Consolidated Communications Holdings Inc (CNSL) 2009 Q4 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Consolidated Communications Holdings, Inc., fourth quarter and year-end 2009 results conference call.

(Operator Instructions).

I will now hand the floor to Matt Smith, Treasurer and Director of Finance.

Thank you, Mr.

Smith.

You may begin the conference.

Thank you, Latonya, and good morning, everyone.

We appreciate you joining us today for our fourth quarter and full-year 2009 earnings call.

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

After their 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, and thanks to all of you for joining us today.

We had another great year, with strong financial and operating results.

I will review some of our quarterly highlights and recap our 2009 accomplishments.

After that, I will provide some comments on our recent announcement regarding our exit of two non-core businesses, and then provide an update on the commercial developments that we have discussed on our past earnings calls.

First, we had an exceptional quarter across the board with our product metrics, including broadband, access lines and CLEC.

We delivered strong broadband growth with DSL subscriber additions of 2400, and IPTV adds of 1600.

We now have over 100,000 DSL customers, while continuing our industry-leading penetration of over 40%.

The broadband growth in the quarter more than offset our access line losses, which also reflected continued improvement; and in fact, the ILEC line losses for the quarter were the best they have been in over two years, and we were also able to increase our CLEC access line equivalents by almost 1,000.

I could not be more pleased with the market reaction to our products and our ability to compete in this very difficult environment.

Financially, we had another good quarter.

Revenue for the period was $100.8 million, and adjusted EBITDA was $48.1 million.

Adjusted EBITDA increased by $2 million over the same period last year, providing a very comfortable dividend payout ratio of 60.3%.

Obviously, Steve will discuss the financials in more detail later in the call.

Now let me recap just a few of our accomplishments for the full-year.

We completed the North Pittsburgh billing system integration in June, and the entire integration on time and ahead of budget.

We completed our relaunch or repackaging of our IPTV product in the third quarter, which consisted of combining both pair bonding and new in-home technology.

The pair bonding technology allowed us to increase bandwidth and tailor our offering to the needs of the customer.

If they want multiple HD streams, multiple DVRs and higher DSL speeds, we can now meet that requirement.

The new IPTV in-home infrastructure includes a wireless device and individual set-top boxes, which makes our install more customer-friendly and efficient.

Beyond the customer benefits delivered through pair bonding, the technology also extended our reach and helped us pass an additional 45,000 homes with our IPTV product in 2009.

Our HD channel offering doubled, and we now have 50 HD channels, and another 20 are planned for 2010.

We improved our HD and DVR penetration rates, which are now at 17% and 22%, respectively.

We increased our DSL and IPTV subscriber base by 9% and 39%, respectively, and our ILEC access line losses improved by 110 basis points to 6.5% for the year.

Financially, we improved our payout ratio and our balance sheet by increasing our cash position by over $27 million to $43 million at year-end, despite making contributions to our pension plans of close to $11 million.

As you can tell, we accomplished a lot in the year, and I'm very proud of our team's performance.

Just this week, we closed on the sale of our Consolidated Market Response division.

This business provided call center and fulfillment solutions to a variety of industries.

We're pleased with the outcome of this transaction and having a buyer, Solex, who is committed to the employees and communities.

Solex is now a large network customer of ours, and they will also provide some services for us.

Also two weeks ago, we announced plans to phase out our Consolidated Operator Services division and expect to finalize the closing by mid-year.

This business provides wholesale operator-assisted and directory assistance to telecommunications companies.

These actions allow us to give full attention to focusing our capital and our resources on our core products and services.

Finally, let me update on you the commercial developments that we have discussed on our past calls.

In our Cranberry, Pennsylvania, market, Westinghouse has announced its intent to construct a fourth building at its recently developed site and add another 1,000 employees to that location.

This will bring the total employees to over 4,000 that have been moved, or hired, in the Cranberry location.

The KBR project in our Katy, Texas market was recurrently cancelled due to financing concerns, but we remain bullish on both residential and commercial growth in our Texas markets.

And finally, in Mattoon, Illinois, the future gen clean coal project is still moving forward.

Recently, new funding commitments from Peabody Energy and Caterpillar added to the existing Alliance members.

With the Department of Energy commitment of $1.1 billion for this project, it's still planned to break ground this year.

So with those highlights, I will turn the call over to Steve for the financial review.

Thanks, Bob.

Good morning to everyone.

As Bob mentioned, we are pleased to report solid financial results for both the quarter and the full-year 2009.

This morning, I will review our quarterly financial performance and then provide our 2010 guidance.

Operating revenue for the fourth quarter was $100.8 million compared to $102.7 million for the same period in 2008.

Local calling, network access and long-distance revenues all declined, primarily due to continued access line erosion, and were partially offset by the growth in our data and internet services products.

Total operating expenses exclusive of depreciation and amortization and excluding a 2008 goodwill impairment charge from our recently-sold CMR business unit were $62.3 million, compared to $63.4 million for the same period last year.

The current quarter included $1.5 million of incremental pension costs compared to the fourth quarter of '08.

When excluding this non-cash expense, our operating expenses declined by $2.6 million year-over-year.

The continued cost structure improvement is the result of leveraging the systems integration work for our Pennsylvania operations which we completed in June, and it enabled us to further consolidate and reduce work groups.

In the current quarter, we took actions to consolidate additional back office and service functions in order to more efficiently provide the highest quality of service to our customers.

Due to this consolidation, we took a charge of $922,000 in severance that does qualify as an add back to adjusted EBITDA under the terms of our credit agreement.

We expect to recognize additional cost savings of $1.5 million starting in May when the consolidation actions initiated in this quarter are completed.

Net interest expense for the quarter declined by $4.6 million to $14.1 million compared to the same period of 2008.

The decline is attributable to the recognition of $2.8 million in non-cash expense in the fourth quarter of 2008 related to the accounting for our interest rate swaps.

While the balance of the decline of $1.8 million is driven by an 80 basis point improvement in our weighed average cost of debt, which was 5.96% through the fourth quarter.

Other income net was $6.5 million compared to $4.9 million for the same period last year.

For the quarter, we recognized $6.9 million in cash distributions from our wireless partnerships compared to $4.9 million for the fourth quarter of 2008.

The current quarter also includes an incremental loss from the disposal of assets of $1.1 million.

Weighing all these factors on a GAAP basis, net income increased $3.4 million to $7 million compared to $3.6 million in the same quarter last year, while net income per common share increased $0.13 to $0.24 compared to the same period in 2008.

However, we believe that it's also 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 $7.6 million, and adjusted net income per share was $0.26 compared to $5.1 million and $0.17 per share, respectively, in the fourth quarter of 2008.

Adjusted EBITDA improved by $2 million to $48.1 million compared to $46.1 million for the same period last year.

Capital expenditures for the quarter were $11.4 million.

From a liquidity standpoint, we ended the quarter with $42.8 million in cash, and our $50 million revolver remains undrawn.

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

Also at December 31, we had $75 million of our interest rate hedges expire, which decreased our hedge position on our term debt from 77% to 69% and lowered the overall cost of debt from 5.9% to 5.57% going into 2010.

For the quarter, our total net leverage ratio as calculated in our earnings release was 4.4 times to 1.

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

Cash available to pay dividends increased by $3.7 million over the same period in 2008, resulting in a very strong dividend payout ratio of 60.3%.

Consistent with prior years, we will provide guidance for 2010 CapEx, cash interest and cash income taxes.

First, capital expenditures are expected to be in the range of $40 to $42 million, which is down from the $42.4 million CapEx spend in 2009.

Cash interest expense is expected to be in the range of $51 to $54 million, which is down to 2009 cash interest levels of $56 million.

Cash income taxes are expected to be in the range of $21 to $23 million.

This compares to 2009 cash taxes of $11 million, when we benefited from bonus depreciation taken under the stimulus plan.

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, 2010, to shareholders of record of April 15, 2010.

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

In summary, we had another solid quarter which capped off a great year of many accomplishments.

We continue to invest in the business and provide the newest technologies to offer the best products and services, and continue our focus on producing strong cash flows in support of our dividend.

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

(Operator Instructions).

And your first question comes from the line of Gray Powell with Wells Fargo Securities.

Good morning, everyone.

Thanks for taking the questions.

I just have a few.

So I guess starting off with the obvious, the improvement in access line trends in Q4 was pretty impressive.

What was the main driver there, and should we think about the Q4 number being a good run rate going into 2010?

Yes, good morning, Gray.

We think we're going to continue to improve on that number; and it goes -- there is a series of things that have happened.

Two and a half years ago when the cable companies all launched, you get that peak and that spike after five or six quarters, so that has obviously moved in the right direction for us.

The second thing is we have seen consistent improvement in port outs over the last two or three quarters.

And the cable competitors in reporting their results, they're showing the lowest number of voice net adds that they have had in a number of quarters, and we're seeing that statistic in our port outs.

And then lastly, it's the focus on the bundle.

It's the focus on having competitive bundles, a different set of product suites to meet the customer need, with options that fit what they're looking for.

So I think it's a combination of all of those things resulting in staying consistently at it, and we're seeing the improvement.

Okay, that is helpful.

I guess you guys also saw a good pick up in margins up 2009 from 2008.

You have announced some initiatives that should hit this May.

I guess my question is, what are some of the other costs that you can take out of the business, and how should we think about your target adjusted EBITDA margin longer-term?

Well, a two-parter there.

I will take the latter part of that first, Gray.

We have said for some period of time that our goal was to move toward a 50% margin; and we have gone from the low 40s and have made progress on that, and with the completion of the Pittsburgh integration and some of the cost that we have taken out there.

We have one big one planned early in the second quarter with a call center consolidation across all three states, and then of course, there is just the consistent constant look at where can you take additional costs out.

We have made significant investments in back office, and starting to gain the benefits of that.

And then I guess the last one I would say is the relaunch on the IPTV that I talked about, the pair bonding and the relaunch.

The in-home now install with the wireless ruckus device has reduced not only our costs and made that install more efficient, but also gives the customer a better experience.

So we should see improvement in our IPTV margins this year.

Got it.

And then just one last question, I think my calculation is correct that you guys have IPTV to roughly 80% of your homes in your territory?

Yes.

How much farther should we think about that going?

Gray, we would put the number more at 55 to 60%.

Oh.

That we can get the product to our customer base.

Okay.

Hey, Gray, this is Steve.

I would like to pile on to the EBITDA margin question just a little bit in that one thing to remember as you're building your model, too, is that with the divestiture of those two businesses -- the CMR and Operator Services businesses -- is while $17 million of revenue fallout -- maybe there was a couple of million in 2010, based on the timing and the closing that we will see; but virtually no erosion or improvement.

Basically, it's neutral from an EBITDA perspective, so you will want to take that into consideration in your model.

And I guess I would just remind you that with all the -- I think every quarter last year or for 2009, we basically announced one cost reduction method combining our repair centers, our network control centers and now customer service, and those cost savings will be -- will see the full-year impact of most of those next year; and as Bob said, the customer service consolidation we're talking about now, we'll see the benefit of that in May.

Okay, thanks.

That makes a lot of sense.

Thank you very much.

Your next question comes from the line of Frank Louthan with Raymond James.

Great, thank you.

Can you give us an impact for EBITDA and cash flow for the units that you're selling?

And then, can you give us a little more color on the pair bonding?

What kind of bandwidth speeds are you getting on average to your customers?

How many HD screens can you provide and so forth?

Thanks.

Frank, Bob.

On the first part of that question, total, when both -- well, the CMR is gone effective Sunday, and the Operator Services, as I said, would be about mid-year.

You're talking about on an annualized basis about $17 million in revenue, and breakeven slightly, a bit of EBITDA.

So that is what Steve was referencing on our margins will improve as a result of no longer in those businesses and focusing back on our core broadband business.

As far as the pair bonding, it depends a little bit on the characteristics; but just in general, in the past, we could get 20 meg out 7,000 or 8,000 feet, and now we can get that 20 meg out 12,000 to 13,000 feet, and we can get 30 meg out to the old 7,000, 8,000 feet.

So you're getting more bandwidth, which allows us to do multiple HD strains; and with MPEG 4 compression, it's about two meg per standard definition and four on an HD channel.

So you can get -- we can get -- now with the new product, we can get multiple HD streams out to these homes that want five or six of them, where in the past, we were restricted to one HD and two standard definitions.

Okay, great.

And with it going out now 12,000 to 13,000 feet, is that -- how much does that change your footprint within -- for your customers?

Well, it added -- in 2009, it added 45,000 new homes that we can get our IPTV products to.

And of course, with that, we're seeing some pull-through into DSL.

I mean, you naturally -- because of the value of the triple play, when we can take the IPTV product out, we're getting some pull-through in the DSL.

And what sort of DSL speeds are you selling, and where do you have the IPTV capability?

We're selling all from -- our basic entry package is three meg, and we go up to as high as 20.

Are you getting much of a take rate at that higher end?

No.

Okay.

Now, the three and five meg product, Frank, really -- three and six meg product satisfies far and away the great majority of our customers.

Great.

Okay, thank you very much.

You're welcome.

The next question comes from the line of [Michael Milfen] with Soleil Securities.

Yes, hey, thanks.

Thanks for taking the question.

A couple of questions, if I may.

First a follow-up on IPTV, you increased your addressable homes by 18,000 in the quarter.

I'm wondering if the rollout was even throughout the quarter?

Was it more back-end loaded?

And did you actively market the service as soon as construction was complete, or was there a lag?

Yes, thank you, Michael.

It was basically even throughout the quarter, and we started direct mail and marketing to those customers within two weeks after completing them.

Okay.

Great.

And then on the regulatory front, I guess as it relates to your business, what do you expect out of the national broadband plan?

Do you think it will -- that the margins help or hurt your business, and specifically as it relates to [USF] and the inner carrier and all?

Thanks.

Well, obviously, we don't know; but you said what do we maybe expect or speculate on?

We'll know in a couple of weeks -- we will all know.

But we have been very actively involved at the SEC level, both as a Company and in our national associations that represent us.

We have done, I think, an excellent job of pointing out the characteristics of the midsize price cap companies with our peers, and I would tell you that I'm encouraged that they did listen.

I actually attended a dinner with Blair Levin three, four weeks ago, and he did a really nice job of listening and acknowledging the concerns.

So we're optimistic.

We think there will be some dealing with inner carrier comp and high cost support; also hopefully dealing with phantom traffic and other issues that we brought up that we would like to see reduced.

And lastly, the Commission has historically had a transition period, where you have an opportunity to migrate over time and adjust your business model.

So we are pretty optimistic that there will be support for rural broadband to expand broadband, and we're convinced that they understand that that is not done without some additional costs.

So keeping my fingers crossed, that's a long-winded answer to a very short question, but we're optimistic.

Great.

And then if I may ask one last one, really the obligatory M&A question.

You guys have obviously been quiet for awhile, but reading through some of the recent merger agreements in the sector, it appears there's been a lot of discussion between most of the parties in the group.

I was hoping you could comment on some of the M&A opportunities you see out there.

Also, have you found that your size has been a hurdle at all in making accretive acquisitions relative to some of your larger competitors who may have been able to make a higher bid?

And then on the flip side, how would the Board view a potential bid for Consolidated and weigh the probable loss of jobs?

(inaudible) Thanks.

Yes.

Boy, there was multiple parts there.

Let me see if I can go back over them.

Obviously, there are confidentiality agreements on each deal, so I'm not at liberty to comment on any individual deal.

You have probably read their proxies and can figure out who was where on those deals.

We still view ourselves as acquisitive.

We have a series of potential acquisition targets that we analyze and look at.

Our leverage and the capital markets have restricted us from putting a lot of cash into a deal.

So ours would be more focused on a stock transaction.

And also, the markets no longer guarantee bridge financing, et cetera.

So as the markets have improved, I think the prospects have improved.

The last part of that as far as what would we do, our Board would have to consider what is in the best long-term interest of our shareholders.

And with the progress that we have reported, the plans that we have and the size that we're at, we think we're able to compete and compete effectively at the current size, but we would like to get bigger.

Great, that is really helpful.

Thanks a lot.

Good luck, guys.

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

Davidson.

Hey, guys, thanks for taking the questions.

I have got three, basically.

On IPTV, can you talk a little about how well you penetrated in the different clusters?

I mean, overall, it looks like you're sort of in the low teens, 12%, 13% area.

But I know you have been working in Illinois a lot longer than in Pennsylvania, so can you give us some sort of flavor on where you're sort of at in each cluster?

And then I've got two other questions.

Yes.

You're clearly correct on that, Donna.

Illinois is -- at total -- is between 25% and 30%, and some of the early markets are at the high end of that.

We don't -- for competitive reasons, we haven't published a lot of data on individual markets.

Pennsylvania, the market that we've been in a little over a year, eighteen months, it's around 10%.

So that is a range of where we are in the market.

But clearly to your point, we -- and with the passing of 45,000 new homes last year -- we have a lot of upside with the homes passed to go improve our penetrations, and we're very optimistic about that.

Great.

And then you mentioned that you were -- you had done direct mail and marketing, like right after you passed the homes.

Do you have marketing programs planned for the next few quarters that would go back and sort of revisit the new homes that you have just passed?

Yes.

Definitely have targeted marketing.

We also, at certain times of the year and certain markets, door-to-door, feet on the street and then introductory offers for these new homes that can now get our service again, targeted more or encouraged to point out the value of the bundle.

So that we can -- as I commented, not to repeat myself -- but get some throughput also from DSL with our extended reach to -- with the IPTV product.

Great, and then on -- can you give us a little flavor on the 2010 cellular joint venture payments, what you looking for there?

Is it going to -- just directionally, is it going to be same as -- similar to 2009, or is the rollout of LTE going to sort of decrease the cash distribution that they can make?

Yes, Donna, it was roughly about 22 million in total for 2009, and we would expect that to be with the range of flat to 0 -- I'm sorry, flat to 5% up for the 2010.

And we -- they have been very consistent over the last several years, and we have seen budgeted information from Verizon for this year so we're pretty confident in that number.

Okay, that's better than I was expecting.

And then one last question.

It looks like your business line loss is starting to trend down.

Anything specific going on there, or is that just sort of the general lag in the economy?

Well, a couple of things, Donna.

We are seeing, hopefully, the bottom on the economy; and there is a few sectors where we're starting to actually see a little bit of growth, so some things have washed their way through.

I think also we're done pruning maybe some customers that were not -- particularly in the CLEC area -- that were not profitable.

So we have assisted them to move to either a higher rate or find another provider, and we have worked our way through that, and so that has also stabilized.

Okay.

Great.

Thanks, guys.

Thank you.

Thank you.

(Operator Instructions).

And your next question comes from the line of Barry Sine with CapStone Investments.

Good morning, gentlemen.

Couple of questions.

First of all, you ended the year with 188,000 homes passed on IPTV.

What are your expectations for 2010?

Do you expect to add to that, or kind of hold after the large expansion you did last year?

Yes.

Barry, we're currently forecasting it will pass another 15,000 in 2010.

And of the homes that you ended with, 188,000, do you have the full suite of products available in all -- for all of those homes, or are there still additional product rollouts that you're planning for those homes in 2010?

No, they're all capable of handling the full suite of product.

Okay.

My next question goes to the ILEC line losses.

And obviously, you're in a better competitive position where you have the triple play to areas where you don't.

What roughly is the percentage of the homes, or the number of homes, that you have where you don't -- you haven't rolled out the video triple play, where essentially you're competing with one arm tied behind your back?

Approximately 40% to 45% of the homes we don't reach with our triple play product.

And how many ultimately do you think you will never get to?

We're going to get to them all if we live long enough.

The technology is improving, we're deploying fiber all the time.

That is a pretty flippant answer.

It's going to be modest over the years, but eventually we think -- in the near-term, the next couple of years -- we can get to 80%.

Okay, and turning to the revenue, you break the revenue out for the telephone portion of the business in a number of line-items.

On the subsidies line item that was reasonably flat up a little bit for 2009, what do you know so far about 2010 in terms of any puts and takes you expect on the subsidies line item?

Barry, this is Steve, and I think we would probably guide you to take subsidies down slightly based on all the improvement we have made on our cost structure, going to price caps and things like that, and losing access lines in a price cap environment.

I mean, we would probably see subsidies come down $3 million or $4 million this year.

And my last question was partially asked in terms of the wireless dividends you receive from the wireless partnerships.

Could you just remind us what the formula is for determining how much of a dividend you will get?

Looks like something like EBITDA minus CapEx?

Well, basically those -- we are -- just to remind you, we're involved in five limited partnerships all through Verizon.

We own anywhere ranging from 2% up to 23% depending on the partnership.

So what we get distributed back to us is basically that pro rata -- or what potentially our pro rata share of those earnings.

They may withhold slightly depending on what they're doing from a CapEx perspective or whatever; but generally, it's our form -- it's the formula the way it is based on our partnership/ownership ventures, and then how they want to manage CapEx or other spending programs.

So it's really discretionary at the partnership level how much they want to dividend back up to their irrespective parents?

Well, it could be, but we think we're on the right side with the needs of Verizon, and I would remind you of the consistency of the dividend streams over the last several years that we have owned them 20 -- $17 million in 2008, $20 million last year; and like we said earlier, based on the budgets that we have visibility to, we're expecting that to be up 5% this year.

Yes, and as we have said, we don't like losing access lines, and that's coming down.

But if you've got to lose an access line, we would hope people would go to Verizon, particularly in our territory where we get some share back.

Okay, thank you very much.

Thank you.

Your next question comes from the line of Dave Coleman with RBC Capital Markets.

Thanks a lot.

Just two questions.

Can you say the number of service bundles that you had at the end of 2009?

And then the DSL net adds were pretty strong in the quarter; I was just wondering what the percent of primary residential access lines were DSL subscribers, and what your expectations would be for DSL growth in 2010?

Thank you.

Yes.

First of all, Dave, welcome to the call.

Appreciate your taking coverage of the Company.

I'll try to remember all your questions there.

The bundles, it's north of 55,000 -- somewhere between 55,000 and 58,000.

Dave, I'd have to get back with you on the exact number, but I know I'm in the right range.

On the DSL question, we're at 40 -- we're just north of 40% on penetration of our primary access lines, and we still see growth in that product.

So while it may not be -- as you're reaching higher penetration rates, obviously the growth gets a little more difficult -- but we would see something maybe slightly under what we did last year, but we still see nice growth in the DSL product.

Is that 40% of resident -- primary residential or total access lines?

Total access lines.

Do you have that percentage of primary residential?

Yes, it's 70% of primary residential access lines.

Okay.

Great.

Thanks a lot.

You're welcome.

Thank you.

At this time, there are no further questions.

Mr.

Currey, I return the floor to you for closing remarks.

Thank you, Latonya, and thank all of you for joining us today and for your interest -- and more importantly, your support -- in Consolidated Communications.

We hope you will join us on our May call.

Thank you, and have a great day.

Thank you for participating in today's Consolidated Communications Holdings, Inc., fourth quarter and year-end 2009 results conference call.

You may now disconnect.