Consolidated Communications Holdings Inc (CNSL) 2009 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the third 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, Demetrice and good morning, everyone.

I am Matt Smith, Treasurer and Director of Finance.

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

Thank you for joining us on this third 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 the 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 Childers will then provide a more detailed review of the financials.

Bob?

Thanks, Matt.

Good morning to all of you and thanks for joining us today.

The third quarter was a strong quarter, both financially and operationally, especially considering the competitive and economic challenges that exist today.

We delivered our best ever IPTV growth with 1800 subscriber additions.

A solid DSL increase of 2100 and our best access line results since the first quarter of 2008.

Our cash available for dividends of $19.9 million and payout ratio of 58.1 continued to provide a comfortable cushion for our dividend.

Additionally, our pair bonding roll out is proceeding as planned and the market response is very positive.

Revenue for the period was $101.6 million and adjusted EBITDA was $47.3 million.

When you exclude the noncash benefit of $1.8 million related to the access dispute resolution in the second quarter, adjusted EBIDTA increased by $1 million sequentially.

This improvement is directly related to the cost savings initiatives that we implemented in the first half of the year.

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

In regard to our operating results, customer demand for our broadband products continues to be very strong in all of our markets.

Our IPTV service had strong growth with the 1800 subscriber adds resulting in a 9.1% increase for the quarter and 39.2% for the last 12 months.

The solid DSL increase of 2,100 lines resulted in a 2.2% growth for the quarter and 9.7% over the last 12 months.

During the quarter, we also added nearly 700 ILEC VOIP lines bringing that total subscriber count to 8,600.

Access lines declined by 1.7% in the quarter which was the lowest quarterly loss since the cable competitive launches five quarters ago.

The trend is exactly what we anticipated.

We do not expect to experience a sustained spike again and the improvement should continue.

As we discussed on last quarter's call, the pair bonding technology deployment is well under way.

It allowed us to pass an additional 18,000 homes with our IPTV product during the quarter and we will pass another 18,000 homes in the fourth quarter.

The market is responding well to both the IPTV expansion and the additional bandwidth available to broadband customers.

In addition, we are very excited about a new wireless device tied to our IPTV service.

This new technology along with pair bonding gives us the ability to better size the capacity needs of each and every customer with a quicker install resulting in overall reduction of costs.

In merely every new installation, we are using this in-home wireless device along with individual set top boxes to scale the service to the number of TVs, HD streams, and DVR boxes that our customers desire.

Through this technology, it can all be done with limited wiring providing a more efficient and importantly, a more friendly customer installation.

Again, the response from our customers has been excellent.

Before I turn it over to Steve, let me update you on the commercial developments that we've also discussed on our past calls.

In our Cranberry, Pennsylvania market, the Westinghouse project has nearly completed its facilities' construction and about half of the planned 3000 employees have moved in.

The remaining half are scheduled to move in stages over the next six months.

We are providing a diverse set of services to these new facilities and they are already one of our top three commercial accounts in Pennsylvania.

In Mattoon, Illinois, the FutureGen clean coal project is proceeding well.

With the Department of Energy commitment of $1.1 billion for the project, it could break ground in 2010.

In Katie, Texas, KBR is still working toward construction of a 900,000 square foot facility which is expected to centralize their 4,500 employees in the Houston area.

The project is still delayed for financing but discussions are ongoing.

We continue to monitor these exciting projects closely and are actively engage with all parties.

So with that, let me turn it 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 confirm 2009 guidance.

As Bob said, we are very pleased with strong results in the quarter.

Operating revenues for the third quarter of 2009 was $101.6 million compared to $103.8 million for the same period of 2008.

Local services revenue declined by $1.7 million primarily due to the continued access line erosion.

Network access revenue was down $2.4 million due to the line loss and lower minutes of use.

Data and internet revenue increased by $800,000 due to the growth of IPTV, DSL, and our voice services.

Total operating expenses exclusive depreciation and amortization for the quarter, were $61.8 million compared to $64 million for the same period last year.

The current quarter included $1.3 million of incremental tension costs as well as $400,000 in incremental integration severance expense.

While third quarter of last year included $1.2 million in Hurricane Ike service restoral costs.

When excluding these items, our operating expenses declined by $2.7 million year over year.

The continued cost structure improvement is the result of leveraging our systems integration work for our Pennsylvania operations and being able to consolidate and reduce work groups.

In our previous 2009 update calls, we announced that as of a result of these efforts we had been able to achieve $5.8 million in an annualized cost structure improvement.

In this quarter, we took actions to begin consolidating additional back office and service function.

This resulted in the charge of $812,000 in severance that qualified as an add back to adjusted EBIDTA under the terms of our credit agreement.

We expect these third quarter actions to generate approximately $1 million of annualized savings.

Net interest expense for the quarter was $14.8 million compared to $13.6 million in the same quarter last year.

In the third quarter of 2008, we recognized a noncash benefit of $2.5 million due to the ineffectiveness of our interest rate swaps.

Normalizing for this benefit, interest expense decreased $1.3 million in the quarter driven by 60 basis point improvement in our weighted average cost of debt.

Other income was $6.1 million compared to $5.9 million for the same period of last year.

For the quarter, we recognized $5.8 million in cash distributions from our wireless partnerships compared to $4.8 million for the third quarter of 2008.

Weighing all these factors, net income increased $2.1 million to $7.1 million compared to $5 million in the same quarter last year.

Net income per common share increased $0.07 to $0.24 compared to $0.17 for the same period in 2008.

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 (technical difficulty), our adjusted net income was $8.6 million and adjusted net income per share was $0.29 compared to $4.7 million and $0.16 per share in the third quarter of 2008.

Adjusted EBITDA was $47.3 million compared to $46.2 million for the same period last year.

Capital expenditures for the quarter were $10.6 million and from a liquidity standpoint, we ended the quarter with $31.9 million in cash and our $50 million revolver remains undrawn.

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

Also, at September 30, $60 million of interest rate hedges expired which decreased our hedge position on term debt from 84% down to 77% and also lowered the overall cost of debt from 6.26% to 5.96% going into the fourth quarter.

For the fourth quarter, our total net leverage ratio as calculated in our earnings release was 4.5 times to 1.

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

Cash available to pay dividends or CAPD increased by $4 million over the same period in 2008 resulting in a very strong dividend payout ratio of 58.1%.

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

First, capital expenditures are expected to be in the range of $41 million to $42 million.

Cash interest expense is expected to be in the range of $56 million to $57.5 million.

Full year cash income taxes are expected to be in the range of $9 million to $11 million.

Our 2009 tax projections do take into consideration bonus depreciation 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 February 1, 2010, to shareholders of record on January 15, 2010.

I'll now turn the call back over to Bob for closing remarks.

In summary, we had another great quarter.

We continued to produce strong cash available for dividends and a comfortable payout ratio.

We continued to utilize the newest technologies to offer the best products and services and we are excited about the commercial opportunities in our markets.

All of which help us to continue to create positive shareholder value.

Finally, before we go to the Q&A let me comment on one last item.

Within the next few days, you will see a filing that reflects a plant change in the Lumpkin family ownership structure.

Since Mr.

Lumpkin is the largest shareholder of Consolidated Communications and Chairman of our Board, I thought it was important for you to understand the structural changes occurring.

This is not a sale of Consolidated stock by Mr.

Lumpkin or his family.

It is just a distribution of shares.

Currently, the Lumpkin family owns approximately 19.2% of the outstanding shares of Consolidated; individually or through various entities for their benefit.

The shares are held in Central Illinois Telephone, LLC.

This entity was established in 2002 and its structure gives Mr.

Lumpkin sole voting rights over the Consolidated shares that it holds.

In order to permit estate planning and financial flexibility within the family, some of the Central Illinois Telephone owned shares will be distributed out to family members or entities maintained for their benefit but after these transfers, Mr.

Lumpkin will still be our largest shareholder and Chairman as well as having sole voting power with respect to the approximately 14.2% of the Company's total outstanding stock.

With that, Demetrice, I'd like to open it up for questions.

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Barry Sine, Capstone Investment.

Gentlemen, very nice quarter.

Thank you, Barry.

Three questions if I might.

The first one, two revenue line items; both long distance and access.

I know you talked about them briefly in the prepared remarks.

They were a little bit lower than, you know, I was looking for and it looked a little bit lower than what we had seen trend wise.

Can you give us a little more color and flavor on both of these revenue line items?

Yeah, Barry, this is Steve.

On network access, for the quarter, it was down roughly, you know, $2.4 million and a little bit wider maybe than what the access line loss was.

So the combination there was at the end of the second quarter we had roughly, $300,000, $400,000 in positive carrier settlements.

Not only did we not have those same settlements in the third quarter, we actually had a couple of net settlements going the other way and then the rest of it, basically is just a continued line loss and declining minutes of use.

Long distance -- again I think just -- there's not been a lot of pricing movement on it.

It's just a reflection of the line.

Well, there's two things.

The reflection of the line loss and people moving to, you know, our move unlimited package and things like that.

So the gap's probably a little bit wider quarter over quarter than you might expect but I also think that with respect to our recent billing integration from our PA system that we may be getting a better classification of things previously classified in long distance up to local.

So we might have a little bit of things -- a little bit of a bucket thing going forward now that we've got the systems integrated.

If somebody's on an unlimited package, do you still book a portion of that revenue in the long distance category?

Yes.

Okay.

My second question in terms of what you're doing with homes passed, the increases there, and what you're expecting to do with pair bonding.

It's a pretty significant increase in your addressable market.

During the third quarter, I think you said about 18000 new homes came on board.

When, in the quarter, did they come on board?

Was that earlier in the quarter?

Did we get the full impact from a marketing standpoint?

And then the same question with respect to the fourth quarter.

Did it come on early in the quarter, late in the quarter?

They're added incrementally, Barry.

You know, I can't tell you that it's erythematic throughout the quarter but it is -- it's spread throughout the quarter.

That will be the same case in the fourth quarter.

There -- you know there's two components part of that.

One is the construction budget and the plan spending and then our marketing program.

So they're brought online in conjunction with the planned construction and the marketing demand.

When you say that you've added homes passed, does that mean that they're constructed or that they're constructed and being marketed to?

Well, once they're passed, they are constructed and they are being marketed to.

Last question, North Pittsburg acquisition is fully integrated.

Things are going well there.

You're also building up a pretty nice cash balance.

What's your current thinking in regards to another one of those similar type of acquisitions?

Well, to the first part of your question.

The integration is completed as far as systems and processes.

There's still some minor tweaking and still some cost reductions that are planned this quarter.

As far as, I guess, your last question sort of to the M&A area.

You know, we'd love to do another North Pittsburg.

You know as we've said in the past, we consider ourselves acquisitive.

You know, as you know, the financial markets have not allowed any activity there but we're - we would certainly entertain and we're constantly looking at potential growth opportunities.

Okay, thank you.

Thank you.

Have a good day.

Your next question comes from the line of Gray Powell, Wells Fargo Securities.

Hey guys, thanks for taking the questions.

I just have a few here.

I guess first off, you're line losses saw a very good sequential improvement in Q3.

Should we think about absolute loss levels staying in the low 4000 range or do you think there's room to bring that down even more?

Well, as I said, I think the spikes are behind us and with the programs that we're implementing, the marketing activity that's going on, we expect that to continue to improve.

Okay.

And then you just talked about how you're pretty close to wrapping up the cost synergies associated with the North Pittsburg acquisition and it sounds like you completed some other initiatives this year.

Do you see any other significant opportunities to reduce costs and then should we think about EBITDA margins staying in this mid to high 40% range?

Or is there an opportunity to further improve margins?

Well, I think there's always an opportunity.

We're looking constantly for opportunities to improve margins.

There -- as I said Gray, there's some opportunities out there still within the North Pitt but we are constantly looking and with some of the CapEx that we deploy in our network and our back office, there are some opportunities that we're looking at to continue to take costs out of the business.

Okay, great and then just last question.

Your dividend payout ratio is now just under 60%.

Should we think about you using your excess free cashflow to reduce leverage going further -- just going forward?

And then along those lines, by my math, leverage is down from 5.3 times a year ago to 4.5 times today.

Do you see leverage getting below 4 times next year?

Well, Gray, this is Steve.

I think that in the terms of thinking about the payout ratio being around 60%.

We'll use excess cash to, you know, continue to deleverage as we have in the past few quarters.

I think the answer to that is yes abstinent a transaction coming up in the (inaudible) but other than that, we will continue to focus on improving the payout ratio and improving the leverage ratio.

As you noted, we have demonstrated improved -- you know the ability to be able to improve the leverage number the last few quarters and we'd expect that to continue.

Four is still the target.

I'm not sure we'll be there by the end of the next year but that's certainly the goal.

Okay, great.

Thank you very much.

Your next question comes from the line of Michael Nelson for Folio Securities.

Hey, thanks a lot.

I appreciate you taking the question and congratulations on a solid quarter.

You know you're really showing some nice improvement on access line trends and I'm wondering if you could provide some color on the some of the puts and takes to the improved performance.

Specifically, I'm wondering, how impactful the expansion of IPTV has been as well as the competitive pressures that may be abating and residential location activity?

Thanks.

Yeah, thank you Michael.

The -- I don't think that the competitive market has abated.

There's still -- there's not any major changes but you know, it's a war out there and I'm not ready to say or declare a victory.

The cable guys and wireless guys are effective competitors.

With that said though, you know, we think we've got the right product set.

IPTV does pull through certainly broadband, DSL, and we're starting to see and it's not a big enough number yet to have a party with but we're starting to see port outs or port ins come back the other way from some of the -- from some of our cable competitors.

So that's a good sign.

I think the other bigger component for us though is aggressively putting our voice product back into the bundle.

You know, we're calling people that are -- who don't have our service now.

We're calling people who only have our broadband product, what we refer to as naked DSL.

So we've got some different strategies to try to get that voice line, if we can, back into the bundle and at least keep an established the contact and relationship with that customer.

Great, that's very helpful.

I appreciate it.

Thanks.

Good luck guys.

Thanks, Michael.

Your next question comes from the line of Donna Jaegers from D.A.

Davidson.

Hi, guys, thanks for taking the question.

A few of them if you would.

The tax rate dropped to 25.5%.

Can you, sort of, explain what was going on with that?

Yeah, Donna, this is Steve.

In the quarter, we had so much normal adjustments at this time that we have every time this year when we finalize our 2000 -- the previous year tax returns and actually true up the provision to the return.

So there was probably, you know, $700,000 or $800,000 kind of flowing that way that were favorable true up to us.

Okay and then the IPTV adds that you had, the 1800.

Is that applicable over -- I'm sure that's over your whole footprint but otherwise, it looks pretty impressive over just the new increase in footprint.

So you can talk a little bit about penetration rates that you're seeing with the new rollout of the 18,000 homes.

Donna, Bob.

Okay.

I'm not sure I followed the question.

Is it spread out over our total three state territory?

The answer is yes.

There's homes -- we passed homes in all three states.

Roughly in proportion to the access lines in that state.

So the question -- excuse me, I've been listening to too many earning calls late into the evening but the question was, on the 18,000 new lines that you rolled out with pair bonding.

What sort of penetration are you getting in approaching those customers with IPTV?

Is it too soon to -- too early to have any stats on that?

Yeah, I -- you know, there probably is a stat but you got me.

I'll have to follow up with you, Donna.

I don't have that at my disposure right now.

I'm sorry.

Okay.

I know they're spread.

You know, we've had a little more success this quarter in Texas but you know, other than that I -- you know, my guess is they're spread but don't hold me to that.

Let me get back to you with a precise answer to your question.

Okay, I'll follow up on that.

Can you just talk a little about -- are you running any promotions now in IPTV?

Or is that 1800 just sort of through word of mouth?

No we are running some promotions.

We always are.

There's no dramatic change.

I will tell you, though, that the pair bonding has been a word of mouth because we've had some customers both wanting our IPTV or DSL service that we could not serve and so they've heard from their neighbors or someone that that service is now available.

So the word of mouth has gotten out and we're very encouraged with that.

Okay and then just the payment that you guys got from your cellular partnerships was a little larger than it has been in the past.

What's your visibility on -- is it going to stay at that level or will it drop back to a more normalized, sort of $4 million a quarter level?

Well, Donna, this is Steve.

We -- you know, last year, we received $17.5 million in total.

We are running at a higher rate in that for 2009 and generally, the distributions are fairly consistent although the second quarter is generally a little bit lower than what we'd expect for the other three quarters of the year.

So I would expect fourth quarter distribution to look very similar to what we received in third quarter.

Okay, great.

Thanks guys.

(Operator Instructions).

Your next question comes from the line of [Dennis Weaver] from Maverick Industry.

Hello?

Hi, Dennis.

Oh hey, I got confused.

Just a real quick question.

Do you expect S&P rating to increase in the near future?

This is Steve.

We just actually met with S&P and I had a call with them in the last couple of weeks.

I don't think there'll be any ratings action at this time.

We hope that as we continue to deliver, you know, great results, build cash, start paying back some of the debt, that they would consider improving the rating but I think it'll be just as it is for right now.

Okay, thank you.

You bet.

Your next question comes from the line of Jason Frazier from Raymond James.

Hey, guys, it's actually Frank.

Just real quick; looking at your the wireless box for IPTV.

Could you give us a little more discussion on that?

Is it -- what's the overall cost savings?

Is it specifically just on the wiring or is the box cheaper?

Just give me the standard going forward and then if you can also give us a little update on your thoughts on uses of cash.

Would you be inclined to do a buyback here?

Why or why not?

Thanks.

Yeah, good morning, Frank.

I'll take the first one and Steve can take the second one.

This -- just -- and this will be probably more wordy than your question would warrant but the wireless -- what we're doing is with the -- what we're calling our video relaunch.

There's actually three technologies involved and what they allow us to do.

The three are bonding, the pair bonding, a ruckus wireless device, and a new single set top box.

Before I get to the cost, let me just describe what it allows us to do.

In a single apartment, one bedroom, somebody wants a one TV.

We now put that in with a $70 plus modem costs.

We don't have a gateway which was running us nearly $600.

So it gives us the flexibility to go into the single bedroom home, one TV, low cost, customer benefits, we save money, the wiring is very quick, etc.

Let's jump to the opposite extreme though where you have a home five or six TVs.

We then run one CAT-5 to one TV.

Install the ruckus wireless device and then the rest of the house is served from that ruckus device which does two things.

One, again, a customer friendly install.

They're not sitting there through a three or four hour install.

These are taking about an hour and secondly, as we upsell them, they want additional HD streams.

They want DVR.

It's come down to the office, pick it up, and take it home plug it in.

It's not a truck roll for us.

So it's an incremental up-sale, an incremental install.

Now to your cost question.

The old gateway into the home which had all the built-in features was roughly $600 and we're doing this, per home, roughly just over $200.

So at the low end, we're saving a quite bit of money.

At the high end, it might cost us more but it's built into the pricing plans and we incrementally up-sell and add to the functions and features that that customer wants.

It gives us much more flexibility than we had under the gateway we were restricted to three streams into the home.

I could now give somebody 10 standard definition channels into the home over the 20 to 30 meg whichever we're providing.

All of that without wiring, one CAT5 to one TV.

I hope that got it.

Probably like I said, more than you wanted, Frank.

Steve, maybe on the use of cash.

Yes.

Hey, Frank, this is Steve.

To your question, you know we were fortunate to build quite a bit of cash in the third quarter per the earlier question and conversation, the leverage ratios are showing some improvement quarter over quarter.

So I think for right now as we can look at where we're positioned, we look at the balance sheet.

We'd obviously love to be able to recash the capital structure in conjunction with an acquisition down the road.

You know, my preferred use of cash would be against acquisition but absent that not happening, I think for right now, we're going to continue to try to balance the payout ratio on leverage and focus on deleveraging in the short-term.

From time to time, we talk about the share repurchase, have discussion with the Board relative to that but based on our limited flow, our desire right now is to focus on deleveraging.

On acquisitions, we saw sort of break in the trend here with Windstream acquiring CLEC.

Our CLEC properties attractive to you?

Is that something that you would consider as part of an acquisition?

A pure place CLEC near your territories or would you just be looking at staying with the rural [ILAC] focus?

Well, Frank, I think you're aware.

We do have a CLEC in Pennsylvania and we like that very much.

That's a great business model.

We were -- my team is blessed with a lot of CLEC experience.

We've launched residential and business over 10 years ago in Illinois.

We like that.

We like that business.

So, would we look at a CLEC?

Yes, particularly where it surrounds our territory, makes some sense.

We'd certainly entertain a look at it but we kind of like the smart build that we're doing in PA and also in Texas.

We've got an edge out strategy in both Texas and Illinois where our IP network allows us to do smart things near territory and edge out that way.

So it would be on the table.

I would tell you though it would have to make some sense and it would have to be near or complimentary to our existing territory.

Great, thank you very much.

Thank you, Frank.

There are no further questions at this time.

I would like to turn the call over to Mr.

Currey.

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

Before I end the call, though, I'd like to publicly thank all the people that I work with for their accomplishments during this very challenging year.

It's easy for me to get on these calls and discuss how well we service our customers as well as the financial and operating gains from consolidation and cost reductions but I recognize it's the hard work, creativity, and energy of all of our employees in Illinois, Pennsylvania, and Texas that make these things possible.

So again, thank you for joining us.

Have a great day.

This concludes today's conference call.

You may now disconnect.