Jim Taiclet - Chairman, President, and Chief Executive Officer
Thomas Bartlett - Chief Financial Officer
Jean Bua - Executive Financial Officer
Michael Powell - Vice President of Investor Relations
David Barden - BAS-ML
Brett Feldman - Barclays Capital
Jason Armstrong - Goldman Sachs
Otto Bohman - Jefferies & Co.
Jonathan Atkin - RBC Capital Markets
American Tower Corp. (AMT) F1Q09 Earnings Call Transcript April 29, 2009 8:30 AM ET
Ladies and gentlemen, my name is Alexandria and I will be your conference operator. At this time, I would like to welcome everyone to the American Tower first quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will a question-and-answer session. (Operator's instruction).
I would now like to turn the conference to our host, Mr. Michael Powell, Vice President of Investor Relations. Mr. Powell, please go ahead.
Thank you, Alexandria. Good morning everyone and thank you for joining American Tower’s conference call regarding our first quarter 2009 financial results. Please note that we had posted a brief presentation to accompany this morning's call in the Company's website which is www.americantower.com. If you have not done so already, you may want to download this presentation as we will refer to it at the various times during our prepared remarks.
The agenda for this morning's call will be as follows: First, I will provide a brief introduction and highlight certain key metrics for our first quarter 2009 financial results. Following this, Tom Bartlett, our Chief Financial Officer will go over our first quarter results in more detail and provide additional color on our 2009 outlook and Jim Taiclet, our Chairman, President, and Chief Executive Officer will then give closing remarks including his current thought and key business trends. After these comments, we will of course open up the call to your questions.
However, before I begin, I would 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 2009 outlook, our stock repurchase program, foreign currency exchange rates, credit markets 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 morning's press release and those set forth in our Form 10-Q for the year ended December 31, 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 this information contained in the call to reflect subsequently occurring events or circumstances. And with that I would like to begin the call. Please turn to slide four of the presentation for a summary of our first quarter 2009 results compared against the first quarter of 2008.
American Tower reported strong operating results for the first quarter of 2009 despite unfavorable foreign currency exchange rates and a challenging economic environment. Our rental and management segment reported revenues of approximately $396 million reflecting a 6% growth rate from the year ago period. Please note that the first quarter growth was negatively impacted by the strength of the US dollar against the Mexican peso and the Brazilian Real along with the negative impacts of straight line revenue recognition. Tom will provide further details regarding the impacts of these factors on the reported results.
The Company's adjusted EBITDA for the quarter was approximately $281 million which is a 7% increase from the year ago period. Additionally, our operating income for the quarter increased 4% to approximately $159. Please note that this profitability measure was negatively impacted by a $6.6 million nonrecurring charge to stock-based compensation expense which is related to the modification of certain stock option awards for a member of senior management who terminated his employment agreement during the quarter. Moreover, we reported strong growth and net income from continuing operations of approximately 32% which is actually a 40% increase on a per diluted share basis.
Tom, I now would like to turn the call over to you for further detail.
Thanks Michael and good morning everyone. I am very pleased to be with all of you this morning. Now, having been here for just a month, I am even more excited about the prospects for American Tower and its ability to generate significant value for our shareholders. The fundamental business model that American Tower is clearly unique within the telecom sector which includes recurring long-term cash flow streams with built in contractual revenue escalations, the lion share of the cash flow being generated from strong institutional telecom carriers with the service model developed by American Tower in the US that can be deployed anywhere on the globe and with the sales and support staff who were incredibly energetic and have built the culture to produce an outstanding customer experience.
As the CFO, I plan to build upon this model and continue to focus on creating shareholder value. I know that you expect us to leave the market not only in value creation but also in financial discipline and transparency. My goal is to exceed your expectations and I look forward to spending time with you in the months ahead.
Before I get started in reviewing our results, I also wanted to thank Jean Bua who has worn several hats for us in American Tower over the last several months. Jean has clearly helped the Company in advancing its leadership role within the industry and has brought tremendous financial discipline across the entire operation. I plan to continue to build upon this legacy and look forward to working with Jean in her current role as treasurer.
In summary, I am extremely happy to be part of the American Tower team and believe that we can leverage the business model in our uniquely attractive asset base, proven operational execution and strong balance sheet to further drive shareholder value. In fact, I think our first quarter results prove this point as American Tower continued its track record of consistently delivering strong revenue, adjusted EBITDA and free cash flow growth.
Now, if you please turn to slide five to review some of the highlights. Our core growth rates for tower revenue and adjusted EBITDA which exclude the impacts of foreign currency exchange rate fluctuations and straight line this accounting were approximately 10% and 11% respectively relative to the first quarter of 2008 with strong free cash flow generation in the quarter. In fact, it was over $150 million after interest taxes and CapEx. We remained focused and disciplined as we evaluate growth opportunities. We built 200 sites in the quarter which puts us on a track toward achieving our guidance of 700 to 800 new towers for the full year.
Additionally, we announced an acquisition in our newest market India which would increase the size of our portfolio in that country by approximately 1700 sites. Finally, we exited the quarter with a strong liquidity position of nearly $800 million which included over $300 million of cash and cash equivalents and nearly $500 million of availability under our revolving credit facility.
Turning to slide six, we can see from the chart the upper left hand side that our top line growth trends remain intact. In fact, our growth versus the year ago period would have been over 10% on a currency neutral basis and excluding the impacts of straight line lease accounting. To put it simply, the quarter top line growth of our business would have been approximately $15 million higher than our reported results. Additionally, I would like to highlight that the vast majority of our growth is from our legacy assets. Although we built our required 1200 sites since the beginning of 2008 to the end of the first quarter of 2009, these new assets drove only 1.6% of our year-over-year reported tower revenue growth.
However, we are quite pleased to supplement our same tower growth rates with these new assets as their day one unlevered returns have averaged over 12% and should obviously continue to drive additional shareholder value as we add additional tenants to those sites over time further increasing the returns on these investments.
If you turn to slide seven, we can see the same trends in adjusted EBITDA. Our reported adjusted EBITDA for the first quarter 2009 was also unfavorably impacted by a strong dollar and straight lining this accounting. Excluding those impacts, our core adjusted EBITDA growth would have been over 11% or approximately $10 million higher than our reported growth.
To summarize, the core growth of our business is very strong even in the current economic environment. Furthermore, our adjusted EBITDA margin continues to expand as we add incremental tenants to our existing assets. Over the past three years, we have increased our margin by nearly 300 basis points.
On slide eight, you can see the trends in our CapEx. Our redevelopment CapEx was lower in the first quarter of 2009 compared to the levels we experienced in 2008. We expect the redevelopment spending for the remainder of 2009 to also be at levels that are below our 2008 spending as the higher spending in 2008 was driven by the agreement with one of our international customers which is now winding down. Conversely, our discretionary capital expenditures have trended higher. This is purposeful as we have focused our development teams on finding high return projects to reinvest and grow the business.
During the first quarter, we spend approximately $23 million on new site development, completing the construction of 200 new sites. In addition, we spend approximately $9 million on land purchases. Separately, we acquired four sites for a total of approximately $1 million. The day one returns at the 204 sites that we either built or acquired in the first quarter are expected to be about 10% with strong prospects for growth as we add additional tenants to those sites.
Turning to slide nine, we have highlighted the trends in both cash provided by operating activities in our free cash flow. During the first quarter of 2009, we generated over $150 million of free cash flow after interest, taxes, and CapEx excluding payments for acquisitions, representing an increase of 13% from the year ago period. Furthermore, if you turn to slide ten, you can see that our free cash flow generation coupled with a strong balance sheet provides American Tower with a significant amount of liquidity.
Additionally, since we have no material debt maturities for the next three years, we should have the ability to continue to invest our free cash flow into higher return projects to grow the business throughout the planning period as well as return cash to shareholders via our share repurchase program. We ended the quarter with net leverage of approximately 3.6 times our annualized adjusted EBITDA. Given the current macro environment, credit conditions and our desire to maintain a robust level of financial capacity, we expect to keep our net leverage below the historical 4 to 6 times adjusted EBITDA level we had previously discussed.
Finally on slide eleven, we have highlighted our 2009 outlook which for the most part we left unchanged versus our prior outlook. This outlook ranges do not reflect the impact of our potential acquisition in India as we do not include acquisitions in our outlook until they close. However, we have increased the range for stock-based compensation to reflect the nonrecurring expense that we booked in the first quarter of 2009 and we have reduced the range for interest expense to reflect LIBOR rates.
As we have indicated in our press release, volatility and foreign exchange rates could cause actual results to differ materially from the estimated outlook ranges. The average foreign currency exchange rates for the first quarter did vary materially from the assumed rates for the full year 2009 and did negatively impact our first quarter results. However, we have chosen to leave our outlook unchanged at this time. As of just a couple of days ago, the foreign currency exchange rates approached 14 pesos to the $1 and 2.2 Brazilian Reals to the US dollar. If the average foreign currency exchange rates for the remainder of 2009 remain at these levels, then the Company estimates that actual rental and management segment revenue and adjusted EBITDA for the full year 2009 would be negatively impacted by approximately $21 million and $10 million respectively from what is included in the Company's full year 2009 outlook.
Please note that the impact for the foreign currency exchange rates on our reported results in Mexico and Brazil is essentially an accounting translation impact. If those businesses continue to grow and we continue to reinvest, the majority of their cash flows back into those businesses through tower builds and acquisitions. In fact, excluding the impact of the foreign currency fluctuations and straight line lease accounting, our total Company quarter revenue and adjusted EBITDA growth for the full year of 2009 is expected to be approximately 9% and 10% respectively.
In summary, we continue to believe that the fundamentals of our business are strong as illustrated by the double digit core growth in the quarter. These business fundamentals are complemented by the flexibility of our capital structure and availability under our revolving credit facility which provide us with a solid foundation to fund our future growth initiatives. Furthermore as we seek to invest our excess capital and drive our long-term growth, our legacy practice of patience and disciplined valuation should further enhance our future returns on invested capital.
Now with that, Jim, your thoughts?
Thanks, Tom and good morning everyone. At first, I would like to say how pleased and proud I am of our employees in the US, Latin America and Asia that worked together to deliver double digit core revenue growth in our served markets in Q1. I am always energized when I see how our frontline teams worked together and with our customers to achieve our growth objectives.
As Michael and Tom just outlined for you, these teams delivered another quarter of great results and I know that they are all out there as we speak working just as hard to keep delivering those kinds of results. This morning, I would like to spend a few minutes with you on how American Tower enhanced the highest energy and expertise of our employees and management team as we look toward the future.
Today, our Company is in the fortunate position of having a great franchise and an industry with a unique and compelling business model. The straightforward three prong strategy that we implemented in late 2001 to early 2002 has brought us to this advantageous position. The three prong strategy we believe will also serve as a great framework to achieve our aspirations for the next five to ten year time horizon as well and for American Tower to be widely viewed as one of the leading companies in the telecommunication's industry.
The first element of our strategy was and is to focus on the tower leasing business model. Therefore, as we seek to expand our business and our asset base, we will continue to focus on shared telecommunications infrastructure assets designed to primarily serve wireless carriers. Today, 87% of American Tower's revenue is generated in the US. Given that we are actively building new tower and distributing antenna system networks and seeking asset acquisitions and larger M&A opportunities in both the US and select international markets, we anticipate that the substantial majority of the Company's revenues will continue to be generated in the US in the future.
Given that economies have scaled apply to the tower business and that our company has the financial wherewithal to reinvest in the business, we do seek actively to add assets to our portfolio. However, the cost paid for a tower asset is the most important factor and the future return on investment performance of that asset. Therefore, we continue to apply a rigorous and highly disciplined approach to valuing investments in the business. This process begins with our three regional presidents in the US, Latin America/Europe and Asia Pacific pursuing and evaluating opportunities for build to suite projects, carrier tower portfolio acquisitions, new market entry and M&A targets. The assets or opportunities are fully evaluated as the current performance, growth potential and asset cost by the regional business development team that knows the local market and the customer based best and they are supported by the Company's functional experts here.
Then as merited, our formal investment committee which includes our CFO, our Chief Administrative Officer/General Counsel and the regional President determine whether to recommend the opportunity to me and of sufficient size, to our Board for approval. So, on one hand, we have institutionalized an active effort to further invest in the business with regionally deployed teams and senior management leadership. But on the other hand, the process is disciplined and thorough and very focused on paying only appropriate entry prices for new assets or new market opportunities.
Our investment decisions are ultimately based on return on investment criteria, adjusted for market risk for international opportunities. Currently, the company's run rate cash return on the capital we have historically invested is 10.7%. Our targeted returns for new investments after a two to three year integration period are approximately 10% for domestic US investments and mid to high teens for international investments depending on the specific market.
Consequently, we believe that our new investments will help to increase the Company's overall return on invested capital even on a risk-adjusted basis. So, to summarize the first element of our three prong strategy for the future, American Tower's goal is to grow an asset base both in the US and internationally but only in cases is where we firmly believe we can achieve our risk adjusted hurdle rates. Our 2009 guidance projects $858 million of cash from operations at the midpoint. Our first priority for the use of this cash is capital investment in the existing markets we have.
For 2009, our CapEx guidance at midpoint is $215 million which includes a construction of 700 to 900 new communication sites in the US, Mexico, Brazil and India. Subsequently, our remaining $600 million plus of cash from operations is available for the types of reinvestment in the business that I described earlier. We have announced the first of these opportunities that has completed our investment committee process this year, the pending acquisition of Xcel Telecom in India.
Xcel shares our philosophy of building select towers for high quality anchor tenants that has substantial co-location opportunity in India. As a result, the combination of Xcel 1700 towers with the 200 that we have built in India provides an excellent platform for future growth under that consistent philosophy. We are also looking forward to bringing our respective management teams and employees together in India and we are impressed with the talent we have seen within the Xcel organization. Our investment committee process remains active and we are hopeful that additional opportunities that we have identified will progress.
Moreover, the current disruption in capital markets in the global economy could make this an opportune time to identify sellers of tower assets that might be more likely to agree to the asset pricing parameters that are derived through our investment committee process. While there is no assurance that this will occur, we are retaining as much financial investment capacity as we can for the time being. Consequently, we have moderated our share repurchase rates substantially downward and over the next few quarters, we will continuously evaluate our cash requirements for approved asset investments, those for perspective asset investments and the assets in cost to debt capital for our company. Then based on all these factors, we will reevaluate the pace of our share repurchase program over time. Our priorities for the uses of cash remain the same as they have over the past 7 ½ years of my 10 year with the Company; to first reinvest in the tower leasing business using a disciplined approach and then to return any excess cash ultimately to shareholders.
American Tower also remains committed to the second of its original element of our strategy, to aspire to operational excellence in all aspects of the tower leasing business. Tom earlier described the kind of results that his dedication to the operational aspect of our business can deliver especially when matched with high quality assets like ours. Over the past few years as many of you know, we have incorporated a number of proven management systems from some more mature companies and even benefited American Tower including our six-sigma based process improvement program that we have.
But I think even more important for our success has been our dedication to training, talent development and recruitment throughout our organization. The quality of our people is represented in part by our executive team. This group brings together a richness and diversity of experience that I believe can take the Company to an even higher level of performance and successfully grow and manage a larger asset base should we find success in our expansion efforts.
I would like to briefly mention just a few of our leaders to give you a sense of the strength of this team. Hal Hess is our longest serving executive, running our Latin America and Europe regions. Hal helped found our Mexico and Brazil markets back in the 2000-2001 timeframe and he has been instrumental in building up the business since them. Steve Marshall now runs our US operations and previously was CEO of National Grid Wireless, then Europe's largest wireless tower operator. Amit Sharma leads our Asia Pacific region having formerly had a similar role at Motorola. Amit's local expertise and customer relationships have been critical in launching our India market. Ed Disanto is our Chief Administrative Officer and General Counsel and brings over two decades of successful global business development and legal experience from United Technologies Corporation where we had previously worked together.
Jean Bua is our Treasurer and has been our controller in addition to serving as interim CFO over the past year, building further on her prior experience at Iron Mountain. I want to join Tom in thanking Jean for her terrific work in that role and I know that she will add to her accomplishments as treasurer working with our new CFO, Tom Bartlett. Tom's extensive and distinguished career horizon makes him incredibly well suited to pick up our business quickly as you have already seen and to make a substantial positive impact on our company in both the near term and the long term.
Finally, I want to thank Steven Moskowitz who has run our US operation for many years, leading that organization to the level of achievement that it enjoys today. Steven is a valued alumnus with the Company and continues to assist us in a strategic advisory role as he begins to explore new horizons.
In summary, our management team provides the unique mix of tower industry expertise; experience gained in some of the well-respected companies in the world and brought international knowledge. It is going to be great for me to continue to work with this team towards getting even better operationally and hopefully expanding the asset base in a meaningful way.
Lastly, as we pursue these goals, American Tower will also continue to follow the principles of the third prong of our strategy, financial strength. We will strive to maintain our ability to weather all phases of the business cycles successfully. That calls for reasonable and supportable leverage ratios and the range of potential financial market circumstances. It also calls for us to continue to work towards extending the maturities of our debt for utilizing a diverse range of financial instruments and for seeking ways to manage down our financing rates.
Hopefully, you our investors, share our enthusiasm about the future prospects for this Company and today, my goal is to highlight for you how our team intends to continue to pursue the strategy that has worked so well for our Company today. We intend to keep our focus on the tower business model and actively and prudently seek opportunities to expand our asset base. We intend to leverage and grow our talent to further improve operational performance and to prepare for possible asset expansion. In the process, we intend to preserve and enhance our financial strength. It is through this proven three prong strategy that we hope to earn your recognition as a true leader in the telecom industry, worthy of your consideration as the long term investment.
We are also looking forward to the Yankees' next visit to Fenway where they will perhaps get to experience yet another sweep by the Red Sox. Operator, with that, you can open the call for questions and comments.
(Operator's instruction) Your first question comes from the line of David Barden - BAS-ML.
David Barden - BAS-ML
If I could maybe two questions, just the first, Jim, thanks for the color on the international kind of IRR targets. Is it possible maybe to just walk through maybe the basic mathematics of how you guys are seeing the Indian tower market looking based on their revenue per minute, it is very, very low. The expectation is that the site rental revenues are lower per lease but that the tower construction or purchase costs are lower but there is not a lot of granularity on that from here. It will be great if you could give us some more numbers to put around the Indian business as we start to think about it and model it out.
The second would be; we saw a relatively strong slowdown in the pacing of CapEx spend from the wireless carriers, AT&T, Verizon for instance this quarter. Could you talk about how you are seeing tower lease up demand pacing, developing over the course of the year?
Sure, David. I will go ahead and start up on both and Tom can definitely talk especially on the second piece. First of all on the economics of the India tower market, you really did hit the high points. Tower costs are substantially lower to build in India and I think it is fair for us to give you a range there that were it make cost upwards of $220,000 to $250,000 to build the tower in the US in a typical area. The costs in India are down around $75,000 to $85,000 and those are for ground-base towers. Rooftop-base towers, they’re even less expensive.
And as you correctly noted as a result of low cost, we do very well in an environment where there is low ARPU and therefore a cost oriented approach by the carrier and you are right, monthly lease cost are lower than in the US but also ground rents are quite a large deal lower than they are in the US over there. So, you got some matching ongoing cost that is much lower that helps support lower revenue based.
Other cost such as insurance and etc, taxes are also lower. So we have got a very low build cost, lower run rate cost in general to match a lower revenue stream. And then the growth rate which is the really interesting reason why I think companies like us ought to be looking hard at India is the real differentiator frankly. India is the fastest growing wireless market in the world. It does not have any data service yet. There are over a billion people in the country. It is maybe 20% penetrated at this point. There is a huge growth upside there. It is going to take years and years for that to be fully enriched and we want to be there for that.
So, what we are going to do in India, David, is like I said in the call here, we are not necessarily the largest tower company but we are going to have the company with I would bet at the end of the day, pound for pound, the most high performing towers that you can have in that country.
On the second area, CapEx slowdown among the major carriers, I think broadly yes, the AT&T and Verizon lower CapEx made certain appropriate program that earlier this year but that was for their entire companies. On the wireless side, the public statements ofthe carriers indicate that that is where the focus of their CapEx will be throughout the year. So, yes Q1 was kind of off to a slow start. We have recognized that. We said that on our earlier call about two months ago but we also feel that the remainder of this year is going to be robust and we are seeing the levels of activity that we would expect to see in the normal course of run rate for business now. So, Tom, you could add some thought.
I think David if you look at the, put on a couple of hundreds sites which is consistent with the kind of the guidance that we have gotten for the year and the kind of the 700 to 900 site range, I would aspect that the carriers, as they have traditionally will do pick up their CapEx in t the balance of the year. First quarter is usually the slowest coming out of the strength of the fourth quarter and I think even one of the carriers said that it was, as Jim said, preprogrammed to start out the year, see what the economy was looking like. And my sense, given the new technology, and they had strong growth in the first quarter, two carries that recorded. So, I sense it will pick up throughout the balance of the year.
Your next question comes from the line of Brett Feldman - Barclays Capital.
Brett Feldman - Barclays Capital
Just two quick ones; I actually noticed some new language in your press release in the guidance section, you actually sort of had a cautionary statement indicating that based on the state of the credit market, it is possible that customers may not pay you on a timely basis.
I am wondering. Is that just good housekeeping in light of what is going on? Or have you actually had a customer to reach out you and indicate they may not pay on time?
Okay. Brett was there a second question or was that it?
Brett Feldman - Barclays Capital
Let us start with that one first.
Okay, okay. I think if you take a look at the obviously our overall receivables, our ADSL is 15, 16 days. I mean we had solid revenue to kind of cash receipt balances. I think you would agree. But I also think that from housekeeping perspective we do need to be realistic in the current times, there could be some slower pay customers that exist out in the marketplace and Jean and I watch this on a daily basis. So, we track this very carefully by carrier.
We do have one larger Latin American account that is renegotiating some loan agreements that you are all well aware of. We have seen this before. We fully believe a full receipt of their billings but clearly we thought that it was prudent to include the kind of cautionary language in our press release and in our Q.
Brett Feldman - Barclays Capital
Okay. Thanks for that. And then just a second one on the fundamental side, the CTIA Conference it was a lot of talk about what is going on with 4G. Could you maybe give us a little color about what is actually happening at the site level and are there significant differences in the progress we are seeing with the WiMAX operators versus some of the LTE operators?
Sure Brett. It is Jim. There are some announced trials by Verizon specifically for LTE. We are working with their local teams and a couple of markets to scope that out, plan for some site augmentations to accommodate those and we are working broader agreements for the full rollout of LTE with at least one customer right now.
On the Clearwire side which is the WiMAX technology to 4G, we have been working with Clearwire for years on their previous technology release. We will continue work with them now on the mobile release with the joint venture between Clearwire and Sprint now fully consummated and funded. That planning is in full swing. We were working closely with teams across the country on the initial launch markets for the new clear product and we are well on our way towards collaborating with them for quite a number of applications this year.
Having said that we still not change our guidance based on Clearwire potential business specifically at this time because most is going to happen in the second half of the year and as I said before we want to get actual commencement dates and site locations and all of that rolled into our forecasting processes to see if we can make any adjustments. We have enough data to do that.
So, I think on the LTE and the WiMAX side, 4G is starting to get traction, real traction in the field. If you will, but it will be 2010 and 2011 before it really impacts the Tower industry in material way.
Brett Feldman - Barclays Capital
Are you at the point where you know what an LTE configuration would look like at the site, whether it is going require almost an entirely full new lease or if it is mostly going to be augmentation to existing leases?
We do not have the specs yet because our customers are certainly on the LTE side of it, trialing different setups, antenna arrangements, sizes, etc. My expectation is that it will be an augmentation to start out with just like most technology upgrades start out and then as the bandwidth and requirements of capacity increase of the newer, faster, more exciting data product then you are going to have self split this time goes on.
So, we do not have the specific specifications quite yet from the carriers on the LTE side but expect in general that is how the rollouts will go like we have seen them before with UMTS and other technologies.
For the WiMAX setups, they are lighter antennas. They are lighter cabling and fewer antennas to start with as these are launching businesses in new markets, but we anticipate as time goes on that those arrays are going to be nearly as robust as full ups of wireless carrier arrays today and it will just involve to that over time.
Your next question comes from the line of Jason Armstrong - Goldman Sachs.
Jason Armstrong - Goldman Sachs
Maybe a couple of questions, first on the FX impact and the results, you sort have been sitting at this $395 million level for site rental revenues for three quarters now which presumably FX is sort of weighing down the underlying trends in the business.
As we look forward here, it seems like looking forward the FX pressure starts to ease in the Q2 and actually could be tailwind for you. So, as we step back here, could the Q2 performance could we actually see finally pretty decent sequential uptick in revenues that sort of what you would expect here given what you talk about?
And then maybe second question on the balance sheet for Tom, you said near terms sort of below the four to six time targets. Have you approached the business, as a new CFO obviously you can sort of start from fresh air, your world I guess at Verizon was investment grade; you have got a path here towards investment grade if you want it. Is that a relevant discussion and maybe you can sort of introduce maybe a broader balance sheet framework as you would look at it in the discussion? Thanks.
Thanks Jason. It is nice to hear from you. First of all, with regards to the FX it is interesting when you take a look at the business model of American Tower, a boat load of revenues are really in place on January 1.
So, when you start to take a look at some of the FX exposure that you may have throughout the year, its really kind of round the edges and some of the FX we have talked about, we stated kind of current levels that could be $20 million and we have a range of revenues that are out there.
But I think even if you look at the first quarter and if you had assumed or if we had realized the actual peso and Brazil currency rates that we had on our outlook it would have been like a couple million dollar delta.
So, I do not expect the FX to be kind of significantly moving around our forecast or second quarter results simply because we have such a big piece that is already coming in the year and it relatively speaking our international business represents a relatively small piece of the total pie. Even in Mexico, much of our business down there is dollar denominated and matter of fact about 50% of it.
So, that would even minimize the impact even further.
I got to add one thing to that Jason and that is again if you look at what we are calling our core business growth for the 10% top line that we are seeing. I think you have correctly identified that there is a sort of a masking effect with these FX changes quarter-to-quarter and I would just suggest go back to those core numbers that we have started to provide I think two quarters ago, just see you all the consistent growth in the actual business over time as these accounting effects kind of wash in. And wash out and then you can go and predict based on your own assumption of foreign exchange how that is going to either continue to burden or maybe turbo charge the reported numbers in each of the next coming couple of quarters.
Jason, the second question on the balance sheet, we are taking a hard look candidly at the balance sheet. I mean candidly right now we trade at really investment grade kinds of levels if you look at that kind of our bonds are floating. If you look at the covenant packages in our most recent notes out there, they really are kind of investment grade types of notes.
My sense is that we are not far away from being investment grade. Jim and I are looking very closely at this in terms of what we need to do or how we should be thinking about that. So, time will tell on that one but I would say that candidly right now I would consider our trading levels at investment grade levels.
Jason Armstrong - Goldman Sachs
And Tom if you just step back, how relevant is it to you to target investment grade or is this, hey if the right opportunity surfaces with the old framework of four to six is still absolutely what we adhere to?
It can be. Yes, we continue to kind of differentiate our self in the entire sector, telecom sector. Investment grade is something that I hold very near and dear candidly and so I am encouraged by where we are trading, how we look, how close we are, the kind of liquidity we have in the balance sheet. I think the management team here has done an outstanding job in terms of getting to the position that we are now.
You look at the kind of assets that we are investing in. Out of the gate, we are already exceeding our wack which is really nice position to be in.
So, given the kind of cash flow that we are generating, I do not think we are far away from that if at all.
Your next question comes from the line of Jonathan Schildkraut - Jefferies & Co.
Otto Bonman - Jefferies & Co.
Hi James, this is Otto Bonman for Jonathan. Just had a couple of questions about the international market, in terms of Xcel Telecom, what key relationships do they have with the major carriers? Do they have relationships to all the major carriers in India? Or are there special relationships with a couple of the bigger carriers?
And then in terms of looking down into Latin American markets, we have seen some commentary from those carriers about some softness in the Mexican market but strength in the Brazilian market. Are those in line with the trends you are seeing and what point you are start thinking about leveraging those carrier relationships to be expanding into new nations down in South America? Thank you.
Sure. On the Xcel side, one of the things you really like about the company was they have master lease agreements and an ongoing business relationships with all of the major carriers that were existing in India and now even some of the new entrants as well. So, the contract and the relationship base of Xcel is extensive and it is something that we think is valuable to us.
In Latin America I think those characterizations are fair that the Mexican wireless market will probably a little bit soft this year. There is a 3G spectrum auction that has been delayed a couple of times. When that auction really hits the street and the carriers know what access to the spectrum hey will have or what the cost will be, things should get very busy in Mexico both in the wireless market itself because new carriers are going to be able to enter with better and faster products and compete.
In addition to that they can open up new territories with some of that spectrum and for the Tower business of course that will be our great times. So, we are looking forward to the spectrum auction in Mexico. Between now and then it will probably a tad slow but we are still gaining business down there.
In Brazil, opposite story as you said the spectrum auctions did occur. There were expansions in a couple of regions by some key carriers, including Sao Paulo and the northeast where we have a significant presence and so we have benefited from that. We are building lots of towers in Brazil to support it and we are getting lots of co-locations. I think your characterization in Brazil was also right.
As far as our additional opportunities down there, you could literally map out where is America Movil, where is NII, where is Telefonica. Those are logical places for us to build adjacent markets to our core markets that we already have in Mexico and Brazil.
Your next question comes from the line of Jonathan Atkin - RBC Capital Markets.
Jonathan Atkin - RBC Capital Markets
A couple of questions, one is on WiMAX. Is it still correct that these leases are usually accompanied by microwave backhaul so when you take the total contribution of a new tenant, it gets up close to a BBE.
And then you gave a total cost for India and for the US kind of on average. What would that looks like in Mexico and Brazil on unit basis? And then finally on LTE in the US, would you characterize the activity as taking place in a handful of select markets or is this happening or being planned on a broader scope at this point? Thank you.
Okay. Let us try to get everything there John. WiMAX leases may or may not include a microwave dish. I think one of the LTE carriers is actually looking hard if not all sites having a wireless microwave setup that some or most will have, same with Clearwire. It is not necessarily a foregone conclusion that every Clearwire location is going to have microwave backhaul. But when they do, of course you are right. There is an additional augmentation cost to that and the lease increase that goes with it.
Now, on the unit costs, I think you are asking about unit cost in Mexico and Brazil for new tower construction, was that the question Jonathan?
Jonathan Atkin - RBC Capital Markets
Okay. Yes, in Mexico, you start looking at $100,000, maybe US$110,000, in Brazil I’d likey lower that to $90,000 to $100,000 for a new tower. And the big differences in construction costs are labor and the timeline and certainly while collar support you need to get through zoning building permitting and other administrative issues like environmental reviews in the US to take more time and energy.
On LTE in the United States, it is so far in specific markets, Clear has actually probably announced to set the markets as they plan to do in 2009 and then another trying to in 2010 and then with Verizon, it has been only two or three trial markets. They hope to get commercial by up to four or five by the end of the year but it will be market-by-market specific in both cases. But, it should be complete by 2010 or 2011, I think that was the Verizon public statement also.
Jonathan Atkin - RBC Capital
On the outdoor DAS, just curious kind of the emphasis that you are putting on that, is that kind of picked up better and you are still sort of looking to expand that incrementally and then we are getting to the point where there is a multiple outdoor DAS providers for markets? That would be my question.
Again, to frame it, outdoor DAS we think is a lot like indoor DAS, a net solution that carriers will move to when the traditional macro site base tower solution may not be available and we want to participate in that so we have secured three, I think, actually four now, projects that we are building on our own and doing with our internal teams. Then, we will also have began to look at this in some of our foreign markets as well, Jonathan, but it is going to be a niche product, a niche solution. About 1% of our revenue today is indoor DAS as we build a business organically that matches that for outdoor DAS, that is one of our objectives and then grow the indoor at the same time. So, I would say, expanding incrementally is probably the best way to characterize it, but in a year or two, we hope it is meaningful.
Jonathan Atkin - RBC Capital
Are you finding any markets where you are really now that you are only provider or is it usually one or two others building out else …?
There is more than one. There are a multiple DAS providers. They tend to be capital constrained on one hand these days depending in some cases, and others are quite small and very local. It is going to vary market by market. There maybe no one available to build besides us. There may be one or two that could. Some of the situations are competitive and some are pre-negotiated with municipality and with the major customer. So, it varies.
Your next question comes from Ric Prentiss - Raymond James.
Ric Prentiss - Raymond James
I got two questions. First, unique opportunity David asked Tom, kind of your first impressions. We do not new guys into the space a lot. A lot of us have been watching the space for a long time. What are your first thoughts coming to the other side of fence? What have you noticed that surprised you? What have you noticed that has kind of made you happy?
Well, I think everything has made me happy. I know watching American tower and tower industry coming from the wireless for kind of a dozen year. So, I am always intrigued by the model and just incredibly intrigued by the margins coming from a kind of traditional carrier sector. The model itself, I think, is even more sound, looking kind of how much revenue is coming in the door. I guess one of the things that waseven more interesting to me and exciting to me was how the businesses run and how much energy and youth is actually in the business and how it is managed. It is managed quite leanly but with the focus in on all of the right issues, there is no bureaucracy, there is no long meeting, it is just all get right down to business and get it done and that candidly is really exciting to me and a little bit eye-opening, I guess.
Ric Prentiss - Raymond James
Okay. Then, peeking back in on some of Jonathan’s comments on Latin America, if Mexico and Brazil are kind of between United State’s cost and Indian cost, I was now looking back at some of Nextel Internationals 10Ks and yours, you guys have bought about 600 towers from them over the last several years. 6, 7, and 8 combined at about 120 grand a towers. Any thoughts that our larger transaction with them might make some sense as you go through your process that you walked us through Jim, given particularly the value arbitrage differential between their trading and your trading, could a win-win transaction be there, would that make Latin America too big maybe in your scheme?
Well, I would consider being a pretty close partnership with Nextel International. We do run a lot of their infrastructure network for them and had an ongoing dialog with them whether another trance would make sense or not. We actually accomplished that about a year ago with them or I think a couple of hundred of towers. So, it is an on-going conversation that we have between partners and when it makes sense for both from financial point of view, you may say something.
We would like to grow in Latin America. In fact, the challenge I gave (inaudible) a couple of years ago was to do that in a fairly robust fashion. He is actually delivering to the timeline that we talked about. So, we would be pleased to add towers from companies like NII or other of our customers down there.
Ric Prentiss - Raymond James
Another finally, quick question; Tom, you are talking about investment grade, and how it is near and dear to your heart. How would it translate into the cost of debt for you guys versus the other tower guys and maybe broadly versus other telecom companies out there? Where do you think you can get your cost down and maybe, are you seeing anything from the bankers currently as far as where cost to that is in the marketplace where you are type of low levered or under four times levered company?
That is a fair question, Ric, and clearly we have enough line of bankers in nevertheless, few weeks talking to us about this. You know, our average cost of debt, I think, in the first quarter was 5.7%, thereabouts. Things are trading quite well. The market, even in the high yield as you have seen, has been quite open over the last several weeks which I think is really a positive reflection on the tower industry and hopefully on the market overall. So, my sense is that we have given kind of where things are trading that potentially, we could even drive down that cost of borrowing, cost of debt and obviously to the extent that we even the lower leverage if that is where in fact we went to, we would have less debt than to actually pay interest on. I think there a couple of interesting elements there. There has been models put in front of me by the bankers in terms of where is, where do we maximize the WAC and all the kinds of transitional ways of looking at where we can maximize the value of the firm. Well, candidly, we are getting quite close, I think, from a capital structure prospective in terms of where we would do that. But overall, where the bonds are trading, yes, I do think that there is an opportunity for us to take down the cost to borrow and I do think that is a way for us to then have more money to be able to invest back into the business.
Your next question comes from Clayton Moran – Benchmark Company.
Clayton Moran – Benchmark Company
Along those same lines, you have referred to the credit situation as the reason for the pullback in the stock buyback but as you are saying, the high yield markets have improved, your debt is trading close par. What are you looking for in terms of the capital markets to possibly restart the stock buyback?
Hey, Clayton, it is Jim. I think if you follow the remarks, I tried to lay it out pretty clearly which is, yes, we are cognizant of credit market space. They got quite four, they starting to improve and we are well aware of where those are heading and as Tom said, we got plenty of briefings and pitches for people that would like to loan us money. The key point is do we need it and what do we need it for. And as I have said a little earlier today, our first priority as it has been for the last 8 years is to grow the asset base. There maybe opportunities to do that now with the current environment that we are in where sellers may, we are not sure, but some may get to the point where they follow our asset placing parameters that we come up with. And when we find that match, we want to be able to act on it and grow the company and grow the business. So, we are holding back on share purchasing out for really both reasons and I would put what I just described as the first reason, we want to preserve our financial strength to add assets at hopefully a favorable moment in time here. And that moment may last a year or two. That does not mean we will keep the share of purchase exactly where it is for that long but we will moderate the share repurchases based on again, what we have got that we have approved on our process and that we have negotiated with the counter party what we think will get done and then reflect that onto cost to capital availabilities as Tom was talking about. So, we would like to add the flexibility to actively grow the business naturally while we dial down the share repurchase the way we have.
Clayton Moran – Benchmark Company
Okay. Thanks. One other question, are you going to give any more details on Excel India? You talked about lower rent per tenant to lower cost. What about the margins, are they similar to what you had seen in other markets? And then also, can you tell us things like what the average tenants are per tower on that portfolio or the length of contract similar to the other markets, are there escalators? Can you give us any more detail?
Yes, Clay, we have not closed that transaction yet. We have fortunate to have recently received the formal government approval, but it will probably be May hopefully, or even June before this gets closed. Once that happens we will pull everything together and then we will decide how we are going to disclose the parameters of that business based on its size and contribution in that company. Again, it is going to be a couple of thousand towers on a base of, I think at that point, it will be 26, 000 and also. We do not even segment out Brazil and Mexico today and with that level of detail and we will figure out how we are going to do that going forward once we close this.
Yes, and I think we have time for one more question.
Your final question comes from Michael Rollins – Citigroup.
Michael Rollins – Citigroup
Just had a couple of questions, just to follow up, I had realized, this is a smaller part of your business but if you can give us anything on the Broadcast Towers side, what is going on trend wise with conversation to HD and how you see that piece of your business moving over the next couple of years. And then, Jim, just going back to the question of M&A and priorities of cash flow, for a few years now the American Towers retained a relatively conservative posture on leverage versus its peers and I think one of your goals over that period of time was to pursue some incremental or transformative M&A to get some excess return in. To date there really has not been anything of size, as in with SpectraSite, can you talk about where your optimism lies in terms of finding those opportunities and maybe, you can give us just some more color as to your feel in terms of maybe something that could be loosening up in the environment, whether it is here in the United States or Latin America or other markets like India? Thanks.
The broadcast business is a niche part of our Company, as you suggested, 5% or 6% of the revenue, diversified customer base from the core which is helpful and good. But it is going to be sort of moderately growing part of the company going forward. There are some puts and takes, yes there are some digital stations and some additional transmitters that I think that will put out for both TV and radio as time goes on but then, there is going to be some analog churn up of traditional TV channels as well. So, I think there will be a mix of some churn and some upside and at the end of the day, the growth will be moderate, not quite as high as wireless but still helpful to the Company going forward.
On the M&A front, I would characterize our leverage position as prudent versus conservative. We have, since 2001, the management team here tried to make sure that we never got ourselves in a box like we have experienced back then and we are going to continue to avoid that box in the future. I think it is prudent and supportable leverages we have talked about and over time, we just hope to perform well, generate lots of cash, find incremental acquisition opportunities that are accretive, like Tom was suggesting and we will have a great company. And then in the process of building that great company, if there is an opportunity for a larger transaction along the lines of the impact the SpectraSite had that was so positive for us. We are going to have, of course, review that. But we cannot bank of something at that nature so we are banking on things that are more manageable, predictable and controllable as we move towards taking the company to the next level. And if there is something transformational that we can uncover that comes to us, we have got the best M&A team in the world, I think, as far as the evaluating tower assets and we will put them right on it.
Michael Rollins – Citigroup
In terms of the four to six times leverage goals that you have had in the past, is that still what investors should be thinking about over time for American Tower?
Michael, the statement we have out there today is what we can reiterate here on this call is that we have a historical leverage target of four to six times. And the capital markets of that time which was sort of the mid 2000s decade, we are going to have to find out where the capital market settle in the upcoming five to 10 year time horizon and then we will rethink what the long range ought to be. But we have not changed it, we have run below it after the reasons Tom and I have talked about and we are going to look at it really hard with some of our advisers and see if there is a merit in living and merit in adjusting.
Ladies and Gentlemen we have reached and end of our Question and Answer session, I would now like to turn the call back over to management for any final remark.
This is Jim. I just like to again, welcome Tom, thank Jean for all the great she has been doing. Our IR Team as well that have put together hopefully a nice new format for you with Tom’s leadership here for our calls and we thank you for joining us and again, appreciate your confidence in the company. Have a great week everybody.
Ladies and Gentlemen, thank you for your participation is today’s American Tower first quarter 2009 Earnings Conference Call. This conference will be available for replay beginning on today, April 29, 2009 at 11:30AM, ET through May 12, 2009 at MN. The dial-in numbers to access the replay are 800-642-1687 domestically or 706-645-9291 internationally. You will need to enter the conference ID number 94670401 in order to access the replay. This concludes today’s call. You may now disconnect.
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