Good day, and thank you for standing by. Welcome to the TDS and U.S. Cellular First Quarter 2021 Conference Call. . It is now my pleasure to turn the call over to your speaker today, Ms. Jane McCahon. Please go ahead.

Thank you, Grain, and good morning, everyone, and thank you for joining us. We hope that you and all your families are doing well. I want to make you all aware of the presentation we have prepared to accompany our comments this morning, which you can find on the Investor Relations section of the TDS and U.S. Cellular websites.

Thanks, Jane, and good morning. Before speaking about the balance sheet and our funding strategies, I want to make you aware of the change present to the TDS Telecom. Starting this quarter disclosures will now be presented at the sales segment, and the wireline and cable segments will belong to reported . We believe this change not only aligns with how we manage the business and evaluate operating performance today but also enhances the visibility into how TDS Telecom is performing against its strategic objectives. The combined view better depicts our progress and success in leveraging a single cost base to become the preeminent broad...

Operator...

The change in segments -- I'm sorry. The change in -- yes, are you still there?

Yes. You cut out for a minute.

Okay. The combined view better depicts our progress and success in leveraging a single cost base to become the preeminent broadband provider in each market in which we operate. The change in segment reporting has no impact on the net income of TDS Telecom in prior periods and have been conformed -- and prior periods have been conformed to the current presentation. You will notice that we have made enhanced disclosures of our progress in building out fiber-to-the-home in our presentation today so that you can more closely follow our progress in this very important initiative. Also, in terms of the results and impacting year-over-year comparisons, I want to remind everyone that we have a higher tax rate in 2021 compared to 2020 due to the income tax benefits of the CARES Act, which provided a onetime rate benefit in 2020 that does not recur in 2021. Regarding our balance sheet, both TDS and U.S. Cellular are taking action to lower interest expense, given the favorable market environment. In April, TDS and U.S. Cellular both announced redemptions of select senior notes. TDS is redeeming $225 million of its 6.875% senior notes and $300 million of its 7% senior notes, and U.S. Cellular is redeeming $275 million of its 7.25% senior notes for a total of $800 million. We will continue to look for ways to avail ourselves of other low-cost financing vehicles to further lower our interest expense. As we've discussed on prior calls, maintaining financial flexibility is one of the pillars of our corporate strategy. Over the years, we have worked to retain relatively low leverage levels, long-dated debt maturities, sufficient undrawn revolving credit facilities and significant cash balances while at the same time making sure we have the financial resources we need to fund our businesses. As you see on Slide 4, at the end of the first quarter, TDS continues to have a good financial position, including ample available funding sources, consisting of cash and cash equivalents and available credit facilities. While we will be using some of our available cash and partially drawing on our TDS revolver to call the notes previously mentioned. We believe we will have ample remaining cash balances as well as excellent access to the debt markets if additional capital is required and as further steps to reduce our interest expense are taken. U.S. Cellular and TDS Telecom are currently both in investment cycles, with U.S. Cellular investing in network modernization, 5G and spectrum and TDS Telecom aggressively investing in fiber expansion. In March, TDS issued $420 million in perpetual preferred stock, which will be used primarily for funding fiber deployments and the repayment of debt. This transaction enabled us to raise significant proceeds while protecting our credit rating.

Thanks, Pete, and good morning, everyone. Flip to Slide 6. Our strategic imperatives are simple. We're designed to drive growth and improve return on capital over time. I think we're off to a really good start this year. I'm going to let Doug cover the operational and financial highlights for the first quarter, then I'm going to provide a few thoughts on strategic priorities. First, I stated on previous calls that one of our areas of opportunity is to enter into strategic partnerships, better leverage the value of our assets and to grow the business. We made progress on this objective in April by signing a tower MLA or a master lease agreement with DISH Wireless. We expect this agreement to contribute to our tower revenue growth beginning in 2022. Any details on the deal have to remain confidential, so please keep that in mind if you've got additional questions. I spoke to you last quarter about some of our new initiatives to drive growth, including a regionalized approach to drive market share and plans for our business in government and prepaid segments. We have full steam on these, and I'm pleased with our progress. And you see that in year-over-year improvement in gross additions and improvements in churn for both postpaid and prepaid. I'm also excited for the next evolution of our brand journey and our new tagline, America's Locally Grown Wireless. U.S. Cellular has always been known for its outstanding network, its branding highlights, and strong local presence we have in our markets. I think this is what sets us apart from our competition and it reflects our culture and our values. More about competition. The competitive intensity of the wireless industry remains high, and we intend to respond as appropriate. Given the total spend on the C-band auction, I'm expecting continued rational pricing, and that most of the promotional activity will remain related to devices, and I think that's a world we can live in economically. A few words on our network position. Network performance continues to be a hallmark of our strategy. We're continuing our network modernization program and our multiyear 5G deployment. We've deployed 5G over each layer of spectrum, low, mid and millimeter wave. Our initial deployment for coverage is on clean low-band spectrum via 5G available to some degree in 18 states today.

Thanks, LT. Good morning. As LT mentioned, we're off to a good start this year. Let's start with a review of customer results starting on Slide 7. Postpaid handset gross additions increased due to higher switch activity and our ability to capture a larger portion of that switcher group this year versus last year. The switcher group increase was driven primarily by March activity, which was severely depressed last year as a result of the unfolding pandemic and was bolstered this year by stimulus payments.

Thanks, Doug, and good morning, everyone. I'm very pleased with our results for the first quarter. We had strong growth in both broadband connections and revenue. Overall, we grew total organic connections for the third consecutive quarter. We added 13,000 fiber service addresses to our footprint and continue to execute on our fiber strategy. Overall, we grew our top line 4%. As Pete referenced earlier, the change to 1 segment reporting results in a combined presentation of our wireline and cable operations. We have been on a trajectory to integrate our businesses around the common strategy of providing superior broadband service and complementing that with value-added video and voice service bundling. Whether it is our markets where we have upgraded copper or building fiber or provided DOCSIS 3.1 capability, we are striving to increase Internet speeds to better serve our customers. On a combined basis, we are able to offer 1-gigabyte speeds to 55% of our total service addresses. We remain committed to our strategic priorities we've been invested in for several years. Our primary strategic objective is to provide growth by investing in our high-speed broadband services. We have a multifaceted approach to this growth that includes leveraging our existing networks and constructing greenfield fiber in opportunistic locations. With support from the FCC's A-CAM program and state broadband grants, TDS Telecom is also deploying high-speed broadband to customers in rural areas within our incumbent market. If you turn to Slide 17 of the earnings presentation, total residential connections increased 4% due to residential broadband growth in new and existing markets, partially offset by a decrease in voice connections. Total telecom broadband residential connections grew 9% in the quarter as we continue to fortify our network with fiber and expand into new markets. Bolstered by this growth, wireline broadband residential…

Thanks, Vicki. And operator, we're ready to take questions.

. Your first question comes from Rick Prentiss from Raymond James.

I want to take a look first at the guidances. At U.S. Cellular, came in strong in the quarter. And as we think about run rating that, obviously, increased the low end but kept the high end flat. I think Doug, you mentioned you're expecting maybe higher loss on equipment promotions. So as you think through that, is process service kind of at a good run rate level? And with the competitive environment, do you think you'll be able to achieve positive postpaid phone adds in future quarters and maybe for the year?

Yes. And so with respect to the run rate of our guidance, and we mentioned it in the call, the reasons we took it out with service revenue increase, resulting to miscellaneous revenues as well as favorability and regulatory revenues and rate plan mix. From a run rate perspective, selling and marketing expenses are a little bit back-end loaded towards the end of the year. And we also have some peaks in some operations expenses in the second and third quarter with heavy construction and maintenance season. So the run rate is not quite uniform throughout the year when we look at that. So again, I think we said it the reasons for the guidance in the comments. With respect to -- with the increase in subscribers, we don't guide specifically to subscribers, but we certainly -- we've stated that we are very focused on growing market share as well as growing our sub base. So I think the answer to that question is yes.

Okay. And for Vicki, on the TDS side, similar question then. Strong quarter, $81 million of adjusted EBITDA. What should we think as far as why you wouldn't be headed towards the high end of that guidance or why couldn't guidance go up? I assume there is some sales and marketing cost of service increases as you roll out more markets. But just wondering, the trends on TDS Telecom.

Yes. Thank you for that question. We did have a strong quarter. Very pleased with our quarter and where we're headed. And it's certainly -- the strong start has given us some headroom on the year. As you know, we're ramping up our construction in our fiber deployment, both within our incumbent market and in new expansion markets. And that's going to ramp up through the year. And so while I expect new growth revenue to come in for the year, we are also going to be experiencing higher costs with the launches of these new markets. Every day, we're turning up new neighborhoods. And as these come into the fold, we have the upfront costs associated with that. But we're well on track for hitting and staying within our range of guidance at this point.

And then following on, last question would be supply chain. On the U.S. Cellular side, any issues. We've heard other get on their conference calls, talked about being skittish on the supply chain. Any concerns on handset supplies, network supplies? I know LG is out of the handset business. But just as from a supply chain standpoint from U.S. Cellular, both at the network side and from TDS Telecom, it does seem like given the 150,000 service addresses added this year, it might be tough. Just kind of talk to that.

Rick, it's LT. Two drivers on the supply chain side that you mentioned, I think they're the 2 big ones that we're paying attention to. LG is the first. We are well prepared for that. Mostly, LG -- most of the LG sales are in the prepaid side of our business and we've got a fairly robust device ecosystem, so that does not concern me. I think we're well prepared that we can serve the demand that's out there. Chipset side of the house, I pay a lot of attention to. Thus far, I'm not seeing effects on our business thus far. If there are impacts, we think we can manage it. But that one, I'm paying a lot more attention to. I'm not sure if I would use the word skittish, but concerned certainly. So that one, we're kind of looking more closely at. Thus far, no impact, but that's not to say that it couldn't -- if we start to see that ramp up. Vicki, you want to answer the telecom infrastructure set?

Yes, sure. We've been watching the supply chain very carefully, and we're in constant touch with many of our suppliers. And in some cases, we've diversified our suppliers where it's made sense. And having those choices helps. But right now, I think the biggest risk I see is the lead times are getting longer. And therefore, we have to be more diligent in our forecasting and our sourcing of our product needs much further in advance. And so some of the capital spend starts to go towards building up inventory. Not significant yet but definitely something we're watching. We're sensitive to the availability of electronics and gear that's associated with our fiber build. You're thinking about heads, connectors, drives, ONTs, modems, the chipsets are in modems. And so these are kind of the areas where we're seeing longer lead times. And so our partnership with our suppliers is really important. Thus far, we haven't had any issues with sourcing fiber, and we do secure that inventory with a longer lead time. Now as I think about your second part of your question, which is we delivered 13,000 service addresses in the first quarter, but we're looking to scale up and double down on the full year of delivering 150,000 service addresses. And our construction is not without challenges or obstacles, but we expect that really to ramp up. These are complex, large projects. And so securing the contractors and the labor for building out the fiber is also a critical component of our sourcing. And as we think about planting flags in new markets, working and contracting with those suppliers continues to be critical.

Your next question comes from Phil Cusick from JPMorgan.

A couple if I can. First, LT, you talked about the market going to promotions on handset discounts. I heard you that churn remains low and then involuntary, in particular, is low. Are you seeing involuntary churn ticking up at all as the world sort of reopens? And any shifting where customers are going when they leave?

Slight upticks, involuntary churn, but I think completely in line with what you would expect when you start to see a little bit of a larger switcher pool. Answer to the second question is no, there's not a big shift in where they're going. So the -- we don't publish it but our win share and our loss share and our port ratios to different carriers has remained generally constant. So not a big shift there.

No impact from sort of cable getting more aggressive with T-Mobile showing up a little bit more in these markets?

We're not seeing it yet. I mean, I'm not suggesting that there's 0 impact. But in terms of incremental impact, I mean, thus far, we're not seeing it.

Okay. And then, Vicki, under the categories of what have you done for us lately, I heard you say that new fiber addresses will double this year versus last. I think, 150,000 you said. Can you accelerate that fiber construction further? And any sign of incumbent telcos building in some of the areas that you find attractive outside of the LEC footprint?

Yes. So great question. We're very focused on scaling up our operations. Doubling our fiber -- the number of constructed fiber locations over last year, I think, definitely shows that the organization is scaling up. And last year, we more than doubled the prior year's. So we are very much focused on how can we go faster, how can we accelerate these builds. And it's a real partnership, quite frankly, with the city -- the cities that we're building in, the support that we need from the city officials, the partnership with our suppliers and our construction contractors and then our own teams. And we're learning and we take those learnings and we put them into the next build. And of course, there's always going to be challenges as we run into different obstacles throughout the way. But we're learning and pushing our way through those. In terms of -- good question around the ILEC competitors. We were very confident in our fiber strategy, and we feel we've got a significant headstart over the other telcos that are just starting to now focus on deploying fiber. We've been doing this for a long time. We've fibered up 1/3 of our own footprint or overbuilt our own markets and we learned from that. And I think we're just continuing to accelerate our program and we've got a headstart.

Your next question comes from Simon Flannery from Morgan Stanley.

LT, you talked a little about some of the new initiatives on to focus on growth. Give us a sense of where we are in the rollout of these and the impact. When do you think we'll see the full benefits of these programs coming through in the results? Obviously, some good progress this quarter. But do you think we'll see more as we go through the year? And maybe any thoughts on just what's driving the total industry adds that we've seen here. I think you mentioned stimulus checks on one level, but any other thoughts would be great. And then, Vicki, perhaps some thoughts on the infrastructure bill and broadband funding from municipalities and others, how you think about -- is there opportunity for TDS there? Any thoughts would be great.

Simon, in terms of growth drivers, I would -- I pointed 4 and let me just kind of give you a bit of an update on each one of these. So part of the ones I talked about on previous calls was regionalization or taking a regional approach. We've started doing that, and so we started trialing different promotional activity in different regions. Frankly, think of it as doing a de-testing on a regional basis and it's working. We think we're able to pretty quickly hone down on which promotions resonate, which ones don't, which drive traffic. And so from a regional perspective, I think that, that one is working nicely. It's where I would expect it to be. And you can see some of the results in our postpaid, what we're doing from a postpaid perspective. We talked about prepaid. You're already starting to see some of the results of the greater focus on prepaid in our results in this quarter, and I expect that's going to pick up for the rest of the year. The initial focus was around life cycle management. I talked about, initially, we would reach out to our prepaid customers pretty irregular in the sense that we'd send them a note when they joined the network. We'd send them a note when they run out of eligibility, and we'd send them a note when they were no longer a customer. We're starting to become much more active around that and reaching out to our prepaid customers more often, gives us the opportunity to bring down churn. You see that in the results, gives us the opportunity to expand ARPU. And what it also allows you to do when you have churn that goes down and you have an expanded ARPU, you can get more…

Sure. On the infrastructure proposal, we're watching this as it develops. We've seen the summary information, but I think the details are still forthcoming. I think critics are taking aim at different elements. But I expect the broadband portion to likely survive the process. The total spending where it ends up may be scaled back a bit. I'm not sure, but I think it's too early right now to speculate on how specifically the build is going to drive further growth at TDS Telecom, but we're definitely watching its development. But standing back, just from additional funding from government programs, we have a long history of participating. And right now, we're currently active, as you know, in the FCC's A-CAM program. And without that level of support, we would not be able to make the economics work to build for the very remote areas that we're building right now. And as we're in the fifth year of that program, we build out to half of the 160,000 location obligation under that program. And we have more work to do under that. But we're also in active discussions with the FCC and others on extending the A-CAM program because if you recall, the star of that program was about 25-megabit speeds. And through the pandemic and the acceleration of broadband adoption and growth that we're seeing and the adoption of higher speeds, we're talking about maybe extending that program to build out to even higher speeds longer term. So -- and we're also participating in state broadband programs, the FCC's Lifeline broadband program, EBB. And so -- and also the American Rescue Plan. We're evaluating participation in that. So lots of opportunities that are in play and we can update you as we move forward.

Your question comes from Michael Rollins from Citi.

I want to go back to the comments, LT, you're making about partnerships. Just curious if you're also considering alternative strategic relationships with the industry. If you look at the direction of competition in your markets, is there an opportunity to improve the structure of your markets and to be able to just help that longer-term competitive positioning?

Simple answer is yes, Mike. I've been fairly clear on even on past calls that we're interested in a variety of different ways for us to better serve our customers, better improve return on capital. And I think that if you look at C-band, the amount of money that was spent in the industry on C-band, the amount of money that's going to be required to deploy that C-band spectrum, I think it's incumbent upon us as an industry to be creative on the way that we think about deploying that, the way we think about getting the best speeds and the best experiences to our customers in the most capital-efficient way. And so the simple answer is yes, right? We're certainly evaluating those options. These things take a lot of time. They don't just happen overnight, but that's something we're looking at.

Your next question comes from Sergey Dluzhevskiy from GAMCO Investors.

My first question is for LT. Obviously, it's great to see our lease agreement with DISH Wireless, and I understand that you guys are limited as far as what you could say. But could you maybe talk a little bit about the background of this deal, how it got to that point? And also maybe just, in general, talk about other conversations with other companies. What types of companies are you talking about potential lease agreements? Are there any nontraditional players that you're talking to?

Yes. Sergey, so I mean, how the deal came about. I mean, obviously, I'm fairly limited on what I can share. But I mean, just broadly, I think that we tried to make it fairly clear that we were open for business as far as our tower assets. I think that we have a relatively attractive value proposition. So I mean, my traditional competitors, from a wireless business perspective, I think about AT&T, Verizon and T-Mobile. And the tower business, obviously, have a different set of competitors. And so I think about our value proposition vis-à-vis those competitors a little bit differently. I think we've got the opportunity to provide better levels of customer service, faster cycle times, talked about that. I also think we have a set of assets that we can share in the form of shelters and generators and so on that some of our competitors can't. And frankly, I think that as a wireless operator, I'm also a customer of towers, and I understand what my customers want. And we're trying to take a fairly customer-friendly approach that some of our competitors don't always do. And so you put all that together, I think we're able to offer a pretty good value proposition, and clearly, that value proposition resonated with DISH. And I fully expect that, that's going to resonate with others as well. I mean we're fairly actively marketing those assets. We have a partnership with a marketing firm to help us with that. They do a pretty good job beating the bushes for potential customers, and I expect those co-location rates to go up over time. And those are dollars that drop right to the bottom line in the form of positive cash flow. So I'm optimistic about that business and we're going to keep pushing.

Great. And on a related question, your sister company, TDS Telecom has meaningfully improved its growth profile through fiber builds. And with the tower business maybe running it more like a tower company, potentially become a similar growth vehicle for U.S. Cellular, potentially enhancing revenue and profitability profile and helping increase valuation multiple on the stocks.

I mean in terms of the strategic opportunity for the tower business, I agree. I mean that's a reason we're investing in this. I think it can be an attractive driver of growth. From a revenue perspective, I would argue more importantly from the cash flow perspective, right? It's an attractive vehicle for growth for us. I mean, we talked about -- I think we've kind of covered the separate company question in the past and that's not something that we're interested in doing. I think we see a lot of benefits in the operational synergies it provides us. The interesting thing is, in the past, we really looked at those operational synergies as primarily one-sided, meaning we own towers and they provide benefit to our network organization. What we're realizing is that there's another side benefit that being a network company that uses those towers, you can provide benefit to your customers differentially. I talked about that already but I think there's upside in both sides of the tower business. And you can expect to see us continue to push on that asset.

Great. My next question is for Pete. So there were some buybacks in the quarter, minor buybacks at both U.S. Cellular and TDS. But if one marks your cellular stake to market, TDS Telecom, which is transforming into growing fiber, and cable broadband business is trading, still at implied multiple of around 3.5x EBITDA, so why isn't this a level where you guys could do a more meaningful buyback or maybe a more consistent repurchase while still balancing your other capital allocation objectives?

Sergey, thanks for the question. We've talked about, in the past, the balance that we're trying to maintain between having the dry powder to invest in all the things that Vicki and LT have been talking about today and returning cash to our shareholders through both the dividend. Don't forget about the dividend and share repurchase. And you saw this quarter that we went out and we raised some capital in a rating agency-friendly way. I'm talking about those perpetual preferred securities. So the rating is very important to TDS. It's part of our long-term sustainability of the enterprise. And so again, it's just a balance that we have to maintain. And as we ramp up the funnel that -- the fiber funnel that Vicki has discussed, we have to make sure that we've got the funds to make those investments, all the significant investments that we've been talking about here. So we're going to continue to look at that balance. And it probably will never satisfy you, but we'll do as much as we can maintaining that balance.

Great. And my last question is for Vicki, kind of on the competitive environment in the markets, particularly in the expansion fiber markets. You're certainly seeing nice broadband connection growth in those expansion markets. And I was wondering, what kind of competitive response have you seen so far from the incumbent players? And has anyone gotten particularly aggressive in some of those markets?

Right now, competitive response has been at minimal levels right now, Sergey. And I'm watching for a number of things. One, it's response from the cable company. As we go into these new markets with fiber expansion, quite frankly, we expect to share the market with the incumbent cable company. What if they've upgraded their network, we're both able to offer 1-gig speeds and we're even aiming, down the road to, offer multi-gig speeds. The ILEC or the incumbent telephone company, for the most part, we've not seen any significant competitive response from them. Now I know some companies are now talking about fiber deployment plans, but in these markets, we get in there, we finish our construction. And with our preregistration sign-ups, we have -- we get significant market share early in the first 12 months. So that strategy is working very well. The third thing we watch for, certainly, is other fiber overbuild -- overbuilders, whether they're coming into the same market or they're beating us to a new market that we have our eyes set on. And right now, that's -- I think that's the biggest focus. There's a lot of opportunity in the U.S. Our funnel, our fiber funnel is wide. And as we're looking at our most attractive markets, I thinks getting to market first is key.

There's no further questions at this time. I would now like to turn the call over back to Jane for closing remarks.

I'd like to thank everybody for joining us today, and we look forward to further updates.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.