Consolidated Communications Holdings Inc (CNSL) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings, Inc. first quarter 2012 results conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host, Matt Smith, Treasurer and Director of Investor Relations. Please begin.

Thank you, Shawn, and good morning everyone. We appreciate you joining us today for our first quarter 2012 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. And Steve Childers will then provide a more detailed review of the financials. Bob?

Thanks, Matt, and good morning everyone. Thanks for joining us today. I'll make a few comments about our performance in the quarter and then provide an update on our progress and excitement with the SureWest acquisition that we announced in February. Steve will then provide a detailed review of the financials.

We're pleased to kick off the year with such a solid quarter. Revenue was $93.4 million and adjusted EBITDA was $46.3 million, resulting in a dividend payout ratio of 56.9%. We also delivered strong operating metrics. We're off to a great start on our key initiatives, which include strengthening the topline, investing for growth, and closing on the SureWest transaction.

I'm quite pleased with the progress we have made on the topline. In fact, revenue over the last six months increased by 1.1% versus the prior six-month period. We continued to drive growth in our broadband services with subscriber increases of over 2,400 in the quarter. This represented growth of over 1,400 from high-speed Internet and 1,000 from video and is consistent with the broadband growth we delivered in the first quarter of last year.

We now penetrate 17% of the homes we passed with the video service and continue to see significant upside. We're continuing to drive ARPU higher and churn lower through our diversified product set and exceptional customer service. Our

access line performance was also very strong in the quarter and was, in fact, the best ever. The economic backdrop is stabilizing and we are seeing some new activity around greenfield developments in our Texas markets. In these cases, we're deploying fiber-to-the-home and now serve over 5,000 direct fiber fed customers with an additional 8,000 homes passed.

On the commercial side, we saw quite a bit of demand for our Metro E services and our hosted VoIP solution. Also, we extended the fiber off of our transport network in Texas with multiple success-based builds for opportunities with some universities and institutions.

On the carrier side, we continue to see growth. We added another 149 wireless backhaul circuits during the quarter, raising the annualized installed revenue under these agreements to $6.2 million. So overall, we are seeing the financial benefits of these investments and we expect to continue to see the demand for these services throughout the year.

So now let me provide some updates around the SureWest acquisition that we announced on February 6. We have received all federal approvals and next week, we will receive a final approval in Kansas. We are on a path to approval in California, which is now expected in early June. Shareholder votes for both companies will be tallied at our respective shareholder meetings scheduled for June 12. And we are expecting to close sometime early in the third quarter.

We have had multiple cross management team meetings and have prioritized several initial integration steps. I personally have made three trips to Sacramento and two trips to Kansas City since we announced the deal. The SureWest employees have been collaborative to work with and they are justifiably proud of what they have built and accomplished. Efforts are under way on setting the complete integration timeline and I'll provide more detailed updates as we move along the process. We are more confident than ever that this will be a smooth transition and are excited about what the combined companies can accomplish.

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

Thanks, Bob, and good morning to everyone. I'll review the quarterly financial performance and then provide an update to our financial guidance. As Bob mentioned, we are very pleased with the results for the quarter. Operating revenue for the first quarter of 2012 was $93.4 million compared to $95.4 million in the same period of 2011. The first quarter of 2011 included a non-recurring benefit of $700,000 for a NECA settlement on access revenue. When excluding this one-time benefit, revenues declined by $1.3 million or 1.4%. Declines in local calling, network access and long distance revenues were partially offset by increases in data and Internet services.

Total operating expenses, exclusive of depreciation and amortization, were $60.2 million compared to $56.4 million for the same period last year. The increase is mostly due to the transaction costs relating to the SureWest acquisition, which totaled $4.8 million in the quarter. Excluding these costs, expenses declined by $1 million due to our continued focus on efficiency improvements.

Net interest expense for the quarter was $14.6 million compared to $11.9 million in the first quarter of 2011. The increase was driven primarily by $3.1 million in amortization of the commitment fees in the bridge financing for the SureWest acquisition. In addition, our June 2011 amendment and extension of our credit agreement increased the rate on the extended debt by 125 basis points, resulting in approximately $1.4 million higher interest cost. These increases were partially offset by $1.8 million lower interest on our interest rate swap agreements.

Other income, net was $6.5 million for the quarter and was $7.1 million for the same period last year. During the quarter, we received $6.2 million in cash distributions from our wireless partnerships compared to $6.9 million for the first quarter of 2011. The decline in cash distributions was due to the increase in smartphone subsidies mostly related to the iPhone 4S launch in October.

Weighing all these factors on a GAAP basis for the first quarter of 2012, net income was $1.8 million and net income per common share was $0.06 compared to net income of $7.4 million and net income per common share of $0.25 for the first quarter of 2011. It is important to note that net income and earnings per common share were impacted by the financing and transaction costs related to the acquisition of SureWest.

In the quarter, on a pre-tax basis, we recognized $4.8 million in fees primarily related to the February bank credit amendment and $3.1 million in non-cash interest expense related to the amortization of the fees to secure our committed bridge financing. When excluding these acquisition-related costs from earnings, our net income and net income per share would have been $7 million and $0.24 per share respectively.

Adjusted EBITDA was $46.3 million in the quarter compared to $48.4 million for the same period last year. Capital expenditures for the quarter were $11.2 million. From a liquidity standpoint, we ended the quarter with $98.5 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 4.19 times to 1. Our leverage and coverage ratios were well within compliance level of the credit facility. Cash available to pay dividends was $20.3 million, resulting in a solid dividend payout ratio of 56.9%.

Now let me update you on our guidance for 2012. Capital expenditures and cash interest expense are unchanged with CapEx expected to be in the range of $42 million to $44 million and cash interest expense expected to be in the range of $44 million to $46 million. These are exclusive expenses related to the SureWest transaction.

Cash income taxes are now expected to be in a range of $6 million to $9 million compared to previous guidance of $15 million to $18 million. This change reflects our current view of the estimated impact for the transaction-related expenses on SureWest. With respect to our dividend, our Board of Directors has declared the next quarterly dividend of approximately $0.39 per common share payable on August 1, 2012 to shareholders of record on July 13, 2012.

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

So in summary, we had another solid quarter and are excited about our future. We're investing in the business for growth and providing exceptional service to our customers. We're delivering positive financial results for our shareholders and we're positioning the Company for the future with this very important acquisition. This combination with SureWest provides the Company with a more diversified and growing revenue base and improved balance sheet and a more competitive product and service portfolio. It also results in a company with a larger market cap and more liquidity, all of which increases shareholder value.

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

(Operator Instructions) Dave Coleman, RBC Capital Markets.

Thank you. Just a couple of questions. Just looking at the reported or the income statement, the revenues by product line. Was there a reclassification of local revenues to data and Internet? And then I guess and secondly if you could talk about the IPTV or the video competition in your markets. And then finally, the percentage of customers that are on double play or triple play products? Thanks.

Hey, Dave, this is Steve Childers. I'll take the first part of your question with the reclassification from data to local. And yes, we reclassified some elements, credits, a new program that we have. We carried that in data and revenue last year. We're now reporting that up in local. So all carriers have been restated to present correctly.

Yes. Dave, as far as the competition, we've got the cable players, one in each of our markets. We can give you the detail on those. I think we've done that in the past. And some satellite in some of the more rural areas. Competition continues to be the same than it's been over the last couple of years. Some introductory offers, lots of direct mail, billboard advertising and the introductory offers and then trying to upsell. And everybody is pretty much following the same playbook.

As far as the percent of people in double and triple play, 49% of our customers take our DSL product. We have 49% penetration of DSL. As far as the percent of customers taking the triple play, I don't have that number right off the top of my head. I'll get back to you on that.

Okay. That's fine. So are you offering DSL stand-alone or does it require voice?

No, we decoupled that a number of years ago. When we sell what we call a naked DSL, we charge $5 extra for it when it's not coupled with an access line.

Okay. So then the double play will be some amount lower than that 49% presumably?

That's correct.

Okay. And then just, it sounds like on the video side, the level of competition is about the same as the past six, 12 months. [Will there be any] change here?

Actually, the last two or three years, Dave, it's been pretty much the same.

Okay, great. Thank you.

We don't know.

Barry Sine, Drexel Hamilton.

Good morning, gentlemen. I wanted to first follow up on the comments you made about the greenfield market expansion down in Texas with the additional homes. How does that square? If I look at the line item that you report for IPTV homes passed, I haven't seen that go up in the recent quarters. How does that square and then what is the outlook for that? Will that new greenfield activity cause that number to go up going forward?

Yes, it will. We don't have -- we didn't have a large number of planned new passings in our forecast or build, but as some of these greenfields and many of these, Dave, were there before, but what we're starting to see now is while they were shut down when the economy was slow, the home building stopped. So we had some fiber in trenches and now that homes are starting to -- in these greenfields that were stopped, we've got fiber there and we're just finishing it into the home.

And quite frankly, as we've said in the past, at 17% penetration and with 30% in some of our early markets, we have a lot of upside potential there. So rather than out building into new areas with an exception of greenfield and mostly in Texas where the housing market has kind of led the nation probably for the last decade. So we're seeing it there. Those would be the only new homes basically that we'll pass.

For the last three quarters, you've reported 211,000 odd homes passed for IPTV. I don't see that number going up, but you're talking about the 5,000 and the 8,000 numbers. So how do I square those, what you're reporting with what you've said in the script?

Those are homes that were already plowed. There was fiber in the trench and houses now are starting to be built in those. So they were technically in our [occult], even though there wasn't a house there at the particular time. And so there's not a new build going on. It's just connecting that fiber and that's why I said, we have 13,000 fiber passings down there, but they didn't all have homes because the homes hadn't been built when the economy turned south.

So will that 211,000 number go up based on what you're seeing in the Texas greenfield markets?

Yes, potentially, but it won't go up a huge amount. We hope it goes up. Obviously, if the economy were to continue to turn, we'd hope that Texas will be the first place we see it and we're seeing it now and we're seeing some activity by the builders, but it's not going to be 10,000 or 15,000, Dave. It's going to be, maybe, a few thousand homes, we hope.

And shifting gears to talk about the access and subsidy line item. Obviously, that's a pretty dynamic environment with federal rules changing. Could you give us an update in terms of what you're seeing for the rest of the year on those line items and include anything you've seen on the Connect America Fund funding you might receive?

Yes. Well, as you're aware, a lot of the rules are still being formulated and that's why we're so excited about the SureWest transaction. On a pro forma basis, our exposure which has been coming down each year, we've had to manage $6 million to $7 million a year for the last couple of years in reduced access charges and USF. And it's down to about 9% now in legacy Consolidated and about 2% in SureWest.

So the combined pro forma company will be about 6% and again, we've been demonstrating that we have been able to manage those reductions. And quite frankly, the current rules, if they're implemented as we understand them, will be no more dramatic than that. And in fact, in the short term we'll have a bit of a positive impact for us.

As far as the Connect America Fund, initially right now it looks fairly modest to us on the new guidelines that we have received. We may get something around $0.5 million and have to build out maybe 500 homes. So we're anxious to see more of that, but quite frankly, we were early in deploying fiber and shortening our loops and that's why 96% of our customer base can get DSL today.

And you mentioned SureWest, I wanted to ask a question. Obviously, they reported earlier this week. Their RGU adds during the first quarter were a little bit late, but they were launching a new Whole Home DVR in the Kansas City market, which should I guess reignite growth in 2Q on. Any thoughts in terms of what you saw come out of SureWest earlier this week?

Not really. We were -- what they reported were right in line with what we had expected and saw in our due diligence. So their revenue was up almost 4%. And when you start looking at connections or RGUs the way they report them, those have seasonal and quarterly fluctuations. And so basically no surprises [in] what we expected.

And my last question in terms of the financing for the transaction. I think you've talked about potentially going out to market with a debt offering to offset the bridge line and permanently fund the deal. Any update in terms of the timing of that and the price talk you're seeing on that?

Barry, this is Steve. Based on where we're at relative to the timing for close, based on the fact with our February credit amendment, we now have an escrow concern, it can go at any time. We're evaluating. When we go to market, we would expect to be there. We'd expect to be in a market within the next couple of weeks. And with price talk, I don't want an open negotiation today. So we'll probably just let the road show take care of itself.

I didn't think you'd answer that, but I had to ask. Thank you very much.

I appreciate that.

Hey, Dave, just thinking about your earlier question on the triple play, we have roughly 33,000 video customers and 90% of them take the triple play.

Frank Louthan, Raymond James.

Okay. Couple of questions. One, just want to -- you mentioned the dividend, can you be just very specific? Anything that you see over the next 12, 18 months in your business that would in any way have you consider cutting the dividend?

I think it sounds like you've been very dedicated to that. But we've clearly seen some other dividend cuts. Just want to give you an opportunity to address investors on that. And then with that, what's sort of your -- how should we think about your philosophy on excess cash after the SureWest transaction? What do you plan to do with excess cash after paying dividends? Thank you.

Hey, good morning, Frank. As far as cutting our dividend, that's obviously a Board decision and being a public company, the Board looks at every -- all aspects of our business each quarter. I will tell you though that as you've seen over the last seven years that we've been public, we've been reducing our payout ratio and our focus has been to the second part of your question on the excess cash to de-lever.

So we are focused on both of those. We see nothing. In fact, with revenue now starting to grow and with the SureWest transaction we should be able to grow revenue. We've published some fairly conservative estimates on our synergies. We're very confident in our payout ratio and our focus will be on delivering solid results and de-levering the Company's balance sheet.

Okay, great. Thank you.

And not cutting the dividend.

Okay, great. Thank you. And can you characterize the -- the access lines that you did lose, can you give us an idea what sort of the breakdown is of commercial versus residential and what's sort of the ARPU on those lines that you're losing relative to your base of more loyal customers? And with the 16% growth year-over-year in video, is that sort of a good run rate? Do you expect to be able to continue double-digit sub growth for the next 12 months?

Yes, on the losses, Frank, they're about two to one biz to res this quarter. And we're still seeing some business rationalize lines and regrew, et cetera. So it's about a two to one. I could get you the exact number, but the biz exceeded the res to some extent. On the lines, on the resi side, it's about $20 ARPU on the losses. And I would just tell you that the port-outs that we monitor regularly, they were steady to declining. So we've seen a nice drop in the port-outs over time and that's reflected in our sub-4% line loss.

Okay. And on the video sub growth?

Oh, I'm sorry. Yes. That's a good number. Again, we're only penetrated at 17% and we see nice upside potential over there and some of our bundling, the triple play is working. The product performance has been enhanced. And so we're very confident that we can continue that kind of growth rate. And we have 30% penetration in some of our early markets.

Okay, great. That's very helpful. Thank you.

Donna Jaegers, D.A. Davidson.

Hi, guys. Just a question I guess on, since you've been visiting with a lot of the SureWest people. Any big -- obviously, they've had a lot of experience in IPTV. I was just curious if you can comment on anything that they're doing widely different from how you guys run your IPTV operation?

Yes, Donna. Well, first of all, let me compliment, we've been thrilled with the quality and cooperativeness of the people. We're going to be able to put these two companies together and take the best of the processes and the technology and the people. So we're very excited.

To your broader question about are they doing things differently, not really. Their approach to the market is about the same. Some of the advertising because of the densities of their markets, they're using some things a little differently, but the playbook is similar and just some fine-tuning for some of the individual market characteristics on the IPTV side.

Okay. Thanks.

George Whiteside, SWS Financial Services.

Good morning. Could you give us some additional color on the 1.25% increase in some of your debt? Is that because of the valuation of your overall debt position or is that --

I can tell you that. This is Steve. The 125 basis point increase on the term debt, if you remember, back in June of 2011, we went to the mark with our bank group and did an amend and extend. We took about 46% of our debt and moved the maturity out three years.

So everything -- prior to that, everything was a [bond] maturity at December 31, 2014 and that coupon on the existing debt was 250 basis points in the LIBOR floor. With the amendment, we got 46% of that to move out three years and for that we've -- the coupon on the extended debt moved up 125 basis points. For March, the overall effective cost of our debt, including a 60% position with respect to hedges, our average cost of debt is about 4.9% going forward.

That's certainly favorable. It's good to have you remind us of your earlier steps in this process.

Thank you.

My next question or maybe it's more of a statement. I view your operations as cash flow focused. And that the net income per se isn't the end-all and be-all in terms of how you measure your success. Is that a reasonable assumption?

I think that's very accurate. We're very focused on cash flow. We think adjusted EBITDA, as defined in our current credit agreement, is really the right measurement for cash flow on how we measure profitability. If you look at net income on a pure GAAP basis, our earnings are going to be diluted because we're based on multiple acquisitions with high amortization cost. Our leverage is a little bit up, so it may be higher interest cost.

So as Bob mentioned earlier, with pro forma for the SureWest transaction, it will be deleveraging for us. Our new target leverage will be about 3.5 times on the other side of the transaction and it will continue to sustain our cash flow improve the payout ratio relative to the dividend and et cetera. So we think your -- we share your analogy on how we look at our business.

And it's totally understandable because to a certain degree you're capital-intensive and therefore you're building up an asset base that can be depreciated over time and this certainly would be one of the factors that influence the net income versus the cash flow?

That's correct. Thank you.

Thank you.

Jennifer Fritzsche, Wells Fargo.

Oh, I'm sorry, I was muted. Hi, thank you. Good quarter. I just wanted to ask a bigger picture question. As you acquire SureWest and increase your fiber exposure, there's been a lot of M&A in the industry around the [fibers and check] model.

I guess bigger picture, as you look out where this Company is evolving, would you say you're kind of certainly not moving away from the ILEC model, but enhancing the fiber component. Is that something you can see growing and if you can offer any sort of -- quantify that in any way, because that seems to be an area of strong growth potential?

Yes, Jennifer. That's spot on. We've been moving, obviously, to more fiber for a decade now and this transaction just enhances that. And we started making that move, as I said, with fiber, but the last couple of years too, we have started to focus on our transport network in Texas, the CLEC in Pennsylvania, business growth, data centric, the wireless backhauls, the capacity upgrades that businesses need.

So all of that while we're not certainly leaving the resi markets and that's why our focus is on the triple play and not just on voice. But clearly the wholesale and business markets are a lot more of our business today and will be in the future and there'll be a fiber bridge.

Okay. Thanks.

I'm not showing any other questions in the queue. I'd like to turn it back over to Mr. Bob Currey for closing comments.

Thank you, Shawn. And thank all of you for joining us today and for your continued interest and support of Consolidated Communications. I hope to be talking to all of you in August. Thanks, and have a great day.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.