Windstream Corporation (NASDAQ:WIN)
Barclays High Yield Bond and Syndicated Loan Conference
May 21, 2013 3:45 p.m. ET
Bob Gunderman - SVP of Financial Planning and Treasury
Andrew Finkelstein - Barclays Capital
Andrew Finkelstein - Barclays Capital
Hi good afternoon everybody. Welcome back. Andrew Finkelstein, a telecom analyst at Barclays. I am very happy to have with us Windstream, one of the wireline players in the industry. With us from the company today is Bob Gunderman, SVP of Financial Planning and Treasury. With that, I’m going to hand over to Bob.
Thank you everyone. Good to be with you here today. Let’s start here with referencing our safe harbor statement. That’s also available on our investor relations website for your reference. Wanted to get start today talking about Windstream, kind of where we have been and where we are today. Many of you know our stories for the past seven years. We have been under our transformation.
In 2006 when we became a standalone public company, we were focused on rural residential customers. We had declining revenue streams within rural residential base, and we were very much a regional focused company. And at that time we more lightly focused on business sales. And knowing the organic trajectory of the business at that time, being focused on rural residential, we knew that we wanted to transform the business to get us to a point where we think we can get stable and sustained growth in our revenues and cash flows.
So where we sit today in 2013 and looking forward from here, we believe we’ve successfully repositioned the business in growth segments. That has allowed us to stabilize our revenue stream through a number of strategic acquisitions over the last several years, we’ve also been able to gain a national footprint, has given us a scale and capital efficiency (ph) at the national level, helping that with a strong business focus, with really the advanced capabilities on enterprise products that we knew we think we’re well positioned to continue going forward. We have differentiated somewhat from our peer group and the way we go to market with our capital efficient go to market strategy and that’s a very important distinction for us as we continue to drive very efficient cash flow models.
Our strategy, straightforward and simple, we want to accelerate our revenue growth opportunities and the mix shift that we have undergone in the last seven years to move more from consumer to enterprise has helped us to get a more stable revenue stream. At the same time we have been able to navigate that revenue transition with a stable margin picture and really stay focused on optimizing our cost structure. And in the past couple of years we’ve certainly gone through an investment period and taking advantage of some strategic growth opportunities for capital expenditures to drive significant positive expansion into our network. All these goals are producing well to produce stable and sustainable free cash flow.
On this slide, I will give you a reference of 2006 versus today, how we look in terms of revenues. At that time we were about $3 billion company, today we are just over double that size of $6.1 billion. Just as important as the mix of revenues that we now have today, in 2006 we were very much focused on consumer. So our business and broadband, different broadband does include consumer broadband, 38% of our revenue mix was 22 for those revenue streams. Today that number increased to 71%. The reason why it is so important because all these are revenues that are growing and we believe have a long term sustainable growth trajectory through the years.
Our adjusted OIBDA again at $1.7 billion, up to $2.48 billion today, we’ve been able to maintain our recent stable margin through that period. Through some of our recent acquisitions, we have expanded our footprint within 48 states, so that gives us the natural scale and strategic competitive unified space. And our broadband addressability grew 93% which is important in terms of being able to drive broadband service to our consumer customers in many of our rural markets.
We’ve now reached milestone of being 115,000 route miles of fiber. This is important again we advanced our unified strategy and our ability to be competitive in driving these customers on net and drive profitable sales. Through this time period, we’ve consistently paid $1 dividend every single quarter since inception (inaudible). And recently Windstream was named as a Fortune 500 company which is a nice milestone for the company.
On this slide, I want to just emphasize the relative contribution of our revenue streams. In the first quarter, we had $1.5 billion of revenues, that was down about 2% from first quarter 2012 but importantly the strategic revenue growth areas of enterprise and consumer broadband was made of 71% of our revenue mix for 2%. That’s been a consistent trend that we have seen in the business and certainly leading the way in terms of revenue mix and shift that we have seen in our business. We do have about 14% of our revenue stilled tied to consumer voice declining as well as wholesale 10% and miles from other revenue streams that are not-bigger (ph).
The revenue mix shifts that we have undergone have been so much significant in the last several years. We’ve done all that with clear focus on maintaining consistent margin. You can see that growth in broadband and business revenues is now 71% of our total revenues, has helped to offset some of the declines in our consumer voice and wholesale revenues which are about 24% of those revenues.
The next slide, just a representation of the pro forma view of our FX three year, it shows that we certainly maintained margin within the 38% to 40% throughout the period that we’ve gone the shifts in revenue.
Windstream’s business in 2013 is expected to generate between $870 million and $960 million in adjusted free cash flow and we expect our dividend payout ratio to be about 61% to 68% this year. So a good indication about the strong cash flow generating capabilities of the business. As a reminder, our business has a seasonal cash use that we incurred in the first quarter specifically on working capital. As was evidenced in 2012 as the year played out working capital did not become a significant use for the company but hope this is the case this year. We also took advantage in the first quarter of some opportunistic financing opportunities and that drove debt extinguishment costs really from an NPV standpoint, PAET 8 standpoint we took out 8 7/8 notes on our debt portfolio and placed that with a 6 3/8 coupon and specifically our 3 million we have on the debt extinguishment costs.
Highlight the key strengths that we are leveraging in the business today, certainly the national footprint and advanced solutions that we learned so far both organically and through some of our strategic acquisitions, it’s important for us. We believe that the focus of the business into strategic growth areas is important, it’s going to be an important driver of our sustained revenue streams and stable and growing cash flows over the long term. All on the way our disciplined expense management and we’ve worked through this transition, has been core to our success, future success. And our model working capital efficient delivery model has certainly helped us to maintain a strong stable free cash flow.
This slide shows just a footprint picture of a map, certainly the present picture right, we have 48 states that we serve, 86 are at the top metropolitan areas today. We have national IP backbone that works with the large transport network that’s complementary to that 115,000 route miles fiber. As we sit today, we have 23 data centers. Before the end of 2013 that number will grow by four as we continue to add to our data center capabilities and capitalize on what’s been a very strong demand area of our business. Our broadband addressability is 93% which brings us to the chance to bring broadband services to many fortunes of our network.
Here is just the representation of some of the solutions that we do offer for our business customers, leading left to right here, on our network, we certainly offer managed router, managed security, advanced application services, the managed PBX, hosted PBX, IP simple are many of the solutions that many of our business customers demand today. The data center and managed services piece of our business is very – is growing, top line is growing at roughly 15% to 20% on an annualized basis, and a nice complement for us that we leverage with a telecom infrastructure and Windstream level combine the network, data center managed services, obviously nice revenue synergies for us.
On the small business side, we’ve been able to differentiate our small business customers we are offering to as for them by bundling up – bundling services around our core products of broadband and voice. For example, we can bring to their web hosting services, premium tech support, internet security and online data backup. We obviously have the benefit of adding more revenues and enhancing margin growth probably for small business customers and also make so much secured (inaudible) versus our competition.
The market that we are targeting today is really mid-market. While we certainly have a good number of small business customers and have some success in large enterprise, we have been able to find the most successes in that mid-market customer segment. Our large, our tagline of smart solutions, personalized service is presenting well in the first level and we have been able to do take shares from some of the largest companies in the market. We have done that offering, this solution for eight service and integrated sales approach that emphasizes our product experts such as sales engineers and data center and equipment specialists. High level of service and enterprises is stable, certainly we see a lot of instance for this, the (inaudible). Our dedicated reps put in the call center environment we’re very focused on making sure that our customer need to (inaudible).
On this slide, this is a picture of how we are driving incremental business services ARPU, you can see that really for the several quarters we’ve consistently been able to get a greater and greater wallet share of the customers that we have there. Year over year changes there have been anywhere from 6% to 8%. We have been doing that by building the top set of services around in today’s customer relationships, and again in addition to the obvious benefits of higher revenue, better margin it also increased again with long term (inaudible). Currently the network sales support to solutions but many times we’re also able to offer around the data center managed services and then also lot of equipment sales offering on top of that overall solution.
On the consumer front, our high broadband penetration is a great opportunity for us. In the first quarter of ’13 we did grow consumer broadband revenues by 5%. This is despite the fact that we have a very high penetration level of our primary residential and voice customers 71%. Those are the strategies of Windstream in the consumer business because of the high penetration level is very much dependent upon our ability to grow relatively existing customer base (inaudible) of our customers and also this again is something like a previously the set top box and --
We do, however, have some incremental growth opportunities in front of us as we complete let’s say broadband stimulus expansion initiatives. There is lot of government subsidies to bring broadband service in favourable markets. Once we complete those projects in late 2013 and early ’14 we will have 75,000 adjustable households to go and sell to that currently today have really no broadband solution.
Our capital efficient go to market strategy at this point our growth story. When you look at the mix of assets that Windstream has this brings there and deliver the services to our customers. We do this in a way that we believe that optimizes our capital expenditures, again our investment thesis, it is important that we deliver the services in the most capital efficient and operating expense efficient way. If you think about the mix of our assets today we certainly manage a robust ILEC business network. CLEC business that has at least should give us in the last mile connectivity through customers. We own and operate the middle mile into the core of our network leasing the last mile with some of our larger and efficient partners and still we are able to bring to bear with the combination of all the business we have been able to put together, we are able to do that in a very efficient manner. Cost structure there, we have been able to see the guarantee over time it’s been a very quartile success.
Additionally have clearly a robust fiber network that we are managing into our 115,000 fiber route miles today and that’s our business in so many ways in many of the four segments that we’re operating today. We always look for ways to expand that on success based expansion, by that I mean contracting with new customers to fund the CapEx expansion projects.
Our data centers, today we have 23, the models that we are using to bring those services, there is a mix of growing data centers with CapEx and cash flow from operations or recently using wholesale services that are available in certain of our markets to take advantage of a wholesale REIT models of the capital structure, and another way for us to bring type of services to market in a very capital efficient way for our customers’ needs. And certainly on the consumer network great quarter as well, the 93% broadband addressability, we have lot of network available, we have competitive speeds in many of our markets and we are leveraging our DISH relationship for video, differentiation point to some of our peer group who have chosen to go more towards capital intensive occupancy model.
One of the just highlights for you all, that we have in an CapEx intensive period we had some unique opportunities for the last couple of years to take advantage of winning fiber to the tower projects, capitalizing on the wireless, it’s pretty high in the last couple of years, support to use the capital needs about the network. Additionally the fiber built cash flow on broadband continually, projects that are aimed at consumer broadband adjusted days also elevated our CapEx and in this chart what we are illustrating is the fiber to the tower and stimulus CapEx attracts overall for the last eight quarters or so and then just a representation of our recurring CapEx which is addition of every other CapEx that we have in the business. This is maintenance CapEx as well as all other associated capital initiatives on the expansion opportunities.
Important thing to take away from this slide is Windstream is operated within 11 to 13% CapEx range really from the last 8 to 12 quarters and still has been able to drive consistent revenue momentum in enterprise and consumers. Really the CapEx intensity over the last year and a half to two years essentially has been capped for existing projects and broadband stimulus and (inaudible). Most of these projects has stepped up by the first half of this year and present by 2014 we see another step down on CapEx even from 2013. As a reminder, we have a three period CapEx intensity for 2012 with over $1 billion, our guidance for this year has been to bring this down to couple of hundred million dollars (inaudible).
Our strategy in 2013, several priorities for us, invest in the network to provide a platform for continued success, it’s very important for us recurring CapEx investments that we are making has sustained the revenue growth, we complete the fiber to the tower and stimulus investments for this year.
And in the business channel we are making some forward investments, we believe that will have a good chance to drive increased revenue and profitability. That’s putting four new data centers that will expand up four years out, and also decide to add – increase our business sales distribution but we found in certain of our markets, the opportunities in front of us is more robust and we are front staffing and address. We are doing this – really second quarter and early third quarter ramping up to about 100 incremental inside sales reps.
Also important for us this year and early next is simplifying our IT systems infrastructure. You all know there is a specific acquisition that was on in late 2011, now 2012 we completed most of all the corporate integration steps but the next really significant integration steps ahead of us is to complete the billing conversions. We are going to accomplish all that between now and the year 2014, between that same time period we will also look for opportunities to improve the back office infrastructure about the business.
And certainly we are focused on reducing leverage and improving the balance sheet, in early 2013 first quarter we had some significant refinancing activities, where we termed some maturities and improved our overall cost structure and improved cash earnings. (inaudible).
On the Capital growth initiatives, we mentioned the three of these on the headline slide, that’s important to us in a very nice overall business. Fiber expansion is success based capital initiatives are what we do every single day, every time you need the customers. Additionally, we always are focused on increasing our broadband fees, capacity within our consume broadband network, just make sure we are competitively reasonable, expanding our visibility where we can. (inaudible).
Investment in the business channel will come in the form of the data centers and our sales services, all these with the goal of increasing revenue and profitability on those new clients.
Just probably a little bit more detail around the systems integration, really ongoing certainly the PAETEC billing system integration project and success, it looks like we will complete that between now and 2013 but also as I mentioned earlier the improvement in the enterprise systems, improve back-office and provisioning systems.
Just a few points about our balance sheet, we have improved that over the past couple of quarters. In the first quarter we did refinance certain amount of debt with the opportunity to extend out some of our term loan maturities from August of 2013 through August 2016. At the same time we were opportunistic, went to market to refinance outstanding notes, there was $26 million in value there. (inaudible).
As we look at what we have ahead of us here, we have an $800 million maturity in August, our stated goal there is to use roughly couple hundred million dollars of our free cash flow from operation this year and the balance of that we will put on to our revolver, efficient way for us to collectively pay down debt. And the reason why we are looking to do that is you can see in this chart, we really have nothing left to pay off in the next several years, 2014, bank debt due in 2016. Our next real maturity year is 2017. So we can use the revolver in an efficient way to use roughly couple of hundred million dollars of cash flows after the dividend payments to pay down debt is a very efficient way.
This next slide is a review of our current guidance, our 2013 guidance of revenues negative 2% to 1%, our adjusted OIBDA range is negative 3% to 1% growth and our adjusted free cash flow 13% to 25% versus 2012. Importantly our CapEx guidance for this year is $800 million to $850 million which is down $200 million from 2012. All that together with the payout ratio of 61% to 68%.
In summary, I mentioned in the commentary of significant transformation in the past seven years, we are certainly focused on changing the mix of our revenues, from business that we are focused on customer, residential broadband and voice, we are now focused on enterprise and consumer broadband and the reason why we have taken that for certainly is because of the growth trajectory that we expect in the (inaudible). We have been able to almost 71% of those revenue streams into the categories and as you look at ahead in 2013, we are looking to grow both revenue and free cash flow generation of the business. We are doing that while leveraging our national footprint of our advanced capabilities and couple of cost discipline and capital efficient delivery model. All that just to build to a robust sustainable free cash flow on paying our dividend and existing debt.
That’s our prepared remarks. I will be happy to take any questions.
Can you talk about your (inaudible)
Great question, thank you. The data center expansions were as much about future opportunities and markets where we have been – in certain of our markets today certainly Charlotte we have a good presence, have a large area where we have the most history (inaudible) dating back to our acquisition two years ago. So those – other things we are adding there, just sort of natural evolution to the market that we needed to bring more capacity there because of sales capacity today. In Chicago and Nashville, both locations where we didn’t have a robust data center presence we selected both locations for a number of reasons but most importantly they are good markets for us, we have good network presence and we use the opportunity, the customers that we do have in the cost base there have been – that’s a great reason to bring to market these facilities. We published externally a lot of our detail data center statistics. More of the same in Riley and Charlotte (inaudible).
Our model today is roughly about half and half and so again we are very mindful about expansion opportunities we have, we really look at everyone on a case by case basis. I would say when we started building data centers, we were just doing network, building our own data centers. What we found is in some of the markets that we were looking to go to today, because of the REIT models that have made more space available at attractive rates with more open mind about releasing them for land and facilities from those providers and then building facilities if you will (inaudible).
The first comment I would make is during the transition we have been able to (inaudible). Now certainly we have seen some erosion in our consumer voice as well as some of the wholesale revenue transition we are now going through. I would remind everybody we are now in year two of the inter period compensation and – so in July of 2012 we took the first step on taking access rates, network access rates from interstate down to intrastate and in the second half of that July of 2013, there have been headwinds as part of the topline and margin related to both of those outcomes. We do think that the risk of business on the terms (inaudible) it’s when we have done that and still maintaining margins. So as we look ahead we see some of those headwinds sort of being behind us for us our margin, when we get through 2013 in particular nothing standard of our margin – the steps that we will have on the – the ability to deliver those services. And some of the IT systems company simplification steps we are looking to take and the implementation steps we are looking to take, we believe that that will also aid us in giving (inaudible) grow robustly and --
So one of the things we talked about earlier in this presentation is bring CapEx in terms of the business line. Windstream has consistently operated over (inaudible) and do that same time we were able to generate enterprise revenue growth of somewhere between 2 and 3% and better than that. So financial inflation will be done that in a pre-unique economy, have a way to sacrifice some growth on the enterprise front or foregoing investments in organization fees (inaudible), elevated level. There is a definite correlation between CapEx and revenue in telecom and our view has always been relatively turn basis we find that we can bring capital projects to bear that have a great cash flow return and we are going to do it, it’s how we manage that business and so far we have not seen an impression of being able to satisfy those objectives.
It’s a good question. This is reminder to everyone our stated leverage goals to get to 3 to 4 times revenues. And those goals are – that’s the level of leverage that we were fully able to sort of through the cash position period over the last three years. We took leverage of that to that level and we thought it was important in order to do acquisition, so far we had a stronger business for the longer term. As we sit today we also recognize that our investors and shareholders, some of that we look at that as an important area to focus on. So we got absolutely grow to repay debt this year, we expect to pay around $300 million of debt, we use our excess free cash flow to pay the dividend to do that. I think the important thing to keep in mind in terms of how fast we get there, might be you just think about the health of the business and our ability to sustain the leverage that we have, and so much about our ability to grow over quickly will come from our ability to see flatten and type of growth into that.
So a couple of flattening and growth in EBITDA with a couple of hundred million dollars, the excess free cash flow prepayment of debt, you can see to the modelling that leverage can be increased pretty significantly over the next term. So that’s our focus. We like now to do returns with some of our investors (inaudible).
Andrew Finkelstein - Barclays Capital
Thank you everyone for your interest in Windstream.
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