Q3 2020 Frontier Communications Corp Earnings Call
All of that frontier Dot com slash IR.
During this call we 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 the 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.
Please refer to the presentation for how management defined the these measures and certain shortcomings associated with these measures.
Reconciliations of these non-GAAP measures to the closest GAAP measures can be found in the presentation.
I will now hand, it over to Rob who will lead off the presentation of the quarterly business update.
Thanks Sheldon.
Good morning, and thanks for joining us before we dive into the details of our quarterly Investor up day I, just like the take a few minutes to discuss the state of our reorganization generally and the progress we have made starting with slide eight.
The team has made significant strides in the last year moving beyond the one dimensional focus on recapitalizing the balance sheet instead.
Instead, we pursued a full scale transformation, which has come to the fine our view of the successful outcome.
Let me provide a bit of background in many restructuring if there is often the predominant focus on addressing the balance sheet and reducing leverage with such activity being necessary, but not sufficient to effectuate a full scale transformation.
However in frontiers case, we approach this through a much wider lines, we realized early on that while the company would have to significantly recapitalize the balance sheet the.
It was an opportunity to preemptively of proactively take a much more holistic approach the.
This led us to not only address the capital structure, but to also implement and operational turnaround and to strategically reposition the frontier of while concurrently adding talent at various points in the process.
All being done with the intent of creating the plan for value creation.
This framework served as the foundation of for productive engagement with our stakeholders around the capital structure, which we proactively initiated.
We're pleased that are the old holder advisors and our note holders constructively engaged with us and of supported our turnaround plan and the strategic plan for value creation.
They understood our approach to strategically repositioned the business assets under various investment scenarios using the virtual separation framework, we developed the transformed from a legacy provider of copper based services to a fiber based provider.
The dialog with the noteholders on recapitalizing, the balance sheet was driven by how the business might perform and what opportunities the strategic plan would present.
At the time, we were proactively developing the turnaround plan for.
But in advance of engaging with our note holders. We strongly believe that we were in need of the leadership team that have the appropriate skills to execute this plan with the relentless focus on driving performance and accountability.
Too often a restructure and lead to a scenario in which the focus on addressing the balance sheet crowds out the level of the tension needed to address the operating performance, which in frontiers case was unclear need of improvement.
The Finance committee determined the Bernie Han what that leader.
Turning was named the CEO in December of 2019 to stabilize the turnaround frontier is operational performance, while supporting the committee is focused on strategically repositioning the company for the long term.
Bernie has been able to dramatically improve frontier is operations across multiple metrics, while laying the foundation for the company's seamless the emergence from chapter 11.
As you can see on slide eight since that time frontier as the moving through a large scale transformation with a focus on for pillars.
Namely the for pillars are a restructure them recapitalized balance sheet and operational turnaround strategic repositioning and talent enhancement.
Each pillar was supported by its own set of work streams and explicit goals.
Let's start with the recapitalization of our balance sheet on slide nine upon.
Upon emergence will have increased our financial flexibility with the reduction in debt of about $11 billion and a reduction in annual interest expense of $1 billion. This will lead to a pro forma debt to EBITDA ratio of under two dot five time.
We're able to achieve this in large part three of the substantial constructive engagement with our various note holders in.
In addition, we recently completed of for Dot nine $5 billion refinancing of the first and second lien debt, which reduced annual interest by an additional $60 million extended maturity to 2027 and increased first lien debt capacity by $800 million to one point.
6 billion.
The second pillar of frontiers holistic transformation is the stabilization of our operating performance with some highlights that we've covered on slide 10.
As discussed Bernie Han was hired in 2019 to spearhead this operational turnaround.
Over the past year, he and his team has implemented a number of initiatives focused on creating a higher performance products suite, which of put frontier on track to achieving the $400 million or so of targeted annual EBITDA benefit by 2022.
Notably, we've significantly reduced churn year over year, leading to the company's fifth straight quarter of positive consumer fiber broadband net adds and improved wholesale and enterprise operations.
The third pillar is the repositioning of the company.
Shown on slide 11.
Over the past 18 months frontier define the strategy and initiated the transformation of the company from a legacy provider of cost of services to be in a fiber rich provider of communication services.
We've done this by establishing a detailed plan for investment to expand the fiber footprint and strategically reevaluate individuals fade operating performance employing a virtual separation framework determine how to optimize our returns on invested capital.
The Companys go forward business plan for the modernization plan implement fiber builds including some builds managed through the Arda program. The transformed the company's footprint and pass an incremental 2.9 million homes as the long term target over the next 10 years or so.
The modernization plan is expected to be completely self funding through organic growth generated operating cash flow of the business and has been developed with strict return on capital hurdles, allowing for very attractive returns.
The expected shift in the subscriber base from the modernization plan, we will increase the percentage of fiber subs from 45% today to 87% over the planned horizon and will drive the transformation of business mix that at the expected to result in 75% of revenue coming from fiber.
Product for the long term as compared to about one third of today.
With the execution of our modernization plan frontier will be a much more fiber rich company with a total of nearly 6 million fiber enabled households over the long term.
Critically to reemphasize, we have set us up to be self funding and under strict and very attractive return on capital hurdles.
Further we have done more than just develop of plan.
We have rolled out a pilot fiber to the home program. This year and expect to reach up to 60000 the homes in 2020, starting from the deal.
In addition, as on other proof point of the FCC recently reported frontier one over $370 million of total government subsidy over 10 years across California, Florida, Texas, Connecticut, West, Virginia, Illinois, New York and Pennsylvania.
With these actions we have clear evidence of not only our Tam.
At our success to date in transitioning from the legacy of provider of copper based services to a next generation provider of fiber rich infrastructure in.
In addition to the fiber passing of the plan there is significant actionable and attractive investment opportunity beyond our monetization plan the can be pursued with access to incremental capital.
Investors should take note of our success to date as proof points of our building our internal capabilities required to execute the longer term growth plan.
Obviously, we have made another move with respect to put in place the leadership talent to take the company through its next phase upon emergence based on today's release regarding our CEO transition.
This is consistent with our fourth pillar.
The fourth pillar of frontiers transformation is the recruitment of a world class team to lead the company forward.
As we've said we were very fortunate to appoint Bernie Han who is delivered a tangible outcome of substantially improving operating results, which forms the foundation for the company's emergence.
And working with our note holders. We also attracted John strength and executive with a proven track record leading telecom businesses through periods of intense change based on the plane with pivotal senior executive leadership role during the horizons owned transformation.
John has been serving as an observer to our board and Finance Committee and will join frontier as executive chairman upon the merchants.
John has made important contributions in the support of the Finance Committee of leadership and the company will continue to benefit from his expertise at the overseas frontier strategic direction. Following the company's of emergence from bankruptcy.
In connection with Frontiers restructuring support agreement. The search committee was formed consisting of for individuals including two individuals designated by the company's note holders and to current frontier Board members to evaluate the company's leadership needs, including the potential CEO succession process.
Following a comprehensive review of both internal and external candidates and with the assistance of the leading executive search firm and two additional note holder Representatives. The search committee arrived at the conclusion that Nick Jeffery is the right choice to assume the president and CEO per ton from Bernie Han and effective on or around.
The March Onest 2021 lead.
The lead frontier to its next phase of the investment and profitable growth.
Our board unanimously voted income pen to a point Mick as our next president and CEO.
The board felt that the company is that a natural juncture to initiate a seamless transition and to pass the CEO. The time from burning who is put in place the foundation, which will allow Mick a running start.
Nick brings nearly 30 years of operational expertise and leadership in the telecommunications industry most.
Most recently he served as CEO of Vodafone UK, a leading wireless and wireline operator, overseeing one of Vodafone group's largest businesses through a successful for year customer centric turnaround and transformation.
During his tenure of Vodafone the pay return to revenue and market share growth and achieved improvements to its net promoter score churn and wider customer and employee satisfaction.
Vodafone UK also reduced its operating expenses delivered significant EBITDA growth increased its free cash flow and became the fastest growing home broadband provider in the UK.
Nick will join us as CEO of following the termination of these Vodafone UK employment agreement, allowing them to join the CEO on around for March Onest 2021, as I previously indicated.
We are fortunate that Bernie will remain at the board member true emergence and we'll work with NEC in guiding the CEO transition.
On slide 13, we provided the timeline of key milestones during the frontiers transformation process. Many of which we have discussed previously there was no need to review this the other than to comment that each of these actions were part of a well thought out mosaic debt fit within our for pillar transformation plan dating back to early 2019.
Let me conclude on slide 14, we.
We feel confident about where we are in our transformation on the progress made in each of our focus areas.
Upon emergence first we will have a significantly de leveraged capital structure and substantially reduced interest expense, creating optionality to invest.
In value opportunities SEC.
Second we will the executed the first phase of an operational turnaround reducing churn improving our levels of customer service, leading out the unprofitable product mix and expect to be on track to deliver $400 million plus of EBITDA benefits in 2022.
Third we will be moving with the plan that well underway to reinvest in the company to transform into a fiber based provider of communication services moving us into a new neighborhood, whose value should be recognized by our investors.
And for <unk>, we will have a new executive team, who will be up to speed and ready to hit the ground the running to lead the company through its next transformation phase, which is based on profitable growth the.
Delivering the highly attractive returns.
So in summary upon emergence the company will be on track to achieve these non strategic and financial objectives. The established by the Finance committee, while ensuring a seamless leadership transition.
We're looking forward to completing the financial restructuring and emerging from chapter 11 in early 2021.
Now, let me hand, it off to Bernie to provide more detail on our progress on our various operational initiatives and to provide a review of success to date, along with some commentary on our reinvestment plan and.
And then to conclude Sheldon the will discuss our Q3 financial results in greater detail Bernie.
Thanks, Rob and good morning, everyone if.
If you move to slide 16, I want to highlight a few results from the third quarter. The children will review in more detail later.
In this period, we generated positive fiber broadband net adds for the fifth consecutive quarter, which shows our ability to grow market share. When we are not at the network. This advantage to our cable peers.
Our consumer churn the came to 1.81% of.
Year over year improvement, resulting from our operational churn initiatives.
But a little higher sequentially due to some seasonal increase in consumer activity as well as the impact of Covidien 18 on Q2 2020 of the.
Consumers generally avoided software providers during the initial months of the paying debt.
We generated $1.7 billion in total revenue in the quarter.
We are seeing stable the modest growth in consumer broadband revenues driven by the FDA for mentioned improving fiber broadband performance.
Our adjusted EBITDA was $690 million, resulting from continued strong operating expense performance.
Finally during the quarter, we posted positive net income of cooking the.
On slide 17, I want to update you on our progress of the fiber to the home pilot.
As discussed in our previous Investor reports, we are aiming to of up to 60000, new locations converted from copper to fiber by the end of the year.
As of November Thirtyth, we of engineered over 60000 homes, surpassing our 20.8 goal.
We have completed construction of about 60% of our target locations and continue to ramp quickly or remain on target to reach our year end goals.
Although the still very early in the process our offer is very appealing to customers.
While we are successfully converting existing copper customers. The fiber most of our early gains are coming from winning net new customers early.
Early penetration of our crews are performing at or above targets.
We will continue to monitor customer acquisition trends as more homes are open for sale the pilot program matures.
Our ultimate goal is to use the learnings from the pilot program for the better implement our larger scale build beginning in 2021 of the dog.
We aim for continually improve our analysis design construction marketing and customer acquisition as we begin the convert more infrastructure of fiber.
Moving on to slide 18, I'll provide some additional color around the recent fiber broadband performance.
Our broadband first approach continues to be successful for.
For broadband net adds remained strongly positive for the fifth consecutive quarter.
In Q3, we saw the first the increase in churn since Q2, 2019, partially driven by Fox sports content drops although.
Although churn increased slightly it is still below pre kogan levels largely due to our ongoing training initiatives that are centered around the early lifecycle of customers and at the time of promotion roll off.
This uptick in churn. It's also partially related to an industry wide trend of consumers increasing activity following of reopening of the uptick cobot locked, though which also called the increases of growth.
We are encouraged by our sustained success in the fiber broadband space and we'll continue to monitor and improve the effectiveness of our customer attention the acquisition strategy.
On slide 19, I want to provide some other operational updates.
We continue to negotiate contracts with content providers and implement further content drops that they do not align with our long term strategy.
Q3 content drops, including box regional sports networks, MSG, FX movies, and not Geo wild are expected to achieve roughly 15 million quarterly run rate savings.
On the company's modernization plan, we are building on our successful fiber to the home pilot program. This year and we have begun the extensive planning and engineering for our 2021 builds.
The 2021 builds will leverage the planning engineering construction the marketing knowledge gained from our 2020 pilot.
And we'll continue our execution against our overall part of our expansion goals in our modern efficient player.
Additionally, we have begun implementing a multi phase plan to simplify our product offerings and pricing structures, the streamlined operations management and to improve the overall customer experience.
Finally as of November Onest 2020, we of fully transitioned from the northwest sale and we have essentially ended transition support services provides the deplete related their acquisition of the northwest operations.
Next I will discuss our plans to reinvest in our network on slide 21.
No. The modernization plan, we plan to nearly double the passing of of our fiber footprint over the long term through strategic modernization of our existing copper footprint.
As Rob mentioned earlier, we along with our advisors have the working diligently over the last 18 months to develop a comprehensive multi year reinvestment plan.
Then the modernization plan, we will target the highest the IR project opportunities, where the focus in our most attractive geographic markets.
This plan is completely self funding through organically generated operating cash flow of the business.
The forecast the returns from this reinvestment program of supported by an attractive competitive environment across our footprint, 92% of homes pets creates one or no wireline competitors.
And by the superior performance of fiber broadband over copper broadband, including higher ARPU higher market penetration and lower customer true.
On slide 22, we provide additional detail on the transformative impact of the modernization plan on our network and the business.
Frontier plans to deploy capital and pursue overbuild in key states, where there is the high return potential.
Solely using available cash flow from the business.
We expect of gigabit speed capable of fiber deployed of 40% of our homes Pat.
The modernization plan also aim for nearly double our broadband fiber subscriber base over the long term increasing the proportion of fiber broadband subscribers from 45% today, the 80 for 7% of total broadband subs.
Today, we already have 40% penetration in areas, where our fiber it's deployed in our plan. The thing that we are able to ramp the 40% penetration in the new build area.
We think this is the very achievable given that 92% of our homes passed today based on for no broadband competitors.
Customers appear to welcome an alternative the cable as evidenced by general feedback from our initial build to up the 60000 homes. In 2020, there are some signs of cable taking preempt the steps the against the business been reflected in our financial projections, we were conservative assumptions on the rate of penetration growth in new areas.
Moving on the page 23 as mentioned on the prior page frontier plan to deploy capital and pursue Overbuilds in key states, where there is the high return potential.
Of the 2.9 million new fiber homes passed for the modernization plan roughly $2.6 million of them are in the PFC, which of California, Texas, Florida and Connecticut.
And why I know, which is West, Virginia, Illinois, New York and Ohio.
With this investment we are targeting over the long term debt fiber available for roughly 50% of our homes passed in the day grouping.
We are constantly evaluating states for investment opportunities and our targets. They think groupings may change going forward, depending on the evolution of the competitive environment, our ongoing analysis of real time results of.
And the outcome of specific events such as the our adoption.
That concludes our operational update I will now turn it over to Sheldon.
Thank you Bernie.
I will update you on our third quarter financial performance has rose for view, our capital structure, given the bankruptcy court confirmation of our plan of reorganization and the refinancing transactions that we executed in October and November.
If you please turn to slide 25.
As a reminder, we closed the divestiture of the northwest operations on May Onest.
As such the reported results include the performance of the for Northwest States through April and then only the remaining 25 state thereafter.
This slide presents our consolidated reported results with such hybrid view.
On the subsequent slide we adjusted the historic periods to exclude the performance for the northwest operations. So you can see the underlying performance of the remaining properties.
As such I will discuss the company's operating performance on the following slide where appropriate apples to apples comparisons can be made.
Our consolidated net income was $15 million for the quarter for this income was impacted by several non operational items.
First we had $73 million of costs related to our balance sheet restructuring bankruptcy filing and refinancing activities.
Which now sits below operating expense post our bankruptcy filing in the new category called reorganization items.
Second we had $58 million for the settlement reached with the our secured creditors to obtain their support for the reorganization plan and other items to help facilitate our refinancing activities.
This also fit in reorganization items.
Please turn to slide 26.
Now looking at the performance for the remaining properties.
Our third quarter revenue was $1.7 billion to $6 billion down 6.6% year over year, driven by customer declines, including a 5% decline in total consumer customers.
A 4% decline in broadband customers and a 22% decline in video users.
Looking at the components of the revenue.
Our data and Internet services revenue was down $13 million versus prior year, driven primarily by copper broadband customer losses for.
Which declined about 7% year over year.
Partially offset by fiber broadband gains our fiber broadband revenue and customers have recently begun growing with the reintroduction of higher speed broadband offerings and turn reduction efforts.
In fact Q3 represented our fifth consecutive quarter of positive fiber broadband net adds.
Wholesale legacy circuit revenue and wireless backhaul decline was partially offset by lower disputes as in the prior year. We took additional accounts receivable reserves related to wholesale billing disputes.
Voice and video services revenues declined at double digit percentage rates versus prior year.
Voice revenue declined 12.8% Sim.
Similar to the declines in Q1, and Q2 driven by customers dropping land lines.
The video revenue declined 20%, reflecting not only the industry shifts to over the top that.
But also the impact of our strategy to deemphasize video attachments on broadband sales and improved customer value.
Looking at the view by revenue of customer type.
Consumer revenue was down 9% year over year, reflecting the trend for copper broadband voice and video that I just mentioned.
Commercial revenue for the quarter declined $53 million over the last 12 months.
Most of the decline came from the retail segment, where we faced pressures in our small business segment related to kind of it.
For the declines in revenue was mostly offset by the expense management arc.
<unk> expenses were down $108 million over the last 12 months related to lower content costs and compensation costs, primarily in our field operations.
Excluding the northwest sale and on like for like basis, our head count is down almost 1900 employees for more than 10% over the last 12 months to 16003 hundred employees.
Content costs are down as well not just from the lower video subs, but also from the efforts to reduce premium content costs. The Ernie mentioned earlier.
Third quarter, adjusted EBITDA was $690 million for an adjusted EBITDA margin of 40%.
Please turn to slide 27.
Cash capex in the third quarter was $314 million. This is about $80 million more than the last quarter as second quarter cash capex payments were impacted by the non payment of pre petition capex invoices due to our bankruptcy filings.
We continue to of lower acquisition Capex due to lower customer acquisition activity in the quarter.
We have seen a lower level of customers in play across our footprint, which is driving lower gross adds but also lower churn so little to no impact the net adds.
So we retain a similar customer levels without the incremental acquisition costs.
In terms of specific projects, we continue our build outs for connect America fund for cash with builds completed two 605000 locations as of the third quarter.
In addition, as the normal ongoing element of our capital spend.
We don't fibre channel was 15000 greenfield locations in the quarter and over 35000 for the first three quarters of the year primary housing developments within our footprint.
These are on top of the over 30000 locations, we sales in 2019.
And as previously announced we are planning to pass up too and the incremental 60000 households, with fiber in 2022.
Targeting high return areas across our footprint.
We expect to spend approximately $50 million the incremental capex related to this footprint expansion.
And as of the end of November we have constructed over 36000 of such households.
Finally as mentioned earlier in.
In the recently completed art off auction, we went over $37 million of government subsidy per year across eight states.
Please turn to slide 28.
Here, we look at our year to date performance against the base case included in our disclosure statement initially filed with the courts on June 17th.
We are tracking well with both our revenue and adjusted EBITDA for the three quarters of the year exceeding the disclosure statement cakes.
Revenue was $35 million better versus the plan driven by lower consumer churn levels.
And adjusted EBITDA of $72 million, better where we are seeing some additional cost benefits from lower gross add activity in the marketplace.
And efficiency in our field operations.
Moving forward on slide 29.
I want to spend a little more time on our recent refinancing transactions.
In October November we Opportunistically refinanced almost $5 billion of our pre petition term loan B first lien notes and secondly notes.
In addition, we amended our dipped to exit revolving credit facility to increase the commitments to $625 million extend maturity by one year.
Decreased interest rates by 50 basis points.
And amend covenants to increase incremental first lien debt capacity.
Taking together these transactions extended our funded debt maturities.
2027 clearing our runway during the important period of the implementation of our modernization plan.
The reduced our run rate interest expense by $60 million per year.
And provided additional covenant flexibility for long term strategic initiatives.
Turning to slide 30, before concluding I want to spend a moment on the northwest divestiture as we are now more than six months past the closing.
As I discussed in our Q1 investor update.
There were a total of $128 million of indirect costs related to the northwest states to address the closing.
These are costs that are incurred not at the state level, but instead of incurred at the corporate level and then allocated to the states based on allocation methodology.
These costs include shared services, such as sales customer tech support provisioning and billing and collections.
Centralized network costs, such as backbone and our network operating center or NOC.
And corporate DNA costs.
Based on our initial forecast for the time of the divestiture and our expectation of the duration of the TSC activities.
We expect is that we are gradually reduce the $128 million of indirect costs by over $80 million, leaving a little over $40 million of stranded costs by 2020 for.
We expected in 2020 alone, we would eliminate $46 million of annualized cost.
We've exceeded that 2020 expectation.
Where we have now already get eliminated for a firm plans to do some for the end the year approximately $51 million of annualized reductions.
As for the longer term outlook, we have conducted during 2020 and extensive assessment of the company's cost structure and proportion of fixed expenses.
This work has been recently completed and based on this we now expect to ultimately reduce the stranded costs down to $65 million.
As opposed to the prior expectation of a little over $40 million.
As for the TSA.
We have successfully transitioned the buyer off of essentially all of the TSH support for November Onest.
We had a revenue associated with the TSA of about $5 million per month.
Which will no longer be effective for November and December.
As such the TSA revenue in 2020 will be $10 million lower than projected as a result.
Outside of the divestiture, we continue to focus on operational improvements and business simplification.
To reduce the cost structure of the business.
This concludes our presentation.
I want to thank you for joining us on todays call. We look forward to updating you on our continued progress next quarter.