Consolidated Communications Holdings Inc (CNSL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Consolidated Communications second quarter 2012 results conference call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Matt Smith. You may begin.

Thank you, Mimi, and good morning, everyone. We appreciate you joining us today for our second quarter 2012 earnings call. At the conclusion of the prepared remarks, we will open the call up for questions.

Joining me on the call today are Bob Currey, President and Chief Executive Officer; and Steve Childers, Chief Financial Officer. Also available during the question-and-answer session is Bob Udell, our Chief Operating Officer.

Please review the Safe Harbor provisions in our press release and in our SEC filings for information about forward-looking statements and related risk factors. 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 different materially from those expressed or implied by these forward-looking statements.

In addition, today's discussion will include 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.

On July 2, we closed on the acquisition of SureWest Communications. We will report complete pro forma results on the third quarter call in early November. I will now turn the call over to Bob, who will provide an overview of our second quarter results and an update to our integration progress. Steve Childers will then provide a more detailed review of the financials, as well as updates to our 2012 guidance. Bob?

Thank you, Matt, and good morning, everyone. I appreciate you joining us today. I'm very pleased in our performance this quarter. We remained focused on delivering excellent results, while working rapidly to close on the SureWest transaction, which happened in less than five months from the announcement.

Financial results were solid with revenue at $93 million, adjusted EBITDA at $44.8 million and a dividend payout ratio of 59.6%. We have continued to make improvements to the top-line trends, and the SureWest acquisition provides additional diversification and growth opportunities.

Second quarter revenue on a pro forma basis was $157.8 million, which represented growth of 2.7% over the second quarter of 2011. We continued transitioning away from traditional regulated revenues while maintaining our consistent cash flows. An indicator of this progress is the continued growth in our business and broadband areas, which on a pro forma basis, including SureWest, were 73% of the second quarter revenue. We also had a good solid quarter operationally. Our broadband net adds were in what is historically a soft quarter -- they were solid in what is seasonally a soft quarter for the industry.

We added 2,000 net new broadband subscribers, with 1,500 of those coming from high-speed internet and 500 from our digital video. This broadband growth surpassed our ILEC access line losses by over 800 subscribers. The ILEC access line performance was also very strong this quarter, with the last 12-month losses improving to 3.2%. These results reflect our continued success in our bundling strategy, led with our triple play offer, which continues to prove to be a differentiator in our retention efforts.

In our carrier sales channel, data growth continues to drive increased capacity needs, especially from the wireless carriers. We're well positioned to continue to benefit from this acceleration in wireless data consumption, both inside and outside our footprint. In the second quarter, we added just over 400 new circuits to the wireless towers we serve, bringing the total wireless backhaul annual revenue under contract to $9.7 million.

Our CLEC business in the Pittsburgh area also had another solid quarter. We continue to expand the network off the fiber ring, into select commercial buildings where paybacks are attractive. We have had success in commercial customer growth with this strategy and see continuing demand.

And finally, before I turn the call over to Steve, let me provide an update on SureWest. We're very pleased with how things are progressing. We announced the functional organization structure in advance of the closing and retained two key executives in Scott Barber and Ed Butler. Scott is leading the network in field operations teams for the new combined Company, and Ed has responsibility for all of commercial sales. Both have played key roles in helping make the SureWest employee transition go smoothly and ensure we're delivering best practices, efficiencies and excellent customer service. The addition of the SureWest employees strengthens our bench, and I would like to personally welcome all of the SureWest employees to the team. And I look forward to achieving great things together.

We already have multiple integration projects underway. As an example, early in the fourth quarter, we will be combining both the California and Kansas City operations into a single operating platform. This will provide efficiencies with service improvements in many areas, including provisioning, billing, sales and marketing. At yearend, we will be combining into a single ERP system platform, bringing together Companywide financial reporting, accounts payable, payroll and human resources. All projects are on schedule and on budget. We will provide updates during our quarterly calls as we progress through the integration process.

From a synergy perspective, we remain committed to achieving the $25 million in annual operating synergies within two years. At close, we attained $10 million in annualized savings through both headcount and non-headcount reductions. We also remained very confident in the $5 million to $10 million of CapEx synergies that we previously guided. Overall, the performance from both companies and the integration efforts are proceeding exactly as we planned, and we are as excited as ever with the benefits of the combined operations.

And with that update, I'll now turn the call over to Steve for the financial review.

Thanks, Bob, and good morning to everyone. This morning I will review our quarterly financial performance and provided updated 2012 guidance, pro forma financial for SureWest. As Bob demonstrated, we are pleased with the results for the quarter and very excited about the SureWest transaction.

Operating revenues for the second quarter of 2012 was $93 million, which represented an increase of $400,000 over the second quarter of last year. Increases in network access, subsidies, data and internet and other operations were partially offset by declines in local and long-distance revenues.

Total operating expenses, exclusive in depreciation and amortization, were $57.1 million compared to $56 million for the same period last year. The increase is primarily due to transaction costs related to the SureWest acquisition, as well as to the higher video programming expenses from both the 15% growth in our year-over-year video subscribers and annual content price increases.

Net interest expense for the quarter was $16.9 million compared to $12.4 million for the second quarter of 2011. The increase was attributable to the following factors. First, we had $2.7 million for one month of interest on the $300 million of senior notes we issued on May 30. And second, we had $2.6 million of fee and amortization associated with the (inaudible) bridge financing for the SureWest acquisition. [Mean] expenses were partially offset by lower overall cost on interest rate hedges.

Other income debt was $6.9 million compared to $6.3 million for the same period last year. For the quarter, we received $5.9 million for in cash distributions from our Verizon Wireless partnerships, compared to $5.8 million for the second quarter of 2011. Weighing all of these factors on a GAAP basis for the second quarter of 2012, net income was $2.8 million and net income per common share was $0.09. This compared to a net income of $5.4 million and a net income per common share of $0.18 for the second quarter of 2011.

As detailed in the adjusted net income per share schedule in the earnings release, after adjusting for the financing and transaction costs related to the acquisition of SureWest, our adjusted net income and adjusted net income per share in the second quarter of 2012 was $5.4 million and $0.18 respectively.

Adjusted EBITDA was $44.8 million in the quarter, compared to $46.4 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 $102 million in cash, excluding the $298 million in net bond proceeds. Of the $102 million in cash, $17 million was considered restricted and held by the escrow agent under the terms of our senior notes offering.

For the quarter, our total net leverage ratio, as calculated in the earnings release, was 4.19 times to 1. Our leverage and coverage ratios were well within compliance levels of the credit facility. Cash available to pay dividends was $19.5 million, resulting in a dividend payout ratio of 59.6%

Before I move on to guidance, let me summarize the funds flow for the July 2 closing of SureWest. To fund the transaction, we used the $298 million in proceeds, which have been held in escrow since our May 30 senior notes offering, and on the day of closing in addition to using some cash off our balance sheet, we also drew $35 million from our $50 million revolver. We paid SureWest shareholders total cash consideration of $176.8 million and issued just under 10 million shares of consolidated stock. We also paid out SureWest's outstanding debt in the amount of $225.6 million and funded transaction-related fees.

Now for our updated guidance, which we are providing on pro forma basis for SureWest for full year 2012, consistent with our existing policy, we will give guidance on CapEx, cash interest and cash taxes. Capital expenditures for the combined Company are expected to be in the range of $110 million to $115 million. Pro forma CapEx for 2011 was $115.1 million.

Cash interest costs are expected to be in the range of $63 million to $67 million, as compared to $59.7 million last year. And finally cash income taxes are expected to be in the range of $5 million to $6 million, and compared to combined cash taxes for 2011 were $7.8 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 1, 2012 to shareholders of record on October 15, 2012.

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

So, in summary, we had another solid quarter, and the close of the SureWest transaction has us very excited about our future. We have combined two solid businesses that provide significant cash flow to continue to invest in the business, to support our dividend and to improve the balance sheet. A larger company has greater scale, is more diversified and better positioned competitively in the markets we serve.

We will continue to deliver on our strategy providing the best service to our customers and delivering results for our shareholders.

And with that, I'd like to open it up for questions. Mimi?

Thank you. (Operator Instructions) Our first question comes from Frank Louthan of Raymond James. Your line is open.

Great. Thank you. Can you give us an idea of sort of the -- your next opportunity as far as growing subscribers and the combined businesses? I mean, when should we start to see the operational impacts of the business -- of the combined businesses from a subscriber growth perspective?

This quarter, Frank. Good morning. It's Bob. Yes, I mean, we've got the new organization in place, the sales and marketing, and the capital's deployed. And we should see -- you know, in my prepared remarks I commented on 2.7% revenue growth quarter over quarter from a year ago, and we're predicting that we will show top-line growth immediately with the combined companies.

Okay, great. And then just to clarify, you know, nice uptick on the OpEx synergies right off the bat. I would assume sort of the next step in that is probably some of the systems conversion you alluded to towards the end of the year or early next year. Is that how we should think about sort of the next update on that?

Yes. As planned -- in fact, we're a bit ahead of where we had previously guided, but we expected something a little under $10 million, and we achieved $10 million. And we've guided, Frank, that leaving year one we would be at $20 million, and then the last $5 million would come during year two.

And to your point, there will be -- there won't be any big cliffs, but as back-office integration projects are completed, and we get on common systems between the companies, you will see a gradual -- the $10 million over the next 12 months, and then the final $5 million in the last year.

Okay, great. Thank you.

Our next question comes from Barry Sine of Drexel Hamilton. Your line is open.

Good morning, gentlemen. Congratulations on getting the deal done. A couple of questions, if you don't mind. First of all, you're now in the California market, and California continues to see challenges, like municipal bankruptcies. Can you give us an update on what you're seeing in that market and what's your strategy in a challenging economy to grow both the retail and the consumer and the business segments of that business?

Yes, well, thank you for the compliment, Barry. You're spot on in California. I think we're a little bit different there in Northern California with the legislature being in the Sacramento area. On the commercial side, they're stressed in that area like others. But like I guess most states in Washington, where the capital -- when you have the seat of government, you don't get quite the pullback as others.

Last year -- excuse me, a little over 12 months ago when they transitioned to Microsoft Media Room, they really upgraded their competitive offering on the video side. And so we're seeing some improvement there. The business growth in data, like our other parts of the Company, is seeing nice growth. And of course the focus on the Ethernet and bandwidth will -- should continue. And our efforts -- they should -- their efforts were a bit more focused on residential, and we've been a bit more focused on business. And when you combine those two, I think there's some opportunities that will not only avail themselves to California but also when we take some of their res focus to the legacy Consolidated operations, we expect to see some improvements there.

We're obviously trying to capture the best processes of both companies, and in fact, that's what we've started to do already.

That actually leads to my next question with the focus on business sales. We can see in the results the Pittsburgh CLEC operation had a good quarter. And I think given the economy, that the Kansas City metro looks like a pretty good opportunity for you in terms of business sales. Can you give us a little more color in terms of what you're going to be doing there to realize that synergy in business sales in that market?

Specific to Kansas City? Barry, this is Bob Udell.

Yes. Well, I mean, I think that that has a strong economy in Kansas City than it does in California, so I would think that would be a better opportunity for you.

Yes, there's no doubt. But I would say that the benefits of combining the two companies has really put us in a good position to leverage our business bundle and metro Ethernet suites across all markets. Kansas is a ripe market for that. They've got a great network. It's IP oriented. So even though they came from some cable TV heritage, with the upgrades they've done, we've got a great opportunity, and they've been capitalizing on it to some degree of extending that network to businesses with the similar product suite that's been successful for us in Pennsylvania.

And my next question, just on the Verizon dividend, up modestly from a year ago. And I know there's some (inaudible) issues with Verizon upgrading to LTE and the iPhone. In the past you've given a little bit of an outlook, how that looks going forward. Could you update us on that? Do we expect to see pretty good growth from the Verizon dividends as we get into 2013?

Yes, Barry, this is Steve, and I'll take that one. You know, as you remember, we had the buy partnerships, two that are in those same markets, three that are in the RSA markets. And to your question on the LTE 4G build-out, that's already behind us in the metro markets. The RSA markets or the more rural markets are currently doing that. So the distributions for the first half of the year are generally lighter than what they are over the last half of the year. And again, we had guided toward they might be slightly down for full year 2012 compared to 2011 and past years, as they made it through this CapEx cycle.

So we -- so, again, we would expect the distributions to increase over the last half of 2012, and then once that CapEx build for 4G and LTE is behind us, we would expect to get back into kind of growing in the same path that Verizon has guided to, and 10%, 11% earnings going forward.

And that's in the 2013 timeframe?

Yes, and again, just to emphasize, we do expect the distributions to be higher the last half of this year than what they were the first half.

My last question, this year you've added and restructured some of the debt on the balance sheet. Could you go through in a little bit more detail on what is the existing composition, the debt, what are the interest rate pieces, and what kind of a blended interest rate we're likely to see going forward to help us out from a modeling standpoint?

Well, let's break it down into the term debt. As a result of the transaction, the term debt stays in place. We had the $880 million term debt facility put into place when we did the North Pittsburgh transaction back in 2007. That's been modified with the amended extend that we did in June of 2011. So at that point in time, we extended 46% of the debt that moved out from the due date of December 31, 2014, to December 31, 2017. The coupon rate on the non-extended piece was 2.5%. The coupon on the extended piece is 3.75%. Given effect to the hedges that we have in place, the weight of cost of debt on the term debt is about 4.9%.

And if you remember with that (inaudible) extend, we also committed to start doing a 1% amortization (inaudible) the first quarter of this year. So we're basically now paying back $2.2 million a quarter. So that's the term debt. With the SureWest transaction, you know, the bond deal priced a little higher than what we were expecting, so we downsized the original expectations for the bond deal from $350,000 to $300,000. That priced at 10.87%. And then we also, to fund a transaction, we drew $35 million on the revolver, and that is carrying a 3.25% coupon rate, and with the Libor factor it's basically 3.5%.

Okay. I'm glad I asked. A lot of moving pieces. Thank you very much, gentlemen.

You bet.

Our next question comes from Jennifer Fritzsche of Wells Fargo. Your line is open.

Thank you. Good quarter. I just -- and I apologize as I missed this. Your leverage ratio at 4.2, can you anticipate -- talk about where you anticipate going to -- toward? And the nice -- you know, the fact that broadband growth surpassed the ILEC line losses was great. Do you expect this trend to continue near term?

Hey, Jennifer, this is Steve. Thanks very much for the comment. With respect to leverage, we are at 4.2 times the earnings release. Over time -- a couple of things on the capital structure. With the senior notes that we put into place as a result of the transaction, we're really pleased that we're moving the secured leverage ratio down three times or below pro forma for the transaction, introducing the senior notes or a full turn of the junior capital, at the top of the capital structure, we think is going to give us more flexibility going forward.

Our -- so our new target leverage giving effect to the new balance sheet and our optimism for the SureWest transaction is over time we would like to be back in a 3.5 times range.

And Jennifer, your question on the access line losses or the broadband net adds being greater than the access line losses, there is absolutely no reason that that trend should not continue. I don't see -- we continue to enhance our bundle and our triple play. And we should not -- we should continue to see improvement, and we still see plenty of opportunity for broadband growth in both our DSL and video offerings.

(inaudible). Thanks, Steve.

You bet.

Our next question comes from [Steve Flynn] of Morgan Stanley. Your line is open.

Great. Thanks. Most of my questions have been asked. Just one question. On the SureWest EBITDA it looks like it was down year over year. Just wondering if there were any one-time items in the current quarter or the year-ago quarter.

Yes, Steve, this is Steve Childers. Thanks for the question. The SureWest numbers, and again, we didn't own the business until July 2, so it's not -- again, the number is just trying to be helpful with what we presented there. But their numbers were influenced by probably around $700,000 in an access dispute that was booked at the end of the quarter -- second quarter 2012. And we did have -- as we were collaborating on the closing process, you know, we did encourage SureWest to kind of clean up a couple of things, and this dispute item was one of them. And I think just generally the trend on some video programming content, the timing of that also kind of impacts the numbers as well.

Okay, great. And then on the revolver side, so you drew I think you said $35 million in the quarter to help fund some of the closing costs. Is that something you would expect to repay in the near future or once you get past some of the upfront costs with regard to the deal on the integration?

I think our -- over time -- we haven't sent a timeline for when it'll be repaid, but there's no term limit on that or the extension on the credit facility itself that, to your point, we do need to move through some integration. We do have some additional one-time costs coming up, but we will look to pay that back as soon as possible.

Okay, great. And then the final question I had was just there's been a lot of noise and press again with regard to Google and Kansas City. Has anything changed there? My assumption is they're in a different area than your current footprint. Has anything changed there? Have you seen anything there that we should be aware of?

No, I think your assumptions are still spot on and very accurate. There's no overlap with our serving territory. They're not anywhere near us, and frankly, at least the public announcements of their offerings, it's a totally different package, clearly not a robust video offering. And frankly, the -- you know, our customers there do not demand the kind of bandwidth that they're offering at the price point. So at this point we don't -- you know, we'll obviously follow it, but we don't see any impact on our business.

Okay, great. Thank you.

(Operator Instructions) We have a follow-up question from Frank Louthan of Raymond James. Your line is open.

Yes, I wanted to touch base on the CapEx guidance. Trending a little higher than I would have thought. Just want to see is there anything in that that's sort of one-time integration, kind of CapEx, and is that net of the CapEx synergies that you're expecting, or should we see -- should we expect to see that trend down a little bit going forward?

Yes, Frank, there's very little synergy or integration CapEx in that number. Basically the guided number is the pro forma that both companies have provided in the past. And as we've announced, there'll be $5 million to $10 million of CapEx synergies in 2013, and there'll be a modest reduction because of the integration.

Okay. And what was the CapEx at SureWest in second quarter?

We're scrambling here, Frank. The number was $70 million -- the budget was $70 million for the year. And --

Frank, I'm looking at the press release, and we did call that out here. It was $21.5 million for the quarter.

Yes, it was a little higher than the -- it's the building season, and it was not proportionate over the four quarters, but we're on target for $70 million, as they previously guided.

Okay, thank you.

Our next question comes from Donna Jaegers of D.A. Davidson. Your line is open.

Hi. Sorry if you answered some of these questions. I joined in progress. Did you give any sort of color on the access charge impact for inter-carrier compensation in the third quarter?

Donna, this is Steve. We did not give that. No one asked that question. We thought we might make it through the call without it.

Oh, too bad.

Thanks for asking. Yes, the impact with the July 1 kind of scheduled step down, I mean, there's two things happening as you're probably aware of. You know, [recip] comp on wireless goes away, as well as we start to step down for jurisdictional parity on the terminating switched access rates. And there's a lot of moving parts to this, but we would -- on a combined pro forma basis, we would describe -- we would estimate our exposure, all things considered, to be in between $1 million and $1.5 million for the last half of the year.

And again, we're really comfortable and think it's a manageable number. And again, we remind you that based on the last several years, based on just degradation and the rate minutes of use and rate deductions and things like that, loss of access lines that we've been more than holding our own with losing considerably more than that type of revenue. So with the things available to us, like looking at the arc and other things, we think it's more than manageable.

And that $1 million to $1.5 million, is that net of the arc charges that you've put in place?

Yes, it is.

Okay. And are you -- I know there was a $31 limit on residential. If you were above that limit on basic service, you couldn't charge arc. You guys run into that, that limit in place?

Yes, there is a baseline number, like in Illinois based on where our local rates, we're not going to be able to do that. But in some of our -- Texas and PA markets, particularly in Texas where the rates are lower, we've got a little -- we've got more ability to move the rate and still maintain a strong competitive advantage.

Great. And then I know Texas, on the Universal Service Fund, will keep waiting for -- to see what it comes out of the FCC. But I think Texas was looking at their high-cost fund as well. Have they come to any sort of decision there, or is there any timing that you can help us with on that?

On Texas, no. I think there's been more action like with the large company fund in Texas. We're in the small company fund, and there's nothing (inaudible) it'll be 2013 or later in 2013, if at all.

Okay. And then on -- I had one other question, but I' looking for it here. Oh, on SureWest and on the Kansas City effort that Google is making, in talking to SureWest previously they held out maybe the possibility -- they have a call center, I guess, based in Kansas City that maybe they could potentially help Google with whatever services Google wanted to offer. Is that a correct understanding? Is there actually a call center in Kansas City or just that SureWest had a call center that they were using for the Kansas City overbuild effort?

Yes, Donna, there is a call center there, but I would tell you that it's probably a stretch that we would be doing call center work for Google. I mean, if they were looking for some help and we could make some money at it, sure, but I don't see that as a possibility. There is a possibility though of some facility arrangements with them, with our nice network that we have deployed or the predecessor SureWest had deployed. There's some possibilities for some sharing of some traffic there. But that would be it. I don't see much of an opportunity with a call center.

Bob, that would be more used in the video head-in that SureWest has put in place already?

No, it'd be more transport facilities, the fiber that we've deployed in the Kansas City area.

Okay. All right. Thanks.

Thank you.

Thank you. Our next question comes from (inaudible) of Goldman Sachs. Your line is open.

Hi, how are you? I was just wondering if you can tell us what the revolver balance is currently. And then I had a follow-up question on the pension and (inaudible) contribution and was wondering what that was for the quarter. Thanks.

This is Steve Childers. The revolver balance we had, again, the original facility, and we had capacity of $50 million, and we drew down $35 million as part of the closing on the transaction.

That was as of July 2? Would you care to comment what it is currently?

Same, no change. Relative to the pension fund, the question was how much we paid in the second quarter?

Yes.

For CNSL, $1.9 million. And then, again, with the new legislation that was impacted, we expected to see the combined requirements for the last half of the year kind of reduced by about $4.5 million.

Thank you.

Thank you. I'm showing no further questions in the queue at this time. I'll hand the call back to 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. Thanks and have a great day.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.