Q4 2019 Earnings Call
[music].
Good morning, ladies and gentlemen, thank you for standing by welcome to Liberty Global Sports and told her two shots in 19 Investor call. This call me associated webcast, our property of Liberty global and any redistribution retransmission or rebroadcast of the call or webcast and any form without the expressed written.
Consent of Liberty Global is strictly prohibited.
This time also all participants are now listen only mode todays formal presentation materials can be found under the Investor Relations section of Liberty Global's website at Liberty Global Dot Com. After todays formal presentation instructions will be given for question and answer session page two of the slides. He tells the company's safe Harbor statement regard.
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 in future growth prospects and other information 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 and Liberty Globals filings with the Securities and Exchange Commission, including his 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 and its expectation.
Arts conditions on which any such a statement in space I would now like to turn the call over to Miss Mr., Mike free.
Thanks, Operator, and welcome everyone had good to be back on line review, we have a lot could talk about today. So I wanted to get your write off with some highlights a that Charlie but at the numbers you will get to your questions.
Dallas or the hour I'm on slide four which is a good snapshot of the year. That's gonna say up front that there are a handful of important storylines here. So bear with me I want to spend a few minutes on this page.
I'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, we had positive customer out pretty girls that was offset by a small customer loss of 74000.
Based operating cash flow, a 4.9 billion was down 3% year over year, that's essentially what we forecasted by the way it was right on budget for us.
What is widely reported the reasons for that right, namely the turnaround in Switzerland, and the headwinds in the UK, which we'll talk a lot about today.
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.
The other disgust, sometimes but there's never been context, Europe isn't more mature market today than it was 510 or 20 years ago broadband growth is slowing that's inevitable in the video business well much healthier than the U.S., but it's flattening out in most countries, having said that though the opportunity to drive sustainable growth.
Healthy free cash flow is there's 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.
Tumor digitizing the customer experience to improve cost in churn. This takes him upfront investment the works everywhere, we do it through we're prioritizing profitable video subscriber growth, which makes total sense as we roll out advance that talk to integrate options for de bundling for we're committed to driving fixed mobile convergence. There is no debate here a fixed mobile.
Burgess deliver significant synergies and the winning customer strategy that improves churn and if yes and grows market your overtime.
Yeah, right away, but it's something we're wondering if we would ever be able to re size and we scale or operating model up the vertical deal and the sale of Austria. The answer is yes.
You'll notice that total central costs were reduced by 170 million or 60% to 2019 with continued reductions coming in 20, Johnny and Charlie will dig into those numbers.
We also announced a partnership with emphasis to deliver the services required to our t. as they partners like Vodafone and to ensure that the revenue and cost completely aligned and those contracts over the next four to five years. So hopefully we put that issue did that.
Now continue on this slide last year was pretty transformational for us on the strategic fronts. The sale of four markets to Vodafone for $21 billion. This transaction, perhaps more than anything.
Hi, let a disconnect between public and private market values in Europe, the price to Vodafone, which by all accounts. They were in remain thrilled with I was around 11 times operating cash flow EBITDA, all in which is twice where our current trading multiple seems to be.
They also validated the power of fixed mobile convergence mergers with reported synergies to them I think around 7 billion euros, and an NPV basis, and it left us with significant liquidity, right, which naturally to $11 billion, including 8 billion of cash.
As we used a large proportion of those proceeds on capital returns to shareholders.
Bought back a record of non stock last year repurchasing $3.2 billion of our equity or approximately 16% of the company.
2.7 billion of that was through the Dutch auction tender that'd be completed in September at $27 per share and to show. Our continued commitment we're announcing today another $1 billion buyback authorization that number might seem small to somebody you, but if you go back over the last 10 years.
This number is consistent with our buyback programs in the past a 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 a market cap and 100% of our free cash flow guidance, which is a billion dollar.
For 2020.
And then the final storyline here is that we're in a great position to continue crystallizing value in our core markets OLED run through each country and I'm not going to talk about Wheeler hypothetical discussions, but the strategies that we might be pursuing our completely consistent with what we've been doing the last couple of years fixed mobile convergence works in 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 a fixed networks are extremely valuable.
The one gig everywhere many years before the comment and with the happy with that expansion comes opportunities to finance capitalize and reseller infrastructure you should assume we're getting 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.
It is for at 2020 indicate we'll continue to grow significantly both on an absolute basis and unlevered free cash flow per share basis. As we continue to speak directly now that was a mouthful I realized I don't have you take questions on any or all of it but since the UK is our largest market.
Let me spend a couple of minutes on Virgin media and I'm on slide five no.
Consistent with the European steam I, just outlined the last 18 months I've been a bit tougher in the UK as a result of three key challenges first the broadband business has become more competitive promotional but the entire market slowing down we're still adding broadband subs and holding share primarily because we're investing me gigabit speed and network expansion.
And the price competition at the low end to the market has been aggressive.
Second the video market is also flattening Sky has lost millions of satellite subs a portion of which there is converted to now TV.
We've done much better than our peers, but we're still losing video word you used to be focused on hiring customers and third.
In fact of external headwinds has been significant.
Last three years, we've incurred over 200 million pounds and increased costs associated with broadband tax increases inflationary programming contracts mobile regulation changes in other factors and despite these challenges as our fourth quarter results demonstrate we are more than holding our own in this market. We delivered the highest revenue in the highest customer.
Our ARPU growth in Q4 at around 100% age we had a record year for mobile postpaid sub adds.
Capex discipline drove operating free cash flow up 26% for the full year and that's including the cost of bundling a out over a building out over half a 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 virgins free cash flow. We've now built over 2 million homes, we're serving over 450000, new customers, who generated 240 million pounds or revenue 120 pounds at Oak CS and just as importantly penetration rates in ARPU are still tracking and the cost.
The premise declined 20% last year, which helps solidify our capital returns.
The bigger question on your line 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 try 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 me foreshadow 2020 will be another year of unavoidable headwinds.
I'm, referring of course to off comes out of contract notification requirements.
Another increase in or annual broadband taxes in contractual programming cost increases all of which will total about 100 million pounds and negative operating cash flow this year.
I lose had his work cut out for him, but in my opinion is doing all the right things first of all he's revitalizing the talent and leadership in Virginia. The addition of February at Pesca, who transferred from switch Lynch. The UK CFO and Deputy CEO is a great move for us or they're going to make an outstanding team in my view.
Secondly, he's focused on the right organic growth drivers.
Let the network to one gig everywhere and well ahead of the competition.
Who are our 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.
Preparing for a switch over to the Vodafone NVNO, which provides access to fiveg in 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 it 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 a self funded out of Virgin free cash so and if you were to look at expanding to an additional seven to 10 million homes, we would almost assuredly seem to do so off balance sheet and with third party partners or financing sources hope that's clear to folks now let me switch to a couple of other markets quickly here on slide seven the folks have asked us.
The past why would Vodafone or go to telecom.
Hey, US 11 to 12 times EBITDA for cable assets.
Or why would we acquire mobile assets in Belgium, Holland, and Middle East lower multiples, but why would we do it and any perhaps the best way to answer that question is to look at the JV in Holland Vodafone.
Which after just a couple of years has achieved everything we hoped it would it isn't the process of becoming a has become the undisputed market leader and you know 2019 was a breakthrough year for Vodafone Ziggo it hit or exceeded all of their guidance targets, which included modest decline is fixed or do you use buck considerable market share gain from <unk>.
Yes.
With a similar story and mobile with Vodafone Ziggo, adding 269000 postpaid subs any company going backwards that helped drive revenue and EBITDA up 1% and 4% respectively last year. So they are back to growth in this market and the Jay JV delivered 470 million euros of Levered free cash flow.
So put a market yield on that and you will arrive at a pretty meaningful equity value for both partners, how they've done that well. They filed the same playbook that is underscored all fixed mobile mergers in Europe, they've already hit 85% of the publicly disclose synergy target.
210 million euros.
Prioritize product innovation, including nationwide gigabit speed the launch of Nexgen set top boxes product simplification I mean, they too.
Bundles from 42000 to 300, and a great set of content arrangements like biggest sports and HBIO and through convergence. They become the number one fixed broadband provider in Holland with seven out of 10 homes, taking at least one product from Vodafone Ziggo. So simply put the strategy worked.
Finally, a short update on your PC, Switzerland, where the business is clearly turning around and why do we say that well we hit all of our internal targets for 2019, including a 40% improvement in fixed customer loss of 40% improvement argue you lost and revenue with cash the result, right on plan.
Even in this heavy investment period, you'd be Switzerland generated 300 million of operating free cash flow and significant free cash over levered free cash.
There have been for consistent drivers to our success in this is going to start to sound repetitive because it's the same strategy. We're deploying it all of our markets beginning with a nationwide one good launch which already reaches 75%. This was helms well ahead of Swiss common sunrise.
We've transformed the TV proposition with advanced TD boxes rolled up 60% of or sub base now.
And like UK, and Holland, and Belgium, a fixed mobile convergence is taking hold with a 70% improvement in mobile subscriber adds last year in a doubling of the NPS.
And then finally, our investment in digital across the organization and including customer interactions is working we've had the highest NPS. Since we began measuring 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 initiatives I just met with the president of Switzerland, and she was thrilled.
We're still there to drive innovation on top of that would living 50% operating castle margins and significant in growing free cash flow from this point forward. So I guess, it's swisscom and surmise can trade at high single digit multiples of EBITDA and mid single digit Levered free cash flow yields a with results similar or not even as good as ours, there's tremendous value to be created with.
With this business on our own.
So to wrap up my remarks for the balance of 2020, we're focused first and foremost navigating the headwinds in the UK 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.
Our 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 UK and 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. Thanks, Mike I'm not on the page concludes group overview my sodium detailed results about key markets in the unusually good so I'm going to focus on the key financials for Q4 group revenue declined in Q4, 0.5% unless you have declined 2.1%, let's take it was a boom to submit to the Q3 figures but.
Option in Capex in Q4 to 20.2% of so let's just say, 2.9% lost you continue to 2019 trend of low capital intensity.
Q4 last year $433 million Mcclatchy remains very strong with $8.1 billion, a cash I'm, a little bit credit facilities, a $3 billion.
Since year end, we've been very proactive on the refinancing front, we announced it with a fixed cost the foot per cent for interest on an average maturity on death of approximately 7.4 years.
Total consolidated debt was $26.3 billion, which resulted in a consolidated debt to worship ratio 5.4 times gross and 3.7 times net.
You should note we've changed talk targeted four to five times debt to I see that leverage definition from an okay way last quarter annualized so Nokia last 12 months post yet basis as we believe LTM approach is more appropriate metric for our portfolio maturing assets.
So you can't fooled me accumulate numbers would have been slightly lower than the LTL.
Excellent turn times gross and 3.6 times net.
Over the next slide we continue on additional disclose the Chicago the past few courses on how essential steinberg's them.
I wanted to kind of season would show total central cost would be reduced by roughly $170 million in 29 team and we have further reductions pumping twentytwenty now of the totaled $890 million spend 2090 $660 million relates to centralized technology innovation activity.
Roughly half of the spend were like sort of countries that we've sold but continuing to supply what is called Tia say revenue will transition services agreement revenue.
This also includes our Dutch JV.
The balance of the spend related to our butane companies in particular badger meter in Switzerland.
2020, we estimated the certain CNO spend will be around $600 million with over $300 million or revenues be on from the various Tia say agreements.
Yes, there was it spends to decline over the next four to five years as the contracts were low I mean, this spend of approximately $310 to our retained operations, but also decline and should be flat to down over that timeframe.
Much of the spend is with third parties, which makes it relatively easy to scale down I mean recently announced additional efficiencies through a deal with emphasis it takes them responsibility for the flexing down to the spend further de risking it to our shareholders.
So my sense was spend is our corporate spread between typical corporate activities of finance legal HR management et cetera.
Well I don't know corporate downsizing in some of this was reduced from $260 million in 20 $18 million to $230 million in 2019, I'm exposed to below still been twentytwenty.
Turning to the next page, we still have a key financial metrics for our core divisions.
Thomas We will now should we see Oh I see after all companies after the allocation of those central to nine costs.
That's further detail not thinking and press release for the what more do some of these allocations, but this is designed to allow our investors who are key divisions on an apples to apples places with for example, Belgium, Ducs JV always disclosed our CFO, who actually up after the show centralized t. and other costs I.
Just one can see on a fully allocated CFT basis, Belgian made $878 million Oh thats, yet for the full year 29 team without touch to do you make 1.1 billion.
We expect that does to the over time to reach the same offset much of the grown 30% the bones and currently achieves as it completes the integration of its fix them up on operations.
Switching to may $298 million ago, FCF, and 29 team on a margin of around 24% also targeting much increases the Swiss wouldn't go toward.
The husband investment related to the turnaround plan is completed.
Really the okay made just on the $1.1 billion and 29 team, which included an investment of $290 million enlightening construction capex.
Well I would expect the excellent new launch an up 22% to also increase as capital intensity declines the higher prudently close to the UK relative to other markets as well is the fact, we didn't read some mobile networks not owns one as we do in the Benelux, maybe that the long term FCF margin is more likely to be in the mid to high 20 percents of sales.
Rather than around that 30% book.
On the next slide we break out the key drivers are the group's free cash flow, which remains a key focus from a financial performance point of view I have a free cash flow was ahead of guidance at $770 million.
Interest payments were $1.1 billion in 29 team, including interest income.
I would expect interest payments to modestly declining twentytwenty is not least due to the recent refinancings about that.
Last time, some $358 million you can do to $72 million U.S. times tenant.
Also expect this to declining twentytwenty.
Ducs joint venture contributed $214 million to our free cash flow through dividends and interest on our shareholder loan.
The 100 million euros shareholder loan repayments in 2009. She is not included in our free cash flow definition.
At least a total cash returned to us from the JV was $325 million.
But on cousins FX, the Dutch JV has recently got into $450 million to $560 million total cash available to shareholder distributions and twentytwenty.
We would expect received 50% about speaker.
Finally, our cash went from working capital items, including customer cycles, when the cycle, a personal finance restructuring and B T cycles amongst others was broadly flat with a net investment to cash of $37 million and we expect broadly the same pattern and twentytwenty.
Turning to last page, we said I'll keep gardens metrics. The key focus remains on free cash flow.
We're going to 30% year on year gross to around $1 billion. This includes the lightning construction capex, so without up a number of behind.
This is underpinned by a mid single digit increasing Oh, yes.
As a mid single digit decline knows yet is offset but further reductions in a little capital intensity.
And as Mike mentioned, we continue to see value and I'll start on.
On the board recently approved a buyback authorization $1 billion.
With that will in turn over to the open to doing two questions. One quick covenant questions because everybody hasn't had a chance in the past last question, we're going to loss that you limit. It to one question one follow up it's not as possible so what that operation over to you.
Thank you. The question answer session will be conducted electronically if he would like to ask a question. Please do so by pressing the star Astra key followed by the number one on your phone in order to accommodate everyone. We request that you ask only one question with one clarifying follow up if needed if you're using speaker phone.
Please make sure your mute function, it's turned off to allow your signal to reach our equipment will pause for one moment to give everyone an opportunity to join the queue.
And our first question comes from the line as I say diet.
Go ahead.
Good morning, it's on track for VJ.
I Wonder if you can go until it gets more color on the expected impact the Oh, the front book back book or oil fee penalty work in the UK and both in terms of the magnitude or the timing when you expect this impact and any thoughts about how you're going to balance.
Yeah potential.
ARPU impacts versus potential across that impacts and the environment. Thanks.
Thanks, James I'll say couple of things all that newts chime in here with his thoughts first of all we're not providing any specific detail around that for obvious reasons.
Not really in our best interest to tell you specifically, what we think we will or won't do how we'll pricings and then what we think the impact will be because this is obviously a competitive market second thing I'll say, we've already implemented the.
Program about 10 days ago I believe in advance of the requirement to start notifications tomorrow just to get a sense of how are customers are reacting and what we think the outcome will be and I would say we're conservative.
Overall in our assumptions of the impact.
There's a wide range of impacts of course that were overall conservative like we have a lot of tools.
At our disposal here to ensure that the impact is minimized, but I think as it relates to almost our entire guidance and budget this year.
I would say in all instances, we have been conservative that you want to provide a little more color on that.
Yeah, I mean, that's some public data available calls that brought the hop off or customer basis, although contract. So they have the opportunity to look for a yield I think what we're doing to true simply keep them onto our network as a couple.
Thank you could talk a lot until the end of March.
Yes, given all our customer a 1 million all together, which had been below on that.
Speed upgrade free of charge. So we could be playing this can be in terms of speed and we are leveraging that to keep our coupled with a as Mike said earlier on we drive fixed mobile convergence.
Roughly once we put tend to foreign people, who have caught play with us through on that and then we have also awful lot stuff on the pumping fun and that's what I'm, saying here. Yes. It is a change we are definitely informing our customers are about oil.
Product.
But we have also look for all four RMB play into high value Tech Ben maybe that's oh value our products and therefore also.
I'm not met coal price couldn't get to them.
<unk>.
We have planned capital for you for 10 days and the market then 60000 matter and so far are thing.
It's absolutely under control.
By the way to 50% or back book bump book, It's about the same sky. So it's not that dissimilar from other players in the market.
Next question operator.
If they hit.
And our next question comes from the line Apollo Tang from U.S. me or you've yes. Please go ahead.
A meal Holly I've got so one question and one clarification question.
So in terms of Ah Ah Ah Ah strategic options Press reports, a stated that you wouldn't talks with scalia by fiber TV and the potential cable wholesale deals if such a deal did happen can you remind us what the merits of a deal would be from both Liberty Global perspective.
Perspective.
Clarification question is really just about guidance because can you clarify what's implied.
Okay and Swiss guidance, because you have said mid single digit declines the group tone that starts towards plus 1% and you've outlined to 100 million.
You can't headwinds and does this imply therefore minus 5%, yes declined in the UK and high single digit Mcf declines in Switzerland. Thanks.
Tony I'll, let you prepare for the guidance question on the strategic options Paula They said at the <unk> in my remarks, I'm not going to get into great detail about what we might or might not be doing doesn't generally serve us well oh. The other had just speaking theoretically you know what would it.
A partnership with anybody that after this guy a partnership focused on driving greater reach for the Virgin network mean to US I think that's pretty straight forward today Virgin we just have to country.
We think we have a brand the product Ah you know what capability, that's under utilized and getting our network and the war products for the rest of the UK market would be just by itself is very valuable outcome. Secondly, we've already shown with lightning that there is potential to penetrate and drive returns.
On capital.
And while we're not willing to sacrifice our free cash flow to do that on balance sheet.
Because we believe in Levered free cash flow Unlevered free cash flow per share. We would certainly entertain ideas are ways of achieving that off balance sheet that could accelerate to reach a one gigabit speeds and diversion brand.
You would expect us to do that.
So there's lots of almost logical reasons, why extending our reach driving scale and doing it.
In an efficient way from a capital point of view would be hugely valuable to Virgin and to US and to you you know when others are shareholders on the wholesale question Trickier, obviously, but if you look at Virgin today, we're only utilizing about 40% of our network. So on footprint generally we've got 40 plus percent of the network being utilized.
As which is the highest market share of anybody our footprint, but nonetheless, there are other operators and those who don't utilize their services at all so the question really is you know whether you build out another seven to 10 million homes or you look at your existing footprint. You know should you consider monetizing the value of this one gig network.
Are there, obviously pros and cons. The pros are immediate cash flow to the bottom line that would both drive expansion of the network.
Self funded manner.
And value creation, because we know infrastructure assets trade at much higher multiples than even we are able to sell in the private market our assets.
And then secondly of course.
You know the benefits would be well basically that is the primary benefit the negatives of course as I mentioned would have to be examining the impact on your own business itself. So cannibalization and you know what would what are the negative synergies. If you will have that so we examine it closely as you know we already provide also access in Belgium, something look like for.
No you're with technologically commercially.
No, it's not something we want to be regulated and it wont be regulated in the UK, but it's something we ought to be looking at.
You know constructively to see if theres a value creation opportunities.
And so of course, where we'd be doing that.
Great Charlie.
Yeah, just to say I was in the past, we're not gonna give specific guidance for our retained operations because you're writing point out mathematically. Most companies you know seems declines the biggest issue I think in and all kinds of my references is under contract life.
Are there any comfort in UK can give me precision of what it means because its and many variables taxes and I would echo mikes comment that we've tried to be prudent and no guidance just make sure. We don't mislead you are electricity evidently we've been conservative.
Hi, good or something else, but the other thing I've highlighted there's a big shifts going on between Opex and Capex I'm sure. Many of you aware of this but.
As the world is towards cloud services that is a very different accounting treatment. So for example, the cloud product and Opex cost, whereas if it's a data center was five years ago. That's capex. So some of the decline in a US yes, the increase and see if it's just that shift between.
From Capex into Opex and that's one of the reasons why we continued to really focus on operations up bonuses and the where they'll come into run all the Oh I see aethlon because for us that is a much better metrics going forward.
Like cash flow generation.
Clarify cycle.
And our next question comes from the line as David Wright from Bank of America. Please go ahead.
[noise] gather guys and thanks very much for taking the calls my keep if I could just I ask one more question on the whole concept of building and potentially creating some kind of fell off balance sheet.
Venture you've talked about you know, having an infrastructure a investor alongside I guess, you know by definition off balance sheet, probably means that should have to be some kind of 50, 50, JV or or less from your side. So that welding imply fairly substantial infrastructure investor could you also consider.
He had bringing another policy and maybe a you know a wholesale operator as a kind of a as a kind of joint partner on the bench right I could not be disable.
I think it's safe to say David that were examining all options.
And you should expect this could be doing that and that this will take time.
Two points that makes so yes. It would then could make sense because obviously.
If you're going to build seven to 10 million homes, while we believe we could penetrate effectively at the 30% level as we seem to be doing effectively on our own lightning expansion.
Wouldn't it be materially better for a partner.
Financing, if you could add conditional operators onto that network or drive greater penetration of network. So.
There's a there's there's puts and takes there, but clearly we would be interested in discussion. It's not just with financial partners, but also with network operators, who are interested in the same opportunity. So I think the answer that question is yes, we would and I'll just repeat that this is.
So not happening in the first quarter. This is not stuff that's going to you know.
The occur overnight. This is a long game that needs to be played in the market remember that both BT any help nets are virtually nowhere.
In the marketplace, maybe they built as many homes with us in the aggregate, but our our lightning machine at four or 500000 homes a year is working like clockwork.
Declining cost the premise and consistent top line and cut and customer result, so even that just happened over the year, we're going to keep driving the growth of the other Virgin network.
We ought to be looking at ways of Supercharging that but doing it in a manner, that's consistent with our belief unlevered free cash flow and never free cash flow per share and I think that's achievable its not going to happen overnight, but it's it's a kind of thing we should be looking at and we're uniquely positioned repeat that Virgin is probably uniquely position.
To be the one to evaluate those types of opportunities. Just another example, where we sit in the UK market and why our business. We believe is.
With the heck a lot more than zero.
My follow up question about if I could get to freeze. My guess is is given that you won't be keeps talking about ramping up.
Potential built in a buyer by a factor of two you know 20 530000 treating 60000 to weak.
A you know and that kind of mid town is the if the capacity for you guys to kind of double your build as well if their actual you know capacity of of the work force required to take roads to actually lay this cable if BP is doubling that build it is the capacity left for you guys to do this.
Right.
We think there isn't I remember if you were too and I'll, let loose chime in a little bit if we work to expand beyond the lightning program, which is a fairly targeted program, where we're extending network and it's a fairly intensive construction process.
If we're to extend beyond that and for example, the Liberty networks entity, we set up or to build network similar to say how city fibers building networks that would be faster and more efficient using P.A. in existing BP infrastructure, but that's why don't you comment a little bit on the current supply situation in the UK on resources.
Yeah, So I think.
We definitely get out what's not prepared to ramp up the do right I mean last year, we've done talking about how difficult part.
Oh the premises.
We are leveraging P.A. so.
The understanding now or how to use the ducts and poles off Openreach. So hope that we have to secure also certain resources and also we have just finalized or you are P to ensure vendors vendor partnerships for the future and I think right.
We have a good relationship built up over the years was our vendor and if you. If you are vendor pay you want to spend on Tweetdeck instead of one.
So we have met.
The big vendor.
Only want to engage with us with one.
So therefore, I think yes, it's a critical resources.
And we are prepared to deal with it like that and we have come from commitment.
To increase make sure that we are a bit for include rollout for the next year.
Thank you guys.
Yeah.
And our next question comes from the line of Nicky All from Soc. Gen. Please go ahead.
Yeah, Mona just so just a simple some one for me. Please just only the buyback might come at $1 billion mission why why pick about numbers just interested in numbers doesn't obviously versus the tender last year the shares a pretty little or does that mean, there's maybe more of a focus on M&A rather than buy but could you just a walk us through that.
Please oh sure.
Sure sure as I mentioned in there, but my remarks Nick.
Historically, if you were to take a look at all of our buyback authorization in the past they have more or less been of an equal quantum.
So by that I mean, if you look at a generally what we've done outside of the Dutch auction tender, we normally announced at this point in time buybacks that equals roughly our free cash flow guidance and roughly you know 5% to 10% of our market cap.
So here, we're at about 8% of our market cap and quite a percent of our free cash flow guidance. That's good discipline that means that we're able to you know drive free cash flow back to shareholders. It doesn't mean that we won't do other buybacks I'm not being specific about how quickly or how slowly we might put that capital to work.
You know and it wouldn't be a surprise to you that while we're certainly pleased and and.
I believe that $27 share was a smart decision on our part and of course, we have information you you know that you would have as well, but any other have we know where our strategic opportunities are and we believe we know where values. It so well for us $27. A share was certainly a price we were willing to pay that 20 Bucks.
I wish we'd weighted so I think there's some extent where you know we're looking to be smart here and that's the timing of buybacks not simply too.
You know a rush into a decision knee jerk, it's not necessarily a.
Buyback or M&A decision on as we look at it we're sitting on 11 billion of liquidity eight Dana cash.
I think there's a lot of things that go into capital allocation decisions on our part, but we think it's the right methods today. It it's not doesn't mean, we won't do additional buybacks doesn't mean anything it just means that we believe at this point, that's the right number to allocate and we'll get at it.
So they go.
Great. Thank you.
And our next question comes from the line up and Feinberg from Morgan Stanley. Please go ahead.
Hey, good morning, guys I will limit myself. So I guess, one one question around the UK or last quarter, you gave us some nice disclosure on lightnings financials within Virgin 'cause, there's some additional detail this quarter on their Capex I'm just wondering if we're at the point now where the free cash flow.
Burn of that project has peaked or we have kind of line of sight to win.
That shifts from maybe a free cash flow headwind to a free cash flow tailwind in the business.
As you guys continue to scale. It and then just broader on the UK a for any of you I don't know if it's now that Brexit is I guess largely behind us if you're starting to see sort of via the economic headwinds because they hit your business at the consumer business level, you know abate a bit or even reverse as we head into.
We're starting here in 2020.
Yeah on the Brexit question, you know, while we did see modest consumer reaction to the uncertainty and the volatility in that political process. You should expect that you know, we're seeing more optimism and I think the market generally you're seeing more optimism income in the clarity of the process today.
It's still a moving target in terms of final deal and all that although it's good things, but I would say on balance. This is a positive for us resolution.
Clarity general certainty and you know we should expect them, we intend to see hopefully a more.
Okay more tailwinds in that regard that headwind Charlie you can jump in here on the lighting financials, but it's my.
Recollection looking at the specific piano tiles that we have who already are starting to see improvement in the negative free cash flow of that business with 120 million of.
EBITDA in 2019 that I believe grew around 40% year over year.
From the prior years right ought to be growing yeah, it's pretty pretty material improvements in operating free cash. So go ahead, sorry, yeah, but that's also because as Mike said, the it's a very Harvard what we believe its arbor tempered it appreciate or others, who are concerned but no mines the mass stuck up in the performance is supporting Oh, sorry.
Aside from disclosures, we invested one unless you have faces about 320 million.
319, you have another we disclose he was the capex we spend a construction, but remember we are also investing capex in two CP in like a against 1.4 billion for the core business as usual. So that's the kind of quantum it will get less and twentytwenty and extend our budget numbers. It will but it's definitely a negative investment as they try and continue to support this this role.
And bill towards getting most got in the market.
Right, that's the but lets would like.
Now here, that's the point, yeah, yeah, but let right if you start to much less negative, but I'd, rather not get there as it regards but it won't be it will be less than 2021 of my husband.
Mhm cool thank you guys.
Okay.
And our next.
No I know mass you're hearing.
Again from benchmark. Please go ahead Sir.
Well. Thank you that's one question, but it's a bit of a long question, but I've been saying if they go you integrate tariff would put their fixed mobile convergence and you probably get more rational pricing behavior competitively well getting integration bad debt.
Well default Dolby palsy argued that just you'd get a better and better but how would you can you give on the table.
On a pick up you know with Vodafone in 21 versus.
I think everything dog outright and putting the two businesses together and ultimate we looked at Vodafone Dal you would open region duty Bard, we're not having much of a backlog being aggressive on broadband pricing.
Where are.
Oh No limited.
The narrowing or an outright sale you could actually look at something in the UK or.
One of them for the two new JV or.
Someone else and equity as opposed to an outright cancelled today.
A lovely multiples looking at multiples that we saw in Germany et cetera.
Thanks, Matt that was actually very clear question, even though it was a long and as you say, but I say couple of things number one on the Vodafone NVNO deal in the UK.
Both parties had an incentive to enter into that arrangement on their part clearly they saw an opportunity to drive revenue to their network.
And it's all incremental revenue to their network and that's a positive for them and so they were very aggressive and willing to be aggressive with us on great pricing access to fiveg.
We think it saves us not on the lease I think we said hundreds of millions.
In Oak CF overtime.
And so that was their motivation I believe and I'm sure they're trying to some extent to make us happy in the in the mobile space and maybe we don't do something somebody else will see I mean, they were clear and we were discussing it with them on that basis from our point of view. It was purely economic decision that if we're going to push fixed mobile convergence as an empty you know.
In the absence of any broader transaction as you've been implying why wouldn't we do it with someone who is willing to give us access to fiveg in great pricing. So there wasn't you know I see in mutual mutual interest on both parties parts to do this deal and it's going to benefit us obviously.
Materially going forward beyond 2020, when we really roll it out in terms of what we're quote unquote, leaving on the table.
You would have read I'm sure multiple analysts have estimated.
What the synergies might be.
If we were to acquire albeit acquired by a mobile operator in the UK and I had the numbers I think ranged from five to 6 billion pounds NPV of synergy and that number does not surprised me in the least since we've already been part of either as a seller a buyer or merger partner.
Her in something like seven fixed mobile deals. It's one of the reasons, we keep saying that this fixed mobile convergence is not just a fad. It's is the direction for all the players we believe in these markets.
And certainly if you look at the numbers that Vodafone publicize the numbers, we publicized in Belgium are we publicized at Holland those are not on the realistic merger synergies.
You know would we be created on structures and and outcomes in the event of somebody was interested in either Switzerland, or UK or Poland or really any market or Ireland willing to do something was of course.
Wouldn't really be creative and flexible the goal is to create value closing the value gap.
Recognize the up but we know the value recognize the value we know exist in our business.
We we respect the fact that for many shareholders and as one analyst said. This is a show me momentum you know we're cool with that those are the kinda situations, we thrive in and so yeah. When if we would be flexible or why wouldn't you be because I'm not being nothing specific about any particular transaction or market.
The goal is to create value and I think as we have been in the past we had been buyers. We have been sellers. We had been 50 50 partners. Yet we have we have done all three models are executed on all three models in different European markets.
Clearly, we are capable of being flexible that would be obvious what exactly could or might happen in a these markets I can't predict and I'm not going to predict view.
Simply say as I said in my remarks.
It's here to stay fixed mobile convergence, whether through and NVNO or an eminent relationship and that's a good thing for cable networks.
That's right.
Yeah.
And our next caller is coming from the line of family Q.
From Exane. Please go ahead.
Yeah. Good morning, guys I was just a critical them UK MTV I guess, you called out skies office and yours as well do you think would possibly have a tipping point I mean, you can tend to traditional TV or just you can stabilize your subscriber base again, and then maybe you could just remind us how much gross profit you may come TV in the UK I went to go by market being sold combats, but Mark do you think you kind of fat.
Those TV losses would book on prices, thanks very much.
Well at least chime in here, a little bit I'll, just simply say that.
I don't they are very few pay TV markets in the in the.
In the first world if you will that aren't experiencing obviously the impact of direct to consumer streaming subscriptions as well as you know I would say general cord cutting of cord shaving you won't be able to find one and they don't exist and that's okay. Certainly has an impact in charter a comp.
Yes, and their ability to drive valuation and growth I would say as they have said broadband is the business. It's the one that generates a essentially meaningful gross margin and is a product that you need whether you're subscribing to our video product or any video product, having said that we generate gross margin.
And I would say good gross margin on our video business in the UK arguably better gross margins in the U.S. guys and so it's worth protecting and we are doing all the things we think are necessary to protect it including rolling out our advanced a user interface very shortly here called horizon for turret.
Place Tivo and be available on the V. Six box, that's going to we think the transformational to the consumer experience in the same way X one was for Comcast.
And this is our basic our version of our UK based X one and so we are investing in the user experience. We are rapidly integrating apps into the box wherever we can Amazon you tube Netflix where you know we are open for business. When it comes to add App integration and that is going to me.
Our platform, we think sustainable and viable and even necessary for consumers, who want to lean back watch television and get access to whatever they're interested in by simply saying to their remote control play Netflix and so that's that's the play we think it will be required will allow customers to be sticky on the other head.
As Lou just said many times and we said, we're not going to chase low end customers.
And we're not going to spend the capital to retain low end customers are going to be smart about profitable growth and we know that a video product combined with a broadband product and a mobile voice product is a much more compelling service for for customers and so the bundle mattered videos, a big part of the bundle. So I don't see it going away I think it's Chris.
So to US there is gross margin, we think it can be stickier as we continue to innovate with horizon, which we'll do this year.
As we integrate apps and become friends, even greater friends with the streamers.
Consumers, we think we'll see the benefit of leaning back speaking into their remote play Amazon play BBC play I TV.
And being sort of the aggregator of that content experience to us that's a powerful a powerful proposition, which we really haven't exploited yet in the UK market. So.
Long answer it looked at I missed anything or where do you want to add to that on the video Scott I mean, I can only two right I mean, a couple of numbers to support what the set like that but yeah. We are focusing really much more into customer then on or be it or the or single arm to you.
Broadly we kept our customer base flat and we have Pat you have had the highest option creep in the buckets right in Q4, so that's what our high value customers strategy, We think Paypal, yes, we lost a a digital video views as you said.
This is err on the low end and simply we are paying a little capex for the boxes.
And because now you didn't used to pay for the treat TV or the deal or money to us.
And so we don't boosting I'm not anymore and you see a certain operating free cash flow contribution out of that and that's the same time to ensure that we participate in the two key growth as Mike said and Oh Gee growth onto our platform. It's it's even higher.
Then BBB, we do have you look you look so therefore, I think the number of supporting a cookie Australia.
Well some guys thanks very much.
And our next question comes from the line of Andrew <unk> from <unk> Research. Please go ahead.
Hi, I'm I guess, you go to 8 billion in cash and it's a pretty high proportion of your market cap I'm I'm, probably says that was pretty limited equity body implied for Virgin media opt to sort of taken out there for us its assets and liabilities. So just wondering if you can weigh out your current thinking about the roads amounts of.
Burris possible approaches to realizing value, which could be spin offs could be literacy metwox infrastructure transactions that you've been.
Mentioning earlier are you.
Traditional approach of buybacks or M&A or anything else.
Yeah, well I'd say look it as a base case, you're correct, but by the way. We believe that there's you can get to our stock price, but pretty much ignoring Switzerland, any UK, which is a highly questionable in our minds of course.
But there are several ways to to get there and I would say, we begin first and foremost with the base case business, So and as Charlie said many times as we've all repeat it many times. We believe we can generate good free cash flow and free cash flow per share.
Out of these businesses, including Virgin and sustainable free cash flow is in our minds the metric that matters.
So as a first instance, we hope to be able to convince you and others that simply the free cash flow yield.
On a market like the UK.
It is worthy of a meaningful valuation.
Especially if you consider sunrise swisscom, even our own business, telenet, and where those yields and multiple sit so first and foremost you know this is a bit of a transformation and thinking.
Well for us and for investors that we believe there is sustainable free cash flow in the business without any transactions.
Without any.
Inorganic moves to close the value gap that we know exist. That's that's step one and I think we can achieve that and that's what we're focused on obviously there are multiple things we could be doing beyond that all around.
For example, as you described you know monetizing our networks in a more creative way looking at inorganic combinations, whether with mobile or other operators that public listing.
It's been office clearly if there's any company out there.
Able and capable of and willing to look at creative ways to to shrink the value gap you're talking to him.
You should assume that is something we're working on every day and trying to be both sensible, but also creative and strategic about how we how we how we close that value gap.
That's how I answer that question.
Okay, and just a quick follow up on the seven to 10 million premises that you're talking about for the expanded UK.
Ah infrastructure opportunity I mean, it's quite a big volume with problems, probably means quite a bit of overbuild of others, but just kind of just kind of thought about it's not it's not seven to 10 beyond these 2 million whitening as I've now or from the woman in end of Lightning.
And it's not like I remind you condemn into 10, yeah. Good clarification, it's seven to 10 from this point.
Principally I missed part and you know.
Yeah, and just to be just to add to your earlier question. Certainly we could consider you know maybe lightning itself is a you know an asset that should be lifted and shifted.
And you know BD and could and become the engine.
Of that growth. So I believe I would say incremental to where we are today.
Okay, I I am not as all your build or scrapped footprint ambition, including you'll build and then third party hole. So.
Oh, well in general terms, we believe the opportunity exists to economically consider expanding our network to seven to 10 million homes.
The way in which you do it.
To be determined but that's what we think is an economic.
Ambition.
Okay. Thank you.
And our next question comes from the line.
James roster from.
And Mr. research. Please go ahead.
[noise] I guess good morning, everyone. Thank you add question regarding just kinda spares a follow on ready from under is just around use of capital I mean, it seems like the message from today is that although it is a kind of final structure of any UK network build there hasn't been finalized it's clear that more capital.
So is intended to be allocated.
Towards UK network builds but out of thought a lot of that could also be covered.
From your organic free cash flow. So still leaves the question really all for how the $8 billion of liquidity that you have could be used so I mean, it's just wondering if you couldn't give us more thoughts on how M&A might feature it not I mean, it's now six month.
Since the voted affecting deal close so it'd be interesting to understand you know kind of walk situations you've looked at I mean tipping stories about Univision around in the press you know can you comment on how M&A might play a part and use of capital if a toll and then just as a clarification.
And just regarding the hundred million pounds of headwind in the UK, which would be around kind of 5% of Virgin. So CF is not a headwind. In addition to the 2019 trend, which was already down 2%. So we should be thinking about Virgin all else being equal down 7%.
Yes, the twentytwenty. Thank you.
I don't believe that's accurate and you're in a 100 million, but Charlie.
You can decide how you want to address that particular point with respect to capital allocation.
I think your first point is accurate, we do not intend to allocate significant.
Balance sheet capital.
To a build in the UK and don't believe it's necessary. So a combination of free cash flow and potentially third party financing sources would be the primary.
A source of capital for that.
At this important clarification, while we think the opportunity is exciting and we think they need and the ability to drive version to the rest of the marketplaces exciting I don't believe we intend to allocate significant amounts of balance sheet cash to that and don't believe we need to.
It doesn't mean, we won't put some cash it simply to say that you shouldn't assume we're we're opening up you know the spigot in poor and all that capital in the UK network build that is not the intention that wouldn't be consistent with our free cash flow objectives, and not consistent with how we would consider allocating capital.
Doesn't it wouldn't put some to work, but it's not a principal source of that so that's good clarification.
I would say you know any a few calls ago or maybe a two calls ago. We went through the buckets of capital allocation and we identify those as being first and foremost capital structure with meeting buybacks. While we took what 3.2 billion of our capital to work in that category last year, certainly can't be accused of not paying attention to that category or.
Well, we're being serious about our investment in that category. We took another 1.6 billion and de lever that was the second category. We did de lever the in the Central Europe area about 1.6 billion as part of the closing of the Vodafone transaction. So we certainly trend leverage a bit and that we thought was smart in that particular moment that.
Third category was core markets, that's what we've been talking about today.
Core markets, meaning UK.
Switzerland, Ireland, Belgium, Holland and that is where we think the first and best use of cash if it were necessary to be used.
It would be stat, and I think that is smart for us because that's where the biggest value gap exists today and I. Both in terms of apparently shareholders lives.
And so we want to be sure we're looking at creative and smart ways of allocating capital or perhaps even a generating capital in the core markets. Now. We did also say quite clearly in prior calls that we have an existing ventures portfolio. It's got a billion a value plus we think 2 billion.
And on hedged we have put in a money to work in various strategic opportunities small amounts of capital generally and when 8 billion of cash is there any 2% we should certainly be looking at capital solutions and in ways of putting small enough somebody the work that could create interesting opportunities I would say that is that is.
Not the main goal, it's not something that you get people nervous.
You know the reports about us quote unquote buying Univision for 9 billion were not accurate.
You know, but we will look creatively at deploying capital in small venture like ways in order to drive potentially future strategic opportunity, but that is the last category on the list. It begins with capital structure, followed by leverage followed by our core markets followed by that.
Say new markets indoor ventures, and that is he order in which we're looking at it that is the order in which we've been spending our time and effort.
And that's where you should want us to be spending time and effort because clearly that's where the greatest opportunity is.
Do you want to it was there you want to comment on 100 million Charlie.
Yeah, you're trying to get ready to give you guidance.
No seven cents ought to look if you take 100 million, it's broadly minus four I wouldn't you say look it's plus or minus is a hold into things like sitting as one offs and at some point.
As government, Texas whatever throat.
And get back to growth I guess to the industry as a whole I think you know some miss about Virgin version actually from a revenue growth, Yes, I got London is slightly down maybe slight down this year, but then the contract like thing, but actually performing group is on Monday. The other markets I think of the revenue decline largely to do the video business is not a cash flow generation I came up.
At this point about free cash flow.
Well, we lost them you know the capital intensity in version of the video products. It's nothing like the a the competency of the book on product.
Just a much better shape and people realize.
Yes. He thinks are true you got it.
You got to I think we're done operator, we're past we've got another question.
We do Sir we have our last question comes from the line of Robert Grindle from Deutsche Bank. Please go ahead.
Yeah, I think you're just steps in that.
May I ask about the distribution from Vodafone Ziggo and full year 20, do you still expect shareholder loan repayments or can the bulk of this paying dividends.
And then if I may just a follow up on the project Lightning builds cost I think you flagged it went down 20% on a per home basis, but it still over 600 pounds, not regardless of any new balance sheet off.
Off balance sheet vehicle to roll out more fiber can you get the existing project Lightning bill cost much closer to 55 level of using P.I. I. Thank you.
Well I answer the second question is yes, that's a prepare a quick response to that Charlie you want talk about Vodafone Ziggo distributions.
No I mean, I think you're quite right to point out the distributions are understated enough free cash for number if you got it back to 100 million Euro shall we learnt payment to us and 100 and you're obviously went to Vodafone in fact, you know free cash flow and a 29 thing, but I should be much harder than the 770 of number more like a 900. So that's that point I think at this stage.
Probably not three by the shuttle and that might change it would be lost and either that's a that's helpful from a from a tax money point of view.
But we will see but I think certainly and I've got it would be factored that in us and I think we're taking a relatively conservative view on distributions from somebody once again.
I mean on the on the lightning good cost right only.
Make sure that we compare apples with apples.
Correct.
Lightning cost 618, and discuss fiber to the whole lot all.
Ah crop, which are just go find our competitors actually fiber to the cabinet and that's really the last mile to the home included the that's number one number two is a if you said P.A. it's <unk>.
Substantially cheaper no.
Be assured that if we I'm a position to rollout or just sort of 72 7 million homes, we would absolutely leverage.
And why would we run it at the higher costs than our competitors. So therefore, you can expect us to get the TPP product on leveraging Pierre.
Hi, Thanks, Okay. Thanks, Robert Yeah, I think that I'm guessing that said operator, so we appreciate everybody jumping on the call.
Just repeat what I said again my remarks, we're focused on three primary things a sustainable free cash flow, we think the free cash flow story here is.
The most significant story and ones that we will demonstrate over time is is hopefully important to shareholders as well.
Secondly, closing the value gap I think you know that means and you should expect that we're focused a very seriously on opportunities to do that.
Core markets, and then thirdly being disciplined about capital allocation.
And and you know I think the 1 billion, we've allocated today due to shareholder buybacks its 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 today and down the road. So thanks for joining it and we'll speak to you said pickup.
Ladies and gentlemen, this concludes Liberty Globals fourth quarter 2019 investor call.
A reminder, Aaron 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.
Oh.
[music].