Lumen Technologies, Inc.

Greetings and welcome to Lumen Technologies' second quarter 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question and answer session. At that time, if you would like to register, please press the 1 followed by the 4 on your telephone. If you require operator assistance at any time during the conference, please press star 0. As a reminder, this conference is being recorded Tuesday, August 3rd, 2021. It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, France. Good afternoon, everyone, and thank you for joining us for the Lumen Technologies Second Quarter 2021 Earnings Call. Joining me on the call today are Jeff Story, President and Chief Executive Officer, and Neil Dev, Executive Vice President and Chief Financial Officer. Before we begin, I need to call your attention to our safe harbor statements on slide two of our 2Q 2021 presentation, which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements on slide two and the risk factors in our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures that can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings material, all of which can be found in the Investor Relations section of the Lumen website. With that, I'll turn the call over to Jeff.

Good afternoon, everyone, and thank you for joining today's call. It's an exciting day for Lumen, and we have a lot to cover. I'll begin today's call with our recently announced transaction, including the just-announced sale of a portion of our legacy local exchange business to Apollo, I'll then ask Neil to review a few second quarter highlights, as well as provide a preliminary view of the expected effects of these transactions on Lumen's financial profile. And, of course, we'll reserve time for your questions at the end of the call. So let's jump in. Last week, we announced the sale of our Latin American assets to Stonepeak at a value of $2.7 billion, representing an approximately nine times multiple of the Latin American business's 2020 estimated adjusted EBITDA. There are more details about this transaction in the release materials, but the simplest way to think about LATAM is that we will transfer ownership of substantially all our LATAM-based customers and assets to Stone Peak and are entering into a services agreement with Stone Peak to continue to serve the needs of our enterprise customers based outside the region. Subject to customary regulatory approvals, we expect this transaction to close in the first half of 2022. I'm also pleased to share that we've agreed to sell our legacy local exchange business in 20 states to Apollo for $7.5 billion, representing a multiple of approximately 5.5 times our 2020 estimated adjusted EBITDA. In short, with this transaction, we are transferring to Apollo all our legacy local exchange assets in 20 states, along with the consumer, small medium business, state and local government, education, and wholesale customers served by those assets. Lumen will retain ownership of our non-local exchange fiber assets in those 20 states, including our long-haul fiber and the enterprise SELAC assets. Lumen will also retain our legacy local exchange assets in another 16 states. In the transferred markets, the service needs of Lumen's enterprise and government customers will be met under a network services agreement to be entered into with Apollo. Subject to customary regulatory approvals, we expect this transaction to close in the second half of 2022. I'm very pleased with the valuations we were able to achieve with these two sets of assets. On the whole, our retained markets have significantly higher fiber penetration, population density, enterprise demand, and overall growth opportunity than the transferred assets. We have spoken about the sum of the parts analysis of Lumen, and I believe multiples of 5.5 times for these 20 states and 9 times for LATAM should shine a bright light on the relative value of our retained businesses. Don't get me wrong, the 20 states we're selling to Apollo are good markets with quality assets, talented employees, and excellent customers. As we looked at these states, though, we knew that we were unlikely to prioritize investments in these markets ahead of our other opportunities in enterprise and quantum fiber. After closing of this transaction, approximately 70% of our remaining mass market footprint is well-suited for quantum fiber investments. This transaction will allow the transferred assets to get the higher level of investment we know they can sustain, and we are committed to partnering with Apollo to help them realize their vision for these markets. As I mentioned on our analyst back in April, we have worked very hard over the past three years to transform our company, both financially and operationally. We committed to driving growth over the Lumen platform and continue to transform the business. These transactions are fully aligned with that strategy and we believe will drive future growth as we meet the needs of the fourth industrial revolution for enterprises and consumers alike. Undertaking these transactions allows us to simplify our business, deliver differentiated products to a higher percentage of our customer base, and target our capital investments to drive higher growth and more attractive long-term returns on both the Lumen platform and through our quantum fiber investments. Of course, the transactions create pressure as well. While the sale of the consumer assets is expected to have a positive effect on our product mix day one after close and an improved growth profile going forward, the high levels of cash flow these markets generate will be free cash flow dilutive in the near term, even at these strong valuations. Even so, we are confident that these transactions are right for our business over the long term and will improve the growth profile of our company. Neil will cover some of the operational financial impacts, but let me take a moment to speak to the implications of these transactions to our capital allocation strategy. First, we absolutely expect to accelerate the pace of our growth investments in quantum fiber. By retaining the 16 states we have, fiber-based consumer and mass market services remain a huge opportunity for us and we have built a differentiated offering with Quantum Fiber, enabling an all-digital customer experience that uniquely positions us among mass-market broadband providers. As Neil will discuss, our Quantum Fiber results are bearing this out, as we saw another quarter of net ads for our fiber and higher-speed offerings, continuing results from previous quarters. The jury isn't out on this one. When we invest in consumer fiber, we take share and we drive profitable growth. As I mentioned, upon closing the Apollo transaction, approximately 70% of our remaining mass market footprint will be the sort of urban and suburban markets that are best addressable with quantum fiber solutions. We are developing an accelerated build plan, and we'll share those details as they're finalized. What we can tell you today is that while we remain strategic and disciplined in our approach, we expect to build faster and with more scale in the markets that we prioritize for quantum fiber investment. We also believe we have a unique opportunity to grow our enterprise business by leveraging our expansive fiber network to provide essential transport services and further penetrating our on-net buildings. utilizing our edge computing network to move critical workloads closer to the source of data and the use of data, and expanding the capabilities of the Lumen platform and enabling greater digital consumption of our services for all of our customers. I'm the first to acknowledge that we're not yet seeing the pace of growth that we expect from these initiatives, but we remain confident in the opportunity and are streamlining our focus and further investing to drive that growth. Second, I expect we will manage our balance sheet to remain more or less leverage neutral over the next few years as we accelerate investment into our growth initiatives. Longer term, I believe the previously articulated leverage range is the right one for our business, but I'm prepared to allow the timeline to achieve that range to extend as we work through this investment cycle. Further, beyond fully investing in the growth of our business, we're mindful of being opportunistic in considering share repurchases. We are not choosing share repurchases over funding growth. Even as we scale the quantum fiber build and the lumen platform investments, we expect to have excess capacity to consider opportunistic share repurchases. If we can do so in multiples, it will be accretive to long-term share value. To that end, we've also announced today approval by our board of a $1 billion buyback program. Lastly, the dividend. We have long stated that we believe return of cash in the form of a dividend is an appropriate capital allocation vehicle in a business like ours. However, with these transactions, the profile of our business is changing and will change rapidly going forward as we lean into investing for growth and continuing to rationalize the portfolio. I do realize that will put pressure on our dividend after we close these transactions and the further we get into our investment program. But as of now, we are not faced with that trade-off decision and will continue to balance the return of cash to shareholders through dividends and buybacks while we accelerate our investment in enterprise and quantum fiber growth. Let me provide a small bit of color on my views on the second quarter results. While we worked hard to get these transactions announced, we remain very focused on driving performance in those areas that we believe provide the best opportunity for growing revenue and strong returns. That said, our second quarter revenue trends were sluggish. We've talked about the slow sales in the fourth quarter and the beginning of the first quarter as a result of COVID and delayed decision making. Since then, we've seen good sales growth sequentially and believe our growth initiatives across the Lumen platform will help us improve our revenue trends as we move forward. Before I turn the call over to Neil, let me offer a few points in summary. We're excited about the two transactions we've announced. We're pleased with the valuations that have also done these transactions to drive investment and operational focus within the remaining business, sticking to the strategy we discussed since launching Lumen and Quantum Fiber last fall. At 5.5 times on the light business and 9 times adjusted EBITDA on the left-hand business, we believe the valuations highlight and support our view of the sum of the parts for the remaining business. While we already operate one of the world's most extensive and powerful fiber infrastructures, we will continue to invest in growth via the Lumen platform, cloud edge initiatives, and to accelerate deployment of quantum fiber. We believe the recently announced transactions were executed at excellent valuations and are aligned to our strategy of streamlining our business to those markets on which we are best able to profitably invest in growth. With that, I'll turn the call over to Neil to provide a few more details on the quarter and some of the expected effects from the announced transactions. Neil?