Consolidated Communications' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Consolidated Communications Holdings, Inc. (NASDAQ:CNSL)

Q3 2013 Earnings Conference Call

November 07, 2013 11:00 a.m. ET

Executives

Matt Smith – Treasurer and VP of Finance

Robert J. Currey – President, CEO and Director

Steven L. Childers – SVP & CFO

C. Robert Udell Jr. – SVP & COO

Analysts

Jennifer Fritzsche – Wells Fargo

Barry Sine – Drexel Hamilton

Alex Sklar – Raymond James

Operator

Good day ladies and gentlemen, and welcome to your Consolidated Communications Holdings Incorporated Third Quarter 2013 Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions) As a reminder, today’s conference is being recorded. I would like to introduce your host for this conference call, Mr. Matt Smith, you may begin sir.

Matt Smith

Thank you, Kevin, and good morning everyone. We appreciate you joining us today for our third quarter 2013 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, 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 Currey, who will provide an overview of our financial and operating results. Steve Childers will then provide a more detailed review of the financials. Bob?

Robert J. Currey

Thanks, Matt, and good morning, everyone. I appreciate you joining us today. I’ll begin with few highlights of the quarter and then turn it over to Steve for more detailed review of our financials. I am pleased to report that we delivered solid operating and financial results for the quarter. We are making great progress on our strategic initiatives and delivering strong cash flows supporting both our growth investments and the dividend for our shareholders.

Our data products are extremely competitive and we continue to provide best in class service. This combination has allowed us to continue to expand our fiber rich network while maximizing the returns on our capital investments. We are successfully diversifying our revenues with strong growth in our commercial carrier and broadband areas while exceeding our synergies from the SureWest acquisition. The business is performing well and I am confident in the future.

Now, let me get into some of the specifics for the quarter. Revenue was $150.8 million which was flat compared to the same quarter of last year. On a year-to-date basis, revenues increased by $1.7 million or four tenths of a percent versus the same period of 2012.

Adjusted EBITDA was $71.2 million for the quarter representing an increase of $1.3 million or 2% over the third quarter of last year. And on a year-to-date basis, adjusted EBITDA has increased by $18.7 million or 9.4% versus the first nine months of 2012.

These results produced another solid dividend payout ratio of 69%. The increases in both revenue and adjusted EBITDA reflect the success we had in driving balanced growth with cost efficient structure.

The success in our revenue growth and diversification strategy can best be seen with 80% of our top line revenue now being derived from business and broadband services. This year stood at just 60% less than 18 months ago. Our focus on the commercial and carrier sales effort is going well and we continue to maintain our competitive position on the residential side.

Metro Ethernet has been a key growth driver for us and we can now offer the service in all of our markets regardless of whether it is over our fiber or copper infrastructure. We increased metro Ethernet revenue by 40% over the third quarter of last year. And with respect to wireless backhaul, we turned up service on 68 new tower sites in the quarter and have over a 180 under contract yet to be installed.

Sales demand for Ethernet services and wireless backhaul in our markets continues to be very strong. We had a solid quarter of broadband growth with 2009 total ads of which 1,210 came from data and 799 from video. We added 2,500 fiber to the home passings in the quarter and most of them came from new Greenfield developments in Texas; a market where we are seeing solid economic growth. Overall, our data and video products continue to be competitive on both price and speed.

With respect to our five Verizon wireless partnerships, we received $8.6 million in cash distributions during the quarter compared to $7.7 in the same period last year. We continue to be very confident in the growth prospect from these partnerships.

And finally, before I turn the call over to Steve, let me provide an update on our integration efforts with SureWest. Overall the process has gone very well. Our final project billing integration is on track with our original plans. The new user interface will complete in the first quarter of 2014 with the rest of the project completing in the third quarter of next year. This project is progressing just like our past integrations and therefore we are confident in another quality implementation.

And with respect to synergies, our original target was to hit $25 million by the end of June in 2014. I am pleased to announce that we have met this target full nine months ahead of schedule. That puts us well ahead of plan and we expect some incremental expense synergies over the next year. I am extremely proud of the hard work that so many of our employees have put in to this effort.

So with those comments, I will now turn the call over to Steve for a more detailed financial review.

Steven L. Childers

Thanks, Bob. Good morning to everyone. I’ll review our third quarter financials and then discuss our 2013 full year guidance. As Bob mentioned, we did produce solid results in the quarter. Revenue is at $150.8 million compared to $151 million for the third quarter of 2012. Increases in our data and video services as well continued growth in our commercial and wireless backhaul areas were offset primarily by declines in network access revenues.

Total operating expenses exclusive of depreciation and amortization were $89.9 million representing a $14.8 improvement over the same period last year. The operating expense reduction was driven by the continuous success and achieving synergies cost savings from SureWest acquisition as well as global transaction related cost. Net interest expense was $20.6 million for both the current quarter and the third quarter of last year. Other income net was $9 million and in the quarter we recognized $8.6 million cash distributions from our Verizon and wireless partnerships. We recognized $7.7 million wireless cash distributions from the third quarter of 2012.

Adjusted net income and earnings per share as presented in our earnings release were $11.8 million and $0.30 respectively. This compares to adjusted net income and earnings per share for the third quarter of last year of $10.6 million and $0.27 respectively. In the quarter we sold our remaining assets of our prison services businesses which have been classified as discontinued operations during the second quarter and we recognized an after tax gain of approximately $1.3 million. The adjusted net income and earnings per share have been adjusted for this gain as well as the transaction and severance related cost and non-cash stock compensation.

Adjusted EBITDA for the quarter was $71.2 million versus $69.9 million for the same period last year. Capital expenditures for the quarter were $28 million with approximately 61% of that being driven by success base projects.

From the liquidity standpoint, we ended the quarter with the full $50 million revolver available to us and $3 million cash on hand. For the quarter, our total net leverage ratio as calculated in our earnings release improved to 4.16x to 1. All leverage and coverage ratios were well within compliance levels of our debt agreements.

Cash available to pay dividend was $22.5 million resulting in a strong dividend payout ratio of 69%. Now let me reiterate our guidance for 2013. First, capital expenditures are still expected to be in the range of $100 million to $110 million. Included in our 2013 guidance is $4 million for non-recurring integration projects.

Cash interest expense is still expected to be in the range of $80 million to $85 million. Cash income taxes are still expected to be in the range of $1 million to $3 million. And with respect to our dividend, our board directors have declared the next quarterly dividend of approximately $0.39 per common share payable on February 1, 2014 to shareholders of record on January 15, 2014.

I will now turn the call back over to Bob for closing remarks.

Robert J. Currey

So finally, before we open it up for questions, I wanted to discuss some organizational changes we implemented based on actions taken in our Board of Directors meeting on Monday of this week. Bob Udell has been promoted to President and Chief Operating Office and has also been elected to the Company's Board of Directors. Bob has done a great job since being named Chief Operating Officer in May of 2011.

I will continue to serve as the Chief Executive Officer and the Board of Directors has also elected me as its Chairman. I am honored that the Board has the faith and trust in me to take on this role. The company has had great success under the leadership of our Board and I am looking forward to continuing that track record of accomplishments into the future.

And lastly, although Dick Lumpkin is stepping down as Chairman, he is remaining on the Board of Directors. The contributions that Dick has made as the founder of this company and to our industry are second to none. And I am thrilled he will continue to serve on the Board and provide his insight to help shape and ensure the ongoing success of our company.

So with that Kevin lets open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jennifer Fritzsche with Wells Fargo.

Jennifer Fritzsche – Wells Fargo

Thank you for taking the question and congratulations to both Bob and Bob on new appointments. I wanted to just ask about cable competition. The continuing thing we have heard in the recent round of calls has been that cable has been specially competitive in the SMB market and it seems like it's only getting worse. I wanted to hear or ask you what your scene on that front and any color would be helpful?

C. Robert Udell

Jennifer, thanks for the question, Bob Udell here. We continue to see varying levels of competition market-by-market, but in general while the activity has increased on the small to medium business customer focus area, our metro Ethernet based offering and now the expansion of that from not only fiber but giving us a copper product what we refer to as type 2 multi location customer type opportunities or just expansions beyond our physical fiber network, it's really enhanced our ability to compete. We are solutions based seller. We have added sales capacity to that channel and while there is some more activity in some of our more urban markets, we have not seen any lack of success in our ability to compete against that.

Jennifer Fritzsche – Wells Fargo

Thank you.

Operator

Our next question comes from Barry Sine with Drexel Hamilton.

Barry Sine – Drexel Hamilton

Hi, gentlemen. First question on video subscriber numbers, maybe you could explain to us what we’re seeing in terms of the trend there. Ads have slowed down a little bit, are you not as aggressive, is cable more aggressive, are you losing share, perhaps over the top and what are your thoughts perhaps on going back and pulling a page out of the old insurance book and extending into a new neighborhood wraps in 2014?

Robert J. Currey

Yes, Barry, with reference to our focus on the consumer opportunities and specifically video, we are continuing to focus on balanced growth in that customer group across all of our markets. So far on the residential side we are currently penetrated at 21% of the homes we pass. We still see upside there with some 30% penetration in our earlier markets on the legacy side and in the fiber set home areas, we are seeing upwards of 40%. We still think that penetration opportunity exists. We have seen some more aggressive promotions on a market-by-market basis and we are being measured in how we respond to that. So in general, while we are not going to invest in 14,000 homes pass like we did in 2012 and we have shifted some of that capital investments towards what we think is better return in the commercial and the carrier areas. We are still going to continue like we have extending the neighborhood where we have reached focusing on strengthening our penetration in areas that are new developments where we in the single digits or low teens as far as our penetration and leveraging the freshening of our product across the board.

For example, we are pushing right now 40 over the top channel options that fits in our TV anywhere product and that's certainly is assisting us and raising our average revenue per customer which is significant focus as well. So we are not falling back from that segment but we are looking to penetrated the markets we already serve deeper before we expand the footprint.

Barry Sine – Drexel Hamilton

What were on the topic of video in the Kansas city market, I guess every call you have to get a question on what's going on with the Google fiber, so I will go ahead and ask you?

Robert J. Currey

Well that's open ended but okay. The Google is interesting to say the least. We now have some customers that have left us to go to Google and some of those have come back. We overlapped them and about 2,500 homes passed in the [Indiscernible] areas. But I would say that our more consultative sales approach and our higher touch in making sense out of technology for our customers and how they use our internet service and what speed they need still seems to win favor in the market. And so while we are going to watch that competitive entry like we would any other competitor, we feel very secure in our product mix, we are continuing to make the enhancements that customers seem to value and I think we will continue to see our market share improve and as any competitor does, raise the bar in the marketplace, we will benefit from the experience we are getting competing against them.

Barry Sine – Drexel Hamilton

Okay that’s great. My last question the subsidy revenue line item you report that showing growth which is little unusual in your sector. Could you remind us what you put in that line item and what is driving the growth and then what is the outlook for that to continue to grow?

Steven L. Childers

Hi, Barry, this is Steve. With respect to subsidies you’re seeing some quarter-over-quarter growth and yet again, remind you that the Federal subsidies have been frozen since 2011 so what you are basically seeing there is that’s where in the short term we are benefiting from the excess recovery arms part of the inter-carrier compensation where we are able to recover part of the client associated with the ongoing rate reductions associated with access. So we are -- so you know you are seeing the reduction in network access or some of the – or we are getting from the arm is actually going up to subsidies. So if you back that out, our subsidies revenue would be basically flat year-over-year.

Barry Sine – Drexel Hamilton

And anything relevant on the state side?

Steven L. Childers

Well, we talked last time about the Texas reduction, the plan going forward for 2014. So we will see a little bit reduction going forward in 2014 and basically with that one we have been able to see – we have actually been able to pass on some local line rate increases looking at the competitive situation or dynamic in each of our markets in Texas. That's kind of why you are seeing local revenue go up now. So we think we will largely be able to offset any kind of decrease with the Texas subsidies going forward.

Barry Sine – Drexel Hamilton

Okay great thank you very much.

Operator

Our next question comes from Alex Sklar with Raymond James.

Alex Sklar – Raymond James

Hi, thanks for taking the question. Two questions, can you talk about the wireless JV of Verizon and the update it does there and the growth of the business or any issues or opportunities stemming from Verizon, Vodafone deals as far as potentially increasing your share of partnership interest? And then with the SureWest integration ahead of plan and it looks like it's wrapping up by next year, can you just give us an update on your appetite for M&A and what assets you specifically be interested in? Thanks.

Robert J. Currey

Yes, with respect to the wireless again we have the five partnerships. We booked $8.7 million in cash distributions for third quarter $24 million for year-to-date. Basically $34 million last 12 months basis, so we think those are producing nicely. We expect to continue to see growth pretty much in line with what Verizon has projected, 10%, 12% going forward. We don’t think there is going to be any direct impact of distributions to us as a result of the Verizon and Vodafone deals more of a parent holding company relationships. Our partnerships are kind of a standalone basis within Verizon and you asked about whether we have the opportunity to increase any of our holdings there. I would remind you that in the fourth quarter of last year in one of our partnerships when one of the partners sold out, we exercise our right of first refusal to stay pro rata with our ownership interest and took up an additional 3% and going forward benefiting as gaining increase contribution based on the additional ownership interest and we would do that if the opportunity came up again.

Steven L. Childers

And Alex, in regard to your M&A question, not much has changed and in spite of my comments and confidence in how well the integration is going and has gone, we remain focused on finalizing and making that a successful integration. At the same time, we are always looking and I would remind you that SureWest wasn’t really Arlec so we would look and continue to look for businesses outside the Arlec space more in the commercial fiber to expand that part of the business, but any deal as we have said all along would have to be accretive, improve our leverage profile and easily integrated in a network that has not been depleted or last gone invested.

Alex Sklar – Raymond James

All right, great, thank you.

Operator

And I am not showing any further questions at this time. Would you like me to repeat the instructions again?

Robert J. Currey

No, that’s fine. Thank you, operator. Let me just summarize and conclude the call. The third quarter marked many successful achievements and continued our path of being a leading communications provider in our markets. We achieved our synergy targets well in advance of the original plan and diversified our revenues and cash flows. Our focus will continue on growing the company and providing value to our shareholders. So I want to thank you again for joining us and for your continued interest and support of consolidated and hopefully we will hear from you next quarter. Have a great day.

Operator

Ladies and gentlemen this does conclude today’s presentation, you may now disconnect and have a wonderful day.

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Consolidated Comms Illinois (CNSL): Q3 EPS of $0.30 beats by $0.09. Revenue of $150.8M beats by $0.58M. (PR)