Consolidated Communications Holdings Inc (CNSL) 2008 Q4 法說會逐字稿

Good morning,.

My name is LaTonya and I will be your conference operator today.

At this time I would like to welcome everyone to the Consolidated Communications Holdings Inc fourth quarter 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer sessions.

(Operator Instructions) I will now turn the conference over to Mr.

Matt Smith, Director of Investor Relations.

Thank you, Mr.

Smith you may begin the conference.

Thank you, LaTonya, Good morning, everyone.

Thank you for joining us on this fourth quarter and year-end 2008 earnings conference call.

With me on the call are Bob Currey, President and Chief Executive Officer and Steve Childers, Chief Financial Officer.

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

I will now review the Safe Harbor pression 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; managements 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.

Earnings release for this quarter's results which has been posted to the investor relations section of our Web site contain reconciliation of these measures to the nearest GAAP equivalent.

I will now turn the call over to Bob who will provide an overview of our financial and operating results.

Steve Childers will then provide a more detailed review of the financials.

Bob?

Thanks, Matt.

And thank all of you for joining us today.

We had a great year and I am pleased to report another solid quarter of both operational and financial results.

Let me start by discussing some of the highlights for the quarter and then move on to our accomplishments for the year.

I will then get into some of the detailed operating metrics provide an integration update and finally touch on regulatory and economic landscape before turning it over to Steve for a more thorough financial review.

First, I am very pleased with our strong broadband performance again this quarter, with DSL growing by 3% and reaching 35% penetration of total access lines.

Our IPTV service continues to show solid growth, with nearly 8% new subscribers, and we passed an additional 8,000 new homes.

As a result, of the successful launch in customer response to HD and DVR, our ARPU on the IPTV subscribers has reached its highest point ever.

Financially we had another solid quarter of results.

Revenue for the quarter was $102.7 million, with adjusted EBITDA of $46.4 million.

When excluding $300,000 in hurricane Ike expense.

Our cash available for dividends was in line with our expectations and we maintained a comfortable payout ratio.

Turning to the full year I am pleased to highlight some of the many successes we have had.

We worked very effectively in interacting the North Pittsburgh operation and end of the year by surpassing our synergy estimate of $7 million.

We rolled out IPTV service in our Pennsylvania market within four months closing the acquisition.

And have had the fastest and most successful IPTV launch in our history.

In addition we increased our homes passed by 35,000 to a total of 143,000.

Our DVR service was launched in all of our markets and we added10 new HP channels to our lineup.

We added thousands of hours of video on demand content and expanded our local content options.

As for DSL we began upgrading our 1Meg customers to a 3Meg product at no charge in support of our customer retention efforts and to keep pace with the growing broadband -- to keep pace with the growing bandwidth demands.

Our residential VoIP service was launched during the year, successfully gaining or retaining approximately 2500 residential customers.

Finally, we successfully trialed [pair bonding] in preparation for the full rollout in the first half of 2009.

We're excited about the opportunity this new technology will provide.

Expanding coverage to new customers for our broadband offerings, and enhancing speeds to existing ones.

I am very proud of our team and all the employees for this extensive list of 2008 accomplishments.

Especially the entire recovery effort around hurricane Ike that we detailed last quarter.

In regard to our operating performance, we delivered strong DSL and IPTV growth in the quarter and in the year.

DSL lines and service increased by 2700 or 3% sequentially, and by 10,500 or almost 13% for the year.

IPTV subscribers increased by 1200 or almost 8% for the quarter and 4400 or 36% for the year.

As for the DVR product we launched in April, penetration rate continues to show substantial growth increasing to 17% at year-end.

During the quarter, we added nearly 800 ILEC VoIP lines bringing that total subscriber count to 6500 growth for the year was a strong 161%.

Let's talk about access lines in the quarter.

As we expected our access line losses have spiked due to the cable voice competition that launched late in the second quarter.

Although on a sequential basis, line losses did show slight improvement in the fourth quarter, we continued to see our competitors launch strong promotions and introductory offers.

In our Pennsylvania markets we saw ILEC line loss trends stabilize during the quarter, the year-over-year rate was 5.7%, compared to the year-over-year loss of 8% in the fourth quarter of 2007.

For the Pennsylvania CLEC business the quarter what essentially flat, however we ended the year with a strong 6.6% growth in access line equivalents which exceeded our expectations, of 5% for the year.

Now let me provide an update on the Pennsylvania integration.

We continue to be very pleased with our progress.

Not only did we exceed our first year's synergy estimate, our run-rate and upcoming completion of the final projects, places us in excellent position to meet our second-year synergy commitment of $11 million.

As for the systems, we will complete the integration of all of our ILEC billing systems in June.

We told you when we made the deal that this acquisition would be accretive in the first year and it was.

Again demonstrating integration is something we do well.

Regarding the regulatory landscape, I mentioned before that we support intercarrier compensation reform.

We look forward to working with the new SEC and developing a solution that can support continued investment in rural America.

It is unclear to us at this point, where reform will fall on the new staff's priority list.

But we don't expect it to move to the top until later this year, or the beginning of 2010 at the earliest.

We will play an active role in any reform effort through collaborative efforts with our ILEC and two primary industry associations.

As for the broadband stimulus plan that you have all heard about, we are working diligently in preparation for the rules and applications to be released, as with intercarrier comp reform we're playing our part to influence the outcome of these rules.

We are pleased with the interest in rural America and plan to actively pursue any opportunity that will help support broadband expansion.

Although we do not have anything built into our current 2009 plans related to the broadband portion of the bill we are optimistic with what the stimulus plan could bring.

Finally let me touch on the economy.

We continue to believe that our diverse markets and effective product offerings will help us weather the national economic difficulties.

As you know and we reminded you, none of our markets saw the big increases and subsequent declines in housing and the commercial developments we mentioned in the past are still moving forward.

We have seen some line losses due to business closings which in some cases has a ripple effect with loss directory advertising.

We recognition we're in unprecedented times and we have to be proactive.

We have developed plans that we can literally pull off the shelf and execute if the economic tide worsens.

Given these factors, we still feel good about our position.

Let me now turn the call over to Steve for our financial review.

Thanks Bob Good morning, to everyone.

As Bob mentioned we're pleased to again report solid financial results for both the fourth quarter and full-year of 2008.

This morning I will review our quarterly financial performance and then provide our 2009 guidance.

Operating review for the fourth quarter of 2008 increased 20.8% to $102.7 million compared to $85 million for the same period of 2007.

The increase is primarily due $23.3 million to review for our Pennsylvania operations.

Excluding the contribution from North Pittsburgh acquisition, which as a reminder we closed on December 31, 2007, operating revenues were $79.7 million.

Approximately half the decline was a result of lower revenue from our non-core businesses which report under other operations and which generally produce low single digit margins.

Other declines in local calling services, network access services and other operations were partially offset by growth of our DSL, IPTV and VoIP businesses.

Total operating expenses exclusive of depreciation and amortization for the quarter was $63.4 million excluding a $6.1 million noncash impairment charge associated with our non-core telemarketing business unit.

This compares to $51.4 million in the fourth quarter of 2007.

The increase is primarily due to the recognition of $14.1 million in cost of sales and SG&A expense associated with our Pennsylvania operation which have consistently been in line with our expectations.

Total operating expense in the current quarter includes approximately $1.3 million of integration and severance cost that qualify [add backs] to adjusted EBITDA under the terms of our credit agreement.

Also, due to additional hurricane Ike service restoral efforts in the quarter, we incurred approximately $300,000 in incremental costs over time contractor, vendor costs.

Depreciation and amortization expense for the quarter was $23.6 million, an increased $7.5 million compared to the fourth quarter of 2007.

The increase was attributable to 2008 capital addition as well as increased depreciation associated with the fixed assets acquired in the amortization of intangible assets recognized with the acquisition of the North Pittsburgh.

Net interest expense for the quarter was $18.7 million incurred to $11.7 million, in the fourth quarter of 2007.

The $7 million increase in net interest expense is primarily attributable to the incremental debt in terms of our new credit facility.

In addition to quarter included a $2.8 million noncash interest charge due to hedge accounting of our interest rate swaps.

The increase in fourth quarter 2008 interest expense is partially offset from savings generated by the April 1, 2008redemption of $130 million of our -- $130 million of our 9.75 senior notes.

The calling of our senior notes will save approximately $1 million a quarter in cash interest expense and replace the high coupon note with bank debt hedged in effective interest rate of 6.8%.

Other income of $4.6 million increased $3.1 million compared to the same period last year.

As part of North Pittsburgh transaction, we acquired limited interest, three additional Verizon Wireless partnerships.

During the quarter we recognized $5 million in income from these wireless partnerships.

Also in the fourth quarter, we recognize noncash extraordinary gain, net of tax in the amount of $7.2 million.

Due to our election to discontinue the application of SFAS 71 accounting for the effects of certain types of regulation, this gain was due exclusively to the reversal of over depreciation previously allowed under SFAS 71 to cover the cost of removal certain regulatory assets.

Weighing all these factors net income including the extraordinary gain was $3.6 million for the quarter compared to net loss of $1 million for the same period last year, while net income per common share was $0.11 compared to net loss per common share of $0.04 for the same period 2007.

We believe it is appropriate to look at net income per share on an adjusted basis as detailed on the adjusted net income per share schedule and earnings release our adjusted net income was $5.1 million and adjusted net income per share was $0.17 in the fourth quarter of 2008 compared to $5.3 million and $0.20 per share respectively in the fourth quarter of 2007.

Adjusted EBITDA for the quarter was $46.4 million when excluding the incremental $300,000 hurricane Ike recovery expenses, compared to $37 million for the same period last year.

The primary driver of the $9.4 million or 25.4% increase of earnings came from our Pennsylvania operations.

Capital expenditures were $10.9 million in the fourth quarter and our full-year CapEx spend was $48 million.

From a liquidity standpoint, we ended the quarter with $15.5 million in cash, in our $50 million revolver remains undrawn.

As a a reminder we have no debt maturities until December of 2014 or the term of the credit facility.

Also as of December 31, 2008 approximately 84% of our term debt was effectively fixed as a result of interest rate hedges our overall cost of debt at year-end of 6.3%.

For the quarter, our total net leverage ratio as calculated in our earnings release was 4.6 times to one.

Our leverage and coverage ratios were well within compliance levels with the credit facility.

Cash available to pay dividends or CAPD was a strong $15.3 million in the quarter, a full-year basis compared to 2007 we improved the dividend payout ratio by 430 basis points to a very comfortable 71.6%.

Now I would like to provide our 2009 guidance.

Consistent with prior years, we will provide guidance in capital expenditure, cash interest and cash taxes.

In addition I will give you some estimates on expected 2009 pension expense and funding.

First, capital expenditures are expected to be in the range of $42 million to $43 million.

The 10% lower spend rate in 2008 is due to $2 million in integration CapEx and will not be needed in 2009 as well as the additional $3 million of CapEx synergies we estimated as part of our North Pittsburgh transaction.

Cash interest expense which was $65 million for 2008 is expected to be in the range of $58 million to $61 million for 2009.

And full-year cash income taxes are expected to be in the range of $11 million to $13 million compared to 2008 of $13.5 million.

Our 2009 tax projections do take into consideration expected savings between $6 million to $8 million due to bonus depreciation allowed to us from the stimulus plan.

Finally, based on preliminary plan valuations we currently expect to make cash contributions in the range of $9 million to $11 million, to our pension fund in 2009.

This is an increase of $3 million to $5 million over our 2008 contribution levels.

Also based on preliminary estimates we expect to recognize additional noncash GAAP pension expense of between $4 million and $5 million compared to $700,000 recognized in 2008.

With respect to our dividend, our Board of Directors has declared the next quarterly dividend of approximately $0.39 per common share payable on May 1, 2009 to share holders of record on April 15, 2009.

With that I will now turn the call back over to Bob for closing remarks.

In summary we're pleased with our results for the quarter and all of the accomplishments throughout the year.

We continue to produce strong cash flows and return a large portion of that cash to our share holders in the form of a dividend.

We have diverse markets that provide economic balance and a service driven culture that combined with our compelling product offerings serve our Company well.

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

Thank you.

(Operator Instructions) Your first question comes from the line of Frank Louthan with Raymond James.

Good morning,.

Several questions but they sort of all getting around the same thing, I can appreciate where you give me guidance where you have in the past but can you give us -- is there anyway you can give us an idea of the margin trends --EBITDA margin trends, or some sort of guidance on what EBITDA will look like over the next 12 months?

Kind of giving where the stock, with the yield, which appears to be very safe, similar to everything else in the industry, but given that sort of lack of confidence the market has is there anything you can tell us about the expected margins or margin expansions or level EBITDA for this year?

Well, Frank this is Steve.

I will start with that, and again we won't give specific guidance on CapEx, or on EBITDA margins, but to maybe go to your question, with respect to the dividends, security around that, couple of things, number one, we would expect a payout ratio with the things we did give guidance on, with the -- $5 million reduction CapEx, improved cash interest, cash tax is staying similar, even offsetting kind of a neutral impact on the pension fund contributions.

We would expect the payout ratio to be at least as good as this year, if not see some improvement in the number, from an EBITDA perspective again we won't give specific guidance on that but, the way to think about it is we told you what our non-GAAP or what our GAAP pension expense was going to be for next year but we're also looking for second year PA synergies going from $7 million to $11 million.

We expect to see improvement on the margins on our video, and DSL products.

And we're going to continue to look at our head count reductions.

So, and looking at our cost structure with and without our integration efforts.

Okay will the improvements on the video and the DSL margin and the improvements in Pennsylvania, will those help overcome the EBITDA drag from the local business?

Frank, I -- I don't know if it will directly offset it but it will certainly minimize the impact of that.

And again as we're trying to stress all the levers of cash flow that support the dividend we're more comfortable staying at the 70% range on the payout ratio for next year.

Okay.

One other question.

Looking at your internet subscribers, the dial-up subscribers fell off quite a bit in the quarter.

Just curious was there any change in how you calculated -- recalculation of those customers or did you do anything from a marketing perspective to kind of encourage those folks to leave and there is any opportunity to migrate them over to DSL, going forward, rather than just seeing them leave?

Frank, Good morning, it is Bob.

It is our stand marketing approach, offering them some teasers at a very attractive rate for a three or six-month trial and migrating them.

We have been doing the same basic program for you know the last three or four years.

So there is no major change there.

We think the product is so compelling that if you can get them to try it for awhile, they won't go back.

So there is nothing different that would explain why you had such an unusually large drop of dial-up customers in the quarter.

Not really.

I think you probably can see it reflected in the, we had a great quarter compared to most on our DSL growth and I think that is partly reflected in that the so-called not having our stand voice product where we have gone naked with that.

That's part of the reason, I think, why we have continued to have very nice growth where some of our brethren had a more difficult fourth quarter.

Okay, great, thank you very much.

Your next question comes from the line of Michael Rollins with Citi.

Hi, Good morning,.

Just a question on the operations, and a question on the cash flow statements.

On the operation, can you talk a little bit about maybe how the heritage consolidated markets performed in an EBITDA basis in '08 versus the NTSI, with respect to if you look at the OIBITDA that MPSI did in '07 and a sort of look at what the contribution was in '08, just want to get a feel for how that core consolidated business did where you're more aggressively marketing that triple play product.

And then, the second question on the cash flow statement, can you talk a little bit more about how you're defining your coverage ratio on the dividend?

If I'm doing the math correctly on the 12-months cash flow statement that is in your press release, it looks like the CFFO minus CapEx, was about $44.4 million.

And it looked like the dividend cash paid in the year was 45.4 -- I'm sorry to say -- million dollars and $45.4 million was the dividend.

And so maybe there is some transitory items that would be in the CFFO that you might want to highlight if there were any -- and if you could talk a little bit more about how you're defining that coverage level of -- the mid 70s.

What is that on versus what is showing in the cash flow statement?

Thank you.

Yes, Frank, or Michael, let me start with the ops question.

There is some differences, in the markets, just kind of high-level.

In PA we launched within four months of closing the deal, we launched an IPTV product.

So, we have had some real interesting results there.

Mitigating the access line losses there.

Drop substantially from when we took the property over.

Contrast that with Texas in late May and June when the two large cable competitors down there launched voice.

Were in that traditional three to five quarter sector where you get the spike where the customer has a choice and competition and they are very aggressive with their advertising.

So we have seen a spike in as we have detailed in the last couple of quarters we have seen that the details of that, we think that that has peaked and we will show the normal curve and cycle that happens.

We spent the year converting both culturally and from a systems and platform back office to the consolidated way of doing things in Pittsburgh and the response by the employees has been excellent.

So there is not really at this point a great deal of difference between the operating performance in those two states or in the three states.

Mike this is Steve Childers with respect to your second question on how we're measuring the coverage to the dividend, consistent with how we reported this in 2005 when we went public we're measuring it against what the definition of CAPD and coverage ratio, in our credit agreement.

And I refer just as a reference point I refer you to page 11of our earnings release which again, what we played out in that table is consistent with how we report it since we have gone public and again, is directly out of our credit agreement.

With respect to your second, your question about how you calculate it looking at the cash flow statement there are I think you used the word transitory.

There are odd things running through the cash flow from operations this year as with respect to the deferred taxes and extraordinary gain, the deferred taxes were impacted based on hedge accounting finalized and purchase accounting from our North Pittsburgh transaction as well as some of the implications with pension.

So there are odd things kind of running through that number but again, we're reporting the number consistently as we have since the day we went public.

Thanks very much.

Thank you.

(Operator Instructions) Your next question comes from the line of Tom Seitz of Barclays Capital.

Thank you for taking the question.

Can you give us an update on the stimulus that is going on in your -- that is the wrong word -- but the economic development that is going on in each of the three territories?

I did notice that clean coal I think was in the stimulus package and I was wondering if you know yet whether that will directly benefit Mattoon, an update on the Westinghouse, nuclear facility, that impacted at all by the economy and then, KBR down in Texas?

Good morning, Tom, and thanks for the -- for the question.

Let's take a -- them in reverse order.

In Texas the KBR, that large engineering construction company that is going to build a 900,000 square foot campus and relocate or centralize 4500 employees right in the middle of our KB market.

We anticipate it will complete sometime in 2010 as originally announced.

It -- they have not broken ground with -- they are meeting with their architectural firms.

We're in there, already, with fiber systems on how to support that process but they are in the middle of financing discussions with their bankers.

Regarding PA, the Westinghouse consolidating its nuclear division and bringing 3,000 employees that construction is well underway on their three buildings and they have begun moving and announce they will move 400 employees the first of 3,000, in the first part of June.

We have sold them a multitude of services, 300 Megabits of metro ethernet, ISDN T1 circuits so we're in there and all over that one and we're very pleased with the progress to date.

FutureGen, the Mattoon the cold fired zero emission power plant.

While we're excited about that, Tom, if you followed it historically it has been in and out of the budget.

It is currently in the current stimulus plan for $1 billion.

It would be huge, if it actually happened.

Obviously with Obama from Illinois and Durbin pushing it we're excited about it.

It is projected to -- if it goes, it will produce about 2500 construction jobs.

And 500 permanent jobs.

So obviously, if you haven't detected it, I'm thrilled to have these three huge developments going on in the three states in which we operate.

Thanks for the color.

Thank you.

Your next question comes from the line of Donna Jaegers with DA Davidson.

Hi, guys thank you for taking the question.

Two quick ones.

On gross margins, they came in a little better than what I was expecting there and I was just curious if you could comment on if there was anything specific driving that.

Then on SG&A, I am assuming that that was a little higher than it had been in the past, the severance costs included in the SG&A.

Donna this is Steve.

On the first question with respect to gross margin, I don't think there was anything specifically that I could call out, I mean just just the way the quarter rolled out there.

The second thing with SG&A, yes, the severance and integration expenses were a little higher in the quarter than what they have been running and that does flow through SG&A.

You said what was $1.3 million in integration and severance costs?

Expenses from hurricane Ike repairs what were those shared between the two --

No, they are probably up in cost of sales primarily.

Okay.

Then you mentioned earlier I think Bob mentioned that you guys expected DSL margins to improve, going forward.

Can you talk in a little more detail, is it because of bigger scale in the industry, or have you guys done something to decrease your costs there specifically?

Well, Donna this is Steve.

And I made the reference to the DSL margin improvement.

The but really I think the -- I guess we wouldn't see a staggering movement in that based on how well we already deliver and serve that product.

I guess the real emphasis is on our video product which as we have talked about in the past is generally dilutive in the first 18, 24 months once we start delivering to a market because we're basically expensing the cost of the -- the tech timed for the labor installation and as we get critical mass in each one of those markets we would expect to start see something positive cash flow in those markets.

So the real opportunity in margin improvement is on the video side and then just what the value of video means enhancing the overall bundle.

I may have misled you on that, Donna.

What I was trying to project is that we have moved our customers from a 1Meg to a 3Meg.

There is no cost increase there but you it is to meet their demands, meet the competitive market place and this year we will launch a 20Meg product as we move up scale with our bonding technologies, so hopefully that could lead to some better margin but that hasn't been announced or rolled out yet.

And the movement, Bob from the one to the 3Megs, they are paying more for that or is to to give them a taste -- show them how fast -- they should be going.

That is to protect us from any migration to the competitor to meet their needs at no cost to them.

That has been our history.

We every year or two, we have moved the basic customer up in speed at no cost.

Okay, thanks.

Thank you.

Thank you.

(Operator Instructions) There are no further questions at this time.

Presenters I return the conference to you for closing remarks.

Thank you and thank all of you for joining us today and for your interest and support of Consolidated.

That's all we have.

Look forward to talking to you next quarter.

Have a great day.

Thank you.

This concludes today's Consolidated Communications Holdings Inc.

fourth quarter 2008 earnings conference call.

You may now disconnect.