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Executives

Leah Stearns -

Thomas Bartlett - Chief Financial Officer and Executive Vice President

James Taiclet - Executive Chairman, Chief Executive Officer and President

Analysts

Jonathan Atkin - RBC Capital Markets Corporation

Batya Levi - UBS Investment Bank

James Ratcliffe - Barclays Capital

Michael Rollins - Citigroup Inc

Simon Flannery - Morgan Stanley

Manish Jain - JPMorgan

David Barden

Brett Feldman - Deutsche Bank AG

Jason Armstrong - Goldman Sachs Group Inc.

Richard Prentiss - Raymond James & Associates

American Tower (AMT) Q2 2010 Earnings Call August 3, 2010 8:30 AM ET

Operator

Good morning, my name is Alice and I will be your operator today. At this time, I would like to welcome everyone to the American Tower 2Q 2010 Earnings Call. [Operator Instructions] Ms. Leah Stearns, you may begin.

Leah Stearns

Thank you, and good morning. Thank you for joining American Tower's conference call regarding our second quarter 2010 financial results. Please note that we have posted a brief presentation to accompany this morning's call on our website at www.americantower.com. If you haven't done so already, you may want to download the presentation as we will refer to it at various times throughout our prepared remarks.

The agenda for this morning's call will be as follows: I will provide a brief introduction and highlight certain key metrics from our second quarter 2010 financial results. Following this, Tom Bartlett, our Executive Vice President and Chief Financial Officer, will go over our financial results and provide an additional overview of our expectations for 2010; and finally, Jim Taiclet, our Chairman, President and Chief Executive Officer, will give closing remarks including his current thoughts on key industry trends. After these comments, we'll open up the call for your questions.

To maximize participation during the Q&A portion of the call, we kindly ask that you limit your question to no more than two parts. If you do have more than two questions or if you think of additional question, feel free to add yourself back to the queue and we'll do our best to answer as many questions as possible in the allotted time.

Before I begin, I would like to remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include those regarding our 2010 outlook, our stock repurchase program, our pending acquisition of Essar Telecom Infrastructure Private Limited and any other statements regarding matters that are not historical fact. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's press release and those set forth in our Form 10-Q for the quarter ended March 31, 2010, and our other fillings with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. And with that, I would like to begin the call with some highlights from our second quarter 2010 results.

Please turn to Slide 4 of the presentation which provides a summary of our second quarter 2010 results compared against the year-ago period. We reported total revenues of approximately $470 million reflecting growth of 11% from the year-ago period. Tom will provide additional color on the core growth of our Rental Management segment, which excludes the impact of foreign currency fluctuations and straight-line lease accounting. Our adjusted EBITDA for the quarter was approximately $321 million, which is an 11.7% increase from the year-ago period. Additionally, our operating income for the quarter increased over 13% nearly $189 million. Income from continuing operations including income from non-controlling interest with approximately $100 million or $0.25 per basic and diluted common share, attributable to American Tower Corporation.

During the quarter, our effective tax rate was 23.3%, which reflects a year-over-year decline of over 17% and was primarily the result of two items, including a foreign earnings and profit study, which created a 2.8% benefit related to the U.S. taxable income that has been predicated on original earnings and profit estimate and a 13.3% benefit triggered by the reassessment of the realized ability of certain acquired NOLs, based on formal studies that were completed during the quarter. Both items were discrete to the quarter and for the full year, 2010, we currently anticipate our effective tax rate will be approximately 33%.

And now I'd like to turn the call over to Tom, who will discuss our results in more detail.

Thomas Bartlett

Thanks, Leah, and good morning, everyone. I'm pleased to report that our second quarter 2010 results came in right on plan as we continue to execute on our strategic priorities for the year.

If you'll please turn to Slide 5, I'd like to begin with some highlights from our Rental and Management segment. Overall, we reported Rental and Management segment revenue growth of 12.2%. Excluding the impact of foreign currency fluctuations and straight-line lease accounting, our core growth was 8.6% relative to the second quarter of 2009 with foreign exchange positively impacting our reported results by 1.4% and straight-line positively impacting our reported results by 2.2%.

Additionally, and as I highlighted on our last call, three discrete items will continue to impact our results during 2010. These items include the impact of broadcast analog churn, the completion of a customer take-or-pay agreement, and a customer settlement, which combined, negatively impact our reported revenue by about 1.7%. So excluding the impact of these items, our core growth would have been over 10%. In the U.S., core growth for Tower revenue was 8.4%, excluding the impact of these discrete items. During the quarter, we continued to experience a strong leasing environment with signed new business up by approximately 10% and commenced new business up approximately 25% relative to the same quarter of 2009. Our solid performance in the U.S. was complemented by over a 21% core growth in revenues from our international markets.

And finally, our results include a year-over-year increase of approximately $9.8 million in straight-line revenue, which reflect a contract extension with one of our major U.S. customers from the beginning of 2010, which we highlighted for you during our first quarter call, and the impact of a new agreement with our largest customers in Latin America which contributed to the year-over-year increase and one of the primary driver of the sequential increase in straight-line revenue for the quarter of about $5.3 million.

Turning to Slide 6. Our reported adjusted EBITDA growth relative to the second quarter of 2009 was 11.7% with core growth of 7.2% on a currency neutral basis and excluding the impacts of straight-line lease accounting. In addition, the impact of our discrete 2010 items, which I mentioned earlier, negatively impacted adjusted EBITDA growth by about 2.4%. So excluding these items, adjusted EBITDA core growth would have been about 9.6%.

During the quarter, our adjusted EBITDA margin was 68%. Our adjusted EBITDA conversion rate was about 72%, which was a direct result of the following. Some pass-through revenue and expense related to our international markets, negatively impacted our conversion rate by over 10%. And additionally, since the beginning of the second quarter of 2009, we've added over 4,100 new sites to our portfolio, which currently have gross margins of about 57% due to our average tenancy of approximately 1.3%. As we continue to increase the utilization of these sites, we expect their margins will approach our legacy portfolio levels.

Excluding the impact of both past due revenue and the new sites, we have added over the past 12 months, our EBITDA conversion rate would have been in excess of 90%. In addition, during 2010, we have continued to make selective investments in our regional overhead systems and corporate functions. We've made substantial progress in our corporate initiatives year-to-date and continue to focus on our key projects which include our ongoing due diligence on a possible REIT conversion, as well as IT projects such as their global implementation of common financial systems. Please note, corporate expense for the second quarter of 2010 also include at about $1 million of accrued severance costs.

As outlined in Slide 7, during the second quarter, we continued our disciplined approach to capital allocation. Specifically, we spent about $77.5 million on total capital expenditures, including $47 million of spending on discretionary capital projects, primarily related to the completion of 237 new sites and about $18 million on land purchases. In addition, we completed the acquisition of 36 sites in the United States and a 113 sites in Chile for a total of about $44 million. And finally, rounding out our capital deployment for the quarter and consistent with our previously announced plans to increase the pacing of our share repurchase program, we nearly tripled our buyback pacing and accordingly spent approximately $145 million to repurchase 3.5 million shares during the second quarter.

I'd like to spend a moment on our recent launch of operations in Chile. A few weeks ago, we issued a press release outlining our agreement to purchase approximately 287 sites from Telefónica, closing on 113 sites during the quarter. We are excited about our development team's recent success, and I'd like to highlight for you some of the key reasons for our investment and expansion into Chile.

First, Chile currently is one of the strongest macroeconomic environment in Latin America, which should provide us with a solid foundation in which to invest. Second, Chile has a vibrant and competitive wireless market where customers in our existing Latin American market already conduct business today. Third, our recent spectrum auction placed 3G spectrum into the hands of a new entrant, VTR, and an existing incumbent, Nextel International, both of which are expected to deploy meaningful amount of capital to build nationwide 3G networks in Chile over the next couple of years. And finally, the government has already indicated its interest in auctioning additional spectrum for 4G deployments, possibly in late 2011, which we'll provide further opportunities for organic growth. Simply put, we're excited about our new market and expect to add through new site construction and select acquisitions to further build our portfolio, our expansion into Chile will over time provide a nice compliment to our existing Latin American markets with return hurdles that are consistent with our other Latin American markets. We also were to continue to pursue additional expansion opportunities in other complementary Latin American markets.

Turning to Slide 8. We delivered approximately 23% growth in both recurring free cash flow and recurring free cash flow per share in the quarter versus the same period last year. This growth was primarily driven by the following: our core growth and adjusted EBITDA, lower redevelopment and maintenance capital spending, and an income tax refund of approximately $9 million which we received during the second quarter. Our year-to-date performance and recurring free cash flow has exceeded our expectations. We continue though to expect mid-teen annual growth and recurring free cash flow for the year largely due to the increased interest expense resulting from the planned acquisition of the towers from Essar. These trends, along with our recent investments and attractive discretionary projects including the acquisitions we made over the past five quarters, have resulted in a consistent improvement in our return on invested capital, which today stands at 11.3%.

Turning to Slide 9. As a result of our performance being unplanned during the first half of 2010, our recent and pending acquisitions, year-to-date customer contract extensions and our new agreement with our largest customers in Latin America, we've updated our 2010 outlook. A few of the highlights include: we've increased the midpoint of our full year Rental and Management segment revenue outlook by $40 million and consequently our range to $1.85 billion to $1.88 billion, which now represents year-over-year growth of approximately 11% to 13%. We've increased the midpoint of our full year adjusted EBITDA outlook by $20 million and accordingly our range to $1.28 billion to $1.31 billion which now represents year-over-year growth of 8% to 11%. And finally, we've increased the midpoint of our full year cash provided by operating activities outlook by $10 million and its corresponding range to $960 million to $990 million, which now represents an increase of 14% to 18% over 2009. Please note our outlook estimates reflect our acquisitions during the quarter, as well as the 63 communication tower sites in the United States we most recently purchased in July and the company's pending acquisition of approximately 450 communication tower sites from Essar Telecom, which we expect will close during the quarter.

Turning to Slide 10. I'd like to discuss the key drivers that have resulted in our increase in 2010 outlook for Rental and Management segment revenue. As I mentioned previously, we're increasing our expectations for our Rental and Management segment revenue by $40 million at the midpoint, which is primarily a result of four key items: The core business continues to perform in line with plan, our recent and pending acquisitions, which includes our acquisition of Essar's towers in India, which we will expect will close during the quarter; customer contract extensions primarily in the U.S.; and a new agreement with our largest customer in Latin America, which was finalized during the second quarter.

Turning to Slide 11. We've also increased our 2010 outlook for adjusted EBITDA by $20 million at the midpoint, which in addition to the items discussed with respect to revenue, is a result of the lower adjusted EBITDA margins on our recently completed or pending acquisitions, which is primarily a result of our acquisition in India or approximately one third of the current revenue relates to past due fuel costs. And as a result, we currently estimate we'll have initial adjusted EBITDA margins of approximately 40% to 45%. And approximately $5 million of additional cost, primarily as a result of greater than originally anticipated development opportunities, is our pipeline for opportunities continues to grow.

Turning to Slide 12. I'd like to highlight our current investment profile for 2010. Through the combination of our outlook for cash provided by operations, an incremental borrowing required to end the year at our targeted 3.5x net debt to last 12 months adjusted EBITDA, we will have access to over $1.5 billion of capital to deploy in 2010. Consistent with our capital allocation strategy, we will first seek to invest this cash back into our current portfolio through our annual capital plan, which is currently expected to be between $300 million to $350 million. This includes the expected construction of between 1,200 and 1,600 new sites and the purchase of approximately $50 million of land under our towers.

In addition to CapEx, we will seek to add new assets to our portfolio for pursuing select acquisitions, which together with pending acquisitions accounts for over $600 million year-to-date and includes approximately $430 million from our pending acquisition of roughly 4,450 sites in India from Essar. And finally, we continue to expect that we will return our excess capital to shareholders via our stock repurchase program.

During the second quarter and consistent with our previous statements, we increased the pacing of our share repurchase program, and accordingly repurchased approximately 3.5 million shares for about $145 million. Year-to-date, we have spent approximately $196 million on our share repurchase program, and we'll manage the pacing of the program during the third quarter to continue to move our net leverage towards our year-end target of 3.5x net debt to last 12 months adjusted EBITDA. With our target of 3.5x net debt as of year end, we currently estimate that the remaining capacity for investment in 2010 is about $530 million, which we expect will be allocated consistent with our capital allocation strategy.

And turning to Slide 13 and in conclusion, I'd like to summarize a few key takeaways for the quarter. Our second quarter results were right on plan with solid performance supported by year-over-year improvements in both signed and commenced new business. We remain disciplined and consistent with respect to our investments and capital allocation strategy. In the second quarter, we added 386 sites to our portfolio, primarily in the U.S., India and Chile. In addition, excluding the Essar acquisition, we have added over 4,300 new sites to our portfolio since the beginning of 2009.

We have received all necessary regulatory approvals for our acquisition of Essar Telecom and expect that the transaction will close during the third quarter. Our key focus in India, post-closing, will be on integration and driving strong organic growth on our existing tower sites. We continue to seek opportunities to expand our presence, including those in which we currently serve. As we previously mentioned, our first priority is to invest in the United States. However, we also have teams in various geographies including Latin America, Asia and EMEA who are working with counter parties to explore acquisitions who are built-to-suit opportunities.

With respect to our balance sheet, we currently have approximately $925 million of liquidity. And as a result, we expect we will continue to utilize a portion of our current financial capacity to continue the pacing of our share repurchase program as we work our way towards our year-end target of 3.5x. Subsequent to the end of the second quarter, we drew down approximately $350 million of our senior unsecured revolving credit facility, which we will use to fund our cash obligations in connection with our acquisition of Essar's towers. Pro forma for acquisition, our 2Q '10 net debt to EBITDA was 3.3x. And finally, we will continue to monitor the capital markets to seek opportunistic transactions that lower our cost of debt. And ladder and extend our maturities.

With that, I'd like to turn the call over to Jim.

James Taiclet

Thanks, Tom, and good morning to everyone joining us on the call today. Our strong second quarter results show the Tower business model is driving as the wireless communications industry transitions to delivering true broadband data services to consumers.

At American Tower, we continue to be excited about both the current and future prospects for our industry and for our company. We're confident that the robust advancement of high-speed wireless data services will continue. First in developed markets such as the U.S., followed by developing economies around the world. A number of key trends support this conclusion. Let's first consider handsets.

Global handset sales were up 13% in the second quarter suggesting that wireless growth is back on track in the wake of the 2008 financial crisis. Moreover, major handset manufacturers, including Nokia, Samsung, Motorola, Sony Ericsson, RIM [Research In Motion] and Apple are emphasizing Smartphone investments and the sales opportunities that they bring to drive their future growth.

And there's plenty of offsite for the deployment of Smartphones. Even in the U.S. and Western Europe, Smartphone shipments were just 30% of all handsets. And in developing markets, in the EMEA region, Asia and Latin America, the proportion of handset shipments that were Smartphones was only 10%. With the handset manufacturers focus on Smartphone unit growth, prices should come down and choices to consumers should increase. Thereby, leading to greater penetration of Smartphones in both the U.S. and internationally.

The U.S. is the leading market with respect to innovation in wireless and consumer readiness for Smartphones and carriers are reporting shortages of their most high-end handset offerings, such as AT&T's Apple iPhone 4, Verizon's Droid and Sprint's HTC EVO 4G. Consumer demand for faster wireless data services is proving to be voracious, and a competitive mobile broadband platform is essential for any wireless carriers continued success over time. Consequently, we believe there'll be even greater burdens on wireless networks to deliver the new level of service that Smartphone owners are demanding.

Substantial investments in 3G and now 4G technologies are being made by carriers in order to meet this demand. Fortunately, for both the wireless carriers and for the tower industry, consumer are willing to pay for these enhanced services. As a result, wireless data is now the primary growth engine for U.S. carrier revenues.

In the second quarter, AT&T, Verizon increase data revenues by 27% and 24%, respectively. Both carriers in turn reaffirmed their commitment to significant levels of capital investment to further develop these types of services while also increasing the proportion of overall corporate CapEx devoted to wireless. In addition, Sprint announced that it has been adding new CDMA sites to its network this year and T-Mobile continues to deploy its upgrade to its current 3G system.

And looking ahead from 3G to 4G, each carrier has restated their plans to support next-generation investments. In Sprint's case, to the support of Clearwire. At Verizon, the launch of LTE markets in the second quarter of 2010. And at AT&T, the launch of 4G markets beginning in 2011. Moreover, MetroPCS and LightSquared have announced their own LTE market launches starting in 2010 and 2011 as well.

Once again, taking a more global view, 3G penetration in Western Europe and the U.S. is only now approaching about 40% of subscribers. Indicating significant additional subscribers and network requirements to come over the next few years for 3G and with the onset of 4G at scale to follow. Developing markets in the EMEA region, Asia and Latin America are only at the nation's stage of 3G penetration and only approximately the 5% range in those places.

We anticipate that there will be terrific future potential in these types of markets for wireless data. In addition, the compelling handsets and ongoing network investments, another key factor in the development of 3G and 4G data services is the availability of sufficient spectrum. Overall in the U.S., the three largest carriers, AT&T, Verizon and Sprint, through its relationship with Clearwire, appear to have sufficient spectrum to deliver today's expected levels of service at current penetration rates. But both the wireless carrier community and the U.S. government are looking ahead to open more spectrum for advanced wireless services. The recent government clearance of spectrum for use by LightSquared is an example of these efforts. And both the FCC and the Obama administration are working towards making additional spectrum available over the next few years.

Many developing markets are right now in the process of ensuring availability of sufficient spectrum for a competitive advanced data services for their consumers. In fact, new 3G spectrum is being made available in all four of our international markets, Mexico, Brazil, Chile and India. We believe that this new spectrum, combined with the financial strength of the leading carriers in each of these markets and lower cost Smartphone handsets are being developed will lead to the deployment of high-speed data networks at all of our served markets over the course of the coming years. Given this three strong global trends in wireless, proliferation of affordable Smartphone, wireless carrier investment plans and additional spectrum availability, we at American Tower, are very pleased with our strategic position.

In the U.S., all four of the national carriers, Verizon, AT&T, Sprint and T-Mobile, are in the midst of a multi-year upgrade cycle. That is, each is in the process of deploying additional equipment primarily on towers to deliver wireless data services. And substantial part, Verizon and AT&T are currently utilizing amendments to existing cell site leases for 3G and 4G equipment while also splitting 3G cells for capacity and/or coverage.

American Tower is in a strong position to garner Amendment business from both AT&T and Verizon as approximately 20% of those carriers respective cell sites reside on our towers. Sprint is now adding net subscribers and it's also adding some new sites. Additionally, Sprint is also deploying its next-generation 4G service capability via Clearwire.

We also expect additional new co-location business in the 2011 timeframe from smaller regional carriers and from the LightSquared venture. So these are contingent on sufficient funding. Given American Tower's portfolio of over 20,000 locations in the United States, we are also positioned well to catch a significant share of new cell site installations on our towers. While the U.S. market is the foundation of American Tower's business, delivering over 80% of our second quarter Tower revenue, we're putting substantial effort into building a framework for complementary international expansion. We found that to earn the credibility and the local market knowledge to engage in significant transactions and with the highest-quality counter parties, it doesn't take months, it takes years.

In Latin America, we've established a track record of operational credibility and staying power over a 10-year period in Mexico and over nine years in Brazil. We serve multi-market carriers in both those countries such as América Móvil, Telefónica and Nextel International. The value of our track record and market reputation was demonstrated by our recent agreement to acquire nearly 300 towers in Telefónica in Chile, and we hope to extend the success in the region through additional opportunities.

In India, we've had teams on the ground for three years and I'll be making my sixth visit to the market in a couple of weeks. By investing time and resources in that region, American Tower has gained a relevant place in the market, and we're now in a final process of closing our third acquisition, which will bring our tower count in India to over 7,000 sites. Given the inherent growth in the Indian wireless industry, we've experienced co-location rates there, there about double that of the U.S. Which we believe will contribute to healthy returns on our investment and region over time.

Our overall goal, as a management team, is to combine unmatched market knowledge, both domestically and internationally, with our financial strength to make superior capital allocation decisions on your behalf. As Tom mentioned, our first priority is to fund our CapEx programs for the year. For each tower that we build or augment and each Distributed Antenna Systems that we install, has both the credit-worthy anchor tenant and solid prospects for the future leasing growth. Each project is judged on its own merits individually and this holds true for land purchases as well.

We also applied a disciplined approach to tower portfolio acquisitions, be they large or small. There are two types of acquisitions, third-party independent tower operators and carrier tower portfolios. Key decision criteria for third-party acquisitions includes the quality of the tower and ground space design, nature of existing lease contracts, the revenue per tower, future leasing prospects and many others. And criteria for carrier-owned tower portfolios also include the viability and market position of the selling carrier and the rates and terms of that carriers willing to commit to in the attached master list agreements since the seller, of course, is the primary lease customer on this portfolio. Each tower deal is therefore, different and a simple comparison of multiples is often invalid. We believe that there's no one better at judging the value of a tower portfolio than our regional and senior executive teams.

In any given year, our objective to deploy the cash generated from operations. Which for 2010 at American Tower is expected to approach $1 billion plus the proceeds for many additional debt capacity generated by our growth in EBITDA. Roughly an additional $400 million to $500 million each year. We wanted to deploy this funds to new assets that meet our investment requirements. However, we don't lower the bar on our expected investment returns to deploy all this capital, rather it's our policy to return excess capital, as Tom mentioned to you, when cash available exceeds our anticipated investment requirements. Now taken over the past few years, we've chosen the mechanism of share repurchase to return excess capital to shareholders. In the event that the company determines to elect Real Estate Investment Trust or REIT status in its future tax returns, this will be by no means signal a significant change in our capital allocation strategy at all. Our priorities would remain the same, investing on our CapEx program and an acquisitions that meet our returned expectations, and thereafter, returning excess capital to shareholders.

Under a REIT election, we'd of course include the additional mechanism of dividends for returning some of our cash to shareholders. However, we expect that American Tower would be able to both meet the dividend obligation under a REIT election and have sufficient cash from operations to reinvest in the business and/or continue to conduct share repurchases at some level under the capital allocation strategy outlined earlier in my remarks.

So in conclusion, I'd just like to reemphasize a couple of points. First, we've increased our full year 2009 guidance, including elevating our expectations for cash from operations to over $970 million at the midpoint. As nearly a billion dollars of cash generated from the business in 2010 to reinvest on your behalf. Second, we're actively engaged in numerous initiatives in the U.S. and in select key international markets to seek out, evaluate and execute on new investments, designed to ensure long-term, robust growth for our company, and I emphasize the long-term. And third, our overall goal is to leverage our current and new assets, to both form a recurring free cash flow on a per share basis while at the same time expanding returns on invested capital from one year to the next. We strive to be one of those relatively few companies that can accomplish both growth and increasing returns on investment on a consistent, sustainable basis.

And as we wrap up the call, I should mention that the Red Sox have the same kind of can-do attitude that we do and they'll be getting healthy just in time to exact revenge on the Yankees this weekend and launch their surge back into first place in August.

Operator, you can now open the call for questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mike McCormack with JPMorgan.

Manish Jain - JPMorgan

This is Manish Jain for Mike McCormack. I just wanted to get an update on a couple of things. One, the potential for REIT conversion, just your thoughts on timing and how close you are to making a decision in terms of that conversion. And then secondly, if you guys are expecting any contributions from LightSquared this year and kind of how you're thinking about contributions from Clearwire and LightSquared in 2011 given their funding concerns?

Thomas Bartlett

This is Tom. Let me first take the REIT and then Jim will take the LightSquared one. With regards to the REIT, we continue to do our homework and the journey to investigate the prospects for moving to a REIT. We entered the year with $1.3 billion worth of net operating losses, current coursing speed. But given the first two quarters of results, we still have over $1 billion of net operating losses so that will extend us to 2012, so that would be the timing when our net operating losses actually expire.

And from a tax perspective, we continue to work the private letter ruling process. Internally, we continue to model our business as well as working through some of the operational aspects of moving to a REIT. We still obviously need board approval and shareholder approval. So it's a long-term journey and we're in the middle of it at this point.

James Taiclet

And Manish, on the issue of wholesale providers for 4G, Clearwire has been a great success story and they're one of our largest new business customers and I'd offer one of our best customer relationships currently and hopefully going forward. And LightSquared is apparently on track to attempt to replicate that kind of success and that's going to depend on their ability to get funding and Clearwire's ability to get additional funding in the future. Clearwire has the benefit of -- announced an active wholesale customer in terms of Sprint and others, and LightSquared probably would be benefited by announcing a similar kind of relationship which we haven't heard about yet. So I think those are some key elements funding in your customer base and we're excited about being a partner with Clearwire and we hope that LightSquared achieves that same level of success.

Operator

Your next question comes from the line of Rick Prentiss with Raymond James.

Richard Prentiss - Raymond James & Associates

I'm glad to see the Essar transaction get the foreign investment approval. In your guidance, when do you assume Essar closes because I think last quarter, you said a half year of Essar might have been about $40 million in revenue and $15 million in EBITDA. Are you thinking mid-quarter, anything in the quarter? Just kind of wondering exactly how much Essar.

Thomas Bartlett

Yes, Rick, we're assuming really four months of activity from Essar so the end of August or the beginning of September close.

Richard Prentiss - Raymond James & Associates

And then obviously as International continues to get big with a lot of opportunities as, Jim, you were talking about, what are the thoughts as far as breaking out International as a line of business or a segment and then looking towards the day maybe of having a taxable REIT subsidiary? How do we think about looking at our models longer-term on the international side?

Thomas Bartlett

Rick, this is Tom. There are a number of elements that go into looking at segments and segment reporting and we continue to evaluate that. We do try to disclose and be transparent relative to our international operations. Clearly, with Essar, it will kind of breaking the 20% of revenue coming from international markets. So we continue to evaluate that and, as I said, until the time if that time comes, we'll continue to provide, we think as much information as you need to be able to evaluate all of our segments, whether they're in the international or U.S. markets.

Richard Prentiss - Raymond James & Associates

And the final question, $530 million left to spend the second half of the year as far as excess cash, how do you look at any large carrier transactions out there? Are there any that we should be thinking about in the U.S. or in Latin America and what that might mean for your cash or leverage?

James Taiclet

Well, Rick, it's Jim. There are no publicly announced auctions for U.S. carrier portfolios at this time that we're aware of, nor are there any in Latin America. Now having said that, we're in contact with all the carriers domestically in the Latin America market. We're familiar again over many years of having them as either customers or collaborators in the past on transactions. So we feel we're in the pole position to understand if those upchase [ph] (52:07) become available, but they aren't any publicly announced ones yet that we are aware of.

Operator

Your next question comes from the line of Jonathan Atkin with RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets Corporation

I got a question about Latin America and India. Latin America, you talked about customer agreement there driving some of the increased EBITDA. I was wondering if you can elaborate a bit on that. And then India, you got two competitors, one of which is independent that can exercise. So just trying to get a sense of how you compete in that market and is your growth going forward mainly organic or you're going to look further with acquisitions?

Thomas Bartlett

Jonathan, it's is Tom. Let me take the first one and then Jim will take the second one. With regards to our largest Latin American customer, we have effectively put in a new agreement with them in Mexico. We are actually amending the current lease terms so that the average remaining terms end between 2019, '20 and '21. So we extended it out about 10 years. We increased the minimum escalation rate. We actually now have changed the functional currency of the U.S. dollar-denominated contract to the peso, and as such in the second quarter, the peso is now the functional currency in Mexico. We have a discount, which is applicable to their annual lease rate and in addition, and I think as you've asked in the past, we've converted their outstanding accounts receivable net as of April into a long-term interesting-bearing note receivable, so in this agreement was effective as of the beginning of the quarter. So the impact it has on the quarter, as I mentioned in my remarks, is that it had the impact of increasing the straight line of revenue, which is reflective in our updated outlook as well as reducing some cash revenue which about net to zero if you will for the entire year.

James Taiclet

And Jon, regards to India, our goal is not to have the largest Tower portfolio necessarily in India. It's to have in that market one of a number of complementary international markets to our U.S. base. And so, our main metric is really tenants per tower versus the number of towers because that's going to drive profitability for us and return on invested capital. And with over 7,000 towers pro forma post the Essar transaction -- and by the way, Essar is bringing tenants per tower of over 1.8 to our portfolio on day one. We're going to be in great shape on the metrics that we think are most important in India for us.

Jonathan Atkin - RBC Capital Markets Corporation

And then on Distributing, on Outdoor Gas, I'm just wondering if you have any updated views on gross opportunities there. What percentage mix of revenues that might grow too ultimately. I think in the past, you've mentioned low single-digit percentages. I know you're finding any change until your willingness to adopt third party debt solutions as opposed to conventional threshold approaches.

James Taiclet

Jon, when it comes to Distributed Antenna Systems, we look at it together, indoor and outdoor, similar technologies, similar types of arrangements of customers, etc. And we are the largest indoor gas provider with about 200 locations in the U.S. We've actually got a couple up and running in Latin America too. And on the Outdoor side, we've got a few systems again up and running with customers now, about 300 nodes being put out there. So it's again going to be in the context of 20,000 towers in the U.S. and another 10,000 or 12,000 outside the U.S. as we close Essar. It's a small piece of our business, we think it will always be. We like to take it from a couple of percent up to 5% of revenue as we grow the rest of the company, so it will be meaningful. It's again one of those five or six complementary initiatives to our core U.S. Tower business that we'd like to develop and boost growth. And then from a carrier interest perspective, it's similar I think over the last 18 to 24 months, some interest was generated on some mid-solutions. They are more expensive and harder to engineer for the carrier so they haven't elevated in the priority list, but now and then, the carriers are willing to go to that solution. We want to be able to provide it as a rounding out of our offerings. So that's where we see DAS fitting in.

Operator

Your next question comes from the line of Brett Feldman with Deutsche Bank.

Brett Feldman - Deutsche Bank AG

A couple of your peers have talked about improved leasing backlogs into the second half of the year. I think that's sort of the consensus expectation. I was just wondering if that's sort of what you're continuing to see in your business. And then just a follow-up on something. I think you alluded to on the last call, you said as part of your REIT conversion analysis, you may have to pay a purging dividend, is there any update on that at all?

Thomas Bartlett

Sure, Brett, it's Tom. On the first one, I think as we've even said in the first quarter call that we do expect more momentum into the second half of the year. I think it's pretty consistent with what we've actually seen over the last several years and is overall consistent with how the carriers actually spend their capital, so we would expect a stronger second half of the year than first half. And we've even seen, in the second quarter, an increase-commenced new business than we saw in the first quarter versus last year. So I think we're seeing those continued trends. Relative to the purging dividend, it really refers to the earnings and profits that exist in your business from a tax perspective and that needs to be purged or your earnings or your profit needs to be cleaned out or zero before you actually make the conversion. And we're actually going through the analysis, that's one of those steps that we're doing looking at both foreign as well as U.S. domestic, which is really the element relative to the purging dividend. And we should know something final, probably over the next three months or so, Brett. So no new news on that, but we continue to be optimistic about it.

Brett Feldman - Deutsche Bank AG

And just on that net debt dividend issue, I don't know how much discretion you guys have and the timing of that relative to when you would convert but there's obviously, some believe that the tax rate on dividends, might increase next year. Would you have the flexibility to potentially accelerate the payment of a purging dividend into 2010 even if you weren't really going to do a conversion until 2012?

Thomas Bartlett

You could in the form of dividend. We don't expect that candidly, but yes, you could do that.

Operator

Your next question comes from the line of Jason Armstrong with Goldman Sachs.

Jason Armstrong - Goldman Sachs Group Inc.

Maybe first, just back to the guidance. I know it's the revenue guidance from the changes from last quarter, it seems like Essar and new sites are plus 30, and straight line and currency is plus 20 and then that's netted against an extra 10 million in cancellations for the plus 40. So A, I want to see if that's sort of the right map and then B, as we look at how the guidance sort of makes its way down to EBITDA with the $20 million hike there, just given all the moving parts, can you help us think through how the revenue down EBITDA conversion sort of filters through? It seems like the incremental margins might have suggest they're a little higher than EBITDA hike?

Thomas Bartlett

Jason, with regard to guidance overall, let me just review a couple of items. Regards revenue, we are now reflecting the acquisition of Essar Telecom, as you suggested, which should be about $30 million. We're also reflecting additional straight line and FX revenue of about $20 million due to the weakening of the dollar, our recent renegotiated plan with a large carrier in Latin America and some straight line revenue in the United States. We're also including some additional discount with that large carrier in Latin America of about $10 million as you suggested due to our renegotiated plan, which is offset by the contract extensions and higher minimum escalations. So all told, an increase of $40 million, 12% growth at the midpoint, 9% to 10% core growth. Regards to EBITDA, we're increasing EBITDA by about $20 million as I said as a result of the increased Essar-related revenue of $30 million plus the increased straight line and FX revenue of $20 million, offset by the $10 million cash discount with a large Latin American customer. Offset by Essar, direct expenses of about $15 million or so, associated with the $30 million of revenue. And business development expenses of about $5 million. So our increase in EBITDA is largely non-cash related. Consequently, our EBITDA growth is in the 10% range with our core growth in the 7% range. A couple of additional thoughts relative to the second part of your question. In the quarter, we have about $20 million of past due revenue and cost, about $7 million more than the second quarter of 2009. So if you back out these revenues and expenses which is margin-neutral, it takes our EBITDA conversion rate from about 72% to well over 80%, as I mentioned in my remarks, and then aiming on our 4,300 towers, takes it up to over 90%. And relative to our outlook, we're increasing revenues year-over-year by about $200 million and EBITDA $120 million. Past due is about $30 million higher in 2010 versus 2009 so our EBITDA growth of $120 million should be viewed to be on about $170 million of revenue. Aiding on some of our business development cost, SG&A cost to scale our business and the lower margins of the new towers with the lower tenancies, again our conversion rate is significant. So as we said in the past and as Jim remarked, we're investing for the long-term growth of the business and believe we can manage strong growth while continuing to generate industry-leading margins. Hopefully, that's helpful.

Jason Armstrong - Goldman Sachs Group Inc.

Just one follow-up on the REIT status, one of the only procedural hurdles would be number of assets sitting inside a taxable REIT sub, and there's certain tax around that. If you get further into the discussions with the IRS, how comfortable are you that the aggregation of these assets, whether International or DAS, or Services business will fit under the threshold for income and asset test that the REIT will require?

Thomas Bartlett

At this point in time, we feel very good. There's a lot of precedent out there for the types of things that we're doing, so it's not like we're creating new ideas or new thoughts here relative to the assets that we have in the U.S. We think that given that there have been tower companies that have borne [ph] (1:03:08) REITs before, obviously our assets we think qualify for REIT status. And with our international assets and some of those assets even in the United States that don't qualify perhaps as REIT-able, we feel very comfortable that they'll fit well within the income and asset tests.

Operator

Your next question comes from the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Strong balance sheet is obviously one of your hallmarks, we've seen some very attractive financing rates added in the marketplace across both the towers and elsewhere in the sector given the low interest rate environment. Have you thought about sort of terming out your debt structure over the balance of the year or even revisiting -- maybe going to the higher end of your sort of historic leverage? And could you give us any sort of updates on now where you stand in terms of land owned, land under long-term leases? I see you continue to be active in that during the quarter.

Thomas Bartlett

Yes, sure, Simon. Relative to the debt structure, we continue to monitor every day what the rate environment looks like, how we're doing in the marketplace in terms of our existing financings and you can be rest ensured that I get called every day by just about every bank in New York. So we continue to monitor that and watch that very closely and we'll continue to be opportunistic to the extent that we can continue to increase the tenors on our debt which is really one of the main things that we're trying to do to better match the overall revenue streams that we've got in the business.

Simon Flannery - Morgan Stanley

And with regards to land?

James Taiclet

I'll guide and speak to that, Simon, it's Jim. As far as the U.S., 23% of our sites are on own land or land subject to capital lease which are typically 99-year leases. Outside the U.S., as an aside, we typically pass through land grant in Latin America or it's very, very inexpensive in India, so the risk there are much, much lower. We tend not to buy land in those markets because, again, the customer for the most part on a pass-through basis is bearing any kind of rent increase risk. Also if you look at the entire portfolio of the company, about 90% of our sites are on own land, land under a capital lease or land on a ground lease with over 10 years of life remaining. And if you just narrow that down to the U.S. it's over 94%. So we feel really comfortable with the basis of our real estate position under the towers and we have a very active program that seeks out those that are coming up for renewal to either buy them out or extend them.

Operator

Your next question comes from the line of the Michael Rollins with Citi Investments.

Michael Rollins - Citigroup Inc

Just a follow-up, I think you mentioned earlier that with the NOLs that would take you into 2012. So as you think about a possible REIT conversion, within that context, would that be the beginning of 2012 or would that be the beginning of 2013? And the second question I had was just a follow-up on just some of the newer products that you've been working on. Can you talk a little bit more about whether it's the power initiative or gas initiative? Just in terms of maybe any further progress that you guys have made in the most recent quarter on those two things.

Thomas Bartlett

Sure, Michael. It's Tom. I'll take the first one, and I think Jim will take the second one. The election is actually for a full year, so the 2012 context that we've been talking about would be effective the beginning of the year. So it would be January 1, it would be a full year of 2012.

Michael Rollins - Citigroup Inc

And with regards to new products?

James Taiclet

On the generators, Mike, as in other industries to introduce new products, it takes time to get traction in large-scale projects with customers. So it's very small still but it's active. We've got vendor arrangements, maintenance arrangements all set. And we are doing this for our customers today, but not in a large-enough scale than it would get to where the DAS businesses is, for example. And on DAS, as I said, we've got almost 200 indoor sites up and running. We've got two outdoor DAS installations up and running with about 300 nodes in process, a number of more outdoor DAS projects in front of customers which we think many of those will be secured. So we're in the first or second inning of a 9-inning game here, I'd say it's probably on both those projects but we're still dedicated to pursuing them or we're going to do it.

Operator

Your next question comes from the line of Batya Levi with UBS.

Batya Levi - UBS Investment Bank

I have a question about your growth trajectory, there's always been good correlation between wireless CapEx growth for the operators and the incremental revenues that the tower companies see and if we look at our assumptions for the wireless CapEx in the U.S., we we're looking for about 10% growth in 2010, but every quarter, we've been edging up these CapEx assumptions. So we're probably are looking for a 20% increase in the U.S. now. So I was just wondering why the outlook for your revenues has been more moderate than the increase we have seen on the operator side and if you could give some color on why there might be a discrepancy or if there's recent increase in the activities that just maybe accelerating growth for next year?

James Taiclet

It's Jim. I'll try to address the question. And I think, generally, there is a relationship between increasing CapEx with wireless carriers and opportunities for revenue growth for the tower industry. I'm not sure it's ever necessarily been proven to be exactly one-to-one. There are timing issues as you've actually suggested here. There's also was the CapEx going into. At this point, couple of carriers, for example, are mainly investing in some software upgrades with some of their capital expenditures. Some are investing in backhaul from the towers that is through fiber or cable or other elements the towers don't necessarily provide. So there's a mix and a timing adjustment to try to make a correlation to tower leasing revenue. Having said that though, generally CapEx goes up, it means the carriers have dedicated to rolling out more advanced networks that's going to hit the tower industry in a big way over again some period of time in some fashion with mix, so we think it's a very positive correlation. It just may not be an exactly a mathematical one-to-one.

Operator

Your next question comes from the line of James Ratcliffe with Barclays Capital.

James Ratcliffe - Barclays Capital

On currency hedging, now that you're getting close to about 25% of revenue coming international, what are your plans around the hedging and the U.S. dollar particular as in Essar borrowing in dollars to invest in other currencies. And secondly, on just thought from a role of any you plan to play out on the back haul side of things as carriers are deploying backhauls, that's going to be more of a coordination role or a business you could see yourself getting into?

Thomas Bartlett

Sure, James. It's Tom. You're exactly right. With the increase of our international pieces, we are becoming more sophisticated I think with regard to looking at hedging. One of the areas that we're thinking about and contemplating now, is also very consistent with some of our strategies in the REIT context is to look at that country financing, local country financing and that by definition will help hedge some of that currency that we're driving from those international markets.

James Taiclet

And on the backhaul perspective, there are really two major approaches to backhaul aside from the traditional T1 and T3 fixed line. One that were very involved in is the microwave option. Clearwire happens to be using that now, so it's and embedded piece of their lease with us. So we're essentially 100% involved in microwave backhaul because there's a piece of the rent that's dedicated then to the microwave dish in installation. More of a coordinating role, I'd call it, on fiber to the tower or fiber backhaul. We would selectively invest, or co-invest I should say, with fiber providers that would like to reach the tower. We haven't done much any of that yet. But we're willing to do it. And so I say, it's more of a coordinating role with some potential investment in return on the Fiber side and it's a very involved role on the Microwave side.

Operator

Your next question comes from the line of David Barden with Bank of America.

David Barden

Maybe just two quick ones, kind of revisiting some territory we've covered. Number one, Tom, could you just confirm that you in fact have sent in a private letter to the IRS and when that actually occurred and what if any, immediate feedback you've gotten? And then second, I guess we've talked a lot about all the moving parts to the guidance but it kind of sounds like at the end of the day, the core revenue growth expectation for 8% hasn't changed even though as we've heard wireless CapEx is growing, your peers have raised their expectations for second half. You guys yourselves commented that the second half was accelerating. So are we being conservative or are there reasons to believe that AMT can't participate in some of the growth other tower companies are expecting?

Thomas Bartlett

Dave, with regards to the PLR process, I think I'd like to just talk about it relative to a process. We're in the middle of that process as we speak and the dialogue going on between the agencies and the company. So when that process completes, we will then talk about the outcome of it, which we would expect hopefully in the next five or six months, it takes a while. With regard to guidance, I think that we are increasing our revenue guidance by $40 million. We have 12% growth at the midpoint, 9% to 10% core growth so I think that's very strong growth that we have in the business, we've talked about stronger leasing demand in the second half of the year. I think you need to take that in the context of how we put our original guidance out in the marketplace. So we don't like to continually upgrade our guidance and to change things quarter-over-quarter over quarter. We like to give, I think, our investor base some thought at the beginning of the year how we really think the year is going to end.

Operator

We have reached our allotted time for our question-and-answer session. Do you have any closing remarks?

Thomas Bartlett

No, I really appreciate everyone being on the call and your continued interest and to the extent that you have any follow-on questions, please feel free to give us a call. Thanks, everybody.

Operator

This concludes today's teleconference. You may now disconnect.

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Source: American Tower Q2 2010 Earnings Call Transcript
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