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Consolidated Communications Holdings, Inc. (NASDAQ:CNSL)

UBS 41st Annual Global Media and Communications Conference

December 11, 2013 11:00 a.m. ET

Executives

Bob Currey - CEO

Analysts

Batya Levi - UBS

Batya Levi - UBS

Great. I think we can get started now. I'm Batya Levi with the telecom team at UBS. Our next speaker is Bob Currey, the Chief Executive Officer of Consolidated Communications. I think we’re going to just go straight into Q&A. Bob, thank you so much for joining our conference.

Bob Currey

Thanks for inviting us. It’s glad to be here.

Question-and-Answer Session

Batya Levi - UBS

Great. It’s the same question I asked in every session now sort of like taking a few minutes to set the stage of us in terms of your focus at the company in 2013 and what we can expect from Consolidated in 2014?

Bob Currey

Great place to start. In 2013, three or four prime objectives, the first one being the integration of SureWest. For those of you who know the story, we closed on SureWest a year ago July. And so it was integrating SureWest, getting those synergies which we’ve announced that we achieved a two year number nine months ahead of time; we’re very proud of that. But focused around that, continue to focus of diversifying the revenue stream away from subsidy and more into the broadband and commercial areas, continue improving our service and focusing on the way we deliver our service. And more penetrating existing plant, not doing a lot of greenfield build but focusing on where we’ve already deployed the plant.

And to the second part of that, into 2014, more of the same. We're basically done with the integration with the exception of billing and there's two steps to billing. The first one will complete next month when we covert to a common GUI front-end, and then in the third quarter we’ll complete the backend of billing. So most of the organization is back to their full-time jobs and there is a small nucleus that's using the same PlayBook that we’ve used in the past on the integrations in billing and they're completing that not that it’s a small task but we are confident that that will complete on time and with the expectations of savings that we have built into the plant.

Batya Levi - UBS

Okay, great. So let’s go into a little bit more detail about the SureWest integration. You have mentioned that you're on track with what you wanted to be and you hit the synergy target ahead of the schedule. As you're going through the process do you see some incremental synergies that you could take out of the business, and as you complete the billing cycle I guess that could be another element that could go on?

Bob Currey

Right. The -- well one reason why it was completed ahead of time is that when you get into it regardless of the due diligence you find things that both good and bad that you didn’t expect and why we were able to advance it is some of the consolidations of the call centers and dispatch we were able to complete earlier. They were planned for the second quarter of next year and we were able to do them in the third and fourth quarters of this year. So that’s the primary reason that we're ahead, obviously there is some more synergy coming out of billing when it completes. So and then next year and the following year we will find other things as we go on to common systems and platforms. So we will overachieve, I'm not going to quote a number yet because I don’t know it, but clearly will overachieve on the synergies, and I'd be very disappointed if it wasn’t at least 10% or 15% over of what we have publicly commented on.

Batya Levi - UBS

Okay.

Bob Currey

So, I'm very, very pleased with the organization. This is the fourth one we’ve done and you don’t want to ever get cocky about them but the same PlayBook, same people doing it and they’ve done a great job.

Batya Levi - UBS

Okay. But the billing integration could be tricky. We’ve seen some companies struggling with it, created a lot of disruption. How -- can you talk a little bit more on how you're preparing for it?

Bob Currey

Yes. Well first of all, the same PlayBook. So it’s just dusted off modified a bit. And then it’s the team reporting every other week at my staff meeting on the progress, monitoring all of the key points along the way. It’s also not allowing creep, historically I guess that few of the scars I have and bruises are from you let a project creep, you extend the due dates, and we’re pretty firm on it’s got to be something very, very needed and required for us to make changes along the way. And then it’s just details with the users being involved. This is not consultants, you augment with a few consultants, but it’s the users that are going to end up with screens and reports at the end not being surprised when you actually do the cut; they know exactly what they are going to get, they’ve been involved in it. And then keep projects within a year. Once you start we have a philosophy that we’re going to do it within a year. We don’t extend it, let it go on and on and you meet those dates. And it’s not easy but people sign up and we do it. So I'm pretty confident that we'll do it well.

Batya Levi - UBS

Okay, great. Maybe moving to the -- your fiber build, you're one of the telcos that has the farther reach on the fiber side. Can you just talk a little bit about what you think is the overall addressable markets in fiber and where do you want to take that over the next few years?

Bob Currey

Okay. Well our network today is we have about 200,000 -- we passed 200,000 homes with fiber. We have another roughly 100,000 with HFC, hybrid fiber coax. And then about 400,000 homes where fiber is deep into the plant but the last mile is copper. More the fiber-to-the-home being a FiOS model and the copper being more the AT&T U-verse product. So we aren’t doing any more big overbuilds. We're doing -- it’s a greenfield, it's fiber-to-the-home, so we'll pass and in Texas where the economy has really recovered and get hit as hard as other places, we're starting to see big ranches being developed and so when they're announced we are putting fiber in the ground somewhere 3,000 to 5,000 homes a year right now I would guess.

So it would be big builds as I commented earlier, its more about penetration into the existing homes. But continuing to push fiber deeper into the plant I think not part of your question but somewhat related is I think that’s one of the things that differentiates us from our so-called peer group is that we can get 98% of our addressable market, can get 10 Meg in 80% of the homes we passed can get a minimum of 20 Meg. So we have an opportunity with that kind of the network to not offer higher broadband speeds but also to offer our IPTV product. So not a lot of new overbuilds, some greenfield and then just pushing copper -- fiber deeper into the plant.

Batya Levi - UBS

Okay. And in terms of what the customers are asking for in terms of the speeds, what do you see the sweet spot is? Is there much ask for the 20 Meg plus right now?

Bob Currey

No, let’s break that down into couple of pieces. The -- in rural we're both the rural suburban slightly urban kind of company maybe slightly more suburban now, but in the rural areas it’s a 3 to 8 to 10 Meg really satisfies the bulk, far and away the bulk of the users. More in the suburban and urban it’s 10 to 18 maybe, it’s in that range. Now we are talking about broadband and of course when you're layering on an IPTV product and a voice product our triple-play you need more bandwidth than that. And again it’s in this suburban area, you're needing low 20s to 30 Megs to do the triple-play and in rural America you can do it with 20 easily and provide the IPTV product along with the broadband and the voice.

Batya Levi - UBS

Okay. You have a very comparable network when you compete with the cable.

Bob Currey

Yes.

Batya Levi - UBS

Your cable operators, your broadband penetration has been very consistent with sort of at that 30% level. Do you see an opportunity to increase it higher?

Bob Currey

Yes. Yes, we do. First back to the speeds in the -- where we compete with cable everywhere obviously and of course with the hybrid fiber coax and the fiber passing we can do 50 Meg, we've already rolled out that product, we're about to rollout 100 Meg, there just isn’t much demand for that product at this particular time. I'm sorry. Would you --

Batya Levi - UBS

In terms of the penetration. So --

Bob Currey

Yes, 30% that you quoted. 30% on broadband we have markets that are well over 40% and I’d answer the same thing on the video we're currently penetrated at 20%, 21%, but we have markets in the mid 30s. So that’s why I -- that’s why we’re going to change our focus to further penetrate those markets where you don’t have the CapEx, we'll bring CapEx down over time except for the modem and the set-top box in the home basically the field distribution plant and feeder plant are built. So we’re fortunate there. And as I said, with this 80% of our customer base being able to get 20 Meg, we're well positioned for right now what the customer is asking for.

Batya Levi - UBS

Okay. And what is the value proposition when you compete with cable? Maybe I think SureWest had been doing very well as they were early on building out fiber-to-the-homes. Are there any practices that you pickup from that that you could implement on your legacy markets?

Bob Currey

Yes. In each market it’s a -- even though sometimes it’s the same cable company, some of the offers are different. And it’s mostly in the introductory where the strategy on how you're going to go to market, and we're a little different in each market but basically the pricing strategy is all around bundles. We want you to take a bundle. And I think part of the reason we have the industry leading access line losses as a result of that, bundle part of it is on service. There's a lot of reasons but we're firm believers, we have data to support that the more services you take the stickier.

And in fact, we’ve got a 110,000 triple-play customers, video customers, and 90% or almost 90% of them take the triple-play. So, but the bulk also take a double play which is the broadband. So we do introductories, trying to get you to entice you with pricing to take the video, the triple-play but long ago we were probably one of the first that started selling a la carte. We have some people that just have voice, we had a handful that just have video, but the bulk take at least two if not a three package. So that’s how we go to market against the cable guys.

Batya Levi - UBS

Okay. And so there is really no structural difference why that 20% video penetration could not go up to the broadband level?

Bob Currey

I want you to come to my staff meeting next week and say that same thing, that’s my -- that is my speech constantly. There is absolutely no reason that those penetrations can’t be higher. And to the point you made with any acquisition we found there are lessons in one company that you take to another and vice versa. And you're not always successful at it but you try to take the best from both. You paid a lot of money, you worked hard to put them together, you're crazy if you don’t try to take the best of both.

Batya Levi - UBS

Okay. And then in terms of the video business some of the telcos had that video business, they're not pushing that hard because of the lower profitability of it given ever increasing content cost. How do you balance share gains versus the content drive?

Bob Currey

Well first of all, I would challenge the assumption in the way you asked that question. Some of them don’t offer it because they can’t, their networks are not capable of offering a TV product, so they resell satellite. And we’ve looked at that and, well, because we can offer TV package to a great majority of our customers, we’ve chosen not to sell satellite. We continue to look at it maybe in some of the rural areas where we're never going to build out, but -- so some can’t.

Absolutely content is a challenge, it’s a huge challenge. And we don’t have the scale to buy content like a Comcast or a Time Warner. We buy 80% of our content through the MCPC consortium. So the mid size and smaller cable companies buy from that about 20% we negotiate ourselves. It’s difficult, it’s I think upside, one of the upsides in our business is video profitability, we’ve got to do, we’ve got to do better.

So what are we doing? We're getting better at passing on price increases. Instead in the first few years we didn’t have HD, we didn’t have DVR, we had two movies in our video on-demand, you can watch them all you want, they were only two, now we have a complete competitive product and we no longer apologize for passing on content. We’re also -- we’re not tied to a national rate plan so we monitor we’re getting better at it, I don’t want to deceive you and say we're as good as we could be. But we're getting better at moving stuff off the channel lineup when it’s not being watched in certain markets or moving it to a tier where the customer pays for it. But it’s you're spot on with the question I think everybody has the problem with programming. That said, sports you got to have sports.

Batya Levi - UBS

Right.

Bob Currey

And so no matter what they charge on -- obviously watched how the -- some of the bigger guys have challenged some of those costs and even the smaller ones on retransmission which have been going up at an incredible rate. It’s just one of the challenges we have in that business.

Batya Levi - UBS

Have you ever disclosed what the programming cost on a per subscriber base is?

Bob Currey

No we talk about it that it's over 50% of the ARPU from -- is going, yeah, over 50% of the ARPU is going to programming cost.

Batya Levi - UBS

Programming.

Bob Currey

Yes. And again constantly trying to fight that battle.

Batya Levi - UBS

Okay. And in terms of the annual increases you're seeing on that programming cost, is it mid to high single digits every year?

Bob Currey

It is.

Batya Levi - UBS

Okay.

Bob Currey

It’s been consistently that.

Batya Levi - UBS

Right.

Bob Currey

For some period of time.

Batya Levi - UBS

Right, okay. Now the obligatory Google fiber question.

Bob Currey

Yes.

Batya Levi - UBS

Can you talk a little bit about what you're seeing from Google in the marketplace?

Bob Currey

Yes.

Batya Levi - UBS

And how do you compete with them?

Bob Currey

It’s amazing. They are the darling of the press, whatever, any time they do something, it’s my phone rings off the hook, probably Matt's more than mine. But -- there -- obviously we don’t take them lightly, they can do whatever they want. I don’t think they're going to rebuild America though, they're probably one of the few balance sheets that could, but I don’t see that, I think they're getting all of us to respond.

In the Kansas City market is the first one they announced, they were picked to great fanfare and everything else. We actually overlapped by about 2,500 marketable homes, not customers, I don’t know the customers are probably in the 500 to 1000 range. And we’ve -- like any competitor that offers a new product we’ve seen some of our customers go to them. We’ve had some come back. And we try to understand why? Well they come back, they don’t, they don’t like, they like the triple-play --

Batya Levi - UBS

Right.

Bob Currey

And the pricing, so they come back. We’re fortunate there in Kansas City we have the HFC, hybrid fiber coax and fiber there, so we're very confident in our product. We’ve got a few tweaks we’re making to the platform on the HFC side, but we’re very confident that it’s a market where we’ve got the bandwidth to be able to compete. They don’t offer a voice product, their video offering is not full. And they offer the - I forgot if it’s a 4 Meg, that’s basically free, you pay the $300 upfront and then it’s basically free. And then it jumps to $70 for the 1 Gig and people don’t need the 1 Gig and so they're not going to pay this $70. So again, don’t take it lightly, love the way we're positioned there. But Time Warner and Comcast, any of those guys are also very formidable competitors and so we're treating it.

Batya Levi - UBS

Right.

Bob Currey

I do have to tell a story because the press only talks about all the good things they did last week in all the Google press releases et cetera. So last week they had one where a contractors I guess put five pedestals in the middle of the sidewalk and some -- a woman that runs the representing the disability people in the Kansas City area they can get wheelchairs and stuff from the sidewalk is embarrassing I’d like to tell it publicly because it’s a little embarrassing for Google that you would miss something so obvious is that, but they are formidable. Some of the things that they announced haven’t been built yet, it takes time and they are learning a new business and they’ve shifted some of their attention to Austin and --

Batya Levi

Right.

Bob Currey

And already AT&T is responding in Austin. So maybe that’s the strategy. I don’t know maybe you can tell me what their overall strategy is.

Batya Levi

It seems like the telcos are also using this opportunity to challenge the regulators.

Bob Currey

Yes.

Batya Levi

And maybe there is more opportunity to get around that and maybe build more fiber where it makes economical.

Bob Currey

You're exactly right. We’ve always had the obligation to build everywhere and they haven’t had that obligation. So we’re actually had done a lot of thinking about do we go to market the same way some have already tried that in some of their markets, but clearly to get yourself out from some of the regulatory impediments that an incumbent telco has had historically. Also you probably heard that some of the access that they had to public right to way and into public buildings et cetera we never had that opportunity.

Batya Levi

Right.

Bob Currey

And so --

Batya Levi

Or they upgrade.

Bob Currey

Some of the towns are rethinking that and whether they really want to open that up because clearly they got to give that to everyone, they can’t just signal, get Google and give them that advantage, it’s a little frustrating when you have deployed your own capital and built around those and now they get the advantage of it, but again it is what it is, so move on.

Batya Levi

Right. In terms of the focus on improving broadband penetration, video penetration, how do you think that will impact the overall residential line connection trends in that? I think you've been consistently seeing about the 4% annual decline. Can we see maybe some improvement on that going forward?

Bob Currey

Yes, we don’t report that by market anymore, but we were a low 3% prior to SureWest and while you don’t like losing access lines.

Batya Levi

It’s the lowest among the peer group.

Bob Currey

It’s the lowest yeah and a third of the RBOCs.

Batya Levi

Right.

Bob Currey

Definitely. And when we added SureWest we were in the mid or high 4s, we're now down into the low 4s. And we’ve got one market that keeps that number higher and we’ll do something there. But to your basic question fundamentally I don’t see that changing dramatically up or down, I think there is more momentum to improve it, but we are not talking about quantum leaps of improvement, it would be modest. But we’re not going to -- in some cases because of regulatory or because of the cost you do move that, you do sometimes cannibalize your own product. If somebody is paying me $30 a month for an access line in rural Illinois and never has any trouble I want to keep that customer as long as I can. That’s still a very profitable customer. So we are not vacating that market, that’s still a very profitable area for us and we’d like to keep that as long as we can.

Batya Levi

Okay. I think the consumer segment I’d like to what people typically expect was one of the highlights of the recent results across the group. It’s holding up pretty well, there is some growth in certain areas. How do you view this consumer business in aggregate? Do you think this improvement could continue?

Bob Currey

Yes. I do and again we are in five different markets, they are all had different outcomes from the recession, some as I mentioned Texas recovered nicely, never had the peaks of the valleys and you go to a Houston area today you will see cranes all over, it’s very, very busy. But some markets continue to struggle. California on the residential side is starting to see some recovery, their commercial is still lagging, they’ve got some serious issues there. But again, as I said we are focused on it, we do not want -- there are still upside penetration, some of that is business, but a lot of that is still consumer on the -- in the residential side. But as I said on the overbuild no, we’re going to shift some of that CapEx that access based CapEx to what we are calling a smart build where we’ve got fiber CLEC type fiber or in Texas our 2,500 mile transport network. And it’s the strategy others are using. We’ve been at it now a little over a year, it’s you are passing a lot of commercial, Kansas City, SureWest.

Batya Levi

Right.

Bob Currey

Total focus on res and not on commercial. You are passing it with your fiber, find the anchored tenant in the building, run your lateral in and then sell up and down the building. And that’s more of a focus for us certainly not taken our eye off the residential side, but.

Batya Levi

Right.

Bob Currey

We want to be balanced. And I think go back five years it was a land grab, you are the first to launch triple-play, get it while you can. And we’ve over the last couple of years we’ve more balanced the growth. We are not going just for additional broadband customers or triple-play customers that have to make sense. We’ve tightened credit policies, doesn’t do anything good to get them, and a year later or and tie to some with $60 package and then a year later it’s a $60 increase and they will leave you. That business mile doesn’t make any sense in the maturity stage of where we are in the business today. So it’s a combination of balancing growth with profitability.

Batya Levi

Right. I wanted to ask about since you have a lot of fiber in the network your competitive advantage versus peers in terms of getting more share in the SME business, maybe moving up the lateral. So on the commercial side how was the competitive environment, so it’s I don’t know if you talked about this before, but if you could tell us what do you think your market share is? Is in the small, medium size business?

Bob Currey

Well it varies by market, it’s all over the market, of you take some of the small towns where we definitely have the home-field advantage and play that to the hilt, the market share and repairment is still the most credible source for that small business to make a decision. So we still we enjoy that.

The small and mid size, let me bifurcate that a little bit. Obviously cable has put a lot of focus in that area. Again it’s refreshing your products, it’s bundling, its service, its continually reminding them on the differentiation. So we’re seeing activity there. On the other side outside the ILEC territory -- sort of the CLEC, and we don’t differentiate go to market with the same things and the same sales people. But the big guys have neglected the small and medium size businesses particularly in the Tier-3 kind of town and you can go there and do well.

They haven’t heard from people some of the new products, Metro E, you're hearing everybody talk about it and how you can price that today and be competitive. So we like what we’re seeing, we’re doing more of that outreach outside of the traditional ILEC territory and we’re blessed with the couple of CLECs that surrounds, that surround the old ILEC territory where have some brand recognition and also we haven’t talked about the Verizon Wireless partnerships. But you get into that too and while I don’t like losing access lines to wireless, I got to lose them, I want to lose them to Verizon because I get some back on the other side, back on the partnership side.

Batya Levi

That seems to be a great partnership. Maybe we can touch on that. Can you give us an overview on how they are setup in terms of control, cash flow and I believe you have the first refusal to maintain your ownership there. So --

Bob Currey

That’s correct. Yes, these go back to the early 80s when the FCC allocated Spectrum an A side and a B side to the competitors and the telcos had to agree and split up those partnerships. And so we have -- they're all Verizon which I think is the best network. And the three in Pennsylvania and two in Texas. We own from 3% to 24%. Let me go to the right of first refusal. These are in perpetuity, Verizon has an obligation to distribute the excess free cash. We’ve enjoyed tremendous growth, it’s slowed in 2010 and 2011 when they were building out their LTE and also the launch of the iPhone they were doing some pretty series. We still had growth but it wasn’t the double-digit growth and in over the last 12 months its back up solidly, it’s almost $34 million for us in the last four months and forecasted to grow double-digit over the next couple of years.

So, we’re -- there are nice -- we cash the checks it’s a nice check to get each quarter, we’ve had record quarters each quarter this year, last year the fourth quarter was another record it’s obviously historically the highest and we expected to be the same, so we’re very happy with our relationship. When someone wants to sell and there is only one left with four partners, most of them are down to just three. And so, there is very little opportunity, we had two opportunities in the last five or six years where someone sold. Last year was a family company trying to get ahead of the tax changes at year end, it was a very quick sale, we had to decide and bought it at a great multiple, invested almost $7 million to keep our pro rata share and we’d have taken more if somebody else had declined and do it quickly like that.

And we’re not a wireless player obviously but like everybody else we do backhaul to the towers, we got a nice business there, 780 towers already built, 180 under contract to be built. I think we built 68 -- 65 last quarter, a nice business there. And then on the transport side with the explosion of video on -- and wireless, we enjoy growth there, so well not a wireless player, we per se we do have some -- we do benefit from some of that growth.

Batya Levi

In terms of the wireless backhaul, there is typically a revenue headwind I guess you transition your legacy network I guess to fiber network and then it starts to build up with higher usage. In terms of your model, do we -- had we gone through that, is it growth from here on or is there still a little bit more pressure as you build out that network?

Bob Currey

In wireless?

Batya Levi

In wireless backhaul.

Bob Currey

No, in fact, there is you barely get it built and they’re back asking for additional capacity.

Batya Levi

Okay.

Bob Currey

So, we haven’t seen anything slowdown there and everything you read and if you watch teens these days they’re on them all the time in video I mean on airplanes these days is ridiculous what you see. So, I just think it’s going to continue, you read the same research I had on what people are expecting it to grow and obviously Verizon and AT&T are trying to acquire spectrum as fast as they could --

Batya Levi

Right.

Bob Currey

And we think that explosion just going to continue and we need to -- we’ve pretty well built out almost everything inside our normal you’d call our franchise territory but lot of our growth is outside that territory, now bidding on others maybe in areas where you had a relationship you built for the big guys. And so, maybe there is areas they’re not happy with their provider and we’re winning some of those too so.

Batya Levi

Okay.

Bob Currey

It’s an aggressive, it’s an area we have some focus on because we like that business a lot.

Batya Levi

Okay. On the regulatory side, I believe you have about $29 million of exposure to USS, its frozen now until we get the cost study done. But you have more fiber in the network versus the peers. Do you still believe that there is an opportunity to have that funds for broadband when it becomes available?

Bob Currey

Yes, that’s a great question. And let me give you a little bit of an attitude problem on it, okay. As I said earlier, we’ve built 98% of our passings can 10 Meg, okay. We didn’t neglect those areas we built it and so, I’m not real pleased that the way plan came out, but again I can beat my head against a law and it doesn’t do any good on that. All the rules aren’t known, it was frozen as you point out, it’s about 5% of our revenue, it was a heck of a lot more than that before we did the last two acquisitions and the more we migrate toward commercial and broadband, the better off we are, but it is an issue we have to manage.

Supposedly, it will take effect next July now but even that it probably and some turmoil FCC has a lot of other issues but it’s a concern, we don’t know all the rules yet. There is a auction process where people decline. There is some -- FCC has done some studies about what we might be eligible for as you transition to the Build America Fund. You also have some latitude to raise rates and slicks.

So, it’s something that is a challenge we didn’t need but there is been a transition period, we’ve worked our way to terminating access and I think we’ll manage our way through that. We’ve got enough upsides in our business with growth that we’ll make that work and hopefully we’ll find some opportunities, and the FCC will get a little more reasonable on how they allocate it and maybe some of the reporting requirements because lot of people have turned it down because of -- and if they’ve made improvements so more to come on that, we’ll see.

Batya Levi

Right. Okay. Just one question on the overall margins. There is a shift to lower margin services from the higher margins ones, but you have continuing cost cutting opportunities going on. I think one key element is and you should benefit from that because of the fiber in your network is transitioning to an all IP network and really retiring the old copper base.

Bob Currey

Yeah.

Batya Levi

So can you talk about not really margin guidance for next year but over the longer term how do you see the profitability of the business?

Bob Currey

Yes. Again, I would challenge a couple of things because if you go back 10 years, 12 when we launched our first broadband products, they had little to no margin and today those are great margins in that business. So, and the backhaul business is another example, we just talked about with some pretty nice margins. But there are pressures on the margin. We’re all going to watch what the new FCC Chairman does with the AT&T proposal and make studies and everything else. We capped, oh gosh, probably three or four years ago all of our legacy and everything was IP from then on, so and then the fiber deployment et cetera.

So, we’re moving that way; Metro E great margins in Metro E. And so, I think with the technological advances, back office improvements, scale that we gained with the last couple of acquisitions I think there are ways to your cost cutting comment to offset some of that pressure to keep margins. I’m certainly not saying that our margins are going to be degraded, I still think we have opportunities, we’re at 46%, 47% EBITDA margins that we can do better than that, I’m absolutely convinced.

Batya Levi

Okay, great. I've more questions, but let’s see if there are any questions from the audience.

Bob Currey

We have to get a mic. Yes.

Unidentified Analyst

Given your comment about over half of your ARPUs goes to content, do you think your clients, your customers aware of that split? And as you think they’re confident in the quality of your network, have you considered whether you should be highlighting that well they’re to paying for your service?

Bob Currey

Yes. The latter part was our network and highlighting it and the first one was the content. Yes, as far as content we try to explain to our customers the content and there is enough in the press that lot of people are aware of what’s happening with the contents. We’ve also historically try to also give them something at the same time when we’re passing on there was a rate increases whether it’s in the triple-play for instance. We use to have a 3 Meg, we upgraded it to 6, maybe when you passed on the content. So, you’ve gave them something, online billing, some way to demonstrate that you’re giving them more HD channels or add to your basic channel line-up to do something to demonstrate that they’re getting something for that, but clearly no longer trying to hide the fact that hey these things have to be passed on and even though we’re doing the best we can.

And then as far as highlighting our network, that’s a great point. I do that all the time with our investors and our sales people clearly on the commercial side it’s a strong selling point. I don’t -- on the residential side, we probably don’t because all they care about is a service works and does what it they wanted to do and that you’re there on time when there is a problem et cetera. Such something -- good question, I need to reflect on that a bit as I said we should take advantage of that because we clearly do it whether it’s something like this or when we’re out on the road with the analyst then and talking about because everybody asked what’s the differentiation, why are you different?

And clearly all of our services go over the same network and if you haven’t -- if you starved your basic network of capital you’re not going to be a broadband company, sure as heck are not going to be able to launch a video product. so -- and hopefully technology continues to advance. We sold the core of this company in 1997 because I was convinced that cable had the superior plant never would have guessed to get 30, 35 Meg out on pair copper wires and now they’re getting 100 in a laboratory. So, it’s a -- that technology has certainly changed and made it a different world.

Batya Levi

Any other questions?

Unidentified Analyst

So, you talked a little bit about the PlayBook that you run for your M&A migrations; it’s been a year and a half now with SureWest. What’s next? Is there -- do you see opportunities, do you see are there over builders out there for sale? Would you trend toward more cable plant or would you look on the ILEC side again?

Bob Currey

Great, question. Thank you. All of the above. I wish I had something, I said that most of the organization is back at their full time jobs, doesn’t mean we bored yet or anything like that. But we’re clearly positioned to do something if it were out there. We map to your ILEC question, we’re not going to just go by somebody who is in the voice business, it would have to be -- it have to be the plant that we can do broadband on -- clearly your comment about fiber that would be a real sweet spot. If it happen to have voice with it, all the better, we know that business very well. We’ve widened the net of the things that we would look at. Cable, we made an offer on a cable property before we did SureWest.

But we’ve historically been prudent buyers; we’re not in a situation where we have to do anything. So, we’ll keep the -- we’ll expand the net of what we’ll look at. We’ll look at certainly anything contiguous regardless of size or maybe even in the same state. If we want to a new state it would have to be of some substance. I’m not going to buy 5,000 excess lines or 2,000 miles of fiber in Oklahoma where I have no business. But if it was a -- some substance $80 million or $100 million revenue, $30 million $40 million of EBITDA in a new state, we’d look at, we’d certainly consider something like that. So, I’m rambling there, I hope I got the question, come on back if I missed it. Yes?

Unidentified Analyst

In terms of the taxes, I know you benefited from the accelerated depreciation, I’m not sure if there is a policy in place to extend that for next year, but can you talk about what you expect that to be going forward as well as how that might impact your CapEx spend given that better (inaudible) won’t -- might not be there?

Bob Currey

Yes. Well, the way we built our budgets next year, we’re not counting on any accelerated depreciation, okay, so we built that. I would tell you that prior to, before I get in the specifics on taxes, prior to the SureWest acquisition we were a full tax payer, okay. So, we’ve been there. We inherited some NOLs with SureWest until we paid almost no taxes this year and those will exhaust toward the end of next year. So, hopefully to the previous question, we have an acquisition but we’re not planning on that and it would have a bunch of NOLs but we’re actually not counting on that and planning to be a tax payer. If accelerated depreciation, it probably won’t happen. I think congress is leaving town at least the house tomorrow or Friday, so there is probably not going to be anything if it happens it will be in the first quarter and we take advantage of that if we could.

So, we’re planning to be a full tax payer. So, how do we get there and not get ourselves in the situation that others have been in? Well, last year we spent a $114 million on CapEx, we’ll be close to a $110 million somewhere between $105 million and $110 million this year. And but again no more big over build. We were historically a company that was in the 11%, 12% range on CapEx of revenue. We’re currently just under $600 million of revenue on a run rate. So, if you took the -- if you took -- migrated back to the 12% you’re in the 70s. And so I think over the next number of years you will see us migrate back to that ending that you don’t see some excellent growth opportunities. And currently 65% of our CapEx is success based, a small part is maintenance. So, you clearly have a lot of headroom there.

I think the thrust of your question, I’m going to expand on just a little bit. I would also add the upside in profitability of video, the growth in the wireless backhaul and the Verizon partnerships. The business -- lot of opportunities there to offset and really not impact the growth side of this business. We are -- we’ve -- since we started this thing again in 2013, we’ve said this is not a liquidating trust, we’re going to invest in the business, we’re going to try to keep it right down the middle of the fairway. Obviously, people are invested in us because of the security and predictability of the dividend and that is still paramount to what we do. And so, as we work our way through that and the challenges of the regulatory and becoming a full tax payer, we’re pretty confident again back to the network question that we’ve invested, we don’t have that in front of us where we can’t expand and grow without extending a ton of new CapEx.

Batya Levi

Okay. Great. I think we ran out of time. Thank you, so much for your comments. Thanks.

Bob Currey

Thank you. And thanks for the questions and thanks for attending today. Very much appreciated. Very good.

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Source: Consolidated Communications Holdings' CEO Presents at UBS 41st Annual Global Media and Communications Conference (Transcript)

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