Q2 2020 Frontier Communications Corp Earnings Call
Section of our Investor Relations website, which can be found at frontier Dotcom Slash IR.
During this call will be making certain forward looking statements.
Forward looking statements by their nature address matters that are uncertain and involve risks, which could cause actual results to be materially different from those expressed in such forward looking statements.
Please review the cautionary language regarding forward looking statements found on page two of the presentation.
On this call, we will discuss certain non-GAAP financial measures.
Please refer to the presentation for how management defined these measures and certain shortcomings associated with these measures.
Reconciliations of these non-GAAP measures to the closest to GAAP measures can be found in the presentation.
I'll now hand, it over to Rob who will lead off the presentation of the quarterly business update.
Thanks, Sheldon and thanks, everyone for joining us on todays call.
I plan to provide a brief update on our four key areas of focus.
These include an overview of the restructuring.
A summary of critical operational milestones that we've achieved.
Some comments on the continued strengthening of our leadership team.
And then finally, a review of the foundation that is being put into place to ensure that we have a platform for continued value creation as we pursue ongoing priorities.
Afterwards, I'll hand, it off the Bernie to provide more detail on our go forward strategy current results progress on our various initiatives than a review of successes to date, along with from the commentary on the impact of coated.
Finally, Sheldon will cover our Q2 results in more detail.
Beginning on slide eight.
We continue to focus on delivering value for our stakeholders to four key overarching goals that relate to the financial restructuring and the operational turnaround, which as everybody knows our being executed in parallel.
First the Finance committee is focused on managing an expeditious restructuring process. We together with the full board are working collaboratively with our various creditors and other stakeholders to navigate the bankruptcy and emerge with a recapitalized and de levered balance sheet and as a leaner and more nimble company.
Second we are progressing on our extensive operational turnaround plan.
We are focused on a wide array of efforts in all facets of the business under Bernie's leadership, which he will discuss in further detail.
Third we are augmenting our current management team through key hires.
And fourth we are positioning the company from maximum optionality to pursue and refine its strategic plan, so as to optimize enterprise value in the coming year.
Moving to slide nine let me offer some comments on the positive impacts of the restructuring as well the process itself.
Our plan of reorganization was confirmed August 20 Onest.
The plan contemplates a reduction of our total debt stack by over $11 billion and a broad support through out our credit or classes.
We expect to emerge from bankruptcy with net leverage under 2.5 times.
The plan will result in a reduction in our annual cash interest expense of over $1 billion.
As part of the restructuring process. We're currently working to secure regulatory approval from various state Pcs, where the company operates.
We already have received approval from six Pcs and are making meaningful progress with the other Pcs with whom approval is forthcoming.
We believe we're well positioned to emerge from bankruptcy early next year. Once we've received the requisite regulatory approvals.
While we've been going through the restructuring process. The team has also been focused on numerous operational initiatives to improve the business as well as refining a strategic framework to pursue and investment program, which has indicated in our disclosure materials offers very compelling risk adjusted returns.
Yes.
As can be seen on slide 10, the main takeaway that I want to highlight is that the company continues to achieve key operational milestones.
We remain focused with ongoing initiatives to stay on track to achieve roughly $125 million of adjusted EBITDA benefit in 2020.
And $400 million by 2022.
While these initiatives are starting to pay off has Bernie will discuss in more detail during his presentation.
We remain focused on executing the extensive operational improvements underlying the turnaround plan.
Moving to slide 11.
We have recently added some key telecom veteran at the senior management to strengthen our industry expertise and assistant implementing many of the operational initiatives covered on the prior page.
For example might shipping our new head of wholesale has been an essential part of our customer reset and repair effort.
Our enterprise business is still in development and Chris and fell husband leveraging has significant expertise to help us build a brand new enterprise strategy and enhance salesforce.
We believe that the enterprise business has significant upside potential moving forward.
Jim Stanley has bolstered our finance team using has analytical skill set to enhance the finance department.
And as brought in some key talent at the lower levels.
In addition to the senior leaders covered on this page we have brought in a number of hires at intermediate level to support the team.
These hires have already paid off in terms of driving the company's operational turnaround and will serve as a springboard for upgrading talent throughout the organization and ultimately through the leadership ranks.
Now turning to slide 12, we're laying the foundation for the new frontier to create sustainable value creation over time by addressing the capital structure as part of the financial restructuring.
While executing on an operational turnaround and creating a platform for value accretive investment.
More specifically and in summary, firstly upon emergence we will have a rightside capital structure that lift a significant burden, which is crowded out the ability to invest.
As you can see on this slide our net leverage will be under 2.5 times.
We will see a 1 billion dollar or 70% reduction in annual interest expense and there's further potential to decrease our cost of debt as part of opportunistic refinancing.
Secondly, we are executing on an operational turnaround.
While it will continue to take time.
We have delivered improved results to date through a focus on our product portfolio customer care churn costs and a variety of other elements.
And thirdly, we have developed and our refining a strategic framework leveraging our position in key geographic markets to invest in the business to provide compelling returns while ensuring that we have a flexible foundation to pursue our ongoing priorities.
With that summary.
Let me hand, the call off the Bernie.
Who will go into more detail on our strategy results an operational initiatives.
Thanks, Rob and good evening everyone.
As we stated a quarter ago, our overall strategies to transform frontier from a legacy utility company to a next generation broadband service provider with a much heavier mix of fiber technology.
As Rob touched on earlier this transformation not only relates to our technology, but also to our people and the company culture.
Execution against the strategy will occur along three parallel paths.
First we are actively working to stabilize and repair the existing business media initiatives that you produce significant EBITDA benefits in 2020 and beyond.
Some of these initiatives that will cover in later slowed have already had positive impacts on areas like customer churn.
We have a long list of initiatives to be deployed going forward that we'll continue to repair existing business.
Second we plan to maximize our potential for fiber investment by evaluating implanting, new fiber builds across our consumer and commercial segments.
We're working to repair relationships with key wholesale customers will make that segment of platform for network modernization.
We have also applied to participate in the upcoming Arda program and believe that it can help us.
Third we will continue they analyze and potentially reconfigure our asset portfolios to maintain upside opportunity.
And as we consider and prioritize various opportunities for network investment we plan to evaluate innovative capital structure option to allow us to do more.
But the move to slide 15, I want to highlight a few results from the second quarter, but Sheldon will review in more detail later.
In this period, we generated positive fiber net adds for the fourth consecutive quarter.
Our churn fell to 1.63%, which is both an improvement quarter over quarter and year over year.
During the quarter, we successfully divested for northwest States with net sale proceeds of $1.1 billion.
As seldom will discuss in more detail, we generated 1.8 billion in total revenue roughly 1.75 billion of which came from the 25 states that remain up to the sale of the northwest operations.
These are many states generated 703 million in adjusted EBITDA.
Moving on.
I'll now take you through some detail about our initiatives beginning with our commercial segment on page 16.
This customer segment was an effect acquired by frontier with the CTF fiber territories in 2016.
And since the acquisition it has underperformed and if not realize its full potential.
Turning to segment around starts with reorganizing the stuff. According to the size of customer type of customer new versus existing opportunities and geography.
Within the structure, there will be a much greater attention placed on existing customers with the objective to reduce churn and migrate customers from legacy modern products, such as Ethernet SD Lan and Ucas.
On the new customer side. The goal is to increase productivity by even better sales information and the target prospects intelligently with an emphasis on multi location opportunities and on that building.
As we seek to significantly improve our performance in this segment over the long run we like others have been seen short term negative impact the men activations, resulting from cobot.
Next I'll move on to our wholesale segment on slide 17, the carrier has been to build trust and open communications with our key customers to be more collaborative and to operate with a long term view towards our partnership.
We are focused on making it much easier to work with frontier via better tools and more streamlined processes.
On slide 18, I want to update you on a brownfield fiber to the home pilot.
As you May recall, we're aiming to have up to 60000, new location converted from copper to fiber it by the end of the year.
We're off to good start with over 40000 locations already engineered and over 1000 locations already built.
Well engineering and construction are important to this initiative the ultimate key to success will be how well and how quickly we can penetrate the new builds with new customers and upgraded copper customers.
Our goal is to use this trial to learn and to improve on all of our processes from analysis to design to construction and customer acquisition, and then to leverage seek learnings to larger opportunities beyond 2020.
Moving to slide 19 over the past several months, we've worked extensively to quantify the opportunity for brownfield fiber overbuilds across our entire footprint. We have concluded that these opportunities are significant.
We estimate that there are two and a half the 3 million homes with IR ours above 20%.
Five and a half was 6 million above 15% I R and ate up from 9 million above a 9% ER.
If all 9 million locations with a 9% or greater IR or where hypothetically pursue the fiber mix in our footprint would increase from 20% today, the 80% to 85%.
As we move forward with actual buildouts in our trial and beyond well, obviously calibrate our projected economics with actual performance prioritize based on what is working about and continue to analyze tradeoffs between investing opportunities based on returns and capital requirements.
On slide 20, we talk about some network opportunities beyond brownfield fiber to the home.
And alternative to converting existing copper locations with slower speeds, the fiber would be to upgrade them at a much lower cost go higher copper speeds, which could support common user needs today, such as streaming indicating.
As with fiber the key to these opportunities the towell quickly we could acquire an upgrade customers and thus provide a return on investment.
We are currently undertaking analysis to examine the economics of a cop upgrade in absolute terms versus a fiber build out.
We've also identified approximately 100000 fiber locations, which can only provide deal felt like speeds today.
We are in the process the converting these locations the gigabit speeds via hardware upgrades at an average cost of $80 per location and plan to complete this upgrade by the end of 20 Tony.
Moving on to product on page 21.
As a quick reminder of the origin of our company was invoice avoid still makes up the significant part of our revenues today that contribution however has been shrinking as technologies have evolved over time.
Similarly, TV was a big part of the strategy for us and for other telecom companies for many years as we competed be a bundle or the triple play.
As with waste TV services declining as the moves quickly towards over the top delivery inviting more and more competition as it but so.
This increase competition in conjunction with the ever growing high cost of content has made the economics of video distribution a marginally profitable.
As such we looked at ourselves first and foremost of the data or connectivity company and we need to focus on being great upside.
Other services, such as TB voice and security will continue to be sold but primarily it's add ons to secure the broadband customer.
As broadband TV invoice move forward in different directions, we're working to decouple are bundled pricing and offers to provide flexibility going forward as well as to help with our customer service and operations.
Well, then broadband TV invoice, we're also working with simplify our product offerings, which will help focus operations and improve our service delivery.
A little more about video on slide 22.
While we continue to offer video service, we have been taking necessary steps to improve the economics.
We increased TV pricing late last year, and the bundle decoupling that I just talked about all effectively increase at some more.
On the cost side, we have been more aggressive with negotiating contract renewals to keep our colleagues from chrome its quickly.
Furthermore, we are now far more willing to make the difficult decision to drop channels entirely if they cannot provide value to our customers that is greater than our costs.
As you May recall, we originally Paul to video sales during the early no contact days of cobot.
We have kept video sale to spend its and as we work to improve our economics and as we saw lesser impact on broadband sales than we expected.
With the changes the pricing cost that I mentioned, we intend to resume selling video service again sometime later this month.
Turning to slide 23, I want to talk about initiatives related to customer service and retention.
When it comes to customer retention the keys to reducing early lifecycle children are targeting higher quality customers that acquisition and improving business rules and practices related to selling.
The key to reducing churn slightly later in the customer lifecycle in other words that promotion roll off and smarter, placing a new customer offers that I mentioned earlier.
And the keys to reducing churn beyond promotion little while our offering great customer service.
This is a part of the lifecycle, where the bulk of our customer base resides in our biggest opportunity to add enterprise value.
While we still have a lot of heavy lifting ahead of us we're starting to see some improvements in our customer experience both in internal tracking and in third party surveys.
Correspondingly, while some of our churn improvement this year, it's been driven by co bid and industry trends, our customer service and trying to initiatives are clearly contributing to our churn performance.
While we're pleased with our early results. There's much more work ahead of US then behind us the mentality. The leadership team is the focus on what's ahead.
Finally on slide 24, I'd like to provide a quick update on coated.
From the onset our priority wasn't has remained the health and safety of our employees and our customers over the past few months, we've made numerous changes to our work environment to our technicians supply provisioning and to our practices and policies to ensure that we deliver on this objective.
Along the way, we created new treatments for customers and during cobot hardship via the FCC keep America connected plugs and other similar programs.
As for many organizations. The overall challenge of operating through Cobot has resulted in some operational improvements most noteworthy for frontier of some efficiencies gained installing high speed Internet service do better practices and new technology.
Some of our early concerns about bad debt related to these difficult times have turned out to be unwarranted overall for our customer base.
The last thing impact on the business side that we're keeping a close and swatch on is the lower activation activity and elevated churn in our commercial frankly.
It's been driven by businesses, it spending downsizing or ceasing operations entirely.
It remains to be seeing how long this will last and how much of lost revenues will be coverage down the road.
And that concludes our operational update I will now I'll turn it over to Sheldon.
Thank you Bernie.
I want to update you on our second quarter financial performance as well as review our capital structure given the recent bankruptcy court confirmation of our plan of reorganization.
Please turn to slide 26.
As a reminder, we close the divestiture of the northwest operations on May 1st as such a quarterly results for Q2 include the performance of the four northwest States for the month of April and then only the remaining 25 states for the month of May and June.
This slide presents our consolidated reported results for such hybrid view.
On subsequent slide if we adjust the historic periods to exclude the performance of the northwest operation. So you can see the underlying performance at the remaining properties.
As such I will discuss the companies operating performance on the following slide where such appropriate apples to apples comparisons can be made.
Consolidated net loss was $181 million for the quarter, but this loss was impacted by several non operational items.
First we had $91 million of costs for banks lawyers advisors and consultants related to our balance sheet restructuring and bankruptcy filing.
Some of which sits within operating expenses as restructuring costs, some of which now sits below operating expenses poster bankruptcy filing in a new category called reorganization items.
Second we had an $85 million charge for the right out of deferred financing fees associated with our unsecured debt, which was triggered by or bankruptcy filing which also sits in reorganization items.
Third the high level of lump sum pension payments in the first quarter triggered pension settlement accounting not only for Q1, but for Q2 and the remainder of the year, which resulted in charge of $56 million to net income in Q2.
And last we recognized an additional 136 million dollar loss on the sale of northwest operations, which was largely attributed to the estimated pension and OPEB liabilities the transfer to the fire.
As I indicated last quarter frontier as approximately $57 million of northwest divestiture proceeds health and Escrows related to the Finalization of these pension and OPEB calculations as well as related to certain contract indemnities and the finalization of to working capital calculations.
We expect these escrows were resolved within the next 12 months.
Please turn to slide 27.
Now looking at performed for the remaining properties.
Second quarter revenue was $1.754 billion down 8% year over year, driven by customer declines, including a 6% decline in total consumer customers, a 5% decline of broadband customers and a 20% decline in video users.
Looking at the components of revenue.
Data and Internet services revenue was down $36 million versus prior year, driven primarily by copper broadband customer losses, which declined 9% during the year and by declines in wholesale legacy circuit revenue and wireless backhaul.
That said versus the prior quarter data Internet services revenue was much more stable or fiber broadband revenue and customers were essentially flat over the last 12 months as our customer base has recently been growing with the introduction of our high speed data offerings.
And churn reduction efforts.
In fact Q2 represented our fourth consecutive quarter of positive fiber broadband net adds.
Voice and video service revenues declined a double digit percentage rates versus prior year.
Voice revenue declined 12.5% consistent with the decline in Q1, but higher than Q3 in Q4 declines.
The high rate of decline in Q1, and Q2 was partially attributed to the lower FCC mandated U.S.F. rates during these quarters.
The decline in video revenue reflects not only the industry shifts to over the top.
But also the impact of our strategy to deemphasize video attachments on broadband sales and improve customer value.
Looking at the view of revenue by customer type.
Consumer revenue was down 9% year over year, reflecting the trends of copper broadband voice and video that I just mentioned.
Commercial revenue for the quarter declined $71 million over the last 12 months.
65% of this decline was related to our retail segment and 35% was from a wholesale segment.
The declines in revenue were partially offset by our expense management, our expenses were down $83 million over the last 12 months.
Related to lower content costs and compensation costs, primarily in our field operations.
In terms of compensation costs, we ended the quarter with about 2500 fewer employees than last year.
13% reduction in the workforce.
Our solid operating expense performance in the quarter went in spite of occurring over $10 million of cost associated with the abandonment of certain in progress capital projects during the quarter.
Second quarter adjusted EBITDA for the remaining properties was $703 million porn adjusted EBITDA margin of 40% a slight increase sequentially.
Now turning to slide 28.
Cash capex in the second quarter was $225 million.
Cash Capex is low in the quarter for couple of factors.
First our cash Capex payments were impacted by the nonpayment of pre petition capex invoices due to our bankruptcy filing.
We estimate the cash Capex was approximately $75 million lower this quarter due to this factor.
Secondly, we continue to have lower customer capex due to lower customer acquisition activity in the quarter.
We have seen lower level customers in play across our footprint, which is driving lower gross adds but also lower churn so little to no impact on our net ads.
So we are attending similar customer levels without the incremental acquisition costs.
In terms of specific projects, we continue our build outs for connect America fund or Caf with builds completed to 594000 locations as in the second quarter.
In addition, as a normal ongoing element of our capital spend we built fiber to almost 12000 greenfield locations in the quarter and almost 20000 year to date. These are primarily housing developments within our footprint.
And our on top of the over 30000 locations, we built in 2019.
And its first announced last quarter, we're planning to pass an incremental 60000 households, with fiber and 20 Twond turning high return areas across our footprint.
We expect to spend $50 million to $50 million, an incremental capex related to this footprint expansion and adds of August 25th we have completed 1200 such households.
On slide 29, we looked at our year to date performance against the base case included in our disclosure statement initially files with the courts on June 17th.
We are tracking well with both our revenue and adjusted EBITDA for the first half of the year exceeding the disclosure statement case.
Revenue was $11 million better versus plan, driven by lower customer churn levels.
And adjusted EBITDA is $15 million better where we're seeing some additional cost benefits from lower gross add activity.
Moving to slide 30.
As Rob discussed earlier, our plan of reorganization was confirmed by the bankruptcy Court on August 21st.
The key components of the reorganization plan in the following.
First over $10 billion of our unsecured notes will be equitized.
The unsecured bondholders will also receive up to $750 million. It take back then.
The second.
That will further be reduced spend repayment of our pre petition revolver, which will occur upon court approval of the dip motion currently scheduled for mid September.
Finally, the remaining unrestricted cash above $150 million subject to certain adjustments is to be distributed to the unsecured note holders upon emergence, which we expect recur in early 2021.
As a result of this reorganization frontier expects to emerge from bankruptcy with the mature deep de leveraged balance sheet and ample liquidity to pursue operational and strategic initiatives.
Our pro forma emergence net leverage will be 2.3 times among the lowest in our industry.
Also in August we have secured $165 million of additional commitments for our emergence revolving credit facility, increasing the size of this facility to a total of $625 million.
The reorganization plan will also result in reduction of interest expense of approximately $1 billion from pre bankruptcy levels.
Furthermore, we are actively considering opportunities to reduce this interest expense, even further by refinancing some or all of our reinstated debt given current market conditions.
That's refinancing could be in a form of new secured notes.
Or new secured term loans.
This concludes our presentation I want to thank you for joining todays call and we look forward to updating you on our continued progress next quarter.