Crown Castle Inc. (CCI) Earnings Call Transcript & Summary

Good afternoon, everybody. This is Jon Atkin. I lead the communications infrastructure investment effort here at RBC. Welcome to those of you that haven't dialed in before to our 6th Annual Global Tower and Mobile Infrastructure Investor Summit, which we normally hold each year in Chicago. This year it has been virtualized. Pleased to welcome yet again, Crown Castle. And from the company, we have the Chief Financial Officer, Dan Schlanger. I'm going to go through roughly 20, 25 minutes of Q&A with Dan. There will be some opportunity for audience questions. And the way to ask a question is to type it into the portal, and time permitting, I will be able to then read it out. So Dan, welcome to our event, virtual edition.

Yes. Thanks for having me, Jon. Good to see you.

So I guess, I wanted to maybe talk about the macro tower business, which makes up the most of your both revenues and cash flow, U.S. portfolio, obviously, and kind of the cadence of second half versus first half, you've talked a little bit about it in -- on your earnings calls, but what are you seeing in terms of activity levels as we kind of head into the second half of the year and into '21?

As we discussed in our second quarter earnings call, we reaffirmed our guidance, but said we would likely be on the lower end of the ranges we had because the ramp in activity coming into 2020 is happening slower than what we expected. So we originally gave guidance in October of '19 for 2020 and made the assumption that the T-Mobile and Sprint merger would close at the end of the first quarter, which at the time, although it sounds like a really long time ago, was a controversial statement to have been made because there were some serious considerations to whether the merger will close at all. And we have made an assumption that after that closing that activity levels would ramp relatively quickly. And we've just seen it ramp slower than what we would have expected. That's not to say slower than what T-Mobile expected, that's up to them. It can be a lot more than we did, but we had to make some assumptions. What we believe though is that's a timing issue. The slow ramp is just because there's a different timing than what we expected. And that we think that the back half of this year will be a substantially more active period than the first half of the year, and that will position us into -- looking into 2021 from a very solid foot, where -- because the back half comes back and you see the exit rate of activity to be similar to what we would have expected even we gave guidance in October last year, that we think that we position ourselves well for 2021, which is why we also said at the time that we believe that we could be at the high end of our 7% to 8% annual AFFO per share and dividend per share target growth rate, either at the high end of that or potentially above that going into 2021, given all the activity that we see in the market and the benefits we see going to our businesses overall. So we are still excited about where we sit. We think that there's lots of activity happening from all participants in the market. And that will bode well for us as an owner of communications infrastructure as we transition from 2020 into 2021, and as we give guidance, which is around 3 weeks from now at this point, in late October, will expound a bit on the assumptions that we have used to build up that case, and we'll get into what we think and why in a little bit more.

So I want to maybe jump to some high-level corporate topics before we kind of drill down into the drivers of your different kind of business segments. And first off, from a personnel standpoint, Jim Young, who's been with the company quite some time has decided to retire, effective February of next year. He was the Chief Operating Officer of Fiber, most recently had a number of different roles within the company. What are you looking for as you look to kind of fill his shoes? And can you provide any sort of an update on how the search is going?

Sure. What we're looking for is somebody who can come in, understand our direction, what our strategy is, why we think it's important to continue on that strategy and to be able to internalize and then articulate and execute on that strategy. And help us think through where we can make tweaks. So we want somebody with a broad business knowledge to be able to help us think about the strategy, and then an ability to execute at a level that will help us more effectively reach the goals and objectives that we've stated, which is to continue to build our small cell business, continue to build fiber and ultimately get to the colocation on small cells on that fiber. But in order to get there, we need to continue to operate very well, take cost and speed out of our system so we become more and more competitive and drive the market to faster, faster adoption of small cells. And we want somebody who can think through all of that and then ultimately make it happen.

So as you kind of came from outside the industry into the CFO slot, but your predecessor, Jay Brown, moved successfully up through internal hiring, you've got kind of both templates. As you fill Jim's shoes, are you thinking inside or outside?

We're looking both. For all the reasons you just stated, we've had success promoting internally. We've had success of bringing in external expertise. And we think that the combination of that makes a very healthy organization. So we're going to look for the best candidate we can possibly find, whether that be internal or external. And we think that we have great candidates all the way around, and we'll continue to go through the process, and we'll give an update of when and how and who, as soon as we have any real information [ for sure ].

And then turning to governance issues. You had an unusually detailed earnings call talking about kind of the small cell business, provided it a little bit of better disclosure. There's been some changes in terms of the churn of different Board members and so forth. And is that kind of the extensive changes that we can expect as you responded, at least in part to the shareholder activism?

The short answer to that is yes. What we did is when we received the letter from our activists, we looked at it basically in 2 fronts. One is a strategic recommendations that were being made and then the other's governance recommendations that were being made. And our overall philosophy was to understand where the majority of our shareholders fit within those 2 aspects of the recommendations. And to give them our perspective on all of it and then get their feedback and see whether they agreed to disagreed and then make changes to the extent that our investors wanted those changes to be made. On the strategic points, the letter basically pointed out to significantly reduce CapEx and do so by targeting a 40% plus return on any investment in fiber and to use the incremental capital that we would save to pay a big dividend, a recurring dividend at that point of $7 a shareholder. On those points, we didn't agree. We thought and have been articulated since going into small cells and really making a significant investment in small cells around 3 years ago when we bought Lightower, a big fiber company, was that the driver of our business and the value creation that we were going for, rested in the small cell portion of fiber and small cells, such that we would recreate a model that looks a lot like tower's where we share an infrastructure asset that is expensive to build to lower the overall cost of implementation and operation for our customers by sharing it across multiple customers. If the fiber on an enterprise side of the business was an adjunct to that to add revenues and returns, Elliott was suggesting to not invest in small cells and only invest in colocation on enterprise fiber. And that's the opposite of what we thought was appropriate. And as we talked to our investors about it, which we did, they were very supportive of our position. And therefore, we didn't expect or think that we needed to make any changes because we had to support our shareholders. And we believe that as long as we continue to show progress and results, and be transparent about our investment cycle, we'll continue to have that support. So the feedback we got was to give them more disclosure, show us as investors -- show it to investors what we look at internally more so that they can see and be more -- we can be more transparent about what the results are in the interim, so they can understand in this long-term business we have, whether we're making progress or not. It was out of that feedback we got from investors that we ultimately changed the disclosure we went and showed in the second quarter, which you said was unusually detailed is because we wanted to respond to our investors and they sensed and told us that we responded well. The other portion on the governance side that Elliott had recommended was we have a long-tenured Board that we needed to refresh, we need to look at management compensation to see if it aligned with our incentives with those investors. And on the Board refreshment point, we agreed. Our Board had already looked at it and understood that and had started the Board refreshment process. Our investors agreed, thought that it was time for us to do something like that. So we announced, based on that recommendation and on our Board's thought process, more on Board's thought process but because of the recommendation we got to talk about it with investors and because investors agreed with the Board, we went ahead and announced something where we were going to refresh [indiscernible] over the next 2 annual meetings. So all that said is, when we got feedback from our investors that they thought that we should change something, we have changed it. When we got feedback from our investors thinking that we are on the right path, we've stayed on the right path, and we've added more disclosure to address our concerns. And we think that we've really done a good job of understanding where our investors are by talking to them, getting feedback, listening very closely and attentively and then going back and asking questions after the fact, which we've got in the last fourth quarter, so we think we're in a spot now, even though we still have the fundamental difference of opinion with Elliott on how to spend capital, we believe that our shareholders are very much in our [indiscernible].

Thank you for that recap. And again, a reminder, to the audience if there's any questions, please type them into the portal, and I'll get to them as kind of time permits. I want to head on towers, a couple of questions on that front, small cells and maybe some financial questions. But kind of continuing down on the tower question that I led off with. As you look at the opportunity set, there's a lot happening. There's CBRS auctions that have recently been concluded. There are C-Band auctions that are going to happen in December. There's the continuing FirstNet project and then there's obviously the integration effort on the part of T-Mobile and Sprint as well as some of the millimeter wave efforts. Focusing on the macro tower portfolio, though, what strikes you at a high level as having kind of the greatest -- has provided the greatest opportunity for your lease out going forward?

As you just pointed out, there are a lot of positive catalysts in our business right now. There's a lot of underlying demand for data in the U.S., which is kind of the real driver of all of that activity you just pointed out. And that's driving our customers, the wireless carriers to buy and deploy more spectrum. Because you need to meet that wireless data demand with additional spectrum that carry the wireless data. And in addition to that, we have somewhat of a unique position [ a bit ] like all over above that of like I said, the integration of T-Mobile and Sprint, which is leading to -- as T-Mobile has talked about publicly, an increase in their capital expenditures late this year and potentially going into next year. We'll see what they have to say. And then the fact that DISH is part of that merger also has spectrum that they are going to deploy to build a nationwide network in the U.S., which is the first time that has happened in years, maybe a decade or so. And all of that put together is why we're so excited about the future of our business, specifically the macro side because all of those activities can happen on a macro site where more spectrum needs to be deployed and the most efficient way to do so is deploying on towers, it's the most cost-effective way of deploying spectrum across wide slots of area. And it's something that we believe is going to be an important aspect of future network demand and growth for a long time. And as we see that growth materialize, we think that there's going to be a good tailwind to our business. And as we said, in an acceleration in our business overall, to take us at the high end or above our 7% to 8% long-term growth rate target as we entered into 2021, and we're excited about, overall, how the business is coming together. And look, like I said before, we'll give more detail in a month or so when we give our guidance for 2021. But all of that put together, there's no specific one thing we would point to. It's all of that put together that's driving the industry to spend more money. And what we get into in cycles like this, at times has been where spending money on network by one company can drive a competitive response on the other, and that creates a good cycle for us of continuing increasing investment in the network as network quality becomes a competitive differentiator between the carriers. And when we put all of it together, we see a very good backdrop for growth in the business.

So you mentioned the AFFO per share growth rate. I want to kind of skip ahead to a question that was going to come later, but I believe you've noted that it could be higher than that range next year, 7%, 8% this year, maybe at or above the high end. What are some of the drivers that are kind of embedded in that view? What would be a base case scenario that might drive it to be higher? What would be maybe a disappointing outcome operationally that would lead you to be lower than that?

Yes. As you just said, Jon, we're -- we think we can be at the high end or potentially above the high end of our 7% to 8% growth target at the AFFO per share and dividend per share line. And all of the things we just talked about are the drivers. It's the increasing demand across the industry that's really driving it. And the continuation of that demand in small cells and fiber and all of those operations and all that operationally, we believe, will drive good growth for us. And we will also focus as hard as we can on maintaining our cost structure and being as diligent as we can on that front. So we think when you put it all together, it sets up well for moving into 2021. And it's one of the more exciting times that not have been around, which haven't been not that long, but it feels like the beginning, the precipice of what could be a long-term growth cycle for our business as demand continues to increase, and 5G moves from being talked about a lot to being put in action and really driving some investment. And we're hoping that we're right on the precipice of that and the increase that comes with that. And we think that, like I said, all of that put together is really what's driving this belief we have that we can accelerate growth going into next year. And to be able to say that in July, when we're looking at that one, is a good sign for our business, and it's a good sign for how stable and predictable what the growth is in our business. And as we get to October and give guidance again, I think we'll have more assumptions we can talk about and more conviction in what we will talk about and give a lot of our own perspectives into what's driving that growth in [ margin ].

In terms of the contracts you have with customers, is it BAU, business as usual, that kind of underlies that assumption? Or are you supposing that there would be some renegotiation or entry into new MLAs as one of your peers has done recently?

It's really predicated on the activity level more than the contract structure. So activity, we think is going to increase. Whether we enter into new master lease agreements or not with our customers, will be a discussion and a decision that we make in conjunction with those customers and whether we can reach a mutually beneficial agreement. And if we can, then we'll enter into something, and we think that, that, by definition, beneficial to us. And if we can't, then we'll operate, as you said, under a business as usual case, but it's really the activity level that drives our business more than whether a contract is in place or not because we have contracts in place now that will accommodate any type of activity that our customers want to provide us on our towers, on our small cells. And specifically in this case, on our towers, and we have those that are in place for 5 to 6 years left on the majority of our customers. And we feel really good about that because what that means is we're not under any pressure right now to hurry into anything. We don't have to do something in the near term, but it gives us the opportunity to discuss with our customers what they want, what their goals are, what they -- would benefit them in their network deployments. And for us to tell them what would benefit us and see if there's agreement. And we hope to have those conversations and do have those conversations all the time. And we'll continue them. And if we come up with something, we'll enter into something, but there's nothing specific that would lead us to say we have to have this MLA in place in order to get to the activity level. It's actually the activity level that drives our growth.