Consolidated Communications Holdings Inc (CNSL) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Consolidated Communications Holdings Third 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 call may be recorded. I would now like to introduce your host for today's conference, Matt Smith, Treasurer and Director of Investor Relations.

Thank you, [Sam], and good morning everyone. We appreciate everyone joining us today four our third 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 Bobby 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 differ 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.

I will now turn the call over to Bob, will provide an overview of our third quarter results and an update to our integration progress. Steve Childers will then provide a more details review of the financials. Bob.

Thank you Matt, and good morning everyone. I appreciate you joining us today. Let me begin by making a few comments about our overall results for the quarter and then provide an update on our SureWest integration progress. This is the first quarter of reporting for the combined company, and we are very pleased with how the business performed. On a pro-forma basis, both revenue and adjusted EBITDA increased year-over-year with revenue growing around 1% and adjusted EBITDA by 6.5%.

These results reflect our successful strategy of improving the top line, operating efficiently and meeting our synergy targets. On the top line, we continued our diversification with business and broadband now representing 73% of our total revenues. We also delivered substantial synergies throughout the quarter and continued our cost-structure improvements. At the close of the SureWest acquisition on July 2, we realized $10 million of annualized operating expense synergies and an additional $2 million throughout the quarter.

These operating expense synergies are right on our plan and have us on pace to meet or exceed the targets we set of $20 million annually, at the end of the first year after close, and $25 million at the end of the second. In addition, we now expect to achieve the high end of our targeted $5 million to $10 million of CapEx synergies, and those will be achieved in the 2013 calendar year.

These strong financial results in the quarter allowed us to deliver a comfortable dividend payout ratio of 67.2%. We distributed $15.5 million in dividends to our shareholders in the Third quarter and on Monday, our board of directors declared our 30th consecutive quarterly dividend to be distributed to shareholders on February 1st, for record holders as of January 15th.

Now, moving on to our operating results for the quarter. We delivered strong growth in our broadband subscribers of 6,500. We added 4,100 data and internet connections and 2,400 video connections. On the residential side, we are now penetrated at 30.2% for internet marketable homes, and 20.2% for video marketable homes, and while these are solid penetration levels, we have significant upside opportunity to drive these higher, in addition to increasing ARPU with faster speeds and video-tier upgrades.

On the internet side, we are now offering our customers a multitude of speeds between 1 and 50 mgs, at different price points, providing more options to the consumer and additional upgrade opportunities. With video, we rolled out whole home DVR in certain markets during the quarter, where it had not already launched. We are no longer at a competitive disadvantage in those markets, and we expect this to help drive higher ARPU.

Our legacy business continued our best-in-class performance with the last 12 month line losses down to 3%. On a combined basis, with legacy consolidated in SureWest, the access line losses were 4.8% over last year, but just as we did when we acquired our North Pittsburgh properties back in 2008, we are using our bundling and sales approach in the California ILAC and expect to improve on our pro-forma access line retention.

In total, net of our broadband growth and voice losses, we increased overall connections by 1,500 in the quarter, delivering on our strategy of growing broadband in excess of voice declines.

Now, moving on to our enterprise and carrier channels, the momentum continues to move forward and our network is in great shape to deliver the advanced communications and technology solutions that are in demand. Capacity needs on the wireless side are still increasing as data consumption is exploding. We are benefiting from wireless data on both the network side and through our five Verizon partnerships.

And finally, before I turn the call over to Steve, let me provide a brief update on our progress with SureWest. We have a lot of people working very hard on our integration efforts and I would like to publicly recognize them for all of their hard work. All of our integration efforts are on plan, and I'm happy to report that in October, we achieved our first major milestone with the completion of the first step of our billing and back-office integration.

The Kansas City customer base was converted into the existing systems and processes with the California customers. This allows the legacy SureWest business to operate more efficiently. And with respect to corporate systems, including accounting, payroll, supply chain and HR applications, this migration is also on plan and will be completed at year end 2012.

Our next major step is to combine all customers into one company-wide system which will result in a more standardized internal process, further operational alignment and a better customer experience. Overall, I'm very pleased with the first quarter of combined operations. The results were strong, and both synergies and integration are on target. I'm confident in our strategy, and our ability to execute on our plans. And with those comments, 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 reiterate our 2012 pro forma financial guidance. But before I do that, let me call your attention to the last table in our press release. To assist with your modeling and trending analysis, we have presented a table of operating metrics that includes the current quarter as well as the four prior quarters on a pro forma basis.

I'd also like to point out that the CLEC access line equivalent counts, the consolidated traditional reported, are now separated and included in each of the appropriate voice and data categories. We believe this presentation of our metrics provides the most useful format for you to evaluate and measure our success going forward.

With respect to our solid financials in the quarter, operating revenues were $157 million which represented an increase of $1.3 million or 0.8% over the third quarter last year on a pro forma basis. Increases in data, video and back-call services were partially offset by declines in voice services and air carrier access.

Total operating expenses, exclusive of depreciation and amortization were $109.7 million compared to $98.5 million on a pro forma basis for the same period last year. The increase is primarily due to $14.5 million of transaction costs related to the SureWest acquisition. Also, the cost associated with our growth and revenue were partially offset by our savings and synergy initiatives.

Net interest expense for the quarter was $20.6 million, compared to $13.4 million in the Third quarter of 2011. Compared to last year, we incurred an additional $8.4 million of interest expense related to senior notes issued to help fund the SureWest acquisition. This was partially offset by lower costs and our interest rate swap agreements.

Other income net was $8.5 million and in the quarter, we received $7.7 million in cash distributions from our Verizon wireless partnerships, compared to $6.9 million in such distributions for the Third quarter of 2011.

Weighing all these factors on a GAAP basis for the third quarter of 2012, we had a net loss of $300,000 and a net loss per common share of $0.01 compared to net income of $5.8 million and a net income per common share of $0.19 for the Third quarter of 2011. As detailed in the adjusted net income per share schedule in the earnings released, 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 third quarter of 2012 were $11.2 million and $0.28 respectively.

Adjusted EBITDA was $70.9 million in the quarter, which is an increase of $4.3 million, or up 6.5% from $65.7 million on a pro forma basis for the same period last year. Capital expenditures for the quarter were $28.3 million. On a year to date basis, pro forma capital expenditures were $88 million. We will be within our guidance of $110 million to $115 million which means the Fourth Quarter will be in the range of $22 million to $27 million.

From a liquidity standpoint, we ended the quarter with $24.8 million in cash on the balance sheet, and we have $15 million available on our revolver. For the quarter, our total net leverage ratio as calculated in our earnings release was 4.38 times to 1, giving full effect for $25 million targeted, that of the estimated $3 million to $4 million realized in the quarter, net leverage would be approximately 4 times to 1. Cash available to pay dividends was $23 million resulting in a dividend payout ratio of 67.2%.

Now, for guidance. We are reiterating the performance guidance we provided last quarter for full year 2012. Capital expenditures for the combined company are expected to be in the range of $110 million to $115 million, as compared to $115.1 million in 2011. 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, as compared to $7.8 million in 2011.

With respect to our dividend, our board directors has declared the next quarterly dividend of approximately $0.39 per common share, payable on February 1st, 2013, to shareholders of record on January 15th, 2013. With that, I will now turn the call back over to Bob for closing remarks.

So, in summary, there are a lot of employees working really hard to deliver the kind of results we did this quarter, while successfully integrating the two companies. I'm very proud of our employees and excited about the opportunities we have before us. We are well positioned to continue to deliver on our strategy, and drive shareholder value through a combination of growth and a strong dividend.

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

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

Thank you. On the video ads, can you give us an idea of what sort of the split is between the customers that you're adding on the co-ax and fiber parts of the network versus the copper, and can you give us an update on, there's been a lot of conversation about what Google is doing in Kansas City. You're in the market as well. Can you give us an update there about your current and expected exposure to what they're doing and how you see that impacting the competitive business there?

Yes, Frank, it's Bob Udell. Can you hear me?

Yes, Bob, how you doing?

Good, how are you? As far as the split between copper and fiber, we really have the benefit of a diversity of markets that's feeding the growth and giving us the good third quarter as well as the seasonality of a third quarter always being a bit better than the second. When you look at the split of fiber and copper, it really somewhat follows the distribution of that network across our customer base. There's no great edge on the fiber growth in this quarter, but we do historically see a better take rate in the fiber neighborhoods because of the faster speeds, and certainly the ability to have more HD in those offerings.

But I can't say that one is dominating. I would say that our Kansas City market was a bit stronger this quarter, and that's just to do with some of our marketing strategies that we brought to market after the close.

On your next question regarding Google, remember that in Kansas City, although they've announced, and we've seen them putting up cable and fiber on the poles, we're not overlapping them in any of our residential developments and we feel still very confident in the depth of our product, the speeds of our data.

We're in conversations -- the good news with this is we're in conversations with all the cities in which we do provide service because they're interested in what our future plans are and we've got a real robust fiber network in that market. So with no overlap, with the attention that the market is getting, it's really brought us a couple of positives in terms of continuing dialogues with the cities we serve, our good service reputation and in fact, we're looking at MFN, most favored opt-in opportunities with the cable attachment or pull attachment agreements that they have in Kansas City.

So where we can extend that to our business reach, we'll benefit from that.

Okay, great. And then can you just, over the long-term, give me an idea of your prioritizing use of cash and sort of debt repayment or dividend increases and comment on the safety of the dividend at this point?

Well, Frank, the predictability and visibility of the dividend is the highest priority here. As we've guided, CapEx is still very healthy in $110 million to $115 million, and that will be in the high of the 5% to 10% down next year. And probably the same kind of reduction in 2014. So our focus is on managing the growth opportunities that present themselves, but maintaining that healthy dividend payout ratio. There's no plans to do anything with the dividend that's sacred and secure and we are focused on reducing our net leverage over time.

Okay, so with the improvements in the CapEx and so forth in the next couple of years, should we assume that's going to just either build some cash on the balance sheet or otherwise go to a lower net debt ratio?

Absolutely, and the only caveat I would add to that, if there were some just fantastic growth opportunity, we're not going to turn down some back all fiber opportunities with just very attractive return opportunities, we would look at those, but I think you're perfectly fine modeling the numbers that I just laid out.

Okay, great. Thank you.

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

I apologize if you mentioned this and I missed it in the beginning, but just if you could talk a little bit about the Verizon wireless joint ventures and any sort of outlook you might have. I realize that we're related to the direction of CapEx, I know you can't offer specific color, but with most of those LTE bills behind these markets, I was just wondering directionally about CapEx in 2013.

And then separately, Bob, if I could just build on that one point about growth opportunities you made to Frank. I mean, I would assume that these would involve like more fiber centric aspects than typical ILEC assets, is that a correct assumption?

Yes, it is, Jennifer. Let me start with that and then Steve can talk to your question on the Verizon wireless partnerships. Yes, spot on, as we've transitioned ourselves to a broadband company and not a voice ILEC business. That's where those opportunities would go, and back to the earlier question that Frank asked also about where's the growth coming on the video side.

You know, the only real homes that we're adding are fiber. Whether that's in Texas in Greenfield or Legacy Consolidated, and most of that growth in the past year of new homes has been in Kansas City. So while Bob made the good point that there's really -- the product is basically as good on either of those fiber or copper or co-ax facilities, our growth in new homes is in the fiber arena.

So you'll probably see a disproportion and share of the growth go to fiber for that reason alone. So Steve, on the wireless partnerships?

Sure. Hey, Jennifer, thanks for the question. On the Verizon -- again, and I'm not sure if you heard the remarks during the call but just to restate, for the wireless distributions for the third quarter, we received $7.7 million from Verizon, as we've talked in the past, the last half of the year is always stronger than what the first half. So the $7.7 million for third quarter is up compared to $6.9 million for the same period last year.

And since you asked the question, on an outlook basis, we have just received notification of what all of our distributions are going to be for the fourth quarter, and we will on the next call, we will be reporting that we have $9.4 million in distributions for the fourth quarter, our highest quarter ever. So that will be a great way to end the year, but also to kind of your question going into 2013, relative in timing to CapEx.

Again, as we've talked in the past, the metro markets for the LTE builddowns are complete in both Pittsburgh and Houston. We're still kind of moving through the RSA, the three RSAs that we have. Our thoughts are that all things being equal, the growth in the metro markets should kind of offset any decline, if any, on the rural markets. But I would also remind you that some of our distributions are a little bit lumpy based on the timing of when they have the iPhone launches, so we would expect our first Quarter distribution for 2013 to be impacted by the iPhone 5 launch they had in the fourth Quarter of this year.

Thank you both.

Thank you. Our next question comes from Donna Jaegers of DA Davidson. Your line is now open.

Hi, guys. Hi, thanks and congratulations on a good quarter. I'm sure you guys put in a lot of work with the integration. Can you give us a little more detail on the wireless back call. Any sort of color on the number of contracts signed or revenues from those contracts so far?

Yes, Donna, this is Bob Udell. With respect to new in the Third quarter, we've added roughly 130,000 in new monthly revenue and I think around 225 new circuits. So we continue to see demand both with existing contracts and opportunity for new sites, and I won't give the specific number, I know at the top of mind but we're building out new sites as we speak.

Good. And then on the CLEC operation, obviously, Sherwood's had a lot of good fiber planned in the Sacramento market, but you're facing a pretty sluggish economy out there. Can you give us any color on what you're doing to try to add a little more energy, energize the Sacramento CLEC operations?

Yes, be glad to. The benefit of our portfolio of markets now is that we have a diversity of markets. Specific to Sacramento and California, while we actually expected the sluggishness of real estate there to hamper any growth, we've seen a more robust take rate on our new metro-E product platform, which is really the basis for the business bundle that we specialize or tailor to the size of the business.

And so with that standardization or that marketing focus on that product, some investments we're making on the VoIP switch and features that we can layer on to that metro-E pad, we're actually a better take rate in California than we would have expected at close.

Okay. And then a more longer-term question for Bob Currey. Obviously the regulatory reform has hit a lot of the smaller independently owned telecom carriers harder with the drop in access charges, and now universal service fund changes looking ahead. What's your view, longer-term on M&A, will that create more opportunities for you to sort of scoop contingent operations that are close-by geographically? Are you interested in that? I know you're still digesting SureWest, so probably nothing in the near term, but just sort of longer-term outlook?

Yes, Donna, we would certainly be interested in opportunities where they make sense and by that I mean perhaps geographically, certainly value-wise that continues to diversify us into a broadband and commercial company and away from ILAC voice. We wouldn't be real excited about a small voice ILAC in a state that we are already, or we don't already operate.

I think the regulatory reforms certainly, and particularly the uncertainty to some of the next phases of it, because cost models and other guidance have not been developed yet from the FCC. I think that will contribute to some nervousness on some providers, but there's also the technological risk, the need for scale and scope today that will also, I think, enhance the opportunity for some of us who want to be consolidators.

So we'll be opportunistic, as you point out. We're hedged down right now, focused on SureWest, but still maintaining relationships and contacts and we'd be interested in talking to somebody that was looking for an exit.

Okay, thanks, Bob.

You're welcome.

Thank you. And again, ladies and gentlemen, if you do have a question, please press star, then one on your touch tone telephone. Our next question comes from Steve Blinn of Morgan Stanley. Your line is now open.

Good morning. I think most of my questions have been answered, but I just had one more. How much in the severance and integration expense do you still see to come, maybe in the Fourth Quarter or beyond. I know there was a term out here in there Third quarter, but can you give us an idea about how much is left? Thank you.

It's Steve Childers. There's probably another $6 million to $7 million that, as we move through our -- there's a cost that will be paid that we've already accrued for, that was reflected in our purchase accounting. But in terms of other severance costs, other integration related costs, I would say it's somewhere between $5 million and $10 million I guess, and particularly in factoring in severance and what we would be treating as add backs for software integration, some of the licensing and things like that. But again, that's a cash spin into the degree that it is, our adjusted EBITDA calculation, we would be taking that as an add back under the covenants of the credit agreement.

Okay, great, thank you.

Thank you. Our next question is a follow up from Donna Jaegers of DA Davidson. Your line is now open.

Okay, Steve just a quick question on depreciation going forward. It looks like you guys wrote down some of the SureWest assets. Is this a good level going forward for depreciation expense?

Donna, that's a really good question. As you'll see when we file our 10Q, we have not finalized the valuation study and all the purchasing accounting related to the SureWest acquisition, so we're still working how the purchase price was allocated.

For right now, that's the best number that we have, factoring in our missions going forward and we hope to have the valuation finalized, I wouldn't expect there to be any tremendous shifts, but it could change a little bit.

Okay, thanks.

Thank you, and at this time, I'm not showing any further questions from the phone lines. I'd like to turn the call back to management for any further remarks.

Well, Sam, thank you and thanks to all of you for joining us today and for your continued interest and support of Consolidated. We hope you will join us again next quarter, and thanks again, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.