Windstream Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.27.14 | About: Windstream Holdings, (WIN)

Windstream Holdings, Inc. (NASDAQ:WIN)

Q4 2013 Results Earnings Conference Call

February 27, 2014, 8:30 am ET

Executives

Bob Gunderman - Senior Vice President – Treasurer

Jeff Gardner - President & Chief Executive Officer

Tony Thomas - Chief Financial Officer

Brent Whittington - Chief Operating Officer

Analysts

Frank Louthan - Raymond James

Barry McCarver - Stephens Incorporated

Batya Levi - UBS

Donna Jaegers - DA Davidson

David Barden - Bank of America

Phil Cusick - JPMorgan

Michael Rollins - Citi

Simon Flannery - Morgan Stanley

Operator

Good day, ladies and gentlemen, and welcome to the Windstream Holdings Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this call maybe recorded.

I would now introduce your host for today's conference, Bob Gunderman, Senior Vice President and Treasurer. You may begin.

Bob Gunderman

Good morning, everyone, and thank you for joining Windstream's fourth quarter earnings call. To accompany today's call, we have posted the presentation slides, earnings release and supplemental pro forma results on our Investor Relations website.

I would like to draw your attention to our Safe Harbor statement on Slide 2. Today's discussion will include statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties.

A discussion of factors that may affect future results is contained in Windstream's filings with the SEC, which are available on our website. The presentation also includes certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure are available on the Investor Relations section of our website.

Turning to Slide 3, for the fourth quarter, we reported earnings of $0.20 per share on a GAAP basis, which includes certain one-time items.

First, we recorded a non-cash benefit of $0.13 per share related to the year-end mark-to-market adjustment of our pension plan, resulting primarily from an increase in the discount rate of 3.9% last year to 5% this year.

Our GAAP results also included approximately $0.02 in after tax merger and integration, restructuring and other expense. Excluding these items, our adjusted EPS would have been $0.09 for the fourth quarter. For the full-year, adjusted EPS was $0.40.

During the fourth quarter, we sold the PAETEC software business for approximately $30 million in cash proceeds and classify the result of this business in discontinued operations. In addition, we have adjusted our pro forma supplemental schedules to remove the results of this business for all period shown.

During 2013, this reduced pro forma revenue by $17 million and adjusted OIBDA about $2 million. For the remainder of the call, the quarterly growth rates discussed are presented on a pro forma year-over-year basis unless otherwise noted.

Turning to slide four, participating in our call this morning are Jeff Gardner, Chief Executive Officer, who will discuss our strategic priorities, Tony Thomas, Chief Financial Officer, who will discuss our results and Brent Whittington, Chief Operating Officer, who will be available during the Q&A portion of our call. At the end of the presentation, we will take a few questions.

With that, here is Jeff Gardner.

Jeff Gardner

Thank you, Bob, and good morning, everyone. I am pleased with Windstream's performance during 2013, and with all that was accomplished from a strategic, financial and operational perspective. Today, I will review some of the 2013 highlights and also discuss our key priorities for 2014.

Windstream's management team and board of directors are singularly focused on maximizing value for our shareholders. Windstream has evolved into an innovative, enterprise focused company positioned for growth. Throughout this evolution we continue to generate strong free cash flow and paying attractive dividend, which we believe is the best way to create value for our shareholders. We recently declared our quarterly dividend of $0.25 per share which we have paid consistently for over seven years.

During 2014, we expect to generate between $775 million and $885 million in adjusted free cash flow resulting in a dividend payout ratio of 68% to 78%. This strong free cash flow generation will allow us to invest in growth initiatives, improve the balance sheet and continue to return a significant amount of capital to our shareholders in the form of a dividend.

2013 was a solid year for Windstream and our annual financial results were within the financial guidance ranges provided. The business team made progress on sales and finished the year strong showing sequential revenue growth, while the consumer team continued to grow broadband revenue and deliver steady results. In addition, we improved the cost structure, invested in growth initiatives and improved the balance sheet, all of which better positioned us to deliver value to our shareholders.

Beginning on slide five, let's review some of the key highlights for 2013. First, we grew strategic revenues, which continue to comprise a greater share of our business. As of the fourth quarter, business and broadband represented 73% of our total revenue, and these revenues grew 2% for the full year 2013.

Second, we improved our cost structure, resulting in adjusted OIBDA of $2.3 billion and strong and stable margins of 39%. Our focus on cost management has consistently produced margins in this range even as we have repositioned the business and growth areas and managed the effects of regulatory reform.

Third, we made strategic investments in our network. Roughly two thirds of the capital that we invested during 2013 was directed towards growth initiatives that enhance our capabilities and provide revenue alternatives.

Fourth, we improved our balance sheet, by refinancing almost $4 billion in debt during 2013 enabling us to extend debt maturities and lower cash interest expense. In addition, we reduced our debt by over $200 million.

Fifth, we returned significant capital to our shareholders. During 2013, Windstream generated $891 million in free cash flow of which we returned $594 million or 67% to our shareholders in the form of the dividend.

Looking forward, I am very excited about Windstream's opportunities and our plans for this year and would like to highlight our strategic priorities on slide six. Our first priority is to drive higher business sales through targeted programs designed to improve our sales capabilities and increase productivity, including new sales and enablement tools, enhanced analytics to improve lead generation and an increased focus on the Windstream brand. We also expect that investments we made during 2013 in enterprise growth initiatives, including data center and fiber expansion will create incremental revenue opportunities for in 2014.

Second, we will make significant progress on our project to unify our enterprise systems, which will enable our team to manage all aspects of the customer lifecycle from a single platform, including sales management, provisioning, billing and customer support.

Having a single interface for all enterprise customer functions will streamline and simplify our processes, facilitate best-in-class customer service and allow us to scale the business as we continue to grow. Last, we will continue to invest in strategic capital initiatives to deploy fiber deeper into our network, enhance our broadband infrastructure and capture other success-based opportunities.

We will also begin making new investments in our broadband network, related to the cap one funding, Windstream received, which will allow us to enhance our broadband capabilities in rural markets.

Windstream is focused on being the premier enterprise communications and services provider, with the goal of growing revenue and generating stable, sustainable free cash flow. To achieve that, we continue to improve our enterprise capabilities and invest in growth initiatives to build a strong and competitive organization.

We added some amazing talent during 2013 in many key areas in order to augment our enterprise expertise. I feel more confident than ever in our ability to emerge from our transformation as a growing, profitable company with the right capabilities to succeed in the marketplace. As always, we remain focused on creating and returning value to our shareholders.

With that, let me turn the call over to Tony, who will discuss our financial results.

Tony Thomas

Thanks, Jeff, and good morning, everyone. Beginning on Slide 7, during 2013, Windstream generated total revenues of $6 billion, a decrease of 2.5%. Strategic revenue was $4.3 billion and grew $68 million or 2%.

Over the past several years, strategic revenue has become a much more significant part of our company, increasing from 56% of total revenue 2009 to 73% today. At the same time, the telecom industry has gone through substantial regulatory reform related to intercarrier compensation.

For Windstream, the largest revenue impact from this reform occurred in 2012 and 2013, when intercarrier rate reductions greatest. In 2013 alone, switched access and USF revenues declined $103 million. The future rate step downs are less significant, and consequently, will cause smaller reductions to switched access revenue. In fact, 2014, we expect switched access and USF revenue declines to roughly half of what we experienced in 2013. Combined with a higher concentration of strategic revenue, this moderating decline in intercarrier revenue will advance us toward our goals of revenue growth.

Moving to our fourth quarter results beginning on Slide 8, business service revenue was $920 million, up $3 million. Our business revenue growth rate slowed during the quarter, which was expected it result from the slower start sales early in 2013. Importantly, business revenue has continued to improve sequentially, growing by $4 million quarter-over-quarter. Average business service revenue per customer location grew 8%.

Specifically, data and integrated services grew by 3%, led by sales of IP-based solutions, next-generation data and data center and managed services. The key driver of growth is created from combination of our data center services and integrated communication offerings which build more meaningful and profitable relationships with our customers.

We now have 27 data center locations, providing highly customized and sophisticated services, including cloud, managed hosting and collocation. Data services are one of the fastest-growing revenue streams, with the growth rate in [teens].

Carrier revenue was up 1% related to fiber-to-the-tower installations which were partially offset by lower carrier transport.

Turning to slide nine. In the consumer channel, service revenue was $318 million, down 5%. Declines in voice and long-distance revenue were partially offset by growth in broadband revenue which increased 3%. We continue to see strong demand for faster broadband speeds and vertical services. Today we can offer broadband speeds of 10 to 12 Meg to roughly 52% of addressable lines and 24 Meg service to 17%. During the fourth quarter approximately 65% of new sales purchased faster speeds and 34% took a vertical service. Our consumer strategy is focused on balancing profitability and unit growth.

Our success in selling broadband services over the years has produced leading penetration levels of 72% to primary access lines or roughly 38% of homes passed. This high penetration has enabled us to sell incremental broadband services to our base contributing to broadband ARPU growth of 6%. At the same time, the higher penetration makes incremental customer additions more challenging. However, we see new opportunities for unit growth in 2014 related to the expansion in the Stimulus markets. Wholesale revenues were $143 million, down 15%, primarily due to switched access declines of $23 million resulting from lower intrastate access rates and fewer minutes of use.

Turning to cash expenses on slide 10. Our culture of disciplined cost management has produced consistent adjusted OIBDA margins throughout our revenue transformation. During the fourth quarter total cash expenses were down slightly. Through solid expense management, we realized significant improvements in both cost of services and SG&A throughout 2013. However, these improvements are not apparent in the year-over-year comparisons due to a one-time benefit in the fourth quarter of last year related to the decision to fund our 401(k) contributions stock.

For the fourth quarter, adjusted OIBDA was $576 million, a decrease of 7%. Excluding the one time benefit in 2012 that I just mentioned adjusted OIBDA would have declined 4%. In absolute terms, adjusted OIBDA was in line with our expectations. Sequentially, we achieved adjusted OIBDA growth due to cost structure improvements and margins increased by 30 basis points to 38.6%.

Turning to slide 11. We are efficiently investing in our network for long-term success. During the fourth quarter, we spent $170 million on adjusted capital expenditures. Specifically our ongoing or recurrent CapEx was $134 million and included success-based opportunities, data center expansion and fiber deployment. We expect recurring CapEx to fall within a range of 11% to 13% revenue. In addition, we had roughly $36 million in nonrecurring CapEx related to fiber-to-the-tower projects and our portion of broadband Stimulus investments. We also spent $5 million integration capital during the fourth quarter related to PAETEC network optimization projects and work on our billing system conversion.

For the full- year 2013, we spent $812 million in CapEx enabling us to expand our fiber footprint, which now stands at 118,000 route miles, there are three new data centers, enhanced our broadband network and deployed fiber to over 2,000 towers. To-date we have completed 4,500 towers and have another 400 currently under construction. Going forward, we expect CapEx related to fiber-to-the-tower projects to continue to decrease.

On slide 12, during the fourth quarter we generated adjusted free cash flow of $213 million. For the full-year, Windstream generated adjusted OIBDA of $2.318 billion and adjusted free cash flow of $891 million both within our guidance ranges. We returned $594 million to our shareholders in the form of dividends, resulting in adjusted free cash flow payout ratio of 67%. In addition, free cash flow after dividends, was almost $300 million.

Turning to slide 13. We reduced our debt by over $200 million. Throughout 2013, we made significant improvements to our debt profile, including extending near-term maturities which improved our liquidity position and will lower cash interest by $45 million. We ended the quarter with net leverage of 3.77 times adjusted OIBDA.

Turning to our 2014 expectations on Slide 14, we expect continued growth in business revenue and improving trends in consumer revenue. In addition, as switched access rate step down becomes some less significant wholesale revenue trend should improve from a 16% decline in 2013 to around 10% decline in 2014. With that framework in mind, we expect total revenue to be within a range of a decline 2.5% to an increase of 1% as compared to 2013 total revenue.

In terms of cash expenses, we plan to invest in our business channel where we see opportunities to increase growth and profits. Even with this adjusted OIBDA margins should remain steady around 38%, aided by cost structure improvements and ongoing expense management initiatives. This concludes our recent decision to improve operational efficiency by eliminating 400 positions.

We expect adjusted capital expenditures of $800 million to $850 million. This includes up to $85 million of fiber to tower and stimulus investments, which is a decline of over $100 million versus 2015.

We are seeing increased demand from our wireless partners related to robust growth in data services, creating an opportunity [compete] 400 incremental towers within our ILEC territory that were not in our original plans. We are pleased to proceed with [additional] contracts, which will bring our total fiber to towers to 5,200 at the end of 2014.

Excluding these non-recurring investments capital intensity should be within 11% to 13% of our revenue. Various tax initiatives will enable us to lower our 2014 tax obligations and preserve NOLs for future use. As a result, 2014 cash taxes should be less than $30 million and we anticipate 2015, cash taxes of less than $200 million.

During 2014, we expect adjusted free cash flow of $775 million to $885 million, resulting in a dividend payout ratio range of 68% to 78% for the year. Further, we plan to continue directing excess free cash flow to debt pay down.

Looking to 2015, we expect improving revenue and adjusted OIBDA trends. This combined with reductions in capital spending and cash interest, position us to deliver solid and sustainable free cash flow, even with higher cash taxes.

Importantly, our business model and strategy are designed to create growth opportunities and position Windstream as a market leader in the enterprise space while providing long-term support to our capital allocation strategy, which we believe strikes prudent balance among reinvesting in the company, paying an attractive dividend and reducing debt over time.

Thank you for your time this morning. We will now take a few of your questions. Operator, please review the instructions and open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from, Frank Louthan of Raymond James. Your line is open.

Frank Louthan - Raymond James

Great. Thank you. Looking at the guidance, I appreciate the detail, so the story has been for the last two years that the CapEx has kind of decline as the cash taxes increased, we still expect that trend to be the case to sort of offset the cash tax increase in '15.

Then can you give us an idea on the guidance. The high end of the range, what would have to happen to hit that? It does not seem is likely that business sees a significant acceleration given the economy of your other enterprise focus carriers, but any consumer opportunities where our stimulus revenue that that you expected to come in that might help you to hit that high end of the range. Thanks.

Bob Gunderman

Frank, I will get it started then let Brent maybe talk about our enterprise strategy and Jeff kind of weigh in on the consumer side.

Speaking to the guidance and the CapEx question that you raised, we did expect originally to see capital expenditures throughout more in 2014, but Frank, we have seen incremental demand from our wireless partners in fiber to tower kind of the combination of fiber to tower and our portion of the Broadband Stimulus investments, to see $5 million of investment in 2014. As I noted earlier, that's 400 towers more than we had originally planned if the wireless carriers are pushing out fiber-to-the-tower deeper into our rural markets. Frankly these are than originally anticipated. Those are still very good investments. It's good for us to push fiber deeper into our island territories and we are happy to partner with our wireless friends. Additionally, we have $20 million for capital investments this year, and that was included in CapEx guidance. So when you think about it, you are right.

The CapEx guidance is $100 million to $150 million but it includes the $85 million associated with fiber-to-the-tower and our portion of Broadband Stimulus, but as you noted cash taxes will be less than $30 million and notably you will see a $45 million reduction in cash interest from 2013 to 2014. And longer-term, we still feel good about our CapEx intensity ratio of 11% to 13%. We also feel like there is still significant opportunities to lower cash interest. We still have some very high pieces of debt in our capital structure that we inherited from acquisitions. So we see lots of room in terms of making improvements in both CapEx as well as cash interest and then you layer on top of that increases in adjusted OIBDA then we become really well-positioned to handle the increases in cash taxes and it has just started calling that very consistent with our goal of having sustainable free cash flow for a long period of time.

Specifically to your question about how do we think about guidance in terms of our relative positioning in it, I think you are right. The overachievement occurs to really probably overachievement in both enterprise and consumer and maybe Brent you want to maybe give some thoughts on there?

Brent Whittington

Yes, Frank, a couple things in here. First off, we need to start the sales year much stronger than we did in 2013 on which we are doing a lot of things that I think helps us in a position to do that but there is certainly a wedge at the high end of our guidance. The second component I would tell you that would help us there and that's really true for both enterprise as well as consumer. It is just much better improvements in churn than what we are forecasting already. We continue to make investments specifically in our network much of which caters improving the customer experience, driving improvements in churn. So a real strong start early in the year in churn would be another big enabler that can help us. In terms of (inaudible), those are probably the biggest things that I would mention.

As it pertains maybe to enterprise sales, maybe I will just make a couple of points there. If you look at this year, we got off to a slower start in sales in the first half of the year. We have been pretty upfront about talking about that throughout the year. We did see improvements in the back part of the year, and where that really shows up is that you see the sequential revenue growth, specifically data and integrated voice. And as we head into 2014, the things we are working on and just get on this.

First, our marketing support, and we launched new signing initiatives in February and we are going to be supporting that throughout '14 with more of what I call our focused promotions of our sales capabilities.

And this year is different than last. Our forecast is not really about sales headcount growth, which is a bit different from last year. It is about retention, training and getting more from our base. A big difference than last year. I think those things can really help us in 2014.

Bob Gunderman

Just to add, I am really excited about what we are doing on the marketing side. I think some very innovative things in demand generation to push the high speed data products that we are selling today. Our focus, as Brent said before, as I said in my opening comments, the data center investments that we made last year both in terms of facilities and headcount, we will reap benefits from this year. So we are very pleased with the momentum we have in the enterprise side going into the quarter.

As it relates to consumer, as you know our consumer strategy is focused on balancing profitability and unit growth and we are highly penetrated today. Today, 38% of the homes passed broadband services from Windstream and 72% of our primary access lines are getting our broadband service, which really has enabled us to continue to drive improvements in ARPU. We had nice growth in terms of broadband year-over-year.

Additionally for this year, Frank, to your question, we are expanding our broadband network by roughly 75,000 new homes passed through our Stimulus investments. We will begin some work on the capped projects that we were awarded. Both of these will provide new opportunities for unit growth and revenue growth in 2014. Our consumer business has had solid performance and we believe will maintain stability in this channel going forward. I feel better than I have in a long time about our network. We made a lot of progress on our network this year, we are seeing improvements in our churn as Brent mentioned. That's an important focus in both, the enterprise and the consumer business.

Frank Louthan - Raymond James

Okay. Great. That's very helpful detail. Thank you.

Bob Gunderman

You are welcome.

Operator

Thank you. Our next question comes from Barry McCarver of Stephens Incorporated. Your line is open.

Barry McCarver - Stephens Incorporated

Good morning, guys, and thanks for taking my question. I guess, first off on customer count. Enterprise count was very strong in the fourth quarter, small business down again and seen acceleration, but in terms of that enterprise, you haven't really seen that show up in the revenues in the last couple of quarters if that's accelerated. Can you give us an idea of the sales backlog and is there something in that count that is going to show up in 2014?

Brent Whittington

Barry, this is Brent. I will take that. The SMB trends, I mean, really continue Q4 with what we saw in Q3 and I spoke about that really in the past and as much as anything just our continued focus and CLEC markets on larger enterprise customers from a sales perspective. The sales success we had in the back part of the year is a dropping part that enterprise customer count that you are seeing.

I will tell it does in terms of the financial results a reason for and details that you have seen a sequential improvement in data and integrated services revenue, which was one of the stronger trends we have seen all year in fact over the last [six].

I think that some of focus from a sales perspective and just better result there and churn as well, both of those two combining, so really help the trends that you mentioned in the enterprise side.

Barry McCarver - Stephens Incorporated

Maybe if I can on carrier service revenue I know was up 3.6% for the year, but it was down in 4Q versus 3Q. Kind of what's the outlook there in the near-term couple of quarters? Are we reaching a point with the maturity on towers and we will still see sequential increases in the future?

Brent Whittington

Yes, Barry. Long-term, we feel confident. We are able to grow carrier services. I would tell you, much like 2013, in the first of 2014, there will still be some volatility as we see wireless carriers turning down their older TDM T1 circuitry and turning on their fiber to the tower technology. Also, when they make that transition initially slightly negative revenues, but over time we have already seen this is those customers upgrade to higher bandwidth speeds, so it's generally combination of both of those just how quickly occur, how quickly do the wireless carriers turn down the older technologies and how quickly do they migrate up for 50 megs or 100 megs or even higher speeds and that begins to outpace those declines in those legacy revenues, but feel very good about those investments and I think you have seen we did grow carrier service revenues as stated in 2013 and that's where we see the business being positioned for the long-term.

Barry McCarver - Stephens Incorporated

Okay. Thanks, guys.

Operator

Thank you. Our next question comes from Batya Levi of UBS. Your line is open.

Batya Levi - UBS

Great. Thanks. Just a follow-up on the guidance question, it isn't really wide range for revenues and you mentioned what needs to happen to be at the top end. Just looking at the year-to-date trends in the sales pipeline, how are we going to look in 1Q? Are we sort of in the mid-point and improvements from 4Q trend or did the year start off stronger than you expected?

Then the second question maybe on cash taxes. We are getting a lot of questions on why are they low again this year? Can you give us a little bit more color on how much NOL has been? What were some of the other initiatives? Thanks.

Bob Gunderman

Certainly, Batya. I will build upon, I think the comments that Brent and Jeff made around business consumer with the original comment around that the revenue guidance and a wide range. You are right. 2013 business service revenue grew 1.4%. As Brent mentioned this, we have seen sequential growth in the back half of 2013.

As we do look to 2014, we expect business revenue for the year to grow between 1% and 2% with improving trends in the back half of the year. Those improvements Brent alluded to, it's the new marketing programs, it's the investments in sales enablement that gives us a lot of confidence plus the investments we made in 2013, the data center investments will start to bear more fruit in 2014 as well as the sales force personnel we added in 2013 as they become more tenured.

And longer-term, as we look forward, we do expect that business service revenue growth rate of 2% to 4%. We feel very comfortable with that range, and we know we have the right set of assets to make that happen. And if you just think about revenues and expenses, I would tell you we are very cognizant and you have seen this in our adjusted OIBDA margins. Our costs will mean our revenues. We know how to adjust our cost structure, as revenues go up and down. I feel very confident not holding in our revenues but also in our ability to maintain our adjusted OIBDA margins.

In terms of cash taxes, I will tell you there is nothing extraordinary, Gary. It's simply blocking and tackling around tax planning and we are also the beneficiary of the previous year's bonus depreciation. So we have a higher net operating loss carry forward than what we anticipated exiting 2013. So the result in 2014, we are not going to pay much in the way of Federal cash taxes. It is going to help offset some of the taxes we plan to pay in 2015. So we think it's a great outcome and frankly the funnel is not empty. We continue to evaluate cash tax planning opportunities for 2015 and beyond to help lower the number further.

The other notable point I would make is, our guidance does not include the extension of bonus depreciation which we continue to monitor and watch Washington from a policy perspective and believe it would be beneficial to Windstream and telecom carriers generally in terms of incentivizing capital investments further. But just to be clear that's not included in our capital guidance. If we were to receive bonus depreciation, it would have benefited 2014 at this point to benefit 2015cash taxes.

Batya Levi - UBS

Okay, just one follow-up. What is the bonus depreciation reversal you are expecting in '14?

Bob Gunderman

I think investors as well as analysts talk about bonus depreciation in terms of the reversal, I frankly like to frame it a little bit differently. I think about it how shows up under corporate tax return. The reality is what you have done is you have accelerated depreciation deductions into 2013 and 204 and what you are doing as a result are building up the depreciation deductions back into your run rate over time. So frankly, we will return to a more normalized income tax depreciation deduction as time progresses. And frankly, as we move out of 2014 and 2015 into 2016 those depreciation deductions start to return to a more normalized level on our corporate tax return, which is helpful to lowering our cash taxes longer-term.

Batya Levi - UBS

Okay, so there is not big reversal this year in 2014? It is more spread out?

Bob Gunderman

Yes, there is no, per se, big reversal in 2014 associated with the bonus depreciation.

Batya Levi - UBS

Okay. Thank you.

Operator

Thank you. Our next question comes from Donna Jaegers of DA Davidson. Your line is open.

Donna Jaegers - DA Davidson

Hi guys. Two questions, I guess. Obviously weather has been very erratic this first quarter. I am just curious if that's interfered with your broadband marketing at all on the new home villages turned on?

And then second question. Could you give us a timing update on the integration timeframe, especially the billing cutover? When should we expect that to happen in 2014?

Brent Whittington

Just on the weather, we have had some really horrible around the country, but fortunately from our network perspective, it had very little impact and as it relates to broadband additions, nothing significant there. So I wouldn't expect any unexpected impact there.

The second part of your question was really integration. I will tell you, Donna, we had a couple of key initiatives as part of that project this year, one of which was already completed during the month of February, which was one of the billing conversion we have been targeting successfully this year. We, all at Windstream, are excited to have that behind us successfully. We can check that one off the list. There is another scheduled one for late this year.

So those are the two big milestones. but as Jeff indicated in his remarks, that request that we got that will continue this year and in to 2015 really just assembled by all of our sales, front order entry and customer service facing functions. A lot of that progress will occur as I mentioned from those two milestones in 2014, as well as one more that will linger into 2015.

Jeff Gardner

Obviously don't underestimate the importance of those system conversion. I talked about it in my opening remarks on how important it is to get a single enterprise platform. The conversion that Brent referenced was back to the old McLeod acquisition, very conversion, went extremely well. In just a couple of weeks, we are going to rollout an enterprise-wide customer portal system and we have got another billing system conversion late in the year, so we have got a lot of momentum around that and I think that's going to help us both, from a customer perspective, enable our sales people and also allow us to be much more efficiently and scale this business the way that we want to over the long run.

Operator

Thank you. Our next question comes from David Barden of Bank of America. Your line is open.

David Barden - Bank of America

Hey, guys. Good morning. Thanks for taking the questions. Jeff, maybe a couple for you. Just a follow-up on the bonus tax depreciation stuff, I think, investors are kind of just operating under the assumption that the debt issue at this juncture, but I think it sounds like there is maybe still some hope that it can be resurrected, I think both, at Windstream and maybe at AT&T and a few other places that have been campaigning for, so if you could kind of give us or lay the land out there like if it was going to happen under - how would it happen by which point in time do we come kind of just rule it out.

Then second question would be obviously ever since you guys did the restructuring for a holding company structure, there has been talk about what could Windstream do on the M&A front. What's out there to be done? I guess, on that front, Jeff, could you just talk how active are you in looking around for opportunities that could be out there that you could be deleveraging, could be accretive to your growth and could kind of help position you in the business market more aggressively, just kind of your level of activity on that front would be helpful to understand. Thanks.

Jeff Gardner

Okay. Great. Thanks, David. First, as it relates to bonus depreciation, we remain very focused on that and hopeful. Just to reiterate, we have not planned on any of that as we presented our guidance for 2014. Really, as we talk about bonus depreciation in Washington, we are trying to get people focused along with many other capital-intensive industries on the fact that in the year where it is pretty clear we are not yet comprehensive tax reform done, this bonus depreciation is a nice bridge to get that and that can really help drive the economy.

As it looks today, there is many discussions going on in the Senate and the house around this issue in terms of the general topic of extenders. I think it's likely to happen more later in the year and so it will be something that will happen. It's hard to be precise on the timeframe, but maybe as late as midpoint of the year where they will institute something that would be retroactive and so harder to assess percentages around that, but we keep working it hard. I think it makes a ton of sense from an economic perspective and there's many companies working along with us, both inside telecom and outside.

Your second question was around the holding company and the restructuring and how we are thinking about M&A. We are very active always in terms of looking at opportunities to improve, accelerate our transformation to a growth business, but as you know we have to be disciplined in reviewing our M&A and judge these potential deals based on a few factors.

One, do they expand us geographically, do we add of infrastructure if you think about fiber our data centers and/or expand our capabilities. We have got to pay attention to our leverage. That's very important, but we are looking around with all those things in mind as you know Tony reported our leverage is at 3.77. We are trying to get it down into the 3.4 range over time. So as you mentioned, we are looking for deals that are either leverage neutral or deleveraging their free cash flow accretive and that will drive significant synergies, so I would say we are very active in looking. Just we have more filters than we would have say two years ago.

Importantly, if you look at our standalone business, I feel like we do have a lot of momentum and we do have the capability to get that growth we have been aspiring to with our organic assets.

David Barden - Bank of America

Jeff, if I could just follow-up on that real quick. Would you characterize the environment as target-rich for assets that meet your criteria or are you kind of actively still looking for one or even two type of assets that would meet that criteria, but you are yet to really identify them?

Jeff Gardner

Yes. I think it would be the latter. It's certainly not target-rich. There's a lot out there met, in many cases, those out there don't exactly fit our criteria in terms of leverage or valuation, but there is a lot of activity out there. I would say, as you mentioned, it is harder to find one that fits within our filters, but we are actively looking at everything that makes sense for us.

David Barden - Bank of America

Okay, great. Thanks guys.

Tony Thomas

You are welcome.

Operator

Thank you. Our next question comes from the Phil Cusick of JPMorgan. You line is open.

Phil Cusick - JPMorgan

Hi guys. Thanks. Given the cash flow this year, should we assume that all the excess cash flow is going to go to pay down debt statement? And can you talk about priorities there? You mentioned the potential for refinancing. Can you layout what that is this year and next year for people? Then given where the stock is trading at $12 and change dividend yield, is there any possibility of trimming away at that a little bit? Thanks.

Tony Thomas

Hi Philips, it's Tony and I will get started here. When you think about the cash flow generation, our goal is to redirect excess free cash flows down, as I alluded to in my prepared remarks, to pay down debt. This year, we paid the down over $200 million of debt. We will continue to make progress in paying down more debt in 2014.

Maybe if you could clarify and make sure I understand your second question.

Phil Cusick - JPMorgan

You mentioned a refinancing opportunity. So one, what particular chances of that are there to pay down ultimately? Would you be paying down the street back or is there something more expensive you could target? And then two, what's the refinancing potential this year?

Tony Thomas

Yes. In terms of refinancing potential, as I look at 2013 as a roadmap. We have made a lot of progress in 2013 in terms of extending maturities. The treasury team did a great job in extending maturities but also driving down cash interest by $45 million. I will tell you, the lens in which the treasury team and I think, it is in terms of where is the greatest opportunity to drive cash interest savings, extending maturities, but be mindful of the nickel prices on debt. It is pretty simple math when you do it all and it's dynamic, so it changes. So I think we will be disciplined, but optimistic as we look to 2014 and as I alluded to, we do have some fairly high cost of debt that we inherited from previous acquisitions. So as Windstream looks forward, we don't will see 2014 as the low mark for cash interest. We expect to make significant progress on the cash interest numbers in 2014 as we look forward.

Bob Gunderman

Phil, as it relates to the dividend, Windstream generates significant free cash flow. I talked about our free cash flow expectations for this year. We see dividend this quarter as our strategy. We have been saying that for a long time in terms of returning value to our shareholders. So when we look at the 2014, we have confidence in our cash flows and believe our capital allocation strategy strikes a prudent balance. We are making the right investments in the business to improve our network to bring the kind of products and services that our customers need everyday. We are making those investments. So we are comfortable with that. The midpoint of our payout ratio here, I talked about between 68% and 78% is very manageable for us.

Phil Cusick - JPMorgan

You are nowhere near the high end of where the (inaudible) at this point? Given that revenue may be flat at this point, EBITDA trailing that, it seems like a little bit At what point is the business actually delevering given the potential for debt pay down but EBITDA still declining?

Tony Thomas

Yes, so it's Tony. We are not giving a specific target date but as you look forward, in my prepared remarks, I alluded to, the significant transition that Windstream has been through as a result of intercarrier compensation reform. We had over $100 million of pressure from intercarrier comp and USF and frankly, that pressure now is in the rearview mirror. So as we look forward, we are very much positioned to be able to grow this company. I would tell you, OIBDA growth trails revenue growth by a modest amount of time, but we do see it. It is a question of when not if Windstream makes the transition to revenue and OIBDA growth. Once we make that transition successfully, you are going to see us quickly deleverage into that 3.2 to 3.4 range.

Phil Cusick - JPMorgan

Than k you.

Operator

Thank you. Our next question comes from Michael Rollins of Citi. Your line is open.

Michael Rollins - Citi

Hi. Thanks for taking the question. Jeff, I was wondering if you can give us a little bit more insight into business services revenue. If you exclude the carrier services part, and if you were in one of your monthly meetings where you have got your big binder, you are doing the review of the of the business, can you share with us some of the things that you look at below the surface to the numbers that investors get in terms do you look at by reach and do you look at it on net off net traffic. Do you look at it, what was a heritage Windstream operation versus what you have acquired over series of years and maybe share with us some of the trends that you see maybe underlying, so we could get a better sense of the compensation in growth opportunities of that revenue.

Then if I could just add one other quick questions, just a point of clarification if you could give me, [I missed it], but did you say how much and in what form the pension contribution could be for 2014? Thanks.

Jeff Gardner

Okay. Thanks, Michael. I do have a big binder. You are right about that that we look at and I think and Brent should add on, because we spend a lot of time. I mean, our future is all about enterprise sales growth. As we look at it, we really run the company as one now, so we Windstream in total and we really focus every month on our revenue meeting on our regions. We have four regions.

Looking at the pipeline, where we have very good visibility, we have rolled out salesforce.com to our entire sales force. What we are looking at is, are we going after the right kind of customers? Those Fortune 2000 customers customer spending somewhere between $2,000 and $5,000 a month is kind of our sweet spot. We handle much bigger customers in that as well, but as we look at it today, we feel very good about the momentum we left the year.

The last two quarters were strong as we enter 2014, we have got a nice pipeline of what I call bigger deals and that's what we are looking for with the right kind of customers, customers who are buying. What's really unique about Windstream today is, we have equipment with our ISG division that can offer customers anything they want in that respect. We have got our network, of course, voice and data, but also our data center and so more and more we are seeing our sales reps bring to us the kind of customers that often start out with network and equipment and we can we can migrate them up to more managed services and hopefully into our data center eventually, so those are the things that we are looking at.

I think that, what gives us the most confidence is that we have seen sequential revenue growth. The sales pipeline looks good going into 2014, and they are key factor in driving our confidence in our ability to execute in 2014.

Tony Thomas

Michael, this is Tony. In terms of - Brent Whittington.

Brent Whittington

No. I mean, I think just as a key highlight maybe to add on in term just specifics, I mean we stay focused as you expect on terms both revenue and customers term. We will drill into the ILEC versus CLEC and then split that between enterprise and SMB, because as we approach those markets differently ILEC of course I think we have a dominant market share much more about retention, focusing on sales from existing customers, CLEC about taking market share, specifically in enterprise side and on and on the SMB side. That's largely a call center relationship as we talked about earlier on this call, so we look at that a little bit differently.

Where we didn't run why [our key] growth initiatives performing versus expectations, what we need to accelerate those and that's a lot of dialogue that takes place in those monthly meetings that's focused on revenue.

Jeff Gardner

Michael, your last question in terms of pension contribution, we would certainly expect to make a pension contribution in 2014 of roughly 80 million. We will fund that with the combination of the Windstream stock cash or we call it other assets. The likely form the other assets contribution would be in the form of real estate. I would tell you we are actively evaluating that as option make it a contribution to our pension plan in 2014.

Michael Rollins - Citi

Thanks for all those details.

Jeff Gardner

Operator, we have time for one more question please.

Operator

Thank you. Our last question comes from Simon Flannery of Morgan Stanley. Your line is open.

Simon Flannery - Morgan Stanley

Thank you very much. Good morning. Could you provide us a little bit of color on the competitive environment? On the business side, we have heard the cable companies talk a lot about continuing to grow in business services and particularly moving up market. Are you seeing much increased competitive intensity from them or is that pretty stable?

Then on the data center side of things, we have got mixed signals out of the data center business, some reports of pricing but others reporting good numbers and what sort of trends are you seeing in terms of your new business and pricing trends? Thanks.

Brent Whittington

Simon, this is Brent, and I will start with the cable company dialogue. I think the cable companies in our market remain aggressive and I would tell you on the CLEC side, and that is where it is probably a bigger issue for us, not really because of how successful they have been but mainly because as I mentioned we really are focused on retaining our base, keeping that call center relationship and because of how aggressive cable and others are, even the ILEC providers on SMB in that space in our CLEC markets. We don’t have the Windstream sales distribution and marketing and or the cost is just too high not a major area of focus for us.

In our island territories, which is a much bigger proportion of our customer count, and certainly higher profitable customers, we have done a great job continuing to retain our customer base and keep our revenues from declining in the ILEC space on SMB and despite what we think is aggressive cable competition, not just last year, but in the years past, and we continue to a very pleased about all that we are doing which is focused on a differentiated cell not just a cheap high-speed solution but value-added bundles that really resonates with our SMB business customers and is unique. And I think the strong relationships that we have there for years, a great network experience. That continues to be a reason we are successful in that segment, despite what you all hear on cable competition.

In terms of data center, I would tell you, that was one of our real strong suits in terms of sales success in 2013. I am aware a lot of what you are referencing in terms of market and I would characterize the sales environment as aggressive because just growth rates and the investment other companies are continuing to make in that space and the aggressiveness did pick up in 2013 for sure. It has not hampered our sales and our results. We saw nice growth in terms of both the number sales reps we were trying to hire and the pure absolute dollars of sales in 2013.

We are counting on that gain in 2014. Part of the benefit, I think perhaps for us versus others as we still are really the insurgent there. It’s a smaller part of our business. We are going into this new markets that have had the competition perhaps in some of these larger areas and are sweet spots for us in terms of customer density that we already have. So we have built-in base that we can sell to which I think is a huge assist as well. So I think we are positioned well to continue our strength.

Simon Flannery - Morgan Stanley

Thank you.

Operator

Thank you. There are no further question in queue. I would like to turn this back over to management for any further remarks.

Jeff Gardner

Okay. To wrap up, 2013 was about improving execution throughout organization in order to grow our business channel and maintain our stable consumer business. We completed many strategic initiatives, invested in growth opportunities and implemented operational enhancements and entered 2014 with confidence in our ability to capitalize on the growth drivers in our strategic areas. We are focused on the right initiatives to realize further improvement from the business and position Windstream for continued success. We are executing a growth oriented strategy while also managing our legacy business for profitability. This combination is gradually stabilizing topline trends and generating substantial cash flows. It is our continued belief that our capital allocation strategy strikes the right balance among investing in the growth drivers of the business, paying an attractive dividend to our shareholders and reducing debt over time. Thank you all for joining us this morning and for your interest in Windstream.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

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