Consolidated Communications' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Consolidated Communications Holdings Inc. (NASDAQ:CNSL)

Q4 2012 Results Earnings Call

March 7, 2013 11:00 AM ET


Matt Smith - Treasure, VP, IR

Bob Currey - President and CEO

Steve Childers - SVP and CFO

Bob Udell - SVP and COO


Frank Louthan - Raymond James

Barry Sine - Drexel Hamilton

Donna Jaegers - D.A. Davidson

Steve Blinn - Morgan Stanley


Good day, ladies and gentlemen and welcome to the Consolidated Communications Holdings Inc.'s 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.

Matt Smith

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'll will provide an overview of our financial and operating results, Steve Childers will then provide a more detailed review of the financials. Bob?

Bob Currey

Thank you, Matt, and good morning, everyone. We appreciate you joining us today as we review our fourth quarer 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 2nd.

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 continued to grow, diversified the business and 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 of 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 continued to grow our data and video subscribes 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, were $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 a 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 have 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 1750 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 the 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'll continue to build fiber-to-the-home 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 in commercial and career 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 on to 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 managements 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 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 publically 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 long time resident of the Kansas City region, Tom will provide great insight into the markets where we operate. I am 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.

Steve Childers

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

On December 4th, we closed in 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 in the transaction. While we did not have any near-term debt maturities, the [bank] market was attractive and we decided to be opportunistic. The numerous facilities matures at the end of 2018 and carries a rate of LIBOR plus 4% with the 1% for.

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 of 2011. The increase was primarily driven by continued growth in our data and Internet services as well as our commercial and wireless backhaul areas. The increases were partially offset by declines in our voice related services.

Total operating expenses exclusively 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 yearend 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 with this segment have been eliminated. Second, we recognized $1.7 million of transactions 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 in expense related to senior notes we issued and made fund to SureWest acquisition.

Other income net was $9.4 million for the quarter and during the quarter, we recognized $9.4 million cash distribution from our wireless partnerships compared to $8.7 million for the fourth quarter of 2011. On December 13, we announced the acquisition of additional 3.5% interest in one of our [success] partnerships which overlap with our operating properties. The required investment was $6.7 million, which is based on current and projected cash flows of the partnership was a very attractive price. We expect to continue to grow in our distributions from these partnerships.

Moving on to net income and earnings per share, in the quarter, our adjusted net income and EPS was $8.20 million respectively. As outlined in the table on our earnings release, the adjustments are for acquisition related cost and non-cash items including the impairment charges, stock compensation and $4.5 million charge for the loss and extinguishment of debt tied to the refinancing.

This compares to an 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 our pro-forma basis increased by $4.1 million or 5.8% to $74.2 million in the quarter and was up 4.7% on a sequential basis. The year-over-year increase was driven by combination of organic growth and OpEx synergy 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 in our $50 million revolver fully available to us.

For the quarter, our total net leverage ratio as calculated in our earnings release is 4.36 times to one giving full effect our target of $25 million of synergies, net of the synergies already realized in earning, total net leverage ratio is 4.1 times to 1. All leverage and coverage ratios were well within compliance levels of 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 have provided guidance with respect to CapEx, cash interest and cash income taxes. First, capital expenditures are expected to be in the range of $100 to $110 million compared to the $114.4 million in 2012. Included in our 2013 guidance is $4 million for non-recurring integration project.

Cash interest expense is expected to 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 have 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.

Bob Currey

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 benefitting from our ability to be more competitive with exceptional service, and our dividend is secure.

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

Question-and-Answer Session


(Operator Instructions) Our first question comes from Frank Louthan from Raymond James, your question please?

Frank Louthan - Raymond James

I am just looking at your guidance for, with the interest expense, any reason you wouldn't look to use some of your cash to pay down some debt next year will 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-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 at all through the co-op? Thanks.

Steve Childers

Hey, 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. I guess, I will remind you if we had a choice we would go after the notes that are carrying over 10% coupon those aren't callable until -- you know, from four years from May.

So paying off the debt which we are going to be very focused on de-levering over the next couple of years, again we will consider that, we're basically with our term debt around a little over 5% on our effective debts. We're even paying that down on after tax basis. It's not that significant, but it is a good consideration as we really are focused on delevering.

Bob Udell

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

Frank Louthan - Raymond James

Okay, the two follow ups, one I guess for Steve. With those, you know, those with the 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, you're able -- [that to me] look opportunistically and take some out in the market. And then can you be a little more specific on the over the top providing operatings that you are pursuing and what sort of revenue opportunity that is?

Steve Childers

Frank, this is Steve, for the follow-up with respect to the bonds. There isn't a lot of trading value right now. We're 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 bond to go effective by May 30th.

And we hope and again we would expect there to be more trading as those become publically available after that time. I think the answer to the question is we will consistently evaluate what's the best use of our cash is, we would look at the bond 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, 3.5 years from now.

Bob Udell

Frank, regarding the follow-up on content, 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 contents. So over the top is a component in our packages. Right now it's the major entertainment networks that you would expect like HBO Showtime, the sports channel, we have 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.

Frank Louthan - Raymond James

Okay, great. Thank you.


Thank you. Our next question comes from the line of Barry Sine from Drexel Hamilton. Your question please.

Barry Sine - Drexel Hamilton

Good morning gentlemen. First question you mentioned additional homes past 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, can you 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 through the CapEx in 2013?

Bob Currey

Barry the number last year was 15,000 and a 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's not necessarily Kansas City, you know 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're basically doing fiber-to-the-home.

Barry Sine - Drexel Hamilton

Okay and one of the revenue synergies that you talked about with the SureWest transition, you guys did a pretty good job in your CLEC business with marketing and I don't think that that your strength run on the SureWest side was more residential. Can you talk about what you are doing? I guess you have already alluded to with the introduction of Ethernet product in Sacramento, but could you kind of elaborate what you are doing to achieve revenue synergies?

Bob Udell

Barry its Bob Udell and thanks for the question. The opportunity is really to exploit any of the growth in any of the markets that we got access to and surprisingly California has been a little bit stronger then I would have expected, but Kansas has been consistently robust on business growth much like Texas and somewhat like we've seen in Pennsylvania. So we are taking the strategy of leveraging this metro Ethernet foundational product and spreading that into Kansas and California markets.

And what's new for California just as an example is, we are now in the process of going out metro Ethernet over copper, which historically wasn't package product in the SureWest market. So we're using that as a foundation and then leveraging some experience SureWest has had with the data center type offering in Kansas City that has been prepackaged, and something we did on as needed basis in the Pennsylvania and Texas markets and leveraging that into the bundle target offering we have for medium and small businesses. So it's really taking the best of both and using the scale then adjusted by some step up in marking attention and those resources.

Barry Sine - Drexel Hamilton

Okay thank you gentlemen.


(Operator Instructions) Our next question comes from the line of Donna Jaegers from D.A. Davidson, your question please?

Donna Jaegers - D.A. Davidson

Hi guys thanks for taking my question. 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 am sort of shocked that SureWest hadn't rolled Ethernet, metro Ethernet in California you already – it sounds like you already – they already have it in the Kansas City. Is that correct?

Bob Udell

Yes. Don its Bob Udell. Thanks for giving me the chance to clarify that. They had a fiber Ethernet based product in California and a robust fiber plant as you know that had been build out to serve their triple play customers. In the focus there is a little bit more on the consumer marketing and packaging side. Really what our strategy and it's a very great fertile market for us 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 note areas and using the copper product to reach multiple locations. So we are making it a more standardize package 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 Internet type service, data center access and so it's really a product platform and a bundling strategy that has been more at ad hoc or done by each customer in the past.

Donna Jaegers - D.A. Davidson

Okay and then the pipeline orders on the business side. It sounds like those are getting - that the pipeline is increasing?

Bob Udell

Yeah 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. Its 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. So I would expect we would see you know that, as that team matures and all the resources hit straight, they are currently on a ramp to get a switch better than that.

Donna Jaegers - D.A. Davidson

Great and now if the economy would just pick up to help even more.

Bob Udell

Wouldn't that be great.

Donna Jaegers - D.A. Davidson

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

Bob Currey

Yeah Donna, you know just maybe for those who aren't quite familiar with it. We've had that contract for 20 plus years and in June last year the State of Illinois the contract was up 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 if I half the sites have been converted and that – so we're not very optimistic about keeping it.

And but that 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 why 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's the operator services in our total marketing, the [fewer] $15 million revenue but also basically neutral to earnings.

So nothing material there and we're pretty resigned to the fact that we are going to lose it sometime in the next 30 to 60 days.

Donna Jaegers - D.A. Davidson

Great, thanks for the update, guys.


Thank you our next question comes from the line of Steve Blinn from Morgan Stanley.

Steve Blinn - Morgan Stanley

Great, thank you. Couple of questions, no 1, can you talk about any cash contributions from pension of [OPEB] that you expect that in 2013, anything with regards to cash tax has been a big topic to figure out to now is your competitors, could you talk about how you see the NOLs rolling off and may be the impact of bonus depreciation and what we should think about cash taxes, once we to start to rolling onto 2014 and beyond?

And then the finally you guy know this always this comes up if you just give us an update with what you're seeing with regards to competition from Google in the Kansas city area anything has changed there? Thank you.

Steve Childers

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

With respect to the NOLs, with the SureWest acquisition at the time of that acquisition we acquired about $75 million in NOLs. Based on activity through the end of the year considering transactions related cost changed controlled types thanks to severance, integration costs, deal costs all that type of things, our NOLs at the end of the year are estimated be a little over $80 million. We would expect to be able to fully utilize those NOLs probably over the next 2 years and so going to 2015 we would start looking more to full cash tax fare which we have been in the past.

With respect to bonus depreciation, we on our $100 million to $110 million in CapEx, we're going to expend -- we do anticipate going ahead and taking the election for the 50% of bonus depreciation obviously given the impact of the NOLs we won't see necessarily see benefit of that in 2013. But it will help us in 2014 and beyond and get bonus depreciation all the time in any way but we'll leverage the benefit while it's there. So with that I'll turn over to, Bob.

Bob Udell

With regards to Google, while they don't overlap us today we don't know whether or not they'll ever be a direct competitor and we do know that the competitors they do a overlap with the [weight] adjustments to their marketing strategy to compete with Google's offers. But I have to say we're still very confident in our products and services, there - our market in the 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 enquire or request the 50 meg service, and are on it.

Vast majority, we continue to upgrade between 10 meg and upwards to just to try to 20 meg. And we're going to continue to monitor the utilization and upgrade the speed that's necessary the match the demand we've got great capacity there as there's a demand for a 10 gig product in the future we'll be able to provide it. So we watch it closely and we'll respond accordingly as the market demand rises.

Bob Currey

And may be just expand on comments Steve made about that we had been a full tax payer 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'll 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 tax payer in 2015.

Donna Jaegers - D.A. Davidson

Okay great, thank you.


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

Bob Currey

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.

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