CNSL

Consolidated Communications Holdings, Inc. (CNSL)

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Consolidated Communications Holdings, Inc. (CNSL)

Q3 2012 Earnings Call

November 1, 2012 11:00 AM ET

Executives

Matt Smith – Treasure and Director, IR

Bob Currey – President and CEO

Steve Childers – SVP and CFO

Bob Udell – SVP and COO

Analysts

Frank Louthan – Raymond James

Jennifer Fritzsche – Wells Fargo

Donna Jaegers – DA Davidson

Steve Blinn – Morgan Stanley

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Consolidated Communications Holdings Third Quarter 2012 Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today’s conference, Matt Smith, Treasurer and Director of Investor Relations. Sir, you may begin.

Matt Smith

Thank you, Sam, and good morning, everyone. We appreciate you joining us today for our third quarter 2012 earnings call. At the conclusion of the prepared remarks, we will open the call up for questions. Joining me on the call today are Bob Currey, President and Chief Executive Officer; and Steve Childers, Chief Financial Officer. Also available during the question-and-answer session is Bob Udell, our Chief Operating Officer.

Please review the Safe Harbor provisions in our press release in our SEC filings for information about forward-looking statements and related risk factors. This call may contain forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements reflect, among other things, management’s current expectations, plans and strategies, and anticipated financial results, all of which are subject to known and unknown risks, uncertainties, and factors that may cause the actual results to differ materially from those expressed or implied by these forward-looking statements.

In addition, today’s discussion will include certain non-GAAP financial measures. Our earnings release for this quarter’s results, which has been posted to the Investor Relations section of our website, contains reconciliations of these measures to their nearest GAAP equivalent.

I will now turn the call over to Bob, who will provide an overview of our third quarter results and an update to our integration progress. Steve Childers will then provide a more detailed review of the financials. Bob?

Bob Currey

Thank you, Matt, and good morning, everyone. I appreciate you joining us today. Let me begin by making a few comments about our overall results for the quarter and then provide an update on our SureWest integration progress. This is the first quarter of reporting for the combined company and we are very pleased with how the business performed.

On a pro forma basis, both revenue and adjusted EBITDA increased year-over-year with revenue growing around 1% and adjusted EBITDA by 6.5%. These results reflect our successful strategy of improving a top line operating efficient rate and meeting cost synergy targets.

On the top line, we continued our diversification with business and broadband now representing 73% of our total revenues. We also delivered substantial synergies throughout the quarter and continued our cost structure improvements.

At the close of the SureWest acquisition on July 2, we realized $10 million of annualized operating expense synergies and an additional $2 million throughout the quarter. These operating expense synergies are right on our plan and have us on pace to meet or exceed the targets we set of $20 million annually at the end of the first year after close and $25 million at the end of the second.

In addition, we now expect to achieve the high end of our targeted $5 million to $10 million of CapEx synergies. And those will be achieved in the 2013 calendar year. The strong financial results in the quarter allowed us to deliver a comfortable dividend payout ratio of 67.2%. We distributed $15.5 million in dividends to our shareholders in the third quarter and on Monday our Board of Directors declared our 30th consecutive quarterly dividend to be distributed to shareholders on February 1, our record holders as of January 15.

Now moving on to our operating results for the quarter, we delivered strong growth in our broadband subscribers of 6,500. We added 4,100 data in Internet connections and 2,400 video connections. On the residential side, we are now penetrated at 30.2% for Internet marketable homes and 20.2% for video marketable homes. And while these are solid penetration levels, we have significant upside opportunity to drive these higher in addition to increasing ARPU with faster speeds and video tier upgrade.

On the Internet side, we are now offering our customers a multitude of speed between one and 50 megs at different price points providing more options to the consumer and additional upgrade opportunities, with video we rolled out Whole Home DVR in certain markets during the quarter where it had not already launched, we are no longer at a competitive disadvantage in those markets and we expect this to help to drive higher penetration and ARPU. With respect to ILEC access lines our legacy business continued our best-in-class performance.

With the last 12 month line losses down to 3%, on a combined basis with legacy consolidated and SureWest. The access line losses were 4.8% over last year but just as we did when we acquired our North Pittsburgh properties back in 2008 we are using or bundling in sales approach in the California ILEC and expect to improve on our pro forma access line retention. In total net of our broadband growth and voice losses we increased overall connections by 1,500 in the quarter. Delivering on our strategy of growing broadband in excess of voice occurrence.

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