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Operator:
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Welcome
to the Consolidated Communications Third Quarter Earnings call. At
this
time all participants are in a listen-only mode.
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Following
management’s prepared remarks we’ll hold a Q&A session. To ask a
question, please press star followed by 1 on your touchtone phone.
If
anyone has difficulties hearing the conference, please press star
0 for
operator assistance.
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As
a reminder, this conference is being recorded November 8, 2007. I
would
now like to turn the conference over to Steve Jones. Please go ahead,
sir.
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Steve
Jones:
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Thank
you, Kate, good morning and thank you to all of you for joining us
today
on Consolidated Communications’ Third Quarter 2007 Earnings conference
call.
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I
am Steve Jones, Vice President, Investor Relations, and with us on
the
call are Bob Currey, President and Chief Executive Officer, and Steve
Childers, Chief Financial Officer. After the prepared remarks we
will
conduct a question and answer session.
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I
will now review the safe harbor provisions of this call. This call
may
contain forward-looking statements within the meaning of the federal
securities laws.
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Such
forward-looking statements reflect, among other things, management’s
current expectations, plans and strategies, and anticipated financial
results -- all of which are subject to known and unknown risks,
uncertainties and factors that may cause the actual results to differ
materially from those expressed or implied by these forward-looking
statements.
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Please
see our public filings with the Securities and Exchange Commission
for
more information about forward-looking statements and related risk
factors.
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In
addition, during this call we will discuss certain non-GAAP financial
measures. Our earnings release for this quarter’s results, which has been
posted to the Investor Relations section of our Web site, contains
reconciliations of these measures to their nearest GAAP
equivalent.
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And
now the proxy solicitation. This material is not a substitute for
the
prospectus and proxy statement Consolidated Communications Holdings
and
North Pittsburgh Systems filed with the Securities and Exchange
Commission, which was mailed to North Pittsburgh Systems’ shareholders on
October 12, 2007.
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Investors
are urged to read this prospectus and proxy statement, which contains
important information, including detailed risk factors.
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The
prospectus and proxy statement and other documents which were filed
by
Consolidated Communications Holdings and North Pittsburgh Systems
with the
Securities and Exchange Commission are available free of charge at
the
SEC’s Web site or by directing a request to either company.
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This
communication shall not constitute an offer to sell or the solicitation
of
an offer to buy securities, nor shall there be any sale of securities
in
any jurisdiction in which such offers, solicitation or sale will
be -
would be unlawful prior to registration or qualification under the
securities laws of that jurisdiction.
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Consolidated
Communications Holdings and North Pittsburgh Systems and certain
of their
respective directors, executive officers and other members of management
and employees are participants in the solicitation of proxies in
connection with the proposed transactions.
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Information
about the directors and executive officers of Consolidated Communications
is set forth in the proxy statement filed in connection with its
2007
annual meeting.
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Information
about the directors and executive officers of North Pittsburgh Systems
is
set forth in the prospectus, proxy statements and the company’s annual
report on Form 10-K for the year ended December 31, 2006 as
amended.
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Investors
may obtain additional information regarding the interests of such
participants in the proposed transactions by reading the prospectus
and
proxy statements.
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I
will now turn the call over to Bob, who will provide an overview
of our
financial and operating results. Steve Childers will then provide
a more
detailed review of our third quarter financials and Bob will then
conclude
the prepared remarks with an update on the North Pittsburgh
transaction.
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Bob?
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Bob
Currey:
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Thank
you, Steve and thank all of you for joining us today. I’m pleased to
report that we had another solid quarter. The existing business continues
to perform well and the North Pitt acquisition is on track to close
in the
fourth quarter or at the latest, early in 2008.
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We
continued to successfully execute on our strategy of providing
high-quality broadband and voice services, thus generating strong
sustainable cash flow to support our dividend. This is achieved by
growing
revenue per customer, improving operating efficiency and maintaining
our
disciplined capital expenditure philosophy.
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Regarding
the quarter, I’ll start with a brief overview of the financial results and
then talk about the strong operating metrics.
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Our
results for the third quarter were solid. Revenue and adjusted EBITDA
were
$80.3 million and $33.5 million
respectively.
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Results
this quarter were impacted by a prior period subsidy settlement.
The net
settlement amount resulted in a $2.1 million reduction in both revenue
and
adjusted EBITDA.
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The
dividend payout ratio for the quarter was 92.6% including the subsidy
true-up and 77.4% without it. Even with the impact of the true-up
we are
at a comfortable 77.7% year-to-date payout ratio.
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We
delivered strong operating metrics, growing connections by 4,000
this
quarter. And we have now surpassed 300,000 total
connections.
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In
terms of DSL, I would describe it as a phenomenal quarter. We added
over
4,300 new DSL subscribers, bringing the total subscriber base to
almost
63,000. This represents our strongest third quarter ever and brings
our
penetration of primary residential lines to 38.6%.
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For
the quarter, we also added 1,500 IPTV customers across both states,
bringing the total subscriber base to just over 11,000.
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In
August, with the launch of Illinois, we completed the high-definition
rollout and now offer a competitive HD channel lineup in both states.
The
picture quality is great and the customer reaction continues to be
very
positive.
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To
date, 750 customers have signed up for HD, representing a 7% penetration
of our IPTV households.
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In
the past I’ve talked about our ability to tailor programming to meet the
needs of our subscribers. Another examples of that is the Big Ten
Network.
We offer it in Illinois and it is not offered by our cable
competitors.
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We
believe that being able to react to market demand is key in helping
to
differentiate us in the marketplace and gain market
share.
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Regarding
DVR, we continue to test the product and are still targeting a fourth
quarter launch in all markets. Combining HD with DVR will further
strengthen our IPTV platform and when coupled with voice and data,
provide
a very compelling triple-play value proposition.
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DSL
and IPTV are sticky and have been drivers of the growth connections
and
revenue per customer. Approximately 90% of our IPTV customers take
our
full triple-play offering, making us the leading triple-play provider
in
our markets.
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As
I’ve previously mentioned, we also offer a hosted VoIP product in Texas
targeted toward small and medium-sized business. We continue to be
pleased
with the subscriber growth. We added 350 seats in the third quarter,
bringing the total number to just over 2,200.
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I
would add that these seat counts associated with this product have
more
than doubled in the last 12 months and that it is not included in
our
total connection count.
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On
the competitive front, although we continue to expect additional
entrants,
no new cable companies launched a voice product in our markets during
this
quarter.
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And
finally, I’m pleased to report that we successfully completed phase 3, our
last phase of our billing integration. This completes the Illinois
and
Texas billing project. I appreciate all the hard work put forth by
the
billing teams.
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After
briefly catching their breath, they have now turned their attention
to
finalizing the integration plan for North Pittsburgh and will focus
their
attention on converting those systems to Consolidated’s
platforms.
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I’ll
now turn the call over to Steve Childers for a financial
review.
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Steve
Childers:
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Thanks,
Bob. Good morning to everyone. As Bob mentioned, we are pleased with
both
our third quarter and year-to-date results. This morning I will review
our
quarterly financial performance and then update 2007
guidance.
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Revenue
for the quarter was 80.3 million, which is consistent with the third
quarter of 2006.
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As
anticipated, third quarter revenues were negatively impacted by a
prior
period ICLS subsidy settlement. The settlement was associated with
the
2006 time period and resulted in a net $2.1 million reduction in
revenue
compared to the third quarter of last year, resulting in a 900,000
negative variance.
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Also
reflected in the net subsidy settlement this quarter was the impact
of an
update to our 2007 ICLS cost studies. This resulted in a $398,000
positive
adjustment in the quarter, of which $265,000 related to the first
half of
2007.
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Additionally,
revenues from local calling services were down, primarily to the
reduction
in local access lines, while the $2.0 million increase in data and
Internet revenue was driven by growth in broadband
customers.
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Total
operating expenses for the quarter were $65.8 million -- an increase
of
approximately 1 million compared to the third quarter of
2006.
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This
increase was driven by 600,000 in incremental noncash compensation
associated with the restricted share plan, 400,000 in weather-related
overtime and 600,000 associated with the resolution of the vendor
disputes
reflected in both periods. These were partially offset by 600,000
reduction in depreciation and amortization.
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We
would expect fourth quarter expense levels to be consistent to slightly
below those of the third quarter, although they could be slightly
impacted
by the timing of integration costs with respect to North
Pittsburgh.
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Net
interest expense for the quarter was 11.9 million -- an increase
of
700,000 compared to the third quarter of 2006.
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This
increase was driven by increased borrowings associated with the July
2006
share repurchase and new interest rate swap agreements that were
initiated
to both replace existing agreements that expired and to increase
our
overall hedge position.
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Consolidated
term debt is now approximately 99% hedged, with an average annual
interest
rate of 6.6%.
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Income
tax expense for the quarter was $2.0 million, reflecting a decrease
of
$1.9 million compared to the third quarter of 2006.
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The
decline was driven by a difference in pretax income and by the fact
that
the third quarter of 2006 included $800,000 in additional tax expense
associated with the finalizing and filing the 2005 federal
return.
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Accordingly,
net income for the third quarter of 2007 was $2.3 million compared
to $2
million for the same period last year.
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Net
income per common share for the third quarter of 2007 was 9 cents
compared
to 7 cents for the same period last year. However, we believe it
is
appropriate to look at third quarter income per share on an adjusted
basis. As detailed when you get the net income per share schedule
in the
earnings release, our adjusted number was 14 cents per
share.
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After
adding back the anticipated subsidy settlement, adjusted EBITDA would
have
been $35.6 million, which was consistent with our expectations. Capital
expenditures were on plan at $8 million in the third quarter of
2007.
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From
a liquidity standpoint, we ended the quarter with $24.4 million in
cash
and cash equivalents. And our $30 million revolver remains fully
available
to us.
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For
the third quarter of 2007, our total net leverage ratio as calculated
in
our earnings release was four times to one. All of our coverage ratios
were well within compliance levels of the credit
facility.
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Cash
available to pay dividends, or CAPD was $10.9 million for the quarter,
yielding a 92.6% dividend payout ratio. Excluding the prior period
subsidy
settlement, the run rate payout ratio was 77.4% for the
quarter.
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Now
I’d like to update our 2007 guidance. Capital expenditures for the
full
year are expected to be in the range of $32.5 million to $33.5
million.
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Cash
interest expense is expected to be in the range of $44 million to
$44.5
million. And cash income taxes are expected to be in the range of
$13
million to $14 million.
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With
respect to our dividend, our board of directors has declared the
next
quarterly dividend of approximately 39 cents per common share payable
on
February 1, 2008 to shareholders of record on January 15,
2008.
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I’ll
now turn the call back over to Bob for an update on North Pittsburgh
and
closing remarks.
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Bob
Currey:
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Thanks,
Steve. We continue to be very excited about our North Pittsburgh
transaction. It adds attractive markets to our portfolio, it has
a strong
network that will be leveraged to increase broadband penetration
and
launch IPTV, and it’s expected to be cash flow accretive in the first full
year of operations.
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In
terms of an update, the North Pittsburgh shareholder meeting will
be held
on Tuesday, November 13. The regulatory approval process is nearing
completion and the integration planning is well
underway.
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From
a regulatory approval perspective, the FTC has granted early termination
of Hart-Scott-Rodino waiting period. The FCC has approved both our
international and domestic 214 applications. We are very close to
completing the process with the Pennsylvania PUC. We have successfully
concluded discussions with all the interveners and expect to be on
the
December 6th PUC open meeting docket.
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Assuming
PUC approval in December, we would be in a position to close in the
fourth
quarter or at the latest, in early 2008.
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In
terms of integration, the planning process is underway and doing
very
well. This is very familiar territory for us. We’re using the same
playbook that has proven successful on our prior integrations. There
have
been detailed planning sessions between the various process owners
from
both companies. And in collaboration with North Pitt management team,
several integration projects have been fast-tracked. I’ll mention two key
projects -- one, IPTV deployment, and the migration of the financial
system from JD Edwards to our PeopleSoft.
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Project
teams have been named for both efforts and the implementation process
has
begun. We are anxious to get going and will be well prepared to hit
the
ground running once the transaction closes.
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As
mentioned on this call and previous ones, we’ve spent the last several
months working with the North Pitt team on completing the detailed
integration plans, having discussions internally on organizational
structure and validating our synergy assumptions. As a result of
all of
this, we are pleased to report that nothing has changed with regard
to our
synergy estimates. We are very confident that we will achieve both
the
OPEX and the CAPEX targets previously provided.
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If
you are not aware, North Pittsburgh also released their earnings
this
morning. And you may refer to their press release for the specifics
on the
quarter. Although third quarter access line loss was higher than
the
second quarter, their results were in line with our expectations.
In
advance of the transaction closing, the incumbent cable providers
have
increased their promotional activities. We expected this and this
is one
of the reasons we’re fast-tracking IPTV.
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Lastly,
regarding the financing for the transaction, both Moody’s and S&P
recently affirmed their existing ratings for us. We intend to launch
the
bank deal on Wednesday of next week and expect to be in a position
to
close and fund the acquisition and financing transactions shortly
after
receiving the Pennsylvania PUC approval.
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So
in summary, we’re pleased with our performance this past quarter. We are
excited with both how the current business is performing and the
opportunities presented by North - by the North Pitt transaction.
We look
forward to continuing our focus on our customers, with both great
service
and great products.
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And
with that summary, Kate, I would like to open it up for
questions.
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Operator:
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Ladies
and gentlemen, if you wish to register for a question for today’s question
and answer session, you will need to press star then the number 1
on your
telephone. You will hear a prompt to acknowledge your
request.
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If
your question has been answered and you wish to withdraw your polling
request, you may do so by pressing the star then the number 2. If
you are
using a speakerphone, please pick up your handset before entering
your
request.
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Again,
we request that if you have pressed star 1 to ask a question before
this
time, please press it once more to ensure that you enter into the
queue.
One moment please for the first question.
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Your
first question is from Patrick Rien from Lehman
Brothers.
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Patrick
Rien:
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Good
morning and thanks for taking the question. I just want to talk a
little
bit about the IPTV potential over at North Pittsburgh.
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I
wonder if you can maybe give us an idea of when you expect to launch
that
product, maybe when marketing would begin, and then an idea of what
percent of lines would actually be able to get that product?
Thanks.
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Bob
Currey:
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Good
morning, Patrick. We plan - as I mentioned with the fast-tracking
of that
project, we plan on launching as soon as possible.
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You
know, I can’t give you a specific date today except to tell you that all
of the planning is well along. The engineering is done and completed.
The
marketing programs are ready to launch. And as soon as this transaction
closes, we will launch pretty quickly after that date.
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As
far as the second part of your question, the size of the Pittsburgh
market, you know, we’ll launch, you know, with approximately 80% coverage
right from the get-go.
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Patrick
Rien:
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Great.
And just one quick follow-up. Will you also be launching HD and DVR
in
that market at the same time?
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Bob
Currey:
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Yes
we will. We’ll launch - we’ll have the same HD and DVR products across all
of our markets.
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Patrick
Rien:
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Great.
Thanks a lot.
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Bob
Currey:
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You’re
welcome.
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Operator:
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Your
next question is from Jonathan Chaplin from JPMorgan.
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Jonathan
Chaplin:
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Good
morning, guys. So DSL and access lines both came in quite a lot better
than we expected. And they really bucked trends we’ve seen pretty much
across the industry this quarter.
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I’m
wondering if you can give us some insights into what you’re doing on the
DSL front that’s driving the growth that you’re seeing at the moment. I
mean it’s particularly impressive given how high - I think you probably
have the highest DSL penetration across the group already. And still
you’re growing at a faster rate.
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And
then I’m wondering if you could just - if you have any insight into the
impact that DSL penetration is having on access lines. I’m wondering if
it’s the high DSL penetration that’s resulting in better than peer access
line trends as well. Thank you.
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Bob
Currey:
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Good
morning, Jonathan.
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Jonathan
Chaplin:
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Hey
Bob.
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Bob
Currey:
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Thanks
for that multipart question there. Let me see if I’ve got them
all.
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The
first part, as far as what are we doing with DSL, nothing different
than
we have in the past. We’ve maintained the pricing. You know, if they take
a longer-term contract we do discount the product.
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But
it’s more of the same, just offering a value proposition, good word
of
mouth in our communities about the value of the product. I would
also add
that the value of the triple play has certainly contributed to our
DSL
success.
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Regarding
access line losses, you know, we’re strong believers that the bundle is
sticky, that IPTV does add to that bundle. You know, we’re up to 11,000
customers. We definitely see less churn with the more products that
our
customers take.
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And
I think, you know, at the end of the day it is the value of the bundle
that is the attraction that is responsible for our access line losses
to
date.
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Jonathan
Chaplin:
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So
Bob, if I could just follow up on your DSL comment, is it the availability
of video in a greater portion of your footprint that resulted in
record
net adds or record quarter net adds this time around? Do you think
that’s
the biggest contributor to the increase in growth that you’re
seeing?
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Bob
Currey:
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No,
not at all because we didn’t even expand the homes passed of IPTV in this
quarter, Jonathan. They’re basically where they’re going to be for the
remainder of this year. So that wouldn’t be a
contributor.
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It’s
just, again the value of the product. You know, I’ll give my marketing and
sales team a lot of credit - a very focused and a compelling
product.
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And,
you know, and we have launched a naked product. I announced that
on the
last call. It hasn’t acquired a lot of new customers at this point and we
charge a $5.00 premium for it. But it has worked particularly in
the
college environment, the off-campus student housing.
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So
it’s really just more of the same. Second quarter was good but seasonal
and the third quarter bounced back up to where we had expected to
be.
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Jonathan
Chaplin:
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That’s
great. Thank you very much.
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Operator:
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Your
next question is from Robert Simmons from Oppenheimer.
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Robert
Simmons:
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Hey
guys. Two questions. One is you said that you’re not going to pass any
more homes this year but what are your expectations for ’08 and ’09 in
your current markets?
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Bob
Currey:
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Yeah.
Thanks for the call, Robert. The plan is to add roughly 30,000 homes
next
year and 20,000 in ’09.
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Robert
Simmons:
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Okay.
That’s great. Thanks. And the other thing is can you talk more about the
subsidy true-up? Like, explain a little bit more how that
works.
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Steve
Childers:
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Hey
Robert. This is Steve Childers. Thanks for your question. The true-up
is
basically - it’s - in the third quarter - let’s kind of back review the -
what we actually recognized in the third quarter.
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We
recorded a $2.1 million net ICLS or Interstate Common Line Support
true-up. Two point four million of that actually was attributable
to
2006.
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And
then based on - and that was triggered by the filing of our final
cost
studies in July of this year, representing 2006, which basically
trued up
our expenses and rate-based categorization of investment for that
time
period.
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At
the same time we also revised our 2007 projections for the ICLS revenue
requirement. And that generated a positive true-up of roughly $398,000
that was booked in the quarter.
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Two
hundred and sixty-five thousand of that was attributable to the first
half
of this year. One hundred and thirty-three thousand of that was
attributable to the third quarter and should be in our run rate going
into
fourth quarter.
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Robert
Simmons:
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All
right. Gotcha. Thank you very much.
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Steve
Childers:
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You
bet.
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Operator:
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Once
again, ladies and gentlemen as a reminder, to register for a question,
please press star then the number 1 on your telephone. Your next
question
is from Chris Larsen from Credit Suisse.
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Brad:
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Hi.
Yes. This is Brad for Chris. I just had a real quick question on
your
level of cable VoIP competition now. I know it’s really low in Texas and
Illinois. But I was wondering if you could just remind us where it’s at,
where you think it’s going.
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And
then you mentioned in the Pittsburgh properties that it’s ramping up. If
you could just kind of compare the two markets and sort of, you know,
where you see that going as well?
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Bob
Currey:
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Brad,
Mediacom in Illinois, which covers about 60% of the territory, is
the only
cable company that has launched a VoIP product. You know, we’ve seen VoIP
competition from the Vonages and others but as far as the cable
competitors, it’s only been Mediacom up to this
point.
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Brad:
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Okay.
And then in Pittsburgh?
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Bob
Currey:
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In
Pittsburgh they have launched - both cable companies up there, Armstrong
and Comcast have both launched a VoIP product.
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Brad:
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Okay.
And you don’t have any idea how many percent of lines that it covers? Or
is it all of them?
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Bob
Currey:
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I
think it’s everything. It would be ubiquitous to the whole
territory.
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Brad:
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Okay.
Thank you.
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Bob
Currey:
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You’re
welcome.
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Operator:
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And
once again, ladies and gentlemen as a reminder, to register for a
question, please press star then the number 1 on your
telephone.
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There
are no further questions at this time. Please proceed with your
presentation or any closing remarks.
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Bob
Currey:
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Well
thank you, Kate. And I want to thank all of you for joining us today
and
for your continued interest and support of Consolidated. As you heard
today, we remain excited about our current position and opportunities,
and
look forward to updating you in the future.
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Thanks
and have a great day.
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Operator:
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Ladies
and gentlemen, that concludes your conference call for today. We
thank you
for your participation and ask that you please disconnect your line.
Thank
you.
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