Liberty Global - Q1 2023
May 10, 2023
Transcript
Operator (participant)
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Liberty Global's First Quarter 2023 Investor Call. This call and the associated webcast are the property of Liberty Global. Any redistribution, retransmission, or rebroadcast of this call or webcast in any form without the express written consent of Liberty Global is strictly prohibited. At this time, all participants are in a listen-only mode. Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at libertyglobal.com. After today's formal presentation, instructions will be given for a question-and-answer session. Page two of the slides details the company's safe harbor statement regarding forward-looking statements.
Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company's expectations with respect to its outlook and future growth prospects and other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed Forms 10-Q and 10-K, as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based. I would now like to turn the call over to Mr. Mike Fries.
Mike Fries (Chairman and CEO)
Thanks, operator, welcome everyone. We appreciate you dialing in for the call, and we look forward to covering our Q1 results and of course, answering your questions. I'm gonna kick it off on slide three with some key highlights. As you'll see, we've organized these comments around our three pillars of value creation, which should be familiar to you by now. The first, of course, is our ownership and operation of our core FMC champions, which we believe are among the best mobile and broadband platforms in Europe. We were the first to recognize the benefits of fixed mobile convergence, and we've always had a strong track record in realizing those benefits, which include scale, synergies, and the operating strength that we generate from lower churn and higher NPS.
The first quarter was a solid result with 90,000 postpaid mobile and broadband adds, roughly on par with last year. As we'll discuss further, we've stepped up our pricing actions to help support revenue growth through the balance of the year. Network upgrades are also progressing well with VMO2 leading the way. We added over 100,000 new UK homes in the quarter, bringing total homes serviceable by gigabit speeds to 16.3 million, and with average customer speeds delivered now at 5x the national average. With our fiber upgrade underway, we're on track to grow our UK footprint to roughly 23 million fiber homes by 2028. As Charlie will detail for you in a minute, we're on track to hit our financial guidance as well across all of our operating companies.
The second pillar is our ventures portfolio, which is valued today at $3.4 billion. That's up from year-end. The main difference here is the roughly 5% stake in Vodafone we purchased in the first quarter and the acquisition of our data center business by AtlasEdge. That's our largest infrastructure investment. It bears repeating that we remain focused on disciplined disposals out of this portfolio, and we have a number of processes underway. The goal isn't necessarily to have a bigger ventures portfolio every year. The goal is to generate above market returns on strategic investments in tech, media, and infrastructure that either benefit our operating businesses or take advantage of our unique track record of buying, building, and profiting from investments in these areas over the last 15 years.
It's also important to point out that the ventures portfolio does not include certain assets that reside inside of our OpCos that could be, and in some cases will be, sources of cash to Liberty Global. These include towers in the UK and NL, as well as property and certain media assets across the group. The third driver remains our capital structure and capital allocation model. We recently announced two transactions to support these strategies. The proposed purchase of the minority stake in Telenet, and our intention to redomicile from the UK to Bermuda. Both steps will open up opportunities for value creation and value crystallization.
The anchor of our capital allocation model remains our stock buyback program, which is in full swing with $330 million purchased year to date, that's towards our goal of 10% of total shares by year-end. While we're not changing the 10% goal today, given current trading levels of our stock, you should expect that we may accelerate our purchases through the first half of the year and possibly beyond. It's worth reminding everyone that our balance sheet is very, very strong. We have no long-term debt maturities for six years. Our interest rates are locked in at around 4%, and all borrowings are siloed and hedged into local currencies. I've had a few folks ask me what we mean by value creation and how we measure it.
For us, it comes down to really just one thing, and that's making strategic, operational, and capital allocation decisions that are ultimately reflected in the price of our stock. There is no other metric for us. While it's frustrating for everyone that we haven't seen the value reflected in our share price, potentially as much from industry multiples, currencies, and macro developments as anything, we're confident that these are the right core strategies. Specifically, if we drive growth in our core FMC markets, use our capital structure to manage a levered equity buyback model, and find ways to accelerate the monetization and crystallization of value for the benefit of shareholders, this is gonna work for all of us. Moving on to some operating updates. Slide four presents our broadband and mobile connectivity trends for the last five quarters.
You'll see right away that despite competitive pressure from incumbent telcos, resellers, and in some cases, altnets, we continue to deliver solid results. VMO2 on the top left added 29,000 broadband subs, which compares to a flat quarter a year ago and was a particularly strong result given the 14% price rise we announced in February. We're seeing limited impact from altnets in the market since, as I just mentioned, we already offer 1 Gig speeds everywhere. In fact, churn is stable and our share of broadband sales is up to about 20% nationally in the U.K. and of course, even higher on our own footprint, which is roughly half that. Also, we continue to add subs on both the BAU and new build territories.
VMO2 postpaid mobile ads were negative in Q1, which is typically a quarter with more activity at the lower end of the market. As you know, we're squarely focused on the more premium end of the market and do particularly well when new product launches are coming up. We also reduced our retention offers a bit in order to maintain the customer value equation in the quarter. Sunrise had a strong quarter of 7,000 broadband adds, despite continued headwinds from the UPC brand phase out, which we've talked about. Overall, the market was relatively stable from a competitive standpoint, with a slight cooldown in broadband price promotions. Postpaid mobile ads at Sunrise were 36,000, which was a strong result given continued low prices from Salt and Q4 seasonality and was supported by both B2B and our flanker brand, yallo.
VodafoneZiggo lost 9,000 broadband subs. That's fewer than a year ago, but was impacted by overall lower gross adds in the quarter. The team has launched several initiatives to drive growth, including the continued rollout of smart Wi-Fi pods, now at 50% of the sub base, and proactive network scans to improve connectivity performance. Postpaid mobile ads in Holland were 39,000, roughly flat to the prior year. By the way, both Sunrise and VodafoneZiggo outperformed the incumbents Swisscom and KPN on broadband and postpaid mobile ads in the quarter. Finally, Telenet reported largely stable broadband and 13,000 postpaid mobile ads in the first quarter. The team launched their Wi-Fi 360, a smart Wi-Fi mesh technology that dramatically improves in-home connectivity, and they continue to rely on their converged portfolio of services.
Slide five shows our revenue growth broken down by OpCo and core business line for the first quarter. If you look across the top, you'll see that total revenue growth was broadly stable if you aggregate the four main fixed mobile champions and trending up sequentially versus Q4. Only Sunrise, in fact, reported negative revenue growth driven by ongoing pressure in the fixed business related to the UPC brand phase out. VMO2 on the left delivered nearly 4% revenue growth in Q1, but that did include some construction revenue from the nexfibre JV, which Charlie will explain further. Working top to bottom across the OpCos, you'll see that fixed consumer revenue continues to be impacted by video and voice losses.
This is a well-known trend, but the real story here is that broadband revenue, which is growing, is becoming a larger and larger component of fixed revenue, and together with price increases, will help stabilize the fixed business over time. If you look at the mobile revenue line, total mobile growth includes handsets and remains solidly positive. Even more importantly, mobile service revenue was positive in every market, supported by price rises and solid subscriber growth. Finally, B2B revenue growth is always consistently strong, with only VMO2 impacted this quarter by the YoY comparison to last year, which included installation revenue from some high-capacity data services. All of our B2B operations are benefiting from new service and growing market share. Charlie will get into a bit more detail on all of this in the financial section.
Now, I've mentioned our pricing actions several times, and on slide six, we summarize the moves we've made to offset the continuing impact of inflation on our costs, particularly in energy and wages. I'll just make a few key observations here. First of all, you'll see that price changes in 2023 on the top right of the slide range from mid-single digit to mid-teens, considerably higher than 2022, which really was in the mid-single digit to low single digit range, and that's shown on the top left. You may have noticed that the 4% Swiss price rise announced in early May is the first we've taken in some time in that market and the only one so far in terms of all the competitors. Although Swisscom has introduced an inflation clause in their contracts for 2024.
So far, we've experienced only a mild reaction from Swiss consumers, which is encouraging. The U.K. price rises are also landing well and in line with our expectations, and the teams are working hard on retention. It's also worth pointing out that most of the 23 price increases don't really take effect until Q2 or Q3 and should be a tailwind for the balance of the year. Second, all of our OpCos now have either a direct pricing policy linked to inflation plus a margin in the contract or the ability to contractually raise pricing up to inflation. That's new for us to have that across the group.
Lastly, as summarized at the bottom of the slide, we continue to support these price actions by relentlessly focusing on the customer experience, whether that be through speed increases, bundle innovation, upgrading our TV experience, or utilizing digital to improve our customer interactions. Finally, I'll address quickly two recent announcements on slide seven. The first is the launch of a voluntary and conditional tender offer for the Telenet shares we don't already own at 22 EUR per share, which of course will be adjusted for the recently paid dividend. Since this is an active public transaction, I'm going to keep my comments brief. From Liberty's perspective, getting to 100% ownership in Belgium helps us simplify our operating structure and will not require, importantly, any of our corporate cash or liquidity to complete.
We believe the price is very attractive to Telenet shareholders, and the transaction, which is subject to a 95% acceptance condition, has the unanimous support of the Telenet board. Happy to take any questions on any of that. The second announcement relates to our desire to redomicile from the U.K. to Bermuda. The principal objectives here are pretty simple, and they're pretty compelling. Namely, we're seeking to reduce administrative complexities and facilitate future shareholder value creation by aligning the US dollar corporate law of Bermuda with our U.S. listing and quite frankly, the expectations of our largely U.S. shareholder base. As we've stated many times, we're always looking for ways to crystallize value for shareholders, and these include share buybacks, self-tender offers, spin-offs, split-offs, and other potential financings and transactions, each of which will be easier to execute as a Bermuda company.
For the record, we think it's important to point out that the move is not tax driven. All of our revenue income and that of our operating entities remain in Europe, and there will be no changes to our Nasdaq listing, our board of directors, our ownership or capital structure, our financial statements, credit arrangements, or day-to-day operations. We filed a preliminary proxy with the SEC, and the definitive proxy will be finalized soon, which will be followed, of course, by a shareholder vote sometime in late Q2 or early Q3. A quick recap. All of our operating companies are on track to hit guidance and making the right network, product, and digital investments that will support commercial momentum this year and beyond. Our capital structure is rock solid and provides flexibility to drive our buyback plans and new investments if and when those make sense.
Our ventures portfolio, plus other strategic assets we own, should generate cash over the next 24 months. We remain committed to shrinking the value gap in our stock, which re-domiciling to Bermuda should only make easier. Charlie, over to you.
Charlie Bracken (CFO)
Thanks, Mike. The next slide sets out the financial impact of nexfibre, our U.K. fiber to the home JV with InfraVia and Telefónica on the Virgin Media O2 financials. Nexfibre plans to roll out fiber to the home to up to another 7 million U.K. homes and strategically increase Virgin Media O2's serviceable footprint to 21 million homes, and potentially after that, to 23 million homes across the U.K. At Q4, with the deal closed, we highlighted that Virgin Media O2 will provide build construction and other related ongoing services to nexfibre. We expect these construction revenues to be around GBP 550-GBP 650 per home, similar to our Lightning build cost.
During Q1, Virgin Media O2 finalized with our auditors the accounting treatment for these nexfibre-related costs and agreed that the construction revenues will be accounted for on a gross basis. This means that Virgin Media O2 reported revenues will be higher by the ongoing construction and that the cost of the network build will now be recorded in our operating expenses. When Virgin Media O2 originally gave guidance, we'd actually assumed that these revenues and costs will be netted out. Given the impact build construction has on reported revenues and also the revenue volatility as the build scales over the next few years, we're confirming that our 2023 financial guidance excludes the impact of these construction revenues and expenses. It continues to include the ongoing services revenues to manage and maintain the network, which we expect to provide for many years.
To confirm the Virgin Media O2 financial guidance, we continue to expect Virgin Media O2 to grow revenues and deliver mid-single-digit EBITDA growth, excluding the positive contribution from nexfibre construction. However, reported revenue is likely to see a tailwind of around 4%-5% in 2023 based on the current build targets. Going forward, we will show underlying growth excluding these construction revenues as well as reported revenues. In Q1, Virgin Media O2 built 108,000 fiber to the home in aggregate. The majority of these were delivered to nexfibre and were recorded using this gross accounting treatment. The next page provides an update on our central costs. We manage these along three broad cost categories: Liberty Tech, Corporate, and Ventures.
Liberty Tech is our centralized tech operations, which provide services such as our Horizon entertainment platform and our connectivity platform, which we provide to our operating assets and joint ventures as well as to assets that we have sold. For each of these customers, Liberty Tech has legal agreements setting out key terms and pricing for a number of years, depending on the customer. The target is to broadly ensure that the spend is matched to these technical services agreements or TSAs. As our customer base has evolved, we've been able to scale down these costs according to the customer demand and have reduced the net spend at Liberty Tech by around $200 million since 2018. We continue to see opportunities to further reduce these costs going forward and expect this category to remain broadly break even in the upcoming years.
During Q1, we renewed these TSA agreements with Switzerland and Ireland, as well as saw the impact of the year-end 2022 renewal with Telenet. These agreements reflect commercial pricing based on independent reviews, not just at the Telenet board level, but also with our joint venture partners. With the renewal of the Swiss and Irish agreements, their associated revenues are now reported in our central segment revenues. Together with Telenet, these are eliminated in the consolidated numbers. At the OpCo level, under this new agreement, this means that the central CapEx spend is fully accounted for in their financials. The impact of this is that going forward, our central financials will better align with the true central net operating costs on a fully allocated basis. To help, we've updated the Q1 2022 central revenue, EBITDA and EBITDA less P&E figures.
Our corporate category includes our head office functions such as management, finance, legal, HR, and corporate development necessary to manage our overall portfolio of assets. This spend historically is around $200 million a year, depending on the dollar exchange rates for sterling and euros, and we expect it to stay at this level for the next few years. The last category is Ventures, which is the cost associated with managing our roughly $3 billion ventures portfolio. The spend here is currently relatively modest. We expect the net spend of these three central categories in 2023 to be between $200 million and $250 million at the net spend level.
There is also a U.S. tax payment of around $80 million in 2023, largely relating to the GILTI transition tax from 2019, which will continue at this level until 2026 when the full payment will have been made. The other key components of free cash flow at our central group is interest income on our 3+ billion central cash balance, which we expect to be in excess of $100 million this year at today's interest rates. On the next page, we provided a summary of the revenue profile in our four key markets. Virgin Media O2, on a reported basis, delivered 3.9% of revenue growth, including the impact of nexfibre construction revenue.
Excluding the impact of nexfibre construction revenue, Virgin Media O2 revenue growth was broadly stable in Q1, as strong mobile service and handset revenues offset declines in fixed revenues. The growth rate of fixed revenues in Q1 2023 compared to Q1 of 2022 was impacted by timing of our price rises, which were later in the quarter in 2023 than in 2022. Switzerland saw a revenue decline in Q1, driven by continued pressures on consumer fixed ARPU as the business continues to navigate the right pricing activity related to the UPC brand phase out. VodafoneZiggo delivered stable revenues in Q1 as weakness in consumer fixed was offset by our eighth consecutive quarter of mobile service revenue growth. We expect our fixed price adjustment of around 8.5% to support revenue trends in the second half.
Belgium delivered Q1 revenue growth of 2.9% in Q1 as the mid-June price adjustment continues to support top line fixed ARPU trends, along with higher advertising, TV production, and B2B revenues. Moving on to our Adjusted EBITDA performance in the quarter. As we suggested in Q4, Q1 was impacted by the phasing of inflation pressures on our wage and in particular on our energy costs. Q1 saw Virgin Media O2 impacted by these inflationary costs, as well as phasing impact versus 2022 due to the later timing of their fixed price rises. Q1 2023 also didn't have as much year-on-year benefit from synergies as there was in 2022. These factors resulted in a 0.9% EBITDA growth, including cost to capture for the quarter. Virgin Media O2's guidance continues to target mid-single-digit EBITDA growth, excluding cost to capture for the full year.
We are reconfirming our full year Virgin Media O2 EBITDA guidance despite this, as it's underpinned by fixed and mobile price adjustments and continued synergy execution throughout the rest of the year. Sunrise saw an EBITDA decline of 9.2% in Q1 as headwinds from the UPC right pricing activity continued to impact EBITDA trends, combined with a continued weaker fixed ARPU mix. This continues to be as a result of the rotational churn challenge associated with the UPC brand sunsetting. The business has taken pricing action to help offset inflationary pressures, implementing a fixed price rise of 4% from July. VodafoneZiggo saw an 8.2% decline in EBITDA growth in Q1.
This was driven by the cost inflation headwinds of energy and wages. It's consistent with our 2023 guidance that Dutch JV will be impacted by EUR 100 million of inflationary costs, particularly from energy and wages. While we expect to see these cost inflation impacts across 2023, we also expect to see some improvement in EBITDA trends versus Q1, in particular from the fixed price adjustment in July, which should result in the business meeting their full year guidance. Telenet reported EBITDA decline of around 4%, driven by cost inflation as strong top line growth was offset by 11% automatic wage indexation from January. Price adjustments of 6% are expected to support EBITDA in the second half of the year, as they did in 2022. Turning to our capital allocation slide.
Across all our core markets, we delivered capital intensity in line with our full year financial guidance targets. Moving to distributable cash flow. On a reported basis, we delivered distributable cash flow of $20 million in Q1, including $198 million of distributions from Virgin Media O2 from our share of the recapitalization, and $14 million of interest revenue from VodafoneZiggo. As has been the case in previous years, Q1 is typically a lower net cash inflow quarter given the timing of interest payments on our debt stack. Our balance sheet remains in good shape with all our debt fixed and with a relatively long average life for our debt across our companies of around 6 years.
We continue to have substantial cash balance with a consolidated figure of around $4 billion, of which just under $3 billion is at the OpCo, as well as a further $1.5 billion of liquidity through our controlled revolving credit facilities. During the quarter, we saw cash outflows for M&A related to the Vodafone stake purchase, our share of the funding for our AtlasEdge acquisition of a German Datacenter Company, and Sunrise's acquisition of EBL, a small Swiss cable company. My last slide confirms the 2023 financial guidance that we gave for each of our key companies. We're also reconfirming our group guidance of $1.6 billion of distributable cash flow, assuming the FX rates at the time of our guidance. With that, operator, can we now turn to questions?
Operator (participant)
The Q&A session will be conducted electronically. If you would like to ask a question, please do so by pressing the star or asterisk key followed by the one on your phone. In order to accommodate everyone, we request that you ask only one question. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll pause for just a moment to give everyone an opportunity to join the queue. Our first question is from the line of Robert Grindle with Deutsche Bank. Please go ahead.
Robert Grindle (Managing Director and Head of European TMT Research)
Yeah. Hi there. Thanks for the question. I wasn't sure whether VMO2 will make a margin on the gross construction revenues. Perhaps you could clarify that. How would you characterize the around 100,000 nexfibre premises built in Q1? Are we early in a ramp-up phase there or on a go slow ahead of inorganic options which have been the subject of speculation in the press? Thank you.
Mike Fries (Chairman and CEO)
Thanks, Rob. Charlie, why don't you take the gross margin, and Lutz, you can address the $100,000. Guys?
Charlie Bracken (CFO)
Yeah, I can, the 100,000, Robert, I think your observation is right. It's higher than a year ago. We are doing a bit better. It's the beginning of the ramp up, right? Absolutely. I can also answer the margin question. We are doing a very small margin on it. Very, very small margin, but there is some margin on it.
Robert Grindle (Managing Director and Head of European TMT Research)
Thank you.
Operator (participant)
Thank you. Our next question is from the line of James Ratcliffe with Evercore ISI. Please go ahead.
James Ratcliffe (Equity Research Analyst)
Hi, thanks for taking the question. Two, if I could. First of all, on Telenet, can you just talk about the rationale for bringing it in beyond just, you know, thought it was attractively priced, and what, if anything, you do differently owning a 100% of that business versus 60? And secondly, on the ventures portfolio, do you see that as being a net generator or consumer of cash over the next few years, given the both sale and potential investment opportunities you see? Thanks.
Mike Fries (Chairman and CEO)
Listen, on the ventures point, we'll have to find out. As I mentioned in my remarks, it shouldn't necessarily be assumed that it's gonna get bigger and bigger every year. We have a number of interests and investments we've owned for quite some time that could easily be, you know, monetized or disposed of. I'm not gonna get specific with you. Hard to say, quite frankly. You know, I think we're gonna be looking at both disposal and investments with an eye to generating returns and/or realizing returns we've already generated. I think it's hard to say, but it, you know, it could be either way. I think at this stage, you know, I know the things that we have lined up to possibly exit are quite substantial. Let's see.
I think that should be, you know, something that's evaluated over time on an opportunistic basis. In terms of Telenet, you know, you mentioned the price, of course. We support what management is doing. You know, it's heading into a very interesting period here, where sometime in the summer, the deal with Fluvius will get approved, and we'll be launching into our first NetCo, ServCo model with pretty ambitious, you know, fiber rebuild and some really strong wholesale revenue in the market. It's going to be really a great model for us or a great test case for us in terms of how these NetCo, ServCo structures operate. You know, how we can almost take an incumbency position in wholesale and drive real value creation.
I think it's easier for us to think about value creation opportunities, whatever those might look like, as a private company for the foreseeable future. Of course, you know, we understand the business, and John Porter and team have talked about the expectations of the business, you know, quite well. We just think that as a private company, we're gonna have more optionality to both manage the business and ideally, over time, realize value from the business. I'll leave it at that.
James Ratcliffe (Equity Research Analyst)
Thanks.
Operator (participant)
Thank you. Our next question is from Ulrich Rathe with Société Générale. Please go ahead.
Ulrich Rathe (Senior Analyst)
Thank you very much. My question would be on the levered equity model. You have said that you're quite comfortable with the situation, but I'm just wondering how we test the boundaries of this if interest rates stay at current levels, especially for the more highly levered entities. How do we think about the sustainability of the current levels of leverage in an environment, let's assume, that the interest rates stay where they are at the moment? Thank you.
Mike Fries (Chairman and CEO)
I'll take it to make a couple comments and then Charlie, you fill in here. I think, you know, as we've stated, I've stated and Charlie stated in our remarks, today, we have the, you know, fortune, good fortune, of operating a balance sheet with fixed rate, not floating rate debt, and no near-term maturities. We're not, unlike some peers in our industry, forced to be in the market for quite some time. I think that gives us the, you know, the freedom to evaluate the right leverage over an extended period without having to do anything radical, you know, or rushed. That's luxury for us, in our opinion. You know, as you know, most of our covenant structures are extremely light. Our, you know, capital structures are portable. There's no change of control provisions.
It's a pretty, I think, fortunate position that we're in today relative to our peers. Charlie, why don't you add to that? Charlie, you might be on mute or off. Okay. Anyhow, that is.
Charlie Bracken (CFO)
Can you hear me now?
Mike Fries (Chairman and CEO)
the way we see the balance sheet. Now. Yeah, got you now, Charlie. Go ahead.
Charlie Bracken (CFO)
Sorry. I was just going to say the other thing you should remember is because of the long debt, by the time we get to that repricing and refinancing, these will be actually through, these companies will be through their investment cycle. Think of Virgin, with its fiber upgrade, et cetera, et cetera. The free cash flow profile, all things being equal, will be much stronger than it is today. I agree with Mike, you know, we're in a very lucky position that we have this flexibility, and we'll just have to see, you know, how rates settle out. There's certainly plenty of time for us to think about, you know, how we, you know, operate within that 4 to 5x range.
Ulrich Rathe (Senior Analyst)
Thank you very much.
Operator (participant)
Thank you. Our next question is from the line of Polo Tang with UBS. Please go ahead.
Polo Tang (Managing Director)
Hi, thanks for taking the question. It's a question for André, if he's on the line in terms of Switzerland. Can you maybe talk through the competitive dynamics of the Swiss market in terms of what you're seeing on both mobile and broadband, specifically what's happening with promotional activity? Just in terms of the recently announced price rises of +4%, a few days ago, Salt announced that they would keep the price of their 10 Gb broadband offer flat for the next three years at CHF 39.95. Do you think this will limit the benefit or impact of your price rises or result in increased churn for Sunrise? Thanks.
Mike Fries (Chairman and CEO)
André?
Speaker 17
Yeah. Thanks, Polo for the question. Firstly, I would say, the competitive environment has quite changed in Q1, at least in the second half of the first quarter. We as a player in this environment have changed our promotional activities and have reduced the intensity from no longer offering discounts over 24 months on a 24-month contract, but have reduced it to a maximum of 12 months on a 24-month contract, which we believe is a very important step, not only to improve the economics of inflow, but also to change the dynamics on customer outflow. From that perspective, it feels like, we have seen Swisscom moderating their promotional intensity already throughout the second half of last year. We have now following that trend, with our change in Q1.
I think, at least on the value brands, there is some moderation of the intensity. On the, I would say no first market of the end, where I would also position Salt to the most extent, their prices remain important and intensity is as high as it was before. As you can also see from our inflow in Q1 in terms of net adds, with the change that we have done through the second half of the quarter, we have not been seeing a significant impact on our ability to drive customer inflow. To the price increase question. Well, firstly, we're not really surprised that Salt is not following that because as I just said, their positioning is more based around price than it is around really value. As such, we are not surprised about it.
We also are not believing that this is changing our assumptions on the ability to lend the price increase that we have just done. On the other hand side, to be honest with you, the price increase is becoming effective in July. There's still a bit of time until we see how this is landing. We have done, I would say, a cautious planning on this, so we're not expecting 100% of that to land. So far, as Mike already said, the reactions to the price rise have been moderate, which is a good sign. Also from the customers getting informed, we have not seen any uproar or difficulties that we were worried about. From that perspective, I think we are on the right path.
The Salt guarantee, which interestingly, I mean, I only have seen it as a post on LinkedIn, so it hasn't been widely communicated, but it's something that we have envisaged, and therefore it's not taking us by surprise at this moment.
Mike Fries (Chairman and CEO)
I think the Swisscom reaction was, you know, they were surprised by it, but they felt it was a healthy thing for the market. As you know, their contracts now allow for it themselves in 2024. Let's see how it unfolds.
Polo Tang (Managing Director)
Thanks.
Mike Fries (Chairman and CEO)
Yeah.
Operator (participant)
Thank you. Our next question is from the line of James Ratzer with New Street Research. Please go ahead.
James Ratzer (Partner and European Communications Services Research)
Yes, thank you, good afternoon. Just if I could just follow on Switzerland, please, and again on the price change. Could you just walk through, André, just how this price rise will be implemented? Is this across all your main brands for customers that are in contract? I mean, does this mean that customers who are in contract have the option to leave when this price rise is implemented as we see in the U.K.? I just want to understand the kind of dynamics of the implementation of the rise. I think in the past, you've also mentioned that the migration from the UPC brand, which is a drag on ARPU, should be completed by the end of Q3. Is that still the intention? If I could just ask a quick kind of technical follow-up question.
Nexfibre, I think in the July release last year when you launched it, you said you'd be doing 5 million homes by 2026, and the presentation here says 2028. Is that kind of like for like comparison? Is this represent a delay in the build-out? Thank you.
Mike Fries (Chairman and CEO)
On that first point, I think the 2028 figure refers to, includes also the upgrade of our 16 million homes or 14 that are already fiber to fiber. That's the date we're referencing when we say 2028, of which nexfibre is just a portion of that. André, you want to handle the other question?
Speaker 17
Sure, yeah. On the technical implementation of the price rise, customers got informed or get informed now during the course of the April invoices, which are sent out during the course of May. After that, those that actually are sitting on existing old contracts that have been signed before the beginning of the year, they do have a opportunity to extraordinary cancel the contract within a four weeks window. That is the first, if you want, a risk and a critical period that we are going through so far.
Roughly half a million customers have been informed. So far churn reactions have been very moderate. Nothing that is beyond our expectation, rather better than expected. The second thing is, on that not all of our revenues are impacted. Roughly only 50% of our total revenues are impacted, and that includes not only new customers, but also existing customers on contract. It includes our flanker brand. It includes also a portion of the B2B business, our SOHO customers that are on consumer-like contracts. That is how this is technically implemented. On the second part of your question, which was related to how long is this migration gonna happen.
What I said last time is the migration will take longer, but the impact we assume to turn neutral by Q3 or by the end of this year. Whereas migrations will carry on for a longer period but will not be as harming any longer as the biggest pain is actually flowing out first.
James Ratzer (Partner and European Communications Services Research)
Got it. That, that's clear. Thank you. Your, Mike, your assumption is still that you can get to 5 million new build in the U.K. by the end of 2026. I mean, that's very substantial current rates.
Mike Fries (Chairman and CEO)
Yeah. We're not changing that. We're not changing that today. Yeah, we're not changing that today.
James Ratzer (Partner and European Communications Services Research)
Okay.
Mike Fries (Chairman and CEO)
The 2028 figure included both nexfibre as well as what we call Mustang, which is the upgrade of our fiber across the fuller footprint.
James Ratzer (Partner and European Communications Services Research)
Okay. Thank you.
Mike Fries (Chairman and CEO)
Yep.
Operator (participant)
Thank you. Our next question is from the line of Steve Malcolm with Redburn. Please go ahead.
Steve Malcolm (Senior Analyst)
Yeah. Good afternoon, guys. I'll follow on the trend of trying to get in two if I can. You can choose whether to answer them or not. First is just, well, both on the U.K. actually. On U.K. cash flow in the first quarter, which looked a lot weaker than Q1 last year, it looks like that was all on the operating activities. I think it was $770 outflow versus $320. Can you just sort of give us an idea why the cash burn was so heavy in Q1? Maybe, you know, just help us sort of see the woods for the trees a little bit on the U.K. with all the moving parts.
I mean, you did GBP 660 of free cash flow guide on the UK. I expected that to rise sort of GBP a couple of hundred million this year. Is that still sort of a reasonable finger in the air for how we think about the UK cash flows? Just on the UK ARPU, it sort of deteriorated again in Q1. It was down I think 4% year-on-year. Obviously, as you move into Q2, you've got the price rise. I know it's a very sort of complex calculus as it is in Switzerland.
Maybe just help us understand, you know, how we bridge the Q1 and the Q2 ARPUs in terms of trend, in terms of the price rise, you know, loss of voice, all those different things, and whether we can expect some sort of growth for the rest of the year in ARPU, or whether, you know, declines are still the order of the day. Thanks.
Mike Fries (Chairman and CEO)
Yeah. Lutz, why don't you take the ARPU question, and Charlie you can prepare an answer to the cash flow question. Lutz?
Lutz Schüler (CEO)
Yeah, sure. Hi, Steve. On the fixed ARPU, two effects are important. Effect number one is that, as you rightly have said, customers are continuing to optimize their monthly bill, right? There's still customers who get rid of the landline or who are getting rid of the mid-pay TV content, and therefore, right? ARPU was down in Q4 last year, something like 3.6%, and now it's around 4%. That shouldn't surprise you. The second thing is that the price rise a year ago started to materialize from March onwards, and this year it has started to materialize from April onwards. Therefore, you've seen zero contribution from the price rise in Q1, different to Q1 a year ago. And how is the price rise materializing? Good.
It's kicking in as planned, we are very confident that we will land the price rise as we have planned for. It's not that we have a high level average feeling. Last time I said, right, we have the data now available from all our customers sitting on different product combinations, sitting in different areas in this in the UK, right? Overbilled, non-overbilled, Altnet, non-Altnet, also spread long tenure, right? They are in different phases. We are in the position to see how all of them have reacted. We are in the position to see what retention offers worked well and further improved it.
Therefore, we are in a pretty strong position here, and April numbers are in already, and so far, so good.
Charlie Bracken (CFO)
Just on the free cash flow point. Steve, as you well know, the working capital can be a very big variable of Virgin, and actually it was a particularly, you know, heavy outflow of working capital in Q1, but that'll be normalized through the year. A little bit of increased year-on-year interest because of the way we phase some of the interest payments, and with the refinancings. I think we're very comfortable with the guidance, which is given on free cash flow. We didn't actually clarify how much of it was from a recap and underlying free cash flow. The business, at least, you know, from our perspective, continues to be tracking exactly to budget, and we're pretty comfortable with that.
I point out we have actually locked in the incremental recap for this recent financing, so we have money in-hand.
Steve Malcolm (Senior Analyst)
Okay. I mean, you obviously very helpfully gave us that presentation at the back of it of divisional cash flows. Last year, UK was just mid six hundreds. Is it reasonable to assume, you know, a reasonable step up from that in 2023?
Charlie Bracken (CFO)
I'm, Steve, I don't think we wanna get into the game of being too precise on that guidance. As I say, we, you know, we're very comfortable in our top level free cash flow target, and Belgium's a big part of that, and we feel pretty good about it.
Steve Malcolm (Senior Analyst)
Okay. Thanks, Charlie.
Operator (participant)
Thank you. Our next question is from the line of Matthew Harrigan with The Benchmark Company. Please go ahead.
Matthew Harrigan (Equity Research Analyst)
Thank you. When you looked at potentially, you know, floating some of the individual company or country businesses, you've really focused on differentials in interest rates and kind of equity risk premiums by market. I mean, clearly you've got a lot of bumpiness in Switzerland right now, and it looks like the Dutch business could be extremely attractive, you know, to the market given the relative conditions in that country. How are the macro conditions really affecting, you know, the timing and the desirability of doing something? I know you wanna get to steady state growth-wise in Switzerland, but it looks like the Dutch business could be extremely attractive for an eventual quotation as well if you can agree to something in concert with your partner. Thank you.
Mike Fries (Chairman and CEO)
Well, you've pointed out a lot of really important facts there. You, you ended with one of the most important facts, which is we do have partners in two markets, the U.K. and in Holland. You know, we can't make decisions unilaterally. Having said that, we believe over time markets will rebound. You know, we're a bit more optimistic perhaps than others about where we'll end up here in the next 24-36 months. I think that, you know, you could look at almost any one of these businesses as a potential candidate for listing at some point in time, if that's the right decision, you know, to be made.
Certainly we've talked most recently about Switzerland for all kinds of reasons, and as you pointed out, we wanna be sure we're hitting our stride operationally, generating a free cash flow number that we think would be, you know, the right level for listing. We're targeting CHF 320 million-CHF 350 million of free cash flow this year, which is a meaningful uptick from last year in Switzerland. You know, we expect that to continue to rise. The timing of something like that at Switzerland's critical. You should assume we're doing, and have done, quite a bit of work around that.
You know, the delisting in Belgium might seem counterintuitive based on this conversation, but not necessarily because we think there are lots of ways to get that business on better footing and perhaps, you know, more regional footing in, you know, without being specific, there will be opportunities to create value in that business as well. Of course, VodafoneZiggo and VMO2, as you point out, are great businesses, you know, compare extremely favorably to peers and incumbents, and could also be interesting candidates. That's always on the table. As, you know, we're looking at each of these markets independently, but also, you know, through the lens of what will be the most impactful way to create value for shareholders.
You know, you know, I can't be more specific than that, but, you know, we'll look at it closely, and we constantly look at it closely.
Matthew Harrigan (Equity Research Analyst)
Thanks, Mike.
Mike Fries (Chairman and CEO)
Mm-hmm.
Operator (participant)
Thank you. Our next question is from the line of Maurice Patrick with Barclays. Please go ahead.
Maurice Patrick (Managing Director)
Hi, guys, thanks for taking the question. A question on the Dutch business. In the UK, you very helpfully break out the sort of BAU and sort of new sort of growth areas and some of the net add stress, that both are actually growing. In the Netherlands, it seems as though, you know, the broader markets generally kind of flattish and you've got slightly negative numbers, KPN sort of similar. I just wondered if there were any market share shifts in the kind of different demographics there. KPN's talked about growing its market share or trying to grow its market share in areas it rolls out fiber to the home.
You know, you do have altnets in the Dutch markets, not the same magnitude as the U.K., but you do have them. Just curious as to in that sort of broadly flattish but slightly negative net ad numbers, if there were any share shifts in fiber areas versus non-fiber areas or to altnets from not altnets. I'm just curious on that. Thank you.
Mike Fries (Chairman and CEO)
Okay. Jeroen, do you wanna handle that?
Jeroen Hoencamp (CEO)
Yeah, sure do. Thank you for that question. I'm Jeroen, chief executive of Ziggo in the Netherlands. Yeah, you mentioned on the net adds, we were about -8,000 for quarter on broadband. Last quarter, KPN was -13, they're kind of in the same ballpark. That by the way said, KPN has been rolling out a lot of fiber you can see the performance is not really there. A lot of competition is taking place in the promotional and the pricing space. To your point around, do you see any very specific market share shifts? No, we don't.
With one exception, and you kind of alluded to it, and that is where you do see fiber being rolled out in the first period, you tend to see a little bit higher churn, where you see a small churn uptick in an area where fiber has just been rolled out. Part of that is because fiber's been rolled out and it's new and customers do appreciate fiber. Largely we see coming from research, why do customers then actually leave? The real reason is then actually price. The competition, where rolling out fiber tends to go in with quite strong promotional levels, and therefore you see a small uptick in the region where fiber is rolled out, and after that it normalizes a bit.
Other than that, we don't really see material, share moves in the market.
Maurice Patrick (Managing Director)
That's very helpful. Thank you.
Operator (participant)
Thank you. Our next question is from the line of David Wright with Bank of America. Please go ahead.
David Wright (Account Manager)
Thank you guys for taking the calls. I'm gonna sneak my two in as well. Looks just maybe possibly a very quick estimate of that ARPU of the price rise in the U.K. You have sort of talked before about how much of it you think you could monetize from kind of the gross line through to the net line. Any updated expectations or thinking on that would be useful. Second of all, I might just follow the question before on sort of listings, local asset listings, et cetera. What is interesting is that you are now effectively breaking up VMO2 over to some extent with the nexfibre build, et cetera.
There is something not dissimilar happening at Telenet with the Fluvius relationship. I wonder, should we sort of think more about these kind of infrastructure building vehicles developing over time and perhaps something to help Switzerland with its fiber rollout and something to help VodafoneZiggo with its fiber rollout over time, and maybe they're the assets that we could consider listing rather than what becomes increasingly a kind of ServCo on the other side? Is that maybe a future we should think about, team? Thank you.
Mike Fries (Chairman and CEO)
I think it's a fair point. I'll take that question quickly and then, Lutz, you can handle the price rise point. I think that's a fair point. As I've tried to say, you know, everything's in scope. You know, certainly in the situation Telenet's created, that NetCo is going to be quite a large business with something like 60%-70% of all broadband customers utilizing, in Flanders anyway, that network. Sure, clearly we will be looking at, you know, in an agile way, what the best strategy is to create value or crystallize value, and that could be an option in certain markets. Yeah, I think you're... It's not beyond, you know, to think that that could be a strategy we take in certain markets. Lutz, you wanna handle the pricing at this point?
David Wright (Account Manager)
Maybe I could just follow up.
Mike Fries (Chairman and CEO)
Yeah. Go ahead. Yeah, go ahead. Go ahead, David.
David Wright (Account Manager)
Yeah, sorry. Sorry. Just maybe a follow-up on it, whether it's a question for Charlie too, when we do think about leverage, obviously there's no refinancing for some time, one thing I think the agencies have suggested is that the use of off-balance sheet ventures to build fiber networks could mean tighter sort of ratios around the ServCos as they effectively dilute away for infrastructure ownership. Is that anything you're starting to kind of talk to bond holders about or getting some pressure that essentially they are bond holders in a VMO2 that is actually edging a little bit more towards ServCo with the nexfibre agreement?
Mike Fries (Chairman and CEO)
Charlie?
Charlie Bracken (CFO)
David, I don't think it's an issue, at least in the short term. I mean, in the case of Telenet, we obviously consolidate, and as far as the bond holder is concerned, you know, we're actually, you know, sharing some of the benefit of the, of the build with a synergistic partner. I think in the case of the UK, the upside is they now have to fund the next wave of growth beyond the original landing home. But you're right that off-balancing vehicles are always taken into consideration by the agencies on what is the right rating. We're very familiar with that with TEF and Vodafone. But, you know, I think at the big span, we're in, we're pretty comfortable with our leverage range four to five. We've obviously got this whole maturity.
We do understand this point about higher interest rates down the line, but I think we have to see first of all, what our businesses are like then, and we will, you know, as I said earlier, get through that investment cycle. For, I think for the purposes of today, there's no real change in the message to our bond holders.
David Wright (Account Manager)
Plenty of time too. Thanks. Maybe Lutz.
Lutz Schüler (CEO)
Hi, David. On ARPU, I think what we have said in the past is that on the fixed side, we managed to keep something like 50% of the gross price rise. I think that that hasn't changed. Obviously what comes into the mix now is, right, that due to the cost of living crisis, completely independent of price rise, customers get rid of the landline or video, all, mid-tier video, although this is getting less and less, the majority of our revenue comes more from broadband. Therefore, I mean, we are not giving a guidance on ARPU, I think you can take both effects a bit into account in your model.
On the mobile side, because the majority of customers are getting the price rise when they're within their minimum contract length, right? You retain much more of the gross price rise. What is happening there, as you might know, is that we retain customers. When they come out of their minimum contract length of three years, we upgrade them into a new contract. The promise we are making is that the retention offer equals the acquisition offer for new customers. Therefore, we are very dependent on the market side. The encouraging thing on the mobile side is, and I don't know how closely you watch it, that the acquisition offers are less aggressive, less promotional, so that our retention offers are also a bit higher.
If you factor both in, that could turn out to be quite positive. Hopefully that helps, David.
David Wright (Account Manager)
That's super useful. Yes, I watch it closely. I've just taken an O2 SIM, there you go, guys. I'm supporting. Thank you.
Ulrik Bengtsson (COO)
Thank you.
Operator (participant)
Thank you. Our next question is from the line of Carl Murdock-Smith with Berenberg. Please go ahead.
Carl Murdock-Smith (Equity Analyst)
Thanks very much, full disclosure, I'm an O2 customer too, David, if we're doing that. I had a question for Lutz on kind of people and operational priorities in the UK. With Jeff Dodds leaving as CEO, and being replaced by Ulrik Bengtsson, I was just wondering if you could expand kind of on what made Ulrik the right candidate to be the new COO. Kind of sitting down with him, what have you set as top of his priority list going forwards? Thanks.
Ulrik Bengtsson (COO)
You're very curious. Look, Ulrik, right, for everybody on the call, is a very experience senior COO. He used to run William Hill, a gaming and betting company, owned by private equity. Acquired another company, Mr Green, and managed to double the value of this company within three years. He's a digital native. He is very experienced in what we call large scale organizations, so meaning stores, meaning field, meaning customer service. This also answers the question. We need somebody who is digital first, right? We are driving this company to a data digital first company. We need somebody who understands large scaled organization, and who has a proven track record to drive value out of it, right?
His profile fits perfect to what I need here. I mean, look, with Jeff, he was 11 years with Virgin Media and Virgin Media O2. He helped me tremendously to land in the country. We did a lot of good stuff together. A year ago, he shared with me he was looking out for something else. We couldn't disclose what it is yet, but if you understand what it is, and you know Jeff, it takes you a millisecond to understand why he's taken that offer. Stay tuned.
Carl Murdock-Smith (Equity Analyst)
That's great. Thank you.
Ulrik Bengtsson (COO)
All right.
Operator (participant)
Thank you. Our next question is from the line of Georgios Ierodiaconou with Citigroup. Please go ahead.
Georgios Ierodiaconou (Managing Director and Senior Equity Analyst)
Hi, guys. Hope you can hear me. I'm also an O2 customer since we're all disclosing our usage. I just wanted to ask a question around price rises. Clearly, what we are seeing now from your end is another round of back book increases, some front book increases as well. What we are liking to see in general in the sector is these price increases actually being sustainable. There is maybe every year, a bigger gap between front book and back book in some of the markets. I'm just curious to hear from your perspective, how you are thinking about this evolution in the next couple of years, because clearly, inflation is not gonna be as big a tailwind in your ability to raise prices in the future.
Are you starting to consider maybe being less aggressive on retention? I noticed you highlight, and it's true that you are doing better on KPIs than some of the incumbents. Is that a strategic goal for you, or could you accept perhaps softer KPIs in an attempt to improve financials? Very quickly, perhaps a follow-up on some of the previous questions around financing structure. At what point, given your maturities are still three or four years away, at what point would you revisit perhaps the capital structure that you have and maybe make different decisions around shareholder returns? Thank you.
Mike Fries (Chairman and CEO)
On the financing structure, I'm not sure if I'm getting the question clearly. I mean, we've addressed the balance sheet and, you know, how we see it today and of course, you know, how the position we think we're in over the next five to six years, which is a strong one. You know, we also have referenced the fact that we are open-minded about ways to crystallize value in our operating businesses and operating countries. We've shown, I think, in the past, a willingness and ability to do that. I'm not sure we can be more specific about any of those today, but we hope to be in time. I think that would be helpful for shareholders to be able to give clearer guidance on where we're going, but this is not the moment to do that, obviously.
In terms of price increases, this is a general comment and, you know, any of the OpCo CEOs are willing to chime in here. Taking price increases that are approximating inflation is helpful but, you know, doesn't necessarily mean we're going to be doing that every year at these levels. The, you know, they are, as we said, approximating inflation. There are benefits to the revenue and hopefully to the EBITDA as well, but we're also seeing impacts of inflation. If inflation declines, our price increases will decline as they have in the past to levels that are more reasonable, mid-single digit in the U.K., for example. We've always taken price increases there. I think this is an extraordinary time, and it's comforting to hear at least three O2 customers who just got a sizable price increase.
Our remaining O2 customers, because perhaps you appreciate as well that it's a good service. It's, we're only making that price increase apply to your service revenues, not your handset and things of that nature. We're trying to do the right thing by customers, but also be sure we're absorbing, if we can, some of these costs and ensuring that it's a balanced arrangement. If inflation comes down, which we think it will, obviously we're gonna be in a different position relative to price increases. The market appears to be willing to absorb some reasonable amount of price, which is very comforting for us in this sector. You know, we've talked in the past that there are tailwinds here. Pricing power is one of them.
Not simply pricing power associated with inflation, but pricing power generally because we're offering a better and better service. You know, the demand for connectivity in particular and the quality of connectivity we provide supports those reasonable price increases in the long run. I think that's our last question. I'll just, you know.
Lutz Schüler (CEO)
Maybe Mike...
Georgios Ierodiaconou (Managing Director and Senior Equity Analyst)
Thank you.
Lutz Schüler (CEO)
May-may-
Mike Fries (Chairman and CEO)
Yeah, go ahead. Let's go ahead.
Lutz Schüler (CEO)
Maybe, Mike, allow me to explain a bit also our, and I think it's for most of the OpCos, but how we are getting less and less dependent from price rises. It's very simple. In the UK, every second household is a customer for us. We have the fastest broadband, the most popular mobile brand. We have all the content our video customers want, and we have all the devices customers want. Today, every household is only using a fraction of our product. Therefore, having the data, having the access to the customer will allow us to sell simply more from what we have. The more we are doing it, and we are on the way doing it, the less we are dependent on price rises.
Mike Fries (Chairman and CEO)
Yeah. Good point. Anyway, thanks for joining us. Hopefully, we've done a good job of explaining the first quarter results in the context of our guidance and the phasing there and the decisions we're making around operating financial and strategic investments, which we think makes sense, and the balance sheet, you know, position we're in, which is very positive. Also the optionality we're trying to create with this transaction where we re-domicile to Bermuda. It's important for you to understand that. Please read the proxy and please vote, because at some time in late Q2, early Q3, we'll put that to a shareholder vote. Thanks for joining us, and we'll speak to you in August. Thanks, everybody.
Operator (participant)
Ladies and gentlemen, this concludes Liberty Global's first quarter 2023 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. Thank you for joining. You may now disconnect your lines.