Frontier Communications Management Discusses Q4 2011 Results - Earnings Call Transcript
Frontier Communications Corporation (
)
Q4 2011 Earnings Call
February 16, 2012 4:30 pm ET
Executives
Gregory Lundberg – Assistant Treasurer, IR
Maggie Wilderotter - Chairman and CEO
Donald Shassian – CFO and EVP
Daniel McCarthy – COO and EVP
Analysts
Batya Levi – UBS Investment Bank, Research Division
Simon Flannery – Morgan Stanley, Research Division
Philip Cusick – JP Morgan Chase & Co, Research Division
Michael Rollins – Citigroup Inc, Research Division
Scott Goldman – Goldman Sachs Group Inc., Research Division
Kevin Smithen – Macquarie Research
Michael Hodel – Morningstar Inc., Research Division
Frank Louthan – Raymond James & Associates, Inc., Research Division
David Coleman – RBC Capital Markets, LLC, Research Division
Christopher Larsen – Piper Jaffray Companies, Research Division
Presentation
Operator
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Good day, everyone, and welcome to the Frontier Communications Fourth Quarter 2011 Earnings Results Conference Call. This call is being recorded. At this time, I'd like to turn the call over to Greg Lundberg. Please go ahead.
Gregory Lundberg
Good afternoon, everyone. Purpose of this call, to discuss the 2011 fourth quarter and full year 2011 results for Frontier Communications. The press release, earnings presentation and supplemental financials are all available in the Investor Relations section of our website, frontier.com.
On today's call are Maggie Wilderotter, Chairman and Chief Executive Officer; and Don Shassian, Chief Financial Officer.
During this call, we'll be making certain forward-looking statements. Please review the Safe Harbor language found in our press release and SEC filings. On this call, we'll also be discussing GAAP and non-GAAP financial measures as defined under SEC rules. Reconciliation between GAAP and non-GAAP is provided in our earnings release. Please refer to this material during our discussion.
I'll now turn the call over to Maggie.
Maggie Wilderotter
Thanks Greg, and good afternoon everyone. For today’s call, it would be helpful for you to follow along with the supplemental slides available on our Investor Relations page of the frontier.com website.
I’ll begin today by addressing our dividend announcements. I will follow with a summary of the quarter, and then hand the call over to Frontier’s Chief Financial Officer, Don Shassian.
To begin, if you could turn to Slide 4. After the market close today, Frontier issued a press release announcing that its Board of Directors declared a quarterly dividend of $0.10 per share, a reduction from our prior levels of $0.1875. We recognized the impact that this difficult decision has on all of our stakeholders, but it is important and an important step to take at this time to strengthen our balance sheet and to provide greater operational and financial flexibility.
First and foremost, Frontier is a healthy business that is expected to generate approximately $1 billion of free cash flow before dividends in 2012. Our Q4 2011 financial performance is our strongest quarterly performance and EBITDA margin since the Verizon acquisition which occurred only 18 months ago, when we nearly tripled in size.
In addition, we have accelerated our final systems conversions to begin in March of 2012, almost a full year ahead of our original plan, which will eliminate over $100 million of annual cash operating expenses. This has allowed us to announce today an increase in our estimated annual cost synergies from $600 million to $650 million by the end of 2012.
I also want to reiterate that once we convert systems and get the Frontier go-to-market implemented consistently over several quarters, we accelerate the improvements in both revenue and cash flow. West Virginia is a great example of what we can expect in all of our markets. The turnaround in 18 months has been very successful with customer churn now approaching our legacy property level, steady net growth and high-speed and video sales, and strong incremental revenues in the commercial segment.
Don will take you through more detail on West Virginia. But I wanted you to know that this is a case study of the improved business fundamentals that we will see in all of the acquired properties several quarters after conversion. These West Virginia and Q4 results clearly show that our business continues to improve.
Let me go over the three primary considerations behind the Board’s decision to reduce the dividend as seen on Slide 5. The first and most important consideration was to deliver on our goal of leverage reduction and to improve access to capital. Since the announcement of the Verizon acquisition on May 13, 2009, we have consistently expressed our goal of reducing leverage to 2.5 times net debt-to-EBITDA.
While our cost synergies are ahead of target, our revenues are behind plan. This has caused our leverage ratio to remain over three times. At the end of 2011, this leverage ratio was 3.18 times. Our Q4 2011 results show that our revenues are now making significant improvement. But this improvement is coming later than expected. To reach our 2.5 times leverage goal, we must begin to reduce our outstanding debt -- to reduce our outstanding debt.
We have $581 million of debt that comes through in January of 2013. The dividend reduction provides $348 million of incremental residual cash flow per annum that will be used to pay down that debt. Likewise, in 2013 and beyond, we will now have more residual free cash flow to continue paying down future debt maturities to enable us to reach our 2.5 times leverage target more quickly. The leveraging will also low our cost to capital in any refinancing.
The second consideration was to enable increased investment in strategic initiative. Frontier’s customers remain our top priority. We need to continue investing in our networks to meet growing business and consumer demand for Internet data and faster speeds.
Our 2012 capital expenditure guidance of $725 million to $775 million reflects continued investments in broadband expansion, improved speeds and capacity for business and residential customers in select markets, and investment in high bandwidth data connection to wireless communication towers. Additional strategic capitals will enable us to speed up process automation and invest in new products and services to grow our customer revenue.
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