Consolidated Communications Holdings Inc (CNSL) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings' fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Matt Smith. Sir, you may begin.

Thank you, Regina, and good morning everyone. We appreciate you joining us today for our fourth quarter and full year 2011 earnings call. 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. We appreciate you joining us today as we review our results for the quarter and put a wrap on 2011. Overall it was an exceptional quarter and a great finish to the year. I'm excited to be able to say that we grew revenue and adjusted EBITDA both on a sequential and a year-over-year basis. We have placed a lot of focus on growing organically while continuing to look for accretive acquisitions.

The results of the quarter reflect our successful programs with this strategy. And on February 6, we announced the acquisition of SureWest Communications. The combination of the two companies provides additional growth opportunities while producing significant cash flow in support of the dividend. We're excited about this transaction and I'll talk a bit more about it in a couple of minutes.

With respect to the quarter, our revenues were $93.7 million and adjusted EBITDA was $48.3 million. Our payout ratio was 48.4% and net leverage improved to 4.1 times. These strong figures are the result of several strategic initiatives we have focused on throughout the year.

As you might recall, in midyear we announced some cost saving initiatives. The $2.5 million of annualized cost savings are in the fourth quarter run rate. We also implemented an internal reorganization to create a dedicated team with an emphasis on the carrier, wholesale, and wireless backhaul opportunities. Our carrier team produced another solid quarter of growth by adding 25 new wireless backhaul circuits at an annual revenue increase of $500,000. This gives us a total of 343 circuits under contract for $4.9 million in annualized revenue.

In addition to the wireless backhaul growth, our wireless partnership distributions for the quarter totaled $8.7 million. Our distributions will continue to see quarterly fluctuations as the final LTE builds are completed throughout 2012 and the SmartPhone subsidies flow through. Consistent with prior years, in 2012 we expect the wireless CapEx to be front-loaded causing our distributions to be lower in the first half and higher in the second half of the year.

Turning to our operating metrics, we delivered another solid quarter of broadband growth and continued our industry leading ILEC access line performance. Broadband subscriber additions totaled 2,700, representing a 1.9% increase in the quarter. This includes 1,400 video and 1,300 high-speed internet adds. With respect to video, we've continued to drive improvement in our overall service delivery and profitability. Our average monthly churn in the fourth quarter, at 1.6%, was our best ever.

We continued to drive ARPU higher with HD and DVR, each penetrated at 31% of the subscriber base. The value of the bundle continues to resonate well with customers and helped drive another solid quarter of high-speed internet growth. And our monthly churn on internet service during the fourth quarter was our lowest of the year at 1.2%.

Shifting gears to access lines, fourth quarter continued to reflect the importance of our bundled packages by maintaining our industry leading ILEC line performance. We held our losses to just under 2,300 lines or 1% for the quarter and 3.9% over the last 12 months. We also had another solid quarter of growth in our CLEC access line equivalents, which were driven primarily by new metro Ethernet subs and capacity upgrades for existing customers.

So, in summary, we're very pleased with the strong financial and operating performance in the quarter. We're positioned well for the future, and we'll continue to provide the best products and services to our customers while delivering consistent and solid returns to our shareholders. Now let me discuss the acquisition of SureWest, which we announced just three weeks ago. We're very excited about this strategic combination and how it advances our collective ability to expand and be more competitive.

The acquisition also offers attractive financial benefits with a solid balance sheet and strong dividend payout ratio. The increased financial flexibility will allow us to continue to invest in growth initiatives, continue to provide superior customer service, and deliver strong excess cash flows in support of our dividend.

Since the announcement, we've taken several steps towards securing regulatory approval. We filed the necessary applications with the FCC and the California PUC, as well as the notices to both the Kansas and Missouri Commissions. Since there are no overlaps in markets, and the combined company can provide more competitive products and services to its customers, we don't expect any significant issues in this process.

Separate from the regulatory filings, we've also received approvals from our current lenders for an amendment to our current credit agreement, providing us additional flexibility in the timing of when we hit the market with our unsecured notes offering. You can find the details of this in our 8-K we filed last week with the SEC, and Steve will provide a summary in just a few minutes.

With respect to integration, we've begun discussions with the SureWest management team on integration planning and have designated the lead transition officers for both companies. Consistent with our past integrations, we expect this to be a smooth and successful process. Finally, and maybe most importantly, I personally met with all the SureWest employees to share our enthusiasm about the prospects and opportunities for the combined company.

As expected, there were a lot of questions, but there is clearly a sense of excitement about what lies ahead as well as similarities in our cultures and a focus on the customer. We will be continuing to build those relationships as we move forward and are excited to be working together. So with that, I'll now turn the call over to Steve for comments on the amendment and the fourth quarter financial review.

Thanks, Bob. Good morning to everyone. Before I review our financial performance, let me discuss the bank amendment that Bob mentioned. As you know, we received committed financing for the entire $350 million required to finance the SureWest acquisition. This financing will be used primarily to refinance their debt and to pay the cash portion of the offer.

With the committed financing in place, we recently elected to request an amendment to our credit facility that gives us the flexibility to escrow the proceeds of the bond offering and to enter the market at any time between now and close. The amendment passed with ease, and we closed on it on February 17.

Our lenders recognize the significant benefits of the transaction, by among other things, deleveraging the balance sheet and reducing the senior secured leverage ratio by more than a turn. As we continue to evaluate the timing of getting regulatory approval, we will also closely monitor the capital markets for the most attractive point in which to issue our seniors unsecured notes.

Now let me review our quarterly financial performance and then provide 2012 guidance. Operating revenue for the fourth quarter was $93.7 million. When excluding revenues from operator services of business we sold in November of 2010, revenue increased by $400,000 on a year-over-year basis. The increase was primarily driven by our continued growth in our data and internet services, as well as the expansion of our Carrier Wholesale business. These increases were partially offset by declines in local calling, subsidies, and long distance services.

Total operating expenses, exclusive of depreciation and amortization, were $55.5 million compared to $56.5 million for the same period last year. In addition to the lower costs related to the sale of the Operator Service business, the $1 million improvement was a result of the cost reduction initiatives in efficiency improvements implemented in mid-2011, which were partially offset by increases in video programming costs.

Net interest expense for the quarter declined by $1.5 million to $11.6 million. The year-over-year decline was driven by a 64 basis point improvement in our weighted average cost of debt, which was 4.92% throughout the fourth quarter. In September 2011, we had $200 million of interest rate swaps roll off that were carrying an average rate of 4.63%. We replaced half of the expiring hedges with a new swap at the rate of 1.65% and let the other half roll to a variable one month LIBOR. We're currently hedged at 60% of our term debt.

Other income net was $8.3 million and $7 million for the same period last year. For the quarter, we recognized $8.7 million in cash distributions from our wireless partnerships compared to the $7 million in cash distributions received in the fourth quarter of 2010. Weighing all these factors on a GAAP basis for the fourth quarter of 2011, net income was $7.9 million and net income per common share was $0.26. For the fourth quarter of 2010, GAAP net income and net income per common share were $6.8 million and $0.23 respectively.

We also 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 and adjusted net income per share were the same for both the fourth quarter of 2011 and 2010 at $8.2 million and $0.28 respectively. Adjusted EBITDA increased $2.5 million or 5.5% to $48.3 million in the quarter compared to $45.8 million for the same period last year. Capital expenditures for the quarter were $11.3 million.

From a liquidity standpoint, we ended the quarter with $105.7 million in cash and our $50 million revolver remains undrawn. For the quarter, our total net leverage ratio, as calculated in our earnings release, was 4.11 times to 1. Our leverage in coverage ratios were well within compliance levels of the credit facility. Cash available to dividends was $23.9 million, resulting in a very strong dividend payout ratio of 48.4%.

Now let me discuss our guidance for 2012. Consistent with prior years, we will provide guidance with respect to CapEx, cash interest, and cash income taxes. First, capital expenditures are expected to be in the range of $42 million to $44 million compared to the $42.6 million we invested in 2011. Cash interest expense is expected to be in the range of $44 million to $46 million, which is an improvement from 2011 cash interest of $47.2 million. Cash income taxes are expected to be in the range of $15 million to $18 million compared to 2011 cash taxes of $8.8 million.

This change reflects the impact of bonus depreciation and is scheduled to step down from 100% in 2011 to 50% in 2012. Once the closing of the SureWest acquisition is near, we will provide updates and refresh synergy expectations and one-time costs. 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, 2012, to shareholders of record on April 15, 2012. With that, I'll now turn the call back over to Bob for closing remarks.

So, in summary, we had another solid year full of many accomplishments. We've expanded our focus on new growth drivers with success-based capital and continue to provide a very strong dividend payout ratio to our shareholders. We're very pleased with how we have positioned the Company for the future, and Consolidated and SureWest combined provide excellent opportunities for our customers, employees, and investors. So, with those comments, now I'd like to open it up for questions. Regina?

(Operator Instructions) Frank Louthan, Raymond James.

Great, thank you. Can you give us an idea of sort of what's the path, the glide path here, on your access in USF changes for the intercarrier, comp changes from the government, and any of the stepdowns that on your CLEC operations that might begin Q1 versus July 1? Thanks.

Frank, good morning. Hey, the impact, and as you know, there's still discussion, negotiations, unanswered questions, but with what we know today, there's not a big impact in 2012. It totals roughly $1.3 million. Switch access will be reduced by about 5%, but those will be offset in end-user charges, either through the arc or the universal service [cath]. So, modest impact this year. Regarding the CLEC, I'm not aware of any dramatic hit there. You know, we're -- like every other CLEC, we're impacted exactly the same way, but I don't have a specific answer to that, Frank, but I don't think it's a big impact.

Okay. Thanks.

Hey, Frank, this is Steve Childers. Just to add one thing. Bob referred to the intercarrier comp piece. I also want to remind you that, based on the way the orders are being implemented, our USF or federal subsidies are being frozen at 2011 levels, so net basis, our regulated revenues really ought to be neutral, maybe even slightly up for the year, as Bob said, with access being slightly down the last half of the year.

Okay, great. And then, you know, looking forward, clearly with the SureWest acquisition, this would be a good addition to your base product. Where do you see yourself, see the Business going? Do you see yourself as being -- doing more acquisitions going forward and kind of taking what you have and kind of leveraging that looking at some other businesses, or kind of digest this for a couple years and try and grow, you know, grow the businesses? How should we think about, over the long term, your appetite for M&A?

Yes, Frank, first of all, you know, we've been signing for a couple of years that we've never been better positioned for an acquisition. You know, we had completed all of our integration and back office upgrades, et cetera. So, we're thrilled, and I can tell you, being out with the SureWest people and our own employees in the three states, I'm even more excited by how the employees feel about this acquisition.

So, the short term, you know, we're all over closing this. We've dusted off our old playbook for integration. That plan works incredibly well, and so we'll take pause and see, get all the planning in place, the organization structure, make sure we carve out the synergies. We've already established those priorities. After that, you know, we'll continue to look.

And I don't think it's a couple of years. Obviously short term, but once you get your hands around it, the implementation starts and you feel comfortable about carving out the -- meeting your expectations on the synergies, we continue to look. In the meantime, and I would tell you if there was a small deal adjacent, contiguous, very little integration, we would -- you know, we'd take a look at it, but not anything of any substance or size. We're going to focus on this one and deliver the publicly committed numbers that we've stated in the past.

Okay, great. Thank you.

Thank you, sir. Barry Sine, Drexel Hamilton.

Good morning, gentlemen. A couple questions if you don't mind. First of all, following up on the question on access and subsidies, was there anything unusual in the fourth quarter that impacted results?

Barry, this is Steve Childers. There were no significant one timers in terms of revenue or anything else in the quarter.

Okay. Thanks. Next question. Now that you guys have had an opportunity to go out and meet all the SureWest folks, any further thoughts in terms of synergy opportunities, both revenue and expense-wise? I know you put the $25 million number out, but any further thoughts on that?

Not really, Barry. You know, it was more to go out and meet them, describe Consolidated, prepare or compare the very similar cultures, focus on the customer, and to assure them that we didn't want them taking their eye off the ball on their 2012 plan, that that was the highest priority. So, it's way too early to change our synergy numbers at this particular time, but we also haven't seen anything that would make us uncomfortable at all on our ability to meet them.

Okay. And my last question regarding your Triple Play product line on the consumer side, vis-a-vis the cable operators in your three markets, can you talk about what you saw from a competitive standpoint in the fourth quarter? Obviously, your numbers look quite good. Was there less activity on the cable front, and then similarly, what are you seeing so far in the first quarter?

Yes. No real change, Barry. I think it's more what we're doing and not what they're doing. You know, we can't control what they do, but you know, we continue to put -- we have, you know, as we've mentioned in the past, two year targets on where we're trying to take our product. I couldn't be more thrilled with the progress we've made on cable, on the video, taking trouble out, expanding the capability and capacity, adding channels. The only negative there is the programming costs. I mean, everything else that we control, we've made nice progress.

The cable guys, you know, continue to do the introductory offers and offer some pretty low price points, but the only real change is a focus on the middle market. They are -- they put some focus on the small to medium size businesses, and so we've responded with some bundled packages there to meet that competition, and we're well- positioned. We feel good about our product positioning and our price points right now.

So, that SME would show up more on your CLEC side rather than the residential numbers?

Yes, that's correct. I think also, Barry, you know, as we commented in the script, you know, our churn is near all time best for us. So, we're feeling real good about that.

Okay. Those are my questions. Thank you, gentlemen.

Donna Jaegers, D.A. Davidson.

Hi, guys, good quarter. A few quick questions. Windstream had some verbiage in its 10-K about the Texas Universal Service Fund, the Commission relooking at how that fund is structured. I think you guys benefit from that in your Katy operation. Can you sort of remind us how much that accounts for, and any sort of update on what the Texas Commission is looking at?

Yes, Donna, this is Steve. Thanks for the comment on the good quarter. We appreciate that. With respect to the Texas USF funding, that's something that comes up about every two years for review. It's too early for us to say what's going to happen. I can remind you that we probably, you know, as access to the baseline per line charge, as access lines kind of go down particularly on the residential side, that's dwindled down to maybe $16 million or $17 million a year in annual subsidy draws from the State of Texas.

I also remind you that in the State of Texas, the way they have the regulatory model set up, that they're really focused on keeping local line rates very low. For instance, the average rate there is probably, you know, $10 or $11 per line as compared here to Illinois, where we're, you know, basically $30 per line. So, whatever happens there --- again, this comes up every two years. There's been no significant change in it in the last several years, and even if there was some movement in it, we feel like we would still have the ability to move on local line rates and still maintain a strong competitive position in the marketplace.

Great. And then on -- I'm not real familiar with SureWest, but do they have CLEC operations in Kansas City? I know they've been rolling IPTV there.

Well, in Kansas City they're more of a cable builder and number one, I would refer you to their information on their website, and they'll be filing their 10-K quickly or in the next couple of days. They released their earnings yesterday, but just to give you the background, as we talked and announced the call on February 6, Kansas City is a high growth market. It's primarily a cable overbuilder concept.

They're not doing, you know, IPTV there, but they are delivering high level of broadband and cable services in Kansas City; and then in the California markets, it is an ILEC in the Roseville area and they do have, you know, an outer region CLEC in California. Again, very focused on high-end broadband services across all the markets, and it is IPTV based in the ILEC in Roseville.

Okay, great. And then one quick, one last question. In talking to Lumos, when they announced earlier this week, they were sort of getting hit by carrier grooming with the carriers that they deal with, sort of reconnecting in different points to pull down terminating access charges before actually the regulations go into place in midyear. Are you guys seeing any of that?

Not really, Donna. We haven't seen that. I think you go back -- I don't remember exactly the date, but about three years ago, we had some of that when the large carriers looked, but that's a three-year ago behind us, a long time ago.

Okay. Great. Thanks a lot, Bob.

You're welcome.

Todd Rosenbluth, S&P Capital.

Hi. Todd Rosenbluth from S&P Capital IQ. Thanks for taking the question. My question is tied to the IPTV area and wanted to just see, you know, we see a lot about 6,000 homes additionally passed in 2011. Wondering if you expect the pace of deployment to continue, or is the focus more to get the penetration rate that's around 16% to moving that higher?

That's exactly right, Todd. Thanks for the question. We're not planning to pass any new homes. The technology will catch up in the future. We'll pass more, but at this point the focus is strictly on profitability and penetration of those 205,000 homes that we currently passed.

And then if I can just follow up on that, where do you see penetration rates moving to? Is there still area to get this higher to the high teens as a percentage of the base, and, I guess, maybe, what makes that move the needle?

Well, we see -- we'd say the high teens, you know, this year; and in some of our early markets, we're up over 30%. So, I think that's the number that we focus on longer term, and so we look at it as a real opportunity to continue to grow with, you know, with only the CapEx to the installation part of it. We're not going to pass a lot.

All right. Thank you.

(Operator Instructions) Dave Coleman, RBC Capital Markets.

Thank you very much. Just wondered if you could talk about the source of the metro Ethernet demand, if that's broad based or isolated to a few customers, and if it's new business or, you know, existing customers taking metro E? And then you talked about, you know, for your IPTV service factors that are out of your control, such as programming rate increases. Just wondering if you could talk about what kind of rate increases that you are seeing from the content providers and how you're pricing to the end users compares to that. Thank you.

Yes. Thanks, Dave. On the CLEC, you know, for competitive reasons, we're probably not -- on your metro E question in the CLEC, we're probably not going to mention companies, but to the second part of your question, it's a combination of both upgrades. You know, people moving from 100 mg circuits to 500 and new businesses. Businesses that pass requirements are expanding rapidly the capacity, and we've got an excellent network in products to provide that. So, we're seeing it from both adds and from existing customers and new customers.

Regarding the content, you know, there -- those contracts are expiring at all different times, but we are kind of forecasting a 6% to 7% across-the-board increase, and as we've said in the past, we've just got to get better disciplined on passing those cost increases on when we get them. We have been successful in raising prices, and -- in our renewal plans and the way we position it now with our set-top boxes in HD and DVR. We're better at it, Dave, but, you know, particularly on the sports programming side, you know, it's borderline. I don't want to say out of control, because you've got to have that on your rate card, but we've got to get better at passing it on than we are.

That's great. Thanks a lot.

Thank you, sir. And now I would like to turn it over to Mr. Bob Currey for final remarks.

Well, thank you again for joining us today and for your continued interest in and support of Consolidated Communications. We hope you will join us again next quarter. Thanks, and have a great day.

Thank you. Ladies and gentlemen, this does conclude your call for today. You may now all disconnect. Thank you and have a wonderful day.