Liberty Global plc
Q4 2020 Earnings Call Transcript

Published: 16 Feb 2021

[Operator:]

Good morning ladies and gentlemen and thank you for standing by. Welcome to Liberty Global’s fourth quarter 2020 investor call. This call and associated webcast are the property of Liberty Global and any redistribution, retransmission, or rebroadcast of this call or webcast in any form without the express written consent of Liberty Global is strictly prohibited. At this time, all participants are in listen-only mode. Today’s formal presentation materials can be found under the Investor Relations section of Liberty Global’s website at libertyglobal.com. After today’s formal presentation, instructions will be given for a question and answer session. Page 2 of the slides details the company’s Safe Harbor statement regarding forward-looking statements. Today’s presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company’s expectations with respect to its outlook and future growth prospects and other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed in Liberty Global’s filings with the Securities and Exchange Commission, including its most recent filed Forms 10-Q and 10-K as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based. I would now like to turn the call over to Mr. Mike Fries.

[Mike Fries:]

Thanks Operator and welcome everyone. Appreciate you joining us today. As this is our year-end call, we’ve got a lot of ground to cover - I’m going to apologize upfront for the length of the remarks, but all my key execs are on the line and I’ll be sure to get them involved in the Q&A. Then as usual, Charlie and I will be speaking from slides which are available on the website, so hopefully you can access those and follow along. I’m going to begin on Slide 4 with some 2020 highlights. By any measure, this was an extraordinary year for us, for our employees and our customers. Nobody was immune to the effects of COVID-19 in 2020, including us as you’ll see, but we were lucky - lucky to have some strong antibodies, so to speak, that emanated from the critical role we play in the lives of our customers and which allowed us to meet or exceed nearly all of our own internal forecasts that we established pre-COVID. Families, schools, hospitals, businesses big and small saw the reliance on stable and robust connectivity rise to unprecedented levels. Average upstream and downstream traffic in January was still 90%, and 50% above year-ago levels, so we’re still in this and doing quite well. As with any crisis, so many operating lessons were learned; for example, the importance of putting our people first with flexible work arrangements, constant communication, and attention to their wellbeing. We also experienced the goodwill that comes from going the extra mile for our customers and our communities with more speed, more data, more entertainment, and essential and low-cost access plans. We quickly identified the significant benefits of accelerating the digital road maps we were already on for customer sales, care and attention. It’s also fair to say that throughout the year, there was an underlying flight to quality among connectivity customers which really played to our strengths. We already deliver the fastest speeds, the most reliable services, fixed mobile bundles and better customer experience than our competition, and as the customer puts a higher value on these factors moving forward, we’re committed to the investments and the innovation required to solidify that position. You’ve seen that happening our fixed mobile transformation, our launch of 1-Gig broadband everywhere, our investments in digital customer journeys, and our commitment to new connectivity and entertainment projects, which I’ll talk about here. With all that said, perhaps not surprisingly 2020 was a strong year for us operationally and financially. There’s a summary table on the right side of this slide with the key numbers, but I’ll just highlight a few things, beginning with a significant increase in subscriber growth. We added over 80,000 new fixed customers in the year, reversing the trend of customer losses which stood at 74,000 last year, and broadband net additions, perhaps one of our most important measures of growth, were 242,000, up threefold from 2019. We even saw growth in postpaid mobile adds to 513,000 despite shop closures throughout the year. Now there were plenty of key drivers behind these results; for example, all operations saw reduced churn and higher MPS, and that provided a tailwind. This was particularly evident in the U.K. where we delivered consistent growth on our BAU footprint and of course in new build territories. We also saw consistent sales and net add improvement in Switzerland every quarter, continuing the turnaround that began 10 quarters ago. Charlie will take us through the financial results, but the bottom line is we delivered. If you net out the impact of COVID on things like premium sports and mobile roaming, we generated positive revenue while at the same time exceeding our original expectations for EBITDA and operating free cash flow. The standout number for me and, I’m sure, for you was free cash flow, where we beat guidance with $1.1 billion this year, up nearly 40% year-over-year. You can do the math against our 580 million shares outstanding to arrive at free cash flow per share since apparently we’re discouraged from doing that for you, and you’ll see that the implied yield on our stock is attractive. Moving to the second box, there’s more good news here when you look at our Q4 results. We’ve been talking about low churn and record MPS most of the year, and this continued to drive sales and net adds higher in Q4, making it by far our best performing quarter of the year. Virgin Media in particular saw its best customer growth in 12 quarters, and in our Swiss operation UPC delivered positive broadband additions for the first time in 13 quarters, and that complements another strong quarter from Sunrise. At the foundation of this customer growth are key product launches around 1-Gig, Smart Wi-Fi, and our advanced entertainment platform - again, I’ll talk about those in a second. Despite working from home and all of the related challenges of a pandemic, we made some pretty big strides in our fixed mobile transformation here with two large M&A transactions, and you’re aware of these. I just referenced the acquisition of Sunrise, closed in November, and I could not be happier with the progress we’ve already made on leadership, integration, and commercial planning. We’ve got a rock star management team led by André Krause, who was the CEO of Sunrise, and includes Severina Pascu, who launched the UPC turnaround and will now report to André in the COO role. The Swiss synergies have been validated, commercial day one planning is well advanced, and momentum in the meantime continues to accelerate, so we should have much more to say about that in our second quarter call--sorry, on our Q1 call. Turning to the U.K., as we do quite a few times today, I’m happy to report that the regulatory review of the joint venture we announced last May between Virgin Media and Telefonica’s O2 is right on track. We’ve been heavily engaged with the CMA and feel really positive about a midyear approval. Like Switzerland, everything we’ve learned in the meantime just reaffirms our confidence in this combination financially and operationally. As reported, the Swiss and U.K. deals together represent about $12 billion of synergies on an NPB basis, and that’s at today’s FX rate, around 65% of which should accrue to us. You can do the math on that in terms of potential value creation. I’ll also just point out that as with our Belgian and Dutch integrations, we have a pretty good track record of under-promising and over-delivering on synergies. You’ve probably noticed that Vodafone Ziggo reported around 6% EBITDA growth and $1.2 billion of operating free cash flow for 2020 with all expected synergies achieved a year earlier than planned. As I mentioned on the last earnings call, Vodafone Ziggo is a great case study for how fixed mobile convergence delivers growth and stable free cash flow even before the more strategic opportunities are factored in, which is a great segue to our 2021 priorities. I’ll start with our commitment to two initiatives that are very, very important to all of us. First of all, I’m extremely proud of our work in diversity, equity and inclusion across Liberty Global, and we have been focused for some time on gender equality and supporting the less fortunate in our communities with broadband access, but we can and we will do more, so we established our first global DE&I council last year, which I co-chair, and we’ve ramped up both our internal and external work around five pillars

[Charlie Bracken:]

Thanks Mike. Turning to our consolidated numbers, I’m starting on a page entitled, Underlying Revenue Stable. Total group revenue saw a decline of 0.5% in Q4, resulting in full year decline of 1.5%. We estimate the negative impacts of COVID to be around $54 million in Q4 and around $200 million for the full year, which negatively impacted our growth rate by around 1.8%. Without that, we believe the group would have seen positive rebased revenue growth for the full year. On the right-hand side of the page, for each of the last three quarters you will see the five key areas impacted by COVID. In general, COVID impacted our business much less in Q4 than it did when the pandemic first hit in Q2. The impact of not having access to premium sports in Q2 was $34 million; however as sports started to return by Q4, the downside was only around $7 million. Handset sales and roaming revenues were impacted by the pandemic and we estimate contributed to a $16 million drag in Q4, while the impacts on our broadcasting businesses was around $6 million for the quarter. There was some impact on our B2B businesses, we estimate around $22 million in Q4, but it was largely due to reduced sales. Fortunately, to date we haven’t seen a material impact on bad debt and late charges on either our B2B or consumer businesses. On the next slide, we provide details of our adjusted EBITDA. For the full year 2020, we delivered minus-3.9% adjusted EBITDA growth, which was in line with our expectations. As we called out in our Q3 results presentation, Virgin Media declined 11% rebased versus Q4 of 2019. This was driven by $7 million of costs related to the O2 merger and some other growth investments, particularly $21 million in the accelerated digitization and on-shoring of our custom content platforms as well as an $18 million increase in marketing, which did result in accelerated subscriber growth. The remaining difference versus Q4 of 2019 was the impact of end of contract [indiscernible], network taxes, and deferment of our price rise from Q4 to Q1 2021. Swiss trends continued to gradually improve with a 7.9% decline in Q4, partially explained by a 4% drag from $10 million of costs to capture [indiscernible] synergies. While Sunrise’s rebased has not improved since completion [indiscernible] financials, the standalone business is reporting around 2% full year growth based on the historical IFRS reporting policy. Turning to operating free cash flow, we delivered 5% operating free cash flow growth for the full year, which is in line with our guidance of mid-single digit growth. This is despite $26 million of cost to capture, which is equivalent to more than 1% of growth. Our capital intensity declined to 22.5% in 2020 or 19.6% excluding capex related to Project Lightning, and but for cost of capture in Switzerland, all markets would have returned positive OFCF growth year-on-year. The standout was [indiscernible] de-consolidated joint venture in the Netherlands, which grew 9% year-on-year, delivering $1.2 billion of operating free cash flow. Turning to our 2020 free cash flow results, we delivered 39% growth or $300 million compared to 2019 and reported $1.1 billion of consolidated free cash flow, ahead of our $1 billion guidance. This is despite some currency headwinds versus guidance assumptions and a $6 million drag from working capital which we generally believe [indiscernible] a telecom company such as ourselves. Our cash flow was further suppressed by the $329 million of capital expenditures related to our U.K. network expansion, Project Lightning. On the page entitled, 2021 Outlook, we provide details of our expectations for our key assets going forward. Given that we fully expect our U.K. business will be deconsolidated into a joint venture by midyear and that Vodafone Ziggo and Telenet already provide standalone guidance, going forward we’ll provide our key financials guidance not on a group consolidated basis but for each business unit. At the group level, we’ll be guiding only to consolidated free cash flow, which we expect to grow more than 25% to $1.35 billion for 2021 based on the assumption that the JV closes at midyear. In the U.K. and Ireland, we expect to return to top line growth despite an increased year-end impact from end of contract [indiscernible], although cost of capture synergies will weigh on adjusted EBITDA and OFCF growth. For the full year, we expect standalone [indiscernible] to decline low single digits across both metrics. We also expect a return to revenue growth in Switzerland for the combined UPC-Sunrise business, though expect a low single digit adjusted EBITDA decline and a mid-single digit OFCF decline, and that’s because we’re spending over Fr 150 million of costs to capture synergies, but on the underlying business we think there will be growth. Telenet, our Belgian operation, has garnered 1% to 2% adjusted EBITDA growth and continued free cash flow growth, expected to generate €420 million to €440 million. Vodafone Ziggo, our Dutch JV [indiscernible] 1% to 3% adjusted EBITDA growth and will increase year-over-year cash distributions to shareholders [indiscernible] range of €550 million to €650 million, or $677 million to $800 million. With that, Operator, over to questions.

[Operator:]

[Operator instructions] All right, we’ll take the first question from Robert--oh, excuse me, James Ratzer--pardon me. It is going to be from Robert Grindle with Deutsche Bank.

[Operator:]

All right, once again that is star, one to ask a question. If you find your question has been answered, you may remove yourself from the queue by pressing star, two. The next question is from Christian Fangmann with HSBC.

[Operator:]

All right, the next question is from James Ratzer with New Street Research.

[Operator:]

All right, the next question is from Michael Bishop with Goldman Sachs.

[Operator:]

All right, the next question is from Nick Lyall with SocGen.

[Operator:]

The next question is from David Wright with Bank of America.

[Operator:]

The next question is from Polo Tang with UBS.

[Operator:]

We’ll take the next question from Steve Malcolm with Redburn.

[Operator:]

The last question is from Andrew Beale with Arete Research.

[Mike Fries:]

Anyhow, I’ll close it out just briefly. Appreciate everybody joining the call. We felt it was a difficult year for everyone on the planet, and we feel fortunate to have come through it with pretty strong operating and financial results, and as I mentioned in my remarks, results that mostly have continued through this year It wasn’t a one-off in our minds, there’s a lot of momentum going into 2021, and thus far we’re seeing that momentum continue, which is a really positive indicator for Q1. Strategically, I think we’re focused on the right things. The ventures portfolio, give it a look. It’s not something we’re sharing with you because there’s nothing else to talk about. We really believe that there is underlying value, we’ve made smart investments. These are investments that enable our opcos and our operating businesses mostly, and that’s something to be taken under consideration, and there could be more coming. As ever, we’re working on the value gap, doing our best to both execute on the business but also be sure strategically and financially we’re making it clear to investors where we see the value in the company. Appreciate your joining us, and we’ll speak to you soon. Take care.

[Operator:]

Ladies and gentlemen, this concludes Liberty Global’s fourth quarter 2020 investor call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global’s website. There you can also find a copy of today’s presentation materials.