Crown Castle International Management Discusses Q2 2012 Results - Earnings Call Transcript

Crown Castle International (CCI)

Q2 2012 Earnings Call

July 26, 2012 10:30 am ET

Executives

Fiona McKone - Vice President of Finance

Jay A. Brown - Chief Financial Officer, Senior Vice President and Treasurer

W. Benjamin Moreland - Chief Executive Officer, President and Director

Analysts

Clayton F. Moran - The Benchmark Company, LLC, Research Division

David W. Barden - BofA Merrill Lynch, Research Division

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Richard Choe - JP Morgan Chase & Co, Research Division

James M. Ratcliffe - Barclays Capital, Research Division

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Simon Flannery - Morgan Stanley, Research Division

Brett Feldman - Deutsche Bank AG, Research Division

Jonathan Chaplin - Crédit Suisse AG, Research Division

Jason Armstrong - Goldman Sachs Group Inc., Research Division

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Michael Rollins - Citigroup Inc, Research Division

Batya Levi - UBS Investment Bank, Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Crown Castle International Q2 2012 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, July 26, 2012, at 9:30 a.m. Central time. I'll now turn the conference over to Ms. Fiona McKone, VP, Corporate Finance and IR. Please go ahead.

Fiona McKone

Thanks, Ron. Good morning, everyone, and thank you all for joining us as we review our second quarter 2012 results. With me on the call this morning are Ben Moreland Crown Castle Chief Executive Officer; and Jay Brown, Crown Castle Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the Investor section of our website at crowncastle.com, which we will discuss throughout the call this morning.

This conference call will contain forward-looking statements and information based on management's current expectations. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to have been correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions.

Information about the potential factors that could affect the company's financial results is available in the press release and in the Risk Factors section of the company's filings with the SEC. Should one or more of these or other risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary significantly from those expected.

Our statements are made as of today, July 26, 2012, and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, today's call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA, funds from operations, funds from operations per share, adjusted funds from operations and adjusted funds from operations per share. Tables reconciling such non-GAAP financial measures are available under the Investors section of the company's website at crowncastle.com.

With that, I'll turn the call over to Jay.

Jay A. Brown

Thank you, Fiona, and good morning, everyone. Let me start with a few summary comments as outlined on Slide 3 and then I'll go through our results and outlook in greater detail. As you've seen from our press release, we had an excellent second quarter, exceeding the high end of our previously issued guidance for site rental revenue, site rental gross margin, adjusted EBITDA and AFFO. We continue to make good progress with the integration of NextG and the WCP assets we acquired earlier this year and are excited by the ongoing deployments of wireless data networks. The strong year-to-date results and our expectations for the second half of the year allow us to meaningfully increase our 2012 outlook for site rental revenue, site rental gross margin, adjusted EBITDA and AFFO.

Turning to Slide 4. During the second quarter, we generated site rental revenue of $518 million, up 13% from the second quarter of 2011. New tenant additions increased site rental revenue by 6%, reflecting the increased leasing activity driven by the 4 major carriers upgrading their networks. And the remaining 7% growth came from our 2 recent acquisitions. The contribution to site rental revenues from these acquisitions was approximately $6 million higher in the quarter than we had previously expected. Further, we were able to achieve certain cost synergies related to these acquisitions quicker than we had previously anticipated.

Site rental gross margin, defined as site rental revenues less cost of operations, was $386 million, up 15% from the second quarter of 2011. Further, our network services continue to exceed our expectations, reflecting the level of network upgrade activity in the market.

Adjusted EBITDA for the second quarter of 2012 was $379 million, up 18% from the second quarter of 2011.

As shown on Slide 5, AFFO was $215 million, up 19% from the second quarter of 2011. And adjusted funds from operations per share was $0.74, up 17% from the second quarter of 2011. Further, while there were no significant nonrecurring items in the second quarter, I would note that we collected approximately $5 million in cash in the second quarter that we had previously expected to collect in the third quarter, which benefited our AFFO results in the second quarter.

Turning to investments and liquidity as shown on Slide 6. During the second quarter, we spent $95 million on capital expenditures. These capital expenditures included $29 million on our land lease purchase program. As of today, we own or control for more than 20 years the land beneath towers, representing approximately 77% of our gross margin. We believe this activity is a core competency of Crown Castle and continue to enjoy significant success with this program as evidenced by the fact that today, 39% of our site rental gross margin is generated from towers on land that we own, up from less than 15% in January of 2007. Further, the average term remaining on our ground leases is approximately 32 years. We continue to focus a significant amount of effort and capital on purchasing land beneath our towers and extending our ground leases.

Of the other remaining capital expenditures, we've spent $7 million on the sustaining capital expenditures and $58 million on revenue-generating capital expenditures, the latter consisting of $30 million on existing sites and $28 million on the construction of new sites, primarily distributed antenna system deployments. Further, during the second quarter, we used $51 million of cash to purchase a portion of our 9% senior notes and 7.75% senior secured notes, including make-whole costs at prices we found attractive relative to these bonds' respective call dates.

We ended the second quarter of 2012 with total net debt-to-last quarter annualized adjusted EBITDA of 5.5x and adjusted EBITDA-to-cash interest expense of 3.1x. As you saw in our press release last night, we reached an agreement with T-Mobile USA to extend the remaining term on all 7,300 existing leases to 10 years and granted T-Mobile rights to upgrade certain towers with radio equipment in connection with their network modernization plan. We expect this agreement to contribute approximately $20 million in site rental revenue to our second half 2012 results.

Moving to the outlook for the third quarter and full year 2012 as shown on Slide 7 and 8. We expect site rental revenue of between $530 million and $535 million and adjusted EBITDA of between $387 million and $392 million for the third quarter of 2012.

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