Liberty Global plc
Q2 2020 Earnings Call Transcript

Published: 4 Aug 2020

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Liberty Global Second Quarter 2020 Investor Call. This call and the associated webcasts are the property of Liberty Global and any redistribution, retransmission or rebroadcast of this call, or webcast in any form without the expressed and 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 Web site 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 statements 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 facts. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risk include those detailed in Liberty Global’s filings with the Securities and Exchange Commission, including its most recent filed Form 10-Q as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or any condition on which any such statement is based. I would now like to turn the call over to Mr. Fries.

[Mike Fries:]

Thanks operator, and welcome everyone to our Q2 results call. First of all, I hope you’re each safe and well and as always, we appreciate you joining us today. Our plan is to run through the slides and prepared remarks for about 20 minutes or so to be sure you're level set on the key messages this quarter and then we'll spend the majority of our time answering your questions. As usual, I've asked a handful of the key execs to join me on the open line and I'll be sure to get them involved in the Q&A session as needed. I'll kick it off on Slide 4 for those who are following along with a summary of the key highlights from the quarter. It's a pretty comprehensive slide so bear with me I want to be sure to hit each point. Beginning with a few remarks and how we've been navigating the COVID-19 pandemic. Obviously, this is on top of everybody's mind so I'll spend couple of minutes upfront and then we'll get into some more color and detail to the course of the presentation in Q&A. Clearly, our primary focus has been and remains the safety and wellbeing of our people, 85% to 90% of whom continue to work from home like most companies you've heard from working from home can and does work and we're no exception, of course. In our case you have to balance that but they need to be in the field, building and maintaining plant and installing and servicing customers. We're also governed by different local regulations and protocols in each country. Most of which have required that we open up offices slowly and carefully and that's exactly what we're doing. As we get back to normal, everyone in our sector is working on bottling the magic, so to speak, whether it's record customer satisfaction levels or faster, more agile ways of working and I am really excited about the progress we're making here, which I think is going to be definitely positive for us down the road. Now while the macro environment in Europe has been severely challenged by COVID-19, the region on the whole has weathered the crisis pretty well and better than many expected. As anticipated Eurozone GDP fell 40% in the quarter and 12% sequentially, but there's some bright spots there, not the least of which is, by all accounts, a pretty effective handling of the pandemic. All of our core operating markets in Europe have successfully flattened the curve with daily confirmed cases anywhere from 75% and 95% below peaks in March and April and fingers crossed staying pretty constant just as impressive, while every death is tragic mortality rates have fallen to levels at or near zero in most of these countries. If you contrast that with the U.S., it's pretty striking. The crisis has also brought the region together. In addition to stimulus measures rolled out at the national level, the EU recently adopted €750 billion recovery fund designed to help businesses rebound, reform those economies hardest hit and protect against future crisis. It appears that the confidence both among consumers and investors seems to be on the rise. You can see that in the euro’s recent strengthening against the dollar by about 10% since mid-May. Against this backdrop, our business continues to perform well, very well in fact, fueled by record NPS levels, lower churn, robust and reliable networks and significant steps to give customers more, more speed, more data and more content and that's a theme I know you've heard from, heard about from many of our peers. In our case, broadband net adds were the highest we've seen since Q3 ‘17 and customer additions, driven mainly by the UK were the best we delivered in over two years. And we had a modest impact on reported revenue and Charlie is going to dig into that in a bit, nearly all of that shortfall occurred in low or zero margin line items, which allowed us to deliver better than anticipated EBITDA and operating free cash flow. The later was up 14% year-over-year. Not surprisingly, we’re reconfirming our original 2020 guidance and quite frankly, we hope to achieve those levels. Pushing gears, I'm pleased to report that our UK JV with Telefonica is off to a great start. As we reviewed in our last call, this will be a transformational deal for the UK, our respective customers and for shareholders, it's a win, win, win as we like to say. And after a couple of months of pre-merger planning, my excitement level for this combination is even higher. And I can review all the details again. I'll just remind you that we're talking about GBP6.2 billion in synergies, a great valuation for Virgin Media going into the deal and expected proceeds to Liberty coming out of the deal about £1.4 billion. I'll talk about the fixed mobile convergence in a moment on the next slide. But when you combine the UK’s fastest broadband network with the country's largest and most admired mobile company, the long-term value creation opportunity is extraordinary. It’s also good to hear that the teams are working extremely well together, the financing is falling into place and the regulatory process is underway. So everything is on track for the completion of this deal. So couple of additional points here on capital allocation. As we indicated on our last call, we definitely front loaded our buyback activity into the first half of the year. And what you would expect us to do given the price volatility and that means we’ve already purchased around 715 million of stock in the last year five months. To preemptive question I know you're going to ask, we don't have any announcements today about adding to the buyback program. We're always reviewing those options, of course, but we have 250 million remaining on the plan and we'll be putting that to work for the time being. And then finally, our treasury teams were really active in the capital markets this year, refinancing over 10 billion of debt, extending our tenant over seven years and reducing our fully swapped borrowing costs to 4%. So to recap and delivered strong subscriber results, EBITDA and operating free cash flow are ahead of consensus and we're confirming our original guidance for 2020. And then of course, we're making great progress on the JV with Telefonica in the UK. Speaking of the UK, I thought it would make sense to revisit the fundamental logic underpinning this deal and the other fixed mobile combinations we've orchestrated recently. This is a very clear and powerful strategy at work here. Since 2015, we've completed or announced five, six mobile mergers with a total deal value of over $80 billion. And in each case, the fulcrum asset was our broadband network build over the last two decades through organic growth and national consolidation. In certain of those transactions, we enabled the creation of the fixed mobile champion through the sale of our cable operations to a mobile only player and that was the case of course for our Australian Business and T-Mobile for $2.2 billion or 11 times EBITDA in 2017 and the more recent sale of our German business along with some smaller operations to Vodafone for $22 billion or 11.5 times EBITDA. These were highly accretive deal for us where we were exiting at premium multiples and banking significant returns on our long-term tax efficient investments in these markets. You've all seen the numbers. But by all accounts these were also homerun deals for Vodafone and Deutsche Telekom, because whether you're a seller or buyer, fixed mobile convergence works. In fact, I think it's one of the most important strategic developments I've seen in Europe in my 30 years. It drives scale, it drives massive synergies, it drives sustainable cash flow and ultimately, it drives better valuations, which is why in Belgium, Holland and the UK, we chose to create our own fixed mobile champions, by acquiring or combining with a mobile player in those markets. And the strategy is working brilliantly for us. Slide 5 provide some numbers to support that. On the top left, we highlight the scale of our combined operations today in these markets. In Belgium and Holland, we surpassed the incumbent in fixed BDC services and we're number one in broadband and TV. And in both cases, we're gaining share in mobile with convergence ratios exceeding 40% and growing. In the UK, we’ll start to JV with the number one share in mobile and on footprint we’ll be number two in TV and number one in broadband. We know that roughly 80% of Virgin customers are using someone else's mobile product today and are highly interested in a converged bundle from us. And as we continue to expand the reach of our gigabit broadband network, we'll reach more and more to customers. Now scale also drives strategic leverage and opportunity in these markets. What does it do? It enhances our ability to shape the political and regulatory agenda, which we all know is critical and it puts us in a position to take advantage of ancillary opportunities in areas like content and new services and infrastructure. Not surprisingly, it shouldn't be and VodafoneZiggo was the first to launch 5G. It's also not surprising that VodafoneZiggo success with fixed broadband is anchored by one gig rollout and the strongest sports franchise in Holland. Telenet similarly acquired a free to air channel is now launching a new Belgian Netflix to supplement its OTT content offering. It also recently announced a project to the largest utility company in Flanders to own and control the network of the future. And the merger of those two in the UK makes our previous expansion and network expansion strategies and infrastructure and monetization ideas even more compelling in my view. Second, as you've seen, synergies in fixed mobile transactions are a significant source of value creation. Just in the three deals where we remain directly involved, Belgium, Holland and the UK, announced synergies total over €12 billion on an NPV basis. And as we've demonstrated again and again, these synergies are real, achievable and sustainable that we've never missed a synergy target. And in Belgium, we've excluded expectations and in Holland, we expect to do the same. This bodes really well for the UK and accrues the benefit of shareholders of course but also the customers as we get smarter, faster and more responsive to their needs. Fixed mobile mergers also generate real growth anchored by stable free cash flow. And you can see that on the top right of the slide. In the case of Belgium and Holland, we were able to turn around the EBITDA trajectory and even more important deliver significant distributable free cash flow of over €4 billion. These results are derived from what are increasingly predictable outcomes. The realization of synergies, better customer experiences, reductions in churn, increases in NPS, and the inevitable repair that occurs over the longer term when markets rationalize and consolidate. And lastly investors, particularly in Europe, are assigning higher valuations to fixed mobile platforms. On the bottom right, we show you half dozen examples, including companies like Swisscom, KPN and Tele2, you can add your own or take these off, it's up to you. But on average, these stocks are trading at 8 times EBITDA with operating free cash multiples in the mid-teens and mid-single digit levered free cash flow year. So clearly, skill, synergies and stable free cash flow are desirable investment characteristics, especially when you're a national champion or national challenger. This underpins our perspective interest in public listing to be frank where it makes sense for us in certain instances to try to take advantage of these market valuations, partly because higher evaluations, and greater transparency and sustainable free cash flow should support our own valuation at the parent company regardless of whether you look at us on some of the parts basis, or you use proportionate EBITDA or operating free cash flow, or if you focus on levered free cash and the annual dividend streams we collect from these high margin operating assets. Speaking of operations, we have our usual updates for each operating company in the presentation for your information. In the interest of time, I'm just going to hit a few high points here from each market and then we can address any questions, your thoughts you might have during the Q&A. I'll start with Virgin Media. We expect all accounts have a strong quarter of 24,000 fixed customer additions, including growth on both the Lightning and BAU footprint. These results are supported in part by reduction in churn and 33,000 broadband ads, which we estimate to be 75% of all broadband ads in the UK. This customer ARPU was impacted by COVID, particularly pausing on the premium sports but on a normalized basis, ARPU was flat. We had a 93,000 home through Lightning footprint in the quarter, bringing our cumulative bill to 2.3 million and total gigabit-ready homes in the market to 15 million. Nobody has a faster or more robust network than Virgin Media, it's not even close. And Virgin had another strong quarter on mobile with 85,000 postpaid adds on the back of their Oomph quad-play bundles, adding 3 points to the fixed mobile ratio. Lutz and the team I think are really starting to hit on all cylinders and that sets us up really well leading into the merger with those two. The Swiss market remains highly competitive by the way and you know that, which is why we’ve invested last year in nationwide 1 gig rollout and our new video platform and digital initiatives across the customer operation. Good news is these investments are beginning to pay-off with commercial momentum building in Q2 and operational trends improving. For example, NPS is at an all-time high and sales in June actually exceeded, both last year and pre-COVID levels. We also announced an agreement with Swisscom that rationalizes sports in the market and ensures that each of our customers will have access to both Telelub and MySports going forward. And as you've heard us in many times, we're particularly focused on free cash flow in this market. And you'll see that operating free cash flow is up 10% in the quarter, which supports our full year forecast of $170 million of levered free cash flow. Strategically I can say we remain opportunistic you'd expect me to say that this market still requires rationalization. By the way, we don't think the announcement by sunrise and salt to jointly build some fiber over the next five to seven years if they can get their financing to do that, changing much of anything really. We already reached 75% of the country we’re giving the speed, so the competition had to articulate some sort of plan, which is what we think that adds up to. Moving to Telenet, they have a strong quarter on a number of levels with their best broadband and digital TV net add since 2015, customer ARPU’s rose 2.4% year-over-year that was supported by a higher proportion of fast broadband and quad play subs. Speaking of quad play, the fixed mobile base now stands at 600,000 and the total conversions ratio or mobile attach rate exceeds 40% in Belgium. While there was a revenue impact from COVID, particularly handset sales and advertising underneath it all you'll see that subscription revenues are growing in above target that's a good thing. Not surprisingly Telenet confirmed the 2020 guidance they gave in April and it stuck to its original free cash flow and dividend forecast for the full year. And finally, VodafoneZiggo also performed well through the pandemic. The investment in networks and infrastructure continues with nationwide 5G coverage now available and new 20 year spectrum license just acquired a few weeks ago. The rollout of 1 gig is also back on track with nationwide coverage slotted for the end of 2021. Our VodafoneZiggo’s results in the second quarter were solid. The team managed to mitigate the revenue impact of COVID in the mobile space, mostly roaming related with 6% ARPU growth in the fixed business and proactive cost controls, which drove normalized Q2 EBITDA up 6%. So as a result, VodafoneZiggo also reiterated their full year guidance, including positive EBITDA growth and $400 million to $500 million of free cash flow available for distributions to shareholders. Now, before I hand it back to Charlie to talk through the financial, I just want to take a moment to switch gears here and recognize the passing of one of our board members, a dear friend and mentor to me, JC Sparkman. You might have seen his obituary in the Wall Street Journal. I’d just say JC was a legend in the cable industry. In John Malone's words, TCI was built on the JC’s back over the 25 years that he was Chief Operating Officer and he brought that same energy and operating wisdom to our board over the last 15 years while he was part of Liberty Global family. He will be sadly missed by all of us. I don't want to end on a side note but I just want to be able to make sure I have a moment to recognize him and his great contributions to our company over the last 15 years. With that, Charlie, over to you.

[Charlie Bracken:]

Thank you, Mike. I’m on the slide entitled Q2 impacted COVID 19. Overall of our 4.3% Q2 consolidated year-on-year revenue decline we estimate that the COVID impact is roughly 4% or around $110 million. Within that, we estimate that the reduced revenues from premium sports accounted for $34 million and increased late charges around $8 million. B2B fixed and mobile impacts were around $19 million and reduced mobile running and reduced handset sales contributed $17 million and $10 million respectively. We also saw reduced revenues at our Irish and Belgium broadcast businesses, which we estimated $21 million. So when you consider the estimates of the covered impacts, the revenue trend is actually in line with recent quarters. We estimate that the impact of COVID on adjusted EBITDA in the quarter was minimal. Many of the impacts such as premium sports and mobile handset revenues are low margin and we also benefited from reduced churn and lower sales and marketing expenses, which help to offset more material impacts. As a result, we believe that our Q2 adjusted EBITDA growth rate was in the aggregate largely unaffected by COVID. On the on the next slide entitled group overview, we show the key financials for the group. Despite the revenue decline of 4.3%, adjusted EBITDA declined 0.4% for the quarter versus the decline of 3.6% in Q1. Property and equipment additions were 21.6% of sales in Q2 and without the impact of Lightning we’re 18.8% of sales. As a result, we saw strong operating free cash flow growth with pre Lightning construction OFCF for the quarter at $678 million, a 12% year-on-year improvement and after Lightning CapEx, $601 million, up 18.3% year on year. Group liquidity remained strong at $9.8 billion. And at quarter end, our gross debt was 5.3 times adjusted EBITDA and 3.8 times net. Having completed a number of refinancings in Q2, our average debt tenor remains beyond seven years with an average cost of 4%. On the page entitled P&E additions, we provide more detail around our CapEx, which we continue to analyze in five major buckets. COVID did have an impact on our CPE spend, which was down 34% year-on-year. However, with the upgrade of our set top box and Connect Box estate, we expect to see a reduction in spend in this category even without the impact of COVID. Despite COVID, we continued to invest in the other CapEx categories and lay the platform for future growth. Project Lightning build volumes were down modestly year-on-year, but we still constructed 93,000 homes in the quarter. Cost of premise trended down with the cost of premise at £636 in the quarter versus £655 cost per home across the project to date. Capacity investment was down 18% as we benefited from the completion of a large spectrum upgrade in Belgium and much of the one gig upgrade in the UK. We increased our spend in the product roadmap 18% supporting our mobile platforms in the UK and Belgium, as well as the IT investments required to drive digitization efficiencies. Baseline, which is our major platform maintenance category, was broadly in line with previous years. In the aggregate, we spent $1.2 billion in the first half of the year or around 22.2% of sales. Without the Lightning construction CapEx, this figure would have been 19.1% of sales. And with the completion of significant projects in the connect and video space, as well as the major capacity and IT upgrades behind us, we expect that our capital intensity excluding Lightning to remain below 20% and turn lower in the coming years. Turning to the divisional overview, which breaks down the figures by our key major subsidiaries and provides a roadmap to analyze the free cash flow of our major assets. The UK and Ireland saw revenue decline in the first half of 2.1%. Adjusted EBITDA declined 2.5% and OFCF was strong at $749 million before the Lightning construction CapEx and $573 million after. Underlying that remains a strong cash flow generating asset despite our new build investment. It also benefit some significant tax loss carryforwards, meaning a higher free cash flow conversion on its OFCF than for example Belgium. In line with the previous as a whole, Belgium revenue in the first half declined 2.8% but reported positive adjusted EBITDA growth of 2.2% and operating free cash flow of $428 million. They recently confirmed that free cash flow guidance at the lower end of the €415 million to €435 million. As Mike discussed the repricing in the Swiss market continues to put pressure on the top line. And despite operating efficiencies, adjusted EBITDA declined 12.9% in the first half. OFCF in the period was $140 million and we remain confident that for the full year they’ll realize around $170 million of attributable free cash flow at today's exchange rate. As Mike highlighted, the standout performer of our major assets was VodafoneZiggo. Despite COVID in the first half, they reported 2.6% revenue growth, 8.1% adjusted EBITDA growth and increased OFCF to $562 million. Turning to the adjusted free cash flow for the group as a whole, after the first six months, operating free cash flow before Lightning CapEx was just under $1.3 billion. We had a half year interest of $600 million and cash tax of $57 million. The joint venture paid interest on the shareholder loan of $22 million for the first six months, and we expect the remainder of our 50% of their €400 million to €500 million projected shareholders distributions in the second half of the year. Working capital for the first half was negative $323 million consistent with previous years. And we expect that working capital impacts to be broadly flat for the full year. As a result, adjusted free cash flow before Lighting CapEx was $315 million and after CapEx $139 million. We remain confident subject to no major further disruptions from COVID of realizing our full year free cash flow target of $1 billion even after Lightning construction CapEx. So in conclusion, the UK JV with Telefonica remains on track. We’re continuing to navigate through COVID-19 but so far the impacts have been manageable. And despite COVID, we were able to achieve record high NPS in Q2 on positive customer additions. We’re encouraged by our first half financials and actually optimistic for the remainder of the year. We are confirming all of our 2020 guidance metrics based on no return to the full lockdowns that we saw between March and May and assuming a gradual economic recovery. Given the uncertainty of this backdrop, we're not raising our guidance at this time, and we'll take questions now.

[Operator:]

The question-and-answer sessions will be conducted electronically [Operator Instruction]. And we'll go first to Steve Malcolm with Redburn.

[Operator:]

We’ll go next to David Wright with Bank of America.

[Operator:]

We'll go next to James Ratcliffe with Evercore ISI.

[Operator:]

We’ll go next to Robert Grindle with Deutsche Bank.

[Operator:]

And we'll take our next question from Nick Lyall with SocGen.

[Operator:]

We'll go next to Matthew Harrigan with Benchmark Capital.

[Operator:]

We’ll go next to [Multiple Speakers] Christian Fangmann with HSBC.

[Operator:]

We'll take our last question from James Ratzer with New Street Research.

[Mike Fries:]

Yes. Well, thanks everybody. I know we’re at of the top of the hour here a little bit past. So, appreciate you joining us as always and appreciate your support. Hope you stay well and safe for the rest of this summer. We've got a lot of positive things happening, we talked about those today, the UK transaction on track, great performance, all things considered through all of our markets in this COVID pandemic period and we're coming out of it with a lot of positive momentum. So, look forward to talking to you in November. Take care.

[Operator:]

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