Windstream Earnings Call Insights: HoldCo & Costs, Capital Structure Improvement

Windstream Corp (NASDAQ:WIN) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

HoldCo & Costs

Michael Rollins – Citigroup: Two questions if I could. One is, can you give us some examples on – some more specific examples – I know we have this holding company structure that can help the Company whether it’s improve your cost of capital, or improve your tax efficiency, just to increase the familiarity with what you’re doing for investors? And then secondly, if you could talk a little bit on the cost side, as you’re looking at the business, do you see another incremental opportunity to take costs out? I realize that you talked before that it’s an ongoing process for the Company, but just wondering if you’ve uncovered any new opportunities or anything that you could size for us?

Anthony W. Thomas – CFO and Treasurer: Good morning, Michael. This is Tony. I will get it started on the HoldCo and costs and then the other team members can add in as necessary. When you look at HoldCo – at this point, let me just reiterate, we are simply exploring what is involved in revising this corporate structure and it provides the benefits that I discussed. But at this point, we don’t want to speculate on potential scenarios. But I did want to point out the rating agencies will basically provide a rating on the structure in its entirety. So, I think that’s important to note. And ultimately, the reason why we are evaluating HoldCo – Windstream has been very acquisitive in the past and right now we kind of have a clear day; we are really focused on integrating PAETEC and given the relatively good performance in the credit markets, coupled with limited regulatory activity we thought now it would be a good time to go out there and pursue HoldCo. So really nothing beyond the prepared remarks I gave in terms of, it enhances our strategic flexibility going forward and it could be credit enhancing to our secured lenders, that’s another point. In terms of costs, we continue to make headway managing our costs. We are on track to achieve our PAETEC synergies. That’s showing up in our OIBDA results. Year-to-date OIBDA is down less than 1%. In the back half of the year, we will stay focused on achieving the remainder of our synergy goals but also managing our interconnection expense. That’s probably been the one area we have over achieved year-to-date and it is an area we think we should be able to improve on in the back half of the year. But generally that’s just ultimately Windstream has been about in the past, just good cost management. So no secret sauce; just day-to-day execution by all of our leaders.

Brent K. Whittington – COO: Yeah, the only thing I might add to that Tony is the systems investments we are making, Michael, in terms of the PAETEC billing conversion, the provisioning in back office, I mean, that’s an initiative around here we know is going to drive operational excellence and we really believe a lot of our teams are going to gain some efficiencies as a result of that. And that’s just continued fine tuning in our cost structure in a lot of customer facing and critical areas where I think we can really improve our service levels, but also gain efficiencies in the future.

Capital Structure Improvement

David Barden – Bank of America Merrill Lynch: Just one quick follow-up on that Tony. Obviously, anything that Windstream can do that could be credit-enhancing would be obviously I think we see pretty well. Could you be more specific about how this HoldCo actually could be credit-enhancing for the organization that would be helpful? And then second just on kind of the enterprise comparisons. I think you guys are happy with the 2% year-over-year growth, but for a couple of quarters now it’s been sequentially declining and I think you called out carrier spending on transport as a potential area of weakness in the second half and obviously that’s a contributor to this business revenue category. So, how are we thinking about the potential inflection in that because if it kind of continues this direction, it will be negative growth by the fourth quarter? So, some color on that would be super helpful.

Jeffery R. Gardner – President and CEO: David I’ll jump in on your first question on HoldCo. Windstream has an operating company that is a guarantor in its credit facility, so it’s structurally supporting it and this this operating company basically coordinates all of the shared services across the Company. So, if we were to implement HoldCo, we would move that shared service obligation to the Windstream Corporation level, basically improving the credit profile and subordination of basically those payables and other associated costs. So that’s how you can improve your capital structure.

Brent K. Whittington – COO: On the revenue side, David. I mean, this is Brent, I’ll take that question. I guess, a couple of comments on that. I mean, are we happy with the 2%? Reasonably, I mean, we are shooting to really do some things that accelerate that. I mean, we talked about that previously and we were hoping to hire few more sales people. We saw some promise late in the first quarter, but just haven’t seen consistently good trend there. Nothing terribly disappointing, but not quite to the levels we hoped for and that’s one of the reasons we talked about on our call is just some of the softer sales environment. A bright spot worth mentioning though, on product sales we had great success in the quarter. We grew that $10 million sequentially and seeing very, very strong demand there. I mentioned on the data center side where we doubled our team, significant increase in year-over-year sales and that’s been real happy to see. But you are right, if you look at the sequential decline, a lot of that is directly in that carrier line item. We have a couple of things there. One, we are seeing a full year-over-year impact from the disconnects that we’ve referenced to be even going back to really the third quarter and fourth quarter of last year. I feel like we are through a chunk of that, but still have some fiber towers that we are working to deliver, but then secondly, it’s just been a softer transport sales environment. I don’t know that we are alone in saying that, but it certainly has been a real noticeable area here and we are doing all the right things in terms of product rollout to try to accelerate that but that’s definitely an area where we are seeing some pressure. We remain focused on it and are not given up by any means, but that’s the driver you referenced.

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