Consolidated Communications Holdings Inc (CNSL) 2010 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the first quarter 2010 earning results 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)

At this time I would like to turn the call over to Mr.

Matt Smith, Treasurer and Director of Finance.

Please go ahead, sir.

Thank you, Jennifer, and good morning everyone.

Welcome to our first quarter 2010 earnings call to review the Company's results that were released this morning.

Joining me on the call today 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 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 good morning everyone.

I'm pleased that you joined us today as we review our results for the first quarter.

Let me start by providing some financial and operating highlights and then I'll turn it over to Steve for a detailed review of our financials.

The first quarter of 2010 was another solid quarter for us.

Revenue was $98.3 million and adjusted EBITDA was $47.1 million.

Excluding the impact from the sale of our telemarketing business, revenue was down 2% year-over-year while adjusted EBITDA increased by 4%.

In addition, we increased our cash available to pay dividends to $18 million, resulting in a very comfortable payout ratio of 64%.

These financial results reflect our continued success in growing our broadband customers, controlling expenses, and improving our margins.

Operationally our product and marketing efforts resonated well with our customers as we delivered strong broadband growth with DSL subscriber additions of 2,000 and IPTV ads of 1,800.

This broadband performance represents a 13% increase year-over-year.

We ended the quarter with over 102,000 DSL customers or 42% of our total access lines.

We continue to see strong growth in IPTV customers with 25,000 subs at the end of March.

After passing an additional 6,000 homes in the quarter, we can now serve a total of 194,000 households and have a current penetration rate of 13%.

ILEC line losses improved again this quarter and were better than our internal projections.

We lost 2,500 lines in the quarter.

That's compared to 4,500 in the first quarter of 2009, or reflecting a 44% improvement.

Our line loss over the last 12 months was 5.8% compared to 8.1% in the same period last year.

We are continuing to see our products and promotional bundles coupled with the best service in our markets provide a significant competitive edge.

For the second quarter in a row we also grew our CLEC access line equivalents.

As you will recall, our Pennsylvania-based CLEC is business only, and the back-to-back periods of growth are an encouraging sign that the economy has bottomed out and is beginning to rebound.

This was also the second quarter in a row where we were able to grow our total connections after a difficult stretch of both competitive and economic challenges.

We increased our total connections year-over-year and had a strong first quarter of 1,800 adds.

From a competitive standpoint, we continue to view ourselves as leaders in our market.

We have high-quality products and services at competitive prices, and our operational performance reflects our ability to take market share.

We don't underestimate our competition, but we do understand our markets and feel good about our position.

Finally, I think recent events in the industry warrant a few comments on M&A.

As we have stated before, we continue to believe consolidation makes sense in this industry.

We recently completed the integration of North Pittsburgh.

We will stay focused on delivering solid operational and financial performance so that we will be well positioned to look at strategic opportunities that may present themselves.

So with that I'll turn the call over to Steve for the financial review.

Thanks Bob, and good morning to everyone.

We are again pleased to report solid financial results for the quarter.

This morning I will review our results and confirm our 2010 guidance.

Operating revenue for the first quarter was $98.3 million compared to $101.7 million for the same period 2009.

Local calling, network access and long distance revenue all declined primarily due to continued access line erosion.

Subsidies declined by $1.9 million primarily due to the impact of the increase in the Federal high cost fund, national average cost per loop, as well as access line loss.

Other operations revenue was down approximately $1 million due to the sale of our telemarketing business that we closed on on February 28th.

Finally, data and internet services grew by $1.6 million due to the continued expansion of our IPTV and DSL services.

Total operating expenses exclusive of depreciation and amortization were $58.7 million compared to $64 million for the same period last year.

The first quarter of 2009 included $3 million in integration and severance expenses and $300,000 related to the ratification of a labor agreement.

The remaining $2 million in savings are primarily due to the cost structure improvements implemented throughout 2009 and lower non-cash pension costs.

Net interest expense for the quarter declined by $1.6 million to $12.9 million compared to the same period in 2009.

The decline was driven by a 70 basis point improvement in our weighted average cost of debt which was 5.57 throughout the first quarter.

Other income debt was $6.4 million compared to $4.5 million for the same period last year.

For the quarter we recognized $6.9 million in cash distributions from our wireless partnerships compared to $5.1 million for the first quarter of 2009.

Weighing all these factors on a GAAP basis, net income increased $3.6 million to $6.9 million compared to $3.3 million in the same quarter last year while net income per common share increased from the same period last year by $0.12 per share to $0.23.

As detailed on the adjusted net income per share schedule in the earnings release, given the effect of the non-cash stock compensation, adjusted net income per share was $0.25 compared to $0.19 in the first period of 2009.

Adjusted EBITDA improved by $1.8 million to $47.1 million compared to $45.3 million for the same period last year.

Capital Expenditures for the quarter were $10.9 million.

From a liquidity standpoint we ended the quarter with $44.3 million in cash, our $50 million revolver remained undrawn, and we have no debt maturities until December of 2014.

For the quarter our total net leverage ratio as calculated in our earnings release improved to 4.38 times to 1.

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

Cash available to pay dividends was $18 million compared to $17.7 million in the same period of 2009, resulting in a solid dividend payout ratio of 64%.

Now let me reiterate our guidance for 2010 CapEx, cash interest and cash income taxes.

First, capital expenditures are expected to be in the range of $40 million to $42 million, cash interest expense is expected to be in the range of $51 million to $54 million, and cash income taxes are expected to be in the range of $21 million to $23 million.

With respect to our dividend, our Board of Directors has declared the next quarterly dividend at approximately $0.39 per common share payable on August 1st, 2010, to shareholders of record on July 15th, 2010.

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

So in summary we're pleased to kick off 2010 with a good quarter.

It's great to be off to a strong start.

We continue to invest in the business and provide the highest value to our customers while delivering outstanding operating metrics.

We remain confident in our ability to sustain strong cash flows and support our dividend.

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

(Operator Instructions) We will pause for just a moment to compile the Q&A roster.

Your first question comes from Dave Coleman with RBC Capital Markets.

Thank you.

Two questions.

Your rate of access line loss during the quarter I guess on a sequential basis ticked down again which is pretty impressive.

I was just wondering if you can talk about what's contributing to the success in retaining more access lines.

And then secondly, Steve, on your comments regarding SG&A, it sounds like about $2 million of the year-over-year step down in SG&A expense was due to cost-saving initiatives.

I'm just wondering how much additional SG&A expense we could expect from those initiatives through the balance of the year.

Thanks.

Dave, this is Steve Childers.

Thanks for your question.

Let me try the SG&A first.

You're exactly right, we did have $2 million of realized cost savings in the first quarter.

As you might recall, last year we had several integration and workgroup consolidation efforts going on throughout the year, and again a lot of the -- some of the stuff that we -- or some of the improvement we saw in the first quarter were the result of those actions being completed in 2009.

Going forward we're still wrapping up our customer care consolidation.

I would just remind you we made based on the billing -- success of our billing integrations we were able to consolidate six call centers down to two.

We're in the final stages of doing that.

That will yield over the course of the year probably $1 million to $1.5 million in cost savings, and there is probably another couple of million dollars in pickup in other initiatives that we have going on and our full-year effect from last year, as well.

Yeah Dave, on the access line question, obviously we're pleased with the trends, and particularly pleased with the first quarter performance of 1%.

And it's just a constant battle with the cable companies, and refreshing our marketing efforts, a lot of emphasis on our bundles continuing to try to retain a voice connection with our customers and rolling out bundles that they view that have value.

DSL, broadband, IPTV, that whole bundle appeals to the customer and I think that's where we're seeing, and our efforts over the last couple years are paying off.

In no way do we underestimate the cable competition or are we declaring victory, but we certainly like the trends and particularly the first-quarter performance.

That's great.

Thank you.

Your next question comes from Barry Sine with CapStone Investments.

Good morning, gentlemen.

Let me kind of follow up on that last question and see if we couldn't dig a little deeper in terms of the competitive environment in each of your three markets for your triple play offering and how that compares to -- I know there's different cable operators in each of those markets.

Could you give us what you're offering, what your price points are, and then what you're seeing in terms of a competitive response in each of the three markets?

Yeah, I'll try, Barry.

Thanks for the question.

As we described in our last call, we're using a new approach in the install in the home and that's been very effective.

It's lowered our costs on equipment and the installation, so we have been offering a base price of $79.95 and then upselling from that.

And, in fact, since we launched that program we've actually seen an uptick in RPU.

The cable guys, we compete against everybody in all three states.

They're running the typical national programs that you see on and off on certain aspects, somewhat obfuscating some of their costs in -- or some of their pricing in the bundle, trying to focus maybe on some of our line rates.

But it's a different battle in each state.

For instance, in Illinois when we launched IPTV we did not have HD or DVR, and so our penetration rates in Illinois are lower than they are in Texas and PA.

So we're specifically doing some targeted approach to improving what we know where we're below the industry average, and those kind of programs are taking place in each state depending on the individual characteristics and where we stand with our competitors.

I guess the last thing that we've really made some nice progress on is our marketing focus.

We've hired and are working with a marketing firm that makes us much more targeted on individual customer segments, what the customer wants, the propensity to buy, and just as importantly allows us to follow up on the effectiveness of those programs and then we can modify them, etc.

So there is no single silver bullet.

It's a whole list of things that both our sales ops and engineering teams are doing on a daily basis.

Could you also go through the profitability of the IPTV business?

I know in the past you've said that the older a market is the more profitable it is.

You have high marketing costs.

Your installation costs have come down quite a bit.

Overall are you profitable today on the IPTV business, and if not when do you expect it to get to EBITDA break-even?

Well, we're close today.

Some markets I would tell you that where we have been launched three years we're profitable.

The new approach on the way we do the install and the reduced cost, we're estimating that that's an 18- to 20-month period of time before it starts to contribute and is no longer dilutive.

But obviously as that base has increased and our knowledge has increased, the vendor prices have come down, the interoperability issues have been solved, the product gets better and better performance every day.

But there is clearly upside in our IPTV performance and we're focused on that.

And just lastly one quick more question on the IPTV.

Can you give us any visibility on where you're going to go for the remainder of the year in terms of homes passed for IPTV?

They're spread across the three states.

I don't have the exact number per state, but it's roughly 15,000 to 20,000 additional homes passed up from the 195,000 that we have today.

So we'll get some more opportunities obviously with those new homes passed.

Okay.

Thank you.

Your next question comes from Frank Louthan with Raymond James.

Great.

Thank you.

How should we think about margins for the rest of the year?

Is this a good run rate for the EBITDA margin?

Was there any sort of one-time impact that hit this quarter?

And I apologize if you covered this, but any update on the FutureGen project or anything going on there that you can give us as to how that might impact your market?

Thanks.

Frank, this is Steve, and I'll try the first part of your question and Bob can take the FutureGen piece of it.

With respect to margins, I do think that on a consistent basis that you could, with the resetting of subsidies, some of the cost initiatives that we implemented last year are starting to hit first quarter.

I think this would be a pretty good run rate, and obviously we are focused on improving profitability in video as Bob suggested.

The one time -- the one thing I would call your attention to, and again I can't remember exactly how you have your model set up, so from an operational perspective I'd say the first quarter is a proxy that you could use for the rest of year and hopefully we'll improve that with some additional cost improvement.

But the one thing I would call your attention to is kind of the lumpiness if you will with respect to the wireless cash distributions that we get.

First quarter we got $6.9 million.

In the last two years they've been down from first quarter, anywhere from 15% to 20% in the second quarter, and then kind of moved back up in the third and fourth quarter so you probably need to call some attention to that.

Yeah, Frank, it's Bob.

One of these days we're going to pronounce your name correctly.

But regarding FutureGen, we continue to be positive about the project.

The Department of Energy last summer gave the Alliance some targets, some things that they needed to get done including recruiting new members.

And they have picked up two big new members, and the negotiations between the Alliance and the Department of Energy continue.

I would also comment that last week the president was in Illinois doing multiple tasks, and spoke positively about the FutureGen project.

So it's not moving as fast as we would have liked, but it's shovel ready and as soon as they wrap up these last negotiating details we would expect the project to begin.

Great.

Thank you.

(Operator Instructions) Your next question comes from Mike Levine with Oppenheimer.

Hey guys.

I was just curious if with all your big competitors busy with mergers, I mean are you seeing or do you -- either are you seeing or do you anticipate seeing more opportunities on the M&A front for you guys?

Hi Mike.

When you say our competitors, you mean our competitors in trying to accomplish an acquisition.

Right.

Yeah, that's a great question.

Certainly if they're distracted, it removes a potential buyer, but on the other hand too the number of prospects has also diminished.

But yeah, we're optimistic, monitoring the situation.

Obviously the markets have improved, and we like where we sit.

And to your point, if they're in the middle of integrations or negotiations, that's one less that we have to contend with.

Thanks.

Your next question comes from Todd Rosenbluth with Standard & Poor's.

This is Todd Rosenbluth with Standard & Poor's Equity.

Thanks for taking the question.

Given that the debt leverage ratio is higher than where you've said your target range is, could we talk a little bit about what your plans for cash usage is in this year and maybe next year in terms of broadband build-outs, in terms of stock buy-backs, in terms of debt reduction efforts?

Maybe you can just talk through that.

Hello, Todd.

This is Steve Childers.

Thanks for the question, and again I will note that our leverage is higher than the peer group but it has come down quarter after quarter for the last four quarters I guess, so we're comfortable with the 4.38 times as we show in the earnings release.

Our target is to get to 4 times.

We're building some nice cash on the balance sheet, over $44 million into the first quarter, and so we're balancing when we might start making some debt repayments compared to what's the best use of cash.

I mean, we're not -- with our stocks trading today, we're certainly not looking at any kind of stock purchase program today, but kind of the internal attention points are debt repayment or reserve some cash for a potential M&A transaction down the road.

And also maybe look at some (inaudible) or a pension plan, although we're in good shape on that.

So that's the way that we're looking at it.

We're totally comfortable with the credit facility that we have, the compliance levels that we have and the leverage at this point in time.

And then just a quick follow-up since you mentioned that, yes, the stock is trading -- has traded up in recent weeks and recent months.

Just given that there are a number of properties out there that are -- or assets that are trading at discounts to yours, can you just give a comment on the M&A activity environment that you might have?

Pittsburgh has been fully integrated?

Well, you're correct there.

Pittsburgh is fully integrated, and we are well positioned should an attractive opportunity present itself.

And so we view ourselves as acquirers, and we're out as we've always been looking for the right opportunity that fits our very specific criteria.

We're happy with the size we're at, and we're not going to do a bad deal but we would look at some attractive properties that were cash flow accretive to our shareholders on day one.

And to your previous question, you also threw in there CapEx.

Steve gave the guidance of $40 million to $42 million on CapEx.

We continue to invest in our network and our products, and so we're growing the business, making the appropriate investments to continue to offer quality products at a great value to our customers.

Thank you.

At this time there are no further questions.

I would like to turn the call back to Mr.

Bob Currey for closing remarks.

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

We hope you will join us again next quarter, and thanks and have a great day.

This does conclude today's conference call.

You may now disconnect.