (technical difficulty).

Our service bundles increased 24% year-to-year and will now -- we ended the quarter at 33,300.

This growth demonstrates the results of our focus on improving the value of our bundle and increasing market penetration.

I will now turn the call over to Bob.

Thank you, Steve.

So, in summary, we remain the market leader in Illinois and Texas with Next Generation technology and assets supporting our customer-driven focus.

Our integration plan is on target, the business plan is performing well, and our strategy is in place.

As described today, we completed the quarter basically on plan and at or ahead of the plan operationally.

Our bundling strategy is working to drive increased revenues per customer by delivering increased value.

Overall, we have a proven team with the reputation for meeting financial and operating targets and providing high-quality service.

We are well positioned to continue to realize the benefits of consolidating the two states into one operating company.

With that, I would like to note that we look forward to meeting many of you.

We will be attending the September Deutsche Bank 13th Annual Global High Yield Conference in Scottsdale, the November CSFB Leveraged Finance Media and Telecom Conference in New York, and also in November, the Lehman Brothers SmallCap Conference in California.

With that, operator, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS).

Ido Cohen from CSFB.

I was wondering if you could give us a little more color on your outlook for 2005, maybe something on revenue or EBITDA.

Then, regarding the access line decline, you mentioned challenging economic conditions.

I was hoping you could give us a little more detail around what you're seeing there and what your outlook is on that going forward.

Thanks.

Good morning, Ido.

I will take that one.

We are providing an outlook on CapEx and interest expense today.

You know, we are off to a good start as a public company with a new Board, and we will continue to evolve and evaluate our policies.

It is our intent to provide you with the information you need to understand our business performance, but that's all we're going to provide today on 2005.

Regarding the question on access lines, you know, almost 50% of the access line loss year-to-date comes from second lines.

As we are -- in Texas.

As we are working our way through that second-line overhang, obviously we expect to see that decline.

I do need to preface my comment, though, that when I talk about access lines, I am ignoring the MCI Metro regroom;

I'm talking about access line performance, excluding that.

So, on an annual basis, the first six months of this year, you know, we're running at a 2.2% annualized line loss, an improvement certainly over last year.

As we've worked our way through the second-line overhang in Illinois, we've seen about a 50% decline in the access line loss in Illinois.

Thanks very much.

Gary Jacoby (ph) with Morgan Stanley.

It's a two-part question.

Any plans to offer wireless, or in those areas where you're not currently offering cable services, to possibly partner with one of the satellite TV guys?

Yes, thanks, Gary.

You know, I will answer the second part of that question.

No, we're not considering, at this point, partnering with the satellite.

We've looked of that; we think we have a better answer with much better margins.

The first part of your question, though -- we have looked at MVNO and the capabilities there as the wireless -- the major wireless players have rethought some of their strategies.

We haven't decided anything there, and quite frankly, our focus has been on integrating these two companies or these two states into one company and launching our video product, our IP video in Illinois.

I would add that we are an agent for Verizon wireless in Illinois.

We sell their products and services in our communication centers; they are displayed prominently.

It's not a huge business, approximately $1 million a year, 250,000 a quarter, with some decent margins.

But we will continue to evaluate the MVNO but our focus right now is the integration and the launch of our video product.

All right.

Adam Moss (ph) with U.S. Trust.

Good morning.

I'm just wondering.

Could you provide us with an update on recent legislative initiatives in Texas and how perhaps some of these changes may impact your company in the future?

Thanks.

The Texas -- as you know, the Texas Legislature was called back.

We had done a lot of work with both the Senate and the House in Texas, and we would categorize the results down there as neutral to positive.

They've passed or will pass.

I don't know that the governor has officially signed it yet, but allowing statewide franchising for video.

We haven't had an issue in Illinois.

We've been really widely accepted and the customers, city councils, Mayors grateful that there is a competitive offering to the cable company.

We expect to see the same thing in Texas, but there is something there the perhaps we would use, should we make a decision -- and we haven't made that -- to launch video in Texas.

As far as the -- they have an opt-out for certain competitive reasons in communities of 100,000 or more.

We aren't even close to that threshold yet.

But there's also an option that you can petition to gain some of that flexibility in some of the smaller communities.

So, we are protected under the current surcharge that is applied to all access lines in Texas.

We like that approach, but we have the flexibility and the Bill that has passed that we can migrate to even a more competitive structure in Texas.

Great.

Just one other question -- I'm just wondering.

What actually qualifies as a bundle?

How are you defining bundles?

Well, it's a great question.

We offer a series of different kind of bundles, but it's basically where you have to have at least two of our services.

That doesn't mean call waiting plus an access line; it's a series of either essential office-based services, video, DSL or LD.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

Joe Radbard (ph) with Nomura.

Thanks for taking the call.

Can you discuss last week's service interruption in Illinois and whether you're going to need to spend substantial CapEx to upgrade your facilities or to purchase new backups?

Yes.

For those on the call that aren't aware of this, we had a major outage in our Taylorville exchange in Illinois last week.

I guess if there's anything fortunate about it, it has nothing to do with future CapEx requirements.

It was a weather-related electrical surge that came into our power system and frankly got through four different points of surge protection and caused damage to multiple rectifiers.

We know exactly what happened; we do not yet know why it failed to be caught in the four different points of surge protection.

We had -- you know, it has really nothing to do with CapEx.

The two rectifiers that malfunctioned are being replaced by the manufacturer, and we're back in there with a team of power system -- our power system technicians and engineers and our supplier and vendors to really determine what happened in this.

We've never had any outage like this in our 111 year history.

So, it really is unrelated to CapEx and I don't see any need for any additional CapEx.

Those batteries, those rectifiers, those generators are all current and recent vintage.

We've extended credit to our customers automatically; it will cost us about $100,000.

We obviously had constant and quick communication with the Illinois Commerce Commission and in fact, they have -- if there's such a thing as complimenting you on an outage, they have complimented us on the way we responded, the way we communicated and the way we are treating our customers.

But, to assure you, there's a lot more work to do to make sure that this type of risk is removed from our network, going forward.

Thank you.

(OPERATOR INSTRUCTIONS).

At this time, there are no further questions.

Please proceed with your presentation or any closing remarks.

Well, thank you, operator, and thank all of you for joining us today.

We are excited about this new stage in our life as a public company and look forward to meeting with you in the near future.

As noted, our strategy is to increase our margins through our service, our bundling and our operational efficiency improvement programs as we continue the integration of these companies.

We intend to deploy our capital.

We are confident we will continue to produce strong and stable cash flows.

Thank you and have a great day.

Ladies and gentlemen, that concludes your conference call for today.

We thank you for your participation and ask that you please disconnect your lines.