Good day, ladies and gentlemen, and welcome to the Frontier Communications Second Quarter 2019 Earnings Conference Call. [Operator Instructions].

It is now my pleasure to introduce Vice President of Investor Relations, Luke Szymczak. .

Thank you, operator. Good afternoon, and welcome to the Frontier Communications second quarter earnings call. My name is Luke Szymczak, Vice President of Investor Relations. With me today are Dan McCarthy, President and CEO; and Sheldon Bruha, Executive Vice President and CFO.

The press release, earnings presentation and supplemental financials are available in the Investor Relations section of our website, frontier.com/ir..

During this call, we will be making certain forward-looking statements. Forward-looking statements by their nature address matters that are uncertain and involve risks, which could cause actual results to be materially different from those expressed in such forward-looking statements.

Please review the cautionary language regarding forward-looking statements found in our earnings press release and other SEC filings. On this call, we will discuss certain non-GAAP financial measures.

Please refer to our earnings press release for how management defines these measures, certain shortcomings associated with these measures and reconciliations to the closest GAAP measures..

I will now turn the call over to Dan. .

Thank you, Luke. Good afternoon, and thank you for joining us. Please turn to Slide 3. Although we made some progress in the second quarter, the pace of improvement is not rapid enough, and we fell short of several important objectives.

At a high level, we have been challenged by ongoing revenue declines, content cost escalations, higher labor costs and other pressures across the business.

That being said, our objective continues to be to optimize our business, leveraging our best assets for future growth, while managing the elements of our business in secular decline by executing on cost efficiency programs and selective capital investment..

I will start with the second quarter itself in which revenue was $2.07 billion, down about 1.6% sequentially. Consumer revenue of $1.05 billion declined by 2.5% sequentially, driven primarily by customer losses. Commercial revenue of $922 million declined 1.1% sequentially, driven by the SME portion of the business.

The increase in Consumer customer churns of 2.14% was a disappointment. In addition, Consumer ARPC of $88.68 was down sequentially..

Adjusted EBITDA of $882 million increased 1% sequentially. Several factors contributed to this performance, including incremental benefits from transformation, the reversal of some of the Q1 seasonal expense pressure and reduced expenses as we restructured our Commercial sales force.

This quarter also reflects a seasonal trough in marketing spend, and we anticipate an increase in marketing activities and costs in the second half of the year..

Moving to transformation. We attained $40 million of transformation benefits in the second quarter. This represents a $26 million incremental improvement over the first quarter, and we're now on track to attain benefits of $110 million to $150 million in calendar year 2019 as compared to the previous target of $50 million to $100 million.

The $40 million of transformation benefits in the second quarter equate to $160 million annualized run rate, and we continue to anticipate exiting 2019 at $200 million annualized run rate of transformation EBITDA benefits..

We're reducing the target for $500 million in annualized transformation EBITDA benefits we had set for exiting 2020 to a range of $200 million to $250 million. While we're ahead of plan in achieving the cost-reduction targets of the transformation program, we anticipate greater challenges in achieving improvements in revenue and customer trends.

In late May, we announced the definitive agreement to sell our operations and assets in Washington, Oregon, Idaho and Montana for $1.352 billion. Sheldon will discuss this as well as our 2019 guidance in a few minutes..

Please turn to Slide 4. Total broadband net losses were 71,000 in the second quarter. This represents a reversal of the improvement in copper broadband in the first quarter.

In fiber, we were negatively impacted by seasonality as well as the elimination of certain retention credits offered to customers in periods following the integration of the California, Texas and Florida properties. In copper, we experienced lower sales and higher churn..

During the quarter, we saw a deterioration of our alternate channel performance. We continue to work with existing and new channel partners that have been added to increase efficiencies and effectiveness to improve our copper broadband unit trends. In Q2, we enabled 12,000 households through the CAF II program.

We expect to enable more than 100,000 additional locations through the remainder of 2019. Copper churn was also impacted by seasonal trends and experienced higher loss levels due to competitive pressures..

Please turn to Slide 5. We had a sequential uptick in Consumer customer churn in the second quarter. Some of this was expected as a result of seasonality. Also the impact of the roll-off of customer retention credits and expiration of older bundles had an adverse impact on customer save rates.

We expect a lower level of this activity in the second half of the year..

Before I turn the call over to Sheldon, let me update you on the potential evolution of the FCC Connect America Fund. The FCC has announced the NPRM for the successor to CAF, which is named the Rural Digital Opportunity Fund. The RDOF program would dedicate over $20 billion for broadband at up to gigabit speeds in rural areas over the next decade.

So far details of the plans appears consistent with our expectations that 25-megabit downlink and 3 uplink would be the base speed targets. We're very comfortable with the aggregate monthly capacity requirements of 150-gigabit per month..

We're also pleased to see that latency will be a consideration in the FCC evaluation proposals. Our current level of CAF II subsidy is approximately $332 million per year and favorably impacts EBITDA. The CAF II program is currently expected to end at the end of 2021.

It would be premature to speculate on the economics of any new program, but we do anticipate that the reverse auction approach may have terms that are less favorable to Frontier than the existing program. We intend to be part of the process with the FCC and look forward to receiving more details on the design of this plan as it proceeds..

Also, in terms of our ongoing fiber network speed upgrades, we are nearing completion of this project. We have been upgrading all FiOS markets to 10-gigabit capability. Although this level of capability will primarily be used for Commercial products, it will facilitate improvements in the Consumer product family.

As a result, we have introduced a new 500-megabit lead speed offer in FiOS markets starting in Q3. Before I finish, I'd like to congratulate Sheldon on having been named Executive Vice President and Chief Financial Officer..

I will now turn the call over to him to discuss our financial performance in more detail. .

Thank you, Dan, and good afternoon, everyone. I'll update you on our second quarter financial performance as well as our outlook for the remainder of the year..

Could you please turn to Slide 7? Second quarter revenue was $2.07 billion, down 1.6% sequentially. We had a loss in the second quarter of $5.32 billion. Let me call out several items related to this loss. First, we had a goodwill impairment of $5.45 billion or $4.93 billion net of tax.

The impairment reflects, among other things, our expectation of continued revenue declines because of pressures on the business, reduced expectations for the transformation program, the long-term sustainability of our capital structure, a lower outlook for our overall industry and the cumulative impact of all these factors on business trends going forward.

After this impairment, we'll have $276 million of goodwill remaining on the balance sheet, and further impairments are possible as a result of ongoing reviews of the business and operations..

Second, we recognized a $384 million loss on the anticipated sale of operations and assets in Washington, Oregon, Idaho and Montana. Third, we had $31 million in restructuring expenses. This compares to $28 million in Q1.

The Q2 amount includes approximately $11 million for severance during the period and approximately $60 million for other costs related to the transformation. Net cash from operating activities in the second quarter was $575 million.

The increase from the first quarter level of $282 million was primarily a result of the cyclicality of our cash interest payments. Our cash interest payments are significantly higher in Q1 and Q3 and lower in Q2 and Q4. So this result reflects our normal quarterly pattern..

We continue to execute well on managing expenses in the second quarter. Adjusted operating expenses were $1.185 billion, a 3.5% sequential decline. A key component of this decline was the benefit achieved from our transformation program.

In the second quarter, we achieved a benefit that was $26 million above the benefit achieved through the first quarter.

Overall, when including the $5 million transformation benefits achieved in the fourth quarter of last year and the additional $9 million of transformation benefits achieved in the first quarter, we've achieved a total of $40 million of transformation benefits or approximately $160 million on an annualized basis..

Second quarter adjusted EBITDA was $882 million, a sequential increase of 1%. Revenue declined $34 million on a sequential basis. Offsetting this was the previously mentioned transformation benefits that yield a $26 million sequential increase.

Additionally, the second quarter benefited from some expenses being lower than originally estimated or accrued as well as the deferral of certain investments and expenses, including delays in anticipated staffing. Normalizing for these, adjusted EBITDA would have been closer to $872 million for the quarter.

The adjusted EBITDA margin of 42.7% increased sequentially. And finally, our trailing 4-quarter operating free cash flow was $592 million..

Please turn to Slide 8. Looking at the components of revenue, Data & Internet services revenue was down slightly sequentially, driven by a decline in Consumer, which was partially offset by an increase in the wholesale portion of Commercial.

Once again both Voice and Video services revenues declined sequentially, consistent with the past trends with the underlying business dynamics..

Looking at the view of revenue by customer type. Consumer revenue declined 2.5% sequentially. Let me step through the components of that decline. Data & Internet services revenue, which accounts for slightly more than 40% of Consumer revenue, declined sequentially as a result of the second quarter subscriber declines.

Voice revenues continue to decline, and the rate of decline accelerated slightly during the quarter partially related to the decrease in Universal Service Fund rates we charge and collect on behalf of the FCC..

Video revenue also continue to decline. Although the churn rate in Video has improved modestly from the results in the first quarter, this rate remains significantly elevated relative to the trends in prior years.

Likewise, the rate of Video growth ads continues to decline as we continue to be successful in shifting our marketing efforts to deemphasizing video attachment as part of our broadband sales efforts. We anticipate continued declines in both Video customers and Video revenue..

Moving to Commercial. Total Commercial revenue was down 1.1% sequentially. Wholesale, which represents slightly more than half of Commercial revenue, declined 0.5% sequentially, driven by a decline in legacy circuits and voice that was partially offset by increases in Ethernet and other services.

Also, wireless backhaul was down sequentially within the wholesale. We anticipate continued declines in wireless backhaul revenues, which accounts for less than 3% of total company revenue. The SME portion of Commercial revenue declined almost 2% sequentially. Voice represents about half of SME revenue.

We anticipate that voice will continue to pressure SME revenue. And so far, we've been challenged in being able to offset this Voice declines with new products. Lastly, regulatory revenues increased slightly sequentially..

Could you please turn to Slide 9? Monthly Consumer ARPC was $88.68, a sequential decline of $0.46. We continue to focus on base management as customers migrate off promotional packages. However, there are other factors that impact our reported ARPC. For example, customer disconnects of Video services typically puts downward pressure on ARPC.

In Q2, our Video disconnects remained elevated with 46,000 net losses compared to an average quarterly net decline of approximately 30,000 during 2018. The second example is disconnects of standalone Consumer Voice customers, which typically push ARPC higher because the standalone Voice customers are normally priced well below our overall ARPC level.

As such, the degree of impact on ARPC each quarter will depend on the rate of Video disconnects and the rate of standalone Voice disconnects..

Could you please turn to Slide 10? Capital spending in the second quarter was $275 million. The focus areas of our capital spending remain consistent with prior quarters. We're in the process of deploying 10-gigabit capability across our fiber footprint.

This will support Commercial activities by enabling an even more robust portfolio of Ethernet services and providing a roadmap for 5G backhaul as well as future proofing our Consumer broadband services. We continue our build out for Connect America Fund or CAF.

We're also building fiber-to-the-home in certain rural markets to a total of 19,000 locations, and we're leveraging state funding programs for these builds..

For the first half of the year, we incurred $508 million of capital spending. We expect the second half CapEx to be slightly higher at approximately $620 million reflecting the increased ramp of our CAF build during the summer and fall periods. This brings our expected full year CapEx to approximately $1.2 billion.

This is approximately $50 million higher than original CapEx guidance with over half of this increase related to higher-than-expected charges we're incurring from a California utility provider for pole sharing as they have accelerated the replacement of long-aged poles during 2019.

This guidance is based on an expectation of normal storm activity during the second half. So any significant storm activity could cause an increase in CapEx.

The guidance also excludes up to $15 million of incremental and nonreimbursable spend for the disposal of the Northwest states as we incur cost to stand up and isolate platforms and systems for the acquirer..

Could you please turn to Slide 11? During the quarter, we announced a definitive agreement to sell our operations and all associated assets in Washington, Oregon, Idaho and Montana for $1.352 billion in cash. These operations accounted for $152 million in revenue in the second quarter, down from $155 million in the first quarter.

We received early termination of the Hart-Scott-Rodino waiting period for this transaction. FCC and required state applications have been filed and the approval process is proceeding as planned. And we continue to anticipate closing of this transaction by the first half of 2020..

Could you please turn to Slide 12? We are updating our 2019 guidance as follows. For the full year, we expect adjusted EBITDA of approximately $3.35 billion to $3.42 billion.

This guidance is based on continued revenue declines in the second half, additional cost in Q3 related to higher level of seasonal activity as well as higher number of workdays in the second half; investments in sales and marketing, including investments aligned with our new broadband speed offers on our fiber network; all of which is partially offset by the benefits of our transformation program, which, as Dan mentioned earlier, we expect to be $110 million to $150 million for the full year..

As I mentioned before, we expect capital expenditures of approximately $1.2 billion. We expect cash taxes of less than $25 million. We expect cash pension and OPEB of approximately $175 million. In the first half of this year, we've provided $77 million in funding, and we're forecasting round numbers another $100 million in the second half..

We expect cash interest payments of approximately $1.475 billion, $712 million of which was incurred in the first half. And we expect operating free cash flow of approximately $290 million to $360 million. Let me discuss some of the items that are impacting our operating free cash flow expectations beyond the items I just mentioned.

First, we have an approximately $30 million payment in the third quarter of previously accrued expenses resulting from changes in our arrangement with a consulting firm that was working with us on the transformation program. This cash payment was not an element of our 2019 cash flow guidance..

Second, we have about $30 million of cash cost related to the divestiture of the 4 Northwest states. Approximately $15 million is related to the incremental CapEx spent to stand up and isolate platforms and systems for the acquirer I mentioned earlier. Another $15 million is related to third-party professional advisers supporting the sale.

This was also not an element of our 2019 cash flow guidance..

Lastly, we expect to have approximately $30 million in a range of costs, primarily professional fees related to transformation and other activities that is not included in adjusted EBITDA. This was also not an element of our 2019 cash flow guidance.

The company does not intend to provide any further commentary regarding its financial outlook going forward, and this includes making any further revisions to the guidance just provided..

Before turning the call back over to Dan to conclude, I want to touch briefly on our capital structure. The Finance Committee of the Board of Directors is evaluating Frontier's capital structure. This includes considering, evaluating and negotiating capital markets and/or financing transactions and/or strategic alternatives.

Frontier remains committed to reducing debt and improving its leverage profile.

Additionally and importantly, as of June 30, 2019, the company had a total liquidity of $786 million representing our unrestricted cash balances plus amounts available under our revolver after excluding outstanding borrowings and letters of credit issued under the revolver..

I will now turn the call over to Dan for concluding remarks. .

Thank you, Sheldon. To conclude today's call, I want to reinforce that while we faced pressures on the business, we remain focused on serving our customers. We continue to have strong capabilities.

We are committed to innovation and are leveraging the immense talent across our organization to develop new solutions that will meet the evolving needs of all of our customers..

Thank you all for joining the call today. .

Ladies and gentlemen, thank you for participating in today's conference. A replay of this call will be hosted on Frontier's Investor Relations website. This concludes the program, and you may all disconnect. Everyone, have a wonderful day..