Consolidated Communications Holdings Inc (CNSL) 2006 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Consolidated Communications Second Quarter Conference Call.

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

Following management's prepared remarks, we'll hold a Q&A session. [OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded August 9, 2006.

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

Please go ahead, sir.

Thank you Michael, and good morning everyone, and thank you for joining us today for Consolidated Communications Second Quarter Earnings Conference Call.

As Michael said, I'm Steve Jones, Vice President, Investor Relations and with us on the call today are Bob Currey, our President and Chief Executive Officer, and Steve Childers, our Chief Financial Officer.

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 context 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 the actual results to differ materially from those expressed or implied by these forward looking statements.

Please see our public filings with the Securities and Exchange Commission for more information about forward looking statements and related risk factors.

In addition, during this call, we will discuss certain non GAAP financial measures.

Our earnings release for this quarter's results, which has been posted to the investor relations section of our website, contains reconciliations of these measures to their nearest GAAP equivalent.

I will now turn the call over to Bob.

Thank you, Steve, and thank all of you for joining us today.

I'm pleased to report that we continue to execute against our plan, and our quarterly and year-to-date results are strong.

Our goal is to provide high quality broadband and voice services, generate strong cash flows, and support our dividend.

Our strategies for long term success continue to be growing revenue per customer, improving our operating proficiency, maintaining our disciplined capital expenditure philosophy, and selectively evaluating and pursuing acquisitions.

I'll summarize our financial successes and our operational execution, and then turn the call to Steve, our CFO, who will provide greater detail on our financial performance.

Revenue was solid at 79 million for the quarter; this reflects an increase of 1 million or 1.3% compared to the second quarter of 2005.

Our adjusted EBITDA was 34.5 million, increasing almost 6% compared to the 32.7 in the second quarter of 2005.

Please note however, that this comparison reflects the adjusted EBITDA calculation as prescribed in our recently amended credit facility for the second quarter of 2006, and excludes the one time receipt of 2.8 million of life insurance proceeds that we received in the second quarter of 2005.

Including the proceeds from the redemption of the RTB, the Rural Telephone Bank investment of 5.9 million, our dividend payout ratio for the quarter was 62%.

Including this quarter's results, we have generated approximately accumulated available cash under our credit agreement of $17 million.

Now, let me talk just for a moment about our operational objectives and achievements.

Our focus is to be the telecom provider of choice in the markets we serve, and to consistently grow total connections.

We have demonstrated quarter-over-quarter connection growth and expect this positive trend to continue.

This was achieved by leading with our very strong broadband offering and a bundle of superior voice and data products.

As we've said in the past, we've added IPTV in selected Illinois markets and support all of our services with outstanding customer service.

Sequentially, we grew total connections by almost 1,200 this quarter, and for the year we are up over 6,000.

Access lines were down sequentially, 2,055 when compared to the first quarter.

In the second quarter of 2005, excluding the impact of the previously discussed MCImetro re room, access lines were down 2,639.

Comparing the two quarters we experienced a slowdown in erosion of over 20%.

And we believe this positive trend is due to our effective marketing programs, and the strength of our Texas growth markets.

We continue to drive DSL penetration.

I'm very pleased with our performance to date as it reflects the strongest first half performance in our history.

We ended the quarter with 45,948 subscribers, an increase of over 2,200 when compared to the first quarter.

And this is consistent with the results we experienced in both the second quarter of 2005 and the second quarter of 2004 and brings our penetration of primary residential lines to 26.5% and our penetration of total lines to 19.2.

For the year, we've added over 6,700 new subscribers.

Regarding IPTV, we had another solid quarter.

We added just over 1,000 customer in Illinois, bringing the total subscriber base to 4,516.

And we continue to see strong and steady demand for this product.

And we'll continue to balance our marketing efforts with equipment availability and install capacity to meet this demand.

At the end of the quarter, we had passed approximately 27,000 homes and with the anticipated completion of our final significant franchise agreement and our continued network deployment, we will end August with approximately 36,000 homes passed.

Our quarter ending penetration rate was 16%, but I would like to highlight that the penetration rate pops 22% in the three original markets that we launched in 2005, which by the way are our three largest markets in Illinois.

To us, this is a strong indicator of the future success of this product and speaks to the compelling product offering.

I'd like to add a couple of additional IPTV updates.

We completed our video on demand enhancements and now offer 1,000 hours of content.

Although the product hasn't been operational that long, early customer response has been very positive and we will experience ARPU increases in the months ahead.

We added six new channels to our programming lineup, bringing the total to over 200 channels.

These additions were based on customer input and are specifically geared to our market.

We also began offering our new universal remote in the second quarter, which also enhances the customer experience.

In terms of the triple play take rate, again, our results are very strong.

Of the approximate 4,500 IPTV customers, 89% are taking the triple play.

Customers continue to recognize both the overall value of the bundle and the proven services of consolidated while we benefit from efficiencies from the multiple product delivery, higher overall ARPU and a deepening of our already strong customer relationships.

And finally, regarding Texas, we will launch our IPTV product in the next 30 to 60 days.

The IP backbone has recently been completed, the head ends deployed, the statewide franchise application has been approved, the network is tested, the workforce is trained and we're ready to go.

We anticipate passing approximately 37,000 homes at launch, which will double the number of homes passed in both states.

With this launch we will be the first to market a triple play offering and the product will be similar to our Illinois offering and packaged to be competitive with satellite and cable offerings.

We're ready to go.

The last hurdle, frankly, that we need to clear, involves the availability of our supplier to give us Gateway set top boxes.

We're awaiting assurances from the manufacturer that we will have supply to meet the anticipated demand before we make the final launch announcement.

But I am pleased to anticipate that we anticipate receiving that confirmation shortly.

Along with growing revenue per customer, we continue to improve our cost structure.

I previously mentioned our successful efforts in reducing costs by rationalizing benefit plans and consolidating facilities.

We continue to look at work groups in ways to leverage the benefits of our integration efforts to consolidate functions where it makes sense for the business and our customers.

We have reduced our headcount by over 200 since the close of the TXUCV transaction in 2004 and 59 of those reductions have occurred in the first six months of 2006.

As noted in our earnings release, we incurred 1.5 million in severance in the second quarter.

Given the anticipated completion of phase II of the billing integration project later this month, we are consolidating call centers and related work groups in the third quarter.

This will result in an additional net workforce reduction of 24 with an anticipated $1 million of annual savings.

The impacted employees have been notified and will leave the payroll in the third quarter.

Regarding CapEx, we spent 8.7 million in the second quarter and have spent 17.2 million year-to-date.

Given the initiatives that we've accomplished, we are tightening our CapEx guidance.

We now believe our annual CapEx in '06 will not exceed $33 million.

In terms of an update, we completed our IP backbone in Texas on time and on budget.

This is a milestone for us because it substantially completes the IP infrastructure in both of our states.

It also positions us with a lower cost, better quality and more flexible platform to enable to delivery and development of new broadband applications to our customers including IPTV.

On the competitive front, for the last 12 to 18 months, we've been anticipating a launch of a voice product by our competition.

For those of you who have listened to me on these calls in the past, I've been saying for a long time I expect our competition to launch any day now and we recently experienced that with Mediacom.

They launched their voice offering in the eastern part of our Illinois Territory in late second quarter.

Despite heavy promotional efforts, the impact on the second quarter was minimal.

We have been anticipating a telephony launch and we are well prepared.

We offer a very compelling array of broadband and voice services that are bundled attractively and supported by our outstanding service.

This gives us a very attractive proposition with which to compete.

On the M&A front, we continue to monitor acquisition opportunities and have nothing new to report at this time.

And finally, before I hand the call to Steve for comments on the financials, I would like to review the share buyback transaction which we announced on July 14th.

We have repurchased approximately 3.8 million shares of our common stock owned by one of our private equity investors, Providence Equity, for approximately $56.7 million or $15.00 per share.

This transaction accomplished a number of strategic goals.

In addition to removing the market overhang related to this large position, it improves our cash flow by decreasing our annual dividend obligation by 12.8% or $5.9 million, and improves our dividend payout ratio.

We financed the transaction with both cash from the balance sheet and additional term loan borrowings.

After accounting for the additional after tax interest charges, this transaction will generate an additional $3 million net increase in cash and cash equivalents.

The transaction was closed on July 28th and with no changes to the terms that were previously announced.

I would now like to turn the call over to Steve, our CFO for a financial review.

Thanks, Bob, and good morning to everyone.

As Bob mentioned, we are pleased with our second quarter 2006 financial results.

This morning I will review financial results for the quarter, provide some detail on CAPD, and update our 2006 guidance.

Revenue for the quarter was 79.3 million which reflects an increase of 1 million, compared to 78.3 million in the second quarter of 2005.

Local calling service revenue decreased by 1 million, primarily due to the reduction of our local access lines.

Long distance revenue decreased by 400,000.

Although our LD penetration is approximately 54%, we continue to experience a decline on our average rate per minute, due to customer response to our unlimited long distance product and general industry trends.

Subsidy revenue declined by 300,000, driven primarily by the impact of changes in the national average loop cost, and their impact on our USF draws.

Network access service revenues grew by 1.5 million, primarily in the strength of demand for special access circuits.

And data and internet services revenue increased by 1.1 million, driven by the growth in both our DSL and IPTV products.

Total operating expenses for the second quarter of 2006 were 65.5 million, compared to 58.4 million for the same period last year, reflecting an increase of 7.1 million.

The primary differences in the second quarter of 2005 included a 7.9 million reduction in SG&A expense relating to a one time curtailment gain associated with the restructuring of our Texas pension plan.

As a result, income from operations was 13.9 million for the second quarter of 2006, compared to 19.9 million for the same period last year, with the primary difference being attributable to the previously mentioned curtailment gain.

Net interest expense for the second quarter was 10.1 million, compared to 11.6 million for the same period last year.

The decline was primarily driven by lower interest costs resulting from the redemption of 70 million of our senior notes in 2005.

Income tax expense for the second quarter of 2006 reflects a tax benefit of 3.1 million, compared to tax expense of 4.4 million for the same period last year.

The second quarter of this year reflects a one time non cash benefit of 5.2 million associated with the enactment of new tax legislation in Texas.

The most significant impact of this legislation was the modification of the current franchise tax to new margin tax calculation which for consolidated results in a reduction in our effective state tax rate used to determine deferred taxes.

This change is not expected to impact the company's cash tax position in 2006.

Accordingly, net income for the second quarter of 2006 was 8.2 million, compared to 7.2 million for the same period last year.

Net income for common share for the second quarter of 2006 was $0.28.

However, we believe it would be more appropriate to look at second quarter EPS on a normalized basis.

For the reconciliation contained in our earnings release, this would exclude charges for non cash stock compensation, the 5.2 million benefit from the Texas tax law change, as well as the tax adjusted cost of severance, billing integration and Sarbanes Oxley.

On this basis, net income per share would have been $0.17 per share.

As a reminder, we provide adjusted EBITDA, adjusted EBITDA margin, cash available to pay dividends and adjusted net income 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 covenants.

Our credit facility was amended in conjunction with the Providence share buyback to among other things permit us to add back certain non recurring expenses when calculating our 2006 adjusted EBITDA.

The add backs include costs associated with severance, billing integration and start up costs for Sarbanes Oxley 404 compliance.

Adjusted EBITDA was 34.5 million for the quarter, compared to 35.5 million for the same period last year.

The second quarter of 2005 reflected the receipt of 2.8 million proceeds from a [key man] life insurance policy.

Excluding this item, adjusted EBITDA would have been 32.7 million in 2005 reflecting a 1.8 million increase quarter-over-quarter.

Our adjusted EBITDA margin for the second quarter of 2006 was 43.5%.

After excluding the life insurance proceeds received in 2005, the adjusted EBITDA margin for the second quarter of last year would have been 41.8%, yielding 170 basis point increase year-over-year.

The period over period increase in both adjusted EBITDA and adjusted EBITDA margin was driven by incremental revenue, operating efficiencies and incremental cash distributions from our cellular partnership investments.

For the six months ended June 30th, revenue was 158.8 million, which reflects an $800,000 increase compared to 158 million in the same period last year.

Adjusted EBITDA for the six months ended June 30, 2006 and net cash provided by operating activities were 69.3 million and 33.4 million respectively, compared to 68.1 million and 29.3 million for the same period a year ago.

Capital expenditures were 8.7 million in the second quarter of 2006, compared to 9.3 million in the second quarter of 2005.

We ended the quarter with 30.4 million cash on the balance sheet, and our 30 million revolving credit facility remains fully available to us as well.

For the second quarter of 2006 our total net leverage ratio as calculated in our earnings release was 3.8 times to one.

All coverage ratios were well within compliance levels for our credit facility.

As previously discussed, the Providence share buyback transaction closed on July 28.

To fund the transaction, we used 17.7 million of cash from our balance sheet and borrowed an additional 39 million under our term loan facility.

Pro forma as if the transaction occurred in the quarter, our second quarter net leverage ratio would have been 4.24 times to one.

Cash available to pay dividends or CAPD, was 18.6 million in the second quarter of 2006, yielding a 61.8% dividend payout ratio.

There are a couple of items that I would like to discuss.

First, in accordance with our credit agreement, the second quarter CAPD includes the [RTV] proceeds of 5.9 million.

Second in the quarter we paid 3.7 million in cash income taxes. 1 million was due to the annual filing of our 2005 Texas state returns.

We do not anticipate paying any additional material state taxes in 2006.

As previously discussed, with respect for our Federal NOL position and applicable 382 limitations, we will pay some Federal cash taxes in 2006.

In part due to the timing of the RTV proceeds, we chose to begin making Federal estimated payments in the second quarter.

The second quarter payment represents approximately 40 to 45% of our full year estimated Federal tax liability.

Because of several strategic changes to the business that we've discussed during this call, we felt it was appropriate to update our 2006 guidance.

First, we did not expect capital expenditures to exceed 33 million.

Second, after giving effect for the additional borrowings associated with the Providence share repurchase and movement in LIBOR, we expect annual cash interest to be in the range of 40 million to 41 million.

Third, regarding cash income taxes, we expect 2006 cash taxes to be in the range of 7 to 8 million.

We also believe our first six months payout ratio of 78.4% is a good proxy for the payout ratio for the second half of 2006.

Our payout ratio could be higher in the third quarter and lower in the fourth quarter, as a result of the timing of the Providence share buy back transaction.

As noted in the earnings release, Providence received its third quarter dividend so we'll still pay approximately 11.5 million in total dividends in the quarter.

Also, as we closed and funded the transaction on July 28, we will incur incremental cash interest cost in the third quarter.

And finally, consistent with prior quarters and our stated dividend policy, yesterday our board of directors declared our next quarterly dividend of $0.39 per common share payable on November 1st to shareholders of record on October 15th.

With that, I'll turn it back to Bob.

Thank you, Steve.

In summary, we are the communications leader in the markets we serve in Texas and Illinois with our award winning technology and a robust product set bundled to benefit both the customer and the company.

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

I am pleased with our progress on billing integration, delighted with IPTV results in Illinois, excited about our upcoming launch in Texas and very pleased with the completion of the Providence share repurchase.

We are well positioned for the second half of 2006.

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

Michael?

[OPERATOR INSTRUCTIONS]

Your first question comes from Tom Seitz with Lehman Brothers.

Hi good morning, gentlemen.

Can you guys talk us through what Mediacom's offer, bundled offer is now that they've launched voice service and your response to that, if anything.

I guess I'm just wondering if they are leading on price.

And then secondly, can you be a little bit more specific with respect to where you are launching video service in Texas and then talk about the network development down there, as you did longer term in Illinois?

Thanks.

Yeah, thanks for joining us Tom.

I got the first two, I'll make an attempt about the third one, about the network in Texas, I'm not sure I fully understood that, but let me try here.

Regarding Mediacom in the eastern part where we compete against them in the eastern part of Illinois, they have launched basically the same package that we have.

They've priced it at $99.

They've overhung the market for a significant period of time but they really are not doing, haven't experienced anything new yet; they are focused on their broadband customers.

And we're seeing, obviously that where we have a bundle, a broadband or an IPTV customer, we're not seeing, virtually no churn in that.

So I think that just reinforces the importance of broadband, both DSL and IPTV.

As far as Texas, Tom, we'll initially launch in selected markets.

As I said, we'll pass 37,000 homes.

Those will be in the Katy and Conroe area of the Houston suburbs.

And for those not familiar we have another property north of Lufkin, we're not launching in Lufkin at this particular time.

The product will be very similar to the product that we have, almost identical to the product and the network, the technology are very similar if not exactly the same as we're using in Illinois.

Same with the processes, the product offering, the launch, etc.

We're duplicating processes and marketing programs that we found successful in Illinois.

And you might want to come back, I'm not sure I got the third part of that where you ask about the network.

Yes, basically, you are passing, I think it's roughly 37,000 homes in Texas out of the gate.

What's on the drawing board in terms of ultimate homes passed with the video product?

Yeah, okay, I'm sorry, I did miss that.

Because as we incrementally launched in Illinois, we started with a small number and then we build to 37,000 by the end of this month.

Well, as I said, we'll launch with 37,000, we'll end the year of '06 in Texas at about 50,000 and then that grows through 2009, 2010 where we get to the total of just over 100,000 in Texas.

In the two states, the total company, we'll end this year just under 90,000 homes passed and next year north approaching 110,000.

Perfect.

Thank you, very much.

You're welcome.

Your next question comes from Jonathan Chaplain with JP Morgan.

Good morning, this is actually [Westin Tucker] filling in for Jon.

I had a question on CapEx.

It looks like the top end of the CapEx guidance has come down slightly to 33 million.

I think before you said 3 million in CapEx on the Texas video launch.

Are you still expecting 3 million for Texas or is that going to be less this year, and if it is still 3 million, I'm wondering where you are seeing the savings sort of in the other parts of the business?

Thank you.

Thank you for the question, Texas, let me break that down a little bit, the Texas deployment, the head end, the servers, et cetera is under $3 million, 2.7, 2.8 million.

The rest of the CapEx in Texas is basically like it is in Illinois; success based.

And we would have like to have launched, last week if we would have had the availability of Gateway, we don't have those.

Those are, we're paying about $380 for them so it will depend on the penetration rates we achieve between now and the end of the year.

Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from [Mike Levin] with Oppenheimer.

Yes, hi guys.

I stepped out for a minute so if you addressed this, I apologize.

But I know there was some recent chatter or discussion on some regulatory issues.

Can you just update us on those developments?

Boy, that's pretty broad, I could talk for an hour on that.

Can you be a bit more specific?

Are you talking about the Federal?

I'm going to mispronounce it, the Missoula?

The Missoula Plan.

Yes.

Okay, sure.

I'd be happy to make a few comments on that.

That of course is addressing inter carrier comp.

And we are generally supportive of that plan.

We think it's a great starting point for the industry and all of the different constituencies to begin discussion on and modify the plan.

It will take a lot of work.

It has just been filed with the SEC.

And it addresses frankly access charges and the varying rates across the country that different companies charge today.

And as we've said in the past, we're in agreement with most of it, we hope to influence it.

It provides a mechanism to keep us revenue neutral and it provides, as currently drafted, it provides the transition plan that the industry has historically, when they've made major changes there has been a transition plan that allows you to adapt.

Okay, thank you.

Thanks for the question, Mike.

[OPERATOR INSTRUCTIONS]

There are no further questions at this time, gentlemen, please proceed with your presentation or any closing remarks.

Thank you, Michael, and thank all of you for joining us today and your continued interest and support in Consolidated.

We remain excited about our current position and opportunities, and we look forward to updating you on our continued progress next quarter.

Have a great day.

Ladies and gentlemen, that concludes your conference call today.

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