Uniti Group Inc.

Good morning and welcome to today's conference call to discuss the Unity and Windstream merger announcement in Unity's first quarter 2024 earnings results. My name is Michelle and I'll be your operator for today. Today's call is being recorded and a webcast will be available on the company's investor relations website, investor.unity.com beginning today and will remain available for 365 days. At this time, all participants are on a listen-only mode. Participants on the call will have the opportunity to ask questions following the company's prepared comment. It is now my pleasure to introduce Bill DiTullio, Unity's Vice President of Investor Relations and Treasury. Please begin.

Good morning, everyone, and thank you for joining today's conference call to discuss the merger between Unity and Windstream. as well as Unity's first quarter 2024 results. Speaking on the call today will be Kenny Gunderman, our CEO, and Paul Bollington, Unity's CFO. Slide numbers referenced on today's call refer to the Unity and Windstream merger investor presentation. Before we get started, I would like to quickly cover our safe harbor. Please note that today's remarks may contain forward-looking statements. These statements include, but are not limited to, statements about the benefits of the proposed transaction between Unity and Windstream, including future financial and operating results, statements related to the expected timing of the completion of the transaction and combined company plans, and other statements that are not historical facts. Any forward-looking statements contained in today's discussion and materials speak only as of the particular date or dates indicated in the materials. Unity does not undertake any obligation to update or revise any of this information, whether as a result of new information, future events, or otherwise. Numerous factors could cause actual results to differ materially from those described in the forward-looking statements. For more information on those factors, please see the section titled forward-looking statements in the presentation and the risk factors section of the proxy statement that we will file in due course with the SEC. Please also note that Unity and Windstream will file a Form S-4 registration statement with the SEC that includes a proxy statement and prospectus regarding the transaction. Investors are urged to read the proxy statement and prospectus when it becomes available because it will contain important information about the transaction. In addition, Unity and Windstream and their directors and officers may be deemed to be participating in the solicitation of proxies in favor of the transaction. You may find information about Unity directors and executive officers in the company's most recent proxy statement. You may obtain a copy of the merger proxy statement and prospectus when it becomes available through the SEC website, Unity's and Windstream's websites, or by requesting a copy from either company's investor relations website. More information on how to request these documents is available in the investor presentation that accompanies this call. With that, I would now like to turn the call over to Kenny.

Thanks, Bill. Good morning, everyone, and thank you for joining. We're excited to announce that we've signed a definitive agreement to combine Unity and Windstream in what we believe will be a transformative transaction for both Unity and the digital infrastructure industry. On today's call, Paul and I will walk you through the details and strategic rationale for the transaction before turning to Q&A. Starting on slide five of the merger presentation, the combination of Unity and Windstream will create a premier insurgent fiber provider in the United States, serving more than 1.1 million customers with a particularly strong presence in the Midwest and Southeast. There's no other company in our industry besides Unity that will have the mission-critical fiber reach especially in less competitive Tier 2 and 3 markets, positioning Unity for growth well into the future. With an enhanced balance sheet and free cash flow profile, we'll accelerate fiber-to-the-home deployments with the option to expand builds by up to a million additional households. Importantly, the combination will also remove several dis-synergies that exist in the current landlord-tenant structure while aligning the two companies' capital allocation objectives. Additional value creation opportunities will result from meaningful annual synergies and greatly enhanced strategic optionality. Turning to slide six. Under the terms of the agreement, Unity shareholders will receive approximately 62% of the outstanding common equity of the combined company. Windstream shareholders will receive $425 million of cash, $575 million of preferred equity, and common shares representing approximately 38% of the outstanding common. Certain of Windstream's largest shareholders, including Elliott, which is also a current holder of Unity's equity and debt, will be rolling substantially all of their investment value in Windstream into the combined company. The implied valuation we're paying for Windstream using our non-affected share price from February 16th, the price prior to press reports on the rumored transaction, results in an attractive 5.3 times EBITDA multiple and 4.7 multiple on a synergy-adjusted basis. Upon closing, both companies' debt silos will initially remain in place, and the combined company will become a taxable C corporation. Though Unity will no longer maintain corporate REIT status following the closing of the transaction, the REIT structure has served Unity well historically. And as we've said before, it has had many financial and strategic benefits. For example, with this transaction, Unity's REIT status has permitted us to structure this merger in a way that is intended to achieve a substantial tax basis step-up. Although we don't expect to maintain corporate REIT status upon closing and the combined company will not be taxed as a REIT, we may restructure certain of our subsidiaries to qualify as REITs, thus potentially providing additional tax savings while preserving strategic optionality. The combined company will retain the Unity name with our corporate headquarters remaining in Little Rock. I'll continue as CEO of the combined organization, and Paul Bollington will continue in his role as CFO. We're also pleased that certain key members of Windstream's management team will remain with the combined company. In fact, Drew Smith, Windstream's CFO, is with us today to participate in Q&A. Drew will also be participating with us in various upcoming investor conferences. The new combined company will be well supported by a deep bench of commercial and residential fiber expertise from both companies. The five-person Unity board will remain in place and Elliott will have the right to select two new board members. Two additional new board members will be jointly selected by Unity and Elliott, resulting in a new nine-person board. Including the dividend we declared yesterday, We will have distributed dividends totaling 45 cents per share for the 2024 tax year, which is more than our current estimated minimum required distribution. As a result, and given that the new business will have substantial value accretive internal uses for our capital, we'll be suspending our common dividend going forward. However, we will consider reinstating a common dividend in the future as appropriate. Please turn to slide seven. We believe that having an owned, scaled fiber network has material, competitive, and financial advantages. This is particularly true when you're a first mover into Tier 2 and 3 markets by building and operating fiber with a true insurgent go-to-market approach. We've proven this consistently with our predictable mid-single-digit growth in our Unity fiber and leasing businesses over the past few years. By combining our fully owned 57,000 route mile kinetic network with the kinetic opco business targeting 4.3 million households, we're now expanding the successful strategy into fiber to the home. Importantly, we expect that the combined company's current operating plan will be fully funded and that we will have the ability to expand the fiber to the home build by up to a million additional households in our existing markets. Windstream's wholesale fiber business fits very strategically with Unity Leasing and Unity Fiber. With a combined 217,000 fiber route mile network, the business will be a leader in both reach and technology while offering unique routes that differentiate us from competitors. Our Southeastern-focused Unity Fiber business will also have a greater growth potential given the more expansive coverage that the Windstream field resources will bring to bear. I'll talk more later about the managed services business business known as Windstream Enterprise, but while it is not core to our fiber infrastructure strategy, there are many value-accretive options that we intend to pursue with that business. Turning to slide eight, before going deeper into the business, let's zoom out for a moment and talk about why Unity is doubling down on fiber. We've been saying for some time that fiber is the mission-critical asset in communications infrastructure, acting as the connective tissue for all current and future broadband delivery. There are currently more use cases for fiber than ever before, driving bandwidth usage exponentially higher. Today and in the future, fiber to the home will be one of the most robust use cases, and this transaction will make Unity a direct and material player in this space. The digital transformation era of the last several years was the first time high bandwidth consuming applications and uses were available on a broad scale to both consumers and businesses. Said differently, millions of users were finally armed with connections that could deliver one gig speeds, driving enormous amounts of traffic onto fiber networks. Importantly, the digital transformation era was also the first time that broadband was truly revealed to be a mission critical asset. During the pandemic, had it not been for things like remote work, telemedicine, and the ability to stay virtually connected socially, our society simply would not have functioned. Looking ahead to the next few years as we now enter the generative AI era, all of these trends will be compounded with the advent of things like autonomous vehicles, robotics, the metaverse, and many others. Slide nine showcases the reach of our insurgent fiber network. extending into unique and highly defensible areas, a strategic advantage that positions Unity to meet the surging demand for high-speed broadband. Including connected buildings, fiber-to-the-tower and small cell connections, connected POPs and data centers, and the 4.3 million total homes within Kinetic's current footprint, Unity will have the potential to reach over 5 million connected on-ramps, each driving increasing amounts of bandwidth onto our owned wholesale network. Despite these millions of connections, we're agnostic as to which use cases are ultimately the winners because as a national wholesale provider, we benefit even if we don't own the last mile connection. Turning to slide 10. For those of you who aren't as familiar with Kinetic, I'd like to explain why it is such a unique fiber to the home platform that we're excited to own outright so our shareholders can benefit from the tremendous upside potential. First, fiber-to-home is indisputably a superior product from a latency and reliability perspective and will be for our lifetimes and beyond. Secondly, we believe after having reviewed many fiber-to-home business models over the years, including overbuilders, open access, and others, incumbent providers have a big advantage when providing fiber-to-the-home. Specifically, Incumbents have an embedded network benefiting from years of investment that allows for a faster fiber deployment at lower costs. And ironically, incumbents are now share takers with fiber to the home after many years of playing defense against wireless and cable. The key to an incumbent success going forward is shedding old brands and the utility mentality and replacing that with a true insurgent go-to-market approach with a focus on quality and customer service. both of which are core to Unity's success as a current share-taker in enterprise and wholesale and Kinetics in residential. Thirdly, Kinetics' footprint is diverse and spread across 18 states with over 50% of those households located in the southeast. We believe the southeast is a terrific place to invest from a competitive and demographic point of view, as evidenced by our success at Unity Fiber. Just as importantly, 75% of Kinetics' footprint has 20,000 or fewer households, reinforcing another core tenant of Unity's focus on Tier 2 and 3 markets. Next, Kinetic is also building fiber passings at what we believe to be an industry-leading cost of approximately $650 per passing. It's important to dwell on this for a moment. Prior to starting its fiber-to-the-home expansion with Unity's GCI program in 2019, Kinetic invested close to $500 million building fiber to the D-SLAM. This investment not only provided Kinetic the ability to provide a highly competitive DSL product with 100 meg speeds to over 40% of households, it has also given Kinetic a head start or a jumping off point to build distribution fiber and drops as part of the final fiber to the home build. This investment not only highlights the cost and time to deploy benefits at Kinetic, but is also a good reminder of another strategic advantage of bringing together the two companies. Unity will not only own the fiber to the home connection, but also the middle mile and ultimately the backhaul network. Having a fully owned and operated network will not only provide superior customer service, but will also help us competitively. As we've highlighted the past few quarters, some of our largest wholesale customers recently have been fiber to the home providers spending substantial dollars procuring backhaul. Kinetic will be able to avoid substantial backhaul costs which we believe equate to roughly 20% of the total cost of building fiber to the home for others. Owning the backhaul network will also be a tool to disincentivize overbuilders from entering our markets, as in many cases our backhaul market is the only one available. This helps segue into the final point to highlight on Kinetic. Only 15% of the footprint today has a true overbuilder, and that has held relatively constant for the last five years. We certainly don't expect this number to grow in the future given we're increasing our presence in offensive posture on a combined basis. If you pick the right markets, build fiber first, you can enjoy the benefits of favorable competitive dynamics for many years to come. Moving to slide 11, you can see the numbers behind why Kinetic's fiber-to-home business has such significant upside potential. Kinetic's been demonstrating strong success the past few years. Initial penetration levels on early cohorts have consistently averaged between 15% and 18% in the first year, increasing to above 25% on average by the second year. Recent cohorts have been demonstrating initial penetration rates of up to almost 30% as Kinetic has really ramped up a more customer-focused, digitally enhanced, local go-to-market strategy. As I said earlier, and as Kinetic is beginning to demonstrate, an insurgent mentality really matters and can move the needle on penetration and churn. The predictable results from initial market builds and subsequent penetration levels are right in line with Unity's anchor lease-up economics, and another reason why we're excited to be entering this space. Kinetic is currently targeting building fiber to 1.9 million homes by 2027, which would result in over 40% of the footprint being overbuilt with fiber. Given the very rural nature of this footprint, achieving over 40% coverage with a disciplined and profitable model in Kinetic will be a significant achievement. With that said, we believe on a combined basis, Unity and Kinetic can expand this build by up to a million additional households, achieving fiber coverage of over 60%. There are a number of reasons for this, but it's primarily driven by having true owner's economics, especially being on the precipice of the B program launching. Over the next 12 months, we'll spend more time refining the new build plan and we'll report more on that as closing approaches. Slide 12 highlights that another exciting aspect of this transaction is combining our Unity leasing business with Windstream's wholesale business. The backhaul network I mentioned earlier that will be important to Kinetic's success has terrific shared infrastructure potential. There's an excellent growth opportunity in national wholesale fueled by the use cases I referenced earlier including and especially generative AI. Today, Unity sells mostly dark fiber and we're beginning to light more and more inner-city routes to become a player in the growing Waves market. Windstream Wholesale is already a meaningful share-taker in the Waves market and has a national network that is highly complementary to Unity's existing network. Thus, on a combined basis, this transaction accelerates our national wholesale strategy by approximately four years. and it also enhances our relationships with the increasingly important hyperscalers. Unity's consolidated bookings during the first quarter were 0.6 million of MRR. However, not included in our bookings number is the dark fiber lease revenue from two large deals that closed in the first quarter with one of our hyperscaler customers. These deals represent approximately 20 million in total contract value and will greatly expand our network in one of our key metro markets in the southeast, providing Unity with substantial new network assets it can lease up to other customers. These 20-year contracts include approximately $16 million of upfront lease revenue that under GAAP accounting rules will be recognized upfront at the time of delivery, which is likely late 2025, early 2026. As a result, there were substantial new sales in the quarter that are not reflected in our bookings number. Going forward, we plan to specifically call out deals of this nature that largely get excluded from our traditional bookings metric, as the hyperscalers in particular often desire to structure their transactions in this fashion for their internal purposes. To be clear, the underlying attractive shared infrastructure economics to Unity are no different than a traditional booking. As I foreshadowed on our last earnings call, we've seen multiple sizable new contract wins from hyperscalers, including the one I just covered. Some of those wins have continued into the second quarter. As a result, consolidated bookings for April are shaping up to be one of the largest months on record for Unity, with close to 500K of MRR expected in April alone. Going forward, the combined company will have many distinct Tier 2 and 3 inner-city routes, which we think will be particularly appealing to the hyperscalers. This consistent strategy of building and lighting fiber on Tier 2 and 3 routes and in Tier 2 and 3 markets across wholesale, enterprise, and now residential positions Unity as a share-taker for years to come. With that, I'll now turn the call over to Paul.