Exhibit 99.2
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Final Transcript
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Conference Call Transcript
FRP - Q2 2005 FairPoint Communications, Inc. Earnings Conference Call
Event Date/Time: Aug. 03. 2005 / 9:00AM ET
Event Duration: N/A
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FINAL TRANSCRIPT
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
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CORPORATE PARTICIPANTS
Brett Ellis
FairPoint Communications - IR
Gene Johnson
FairPoint Communications - Chairman and CEO
John Crowley
FairPoint Communications - CFO
CONFERENCE CALL PARTICIPANTS
Simon Flannery
Morgan Stanley - Analyst
Kevin Moore
Wachovia Securities - Analyst
David Barden
Banc of America Securities - Analyst
Tom Seitz
Lehman Brothers - Analyst
Edward Yang
CIBC World Markets - Analyst
Westin Tucker
JP Morgan - Analyst
Andrew Kylie
Deutsche Bank - Analyst
PRESENTATION
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Operator
Good morning, my name is Crystal and I'll be your conference facilitator. At
this time, I'd like to welcome everyone to the FairPoint Communications second
quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS]. This
conference is being recorded today, August 3, 2005. I would now like to
introduce your speaker for today, Mr. Brett Ellis. Thank you, Mr. Ellis. You may
begin your conference, sir.
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Brett Ellis - FairPoint Communications - IR
Good morning, everyone and thank you for joining the FairPoint second quarter
earnings conference call. Participating on today's call are Gene Johnson, our
CEO and John Crowley, our CFO.
Certain statements made during this conference call, which are not based on
historical fact, may be deemed to constitute forward-looking statements within
the meanings of the Private Securities Litigation Reform Act of 1995. Because
these forward-looking statement's involve known and unknown risks, and
uncertainties, there are important factors that could cause actual results or
events to differ materially from those expressed or implied by these
forward-looking statements.
Such factors include those risks described from time to time in FairPoint's
filings with the Securities and Exchange Commission, including, without
limitation, the risks described in FairPoint's most recent annual report on form
10-K on file with the Securities and Exchange Commission. All information is
current as of the date of this earnings call and FairPoint undertakes no duty to
update this information. In addition, FairPoint's results for the second quarter
ended June 30th, 2005, are subject to the completion and filing with the
Securities and Exchange Commission of its quarterly report on form 10-Q for such
quarter.
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FINAL TRANSCRIPT
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
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Having said this, allow me to introduce Gene Johnson, our Chairman and CEO.
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Gene Johnson - FairPoint Communications - Chairman and CEO
Thanks, Brett. I hope that all of you had a chance to see our press release.
I'm pleased to report a good second quarter for FairPoint with progress on all
of our strategic fronts.
This resulted in second quarter revenues of $65.2 million up 4.5% from the same
quarter last year, and after adjusting for acquired operations and non-recurring
revenues, revenues were flat compared to the same quarter of last year, but up
slightly from the first quarter of '05. Adjusted EBITDA, as we defined in our
press release, was $33.8 million. Non-recurring revenues in the quarter were
partially offset by costs of ramping up the preparation for compliance with
Section 404 of the Sarbanes-Oxley act, which will trend back down as we go
forward. If you adjust for these unusual items, adjusted EBITDA was relatively
flat compared to the first quarter of 2005.
In light of expected declines in regulatory revenues, we are pretty happy with
the results. It reflects all the hard work by all of the many FairPoint
employees around the country. Earnings per share on diluted basis were $0.16 and
the key measure of cash available for dividends, again, as defined in the press
release, was about -- was $0.55 per share--not about.
On the operations and marketing side, we continued our growth trends. During the
quarter we added more than 11,500 access lines, partly through acquisitions and
partly through growth as we added more than 3,000 high-speed data subscribers in
our core companies. Our overall high-speed data penetration is now 16.6% up from
12.5% at the end of the same quarter last year. Long distance customers now
total more than 103,000 or 41.7% of voice access lines and that compares to
34.1% at the end of the second quarter of last year.
I previously talked to you about our four main strategic objectives. First is to
increase revenue per customer, second to improve operating efficiencies, third,
enhance customer loyalty, and then, finally, fourth to pinpoint selective
acquisitions.
On the revenue side, we increased data revenues in the quarter by 33%
year-over-year. Largely through better price discipline in our marketing of
high-speed data products. As to operating efficiencies we converted 17 of our
companies, which represent about 69% of our access-line equivalents, to a single
outsourced billing system, and that's going to allow us to enhance customer
support and better develop targeted marketing.
Though in the short-term it's been very, very hard work and it's disrupted some
of our collections processes as is common in these billing conversions. Finally
as to strategic acquisitions we previously announced that during the second
quarter we completed the Berkshire Telephone purchase, and we have contracted to
acquire Bentleyville Communications, and we expect to close the Bentleyville
transaction, which is -- Bentleyville is located in Pennsylvania -- later this
month.
From an equity marketplace standpoint, we think the second quarter was important
in clarifying the FairPoint investment proposition. Remember, we said that the
first quarter was not very predictive because our results included five weeks
under the burden of the old high-yield debt capital structure. This quarter
reflects the full effect of the new capital structure, at least almost the full
effect that resulted from the IPO.
Interest expense was $9.6 million, still about $400,000 higher than our run rate
because we we had debentures that were not redeemed until May. The result was
cash available for dividends of $19 million. Again, cash available for dividends
is defined in the press release. We also believe that the prorated first-quarter
dividend may have masked our equity story. In June we declared the
second-quarter dividend of $0.39781 per share, right in line with our stated
dividend policy. Compare that to the cash available for dividends per share of
about $0.55. You can calculate our dividend payout ratio for this quarter at
72%.
For reasons that John is going to describe in a minute, there are some slight
variations from quarter to quarter within our overall stable operating income so
you should measure this on an annual basis. We anticipate that our dividend
payout ratio for the full year, if dividends are paid in accordance with our
stated dividend policy, will be in the range of 75 to 80% of cash available for
dividends. With that dividend coverage and now one-quarter behind us of a full
$0.39781 quarterly dividend, we hope the market will finally recognize the value
proposition.
On external conditions, we don't really see any meaningful change in the
competitive marketplace. The cable situation seems to be status quo. We
continued to estimate that cable modems are available in only about 36% of our
markets, approximately 31% of our markets you remember have no cable system
operator at all and I think that this in large part explains our ability to
maintain the price discipline of our high-speed data products.
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FINAL TRANSCRIPT
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
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As part of our strategic refocus, I think you know that we promoted John Crowley
to CFO and that Walt Leach stepped up to take over the corporate development
effort, which you know is what I used to do before I became CEO. So I'm pleased
with both of those moves. I know I'm going to get a lot of questions to tell you
about Walt's activities and about the acquisition environment. So I'm going to
make a brief comment or two about that.
We've always said that a significant part of our growth will come by
acquisition, and as such we stay in contact with many RLECs. We'll continue to
be strategic in our acquisitions, continue to be thorough in due diligence which
we hope will allow us to create value for our shareholders. That is what we're
all about. When we find something that makes sense for our shareholders we'll go
into action and let you know about it at the appropriate time.
Let me summarize the second quarter. Growth, both organic and from acquisitions,
strong cash available for dividends, the message is getting out there about the
amount of the dividend of the payout ratio and continued marketing and sales
progress with access-line equivalents of nearly 288,000. Now to give you the
details on the second quarter operating metrics and financial results I'd like
to introduce John Crowley, our CFO to report to you and then he'll take any
questions you may have.
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John Crowley - FairPoint Communications - CFO
Thanks, Gene, and good morning, everyone.
I'll go directly to the numbers you're most interested in. Revenues for the
second quarter were $65.2 million, an increase of 4.5% over the same quarter
last year. The increase was partly attributable to $1.9 million in non-recurring
inter-state access revenues related to prior year settlements and adjustments.
The Berkshire Telephone acquisition that Gene just mentioned represents much of
the remainder of the increase. On a same-store sales basis and excluding the
previously mentioned non-recurring items, revenue was flat compared to the
second quarter of '04 and up about 1% from the first quarter of this year. Net
income for the quarter was $5.6 million, versus a loss of $4.1 million in the
second quarter of 2004, and note here that taxes for book purposes exceeded cash
taxes by $3.3 million.
Earnings per share on a fully diluted basis were $0.16 for the second quarter
compared to a loss per share on a fully diluted basis of $0.43 in second quarter
of 2004. Cash available for dividends, which is defined in the press release,
and one of the most important metrics was $19 million for the quarter, or $0.55
per fully diluted share. Our dividend in the quarter represented a 72% payout
ratio.
Gene described for you the dividend policy, and our operating goal is to earn
cash available for dividends so the payout ratio averages in the range of 75 to
80% over the course of the year. The pattern of our capital expenditures, which
I'll talk about in a second, may move individual quarters on our cash available,
but we expect our payout ratio to be in this range, that is to say, 75 to 80%,
for the full year.
Adjusted EBITDA, also defined in the press release, was $33.8 million for the
second quarter, down from $35.3 million in the same period of 2004. This is
principally due to timing differences in distribution--excuse me, from passive
investments and in a moment I'll talk about that and some of the other variances
in both revenues and expenses.
At the end of the quarter, we had 287,723 access line equivalents, up 11,556
from the previous quarter. Of this increase, 7,229 access line equivalents were
from Berkshire Telephone which we acquired in May. 3,295 represents an increase
in high-speed data customers, and the remainder, about 1,000 was in voice
access-line increases.
Let me go through the financials in the order that they are presented in the
press release. On the balance sheet, total long term debt is $603.1 million at
June 30. Our bank agreement represents $598.3 million of our total long-term
debt. At June 30, of this year, through the use of interest rate swaps, we have
fixed $490 million of our debt, at an average life of four years and an average
cost of 6.1%. Though Gene mentioned a second ago, the current cash, current run
rate cash interest was $9.2 million in the second quarter.
Turning to the income statement, revenues were $65.2 million, up 4.5% from the
same quarter last year. As we've mentioned, we had non-recurring revenue, $1.9
million, from interstate revenue settlement adjustments related to the prior
year. In addition, there was a slight favorable timing difference in recognizing
regulatory true-ups because of early filings of cost studies with NECA, the
National Exchange Carrier Association. The remainder of the $2.8 million
increase over the same quarter last year is the contribution of Berkshire
Telephone, which closed
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
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in May. Relative to the first quarter of 2005, even after deducting the
non-recurring revenue and the Berkshire revenue, we still had organic growth of
about 1%.
Let me talk about, for a second, about the mix of revenue. You will see on the
sequential reporting page of the earnings release that local calling service
revenue was up. This principally reflects the first step of rebalancing in
Maine, our largest state. The Maine PSC ordered reductions in intrastate cost
access charges and permitted increases in local service rates. Both changes were
done in two steps taking effect in February of '05 and in June of '05.
The first step was essentially revenue-neutral in Maine. The second step is
hardly reflected in the quarterly revenue figure, because of the timing.
Remember, it occurred in June. However, it may be revenue-negative, depending on
whether the interexchange carriers pass on the savings to their customers, and
how that affects their customers' usage.
As we've noted before, universal service funds support declines in the absolute
amount and as a percentage of our total revenue. Intrastate revenue, is
essentially flat on same store sales basis. Decline in intrastate access revenue
is not totally explained by the Maine rebalancing I mentioned a second ago.
There was also a slight decline in minutes of use throughout our service area.
Long distance continues to grow, as Gene mentioned. Our subscriber penetration,
as measured by subscribers that had selected us as an interstate carrier,
reached 41.7% as of June 30, 2005, up from 34.1% a year ago. Revenues from long
distance were up 14% from a year ago, which reflects the effect of bundling and
packaging of minutes, which we'll get into, in a moment.
Data and Internet, which includes DSL, continues to be our good performer. Total
high speed data or HSD, which includes DSL, cable modems and wireless broadband
reached 16.6% penetration. HSD revenue was up 33% to $5.9 million for the
quarter. As Gene mentioned, we've been able to maintain our retail prices in all
but our most competitive markets, and margins continue to improve because the
expenses associated with DSL have dropped and partly from the scale of the
business, because of the growth.
And on the expense side, the largest line item increase was in consulting, as we
talked about in the press release. Our consulting expense increased by $1.5
million compared to the second quarter last year. The increase was substantially
due to preparation for compliance with the Sarbanes-Oxley act. Iif you're
familiar with Sarbanes-Oxley, you know that the intermediate step of this
preparation is documenting our existing processes, existing business processes
and our internal controls. This is a very labor-intensive process, and by
getting a lot of outside support, we are far along and are now performing
preliminary tests of our controls, something we don't actually need to complete
until 2006.
While we are continuing to go get some consulting advice, much of the current
work is being done in-house and the cost, as reflected in the second quarter,
have already come down substantially. Another increase in expenses was an
increase of $200,000 to the reserve for uncollectible accounts. As we mentioned
in the press release, billing conversion has caused some delays in the
collections treatment process and we thought that this is the prudent thing to
do.
The other big expense increase is in stock-based compensation which increased
$600,000 from the same quarter last year. Total salary benefit costs, excluding
stock-based compensation increased by about $150,000 from the same quarter of
2004.
Now, let's move to the statement of cash flows. I want to explain a few
anomalies. First, you'll see under cash flow from investing activities that we
spent $16.4 million on acquisitions which is the Berkshire Telephone closing. We
purchased Berkshire for $20 million but it is shown in the cash flow statement
as net of the cash on the Berkshire balance sheet at the time we acquired the
company.
Next you will see net capital additions of $9.7 million for the first half.
During the second quarter we made capital expenditures of $5 million which
appears lower than the guidance we've previously given of $27 or $28 million for
the year. This is purely a timing issue and we continue to expect capital
expenditures of approximately $27 to $28 million for the full year of 2005.
My last point on the cash flow statement, I know there's always interest in the
distributions that we get from our investments, you can see these distributions
dropped by $4 million, relative to the first half of last year. Last year in the
first quarter, a cellular partnership in which we had an interest was liquidated
which resulted in a one-time distribution of $2.5 million. The remaining
variance is explained by timing differences.
In particular, Orange County, Poughkeepsie, LP paid the fourth quarter
distribution in the first quarter of '04 and then paid both the first quarter
and second quarter dividends in the second quarter in the second quarter of '04.
I should repeat that. Orange County Poughkeepsie paid the fourth quarter
dividends in the first quarter--fourth quarter dividend of '03 in the first
quarter of '04 and then paid the dividends for the first and second quarter of
'04 in the second quarter of '04.
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
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You will see that the comparable equity in net earnings of investees increased
year-over-year. The easiest place to see this is on the EBITDA reconciliation
page. The last page of the earnings release. There, on the top half of the page,
you will see that we deduct the equity and earnings of investees from our EBITDA
and in the very next line we add in the actual cash received as distributions
from investments. To draw the comparison underlying earnings were flat and
actually grew a bit, but distribution dropped, and this is because of the timing
difference that I attempted to explain a moment ago.
And, finally, I'm happy to take your questions.
QUESTION AND ANSWER
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Operator
[OPERATOR INSTRUCTIONS]. We'll pause for a moment to compile the Q & A roster.
First question comes from the line of Simon Flannery with Morgan Stanley.
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Simon Flannery - Morgan Stanley - Analyst
Good morning. Thanks very much. If I could just turn back to the M&A
environment, please. First, could you give us an update on Berkshire and how the
integration is going, the sort of opportunities to drive margins and where we
are a couple of months down the road? And then can you talk a little bit about
what is on your plate, what are the sort of opportunities in front of you, are
there more Berkshires out there in the next several quarters, and what is your
capacity in terms of financing to do more sort of $15 to $20 million type
transactions? Thanks.
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Gene Johnson - FairPoint Communications - Chairman and CEO
Thanks and good morning. You know, we don't give a lot of guidance on the
details of these acquisitions. I will tell you, Berkshire is ahead of where we
expected to be right now. I was actually there myself last week and it's going
very, very well, so we're quite pleased with the integration. So suffice it to
say it is ahead of schedule at this point. As far as acquisitions on the
horizon, I think was your second question, we don't give any guidance at all
about that. We don't talk about them.
I like to use the old navy term "Loose lips sink ships." We've actually lost
deals because we've talked about them in the past. Suffice it to say, though,
that there a number of things we're working on right now. We will be extremely
thorough in our due-diligence, as always. We'll be very careful to ensure that
these transactions, in fact, enhance shareholder value or we just won't do them.
So I can tell you that we are working on some things, but nothing imminent to
report, and we're going to be extremely thorough and careful and thoughtful to
ensure that whatever we do enhances shareholder value.
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Simon Flannery - Morgan Stanley - Analyst
Okay. And in terms of paying for the transactions?
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Gene Johnson - FairPoint Communications - Chairman and CEO
Sorry?
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Simon Flannery - Morgan Stanley - Analyst
In terms of your ability to pay either cash or issue stock for anything you
might buy?
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Gene Johnson - FairPoint Communications - Chairman and CEO
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
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Yes, I'll let John answer that one.
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John Crowley - FairPoint Communications - CFO
Well, yes, I guess I won't go into specifics of how much of our revolving
credit is unused, but there is a substantial chunk of our revolving credit that
is unused and we would obviously be interested in utilizing our stock for an
acquisition. Both of the acquisitions that we talked about for this year were
essentially negotiated prior to being a public company, so we didn't necessarily
have that opportunity. But as our stock continues to perform, and if you'll do
your part on that, we may be able to use that.
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Simon Flannery - Morgan Stanley - Analyst
Okay. Thank you.
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Operator
Your next question comes from the line of Kevin Moore with Wachovia.
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Kevin Moore - Wachovia Securities - Analyst
I just wanted to see if there is any regulatory update, either the state or
federal level, that you think that are noteworthy, that can affect your story?
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Gene Johnson - FairPoint Communications - Chairman and CEO
Kevin, thanks. I think one of the more interesting things happening right now
is at the FCC, I'll tell you it is not anything significant on the state side,
that we could comment on right now, but certainly on the federal side it has
been reported, and we have been watching this for now the last two or three
weeks, it looks like it is pretty clear who the two Republican nominees to the
FCC are going to be. The word seems to be that the president plans to formally
announce that in early September.
We believe there is a very strong chance he'll also announce that Commissioner
Cox will be reappointed and we believe one reason to do that is to speed the
process through the senate for approving these nominations. So that's very
important, we need to pay a lot of attention to that. The two nominees on the
Republican side are people who apparently -- one of them is a very close friend
of Kevin Martin's, and the other one I think is, thinks the way Kevin does, so I
think it's idea the President would like to see the FCC get a little teeth again
and be able to accomplish its goals.
Equally important, I think, is the meeting that is being held, I believe it is
today actually, at the FCC, the open meeting, in which it's very possible that
DSL could be deregulated as a response to the brand X case. I actually was with
Kevin Martin recently and discussed this and it was very clear that he thought
that something could be done there. It is also very clear that he hoped that his
goal was to make sure that rural companies were not negatively impacted by this.
We need to watch it very carefully if an order does come out of the meeting
today, what that says about rural companies, because if you start talking about
DSL, you have to be concerned about the local loop piece that DSL rides on and
what impact that has on separations process and on universal service. We've been
encouraged in our meetings with Chairman Martin about that, so we'll have to
wait and see.
Other than that, I will tell you that the other processes are moving quite
slowly right now, that is, intercarrier compensation and universal service
reform, and I would expect to start hearing some noise from the FCC sometime in
the third or perhaps the fourth quarter about intercarrier comp. I don't think
we'll see anything significant,or any significant talk, on universal service
until next year. So I don't think anything has changed from the last call on
those two fronts.
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Kevin Moore - Wachovia Securities - Analyst
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
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What about the recent bill introduced, any impact on.
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John Crowley - FairPoint Communications - CFO
What recent bill was that, Kevin?
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Gene Johnson - FairPoint Communications - Chairman and CEO
We don't think so. First of all, I think it's relatively unlikely that those
bills get anywhere. I think the idea of making intrastate access -- intrastate
revenues, pay in, is a great idea.
Whether that actually happens or not, it would certainly help to drive down the
the 11% or whatever the current--I guess it's slightly over 10%, anyway, the
current long-distance surcharge. Come down. But whether that actually happens or
not is anybody's guess right now. So we don't see anything negative for rural
companies for either one of those bills.
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Kevin Moore - Wachovia Securities - Analyst
All right. Thanks.
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Operator
Your next question comes from the line of David Barden with Banc of America
Securities.
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David Barden - Banc of America Securities - Analyst
I think the FCC meeting is actually going to be tomorrow, and so we'll
hopefully hear some more from that, Gene. The three questions, maybe first on
the line performance, looks like stripping out the impact of Berkshire and
looking at lines opposed to access line equivalents, you guys actually grew
lines in the quarter. So that was a surprise for us and I'd love to know more
about kind of, along which avenues did you grow those lines, residential,
business, primary, secondary, it would be great to get some more color about
that, kind of tease the apart from the Berkshire effect from the underlying
effect.
Second thing would be just on the cash flows, John, the Berkshire effect on OCS
and Capex in the quarter so we can get a sense of what incremental effect it
had. And, third, I think you mentioned, obviously the revenues, on the Sarbanes
costs in the quarter itself, or Sarbanes consulting-related costs, can you give
us an actual number for the quarter and how that compared with the first
quarter, that would be great. Thanks a lot.
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John Crowley - FairPoint Communications - CFO
Yeah, thanks, David, let me take the questions in the order in which you gave
them to us. First of all, with regard to the mix of the subscriber growth,
we--there is a certain pattern nationally in the second quarter that occurred
last year as well, which is that we do serve a couple of, I guess you would
call, summer resort communities, and so there is a certain seasonality to the
growth. There are two in particular where that represented a big chunk of that
growth. On the break-out of the access-line growth, between business and
residential, we include that, I think--
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David Barden - Banc of America Securities - Analyst
I guess it was more of, because Berkshire has been added to the numbers it is
not exactly clear if I took Berkshire out, how Berkshire filters into all those
numbers.
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John Crowley - FairPoint Communications - CFO
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
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Right. Do you have the sequential right there? Well, Berkshire represented
7,223 access-line equivalents.
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David Barden - Banc of America Securities - Analyst
How about if we just look at access lines?
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John Crowley - FairPoint Communications - CFO
It's 6,531 access lines.
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David Barden - Banc of America Securities - Analyst
How is it divided into business and residential.
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John Crowley - FairPoint Communications - CFO
We don't have that in front of us. What we have is the aggregate numbers.
Aggregate numbers are 192,643 residential. And 54,170 business. This is for June
30, 2005. That is the aggregate numbers for all of FairPoint.
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David Barden - Banc of America Securities - Analyst
Right. We can follow up off line. The idea would be that if you strip out the
Berkshire you'll be able to see what was going on with the balance of the
business apples and apples in the two different units.
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John Crowley - FairPoint Communications - CFO
Right. The other thing I just want to briefly--you talk about the other
contribution from Berkshire. We haven't given any specific numbers in terms of
financial performance of Berkshire and what we have said, and you can expect
this, was that the Berkshire acquisition was accretive in terms of net income
and in terms of cash available for dividends on a per-share basis.
And in terms of further detail in the Berkshire financials, we don't want to
give too much of that out because of the information it provides to competitors
on future telecom acquisitions in the M&A marketplace. As to Sarbanes-Oxley, the
$1.5 million that we spent in the second quarter is the actual figure for the
second quarter.
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David Barden - Banc of America Securities - Analyst
How does that compare to first quarter?
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
First quarter, we'll look that up for you. It was in the $300,000 range. The
important thing is that going forward, the Sarbanes-Oxley preparation is going
to come down substantially because we've moved so much of it in-house.
The phase that we were in the second quarter included for the most part, the
recording, documentation of our business processes and the documenting of our
internal controls. We're now beyond that phase.
We're now at the point where we're doing what we call soft testing, which is
something that we don't actually have to do until next year. As I said before,
we'll continue to have some consulting expenses there, but they will be down
substantially, versus the second quarter.
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FINAL TRANSCRIPT
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
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David Barden - Banc of America Securities - Analyst
If I can just ask one last follow-up is there a mix between primary and
secondary updated now for the quarter on the Berkshire?
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
No, we don't give that out.
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David Barden - Banc of America Securities - Analyst
Okay.
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
The primary lines and secondary lines, we don't break that out.
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David Barden - Banc of America Securities - Analyst
Okay. Thanks, guys. Okay.
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Operator
Your next question comes from the line of Tom Seitz with Lehman Brothers.
- --------------------------------------------------------------------------------
Tom Seitz - Lehman Brothers - Analyst
Yeah, just a follow-up on David's question. Maybe I could ask it this way: In
the past you said that second lines have been going down as DSL has been going
up. We also calculate that you organically added access lines after taking out
Berkshire. Was there, you know, other than the two resort communities, did you
have a promotion on second lines? Anything like that that added to the
prime--that added to the access-line count, not the access-line equivalent
count?
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
You know, Tom, there were no specific promotions on second lines. There is just
the ordinary marketing of lines, whether they're primary or secondary.
- --------------------------------------------------------------------------------
Tom Seitz - Lehman Brothers - Analyst
Right.
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
But I think in looking at it, the biggest component of the growth really came
from the seasonality of the areas where people moved back for the summer.
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Tom Seitz - Lehman Brothers - Analyst
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FINAL TRANSCRIPT
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
- --------------------------------------------------------------------------------
Okay. And then second question, it's not perfectly analogous, I understand, but
in the MLP world, the smaller MLPs get a bit of a premium because I think the
rationale is that they can do a free cash flow per share acquisition much more
easily than the larger MLPs, the bigger you get, the tougher it is to do, an
acquisition, that is free cash flow accretive per share.
Does that at all work into your thinking with respect to M&A? I mean, all things
being equal, I mean, would you try and get bigger if a huge acquisition came
along, or do you consider it a strategic advantage to be sort of the size that
you are with the relationships through the RLEC community that you have, such
that you theoretically do have somewhat of an advantage in rolling up the
smaller RLECs?
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
Thanks for that. I think we do have an advantage and we don't use the term
"rolling up." But I think we do have the advantages in the RLEC space, more
management and managing relationships, and what have you.
In part because of our track record. One of the hallmarks here really is
thorough due diligence and analysis when we do an acquisition. I do just want to
briefly comment on your point about how the bigger you get the harder it is to
make an accretive acquisition. I suppose that's a simple matter of mathematics,
but by the same token, one of the things that Gene has emphasized--well, in the
history of the company--is that our focus in acquisitions is in creating
shareholder value. One of the ways we measure that in the short term is
accretion to the earnings per share and accretion to the cash available for
dividends to the we've been able to do that. That will continue to be a guiding
principle.
But the primary consideration in acquisitions will be adding to long-term
shareholder value. As to how we do that, obviously we're limited to some extent
by the marketplace. We are limited to some extent by what becomes available. But
I think saying too much more about that would start to trend into suggesting
that we have something in play, which I don't think would be correct to say.
Does that answer your question, Tom?
- --------------------------------------------------------------------------------
Tom Seitz - Lehman Brothers - Analyst
Yeah, that's good, thanks.
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
Okay.
- --------------------------------------------------------------------------------
Operator
[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Edward Yang
with CIBC World Markets.
- --------------------------------------------------------------------------------
Edward Yang - CIBC World Markets - Analyst
Good morning Gene, good morning, John. Coming back on access lines again, it
does look like if you--even if you strip out the seasonality and look at it on a
year-over-year basis, the rate of line erosion improved from about 2.5% to less
than 2%. Was this impacted at all by the billing conversion to the outsource
vendor, because I think you do mention that there were some delays in terms of
non-paid turnoffs and so on, just trying to get a better sense of the
access-line trends there.
And, second, just on EBITDA, there were some--you mentioned the Sarbanes-Oxley
costs, but there were some unsold, some one-time access that offset that. You
mentioned in the press lease that there is a product mix shift going on that is
somewhat impacting margins. How should we think about margins longer term?
Should we expect that margins should continue to trend down at a moderate pace,
or do you think we're at a good run rate now? Thank you.
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
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Tom Seitz - Lehman Brothers - Analyst
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FINAL TRANSCRIPT
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
- --------------------------------------------------------------------------------
Let me take the last one first. Because it is quite a complicated answer. But
it's--I mean, frankly, it is very difficult to predict the specific trends in
our margins, because it in a sense it is sort of answering the question of what
is the outcome of the foot race between the various support items where
obviously there are challenges, and the unregulated areas where obviously having
very, very high growth. I mean, small increases in our growth rate in HSD could
quite easily offset small decreases in say, universal service and what have you.
What I'd rather talk about is margins on specific products. Clearly on the
regulated products, the margins could be expected to come down, and as you
pointed out, they have. What is very interesting, though, is that particularly
in the area of high-speed data, not only is it a bigger percentage of our
revenue each quarter to quarter but the underlying margins in that business
continue to improve.
And as I mentioned, that is from a couple of things. One is the bulk of our DSL
lines, which is the bulk of our HSD, the bulk of our DSL lines, are regulated in
such a way that they pay a line charge into NECA on a per-month basis, and that
was reduced in April and so that has been clearly reflected in the improvement
in our HSD margins.
The other contributor to that is we continued to get the benefit of scale in the
HSD area. We have over 40,000 HSD subscribers, so as we continue to benefit from
scale we'll benefit from improvement in margins. With respect to the declining
rate of line loss, I think the--probably one of the important contributors there
is the competitive situation.
As Gene mentioned earlier, there has been very little change in the competitive
situation for us. There are not many markets where we're adjusting our business
plan to react to competition. There is one small market where we have to be a
little more promotional on the HSD side because of a cable operator that has
been pretty aggressive.
And to some extent I'm told by our marketing people that there has been what
they call -- I think what they call it advertising bleed in Maine, which is to
say that Verizon has apparently been quite aggressive in promoting DSL,
discounting DSL, the typical sort of discounts for a few months. Because they're
the big gorilla--maybe say big moose in Maine. I don't know what they have in
Maine. But because they're the big gorilla in Maine, advertising bleeds, on to
us so to speak and it has a slight impact on our ARPU there. That is the main
reason for the changing trend in access lines, we simply face different
competitive dynamics.
- --------------------------------------------------------------------------------
Edward Yang - CIBC World Markets - Analyst
John, scrolling down a little bit deeper into that. What is your typical rate
of disconnect notices as a percentage of access lines per quarter?
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
Right, the important thing--let me explain what's happened there. The important
thing there, is obviously, in the ordinary course of business, we disconnect
people on a regular basis for non-payment. There has been an accordion process
of delays where late notices, and this refers just to the converted companies
and just to the companies that have most recently converted to the new outsource
billing platforms.
- --------------------------------------------------------------------------------
Edward Yang - CIBC World Markets - Analyst
About 70% of your access lines?
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
Yes, as Gene says it was 69% of our access lines have been converted to the
outsource billing platform. Obviously not all of those were just converted.
We've been converting for eight months now. The ones that were converted most
recently we'll have delays in getting out late notices and that then has a
knock-down effect of getting out the late disconnect notices and knock down
effect on getting out the disconnects because for regulatory reasons. So the
concern that we had was that as a consequence while we wouldn't expect the
disconnects to necessarily change but the balances at the time of disconnect
might be larger. As a consequence we decided it was prudent to increase the
reserve for bad debt.
- --------------------------------------------------------------------------------
Edward Yang - CIBC World Markets - Analyst
Okay. Great. Thank you.
- --------------------------------------------------------------------------------
Tom Seitz - Lehman Brothers - Analyst
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FINAL TRANSCRIPT
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
Thanks.
- --------------------------------------------------------------------------------
Operator
Your next question comes from Jonathan Chaplin with J.P. Morgan.
- --------------------------------------------------------------------------------
Westin Tucker - JP Morgan - Analyst
This is actually Westin Tucker in for Jon. Can you just comment to what extent
you're seeing pressure from cable in the markets where there is a competitive
voice offer from cable? Can you give us color on which markets those are and
Time Warner actually reported some strong subscribers. If you could give us a
sense of which cable guys those are, as well, that would be helpful, thanks.
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
I don't want to point to a particular market where someone is getting to us
just because we don't necessarily want to encourage them. The situation is that
the competitive--cable competitive situation is relatively unchanged. 31% of our
subscriber base does not have cable available to it and 36%--only 36% have cable
modems available to them. And that number has been pretty stable for a while.
So I would think--I mean, there is entirely the possibility some of those cable
operators in those places where there are no cable modem systems could change
hands to stronger companies but they still face the same economics we do, which
is, with low density of populations it is still difficult to justify the
investment in the two-way capability and the ability to support wireless--not
wireless broadband, but wired broadband. I say that is relatively unchanged. I
would say there is one market that we're doing more discounting than the rest,
but it is one and it is small.
- --------------------------------------------------------------------------------
Gene Johnson - FairPoint Communications - Chairman and CEO
We have also previously disclosed the four primary cable competitors in the
marketplace are Time Warner, and this is not in any particular order, Time
Warner, MediaCom, Adelphia, and Charter. So I think that itself explains the
competition you see in those markets.
- --------------------------------------------------------------------------------
Westin Tucker - JP Morgan - Analyst
Great.
- --------------------------------------------------------------------------------
Operator
Your next question comes from Andrew Kylie with Deutsche Bank.
- --------------------------------------------------------------------------------
Andrew Kylie - Deutsche Bank - Analyst
Question you mentioned a change in the rebalancing of rates in Maine. I wasn't
clear in what the second step you mentioned in June was. You mentioned potential
negative impact coming from that in the third quarter. I just wonder if you can
run into that in more detail. And then, I noticed in the press release that
there was some change in the lock-up period. I wonder if there was a specific
date around that at the end of August. Thanks.
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
- --------------------------------------------------------------------------------
Tom Seitz - Lehman Brothers - Analyst
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FINAL TRANSCRIPT
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Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
- --------------------------------------------------------------------------------
Thanks, Andrew. With respect to Maine, what happened was, the key to filling
you in on that are the days. The Maine rebalance was done in two steps, so you
might think of it as four steps. So there were two increases on the subscription
side and two decreases on the intrastate access side. There was one increase in
subscription in February of this year, and the second increase in subscription
in June of this year. And then there was a decrease in the intrastate access
charge we collect in February this year and another one in June of this year.
The effect of that first step, which is one increase in subscription and one
decrease in intrastate access charges, was essentially revenue-neutral. It
wasn't exactly revenue-neutral but very close. The results of the second one is
not necessarily reflected the second quarter results because of the fact it
happened so late in the second quarter. It appears that it may be somewhat
revenue-negative, but to say much more than that would be a prediction based on
traffic patterns going forward which will result from what the interexchange
carriers do as a result of the lower access charges they pay to us and to others
in the marketplace.
With respect to the lock-up, the lock-up was extended automatically under our
underwriting agreement because of this second-quarter earnings announcement. It
would have restricted a number of banks from writing about us for a period. Now
the lock up is extended to August 21st.
- --------------------------------------------------------------------------------
Andrew Kylie - Deutsche Bank - Analyst
One other question, on I guess the reserve on increase receivables.
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
Um-hum.
- --------------------------------------------------------------------------------
Andrew Kylie - Deutsche Bank - Analyst
I mean, would you expect that to kind of wind off as we go forward and as the
billing integration progresses?
- --------------------------------------------------------------------------------
John Crowley - FairPoint Communications - CFO
Yeah, I think we would probably ultimately expect that. As to when, it depends
in part on the timing of continuing conversions that we have scheduled for next
year. But you would expect that would reverse itself over a fairly short period
of time.
- --------------------------------------------------------------------------------
Andrew Kylie - Deutsche Bank - Analyst
Okay. Thanks.
- --------------------------------------------------------------------------------
Operator
At this time there are no further questions. Mr. Johnson, are there any closing
remarks?
- --------------------------------------------------------------------------------
Gene Johnson - FairPoint Communications - Chairman and CEO
Well, yes, I just want to say thanks to all of you for taking the time to
listen to the earnings call today, for your questions, and thanks for being
investors for those of you on the line that are investors. And I always say
thanks to all of our many employees who really working very hard, harder than
most people I know, every day, to get the results that we're seeing. So thanks
very much, and we look forward to talking to you again in the future.
- --------------------------------------------------------------------------------
Operator
To hear a replay of today's conference call dial 1-800-642-1687 for US
participants Or 706-645-9291 for international participants. You will hear a
prompt asking for conference ID, which is 7879033. This concludes today's
conference call. You may now disconnect.
- --------------------------------------------------------------------------------
Tom Seitz - Lehman Brothers - Analyst
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FINAL TRANSCRIPT
- --------------------------------------------------------------------------------
Aug. 03. 2005 / 9:00AM, FRP - Q2 2005 FairPoint Communications, Inc.
Earnings Conference Call
- --------------------------------------------------------------------------------
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