Q2 2019 Earnings Call
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I would now like to turn the call over to Mr., Mike freeze.
Great. Thank you operator, and welcome everyone to our Q2 results call. We always appreciate the opportunity to talk to you about our business of course in our broader strategic plans and today, we're sticking to the two man show, So Charlie and I will handle the prepared remarks, and then we'll engage the other key leaders as needed in Q1 and I'll kick it off.
On slide three which is entitled delivering 2019 priorities.
We thought that since we're halfway through the year would be a good idea to revisit the key goals. We laid out for you nearly six months ago. These with a big needle movers in our minds and by all accounts, we're making or have made substantial progress number. One of course was completing the announced M&A transactions with Vodafone and Sunrise as expected the deal with Vodafone closed a days ago with net proceeds of 11.3 billion and the Swiss deals in the midst of a phase two regulatory review and we think is on track to close in the fourth quarter.
Might be worth reminding everyone that these deals are a result of purpose full rebalancing, which saw us capitalize on the strategic and financial value of our fixed broadband and video networks in what is a converging marketplace in Europe .
And in each case generating double digit doshi of transaction multiples.
Now secondly earlier this year, we also talked about resetting our operating model and cost structure.
And that was in an attempt to reflect the reduced the size of our European platform and to unleash the efficiencies, which resulted in flat opex for three straight years.
Charlie has a slide on this in his section, but we are right on track if not a bit ahead of plan here on reducing our corporate costs and radically restructuring our technology services delivery platform, both of which will benefit doshi of growth as we confirm our mostly of guidance for the full year.
The third major priority was reducing our capital intensity as we look to optimize our recent investments in networks in products. Here. We are ahead of plan. The piney additions through June down, 25% year over year, reflecting a number of factors, including more efficient lightning build cost in the UK the completion of fixed and mobile upgrades in Belgium, I'm more focused product development and the decision to slow down CP swaps in the UK and while we didnt provide guidance on operating free cash flow I did mention on the call that we were looking at about 50% growth for the year, excluding Switzerland and through six months operating free cash flow is up nearly 75%.
And as Charlie will show all of our Opcos are generating significant operating free cash flow margins and growth and we are reconfirming, our free cash flow guidance for the year.
And then lastly, we highlighted the importance of developing plans for allocating our excess capital and I realize that we've been relatively quiet about that.
Mostly in anticipation of these transactions closing as you would have seen yesterday, we announced our first step with a $2.5 billion modified Dutch auction tender and this represents about 24% of our cash before completion of the Swiss transaction and roughly 13% of our outstanding shares. It would also bring total buybacks to $3 billion for 2019. When you include the $500 million purchased during the first six months.
Now the next slide on capital allocation tries to put this decision into context, a bit starting with a cash walk that illustrates how we get from the total transaction value for the Vodafone and Sunrise deals to our pro forma cash balance I'll leave it to you to review if needed.
But it shows pro forma cash of 14.4 billion or around $12 billion today before completion of the Swiss transaction.
On the right hand side of the slide we lay out our capital allocation strategy for that cash with five areas of focus and beginning not surprisingly with buybacks.
It should be clear that we fundamentally believe in this strategy, having now bought back $21 billion of our shares over the last 15 years.
But we will continue to be prudent and opportunistic in how and when we repurchased stock and as we have done in the past, we will continue to balance that against investments that create long term value.
Now Weve used Dutch auction tender is effectively on several occasions in the past some of you may remember.
We like this approach.
It gives us significant flexibility in how we size and price repurchases and it's easy and efficient to execute.
The plan is to launch formally on Monday next week and a closing 20 business days thereafter, the current expected price range was set off of yesterday's close and is expected to be 25, and a quarter to $29 for up to $625 million of class a shares and 20, 475% to 20 850 for up to $1.87 billion worth of class C shares.
Now of course, we may consider additional tenant offers down the road. We may return open market purchases or we may do neither we will make those decisions based on a number of factors, both internal and external at that time.
Moving down the slide it won't be a surprise to you that we continue to believe four to five times leverage is the right capital structure for us.
Of course, our net leverage today is something like three times adjusting for the Vodafone proceeds, but on a gross basis, we expect to be at or below five times and all of our credit groups by the end of the year.
Going forward, we may consider using cash to maintain these target leverage levels, but again, we'll make those decisions at the time based upon financial performance market conditions and things of that sort of that sort.
Now when it comes in deploying capital externally, we are first and foremost focused on our core operating markets.
Remember, we still have considerable operating assets in Europe , totaling 31 million fixed and mobile subscribers and nearly $5 billion of operating cash flow and an additional $15 million fixed and mobile subs and nearly $2 billion of operating cash flow coming out of our 50 50 JV in Holland.
We are invested in these markets, we have confidence in their prospects and we will look to fortify or capitalize on our positions if and only if attractive and compelling opportunities arise. This is in our wheelhouse as they say and shouldn't be a surprise to you.
Now beyond our existing operations, we will be highly selective I'll just say a few words here because this topic seems to generate quite a bit of commentary. One we are more interested in buying building and operating scale businesses in geographies and sectors. We understand then spreading capital around.
In looking at the deals we've done over the last 15 years. They all had a few things in common typically represented long term scale driven investments that leverage our deep technical and operational expertise in most instances created synergies with existing businesses we own.
They also allowed us to optimize the use of leverage.
Tax strategies and free cash flow, who can't find anything that meet these needs that meet these criteria. We are likely to go back to the top of the page it shouldn't be surprising.
And look at our stock in our core markets, but again, we're going to be disciplined and patient here and then finally.
We have a pretty successful ventures platform with investments that we conservatively valued at about $1 billion. Today. These are generally smaller typically minority interest or financial positions that we believe benefit our core operations will provide strategic value or insight or can lead to outsized financial returns you may see us add to or subtract from that portfolio using relatively modest amounts of capital I wanted to be sure.
You understand that and we will call out these investments should they ever happened as deals for the ventures portfolio.
Now moving to some operational updates beginning on slide five we had a disappointing quarter on the subscriber front. There is no other way to describe it but thats not the entire story, especially at Virgin and where the team has been focused on so many new strategies, mostly intended to drive ARPU and profitable growth. The top left you'll see quarterly net ads for our base of 23 million fixed broadband voice and video RG use excluding Switzerland.
We've been averaging around 60000 net adds per quarter over this period.
You know, reflecting good growth in broadband and voice and net losses and video in the second quarter. This year, we saw steady video losses, but slower growth in broadband and voice driven primarily by competitive market dynamics in the UK were going to dig into Virgin results on the next slide and Lutes will comment during Q in a but there are a few factors at work here. The UK market has definitely slowed down a bit with sales volumes off from prior periods at the same time competition has ratcheted up, especially at the lower end of both broadband and TV in the midst of that Virgin is maintaining a disciplined and balanced approach to customer acquisition and capital expenditure.
Focus on higher value customers and not chasing after growth at the aggressive priced entry level of the market.
Meanwhile, on the bottom left of the slide you can see that we continue to grow our 5.9 million mobile subs in Europe , where the strong postpaid quarter driven by new FMC bundles in the UK, which is where we've actually doubled the mobile attach rate and our new wego bundles in Belgium, which doubled postpaid adds compared to a year ago. So the mobile business doing well.
So the next few slides provide a more detailed update on Virgin media just a couple of key points here on slide six.
The first is that we returned to modest ARPU growth in the second quarter. Despite continued headwinds in pay per view and phone usage revenues.
Fact rental ARPU, a better indicator of our subscription business was up 1.2% in the quarter. We have reason to be encouraged about ARPU growth in the second half of the year.
With the announcement of a 4.9% average consumer price increase effective in September and October we've nearly 75% of customers have been notified of the price rise and so far reaction has been consistent with expectations. In fact call volume to discounts have been lower than they were last year at this stage.
And this year the price rise is underpinned by substantial product innovation like the launch of intelligent Wi Fi and the new Virgins TV go App and we continue to push our speed leadership, the 500, megabits available across our footprint and faster download and upload speeds offered to millions of customers without charge just as importantly, we remain committed to offering a best in class video experience and we were the first to launch Netflix on our box in the UK you know that we've now added Amazon Prime Bts Fourk Ultra high Def channel and a whole lot more content from Sky. Following a new multi year agreement, we signed last month and absolutely all the football available in the marketplace Virgin is still the only super aggregator of content and sports in the UK.
Now I've already addressed the lower volume figures at Virgin shown on the right hand side here and while the broadband market share of net adds was steady.
And churn was in line gross adds were disappointing again, a combination of a slower market and more promotional activity at the low end and in video the focus was on higher value paytv subscriptions versus a year ago, when Virgin, but triple play price was nearly at parity with a double play product leaks and his team have their work cut out for them. There's no question about that but there is good reason to be confident in their plans and the new product bundle called who has seen sales accelerate modestly month to month since launch in early June .
And the majority of the sales at the higher end ultimate package of 500 Megabits.
Which includes premium TV with sports and movies unlimited data.
On a Sim card priced at 99 pounds per month.
This will be good for ARPU, obviously and as I mentioned, the FMC strategy has doubled the mobile attachment rates and resulted in more postpaid net adds.
And Virgin remains the broadband speed leader in a market where all anyone can talk about these days from politicians. The pundits is superfast broadband.
Which is a good segue to the next slide on project Lightning and have three key points here.
First while it's an increasingly noisy marketplace. When it comes to next generation networks and broadband Rollouts Virgin is miles ahead of everyone else.
We already have 15 million homes capable of 500 megabit speeds, while the rest of the market relies on a copper network that delivers top speeds of around 70 Megabits per second.
And we have already built out more new homes, then all of the competition combined.
The second Lightning is absolutely working on an operational consumer and financial level.
We have built over 1.8 million premises as part of our UK network extension, including 232000 in the first half of this year and with build costs coming down.
Importantly, nearly 400000 customers in almost 1 million RG use had been added so far in the lightning network with our earliest cohorts achieving penetrations of 35% after just four years.
In ARPU over 45 pounds are right in line with the rest of the business. After discounts together. This means that lightning has delivered strong growth in revenue and operating cash flow, both up something like 50% year over year and Charlie will break these numbers down even further in just a moment to show you. How we're progressing and lastly, there is no operator better positioned than Virgin.
To determine how this next wave of fixed infrastructure investment unfolds in the UK.
Listen, we absolutely applaud the government's ambitious broadband plants, which call for superfast broadband access for every UK home and business by 2025 on the flip side. We also agree with BT and others that this will be increasingly difficult and expensive for openreach and undercapitalized fiber openness to achieve at least without substantial regulatory relief.
Which puts Virgin in an enviable position will be at one gig across 15 million homes in about 24 months. That's four years ahead of Boris Johnson schedule.
And we will be by far being the most important partner or platform for the remaining 10 million homes.
You should expect us to be exploring every alternative to creatively finance and participate in this expansion of broadband connectivity in UK, while preserving capital and optimizing free cash flow so stay tuned.
Now finally, I'll close with a couple of quick slides in our Swiss business, which as you. All know is in the midst of a turnaround plan thats hitting on all cylinders and just to remind you. There are four key drivers of the plan.
Beginning with transforming our TV proposition.
With our iOS and horizon for video platform by far the market's most sophisticated and cutting edge service, which includes four k. a voice remote a sleek user interface in cloud based storage.
This rollout is right on track for 50% penetration by year end with 190000 boxes already deployed.
And the product is working as well that's the most important thing with MPS higher in churn and calls and truck rolls lower Thats, what we want to see.
The second driver of the turnaround plan is to continue to push the convergence agenda. So we know from Belgium, and Holland that a good fixed mobile convergence proposition improves NPS and reduces churn and thats happening in Switzerland to the mobile base already at 170000.
Represents about 16% of broadband subs.
And Thats a good outcome. The third driver is all about broadband in future proofing. The network you PC customers already averaged 250 megabits per second average speed delivered by far the highest in the marketplace.
But the plan is to roll out one gig capability here in the fourth quarter of this year to further cement that position and then finally, we are investing real opex and real capex into our simply digital initiative and this will be a multiyear process, but we're already well advanced on the journey, which by the way is very similar to how sunrise as attack these challenges and opportunities.
So those are the drivers and on slide nine we show some results.
We talk about being right on plan and right on track, but we think it's important for our shareholders and sunrise shareholders to see what that plan is and has been so we've actually provided here our quarterly forecast on several metrics both historical and the remaining part of this year.
So let the numbers speak for themselves and feel free to review this at your leisure, but I'm guessing they'll get some attention in Switzerland, which is great. The punch line is that fixed charge you losses were better than plan in Q2 mobile postpaid adds have been consistently higher than planned.
Underpinned by our on our unlimited offerings, we've exceeded absolute revenue forecast supported by continued ARPU growth BCS price increases and positive tier mixed results and finally, we're ahead of plan on operating cash flow, which as a reminder includes our investment in simplification and Digitization and looks a little lumpy in Q1 and Q4 due to the timing of our investment in sports content. So wrong all the Swiss plan is tracking to our internal forecast. The same numbers, we shared with Sunrise and we couldn't be prouder I couldn't be prouder of the job Severine and her team have done in Switzerland. So a lot of information I'll turn it over to Charlie now to go through the financial update and then we'll get right to your questions Charlie.
Thank you, Mike I'm going to slide into rental revenue you know CF growth. This is a summary of our key financial results and the group as a whole recorded negative revenue growth from quarter, 4.9%, let's see if the coupon of 4.3% now there were a number of one offs impact to your sales figures, including around $12 million of several one off retention payments.
Some of these impact to the UK and on them, which reported negative mostly of growth of 2.5% posted revenue growth of 8.4%. Belgium was also impacted with the most of the medium contract, which was also the negative revenue no CF growth of 1.5% and 3.6% respectively.
Without this impact, Belgium, mostly of growth would be broadly stable.
Mike has discussed Switzerland. The Q2 performance remains in line with our financial expectations for the year. Despite reporting negative revenue growth was 3.9% and the diversity of growth of 8.7% in the quarter.
GE had good revenue growth of 2.9% supported by Newbuilds and B to B to fund some problems with a slight decline in those cfptwo to programming cost increases.
Central another important to say revenues of $60 million for the quarter limit associated cost of $90 million, which I will now address in more detail on the following slide which we called discounting central.
We think of central spend in two separate buckets. The first is more classical corporate spend.
During the group functions for finance legal HR and development.
We spent $260 million on these functions in 28 team and are on track to reduce this by 20% by 2020 as we support a smaller group close the disposals.
The second category is our centralized spend in technology and innovation.
Im going to decide to spend that we've taken out of our country operations and centralized in order to realize scale efficiencies.
In 2018, this was around $800 million and we expect that to reduce to around $700 million. This year, and then around $600 million and 2020 .
A large amount of this spend is rechargeable the companies, we have sold including Vodafone Ziggo formal Austrian business.
And we estimate that in 29 too if the disposals to Vodafone and Sunrise that occurred on January . The first this would have resulted in a net allocations of Virgin enough CE businesses around $250 million over revenues from the two assays are projected to fall over the next four to five years, we intend to keep the net allocation to Virgin and CE broadly flat during that period as we're able to flex down the costs of the centralized activities.
Moving to the next slide titled any additional fees for Q2, we reported any additions, excluding switzerland of around $600 million or 24% of revenue, representing a 25% year on year reduction, including Switzerland, we still reduced our capex spend by 21% year over year and continue to target a reduction of approximately 20% for the full year.
The increase was largely driven by the UK.
As the prior year growth would be six set top box has not been largely concluded and that's been a reduced cost per lot improvements in Belgium, we have completed the fixed and mobile network upgrades as well as some significant IP project spend so the only operations reported an increase with Switzerland.
Which relates to the growth investments into the PC TV rollout the one gig upgrade the Digitization program.
On slide 14, we set up the AOCF in Capex for our key divisions and how this translates into Oh Scf operating free cash flow for the first half we split Virgin into enlightening and our core cable businesses have been very different subsea characteristics and Weve also allocated the central Tonight costs through our retained assets using the same methodology as we use the TSS agreements.
Now as the revenue growth from the core cable business has slowed we are seeing significant FCF generation in the first half of this year is up nearly 40%.
No $193 million now if you add back the investments in mining the figure for the first half of the year would be $1.15 billion.
London continues to be a major investment for us and we spent $235 million of Capex year to date, resulting in no FCF cash outflow of $157 million.
Okay, let's see if growth is very strong with half one estimate to those who have over 50% $78 million.
As you can see from this slide Belgium is converting 29 cents and every dollar into CF.
And if you include the recharges, the UK X lightning and Holland have slightly lower margins and convert 23 and 25 cents on the dollar respectively lower margin in the UK is largely because they run into mobile networks will be empeno, rather known one.
Well the 100 weeks, what the margin to rise as we continue to realize the synergies from a merger with Vodafone, which are largely been achieved in the comparable merger but until amount.
And remember because of the tax attributes in both the UK and Holland, Unlike Belgium, there's no cash tax payments and other market, making them very efficient free cash flow generating assets.
Despite investments in the turnaround plan, Switzerland remains a very cash generative assets with low FCF margin of 24%, including recharges Despite increased capex spend.
Turning to the next slide we summarize the results in free cash flow conversion.
We've broken down the free cash flow to show for an off to working capital and operational finance.
In Q2, the free cash flow before these items was $511 million for the quarter.
In contrast, the Q1, there were no cash interest payments and you'll see a similar picture in the second home with significant interest payments in Q3, and none in Q4 tax paid in the quarter was the payment of our 2018 accruals for Poland and the United States, which are only current tax pass over them telling us.
In terms of telephones ago. The company has reconfirmed as guidance for shareholder distributions of four to 600 million euros for the full year.
However year to date, the Jvs owned disbursed $24 billion and we expect the balance during the second half of the year.
You should note that our share of the four to 600 million euros include shareholder loan repayments to us of around 100 million euros, which we do not include within our adjusted free cash flow definition.
Our working capital and operational finance loan was positive in Q2 at $35 million, resulting in adjusted free cash flow for the quarter of $546 million for the full year. We expect this category to be slightly positive on a source of cash flow.
We remain on track for our full year free cash flow guidance of $550 million to $600 million that includes our estimated $400 million to $500 negative free cash flow from project blood.
On the next slide entitled balance sheet, we said on our current leverage targets.
Pro forma for the Vodafone transaction Q2, gross leverage is 5.2 times, but none of the deal proceeds it's three times.
We remain committed to the four to five times leverage ratio for the group and we'll continue our policy of long term debt maturities and fully hedging FX and interest rate exposures as of Q2, our average life is around seven years and a weighted average cost of debt is around 4.1% as a result of the disposal of certain CE countries as part of the Vodafone transaction, we repaid the $1.6 billion CPC term loan, resulting in a leverage ratio you PC of 4.6 times.
Upon the sale of you could see Switzerland, we will transfer the remaining MPC bones to Sunrise.
Group and the rest of the facility, marking the end of a 20 year history of borrowing on WPC group proposed to re lever the rum eastern European assets opponents Rockier to around four times following the completion of the Swiss disposal, representing additional debt approximately $900 million.
So going to the conclusion slide the sell of Ulysses was that remains on track and the business fundamentals continue to improve in the UK. The annual price rise has been announced and our sky constant negotiation has been completed in line with our purchases assumptions, we continue to see strong FCF and free cash flow generation in our core cable assets and we're reconfirming, our 2019 guidance target with that over to you operator for questions.
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Well go first to Maurice Patrick with Barclays.
Good morning, guys I'm, just more seven buttons.
Just a couple of questions. Please on the UK.
It's really mind touching on your comment about pushing on investments in some of the comments and Boris Johnson announced investments in next generation access there's been some press reports about you looking it's investing beyond project lightning.
And I'd just love to hear your thoughts around because of a long term investment one lighting is done and the obstacles or touched upon entertaining the idea of that offering whole southern cross doing that work or have your thoughts on how can I come from the UK changed. Thank you so much.
Hi, Maria it's not that there's a lot of questions. There on wholesale access our position has been pretty consistent across Europe , which we don't think it's a particularly good idea and it discourages investment in infrastructure by cable, which is the only competitive platform out there to the phone operators on the other hand, you know we have had to utilize it in Belgium, where it was acquired and in some instances we have in the past looked at a voluntary or I would say private negotiation. So we're opportunistic and I think were creative in how we approach it but but we certainly our position has always been from a regulatory point of view it should not be mandated.
And in some instances we have in the past looked at whether we would partner with companies who might be interested in utilizing network, but that is a private transaction not one determined or priced by the government big differences there.
That's what I'd say in terms of building beyond lightning.
We think the lightning footprint that we originally estimated a 4 million homes will be built about half of those are most is is still attractive to us and we're evaluating certainly market by market and city by city, how to do that in the most effective and efficient manner.
On the other hand as I mentioned in my remarks, there's quite a bit of activity occurring.
Across the marketplace and there is at least another 10 million homes that somebody's going to build I don't see us doing that on balance sheet as a lightning like project, where we're funding in and out of our operating free cash flow.
But.
Virgin is by far the best partner, if somebody is looking to build those homes, because we bring obviously a great brand ability to penetrate quickly and potentially outside capital to do something off balance sheet. So, let's just say that we are in the mix as we should be in any discussions about building. The next wave of networks outside of where we already have built superfast broadband we feel like our 50 million homes with one gig ready go into 10 gig is it.
For that footprint, but beyond that footprint, we're going to be opportunistic to see if we can put capital to work off balance sheet.
Without consolidating losses and.
Activities.
Potentially with partners just to work just to get burgeon, possibly in the Virgin brand to a national scale wouldn't that be great. A Virgin was a national brand not a regional brands in half the marketplace.
We know on footprint, we generate 50% market share we beat P.T., we beat Sky on footprint in video and broadband we know that.
If we could expect extend our footprint potentially using other people's networks are participating in off balance sheet type type network construction that could be pretty interesting. So it's all very preliminary and it's worked you would expect us to do.
But abiding by the the the points I made in my remarks, which we're looking at opportunities at our capital efficient optimize free cash flow and largely off balance sheet.
That's a longer answer than you probably wanted but hopefully that's clear.
That's great. Thanks, so much into it.
Well move now to Ben when Byrd with Morgan Stanley .
Good morning, guys.
No.
Hey, Good morning can you hear me.
Hi, Ben Yeah, we got you.
Okay, Hey, Mike.
I know you made some comments earlier, Mike about sort of the rationale behind the tender, but I just wanted to come back and ask you know.
My sense that maybe I, just misinterpreted I said over the last couple of calls as you guys were sort of suggesting that the cash wasn't going to burn a hole in your pocket, you're going to take your time et cetera, et cetera, and obviously you still have a lot of capacity. So I'm not you know I I get the numbers, but I just was wondering anything changed between you know may and now to lead you to launch the tender for two and half billion.
You know if there is any sort of change in how you're thinking about allocating that capital that we should be aware of.
And then secondly, you know on the subscriber trends in the UK you mentioned competitive environment I'm, just wondering as you look out through the back half of this year. You know do you see that getting any better any initiatives you guys have on either churn management, it's probably for Luca.
Or or or or new bundles to help try to drive that or you or maybe you're just focus more on EBITDA and ARPU and you're not going to chase subs I just love an update there.
Sure or at least once you work up in answer to the to the UK question on the tender I don't think our position has changed materially I mean, if we had announced this morning, a two and a half billion dollar buyback program. It would have taken US you know based as you know on rules and restrictions pretty long time to get that money put that money to work. So it's our view that these Dutch auction tenders are efficient you can launch them and be done in 20 business days, we're not suggesting this is the only one we'll see what happens to the market or our alternative uses of capital.
What I meant to say on on patients was really about and discipline was really related to transactions outside our core markets and let's say in new markets or new opportunities. There seems to be a fair amount of concern at least I hear it and are re IR guys here that we're going to turn around and buy something nonsensical in a in a sector or market, where we have no expertise or no capabilities and that's not what we're going to do and the patients and the discipline comment was really related to our opportunities outside of our core markets, where our core capital structure.
And I'm not.
I'm certain we have those capabilities to do interesting things, we're just going to be very very selective about those.
In the meantime, you know, we'll look at where the stock trades and we'll look at what other opportunities we have to be to solidify and grow the businesses that we already own and operate which we think are substantial great free cash flow generators.
And have the ability to to be re valued in this environment No question.
That.
Our stock today has zero value from Virgin media, maybe negative value purchase yes.
Which is incredible to me. So you know we know there's huge opportunity to create value in and and demonstrate value in the UK based on our cash flow characteristics on our market position all strategic opportunities and you don't have to be heroic in your assumptions about what that value might be.
On any metric to to know the stock's undervalued. So we're going to look at that I would say quarter to quarter.
Every six months, we're going to be thoughtful about what the best allocation of capital is but the patients in a disciplined manner. It was really more geared towards.
No.
Doing things outside of our core business today.
Got it.
Luke do you want to address the UK point yeah.
Yeah, Hi, Ben.
So before I give you a bit of an outlook just maybe one number two to compare a bit the market size right.
Broadband market Q2, 2018, 171000 net adds on Openreach in our network.
I neglect the ordinary.
This year 14 pounds right. So the market is materially Don.
Our churn like for like has been stable at 50%. So this about growth in that market.
And I think we are if you compare our number we got almost.
Close to 50% of the entire market or 80% onto our coverage right.
What we are not doing is.
Chasing for the low end of the market and right I mean, that's moved up on this now Brochmann from Sky 17, 20 pounds, we're not fishing in that segment. So therefore, you won't see us changing our strategy in that direction.
What will help us in the future I think if for things. So we have launched fixed mobile convergence.
Middle of June was our campaign.
That has already helped you see that in the mobile subscriber, although it's only less than one month of month market launch.
In Q2.
And that if you see steady growth that leads to a lower churn and high ARPU. So this is really a momentum we will be using going forward more more.
Number two and as Mike has said earlier on right we have.
All soccer available we have a very strong sport package. So Q3 is about that in general Q3, and Q4 are the strongest quarters in terms of sales. So therefore, we are prepared for that and we are leveraging more and more digital and data or digital.
Our share of channels is increasing.
So therefore already in July we've seen materially higher sales numbers.
However, having said that don't forget that we have put our price rise for war by two months.
Yeah. So.
Two last year. So therefore, you will we will eat up some of these additional sales we are already generating by some churn. However that was planned and as Mike said earlier, our own 75% off.
Letters and emails have been turned out and reaction is better than last year, but last year. We had also a bit the UK TV a struggle going on so that part is as expected.
Okay, that's great color. Thank you.
And well move now to Christian thing men with HSBC.
Yeah. Good morning, and I was just following up on the on the buybacks I think they did the plan is a bit below what the street was expecting I mean, <unk> fleet should definitely big number but beyond that so I was curious are you updating US then you know on a quarterly basis or could it also be in between quarters. If you think you may do more tenders because you just mentioned.
It may not be the last one you do.
So interested in your view on that one.
And then maybe on the UK.
I mean, you signed a new deal with Sky a content deal and I think for the full year you have to you know content cost going up 60 to 80 million pounds. I think it was the guidance for the year and can you maybe give some color. If you are more towards the higher end the mid end or the low end so would be interested in that one.
Fair and that was I think guide you allude you correct me I think the Sky deal is where we thought it would be so.
But you can provide some color on that later if I missed it.
I'm pretty sure we're right on where we thought we would be in terms of what we might have forecast to you on the on the guidance in terms of the buybacks I think what I said in my remarks, I'll repeat which is we could do more these we could launch tender buyback programs as we've done the best well, we could do neither it doesn't it's not a good idea for me to signal to you well, we're going to do these every quarter and people will be interested in selling shares and won't be tendering and were interested in owning more share. So you know my goal here for shareholders, who are going to be long term shareholders is to acquire shares at the most efficient price that we can acquire them at this point. This is all we've got going on.
And so I don't anticipate quarterly updates.
On our quote unquote tender offer activities, but if we are to launch additional tenders down. The road you are likely not to know about that until we do it I mean that's.
Kind of how it works.
So I don't believe this is something that we're we're going to.
Discuss on a quarterly basis I think we're going to look at how this particular transaction performs and our ability to efficiently acquire more of a company. We believe in and then we'll make decisions.
And we will be looking at it of course quarterly and making decisions about how best to utilize capital on a quarterly basis, but I don't know that we will be.
Signaling to you in our in our earnings call every quarter exactly what we may or may not do just as we didn't signal to you up until this particular tender what we were going to do because we're you know we're still evaluating those options real time limits on the Sky deal you want to just confirm what I said.
I'm pretty sure that yeah.
I'm interested of course, we cannot really disclose any details I think what I can say is the general idea was between sky and Uh Huh.
To create win win potential when we close the deal so future gross revenue jointly and I can say, we have tremendous should do so right. So we can now jointly monetize you HD together, we got much more boxes. So we are able to monetize that trial. That's more customer we are able now to really integrate sky movie into our Liberty go apps to increase usage here and we've got a lot of additional benefit so therefore.
Right. It's it's boas is it in the range, we have expected as Mike said it is but I think more importantly, we found a way to make up for the cost increase business. Both on price increases, but also simply saying selling higher value packages to the customers and this exactly what we're doing.
Okay.
And maybe one follow up if I may I'm also on Virgin I think there was some news yesterday from Virgin.
And that Virgin's addressing off comes ongoing review of the of the broadband pricing and related efforts to protect customers running out of that minimum contract period. So it looks like Virgin may address 100000 customers that are you know vulnerable, let's call. It kind of just able to pensioners unemployed people. So can you maybe quantify the effect where the cost to embed it should to that kind of approach that divergence taking.
So 2020, maybe.
Just a rough feel.
I think it's it it's very small and Christian so it's it's a smaller tam and at the end.
Right. If we if you do that and your customer centric you come to a much lower churn and it with these customer right. So therefore.
I think the impact on 2020 is neglected but.
Okay, great. Thank you.
Well move now to James Ratz, Sir.
New Street research.
I guess good morning. Thank you very much indeed I had two questions. Please the first one just getting back to the topic of Houston pretty <unk>.
Hey, what you've said so far but was just wondering if you could talk us through.
How you see some of the relative merits.
Some of the deals.
Kind of being discussed I mean, nobody in the UK is one area, but I think in the past you've seen us about.
Mobile performance you how many you now feeling more comfortable with that there's also been some speculation you might look in Latin America.
I mean, given your comments about geographical focus are you able to rule out categorically doing any deal in Latin America.
With the capital you have almonds thoughts around kind of deals in the Benelux area as well, it's interesting that you kind of.
Preference for turns thinking around those kind of options.
And then follow up question I had was just getting back to the price rise in the in the UK.
I mean, how do you weigh that off against what your market share tolerances, I mean, I'm looking at the <unk>.
In taking price for a while and it seems like they know how to give us engines, a bit and say that no longer willing to cede share because that pricing approach led to customer losses. How do you think about that potential trade off going forward. Thank you.
James on the use of proceeds I'm not going to.
Get into that year on this call.
I can just repeat what I said, which is we will look at things in our core markets first as we should and then possibly consider things outside our core markets, if they make sense and fit.
Pretty a pretty tight.
Group of criteria for us.
So I hear what you're asking and I'm sure. It would be it would be a great info, but its not prudent for me to get into the relative merits of any one transaction or any one opportunity as things unfold and become real will certainly comment on that.
You want to talk about price increase.
Yes.
I mean, yes, I do thanks bye.
And so we are growing still market share right I mean.
Although it was.
No not the strongest quarter in general at this this quarter, we are flat, but in general we're growing market share. According to our information our churn is substantially lower than from from the competitor you mentioned and.
So far customer reaction is in line I mean don't forget we are targeting the high value segment of the market and we spend a lot of money for increased speed now intelligent Wi Fi better content high up those be better boxes.
And also a lot of.
Money in better service so.
I think we are not in the position to say.
Do we really shrink at the business or not.
And and I think when you look at the UK market you see higher competition on sales rosette marketing.
But you see still a pretty rational approach in the customer base right Sky has taken price rise Netflix has taken price rise talk talk has taken price rise, even bts taking price rise on the.
BT sports packages so.
I think we have no reason to change our approach here.
Yeah, I mean, it's got to have a 5% price rise in April as you guys will again.
Which by the way, we did not pass through to our customers show.
Our price rise will to some extent compensate us for not having passed through this guy price rise to our customers.
So I think that's noteworthy.
Good that helps James Thank you for that just yet and that's great. Thank you just going back to the point I mean outside your coal markets might look more attractive than doing a deal within your existing core markets today.
I mean, again I'm not going to get get into that with you I think that that wouldn't be smart for us to start.
You know other divulging or if we have things you know preempting those kinds of opportunities.
It's just not a good idea.
I would be it would be a generic conversation and I don't think it would be particularly useful for you I did describe that we like businesses and have always benefited I think from owning and operating businesses that have scale capability that are in our wheelhouse around technology and subscription and businesses that we understand well.
We know who we are we know who are not so.
You can look backwards, perhaps does look forwards.
And you know at one point, we were operating in 40 different countries around the world. So there's very few places we haven't done business doesn't mean, we're interested in doing business in those places today I'm simply saying.
That.
We have a pretty long history of I think you are investing in the types of opportunities that we think.
You know fit our profile, but to be specific about a territory or market or an opportunity would be prudent at this point.
Great. Thank you Mike.
You got it.
And Evercores BJ giant has our next question.
Exactly.
Hey, Jay.
Hi.
Hi, James Ratcliffe.
Just on the.
Now did you do Vodafone check is cleared and you've got the cash on the balance sheet I'm wondering if you if you talk about the trade off between.
Having a lot of liquidity available for opportunities and I think liberty generally done well by having liquidity when others did historically.
Versus the negative arbitrage associated with account, which actually I'm going to be 100 million Bucks a quarter or so and do you have flexibility to essentially reduce that negative arbitrage.
Well still keeping a lot of liquidity readily available should opportunities arise.
Thanks.
You mean, the negative arbitrage on our debt.
Basically, yes, I'm, just happy cash versus having yeah. Okay. Yeah, I got you I got you so I think its.
I I just a couple of answers to that one I think having liquidity as you point out is a huge advantage.
You know one thing John and I have seen many of you have seen is.
Market volatility comes and goes and there are many.
As always it's always good to be in a cash position. When you don't know what the future brings and that's you know more opportunistic than anything and so there isn't any while there is a cost of carry there is certainly an opportunity cost not not having liquidity. So as you say rightly, we balance that off and we balance it off dynamically and actually generating cash Charlie and the team.
Our.
You know charged with one of the reasons, we put all the money into dollars is we believe we can generate a better return on that capital than we could in euros or any other currency and so Charlie and the treasury team are going to do their best to generate a maximum amount of return that that can be prudently achieved on that capital and so that will certainly help a little bit.
And then if necessary and on occasion as we talked about around leverage you know will trim here or there so.
If needed so I think it's going to be a combination of things as you rightly say little tension between liquidity, an opportunity and cost to carry but if we can get the treasury guys did to work their magic hopefully, we can shrink that a little bit.
Charlie you want to add anything.
Yeah the one.
I just don't think it's 100 in the quarter I think it's because of debts for is in US dollars you're getting so many mills are too. So it's roughly a 2% negative Korean and performed well, but was about 12 billion. So.
It's more like 240 million.
You know is the bid offer in terms of the cost of the option and as Mike said, you know, we'll continue to evaluate the best way to run the negative carry but it's more it's not a 100 million a quarter that going.
Great. Thank you if you have two clarification okay.
Well move now to Matthew Harrigan with benchmark.
Thank you you have to.
Thank you you have to feel fairly vindicated on Vodafones Diego given the turn around their fastest growth business in Q2, how do you feel about the fixed mobile convergence benefits I mean do they come in line with what you expected would be even higher or is there anything or any runway still on getting that and then clearly if you get a little more expansive on the Vodafone Ziggo valuation of your stock gets even more ridiculous <unk> inexpensive and when you I know you're not going to comment too specifically on any sort of transaction on re unwinding, the JV, but should logically traded at somewhat lower multiple if those those synergies are pretty much been been realized at this point I think it's an asset that maybe the street, maybe including myself neglecting little bit. Thanks.
Yeah. Good question first of all the synergies Havent all been realized I believe we're only about halfway through the synergies.
They may or may not have addressed that so that pneumatic public but my understanding is that we're only about halfway through the synergies originally projecting 210 million and I think as we've indicated.
You know likely to exceed that just because we always do in these types of businesses and I do agree with you.
You know that it's been terrific to see the business returned to revenue growth and good you know good Oh, she have growth in the race.
Their expectations around that and it is a function of both the natural synergies that occur fixed mobile.
Mergers is the reason why we repaid 12 times for Germany, it's because the synergies are massive and they are real and they work for a mobile and fixed platforms and weve proven this out now and how many transactions I can't even keep count in Europe , so far.
And as you know so I think all positive indicators, there and we're pretty excited about.
How they're performing as a team.
Well you know what it's worth is you know you can come up come to that value added a bunch of different ways, whether its a.
Levered free cash flow yield or operating free cash flow multiple even an EBITDA multiple I would suggest we would we would think theres very little value if I should talk for that business today.
But we continue to be supportive of it we think the team's done a great job.
You know, we think it's been a terrific partnership with Vodafone him are both really pleased with the business as it sits today.
Thanks, Mike anybody want to add to that Charlie you're on the board and you want to add to that.
Hi, Good I think it's done very well in fact, I think in some respects it could be the most successful internet, which is obviously one comparable.
You could look out in the free cash flow conversion.
As a growing other synergies should drop towards the similar talk margins are telling us. So no I think I would like it so it's a very attractive us or them lots of Uh huh.
Thank you.
Well go next to pivotal research groups, Jeff Wlodarczak.
Hi, guys.
Hey, guys I'm, one of the UK and one on Belgium.
UK, you've had a number of one off.
Hitting EBITDA, mainly the higher network taxes, but as far as I know or are not going higher after 2020.
You, obviously got a a large program price increase this year.
Do you feel comfortable that the core UK business is going to be able to sustainably grow EBITDA.
Once you get past these overhangs and then on Telenet.
I wanted to get your thoughts on this whole situation. It just seems like the regulator.
Just wants the wholesale price to go down and continue trying to push it out trying to force you guys.
To do a single play you know how do you how do you push back against that.
Well that includes cook up his views on the UK question I think the Belgium wholesale question remains a thorn.
In our side and as I've said, many times and John Porter said, many times, it's a highly political marketplace.
And you know we do the best we can to address those politics and to point out.
The absurdity in some cases of what they're proposing we fight them in court, we appeal to the EU. We do all the things we're supposed to do you know where a rascal an opinion there but.
But at the end of the day, we know that that the way in which they are trying to regulate this market is wrong fundamentally wrong now the flip side of that is we're doing pretty well either way.
You know if you look at Orange, Belgium, or their subscriber base on our platform is not that material I think it's roughly 130 140000 subs and the amount of revenue quote unquote at risk.
In a wholesale change of pricing is not that material either so I don't want to overstate.
The impact of what may or may not occur and the regulatory side on the other hand, I do want to do on a I don't want to understate and I want to be sure. It's clear that we don't agree with the way in which they are approaching this market and you know in Holland, where we have similar conversations it's much more reasonable and rational. We also don't agree with what they how they are approaching it but are there on the other hand, it looks to be coming at it from us certainly more healthier point of view.
So we fight the good fight I mean, I think the good news is it's not a material impact at least based on current wholesale revenues.
We can't be certain how it will unfold all I can tell you is we keep fighting the good fight and we're as a focused on this as anything and it does it does really feel to US you know to the extent you're concerned about contagion or anything else. It does really feel focused in the Benelux, partially because of the success cable has had in those markets for decades, not just recently.
Tell him that's market share is quite substantial relative to production us and others and and Vodafone Ziggo as a market leader. So I think it's partly a reaction to that.
And partly reaction to politics part of which we control and obviously the rest of it we just we can't so [noise].
I Hope that's helpful was there another question John .
Yeah, well the take yeah.
Yeah go ahead yeah.
Well I haven't so so I mean, we have a.
We we did the consumer strategy right, which is 80% of the business Enbridge media.
Last autumn and we came up with four growth drivers right. One is fixed mobile convergence. This is launched now early signs are positive, but that takes a while we have 20%.
Fixed mobile convergence customers when you look at where the funds they go up or a tailwind that they have more than doubled our huge opportunity for lower churn and a high ARPU.
And far too early stage, but positive signs.
Second one is base management I mean, we have higher speed, we have from our intelligent wildfire leap try our customer satisfaction, we are going to launch.
Rising for our new video platform, which has been launched in Belgium and.
[laughter], Switzerland, so far so you you'd be I'd be assembly to leverage that and to get to lower churn.
Then we run a digital transformation program the impact this huge it's a big change for the company, but others have done it successfully why wouldn't we do it and that more segmented say, it's the more the market. This mature the more the go to market has been segmented for m. views the so.
So whole machine leverage closer to the consumer machine. So therefore, we believe that when all these growth drivers I'm place.
Cause.
We we will come to two.
Growth again.
I'm not in position to give any guidance also headwinds from netbook, Texas and also content costs are getting down a bit in the future. So both should help to to get back to growth, but we do have headwinds I mean, just to your point, Jeff next year. There are we do still have.
Increases in both year over year in network taxes and program. So we'll provide more visibility on that as we get you know obviously into our.
Got into the following year, but there still is some there are headwinds there having said that I think looters on is actually absolutely right. We're doing all the things that we think we need to do in that market or to grow the base and to grow profitably and to drive cash flow in particular free cash flow.
I think that brings us to the top of the hour. So I'll just close it out first of all.
I appreciate everyone joining second I'll, just repeat that we feel like were.
Doing what we told you we would do at the beginning of the year number one to get these deals close out to people Didnt think we would.
We always felt we would have gotten close on original terms and that's important to us.
We're driving costs down in the corporate and T.N. <unk> space in our company that is critical as we de scale, we needed the scale of what we do and how we do it and a lot of good work happening there, which I think will benefit both operating cash flow and operating free cash flow, we're driving capex down actually not 20%, 25% through the first half of the year.
And that hasn't been difficult and it hasn't had an impact.
Material impact at all on our ability to create growth and we're and we're delivering on the promise to put capital to work you know we didn't waste any time you know there's only been a few days since we closed that deal and were out in about a more excited about getting that tender launched formally on Monday stay tuned for for that people work in those details.
Thanks for joining us and well I will speak to you soon thanks everybody.
Ladies and gentlemen, this concludes Liberty Global's second quarter 2019 results Investor call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's website.
There you can also find a copy of today's presentation materials.