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| 8-K - FORM 8-K - FAIRPOINT COMMUNICATIONS INC | d239475d8k.htm |
 FairPoint Communications, Inc.
Investor Presentation
October 2011
Exhibit 99.1 |
 Cautionary Notes
2
The information contained herein is current only as of the date hereof. The
business, prospects, financial condition or performance of FairPoint
Communications, Inc. (“FairPoint”) and its subsidiaries described herein may
have changed since that date. FairPoint does not intend to update or
otherwise
revise
the
information
contained
herein.
FairPoint
makes
no
representation
or
warranty,
express
or
implied,
as
to
the
completeness
of
the
information
contained
herein.
If
any
other
information
is
given
or
any
other
representations
are
made,
they
should
not
be
relied
upon
as
having
been
authorized by FairPoint.
Market data used throughout this presentation is based on surveys and studies conducted
by third parties, as well as industry and general publications. FairPoint has no
obligation (express or implied) to update any or all of the information or to advise you of any changes; nor does
FairPoint make any express or implied warranties or representations as to the
completeness or accuracy or to accept responsibility for errors. Some
statements
herein
are
known
as
“forward-looking
statements”
within
the
meaning
of
Section
27A
of
the
Securities
Act
of
1933,
as
amended,
and
Section
21E
of
the
Securities
Exchange
Act
of
1934,
as
amended.
These
forward-looking
statements
include,
but
are
not
limited
to,
statements
about
our plans, objectives, expectations and intentions and other statements contained
herein that are not historical facts. When used herein, the words
“expects,”
“anticipates,”
“intends,”
“plans,”
“believes,”
“seeks,”
“estimates”
and similar expressions are generally intended to identify forward-
looking statements. Because these forward-looking statements involve known and
unknown risks and uncertainties, there are important factors that could cause
actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements,
including
our
plans,
objectives,
expectations
and
intentions
and
other
factors.
You
should
not
place
undue
reliance
on
such
forward-looking
statements, which are based on the information currently available to us and speak only
as of the date hereof. FairPoint does not undertake any obligation to publicly
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Throughout this presentation, reference is made to Consolidated EBITDAR or EBITDAR and
Adjusted EBITDAR. EBITDAR and Adjusted EBITDAR are non- GAAP financial
measures. Management believes that EBITDAR and Adjusted EBITDAR may be useful in assessing our operating performance and our
ability to meet our debt service requirements. EBITDAR and Adjusted EBITDAR, as
used herein, however, are not necessarily comparable to similarly titled
measures of other companies. Furthermore, EBITDAR and Adjusted EBITDAR have limitations as an analytical tool and should not be considered
in isolation from, or as an alternative to, net income or loss, operating income, cash
flow or other combined income or cash flow data prepared in accordance with
GAAP. Because of these limitations, EBITDAR, Adjusted EBITDAR and related ratios should not be considered as measures of
discretionary
cash
available
to
invest
in
business
growth
or
reduce
indebtedness.
We
compensate
for
these
limitations
by
relying
primarily
on
our
GAAP results using EBITDAR and Adjusted EBITDAR only supplementally. The Securities and
Exchange Commission (“SEC”) has adopted rules to regulate the use in
filings with the SEC and public disclosures and press releases of non-GAAP financial measures, such as EBITDAR and Adjusted
EBITDAR, that are derived on the basis of methodologies other than in accordance with
GAAP. Our presentation of EBITDAR and Adjusted EBITDAR may not comply with these
rules. |
 Agenda
I.
Company Overview
II.
Growth Opportunity
III.
Recent Results
3 |
 FairPoint is positioned for success
Leveraging core strengths for growth in revenue, EBITDAR and free cash flow
Geographic scope and ubiquitous network in northern New England (ME, NH, VT)
Next generation, IP-based technologies
Organic revenue growth opportunities given low market share
Stable RLEC business in legacy FairPoint markets (“Telecom Group”)
Operational improvements allow for acceleration of cost reduction initiatives
High-speed data subscriber growth accelerated in 2Q11 to 5.4%
year-over-year Voice access line loss slowed in 2Q11 to 9.3%
year-over-year Recently announced workforce reduction of approximately
400 employees; expected to result in approximately $34 million of annualized
operating savings in 2012 Experienced management team with fresh focus
Aligned to capture revenue growth opportunities and improve operations
Focused on enhanced service and responsiveness
Simplified and right-sized capital structure
Total debt of $1.0 billion, liquidity of $76 million as of June 30, 2011
Listed with NASDAQ: FRP
4 |
 Company
Overview at 2Q11 FairPoint service territory
Telecom Group
Northern New England
Operate in 18 states with approximately
1.4
million
access
line
equivalents
(“ALEs”)¹
~80% of ALEs in northern New England, ~20% in
Telecom Group
NNE averages 25% high-speed data penetration²
TG averages 45% high-speed data penetration²
FairPoint offers an array of services across its
footprint including voice, high-speed data,
video and high-capacity bandwidth products
Extensive capital investment on next
generation network in NNE markets
Broadband available to ~85% of our customers in
NNE, more than 90% in TG
Access line equivalents
5
(1)
Switched access lines plus high-speed data subscribers
(2)
High-speed data subscribers as % of switched access lines
(3)
UNE-P and Resale lines. Excludes UNE-L and Special Access
circuits
(4)
Before Sept 2011 announced workforce reduction. Collective bargaining agreements
with CWA and IBEW cover approximately 2,500
employees including ~230 temporary workers
4
Telecom Group: 30 rural LECs in 18 states
with lower competitive profile
Northern New England: 3-statewide
footprint with ubiquitous network presence
Over $1Bn in annual revenue and
approximately 4,000 employees
as of June 30, 2011
Northern
New
England
Telecom
Group
Total
Switched access lines:
Residential
541,814
138,375
680,189
Business
268,533
49,051
317,584
Wholesale
82,231
NM
82,231
Total switched access lines
892,578
187,426
1,080,004
High-speed data
220,561
84,594
305,155
Total access line equivalents
1,113,139
272,020
1,385,159
3 |
 Organic
Revenue Growth Opportunities 6
Northern
New
England: Network + Service
Geographic scope and network ubiquity are
significant advantage, especially to major, enterprise
and wholesale customers
NNE markets offer organic growth and market share
“win-back”
opportunities
Management aligned to unique characteristics of
each customer segment
Quality of Service (“QoS”) and rapid response as
competitive advantages
Next-generation products that speak to SMBs,
enterprise and wholesale customers
Telecom Group: Leverage stable platform
Maintain the market share advantage with attractive bundles and excellent QoS
Hone new products and processes before exporting to NNE markets
Strategic capital investment to enhance the local network and optimize regulated
revenue streams
Product
Development
Geographic
Scope
Network
Ubiquity
Organic
Growth
Opportunity
Management
Alignment
Quality of
Service |
 Organic
Revenue Growth in Wholesale 7
Segment / CAGR
Total: 4.3%
Wireless Tower : 21.8%
Wireless Transport3: 4.8%
CLEC Access and Transport: -3.1%
NNE Wholesale Market
1
($ in millions)
FairPoint commissioned a market share and demand study for its NNE markets
FairPoint maintains a majority share in the wholesale market
Organic growth opportunities fueled by mobile broadband demands
We are investing in new products and technologies to capture growth potential
Sources: SNL Kagan, In-Stat, US Census, InfoUSA, Altman Vilandrie &
Company (1)
Wholesale as defined by traditional products and technologies like switched access and
special access circuits (DS1s, DS3s, SONET, etc.) (2)
Wireless tower refers to transport between towers and aggregation sites
(3)
Wireless transport refers to transport between aggregation sites
1
2
3 |
 Win-back Opportunities
8
Overall retail wireline market is expected to decline gradually
FairPoint’s non-dominant market share provides significant win-back
opportunities 2010 retail business market share estimated to be 26% (data and
voice) 2010 retail residential market share estimated to be 39% (data and
voice) Segment / CAGR / 2010 FRP Market Share Est.
Total: -0.8% / 33%
Biz Wireline Data: 2.6% / 16%
Biz Wireline Voice: -1.9% / 33%
Res Wireline Data: 4.9% / 17%
Res Wireline Voice: -6.4% / 53%
Sources: SNL Kagan, In-Stat, US Census, InfoUSA, Altman Vilandrie &
Company 39% share
26% share
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
2010
2011
2012
2013
2014
NNE Retail Market
($ in millions) |
 Aligned
to Capture Revenue Opportunities 9
Revenue
Segment
Telecom
Group
Wholesale
1
Government
&
Education
1
Business
&
Residential
1
Revenue
Contribution
Opportunity
Leverage scale and
scope of enterprise;
Increase attention
Fiber-to-the-tower;
High-capacity and
special access circuits
Increasing bandwidth
needs
Organic growth in
business; targeted
marketing in
residential
Advantages
Dominant presence;
Low competition
Market ubiquity
Market ubiquity
VantagePoint Network
Approach
and Strategy
Local market
knowledge and
presence;
Product development
platform for NNE
Network reliability;
Fiber-to-the-tower
buildout
Maintain market share;
Market FairPoint’s
network ubiquity and
reliability in northern
New England
“Win-back”
business;
“Defend”
residential
and capitalize on
broadband expansion
(1)
Northern New England only |
 Combining Network, Service and Products
10
Network reach and IP-based services support organic revenue growth
opportunities Over 1 million fiber strand miles on over 12,000 route miles
Designed
and
deployed
with
400G
dense
wave
division
multiplexing
(“DWDM”)
capabilities; Multiprotocol Label Switching (“MPLS”) design
350 central offices with inter-office fiber capacity
Sales successes enabled by network and service
Maine Schools and Libraries network: 650 locations delivering 21G of bandwidth
capacity averaging 66Mb per location on 16,000 Ethernet ports turned up over a
variety of network elements (fiber, copper, bonded DS1)
Fiber-to-the-tower: announced initial build to over half of 1,600
towers served in NNE. Fiber placed to over 400 towers as of June 30,
2011 Regional businesses: banks and hospitals seeking single source
solution in NNE Expanding broadband network: broadband service available to
approximately 85% of northern New England customers and more than 90% of Telecom
Group customers SMB bundle
Very-high speed data (over fiber)
Carrier Ethernet Service
(1)
FairPoint acquired over 120,000 homes and businesses served with
fiber-to-the-premise during the northern New England
acquisition (former Verizon FiOS territory)
1
Product development will drive future sales |
 Operational and Quality Metrics are Improving
11
Retail
Service
Quality
Metrics
Met
3
Call
Center
Volume
2
Mean-time-to-repair
(hours)
1
Service
Quality
Penalties
4
(1)
For a select major customer in northern New England
(2)
Northern New England consumer, small business and repair call centers
(3)
Number of retail service quality metrics achieved as a percentage of total
penalty-bearing metrics in northern New England (4)
Excludes benefit from service quality penalty reversals related to regulatory
settlements, legislative changes and true-ups (A) Operational
improvement (B) Promotional activity
(C) Seasonal storm activity |
 Cost
Reduction Opportunities 12
Operational improvements in late 2010
and early 2011 allow FairPoint to
accelerate cost reduction initiatives
Areas of focus:
Cost of goods sold (access circuits)
Facilities and fleet (power, fuel, real
estate)
Contracted services
Bad debt
Employee costs
Recent Announcement:
Workforce reduction of approximately 400
employees
~100 management
~300 union
4
Annualized employee cost savings of
approximately $34 million expected, with
full benefit in 2012
Severance and incentive payments cost
range of $7 million to $13 million
5
Voice access lines per employee
~$800Mn Cost Structure
1
3
50%
23%
8%
6%
7%
3%
3%
Employee
Circuits, network and
backoffice
Facilities and fleet
Contracted services
Operating taxes, legal,
insurance and other
Marketing, customer service
and billing
Bad debt
282
344
385
320
331
200
220
240
260
280
300
320
340
360
380
400
FRP
Average
FTR
CTL
WIN
FRP
Average
FTR
CTL
WIN
2
(1)
1H11 annualized. Excludes restructuring and vacation accrual
(2)
As of December 31, 2010
(3)
Weighted average of FTR, CTL and WIN
(4)
FairPoint is following prescribed steps in the collective bargaining agreement
(5)
Credit agreement allows for severance add-back of $12 million per calendar year
and $30 million aggregate for Consolidated EBITDAR purposes |
 Capital
Structure 13
Capital Structure Summary
As of June 30, 2011:
Generated $3 million of FCF in 157
days post-emergence
Liquidity of $76 million
$13 million unrestricted cash
$63 million revolver (net of LCs)
Leverage of 3.87x vs. 4.75x covenant
Interest Coverage of 4.49x vs. 3.25x
covenant
Capex covenant:
2011 = $200 million
2012 = $190 million
2013 = $170 million
2014 = $150 million
2015 = $150 million
(1)
Excludes letters of credit of $12 million and capital lease obligations of $5
million (2)
Before applying letters of credit of $12 million, which reduces revolver
availability (3)
Includes management restricted stock and ~0.6 million of common stock held in reserve
for certain pre-petition claims (4)
Generally vest 25% at emergence, 25% on each anniversary for three years
thereafter. All restricted stock included in common stock outstanding
(5)
Generally vest 25% at emergence, 25% on each anniversary for three years
thereafter. Options struck at $24.29 as of June 30, 2011
(in millions)
Cash and cash equivalents (unrestricted)
$13
Gross debt
$1,000
Revolver
$75
Amortization schedule:
2011
$0
2012
$10
2013
$10
2014
$25
2015
$38
January 24, 2016
$918
L+450, with LIBOR floor of 200
No dividends if leverage > 2.0x
Interest coverage and leverage covenants
Common stock outstanding
26.2
Warrants
(7
yr,
$48.81
strike
)
3.6
Management long-term incentive
Restricted stock
4
0.5
Options
5
1.0
1
3
2 |
 Recent
Operating and Financial Results 14
2Q11 highlights
Data
and
Internet
services
revenue
up
3.1%
YoY
on
5.4%
growth
in
high-speed
data
subs
Revenue
of
$255-260
million
for
last
3
quarters
on
adjusted
basis
5
Consolidated EBITDAR
1
$70.5 million in 2Q11: Adjusted EBITDA up sequentially and YoY
($ in millions)
2Q11
1Q11
2Q10
2Q11 vs.
1Q11
2Q11 vs.
2Q10
Consolidated EBITDAR (1)
70.5
$
49.1
$
72.3
$
43.6%
-2.5%
One-time penalty reversal (2)
(4.0)
-
-
Restatement items (3)
-
-
(8.3)
Vacation accrual impact (4)
(3.2)
10.8
(3.1)
Adjusted EBITDA
63.3
$
59.8
$
60.9
$
5.7%
3.8%
margin
24.5%
23.5%
22.4%
High-speed data subscribers (000s)
305.2
297.5
289.6
2.6%
5.4%
Residential access lines (000s)
680.2
695.9
758.0
-2.3%
-10.3%
Business access lines
317.6
322.1
341.0
-1.4%
-6.9%
Wholesale access lines
82.2
84.7
91.1
-2.9%
-9.8%
Total switched access lines
1,080.0
1,102.7
1,190.1
-2.1%
-9.3%
Access line equivalents (000s)
1,385.2
1,400.2
1,479.7
-1.1%
-6.4%
(1)
As defined in FairPoint’s credit facility. For a reconciliation of Net
Income (Loss) to Consolidated EBITDAR, see our year end 2010, first quarter and
second quarter 2011 earnings releases furnished by FairPoint on April 5, 2011, May 16,
2011 and August 8, 2011, respectively, on Form 8-K (2)
Reversal of penalties related to Maine legislation and other
true-ups (3)
Though added back under new credit facility, the impact of the financial restatement
does belong in 2Q10 for comparative purposes (4)
FairPoint accrues a full year of vacation expense each
January (5)
Adjusted for one-time service quality penalty reversals in 2Q11 and 4Q10 of $4
million and $13 million, respectively 1
st
, which is then reversed throughout the year |
 FairPoint Management Team
15
Experienced
management
team
with
fresh
focus:
FairPoint
strengthened
its
senior
management team in key areas, while maintaining institutional knowledge
Name
Position
Experience
Paul Sunu
Chief Executive Officer
31 years corporate and operating experience; CEO since August
2010; Former CFO of Hargray Communications and Hawaiian
Telecom; Co-founder and former CFO of Madison River
Communications
Ajay Sabherwal
Executive Vice President, Chief
Financial Officer
23 years of experience with 18 years in telecom; Joined FairPoint
in July 2010; Former CFO of Choice One Communications, Aventine
Renewable Energy and Mendel Biotechnology
Kathleen McLean
Executive Vice President and Chief
Revenue Officer
28 years of telecom and information technology experience; Joined
FairPoint in 2010 from Verizon Partner Solutions
Ken Amburn
Executive Vice President, Operations
and Engineering
42 years of telecommunications experience. Prior to joining
FairPoint, served as COO of Madison River Communications
Peter Nixon
Executive Vice President, External
Affairs and Operational Support
33 years experience; Former COO and SVP of Corporate
Development and President of Telecom Group; Former President of
C&E Telephone Corp.
Shirley Linn
Executive Vice President, General
Counsel and Secretary
35 years business and securities law experience; Joined FairPoint in
2000
Greg Castle
Senior Vice President, Human
Resources
Over 25 years of experience managing employee and labor
relations, including VP of labor relations at Ameritech
Rose Hauser
Senior Vice President, Chief
Information Officer
20 years experience in the telecom and IT; Joined FairPoint in May
2011; Prior to FairPoint, most recently served as CIO of Hawaiian
Telcom. Held leadership roles at MCI, XO Comm. and Bell Atlantic
Lee Newitt
Director, Investor Relations and
Corporate Development
Joined FairPoint in 2003; has held leadership roles in M&A,
corporate finance and investor relations
|
 Conclusion: FairPoint is positioned for success
16
Leveraging core strengths for growth in revenue, EBITDAR and free cash flow
Network: geographic scope, network ubiquity, next-generation platform
Service: enhanced service and responsiveness as competitive advantage
Organic revenue growth opportunities: business and wholesale
Stable RLEC business: steady cash flow, platform for product development
Recent achievements accelerate cost reduction opportunities
Operational
improvements:
service
quality,
data
growth,
slowing
voice
loss
Margin expansion: revenue growth plus cost reduction
Aligned to capture growth and improve operations
Experienced management team |