Consolidated Communications Holdings Inc (CNSL) 2005 Q4 法說會逐字稿

Welcome to the Consolidated Communications fourth quarter and year end 2005 earnings conference call.

[OPERATOR INSTRUCTIONS].

As a reminder this conference is being recorded today, Wednesday, March 15th, 2006.

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

Please go ahead, sir.

Thank you, Judy.

And good morning to everyone.

Thank you for joining us today for Consolidated Communication's fourth quarter and year end 2005 earnings conference call.

As Judy mentioned, I'm Steve Jones, Vice President, Investor Relations and with us today on the call are Bob Currey, our President and Chief Executive Officer, Steve Childers, our Chief Financial Officer and other members of the senior team.

After the prepared remarks we will conduct a question-and-answer session.

I will now review the Safe Harbor provisions of this call and then turn it over to Bob.

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 expectations, plans and strategies and anticipated financial results.

All of which are subject to known and unknown risks, uncertainties and factors that may cause the 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 filed with the Securities and Exchange Commission 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.

In addition, during this call we will discuss adjusted EBITDA, EBITDA margin, total net debt and cash available to pay dividends, all of which are non-GAAP financial measures.

Our earnings release for this quarter's results has been posted in the investor relations section of our website and in that release there are reconcilations for these non-GAAP measures to their nearest GAAP equivalent.

I will now turn the call over to Bob.

Thank you Steve.

And thanks to everyone joining us today.

This quarter we completed our first full quarter operating as a public company following our July 27th IPO and I'm very pleased with our terrific results for both the quarter and the year.

We continue to execute on our plan.

Revenue increased to 81.2, an increase of 3.3% compared to a year ago.

Adjusted EBITDA was 35.6 million and cash available to pay dividends -- which we will refer to as CAPD -- was very strong at 16.7 million for the quarter.

This represents a 69% dividend payout ratio based on a quarterly dividend of 11.5 million.

I'm also pleased to announce that our board of directors has indicated its intention to continue paying the quarterly dividend at this level.

Additionally we continue to improve our capital structure.

We completed a number of financial transactions that will help mitigate interest rate risk and reduce our interest cost going forward.

As we've previously discussed, our focus is on providing high quality broadband and voice services and generating strong cash flow.

Our strategy for long-term success of the company is focused on growing revenue per customer, improving our operating efficiency, maintaining our disciplined CapEx philosophy and selectively pursuing acquisitions.

Now let me talk a bit about some of the strategic elements and activities we've accomplished in support of these goals.

We continued to deliver high value services such as DSL and have successfully launched an Internet Protocol Television or IPTV product in Illinois.

It positions us well in the markets we serve.

We have been effectively competing head on with wireless for years and currently offer an array of services in anticipation of the eventual entry of cable voice competition in our markets.

We are the leading provider of telecommunications services in our markets by offering superior voice and data products at the right price and supported by outstanding customer service.

In terms of results, let me talk for a moment about our total connections, our access lines, IPTV and DSL.

Our year-end total connections were 283,362, an increase of 1,356 over the third quarter and an increase of 608 versus a year ago.

Please note that in this quarter we started including our IPTV subscribers in the total connection metric.

Impacting these comparisons and as we've previously discussed our total 2005 -- total connections included the impact of the MCI metro regrooming which resulted in access line losses totaling 5,332.

And again as I've said in the past, all access lines are not created equal.

The revenue per line of each of these 5,000 plus lines represents only about 25% of the revenue associated with an average access line.

The MCI metro regroom activity is essentially behind us and if you adjust out these lines, our year over year growth in total connections would have been almost 6,000 or a 2.1% increase.

We ended the year at 242,024 access lines which is down versus both the third quarter of '05 and year end '04.

If you adjust out the MCI regroom our year over year loss would be approximately 3.1%, in line with our expectations.

On to IPTV.

As you are aware, we launched our IPTV product in parts of the Illinois service area about a year ago, rolling it out to company employees and what we call friendly customers. we began aggressively marketing in September and as of December 31st, we had 2,146 subscribers -- more than double the 1,053 that we had at the end of the third quarter.

We passed approximately 19 and a half thousand homes.

This equates to an approximate 11% penetration rate at the end of 11 -- at the end of 2005.

We remain on track to complete the majority of the buildout in Illinois by mid-2006.

And expect to pass approximately 36,000 homes at that time.

We are thrilled with the potential of IPTV in 2006 as there has been a great deal of positive word-of-mouth interest, particularly since we started marketing in September.

Of the 2,000-plus customers that have signed up, 87% have taken our triple play offer, which includes IPTV, DSL and voice product.

This bundle helps secure the customer relationship and positions us well when the cable competition does launch a voice product.

At the same time, the installation product is even more streamlined with our new Gateway set-top box which has lowered installation costs and improved the customer experience.

For those of you willing to visit metropolitan Mattoon, we would be happy to show you the IPTV product so you can see the superior video quality first-hand.

I know I will get a question regarding launch plans for IPTV in Texas so let me address that directly.

We continue to study the positive results from Illinois and the overall market opportunity in Texas.

We are excited about the possibilities in Texas and we will let you know just as soon as a final decision is made.

Now to DSL which continues to be our more core strategic product and one we use to deliver value.

We provide customers with choices that we believe are superior to the competition.

We provide both a very compelling DSL offer for customers on a budget as well as a higher-speed offering for those wanting blazing performance.

In addition, DSL builds a fertile platform from which to market other broadband services like IPTV.

Our strategy is working and as we continue to gain share in DSL from new customers and from successfully migrating existing customers up from a dial-up product.

Now for the DSL metric update.

DSL continues to be strong in both Illinois and Texas.

We delivered 43% growth in DSL customers compared to a year ago, ending the year with more than 39,000 subs.

We gained over 3,100 net new subscribers during the quarter and have a 16.2% penetration of total lines and 22.1% of primary residential lines.

Our flexibility and offerings and service plans provide great advantages compared to the competition and coupled with bundling voice and IPTV, we think it is a hard proposition to beat.

In addition to generating revenue growth with superior product offerings, we continue to drive operating efficiency.

For the quarter our total company adjusted EBITDA margin was 43.8%.

This was up from the 40.2% in the third quarter of 2005.

As we mentioned on last quarter's call, our third quarter results were impacted by approximately 1.5 million in prior period subsidies and a 2.7 million litigation settlement.

If you adjust for these two non-recurring items, our third quarter adjusted EBITDA would have been 42.5% compared to the 43.8% for the fourth quarter or a sequential 130 basis-point increase.

In terms of our billing integration project, we're pleased to report we remain on schedule and on budget.

Regarding capital expenditures, I'm pleased with our ability to come under the guidance we provided for both the quarter and the year.

We worked hard in '05 to manage the capital spend process as efficiently as possible and all of those efforts paid off.

We were not able -- we were not only able to come in under budget overall, but we completed the IP backbone network in Illinois ahead of schedule and under budget.

We expect to complete our IP backbone build for Texas in the second quarter of this year.

Our network is and continues to be a strategic competitive advantage.

It positions us with lower cost, better quality and a flexible platform which enables the development and delivery of new broadband applications.

Before I turn it over to Steve for financial summary, let me address our acquisition strategy.

It hasn't changed.

We are interested in acquisitions and are certainly following developments in the industry.

We will continue to be opportunistic and prudent about what we will pay.

We are happy at our current size and believe our focus on developing more and better products, bundling them to the advantage of the customer as well as taking cost out of the business and proper capital deployment will allow us to deliver returns to our shareholders.

We do not need acquisitions to implement our strategies.

But with that said, when we identify potential opportunities, we will take a look at them and see if they make sense for Consolidated.

With that, I will now turn the call over to Steve Childers, our CFO, for the financial review.

Thanks, Bob.

And good morning to everyone.

As Bob mentioned we are very pleased with our fourth quarter and full year 2005 financial results.

For our financial review I will discuss results for the fourth quarter ended December 31st, 2005 as well as highlight some of the recent transactions relating to our capital structure and then we'll touch briefly on an impending disposition of our rural telephone bank investment.

For the quarter we generated 16.7 million in cash available to pay dividends, resulting in a 69% payout ratio for the quarter.

Since this was our first full quarter as a public company, we started building cumulative available cash as defined under the restrictive payments covenant in our credit facility.

Accordingly we ended 2005 with 5.2 million of cumulative cash.

On a pro forma basis, as if the IPO occurred on July 1st, our payout ratio would have been 69% for the second half of 2005, which is consistent with our projections.

Revenues for the fourth quarter 2005 were 81.2 million for an increase of 2.6 million or 3.3% compared to the fourth quarter of 2004.

Now let me provide some color on the major revenue line items.

First, regarding local calling service, the quarter over quarter revenue decline of 1.3 million was primarily driven by the reduction on our local access lines.

The quarter over quarter decrease in network access services of 2.2 million was primarily driven by the recognition of 3.1 million of additional one-time revenue in the fourth quarter of 2004.

Revenue from subsidies increased 2.7 million.

This was driven primarily by both increased subsidy receipts in 2005 and a $1 million negative [inaudible] period subsidy settlement that occurred in the fourth quarter of 2004.

The increase in other services revenue of 2.4 million is primarily driven by incremental revenue from directory publishing, IPTV and equipment sales.

Finally, the increase in other operations revenue was driven primarily with performance of our market response and public services businesses.

Total operating expenses were 66.2 million in 2005, compared to 78.2 million in the fourth quarter of 2004.

In Q4 '04, we recognized a non-cash impairment charge of $11.6 million, primarily associated with the write down of goodwill for our operator services business.

As a result, income from operations was $15 million, compared to 251,000 in the fourth quarter of 2004.

Net interest expense for the quarter was 10.6 million compared to 11.5 million in fourth quarter of 2004.

This reduction is primarily attributable to changes to our capital structure, both associated with and subsequent to the IPO.

I will review those capital structure improvements in just a minute.

In regards to our fourth quarter income tax expense, let me first explain that as a result of the IPO, we completed a tax-free reorganization of CCI Illinois Holdings and CCI Texas Holdings and all related subsidiaries.

The reorganization consolidated these previously separate entities and we now file a single consolidated return at the federal level and for certain purposes at the state level.

Through this reorganization, the company will as maximize the near-term use of federal and state NOLs, thereby reducing cash taxes.

As a result of reorganization, during the fourth quarter of 2005, we recognized an additional 4.6 million in deferred state income tax expense.

The increased expense was the result of applying an increased tax rate for deferred state income taxes to previously recorded deferred income tax liabilities from CCI Texas Holdings.

The increase in deferred expense is non-cash, and is not expected to impact the company's cash tax position in 2006.

Accordingly, our net loss for the period was 2.1 million, compared to a net loss of 6.3 million for the fourth quarter of 2004.

As a result, earnings per common share for the period were locked at $0.07 per share.

However, earnings per share for the quarter would have been a positive $0.13 per share if we exclude the impact of a deferred tax [inaudible] in the fourth quarter as well as the impact of non-cash stock compensation charges.

We provide adjusted EBITDA cash available to pay dividends and adjusted earnings per share as management believes these metrics are useful as a means to evaluate our ability to pay estimated cash needs including our dividend.

In addition, adjusted EBITDA is also a component of our bank covenance.

Adjusted EBITDA was 35.6 million for the quarter compared to 35.3 million in the fourth quarter of 2004.

Results were in line with our expectations and generally consistent with the fourth quarter of 2004 and the third quarter of 2005 after adjusting for the third quarter, 2.7 million litigation settlement.

Please note that in 2006 we expect to incur costs associated with billing integration and [inaudible] 404 compliance.

We expect these costs to roughly approximate $2 million in 2006.

Historically these integration costs would have been add backs to adjusted EBITDA in accordance with our credit agreement.

Starting in 2006 these costs will no longer be added back to adjusted EBITDA but going forward we will continue to identify these costs in our quarterly financial results.

Capital expenditures were 9.5 million for fourth quarter 2005 and 31.1 million for the year.

As Bob mentioned, we were pleased with our ability to complete all major network build priorities and come in under full year CapEx guidance.

We ended the quarter and the year with 31.4 million of cash on our balance sheet and our $30 million revolver under the credit facility remains fully available to us as well.

During the fourth quarter we completed several capital structure improvements, all of which have been previously announced so I'll run through them quickly.

On October 12 we executed a $100 million, 6-year interest rate swap.

Combined with the 6-year, $100 million swap agreements we executed in August, interest rates on approximately 85% of our term debt are now effectively fixed and our weighted average interest rate on term debt is approximately 5.82%.

Effective November 25th, we repriced our $425 million term loan facility -- 2.25% plus LIBOR to 1.75% plus LIBOR.

On an annualized basis, 50 basis point reduction is expected to yield $2.1 million in full-year cash interest savings.

On December 8th, we redeemed $5 million of our 9 3/4 Senior Notes.

The redemption is expected to result in full-year cash interest savings of approximately $488,000.

For 2005, our total net leverage ratio was 3.8 times to 1.

This ratio and all other coverage ratios -- coverage tests were well within compliance levels of our credit facility.

Finally, let me discuss the expected redemption of our investment in the rural telephone bank.

We expect to receive a 5.9 million cash distribution in the second quarter of 2006, which represents our full carrying value of RTB stock.

For purposes of the credit agreement, we'll be able to use these proceeds to make capital expenditures but these expenditures will not reduce our cash available to pay dividend and therefore have the effect of increasing cumulative cash available under our credit agreement.

Now, to financial guidance.

Consistent with our 2005 guidance policy, today we'll give you an overview of our expectations on Cap Ex and cash interest for 2006.

For full year 2006, we're expecting capital expenditures to be within the range of $31 million and $34 million and cash interest to be within a range of 37 million and 38 million.

I'll now turn the back over -- call back over to Bob.

Thank you, Steve.

In summary before we open this up for questions, Consolidated is the telecommunications leader in the markets we serve with our next-generation technology and most robust product set bundled to benefit both the customer and the company.

I'm very pleased with the results of the quarter and the full year.

We will continue to focus on providing high quality broadband and voice services while generating cash flow.

And with that, operator, I'd like to open it up for questions.

Yes, sir.

[OPERATOR INSTRUCTIONS].

One moment please for your first question.

And your first question comes from the line of Jonathan Chaplin with JP Morgan.

Good morning.

Thanks for taking the question.

Two very quick ones.

Firstly could you give us an idea of what your video [inaudible] is in Illinois and secondly if you could give us any indication of where you expect cash taxes to come in in 2006 given some of the adjustments to your deferred tax balance that you made this quarter -- that would be very helpful.

Thank you very much.

Jonathan, good morning.

It's Bob.

Let me take the first one and Steve'll handle the second one.

On the ARPU it's about $50 for the 2,000 plus video subscribers in Illinois.

Excellent.

And do you expect ARPU to grow over time -- the sort of 3 to 5% rate that we see with the cable companies?

That or maybe even a little better.

We've got some product enhancements that are coming, Jonathan.

We're doing no selling of any advertising there today.

There's a more robust video on demand suite of products coming so yes we would hope to see some growth in that.

Excellent.

Steve, on the --

Jonathan, with respect to cash taxes I think your questioning because [inaudible] the deferred tax liability, that reorganization in the way we accounted for that year end will not have any impact on our cash taxes for 2005 -- or 2006.

And I do want to point out that that was sort of a non-cash adjustment, no impact for 2005 as well as 2006.

So our -- that does not change our view on what cash taxes are for 2006.

Can you give us some indication of where cash taxes should come out through '06?

Well, I'm not going to give you a dollar amount but I think consistent with what we've said throughout and with that for 2005 as we demonstrated in the results today that the payout ratio would be in the 70% range.

And I think going through -- managing through our NOLs and profitability for the business, we expect the payout ratio to be in the 80% -- again, at around 80% for 2006.

Excellent.

Thank you very much.

Your next question comes from the line of Tom Seitz with Lehman Brothers.

Yeah, good morning.

Thanks for taking the question.

Couple on the competitive front.

Can you talk about what plans you've heard from the cable competitors in both Illinois and Texas and then secondly it looks like you're the clear leader on high-speed data.

I mean with 22% residential penetration on your DSL product, are you seeing any pricing action on -- you know putting aside the VOIP product, are you seeing any pricing action by the cable guys on their cable modem product?

Could you just give us an update on that, that'd be great.

Yeah.

Good morning, Tom.

And thanks for the questions.

On the competitive front, each quarter we say we're expecting it again there has been no launch of a voice product by the cable competitor.

In Illinois, Mediacom has launched in some citizen's markets and they've started to advertise that it's coming.

But as of yet, nothing.

Sort of the same in Texas.

They've -- some of the markets there have seen some advertising but no one yet has launched a product.

And we do not have -- you know, there's some ancillary VOIP in the area but we haven't had any VOIP launch by any -- reputable or anybody of any size that we're aware of.

Regarding DSL, yeah, we're very pleased with our results.

I will point out though that the 3,100 customers that we added in the fourth quarter was our best quarter going back to the first quarter of last year.

So we continue to add 3,000 plus a quarter, we don't see that -- that that product has a lot of legs left in it.

And a demand is still very, very strong.

Particularly when bundled.

The competition really hasn't responded -- they're -- I think they're behaving rationally.

They're doing some things with some promos -- you know, sign up 30 days free, 60 days free or where they're bundling it with the video product -- you know, they throw in a tier for a month or give you some free movies or something like that.

But they're holding their price points.

So I hope that addressed the question.

Yeah, that's great.

Thank you very much.

Your next question comes from the line of [Juergen Hussman] from Wachovia Securities.

Hi.

Good morning.

I'm speaking on behalf of Kevin Moore here.

I got a couple of questions.

One is that one the NOL, what is the balance now and do you still expect to use it up by the end of this year?

And then the second one is on your IPTV build out, it looks -- I mean, in the Q3, you passed -- what -- 19,000 homes -- now 19 and a half thousand so that was -- that is an increase only about 500 homes.

And where do you stand right now today and it looks like you're still going to get to that 36,000.

As well as, I think in the past earnings call you mentioned about probably adding 10,000 more homes in the -- in Illinois.

So if that is still the case or not.

And then last one is that on MCI metro line loss, in the last quarter you -- I think you stated 4.7, so 4,700 and now it's 5,300.

Can you explain maybe the discrepancy?

Thank you.

Yeah.

Let me handle the latter part of those and then Steve can talk about the NOLs.

On the IPTV, we've -- we will pass by the end of the first quarter, we'll pass approximately 23,000 homes, up from the 19 5 that we said at year end and we'll be at the 36,000 mid year.

Late second quarter, early first quarter and in that -- that will be added to over time but that was our plan and that covers the majority of our service territory.

The discrepancy as you called it from the 4,600 to the 5,300 -- 4,600 we talked about last time, there was -- I think we announced on the last call that we had an order pending in Illinois to remove 624 lines in Illinois.

So when you add the 4,700 roughly in Texas with the 624 in Illinois you get to the 5,332 that I was talking about.

Okay.

Juergen, this is Steve.

On your question on the NOL, as you'll see in our 10-K when we file that that the -- we're ending -- going in 2006 with carry over NOL net evaluation allowances of roughly $20 million.

Subject to 382 limitations that will not all be used in 2006 so we will have -- we will pay some level of cash taxes in 2006 and we will have a little bit of NOL -- or today based on our current view of the 382 limitations we expect to carry some over NOL into 2007.

Thanks for the answers.

Your next question comes from the line of [Mike Rawlins] with Citigroup.

Hi.

Good morning.

Just curious if you can give us an update -- I don't think I heard you guys talk about what you wanted to do with that extra cash that you're generating in excess of the dividend.

If you could talk about how you think abou the uses of that cash, how you think about your leverage ratio over the next 1 to 2 years, that'd be really helpful.

Thanks.

Mike, thanks for the question.

This is Steve.

Basically in use of excess cash, first full quarter as a public company, we're delighted to actually have some buildup in the baskets and we would expect to continue that with our -- [inaudible] strong performance the first couple quarters of '06 as well.

The RTB distribution that'll help us build the basket.

We don't have -- not going to announce anything today obviously but we are continuing to evaluate what's the best use of that excess cash.

Is it share buyback?

Is it doing something with the Senior Notes which are callable in 2008?

Paying down bank debt or additional capital investments or whatever.

We're just continuing to kind of push the pencil to see what is the best use of that.

We haven't made any decision short-term.

Leverage?

Oh, I'm sorry.

Leverage -- today based on 2005 results we ended at I think 3.8 three times on a net debt adjusted basis.

We're comfortable with that.

We've obviously deleveraged since we did the Texas acquisition and we'll -- I think as we build cash we'll continue to optimize the capital structure and look on -- and continue to delever.

But we don't have a target leverage number in mind other than keep where it is or lower.

And do you have a target cash balance that you want to keep on hand so that at any given point there's a certain amount of cash that you have access to?

I'd say somewhere between 15 and 20 million.

Okay.

Thanks.

Appreciate it.

[OPERATOR INSTRUCTIONS].

Your next question comes from the line of George Whiteside with SWS Financial Services.

Congratulations on a good quarter and certainly finishing up the year strongly.

I'm interested in your long-term plan to address the very competitive environment in which you operate in terms of the AT&Ts, the cables, et cetera.

Can you give us sort of a thumbnail sketch of how you envision surviving in this very competitive arena?

Yeah.

Let me -- that's a pretty broad question, George.

Yeah.

Let me take a try at it.

Well, it was intended to be broad.

Yeah and you come back if I -- if you think I haven't hit it or dodged it.

But one, it's all around our products and our bundle.

We're committed to broadband.

We've developed an IP backbone.

We've capped our investment in old technology.

We're putting all our money into IP which gives you great advantage as demonstrated by our success with DSL and IPTV.

We also -- we're blessed in both of our properties with great plant.

This is not plant that's been neglected so we don't have a huge CapEx hurdle in front of us.

Bundling clearly offering value to the customer and with 87% of those 2,000 plus customers taking IPTV, taking full bundle, we're getting a great response on how people like to one-stop shop.

They like the service.

They like paying one bill, believe it or not.

And so we're very excited about that.

So -- and I think the last point I would make would be it's then all wrapped around superior service.

It's responding.

It's avoiding the cable reputation on service.

We have tremendous brand equity in most of our markets and we take advantage of that and reinforce it with great service.

I think you've answered it exceptionally well.

I gather that the theme is through your IP and your bundling initiatives that basically you are going to not be outmaneuvered by the big boys.

We will own that customer relationship, George.

That's our -- that is the real key.

I think the other thing that I didn't mention that's implicit in our strategy -- we talk about it every time, is cost efficiency.

Continue to drive costs out of the business.

We've been very successful in doing that and with the one remaining billing project that we have, that will also give us a platform for some more fairly significant cost reductions so cap that old investment, migrate to IP, automate, great service, you can drive your cost structure down where you can compete and then offer value to your customers through bundles and being a great community partner.

That's our strategy in a nutshell.

Well, it certainly sounds like a very positive strategy and it'll be interesting how you're able to execute using those principles in some of your acquisitions in the future.

Thank you, George.

At this time we'll give a final opportunity for questions.

[OPERATOR INSTRUCTIONS].

At this time there are no further questions.

I will now turn the conference back over for any closing remarks.

Yes, operator, thank you.

And again thanks for all of you for joining us today and you're interested -- your interest in Consolidated.

We're -- I hope you could tell, we are very excited about our current position and the opportunities that we have planned in 2006.

And we look forward to updating you on our progress in a couple of months.

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.