Consolidated Communications Holdings Inc (CNSL) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Consolidated Communications Holdings Inc. to release second quarter 2010 results conference call.

(Operator instructions).

I would now like to introduce your host for today's conference, Mr. Matt Smith, Treasurer and Director of Investor Relations. Sir, you may begin.

Thank you, Devin, and good morning, everyone. Welcome to our second quarter 2010 earnings call to review the company's results that we 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 financials and operating results, Steve Childers will then provide a more detailed review of the financials. Bob?

Thanks, Matt, and good morning, everyone. We appreciate you joining us today as we review our results for the quarter.

As is our normal practice, I will start with a high level financial and operating highlights and then Steve will provide a detailed review of the financials.

The second quarter of 2010 was another solid quarter for us. Revenue was 95.7 million and adjusted EBITDA 46 million.

As we mentioned last quarter, the sale of our telemarketing business and the ongoing process to close our operator services unit will lower revenue but be neutral to EBITDA. When excluding the 1.8 million f the revenue reduction attributable to these businesses, our overall revenue declined by less than 1% on a sequential basis.

With respect to our dividend we continue to deliver a solid and secure return to our shareholders as demonstrated by our payout ratio of 70.6 for this quarter and 67.2% year to date.

Operationally, we continued to perform well. Despite the competitive and economic pressures we increased our total connections for the third consecutive quarter and delivered growth of 4,150 connections year over year. This growth is led by our broadband products which fortify our competitive position in all three states.

We increased our broadband connections by 2500 in the quarter in what has historically been our softest quarter. This brings our total broadband customers to 130,000 which represents a year over year increase of 12%.

Our industry leading DSL penetration which is currently at 30 - excuse me, which is currently at 43% provides tier pricing points at various speeds as high as 20 megabits. We have been successful in adding our IPTV service to our DSL customer base and the combination of our large DSL penetration with our bundled pricing advantage provides us with substantial grown opportunities.

Currently, we penetrate 13% of the 198,000 homes that we pass with our IPTV service. We are driving higher ARPU through modest price increases and more importantly, through upselling HD and DVR as well as more video on demand programming. We see upside in these ARPU drivers as well.

With respect to access lines, we had another strong quarter. Our (ILAC) lines decreased by 2400 or 1%. This growth our line loss rate for the last 12 months down to 4.8%, compared to the 8% rate at this time last year and this is the lowest rate we've had since the end of 2007, before our North Pittsburgh acquisition and positions us as one of the best in the industry. We feel this is a direct result of our success in providing attractive product bundles coupled with exceptional service.

Specific to the Pennsylvania (CLAC) business, this is the third quarter in a row that we have increased access line equivalents and the key driver of this success is tied to our commercial, metro Ethernet data product, which can be either fiber of copper based.

The copper based product was another positive that came out of our north Pittsburgh acquisition and we have been able to replicate it in our Illinois and Texas markets. We have increased the number of metro east circuits by 25% over the last year.

From a competitive standpoint, pricing continues to be rational with a variety of aggressive promotional offering leading the acquisition battle. We are delivering the best products and services at a competitive price and continue to remain flexible with our marketing and promotional plans.

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

Thanks, Bob and good morning to everyone. This morning I will review our results and then update our 2010 guidance.

Overall, we are pleased to report another solid quarter of financial results. Operating revenues for the second quarter was 95.7 million compared to 102 million for the same period of 2009. Of the 6.3 million period over period decline, approximately one half was attributable to the sale of our telemarketing business in the first quarter of this year and the ongoing process to phase out our operator services division.

The 3.1 million revenue reduction from these business units is neutral to earnings. The remaining year over year fluctuations in our ongoing revenue streams consist of the following, local calling, long distance and network access revenue were down by 3 million primarily due to lower access lines.

Subsidy revenue declined by 1.6 million, also as a result of access lines, but impacted more so by the increase in the federal high cost fund, national average cost per loop while the national average cost per loop is going up, our costs are going down.

Finally, revenues from broad band - our broad band growth products increased by $2 million as seen in our data and internet revenue.

Total operating expenses exclusive of depreciation and amortization were 57 million, compared to 62.2 million for the same period last year.

The second quarter of 2009 included 1.8 million in integration and severance expenses as well as 2.7 in expenses from our telemarketing operations which as mentioned previously were sold in the first quarter of 2010.

Based on the 32% year over year growth in IPTV subscribers and the July 2009 relaunch of the video product, we incurred approximately 1.4 million in increased programming and video equipment costs. The remaining 2.1 million in savings are primarily due to the cost structure improvements implemented throughout last year.

Net interest expense for the quarter decreased by 1.5 million to 13 million compared to the same period of 2009. The improvement is driven by a 66 basis point decline in our weighted average cost of debt which was 5.61% throughout the second quarter.

Other net - other income net was 6.6 million compared to 8.5 million for the same period last year. For the quarter we recognized 7.1 million of our pro rata share of earnings from wireless - our wireless partnerships which generated 6.6 million in cash distributions. In addition, we recognized 800,000 in losses from the disposal of assets primarily related to the sale of the building in our Butler Pennsylvania market.

Also in the second quarter of 2009 we post at 1.8 million noncash benefit for the resolution of an access dispute.

Weighing all these factors, on a GAAP basis for the quarter, net income was 7 million and net income per common share was $0.24 per share. This compares to 7.4 million in net income and income per share of $0.25 for the same quarter last year.

As details on the adjusted net income per share schedule and the earnings release, adjusted net income per share was $0.28 in the current quarter compared to $0.27 for the second quarter of last year.

Adjusted EBITDA was 46 million compared to 48.1 million in the same period last year. As I mentioned the second quarter of 2009 included a 1.8 million non cash benefit for an access dispute settlement that was included in adjusted EBITDA.

When excluding this from our results, adjusted EBITDA was basically flat year over year.

Capital expenditures for the quarter were 10.9 million.

From a liquidity standpoint, our cash in the balance sheet at the end of the quarter was 53.6 million, which was an increase of 33.5 million compared to the same period last year.

In addition, our $50 million revolver remains undrawn and we have no debt maturity (inaudible) (December) of 2014.

For the quarter our total net leverage ratio as calculated in our earnings release was 4.38 times to one. Our leverage and coverage ratios were well within compliance levels of the credit facility.

Cash available to pay dividends was 16.4 million compared to 21.6 million in the same period of 2009, resulting in a very comfortable dividend payout ratio of 70.6%.

Now, let me reaffirm full year guidance for 2010 CapEx cash income taxes and then provide an update to our cash interests.

Capital expenditures continue to be expected to be in the range of $40 to $42 million and cash income tax guidance is unchanged and it's expected to be in the range of $21 to $23 million.

Cash interest expense is now expected to be in the range of $49.5 to $51.5 million, which improves the midpoint of our previous guidance of $51 to $54 million by $2 million.

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, 2010 to shareholders of record on October 15th, 2010.

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

Thank you, Steve. In summary, we're pleased with our results for the quarter and all of our accomplishments so far this year.

Our dedicated team continues to work hard to provide the best products and services to our customers and efficiently manage our expenses. Together these actions result in strong and sustainable cash flows and support of our dividend.

And finally, before we go to the Q&A, I have one other comment on one last item. Within the next few days you will see a filing that reflects a planned change in the Lumpkin Family ownership structure. Since Mr. Lumpkin is the largest share holder of Consolidated and the Chairman of the Board, I thought it was important for you to understand the structural changes incurring. These changes do not reflect any sale of Consolidated stock by Mr. Lumpkin. Currently 14.2% of our outstanding shares are held in Central Illinois Telephone, LLC, or CIT for direct or indirect benefits of members of the Lumpkin family. CIT was set up at the time of our IPO 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 for several members of the family, some of the CIT shares will be distributed out to family members or entities maintained for their benefit. After these transfers, Mr. Lumpkin will remain our largest shareholder and still have voting power with respect to approximately 10.3% of the company's total outstanding stock.

This change in ownership structure is quite similar to the one we notified you of last year that involved other members of the Lumpkin family.

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

Thank you.

(Operator instructions).

Our first question comes from Gray Powell of Wells Fargo Securities.

Hi, guys. Thanks for taking the questions. Just had a few, so access line trends continue to look pretty good. How much of the improvement would you say is due to the economy versus company specific initiatives? Plus, you've been running at a low 4% loss rate for the last two quarters, do you think that level is sustainable going forward?

Yes, good morning Gray and thanks for the call. We're very pleased with the second quarter performance, which did match our first quarter percent loss. It's more our internal efforts than the economy. We frankly aren't' seeing much on the - particularly on the residential side. We've seen a little stabilizing at least the outs on the business have been mitigated and you're starting to see a little uptick there, but there's still tremendous pressure on the residential side as a result of the economy.

As far as going forward, I - in complete candor with you, we're ahead of some of our internal projections. We'd love to stay at this level or even be better obviously. But Ur near term target was in the 5% range. So we're quite satisfied and we are going to do everything we can to keep that arte where it is.

Okay, that's very helpful. And then I guess it does appear that broadband growth just for the industry in general slowed in Q2, how should we think about trends in Q3 and should we expect just sort of the typical seasonal uptick that you've seen in prior years?

Yes, well you're spot on identifying the second quarter as historically is always the softest quarter of the year. So we would expect to see improvement in the third quarter. From a broadband perspective, bifurcating that on your DSL, we're at a 43% penetration rate and we still see opportunities above that 43%, particularly back to subscribers who no longer have our access line. So we've got a base to go out there and mind, but I want you to be aware that as those penetration rates rise the low hanging fruit is gone.

The flip side of that however is on the IPTV, we ought to be able to pull some of those broadband only customers and attract them into our bundle with the value and the pricing of our bundle. So we see upside opportunities from that standpoint.

Okay, that makes a lot of sense. And then one final question, I know you don't want to break out too many specifics on your IPTV economics. Can you give us a sense as to whether its break even on an EBITDA basis today and then just what are your longer term targets for the business, just in terms of margins and penetration? Thanks.

Hey, Gray, thanks for the question. This is Steve and I'll try that one.

As we look at video and again, we're - the numbers that I'm going - that we're going to talk about are basically measuring on a stand along product basis, we still think it's the right strategic initiative to have video as part of our triple play offering and as Bob just said, having that offering, we think, has minimized access line losses as well as have increased throughput for our broadband product. So when we talk about the margins on an all in basis, it would be dilutive currently. We think over time we're at 13% penetration, we think there's still a lot of upside. I think we've talked publicly in the past about getting the 30% penetration across all markets. We still think that's doable. We think a 30 to 40% gross margin on the product is doable and we have a lot of opportunity particularly with the relaunch that we've just - it actually started last year going from a gateway set top box a single stream top, we're actually seeing lift in ARPU, people buying more of the single stream set top boxes, driving more HD content, DRV, we're seeing a nice increase in our video on demand product and then o the cost side of the relaunch, we're also able to really improve - we think improve the customer experience because we're not having to reuse as much of the coaxial cable in the house and do as much rewiring and so installation time is quicker in the CP cost is less.

So we think we have a lot of things going in the right direction, but we still have a lot of work in trying to balance customer acquisition and retention with profitability going forward.

Okay, great. Thank you very much.

Thank you. Our next question comes from Frank Louthan of Raymond James.

Great. Thank you. On the IPTV, I mean we've been at a - some fairly low penetration for a while. I mean 13% penetration, generally competitive video products have been able to easily capture north of 20% and in some cases north of 30%. I mean what do you think we need to do to try and get that penetration up? I mean is it a product set issue that you need - that you have, what do you need to get there from a capital investment or is it a marketing initiative, what are your thoughts on the prospects of increasing that to more of an industry kind of level of penetration.

Yes, Frank, I'm going to start calling you Frank L because everybody has a little trouble with that last name. But thanks for the question. First of all, we have some markets, Frank, the early markets that are very close to 30% and we think that that should be the targeted range.

We've - we're stepping up - let me describe it as a two pronged project that we're doing. One is on the churn. You know churn we've seen a little bit of an uptick in churn and so we've stepped up our churn mitigation efforts on the front end. We're working with people on terms to lower the non pays, reduce the non pays, and very actively going back in before contracts expire, people under a one year or two year contract. But probably the most important thing that we've done is over the last year we've developed a comprehensive marketing database and it's allowing us to map our customers to better target our customers to the high value profitable customers. We need to balance growth versus profitability.

This new database gives us a much better look and different slices of our customers by income, age, propensity to churn, propensity to buy additional products and services. So not only does it assist us in our target marketing, but it also allows us, most importantly to measure the results of those activities.

So it's a combination of things, as I said in my introductory comments, I think the 100,000 DSL customers that we have give us a tremendous opportunity to go back with our product.

I've also mentioned in the past that when we launch this product we really weren't competitive. We didn't have HD, we didn't have DVR, and we didn't have a VOD. A recent example of the video on demand product, we were running about $1 per subscriber, three or four months ago we increased that product, offering more channels. We introduced a barker channel that shows the new titles that are available and we've boosted that, just in four or five months from a buck a sub up to $3 a sub. So I think product enhancements, marketing database and churn efforts give us a tremendous opportunity to grow that product.

So what was churn running and has that come down materially and then do you think that there's a reeducation process you need to go through? Do you think that there - some of the initial - the initial product launch people still have that impression that you have an inferior product when in fact you've gotten it up to par? I mean what do you think is sort of the issue there?

Well, I don't - I'll take the latter part of that, I don't think that they had an opinion that we had an inferior product. There were people who would not take our product because we didn't have DVR or you were limited to only one JD channel and we didn't have the 50 HD channels that we have today, so there was variety. But again, back - we've talked in the past about bonding and deploying fiber deeper, they can get three simultaneous HD channels today. So I don't think it was perceived as inferior as much as we probably weren't as proud of our product as we needed to be.

Also talked about some interoperability issues, trying to get all the vendors working together. We've had tremendous progress in working on that issue and in fact in test mode in a couple hundred homes today we've now introduced a new set top and a gateway into the home by a second vendor, and you get the second vendor, you not only get the price competition, but you also get quality, a lot more focus on the quality. Specifically, to your first question about the churn, there was an uptick in churn, about 20 to 25% I would say Frank, and a lot of it - when we do our studies and ask why it was around the highest category is moving people - moving out of the territory, there was not a lot of service churn and it was non pay and that's why we're working with the customers on the nonpay issue. We don't have a bad debt problem, we manage that very, very closely, but we have seen the pressure of the economy and the job losses impact our IPTV product.

Long winded answer, I hope I got to all of them. Sorry to ramble on so long.

No, that's helpful. Just two - quickly a follow up, what are CPE costs running now per subscriber versus say 12 to 18 months ago or how much -how is that pricing competition to the vendors helping you?

And then of the 43% of customers that are - that you have broadband penetration, how much- how many of those are broadband only that you could circle back with an IPTV marketing product as well? Thanks.

On the pricing, Frank, the old in home all in was $550 in the range. The new one - the flexibility with the relaunch that gives us an opportunity, on average it's still around 500 but the benefit is you can tailor it to the need of the customer and all in the home, if you include HD capability and DVR capability its roughly $250. It's $70 for the (ruckus) device and a set top of approximately $130. So it - but then you're adding on as you want more functionality, more DVR, more HD, it gets back up close to the $500 range if you've got three sets and a minimum of three sets and you're taking HD.

Regarding the question on the DSL, I'll call it naked Frank, I think your question was how many DSL subscribers take no other service. IPTV or voice, it's about 10% of our DSL subscribers or 12 - roughly 12,000.

Okay, thank you very much.

Thank you. Our next question comes from Dave Coleman of RBC Capital Markets.

Thank you, Steve, I was just wondering if you could I guess explain the reduction in interest rate - I'm sorry interest expense, that's astute to hedges rolling off in the second half of the year and then just to follow on to that, what the expectation is for additional interest rate hedges to expire in 2010 and '11, what your strategy is whether to hedge more of your credit facility or just let it float.

And then, just on the wireless JVs, just wonder if you have any insight as to where things stand as far as LTE roll out in those markets and how much of a drag that's been on the contribution to partnership income. Thank you.

Well, Dave, this is Steve and thanks for your questions and I will - you may have to prompt me here on these, but let me start with the wireless first, first of all, for the quarter on a year to date basis, we've received cash distributions from the five partnerships of just a little bit over 13 million for the first six months, that compares to a total of 22.4 for all of last year. Those distributions, I mean they're all in different phases of their roll out on dates build outs and everything, but our contribution - or distributions to us are always net of CapEx after they've already made those investments.

The in - and again we are a limited partner, so we don't - we're not helping them manage the business but the insight that we have - we might expect based on the accelerated distributions for the first half of the year, we might expect a modest reduction over the last half. We hope the growth continues at the same pace, but we definitely expect more than what we had received last year. So I guess the net net answer to your question is we aren't seeing a lot of reduction or impact on cash distributions to us because of the roll out off Verizon wireless data products in those markets.

With respect to your hedges, question on the interest rate reduction, we did show a nice reduction in interest expense for the quarter that was because again just the way the unheeded rate of the variable rate continues to drop as well as the impact on hedges.

Historically we've been at 70, 75% or maybe a little bit more in a hedge position. We have had some of those roll off at the end of last year and we've actually, and you'll see it when we file our Q probably on Friday, that we did enter into a forward looking - forward looking swap at the end of the year for 175 million that roll off. Again a very attractive rate to hedge that and we're also looking at hedges that roll off for about 200 million at the end of 2011. We actually entered into an interest rate hedge at the end of July or in the middle of July for 100 million of that and again we just are continuing to explore and monitor rates and see where we end up on that. Because our effective hedge rate today is probably a little bit - probably 4% plus and even the forward looking hedge rates today are a point and a half or whatever so very attractive rates and we'll continue to monitor the market.

Okay great. And then just going back to the wireless JVs, any sense as to how much the LDE spend has been in those markets and if that 13 million of distributions that you've received what that would have been without an LTE spend this year.

Dave, the - we don't have that information, but we were told when they gave us the forecast at the beginning of the year that their projection of dividends included the LTE build outs that were planned for this year. So I think that's why Steve is so confident about the distributions that we've received and what we'd expect to receive in the last half of the year.

Okay, great. Thank you.

Thank you.

(Operator instructions).

Our next question comes from Barry Sine of CapStone Investments.

Good morning, gentlemen. First, I guess this questions for Bob. Question surrounding the dividend. Obviously I guess its 149 days from now the top dividend tax rate jumps from 15% to 43%. So a question is the board looking at that and if that stays, if there's no change in that current policy, is the board prepared to do something fairly dramatic surrounding the dividend like eliminate the dividend and more to share buy backs or debt reduction what's your thinking in terms of reacting to higher dividend tax rates.

And then my other question would be if we could just get an update on terms of what's the status of economic activity surrounding the future (jem) product in Mattoon, thank you.

Yes, thank you, Barry and good morning to you also. There's still so much uncertainty about what's going to happen with the tax changes. In the upcoming election this morning at least the TV station I was looking at, tons of discussion about extending them and not extending them and when they're going to do it, et cetera. So I think there's just - there's so much uncertainty about what the ultimate changes would be. Specifically to our dividend though, our board makes the decision on dividend strategy but we don't expect - I don't expect any change in that current strategy and we're just as committed to our dividend regardless of potential of tax rate changes.

Regarding future (jem), the DOE has probably announced that it supports that effort with a $1.1 billion in financing and we continue to expect an announcement any day and as we've told you in the past, this is the first coal fueled near zero emissions power plant and its shovel ready which of course the administration talked about they wanted those kinds of jobs. It's estimated it will product 3000 construction jobs. So if there is a shovel ready TARP project that's slated to be funded, this is one and we remain optimistic.

Okay, thank you.

Thank you. Our next question comes from Donna Jaegers of EA Davidson.

Hey, guys. Bob, I just got a question on the regulatory scene since you're fairly plugged in on that. What do you - can you talk a little about (boucher's) billion USF reform and what you see the FCC really - how you see them moving forward and what you see the FCC really -how you see them moving forward and the timing.

Yes, good morning, Donna. I wish I - I wish I knew instead of just speculating, but let me attempt to answer that. There is still - it's probably even more confusing and hard to predict than the answer I just gave on taxes. There are so many unknowns before we get to a final outcome. I think the November elections will have a big impact on that. But with all that said we are involved, we support the reform, we wish that the FCC and hope that the FCC would act on some of the things that they said they could act on without comprehensive legislation, phantom traffic, voice being included in the broadband support of new pools of voice costs and limiting the payments to the wireless sector.

With all that said though, we still continue to support the reform. We hope that it happens. But my best guess would be mid to late 2011 before we see anything and then under the current structure the transitional periods that are being talked about, while we would have some exposure with think with those transitional periods and our ability to influence it and make it a better bill that we would be able to better manage our exposure and adapt our business model.

Great. And then just - you mentioned earlier on the cable competition, you didn't see anything irrational, are you seeing your cable competitors rolling our (doxus) in your service areas and marketing aggressively on those higher speeds?

Yes, they are doing both. I think - but we've had this - they've tried to make the speed issue since day one and we've been able to negate that. We go all the way up, we've got a 20 (meg) product, we have 100 people taking it. our customers are very happy with our three and six tier products but we have the ability to go higher.

What they're generally doing, they're advertising it but there really isn't any special pricing everybody's still generally around 100 bucks for the triple play, they play a little games with the fine print, there's always a great headline price and then if you read the fine print they have the ability to modify the price during the terms of the contract etc.

So it's the same, maybe a little bit more with the (doxus) but we're - we think we're in good shape to compete with the product offerings that we currently have at the price points we have them.

Great, thanks, Bob.

Thank you. I'm showing no further questions at this time, sure.

Well, thank you Devin and thank all of you for joining us today and for your continued interest and support of Consolidated Communications. We hope to talk to you and that you'll join us again next quarter. Thanks and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference, this concludes the program. You may all now disconnect. Thank you and have a nice day.