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| 8-K - 8-K - FAIRPOINT COMMUNICATIONS INC | frp-8kx12313.htm |
December 2013 Company Presentation
2 Safe Harbor Statement The information contained herein is current only as of the date hereof; however, unless otherwise indicated, financial information contained herein is as of September 30, 2013. 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. 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 nor does it 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 Adjusted EBITDA and Unlevered Free Cash Flow and adjustments to GAAP and non-GAAP measures to exclude the effect of special items. Management believes that Adjusted EBITDA provides a useful measure of operational and financial performance and removes variability related to pension contributions and payments for other post-employment benefits and that Unlevered Free Cash Flow may be useful to investors in assessing the Company’s ability to generate cash and meet its debt service requirements. The maintenance covenants contained in the Company’s credit facility are based on Adjusted EBITDA. In addition, management believes that the adjustments to GAAP and non-GAAP measures to exclude the effect of special items may be useful to investors in understanding period-to-period operating performance and in identifying historical and prospective trends. We provide guidance as to certain financial information herein, which consists of forward-looking statements. Our guidance is not prepared with a view toward compliance with the published guidelines of the American Institute of Certified Public Accountants, and neither our independent registered public accounting firm nor any other independent expert or outside party compiles or examines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto. Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent our actual results which could fall outside of the suggested ranges. The principal reason that we release this data is to provide a basis for our management to discuss our business outlook with analysts and investors. Notwithstanding this, we do not accept any responsibility for any projections or reports published by any such outside analysts or investors. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions or the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date hereof. Actual results may vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data diminishes the farther in the future that the data is forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it. Any inability to successfully implement our operating strategy or the occurrence of any of the events or circumstances discussed therein could result in the actual operating results being different than the guidance, and such differences may be material.
3 Investment Highlights Sustainable, Growing Free Cash Flow Stabilize Transform Grow Revenue Improve Operations Execute HR Strategy Change Regulatory Environment • FairPoint is well positioned to grow free cash flow sustainably • The Company is executing its ‘four-pillar’ strategy designed to deliver sustainable free cash flow growth • Sustainable free cash flow growth is the best way to increase shareholder value
4 Access Line Equivalents Company Snapshot • 3Q13 Revenue of $236.0M, YTD Revenue of $706.0M and 3,182 employees • Operates in 17 states with over 1.2M access line equivalents(1) ̶ 80% former Verizon wireline business in Maine, New Hampshire and Vermont (“NNE”) ̶ 20% pre-merger FairPoint in rural communities in 17 states, including ME, NH and VT (“Telecom Group”) • NNE: ̶ Incumbent wireline provider with extensive “enterprise class” network and scale in three contiguous states ̶ 15,000+ fiber route mile network offering IP/Ethernet services to attract sustainable revenues ̶ Significant organic growth opportunity, especially in business market ̶ ~90% broadband availability; 33.3% penetration(2) • Telecom Group: ̶ Consistent, substantial cash flow generation ̶ Local presence and workforce; less competition ̶ ~90% broadband availability; 53.8% penetration ̶ Closed sale of Idaho property for 6x EBITDA in 1Q13 Telecom Group Northern New England (1) Switched access lines plus broadband subscribers as of September 30, 2013 (2) Broadband subscribers as a percentage of switched access lines (3) Approximately 20% of Telecom Group is located in ME, NH and VT Service Territory (3) Telecom as of September 30, 2013 NNE Group Total Switched access lines: Residential 429,598 112,640 542,238 Business 249,360 44,539 293,899 Wholesale 60,315 NM 60,315 Total switched access lines 739,273 157,179 896,452 Broadband Subscribers 246,211 84,487 330,698 Total access line equivalents 985,484 241,666 1,227,150
5 Executing on our Strategy 1 2 3 4 Improved Operations Changed Regulatory Environment Stabilized & Transforming Revenue for Growth Execute HR Strategy 2011 Focus 2012 Focus 2013 Focus 2014 Negotiation Complex project management, including FTTT Attained Level playing field Revenue stabilization period entered in 2Q13 Over 21% Reduction since 2Q11 Improved service quality “De-reg” through Legislation in ME & NH; IRP in VT 3Q13: sequential revenue growth Focus on training including all Front line supervisors Continuing focus on Service Quality Productivity Maximizing FCC ICC/USF reform Major long-term contracts leveraging fiber assets Enhanced competencies in labor relations and learning & development
6 Key 2013 Initiatives (as of 9/30/13) - Fiber-to-the-Tower initiative - Projects based on contracted services - Close to achieving target of over 1,300 Ethernet cellular connections in 2013 - Next Generation E-911 service Fiber and next generation 911 service to 26 Public Service Answering Points in Maine well underway - New England Telehealth Consortium Fiber connection delivered to over 200 healthcare facilities Targeting fiber connections to over 400 healthcare facilities Assurance of Reliability and Delivery Assure quality and delivery through best in class complex project management and 15K mile fiber based network throughout NNE
7 Next-Generation Network • Over 15,000 fiber route miles • Over 721,000 fiber strand miles • Scalable 400G DWDM Network • Over 350 central offices • Over 1,300 FTTT Ethernet cellular connections expected by year end • Over $200 million invested • Easy access facilitated through New York and Boston Enterprise Class fiber network designed to meet growing demand of business customers
8 Revenue: Stabilize, Transform and Grow • Growth revenues are comprised of products such as: • Retail and Wholesale Ethernet • Hosted Voice • Broadband and FTTT • Convertible revenues are moving from older technologies like: • Centrex • ATM • Frame Relay • Legacy revenues are in managed decline and comprised of: • Residential voice • Switched access 3Q 2013(2) 5-Year Outlook • Sales and marketing efforts focused on driving acceleration of Growth products including the evaluation of new products and services • Proactive re-terming and up-selling designed to reduce revenue churn as Convertible customers switch from TDM to IP/Ethernet • Retention efforts structured to slow churn in Legacy category Entered period of revenue stabilization in 2Q13 (1) 1Q11 revenue of $254.8 million (2) 3Q13 revenue of $236.0 million (2) Growth = +13% to +17% CAGR Legacy = -2% to -6% CAGR Convertible = -10% to -14% CAGR 1Q 2011(1) by Strategic Category Projected Growth Rate Growth 13% Convertible 37% Legacy 44% Other 6% Growth = +20% CAGR Legacy = -7% CAGR Convertible = -7% CAGR Historic Growth Rate Growth 44% Convertible 16% Legacy 33% Other 7%
9 Selective Rate Increases Retention and Save Programs Consistent Monthly Sales Bookings Stabilization leads to growth through revenue transformation and successful retention programs Recipe for Revenue Stabilization
10 Revenue Strategy Focus: Stabilize, Transform to Grow Revenue Approach: Convert revenue mix toward Ethernet, Fiber and business services Objective: Revenue Stability turns to Revenue Growth Field Sales • Over 6 quarters of consistent monthly bookings • Sales force of 65 to 70 Reps averaging over $7K/month • Focus on Fiber and Ethernet based services • Hosted VoIP, FTTT, NG911 and NETC Rate Increases Retention Revenue Assurance and Special projects provide cushion for regulatory and other changes • Selective increases offset revenue loss from residential line churn • Several selective increases over the year • Balance rate increase with retention • Extend customer lives • Renew expiring contracts • Retain customers after promotions end • Promotions designed to prolong customer life: “Stay and Save”
11 Enhanced Data Products • Moving customers to higher speeds to protect base and increase ARPU • 26% increase of customers with 7Mb or more in 2013 • 1.3M qualified and available loops at 7Mb, 15Mb and 30Mb • Competitive speed • Ample room for growth • Improving credit quality of customer base Broadband Opportunity Next-Generation Ethernet & IP Products • Key growth products include: ̶ Retail and Wholesale Ethernet (FTTT, E-DIA, E-LAN) ̶ Broadband (DSL and FTTP) ̶ Managed services (Hosted VoIP) • Ethernet products increasingly important as the Company drives expansion into the business market ̶ Ethernet revenue has grown 57.8% YoY • IP and Ethernet products will be critical as the product mix shifts away from local voice, ATM, frame relay and switched access Opportunity for 7Mb+ Data Products Max Speed Current Subs Total Qualified Loops % Penetration <=1.5Mb 0.1M 0.3M 20% 3Mb 0.1M 0.5M 20% 7Mb 0.1M 0.5M 10% 15Mb 0.0M 0.7M 2% 30Mb 0.0M 0.1M 8% Total 0.3M 2.1M 11% Rapid Ethernet Adoption 54% (1) (Ethernet circuits) (2) (1) CAGR of Ethernet circuit counts (2) Includes FTTT customers
12 Circuits & Network 26% Facilities and Fleet 7% Contracted Services 7% Employee Expenses 48% Operating Taxes & Other 8% Marketing 4% 3,261 3,260 2,999 2,860 2,787 2,816 2,809 2,784 2,752 2,698 2,631 747 749 691 681 667 594 589 585 569 557 551 2,000 3,000 4,000 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 NNE Telecom (No. of Employees) (2) Execute HR Strategy • FairPoint continues to align its human resource assets with the changing telecom landscape • 21% workforce reduction in last 2 ½ years • 3,182 employees as of September 30, 2013 ̶ 1,157 non-represented ̶ 2,025 union (1,782 covered by CBAs with CWA and IBEW in NNE, which expire Aug. 2014) • FairPoint has increased productivity and maintained service quality ̶ Demonstrated improvement in key service-quality metrics despite headcount reduction ̶ Increased productivity on a per-employee basis over time Headcount Rationalization (21%)(3) $700M Cost Structure (1) 3.55 3.33 3.00 3.42 4.10 2.6 3.0 3.4 3.8 4.2 (Employees per 1000 lines (4)) Headcount Rationalization Labor negotiations in 2014 provide opportunity to further address cost structure (1) FY 2012 adjusted for items added back to compute Adjusted EBITDA (2) NNE = Yellow, Telecom Group = Blue (3) Decrease represents total change in workforce since 1Q11 (4) As of Dec. 31, 2012 for peers, as of September 30, 2013 for FRP (5) Weighted average of FTR, CNSL and CTL 7% Peer Avg.(5)
13 Financial Overview
14 Summary Financial Results (1) Pro forma for the sale of Idaho operations on Jan. 31, 2013 (2) Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Net Income (Loss) to Adjusted EBITDA, see our third quarter 2013 earnings release furnished November 4, 2013 on Form 8-K (3) Unlevered Free Cash Flow means Adjusted EBITDA minus the sum of pension contributions, OPEB payments and capital expenditures. Unlevered Free Cash Flow is a non-GAAP financial measure. For a reconciliation of Net Income (Loss) to Unlevered Free Cash Flow, see our third quarter 2013 earnings release furnished November 4, 2013 on Form 8-K Q3 and YTD 2013 Results • Q3 Revenue of $236.0M was up $1.5M versus Q2 revenue • Reported positive momentum in growth-oriented business ̶ Ethernet services contributed approximately $16.4M of revenue in Q3 2013 as compared to $11.5M a year ago, an increase of 43% YoY ̶ Data and Internet services revenue grew 12.9% YoY ̶ Broadband subscribers grew 3.0%(1) and total Ethernet circuits grew by 57.8% YoY • Adjusted EBITDA(2) increased to $67.5M in Q3 2013 as compared to $66.4M in Q2 2013 • Unlevered Free Cash Flow(3) declined to $24.4 million from $34.8 million in Q2, because of higher capital expenditures and pension contributions partially offset by higher Adjusted EBITDA • Liquidity remains strong with a Q3 2013 cash balance of $25M; $75M revolver remains undrawn exclusive of letters of credit • As of November 4, 2013 Q3 earnings release, full year Unlevered Free Cash Flow guidance of $100-110M
15 Commentary: • 2013 guidance takes into account the sale of Idaho on Jan. 31, 2013 ($8M of revenue, $5M of Adjusted EBITDA and $1M of CapEx per year) • Annual mandatory debt principal payments of $6.4 million Recent Financial Trends (1) Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Net Income (Loss) to Adjusted EBITDA, see the Company’s third quarter 2013 earnings release furnished November 4, 2013 on Form 8-K (2) Unlevered Free Cash Flow means Adjusted EBITDA minus the sum of pension contributions, OPEB payments and capital expenditures. Unlevered Free Cash Flow is a non-GAAP financial measure. For a reconciliation of Net Income (Loss) to Unlevered Free Cash Flow, see our third quarter 2013 earnings release furnished November 4, 2013 on Form 8-K (3) Sale of Idaho operations on Jan. 31, 2013 resulted in $1.3M of sequential revenue decline from 4Q12 to 1Q13 and approximately $0.6M of sequential revenue decline from 1Q13 to 2Q13 (4) Guidance provided November 4, 2013 ($ in M) 4Q12 1Q13 2Q13 3Q13 2012 2013 Guidance Revenue $239.7 $235.5 $234.5 $236.0 $973.6 Adjusted EBITDA(1) $63 $64 $66 $67.5 $278 $255 - $265 margin 26% 27% 28% 29% 29% Capital expenditures $49 $30 $27 $33.8 $145 $130 % of revenue 20% 13% 12% 14% 15% Cash Pension & OPEB $1 $1 $4 $9.3 $21 $27 Unlevered Free Cash Flow(2) $12 $33 $35 $24.4 $112 $100 - $110 Cash on hand $23 $17 $27 $24.7 $23 Debt, gross $957 $940 $938 $936.8 $957 Financial Highlights (3) (3) (4)
16 210 220 230 240 250 1Q 13 2Q 13 3Q 13 Revenue • Revenue stabilized on a QoQ basis when viewed in the aggregate Results for prior three quarters, adjusted for divestitures, NECA pool exit and other non-recurring items, suggest stabilization at approximately $234 million in revenue per quarter. • Strong 3Q performance • Maintaining consistent field sales, using selective rate increases and enhancing retention programs to stabilize and then grow revenue Period of Revenue Stabilization
17 Revenue: Stabilize, Transform and Grow by Customer Segment (1) by Product Type (1)(2) Entered period of revenue stabilization in 2Q13 (1) 3Q13 revenue of $236.0 million (2) Access includes switched access and special access, which includes wholesale Ethernet services like fiber-to-the-tower (2)
18 Disciplined approach to Cap Ex $198 $176 $145 $130 18% 17% 15% 5% 7% 9% 11% 13% 15% 17% 19% $100 $120 $140 $160 $180 $200 $220 $240 2010 2011 2012 2013 Guidance (Capital expenditures by year and as a % of revenue ($ in M)) Cap Ex Trend and Allocation Regular PUC Mandate FTTT Optimal Level Success-based Network Growth Non-revenue generating • Cap Ex managed through regular review of priorities and initiatives • Cap Ex trending toward optimal level • Cap Ex spend tends to increase in 2H due to timing of construction • Success-based includes spending directly attributable to sales • Network growth includes fiber expansion, broadband buildout and speed upgrades • Non-revenue generating includes IT, plant maintenance and cost saving projects Optimizing Cap Ex Levels
19 Pension & OPEB Sensitivity (1) Pension & OPEB GAAP Liability • Pension & OPEB liabilities arise primarily from Northern New England union contracts ̶ GAAP liabilities represent status quo into perpetuity and reflect continuation of past practices • 2013 Pension contribution of $22M and OPEB payments of $5M targeted • Pension and OPEB liabilities are highly sensitive to changes in the discount rate and healthcare cost trend assumptions • 21% reduction in headcount since 2011 (2) (1) Based upon liability at December 31, 2012 (2) Resulted in over $65 million in lump sum distributions since 2011 ($ in millions) Pension OPEB Impact o liability given 1% change in the discount rate assumption 20% 23% Impact on liability given 1% increase in healthcare cost trend assumption N/A $158.2 Impact on liability given 1% decrease in healthcare cost trend assumption N/A ($119.2) Labor negotiations in 2014 provide opportunity to address Pension & OPEB Pension and OPEB Considerations Pension & OPEB GAAP Liability ($ in millions) 2011 2012 3Q13 Pension Plan assets $160.3 $166.3 $168.8 Projected benefit obligation $318.3 $369.8 $377.8 Key assumptions: Discount Rate 4.63% 4.08% 4.18% OPEB Pla assets $1.0 $0.0 $0.0 Projected benefit obligation $533.2 $621.4 $658.5 Key assumptions: Discount Rate 4.66% 4.20% 4.20% Healthcare cost trend (<65 years) 8.40% 8.10% 8.10% Healthcare cost trend (>65 years) 8.40% 8.10% 8.10%
20 • Focused on revenue & product transformation ̶ “Enterprise Class” network with 15K fiber route miles in 3 contiguous states ̶ Continually developing network to meet growing and rapidly evolving needs of enterprise and wholesale customers ̶ Enhanced sales organization with positive momentum • Significant growth opportunities in NNE Business Market Disciplined Investment for Growth Strengthen Balance Sheet • Deleveraging ̶ Reduced debt from $1B to $936.8M in a little over 2 years ̶ Successful refinancing in 1Q13 ̶ Mandatory debt principal payments of $6.4M per year ̶ 50% excess cash flow sweep ($0 sweep expected for 2013) ̶ Continued investment discipline ̶ Sustainable, growing free cash flow • Monetizing non-core assets at attractive valuations ̶ Sale of Idaho operations for 6x EBITDA ̶ $2M gross proceeds from non-productive real estate • Focus on cost savings leading up to labor contract renegotiations in August 2014 • Manage pension liability through prudent cash contributions Strengthening Financial Profile