Liberty Global - Earnings Call - Q3 2020

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's Third Quarter 2020 investor call. This call and the associated webcast are the property of Liberty Global, and any redistribution, retransmission, or rebroadcast of this call or webcast in any form without the 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 facts. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These 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 (CEO)

Thanks, operator, and welcome, everyone. There's quite a bit going on in the world, so we certainly appreciate you spending an hour with us. We'll try to make it worth your while. Charlie and I will handle the prepared remarks today, and then I'll get other execs involved in the Q&A as we normally do. We'll be referring to slides as we walk through the quarter, so hopefully you can grab those off the website and follow along with us. And I'll kick it off on slide four with some key highlights from the quarter. This should get you level set on most of the main issues, many of which we'll come back to in this presentation, but let me start with the pandemic.

As we've discussed throughout the year, while we're not immune to the effects of this global crisis, of course nobody is, we continue to deliver solid operating and financial results, largely in line with, or in some instances better than our original expectations for the year, and I'll talk about that a bit on the next slide. Obviously, this has been a busy year for us on the M&A front, and we're excited to be on the verge of closing our acquisition of Sunrise in the Swiss market. You would have seen that around 97% of the shares were tendered to us, which is a great result and will facilitate the delisting and merger process. We also just received all regulatory approvals, which means we're targeting completion of that transaction actually next week.

In a few slides, I'll spend just a minute revisiting the strategic and financial benefits of this combination, which are significant. We're also making steady progress on the completion of our JV with Telefónica in the U.K. The teams are working extremely well together and have already validated the GBP 6.2 billion synergy estimate. They've developed strong commercial day-one plans. And of course, the transaction is now fully financed. I got to tell you, we're even more convinced today that this will be a fantastic deal for customers, employees, and shareholders. All we're waiting for now is regulatory approval, which, as we've said, should be mid-next year. Now, you can see some highlights of our Q3 results on the right side of this slide. We delivered strong customer growth in both fixed and mobile, which I'll talk about in a second.

We saw modest declines in revenue, Adjusted EBITDA, and Operating Free Cash Flow. Now, Charlie will drill down on those figures, but we are largely on plan for the year, which means we're managing through both the expected headwinds we identified at the beginning of the year and the unexpected impacts of COVID pretty well. And that's one of the reasons we're confirming our original 2020 guidance today, in particular, mid-single-digit Operating Free Cash Flow growth and GBP 1 billion of Adjusted Free Cash Flow, both of which are benefiting from continued declines in capital intensity. Now, you no doubt noticed that we added a billion to our buyback program today. This will give us the flexibility to be opportunistic during the remainder of this year, and it'll give us the capacity to continue shrinking our equity and driving levered free cash flow per share in 2021.

And then finally, I just want to say how encouraged we all are by our employees and how well they're managing through this pandemic. And we've consistently made their safety and well-being our number one priority. And as a result, we're seeing record engagement levels across our markets, which is a good segue to the next slide, where we talk a bit about the COVID-19 pandemic, which has in many ways highlighted some of our own strengths, beginning, of course, with our networks, which have remained resilient in the face of increased utilization, both upstream and downstream, and have plenty of remaining capacity. I just, I can't express how important this is for the families and students and hospitals and schools and businesses that we serve. It certainly helps explain why we're experiencing some of the highest NPS levels we've seen across our core markets.

And it allowed us to support our customers with more data, more speed, and more content, while at the same time supporting our communities with programs like Virgin Media's Essential Broadband and Telenet's Digital Lifeline services that are targeted to the more vulnerable among us, for whom connectivity is even more important. I'd also point out that COVID has forced us to accelerate our investment in other areas of our business, like digital. We've talked about this. When customer care centers were disrupted and shops were closed, we needed to lean on our digital platforms to drive things like online sales, which are up 10% in most markets and now represent nearly half of our sales in the UK, for example. We also ramped up our digital care and support platforms, which helped drive call volumes down 30% in markets like Switzerland.

As I'm sure you've heard from other operators, the COVID headwinds were less severe in Q3 than in the prior period. The return of sports, improved roaming traffic, and growth in both fixed and mobile subs helped our results. More recently, however, we've seen a return to more stringent lockdown and social distancing protocols in Europe as infection and positivity rates have spiked. To be fair, this could impact our medium-term outlook, but I'd point out a few things. Most of the measures are intended to be short-term in duration, two to four weeks typically, and generally, they're more moderate and more targeted than last spring, and after six to seven months of this, businesses and consumers are more prepared this time around.

Our hope, as I said before, is to build on our improved relationship with subscribers, regulators, and politicians and to make sure we come out of this period even stronger and more customer-focused, and I think we will. The pandemic has also reinforced the fact that our strongest customer proposition is connectivity: fixed and mobile, fast and reliable, and intelligent and adaptable connectivity, including also the integration of incredible features, content, and applications. On slide six, you can see that our broadband results reflect that. With 71,000 net additions in the third quarter, that's up sixfold from a year ago. We saw strength across our footprint. Belgium had its best result in five years. The U.K. delivered solid growth on both the Lightning and the BAU footprint. Switzerland had its first positive month in September in a very, very long time.

Now, we know that speed leadership still matters in these markets and that our investment in fiber deep, smaller nodes, and DOCSIS 3.1 is paying off. I remember the debates we all do around the question of who needs 100 megabits at home. Well, today, nearly 100% of our U.K. customers are taking 100 megabits or higher, with average speeds of 166 meg across the footprint. By the way, that compares to 46 meg in the rest of the U.K., among other operators. Across Europe, around 50% of our subs are taking products of 200 meg or higher. And then you add to that the fact that we are gigabit-ready across 32 million homes and actively marketing gigabit services to about 45% of those, and we're in a very strong position here.

Now, there's no question that broadband is also impacted positively by our fixed mobile strategies across our markets, where convergence continues to grow. In Holland, over 40% of broadband subs take a mobile product from us after about three years. Now, we'll talk a lot about the strategic and operating rationale for fixed mobile convergence in Europe. We've done that. We'll continue to do that. And there's really no better example than VodafoneZiggo in Holland. There's a chart on this slide, and I apologize. It's a little small, but it shows the complete turnaround in revenue and EBITDA growth that the team has achieved over the last three years. In 2017, the company's revenue and EBITDA declined 3.7% and 5.6%, respectively. Those numbers have improved steadily every year, with revenue and EBITDA actually in the nine months of this year up 2.5% and EBITDA up 7.5%.

Now, there are several factors that contribute to this, including, of course, a significant synergy target that was achieved a year early. But equally important is the positive impact of higher NPS and reduced churn levels from fixed mobile subs. That's anywhere from 50%-80%. And the scale that VodafoneZiggo has in the Dutch market is also critical, right? It's now larger than KPN in broadband, fixed voice, and entertainment services, and is generating EUR 400 million-EUR 500 million of distributable cash to shareholders this year. The other major factor here is continuous innovation across our product and technology roadmaps. In Holland, VodafoneZiggo is rolling out a nationwide 1 gig network. They were the first to roll out 5G, and they've embraced a Horizon entertainment platform. And that sort of innovation is occurring across the European footprint.

It all begins with network superiority in markets like the UK, for example, where Project Lightning has been a resounding success. In fact, we've included the latest figures in the appendix of this deck, so check them out. And we continue to be bullish on continued expansion of Lightning. We're also working on a clear path to 10G or 10 gigabits per second using a combination of HFC and fiber to the home. The pace of innovation on 5G mobile is equally critical, with VodafoneZiggo and Sunrise and others leading the way in their markets. Robust and reliable network support innovation and connectivity, which is where this all began. And we've led the way with smart and intelligent Wi-Fi and better, faster, and cheaper CPE.

And then finally, our entertainment platform continues to delight customers with the best user interface, seamless integration of apps, voice control, and tons of other features. And importantly, Horizon has also laid the groundwork for our migration to an all-IP video services platform with our Apollo Box. This is network-agnostic, app-centric, portable, and low cost. This is where the entertainment business is headed, and we're leading the way again in Europe. Now, our success in Holland and Belgium really underscores our excitement about the Sunrise acquisition, which we recap a bit for you on slide seven. The main driver here is scale. UPC and Sunrise together create a clear number two to Swisscom and one of Europe's most attractive and stable markets, with around a 30% share across all services and a significant opportunity to grab meaningful share in B2B.

Now, like our other FMC deals, the combination is anchored in best-in-class networks. Right out of the gate, UPC Sunrise will reach 90% of the fixed market with 1 gig services. They'll have leadership in 4G mobile and the largest and fastest 5G network in the country. Now, the synergies are also substantial. You'd expect that with an NPV of over CHF 3 billion, about 80% of which is attributable to OpEx and CapEx efficiencies. The real opportunity here is to deliver the sort of combined financial growth profile that we've seen in Holland. I'm not saying the numbers will be the exact same, but we're convinced that scale, market strength, and synergies will deliver stable free cash flow for a very, very long time. It's also worth mentioning that both operations had a strong Q3, as you can see from the charts on the right.

UPC continues to deliver improved subscriber trends with a record sales month for mobile in September and consistent improvement in broadband. Sunrise released their results earlier today, also a very strong quarter with positive service revenue growth despite roaming headwinds, positive EBITDA growth, which reflects strong cost management. They also delivered their best quarter of postpaid mobile adds in a decade and really strong broadband and TV customer growth. So far, the pre-merger integration work here has validated the synergy estimates and clearly established the opportunity for Sunrise and UPC together to give Swisscom a run for its money. Now, I'll end on slide eight with a quick look at Liberty Global, what we look like pro forma for both the Swiss and the UK transactions. Now, most of you know this, but it's really, really important to continually reinforce the narrative of how we've transformed this company.

After spending over a decade consolidating cable and chasing broadband market share, we saw the fixed mobile convergence story developing in Europe around five years ago. Around that time, the incumbent telcos started prioritizing their fixed networks and broadband growth together with wireless, and they left the other three to four mobile operators struggling to compete with their own fixed infrastructure since they didn't have any. And that was the moment we pivoted, where we didn't have scale. We exited to mobile-only operators like T-Mobile in Austria and Vodafone in Germany. And as you know, those deals were valued at double-digit multiples and represented huge returns on equity for us because of the value of the network and the value of the fixed customer base. In fact, you could argue today that those prices look cheap given where infrastructure assets are trading.

And where we had network and broadband scale, we decided to build our own FMC champions in four markets, right? We merged with Vodafone's mobile unit in Holland to form a 50/50 JV, and I just showed you the results there. We bought KPN's mobile business in Belgium, and Telenet today is the leading converged operator in the market. We announced the merger of Virgin Media and Telefónica's O2 in the UK to form a 50/50 JV. That will be second only to BT in size and scale and poised for incredible strategic and financial upside. And we're acquiring the best mobile company in Switzerland to create the clear number two to Swisscom. When you put it all together, we have tremendous converged scale in Europe, serving 84 million fixed and mobile RGUs and generating $26 billion of aggregate revenue. That's a strong platform for value creation.

And as we've shown in Holland and Belgium, each operation generates stable, long-term free cash flow and represents a real opportunity for further strategic growth and potentially public listing. Certainly, Sunrise has shown us that the institutional demand for crown jewel assets on local exchanges is huge. Now, beyond that, we're focused on allocating capital just as we've done thus far, right? We've announced a new $1 billion buyback program. I mentioned that. When that money is spent, we will have purchased around $4.7 billion of our stock since we closed the sale of Germany to Vodafone 16 months ago. It represents about 40% or more of those proceeds. Now, we'll look for opportunities in our remaining cable markets, Ireland, Poland, and Slovakia. We'll see if there's opportunities there to pursue similar FMC playbook strategies or not.

We'll continue to invest in adjacencies through our ventures portfolio, which we conservatively value today at over $1 billion. Let me just take a second to talk about that. We've had a really good track record with our venture investing and some recent wins. We were an early investor through our technology portfolio and Skillz, a mobile gaming platform that just got bought for $3.5 billion. That was a 10X for us. The crown jewel of our sports portfolio was Formula E race series, which we conservatively value at $250 million. We have small but important interest in content platforms in our largest markets. Our infrastructure portfolio was an early investor in EdgeConneX, which was just acquired by EQT in a multi-billion dollar transaction. We're actively pursuing ways to monetize or grow our own infrastructure and property-related assets, which is an exciting space right now.

You're following that, I'm sure. So looking forward, we're mainly focused on four things. Firstly, delivering stable and long-term free cash flow in our core fixed mobile markets. I've just talked about that. Looking for ways to close the value gap on those assets, which we think are real and tangible opportunities. Investing in our own equity story through buybacks. Of course, we've just added more to our buyback program. And then selectively and only when appropriate, investing in adjacent and attractive opportunities. That's the strategy. So I'm happy to take questions on any or all of my remarks at the end, but for now or right now, I'm going to turn it over to Charlie. Charlie, to you.

Charlie Bracken​ (EVP and CFO)

Thanks, Mike. Turning to our consolidated numbers, I'm starting on a page entitled Underlying Revenue Stable. Total group revenue saw a decline of 1.3% in Q3.

On the right-hand side of the page, we set out our estimates of the impact of COVID and what it has done to our underlying revenue growth, which, as you can see, accounts for more than 100% of the Q3 decline. In Q3, we estimated that COVID reduced revenues by $41 million compared to $110 million in Q2. Of the total, premium sports accounted for around $13 million. B2B revenues were also impacted by $13 million, and mobile revenues were reduced by $9 million, predominantly by roaming revenues. Broadcaster revenues accounted for around $6 million of the drag. Many of the affected revenue streams are either relatively low margin or have other compensating operating expense impacts, which is why our Adjusted EBITDA growth was not significantly impacted in the quarter. On the next slide, we provide details of our Adjusted EBITDA.

The Rebased Adjusted EBITDA growth was minus 5% in the quarter, which means year-to-date growth is minus 3%. Now, we're confirming our full-year guidance for mid-single-digit Rebased Adjusted EBITDA decline, which implies a significant year-on-year decline in Q4. Why is this? Well, 2019 saw a material step up in Adjusted EBITDA in Q4 versus Q3, whereas in 2020, we expect Q4 EBITDA to be broadly flat through Q3. Now, this is because we have deferred the UK price rise that we typically execute in Q4, resulting in a $26 million delta. And in response to the demands of COVID, we are onshoring certain customer care operations and have accelerated investments in a number of digital initiatives. Together, this results in an increased spend year-on-year of $17 million. We expect these investments to deliver long-term savings going forward, but these are after these initial setup costs.

Finally, in both the UK and Switzerland, we expect to incur pre-merger integration costs of $8 million and $9 million due to the pending transactions. Turning to our capital intensity, year-to-date, we continue to reduce our CapEx spend versus previous years due to the completion of many of our investments in capacity and roadmap projects, as well as the decreased spend that resulted from upgrading our customer premises equipment on our new platforms. In Q3, we reported a CapEx-to-sales ratio of 22.3% or 19.9% on a pre-Lightning basis. There was a reduction in new build spend in the quarter, but we still succeeded in building 125,000 homes in the UK and Ireland, contributing to a year-to-date total of 311,000 homes. We're looking to complete a further 100,000 homes in Q4, assuming our plans aren't affected by the upcoming lockdown.

In Q4, we did not expect CapEx to rise as it did in 2019, and so for the full year, we estimate CapEx-to-sales pre-Lightning will be around 20%. Because of this reduction in CapEx, we remain on track to grow our OFCF mid-single digits in 2020, as we set out on the next page. For Q3, we reported OFCF of $552 million and, on a pre-Lightning basis, $623 million of underlying OFCF. All our markets, except Belgium, where it was flat, show underlying growth in OFCF versus the Q3 2019 numbers. The Netherlands, in particular, saw very strong growth, rising from $247 million to $348 million year-on-year. We expect this underlying growth to continue in Q4 across our markets, and we're targeting $500 million of consolidated OFCF for Q4, including the impact of our Lightning investments, up from $433 million the previous year.

Turning to free cash flow, we confirm our guidance of $1 billion of free cash flow for the full year, increasing from $542 million year-to-date. Turning to the key drivers to achieve this, we expect no further material interest payments in Q4 in line with previous years, and tax payments will be minimal. We expect to receive the balance of the shareholder distributions from VodafoneZiggo, which we expect to be 50% of the upper end of their EUR 400 million-EUR 500 million target range. Year-to-date working capital is positive $31 million, and we expect it to be broadly flat for the full year. Our underlying year-to-date pre-Lightning Adjusted Free Cash Flow was $789 million, demonstrating the continued strong cash flow generation of our businesses. Turning to our capital allocation on the next page, group liquidity remains strong.

We reported full company liquidity of $9.3 billion at the end of Q3, including $6.8 billion of cash and SMAs. Pending the Sunrise transaction close, this will be reduced to $5.4 billion, including approximately $2.9 billion of cash and SMAs. If you overlay the close of the Virgin Media O2 transaction, post-merger cash is expected to be $4.7 billion. Now, with that transaction, we would deconsolidate Virgin's revolving credit facility, leaving remaining revolvers of $1.2 billion, predominantly at the UPC credit pool, resulting in total group liquidity of $5.9 billion, which will continue to provide the group with excess capital to invest. We continue to repurchase our stock and have purchased $1 billion through the end of October. Since Q3 of 2019, we've repurchased 29% of our market cap and continue to look to repurchase further stock.

As Mike indicated, we're looking to opportunistically buy back a further $1 billion through 2021. Telenet's firm dividend distribution model is committing to a dividend floor of EUR 2.75 per share going forward. We see this firm's dividend distribution policy as a template for our future FMC companies as we explore local listings over time. In terms of leverage, we remain committed to our four to five times leverage targets and are very comfortable at the top end of the range, as there is clear near-term visibility on EBITDA growth as we realize FMC synergies, which allows us optionality to deliver towards the middle of the range and below over time. Both our existing FMC champions, Belgium and VodafoneZiggo, are on this path. Both have long-dated debt with an average life of around eight years and low borrowing costs fixed at 3.4% in Belgium and 4.2% at VodafoneZiggo.

Belgium leverage remains at 4.4 times on a U.S. GAAP basis, following the execution of the synergies of its fixed mobile consolidation. VodafoneZiggo is continuing to execute the synergies from its merger and should deliver further from its current 5.25 times. We completed a number of financings in the quarter, including attractive financings in advance of closing our UK and Swiss transactions. In both the UK and Switzerland, the companies will be leveraged five times before the benefit of any synergies, with average lives of around eight years and a cost of debt in the U.K. of 4.4% and 3.8% in UPC, which benefits from the lower underlying Swiss rates. Given the completion of these financings, we do not anticipate having to allocate any of our excess capital to further deleverage these or any of our other credit silos.

In conclusion, Q3 saw strong customer and broadband performance with high NPS. The Swiss transaction has been approved and will close around mid-November, and the UK transaction remains on track. Our underlying cash flow generation remains strong, with capital intensity established below 20% of sales, excluding Lightning. We are reconfirming all our 2020 guidance metrics, namely mid-single digit adjusted EBITDA decline, mid-single digit OFCF growth, and Adjusted Free Cash Flow for the full year of $1 billion, including Lightning construction CapEx. And then finally, we are announcing a new $1 billion buyback authorization. And with that, operator, over to questions.

Operator (participant)

The question-and-answer 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 digit 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, and we will take our first question from Vijay Jayant with Evercore ISI.

Vijay Jayant (Senior Managing Director and Partner)

Good morning, Mike. Two questions. First, in the UK, you've been reconnecting with your customers and sort of contacting them on modifications of their plans as part of sort of a repricing of the base. Can you just talk about how much was done, what's been the customer impact in terms of dollars, and any sort of outlook on what that could be going forward? Second, more sort of a bigger picture question. Obviously, your fixed-mobile convergence strategy is showing a lot of success in Holland and Belgium.

We expect that to come in the UK and Switzerland over the next year. Can you sort of talk about structurally or competitively or culturally, is there any real reason those two markets, the new markets, won't have similar success and we can get back to pretty healthy EBITDA growth and KPI growth? And in that context, is there any way to even sort of quantify what sort of margin benefits you're getting? I know the churn is down and NPS is better, but any sort of profitability measure on this convergence would be very helpful. Thank you.

Mike Fries (CEO)

Sure. Thank you, Jay. Listen, Lutz is on, and I'll let him address the End-of-Contract and Annual Best Tariff issue. What we've said in the past, I think we would repeat here, though, which is we're not disclosing specific numbers to who we've contacted, how many here.

We have said publicly that so far, the effect of that End-of-Contract notification process has been better than we expected, which means that while our churn from that process was largely in line, we have not had to provide the same level of discounting or changes to our pool that we thought would occur, so in the end, we believe that the End-of-Contract notification process thus far has been better than we expected. I'll let Lutz dig into that. Let me just answer the second question. If there's more to add to that, Lutz, go ahead.

Lutz Schüler (Virgin Media CEO)

Yeah. I think what I can add is, right overall, you have seen strong net adds in the UK.

So therefore, you see that the churn number out of End-of-Contract notification is not really material. Year-over-year, we are doing much better on churn. And on our churn, we are 1% down, but a year ago, we have had the price rise started 1st of September and 1st of October, half and half across the customer base. So therefore, you see also that the impact is not too high. However, there's an impact, and this impact will also obviously flow through into 2021 so that we have fully swallowed the impact in a negative way 2022.

Vijay Jayant (Senior Managing Director and Partner)

Yeah. And annual best tariff has really just started, so it's too soon to know.

Lutz Schüler (Virgin Media CEO)

It has just started. Yeah, sorry. Yeah, exactly.

Mike Fries (CEO)

On the FMC question, listen, I do believe, to answer your question in sort of the general way, we do believe that both the UK and Switzerland can show, should show, similar trends in terms of both financial trends and operating trends to what we've seen in Belgium and Holland. There's a couple of things that are the same, of course. We look at the synergy estimates there in both markets. They're within the range of what we've seen in all the other transactions we've been involved in. We've been involved in over eight different country mergers, whether we're a seller or a buyer or a partner with FMC. And so there's a lot of data on synergies. And just in the case of Holland and Belgium, it was about a EUR 5 billion synergy estimate, and we knocked the ball out of the park, as they say, in both countries.

We've got experience. We know that experience in these. I believe the estimates have been validated. I don't believe I know the estimates have been validated in both transactions by both sides of the equation, and we feel really good about those estimates, the EUR 3 billion number in Switzerland and the EUR 6 billion number in the UK. Those provide a lot of tailwinds financially, obviously. Of course, on the operating side, the benefits of FMC are hard to argue with. Structural reductions in churn, consistent and regular improvements in NPS. In a competitive market, having this quad-play bundle, you've seen it in Belgium, you've seen it in Holland, having a quad-play bundle matters. Being able to provide the full package of products and services around connectivity matters. Having a mobile operation to cross-sell broadband, having a broadband platform to cross-sell mobile matters.

And the statistics and the opportunities look very similar in both countries to what we've seen. I can't share with you the long-range plan, but if I could, you would see similar kinds of profiles. I mean, VodafoneZiggo is up their guidance on EBITDA this year at mid-single-digit. Well, I just showed you that three years ago, it was negative 5%. And we do think that those same kinds of characteristics, both operating and financial, are achievable. And again, I can't share with you my plans, but you should assume that we see that opportunity similarly, as do our partners in the case of the U.K., and I think the Sunrise management team as well. Of course, they were on the other side of the transaction for a long time. So everybody seems to be aligned here, and we're anxious to get started.

Vijay Jayant (Senior Managing Director and Partner)

Thanks, Mike.

Mike Fries (CEO)

Yep.

Operator (participant)

We'll take our next question from Michael Bishop with Goldman Sachs.

Michael Bishop (Executive Director in Equity Research)

Yes. Just one question, which is also on UK pricing. I just wanted to understand how you think the price versus volume equation has worked in the year not taking price. And that's with a view to potentially what you're thinking about next year, given BT's move and actually some of the moves on UK mobile we've seen as well. So just in general, the pricing environment feels like it's got quite a bit better despite COVID.

Mike Fries (CEO)

Well, I'll add a question. Yeah, go ahead. I'll add to it if I need to. Go ahead. Yeah.

Lutz Schüler (Virgin Media CEO)

Well, right, we have only postponed the price rise for this year, Michael. And we wanted to make sure that we really continue with the momentum we built up in especially broadband net adds.

But as you have recognized yourself, the market seems to get more rational on the price increase side. And obviously, we cannot disclose here what we are going to do, but I think overall, I see that as pretty positive.

Mike Fries (CEO)

Yeah. I think the decision made to defer the price rise in 2020 was the right decision. It had perhaps a marginal impact on volume, although I think the reduced churn, the pandemic, the essential elements of our products and services probably had more of an impact on that. But as you pointed out, Lutz, the market is clearly expecting from other operators, and other operators have made this clear publicly, that they will be taking price rises in 2021. So we'll decide internally what our best move is, but we think the decision in 2020 was the right one.

For sure, it set us up for a stronger 2021.

Operator (participant)

We will take our next question from Ben Swinburne with Morgan Stanley.

Ben Swinburne (Head of U.S. Media Research)

Thanks. Good morning. And good afternoon to the folks overseas. I wanted to just stay in the U.K. if we could. Two questions. One, you guys have had some programming cost pressure, I think, over the last couple of years, probably largely tied to sports. And I'm wondering if you look out from here, if you see the curve there bending one way or the other. I partly bring it up because Sky is talking about some real opportunities in terms of driving down, I think, entertainment expenses. So I'm just wondering if you see that in your outlook as well.

And then sticking with video, I know we don't talk about video much anymore, but this Virgin TV 360 platform, is this a big deal for your position in the market? I don't know how you would compare that to Sky Q, and I don't think it's a new set-top box. It doesn't feel like a big CapEx deployment. So I wanted to just make sure that's the case and get a little more color on that product which launched this quarter.

Mike Fries (CEO)

Yeah. I'll let Lutz again just say a couple of things, then I'll hand it over to you.The 360 platform really is a new user interface, the Horizon 4 UI, which is X1 plus plus, whatever you'd expect to see. And that, we think, is a game changer in this market where everybody continues to watch video pretty significantly on television.

But it also integrates all the apps and has the full, that's why it's called 360, the full integrated OTT experience built in. So we do think that's a game changer later this year when it rolls out. It has been in other markets in Switzerland, just rolled out in Ireland, and in Holland, NPS rises materially, and people see it as the next generation of video experience, which we need to be part of, and our customers are as well.

On the programming point, without being specific about any particular programmers, I think it's fair to say that across Europe, not just in the UK, we anticipate a different type of discussion with all of our linear providers, whether it be sports or entertainment. And you're seeing that in most of our markets. We're not disclosing it, and why is that occurring?

For the same reason you're seeing it here in the U.S., perhaps. While linear viewership remains pretty robust in Europe compared to the U.S., it's clearly moving the other direction over time, and we are seeing some modest losses in video subscribers. So the idea that we'll continue to pay more for linear programming in Europe, that we'll continue to pay flat rates, if you will, and not customer-dependent rates, is crazy. It's not going to happen. And so in all of our negotiations with these providers, we're finding that their desire to go over the top, together with the headwinds we feel in the linear video business, will result in better margins over time on the video product. But I think most importantly on that issue, we're not waiting around for that transformation. We are integrating apps into our boxes today.

As I mentioned in my remarks, our IP box is rolled out in Poland. That's an app-centric network-agnostic box. We can roll it out anywhere. We have IP rights. So clearly, Europe is heading in the same direction. Integration of OTT apps, aggregation of over-the-top content seamlessly in an entertainment experience, and we lead the pack in Europe on that roadmap. So similar trends in the U.S., not quite as aggressive or quickly appearing, but I think programming cost pressure ought to be lessening for us over the longer term here, which is natural given where the market's evolving.

Lutz Schüler (Virgin Media CEO)

Yeah. I think you said most of it, Mike. So I think Virgin TV 360, we think it's a bit better than Sky Q, right? It has some functions Sky Q doesn't have.

It's an over-the-air software update our customers will get, and therefore not high cost, and it will lead to lower churn, right? Because we know from other markets that NPS is extremely high, and that leads to lower churn, and we will factor that in. On the programming cost side, well, when you compare programming cost 2021 to 2020, obviously, the cost increase has flattened a lot, but this is more due to COVID. In the long term, we are doing exactly what Mike has explained for the overall UK market. We want to get much more to variable cost, right? We help all our partners on their way to direct-to-consumer apps, and we have a lot to offer there from prominence, data, and so on and so forth.

And on the other hand side, we are keen on getting more on variable content cost for linear viewing, and we have already managed to close some of these contracts, and in some others, we are still in negotiation.

And don't underestimate the leverage we bring to those conversations today. Years ago, Ben, we didn't have any mobile customers. Today, if you include MVNO Subs, we'll have something like 50 million mobile subs. The OTT guys are searching us out. You've seen how well Horizon did for Disney+, and you've seen all the DTC guys here looking for mobile partnerships to get launched. So we're in a position in all the core markets to play that role. O2 is already the launch partner for Disney+ in the U.K.

So we'll be in that position in all these core FMC markets with the mobile platform, which gives us additional leverage in those conversations.

Ben Swinburne (Head of U.S. Media Research)

Right. Got it. That makes sense. Thank you both.

Mike Fries (CEO)

Okay.

Operator (participant)

And we'll take our next question from Steve Malcolm with Redburn.

Steve Malcolm (Partner and Senior Analyst)

Yeah. Good afternoon, guys. I just want to come back to that question on programming costs and just clarify if that's okay. And then one more quick question after that. You basically have two large premium sports providers in the UK, BT and Sky. The BT deal's largely fixed. The Sky deal's kind of fixed and variable.

From what you're saying, I think it's reasonably clear, but should we assume that over time you are making every effort to make those fixed costs from those two large suppliers more variable and give them kind of more access to a larger base and ability to go OTT? So I guess that's question one. And then secondly, just on the local listings point, Mike and Charlie, I did ask this last time, right, but when I look around Europe, there are two kind of companies of that ilk, Telenet and O2, both traded at very high dividend yields and pretty low multiples. So I guess the question is, what's the market missing? Why would Switzerland be that different? Is it just because it's a better market? And would you consider something a bit more radical, say a full demerger to your shareholders in an effort to create value?

Mike Fries (CEO)

Thank you. Well, I'll take the second one, and Lutz, you can be thinking about the first one. And Charlie will chime in here too if you want. Look, I think there is. You did ask the same question last time. Appreciate that. There are lots of reasons why Telenet is where it is. We think the dividend they've announced, the long-term free cash flow profile, their competitive position in the marketplace are winning characteristics. I think there is some concern that's unique to Telenet among shareholders there, specifically related to strategic issues, whether it's the previous conversation and capital expenditures.

So I don't think you can look at Telenet and read across the rest of Europe and say, "Well, because it trades here, a Swiss IPO or a UK IPO won't trade well." If you just look at VodafoneZiggo and what KPN trades, and VodafoneZiggo leads KPN in all the core metrics. If you look at the three-month or year-to-date results for both companies, it's night and day. And yet that also could be an opportunity for reasonable valuation. And lastly, I'll just say that while you could be right and the valuations won't be as robust as perhaps we hoped for, they couldn't be any lower than our own valuation. Let me just pause there. Right? So perhaps it won't be nine times EBITDA and a 6% free cash flow yield.

But if you look at where we trade today, creating local listings with local following and local energy in that marketplace gives you the shot at and manage with the balance sheet correctly and the dividend profile correctly, gives you a shot at long-term value creation that apparently we're not able to achieve at the HoldCo for reasons you would know better than me, I suppose. And so from my point of view, creating value at the OpCo, whether it's the way we sold Germany or the way in which we're managing Telenet or the value we're creating in VodafoneZiggo, that's the core of that creating value for us. And we'll look at all options to address your last point. We'll look at all options to create fundamental value, to shrink the value gap in our OpCos, whatever that might look like.

Steve Malcolm (Partner and Senior Analyst)

Should we assume that you're sort of number one? Hello? Sorry. No, you go ahead. Go ahead. I was just going to ask, should we assume that you would seek to use any proceeds raised through an IPO just to retire more equity, arbitrage a higher multiple in Switzerland, possibly against your group multiple?

Mike Fries (CEO)

I think it's because we generate free cash flow, so we don't need to look at inorganic transactions to raise cash for equity shrinks since we generate free cash. But look, we'll be opportunistic. You've seen that over the last five years, right? We've always done what we believe is the right thing, both in terms of the operating strategic position we're in and the ability to manage our capital and capital allocation. So nothing's off the table. You would know that about us. However, I think that the plan A should be pretty clear.

Lutz, you want to address the programming cost question?

Lutz Schüler (Virgin Media CEO)

Yeah. My comment, Steve, was more across all programming costs. So you were now only referring to the sports premium programming cost, right? So therefore, take this view a bit more broadly across all our content costs, not only the premium. When it comes to the sports premium, obviously, we have with both partners, BT and Sky, still we are sitting in an existing contract, and renewals will come up, I think, in 18 months from now. So here, we need to find a way, on one hand side, to help our partners to have a secured revenue stream, but on the other hand side, to sit on something more variable. And this is something, obviously, we will figure out in the next 18 months, and then obviously, we will share that with you guys, right?

But the idea is that obviously, strategically, in general, we want to get more and more on variable cost. And on the other hand side, if it comes to variable, then obviously, we use all the assets we are having to then come to a proper volume plan behind that.

Steve Malcolm (Partner and Senior Analyst)

Just one final thought. Do you feel you're in a negotiating position with those operators' strengths in the last eight months given what's happened?

Lutz Schüler (Virgin Media CEO)

Well, I mean, so first of all, we have worked very good together during the pandemic. I think that was very good. And then, I mean, these content contracts come into play, I think, when we are also when hopefully have closed. And then yes, I mean, then we are mobile and a fixed customer, and hopefully, we have more to offer for distribution ourselves.

Steve Malcolm (Partner and Senior Analyst)

Great. Thanks a lot.

Operator (participant)

And we'll take our next question from Matthew Harrigan with Benchmark.

Matthew Harrigan (Equity Research Analyst)

Oh, thank you. Mike, in your comments at Cable-Tec, you kind of highlighted some of the differences between your position and the U.S. operators, a lot more fiber competition over in Europe, and I thought you also seemed to suggest pretty explicitly even that you thought the headroom on DOCSIS 3.1 was a little bit less than what the U.S. operators were saying, and clearly, that requires a need for deeper fiber and DOCSIS 4.0 and all that. I mean, do you think that's a fair characterization? And do you think that with all this capacity being brought on 5G and DOCSIS 4.0 and all that, you're going to finally see some better app development that you can monetize?

I mean, there are some cool things at Cable-Tec, like the light field holographic hopping frog and all that, but it feels like you really could see some definite acceleration in your perceived value and price potential, even beyond what we've seen with Zoom and conferencing and all that. Thank you.

Mike Fries (CEO)

Look, I think a couple of points there. The value of our networks is undeniable. You could just look at what's happening in the European infrastructure space. We know our networks are valuable today, well beyond where they're being valued, and for all kinds of reasons, that makes good sense. The path to continued speed enhancement in our fixed networks, we've got multiple paths. Today, we're getting the most out of 3.1 with a gig. We've already trialed 2.5 gig speeds with 3.1. That's something we can do if we choose to do. We've trialed that in the UK.

But we're really focused on 10G or 10 gig. And to be honest with you, when I mentioned 1 gig five or six years ago, everybody was like, "What the heck is that needed for?" Trust me when I say that the 10 gig conversation will be starting, and we'll be starting pretty quickly. And when we look at our networks, we've got a couple of ways to get there with DOCSIS 4.0, as you mentioned, where we would fall right in line with the US operators' Charter and Comcast, both of whom would be pursuing a strategy like that. And we could also use fiber to the home, XGS-PON, where we think the economics to support that kind of roadmap to 10G. So stay tuned. Lots to talk about there.

And as you point out, lots of cool things with faster speeds and lower latency, lots of cool things we can do both with our fixed and mobile networks. We just talked yesterday as a team on some of the internet and the ideas around Internet of Things. And to be honest with you, there's real benefits to being in the mobile space for the IoT opportunity. It's also advantageous to be partners with companies like Telefónica and Vodafone who are leading the way in the development of IoT revenue. And as partners of ours, we learn and benefit from that too. So I think there's tons of opportunity to monetize networks, fixed to mobile, continue to expand speed and capacity and reduce latency with 5G and 10 gig. And sky's the limit. I think that's really why these networks are being valued where they are.

Matthew Harrigan (Equity Research Analyst)

Thanks, Mike.

Mike Fries (CEO)

Yeah.

Operator (participant)

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

James Ratzer (Head of European Communication Services Research Team)

Yes. Thanks very much indeed. Two quick questions, please. The first one was just regarding your UK KPIs. I mean, the customer adds this quarter really looked to me like one of the kind of standout figures in the release. So I was wondering if you could kind of just talk us through a bit more what's helped to drive those adds up even further than we saw in Q2. I mean, is that solely down to being more kind of price competitive? I'd have thought not having the price rise might have only impacted September. So, a strong performance there. I was wondering what you can say about how you see that in future quarters as well. And then secondly, just interested to get your updated thoughts on the ITV stake.

I believe that that collar position you have is now unwinding. I think about 30% unwound in the quarter. So you're now running a kind of economic stake with equity exposure on the ITV stake again. Just interested in your thoughts on the kind of rationale for continuing to hold that and what you want to do with that stake longer term. Thank you.

Mike Fries (CEO)

I'll take the second one, Lutz. You can take the first one. Look, on ITV, as you would know, James, when we originally acquired our position some time ago, our average cost was well over GBP 2. Fortunately, we collared that position and had virtually no economic exposure to the ups and downs of ITV. As those collars are expiring, we had a choice to make, and we decided to average down the price around 70% or more.

So we're essentially owning the shares that the market thinks we own anyway at about a 70% reduced price. And in our minds that was worth exploring, and we are doing that from time to time, and we think that's smart. We have no intention of doing anything with the stake. We have no intention of doing anything with ITV. But look, we're going to be the second largest telco in this market, second only to BT. In our view, a small stake in the largest broadcaster could be strategic defensively, offensively. I don't know. But there's an opportunity to own that stake for 70% less than you thought we owned it, and we think that's a good trade. So we might look at that. We might not. We could hedge the position again once we unwind it. We could also hedge it again.

So expect us to be financially astute and take advantage of any opportunities there are to average down and be in a stronger position than we were a year ago on that strategic position or strategic stake. So Lutz, you want to take the KPI point?

Lutz Schüler (Virgin Media CEO)

Yeah. Predominantly, your question was around fixed net adds. And so I think it's two factors, right? The churn is down, and this is not only because of COVID. COVID has helped, especially in Q2, as Openreach had no installation teams out there, and we had, but that was not the case in Q3. But we have done a lot for our customers. We have onshored a lot of call center resources. We have offered a lot of digital functionality for customers. We have offered 100 Mbps speed at the minimum for everybody without charging more.

So we have offered a lot to them, and NPS has increased 10 percentage points in previous years. So that leads to lower churn. And this is an effect which we see is not only in Q2, Q3. It's more midterm. And obviously, also, we are making up for the churn of End of Contract Notification, as I said before. And then, on the other hand side, although we have closed all our retail stores, you must remember that, we have been able to accelerate sales. So we are not only above budget. We are above previous years in terms of fixed sales. And I mean, acquisition price is more under pressure, right? So while the back book is getting more rational, the acquisition pricing is still in the heavy competition. We are not going down to these price levels, and we get our fair share. And that's a combination.

And also, obviously, fixed mobile convergence is helping now, right? So we have launched Oomph 15 months ago, and also that. You will see that more and more contributing to churn. So therefore, maybe long explanation, but short story, it's not that we have done anything special, more commissions or lowered acquisition prices enormously or huge retentions, and we can only do this for one quarter. It is an automatic effect of the long-term levers, more digital, better NPS for customers, and lower churn.

Mike Fries (CEO)

Thank you, Lutz. So that would kind of suggest that the rate you've seen in Q3 could probably be sustained towards into Q4 as well.

James Ratzer (Head of European Communication Services Research Team)

Thank you.

Mike Fries (CEO)

Great. Thank you.

Operator (participant)

And we'll take our next question from Andrew Beale with Arete Research.

Andrew Beale (Senior Analyst)

Hi. Just following on from Steve's earlier IPO question.

I mean, I guess I understand the point relative to the current Liberty Global equity valuation. But what are you thinking is the rough timeline for local listings? And given the state of the European sector valuations, why do you think this is a better midterm value creation path than private market or corporate transactions, given your now fairly unique footprint and the fact there seems to be a pretty wide gulf between public and private, both for the operating assets and also the underlying infrastructure? And also, if I can just ask, Mike, if when you say strategic investments in adjacencies, can you explain what you're meaning? I mean, I assume that fiber and targets in current geographies are in the state, but what about geographic expansion, exclusive content? Is there anything you can rule out?

Mike Fries (CEO)

Yeah. Okay. Good questions.

Listen, on the IPO question and the reference to public and private multiples and other sort of corporate transactions, you know us. We are always going to be opportunistic. It isn't like we have one path, and we will pursue that path at all costs, stand by or stand down. We're going to be looking at all sorts of opportunities, and sometimes it could be dual track, so who knows? But we do know that taking action and being sort of on the front foot when it comes to value crystallization and things of that nature is the right posture for us. And so you'll see us look at these opportunities. We may not take advantage of them. We might. So we'll always be opportunistic and focused on creating value first and foremost and would never exclude any particular financial, corporate, or strategic approach to doing that.

Without getting into the details of what those might look like or valuations or things of that nature, just rest assured that you know us, you've seen us, you've watched how we pivot and adjust and stay agile. We're always going to do what we think is the best for long-term value creation. In terms of adjacency, yes, certainly we can rule certain things out. I mean, geographically, our focus is principally in Europe. That's where we think the adjacencies reside because we have a strong fixed mobile footprint in Europe. And so for the most part, the adjacencies geographically would be in Europe. We don't exclude in an absolute way anything else, but you should assume that most of those adjacencies would be Europe-focused. And the adjacencies would be technology and content-focused things that enable our core fixed mobile converged platforms.

So the things that we've done, investments we've made in our tech platforms, the things that Charlie and Andrea are working on in infrastructure, the things that our content team are investing in. These are all opportunities to not just make money in the underlying investment, but create value, relationships, long-term partnerships with our operating assets. So the adjacencies are sort of structural in terms of our operations and our technology platforms, and they are geographic. And it's also, thirdly, using our expertise. I mean, listen, one thing we know how to do is buy and sell companies. One thing we know how to do is finance and manage and structure businesses. We have an incredible T&I platform that Enrique runs, where we have vast knowledge of where things are happening, where things are going technologically.

And so the adjacencies also exist in our talent pool and our expertise and our specific capabilities in this marketplace. So those are the three adjacencies we're referring to. And if you stick with those three lenses, I think you'd be close to where we're heading.

Andrew Beale (Senior Analyst)

Okay. Thanks. And just on the timeline for local listings, is there anything you can say without breaking the rules?

Mike Fries (CEO)

I don't think so. Yeah. No. I wouldn't want to get into that right now.

Operator (participant)

And we'll take our next question from Christian Fangmann with HSBC.

Christian Fangmann (Head of Equity Research)

Yeah. Hi. Thanks. I have actually a question on the Swiss business. It looks like the UPC asset is finally stabilizing its RGU trends. But financially, I mean, obviously, we have not seen a substantial improvement. What's the structural issue that the EBITDA is weaker than the top-line performance? Are you still investing in the digital infrastructure?

I was expecting a bit more, let's say, closing the gap between the revenue trends and the EBITDA trends. I mean, I know going forward now that you will own Sunrise, things will materially change anyway, but just trying to understand the short-term dynamics with respect to Q4 and maybe Q1 next year. Thanks.

Mike Fries (CEO)

And Baptiest or Charlie, you want to take a stab at that?

Baptiest Coopmans (SVP of Operations)

Yeah. This is Baptiest. And maybe so we see now in the quarter that in-quarter momentum really comes. Positive broadband net adds in the last month. The trend is really turning. But like always in the cable business, you're a trend business. So your last 18 months, 24 months, net adds and price effects flow through your P&L. But like promised, we were able to stabilize the free cash flow and, again, a strong free cash flow quarter.

So with this, we see the momentum for a turnaround in the coming year as well. So Charlie?

Charlie Bracken​ (EVP and CFO)

I think you were right that there is obviously investments in digitalization true across the board where COVID has accelerated what was going to be good return investments anyway. The other thing I think, Christian, we should bear in mind is there's a lot of switch across our cost structure from CapEx to OpEx, which actually is a good thing. So for example, if you provide cloud-based services, which is obviously a more efficient way of providing IT support, that's actually OpEx, whereas in the old days, you'd have canceled it as CapEx. So that's one of the reasons why sometimes it seems counterintuitive that our OFCF is growing so much that our EBITDA or OCF is declining. There is a bit of an accounting effect, and it's recent material.

We might try and quantify that for you for the group as a whole, actually, at the year end.

Christian Fangmann (Head of Equity Research)

Okay. And then I have one follow-up regarding the UK deal. It looks like, with respect to timing, kind of your scheduling or expecting it for kind of mid of next year, that implies actually that you think it's going to the UK level rather than staying at the EU. Is that a fair assumption?

Mike Fries (CEO)

Well, it's outside of our control, really. I think that timeframe could also be consistent with a longer-term evaluation from the EU, right? But it's really in the hands of the commission. They'll determine whether to decide the case or refer it back. And we're prepared for the longer-term process if that's where it goes.

And we'll happily engage with CMA and principally CMA, but to some extent, Ofcom on the transaction, which we think is absolutely positive for the U.K. consumer, the U.K. business environment, and has virtually no competitive issues at all. We think it's probably the cleanest, simplest transaction any regulator has looked at. So we're excited to keep the process moving. And I think the next year is the timeframe we've always talked about. And so we'll hopefully make that timeframe. Okay. Thanks. Good luck. All right, Operator. I think yep, you got it. I think that's it for us, Operator. And I want to just thank everybody for joining us, spending a little over an hour. I know you're still on, so I appreciate that. Just to point out, the IR teams in London and Denver are always available for more questions.

They're on standby, so feel free to reach out to them or to me and Charlie or anybody here that you'd like to chat with about this. We always appreciate your input and questions. We look forward to talking to you in three months or so between now and then. Please stay safe and well. Thanks very much, everybody. Take care.

Operator (participant)

Ladies and gentlemen, this concludes Liberty Global's third quarter 2020 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 material.