Consolidated Communications Holdings Inc (CNSL) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings, Inc. fourth 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 be given at that time.

(Operator Instructions)

As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Matt Smith, Treasurer and Vice President of Investor Relations. Please go ahead.

Thank you, Jonathan, and good morning, everyone. We appreciate you joining us today for our fourth quarter and full-year 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; Steve Childers, Chief Financial Officer; and Bob Udell, 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, who will provide an overview of our financial and operating results. Steve Childers will then provide a more detailed review of the financials. Bob?

Thank you, Matt, and good morning, everyone. We appreciate you joining us today as we review our fourth quarter and full-year results.

Consolidated continues to perform well as 2012 was a very successful year for us. We announced the acquisition of SureWest right at 13 months ago and fast-tracked the closing to July 2. We have completed significant steps in our integration efforts, which I will review in more detail in just a moment. And all of this was accomplished while we continue to grow, diversify the business and deliver -- delivered significant cash flow. We became a larger company with a robust set of competitive products and services, improved our capital structure, strengthened our team and added significant growth opportunities. I could not be more pleased with how successful the year was and I want to take a moment and extend my appreciation for all the hard work accomplished by our employees.

Now let me share some of the specific results for both the quarter and the year. We had a strong quarter of revenue growth with an increase of 1.8% versus the same period last year. We continue to grow our data and video subscribers while placing a greater emphasis on commercial and wholesale opportunities. Our business in broadband revenues now represent 74% of our top line, which demonstrates our diversification strategy. Total revenue for the year was $631.4 million, or an increase of 1.3% over 2011. Adjusted EBITDA for the quarter was $74.2 million, an increase of 5.8% over the fourth quarter of 2011. This increase represents our ability to grow the business organically while also achieving our synergy targets. For the year, adjusted EBITDA was $275.5 million, which represents an increase of just under 1% compared to last year.

The dividend payout ratio was strong at 58.2% for the quarter and 63.9% for the year. These results reflect the unique characteristics of our business with top line growth, increasing earnings and meaningful cash flow securing our dividend. We believe these factors differentiate us from many others in our sector. With no debt maturities for nearly five years, we are in a great position and will continue to do what we do best, operating the business and providing exceptional service to our customers.

The fourth quarter financials reflect the success we are having in our strategic initiatives. Despite the challenging economy, our commercial and carrier channels are doing well and we have added sales resources in our key growth markets. Our network is all IP-based and has significant fiber throughout that allows us to expand with CapEx tied to success-based opportunities. We've been driving growth through our ethernet products in both our ILEC and CLEC territories, achieving a 32% increase over last year. We recently expanded our ethernet product set into our California markets, giving that sales team a deeper set of services to offer.

With respect to wireless backhaul, we had one of our best quarters ever by signing agreements that added over 50 new sites and $3 million of annualized revenue. These new sites will be installed over the next year and are included in our CapEx guidance. This will bring our total sites to approximately 700 with $19 million in annualized contracted revenue.

With respect to broadband, we increased our data and video connections by 1,750 for the quarter and 16,463 for the year. Our triple play ARPU of $132 is the highest it has ever been and is a testament to the value of our products and bundles provide. We are driving this revenue growth through higher HD and DVR penetrations, expanded video-on-demand programming, maximizing the channel lineup flexibility and price increases. Our triple play offering is the best value proposition for our customers and is a key reason why our access line performance continues to be best in class. For the quarter, our access lines declined by 2,363, or 0.9%. And on an LTM basis, the rate improved by 50 basis points to 4.3%.

On the consumer side, we expanded the network by adding over 2,500 fiber-fed marketable homes, bringing the total additions for 2012 to just over 15,000 homes. This year we will continue to build fiber to the homes in new greenfield developments and into neighborhoods where demand exists. We will increase our focus towards achieving higher penetration and growth in the average revenue per customer. Our capital dollars will be more focused on higher return commercial and carrier opportunities.

Now let me provide a brief update on our integration efforts. During the fourth quarter we achieved important milestones. First, we completed the initial stage of billing integration where the Kansas City customer base was converted into the existing systems and processes with California. Second, we completed the integration of our California operations onto our customer call center platform, which provides for a better customer experience and more efficient process across our markets. And finally and most importantly, we completed the combination of our corporate systems, which places all of the functions for financial reporting, accounts payable, human resources, payroll and supply chain management under the same platform and processes. And all of these projects are on plan.

These steps, along with the actions that we took at closing, have produced $15 million in annualized synergies. And as a reminder, our targets are $20 million by the end of June 2013 and $25 million by June of 2014. We are very confident we will meet or exceed our targets.

And finally, before I turn it over to Steve, I would like to publicly welcome Tom Gerke to our Board of Directors. Tom has extensive experience in the industry with his time as General Counsel at Sprint, Chief Executive Officer at Embarq and Vice Chairman at CenturyLink. As a longtime resident of the Kansas City region, Tom will provide great insight into the market where we operate. I'm pleased to add him as a member to our outstanding Board.

So with those comments, I'll now turn the call over to Steve for an overview of our refinancing and a detailed financial review.

Thanks, Bob, and good morning to everyone. Today I'm going to do three things. First, I will start by discussing the refinancing we completed in December and then review our fourth quarter results and finish up with 2013 guidance.

On December 4, we closed on a new debt financing for $515 million. We used the proceeds to pay off our December 2014 maturities as well as the outstanding borrowings on our revolver and also to fund fees related to the transaction. While we did not have any near-term debt maturities, the bank market was attractive and we decided to be opportunistic. The new facility matures at the end of 2018 and carries a rate of LIBOR plus 4% with a [1.25%] floor. The facility includes a 1% annual amortization, which is consistent with our other term debt. We have the full amount of our $50 million revolver available to us and we have no debt maturities until December of 2017. Our capital structure is in good shape and we have greatly improved our debt maturity profile.

Now let me review our quarterly financial performance and then I'll provide 2013 guidance. Operating revenue for the fourth quarter was $160.1 million, which on a pro forma basis represented a $2.8 million, or 1.8% increase over the same period in 2011. The increase was primarily driven by continued growth in our data and internet services as well as our commercial and wireless backhaul areas. These increases were partially offset by declines in our voice related services. Total operating expenses, exclusive of depreciation and amortization, were $104.9 million, compared to $98.5 million on a pro forma basis for the same period last year.

The $6.4 million increase was primarily due to the following items. First, based on our year-end evaluations of intangibles, we recognized a total of $2.9 million in non-cash impairment charges for two non-core businesses in our other operations segment. As a result, all the intangibles on our books for this segment have been eliminated. Second, we recognize $1.7 million of transaction and severance related costs. The remaining $1.8 million increase is tied to growth in the business.

Net interest expense for the quarter was $20.5 million versus $11.6 million last year. The increase was primarily driven by $8.2 million expense related to senior notes we issued in May to fund the SureWest acquisition. Other income net was $9.4 million for the quarter, and during the quarter, we recognized $9.4 million cash distributions from our wireless partnerships, compared to $8.7 million for the fourth quarter of 2011. On December 13, we announced the acquisition of an additional 3.5% interest in one of our Texas partnerships, which overlapped with our operating properties. The required investment was $6.7 million -- was based on current and projected cash flows of the partnership with a very attractive price. We expect continued growth in our distributions from these partnerships.

Moving onto net income and earnings-per-share, in the quarter our adjusted net income and EPS was $8 million and $0.20, respectfully. As outlined in the table on our earnings release, the adjustments are for acquisition related costs and non-cash items including the impairment charges, stock compensation and a $4.5 million charge for the loss and extinguishment of debt tied to the refinancing. This comparison adjusted net income of $8.2 million and an adjusted earnings per share of $0.28 for the same period of 2011. Adjusted EBITDA on a pro forma basis increased by $4.1 million, or 5.8%, to $74.2 million in the quarter and was 4.7% on a sequential basis. The year-over-year increase was driven by a combination of organic growth and OPEX synergies achievement on SureWest.

Capital expenditures for the quarter were $26.7 million, approximately 70% of our capital expenditures for the year were for success-based and growth opportunities. From a liquidity standpoint, we ended the quarter with $17.9 million in cash and our $50 million revolver fully available to us. For the quarter, our total net leverage ratio, as calculated in our earnings release, was 4.36 times to 1, giving full effect to our targeted $25 million of synergies, net of the synergies already realized in earnings, our total net leverage ratio is 4.1 times to 1. All leverage and coverage ratios were well within compliance levels in the credit facility. Cash available to pay dividends was $26.6 million resulting in a strong dividend payout ratio of 58.2%.

Now, let me discuss our guidance for 2013. 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 $100 million to $110 million, compared to $114.4 million in 2012. Included in our 2013 guidance is $4 million for nonrecurring integration projects. Cash interest expense is expected be in the range of $80 million to $85 million, compared to $67.6 million in 2012 when we only had the seven months of interest on our senior notes. Cash income taxes are expected to be in the range of $1 million to $3 million, compared to $4.3 million in 2012. 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, 2013 to shareholders of record on April 15, 2013.

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

So in summary, we had another strong year, full of many accomplishments. During the year, we became a larger company with greater scale, positioning us well for the future and providing a unique blend of growth and significant cash flow generation. Our integration efforts are going smoothly and our customers are benefiting from our ability to be more competitive with exceptional service and our dividend is secure.

So with that, Jonathan, I would like to open it up for questions.

(Operator Instructions)

Frank Louthan, Raymond James.

Just looking at your guidance for the interest expense, any reason you wouldn't look to use some of your cash to pay down some debt next year? Would that have an impact on that interest expense line? And then could you comment on some of the cost increases for content for your video products? As that becomes a bigger and bigger part of the business, it's been an issue in the industry for video providers. Any thoughts there? Do you have any direct content deals with -- directly with the providers or is it all due to co-op? Thanks.

Hello, Frank, this is Steve. I will take the first part of your question with respect to potentially paying down the debt. And we will always evaluate that and see what the best use of cash is. But I guess I would remind you, if we had a choice, we would go after the notes that are carrying over a 10% coupon. Those aren't callable until -- from four years from May. So paying off the debt, which we are going to be very focused on delevering over the next couple of years, again, we will consider that. But we are basically, with our term debt, around a little over 5% on our effective debts. So even paying that down on an after tax basis, we're -- it is not that significant but it is a good consideration as we really are focused on delevering.

Frank, it is Bob Udell. Regarding the question on content, as you referenced, we've all seen retrans fees and things like that put pressure on content costs. We are benefiting right now from the combination with SureWest in reducing some cost on specific channel groups. But I would tell you right now, we are still 85% through the co-op and what is growing in terms of our own individual content contracts is the over-the-top things that we are beginning to integrate into our product line and some of the off-air things from a retrans perspective -- we are pursuing those on our own as well.

Okay. So two follow-ups -- one, I guess for Steve, with those with a longer call provision, would you consider buying some of those in the open market? Does that trade very much? I would think maybe it doesn't, but is that something you look opportunistically to take some out in the market? And then can you be a little more specific on the over-the-top providing -- or offerings that you are pursuing and what sort of revenue opportunity that is?

Well, Frank, this is Steve. For the follow-up with respect to the bonds, there isn't a lot of trading value right now. We are actually in the process, as soon as we file the 10-K either Friday or Monday, we are going to be filing an S-4 that will cause the bonds to go effective by May 30. And we hope, again, we would expect there to be more trading as those become publicly available after that time. And I think the answer to the question is, we will consistently evaluate what is the best use of what our cash is. We would look at the bonds in the open market. We would look at paying down regular bank debt. But I guess I just wanted to make it clear that we couldn't address our highest cost debt on a very aggressive basis until the call date, which is 4 years or 3 years -- 3.5 years from now.

Frank, regarding the follow-up on content, the over-the-top part of our product package is really a constant freshening effort as our users' habits continue to pursue multi-device consumption of content. So the over-the-top is a component in our packages. Right now it is the major entertainment networks that you would expect like HBO, Showtime, the sports channels. We've got roughly, I think, 30 in process right now in the first market of release. And so it's going to be a product freshening effort to allow us to sustain our pricing strategy and continue to drive up average revenue per user.

Okay, great. Thank you.

Barry Sine, Drexel Hamilton.

First question -- you mentioned additional homes passed in some greenfield markets and I know that was a focus of the SureWest management team. I thought you guys were going to scale that back a little bit. Could you give us some -- just update us on what your philosophy there is and then give us some numbers as to how many additional homes you plan to pass with the CapEx in 2013?

Yes, Barry. The number last year was 15,000 and the significant number of those came on late in the year. So the plan for 2013 is 5,000 additional homes. And I would tell you, a lot of that is greenfield but it is not necessarily Kansas City. Texas is starting to see some redevelopment down there. So there will be some homes there. And the rest are just spread around, again, wherever there is a new development, we are basically doing fiber to the home.

Okay. And one of the revenue synergies that you talked about with the SureWest transaction -- you guys do a pretty good job in your CLEC business marketing and I don't think that the strength on the SureWest was more residential. Can you talk about what you are doing -- I guess you've already alluded to with the introduction of the ethernet product in Sacramento, but could you elaborate what you're doing to achieve revenue synergies?

Barry, it is Bob Udell. And thanks for the question. The opportunity is really to exploit any of the growth in any of the markets that we've got access to and, surprisingly, California has been a little bit stronger than I would've expected. But Kansas has been consistently robust on business growth, much like Texas, and somewhat like we've seen in Pennsylvania. And so we are taking the strategy of leveraging this metro ethernet foundational product and spreading that into Kansas and California markets. And what is new for California, just as an example, is we are now in the process of rolling out metro ethernet over copper, which historically wasn't a package product in the SureWest markets. And so we are using that as a foundation and then leveraging some experience SureWest has had with a data center-type offering in Kansas City that has been prepackaged and something we did on an as needed basis in the Pennsylvania and Texas markets and leveraging that into the bundle target offering we have for medium and small businesses. And so it is really taking the best of both and using the scale then to justify some step up in marketing attention and sales resources.

Okay. Thank you, gentlemen.

(Operator Instructions)

Donna Jaegers, D.A. Davidson & Co.

Bob, I guess if you could just go into maybe give us a little more color on the pipeline of orders that you are seeing on the business side? And I'm sort of shocked that SureWest hadn't rolled out ethernet -- metro ethernet in California. You already -- it sounds like you already -- they already have it in Kansas City. Is that correct?

Yes, Donna. It is Bob Udell. Thanks for giving me a chance to clarify that. They had a fiber ethernet-based product in California and a very robust fiber plant, as you know, that had been built out to serve their triple play customers. And the focus was a little bit more on the consumer marketing and packaging side. Really what our strategy has been, and it's a very great, fertile market for it and there are some great sales resources that we're actually supplementing in both Kansas City and California, we are taking that ethernet product and making it available beyond just the fiber node areas and using the copper product to reach multiple locations. So we are making it a more standardized packaged product based on ethernet as the anchor and then the ability to layer on a more robust voice over IP platform, internet access, multi-location, wide area network-like intranet-type service, data center access. And so it is really a product platform and a bundling strategy that had been more ad hoc or (technical difficulty) by each customer in the past.

Okay. And then the pipeline of orders on the business side, it sounds like those are getting -- the pipeline is increasing?

Yes, the pipeline is getting even stronger. The sales discipline that actually came with Ed Butler who we brought over to our team from SureWest and focused him exclusively on the commercial segment. It's allowing us to manage that funnel, track it more tightly and we feel real good about the 255 units that we added in Q4 -- just an example for metro ethernet. And so I would expect with the -- that -- as that team matures and all the resources hit stride that are currently on a ramp -- get a smidge better than that.

Great. And now if the economy would just pick up that would help even more.

Wouldn't that be nice.

We pray for it every day. One quick follow-up -- on the Illinois prison contract, any news on that?

Yes, Donna. The -- just maybe for those who aren't quite familiar with it. We have had that contract for 20-plus years and in June of last year, the state of Illinois -- the contract was up and an RFP took place and they announced their intent to award it to a competitor. And they have. We still have a couple of appeals pending but about half the sites have been converted. And so we are not very optimistic about keeping it. And -- but I want to add that financially, the impact to our cash flow and EBITDA is really immaterial. While it provided about $20 million in revenue, it was essentially neutral to cash flow. So while we never like to lose a business, it really isn't part of our core. And very similar to a couple of other businesses that we've sold over the last two or three years, they produced $15 million and that is the operator services in our telemarketing. They were $15 million in revenue but also basically neutral to earnings. So nothing material there and we are pretty resigned to the fact that we are going to lose it sometime in the next 30 to 60 days.

Great. Thanks for the update, guys.

Steve Flynn, Morgan Stanley.

Couple of questions -- number one, can you talk about any sort of cash contributions for pensions or OPEB that you expect in 2013? And then with regard to cash taxes, it has been a big topic with regard to a number of your competitors. Could you just talk about how you see the NOLs rolling off and maybe impact of bonus depreciation and what we should think about cash taxes once we start to roll into 2014 and beyond? And then finally, I know this always comes up -- if you could just give us an update with what you are seeing with regard to competition from Google in the Kansas City area -- if anything has changed there? Thank you.

Steve, this is Steve Childers. I will take the first two parts of your questions and then Bob Udell will take the Google piece. So with respect to pension, we benefited from the legislation that happened in the fall, which drastically reduced the pension funding that we had to do. For 2012, the election you can make a 25 year average for the discount rate and all of that that went with that, on a combined basis, we contributed about $18 million in 2012. 2013, right now, looks like it would be about $11 million in cash contributions.

For -- with respect to the NOLs, we -- with the SureWest acquisition -- at the time of acquisition, we acquired about $75 million in NOLs based on activity through the end of the year considering transaction related costs, change of control-type severance, integration costs, all deal costs, all that type of thing. Our NOLs at the end of the year are estimated to be a little over $80 million. We would expect to be able to fully utilize those NOLs, probably over the next two years. And so going into 2015, we would start looking more of a full cash taxpayer, which we have been in the past.

With respect to bonus depreciation, we -- on our $100 million to $110 million of CapEx we are going to spend, we do anticipate going ahead and taking the election for the 50% bonus depreciation. Obviously, given the impact of the NOLs, we won't see -- we won't necessarily see the benefit of that in 2013, but it will help us 2014 and beyond. And again, a bonus depreciation is all timing anyway. But we will leverage the benefit while it is there. So with that, I'll turn it over to Bob.

Yes. With regards to Google, while they don't overlap us today, we don't know whether or not they will ever be a direct competitor. And we do know that the competitors they do overlap with have made adjustments to their marketing strategy to compete with Google's offers. But I have to say, we are still very confident in our products and services. There -- our market in Kansas City has access to a variety of bundles with multiple data speeds starting at 1 meg and up to 50 meg and roughly about 2% of our customers today really inquire or request the 50 meg service and are on it. The vast majority we continue to upgrade between 10 meg and upwards to just shy of 20 meg and we are going to continue to monitor the utilization and upgrade speeds as necessary to match the demand. We've got great capacity there. If there is a demand for a 10 gig product in the future, we will be able to provide it. So we watch it closely and we will respond accordingly as the market demand drives us.

And maybe just to expand on a comment Steve made about -- that we had been a full taxpayer in the past, prior to SureWest, and supported our dividend. And based on our internal forecast, adjusted EBITDA will continue to grow as we expect to see growth in our business. We will continue to improve our cost structure and the $25 million of synergies that I outlined. And the quality of our network, our CapEx, will come down to our historical 12% to 13% of revenue. And with the growth in the wireless partnerships, these will more than offset the increase in taxes when we become a full taxpayer in 2015.

Okay, great. Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I would like to turn the call back to Bob Currey for any further remarks.

Thank you, Jonathan, and thank 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 and have a nice day.

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