Good morning, Ladies and gentlemen, and welcome to the Consolidated Communications Holdings Inc. Third Quarter 2018 Results Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Miss Lisa Hood, Treasurer and Vice President of Investor Relations. You may begin your conference..

Thank you, and good morning, everyone. We appreciate you joining us today for Consolidated Communications’ third quarter earnings call. On the call with me 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. Today's discussions include statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties.

A discussion of factors that may affect future results is contained in Consolidated's filings with the SEC, which are available on our website. Today's discussion will include certain non-GAAP financial measures. Our earnings release has been posted on the Investor Relations section of our website at consolidated.com.

It includes reconciliations of these measures to our nearest GAAP equivalent. With that, I will turn the call over to Bob Udell..

Thanks Lisa, and good morning everyone. And thank you for joining Consolidated Communications’ third quarter call. Our business has performed well and I'm pleased with our third quarter results.

First, I will provide an update on the consistent and strong results we are getting from commercial and carrier as well as an update on consumer revenues and what we're doing to improve the customer experience in the Northern New England markets. I'll then provide an update on integration and synergies.

Within our commercial and carrier channels, we have grown data and transport revenues more than 2% year-over-year with a 7% increase in Ethernet revenues as the largest catalyst contributing to this growth. And let me explain how we do this.

We've a very effective sales process known as [CCI Night] where we focus on growth through solutions based selling in all of our markets.

This creates the catalyst for expanding our fiber networks, sales opportunities requiring less than a 100,000 in CapEx investment are decided on regionally, or those requiring capital both a 100,000 go before capital committee led by our CFO and CTO.

This process has enabled us to increase Metro Ethernet circuits by 14.5% year-over-year in our legacy and Northern New England markets combined. Commercial cloud voice connections have grown 6% year-over-year as we migrate our customer base from traditional voice to higher value unified communications services.

All of this has allowed us to expand our robust fiber network by more than 1000 fiber route miles organically and add over a 1200 on-net buildings year-over-year. Few of our third quarter commercial sales successes include a three side cloud voice deal with MPLS managed routers and just under 800 SIP trunks for a nationwide collections agency.

And also, a nine side cloud voice and SD-WAN sale for regional bank and in Northern New England, an enhanced switched Ethernet solution for a very large national food products company.

I share these examples as they demonstrate the benefits of our expanded products suite and the services that commercial customers can receive from us throughout our footprint. In the past quarter, we added onsite secure a fully managed data security solution for our Northern New England markets.

We launched our business one service for small and medium business customers providing a competitive voice and data offering, additionally we expanded our advanced unified communication solution known as ProConnect offering businesses more tools to increase productivity and efficiency.

Looking at the carrier channel, we continue to have success within the wireless sector and are well-positioned within our diverse fiber network across rural and suburban areas.

In addition to upgrades resulting in higher monthly recurring revenues, we increased the number of wireless carrier fiber connections under contract by 2% on a sequential quarter and 7% year-over-year.

Our pipeline of over 250 connections pending install creates a sustained contribution to future revenues as these connections typically carry turns between 48 and 60 months. Turning to our consumer channel. I am pleased with our progress increasing broadband speeds in all of our markets.

While the revenue performance and legacy consolidated areas has been positive, we can do better with the results in our Northern New England territories. Let me tell you what we're doing about that and why we remain excited about the opportunities in these markets.

As bandwidth demands increase, we've made delivering faster speeds a number one priority. In the recent quarter, we have increased speeds to an additional 159,000 homes and small businesses including a 151,000 passing throughout Northern New England.

This brings the total upgrades in Maine New Hampshire and Rimmon to 365,000 year-to-date and we're on track to upgrade speeds available to over 0.5 million addresses by year-end. Overall, customer broadband revenue increased 1.3 million or 2% when compared to the second quarter of 2018 and was flat year-over-year. Now, let me break this down for you.

Legacy consolidated broadband revenues increased 1.2 million or 4% compared to the third quarter a year ago. The increase is largely due to the growth in average revenue per unit associated with speed increases. Overall, we're seeing positive growth and faster speed tiers due to our network upgrade strategy.

In the former FairPoint markets, broadband revenues declined approximately 1.2 million as compared to a year ago. However, we are pleased to report that broadband revenues increased in the third quarter of 2018 by 500,000 or 1.6%.

Now, while we're encouraged by this increase, we know that we will begin to see some headwinds as our seasonal customers in Northern New England migrate south during the fourth quarter. Let me be clear. We have been able to readily create demand for broadband in our Northern New England markets.

The high volume of orders generated by our rebranding earlier this year and our widespread network expansion put pressure on our back office extending installation intervals.

As a result, we did suspend marketing in Northern New England and focused on the reengineering of processes to improve our ability to meet predictable installation intervals for customers.

While the demand for our broadband is a good problem to have, our hallmark of providing a good installation and service experience is important to long term customer relationships. So, here is what we're doing about it. We are leveraging call centers, we have now virtually integrated across notable regions of now the combined company.

We've augmented field resources with contractors to improve installation intervals and deliver on-time customer appointments. As a result of these changes, we are excited about the future outlook to grow consumer broadband in these markets.

Regarding integration with the LABOR agreements now finalized, we now haven’t even higher level of confidence in our ability to improve the customer experience and gain operational efficiencies. We remain focused on integration and its associated projects. We'll achieve a revised synergy target of 75 million within two years of closing.

And at the end of third quarter, we've recognized over 52 million in cumulative run rate synergies which is ahead of our original plan. We continue with our disciplined and proven approach to integration. And before I turn it over to Steve, a few additional points.

We extended our fiber network and broadband services to a suburb of Houston bringing them latest fiber technology and 1gig speeds to over 350 small business and eventually expanding over to 5000 additional residents.

I am proud to say, today we paid our 53rd consecutive dividend and I'm pleased to announce that earlier this week our board declared our 54th quarterly dividend.

Our dividend payout ratio is right on plan despite increased construction activities during the second and third quarters for commercial fiber builds turn up of new wireless tower connections and consumer broadband upgrades. With that, I'll now turn the call over to Steve for the financial revenue.

Steve?.

Thanks, Bob. And good morning to everyone. Today I'll review our third quarter financial results compared with the same quarter last year. Operating revenues for the third quarter were $348.1 million, down 4.2% from last year. After adjusting further investor of our Virginia Properties revenue decreased by less than 4% year-over-year.

Now, let's take a look at each one of our customer channels. In the third quarter, total commercial and carrier revenue decreased $1.6 million or 1%. The primary driver of the client services revenue being down 7.7%. We continue to demonstrate consistent growth in data and transport as these strategic revenues increased $2 million or 2.3%.

Legacy consolidated data and transport service grew 4.3% or $2.2 million while FairPoint market decreased less than 1% or just 246,000 and we are showing positive momentum. As price compression continues to evade, we are investing in our fiber network and adding new business centric progs.

We expect the commercial and data revenue to continue to stabilize and grow. Finally, in commercial, other revenues increased 540,000 due to equipment sales and special projects.

Consumer revenue was down $8 million for the quarter, voice revenues were down $6.5 million with a majority of the clients coming from the former FairPoint markets, while video revenues consistent with our strategy to encourage our customers to transition from linear video products to over-the-top streaming content declined $1.6 million for the quarter.

Consumer broadband revenues increased $1.3 million sequentially from the second quarter and were basically flat as compared to the third quarter of 2017. Subsidy revenues were down 1.7 million mainly due to the final annual stepdown of CAF 2 transitional support. Network access revenues declined $3.1 million for the quarter.

Operating expenses, exclusive depreciation and amortization were $238.5 million compared to $239.5 for the third quarter last year.

Cost of services and products increased $4.6 million primarily due to increased business system sales in the current period combined with new recurring circuit and colocation cost as a result of growth in commercial data and transport revenue. SG&A cost decreased $5.6 million during the quarter.

We are realizing synergy in operational efficiencies associated with the FairPoint merger, these savings are being offset by [3 point million] and severance charges recognized as the result of the union negotiations. In addition to the benefits of the – [technical difficulty] 2019.

Net interest expense for the quarter was $33.5 million compared to $36.3 million for the third quarter of '17. The decrease was due to the recognition of a $5.8 million bridge commitment fee related to the FairPoint acquisition financing in the third quarter of 2017.

This was being offset by increases in LIBOR and cost associated with the hedge agreements we used to convert a portion of our floating rate debt exposure to fixed rate for approximately 75% of our total debt. Cash distributions from the company's wireless partnerships were $8.1 million as compared to $8.6 million a year ago.

Adjusted EBITDA was a $133.7 million compared to $137.4 in the third quarter last year. The year-over-year change is primarily due to revenue declines and declines in wireless distributions offset by synergy realization. In the third quarter, CapEx was $61.9 million.

The third quarter CapEx spend was elevated due to work on the broadband upgrades and fiber spend associated with commercial sales and turning that new wireless fiber connection sold during 2018. Total liquidity including cash on hand and availability under our revolver was approximately $98 million.

For the third quarter, our total net leverage ratio was 4.3 times. We have an attractive capital structure, a low cost of debt and no maturities until 2022. Cash availability to pay dividends was $39.5 million resulting in a dividend payout ratio of 69.9% for the quarter. Now, turning to financial guidance.

We expect cash interest cost to be in the range of a $123 million to $128 million. Cash income taxes are expected to $1 million to $3 million and we do not expect to be a federal cash income tax payer until 2023.

We are updating our capital expenditure guidance to be in the range of $240 million to $245 million in part due to Hurricane Michael recovery efforts and success-based capital projects. With that, I will now turn the call back over to Bob for closing remarks..

Thank you, Steve. In closing, we are pleased with our third quarter results and confident in our position as we realize even more benefits in the second year following the FairPoint acquisition. We are focused on a seamless integration in achieving increased synergies as we combine the companies.

We're realizing the financial operational and capital structure benefits of the combination and we remain confident in our plan and strategy to invest in our network, deliver results and return value to our shareholders. Thanks for taking time to join our call today. We'll now turn to taking questions.

Kael?.

[Operator Instructions] Your fist question comes from the line of Jon Charbonneau from Cowen and Company. Your line is open..

Great, thanks for taking the question.

How do you recommend we think about the decline within your consumer business in the fourth quarter especially given typical seasonality in the FairPoint markets? And then, in terms of our models, how do you recommend we think about the timing of the remaining expected FairPoint synergies over the next few quarters? Thanks..

Hey Jon, this is Steve. Thanks for the question. I think that the way to think about it for fourth quarter, we do have as Bob mentioned, we do have some momentum in the Northern New England markets with respect to broadband and that aspect to your question. We do expect to start seeing seasonality again in the fourth quarter.

Last year, you might remember that we talked about the financial impact on fourth quarter revenues was roughly about $2 million split equally between voice and broadband. And again, that might hopefully that's a little bit high but that's how I would think about for your model going into fourth quarter..

And I will add, Jon. The boxing of that or the limiting of that impact has been affected or addressed by introducing suspend online suspend alternatives versus the past FairPoint process of allowing them to disconnect and then putting them through the reconnect process.

So, we've got a pretty aggressive campaign in getting to those folks through the call centers to advise them of the alternative to the line suspend service, keeps a little bit of revenue allowing us to keep the account open and makes the turn on in the spring or in the summer a lot more efficient..

Great.

And then the timing of the remaining FairPoint synergies?.

Yes. To the synergies, I think that's a two year number and with the 52 accomplished this quarter, I think you could ratably divide it across maybe a little -- now you probably ratably divide across the upcoming two quarters, three quarters, I guess..

Great, thank you..

Your next question comes from the line of Mark McCormack from Guggenheim Partners. Your line is open..

Hey guys, thanks. And let me just hear a comment on with pricing environment for broadband. What you're seeing out there obviously in your upgraded markets, whether you have better pricing power, I assume you do. And then just more competitively I guess thinking about wireless substitution as a provider of broadband.

And I think that could grow over time. But your thoughts on that would be great, thanks..

Yes, let me start with the wireless substitution and then I'll come back to the pricing. We, the market we serve are predominantly suburban at best and then Tier 3, Tier 4, or you might call rural. And so, we feel like we're in a very good position to maximize the benefits of 5G buildout when it gets to us.

And we're working with the wireless carriers in ways that can allow us to benefit from building the towers, passing additional commercial opportunities and terrestrial neighborhood with terrestrial fiber to build out broadband. And so, as that continues to unfold, we're staying very close to it.

We've got the opportunity to support some of the early markets as a subcontractor in the last. So, I really don’t see that yet as a significant of threat. I think it's going to be more of an evolution.

And in fact on CAF 2 obligations, we've been using fixed wireless kind of a pre-5G alternative in some of the hard to build areas in Northern New England as a way to meet out CAF objectives for buildout and that's helping on the capital deployment front. With regards to pricing.

Most if not all of our competitors and we have a diverse set of competitors from Comcast, Turtle, Armstrong in Pennsylvania, MediaCom, just to name a few. And they've been rational. And so, from a broadband perspective, we have a periodic price increase that occurs when content cost go up and bundled with video.

And we also as we upgrade customer speeds and entice them to make two speed tier jumps, we see a moderate ARPU improvement like we're demonstrating this quarter. So, I think pricings relatively rational and I think we're well positioned to be competitive..

Great, thank you..

Your next question comes from the line of Michael Rollins from Citi. Your line is open..

Hi, thanks for taking the question. Just two of them question. 1) Just a follow-up. As you think about your use of fixed wireless and the potential for others to evade over time as you have mentioned and might be an evolution.

Just trying to conceptualize in what the risk is to your broadband business if others can use that in your footprint over time to try to take share.

2) And then the second question, I'm curious on just an update, if you were to think about long-term about 5 years to 10 years, where you want to take your broadband footprint to in terms of speed and capability. Think of it's a maybe a sense of that and maybe what type of cost that you're looking at to achieve those aspirations? Thanks..

Yes, Mike. Thanks for the question. The way to think about the evolution as broadband, at least the way we think about it is we watched the actual utilization of our customers and study that with our industry brother and through SETE and through our telecom associations, U.S. Telecom.

And so, our average utilization view is in the 11 to 12 peak still and it continues to seek up a little bit especially when new devices come out that allow people to view HD videos. And so, we're watching that carefully.

And our sweet spot is in the 25 meg to 50 meg range and where possible we're driving customers to a 100 meg in order to keep ARPU going the right direction.

And so, across our market, we're constantly investing in extending the fiber footprint passing more and more addresses, the buildings past or connected increase of 1200 is a perfect example of that. And that's continuing on the consumer and residential side as well.

So, five years from now, I think we'll have a significantly higher number of homes connected directly to fiber. And that continued evolution will track with what we see as bandwidth average peak bandwidth utilization of our end customers.

What part of this question, your question that I just missed?.

I guess, in terms of the cost, do you want to get to let's say charter or cable companies in general seems to be launching 100s of megabits broadband to the homes..

Yes, let me address that..

Yes, please..

All bandwidth isn’t created equal. And cable architecture will typically upsize the bandwidth that customers take because of the way the architecture works and I know many people understand that and customers are getting savvy to that. And so, our dedicated port approach allows us to manage capacity in busy hours a lot more efficiently.

We operate cable TV network in Kansas City and has continued to educate ourselves on what it takes to manage the busy load there. And dot to 3.1 certainly helps but you have to upsize the customers take way beyond what they actually utilize in order to stomach the peak hours when they occur. And so, that's the starting point.

We're very good from a quality of service and we've been rated very high on delivering the bandwidth we say we're going to deliver. And I think that ability to stay in front of that, allows us to spend thoughtfully. There's no doubt we want to get fiber to every home but consumer is a scale component for us.

The real return on best investment continues to be commercial and carrier and that's where we continue to show broadband and data transport revenue growth..

Thanks, very much..

Your next question comes from the line of David Tawil from Maglan Capital. Your line is open..

Thank you. Thank you for taking the question. Just a couple of questions. First of all, it seems that the company is getting quite close to one of the holy grails of wireline telecommunication topline stability.

You guys foresee sometime in the near future of being able to get to either revenue being flat on a quarter-over-quarter basis or even growth?.

Yes David, thanks for the question. And that's kind of a forward-looking statement, it's hard to answer. But let me approach it this way. We're feeling really good about the commercial and carrier and that's moved especially in the FairPoint markets from a recovery perspective faster than we expected.

And yet, we all had to kind of settle into a new world order as it comes as it relates to wholesale and wireless backhaul per site pricing. That was precipitated from the unlimited data moves that we made over the last few years.

So, it's a crystal ball question and what I can tell you is I feel ever more confident in our ability to at this scale play for our fair share or more on carrier revenue.

I feel very confident in our CCI Night commercial sales process and strategy and giving increasingly more confident since as to the labor agreement that we came to terms with for the CWA and IBEW and our ability to deliver growth in the consumer space, consumer broadband space.

And just to put a final point on that, the work rules flexibility that we achieve broke loose our ability to really get back to basics and put a collective team approach of selling provisioning and installing the consumer customer in Northern New England our initial trials show a 4% lift in two weeks of just targeting an area of 3200 homes.

So, we have an average penetration is a long way to answer the question really but we have an average penetration in Northern New England and just under 15% with some of the markets that we have a 100 meg capability in being at 3% or 4% penetration or neighborhoods I should say.

We've got real upside opportunity on the consumer front in Northern New England. And that's why we're taking the time in being diligent on fixing the process so we can do it the way we know represents our brand well.

So overall, can I tell you what quarter that happens in or we have models that estimate that, I really can't give you that advice but I can tell you that the trend lines you see in this quarter's results consistent with the context we're giving you make us pretty bullish..

Perfect. And thank you, for that. And to that answer that tails well into the next question that I have. With regard to the increasing CapEx guidance, can you give us a sense of what percentage is opportunistic and what percentage is hurricane related.

And then on the opportunistic side, what's the company's kind of return target on those CapEx side?.

Yes. The way to look at that increased CapEx and we really contemplated how deep to get into this new projects that drove that. If it were the hurricane only, we probably wouldn’t have changed guidance. But I would say it's 50:50. Let me box the hurricane and I didn’t comment on that.

We had a wonderful response, and we've set technicians from Pennsylvania and from Texas and had an excellent and management from Northern New England as well. We've had an excellent report card from Department of Homeland Security and from the Governor in Florida and it was, it's a significant devastating situation.

But in a whole scheme for the residents there but in a whole scheme of our financials, it's less the total revenue from that region is less than 2% and only 20% of the customers there were impacted and they're quickly moving back and asking for service so they can restore their situation but some will take very long.

So, the way to think about that is it's going to be a long road to recovery. So, I don’t see all of the money being spent at once and I don’t think it'll be noticeable financially.

On the project front, we have a capital committee as I said in the prepared remarks that meets frequently in our case every two weeks, and we look for 25% IRR in a 36 month payback. And while we see as we stretch, some pressure on those returns, it's still very attractive..

Got it. And then, just one last question. This is probably a unique question. The company stock price really whips all and so does the volume in the trading throughout the trading day frankly and from day-to-day.

And I know that the company to its credit a lot of the directors and officers of the company have made open market purchases of the stock over time. So, I'm sure that this is of at least note if not concerned to them, I'm wondering if the company wants to comment at all on any of that..

No, we really can't. I mean, it's a volatile market and it's still a robust sector. Those of us that know it and I can't speculate on the stock price..

Okay, thank you so much..

Your next question comes from the line of Frank Louthan from Raymond James. Your line is open..

Great, thank you. Can you talk to us a little bit about the 500,000 homes and when do you expect to see that project if it's that earlier.

And then what's the margin impact from the contractors that you've hired and when do you expect you kind of wean yourself back from that as you were to do so with the marketing growing pains?.

Yes. Let me comment on the 500,000 first. The 500,000 will all be completed in the next few months or certainly by the end of the year. And that in total across the whole company is approaching 500 -- in 30,000 or more upgrades by the end of the year depending on all the projects we're able to complete.

But specifics in Northern New England, it's a robust increase in addressable market. So, with regards to let's say the part --..

Margins?.

Yes, the margins. The contractor impact is really positive on margins. And let me explain to you why.

We've had a long term work rules flexibility that made it difficult for us to bring in flexible resources to manage for peaks and as a result workload would back up and with the new labor agreement we're insisting that we would rather keep our employees in their home markets than sending them playing whac-a-mole across the three states moving them around the states and bring in supplemental contract resources in order to meet the peak loads.

Our preference is to keep our employees in front of the customer and only use contract resources behind the scenes for cable facility deployment and line work like poles and manholes and things like that. But we will use them for installation when we hit peak periods like the rollout of additional speeds in markets with little penetration.

So, it really is a positive on margin, not a negative..

So, when do the so we'll have the work rules changed or you now have that flexibility with the new contract?.

Yes..

Okay.

And is that across company-wide or just Northern New England or how should we look at that?.

We've made it consistent with how we operate in the other in the legacy markets. And so, it's two things.

It's one, educating the workforce and how we're going to work in order to meet customer demand and not that they wouldn’t want to do that, they're very capable and we got the agreement done because we explain the rationale of why we needed the flexibility. And the unions been quite respectful to work with.

And so, the one step was to make sure we could spread the calls across our region, the consolidated legacy call centers in central region as well as keep the cost inline in Northern New England. So, we have a unified platform from a call center wage and call distribution perspective now.

And we've been taking calls in Minnesota and Texas for Northern New England since 30 days after for the last month, 30 days after the close of the agreement, through application of the agreements.

On the technician side, we began supplementing our workforce with contracted resources at a reasonable cost in order to address spikes in workload and additional broadband speed upgrades. And will say there's been a little bit of an impact on the availability of those resources by Florence and then Michael.

So, that's been a little bit of a headwind but the flexibility gets us consistent in Northern New England with the rest of the consolidated operation..

All right, great. Thank you, very much..

[Operator Instructions] I am showing no further question at this time. I would now like to turn the conference back to Mr. Bob Udell..

Well, I want to thank you all for joining us today and taking time to join our call. We look forward to updating you on our full-year of 2018 financial results next year. Thanks, and have a great day..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect..