Consolidated Communications Holdings Inc (CNSL) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings Incorporated Fourth Quarter 2014 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, today's conference is being recorded.

I would like to introduce your host of this conference call, Mr. Matt Smith, you may begin.

Thank you, Kevin and good morning everyone. We appreciate you joining us today for our fourth quarter 2014 earnings call. At the conclusion of the prepared remarks, we will open up the call for questions. Joining me on the call today are Bob Udell, President and Chief Executive Officer and Steve Childers, Chief Financial 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 to provide an overview of our fourth quarter results. Steve Childers will then provide a more detailed review of the financials and discuss our 2015 guidance. Bob?

Thanks, Matt and good morning everyone. I appreciate you joining us today. The fourth quarter was an exciting one for Consolidated. We closed on the acquisition of Enventis and jumped out to a great start on our integration and synergy plans. At the same time, we refinanced some of our bonds and we delivered solid operational and financial results. We accomplished much throughout the year and continue to provide consistent results, and I expect this trend to continue for 2015.

Pro forma revenues in the fourth quarter were $192.6 million and our business in broadband services increased to 80% of our total topline. Pro forma adjusted EBITDA for the quarter was $80.6 million and we delivered another comfortable payout ratio of 63.4%. Our commercial and carrier sales channels again showed strong growth with a year-over-year increase of 4.2%, led by an increase of 21% in Metro Ethernet circuits, compared to last year. We ended the year with a total of 879 fiber-to-the tower sites under contract with 76 pending installation. These Ethernet services continue to be the lead for new business growth and combined with our hosted voice solutions, provide an attractive bundle for customers.

The success and demand we see for these services will drive continued investment in our fiber network and expansion into additional markets during 2015. Some of the expansion will come from commercial business plans and others will be initially driven by winning new fiber-to-the cell sites. The positive results from our expansion efforts during 2014 paved the way for us to do more in the future, all of which will be accomplished within our CapEx guidance.

Turning to the consumer side, we continue to move customers to higher bandwidth products and recently rolled out our 1 gig and 100 meg offerings. We upgraded over 3,600 customers in the quarter, of which about 40% shows our 50 meg service. We will continue our strategy of moving customers to higher speeds to meet their data-driven needs, including the movement to over-the-top programming.

With respect to video, we have made a concerted effort to ensure it is delivered more profitably. With the increasing cost of video content, we have to aggressively pass those costs on to our subscribers. This does result in additional video churn, but we are satisfied with the net benefits of the actions we've taken and will continue to take in the future. Overall, we posted a solid quarter of data net adds with 2,033 additions, while we lost 420 net video subscribers.

Now let me turn to the regulatory front. With respect to the FCC's CAF 2 implementation, we have not yet received the detailed funding letters to provide certainty around what might be available to us. But based on our initial view, we would accept funding in most of our eligible markets. We will make final assessments once the details are provided. Overall, we expect that given the fiber investments we've already made in our infrastructure, our funding levels will trend lower over the 6- to 10-year transition period. Just like we have in the past, we are confident in our position and ability to manage through any declines in USF funding.

Finally, before I turn the call over to Steve, let me provide an update on the Enventis acquisition. Overall, we are incredibly pleased with how well the integration has gone and the growth opportunities we see in the Enventis markets. But first key project was completed on December 31, which was the integration of the financial, HR and supply chain system. Remember, we closed on the acquisition on October 16. So to complete this integration in just two and a half months is a testament to how good and experienced our team is at integrating companies. There were many employees on both sides working long hours to make the transition go seamlessly and I couldn't be more proud of all of them.

Now with respect to synergies, we achieved $4.5 million in annualized savings at the close and an additional $1 million by year-end. The combined $5.5 million in synergies is a great start towards our two-year target of $14 million. Looking forward, I'm excited about the prospects we have with the additional scale, growth and expansion opportunities. We are well positioned to continue our strategic transition into a leading business and broadband company and we are laser focused on successfully integrating Enventis and will meet or exceed our synergy targets as we have in the past.

With that, I'll turn the call over to Steve for financial review. Steve?

Thanks, Bob and good morning to everyone. This morning, I will review our fourth quarter financial performance on a pro forma basis for all periods discussed, and then I'll provide our 2015 guidance. But before I do that, let me comment on the opportunistic bond repurchases we made in the quarter.

During the quarter, we made two repurchases of our 10 7/8% bond for total principal reduction of $72.8 million. In addition to cash on hand and use of the revolver, these repurchases remain with the use of $50 million in excess proceeds from the $200 million, 6.5% senior notes we raised in September, primarily to fund the Enventis acquisition. These actions resulted in an estimated $4 million of ongoing annual cash interest savings.

Financial results for the period were as follows. Operating revenue for the fourth quarter was $192.6 million compared to $194.2 million in the fourth quarter of last year. Revenues increased by $1.4 million compared to the same period last year when excluding the $2 million decline in the Enventis equipment sales and service. The increase was primarily driven by the continued growth in our commercial and carrier sales and was partially offset by declines in local calling and network access services. With the acquisition of Enventis and their equipment services product set, we will see more volatility in our quarterly revenues than in the past. In the detailed revenue table in our press release, we have separated equipment sales and services revenues over the last five quarters, so that you can see the kind of fluctuations those revenues came in. Please keep this in mind as you build your models for future topline performance.

Total operating expenses, exclusive of depreciation and amortization, were $121.9 million, compared to $125 million for the same quarter last year. Our continued cost savings initiatives and synergy realization were partially offset by the continuing increases in video programming cost. Net interest expense for the quarter was $22.3 million compared to $22 million in the fourth quarter of 2013. The small increase was primarily due to the $200 million, 6.5% senior notes raised for the Enventis acquisition and held in escrow for approximately six weeks.

Other income net was a loss of $5.3 million, compared to income of $3.1 million for the same period last year. The current quarter includes a $13.8 million loss on extinguishment of debt tied to the previously mentioned repurchase of $72.8 million in principal of our 10 7/8% senior notes. In the fourth quarter of last year, we had a $7.7 million loss on the extinguishment of debt as a result of the successful refinancing of our secured bank facility. For the quarter, we received $9.2 million in cash distributions from our Verizon Wireless partnerships, compared to $10.5 million in the fourth quarter of 2013. Weighing all these factors and adjusting for certain items as outlined on the table in our press release, adjusted net income was $8 million and adjusted net income per share was $0.16, an increase as compared to $7.6 million and $0.15 per share for the same period last year. Adjusted EBITDA was $80.6 million in the quarter compared to $82.3 million for the fourth quarter last year. Capital expenditures for the quarter were $33 million, with over 63% driven by success-based projects.

From a liquidity standpoint, we ended the quarter with approximately $6.7 million in cash and $36 million available under our revolver. For the quarter, our total net leverage ratio, as calculated in our earnings release, improved from 4.34 times last quarter to 4.15 times at year-end. Cash available to pay dividends was $24.6 million, resulting in a strong dividend payout ratio of 63.4%.

Now, let me discuss our 2015 guidance as compared with the pro forma results for 2014. Capital expenditures are expected to be in a range $122 million to $129 million as compared to $131.3 million in [2013]. Our CapEx guidance includes $5.2 million of integration CapEx from the Eventis acquisition. Cash interest costs are expected to be in the range of $78 million to $81 million as compared to $81.4 million. Cash income taxes are expected to be in the range of $4 million to $8 million compared to $12.4 million last year.

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, 2015 to shareholders of record on April 15, 2015. This will represent our 39th consecutive quarterly dividend.

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

So, in summary, we achieved a lot in 2014 and capped it off with a solid fourth quarter. The combination with Enventis provides us with additional scale and geographic diversity. We are excited about our future and will continue focusing on delivering consistent results and driving increased shareholder value.

With that I'd like to open it up for questions. Kevin?

(Operator Instructions) Jennifer Fritzsche, Wells Fargo.

Thank you for a good quarter. I just wanted to -- there's been some transactions in the last month involving some ILEC lines, namely Frontier, Verizon, and just as you look at your M&A strategy going forward, realizing you had just freshly closed on Enventis. So is something like -- will access line [be] still appealing to you or is the focus much more fiber-centric at this point and that won't really be even in your purview?

Yes, Jennifer, good morning. If you look back through history, our evolution has been based on continuing to expand our fiber footprint. And so, I don't see us being incredibly interested in access lines, especially legacy [R-BOX] access lines, although depending on the opportunity in the market, we might consider anything that's accretive and a good diversity of markets for us to focus on. But in short, I think our strategy is to focus primarily on the Enventis integration and not anything of that size in the near-term future, until we're further along in the integration effort. But we feel good about our progress there. What we would look at is contiguous fiber assets that help expand our footprint, because our strategy of putting marketing attention on the three customer groups of consumer, commercial and carrier really causes our organic growth interest to benefit from the portfolio of markets that we have access to. So if we saw a tuck-in asset that accelerated that organic growth for us, then would certainly consider that.

Barry Sine, Drexel Hamilton.

Congratulations on getting the transaction done and well on the way to integration. Could you -- do you have numbers in terms of your fiber optic network route miles, fiber miles? My sense is that you guys are much more fiber-heavy carrier with what you've done organically and with what you've acquired with Enventis? And then what your thinking is in terms of expansion. I think you referenced some expansion in the fiber network at 2015?

We haven't done discrete reporting on our fiber towers in the past and that's something we're looking into going forward to help satisfy those questions, but I think the way to think about it is this, we have roughly 12,000 fiber route miles and Enventis brings an additional 4,100, 4,200 and so it puts us in a good position to have those fronts for expand -- organic growth diversified, because if you concentrate your build in one area, you can only attract and build density so quickly. So the diversity of markets and the reach of those assets serve us well.

And then if you could give us a sense of what the prospective growth profile of the Company is. The mix of business you pointed out is mainly broadband and business now, much less consumer, much less exposed to subsidies. Is the growth profile of the Company or the growth potential accelerating, can you grow this Company more quickly? Historically, you haven't been much of a grower on the topline.

Well, I think we're still in that transition period. If you look at comparable size companies or even some of our industry colleagues, keeping the topline flat as you deal with the decline in some of the traditional revenues and replace that with the growing higher margin facilities-based revenues on the commercial and carrier side, especially, it's a good accomplishment and we're proud of it and we can eke out a little bit of growth in that topline. And so I think we're still in for the next couple of years that transition period with access and subsidy declines being offset by organic growth, focused on the commercial and the carrier front.

And my last question, I understood what you are talking about in terms of video programming costs skyrocketing and necessitating your passing those along to consumers. Could you give us some example of what type of price increases those are and where you're at price wise in the market for a typical video bundle, just so I can get a sense of how expensive that is and how much the increases are?

We're matching the competition in most cases and the increases on an annualized basis, depending on what market you're in, have averaged around the [300 to 350] price range. And we're also pruning where possible the content to control the content cost. So it's a very sensitive balance that we're trying to strike, but I'll remind you the growth in our Internet product and the speed increases that has helped afford us that growth continue to serve us well and give our customers more value for the total package, considering most of them have a double play.

All right. They need that speed, so they can download all those [networks].

Exactly.

Scott Goldman, Jefferies.

Maybe one housekeeping and another question on top of that -- or a couple. On the housekeeping side, Steve, is there any way you could break down for us just, perhaps what the revenue and EBITDA looked like from legacy consolidated versus Enventis for the quarter? Apologize if I had missed that, but didn't see it in the press release. So, I'm trying to get a sense for how the individual businesses performed throughout the quarter. And then secondly, maybe Bob you could update us just on the 1 gig product deployment to what you're seeing -- I know it's probably early days, but what you're seeing from an interest level at the consumer side and competitive response. And then maybe lastly, if you could just give a comment in terms of Title II, obviously a vote likely being held as we speak, whether there's any impact to your business going forward based on what we've heard in the marketplace today? Thanks.

Hey, Scott, this is Steve. Thanks for your questions. I'll take the first part of that. Number one, I'll say that the Enventis financials were pretty much in line with what we had expected and modeled for fourth quarter. The revenue number for fourth quarter for Enventis standalone would be roughly $44 million. So legacy CNSL would be the balance of that. And [even] a number probably really wouldn't be that relevant, based on the way we've already made progress on the integration side, already managing from a functional organization and combining the numbers. So I would just ask you to look at the total on that, but we're really comfortable with fourth quarter results relative to Enventis.

And regarding, Scott -- the question regarding the 1 gig take rates, it's really early, since late last fall was the rollout of that product that I'll say that in Kansas City, the take rate is probably the strongest based on the interest in 1 gig that's been created there and we feel very well positioned. And the 1 gig in general has created an opportunity for us to have additional conversations with our customers and many still take the 20 to 50 meg product that seems to be the sweet spot. In our mind, a year ago the average product and bandwidth demand was in the 6 meg range. So we're seeing the customers' demand move up market, and we're very well prepared with our network to accommodate that.

Regarding the Title II, this discussion is actually interesting internally, and the way we look at this is really along the lines of having lived with Title II for our existence. We're familiar with it, we understand it, would prefer to have less regulation, but in some ways this levels the playing field. And so, Title II regulation really is more of an issue for cable competitors to get used to and we're anxious like everyone else to see how significantly the move is by the FCC to impose reporting requirements and things that largely we're familiar with already.

And so, if I interpret your comments there, probably no real change financially and perhaps still have to see how the reporting structure may go there. And then, Steve, if I could just follow up on one question as well on cash taxes, presumably you are benefiting from bonus depreciation in NOLs here again in 2015. I wonder if you can just give us a look for what cash taxes might look like beyond 2015 and when you may be a full cash tax payer?

That's a good question, Scott. For 2015, we did -- bonus depreciation was passed so late in the year in 2014, it helped us a little bit in 2014, but most of the benefit actually rolls over to 2015, that's consistent with the guidance we gave of being between $4 million and $8 million for 2015. And actually all things considered with the transaction costs for Enventis, bonus appreciation, our NOLs actually got extend a little bit. We have about $23 million going into 2015. So we would expect to be a full cash tax payer going into 2016. That's what we're planning for. So maybe there's no other extension of bonus depreciation or anything like that. And I think you can probably assume a normal 38% to 40% tax rate all in for that.

(Operator Instructions) Aaron Lee, Park West.

At the Wells Fargo Conference in November, you guys gave us home overlap with Google, I think you said was 2,500. Can you update that number for us?

It's actually -- I am sorry, go ahead Aaron.

In Kansas City, obviously, yes.

It's actually not changed, it's roughly 2,500, although we expect them to advance some additional passings this year. It remains to be same how fast that will happen.

Do you have any sense of what the impact will be and can you update us on the impact on those 2,500 homes where there is overlap?

Yes, regarding the 2,500 where there is overlap, we've seen some puts and takes. It's not really drastically different or perceptually different than the other areas where we compete with Time Warner AT&T. So while we expect that number to continue, I really don't know at what rate they're going to build, they're not incredibly predictable as we've seen them move some of those resources to other markets in order to accommodate launches there.

But have you lost subscribers on those 2,500? Can you help us understand what the puts and takes are?

Yes. I can tell you this. We've seen roughly a couple hundred leave us and I don't know the specific number. And we've also seen more than a handful come back. And so, I think there is a natural movement between us and them as a competitor like other competitors. I will tell you this, no disrespect to Google intended, because their model is different than ours. Ours is a consultative sales approach and those customers that need some attention on how to use the Internet, how to solve problems inside their home when it doesn't work the way they expected, they turn to us and we're very good at that and we've got a model that's efficient and profitable that works. So those are the customers that we tend to do a good job of winning back.

And then can you tell us what percent of your homes in the Kansas City area have fiber that will allow them to do a 1 gig product?

It's roughly 45% that are fiber fed in Kansas City and all of those customers over this next couple of quarters will have access to a gig. I don't know top of mind how far along the upgrade of the electronics is, but it's not a long put to get those customers a gig and should someone order it and not be in initial launch areas, we can re-prioritize the upgrade process to accommodate them and have been doing so.

Jennifer Fritzsche, Wells Fargo.

Bob, just a follow-up and I dropped off mistakenly. So, I apologize if I've missed that. But the CAF 2 funding, you said in your prepared remarks you anticipate taking all of it. Can you talk about this biz? It's my understanding this will replace the USF finding, but like a slow and steady rate, is that correct? And then, is there a way or is it still too early based on what models do you see from the FCC to anticipate how much more expense will be required to fulfill their requirement to this?

Jennifer, this is Steve. I'll try that and Bob can add to it if he so desires. But relative to CAF 2, we're still waiting on getting the right of first refusal [votes] from the FCC. That will really determine how much money is available to us relative to what the construction buildout will be for the unserved and underserved markets. We expect to see those maybe sometime in March, they are supposed to be in February, but the FCC is running late with those. So, again, based on -- to tie to Bob's prepared comments, right now, based on what we have seen from preliminary estimates, we do expect to accept funding. In most of our markets, right now there might be one that we would go to auction in. And so until we go to auction or that's determined, we would continue to receive CAF 1 funding at the same rate and then once you go onto CAF 2, there probably will be a step down, but it's kind of a transition over a 6 to 10-year period. And so, we feel like we're -- the way we've been managing the business, the focus that we're putting on growing the commercial and carrier side of the business, we feel like we're more than prepared to manage through that.

I apologize. Hey, Jennifer, can you just add on that we're already -- 98% of our market is already enabled that [four in one], which was sort of the initial planning phase and we have a really high, probably over 80%, more than (inaudible) CAF 2 funding is based on. So the investment levels, I think, are tolerable for us to be able to match whatever the FCC ask us to do.

Barry Sine, Drexel Hamilton.

A follow-up. You break out the revenue by category in the press release and wanted to zero in on a couple of those. Steven, in the past you've been pretty helpful in terms of helping us understand the outlook on the subsidy line, given what you know from a regulatory standpoint, but could we get a little color on what you're expecting in subsidy revenue in 2015?

Sure. We'll give it a shot. I guess the way I think about it, legacy Consolidated, pre-Enventis, we we were probably around $50 million a year in total subsidies, $16 million to $18 million of that was on state, from state funding, primarily in Texas. And so, the high costs -- so the balance of that would be high cost or federal support. So remember, as long as -- if they start implementing or talking about going to CAF 2, our high level support numbers have been frozen at basically 2011 levels, there really hasn't been much of a drop off in subsidies prior to CAF 2. And just a comment, it will be fully disclosed in our 10-K, but the Texas high cost funds, there's two separate funds there. Those have been dropping off modestly starting last year and sort of a phased in for the next four years. But we think we've largely been able to offset any kind of reduction in the Texas subsidies by passing on increases in our local line rates in Texas and still retain a very competitive position in that market. Enventis adds about another $5 million in high cost federal support. They were an average cost or [average] rate of return company, we're converting them to price caps. So that $5 million is kind of frozen until CAF 2 is implemented. And Barry, I guess we are expecting a modest reduction in 2015 based on accepting the CAF 2 money, but it's really kind of hard to give you a number when we don't have the final CAF 2 letters on the first right of refusal. So again, we are modeling very much step down in 2015 and maybe on the next call after we get those letters, assuming we get them in March, we'll be able to give you a little clearer guidance on that.

And then on the equipment sales revenue in that same table, in that past, I think when you announced Enventis, you guys were on the fence as to whether you wanted to continue the Enventis equipment sale business to the extent that they were doing it or perhaps scale it down. You've also talked in the call about variability quarter-to-quarter, which everybody sells equipment sees. When I looked at the numbers for the fourth quarter, I had just assumed that you're scaling the business down. Which factors should we think about? Are you scaling the business down or will it come back potentially to some of the high levels that we've seen on a pro forma basis that you give in the table?

Barry, it will likely come back. I mean, it's an inconsistent revenue stream, but a consistent trend with regards to its range in the $60 million of revenue last year. I wouldn't expect it to be much less and probably somewhat more than that if I had to speculate at this stage. The bottom line there is, as we learn more and more about the business, we like it more. It's a part of our strategy going forward now, we're leveraging the skill set and the experience there to enhance the consultative sales approach we have with our customers and the conversations that we have with especially our commercial prospects in an effort to solve their business problems. So it's an asset, it pays for itself, it provides some cash flow and it's something I think that will allow us to differentiate ourselves.

And then lastly, I think you highlighted that the distributions from the Verizon Wireless partnerships were down a bit from the year ago period. Could you talk about what you believe some of those drivers are and what you think the outlook might be for 2015 for Verizon Wireless partnership?

Barry, this is Steve. And last year, for 2014, we received about $35 million in cash distributions from Verizon. That was essentially flat from 2013. And we normally expect those to grow 10%, 12% a year, but as Verizon went into the [hedge] program, they kind of changed the cash flow model for Verizon as instead of having all the subsidy funding from the providers to support that. So, basically taking 24 -- allowing customers to pay for their handsets and tablets and et cetera, over a 20-month period, which is putting a little upfront pressure on cash flow or how they think about distributions to us. So we think that's going to level out. But as they -- I think in this year, it will still be a little bit volatile. So, we are basically expecting it to be flat for 2015 and hope as they get -- we kind of catch up from a working capital perspective and they get off. They even accelerated some of their CapEx, because of the success they are having in the data programs. Once that normalizes, we would kind of expect it to return to growth, consistent with what Verizon's talking about as a whole for their earnings.

And I'm not showing any further questions at this time. I like turn the call back over to Bob Udell.

Thank you. Thank you again for joining us today and for your continued interest in support of Consolidated Communications. We appreciate your questions and we hope you will join us again next quarter. Thanks and have a great day.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.