Matt Smith - IR Bob Udell - CEO Steve Childers - CFO.

Jennifer Fritzsche - Wells Fargo Barry Sine - Drexel Hamilton Scott Goldman - Jefferies Barry Sine - Drexel Hamilton.

Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings, Incorporated, Fourth Quarter 2014 Results Conference Call. [Operator Instructions]. As a reminder, today’s conference is being recorded. I’d now like to turn this conference call to Mr. Matt Smith. You may begin..

Thank you, Kevin and good morning everyone. We appreciate you joining us today for our fourth quarter 2014 earnings call. At the conclusion of the prepared remarks, we will open up the call up for questions. Joining me on the call today are Bob Udell, President and Chief Executive Officer, and Steve Childers, Chief Financial Officer.

Please review the Safe Harbor provisions in our press release and then our SEC filings for information about forward-looking statements and related risk factors. This call may contain forward-looking statements within the meaning of the Federal Securities laws.

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.

In addition, today’s discussion will include certain non-GAAP financial measures. Our earnings release for this quarter’s results which has been posted to the Investor Relations section of our website contains reconciliations of these measures to their nearest GAAP equivalent.

I will now turn the call over to Bob to provide an overview of our fourth quarter results. Steve Childers will then provide a more detailed review of the financials and discuss our 2015 guidance.

Bob?.

Thanks Matt and good morning everyone. I appreciate you’re joining us today. The fourth quarter was an exciting one for Consolidated. We closed on the acquisition of Enventis and jumped out to a great start on our integration and synergy plans. At the same time we refinanced some of our bonds and we delivered solid operational and financial results.

We accomplished much throughout the year and continued to provide consistent results and expect this trend to continue for 2015. Pro forma revenues in the fourth quarter were 192.6 million and our business in broadband services increased to 80% of our total top line.

Pro forma adjusted EBITDA for the quarter was 80.6 million and we delivered another comfortable payout ratio of 63.4%. Our commercial and carrier sales channels again showed strong growth with the year-over-year increase of 4.2% led by an increase of 21% in Metro Ethernet circuits compared to last year.

We ended the year with the total of 879 fiber-to-the-tower sites under contract with 76 pending installation. These Ethernet services continue to be the lead for new business growth and combined with our hosted VOIP solutions provide an attractive bundle for customers.

The success and demand we see for these services will drive continued investment in our fiber network and expansion into additional markets during 2015. Some of the expansion will come from commercial business plans and others will be initially driven by winning new fiber to the sale sites.

The positive results from our expansion efforts during 2014 paved the way for us to do more in the future all of which will be accomplished within our CapEx guidance. Turning to the consumer side, we continue to move customers to higher bandwidth products and recently rolled out our 1-Gig and 100-Meg offerings.

We upgraded over 3,600 customers in the quarter of which about 40% choose our 50-Meg service. We will continue our strategy of moving customers to higher speeds to meet their data driven needs including the movement to over-the-top-programming.

With respect to video we have made a conservative effort to ensure it is delivering more profitably with the increasing cost of video content we have aggressively pass those cost on to our subscribers.

This does result an additional video churn but we are satisfied with the net benefits of the actions we have taken and will continue to take in the future. Overall we posted a solid quarter of data net adds with 2033 additions while we lost 420 net video subscribers. Now let me turn to the regulatory front.

With respect to the FTC’s cab-2 implementation we have not yet received the detail funding letters to provide certainty around what might be available to us. But based on our initial view we would accept funding in most of our eligible markets. We will make final assessments once the details are provided.

Overall we expect that given the fiber investments we have already made in our infrastructure our funding levels will trend lower over the six to 10 year transition period. Just like we have in the past we are confident in our position and ability to manage through any declines in U.S. sales funding.

Finally, before I turn the call over to Steve let me provide an update on the Enventis acquisition. Overall, we’re incredibly pleased with how well the integration has gone and the growth opportunities we see in the Enventis markets.

The first key project was completed on December 31st which was the integration of the financial HR and supply chain system. Remember we closed on the acquisition on October 16th. So to complete this integration in just two and a half months is a testament to how good and experienced our team is at integrating companies.

There were employees on both sides working long hours to make the transition go seamlessly and I couldn’t be more proud of all of them. Now with respect to synergies we achieve 4.5 million in annualized savings at the close and an additional 1 million by year end.

The combined 5.5 million in synergies is a great start towards our two year target of 14 million. Looking forward I'm excited about the prospect we have with the additional scale growth and expansion opportunities we are well positioned to continue our strategic transition into a leading business and broadband company.

We are laser focused on successfully integrating Enventis and will meet or exceed our synergy targets as we have in the past. With that, I'll turn the call over to Steve for the financial review.

Steve?.

Thanks Bob. Good morning to everyone. This morning, I will review our fourth quarter financial performance on pro forma basis for all periods discussed and then I’ll provide our 2015 guidance. But before I do that let me comment on the opportunistic bond and purchases we made in the quarter.

During the quarter we made two repurchases of 10 7/8 bonds for total principle reduction of 72.8 million. In addition to cash on hand and use of the revolver these new purchases were made with the use of $50 million in excess proceed from the 200 million 6.5% senior notes we raised in September primarily to fund the Enventis acquisition.

These actions resulted in an estimated $4 million on going annual cash interest savings. Financial results for the period were as follows. Operating revenue for the fourth quarter was 192.6 million compared to 194.2 million in the fourth quarter last year.

Revenues increased by 1.4 million compared to the same period last year when excluding the $2 million decline in the Enventis equipment sales and service. The increase was primarily driven by the continued growth in our commercial and carriers sales and was partially offset by declines in local calling and network access services.

With the acquisition of Enventis and their equipment services product set we will see more volatility in our quarterly revenues than in the past. In the detail revenue table in our press release we have separated equipment sales and services revenue over the last five quarters so that you can see the kind of fluctuations those revenues can have.

Please keep this in mind as you build your model for future top line performance. Totaling operating expenses exclusive of depreciation and amortization were 121.9 million compared to 125 million for the same quarter last year.

Our continued cost savings initiative and synergy realization were partially offset by the continuing increases in video programming cost. Net interest expense for the quarter was 22.3 million compared to 22 million in the fourth quarter of 2013.

The small increase was primarily due the 200 million 6.5% senior notes raised for the Enventis acquisition and held in Escrow for approximately 6 weeks. Other income net was a loss of 5.3 million compared to income of 3.1 million for the same period last year.

The current quarter included, a 13.8 million losses on extinguishment of debt tied to the previously mentioned repurchase of 72.8 million in principle of 10 7/8 senior notes. In the fourth quarter last year we had a 7.7 million losses on the extinguishment of debt as a result of the successful refinancing of our secured bank facility.

For the quarter we received 9.2 million in cash distribution from our Verizon wireless partnership compared to 10.5 million in the fourth quarter of 2013.

Weighing all this factors and adjusting for certain items as outlined in the table on our press release adjusted net income was 8 million and adjusted net income per share was $0.16 an increase as compared to 7.6 million and $0.15 per share for the same period last year.

Adjusted EBITDA was 80.6 million in the quarter compared to 82.3 million for the fourth quarter of last year. Capital expenditures for the quarter were 33 million with over 63% driven by success based projects. From liquidity standpoint we ended the quarter with approximately 6.7 million in cash and 36 million available under our revolver.

For the quarter our total net leverage ratio as calculated in our earnings release improved from 4.34 times last quarter to 4.15 times at year end. Cash available paid dividends were 24.6 million resulting in a strong dividend payout ratio of 63.4%. Now let me discuss our 2015 guidance as compared to the pro forma results for 2014.

Capital expenditures are expected to be in the range of 122 to 129 million as compared to 131.3 million in 2013. Our CapEx guidance includes 5.2 million of integration CapEx in the Enventis acquisition. Cash interest costs are expected to be in the range of 78 million to 81 million as compared to 81.4 million.

Cash income taxes are expected to be in the range of 4 million to 8 million compared to 12.4 million last year.

With respect to our dividend our board of directors has declared the next quarterly dividend of approximately $0.39 per common share payable on May 1st 2015 to shareholders of record on April 15, 2015 this will represent our 39 consecutive quarterly dividend. With that I’ll now turn the call back over to Bob for closing remarks..

So in summary, we achieved a lot in 2014 and kept it up with a solid fourth quarter. The combination with Enventis provides us with additional scale in geographic diversity. We are excited about our future and we’ll continue focusing on delivering consistent results and driving increased shareholder value.

With that I’d like to open it up for questions.

Kevin?.

[Operator Instructions] Our first question comes from Jennifer Fritzsche with Wells Fargo. Jennifer, your line is open..

I just wanted to -- there has been some transactions in the last month involving some [ILEC] lines mainly with Enventis and Verizon and I guess as you look at your emanating strategy going forward realizing you’re just close than Enventis, but is something like [rural] access line something still appealing to you or is the focus much more fiber centric at this point and that would really be in your preview.

.

Jennifer, good morning. If you look back to history our evolution has been based on continuing to expand our fiber footprint.

So I don’t see us being incredibly interested in access lines especially legacy [indiscernible] access lines although depending on the opportunity in the market we might consider anything that’s accretive and a good diversity of markets for us to focus on.

But in short I think our strategy is to focus primarily on the Enventis integration and not anything of that size in the near term future until we’re further long in the integration effort. We feel good about our progress there.

What we would look at is continues fiber assets that help expand our footprint because our strategy of putting marketing attention on the three customer groups so the consumer, commercial and carrier really causes our organic growth interest to benefit from the portfolio markets that we have access to.

So if we saw a tuck-in asset that accelerated that organic growth for us than we’ll certainly consider that..

Great. Thanks..

Our next question comes from Barry Sine with Drexel Hamilton. .

Good morning gentlemen. Congratulations on getting the transaction done and well on the way to integration.

Do you have numbers in terms of your fiber optic network route miles, fiber miles? My sense is that you guys are a much more fiber carrier with what you’ve done organically and with what you’ve acquired with Enventis and then what you’re thinking in terms of expansion? I think you’ve referenced some expansion in the fiber network in 2015. .

Barry, good morning. We haven’t done discrete reporting on our fiber miles in the past and that’s something we’re looking into going forward to help satisfy those questions, but I think the way to think about is we have roughly 12,000 fiber route miles and Enventis brings an additional 4100-4200.

So it puts us in a good position to have those fronts for expand -- organic growth diversified because if you concentrate your build in one area you can only attract and build density so quickly. So the diversity of markets and the reach of those assets serve as well. .

And then if you give us a sense of what the expected growth profile of the company is, the mix of business that you pointed out is mainly broadband of business now, much less consumer, exposed to subsidy.

Is the growth profile of the company and the growth potential accelerating? Can you grow this company more quickly? Historically you haven’t been much of the grower on the top line..

I think we’re still in that transition period. If you look at comparable size companies or even some of our industry colleagues keeping the top line flat as you deal with the decline and some of the traditional revenues and replace that with the growing higher margin facilities based revenues on the commercial and carrier side especially.

It’s a good accomplishment and we’re proud of it and we can ink out a little bit of growth in that top line. I think we are still in for the next couple of years that transition period with access and subsidy declines being offset by organic growth focused on the commercial and carrier front..

And my last question I understood what you're talking about in terms of video programming cost sky rocketing and that your passing those along to consumers.

Could you give us some example of what type of price increases those are and where you app price wise in the market for a typical video bundle just so I can get a sense of how expensive that is and how much the increase are. .

We're matching the competition in those cases and the increases is on an annualize basis depending on what market you're in have averaged around 300 to 350 price range and we're also pruning where possible the content to control to content cost.

It's a very sensitive balance that we're trying to strike, but I'll remind you the growth in our internet product and the speed increases that has helped us afford us that growth continue to serve us well and give our customers more value for the total package considering most of them have a double play..

Right, they needed that speed so they can download all those network..

Exactly..

Our next question comes from Scott Goldman with Jefferies..

Maybe one house-keeping and another questions on top -- a couple on the housekeeping side. Steve is there way you could breakdown for us just perhaps what the revenue and EBITDA look like from legacy consolidated versus Enventis for the quarter.

I apologize if I miss that but didn’t see it in the press release, trying to get a sense for how the individual businesses performed throughout the quarter. And then secondly maybe Bob you could update us just on the 1-Gig product deployment to what you're seeing I know it's probably early days.

But what you're seeing from an interest level of the consumer side and competitive respond and then maybe lastly if could just give a comment in terms of title two and obviously the vote is likely being held as we speak. Whether is there any impact to your business going forward based on what we've heard in the marketplace today? Thanks..

I'll take the first part of that and number one I'll say that the Enventis financials were pretty much in line with what we had expected and model for fourth quarter. The revenue number for fourth quarter for Enventis standalone would be roughly $44 million.

So legacy seeing a sell will be the balance to that these and these are the number probably really wouldn’t be that relevant based on the way we’ve already made progress and the integration side, already managing functional organization and combining the number. So I will just ask you to look at the total on that.

We're really comfortable with fourth quarter results throughout Enventis..

And the question regarding the 1-Gig takes rates. It's really early since late last fall was the roll out of that product, but I'll say that in Kansas city the take rate is probably the strongest based on the interest in 1-Gig that’s been created there and we feel very well positioned.

And the 1-Gig in general has created an opportunity for us to have additional conversations with our customer and many still take the 20 to 50 mega product that seems to be the sweet spot. And I'll remind you, a year ago the average product and balance demand was in the six megg range.

So we're seeing the customers demand move up market and we are well prepared with our network to accommodate that. Regarding the title two, this discussion is actually interesting internally and the way we look at this is really along the lines of having lived with title two for our existence.

We are familiar with it, we understand it, we prefer to have less regulation but in some ways this levels the playing field and so title two regulation really is more of an issue for our cable competitors that use to and we're anxious like everyone else to see how significantly the move is by the FTC to impose reporting requirements and things that largely we’re familiar with already..

So if interpret your comments there probably no real change financially and perhaps we'll have to see how the reporting structure may go there.

And then, Steve if I could follow up one question as well on cash taxes, presumably you're benefiting from bonus depreciation and oils here again in '15, wonder if you can just give us a look for what cash taxes might look beyond 2015 and then when maybe a full cash tax payer?.

That’s a good question Scott for '15 we did launch depreciation was passed so late in the year in '14 -- it helped us a little bit in '14 with most of the benefit actually rolls over to 2015 that’s consistence with the guidance we gave of being between 4 million and 8 million for 2015 and that actually all things consider with the transaction cost from Enventis , bonus deprecation our NLLs actually good extend a little bit we have about 3 million going into 2015.

We would expect to be full cash payer going into 2016. That’s what we're planning for assuming there is no other extension on bonus deprecation or anything like that. And I think you can probably assume normal 38% to 40% tax rate all in it for that..

[Operator Instructions] Our next question comes from [indiscernible] with Barclays..

Can you hear me?.

Yes, sir. Good morning..

Thanks for taking my call.

At the Wells Fargo conference in November you guys gave us home overlap with the Google I think you said it was 2500, can you update that number for us?.

It’s actually -- I’m sorry go ahead.

You didn’t --..

It’s actually not changed. It’s roughly 2500 although we expect them to advance some additional passing this year, it remain to be same how fast that will happen..

Do you have any sense of what the impact will be and can you update us on the impacts on those 2500 homes where there is overlap..

Yes, regarding the 2500 where there is overlap we’ve seen some puts and takes. It’s not really drastically different or potentially different than the other areas where we compete with AT&T.

So while we expect that number to continue I really don’t know at what rate they are going to build, they are not incredibly predictable as we’ve seen the move some of the resources to other markets in order to accommodate launches there..

But have you lost subscribers on those 2500, can you help us to understand what the puts and takes are?.

I can tell you this. We’ve seen roughly a couple of hundred leave us and I don’t know the specific number and we’ve also seen more than a handful comeback. And so I think there is a natural movement between us and them as a competitor like other competitors I will tell you, no disrespected to Google intended because their model is different than ours.

Ours is the consultative sales approach and those customers that need some attention on how to use the Internet and how to solve the problems inside their home when it doesn’t work the way they expected, they turn to us and we’re very good with that and we’ve got a model that sufficient and profitable, that works.

So those are the customers that we tend to do a good job of wining back..

And then can you tell us what percent of your homes in the Kansas City area have fiber that will allow them to do a 1-Gig product..

It’s roughly 45% that are fiber fed in Kansas City and all of those customers over this next couple of quarters have access to a Gig, I don’t know top of mind how far long the upgrade of the electronics is, but is not a long part to get those customers a Gig and should someone order it and not be in the initial launch areas, we can prioritize the upgrade process to accommodate them and have been doing so.

.

Our next question comes from Jennifer Fritzsche with Wells Fargo..

Bob just a follow up and I dropped off mistakenly, but the cab-2 funding you said in your prepared remarks; you anticipate taking all of that. Can you talk about this, it’s my understanding this will replace the U.S.

debt funding but like a slowing and steady rate, is that correct? And then is there a way or is it too early based on what model you see in the FTC to anticipate how much more spend will be required to fulfill their requirements with that?.

Jennifer, this is Steve I’ll try that and Bob can add to that if you so desires.

Relative to cab-2 we’re still waiting on giving the first -- write the first [refusal] letters from the FTC that will really determine how much money is available to us relative to what the construction build out will be for the underserved markets we expect to see those maybe sometime in March, they were supposed to be in February but the FTC is running late with that.

So again based on Bob’s prepared comments right now based on what we have seen from preliminary estimates we do expect to accept funding in most of our markets right now there might be one that we would go to auction and so until we go to auction or that’s the term till when we will continue to receive cab-1 funding at the same rate and then once you go in the cab-2 there probably will be a step down but there is kind of transition over six to 10 year period.

And so we feel like where the way we’ve been managing the business the focus that we’re putting on growing commercial and carrier side of the business which like were more than prepared to manage through that..

Thank you..

Our next question comes from Barry Sine with Drexel Hamilton. .

I apologize, hey Jennifer can I just add on that we’re already, 98% of our market is already enabled that four and one which was sort of the initial planning phase and would have a really high probably over 80% more than 10 and 1 to cap funding is based on.

So the investment levels I think are tolerable for us to able to match whatever the FTC asks us to do..

You break out the revenue by category in the press release and I wanted to zero in a couple of those. Steve in the past you’ve been pretty helpful in terms of helping us understand the outlook on the subsidy line given what you know from a regulatory standpoint.

But could we get a little color on what you're expecting subsidy revenue in 2015?.

We'll give it a shot I guess what I think about it, legacy consolidated post to pre-incenses we are probably around $50 million a year in total subsidies 16 million to 18 million of that was on state from state funding primarily in Texas.

So the balance of that would be high cost for federal support so remember as the cab -- as long as simply start implementing or talking about going to cab-2 our high level support numbers have been frozen at basically 2011 levels. So they really haven’t been a much of a drop off in subsidies prior to cap two.

And just a comment [indiscernible] fully disclosed in our 10-K the Texas high cost fund, there are two separate fund there those have been dropping off modestly over the starting last year and sort of a phase in for the next four years.

But we think we've largely been able to offset any kind of reduction in the Texas subsidies by passing on increases in our local line rates in Texas and still retain a very competitive position in that market.

Enventis adds about another $5 million in high cost federal support they were an average cost or rate of return company, we're converting them to price cap. So that $5 million is kind of frozen until cap 2 is in implemented. I guess we are expecting to a modest reduction in 2015 based on expecting the cab-2 money.

But it’s really kind of hard to give you a number when we don’t have the final cab-2 letters and the first writer of refusal. So again we're modeling a very large step down 2015 and maybe on the next call after we get those letters assuming we get in March will be able to give you all clear guidance on that. .

That’s excellent and then on the equipment sales revenue in that same table in the past I think when you announced Enventis you guys were on the fence as to whether you wanted to continue the Enventis equipment sale business to the extent that they were doing at perhaps scale it down.

You've also talked in the call about variability quarter to quarter which everybody sells equivalent fees. When I looked at the numbers for the fourth quarter I just assume that you're scaling a bit down.

Which factor should we think about you're scaling the business down or will it come potentially just over the high levels if we've seen on a pro forma basis that you give in the table..

It will likely come back I mean it's in consistent revenue stream but a consistent trend. With regards to range in 60 million revenue last year, I wouldn’t expect it to be much less and probably somewhat more than that if I had to speculate this at this stage.

The bottom line there is as we learn more and more about the business we like it more it's a part of our strategy going forward now we're leveraging the skill set and the experience there to enhance the consultative sales approach we have with our customers and the conversations that we have with especially our commercial prospect in an effort to solve their business problem.

So it's an asset it pays for itself it provide some cash flow and it something I think that will allow us to differentiate ourselves..

And then lastly, I think you highlighted that the distribution from the Verizon wireless partnerships were down a bit from the year ago period.

Could you talk about what you believe some of those drivers are and what you think the outlook might be for 2015 for Verizon wireless partnerships?.

Last year for 2014 we received about $35 million in cash distribution from Verizon that was essentially flat from 2013 and we normally expect those to grow 10% to 12% a year.

But as Verizon went into the edge program that kind of change the cash flow model for Verizon as instead of having all the subsidy funding from the providers to support that would basically allowing customers to take their Handsets and Tablets, et cetera in over 20 month period which is putting little up front pressure on cash flow or how they think about distribution to us.

So we think that’s going to level out, but as they -- I think in year it will still be a little bit volatile.

So we're balance expecting it to be flat for 2015 and hope that they get and we trying to catch up in a working capital perspective and they get off, even accelerated some of the CapEx because the success we’re having at data programs, once that normalize and we kind expected to return the growth consistent with what Verizon is talking about as a whole for their earnings.

.

Again, very helpful. Thank you very much Steve..

You are welcome..

I’m not showing any further question at this time. I’d like to turn the call back over to Bob Udell..

Thank you. Thank you again for joining us today and for your continued interest in and in support of Consolidated Communications. We appreciate your questions and we hope you will join us again next quarter. Thanks and have a great day..

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a wonderful day..