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Edited Transcript of FTR earnings conference call or presentation 30-Apr-19 8:30pm GMT

Q1 2019 Frontier Communications Corp Earnings Call

STAMFORD May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Frontier Communications Corp earnings conference call or presentation Tuesday, April 30, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel J. McCarthy

Frontier Communications Corporation - President, CEO & Director

* Luke T. Szymczak

Frontier Communications Corporation - VP of IR

* Sheldon Bruha

Frontier Communications Corporation - Interim CFO, Senior VP & Treasurer

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Conference Call Participants

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* Batya Levi

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* David William Barden

BofA Merrill Lynch, Research Division - MD

* Frank Garrett Louthan

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Matthew Niknam

Deutsche Bank AG, Research Division - Director

* Michael Rollins

Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst

* Michael L. McCormack

Guggenheim Securities, LLC, Research Division - MD & Telecommunications Senior Analyst

* Philip A. Cusick

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Simon William Flannery

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Frontier Communications First Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Luke Szymczak. Please go ahead, sir.

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Luke T. Szymczak, Frontier Communications Corporation - VP of IR [2]

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Thank you, Brad. Good afternoon, and welcome to the Frontier Communications first quarter earnings call. My name is Luke Szymczak, Vice President of Investor Relations. With me today are Dan McCarthy, President and CEO; and Sheldon Bruha, Senior Vice President and Interim CFO.

The press release, earnings presentation and supplemental financials are available in the Investor Relations section of our website, frontier.com.

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 in our earnings press release and other SEC filings.

On this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings press release for how management defines these measures, certain shortcomings associated with these measures and reconciliations to the closest GAAP measures.

I will now turn the call over to Dan.

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [3]

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Thank you, Luke. Good afternoon, everyone, and thank you for joining us.

Please turn to Slide 3. We had solid results in the first quarter with revenue of $2.1 billion, down about 1% sequentially. Both Consumer and Commercial revenue had similar performances in the quarter.

Consumer and customer churn and Consumer ARPC increased slightly sequentially. Adjusted EBITDA of $873 million declined sequentially as a result of expense seasonality and revenue declines, partly offset by transformation benefits.

I am pleased that we continue to make progress with our balance sheet, clearing our runway through the end of 2021 with the issuance of $1.65 billion in secured notes maturing in 2027. We also closed a previously announced asset disposition with sale proceeds of $76 million. We will continue to explore opportunities to sell assets where there is a potential to reduce debt in a prudent way. And Sheldon will provide more details on our capital structure shortly.

Turning to our transformation program. In the first quarter, we obtained approximately $8.7 million in benefits from transformation. This represents a $35 million benefit on an annualized basis. As you will recall, our target is to realize an EBITDA benefit of between $50 million and $100 million over the course of calendar year 2019. We anticipate that this will be back-end loaded to the second half and particularly weighted to the fourth quarter.

And we are targeting to exit 2019 with benefits at roughly a $200 million annual run rate.

We continue to make progress with specific elements of the transformation program in the first quarter. For example, we now have 9 initiatives that have been completed versus the 4 we discussed in the fourth quarter. Also, 23 solutions are in various stages of being scaled. This includes 11 in capture phase, which when fully completed could represent an opportunity of more than $100 million annually. Another 12 are in earlier phases of being scaled.

We believe the transformation program will accelerate further as we increase the number of initiatives underway. As discussed last quarter, the initiatives that are most mature remain in the area of field force. And we continue to be pleased with the progress we have achieved in field efficiency and customer satisfaction.

We continue to see improving trends as a result of initiatives in technical support. For instance, we have been able to reduce repeat rates, the number of unnecessary truck rolls and the number of customers needing to contact us for system troubles and service orders. We've also been expanding our efforts related to sales management as well as churn.

Please turn to Slide 4. Turning to Broadband. Total Broadband net losses were 38,000 in the first quarter. This represents a substantial improvement from the 67,000 loss in the fourth quarter of 2018. The largest driver of improvement was Consumer copper broadband, where the loss is more than half to 21,000 units in the first quarter. We were hoping to achieve this improvement last year, but I am pleased that our work has ultimately yielded results. This represents the best Consumer copper net unit performances since the closing of the CTF acquisition 3 years ago. We also achieved an improvement in fiber broadband with net losses improving from the fourth quarter level.

Please turn to Slide 5. We had a minor sequential uptick in Consumer customer churn in the first quarter. This reflects a higher rate of Video losses in the first quarter, and we were successful in being able to more than offset the sequential increase in churn with stronger Broadband gross additions. This illustrates the progress we've made with targeting, marketing and channel performance. We remain very focused on a full range of churn initiatives that address the various portions of the life cycle of customers.

Looking at our overall subscriber performance. We continue to focus on managing to customers' needs, while at the same time, improving the trends in the business and increasing the efficiency of demand generation. Before I conclude, I'd like to say that I'm pleased to see that the FCC is beginning to move forward with planning for the next phase of the CAF program. We look forward to the FCC releasing its rule-making later this year so that we will have further details about the evolution of the program.

In summary, our transformation initiative is targeting $200 million in EBITDA run rate improvements by year-end 2019 and $500 million by year-end 2020, and the entire organization is committed to achieving these objectives. As you know, the challenge of our business is that we have ongoing declines in Legacy products. These declines have been offsetting growth we achieved in newer products and also may offset benefits from the transformation program. Our goal is to improve the Legacy revenue headwinds and accelerate newer product revenue trends while remaining focused on our long-term goals of improving unit trends, realizing our transformation program targets, driving free cash flow and reducing leverage.

I'll now turn the call over to Sheldon to discuss our financial performance in more detail.

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Sheldon Bruha, Frontier Communications Corporation - Interim CFO, Senior VP & Treasurer [4]

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Thank you, Dan. Good afternoon, everyone. I will update you on our first quarter financial performance. Commencing with this quarter, we will report only on the basis of ASC 606 revenue recognition standards.

Please turn to Slide 7. Our first quarter revenue was $2.1 billion, down 1% sequentially. We had a loss in the first quarter of $87 million. Let me call out a few items related to this loss.

Firstly, we had severance costs of $15 million. Secondly, we had a $20 million loss resulting from the write-off of remaining issuance costs associated with debt that was retired during the quarter. This was noncash. And thirdly, we had $18 million of tax expense in the quarter, which was driven by the establishment of additional valuation allowances for certain state-deferred tax assets.

Net cash from operating activities in the first quarter was $282 million. The reduction from the fourth quarter level of $603 million were the result of cyclicality of cash interest payments. Our cash interest payments are significantly higher in Q1 and Q3 and lower in Q2 and Q4, so this result reflects our normal quarterly pattern.

We continued to execute well on managing expenses in the first quarter. Adjusted operating expenses were $1.228 billion, stable sequentially despite seasonal headwinds typical of first quarters. First quarter adjusted EBITDA was $873 million, a sequential decline of approximately 2%. Adjusted EBITDA margin of 41.6% declined sequentially, and we continue to target adjusted EBITDA margins above 40%. Trailing 4-quarter operating free cash flow in Q1 was $643 million.

Please turn to Slide 8. Looking at our components of revenue. Data & Internet services revenue increased sequentially, with Consumer Broadband and wholesale contributing to this increase. Both Voice and Video services revenue declined sequentially, consistent with past trends and the underlying business dynamics.

In Consumer, Data & Internet services revenue grew sequentially, but this is offset by a sequential decline in Voice and Video services revenue, yielding a sequential decline in total Consumer revenue of 1%. In Commercial, total revenue was down 1% sequentially. Wholesale revenue was stable, while SME experienced sequential decline. Lastly, regulatory declined slightly sequentially.

Please turn to Slide 9. Monthly consumer ARPC was $89.14, sequential increase of $0.77. We continue to improve our base management as customers migrate off Commercial packages. Partly offsetting this was secular unit declines in Video.

Please turn to Slide 10. Capital spending in the first quarter was $305 million. The focus area of our capital spending remains consistent. As Dan mentioned last quarter, we're in the process of deploying 10-gigabit capability across our fiber footprint. This will support our Commercial activities by enabling an even more robust portfolio of Internet services and providing a road map for -- and 5G backhaul as well as future-proofing our Consumer Broadband services.

Connect America Fund buildouts remain an important focus this year. We added about 10,000 locations in the first quarter for a total of 496,000 locations. The slower rate of building in this quarter reflects the impact of winter weather in many of the areas where we are building CAFs. We expect the pace will increase now that we're into spring.

We are also building fiber-to-the-home in certain rural markets to a total of 19,000 locations. We're leveraging state funding programs for these builds. Also, we continue to build fixed wireless broadband to fulfill some of our CAF requirements.

Please turn to Slide 11. We made progress on a number of areas on our balance sheet in the first quarter. In March, we issued $1.65 billion in 8-year senior secured notes and used the proceeds to retire our primary Term Loan A facility as well as a smaller co-bank loan facility. As a result, we shifted out almost $400 million in amortization payments related to these 2 facilities that would have been due over the next 2 years and additionally extended the remainder of the maturity by 6 years from 2021 to 2027. We also extended our $850 million revolver by 2 years from 2022 to 2024. On March 15, we repaid $348 million of maturing unsecured notes on schedule. Finally, as we discussed in the fourth quarter earnings call, we closed an asset sale of towers for $76 million in January.

The result that we now have clear the runway through the end of 2021. We have a modest term loan amortization remaining in 2019, $245 million of principal payments in 2020 and $327 million of principal payments in 2021. These maturity amounts are each below our operating free cash flow guidance for 2019, which is $575 million to $675 million. Additionally, at quarter end, we had $375 million drawn on our revolver.

Executing on our priorities will reduce leverage and expand the range of options for our capital structure. Nonetheless, we continue to evaluate balance sheet alternatives as we remain committed to reduce the debt and improving our leverage profile.

Please turn to Slide 12. Our 2019 guidance remains unchanged. For the full year, we expect adjusted EBITDA of approximately $3.45 billion to $3.55 billion, which includes $50 million to $100 million of benefits from our transformation program. We expect capital expenditure of approximately $1.15 billion, cash taxes of less than $25 million, cash pension and OPEB of approximately $175 million, cash interest expense of approximately $1.475 billion and operating free cash flow of approximately $575 million to $675 million. Also, we continue to anticipate the costs relating to achieving transformation initiatives to be around $50 million in 2019.

Looking toward the remainder of the year. We anticipate the company-wide transformation initiatives will continue to contribute to improving trends -- to improving the trends in our financial results and we remain focused on providing and improving operational efficiencies and driving free cash flow through these levers.

I will now hand the call to the operator to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Batya Levi with UBS.

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Batya Levi, UBS Investment Bank, Research Division - Executive Director and Research Analyst [2]

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A couple of questions. First on the Broadband side. Can you provide more color on the Broadband churn versus gross adds in the quarter? And maybe specifically for the fiber footprint, if there's anything to call out. And the improvement that we saw on copper and the CTF losses, did that track into April as well? And then second question on the EBITDA side. Can you provide maybe what the -- quantify the seasonal expense that you had in the quarter. And the pacing of the transformation benefits through the year, can we expect the first quarter level to be the trough for the year?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [3]

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Batya, it's Dan. On the Broadband, just to give you a little bit more color. We saw, as you see, sequential improvements on both fiber and copper. The fiber improvements were around sales to single, double-play bundles where we did see, as I mentioned, some uptick in churn in the triple-play base. But the incremental sales that we saw really offset the additional churn, and that's what you saw the improvement on the net side on the fiber. On the copper side, the biggest improvement was on the Legacy Consumer base, and it was really around churn. We did see some improvements in sales, but it was really around churn. And a lot of the efforts that we've been placing on improving churn levels on the copper side and on the fiber side associated with our transformation efforts as well as a lot of other initiatives that have been underway really started to gain some traction on that. So we were very happy with the results that's starting to flow through, but we have a lot of work to do to continue to improve the trends on the Broadband side, both on the fiber and the copper footprint. And we think there's a lot of opportunities, especially on the churn side.

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Sheldon Bruha, Frontier Communications Corporation - Interim CFO, Senior VP & Treasurer [4]

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Just on the -- on some of the EBITDA questions you had. You asked about some of the expense headwinds in Q1. We had roughly $20 million related to some seasonal expense resets that occurred in the quarter. With regard to transformation, as Dan mentioned, we had about $8.75 million benefit in the quarter, $35 million on an annualized basis. We anticipate that transformational revenues should build over the course of the year. These benefits -- and also anticipate these benefits to be back-end loaded to the second half, particularly weighted to the fourth quarter. The benefits will be sort of initially from operational and commercial and technical support, with the revenue initiatives really contributing later in 2019.

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Batya Levi, UBS Investment Bank, Research Division - Executive Director and Research Analyst [5]

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And given those 2 items, would you expect EBITDA to grow sequentially from the first quarter level?

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Sheldon Bruha, Frontier Communications Corporation - Interim CFO, Senior VP & Treasurer [6]

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Yes. As you know, we don't provide quarterly guidance. But I think you should take what I've mentioned around how the transformation benefits should phase for the year, as well as just a reminder that we do -- that we have the typical summer seasonality in our business during Q2 and Q3.

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Operator [7]

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Our next question comes from Matthew Niknam with Deutsche Bank.

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Matthew Niknam, Deutsche Bank AG, Research Division - Director [8]

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Just 2, if I could. One, if we could just think about Consumer ARPC, a nice bump. Again, higher in the quarter. You talked about rising Video losses. Typically, that comes at a pretty high ARPU that leaves. And so can you talk about what's driving the improvement at ARPC and if it is, in fact, customer bills resetting higher, how you kind of balance that with higher churn? And then secondly, in terms of the cost to achieve, I think, Sheldon, you may have called that, I think it was $15 million in severance cost, but there's about $28 million in costs that are being added back in restructuring and other. And so I'm just trying to figure out what the sort of incremental was because that was a pretty big step-up in terms of the add-back this quarter relative to 4Q?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [9]

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Sure, Matt. On the ARPC question, we're very pleased, as I mentioned last quarter, in our approach and how we've refined it as far as managing our base. So that probably is one of the biggest impacts to the ARPC line. Having said that, you're absolutely right. Video losses do come with a fair amount of revenue. So it won't always be a higher ARPC level each quarter, and that's not really a bad thing. Because as we lose some of the Video customers, even though it is a higher revenue, it really doesn't affect us from a profitability perspective anywhere near some of the other customers. And to give you a little bit of a flavor on the Video losses for the first quarter, they were really a combination of what I would call normal secular trends that I think most of the other video providers are experiencing. But we shifted our emphasis to a little bit more on Broadband standalone as well as double-play Broadband bundles. This shifted our gross additions mix more towards those 2 buckets and away from triple plays. And as we shifted away from those, it actually is pretty positive from an acquisition cost perspective, which a triple-play acquisition cost could be 3x to 4x that of a single or double-play without video. In addition, during the quarter, we did take some steps to evaluate the profitability of certain customers and made some decisions to step back from some larger, longer-term bulk contracts that didn't have the pricing characteristics we like. And we've spoken about how we would look at those MDU bulk contracts in the past, and that accounted for about 10% of the Video losses for the quarter. So net-net, I'm happy with where the ARPC was, but we'll do the right thing to drive EBITDA and cash flow in the business. And you won't always see probably ARPC continuing to rise like this.

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Sheldon Bruha, Frontier Communications Corporation - Interim CFO, Senior VP & Treasurer [10]

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Okay. And just regard to some of the charges you had identified in the release, that $28 million. About $13 million of this was associated with the transformation program, very consistent with the charges we had in Q3 and Q4 of $12 million, $11 million, respectively. And then we also had separately $50 million of restructuring charges. You may have noticed our headcounts in the quarter was down about 734 heads from year-end levels. Some of that was achieved through restructuring. Some of that was just now back to normal attrition in the organization. So that was -- that charge is related to headcount reduction.

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Operator [11]

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Our next question comes from Frank Louthan with Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [12]

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So you sold the towers in the quarter and focused on delevering. Are there any other assets that you have in your hidded assets or others that you would consider divesting? And then can you talk to us about the rate of penetration in the CAF II markets? How successful has that program been? And what are your intentions when they re-auction that in the next year or 2?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [13]

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Frank, you're absolutely right. We did close on the tower sales. We continue to look at all of the asset base, principally around some of the real estate holdings we have around the country. We have a portfolio and team trying to move through that. There are a number that, we think, that we can get to a transaction on. Whether it gets done in the next 2 quarters or more towards the end of the year or the beginning of next year, it's really a function of some of the negotiations that go from that. As far as other assets, of course, we would look at asset dispositions if it was the right thing to do for the business from a deleveraging perspective and really strategically. So we continue to look at that all the time, but nothing really to report at this point. And as far as rate penetration, you should think about a 30% penetration on the CAF households. We do like it. we think that there is more room to really drive that. We're experimenting with different channel techniques to go after that in different ways. And we are going to actively pursue participation in the CAF III or the rural digital program as the Chairman has started to coin it. We do think there's opportunities to work with the commission to do a better job versus targeting versus census blocks and maybe targeting higher speeds and even existing areas that were upgraded with the previous CAF programs. But I think you'll see us actively participate with the industry and the industry groups as well as look to participate in as robust way as we can on the CAF III.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [14]

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Any thoughts on why that penetration remains so low? I mean given the, by definition, really lack of any available broadband, you would have thought that it would -- the penetration would have been much higher than that. Any thoughts on why that's the case?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [15]

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I think it is higher in earlier. But from our -- where our footprint has been, Frank, it tends to skew towards adding more and more customers or households later in the year and then we wind up in a place where we bring them on in available for sale probably 6 months, 8 months later than it would have been ideal to do. But that's just the nature of having to serve some of these both from a construction perspective and even getting permits for certain parts of it. But we do still think it's -- we should be able to grow into that 50%, 60% penetration over time. It's just going to take a little bit longer than we originally thought.

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Operator [16]

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Our next question comes from David Barden with Bank of America.

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David William Barden, BofA Merrill Lynch, Research Division - MD [17]

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I guess just a couple. Just back on the CAF stuff, like I noticed you guys kind of highlighted you're undertaking some fixed wireless broadband initiatives. I wonder if you could scope that for us and share what that looks like. Second, I guess, would be just an update on the permanent CFO search. And then I guess the last thing maybe Sheldon or Dan, just kind of as we think about that 2022 tower, which is kind of the elephant in the room on the balance sheet, we've got probably 24 months of runway, maybe some would argue 18 months runway, to get to somewhere where that '22 tower looks manageable, which means kind of reopening up the credit markets to the company. And I guess based on your conversations, either with the rating agencies or with the bond investors, kind of what does Frontier look like at that moment in time? Is it just -- is it flat? Is it close to flat? Is it, as Batya was saying, maybe growing EBITDA at the margin? Like what does the Frontier look like that's able to access the credit market sometime in the next 18 to 24 months?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [18]

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Okay. Dave, first on the first 2, and I'll let Sheldon tackle the third one. On the first one, yes, we're using a variety of techniques for CAF II, everything from traditional copper approaches. Selectively, as you heard, we're incorporating some fiber-to-the-home where we're building the infrastructure. And in many cases, that's around some traditional brands from various states, whether that's in California, New York or 1 or 2 other states. But those products have been well received, I would say. But the attributes could be certainly meets the minimum, but can be up to 100-meg throughput. So it's been good. We've been refining those designs and trying different approaches. And we'll continue to iterate on that as we go into the year. As far as the CFO search goes, we're hopefully reaching the end of that process. We have been very pleased with the roster of candidates that we've had the pleasure of meeting and reviewing for the role, and we hope to bring that to conclusion soon. Our list of criteria remains, as we talked about in the past, really experience in the public markets, experience with high-leverage situations and with capital-intensive businesses. So hopefully, I'll be able to give you an update on that over the coming weeks and months.

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Sheldon Bruha, Frontier Communications Corporation - Interim CFO, Senior VP & Treasurer [19]

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Just onto your question on the 2022 tower. I mean, firstly, because -- as we're thinking about it, I mean, our capital structure activities in Q1 has created a situation where we have significantly reduce the debt principal obligations we have through the end of 2021. So we pushed off approximately $400 million of bank amortization that we would normally have been due. So which means we'll be able to earmark a lot of extra cash flows to whittling down that tower in advance of that -- in advance of approaching that maturity. Beyond that, as we've expressed before, we're committed to easing our debt profile through a combination of debt paydowns through free cash flow, EBITDA growth, particularly as well from our transformation initiatives, potential asset sales and ultimately, capital markets transactions.

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Operator [20]

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Our next question comes from Mike McCormack with Guggenheim Partners.

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Michael L. McCormack, Guggenheim Securities, LLC, Research Division - MD & Telecommunications Senior Analyst [21]

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Dan, maybe just a quick comment on what you're seeing in the Commercial market as far as the competitive and pricing situation goes. And then maybe if you can, I don't know if you can break it apart, but give us a sense for how much Legacy revenue exposure is still in the Commercial side of the business. And then maybe just one for Sheldon quickly on the secured capacity. Can you give us a sense for what's remaining on secured capacity?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [22]

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Sure. From the commercial side, Mike, I think first up on the wholesale carrier side, we saw kind of a stable quarter. We see customers that there certainly may be some hold, waiting on, what's going to come out of the FCC on a large merger. We also see some muted but small impact just from Windstream going through bankruptcy. So -- although that's really a smaller part. We continue to see customers on the wholesale side just following their end-user customer needs. And we continue to see some growth on the Ethernet circuits serving our tower customers. So it was a pretty benign, I'd say, quarter from a carrier perspective. Nothing really creating a lot of compression from a price perspective and really nothing really causing big swings in that segment. On the SMB-SME perspective, we still can see -- we see a lot of competition. Probably the biggest headwind we have is just Legacy Voice declines that are occurring. And that's really both a substitution perspective from a technology as well as people doing grooming even on some of the legacy packages. We had a, for instance, a large customer that was based in Texas just groomed down based on business and their business profile to both different technology as well as lower needs from a voice perspective. That's probably been the biggest, I would say, headwind that we've been dealing with. It hasn't been as much on some of the TDM or the SONET kind of point-to-point circuits. Prices still are rationale. We haven't seen any significant change from that perspective as far as the different cable providers in the markets. So I would say it's been pretty -- pretty stable from last quarter from that perspective.

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Sheldon Bruha, Frontier Communications Corporation - Interim CFO, Senior VP & Treasurer [23]

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And with regard to our secured debt capacity, we don't comment publicly on interpretations on our indentures or sort of on our basket calculation. So...

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Michael L. McCormack, Guggenheim Securities, LLC, Research Division - MD & Telecommunications Senior Analyst [24]

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Sheldon, can you just then circle back maybe on your comment regarding balance sheet alternatives. You mentioned a couple of things in the call already. If you're thinking sort of beyond the asset sales, are there other levers you can pull on that?

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Sheldon Bruha, Frontier Communications Corporation - Interim CFO, Senior VP & Treasurer [25]

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Look, I think I've said our near-term focus is maintaining our runway here and trying to end -- and then exploring. I think you would have seen what we did most recently in the quarter -- in the quarters around sort of extending our first-lien liabilities. Beyond that, I don't think we're go into further commentary around alternatives we're considering about next steps.

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Operator [26]

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Our next question comes from Michael Rollins with Citi.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [27]

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I guess 2 questions. The first, if I go back, you registered for some of the millimeter wave -- I think at least one in the millimeter-wave auctions but never put down a deposit to go forward. And I was curious if you can give us a little bit of insight into what were you thinking about in regards to millimeter wave? And how are you thinking about that now as the solution to extend broadband-to-the-home? Or as a possible competitor to your own fixed services in the home? And then if I can switch gears and just ask a little bit about if you had strategic or conversations with financial buyers in the industry, what are they focused on in terms of what drives value for fixed-line assets? Is it fiber penetration? Is it mix of enterprise services? Maybe give us a little insight into how others in the industry are thinking about value for the assets that you have.

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [28]

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Yes, Mike, this is Dan. I'm not sure I can really talk too much about the specifics on the auction because of those rules. But I would just say, our view on millimeter was we were looking at whether or not it was a viable tool to put in the portfolio. But I can't really talk about the auction rules. We did look at it in different -- some test markets that we were trying to prove it out one way another from a customer homecast perspective. I think I have to leave it at that. But as far as discussions with whether it's strategic or financial buyers, I think the key things people have historically I think looked for is fiber penetration, to your point. I think enterprise and enterprise mix, as far as growth rates and what the opportunity is on that and really demographics and whether or not those demographics are growing, shrinking. In all of our markets, I think, anybody's markets, it's very different. There's nobody who has a pure portfolio of growth assets. So I think those are the key things that people look at. Certainly, I'm sure they'll look at it from their own side as far as opportunity from a profitability perspective or synergy perspective, but I think those are probably the key things that they look at as far as trackers.

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Operator [29]

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Our next question comes from Philip Cusick with JPMorgan.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [30]

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A couple of follow-ups. First, can we dig into the Broadband improvements a little more. What promotions are working to help those copper improvements? And on the fiber side as well, what kind of Broadband single-play or double-play offers are you out there with?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [31]

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Yes. Phil, so the real big improvement on the copper side came from more on the churn reduction. And when you look at that, it's no single one point. As I pointed out before, we've had a number of different initiatives in the transformation effort as well as even before that, that we're focused on everything from how a technician interacts with a customer to moving the copper Legacy base into next-generation provisioning platforms that allow us a much better job from a troubleshooting perspective and an integration into the future as we've developed around customer service for the FiOS markets. So there's a lot of that work. It was very complex. It was arduous. It continues. We're not completely there. I think we'll have a lot more of the base into those next-generation tools and troubleshooting techniques as we get through the second and third quarter. But I was pretty happy since I've been trying to drive the top for significant improvements for a while now. There was no really -- wasn't really a significant change on acquisition or targets or pricing. That was fairly constant, but it was really some channel improvement, performance, both internally and externally as well as principally on the churn side. And then on the FiOS side, we've continued to see pretty good performance out of the price points that we had in market that were really $80 introductory lower in triple-play, and double-plays were more moral like $75 and the single-play $50. So that's kind of been where we are. We vary sweeteners and offers that go in and out of the markets just like, I think, most of our competitors. But we've been pretty pleased with where we are right now with that.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [32]

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That's great. And then second, we've been through periods in the past when you've talked about sort of exiting run rate EBITDA savings. And I just want to clarify, so $200 million of run rate EBITDA benefit exiting 2019, can we interpret that to mean $50 million of benefit in the fourth quarter? Or is that sort of a last week's or month's exiting type of run rate?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [33]

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Right now, Phil, we have a significant amount of efforts that are in the scaling mode. Those scaling modes require us to schedule and coordinate. So I think you'll see a lot of the efforts that go into production really are in more towards the back end of the fourth quarter just because there's so much going on. If we can pull it forward, we will. But you should expect to see that benefit start to really build as we get into the latter part of the fourth quarter.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [34]

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Okay. So we'll see some impact in the fourth quarter, but the real full run rate of that $50 million in the first quarter and maybe more than that by then?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [35]

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Yes, I think that's a good way of thinking about it.

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Operator [36]

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Our next question comes from Simon Flannery with Morgan Stanley.

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Simon William Flannery, Morgan Stanley, Research Division - MD [37]

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Can you just talk about the CapEx trajectory for the year? Normally it's more back-end loaded, but you -- I think you spent over $300 million in the quarter. So how should we think about that over the balance of the year and relative to your guidance? And on the copper, maybe you could update us a little bit more on where you are on the speeds, tiers and what you think you need to get that to be competitive in some of the markets? How much do you have now, at 25 or 50 or 100?

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Sheldon Bruha, Frontier Communications Corporation - Interim CFO, Senior VP & Treasurer [38]

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Yes, sure. I'll just start on the CapEx. I think our $300 million that we announced here for the first quarter are largely in line with sort of an even phasing, slightly higher of an even phasing of our guidance across the 4 quarters. Nothing in particular to highlight of note other than we did have about $10 million or so of extra CapEx in the quarter related to some -- the California wildfires spending that we incurred. Beyond that, I don't -- I wouldn't necessarily say the profile that you mentioned from a historical context is right. You would see that last year, fourth quarter CapEx was the lowest spend that we had for the full year. So which -- and I don't think we -- we don't give guidance on a quarterly basis around CapEx, but that profile wouldn't necessarily be right as you think of this on a regular basis.

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [39]

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Simon, it's Dan. I think we may have about 1 million homes at the 100-meg level on copper. We have about 6 million homes above 25 megs. And we think that's a very robust set to go after, especially in these markets where we're targeting some of the copper. I don't think you're going to see us do a lot of significant copper upgrades this year. Our big focus is really future-proofing kind of the CTF fiber markets. So we're spending the money to upgrade the entire market to the 10-gig capability. So where maybe others, it would -- they'd have to do that in stages. By the end of the year, we'll be in a point where we can offer 10 gigabit if we chose to ubiquitously throughout the CTF markets, but for Commercial as well as 5G backhaul or any kind of backhaul for commercial opportunities as well as potentially for consumers. So we think that's a good use of where we want to put our funds this year, and we think that will earn us really good returns as we go forward in trying to change the game in the CTF markets.

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Simon William Flannery, Morgan Stanley, Research Division - MD [40]

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Okay. So how much is on 10 gig now?

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [41]

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That just started. You'll see it build throughout the year, but you'll see it conclude as we get into the end of the third quarter and into the fourth quarter.

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Operator [42]

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At this time, I would like to turn the conference back over to Mr. Dan McCarthy for closing remarks.

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Daniel J. McCarthy, Frontier Communications Corporation - President, CEO & Director [43]

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Thank you, operator. I'll leave you with the following thoughts and observations. That our first quarter results continue the progress we made in the fourth quarter as we work towards our long-term goal of improving revenue and unit trends and realizing our transformation program targets, driving free cash flow and reducing leverage. While we recognize the challenges ahead, we are pleased with the achievements of our transformation program. And we intend to continue to make further headway in proving our financial profile over the course of 2019. I want to thank you all for joining us today, and I look forward to updating you on our first quarter results.

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Operator [44]

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Ladies and gentlemen, this concludes today's conference. We thank you for joining today's presentation and hope you have a nice day. You may now disconnect.