(Operator Instructions) I would like to welcome everyone to the American Tower Corporation Third Quarter 2008 Earnings Conference Call. I would now like to turn the call over to Michael Powell, Vice President of Investor Relations.
Thank you for joining American Tower’s conference call regarding our third quarter 2008 financial results. We will begin with comments from Jean Bua our Interim Chief Financial Officer, and then we will have comments from Jim Taiclet our Chairman, President and Chief Executive Officer. After these comments we will open the call to your questions.
In order to maximize participation during the Q&A portion of the call we kindly ask that you show courtesy to the other participants and limit your questions to just one or two parts. If you have more than two parts or if you think of additional questions feel free to line up in the queue again and we’ll try to answer as many questions as possible in the allotted time.
However, before I turn things over to Jean I’d like to remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include statements regarding our 2008 outlook, our stock repurchase program, our international business development initiatives, and any other statements regarding matters that are not historical facts.
You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this mornings press release and those set forth in our Form 10-Q for the quarter ended June 30, 2008, and our other filings with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in the call to reflect subsequently occurring events or circumstances.
Now I’d like to turn things over to Jean.
American Tower continued its track record of consistently delivering strong revenue, adjusted EBITDA, and free cash flow growth as our third quarter business performance indicates. Today I will talk about our third quarter business results, our outlook for the remainder of 2008, our share repurchase, liquidity positions, and our outlook for our business performance for 2009.
Turning first to our third quarter results our core Tower division reported increased revenues of approximately $394 million reflecting a 10% growth rate. Tower gross margin increased 9% to approximately $304 million from the third quarter in 2007. Please note that the third quarters growth comparables are impacted from a one time pick up from a customer settlement in the third quarter 2007. Excluding the effect of this item the third quarter growth comparables for revenue and gross margin would be approximately 11% and 12% respectively as compared to Q3 2007.
Our level of organic new business continued to be strong with annualized levels of signed new business of approximately $97 million during the third quarter. Signed new business for the third quarter was at comparable levels to the second quarter and was across all of our markets.
Our total selling, general administrative and development expense was $45 million which includes $13 million of stock based compensation expense. Third quarter SG&A is down from the same period in 2007 principally due to reduced stock option review costs from the 2007 levels. Adjusted EBITDA increased approximately 12% to $278 million and our adjusted EBITDA margin was 68%.
Our operating income for the quarter increased approximately $56 million from the third quarter 2007 to $154 million. Of the increase approximately $30 million was attributable to the change in the estimate of the useful life of our towers and related intangible assets that we instituted at the beginning of 2008. Our net income for the third quarter was approximately $60 million or $0.15 per basic and diluted common share.
Our capital expenditures totaled $68 million during the quarter and we completed the construction of 223 new sites. New build activity has increased in the second half of 2008 consistent with our previous forecast. We continue to see increased activity and growing pipelines in all of our markets. We also added five new towers to acquisitions during the quarter. The average un-levered day one return on new sites that we acquired and built in the quarter was over 11%. These towers have strong prospects for additional tenants further increasing our future returns on invested capital.
We also had higher than historical levels of redevelopment CapEx during the quarter due to an incremental investment related to one of our international customers. We are nearing the completion of this agreement and anticipate redevelopment spending to return to normalized levels in 2009.
Under our land management program capital spending on land acquisitions totaled $11 million in the quarter and we also spent approximately $600,000 to extend and prepay ground leases. Please note that the prepayment of ground leases even for the prepayment of 99-year leases is not treated as capital spending in our financials. It instead flows through as a reduction of cash provided by operating activity.
Our strong operating performance produced approximately $159 million of free cash flow for the quarter. We define free cash flow as cash provided by operating activities less all capital expenditures. I would like to point out that our free cash flow calculations include approximately $41 million of discretionary capital spending on new site construction and land acquisition. The prepayment of long term ground leases as well as $17 million for the redevelopment of existing sites.
Regarding our outlook for the remainder of 2008 we anticipate continued strong new business performance within our business operations. However, our reported revenues could be influenced by the recent volatility in foreign currency exchange rates. Since early September foreign currency market have experienced significant movement resulting in the strengthening of the US dollar versus the Mexican peso and Brazilian real by approximately 20% as compared to the average rates we experienced in the third quarter.
Because of this it should be noted that our outlook for 2008 reflects the following exchange rates. Approximately 12.85 pesos per US dollar and 2.11 real per US dollar. Jim will talk more about the foreign currency effects on our reported revenue in his remarks.
The midpoint of our full year 2008 outlook now anticipates tower revenues of $1.5475 billion, tower gross margins of $1.198 billion and adjusted EBITDA of $1.0895 billion. We have increased the midpoint on each of these metrics by approximately $2 million from our previous outlook. The changes to our 2008 outlook are primarily attributable to our strong performance in Q3 and continued strong performance expected in Q4. Our strong business performance is offset by the impact of the recent strengthening in the US dollar against the peso and the real.
Based on an even strong pipeline of new build opportunities then we had previously forecast we are increasing our outlook for capital spending for the full year 2008. Our capital spending ranges from $230 to $250 million and includes the construction of approximately 650 new sites. Within the 650 new sites we expect to complete construction of approximately 200 towers in India.
Regarding our share repurchase activity, during the third quarter we repurchased approximately 8.3 million shares for $332 million. As of October 24, 2008 we had repurchased approximately $484 million under our current $1.5 billion stock repurchase program that we announced in March 2008. The $484 million of share repurchases includes $30 million of share repurchases subsequent to the end of the third quarter.
While we are committed to our stock repurchase program we adjusted the pacing of the program at different times. During the third quarter we increased the share repurchases in order to accelerate our buyback rate. However, starting in late September in response the current uncertain financial market conditions we decided to buy cash flow neutral levels to maintain greater financial flexibility. We expect that we may adjust the pacing of the buyback in the future in response to market conditions or other factors.
Our financial position remains very solid with the lowest leverage of our publicly traded peers by approximately half, supported by stable growing operations that generate substantial free cash flow. As of September 30, 2008, we had approximately $4.4 billion of long term debt and we ended the quarter with leverage equal to 3.9 times annualized adjusted EBITDA.
During October holders of approximately $125 million of convertible notes converted their debt into shares. Additionally, we drew down $50 million from our credit facility. Factoring in the $125 million of convertible note conversions and the draw down on our revolver our pro forma net leverage ratio was approximately 3.8 times. Additionally, from a combination of cash on hand and availability under our revolving credit facility we have over $600 million of available liquidity.
While we continue to believe the appropriate target leverage range for our business is four to six times net debt to adjusted EBITDA due to the current credit market conditions we expect our leverage will likely remain at or below the low end of our target range for the near term. We will continue to actively monitor the credit markets to identify the appropriate time to raise incremental capital.
However, due to our lack of near term maturities and a substantial free cash flow and available liquidity we have the ability to remain patient which is a valuable benefit given the current credit and capital market conditions.
As we look to 2009 we anticipate continued strong new business and revenue growth. We are forecasting similar levels of commencement business when compared to 2008. Our 2009 commenced new business outlook does not include any activity related to a large-scale WiMAX network deployment. However, as mentioned earlier our reported results could be influenced by foreign currency exchange rates.
Compared to the mid point of our 2008 outlook we expect incremental tower revenues in 2009 to increase by approximately $93 to $118 million which includes the unfavorable impact of straight-line revenue and foreign currency fluctuation. However, excluding the impact of straight-line revenue and foreign currency we expect Tower revenues to increase approximately 9% to 10.5% from the mid point of 2008 outlook.
Our gross margin increase for 2009 ranges from $79 to $99 million as compared to the mid point of our 2008 outlook. The increased gross margin represents the flow through of new revenue less the increase in direct expenses associated with new tower sites and ground rent escalation.
With respect to SG&A our outlook for 2009 reflects cost increases related to the full year effect of the increased scale of our Brazil operation as well as the first full year of operations for India. Also, as disclosed in our second quarter results 2008 SG&A benefited from a one-time expense accrual reduction of approximately $3.1 million. Normalized for these items we expect SG&A in 2009 to increase consistent with inflationary levels.
Our conversion ratio incremental tower revenue to adjusted EBITDA for 2009 is expected to be in the mid 80’s after excluding the impact of straight line and the one time benefit to SG&A in 2008 that I noted. A mid 80’s conversion ratio for 2009 reflects our typically high conversion ratio of organic growth offset by the naturally lower conversion ratio of growth from adding new assets which have associated expenses such as land rent, property taxes and utilities.
Compared to the mid point of our 2008 outlook we anticipate 2009 adjusted EBITDA to increase between approximately $72 million and $96 million which includes the unfavorable impact of straight-line revenue and expense and foreign currency fluctuations. However, if you exclude the impact of straight line and currency we expect adjusted EBITDA to be increase approximately 9.5% to 12% from the mid point of 2008 outlook.
Our outlook for capital expenditures in 2009 reflects an increase in the number of new sites we expect to complete which ranges from 700 to 900 sites. In addition, we expect redevelopment CapEx to normalize after spending higher than historic levels of redevelopment CapEx during 2008 in connection with an international customer agreement. In 2009 we expect to spend $25 to $30 million on land purchases and $10 million on ground lease prepayments. In total we anticipate capital spending between $200 and $230 million for 2009.
We expect free cash flow at the mid point to increase over 20% to $650 million in 2009. This reflects an increase in cash provided by operations of over $85 million as well as the reduction in capital expenditures of $25 million from 2008.
In summary, we experienced consistent strong growth in revenue, adjusted EBITDA and free cash flow in the third quarter and we anticipate continued strong revenue adjusted EBITDA and free cash flow growth over the remainder of 2008 and throughout 2009. Our financial position remains very solid with a relatively low-levered balance sheet supported by stable growing operations that generate substantial free cash flow.
We have approximately $600 million of liquidity and no material maturities until 2012. In the unlikely event that credit markets were to remain dislocated over the time period until these maturities occur in 2012 we believe that we would generate sufficient cash from operations so that we would be able to use our internally generated cash flow to pay off the approximate $2 billion in 2012 maturities.
With that I will turn things over to Jim.
As you just heard Jean describe American Tower’s performance in the third quarter demonstrated continued strong growth in both revenue and profitability. Our managers and team members across the organization once again delivered superior customer service and lease processing cycle times fueling another quarter of solid organic growth.
In addition our Tower development team’s worked closely with our customers to identify and execute new build opportunities. In the third quarter alone we built nearly 100 towers in Brazil and completed our first 50 towers in India.
In the third quarter our wireless customers and American Tower were running on all cylinders. We believe this pace of activity will continue in 2009. Our sales activity is robust, new lease and amendment applications are keeping our lease processing teams quite busy and our operations teams are out in the field helping customers get installed and transmitting on our towers.
Consequently we have raised the mid points of our full year 2008 guidance for Tower revenue by $2.5 million and for adjusted EBITDA by $2 million in spite of unfavorable fluctuation in foreign currency exchange rates that occurred over the past month and have negatively impacted our outlook for the remainder of this year.
We’ve also released our guidance for 2009. Our 2009 forecast is created by triangulating three key inputs. The first is a detailed bottoms up budgeting process that’s performed by our sales force and general managers in each of our certain markets, Mexico, Brazil and India and our five US wireless regions plus our domestic broadcast and distribute antenna teams.
I’ve recently had the opportunity to meet with a number of our front line sales account representatives and was pleased to hear their confidence in our revenue growth prospects based on their territory-by-territory, customer by customer analysis.
The second key input in our operational and general manager perspectives from planning meetings and discussions with their management counterparts and our customers regarding roll out schedules, the specific market priorities and anticipated carrier budgets.
Our third key input is the public statements and performance metrics of our customers a couple of which I’ll highlight in a few minutes. As a result of combining these three inputs we have reaffirmed our expectation that our absolute dollars of core Tower revenue growth in 2009 should be at or above the level anticipated for 2008.
The incremental cash revenue included in our 2009 guidance before the effects of currency fluctuations and straight-line revenue recognition is anticipated to be over $140 million versus an expected increase of approximately $135 million in 2008 using this same methodology.
In this mornings press release we’ve broken out these three components for our 2008 and 2009 guidance to provide you with clear visibility to the actual growth performance of the business on a percentage basis and how the estimated impact of foreign currency fluctuations and of non-cash straight line revenue and expense recognition are anticipated to effect our reported numbers.
Let’s briefly walk through the 2009 guidance to ensure we all have a common understanding. First, we anticipate core Tower revenue growth of 9.6% year over year from the mid point of our 2008 guidance. For full year 2009 we’re using exchange rate projections of 12 Mexican pesos to the US dollar and 2 Brazilian reais to the US dollar which are each about 5% more favorable than we’ve assumed exchange rates to be for the fourth quarter 2008.
Under these 2009 exchange rate assumptions our core Tower revenue growth would be adversely impacted by approximately $17 million or 1.1 percentage points. We also expect the adverse impact of non-cash straight-line revenue recognition in 2009 to be approximately $22 million reduction to our revenue growth or approximately 1.7 percentage points in 2009.
Taking all three factors into account in our 2009 guidance results in the reported revenue growth of 6.8% that you see in our press release and which ties to the guidance range of $1.64 billion to $1.665 billion for 2009. Using the same three-factor methodology we show our expectations for adjusted EBITDA growth for 2008 and 2009.
For 2009 we expect our core adjusted EBITDA growth to once again be in double digits at 10.6% prior to the estimated impact of foreign currency fluctuations and non-cash straight-line revenue and expense recognition. After taking these factors into account the as reported guidance for adjusted EBITDA is 7.7% as reflected in the $1.161 billion to $1.185 billion range for 2009 that’s shown in the press release.
In addition to providing full visibility to our core growth expectations and the anticipated effects of the foreign currency fluctuations in straight-line accounting we’ve also provided a sensitivity estimate in the event that currency exchange rates differ from our 2009 projection of 12 pesos and two reais to the dollar. Should exchange rates vary 10% from those rates used for our 2009 outlook we would then expect the impact to be $17 million or approximately 1% of Tower revenue and $9 million or less than 1% of adjusted EBITDA.
In other words, if these foreign currencies appreciate versus the dollar beyond our assumed exchange rates the effects would be positive. If these currencies do not appreciate to the levels assumed in our outlook or depreciate further versus the dollar the effect would be negative to our outlook. In summary, we view our exposure to foreign exchange rates to be measurable, relatively modest and unlikely to impact the long-term prospects of the company.
Let’s get back to the growth prospects of the core business. Our confidence and strong core revenue growth is based on a number of factors. First, the wireless industry as a whole is still healthy and growing. For example, in the third quarter earnings calls both AT&T and Verizon Communications reported that their wireless units delivered substantial revenue growth and both noted the increasing importance of data revenues.
AT&T experienced over 50% year over year growth in data revenues with an increasing portion coming from bandwidth hungry internet access and related services. Third quarter iPhone sales numbered $2.4 million and AT&T stated that wireless CapEx was augmented in 2008 largely in support of widespread adoption of the 3G iPhone.
Similarly Verizon reported a 42.5% increase in year over year data revenues and noted that the company is already running trials for LTE technology. Additionally, Metro PCS pre-released third quarter subscriber adds that exceeded expectations suggesting a sustained interest among consumers for an unlimited voice plan option.
These industry announcements support two critical beliefs that we have at American Tower which should help drive future growth revenue for our company. First is that wireless services become a necessity rather than a luxury. Even in difficult economic times wireless subscribers and usage should continue to grow.
Second, with the advent of such developments as the iPhone, Google’s Android software initiative, Intel’s support of WiMAX chip technology and many others that 3G has turned the corner in the US as a successful consumer product that will expand to very high penetration levels over the next few years.
Of course we are, at the moment in the midst of a constrained credit environment so how might this affect the wireless industry and our growth prospects? We believe that the great majority of our clients can either self fund their upcoming capital expenditures or can turn to a well-financed parent to do so. Thus we believe most of our new revenue will not require near term incremental financing by our customers.
Moreover our customer’s customers which is the consumer typically does not need financing to pay their monthly bill nor even to purchase handsets. Therefore, unlike buyers of automobiles, housing or other big-ticket items the wireless industry’s customer base should be able for the most part to continue to afford wireless service. As rates for data services continue to come down more and more people should find 3G an affordable option as well.
At American Tower we still believe we are in an industry environment that will support our growth in spite of the turbulence in the broader economy and credit markets. Among the publicly traded tower companies we at American Tower believe that our company is best positioned to weather this turbulence.
In developing the company’s strategy over the past few years we have consistently maintained a five to 10 year planning horizon. We’ve assumed that at some point in time within that planning horizon there might be the types of events that have historically occurred within a typical business cycle. Therefore, in the midst of today’s economic uncertainty and dislocated capital markets we believe that we’re far ahead of our peers in the tower industry in the ability to weather the current economic environment and deliver on our strategic goals.
You should expect that we’ll remain attuned to the environment and conditions around us, strive to sustain our strategic and financial flexibility and maintain our patience and discipline when it comes to investment opportunities. To reconfirm we’re continuing to seek additional scale and diversification within our asset base while holding firm to our commitment to the Tower leasing business model.
As reflected in our guidance we expect to generate substantial cash from operations in 2009 on the order of $865 million. Our first priority for this cash is to invest in our existing market operations through the construction of new towers, augmentation of existing towers to generate additional revenue and installation of indoor and outdoor distributed antenna systems. Our capital expense guidance of $200 to $230 million confirms our commitment to these projects.
Our next priority for use for available free cash flow is to add assets in existing or new markets through acquisitions or build to suit agreements that we believe will meet our internal return targets. You can be assured that especially in these current economic and credit environments that we will adhere to our disciplined approach to evaluating any potential investment.
Our process remains the same. First evaluate the quality of the assets and the attractiveness and growth potential of that relevant customer base. Second, establish a purchase price range based upon this assessment which will achieve the risk adjusted return we’re seeking based on the asset and its geography. Third, take into consideration any synergies or strategic value resonant in the opportunity. As has been our track record even though we have the financial flexibility to act we will not act until the criteria of our review processes are met.
Finally, we’ve demonstrated a history of returning cash to shareholders when attractive CapEx and acquisition opportunities do not fully absorb our total investable capital. We also have a tradition of maintaining our financial and strategic flexibility and to avoid putting ourselves in the situation where our capital structure could become unduly restrictive if the economic or financial environments don’t meet expectations.
Over the past few years and normalized capital markets American Towers target leverage range has been four to six times adjusted EBITDA. At this moment in time we will not consider this to a normal credit environment. Therefore, we intend to maintain leverage at or below the low end of our targeted range at least in the near term and sustain a strategy of prudently returning excess capital to shareholders by keeping our share repurchase program in place.
However, we will continue to monitor our available strategic opportunities and the overall economic and credit environment and adjust the rate of repurchase based on these factors.
Finally, I’d like to close today’s comments by reiterating what a great business we’re in, one that can be quite successful even in the current environment. We’ve designed this company not only to survive but to thrive in such times. I’m excited about the future of the company, excited about our organic growth prospects and also hopeful about the possibility of some nice opportunities to prudently expand our asset base at entry prices that we find attractive.
In a moment of humility I’d like to congratulate the fans on the call of the Rays and the Phillies on making it to the World Series and to the Phillies for coming out on top. Watch out for the Red Sox next year. Thanks for joining the call today everybody and now Jean and I would be happy to answer your questions.
(Operator Instructions) Your first question comes from Jason Armstrong – Goldman Sachs
Jason Armstrong – Goldman Sachs
You talked about balance sheet positioning and wanting to be below the low end of the historical range at least for the near future. Maybe just take the other side, why wouldn’t you come out and be a little bit more aggressive at this point? This seems to be what the company’s been positioning for, for a long time, conservative balance sheet, take advantage of opportunities when potentially credit markets dislocate and maybe get devaluation of other assets. Step us through the logic there.
Second, on the revenue guidance as you think about ’09 you went into really good detail around the granularity behind those forecasts and how you do the bottoms up approach. Can you help us think about the phase in through ’09 is this something that should be lumpy in the first half of the year given the visibility you have or is this something the type of revenue up tick you’re thinking about is sort of smooth up tick throughout the year?
You said the key word in your first part of your question which was asset availability and the prices thereof. In difficult times we might have the good fortune of seeing assets move into our price range versus the quality that we see in them. When and if that happens we want to be able to act. No one really knows how long the credit markets are going to be in their dislocated position as far as access to capital and so we want to make sure we’ve got the capability in this current time to make sure that we’ve got an ability to go after those assets if they come available.
We will, as I said very specifically in the call, we’re going to monitor the access to credit that’s out there, the pricing of assets and strategic opportunities that we have been cultivating. We’re going to do the same thing we’ve always done which is keep our options open and if repurchasing shares is the best activity at that given point in time we’re going to do that too.
The second part of your question which was the ’09 forecast, we think it will be very level spread through the course of the four quarters of 2009. This year was pretty level spread as well so I think we’re going to see that continue in 2009.
Your next question comes from Jonathan Atkin – RBC Capital Markets
Jonathan Atkin – RBC Capital Markets
I wondered if you could give us a little bit of an operational update on international first on India and the expansion there I’m assuming that’s going to continue to be relatively incremental. Would that possibly involve a carrier transaction or is that restricted for the time being to new tower construction? With respect to Latin America if you could just refresh us on what the drivers are there?
Regards to India we’ve chosen a build to suit entry strategy simply because the process I outlined to you earlier when we looked at carrier assets and/or third party tower companies over the last year or year and a half I’d say. The quality and the growth prospects were good but the price expectations were, as you can imagine, a lot higher then we would have calculated on our own and we didn’t act in that way.
This is a situation where in this market we may see prices moderate. If we do you’ll see us act whether it’s a third party tower acquisition or some sort of carrier opportunity. I think you’re going to see us maintain the prudence and the patience that we’ve already demonstrated in this market and others. Overall I just think we’re in a great position to be the preferred acquirer of assets at the right prices. We’re in a great position if those don’t come around to buy our shares back with a really, really strong balance sheet. I’m looking forward to all of these options playing out.
Latin America is another great place for us right now. Mexico and Brazil performed well for us in ’08. We think they’re going to do well in ’09. Brazil in particular has some very nice growth opportunities with some spectrum being put into use in 2009 so a couple new entrants in the Sao Paulo region which is a place we’re very strong. We’ve begun investing in build to suit at a higher rate this year. We think we’ll do some more next year too.
Those are the key factors in Latin America, continuing good performance in Mexico and some nice asset expansion opportunities through the build to suit in Brazil.
Jonathan Atkin – RBC Capital Markets
In your ’09 outlook you talked about WiMAX not being part of the forecast right now. What about 700 MHz because there is one operator that looks like they’re getting ready to build out is that something that’s included in your forecast?
If you’re referring to CoS Communications they’re in a modest way. It will be helpful it won’t be a material boost if you will to ’09 but we’re very pleased to see them in the wireless space and looking forward to working for them for a few years to deploy that network.
Your next question comes from David Barden – Bank of America
David Barden – Bank of America
Could you revisit for us specifically the foreign ex exposure that you have in Brazil, Mexico as distinct from the foreign exposure? How do the actual revenues expose to the currencies, I know that there’s some natural hedging that goes on in the peso denominated markets for instance where some things coming in dollars, if you could review that for us.
You mentioned access to capital being restricted obviously there’s higher levered tower companies out there then you guys, are you saying that regardless of where you are in the levered cycle that access to capital is restricted and if not could you frame out what you think your cost of capital in the current market is?
On the foreign exchange an excellent point you’re making there that we do have some offsetting local currency expenses in our foreign markets. Let me just step back first and put this whole thing into context which is 85% of our revenues come through the US and US dollars. That’s the first place to start and about 15% is in foreign markets via foreign currency. If you then take a step by step Mexico that’s about 10% American Tower revenue. Half of that revenue is in US dollar denominated contracts. Right off the bat five-percentage points of those 10 percentage points are denominated in dollars.
We also have a TV Azteca contract that doesn’t show up in revenue but shows up in about $15 million of EBITDA, that’s dollar denominated also. Then you turn to the expense side in Mexico almost all the expenses there are peso denominated. When you get down to the EBITDA line only about a third of the EBITDA out of Mexico for the US dollar denominated currency you’re only exposing about a third of the EBITDA to currency fluctuations out of Mexico.
Brazil, similar story with the exception that all revenues there by local regulation is denominated in reais but we’ve got a percent or two of the 5% of total revenue that gets recycled if you will through local costs. You’ve got four percentage points of revenue that’s actually exposed on a net basis exposed to currency fluctuations.
That’s when you run all that math through that 10% change in those two foreign currencies only impact revenue at American Tower by about 1% and on EBITDA by less than 1%. It’s because of the couple factors that you suggested there.
On the leverage side capital markets are dislocated for all companies at all grades on the ratings system scales. That’s not to say you can’t get it it’s to say you can’t go as far down into leverage as you used to be able to do and you’re going to be paying a lot higher costs in any capital market segment today then you did six months ago. We’re taking that access and costs into consideration when we look at acquisitions, when we decide whether to buy shares back or not.
Our first priority is our CapEx in our core markets and getting great acquisitions and new build to suit contracts in new markets. We don’t want to, and we’ve never backed ourselves into a corner on the balance sheet when we thought opportunities were available on the asset side. Everybody’s got to be cognizant and we are certainly cognizant of the capital market situation and we’re not going to paint ourselves into a corner.
David Barden – Bank of America
Are you getting a sense that in any market are people making distinction for Tower assets or Tower cash flow streams or is it Tower’s been baby in the bathwater with all the other assets in the market?
It’s hard to tell. We’re looking at context in that we have access to credit. It’s more expensive. We look at it more as our company’s attributes versus the sector attributes. Part of our company’s attributes are long-term contract, stable revenue, escalator, very low churn, and all those things. There are a number of other attributes of American Tower like revenue diversification, capital markets position we’re in as far as our balance sheet that actually set us apart from the sector. I would look at American Tower uniquely within the greater sphere of the capital markets.
Your next question comes from Brett Feldman – Barclays Capital
Brett Feldman – Barclays Capital
Thanks for all the color in the press release about the exposure to foreign currency and some of the non-cash adjustments. I think that’s very helpful. As we think about your outlook for next year I was hoping maybe you could just walk us through just how sensitive that outlook could be if things happens in the industry. I know you gave a lot of detail on the discussion but you mentioned how there’s no WiMAX in there. How significant would if be if you actually were to capture a share of a big WiMAX build out?
On the other end of it what would happen to your outlook if a big customers decides to pull back on spending just to be cautious because of the economy? What I’m really getting at is how big of a magnitude in leasing activity would you have to see for your range to either move up or down?
The sensitivity to WiMAX or any other customer change is in the context of the $140 million of incremental revenue that I’ve talked about. If you use that as your starting point and then look at each case. WiMAX deployment in ’09 we’re not going to count it until we see surge rings, until we start scrubbing sites then getting applications on those sites. We’re very hopeful that that will be in December or sometime in the first quarter but it won’t happen until the deal closes and the funding hits the bank for Clearwire.
We’re hopeful that happens and we’ve been pre-planning with some of the local teams and markets to anticipate that. It will depend on how many surge rings, what’s the geographies, when do the commencements hit and I think if that project does launch it will be more of a second half ’09 revenue impact and it probably won’t be as large as it would have been if applications were in our hands today and they were going to commence early in the first part of the year.
On the other hand big customers have large deployment programs going on. We’ve got those surge rings. We have those applications they’re in process. I think as most people on this call know most of the large carrier network programs are multi-year. They’re essential to their competitiveness and therefore we think it’s fairly unlikely that they get disrupted in a significant way.
Even again if they do let’s take $140 million of incremental revenue as we’ve been talking about would $5 to $10 million of that be at risk if one of the big carriers pulled back dramatically? Possibly. We think again the bulk of our incremental revenue is going to be there. A lot of it, almost a third of it is in escalators which are contractual and we’ve got a big diversification across our customer base so it one was to pull back I think we could absorb it within the guidance.
Brett Feldman – Barclays Capital
One of your peers had said that when they gave their outlook almost any business that they would get in the second half of next year would probably have a very immaterial contribution. Does your outlook factor that in the same way?
We didn’t factor anything for substantial WiMAX deployment in our guidance so far.
Brett Feldman – Barclays Capital
Just in general in terms of thinking about how sensitive your outlook is to what happens during 2009 is it safe to say that the amount of business you would generate, new business you generate in the second half of the year is relative immaterial to the outlook anyhow.
I think that’s a fair statement. It’s going to matter especially depending on the magnitude but the later the applications roll in we’re the fastest cycle times we think in the industry. That’s still 60 to 90 days to get somebody commencing revenue up and running on the tower. If something shows up on July 1st it’s going to be the fourth quarter usually before it commences revenue.
Brett Feldman – Barclays Capital
Could you guys clarify something that you guys said during the comments, you said that the share repurchases during the quarter I think maybe during this quarter so far had been cash flow neutral. What does that mean? Does that mean that the share repurchases were roughly at the level of cash flow you were generating after reinvestment?
That’s correct. After CapEx we’re generating about $50 million a month of free cash flow. I think for the first three or four weeks, three and a half weeks of October we showed in our press release we bought about $30 million worth back. We’re a little bit under for three, three and a half weeks our free cash flow generation, meaning we don’t have to go to capital markets at all to buy back at that particular rate should we decide to maintain that.
Brett Feldman – Barclays Capital
Since you guys are skewing a bit conservative right now in the management of your balance sheet should we be thinking that sort of the maximum level of buy backs you might be willing to do until we saw some improvement in the capital market environment?
Not necessarily we’re going to look at all the factors on the radar screen and we’ll move the share repurchase up and down accordingly. I really wouldn’t make any sort of black and white assumption on what we’re going to do. It’s all going to depend on strategic opportunities, access to capital and that really nice free cash flow that comes through each and every month as to how we’re going to deploy that.
Your next question comes from Michael Rollins – Citi Investment
Michael Rollins – Citi Investment
I think you mentioned earlier in the call that the annualized new business that was signed in the quarter was about $97 million. I was wondering if you could describe, does that include both new builds and lease amendments and what split was there and how we should think about the split between new site collocation and lease amendments heading into 2009.
The incremental revenue signing rate does not include new builds its collocation plus amendments. The split this time was 71% new 29% amendments. Going into next year it will probably look a little more like 75%, 25%.
Your next question comes from Simon Flannery – Morgan Stanley
Simon Flannery – Morgan Stanley
You talked a little bit about distributor antenna systems as being an area of focus for you. Perhaps you could expand on that and also if you’re seeing anything material in wireless backhaul in your forecast for ’09?
DAS as we said on our previous earnings call last quarter we see as a niche business. It’s definitely a nice thing to have to round out our complete service offering to our customers for sites. We’re the only company we feel that can deliver the whole package which is tower leasing, tower construction, rooftop management. We’re the leader in indoor distributed systems and now we’re able to deliver outdoor systems as well.
It’s a nice complement to the total package. It’s in our view probably always going to be relatively small. As I said we’re the leader in indoor and its about 2% of our revenue right now and we hope to grow outdoor to another 2% maybe all in a couple years down the road could it be 5%, 6% of revenue that would be terrific but that’s probably the extent of it.
Backhaul is showing up in a couple of ways. Increases over time in the microwaves that we have on our sites, that’s been a consistent trend over the last couple years for both redundancy and cost management by the carriers versus the local exchange carrier in the US. Its a couple percent of revenue it probably won’t grow much more than that, single digits I’d say is where backhaul will stay for us. There is some fiber being drawn to some of our towers and our operations folks when I ask them about in the US is was about 15% of the towers on balance are getting fiber now.
Your next question comes from Michael Bowen – Piper Jaffray
Michael Bowen – Piper Jaffray
In India I think you said you had rolled out the first 52 towers. I was wondering if you could maybe give us an idea of how we should think about the pace of that build out and also if you could just review for us what you’re finding troublesome or not in that market.
Secondly, we picked up some information at an industry conference a few weeks ago talking about issues going forward possibly with some of the WiMAX equipment and Clearwater equipment being very, very heavy on some of the long standing towers and that this may require a future retrofitting and things like that. If you could maybe address that and let us know if you’re looking at that or if you’ve seen any that.
On the India front we successfully built 50 towers in the third quarter. We’re actually at our 100th tower about last week which is a very nice pace. We’re going to finish, I believe, our 200-tower commitment by the end of the year. You’re looking at 50 to 75 towers a month is the run rate right now that we’re building under. We think we can continue that under some additional contracts that we’ve secured for 2009.
The opportunity is huge there, the building challenges are similar to Mexico or Brazil when we got started there we’re obviously overcoming and succeeding in light of those. We have a very solid management team and some good support with vendors in that country so I’m very confident that we’re going to be able to continue to build good towers at the cost levels that we expected.
With regard to WiMAX equipment there often are augmentations to the tower every fourth or fifth tower no matter what kind of application equipment you’re putting on it may require on average an augmentation. We can do that, we’ve actually got the best structural engineering and design team if not in the country in the world to do those things. We don’t see it as an impediment and we welcome WiMAX equipment onto the towers.
Your last question comes from Rick Prentiss – Raymond James
Rick Prentiss – Raymond James
On your ’09 guidance on the official adjusted EBITDA line of $11.61 to $11.85 just to confirm again does that include or exclude the non-cash revenue expense item?
It basically includes everything that’s going to be in the GAAP reporting so straight line is in there, expected changes in currency as we’ve assumed are in there and if you go to the press release you can really see the breakout we think pretty clearly which is we start with business and local currency without straight line and what’s the growth year to year on that.
Then we correct, if you will, for the GAAP effects of currency fluctuations as we’ve assumed them. Then we correct for the straight-line effects. That bottom line number you see on a percentage basis is what’s in those numbers in the guidance above.
Rick Prentiss – Raymond James
The actual $11.61 to $11.85 on adjusted EBITDA would it be higher or lower if non-cash was not being done?
It would be higher.
Rick Prentiss – Raymond James
When we looked in the past at some point the non-cash revenue, non-cash expense turns colors from being a negative impact to being a positive impact. Is that still off in the wings maybe in ’10?
No, unfortunately the other way around if you’re an accountant. We are now in diminishing benefit from straight-line accounting as the years go forward. It hasn’t crossed the negative line yet meaning that the cash revenues actually higher than the GAAP revenue that’s not true but the cash revenue benefit is lower in ’09 than it was in ’08 it was lower in ’08 than it was in ’07.
Rick Prentiss – Raymond James
Where do you guys feel comfortable holding your cash balances on the balance sheet?
Our history has been $75 to $100 million of non-restricted cash available to the company.
At this time I would like to turn the call back over to management.
To the investor base thank you very much for being on the call we appreciate your continued confidence in the company. I think and hope that you’re seeing from our last few calls that we’re trying to do what we think great companies ought to be doing which is setting a long-term strategy making sure we have the flexibility to execute that as capital markets or the economic environment adjust over time to the business cycle.
You’re not going to see us do dramatic changes in our strategy. You’re going to see us execute on the strategy that we’ve had for the last few years and we’re going to be very aware of the external environment as we do that. That’s the one thing I would end the call with is that we’re still on message. We’re still on our strategy and we’re going to use the same approaches and discipline now that we’ve always used in executing that. We’re glad you guys are with us.
Thank you for participating in today’s conference call. You may now disconnect.
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