Liberty Global plc
Q4 2019 Earnings Call Transcript

Published: 14 Feb 2020

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's Fourth Quarter 2019 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 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 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 it’s 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. Good to be back online with you, we have a lot to talk about today, so I’m going to kick it right off with some highlights, then Charlie will hit the numbers and we’ll get to your questions for the balance of the hour. I’m on slide four, which is a good snapshot of the year. I’m just going to stay upfront that there are handful of important story lined here, so bear with me. I’m going to spend a few minutes on this page. And we’ll start with the fact that we met or exceeded all of our guidance targets for 2019. You would know that revenue was largely flat year-over-year and we have had positive customer ARPU growth that was offset by a small customer loss of 74,000 and fee [Ph] based operating cash flow of 4.9 million was down 3% year-over-year. That's essentially what we forecasted it, and by the way was right on budget for us, and we widely reported the reasons for that, right, namely the turnaround in Switzerland, and the headwinds in the U.K. which we’ll talk a lot about today. And then finally, we had better than budgeted capital efficiency, which helped deliver 770 million of free cash flow exceeding our guidance. And that's a number that's up nearly 100% year-over-year. Now as we discussed for sometimes, just put these numbers in context. Europe is a more mature market today than it was five, 10 or 20 years ago. Broadband growth is slowing, that's inevitable, and the video business, while much healthier than the U.S. is flattening out in most countries. So having said that though, the opportunity to drive sustainable growth and healthy free cash flow is as real as it ever was. And to achieve that, our operating strategy is clear. Number one, we're investing in gigabit broadband speeds across our footprint, usually well ahead of the fiber guys, two, we’re digitizing the customer experience to improve cost and churn. This takes him upfront investment that works everywhere we do it. Three, we're prioritizing profitable video subscriber growth, which makes total sense as we roll out advanced set tops, integrate apps and support the bundle, and four, we're committed to driving fixed mobile convergence. There is no debate here. Fixed mobile convergence delivers significant synergies, and the winning customer strategy that improves churn in NPS, and grows market share over time. Now, by the way, some of you were wondering if we would ever be able to resize and reskill our operating model up the Vodafone deal, and the sale of Austria? And the answer is yes. You'll notice that total central costs were reduced by $170 million or 16% in 2019 with continued reductions coming in 2020, and Charlie will dig into those numbers. We also announced a partnership with Infosys to deliver the services required to our TSA partners like Vodafone, and to ensure that the revenue and costs completely align in those contracts over the next four to five years. So hopefully we would put that issue to bed. Now, continuing on this slide, last year was pretty transformational for us on the strategic front, with the sale of four markets to Vodafone for $21 billion. This transaction perhaps more than anything, highlighted the disconnect between public and private market values in Europe. The price to Vodafone, which by all accounts they were and remains thrilled with, was around 11 times operating cash flow or EBITDA all in, which is twice where our current trading multiple seems to be. The deal also validated the power of fixed mobile convergence mergers with reported synergies to them, I think around €7.5 billion on an NPV basis, and it left us with significant liquidity right, which now sits at $11 billion including $8 billion of cash. Now of course, we used a large proportion of those proceeds on capital return to shareholders, and we bought back a record amount of stock last year repurchasing $3.2 billion of our equity or approximately 15% of the company. $10.7 billion of that was through the Dutch auction tender that we completed in September at $27 per share. And to show our continued commitment, that we're announcing today, another $1 billion buyback authorization. That number might seem small to some of you, but if you go back over the last 10 years, this number is consistent with our buyback programs of the past. Usually the quantum of our buyback authorizations generally represents around 5% to 10% of our market cap and around 75% 225% of our projected free cash flow. In this case, we're right down the middle, with 8% of our market cap and 100% of our free cash flow guidance, which is $1 billion for 2020. And then the final story line here is that we're in a great position to continue crystallizing value in our core markets. I won't run through each country, and I'm not going to talk about real or hypothetical discussions, but the strategies that we might be pursuing are completely consistent with what we've been doing the last couple of years. Fixed mobile convergence works, and fixed mobile combinations are materially accretive operationally and financially to our core cable platforms. You should assume, we're always examining those options. And that's because our fixed networks are extremely valuable. We'll be one gig everywhere, many years before the incumbents and with that expansion, comes opportunities to finance, capitalize and reseller infrastructure. You should assume, we're examining those sorts of options as well. And then lastly, as we demonstrated in 2019, our operations are highly cash generative and already delivering substantial free cash flow, which as our guidance for 2020 indicates will continue to grow significantly both on an absolute basis and a levered free cash flow per share basis as we continue to shrink equity. Now that was a mouthful. I realize, and I’m happy to take questions on any or all of it, but since the U.K. is our largest market, let me spend a couple minutes on Virgin Media, and I'm on Slide five now. Consistent with the European theme I just outlined, the last 18 months have been a bit tougher in the U.K. as a result of three key challenges; first, the broadband business has become more competitive and promotional with the entire market slowing down, and we're still adding broadband subs, and holding share, primarily because we're investing in gigabit speed and network expansion, but price competition at the low end of the market has been aggressive. Second, the video market is also flattening. Sky has lost millions of satellite subs, a portion of which they've converted to now TV. We've done much better than our peers, but we're still losing video audio users, we focus on higher end customers. And third, the impact of external headwinds has been significant. In the last three years, we've incurred over £200 million in increased costs, associated with broadband tax increases, inflationary programming contracts, mobile regulation changes and other factors. And despite these challenges, as our fourth quarter results demonstrate, we are more than holding our own in this market. We deliver the highest revenue and the highest customer ARPU growth in Q4 at around 1.5% each. We had a record year for mobile postpaid sub ads, and CapEx discipline drove operating free cash flow up 26% for the full year and that's including the cost of bundling out over a -- building out over a half million new premises to Project Lightning. Just to reiterate, because I know it's on everyone's mind. Lightning continues to be a smart use of Virgin's free cash flow. We've now built over two million homes, and we're serving over 450,000 new customers, we generated £240 million of revenue, £120 million of OCF. And just as importantly, penetration rates and ARPUs are still tracking and the cost per premise declined 20% last year, which helped solidify our capital returns. Now the bigger question on your mind is the strategy moving forward for Virgin Media I imagine. And the short answer is, we're confident, that Virgin has a sound operating plan that will retain and grow customers, drive modest revenue and operating cash flow growth, and deliver significant and sustainable free cash flow over the medium term. And that's the base case. So excluding any strategic transactions we might consider in the market, and we say medium term, because as we foreshadow 2020 will be another year of unavoidable headwinds. I'm referring of course to Ofcom’s out of contract notification requirements, another increase in our annual broadband taxes, and contractual programming cost increases all of which will total about £100 million in negative operating cash flow this year. Now Lutz has his work cut out for him. But in my opinion, he’s doing all the right things. First of all he's revitalizing the talent and leadership at Virgin. The addition of Severina Pascu who transferred from Switzerland to the U.K. as CFO and Deputy CEO was a great move for us. They're going to make an outstanding team in my view. Secondly, he's focused on the right organic growth drivers, get the network to 1 gig everywhere and well ahead of the competition, who are out busy making promises while we're delivering. This is a huge strategic and political advantage for Virgin by the way. Continue pushing our fixed mobile leadership and preparing for a switch over to the Vodafone MVNO, which provides access to 5G and much better pricing, and invest in the customer experience through digital initiatives that will create better customer journeys at lower cost. All those things are working, and will work. And then obviously we continue to explore strategic options in the market. For example, there is a clear opportunity to scale up our network, and potentially look at other infrastructure related moves that create value. And by the way, everything we're doing today with lightning is self-funded at a Virgin free cash flow, and if we were to look at expanding to an additional seven to 10 million homes, we would almost assuredly see to do so off balance sheet and with third party partners or financing sources, hope that's clear to folks. Now I’m going to switch to a couple of other markets quickly here on Slide seven. The folks have asked us in the past, why would Vodafone or go to telecom? Pay us 11 to 12 times EBITDA for cable assets, or why would we acquire mobile assets in Belgium or Holland? Admittedly at lower multiples. But why would we do it? And I think perhaps the best way to answer that question, is to look at the JV in Holland and Vodafone, which after just a couple of years has achieved everything we hoped it would, and is in the process of becoming and has become the undisputed market leader in Holland. 2019 was a breakthrough year for VodafoneZiggo. They hit or exceeded all of their guidance targets, which included modest decline in fixed RGU but considerable market share gain from KPN. It was a similar story in Mobile, with VodafoneZiggo adding 269,000 postpaid subs and the incumbent going backwards. That helped drive revenue and EBITDA up 1% and 4% respectively last year so they're back to growth in this market. And the JV delivered €470 million of levered free cash flow. So put a market yield on that, and you'll arrive at a pretty meaningful equity value for both partners. How have they done that? Well they followed the same playbook that has underscored all fixed mobile mergers in Europe. They've already hit 85% of the publicly disclosed synergy target of €210 million. They prioritized product innovation, including nationwide gigabit speeds, the launch of next-gen set top boxes, product simplification. I mean they took bundles from 42,000 to 300 and a great set of content arrangements like ZiggoSport and HBO. And through a convergence they become the number one fixed broadband provider in Holland, with seven out of 10 homes taking at least one product from VodafoneZiggo. So simply put, the strategy worked. Finally, a short update on UPC Switzerland, where the business is clearly turning around, and why do we say that? Well, we had all of our internal targets for 2019, including a 40% improvement in fixed customer loss, a 40% improvement in RGU loss and revenue and cash flow results right on plan. Even in this heavy investment period, UPC Switzerland generated 300 million of operating free cash flow, and significant free cash flow or levered free cash flow. There have been four consistent drivers to our success, and this is going to start to sound repetitive, because it’s the same strategy we're deploying in all of our markets, beginning with a nationwide 1 gig launch, which already reaches 75% of Swiss homes well ahead of Swiss Common Sunrise. We've transformed the TV proposition with advanced TV boxes rolled out to 60% of our sub base now. And like U.K. and Holland and Belgium, a fixed mobile convergence is taking hold with a 70% improvement in mobile subscriber ads last year and a doubling of the NPS. And then finally, our investment in digital, across the organization and including customer interaction is working. We've had the highest NPS since we began measuring it 11 years ago. So at this stage, we're happy to own this business. Switzerland is a strong and rational market with a stable economy and good political support for our initiative. I just met with the President of Switzerland, as he was thrilled that we're still there to drive innovation. On top of that, we're living 50% operating cash flow margins and significant and growing free cash flow from this point forward. So I guess, if Swiss Com and Sunrise can trade at high single digit multiples of EBITDA and mid-single digit levered free cash flow yields with results similar or not even as good as ours, there's tremendous value to be created with this business on our own. So to wrap up my remarks, for the balance of 2020, we're focused first and foremost on navigating the headwinds in the U.K. market and delivering steady and growing free cash flow. Virgin is a strong brand, with the best network, the fastest broadband speeds, all of the key content and a robust fixed mobile strategy. And these are powerful drivers for operating success, and I believe in this team they're going to get it done. And just as importantly, and as you would expect, we're exploring strategic opportunities in the U.K. in all of our core markets, to create meaningful value today, and over the long term. So three drivers, sustainable and growing levered free cash flow, real strategic opportunities, to close the value gap in our core markets, and $11 billion of liquidity to fuel this narrative. Charlie over to you.

[Charlie Bracken:]

Thanks Mike. And I’m on the page titled “Group Overview”. Mike's already kind of detailed the results of our key markets. So the annual figure, so, I'm going to focus on the key financials for Q4. Group revenue declined in Q4, 0.5% and OCF declined 4.1%. Both figures are broadly similar to the Q3 figures. The reduction in CapEx in Q4 to 28.2% of sales versus 32.9% last year continued the 2019 trend of lower capital intensity resulting in a Q4 OFCF of $443 million. Liquidity remains very strong with $8.1 billion of cash and revolver credit facilities of $3 billion. Since year-end, we've been very proactive on the refinancing front, and we now sit with a fixed cost of 4% for our interests and average maturity in our debt of approximately 7.4 years. Total consolidated debt was $26.3 billion, which resulted in a consolidated debt to OCF ratio of 5.4 times gross and 3.7 times net. Now we should note, we've changed our targeted four to five times debt to OCF leverage definition. From an LQA last quarter annualized, to an LTM last 12 months OCF basis. As we believe LTM approach is more appropriate metric for our portfolio of maturing assets. Now in Q4 the LQA numbers would've been slightly lower than the LTM at 5.2 times gross and 3.6 times net. On the next slide, we continue our additional disclosure which we've had over the past few quarters on how our central spend breaks down. Now I think, I can see from the chart, total central costs have been reduced by roughly $170 million in 2019, and we have further reductions planned for 2020. Now of the total $819 million spent in 2019, $660 million related to centralized technology and innovation activity, roughly half of this spend relates to the companies that we have sold, but continue to supply what is called TSA revenue or transition services agreement revenue. This also includes our Dutch JV. The balance of the spend release to our retained companies, in particular Virgin Media in Switzerland. Now in 2020, we estimate that this total T&I spend will be around $600 million with over $300 billion of revenues being earned from the various TSA agreements. We expect the TSA Virgin spend to decline over the next four to five years, as the contracts roll off, and the net spend of approximately $300 billion to our retained operations will also decline and should be flat-to-down over that timeframe. Much of this spend is with third parties, which makes it relatively easy to scale down, and we've recently announced additional efficiencies through a deal with Infosys to take some responsibility for the flexing down of the spend, further de-risking it to our shareholders. The balance of our Central spend is our Corporate spread and kind of typical corporate activities of finance, legal, HR Management etcetera. Following our corporate downsizing in the summer, this was reduced from $260 million in 2018 to $230 million in 2019 and we expect this to be lower still in 2020. Turning to the next page, we set up the key financial metrics for our core divisions. Now as promised, we will now show the OCF and OFCF of all our companies after the allocation of those central T&I costs. Those further detailed in our 10-K and press release for those that want more detail on these allocations. But this is designed to allow our investors to compare our key divisions on an apples-to-apples basis with for example Belgium and our Dutch JV who have always disclosed OCF and OFCF after their share of Centralized T&I costs. As you can see, on a fully allocated OFCF basis, Belgium made $838 million of OFCF for the full year 2019, with our Dutch JV making $1.1 billion. We expect the Dutch JV overtime to reach the same OFCF margin of around 30% that Belgium currently achieves as it completes the integration of its fixed and mobile operations. Switzerland made $298 million of OFCF in 2019 at a margin of around 24%. We're also targeting margin increases for Switzerland going forward, as the heightened investment related to the turnaround plan is completed. Finally, the U.K. made just under $1.1 billion in 2019, which included an investment of $390 million in Lightning construction CapEx. Whilst we would expect the ex-Lightning margin of 22% to also increase as capital intensity declines. The higher programming costs of the U.K. relative to the other markets, as well as the fact that it rents the mobile network, not owns one, as we do in the Benelux, meaning that the long-term OFCF margin is more likely to be in the mid-to-high 20% of sales, rather than around that 30% mark. On the next slide, we break out the key drivers of the group's free cash flow, which remains our key focus from a financial performance point of view. Overall free cash flow was ahead of guidance at $770 million. Net interest payments were $1.1 billion in 2019 including interest income, and we would expect our interest payments to modestly decline in 2020. This is not least due to the recent refinancing of our debt. Cash tax of $358 million included a $72 million U.S. tax payment. And we would also expect this to decline in 2020. The Dutch Joint Venture contributed $214 million to our free cash flow through dividends and interest on our shareholder loan. The €100 million shareholder loan repayment in 2019 is not included in our free cash flow definition. That means, that total cash returned to us from the JV was $325 million. At our guidance FX, the Dutch JV has recently guided to $450 million to $560 million of total cash available for shareholder distributions in 2020. And clearly, we would expect to receive 50% of that figure. Finally, our cash flow from working capital items including customer cycle, vendor cycle, operational finance, restructuring and VAT cycles amongst others was broadly flat with a net investment of cash of $37 million and we expect broadly the same pattern in 2020. Turning to the last page, we set our key guidance metrics. The key focus remains on free cash flow. And we’re guiding to 30% year-on-year growth to around $1 billion. And this includes the Lightning Construction CapEx. So without that, the number will be higher. This is underpinned by a mid-single digit increase in our OFCF. As the mid-single digit decline in OCF is offset by further reductions in overall capital intensity. And as Mike mentioned, we continue to see value in our stock, and the board recently approved a buyback authorization of $1 billion. And with that, we're going to turn over to the operator to answer questions. One quick comment on questions, because everybody hasn't had a chance in the past to ask questions, we're going to ask that you limit it to one question, and one follow up, if that is possible. So with that operator, over to you.

[Operator:]

Thank you.[Operator instructions] And our first question comes from the line of Vijay Jayant. Please go ahead.

[Operator:]

And our next question comes from the line of Polo Tang from UBS. Please go ahead.

[Operator:]

And our next question comes from the line of David Wright from Bank of America. Please go ahead.

[Operator:]

And our next question comes from the line of Nick Lyall from SocGen. Please go ahead.

[Operator:]

And our next question comes from the line of Ben Swinburne from Morgan Stanley. Please go ahead.

[Operator:]

And our next question comes from the line of Matthew Harrigan from Benchmark Please go ahead sir.

[Operator:]

And our next caller is coming from the line of Sam McHugh from Exane. Please go ahead.

[Operator:]

And our next question comes from the line of Andrew Beale from Arete Research. Please go ahead.

[Operator:]

And our next question comes from the line of James Ratzer from New Street Research. Please go ahead.

[Operator:]

We do sir. We have our last question comes from the line of Robert Grindle from Deutsche Bank. Please go ahead.

[Mike Fries:]

Okay. Thanks Robert. Yes. I think that, I'm guessing that's it. Operator, so we appreciate everybody jumping on the call. I’ll just repeat what I said at the end of my remarks. We're focused on three primary things; sustainable free cash flow, we think the free cash flow story here is the most significant story and one that we will demonstrate over time is, is hopefully important to shareholders as well. Secondly, closing the value gap. I think, you know what that means, and you should expect that we're focused very seriously on opportunities to do that in core markets. And then thirdly, being disciplined about capital allocation, and I think the one billion we've allocated today to shareholder buybacks, it’s the beginning of that, but we will and we do intend to stay very disciplined about how we allocate that capital. I think that creates a lot of opportunity for us today, and down the road. So thanks for joining. And we'll speak to you soon. Take care.

[Operator:]

Ladies and gentlemen, this concludes Liberty Global's fourth quarter 2019 investor call. As a reminder, a replay of the call will be available in the Investor Relations section of the Liberty Global's website. There you can also find a copy of today's presentation materials. Thank you.