Shenandoah Telecommunications Company (SHEN) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Shenandoah Telecommunications Conference Call to discuss yesterday's announcement of the sale of their wireless business. Today's conference is being recorded. At this time, I would like to turn the conference over to Kirk Andrews, Director of Financial Planning and Analysis for Shentel.

Good morning, and thank you for joining us. The purpose of today's call is to review Shentel's recent announcements regarding the sale price of our wireless assets and operations, the expected timing of the remaining steps in completing the divestiture, the expected use of proceeds and the company's preliminary 2020 results and 2021 outlook. The press releases are included on the Investor page at our website, www.shentel.com. Please note that an audio replay of this call will be made available later today. The details are set forth in the press release announcing this call. With us on the call today are Chris French, President and Chief Executive Officer; Dave Heimbach, Executive Vice President and Chief Operating Officer; and Jim Volk, Senior Vice President of Finance and CFO. After our prepared remarks, we will conduct a question-and-answer session. As always, let me refer you to our safe harbor disclaimer contained in the press releases and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. These may cause our actual results to differ materially from the statement. Therefore, please refer to the risk factors in our SEC filings, which you're encouraged to review. You're cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements. And with that, I'll now turn the call over to Chris. Go ahead, Chris.

Thanks, Kirk. We appreciate everyone joining us this morning and hope everyone is healthy and safe. We're pleased to announce that the appraisal process for the sale of our wireless business has been completed. The 3 independent valuation providers have determined that the purchase price based on the calculation of 90% of entire business value as defined in our Sprint affiliate agreement, will be $1.95 billion. This includes approximately $62 million for the present value of the waived Sprint management fee. The valuation result is final and binding. We expect to enter into a definitive asset purchase agreement in the coming weeks and expect the transaction will close in the second quarter of 2021, after satisfying customary closing conditions and obtaining required regulatory approvals. The transaction is structured as an asset sale for tax purposes and all consideration will be paid in cash to Shentel. Upon closing of the transaction, we currently expect to issue a special dividend of $18.75 per share to Shentel's shareholders subject to the approval of our Board of Directors. The anticipated dividend will total approximately $940 million, a significant return of value to our shareholders. As we've disclosed over the past 3 years since Sprint announced their merger with T-Mobile, and we began to explore our options under the affiliate agreement, our goal was to pursue the strategy that was in the best interest of our shareholders. We feel this transaction and the special dividend are great outcomes for our shareholders. In addition, we plan to continue the annual dividend policy that we followed for the past 61 years. We're proud of the wireless business that we have developed and grown for the past 25 years. Our best-in-class network with outstanding sales distribution channels was unsurpassed by any other wireless provider in our region and is a credit to the hard work and dedication of our entire team of employees. We've provided a phenomenal base upon which T-Mobile can build, and customers should expect to continue enjoying the best wireless service experience in our service area. I'd like to now give an update on the strategic post wireless direction of Shentel. Over our long history, we've continued to evolve by investing in the latest technologies to meet the growing demand for telecommunication services in the rural markets we serve. This transaction will allow us to fully focus our resources on our regional integrated broadband communications business. As Jim will discuss shortly, we plan to invest aggressively in our new Glo Fiber and Beam fixed wireless broadband initiatives. With a complementary mix of state-of-the-art cable, fiber and fixed wireless technologies, our broadband business will be able to serve approximately 700,000 homes in the coming years and create a platform for sustainable long-term growth. We're very excited about the growth opportunities for providing quality broadband services to our customers and creating value for our shareholders. With that, I'll now turn the call over to Jim to review the details of the transaction, income tax impacts, expected use of proceeds, preliminary financial results, 2021 outlook and guidance on future leverage. Jim?

Thank you, Chris, and good morning, everyone. The after-tax proceeds from the sale of Shentel Wireless will be approximately $1.5 billion. As Chris noted, the transaction will be accounted for as an asset sale for income tax purposes. Our tax estimate is based on a tax basis of the wireless assets of approximately $250 million as of December 31, 2020, and an effective tax rate of 26.7%. We currently expect to use the after-tax proceeds of $1.5 billion, plus $195 million of cash on hand at December 31, 2020, to repay the approximately $700 million of outstanding term loans and interest rate swap obligations and fund the approximately $940 million special dividend. We expect to pay the special dividend in the second quarter following the closing of the transaction and approval from our Board of Directors. We are planning to add a new credit facility in the second quarter after closing, and are targeting net leverage to be approximately 2x adjusted OIBDA over the next few years. Turning now to the 2020 preliminary financial results and our 2021 outlook for continuing operations, as we discussed in our press release and 8-K this morning. We are still in the process of completing our financial and operating closing procedures and the 2020 preliminary results provided are unaudited. I will defer any comments on the preliminary results until our fourth quarter earnings call later this month. We expect 2021 revenues to grow approximately 11% to a range of $241 million to $248 million. Operating income is expected to be $7 million to $14 million in 2021. Adjusted OIBDA is expected to grow approximately 28% in 2021 to the $69 million to $76 million range. Both the revenue and adjusted OIBDA growth are driven primarily by the record year of broadband data net adds from our Glo Fiber and incumbent cable products in 2020. Capital expenditures are expected to be $157 million to $168 million in 2021, as we accelerate our investments in new market expansions for Glo Fiber and Beam. We expect to be free cash flow negative in the amount of $90 million in 2021. The investment cycle to reach our targeted 700,000 homes passed will drive negative free cash flow in 2022 and 2023, before our business returns to positive free cash flow in 2024. Please note that we are providing the 2021 guidance for revenue, operating income and adjusted OIBDA to allow the investment community to assess the value of our continuing operations after the wireless divestiture. We plan to revert back to our prior practice of only providing capital expenditure guidance in future years. Operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from Ric Prentiss with Raymond James.

Congrats on getting to the finish line.

Thanks, Ric.

Thanks, Ric.

A couple of questions. I appreciate you doing the call. On the after tax, approximately $1.5 billion, when will you know the actual amount that you have to pay on taxes? And when would you actually pay it as opposed to the cash sitting on the balance sheet?

Ric, we're still closing our books, as we mentioned, in [ 2020 ]. So we'll be keeping an eye on the basis [ up ] and be doing an estimate through where we expect to be by the end of the year as a form for paying the taxes. So as an example, our fixed assets will continue to depreciate up and through closing. So the number will move somewhat in the next few months. As far as for paying the taxes, what we expect is, we'll probably have to make the first payment in the third quarter, and I expect that would be about 75% of the taxes due, and the remaining payment would be in the fourth quarter.

Okay. That helps. And obviously, now you become a very focused broadband company, but you also have towers. Any thought about keeping the towers, selling the towers. Valuations in the tower space have been pretty high, a lot of interest in those tower assets. What are your thoughts on the tower side of the business?

Ric, in general, I think we've said in the past that towers are not strategic to us. But they're very valuable. So we will -- at this point in time, we plan to hold on to the towers. We think there's some upside to holding on to them. And in the event that we get into a more transformative acquisition, we could certainly think about using them to monetize them at that point in time and allow us to avoid issuing equity to future acquisition beyond our debt capacity.

Makes sense. And that leads to my other question. As you look at the landscape out there for broadband properties, how should we think about the pipeline of what might be transactions, particularly transformative acquisitions?

Dave, would you like to take that one?

Yes, sure, Jim. Look, the -- as I think we've discussed previously, our focus, generally speaking, is on properties that are reasonably adjacent to us geographically, unless there's a sizable one where it would make sense for us to leapfrog several states away or something. So at this point, the funnel is mostly full of opportunities that are more adjacent and less transformational, but we're keeping a close watch there.

Okay. And the final one for me is, obviously, the corporate costs are fairly high, given you used to be a much, much larger company with the wireless business. How should we think about rightsizing that corporate cost line area, given that you might do some M&A as well?

Yes, Ric, we expect it will probably take us a couple of years to get it rightsized. So just a couple of numbers to share: from 2019 to 2020, our corporate expenses declined approximately 14%. We expect a similar decline in 2021. And then the next couple of years, we'll see some smaller declines. From a IT perspective, a finance perspective, we are in an investment cycle to automate a lot of our customer-facing and financial systems which will keep the SG&A at a higher level than our peers for a few years. However, we do expect the SG&A as a percentage of revenue to decline into the low 20% range by [ 2024 ] due to a combination of lower expenses as the automation projects start to create efficiency savings and our Glo Fiber and Beam revenues start to reach scale. And certainly, to your point, if we do an acquisition, that would help leapfrog some time there as well, if we were able to add some accretive acquisitions.

Great. Appreciate it, guys. And congrats on getting the deal done. Obviously, you created a lot of value and a good customer experience. So hopefully, T-Mobile can take the ball and run with it to keep serving the territory.

Thanks, Ric.

Yes. Thank you, Ric.

Our next question comes from Zack Silver with B. Riley.

Congrats on getting the deal done. [Technical Difficulty]

Zack, we are having trouble hearing you.

Our next question comes from Hamed Khorsand with BWS Financial.

So first off, just wanted to ask you, what drove you to actually just completely -- almost completely use the cash for dividend versus holding on to some for M&A or some sort of target? Is it M&A more a long-term focus than anything else?

Yes, Hamed, We do plan to hold on to some of the cash to make sure that we will be fully funded for our internal business plans today, or specifically keep investing in Glo and Beam. So I expect to end the year with about $200 million of cash on hand that will allow us to fully fund the negative free cash flow in '22 and '23. As far as for M&A, by targeting net leverage of 2x, we have the ample capacity to fund small- to medium-sized acquisitions with additional debt and still have leverage, call it, in the 3.5x range. Anything more transformative, as Dave talked about earlier, would probably be funded partially with debt, but we may have to consider potentially monetizing towers and/or issuing equity to do that.

Okay. And my other question was as far as the Glo Fiber and the Beam is concerned, what kind of penetration rates are you forecasting as you expand?

Yes. Our terminal penetration rates for Glo are in the 36%, 38% range; and for Beam, it's in the low 30% range.

And can you get there immediately?

No. But it's -- this is telecom, right? So you got to build the infrastructure first and then add subs as you go. So we'll -- we're going to every quarter post you and shareholders on where we are in each of our markets, in each of our new product launches and initiatives so that you can take note of the mile markers as we pass them.

Our next question comes from Howard Rosencrans of VA.

Congratulations on the sale. You're guiding to 11% top line and close to 30% OIBDA in '21, is that due to an expense drop? Or is that just a function of sharply higher margins or Glo and Beam getting closer to maturity? Or what is it that bridges that?

Yes. Howard, the growth is mainly due to the 2020 broadband data net adds. We had a record year. And by record year, we had almost 3x as many broadband net adds in 2020 than we've had in the past 2 or 3 years. So most of the revenue growth and adjusted OIBDA growth is driven by the subs that we've already acquired.

Okay. And where do you -- and where are you now in terms of -- you said your goal is 700, I apologize. Where did you end the year approximately?

About 230,000 homes passed, I believe.

We'll give you more detail on that, Howard, in the fourth quarter call.

Okay. And this will take -- and the plan will take -- and in a few years, you -- and in the next 2, 3 years, you expect to get to 700,000 with a big CapEx spend?

Yes, that's right. And hopefully, a little more than that.

Okay. And just a couple of more housekeeping questions. The special dividend, is that return of capital [ on vision to be ]?

Howard, we'll have to check our accumulating earnings and profits and determine how much that would be income versus return of capital. I don't know that answer, as we speak.

Okay. And a really ignorant question, I apologize. What happened to Wireline? Did you sell that already?

Howard, we combined segments in 2020. So Wireline is now in the Broadband segment, along with our cable operations, our Glo Fiber product and our fixed wireless Beam product.