Good day, ladies and gentlemen, and welcome to the Consolidated Communications Conference Call Fourth Quarter 2018 Results. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Lisa Hood, Treasurer and Vice President of Investor Relations. Please begin..

Thank you, and good morning, everyone. We appreciate you joining us today for Consolidated Communications' fourth 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 for questions.

Please review the safe harbor provisions in our press release and in our SEC filings. Today's discussion includes 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 their nearest GAAP equivalent. With that, I will turn the call over to Bob Udell..

Thank you, Lisa, and good morning, everyone and thank you for joining Consolidated Communications' fourth quarter call. 2018 was a productive year for Consolidated. One, where we made great progress, improving service levels and advancing our business and broadband strategy.

We are well into the integration of our new Northern New England and telecom group properties having already achieved $62 million in run rate synergies, and we will recognize our increased target of $75 million in synergies by the end of second quarter of this year.

This acquisition has added meaningful scale making Consolidated a top 10 fiber provider in U.S. I'm very pleased with our achievements during 2018 and would like to highlight some of the more significant ones. We've realized consistent year-over-year growth within commercial and carrier data and transport increasing revenue by more than 2%.

We completed our plan to upgrade more than 500,000 broadband passings and we have aggressively expanded our fiber network to achieve higher speeds, resulting in increased broadband revenue opportunities and network reliability.

We secured new labor agreements with our bargain for employees in Northern New England, which enables us to better serve and support our customers with increased flexibility to speed the delivery and the support of services.

Our employees have come together and formed one strong team, using their combined skills and expertise to provide better service and launch new products over our robust fiber network. We're committed to serving our customers better and we're making great progress in this area. Now let me turn to our three customer channels.

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.

Our expertise in building and supporting advanced fiber network solutions has enabled us to launch several new products during 2018, which complement our solutions based sales process known as CCI Ignite. This process is key to our ongoing growth in customer retention.

For example, we launched advanced data networking products, including SD-WAN and Cloud Peer Connect, security solutions, including DDoS mitigation and the expansion of Cloud Secure.

And we enhanced our Unified Communications suite with the development of ProConnect, an advanced hosted IP based platform with groundbreaking collaboration, meeting, messaging, and calling features to allow us to solve business problems for our customers.

A few of our commercial sales highlights show our ability to serve a diverse customer base, including a 15 gigabit diverse dedicated internet sale to a higher education institution in Texas. This sale serves as an anchor to a large opportunity with the fiber build passing 90 additional commercial customers we can market to in the future.

In Maine, we secured a contract for Ethernet LAN network services with a regional bank and trust company that has 68 locations. And another notable win was a sale to a manufacture company in North Dakota with 12 locations, adding SIP trunks, DIA and using SD-WAN to reach the distant branches.

While the above examples are associated with specific sales to customers, I also want to highlight the momentum within the commercial sales channel in Northern New England during this past quarter as we generated a 5% growth in new orders for 2018, as compared to 2017.

I share these examples as they demonstrate the benefits of our expanded product offerings and the value we bring to our commercial customers throughout our footprint with the ongoing expansion of our extensive fiber network. Within the carrier channel, the total in-service towers increased 4% year-over-year.

Including pending installs, our total wireless connections under contract increased 9% as compared to the fourth quarter of 2017. Our pipeline of over 300 connections pending install creates a meaningful contribution to future revenue.

Major carrier orders for the fourth quarter included a hyperscale dark fiber 20-year agreement, a 56 tower fiber backhaul agreement in Northern New England plus multiple wave and 10 gig services in our Minnesota markets. Overall, fourth quarter was a great quarter for our carrier channel. Now turning to the consumer channel.

Overall, consumer broadband revenue increased by $546,000 or 1% when compared to the same quarter in 2017. Let me break this down. Legacy Consolidated broadband revenues increased $1.8 million or 7% compared to the fourth quarter a year ago. The revenue growth is driven by the continued improvement in ARPU associated with speed increases.

Overall, we are seeing positive growth in faster speed tiers consistent with our network upgrade strategy. In the former FairPoint markets, broadband revenues declined approximately $1.3 million as compared to a year ago.

This is due to the impact of Hurricane Michael in Florida and the winter seasonal trends we experienced typically in Northern New England.

On our third quarter earnings call, we noted our top 2 consumer priorities were -- are improving service delivery and response times in Northern New England to enable mass market scalability, and 2, driving revenue growth with faster broadband speeds.

In the fourth quarter, we made very good progress in both of these areas, enabling us to restart mass marketing this past week. As we ramp marketing back up in Northern New England, we expect to see lower churn, improved retention and increases in ARPU as we take full advantage of our recently upgraded fiber network in the area.

With the new labor agreement in place, we have implemented our call routing virtualization and spread calls across our other call centers dramatically improving service levels, lowering wait times and abandon rates. We've also enhanced back office broadband provisioning systems and processes, and bolstered field resources.

As a result, we have shortened appointment intervals, while improving our overall broadband on-time delivery rates by over 50%. This has positioned us to take advantage of the 500,000 upgraded broadband passings with faster speeds.

Let me tell you, we've done this before, and have demonstrated we can execute upon our proven consumer playbook that has resulted in a 7% increase in consumer broadband revenues in our legacy markets this quarter.

I'm very pleased with our progress and improvements in Northern New England and confident we will report overall growth in data and Internet connections during the first quarter of 2019. As I wrap up, I would like to announce our board recently declared our dividend payable on May 1. Now, I'll turn the call over to Steve for the financial review.

Steve?.

Thanks, Bob, and good morning to everyone. Today, I'll review our fourth quarter financial results as compared to the same quarter last year, and then provide guidance for the full year 2019.

Operating revenues for the fourth quarter were $344.8 million, down less than 3% after adjusting for the divestiture of the Virginia properties, which occurred in July 2018. Now, I'll provide some color on each of our customer channels. In the fourth quarter, total commercial and carrier revenue grew $1.9 million or 1.2%.

We can 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 2.7% or $1.4 million, while the former FairPoint markets continued to show strong momentum increasing 1.8% or $585,000.

Other commercial revenue increased $4.7 million due to equipment sales and structured cable projects. Consumer revenue was down $7.4 million for the quarter, voice revenues accounted for $7 million of the decline while majority of the erosion coming from the FairPoint -- former FairPoint markets.

As expected, video revenues declined $1 million in the quarter, and this trend is consistent with our strategy to encourage our customers to transition from linear video products to over-the-top streaming content with higher broadband speeds and higher data ARPUs.

Consumer broadband revenues increased $546,000 for the quarter, driven by very strong increases in legacy broadband of $1.8 million or 7%, offset by the expected seasonality declines in our Northern New England properties.

Subsidy revenues were down $2.4 million, mainly due to the final annual step down of CAF II transitional support which occurred in the third quarter -- excuse me. Network access revenues declined $2.9 million or 7.1% for the quarter.

Operating expenses, exclusive of depreciation and amortization, were $237.3 million compared to $244.6 million in the fourth quarter of last year, a $7.3 million or 3% improvement.

Within cost of services and products, higher CPE equipment cost of $2.9 million were incurred as a result of the large commercial equipment sales that are being offset by headcount synergies resulting in net savings in COGS of $800,000.

SG&A cost improved $3.7 million during the quarter as we are realizing synergy and operational efficiencies associated with the FairPoint merger. Net interest expense for the quarter was $35.5 million compared to $29.9 million for the fourth quarter of 2017.

The increase was due to increases in LIBOR and non-cash interest expense associated with the interest rate hedge agreements we used to achieve a percentage of fixed debt in our target of 75%. Cash distributions from our wireless partnerships were $10.3 million in the fourth quarter compared to $8 million a year ago.

Adjusted EBITDA was $132.4 million compared to $133.2 million in the fourth quarter last year. The year-over-year change is primarily due to revenue declines offset by continued cost reductions. In the fourth quarter, CapEx totaled $58.1 million and $244.8 million for full year 2018.

Total liquidity, including cash on hand and availability under our revolver was approximately $98 million. For the fourth quarter, our total net leverage was 4.3x. We continue to maintain an attractive capital structure at a low cost of debt with no maturities until 2022.

Now, I'll provide guidance for 2019 in the area of cash interest cost, cash income taxes and capital expenditures. We expect cash interest costs to be in the range of $135 million to $140 million.

Our estimates for 2019 are based on current capital -- our current capital structure, our portfolio of interest rate swaps and the forward-looking LIBOR curve. Cash income taxes are expected to be $1 million to $3 million and we do not expect to be a federal cash income tax payer until 2023.

Finally, we expect capital expenditures to be in the range of $210 million to $220 million. The lower expected capital expenditures compared to 2018 is due to completion of the build out from the New York broadband speed upgrades, lower CAF-II CapEx projection, and a decline in integration project spending.

During 2019, we will focus our investment on success-based projects to support fiber network expansion and broadband speed upgrades. We expect our capital intensity to be approximately 16% of revenues with over 60% associated with success-based projects. With that, I'll now turn the call back over to Bob for closing remarks.

Bob?.

Thanks, Steve. In closing, we are pleased with our fourth quarter and full year 2018 results, and especially the significant progress we made last year. We remain focused on the long-term building an even stronger and more competitive broadband company as we invest in the future and grow our strategic revenues.

In 2019, we're focused on growing market share, increasing profitability, as we continue investing in the business and improving upon the overall customer experience for our targeted 3 customer groups. We're confident in our plan and strategy to invest in our fiber network, delivering results and creating value for our shareholders.

Thank you for taking the time to join us today. And we'll now take questions.

Laura?.

[Operator Instructions]. Our first question comes from Jonathan Charbonneau of Cowen and Company..

Where do you stand in terms of the price compression you had been seeing within the data and transport business? And how do you think we should be thinking about growth within that segment this year, especially given some of the backlog you talked about in the prepared remarks? Thank you..

Yes, Jonathan. As it reflects on the carrier price compression, which is where we fell that the most, it -- we're really 90% to 95% through that. We've got a few remaining contracts and in most, well, in all cases, really I can't think of any that were a specific write-down.

We have traded renegotiating those early first gen pricing structures into -- up to date, second or third gen pricing per sites or connections. We've bundled that with new tower opportunities, and that's worked out quite well. I mean, we're up from like a 117 in Q same time last year to now we have 316 pending.

And as you can see that revenue channel for us is continuing to grow. So from a carrier perspective, I think we're well through it..

And then of the $4.7 million in business system sales and special construction projects, how much of that was a one-time in the fourth quarter?.

Steve?.

Yes, Jonathan, we had a pretty strong year in CPE for 2018. And I wouldn't say it's been certainly one-time. There's a fairly large construction project for a Central Illinois hospital. They had multiple buildings in third quarter, fourth quarter.

So it probably won't continue to run at that run rate, but also I think there's more opportunity in '19 and I wouldn't classify that as a one-time item..

Our next question comes from Marc Berkowitz of Aviva Investors..

One of your competitors, another industry participant cut their dividend to get their coverage ratio into the mid-30s. You guys are considerably higher than that. I wanted to get your commentary on where you feel comfortable with your dividend coverage ratio. And then you do have a clear maturity wall, but 2022 isn't far away.

Where would you like to see leverage before you consider a refinancing?.

Yes. Well, let me start and then Steve will certainly pile on. We're well aware of what others are doing around us in the industry, but we're also unique in respect that we focus on what's important for our growth. Looking back in the last year, we returned $110 million to shareholders in 2018, and we have paid our February dividend.

And last Tuesday, we announced -- the board declared the May 1 dividend. And here's how we think about -- here's how we think about it, I mean, specifically. It's an allocation of capital decision that we like any other company continue to evaluate for highest return and best use of cash. Our coverage ratio has felt safe.

But we've always been good at making the best decision for what we think will grow value for shareholders.

As far as leverage, Steve?.

Yes. Well, just to maybe pile on to that answers a little bit. I mean, the payout ratio for fourth quarter was 68%. We're generally comfortable -- given our capital structure, given our cash income taxes, we're comfortable in the 65% to 70% range, and we're still investing 17% to 18% of our CapEx back into the business.

With respect to the question on leverage, again, as you pointed out, we have no current maturities until 2022. Our current cost of capital from the debt side is about 5.5%, given 75% of that's fixed. Leverage is 4.3. We want to be sub-4 here in the near term.

And I think we have to be lower than that before we get into the refinancing in '20 -- late '20 or '21 or whatever. So we are trying to address that..

Our next question comes from Frank Louthan of Raymond James..

It's Megan Yang, covering for Frank.

So what's your outlook for the video stop losses for the year? I mean, are you expecting to see the same pace as you saw in 2018? And then the second question is when will you start to see benefits from the $500,000 homes that you passed?.

Yes. Good morning. If you look at our strategy around the consumer customer is to secure the broadband pipe. And so doing that in the most cash accretive way for us has transitioned because of the set-top box cost away from emphasizing video to more only using video as a way to attract or retain the broadband customer.

So we're going through a natural managed decline of that, and it's actually cash accretive for us from a bottom line perspective.

So that's going to continue through, at least, part of '19, although our emphasis on over-the-top ways to complement our broadband product with the video offering continues as long as we can do it without the expense of the set-top box and we'll have more to talk about later in the year around that.

Specifically, though, in terms of broadband activity on the consumer, the 500,000 that we've upgraded has created an opportunity to reignite the marketing programs in Northern New England. And we talked about last quarter, our need to fix some provisioning back office things and we've gotten that behind us. Install rates have picked up.

We are confident enough that we restarted marketing last week.

And as we have reengineered the broadband installation process, we are hitting our date dues on a consistent basis -- on a much more consistent basis, which creates a much better customer experience, including dealing with the whole home Wi-Fi coverage and making sure that we reduce follow up visits that are troubling.

And added to that, one of the things that gives us more confident in Northern New England is with our more flexible rules -- work rules, that we negotiated with our employees, and they are seeing the benefit of this.

We now can use flexible resource where it makes sense, especially in storm or severe weather conditions that will distract it from installs and that allows us to recover more quickly from those and get back to a consistent install -- installation schedule, so we can meet customers' expectations..

[Operator Instructions]. Our next question comes from Davis Hebert of Wells Fargo..

I wanted to ask again somewhat on the leverage question. I know you have some synergies that you expect to realize this year, and then, you obviously talked about some of the market share opportunities in the Northern New England markets.

So I know you maybe can't give us guidance, but is the idea around deleveraging primarily from EBITDA growth, will that primarily come from that side or will you be repaying debt with free cash flow?.

Davis, this is Steve. I think the answer is we need to improve our free cash flow profile in a way and we do need to slow down the revenue growth or revenue decline, which we're extremely focused on, which again combination we expect that we've had really consistent growth in carrier and transport.

We expect -- with the capital investments we're making, we expect to be able to hopefully thread that needle or grow that a little bit. Consumer, we've talked about in Northern New England quite a bit.

We feel like we've haven't benefited yet from the investment we've made in Northern New England for the 500,000 upgrades well along whatever we do going forward. Bob talked about that how we feel really good about the plan going forward for 2019. So, I think, this is going to be a combination.

I've seen improvement on, as we always referred bending the revenue curve, particularly with the field FairPoint properties. We continue to have cost synergy, cost structure opportunities and we will just continue to execute across that -- on those key initiatives..

And what I'd add Davis is, as Steve mentioned, we are emphasizing getting below 4 as fast as we possibly can. And so our focus is on maximizing cash both through synergies and smart investment of CapEx. Steve talked about our CapEx guidance. The biggest improvement that we can point to is we're spending less cash on integration in 2019.

And going forward at the second half of '19, we're primarily running the business as an combined operating entity. And so we get out of the funding integration projects and all the things that come with that, including on the capital side, plus we have CAF-II behind us for the most part, which lowers CapEx.

You have the build in New York broadband and you add those things together, we feel like we're on a trajectory through 2019. That's a lot more comfortable from a cash perspective..

That's really helpful commentary. And if I can just ask one more on the leverage front. I mean, obviously, you're always looking to probably optimize your portfolio of -- within your footprint.

I mean, are asset sale is potentially part of the plan or a thought process there?.

Yes, Davis, this is Steve. We -- I mean, we would entertain asset sales, right. We've done that with our Iowa. We've done it with Virginia, Iowa on the FairPoint side. I think there are several smaller operating properties that were part of the FairPoint transaction.

I think that we would -- and we've -- we're not running a process or anything that package all those. We do get a lot of inbound inquiries for certain properties. And I think the ones that maybe we're not seeing as -- or probably see as a growth vehicle or aren't serving all 3 customer channels.

We would probably consider selling based on the right valuation, but there's got to be a minimum -- sort of a minimum valuation requirement, I guess, for us to consider doing through the integration and taking on the distraction.

So, I think, overall, there are -- and there's probably other assets in the portfolio that, under right circumstances, we would consider selling. But again we'll evaluate those things that come to us..

And I just have one last question on CapEx, and appreciate that guidance.

On the success based front, I mean how would you characterize different buckets? Would it be focused more on-net buildings or broadband or CPE? And then what's kind of in the maintenance piece from an activity perspective?.

Yes. Great question.

I mean, the focus is on fiber network expansion, and the capital committee that Steve chairs with our CTO and the sales teams bring from the fiber regions that we operate, that is very disciplined and they will get more CapEx actually at minimum -- at least as much in 2019, because of the robustness of our network and the ability to do maintenance as more of an evolutionary than a step function investment.

And it's also a factor of why we bought the FairPoint network. It was well-built in a reasonable amount of time from '08 or '09 forward and doesn't require step function investments in order to be carrier ready. And so we can build more incrementally on a success basis.

So I would look at most of the success-based CapEx go -- and then on a per sale basis is when we get into the CPE distribution. It's more directly associated with orders and contracts..

This concludes our Q&A portion. I'd like to turn the call over to Bob Udell for closing comments..

Well, we very much appreciate you taking time to join us today and listening to our results. And we look forward to speaking with you again next quarter and discussing the first quarter of 2019. Have a great day..

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Everyone have a wonderful day..