Q4 2019 Earnings Call
[music], ladies and gentlemen, thank you for standing by welcome to the consolidated Communications holding Inc. fourth quarter 2019 results conference call.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session to ask question. During this session you will need to press star one on your telephone keypad.
Please be advised that todays conference is being recorded if you require further systems. Please press star zero on your telephone keypad I would now let's turn the conference over to your Speaker today, China for Saudi Please go ahead.
Thank you and good morning, everyone I would like to welcome you to consolidated Communications fourth quarter 2019 earnings call.
With me today, our bottomed out our president and Chief Executive Officer, and speech Gilbert our Chief Financial Officer.
My comments today, we'll highlight our strategic initiatives and our operational results.
He will provide details on our fourth quarter financial performance and 2020 Guy.
Following their prepared remarks, we will open the call up for questions.
Are we proceed I will remind you our earnings release financial statements and do this quarter in earnings presentation are all posted on our Investor Relations section of our web site at consolidated Dotcom.
Please review the Safe Harbor provisions on slide two of the presentation. Today's discussion includes statements about expected future events and financial results that are forward looking and subject to risks and uncertainties.
Discussion of factors that may affect future results in the container consolidated filings with the easily.
Today's discussion will also include certain non-GAAP financial measures.
Earnings release includes reconciliations of these measures to the nearest GAAP equivalent I will now turn the call over to Bob who don't.
Thank you Jennifer and good morning, everyone.
2019 marked a transformational period for consolidated communications, we grew broadband data and transport revenue and improved cash flow well, we finished integration projects and transitioned back to our focused on continues continuous improvement of the business across all markets.
Our strategic imperatives would you can see on slide four of our presentation, our consolidated road map for success.
First we are committed to producing stable earnings and growing free cash flow, we delivered stable and consistent adjusted EBIDTA and revenue in the fourth quarter.
We are leveraging our fiber networks and demonstrated growth in broadband revenue and commercial carrier data and transport revenue. This is further offsetting the managed declines in legacy services.
We remain disciplined and optimizing cost as well as prioritizing every dollar we invest with a focus on the highest return projects and ultimately growing free cash flow.
Our second strategic imperative is leveraging our fiber assets across three customer groups carrier commercial and consumer.
We are investing in and edging out our fiber network and have built nearly 600 fiber route miles in the last year.
As a top 10 provider of fiber provider in the U.S., we're delivering competitive broadband solutions to rural America lighting buildings offices and homes across 23 states.
Stable earnings and cash flow combined with leveraging our fiber assets lead to our third strategic imperative and that's executing on our capital allocation plan, which we announced last year I'm pleased to report we are delivering on this plan and did exactly what we said, we would do pay down debt and strengthen the balance sheet.
We retired over 27 million in senior unsecured notes during the fourth quarter and 55 million since announcing our capital allocation plan in April.
Essentially we've taken our entire dividend savings to pay down debt and lower other our leverage ratio.
Our final strategic imperative is reviewing our portfolio of assets for investment or monetization to ensure all assets have a long term strategic fit.
The sale of our polls in Vermont last year is a small example of a non strategic asset divestiture, which generated 13 million in cash proceeds.
Our plan and priorities are clear for our entire team we remain laser focused on our strategic initiatives and believe that continued execution on our plan will differentiate us within our peer group and within the communities we serve.
Now I'll update you on some of the highlights and the progress we have made with in our operations.
We grew commercial and care date, and transport revenue, 2% in the fourth quarter.
Well I am pleased with this growth our target is higher in 2020, our sales teams airline and energized and our marketing strategy as refined and we've added to our sales channels.
Our care sales team is doing an excellent job of negotiating long term contracts that continue to drive gig Ethernet sales and offset Tdm services.
Many 19 was a record year with more than 700 wireless facility upgrades.
Total <unk> total tower connections under contract increased by 4.5% year over year, reaching approximately 3900, Tony tower connections.
We continue to collaborate with wireless carriers to optimize their capacity needs and provide transport solutions that offer diversity and maximize utilization for peak performance.
We're building out capacity within our carrier grade fiber network to support wireless densification, especially in rural areas, we're well positioned to be the backhaul provider of choice with high reliability and excellent back office and an experienced team.
Our network investments made for carrier services are also benefiting our commercial customers. We connected 1800 newbuildings onto our network in 2019, an increase of 18%.
Approximately 90% of new sales generated in 2019 were on net which correlates to higher margins increased opportunity to add products and a greater ability to ensure the best customer experience.
In 2019, consistent with our commercial product roadmap, we launched a new virtual intelligent agent solution, we enhanced our cloud secure solutions and launched Microsoft productivity suite.
We built and partner to deliver highly competitive solutions for businesses to stay connected be productive wherever they are and whatever device. They may choose to use.
Our 2020 commercial product roadmap is focused on enhancing our cloud and security services as well as launching new premium data services, including secure broadband.
We are launching a new channel partner program next month called partner, one which offers new incentives and benefits for our agent partners to do business with consolidated.
Partner, one features a new full service portal.
Performance base recognition program and other benefits, including new marketing tools.
This is redefining our channel program and it gives us the opportunity to reinforce our commitment to existing partners and drive greater awareness of our brand amongst potential new partners.
Now turning to our consumer channel our focus is to lead with broadband and grow ARPU through speed upgrades in the last two years, we have increased speeds to more than 750000 homes, primarily in northern New England. These upgrades were only incremental investments made possible because of our robust fiber network and its close proximity to end use.
There's.
Virtually 100% of our consumer customer base is connected to the network through either fiber to the note or fiber to the home.
We have the flexibility to connect directly to the fiber network or use lower cost alternatives to deliver speeds determined by the local competitive environment. Our core fiber network allows us to maximize our network delivery in order to grow broadband revenue and most in the most cost effective manner.
Consumer broadband revenue grew 1.4% in fourth quarter, despite the fourth quarter being our high watermark typically for seasonality. This is our third consecutive quarter of broadband revenue growth.
And our success with public private partnerships continue in the fourth quarter, we completed the fiber overbuilt and Chesterfield New Hampshire in the three months since completion, we have been activating customers and have seen the average speed grow by more than four times with approximately one third of the orders being first time customers.
We have five more fiber overbuilt projects similar to Chesterfield targeted for the second half of 2020.
Our fiber rich network positions us well to partner with communities to deploy last mile fiber in rural areas that would otherwise be difficult to justify financially.
Through a combination of efforts, including public private partnerships innovative fixed wireless and new technologies, we continue to improve our consumer broadband business.
Also in the fourth quarter, we completed the launch of our streaming video service branded CCTV across northern New England or it is early in the launch we are fine finding that nearly half of all CCTV orders come from customers also activating a new broadband connection with us and approximately one quarter of them with broadband service.
Our upgrading their speeds.
We have made measurable progress in our consumer markets, delivering faster speeds and providing a quality experience, which establishes the groundwork for products like CCTV.
The cumulative effect of this strategy is a platform that gives us the ability to more effectively complete compete on on lower capital intensity, ultimately driving higher revenues with lower churn.
I will now turn the call over to Steve who will provide details on our financial results for the fourth quarter as well as an outlook for 2020, Steve.
Thanks, Bob Good morning, everyone slide five summarizes the company's fourth quarter full year results I am pleased to report that we achieved our 2019 guidance for adjusted EBITDA as we produced another solid quarter financial result in demonstrated progress on our capital allocation plant operating revenue for the fourth quarter totaled 331.
1 million and generated adjusted EBIT of 130.9 million EBITDA margins remained strong at 39.5% for the quarter, 39.2% for 2019.
Now, let's discuss each of our customer channels, turning to commercial and carrier revenue totaled 148.9 million in the fourth quarter data transport grew 2% in total approximately 90 million in the quarter.
Services revenue declined 2.8 million, while other revenue declined 3.9, primarily due to the timing of equipment sale, which on average have margins of approximately 10 or 15%.
Within our consumer channel revenue was down $4.3 million were 3.2% year over year.
Consumer broadband revenue grew 1.4%.
In the fourth quarter and this is our our third consecutive quarter and broadband growth consumer ARPU increased 4% or just over $3 per unit, we continue to realized positive momentum by leading with broadband specifically in our newly upgraded areas consumer voice revenue was down 7% or three.
$3.4 million for the recent quarter.
However, our voice services revenue decline was nearly cut in half from a year ago.
We attribute this to a more robust broadband offerings, which contributes to more positive voice revenue trend.
Video consistent with our strategy to transition from low margin linear video to broadband streaming services declined 1.8 million, which was entirely offset by reductions and video programming expense.
Network access declined 4.3 million subsidy revenues remained at our expected $18 million run rate. Following the last transitional step down per cap to that occurred in August 2018.
With respect to subsidies the FCC released the final order for the rich rule digital opportunity fund on February seven in our view the final order improves substantially with some of the enhancement for example, bringing certainly on transition revenue and new search service tiers and auction ratings that we believe will be advantageous for fiber.
Infrastructure providers.
I remain optimistic about the opportunity to expand broadband capabilities and rural markets with the support embargo off we will evaluate the economic opportunities within our service area in will be aggressive as we look to enable access to underserved areas now turning to operating expenses exclusive of depreciation and amortization.
Operating expenses totaled 212.7 million in improvement at 10.4% or 24.6 million from the prior year.
We continue to identify and implement initiatives to transform the business and optimized free cash flow.
Track record speaks for itself in this area as we had been have been and will continue to be very focused on improving cost structure as our revenue mix changes.
Cost of service and products declined 18.5 million, driven by network cost or optimization, and lower salaries and benefits associated from the ongoing cost savings initiatives.
So you know any costs were reduced 6 million in the recent quarter, primarily due to operational synergies and ongoing efficiencies.
Net interest expense for the quarter was 33.4 million down 2.1 from the same period last year, our weighted average cost of debt was approximately 5.6% as of December 30 Onest.
Cash distributions from from the company's wireless partnerships were 7 million in the fourth quarter compared to 10.3 billion a year ago.
Due primarily to accelerated partnership capital expenditures in the fourth quarter.
For the year wireless cash distributions totaled 35.8 million compared to 39.1 million in 2018 for 2020, we expect distributions will be in line or past run rate in the range of 30 739 million.
Adjusted net income per share was one cents compared to a net loss of nine cents per share a year ago.
Prudent reflects the consistency of our operating result, and a decline in depreciation expense.
We invested 47.9 million capital expenditures during the quarter, which supported success based projects and broadband network infrastructure expansion for the full year 2019, Capex totaled 232.2 million and included 57 million and nonrecurring costs for hurricane.
The restoration and integration projects.
Total liquidity liquidity, including cash on hand availability under our revolver was approximately 82 million.
We retired over $27 million and senior unsecured notes at par value in the recent quarter, when we announced a change the cap allocation, possibly policy last April we committed to re purpose in the dividend savings for the last half of 2019 pay down debt. We actually retired 55 million in our senior unsecured notes at par value.
2019 in 2020, we will further commit to using substantially all free cash flow to pay down debt. We will continue prioritize be opportunistic opportunistic with open market purchases of our bonds.
Our net leverage ratio was 4.33 times at the end of the fourth quarter.
Our consistently strong operational execution, coupled with our capital allocation strategy and focus on improving the balance sheet will enable will enable us to achieve our total net leverage target of four times by the end of 2020 and position us for refinancing no later than mid 2021.
Now I'll review, our 2020 guidance as out warm outlined in our earnings release and on Slide 12.
We expect adjusted EBITDA to be flat 2019 resolved and be in the range of 520 525 million.
Cash interest expense will be in the range of 125 $230 million cash taxes are expected to be one to 3 million capital expenditures are targeted to be in the range of 195 to 205 million and as part of our capital allocation policy, we are enhancing our outlook metrics by providing guidance for free.
Cash flow, which we expect to be in the range of 145 to 155 million for 2020.
I'll now turn the call back over to bump for closing remarks.
Thank you, Steve I am pleased with our progress in producing stable and consistent EBITDA and revenue, while reducing operating expenses and while executing on our capital allocation plan. We are diligently focused on strengthening our balance sheet.
We continue to build out fiber assets and while our sector is under undergoing continued transformation.
Consolidated remains to growing top 10 fiber provider in the United States delivering on our promise of providing competitive broadband solutions to Rural America. We're excited about the strong momentum and position we have going into 2020. Our path forward is about building long term sustainability and value for our investors our customers.
And our employees.
I will now turn the call over to the operator for our first question.
At this time, if you'd like to ask a question over the phone lines. Please press Star then one on your telephone keypad. Your first question comes from the line of Jennifer Fritzsche of Wells Fargo. Your line is open.
Great. Thank you. Thank you very much congrats you guys great quarter.
The the area you can't control on the Bryson dividend with a little bit lower than what we are looking for which I guess makes your results even more impressive but.
What are you what are you seeing there I know, we all know Verizon is undergoing a fairly large piper initiatives is that hitting some capex there.
We'll have a follow up.
Hey, Jennifer this is Steve. Thank you for your question in your comment about the core I'll take the first part and Bob might want to add onto it but we expect the distributions in Q4, they were a little bit lighter than what we expected at the 7 million there were there with some accelerated capex coming in.
To the Q4 distributions for for Us.
They all over the course of the year Horizon also and rising wireless also implemented a new lease accounting.
Rules that.
Sort of a onetime effect on full year distributions, but for fourth quarter. It was primarily the timing of Capex and we have some visibility to Q1 distribution. So we're we're back we are back on track for.
What you might expect than what we expect.
Got it okay.
And then I could just you had talked about.
Selling some assets in the past that night at the core to your fiber strategy is that still and sorry. If you mentioned as continued focus that means it came back from Metro connect last week, where it seems like there's a lot of fiber.
Bye.
Including non cyber our lack assets lot of interest given the right away and wondering if you are being opportunistic.
Negotiations or discussions, yes, those Jennifer it's Bob and those.
Discussions take have a long lead time associated with them. So.
In our prepared remarks and will reinforce that here.
We're looking at ways to optimize.
Our assets, including divestiture, where it makes sense core.
Certainly assessing for continued investment we have we have assets, we feel really good about we've been intentional about the things we've acquired but where there's interests were entertaining that and we'll continue to explore the best options.
To maximize value for shareholders and that includes considering.
Divestitures.
And entertaining those discussions.
Got it thank you very minutes.
Your next question comes from the line of Greg Williams of Cowen Your line is open.
Great. Thanks, and again correct congrats on the quarter.
So I just wanted to talk about Bobby mentioned, how in consumer leading with broad band.
And then growing ARPU in turn and as I look at the model you did lose.
Outside level customer a consumer connections.
Yet your ARPU growth was at near record Heart, Hi, So as I take your scripted remarks, and I look at the models at the new sort of cadence, we should look at as any outsized losses on the customer level, but but these are the gains as they take speed uptake in they take a new video product.
Then I've a follow up thanks.
Yes, thanks, great for the question what Youre seeing is in the competitive areas, we're continuing to upgrade speed.
Resolutely and and so yes, you are seeing the two tier speed upgrades on the average bring us ARPU lift.
And Thats outweighing some of the the.
The lower speed less competitive areas, where we might be losing some some customer base, but but it's it's really predominantly weighted by the places we're doing upgrades and the the increase in share we're seeing there.
Got it and then second question is on EBITDA and maybe at the risk of thinking about longer term EBITDA, obviously very solid guidance and if I recall you guys. How to think that 12 projects that you are working on in the fourth quarter. You closed six then I think six more cost efficiency projects, you're closing in the first quarter.
I imagine that had a lot to deal with the.
Solid EBITDA guidance and I would just hoping you can talk about the trajectory of the savings and when they come through each quarter in the year end and more importantly can you sort of identify these projects.
Specifically what are they because they're trying to understand.
How many more projects would you have in the pipeline as we think about EBITDA sustainability beyond 2020 is there is there more efficiencies and transformations to be realized.
As we think with the outer years with that revenue mix pressure. Thanks, Yes. There really are in this this is a.
A benefit of transitioning from integration to our normal cadence of continuous improvement the scale. That's been provided by the acquisitions. We've done has allowed us to do platform upgrades that you otherwise wouldn't necessarily be able to justify and that is giving us significant automation opportunities and.
And the ability to refine refine the business process and and I'm not going to go through every project.
Because some are in different stages of of implementation, but thats the benefit for example.
The platform that Weve deployed in the last year that gives us.
Automation capability.
Started with.
Automating the most frequent transaction in the consumer side and that's that's helped us in the quality of service improvements, it's helped us get better information to the fuel tech's for for deployment.
The installations and we're now spreading that into the commercial.
Process.
Development activity and.
And installation activity and shortening.
Sold to build.
Timelines as a result.
And we're driving that through the entire business. So there is there is now a list of 26 projects, we roll some off we add some on and and we have.
Our ops executive gave Wagner lead that cost reduction discussion with support from our CTO and CIO and they're very closely aligned so that each time.
New project comes up Steve and I do a cost benefit analysis with the team and and.
And it's a very disciplined approach so it's really.
Function of turning that integration focus to refining the business as usual and getting.
All the focus on getting deeper penetrations across the three customer groups.
For which were leveraging common fiber assets.
So yes capital projects continue Greg and they continue to roll out and deliver and that's why we have the confidence to give the guidance on EBITDA and cash flow that we're giving.
And just the trajectory of the quarter by quarter as I think about those savings coming through.
Yeah, we're being very careful.
Two.
I guess careful as probably the right were deliberate.
In making sure that we see delivery of those things to feed our budget and and so theres theres, a little more of that that that bleeds out and second third and fourth quarter.
Just by nature of of kicking off things as we end the year.
But.
But.
It is a set up then for for 2021, and we're always putting new projects in Q or looking for how do we match.
But the cost model with where we see the revenue trajectory.
Got it thank you.
Again, if you would like Dusty question over the phone lines. Please press Star then one on your telephone keypad.
Your next question comes from the line of data server.
Wells Fargo. Your line is open.
Davis.
Hey, good morning, guys.
Nice to see the guidance that.
Thats impressive and.
I think you've already touched on some of the.
Moving parts there.
Can you share with us anything on the Capex side like broadband subscriber growth.
Yes.
Offsetting pressure and voice and video how you're thinking about some of the some of those metrics when you're looking at your 2020 guidance.
I think the the way to think about it right now is the im going to probably do some work on.
On the metrics.
And and helping you with that but the ARPU and the the trajectory on.
Data invoice are going to be impacted by the speed upgrades and the reduce churn that's associated with those I mean, we're seeing.
Turn.
Despite some of the.
Data low speed losses.
We're seeing great progress on churn on both voice and data and so there's a significant improvement as Steve mentioned.
In the in the Q4.
Reflection.
Significant improvement and consumer voice as a result of retention on the broadband side and and so that's that's helpful and I think you'll see that in the ARPU numbers as well as in the revenue line on voice.
Okay. That's helpful and given the recent Cincinnati Bell announced transaction I guess thats still influx, but.
How do you think about I guess that turned a lot of has when people are thinking about fiber and you've mentioned fiber a lot on this call do you have any footprints that you would say would be.
Similar to Cincinnati Bell in their fiber to the home and fiber to the Prem.
Build out.
Yes, I think the way to think about our businesses.
We are we're fortunate that we've either like in Texas, California.
Pennsylvania, we have been deploying fiber, Illinois for that matter Weve been point deploying fiber for years and.
And.
Some of the areas, where we bought or acquired assets with deep fiber, even though it may not have had the onramps and offerings like northern New England. We're quickly accelerating those those connections and so we have pockets of what might look like Cincinnati in five different regions and that serves us very well add.
Yes, it gives us the diversity of having different regions in the economic.
Environments in those regions.
That allow us to put multiple levers and think of five regions and three customer groups at 15 levers, we can pull to balance the cash flow end to end the delivery on on our commitments throughout the throughout the year. So.
If you look at the upgrades we've done.
It's a 750000 in the last.
18 months to two years and Thats allowed us to increase our competitive speeds.
In the most densely populated areas and since 2006 in California, and Texas, we've been deploying only fiber so it puts us in an excellent position those would be very similar to what you see in.
The concentrate investment that that Cincinnati Bell made and since then.
Okay excellent that's that's good color and I've got two for Steve.
You mentioned, you're continuing to repurchase senior notes in the market as a possibility, but has anything changed with how you're thinking about a more comprehensive refinancing extension of your maturities or do you want to wait to see how this this asset portfolio review plays out.
Well there's thick. Thanks for the question. We so we're looking at all things relative to capital structure right and the deck on page eight we have our maturity towers and stacks and I guess the way we think about it for the short term is where we have number one we're focused on execution of the business make sure that we are.
Got it can deliver that 525, 25 retail but to be able to invest the 145 to 155 and.
In debt pay down and as I said, we would prioritize.
Open market repurchase of bonds with particularly for trading.
Discounts, but nice to see them trade up here lately. So we do have the revolver that that we need to deal with this year. We are we've already kicked off conversations with our relationship banks optimistic about being able to get that done in the meantime, we were going to continue to prioritize paying down the senior notes or.
Getting to zero in the revolver whichever kind of comes first but to your question.
We're closely following market conditions were closely following what's going on.
The peer group.
Mentioned, Cincinnati bells, while some of the other guys it might be going through some restructuring. So we are looking at everything if we could.
If we could do a holistic refinancing we would do that but again, we're we're set up where we're taking that revolver. This year. We're focused on doing the senior notes by mid 2021 at that time, we'd be we would consider doing something holistic, but we'll do it assumed we would move as soon as market conditions based.
And our resolved allowance.
Okay. That's very helpful. And then just last one from me on pension contributions how are you thinking about that for 2020 as that included in your free cash flow guide. Thanks for taking all the questions. Yes. It is we also have a free cash flow reconciliation in the tab and I think we have a 30 for this year.
We have 30.
Six number I think it took about a 34 to 35 number for 2020.
Okay, great. Thank you.
Again, if you would like test question over the phone lines. Please press Star then one on your telephone keypad.
There are no further questions over the phone lines I turn the call back over to the presenters.
Well, thank you and thank you all for joining the call today. We appreciate your continued interest in consolidate communications and look forward to updating you on next quarter have a great day.
This concludes todays conference call you may now disconnect.
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