Consolidated Communications Holdings Inc (CNSL) 2009 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Consolidated Communications Holdings, Inc.

second-quarter 2009 earnings conference call.

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

After the speakers' remarks there will be a question-and-answer session.

(Operator instructions.) Thank you.

Mr.

Smith, you may begin your conference.

Thank you, Operator, and good morning everyone.

I am Matt Smith, Treasurer and Director of Finance.

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

I want to thank you all for joining us on this second-quarter 2009 earnings call.

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 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, who will provide an overview of our financial and operating results.

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

Bob?

Thanks, Matt, and thanks to all of you for joining us today.

I'm very pleased with the solid performance in the quarter during these difficult economic times for many of our customers.

We delivered our best-ever payout ratio of 53.3%, net broadband and VOIP additions of 3,400, and our third consecutive quarter of improved access line losses.

Additionally, we launched our new pair bonding technology, which enhances our broadband product suite, and completed the final systems integration with North Pittsburgh.

Revenue increased by $300,000 from last quarter to $102 million.

Adjusted EBITDA increased by $2.8 million to $48.1 million, which does include a noncash benefit of $1.8 million related to the resolution of an access dispute.

Our cash available for dividends increased to $21.6 million.

And Steve will discuss the financials in more detail a bit later in this call.

In regards to our operating results, our IPTV service continued its solid growth in the quarter, with over 1,500 subscriber additions, or 8.4% for the quarter and 41% for the last 12 months.

DSL lines increased by a seasonably soft 1,100, or 1.2% in the quarter, and a solid 11% over the last 12 months.

During the quarter we also added 700 ILEC VOIP lines, bringing that total subscriber count to 7,900.

We have received a very positive response for this product from both our commercial and our residential customers.

While to some extent it does erode traditional access lines, the VOIP product offers a high-value, quality service that meets evolving customer needs.

As you might recall, three cable competitors introduced their voice services in our markets during the second quarter of last year.

With these competitive launches a full year behind us, we continue to see line losses moderating, as this was the third consecutive quarter where we saw line loss improvement.

When excluding the 1,000 line true-up that we mentioned in the first quarter, we saw line losses improve by over 6% for this period.

We are pleased with the consistency of our line loss improvements and believe this moderation would be even better if it weren't for the challenging economic times.

As we mentioned before, both the economy and our internal initiatives have had an impact on the net line additions for our Pennsylvania CLEC business.

Despite losing over 1,600 access line equivalents in the quarter, our year-to-date CLEC revenue is higher compared to the same period last year.

This is a testament to our continued effort in adding profitable, long-term customers and pushing higher rates on our unprofitable customers, or assisting their move to another provider.

As for pair bonding, we're really excited about the opportunity that exists with the deployment of this technology.

We passed another 5,000 homes with our IPTV service in the quarter, due to the extended reach it provides.

And, as a result, we expect our total homes passed to grow by an additional 35,000 to about 190,000 by year end.

In addition to increasing the homes passed, pair bonding also expands the bandwidth available to our broadband customer from 20 meg to 30.

Also, we can increase the number of streams and HD sets served in a home as well as provide faster DSL.

We will tie our marketing to specific areas where demand exists and quickly enable the equipment to offer the service.

This even further refines our capital deployment on a success-based model.

Besides these enhancements, pair bonding is materially cheaper than building out to the individual customer.

With pair bonding we can simply place bonding-capable cards in our existing access nodes, cutting the cost by over $200 per added subscriber.

Now let me provide a brief update on the Pennsylvania integration.

In June we completed our final systems migration, the ILEC billing platform.

We have completed two bill cycles for every customer and, again, we've delivered a high-quality, successful billing integration.

This success and the added ability to consolidate certain work groups allowed us to cut costs in the quarter through headcount reductions.

We expect these additional reductions to generate over $2 million in annual OpEx savings, and put us on plan to meet or exceed our second-year synergy targets.

Finally, before I turn it over to Steve, let me provide updates on the commercial projects that we have in each of our markets.

KBR is still planning on centralizing its 4,500 employees through construction of a 900,000 square foot facility in the middle of our Katy, Texas property.

The project is still delayed due to financing.

Westinghouse, the project in Cranberry, Pennsylvania, is nearing completion and they have already moved in a substantial number of employees.

We are providing a diverse set of services to their facilities today and they are now one of our top three commercial accounts in Pennsylvania.

And finally, in that tune, the FutureGen clean coal project is proceeding well.

In June, the Secretary of Energy publicly announced an agreement with the FutureGen Alliance to construct the facility on the already-acquired land in Mattoon.

The Department committed $1.1 billion for the project and issued a handful of items the Alliance must complete by early 2010.

Assuming no setbacks, the project could break ground as early as next year.

We continue to monitor these important projects closely and are actively engaged with all three parties.

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

Thanks, Bob, and good morning to everyone.

This morning I'll review our quarterly financial performance and then update you on our revised 2009 guidance.

Operating revenue for the second quarter of 2009 was $102 million, compared to $106.4 million for the same period of 2008.

Local services revenue declined by $2.3 million, primarily due to continued access line erosion.

In total, network access revenue was down $2.7 million, as special access was up $400,000 for the quarter and switched access was down $1.6 million due, in part, to the line loss, lower minutes of use and rate reductions associated with our July 2008 price cap filings.

The balance of the decline in network access was a result of the climb in subscriber line charges of approximately $700,000 and the 2008 elimination of the Texas Infrastructure Fund and Texas Local Number Portability, which combined was about $500,000.

Long distance revenues declined by $900,000, of which $300,000 was due to the one-time change in the deferred revenue recognition for our Pennsylvania long distance, as the direct result of the successful completion of the Pennsylvania ILEC billing systems conversion.

Data and internet revenue increased $1.5 million due to the growth in IPTV, DSL and VOIP services.

Total operating expenses, exclusive of depreciation and amortization, for the quarter were $62.2 million compared to $63 million in the second quarter of 2008.

The decrease in operating expenses is due to our ongoing cost saving initiatives as we discussed on our first-quarter call and as Bob mentioned in his overview today.

These efforts helped us offset the recognition of an incremental $1.3 million (sic - see Press Release) in pension and OPEB expense compared to the second quarter of 2008.

Additionally, results for this quarter included $857,000 in severance charges and $900,000 of integration, of which all but $275,000 qualify as an add-back to adjusted EBITDA under the terms of our credit agreement.

This compares to total severance and integration charges of approximately $1 million that all qualified as an add-back to adjusted EBITDA in the second quarter of last year.

Net interest expense for the quarter declined by $1.5 million, to $14.5 million compared to the second quarter of 2008.

The decline is driven by an overall lower weighted average cost of debt, due primarily to the April 1st, 2008 redemption of our 9.75% senior notes.

Other income was $8.5 million compared to $4.7 million for the same period last year.

For the quarter we recognized $1.8 million in a noncash settlement of an access dispute.

In addition, our wireless partnerships received $4.5 million in cash distributions during the second quarter compared to $3.4 million in the same period of 2008.

Weighing all these factors, net income was $7.5 million, compared to $200,000 in the same quarter of last year, while net income per share was $0.25 compared to $0.01 for the same period in 2008.

The second quarter of 2008 included $5.2 million in after-tax charges associated with the redemption of our old, high coupon senior notes.

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 in the earnings release, our adjusted net income was $7.9 million and adjusted net income per share was $0.27, compared to $6.4 million and $0.22 per share in the second quarter of 2008.

Adjusted EBITDA was $48.1 million compared to $48.3 million for the same period last year.

Capital expenditures for the quarter were $10.2 million.

From a liquidity standpoint we ended the quarter with $20 million in cash and our $50 million revolver remains undrawn.

As a reminder, we have no debt maturities until December of 2014.

Also, at the end of June 30th, 2009, approximately 84% of firm debt was effectively fixed as a result of interest rate hedges, and our overall cost of debt was 6.7%.

For the quarter, our total net leverage ratio as calculated in our earnings release was 4.6 times to 1.

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

Cash available to pay dividends, or CAPD, increased by $5 million over the same period in 2008, resulting in a very strong dividend payout ratio of 53.3%.

Now I'd like to update you on our revised 2009 guidance for CapEx, cash interest and cash income taxes.

First, capital expenditures are now expected to be in the range of $41 million to $42 million, which is down from prior guidance of $42 million to $43 million.

Cash interest expense is now expected to be in a range of $56 million to $57.5 million for full year 2009, which is a reduction from previous guidance of $58 million to $61 million.

And full-year cash income taxes are now expected to be in the range of $9 million to $11 million, compared to prior guidance of $11 million to $13 million.

Our 2009 tax projections do take into consideration bonus depreciation as allowed under the stimulus bill.

With respect to our dividend, our board of directors has declared the next quarterly dividend of approximately $0.39 per common share, payable on November 1st, 2009 to shareholders of record on October 15th, 2009.

With that, I'll now turn it back over to Bob for closing remarks.

So in summary, we're very pleased with our overall results for the second quarter.

We continue to produce strong cash available for dividends and a very comfortable pay-out ratio.

We have again had great success with integrating an acquisition, and we are very excited about the opportunities surrounding our products and the pair bonding introduction, all of which help us to continue to create positive shareholder value.

With that, we'll open it up for questions.

Arnika?

(Operator instructions.) Barry Sine; Capstone Investments.

On IPTV, on the increase in the homes passed going up to 190,000 or so by year end.

First, can you remind us, what's your total homes passed and then talk about which markets you'd be going into with those additional?

And then, what's left to do after the end of this year, and in which markets would those still be?

And what would the outlook be for rolling that out?

Yes, Barry.

Thanks for the question.

First of all, for the homes passed, we're currently at 152,000.

We added 5,000 this quarter.

And the plan would be to add roughly 17,500 each of the last two quarters, to take us right to 190,000 by year end.

They're spread across all markets.

They're not -- there's no specific concentration going.

They're pretty well proportionate to the number of access lines that we serve in each state.

And what is the total number of homes passed?

And then what's the outlook for the remaining homes passed after the end of '09?

Well, we'll end the year at 190,000 and there won't be a huge addition next year unless there's some technological breakthrough.

That'll be -- I won't say it's the end, but they'll be incremental from then on.

Okay.

And then you gave an update in terms of the cable competition.

You talked about you passed the anniversary date.

Now that that's kind of passed, what are you doing in terms of win-backs and what's your marketing plan?

What are you going to market with in terms of offers there?

Well, the specific -- there's a bunch of different plans, Barry.

That's a great question.

Obviously, one of the things that the bonding does by expanding -- we can now get our 20 meg out another 3,000 to 5,000 feet.

So we pick up some homes there, which also, offering the triple play, we hope to get some pull-through for our DSL product at the same time.

We're going back to customers that have a standalone product.

Most of our marketing efforts now are going toward targeted, to standalone customers and noncustomers that have either -- who used to have a service.

So we're focused on the old customers that still have copper out there, stranded plant, so to speak, and then our standalone and VOIP customers today.

We think the triple-play bundle is compelling.

So those that aren't taking a triple play are our area of focus in this quarter.

And is it a price-based marketing approach?

Services?

What's your marketing pitch to these customers?

It's all of those things.

But I would tell you it's not to lead with price and, in fact, we've recently introduced some modest price increases.

We think there's an opportunity to pass on some programming costs and some of the value-added that we've added as we've again doubled the number of HD channels.

We're adding -- the bonding allows us to take more streams out to existing customers.

So we think there's an opportunity to actually raise some prices and improve ARPU.

Okay.

The last area I wanted to ask about -- you mentioned that you've now completed the integration of North Pittsburgh Systems.

And I think the billing cutover without any problem is pretty notable, given what some others in the industry have seen.

Now that that's done and the integration went well, what's your appetite going forward for future acquisitions?

I think the balance sheet looks good with the payout ratio down.

What would you look for, in what markets?

What's your outlook there?

Well, we have some very specific criteria that we evaluate acquisitions.

I would say overall, broadly, we still think of ourselves as acquisitive.

We would look at opportunities.

Unfortunately the capital markets aren't in the greatest of shape, although getting better.

But there's also the opportunity to do stock transactions, as recently witnessed with the Century and Embarq.

We would be more focused on the Midwest, Southwest, Southeast, would be our area of focus, in a state where we already operate would be a priority.

But if there was scale in another new state, we'd certainly take a look at that.

Okay.

Thank you very much.

Gray Powell; Wells Fargo Securities.

I just had a few quick ones.

So it seems like you guys are doing a very good job on the expense management side.

Can you just talk about where you can take incremental costs out of the business and where you think margins can go longer term relative to the 47% rate that you achieved in Q2?

Thanks for the question, Gray, and thanks for joining us this morning.

Yes, we had a plan to execute on that integration and we've now completed all of the systems integration.

So there were opportunities.

None -- I wouldn't tell you they were new.

They were planned in the integration planning process from day one.

As far as -- there are additional opportunities now that every -- all of our geography is under common systems and platforms and, now, processes.

So we'll be taking some additional cost out.

We have sort of a short-term, intermediate-term outlook to shoot for 50% EBITDA margins.

We think that's reasonable.

And have some plans that take us most of the way there.

But, we are not going to sacrifice service.

The previous question on all about competition and everything -- we still think that that's a critical component, particularly as our customers are looking for more value in a quality product.

So balancing those two, but we do have some -- we do have a little wind at our back with some of the work that we've done, that we can take some additional cost out.

Okay, that makes a lot of sense.

And then just kind of sticking with the cost side, on the synergies, I just want to make sure that I'm thinking about it correctly.

You ended 2008 running at about a $7.7 million annual run rate on synergies.

And it sounds like you're going to meet or exceed the $11 million target during 2009.

So does that mean for the full-year 2009 that kind of the average benefit is closer to like $9 million or $10 million and that, as I'm looking at 2010 and you're at the full run rate, you should see somewhat of a benefit?

Hey, Gray, this is Steve.

Thanks for the question.

You're right in that we did in the year that kind of run rate of $7.7 million and a lot of those actions also jump started us relative to the $11 million target for 2008 -- or 2009, excuse me.

So with all of the cost initiatives -- cost-saving initiatives that we talked about on the first-quarter call and today as well, with the additional synergies and integration efforts and whatever, we're totally comfortable that we're going to exceed the $11 million and probably maybe be about, I don't know, 5% or 10% above that.

But it's kind of hard to say.

Again, in that synergy number we weren't anticipating the additional pension expense that I talked about.

But overall I would say that we are well above the $11 million going into 2009, offset somewhat by additional pension expenses that weren't anticipated in the synergy targets.

There are, just to pile on, there are some activities planned for later this quarter and fourth quarter.

So I'm not -- I can't specifically quantify the additional run rate in '10, Gray.

But there'll be a little bit that happens later in the year.

So you'll see some benefit into 2010.

Okay.

No, that's very helpful.

And then just last question, switching topics, I know you talked about this in the prepared remarks, but your line losses showed a nice improvement in Q2 from Q1 and even last-year levels.

It seems to be somewhat of a trend -- can you venture to say where you think line losses should stabilize now that you've anniversaried on the spike in cable competition?

That's a very difficult question.

We think we're past the normal peak.

It started in the right direction.

We would -- we think we'd even be better than that if it weren't for the economy.

So our intermediate target, let me just put it that way, is 5%.

We want to be aggressive and keep improving that number.

As a proxy, Pennsylvania, which was our highest 18 months ago, is now our lowest.

Now, they've had the competition for the longest period of time.

But that market and, of course, the launch of the triple-play and the fact that they've had head-to-head competition the longest, it now is our best market.

So we -- we're optimistic, with all the plans and everything, that that number will continue to go down and hopefully go down faster than it has.

But we're pleased that three quarters we're seeing what is now, hopefully, a trend.

Our strategy is working, we think.

Okay.

Great.

That makes a lot of sense.

Thank you very much.

Donna Jaegers; D.A.

Davidson.

On the cellular joint venture distributions, what's the outlook for the second half of the year?

Because that was a very nice distribution that they gave you in second quarter.

Yes.

Donna, thanks for the question.

On the cash distributions from the wireless partnerships, we recognized a total cash distribution for full year of 2008 of $17.5 million.

We would expect those to be up 10% or 15% for the full year.

So we'd actually see -- we expect to see a little bit of an uptick in the last half of the year, compared to the first six months of this year.

Okay, great.

And then did I hear you right -- the workforce cuts that you guys did in the second quarter, you're thinking that those will save you $2 million in annual costs?

$2 million on an annual run rate basis, right.

Great.

And then just one other quick question.

Bob, you mentioned that the pair bonding was saving you $200 per household passed versus the old cost.

Can you just talk a little about what sort of cost per home passed you're seeing on that technology?

Yes.

Well, I think in past calls, Donna, I've talked about how, as we've launched this product over the last two or three years, we took the low-hanging fruit and we were passing homes in the $400 to $500 range.

But as we completed a great deal of that, it went up into the $800, $1,000 range and that's when we slowed it down, waiting -- because we knew bonding was in the laboratory and getting ready to become commercially available.

Today the -- well, we said it was roughly a $200 savings.

We spend today approximately $200 on the -- it's down to $200 on the install; $50, $60 in materials; and about $150 in installation.

The gateways are roughly $500, including the modem.

So that gives you -- I don't know that I specifically got to your question.

I think if I add them -- so $200 per install and that includes the -- you gave a $50 to $60 per supplies and then $150.

That was the breakdown of the $200?

No.

Just -- yes.

(Inaudible - multiple speakers.)

On the install.

And then there --

$500 for the gateway?

-- is a gateway.

And then your specific question about the homes passed is included in that.

Okay.

All right.

Great.

Thanks, Bob.

(Operator instructions.) Aram Fuchs; Fertilemind Capital.

I was wondering if you could get a little more specific on the price increases you're passing on?

What percent, what fraction of your base, and how you look at it in the context of competition from cable and satellite.

Yes.

It's in the range of -- it's not a huge number, but it's meaningful to us.

It's $2 to $3 per sub.

And it's -- depending on the services that you have, the bulk of it is in programming.

But there's also some additional costs now on the DVR.

We've repackaged a few of our programs.

If you're taking more than basic, you might see $1 or $2 there, depending on the package that you're under.

But it's -- it's not a great deal, but it is $2 or $3 -- on average, it's $2 or $3.

And as far as the cable competition -- I think that was the second part of your question there -- we're still very competitive with the cable guys.

They're passing on -- they have a history of always passing on, if not yearly or twice a year, their programming costs.

And as we announced last call, we have not done that.

And we are starting to do that.

Okay.

And then in the pair bonding, you seem to be the most aggressive on that.

So I was just wondering what you think the strengths are of the technology and what are the weaknesses are, when you compare it to your old way of doing business, of installing it.

Well, we don't really see any weakness.

We spent a lot of time with a couple different suppliers on testing.

We did not launch until we were fully confident of the technology and our ability to make it work flawlessly for our customer.

It's basically all upside.

You've got almost to all of our customers two pair sitting out there.

So, for instance, we were limited to -- at 7,000 or 8,000 feet, getting our 20 meg out for our triple-play product.

We now can get out to 11,000 or 12,000 feet.

So it extends that reach.

Or, you can also just go further if -- so the triple-play can go further.

Or you can get 30-meg to that 7,000 feet.

Somebody wants a 10- or a 15-meg DSL product or they want two or three HD streams, a lot more flexibility to meet the customer need.

So -- and as I said before, it reduces the incremental cost per average home passed by $200.

So, we don't -- I don't see any downside in it.

If you wanted to stretch, maybe training your people in deploying a new technology.

But, again, we kept this thing in the laboratory until it was ready for prime time.

And my last question is, Frontier and a couple of the others have been aggressive at selling ancillary services on their ISP, things like security and other things.

Is that something you're looking into?

It is something that we're looking into.

And there's one or two things that we'll probably announce later this year.

We're not ready to -- I'm not ready to talk about them on this call today.

It kind of goes to the -- your pair bonding question.

We want to make sure that it works, that it's flawless, that the customer experience is very good or we're not going to launch it.

So more to come on that in the third or fourth quarter.

Great.

Thanks for your time.

There are no further questions at this time.

Well, thank you again for joining us today and for your continued interest and support in Consolidated Communications.

Thanks, and have a great day.

This concludes today's conference call.

You may now disconnect.