Categories Earnings Call Transcripts, Other Industries

Frontier Communications Corporation (FTR) Q3 2020 Earnings Call Transcript

FTR Earnings Call - Final Transcript

Frontier Communications Corporation  (NASDAQ: FTR) Q3 2020 earnings call dated Dec. 15, 2020

Corporate Participants:

Sheldon Bruha — Executive Vice President and Chief Financial Officer

Robert A. Schriesheim — Chairman of the Finance Committee of the Board

Bernard L. Han — President and Chief Executive Officer

Presentation:

Sheldon BruhaExecutive Vice President and Chief Financial Officer

Good morning, everyone. I’m Sheldon Bruha, Chief Financial Officer of the Company. Joining me today is Rob Schriesheim, Chairman of the Finance Committee of the Board; and Bernie Han, our President and CEO. At the outset, I would like to inform you that the quarterly business update is available on our Webcasts & Events section of our Investor Relations website, which can be found at 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 on page 2 of the presentation.

On this call, we will discuss certain non-GAAP financial measures. Please refer to the presentation for how management defines these measures and certain shortcomings associated with these measures. Reconciliations of these non-GAAP measures to the closest GAAP measures can be found in the presentation.

I will now hand it over to Rob, who will lead off the presentation of the quarterly business update.

Robert A. SchriesheimChairman of the Finance Committee of the Board

Thanks, Sheldon. Good morning and thanks for joining us. Before we dive into the details of our quarterly investor update, I just like to take a few minutes to discuss the state of our reorganization generally and the progress we have made starting with slide 8. The team has made significant strides in the last year and looking beyond a one dimensional focus on recapitalizing the balance sheet. Instead we pursued a full scale transformation which has come to define our view of a successful outcome.

Let me provide a bit of background. In many restructurings, there is often a predominant focus on addressing the balance sheet and reducing leverage. With such activity being necessary, but not sufficient to effectuate a full scale transformation. However, in Frontier’s case, we approach this through a much wider lines. We realized early on that while the Company would have to significantly recapitalize its balance sheet, there was an opportunity to preemptively and proactively take a much more holistic approach. This led us to not only address the capital structure, but to also implement an operational turnaround and to strategically reposition Frontier, while concurrently adding talent at various points in the process, all being done with the intent of creating a plan for value creation. This framework served as the foundation for productive engagement with our stakeholders around the capital structure, which we proactively initiated.

We’re pleased that our noteholder advisers and our noteholders constructively engage with us and have supported our turnaround plan and strategic plan for value creation. They understood our approach to strategically reposition the business under various investment scenarios, using a virtual separation framework we developed to transform from a legacy provider of copper-based services to a fiber-based provider. The dialog with the noteholders on recapitalizing the balance sheet was driven by how the business might perform and what opportunities the strategic plan would present.

At the time, we were proactively developing a turnaround plan, but in advance of engaging with our noteholders, we strongly believe that we were in need of a leadership team that have the appropriate skills to execute this plan with a relentless focus on driving performance and accountability too often a restructuring leads to a scenario in which the focus on addressing the balance sheet clouds out the level of attention needed to address the operating performance, which, in Frontier’s case, was in clear need of improvement.

The finance committee determined that Bernie Han was that leader. Bernie was named the CEO in December of 2019 to stabilize and turnaround Frontier’s operational performance, while supporting the committee’s focus on strategically repositioning the Company for the long term. Bernie has been able to dramatically improve Frontier’s operations across multiple metrics, while laying the foundation for the Company’s seamless emergence from Chapter 11.

As you can see on slide 8, since that time, Frontier has been moving through a large scale transformation with a focus on four pillars. Namely the four pillars are a restructured and recapitalized balance sheet and operational turnaround, strategic repositioning and talent enhancement. Each pillar was supported by its own set of work streams and explicit goals.

Let’s start with the recapitalization of our balance sheet on slide 9. Upon emergence, we’ve increased our financial flexibility with the reduction in debt of about $11 billion and a reduction in annual interest expense of $1 billion. This will lead to a pro forma debt to EBITDA ratio of under 2.5 times. We were able to achieve this in large part through the substantial constructive engagement with our various noteholders. In addition, we recently completed a $4.95 billion refinancing of the first and second lien debt, which reduced annual interest by an additional $60 million, extended maturity to 2027 and increased first lien debt capacity by $800 million to $1.6 billion.

The second pillar of Frontier’s holistic transformation is the stabilization of our operating performance with some highlights that we’ve covered on slide 10. As discussed, Bernie Han was hired in 2019 to spearhead this operational turnaround. Over the past year, he and his team has implemented a number of initiatives focused on creating a higher performance product suite, which has put Frontier on track to achieving the $400 million or so of targeted annual EBITDA benefit by 2022. Notably, we significantly reduced churn year-over-year, leading to the Company’s fifth straight quarter of positive consumer fiber broadband net adds and improved wholesale and enterprise operations.

The third pillar is the repositioning of the Company shown on slide 11. Over the past 18 months, Frontier has defined the strategy and initiated the transformation of the Company from a legacy provider of copper services to being a fiber-rich provider of communication services. We’ve done this by establishing a detailed plan for investment to expand the fiber footprint and strategically reevaluate individual state operating performance employing a virtual separation framework to determine how to optimize our returns on invested capital.

The Company’s go-forward business plan or the modernization plan implements fiber builds including some builds managed through the RDOF program to transform the Company’s footprint and passed an incremental 2.9 million homes as a long-term target over the next 10 years or so. The modernization plan is expected to be completely self-funding to organically generated operating cash flow of the business and has been developed with strict return on capital hurdles, allowing for very attractive returns. The expected shift in the subscriber base from the modernization plan will increase the percent of fiber subs from 45% today to 87% over the plan horizon and will drive a transformation of business mix that is expected to result in 75% of revenue coming from fiber products in the long-term as compared to about one-third today.

With the execution of our modernization plan, Frontier will be a much more fiber-rich Company with a total of nearly 6 million fiber-enabled households over the long term. Critically to reemphasize, we have set this up to be self-funding and under strict and very attractive return on capital hurdles. Further, we have done more than just develop a plan. We have rolled out a pilot fiber-to-the-home program this year and expect to reach up to 60,000 homes in 2020 starting from zero [Phonetic].

In addition, as another proof point, as the FCC recently reported, Frontier won over $370 million of total government subsidy over 10 years across California, Florida, Texas, Connecticut, West Virginia, Illinois, New York and Pennsylvania. With these actions, we’ve clear evidence of not only our intent that our success to date in transitioning from the legacy provider of copper-based services to a next-generation provider of fiber-rich infrastructure. In addition to the fiber passings planned, there is significant actionable and attractive investment opportunity beyond our modernization plan that can be pursued with access to incremental capital. Investors should take note of our success to date as proof points of building our internal capabilities required to execute these longer-term growth plan.

Obviously, we have made another move with respect to put in place the leadership talent to take the Company through its next phase upon emergence based on today’s release regarding our CEO transition. This is consistent with our fourth pillar. The fourth pillar of Frontier’s transformation is the recruitment of a world-class team to lead the Company forward. As we’ve said, we were very fortunate to appoint Bernie Han, who has delivered a tangible outcome of substantially improving operating results, which forms the foundation for the Company’s emergence.

And working with our noteholders, we also attracted John Stratton, an executive with a proven track record leading telecom businesses through periods of intense change based on his playing a pivotal senior executive leadership role during Verizon’s own transformation. John has been serving as an observer to our board and finance committee and will join Frontier as Executive Chairman upon emergence. John has made important contributions in support of the Finance Committee’s leadership and the Company will continue to benefit from his expertise as he overseas Frontier’s strategic direction following the Company’s emergence from bankruptcy.

In connection with Frontier’s restructuring support agreement, a search committee was formed consisting of four individuals, including two individuals designated by the Company’s noteholders and two current Frontier board members to evaluate the Company’s leadership needs including a potential CEO succession process. Following a comprehensive review of both internal and external candidates and with the assistance of a leading executive search firm and two additional noteholder representatives, the search committee arrived at the conclusion that Nick Jeffery is the right choice to assume the President and CEO of the time from Bernie Han. And effective on or around March 1, 2021, leads Frontier to its next phase of investment and profitable growth. Our Board unanimously voted its intent to appoint Nick as our next President and CEO.

The Board felt that the Company is at a natural juncture to initiate a seamless transition and to pass the CEO baton from Bernie who has put in place the foundation, which will allow Nick a running start. Nick brings nearly 30 years of operational expertise and leadership in the telecommunications industry. Most recently, he served as CEO of Vodafone UK, a leading wireless and wireline operator overseeing one of Vodafone Group’s largest businesses through a successful four-year customer-centric turnaround and transformation.

During his tenure, Vodafone UK returned to revenue and market share growth and achieved improvements to its net promoter score, churn and wider customer and employee satisfaction. Vodafone UK also reduced its operating expenses, delivered significant EBITDA growth, increased its free cash flow and became the fastest-growing home broadband provider in the UK.

Nick will join us as CEO, following the termination of his Vodafone UK employment agreement, allowing him to join as CEO on or around March 1, 2021 as I previously indicated. We are fortunate that Bernie will remain as a Board member through emergence and will work with Nick in guiding the CEO transition.

On slide 13, we provided the timeline of key milestones during Frontier’s transformation process, many of which we have discussed previously. There is no need to review this other than to comment that each of these actions were part of a well thought out mosaic that fit within our four-pillar transformation plan dating back to early 2019.

Let me conclude on slide 14. We feel confident about where we are in a transformation and the progress made in each of our focus areas. Upon emergence, first, we will have a significantly deleveraged capital structure and substantially reduced interest expense, creating optionality to invest in value opportunities. Second, we will have executed the first phase of an operational turnaround, reducing churn, improving our levels of customer service, leading out an unprofitable product mix and expect to be on track to deliver $400 million plus of EBITDA benefits in 2022.

Third, we will be moving with the plan of well underway to reinvest in the Company to transform it to a fiber-based provider of communication services moving us into a new neighborhood, whose value should be recognized by our investors. And fourth, we will have a new executive team who will be up to speed and ready to hit the ground running to lead the Company through its next transformation phase, which is based on profitable growth delivering highly attractive returns.

So in summary, upon emergence, the Company will be on track to achieve these non-strategic and financial objectives established by the finance committee, while ensuring a seamless leadership transition. We’re looking forward to completing the financial restructuring and emerging from Chapter 11 in early 2021.

Now, let me hand it off to Bernie to provide more detail on our progress on our various operational initiatives and to provide a review of success to date, along with some commentary on our reinvestment plan. And then to conclude, Sheldon will discuss our Q3 financial results in greater detail. Bernie?

Bernard L. HanPresident and Chief Executive Officer

Thanks, Rob and good morning, everyone. If you move to slide 16, I want to highlight a few results from the third quarter that Sheldon will review in more detail later. In this period, we generated positive fiber broadband net adds for the fifth consecutive quarter which shows our ability to grow our market share when we are not at a network disadvantage to our cable peers.

Our consumer churn came to 1.81%, a year-over-year improvement resulting from our operational churn initiatives, but a little higher sequentially due to some seasonal increase in consumer activity as well as the impact of COVID-19 on Q2 2020 as consumers generally avoided swapping providers during the initial months of the pandemic.

We generated $1.7 billion in total revenue in the quarter. We are seeing stable to modest growth in consumer broadband revenues driven by the aforementioned improving fiber broadband performance. Our adjusted EBITDA was $690 million resulting from continued strong operating expense performance. Finally, during the quarter, we posted positive net income of $15 million.

On slide 17, I want to update you on our progress of the fiber-to-the-home pilot. As discussed in our previous investor reports, we are aiming to have up to 60,000 new locations converted from copper to fiber by the end of the year. As of November 30, we have engineered over 60,000 homes surpassing our 2020 goal. We have completed construction of about 60% of our target locations and continue to ramp quickly and remain on target to reach our year-end goals. Although, it is still very early in the process, our offer is very appealing to customers. While we are successfully converting existing copper customers to fiber, most of our early gains are coming from winning net new customers. Early penetration and ARPUs are performing at or above targets.

We will continue to monitor customer acquisition trends as more homes are opened for sale and the pilot program matures. Our ultimate goal is to use the learnings from this pilot program to better implement our larger scale build beginning in 2021 and beyond. We aim to continually improve our analysis, design, construction, marketing and customer acquisition as we begin to convert more infrastructure to fiber.

Moving on to slide 18, I will provide some additional color around recent fiber broadband performance. Our broadband first approach continues to be successful. Fiber broadband net adds remain strongly positive for the fifth consecutive quarter. In Q3, we saw the first increase in churn since Q2 2019, partially driven by FOX Sports content drops.

Although churn increased slightly, it is still below pre-COVID levels largely due to our ongoing churn initiatives that are centered around the early life cycle of customers and at the time of promotion roll off. This uptick in churn is also partially related to an industry-wide trend of consumers increasing activity following reopenings after COVID lockdowns, which also caused increases in gross adds. We are encouraged by our sustained success in the fiber broadband space, and we’ll continue to monitor and improve the effectiveness of our customer retention and acquisition strategies.

On slide 19, I want to provide some other operational updates. We continue to negotiate contracts with content providers and implement further content drops that they do not align with our long-term strategy. Q3 content drops including FOX regional sports networks, MSG, FX Movies and Nat Geo Wild are expected to achieve roughly $15 million in quarterly run rate savings.

On the Company’s modernization plan, we are building on our successful fiber-to-the-home pilot program this year, and we have begun extensive planning and engineering for our 2021 builds. These 2021 builds will leverage the planning, engineering, construction and marketing knowledge gained from our 2020 pilot, and we’ll continue our execution against our overall fiber expansion goals in our modernization plan.

Additionally, we have begun implementing a multi-phased plan to simplify our product offerings and pricing structures to streamline operations management and to improve the overall customer experience. Finally, as of November 1, 2020, we have fully transitioned from the Northwest sale, and we have essentially ended transition support services provided to Ziply related to their acquisition of the Northwest operations.

Next, I will discuss our plans to reinvest in our network on slide 21. Under the modernization plan, we plan to nearly double the passings of our fiber footprint over the long term through strategic modernization of our existing copper footprint. As Rob mentioned earlier, we, along with our advisers, have been working diligently over the last 18 months to develop a comprehensive multi-year reinvestment plan. In the modernization plan, we will target the highest IRR project opportunities with a focus in our most attractive geographic markets. This plan is completely self-funding through organically generated operating cash flow of the business.

The forecasted returns from this reinvestment program are supported by an attractive competitive environment. Across our footprint, 92% of homes passed face one or no wireline competitors, and by the superior performance of fiber broadband over copper broadband including higher ARPU, higher market penetration and lower customer churn.

On slide 22, we provide additional detail on the transformative impact of the modernization plan on our network and business. Frontier plans to deploy capital and pursue overbuild in key states where there is a high return potential. Solely using available cash flow from the business, we expect to have gigabit speed capable fiber deployed to 40% of our homes passed. The modernization plan also aims to nearly double our broadband fiber subscriber base over the long term, increasing the proportion of fiber broadband subscribers from 45% today to 87% of total broadband subs.

Today, we already have 40% penetration in areas where our fiber is deployed. And our plan assumes that we are able to ramp the 40% penetration in these newbuild areas. We think this is very achievable given that 92% of our homes passed today face one or no broadband competitors.

Customers appear to welcome an alternative to cable as evidenced by general feedback from our initial build to up to 60,000 homes in 2020. There are some signs of cable taking preemptive steps against that. But this has been reflected in our financial projections with conservative assumptions on the rate of penetration growth in new areas.

Moving on to page 23, as mentioned on a prior page, Frontier plans to deploy capital and pursue overbuilds in key states where there is a high return potential. Of the 2.9 million new fiber homes passed for the modernization plan, roughly 2.6 million of them are in CTFC, which is California, Texas, Florida and Connecticut and WINO, which is West Virginia, Illinois, New York and Ohio. With this investment, we are targeting over the long term that fiber available to roughly 50% of our homes passed in the state grouping. We are constantly evaluating states for investment opportunities and our target states and groupings may change going forward depending on the evolution of the competitive environment, our ongoing analysis of real-time results and the outcome with specific events such as the RDOF option.

That concludes our operational update. I will now turn it over to Sheldon.

Sheldon BruhaExecutive Vice President and Chief Financial Officer

Thank you, Bernie. I will update you on our third quarter financial performance as well as review our capital structure given the bankruptcy court confirmation of our plan of reorganization and the refinancing transactions that we executed in October and November.

If you could please turn to slide 25, as a reminder, we closed the divestiture of the Northwest operations on May 1. As such, the reported results include the performance in the four Northwest states through April and then only the remaining 25 states thereafter. This slide presents our consolidated reported results with such hybrid view. On the subsequent slide, we adjust the historic periods to exclude the performance for the Northwest operations, so you could see the underlying performance of the remaining properties.

As such, I will discuss the Company’s operating performance on the following slide where appropriate apples to apples comparisons can be made. Our consolidated net income was $15 million for the quarter, but this income was impacted by several non-operational items.

First, we had $73 million of costs related to our balance sheet restructuring, bankruptcy filing and refinancing activities, which now sits below operating expense post our bankruptcy filing in a new category called reorganization items. Second, we had $58 million for the settlement reached with our secured creditors to obtain their support for the reorganization plan and other items to help facilitate our refinancing activities. This also sits in reorganization items.

Please turn to slide 26. Now looking at the performance for the remaining properties, our third quarter revenue was $1.726 billion, down 6.6% year-over-year driven by customer declines including a 5% decline in total consumer customers, a 4% decline in broadband customers and a 23% decline in video users.

Looking at the components of the revenue, our data and internet services revenue was down $13 million versus prior year, driven primarily by copper broadband customer losses, which declined about 7% year-over-year. Partially offset by fiber broadband gains, our fiber broadband revenue and customers have recently begun growing with the introduction of higher speed broadband offerings and churn reduction efforts. In fact, Q3 represented our fifth consecutive quarter of positive fiber broadband net adds.

Wholesale legacy circuit revenue and wireless backhaul decline was partially offset by lower disputes. As in the prior year, we took additional accounts receivable reserves related to wholesale billing disputes. Voice and video services revenues declined at double-digit percentage rates versus prior year. Voice revenue declined 12.8% similar to the declines in Q1 and Q2 driven by customers dropping landlines. Video revenues declined 20% reflecting not only the industry shifts to over the top, but also the impact of our strategy to deemphasize video attachments on broadband sales and improved customer value.

Looking at the view by revenue of customer types, consumer revenue was down 9% year-over-year, reflecting the trends on copper broadband, voice and video that I just mentioned. Commercial revenue for the quarter declined $53 million over the last 12 months. Most of this decline came from the retail segment, where we faced pressures in our small business segment related to COVID. The declines in revenue was mostly offset by our expense management. Our expenses were down $108 million over the last 12 months related to lower content costs and compensation costs primarily in our field operations.

Excluding the Northwest sale and on like-for-like basis, our headcount is down almost 1,900 employees or more than 10% over the last 12 months to 16,300 employees. Content costs are down as well, not just from the lower video subs, but also from the efforts to reduce premium content costs that Bernie mentioned earlier. Third quarter adjusted EBITDA was $690 million for an adjusted EBITDA margin of 40%.

Please turn to slide 27. Cash capex in the third quarter was $314 million. This is about $80 million more than last quarter, as second quarter cash capex payments were impacted by the non-payment of prepetitioned capex invoices due to our bankruptcy filing. We continue to have lower acquisition capex due to lower customer acquisition activity in the quarter. We have seen a lower level of customers in play across our footprint which is driving lower gross adds, but also lower churn, so little to no impact in net adds. So we are attaining similar customer levels without the incremental acquisition costs.

In terms of specific projects, we continue our buildouts for Connect America Fund or CAF with builds completed to 605,000 locations as of the third quarter. In addition, as a normal ongoing element of our capital spend, we built fiber to almost 15,000 greenfield locations in the quarter and over 35,000 through the first three quarters of the year, primarily housing developments within our footprint. These are on top of the over 30,000 locations we built in 2019. And as previously announced, we are planning to pass up to an incremental 50,000 households with fiber in 2020, targeting high return areas across our footprint.

We expect to spend approximately $50 million in incremental capex related to this footprint expansion. And as of the end of November, we have constructed over 36,000 of such households. Finally, as mentioned earlier, in the recently completed RDOF auction, we won over $37 million of government subsidy per year across eight states.

Please turn to slide 28. Here, we look at our year-to-date performance against the base case included in our disclosure statement initially filed with the courts on June 17. We are tracking well with both our revenue and adjusted EBITDA for the three quarters of the year, exceeding the disclosure statement case. Revenue is $35 million better versus the plan driven by lower consumer churn levels and adjusted EBITDA is $72 million better, where we are seeing some additional cost benefits from lower gross add activity in the marketplace and efficiencies in our field operations.

Moving forward on slide 29, I want to spend a little more time on our recent refinancing transactions. In October-November, we opportunistically refinanced almost $5 billion of our prepetition term loan B, first lien notes and second lien notes. In addition, we amended our DIP-to-Exit revolving credit facility to increase the commitments to $625 million, extend maturity by one year, decrease interest rates by 50 basis points and amend covenants to increase incremental first lien debt capacity.

Taken together, these transactions extended our funded debt maturities to 2027, clearing our runway during the important period of the implementation of our modernization plan. We reduced our run rate interest expense by $60 million per year and provided additional covenant flexibility for long-term strategic initiatives.

Turning to slide 30, before concluding, I want to spend a moment on the Northwest divestiture as we are now more than six months past the closing. As I discussed in our Q1 investor update, there were a total of $128 million of indirect costs related to the Northwest states to address at closing. These are costs that are incurred not at the state level, but instead incurred at the corporate level and then allocated to the states based on allocation methodology. These costs include shared services such as sales, customer tech support, provisioning and billing and collections, centralized network costs such as backbone and our network operating center or NOC and corporate G&A costs.

Based on our initial forecast at the time of the divestiture and our expectation of the duration of the TSA activities, we expected that we are gradually reduced to $128 million of indirect costs by over $80 million, leaving a little over $40 million of stranded costs by 2024. We expected in 2020 alone, we would eliminate $46 million of annualized costs. We’ve exceeded that 2020 expectation, where we have now already eliminated or affirmed plans to do so before the end of the year approximately $51 million of annualized reductions.

As for the longer-term outlook, we’ve conducted during 2020 an extensive assessment of the Company’s cost structure and proportion of fixed expenses. This work has been recently completed. And based on this, we now expect to ultimately reduce the stranded cost down to $65 million as opposed to the prior expectation of a little over $40 million. As for the TSA, we’ve successfully transitioned the buyer off of essentially all the TSA support by November 1.

We had a revenue associated with the TSA of about $5 million per month, which will no longer be effective for November and December. As such, the TSA revenues in 2020 will be $10 million lower than projected as a result. Outside of the divestiture, we continue to focus on operational improvements and business simplifications to reduce the cost structure of the business.

This concludes our presentation. I want to thank you for joining us on today’s call. We look forward to updating you on our continued progress next quarter.

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

IPO Alert: What to look for when Boundless Bio goes public

Boundless Bio is preparing to debut on the Nasdaq stock market this week, and become the latest addition to the list of biotech firms that have launched IPOs this year.

Nike (NKE) bets on innovation and partnerships to return to high growth

Sneaker giant Nike, Inc. (NYSE: NKE) has been going through a rough patch for some time, with sales coming under pressure from weak demand and rising competition. Post-pandemic, the company

Walgreens Boots Alliance set to report earnings next week. Here’s what to expect

Walgreens Boots Alliance, Inc. (NASDAQ: WBA), the drug store chain that is expanding into a diversified healthcare provider, is on a restructuring drive aimed at better aligning the business with

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top