Good day, ladies and gentlemen, and welcome to the Consolidated Communications Holdings Inc. Fourth Quarter 2016 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Jennifer Spaude, Director of Investor Relations. Ma'am, please begin..

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

Please review the Safe Harbor provisions in our press release and in 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.

Today's discussion will also include certain non-GAAP financial measures. Our earnings release for the fourth quarter results has been posted on the Investor Relations section of our website at consolidated.com. It does include reconciliation of these measures to their nearest GAAP equivalent. I will now turn the call over to Bob Udell..

Thanks, Jennifer, and good morning, everyone. I appreciate you joining us today. I will provide highlights for both the fourth quarter and the full year, and Steve will provide a more detailed review of the financials.

We took important steps through several strategic transactions to sharpen and refine our focus on our core business and broadband strategy, while enhancing shareholder value. Most recently, we announced our agreement to acquire FairPoint Communications, an acquisition consistent with our strategy to sustain and grow cash flow.

The addition of FairPoint will significantly expand Consolidated's broadband reach and scale by adding more than 21,000 fiber route miles in 13 new states to our service area.

We believe this combination will create significant benefits for our combined customers and shareholders as we realize important growth opportunities and ultimately become a stronger company. Consolidated has a successful track record of integrating companies.

We believe we are in an excellent position to leverage FairPoint's enterprise-class fiber optic network, along with our extensive product and service portfolio that benefit our carrier, commercial and consumer customer groups.

We are currently working on the required approvals and are making great progress with a targeted closing on the transaction by mid-2017. In January, we were granted Hart-Scott-Rodino approval and secured the financing to fund the acquisition on very favorable terms.

We, in collaboration with FairPoint, have completed all required state and federal merger applications. The calendars have been set and we are working through the regulatory process in each state.

Overall, I am very pleased with the progress made to date on the FairPoint acquisition and I'm very confident in the many benefits we will realize with this merger and the increase in scale. Additionally, our acquisition of Illinois-based Champaign Telephone Company closed on July 1, 2016.

This is a great example of a successful tuck-in acquisition and another important step we took to expand our commercial strategy and our fiber network.

It brought us the metro fiber network in the Champaign-Urbana area, connecting more than 300 lit buildings and a commercial and enterprise customer base which is adjacent to our existing Illinois operations. We also took steps in 2016 to refine and focus on our core strategy by completing two divestitures.

First, we sold our rural Iowa ILEC property last August. These communities will be better served by adjacent incumbents who acquired the assets, allowing us to allocate our capital dollars to best support our broadband strategy in these markets with higher returns.

Second, we completed the divestiture of our equipment and services business in December, which allows us to concentrate on our network-based business and broadband services. We formed a partnership with the acquiring company to support our network customers with IT services nationwide.

It's the combination of these four transactions that sharpen and refines our focus on our core business and broadband strategy. These transitions strengthen our business, improve EBITDA margins, cash flows and our ability to deliver long-term growth and shareholder value. Now let me give you an overview of our fourth quarter results.

We continued our strategy of extending our fiber network, maximizing commercial and carrier revenues while producing cash flows which support our dividends. Revenue 175.9 million in the fourth quarter and adjusted EBITDA was 72 million.

In 2016, we invested more than 125 million or 16% of revenue back into the business and returned 78.4 million to our shareholders in dividends. This resulted in a solid payout ratio for the year of 71%. Now let me highlight some of the results within the quarter and our customer channels.

First, within our commercial channel, we had another strong quarter of growth in Metro Ethernet and data connections with an increase of 7% in the quarter and 22% for the year.

We recently won a contract for a 34 site medical service network in Texas, providing a private Ethernet network solution with gigabit capacity which we will be utilized -- which will be utilized for telemedicine.

This solution which is a good example of our consultative sales approach will be fully installed by midyear and brings with it a total contract value of 16 million.

In 2016, we continued to expand our fiber footprint growing our network by 434 route miles which supported our carrier team's addition of a net 28 new towers and 270 additional on-net buildings, which also creates an opportunity for our commercial team.

In addition, we secured our first small sale contracts and saw demand for proposals of these ticking up. Despite increased price compression, we grew carrier and commercial revenues 2% in 2016. Within our consumer channel, we continue to focus on securing the broadband pipe-to-the-home and offering higher speed connections at competitive prices.

We now offer over 90% of our marketable homes a broadband connection of 20 meg per second or higher and 42% can receive our 100 meg product.

The number of customers subscribing to our 1 gig speed offering has more than doubled in the last year and the demands for higher speeds will continue and our network, our service and support are key differentiators.

In Q4, data and broadband connections grew by 2,900 however consumer revenue was down, primarily due to voice services and digital TV declines. As you know, we are focused on delivering a profitable video product while we focus our customers on over-the-top versus traditional cable TV offerings.

With that, I'll turn the call over to Steve for the financial review.

Steve?.

Thanks Bob, and good morning to everyone. As Bob mentioned, the fourth quarter was a very important quarter for us as we completed several strategic transactions. This morning, I'll review our fourth quarter financial results compared to the fourth quarter of 2015.

I'll also update you on two financings we did in the quarter and I'll end by updating our guidance for 2017. Operating revenue for the fourth quarter was 175.9 million compared to 188.2 million a year ago. Over half of the 12.3 million decline was due to the divestitures of our equipment services business and the Iowa ILEC.

Subsidy revenue net of the Iowa ILEC sale was down 1 point million for the quarter after the second step-down of CAF II funding which occurs each year in the third quarter. We grew commercial and carrier revenue despite price compression and churn on carrier count.

Consumer revenue was impacted by the sale of our Iowa ILEC and continuing to decline in voice and access revenue. 82% of our revenue mix in the fourth quarter was from business in broadband services as we continue to grow strategic revenue to counter the expected legacy decline.

Total operating expenses exclusive of depreciation and amortization were 115.3 million compared to $121.8 million for the same quarter last year. The improvement in operating expenses in 2016 is a result of our continued focus on cost structure, product margin expansion as well as the sale of the equipment business and the Iowa ILEC.

Net interest expense for the quarter was $20 million compared to $19.3 million for the fourth quarter 2015. In October, we did a refinancing of our term debt that resulted in a 25 basis point rate reduction for an annualized cash interest savings of over $2 million.

We also amortized one month or $1.2 million of the commitment fee on the FairPoint acquisition financing. I will talk a little bit -- in a little bit more detail about each of these financings in a few minutes. Other income net was $9.8 million compared to $9.4 million in the fourth quarter of 2015.

Cash distributions from our wireless partnerships in the quarter were $8.9 million as compared to $11.2 million a year ago.

Distributions totaled $32.1 million in 2016, down $13.2 million from 2015, which did include approximately $10 million in nonrecurring distribution for our share of proceeds from the partnership -- from sale of partnership-owned tower sales.Weighing all these factors and adjusting for certain items as outlined in the table in our press release, adjusted net income was $5.5 million in the fourth quarter and adjusted net income per share was $0.11, which compares to $8.1 million and $0.16 per share, the same period in 2015.

Adjusted EBITDA was $72 million in the fourth quarter compared to $79.4 million in the prior year. Approximately $2 million of the decline is due to the fourth quarter performance of the equipment services business and -- as a result from the sale of the business on December 6, as well as the September 1 sale of the Iowa ILEC.

Cash distribution from wireless were down $2.3 million, and as mentioned earlier, we also saw decline in subsidies due to the second annual step-down in Connect America Fund in the third quarter. We also continue to experience erosion in legacy voice and access revenues. Adjusted EBITDA for 2016 was $305.8 million compared to $328.9 million for 2015.

The primary differences in the year-over-year results are that 2015 included a $10 million of nonrecurring wireless distribution as well as the fourth quarter sale of the Inventus billing software business. 2016 includes the divestitures of the equipment business and the Iowa ILEC.

In the quarter, we made $31 million in capital investments and invested $125 million into the business for the full year of 2016. We have flexibility in our capital plans with two-thirds tied to success-based opportunities with a continued focus on fiber deployment, and our capital investments have to meet our internal paybacks on returns.

From a liquidity standpoint, we ended the quarter with approximately $27 million in cash and the full $110 million available in our revolver. For the quarter, our total net leverage ratio was 4.46. Cash available to take dividends was $25.1 million resulting in a payout ratio of 78.2% for the quarter compared to our 2016 full year payout ratio of 71%.

Last year, we delivered value to our shareholders through $78.4 million in declared dividends. And with respect to our dividend, our Board of Directors declared the next quarterly dividend of approximately $0.39 per common share, payable on May 2, 2017 to shareholders of record on April 15, 2017.

This will represent our 47th consecutive quarterly dividend. We significantly improved our financial flexibility and capital structure with two financings in the fourth quarter.

In October, we refinanced our legacy secured term debt which resulted in extending term by three years, and the coupon interest rate was reduced 25 basis points as it was re-priced at 3%. We also extended the maturity of the revolver by three years and upsized it from 75 million to 110 million.

As part of the refinance -- the recurrent [indiscernible] for a secured leverage was increased to three times from 2.75 times. Additionally, in the fourth quarter, we also secured financing commitments under a new incremental term loan facility for the acquisition of FairPoint Communications.

The new loan facility provides up to $935 million that will be drawn at closing. The terms, conditions and covenants of the new incremental term loan facility are materially consistent with the company's existing term loans and will be treated as a fungible tack-on to the existing facility at close.

The new facility has an interest rate of LIBOR plus 3% with a 1% LIBOR floor. We are extremely pleased with the outcome of both of these transactions and we significantly de-risked our capital structure by getting the acquisition financing behind us.

We will pay monthly ticking fees which started to accrue January 15 through the closing on a similar rate to the effective rate on the term debt. We greatly appreciate the strong support of our plan to acquire FairPoint by our underwriters and our banker. Now let me share our guidance for 2017.

On a stand-alone basis and without giving effect of the pending FairPoint acquisition, we expect cash interest cost to be in the range of 70 million to 72 million. Cash income taxes are expected to be less than 2 million and we expect capital expenditures to be in the range of 115 million to 120 million.

We will reset guidance after we close on the FairPoint transaction. With that, I'll now turn the call back over to Bob for closing remarks..

Thanks, Steve. In closing today, I am confident in our ability to execute, deliver results and return value to our shareholders. We're focused on investing for the future, expanding our fiber footprint and growing our strategic revenues.

It's a combination of these steps that provide long-term sustainability and value to our shareholders, our customers and our employees.

We look forward to closing on the FairPoint acquisition, and once we do, we'll be dedicated to ensuring a smooth and seamless integration while extending our business and broadband strategy across the combined footprint. With that, Vince, we'll take any questions at this time..

Yes sir. [Operator Instruction] Our first question is from Scott Goldman of Jefferies..

A couple of questions, if I could, first, on the revenue side of the equation, looking particularly at commercial and carrier, I guess, a two-parter, wondering if there is any impact from the timing of any of the sales or transactions that would have impacted the 4Q results.

But then, as we look out into 2017, I think Bob, you mentioned and maybe Steve as well, price compression and churn offsetting some of the gains you're seeing in Metro Ethernet.

Wondering how should we think about price compression and churn and how that might impact 2017 commercial and carrier revenue? And then, secondly, Bob, just on the FairPoint, obviously, you've had, I guess, a couple more months to maybe dig under the hood a little bit.

Wondering if there's anything you've discovered as you've been digging deeper that gets you more excited about that deal than when you first announced it?.

Scott, thanks for the question. I'll take the second part of the first question first. And then, we'll get to FairPoint after Steve piles on. First, in terms of price compression, we are seeing cost per meg as well as some interest by the wireless backhaul customers of ours in larger deals across our entire footprint.

That's where scale will work to our favor with the FairPoint acquisition. And in this case, it caused us to rewrite some TDM circuits, larger deals down as we expanded the term of those contracts and replaced them with Ethernet. So that's kind of the inflection point we experienced in the fourth quarter on a price compression basis.

In terms of the moving parts around the deals, Steve, do you want to comment on that?.

Sure. Scott, I think, your question was directly with the divestitures of EIS in Iowa, the impact that had on fourth quarter revenues.

So EIS did have a major impact on overall consolidated revenue, as you can see by the breakout on the revenue schedule in the press release, but it would not have impacted or directly impacted the commercial and carrier line that you asked about.

The Iowa sale of the ILEC -- or the Iowa ILEC sale would have had more of an impact on consumer and subsidies, but there's probably 300,000 to 400,000 in commercial revenue that we didn't get in the fourth quarter due to the sale..

The way to think about this, the way we think about this is it's a 3% growth opportunity that we pursue each year. And we wouldn't expect that to be any different. The pipeline is strong, it's bigger than it has ever been.

In terms of sole revenue to be installed, it's a higher percent of facilities-based orders with our expanded footprint based on network build-outs. And so we feel pretty good about our consultative sales approach and the runway ahead for 2017..

That's very helpful.

Just as one quick housekeeping, the equipment sales in service line, does that completely go away in '17? Or is there anything in there that wasn't part of the sale of that business?.

The EIS lines....

Yes, Scott, it will go away. There's a couple of revenue-sharing opportunities based on the partnership agreement that we have with ePlus, the company that bought the asset. But it will probably -- those revenues will probably flow through the commercial revenue line..

Okay, I appreciate the color, thanks guys..

As far as the FairPoint question, Scott, we grow increasingly more excited the more we learn about the team there, the opportunity to leverage that footprint. They've done some things really right on the carrier and very large customer side that we're going to exploit in our playbook for commercial and consumer.

So I would say that our excitement around the opportunity continues to grow, and that process is on track and we feel good about the progress..

Great, thanks Bob..

Our next question is from Barry Sine of Drexel Hamilton..

Good morning folks.

Bob, kind of a long question for you and I have ask before -- you guys obviously operate in a lot of pretty disparate market with different dynamics, could you give us a quick whirlwind tour of the markets? What's the economy looking at? What is spending looking like? What is the competitive situation looking like?.

Wow, I'll do -- go ahead, Barry..

In 10 words or less..

Yes. Let me do it this way and I'll start at a high level. Our predominant carrier or predominant competitors are the cable guys. And where we see them most aggressive is in consumer and small biz. Our facility base and service discipline really positions us well against all of them and the one-off fiber competitors we have in various areas.

We look for reasonable returns and so the only challenging positions that we get in is where scale works against us and we can't use the scale to -- that others might have to benefit offsetting postalized pricing that some of the larger wireless guys are pursuing.

But we're very excited that the FairPoint deal helps put us in a better position from a scale perspective. So when you go market by market, you really have to handicap the competition based on the effectiveness of the cable competitor that's there.

And the smaller more nimble ones like Midcontinent in the north, Armstrong, they're pretty good competitors and they can move more quickly. The Comcast, the Time Warners, we feel very effective to compete against. And they're in the Houston, the Texas markets, the Pennsylvania market, some of its Comcast, some of it is Armstrong.

So it really varies market by market. But let me say this on a broad sense, there was little bit slower decision making that we saw across all of our markets through the election time period of third and fourth quarter last year. That was obvious in a lot of wireless proposals that went out for small sells, as well as on the commercial front.

And when you're making facilities based decisions they're usually longer lead times but I think there was some election paralysis that set in for a short time. That's starting to free up. Also when you look across the U.S. markets, we're seeing a nice resurgence in the South, in Texas, even though oil is still not growing tremendously in value.

That market seems to normalize in terms of what we used to see as leading indicators as out of business labels to our directory out there. That's fairly well-stabilized, so I'm seeing a more positive sign from an economic leading indicators that we watch for the starter.

But I would say third and fourth quarter was little bit softer than we had seen in the past..

Okay. And next, talk about the sales force a little bit.

Are you still growing sales headcount? Where are you at in terms of the size of the quota bearing sales force? And what are you looking like in terms of productivity? Are they all up to speed? Are there still gains that you can have from the existing sales force?.

We're making some additions in markets where we see the more significant growth potential, and I would say we're trading headcount around to maximize our opportunities. We're pretty stable at around 80 quota-bearing and with the whole team at about 140 which includes management and sales engineers. We're feeling, I would say, pretty stable.

The thing that we've done to enhance our distribution capability is really develop a three-pronged approach on the sale side, so while our FTEs full-time equivalent direct sales folks have stayed relatively stable at about 80 quota-bearing, the reason we have 140 total in this organization is we've got a consultative approach that supports not only the direct channel, but also the two other channels, agents and inside sales.

And we've really beefed up the inside sales that focuses on our bronze customer so we can more effectively compete with the cable guys who are fairly effective in that customer profile or size. And the agent program is just beginning to get really good traction for us towards the end of fourth quarter.

And you may remember, we signed an agreement with a national agent provider that's really, really been showing good signs of building a solid funnel. So you can't really count it exclusively on our 80 FTE agents. That's going to be a fairly stable number, even though we trade the resources between our most fertile markets..

Okay. And then, again, shifting gears over to FairPoint and just talk about the approval process. We have pretty good visibility in the three New England states, hearings are going on, and I haven't seen many major issues crop up. The telecom group properties has a lot of states going on there.

How many do you need actually go through a PUC process? And then, once you get that closed, do you see synergies, I know for example, Pennsylvania, they have a property that's just south of your Pittsburgh property?.

I can't answer specific synergy questions at this stage around Pennsylvania because I just don't know until we get underneath the covers and work more closely with management who will be involved in that decision-making progress, what those synergies are going to look like. But what I do know is we're well along in the process.

I can't remember, Steve, do you have the number? There's -- out of 17 states, there's 14 of them that are telecom. There's roughly seven or eight that require formal approval process. And there's a corresponding five or six, I think, that we've already gotten approval in. And so it's moving along quite efficiently.

There's normal snags here and there but nothing that's surprising and nothing we haven't faced before..

Okay. My last question is on the Verizon distribution.

The step-down in 4Q versus a year ago, was that due -- was there some tower proceeds in the year-ago fourth quarter? If not, what is driving that? And then, if you have any sense of what 2017 will look like? And specifically, are there any known one-timers that may impact your distributions on the Verizon properties?.

Barry, this is Steve. Yes, the distributions for full-year 2016 are 32 million compared to kind of our normalized run rate for the prior years of being around 35.

And I think, on the onetime distributions from tower sales, we called out the 10 million that we received last year in the -- I guess, they actually sold the tower in second quarter we got our pro rata share of the proceeds in third quarter. There's nothing relative to the tower sales that's happened subsequently to that.

I think, what you're seeing -- what we're seeing in the distributions are primarily in a couple of specific markets for the partnerships that we're involved in, one in Texas, the Houston SMSA, as well as one of the Pittsburgh RSAs that Verizon is just accelerating some of the 4G LTE build-out in those markets, and particularly in Houston, they're doing a little bit of prep for the Super Bowl that just happened.

And so again if they're building on the data side the network, maybe it's a short-term inconvenience relative to the distributions, but hopefully, we'll see greater distributions down the road as they enhance the data profile.

They're also making the -- they're getting much more competitive with Sprint and T-Mobile with the device plans and I think they're really starting to match kind of the offerings for those programs. So we expect to see the numbers improve going forward. But again, for 2016 I mean we're -- I think I would kind of put you in the 32 to 35 range.

We hope we start seeing getting to the high side as they move through some of the CapEx deployment..

Our next question is from John Charbonneau of Cowen and Company. Your line is open..

Can you just give us an update on how we should be thinking about EBITDA margins this year, especially given the sale of your equipment business? And then, within your consumer business, can you also maybe give us an update on how we should be thinking about potential price increases over the course of this year?.

Jon, this is Steve. I'll take the first part. On overall EBITDA margins, if you, I think, refer for the fourth quarter, we are roughly 41%, and that's with wireless being down just a little. But if you take EIS out of there, and that's basically for full-year, it's 45 million in revenue, roughly $4 million in EBITDA.

I would probably expect to see, again, if everything else remain steady, just from an EBITDA margin perspective, EBITDA margins probably improve 200 basis points..

With respect to the consumer business, we continue, as you know, to focus on profitability and a transition of the video product over-the-top. ARPU remains relatively stable, if not slightly increasing.

Price increases were just put in place at the beginning of this year or towards the end of -- I guess, it was the end of December, so those will be gaining traction here in next quarter's results..

Our next question is from Adam Ilkowitz of Citi. Your line is open..

I wanted to revisit the wireless backhaul pricing that you had mentioned, a lot of others in the industry has seen it too.

Is that something that's fully priced into the fourth quarter? And with the change in pricing, have you completely or mostly mitigated the pricing change from moving from TDM to Ethernet from that customer?.

Yes, specific to actually two of those customers, but those -- that's an evolutionary item for us and for the industry. There's fewer and fewer of those TDM-oriented overhangs out there, so I don't expect them to be as significant as we experienced this past quarter.

However, we've been incredibly successful at turning them into extended terms or additional sites that we're either currently building out or will as we complete additional negotiations. So that's about as much specificity as I can give on that for now..

I guess, just to finalize that, do you expect additional pressure from those two contracts in the first quarter? Or was fourth quarter fully priced in that pressure?.

With those -- with one of those contracts, it's fully priced in. With the second, there's still a little overhang..

And then, if we were to remove those two contracts from the quarter, would you have been able to grow commercial revenues sequentially? Or just the data in transfer lines sequentially, maybe if you can help us understand how that impacted the sequential change in commercial and carrier?.

Eric, we're looking at our analysis here, and I think, the answer is growth obviously would have been a little bit higher, but right now, we wouldn't give you a firm number on that so we can get back to you on that.

But obviously, with price compression and the churn we had in the quarter -- in the late third quarter, early fourth quarter did impact fourth quarter numbers. And we'll just -- we'll have -- I think it would have been positive overall, I just can't tell you how much right now..

And then, just one final one.

Given that the FairPoint acquisition is going to be increasing your scale, I don't know how handy any numbers are in this, but do you have a sense of how much of your commercial and carrier revenue is coming from perhaps multiple regions versus just one region? How many sell in Illinois and Houston, for example, versus just Houston?.

That's a good question. We do look at that. We don't quite frankly disclose it in that level of detail, we don't disclose market data on a specific basis. I would tell you this, the number of multiple state inquiries on especially the carrier front are increasing.

And it's just the natural evolution of the carriers looking to remain competitive on their cost structure, wireless carriers, and squeeze the network providers as a result. So that's where scale has been a significant priority of ours within our playbook for that customer channel.

So what it was five years ago or even two years ago is different than what it is now. And it'd be tough to give you even a rough percentage..

Okay, thank you very much..

Thank you. At this time, there's no other questions in queue. I'd like to turn it back to Mr. Udell for any closing comments..

Well, thanks, Vince, and thank you, all, again, for joining us today. We look forward to updating you on our first quarter results and progress with the FairPoint acquisition in the near future. With that, thank you, and have a great day..

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the program. You may now disconnect. Everyone, have a great day..