Liberty Global plc
Q3 2020 Earnings Call Transcript

Published: 6 Nov 2020

[Executives:]

Michael T. Fries - Liberty Global Plc Charles Henry Rowland Bracken - Liberty Global Plc Lutz Markus Schüler - Virgin Media, Inc. Joost Baptiest P. Coopmans - Liberty Global Plc

[Analysts:]

Vijay Jayant - Evercore ISI Michael Bishop - Goldman Sachs Benjamin Daniel Swinburne - Morgan Stanley & Co. LLC Steve Malcolm - Redburn (Europe) Ltd. Matthew Harrigan - The Benchmark Co. LLC James Ratzer - New Street Research LLP Andrew Beale - Arete Research Services LLP Christian Fangmann - HSBC Trinkaus & Burkhardt AG

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Liberty Global Third Quarter 2020 Investor Call. This call and the associated webcast are the property of Liberty Global and any redistribution, retransmission, or rebroadcast of this call or webcast in any form without the expressed or written consent of Liberty Global is strictly prohibited. At this time, all participants are in a 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 slide 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 recently 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.

[Michael T. Fries - Liberty Global Plc:]

Thanks, operator, and welcome, everyone. There's quite a bit going on the world, so we certainly appreciate you spending an hour with us. We'll try to make it worth your while. Charlie and I will handle the prepared remarks today, and then I'll get other execs involved in the Q&A as we normally do. I would be referring to slide as we walk through the quarters, so hope you can grab those off the website and follow along with us. And I'll kick it off on slide 4 with some key highlights from the quarter. And this should get you level set on most of the main issues, many of which we'll come back to in this presentation. But let me start with the pandemic, as we've discussed throughout the year, while we're not immune to the effects of this global crisis, of course nobody is, we continue to deliver solid operating and financial results, largely in line with or in some instances better than our original expectations for the year. And I'll talk about that a bit on the next slide. Obviously, this has been a busy year for us on the M&A front and we're excited to be on the verge of closing our acquisition of Sunrise in the Swiss market. You would have seen that around 97% of the shares were tendered to us, which is a great result and we'll facilitate the de-listing and merger process. We also just received all regulatory approvals which means we're targeting completion of the transaction actually next week. And in a few slides, I'll spend just a minute revisiting the strategic and financial benefits of this combination which are significant. We're also making steady progress on the completion of our JV with Telefonica in the UK. The teams are working extremely well together and have already validated the £6.2-billion synergy estimate. They've developed strong commercial day one plans, and of course the transaction is now fully financed. I've got to tell you, we're even more convinced today that this will be a fantastic deal for customers, employees and shareholders. And all we're waiting for now is regulatory approval which as we've said should be mid next year. And you can see some highlights of our Q2 results on the right side of this slide. We delivered strong customer growth in both fixed and mobile, which I'll talk about in a second. And we saw modest declines in revenue adjusted EBITDA and operating free cash, and Charlie will drill down on those figures but we are largely on plan for the year, which means we're managing through both the expected headwinds we identified at the beginning of the year and the unexpected impacts of COVID pretty well. And that's one of the reasons we're confirming our original 2020 guidance today, in particular mid-single digit operating free cash flow growth and $1 billion of adjusted free cash flow, both of which are benefiting from continued declines in capital intensity. Now, you no doubt noticed that we added $1 billion to our buyback program today. This will give us the flexibility to be opportunistic for the remainder of this year and also give us the capacity to continue shrinking equity and driving levered free cash flow per share in 2021. And then finally, I just want to say how encouraged we all are by our employees and how well they're managing through this pandemic. And we've consistently made their safety and well-being our number one priority. And as a result, we're seeing record engagement levels across our markets, which is a good segue to the next slide, where we talk a bit about the COVID-19 pandemic, which has in many ways highlighted some of our own strengths. Beginning of course with our networks, which have remained resilient in the face of increased utilization, both upstream and downstream, and have plenty of remaining capacity. I just – I can't express how important this is for the families and students and hospitals and schools and businesses that we serve. It certainly helps explain why we're experiencing some of the highest NPS levels we've seen across our core markets and allowed us to support our customers with more data, more speed and more content, while at the same time supporting our communities with programs like Virgin Media's Essential Broadband and Telenet's Digital Lifeline services that are targeted to the more vulnerable among us for whom connectivity is even more important. I'd also point out that COVID has forced us to accelerate our investment in other areas of our business like digital. We've talked about this. When customer care centers were disrupted and shops were closed, we need to lean on our digital platforms to drive things like online sales, which are up 10% in most markets and now represent nearly half of our sales in the UK, for example. We also ramped up our digital care and support platforms, which helped drive call volumes down 30% in markets like Switzerland. And I'm sure you've heard from other operators, the COVID headwinds were less severe in Q3 than in the prior period. The return of sports, improved roaming traffic and growth in both fixed and mobile subs helped our results. More recently, however, we've seen a return to more stringent lockdown and social distancing protocols in Europe as infection and positivity rates have spiked. To be fair, this could impact our medium term outlook. But I'd point out a few things. Most of the measures are intended to be short-term in duration, two weeks to four weeks typically. And generally they're more moderate and more targeted than last spring. And after six to seven months of this, businesses and consumers are more prepared this time around. So I hope, as I said before, is to build on our improved relationship with subscribers, regulators and politicians, and to make sure we come out of this period even stronger and more customer focused, and I think we will. And the pandemic has also reinforced the fact that our strongest customer proposition is connectivity, fixed and mobile, fast and reliable, and intelligent and adaptable connectivity, including also the integration of incredible features, content and applications. And on slide 6, you can see that our broadband results reflect that with 71,000 net additions in the third quarter, that's up six-fold from a year ago. And we saw strength across our footprint. Belgium had its best result in five years. The UK delivered solid growth on both the Lightning and the BAU footprint, and Switzerland had its first positive month in September in a very, very long time. Now we know that speed leadership still matters in these markets and that our investment in fiber deep, smaller node and DOCSIS 3.1 is paying off. I remember the debates we all do around the question of who needs 100 megabits at home. Well, today, nearly 100% of our UK customers are taking 100 megabits or higher, with average speeds of 166 meg across the footprint. By the way, that compares to 46 meg in the rest of the UK among other operators. Across Europe, around 50% of our subs are taking products of 200 meg or higher. And then you add to that the fact that we are gigabit ready across 32 million homes and actively marketing gigabit services to about 45% of those. And we're in a very strong position here. There's no question that broadband is also impacted positively by our fixed mobile strategies across our markets, where convergence continues to grow. In Holland, over 40% of broadband subs take a mobile product from us after about three years. Now, we'll talk a lot about the strategic and operating rationale of a fixed mobile convergence in Europe. We've done that, we'll continue to do that. And there's really no better example than VodafoneZiggo in Holland. There's a chart on this slide and I apologize, it's a little small. But it shows the complete turnaround in revenue and EBITDA growth that the team has achieved over the last three years. In 2017, the company's revenue and EBITDA declined 3.7% and 5.6%, respectively. Those numbers have improved steadily every year, with the revenue and EBITDA actually in the nine months of this year up 2.5% and EBITDA up 7.5%. And there are several factors that contribute to this, including of course a significant synergy target that was achieved a year early. But equally important is the positive impact of higher NPS and reduced churn levels from fixed mobile subs. That's anywhere from 50% to 80%. And the scale that VodafoneZiggo has in the Dutch market is also critical, right? It's now larger than KPN in broadband, fixed voice and entertainment services, and is generating €400 million to €500 million of distributable cash to shareholders this year. The other major factor here is continuous innovation across our product and technology roadmaps. In Holland, VodafoneZiggo is rolling out a nationwide 1-gig network. They were the first to rollout 5G and they've embraced our Horizon entertainment platform. And that sort of innovation is occurring across the European footprint. It all begins with network superiority in markets like the UK, for example, where Project Lightning has been a resounding success. In fact, we've included the latest figures in the appendix of this deck, so check them out. And we continue to be bullish on continued expansion of Lightning. We're also working on a clear path to 10G or 10 gigabits per second using a combination of HFC and fiber-to-the-home. The pace of innovation of 5G mobile is equally critical, with VodafoneZiggo and Sunrise and others leading the way in their markets. Robust and reliable network support innovation and connectivity, which is where this all begin. And we've led the way with smart and intelligent WiFi and better, faster and cheaper CPE. And then finally, our entertainment platform continues to delight customers with the best user interface, seamless integration of apps, voice control and tons of other features. And importantly, Horizon has also laid the groundwork for our migration to an all IP video services platform with our Apollo box. This is network agnostic, app-centric, portable and low cost. This is where the entertainment business is headed and we're leading the way again in Europe. Now, our success in Holland and Belgium really underscore our excitement about the Sunrise acquisition, which we've recap a bit to you on slide 7. The main driver here is scale. UPC and Sunrise together create a clear number two to Swisscom in one of Europe's most attractive and stable markets, with around a 30% share across all services and a significant opportunity to grab meaningful share in B2B. Now, like our other FMC deals, the combination is anchored in best-in-class networks. Right out of the gate, UPC Sunrise will reach 90% of the fixed market with 1 gig services. They'll have leadership in 4G mobile and the largest and fastest 5G network in the country. Now the synergies are also substantial, you'd expect that with an NPV of over CHF 3 billion, about 80% of which is attributable to OpEx and CapEx efficiencies. The real opportunity here is to deliver the sort of combined financial growth profile that we've seen in Holland. I'm not saying the numbers will be the exact same, but we're convinced that scale, market strength and synergies will deliver stable free cash flow for a very, very long time. It's also worth mentioning that the both operations had a strong Q3. As you can see from the charts on the right, UPC continues to deliver improved subscriber trends, with a record sales month for mobile in September and consistent improvement in broadband. Sunrise released their results earlier today, also a very strong quarter with positive service revenue growth despite roaming headwinds, positive EBITDA growth, which reflects strong cost management. They also delivered their best quarter of postpaid mobile adds in a decade and really strong broadband and TV customer growth. So far, the pre-merger integration work here has validated the synergy estimates and clearly established the opportunity for Sunrise and UPC together to give Swisscom a run for its money. Now I'll end on slide 8 with a quick look at Liberty Global, what we look like pro forma for both the Swiss and the UK transactions. Now most of you know this, but it's really, really important to continually reinforce the narrative of how we've transformed this company. After spending over a decade, consolidating cable and chasing broadband market share, we saw the fixed mobile convergence story developing in Europe around five years ago. Around that time, the incumbent telcos started prioritizing their fixed networks and broadband growth together with wireless, and they left the other three to four mobile operators struggling to compete with their own fixed infrastructure. So they didn't have any. And that was the moment we pivoted. Where we didn't have scale, we exited the mobile-only operators like T-Mobile in Austria and Vodafone in Germany, and as you know, those deals were valued at double-digit multiples and represented huge returns on equity for us because of the value of the network and the value of the fixed customer base. In fact, you could argue today that those prices look cheap, given where infrastructure assets are trading. And where we had network and broadband scale, we decided to build our own FMC champions in four markets, right? We merged with Vodafone's mobile unit in Holland to form a 50/50 JV, and I just showed you the results there. We bought KPN's mobile business in Belgium, and Telenet today is the leading converge operator in the market. We announced the merger of Virgin Media and Telefonica's O2 in the UK to form a 50/50 JV that will be second only to BT in size and scale and poised for incredible strategic and financial upside. And we're acquiring the best mobile company in Switzerland to create the clear number two to Swisscom. When you put it all together, we have tremendous converged scale in Europe, serving $84 million fixed and mobile RGUs and generating $26 billion of aggregate revenue. That's a strong platform for value creation. And as we've shown in Holland and Belgium, each operation generates stable long-term free cash flow and represents a real opportunity for further strategic growth and potentially public listing. Certainly, Sunrise has shown us that the institutional demand for crown jewel assets on local exchanges is huge. Now beyond that, we're focused on allocating capital just as we've done thus far, right? We've announced a new $1 billion buyback program, I mentioned that. When that money is spent, we will have purchased around $4.7 billion of our stock since we closed the sale of Germany to Vodafone 16 months ago. It represents about 40% or more of those proceeds. Now, we'll look for opportunities in our remaining cable markets, Ireland, Poland and Slovakia. We'll see if there's opportunities there to pursue similar FMC playbook strategies or not. And we'll continue to invest in adjacencies through our Ventures portfolio, which we conservatively value today at over $1 billion. Let me just take a second to talk about that. We've had a really good track record with our venture investing and some recent wins. We were an early investor through our technology portfolio in Skillz, a mobile gaming platform that just got bought for $3.5 billion. That was a 10x for us. The crown jewel of our sports portfolio is Formula E race series, which we conservatively value at $0.25 billion. We have small but important interesting content platforms in our largest markets. Our infrastructure portfolio was an early investor in EdgeConneX, which was just acquired by EQT in a multi-billion dollar transaction. And we're actively pursuing ways to monetize or grow our own infrastructure and property-related assets, which is an exciting space right now. You're following that I'm sure. So looking forward, we're mainly focused on four things. Firstly, delivering stable and long-term free cash flow in our core fixed mobile markets. I've just talked about that. Looking for ways to close the value gap on those assets, which we think are a real and tangible opportunities. Investing in our own equity story through buybacks, of course we've just added more to our buyback program. And then selectively and only when appropriate, investing in adjacent and attractive opportunities. That's the strategy. So, I'm happy to take questions on any or all of my remarks at the end. But for now or right now, I'm going to turn it over to Charlie. Charlie to you.

[Charles Henry Rowland Bracken - Liberty Global Plc:]

Thanks, Mike. Turning to our consolidated numbers, I'm starting on a page entitled underlying revenue stable. Total group revenues sort of declined at 1.3% in Q3. And on the right hand side of the page, we set out our estimates of the impact of COVID and on what it has done to our underlying revenue growth, which as you can see accounts for more than 100% of the Q3 decline. In Q3, we estimated COVID reduced revenues by $41 million compared to $110 million in Q2. Of the total, premium sports accounted for around $13 million, B2B revenues were also impacted by $13 million and mobile revenues were reduced by $9 million, predominantly by roaming revenues. Broadcaster revenues accounted for around $6 million of the drag. Many of the affected revenue streams are either relatively low margin or have other compensating operating expense impacts, which is why our adjusted EBITDA growth was not significantly impacted in the quarter. On the next slide, we provide details of our adjusted EBITDA. The rebased adjusted EBITDA growth was minus 5% in the quarter, which means year-to-date growth is minus 3%. Now, we're confirming our full year guidance of mid single-digit rebased adjusted EBITDA decline, which implies a significant year-on-year decline in Q4. Why is this? Well, 2019 saw a material step up in adjusted EBITDA in Q4 versus Q3. Whereas in 2020, we expect Q4 EBITDA to be broadly flat to Q3. And this is because we have deferred the UK price rise that we typically executed in Q4, resulting in a $26-million delta. And in response to the demands of COVID, we are ensuring certain customer care operations and an accelerated investment in a number of digital initiatives. Together, this results in an increased spend year-on-year of $17 million. We expect these investments to deliver long-term savings going forward but these are after these initial setup costs. Finally, in both the UK and Switzerland, we expect to incur a premerger integration cost of $8 million and $9 million due to the pending transactions. Turning to our capital intensity, year-to-date, we continue to reduce our CapEx spend versus previous years due to the completion of many of our investments in capacity and roadmap projects, as well as a decrease spend that resulted from upgrading our customer premise equipment on our new platforms. In Q3, we reported a CapEx to sales ratio of 22.3% or 19.9% on a pre-Lighting basis. There was a reduction in new build spend in the quarter, but we still succeeded in building 125,000 homes in the UK and Ireland, contributing to a year-to-date total of 311,000 homes. We're looking to complete a further 100,000 homes in Q4 assuming our plans aren't affected by the upcoming lockdown. In Q4, we do not expect CapEx to rise as it did in 2019, and so for the full year, we estimate CapEx to sales pre-Lightning will be around 20%. Because of this reduction in CapEx, we remain on track to grow our OFCF mid single-digits in 2020, as we set out in the next page. For Q3, we reported OFCF of $552 million in the next page. The Q3 we reported OFCF of $552 million and on an pre-Lightning basis $623 million of underlying OFCF. All our markets, except Belgium that was flat, show underlying growth in OFCF versus the Q3 2019 numbers. The Netherland in particular saw very strong growth, rising from $247 million to $348 million year-on-year. We expect this underlying growth to continue in Q4 across our markets and are targeting $500 million of consolidated OFCF for Q4, including the impact of our Lightning investments up from $433 million the previous year. Turning to free cash flow. We confirm our guidance of $1 billion of free cash flow for the full year, increasing from $542 million year-to-date. Turning now to key drivers to achieve this. We expect no further material interest payments in Q4 in line with previous years and tax payments will be minimal. We expect to receive the balance of the shareholder distributions with VodafoneZiggo, which we expect to be 50% of the upper end of their €400 million to €500 million target range. Year-to-date working capital is positive $31 million and we expect it to be broadly flat for the full year. Our underlying year-to-date pre-Lightning adjusted free cash flow was $789 million, demonstrating the continued strong cash flow generation of our businesses. Turning to our capital allocation on the next page. Group liquidity remained strong. We reported full company liquidity of $9.3 billion at the end of Q3, including $6.8 billion of cash and SMAs. Pro forma for the Sunrise transaction close, this will be reduced to $5.4 billion including approximately $2.9 billion of cash and SMAs. If you overlay the close of the Virgin Media O2 transaction, pro forma cash is expected to be $4.7 billion. And with that transaction, we will deconsolidate Virgin's revolving credit facility, leaving remaining revolvers of $1.2 billion predominantly at the UPC credit pool, resulting in total group liquidity of $5.9 billion, which will continue to provide the group with excess capital to invest. We continue to repurchase our stock and repurchased $1 billion through the end of October. Since Q3 of 2019, we repurchased 29% of our market cap and continue to repurchase further stock. As Mike indicated, we're looking to opportunistically buyback a further $1 billion through 2021. Telenet's firmed up its dividend distribution model, committing to a dividend floor of for €2.75 per share going forward. We see this current dividend distribution policy as a template for our future FMC companies as we explore local listings over time. In terms of leverage, we remain committed to our 4 times to 5 times leverage targets and are very comfortable at the top end of the range, as there is clear near-term visibility on EBITDA growth as we realized FMC synergies, which allows us optionality to delever towards the middle of the range and below over time. Both our existing FMC champions, Belgium and VodafoneZiggo are on this path, both have long dated debt with an average life of around eight years and low borrowing costs fixed at 3.4% in Belgium and 4.2% at VodafoneZiggo. Belgium leverage remains at 4.4 times on a US GAAP basis, following the execution on the synergies of its fixed mobile consolidation. VodafoneZiggo is continuing to execute the synergies from this merger and to delever further from its current 5.25 times. We completed a number of financings in the quarter, including attractive financings in advance of closing our UK and Swiss transactions. In both the UK and Switzerland, the companies will be levered 5 times before the benefit of any synergies, with average lives around eight years and the cost of debt in the UK of 4.4% and 3.8% in UPC, which benefits from the lower underlying Swiss rates. Given the completion refinancings, we do not anticipate having to allocate any of our excess capital to further deleverage these or any of our other credit silos. In conclusion, Q3 saw strong customer and broadband performance with high NPS. The Swiss transaction has been approved and will close around mid-November, and the UK transaction remains on track. Our underlying cash flow generation remains strong, with capital intensity established below 20% of sales excluding Lighting. We are reconfirming all our 2020 guidance metrics, mainly mid single-digit adjusted EBITDA decline, mid single-digit OFCF growth, and adjusted free cash flow for the full year of $1 billion including Lightning construction CapEx. And then finally, we are announcing a new $1-billion buyback authorization. And with that, operator, over to questions.

[Operator:]

The question-and-answer session will be conducted electronically. And we will take our first question from Vijay Jayant with Evercore.

[Operator:]

We'll take our next question from Michael Bishop with Goldman Sachs.

[Operator:]

And we will take our next question from Ben Swinburne with Morgan Stanley.

[Operator:]

And we'll take our next question from Steve Malcolm with Redburn.

[Operator:]

And we'll take our next question from Matthew Harrigan with Benchmark.

[Operator:]

And we'll take our next question from James Ratzer with New Street Research.

[Operator:]

And we'll take our next question from Andrew Beale with Arete Research.

[Operator:]

And we'll take our next question from Christian Fangmann with HSBC.

[Michael T. Fries - Liberty Global Plc:]

All right, operator I think – you got it. I think that's it for us operator and I want just thank everybody for joining us. I think we're a little over an hour, unless if you're still one. So I appreciate that. Just to point out, the IR teams in London and Denver are always available for more questions and they're on standby. So feel free to reach out to them or to me, and Charlie or anybody that you'd like to chat with about this. We always appreciate your input and questions, and we look forward to talking to you in three months or so. Between now and then, please stay safe and well. Thanks very much, everybody. Take care.

[Operator:]

Ladies and gentlemen, this concludes Liberty Global's third 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 material.