Liberty Global Ltd. (LBTYA) Earnings Call Transcript & Summary

Great. Let's get started. It's my pleasure to welcome back to Communacopia, CEO of Liberty Global, Michael Fries. Welcome back, Mike.

Nice to see you guys. Thank you.

Great. Just one quick admin point. There is functionality on the Communacopia website to submit online Q&A, which I can try and weave in or get to at the end.

But Mike, I'd love to kick off with the COVID impact. I mean Liberty Global was super resilient in terms of trends in the second quarter. You didn't change guidance. You noted high usage, networks performing well. Could you give us perhaps an update in what you're seeing in the second half so far? And then perhaps I'll follow up, and we can talk about the more medium and long term as well.

Sure. Well, as you say, we performed well during what has obviously been a difficult period for everybody on the planet, unfortunately. But we had a very modest impact in the second quarter on revenue. It was mostly things like sports and low-margin handset revenue, roaming revenue. So our impact financially was minimal. EBITDA was basically in line for us, and operating free cash flow was up 14% or something. So -- and our Q3 is trending pretty well. A lot of the things that impacted Q2 are still in place. So record NPS, really low churn, good growth on broadband, good cost control. So I think the Q3 period looks also quite good. And what we've learned is what everybody in this sector has learned is that we are obviously an essential service. We always felt we were essential. And -- but it's really been, I think, a very positive relationship that we're building with our customers, our communities, regulators, taking care of customers, more speed, more data, more content, whatever it takes. I mean you referenced medium term, I think it's a little tougher to predict, to be honest with you. Europe has weathered the storm well. I mean you would know that. GDP is more or less trending where people thought it would. Infection rates initially were managed very, very well. There was a lot of cooperation among EU countries. So people were pretty optimistic. I think today's sentiment's a bit more mixed. Confidence might be rising in the business, in consumer sector, and the euro's trading pretty well. But there's been spikes in infection rates, as you know. These job protection programs are going to expire, what happens then? Unemployment. And so I think we're a little less convinced of the medium term, but we remain optimistic in principle. I mean the B2B business, perhaps we're a little more cautious because that sector [ depends on ] retail, tourism, hospitality has to come back. And you need the macro recovery to really build steam. But the consumer business looks good to us. Roaming and advertising and sports revenue, where that impacts us, is already coming back. We are countercyclical. We have always been countercyclical, as you know. And the beauty of our business is we have these FMC tailwinds, these fixed mobile convergence tailwinds around synergies and scale and growth. And I would say that our entire industry, not just us, is really trying to figure out how to bottle the magic that's come out here in this period of time. When NPS is as high as it is and churn is as low as it is, you want to keep that relationship steady. So I'm much more optimistic on the consumer side. And I think medium term, we'll watch the broader indicators, but we remain cautiously optimistic.

Yes. One theme actually that's come out in the last couple of days of the conference from telco operators in Europe is we're already talking a lot about digitalization and the shift from physical to online, both from a work practice perspective, but also in terms of physically selling your products to customers. I mean do you think COVID has just accelerated that almost overnight?

Totally. Totally, in almost every category. More self-installs, more online sales, a real catalyst for all of the digital initiatives that we've been pursuing in Switzerland and Belgium and Holland and the U.K. because it's an eye-opener, right? I mean retail shops are closed or have been or depending on which market, and so we were -- we've been forced to really kick that into high gear, but it's really been a positive experience. So all the key metrics, whether it's online sales, customer -- digital customer interactions, self-installs are all up materially in almost every market. So I think the industry as a whole has got a good kick in the pants in this space, and I think it's going to pay dividends.

Yes. What I wanted to do -- and actually, versus a year ago, a lot of things are clearer about Liberty Global. So I wanted to sort of methodically walk through the different countries and talk about the stand-alone, but then also come to the various deals that you've announced, obviously. But firstly, we start with still the biggest asset, the U.K. There's been a lot of focus on U.K. pricing, I mean, over the last couple of years, in general. And we've had the headwinds on regulatory and broadband competition. Could you just discuss the pricing environment? Because a lot of people have been asking me over the last couple of weeks. Virgin's decided not to take price. And then we've this announcement from BT, they'd already moved to inflation-linked pricing, now they're going to do inflation plus 4. So how do you think about the Virgin decision? How do you think about the market in general?

Yes. Good question. So listen, Virgin is, for those who don't know, has already got the highest, most stable ARPU in the market. And I'll emphasize stable because it is relatively stable. And that's because we have the best fees, the highest bundle penetration. So we lead the market in ARPU, ARPU stability and, historically, ARPU growth. Second quarter was off about 1.8%, as you know, but that was almost entirely sports. When Sky Sports and the sports product shut down, the premium, low-margin, 0-margin sports business goes away, you lose that revenue. If you take that sports impact out, we were up slightly in the second quarter. Other operators, I think, were down 5% to 6%, almost all of them in that category. And the market remains competitive, as you would know, right? Broadband competition is intense, especially in that 60 to 100 megabit range, prices were down last 12 months. And a lot of that's because of open reach and volume discounts. And we've got some regulatory headwinds as you well documented around end-of-contract notifications and things like that. But the price rise for us -- not taking the price rise, which is the first time, was the right decision. For starters, we had such good performance on broadband and customer growth. We really wanted to keep that tailwind. I think the macro picture is tough for consumers. And we felt it was the right thing to do not morally so much, it's just for our customers as it is. And it's been good for our business. And what Lutz will tell you, and as he might said on the second quarter call like he did, is we can mitigate that lost revenue for 3 months in a couple of different ways. Number one, we had our best second quarter in 4 years. So that additional customer growth is going to pay dividends through the second half of the year in the revenue line. NPS remains high. Churn remains low. So we have good, good momentum in the consumer business. We're launching new products, 600 megabits for our ultimate and new customers. We're launching a new TV product. So we have a lot of positive things happening that we think will keep RGU and customer growth really robust in the second half of the year. It's not a permanent move. We always take a look at the macro picture, the competitive environment. As you point out, what our peers are doing, I thought it wasn't -- it was interesting how BT got all this credit for CPI. And then they said, "Whoops." And so we retain a lot of optionality to take price where it matters. But in our minds, the strategy is always underpinned by more for more. So we want to take price when we can give more consumers. And we've got some things coming that will allow us to do that. So I wouldn't view this as a change in strategy as such. I think we just -- at this moment, we felt it was the right thing to do, and it's giving us a nice boost in consumer sentiment and consumer growth.

Yes. No, that's very clear. And I think from a BT perspective, as they invest all this money in fiber, which leads into my next question, they're sitting there thinking, CPI is not that much and we're investing billions into upgrading the network. So from that perspective, you've potentially got a negative impact on Virgin because BT's product becomes more competitive across your footprint. But then potentially, there's more of a pricing tailwind, which might be underpinned by better regulation for asset owners as we go to the Ofcom review or the finalization of the Ofcom review next year. Now how do you think about all those dynamics in terms of the stand-alone Virgin business?

I think you've hit on the right points. Let me just start by making the obvious claim, which I need to make for investors who may not know. We're the clear speed leader in this market, and that's not going to change anytime soon. Clear speed leader, not going to change anytime soon. We are already offering 1 gig to 3.6 million homes. I think BT has reached 3 million homes. That gap is going to triple in the next 12 months because we'll be launching 1 gig to all 15 million homes. They are budgeted to get to 4.5 million by [ mid-2022 ]. So this gap is going to widen. And our ability to sort of create momentum and energy around 1 gig is going to be almost unchallenged for a period of time here. And as you point out, wholesale rates in fiber are unregulated. So I think the published rate is something like GBP 31. And that's driven higher ARPUs in this 1 gig category, GBP 50, GBP 60 ARPUs. And so that's a positive. Now that might change. BT could lower prices. It could all evolve. But today, it's actually more of a positive. In my opinion, when you look at the market there, it's a 2-horse race in this fiber experience, if you will. It's us and BT. The altnets, and there's a bunch of them, a lot of them, they can't all survive. They built 1.4 million homes. They have big ambition, but they can't all make it. And so if you look at our business, we're at 15 million homes today, gigabit ready. We're building 400,000 to 500,000 a year in Lightning. And as we've said many, many times, we are excited about the opportunity to take that number to 22 million, 25 million over the next 5 to 7 years. BT is at 3 million today, saying they're going to get to 20 million by mid-, late '20s. So I don't know what that means. And they've got some hurdles. You pointed out a couple. They've got financial hurdles. They've got technical hurdles, resource hurdles. So will they do it, when they do it? I don't know. But for the time being, it's really us and them. And we're really -- we've got a massive gap, as you say, on the reach issue. And prices are high. So I think the whole whether the 1 gig market expands in the U.K. as awareness and availability expand and as unregulated rates probably stay high for a while, that's an ARPU tailwind, in my opinion, and a positive thing. And this whole equation, I think, supports the logic of the O2 transaction, where we know we are going to be a national champion in this market. We're the best broadband network, the best 5G network, the best brands. It just -- it all sort of positively compounds, and it sort of sets us up nicely.

No. Nice. My next question, which is we hosted Telefonica on Tuesday. They're very upbeat on the deal. And so I'd just love to get your thoughts on where are we in terms of thinking about the regulatory process, and then probably more importantly, whether you and Telefonica have been able to think about things like management team, the brand, the broader strategy, whether that includes more build and those sort of bigger strategic questions.

Sure. Sure. So first of all, I think this is a great transaction for us, obviously. As I said, we're building a national champion. We've got a great valuation for our business. The transaction is generating cash for us at closing, synergies over GBP 6 billion. There's going to be sort of a long-term distributable free cash flow profile to the business. And I think all strategic options are on the table, in fact, may be enhanced. So from my perspective, it's a really positive deal. And I think O2, as I said on our call, is the best partner for us. I mean they have the best brand, they have the lowest churn, highest NPS, best front-book, back-book equation. And I think we have an opportunity to cross-sell mobile to 80% of our customers who don't have an O2 mobile. And they can cross-sell or we will all cross-sell broadband to half of their mobile base who doesn't have our broadband. So a lot of opportunities here. It sets up very nicely for fixed mobile convergence, gives us the scale to invest in 1 gig and 5G gives us the strength to compete. And the synergies, obviously, are nice tailwind. The deal is actually going very well. You may have noticed the financing got done. And we have done actually GBP 10 billion of refi, recap financing around Virgin just this June. This is sort of a record achievement, 8-year average life, 4.25% kind of rates. So the financing, ticked, done. And I think we're really pleased with the reception of the debt capital markets have around the deal. The integration process is progressing. This is all pre-merger integration. So there's only so much you can do, but we're validating synergies. We're building the joint business plan together. We've got our day 1 strategies. We're evaluating management that's coming together. No announcements there. And then the regulatory process is going smoothly. I mean we're doing what we were supposed to do. We had notified this transaction to the EU. We had no other option to do that. That is the process. EU is doing a ton of work. Fortunately for us, this is -- I don't know how many transactions of ours they've evaluated in the fixed mobile space. I think this is the sixth one. It's pretty regular stuff. It's -- there's very few theories of harm that we think are impactful here. They're very positive about the case. And we're monitoring the process between the EU and CMA, which we don't control. And of course, we've kept CMA and Ofcom up to speed on everything. So we're very -- feeling very positive about the regulatory process with no more strong precedence in the U.K. for this deal, BT and EE would just be one. And we'll know more in the next month or so about timing. But everything is coming together on this transaction, really enjoy working with Telefonica, see eye to eye pretty much on everything so far. And I think this is going to be an exciting, exciting business.

I was about to move on from the U.K., but just got a couple of questions from the audience. And actually bringing a couple of them together, it seems to be this recurring question about whether you would consider sort of wholesaling from a fixed perspective in the U.K. or JV-ing with bigger retail players? I mean is that something that's just on hold while you set the JV? Or do you have any more thoughts on...

I mean I'll say 2 things to be careful. One, all options are open. But two, we have to be thoughtful about -- our focus right now is obviously on the regulatory process. So it would be very difficult for us in the midst of a binding transaction that's under regulatory review to go ahead and do something else significant or strategic that could alter or impact the transaction and the regulatory process. So clearly, we're not going to do that and nor should we do that. Having said that, once the deal is complete, we've had preliminary conversations with Telefonica. I think they agree with us. As we were sort of talking a bit more about before this announcement, we think the opportunity to build a robust network in that market that potentially with other partners, potentially with financial partners, creating some sort of wholesale arrangements could be very accretive and very interesting. And we look forward to those conversations. Nothing's off table. I guess that's what I'd say. But today, we have to be laser-focused on this transaction.

Yes. No, perfect. That was all very clear. And then moving to the next big transaction in Switzerland. I think this is the first time we've caught up since the Sunrise transaction. So I'd love to start big picture, how you're presenting this deal, the rationale, the multiple paid. And then also how you see the position of the combined entity and what the opportunity is in the medium to long term in the Swiss market.

Sure. Well, I mean when we came into 2020, you, others had 2 big questions for us, right? How are you going to compete in the U.K. long term? And what's going on in Switzerland? And we've -- obviously, we've answered both of those questions, okay? U.K., we built a fixed mobile champion for the ages. And in Switzerland now, we're acquiring Sunrise in what we think a very accretive transaction with great synergies. The deal from my perspective is a home run deal, building a national FMC challenger. We'll have 1 gigabit to 90% of Swiss households. Swisscom, I think, has a 30% reach of fiber. We'll have the best mobile with 5G right around the corner. We've got B2B upside. We're #2 to Swisscom in every category, which sets us up to be really the #1 challenger. And I think it rationalizes the market. Swisscom is like, yes, great, love it. So I think there's a lot of positive things there. Since synergies are huge, right, I mean 3 billion of synergies. We've now vetted them 3x. So we know they're real, and we have a good track record on these synergies. And it's great for Liberty Global shareholders. Some people have said, "Wow, the valuation seems high." But look, the fact is this, Swiss stocks trade at a premium, right? That's because you got negative interest rates. You've got a safe haven currency, strong economy, tax regimes. Sunrise was the darling of that public market, no question about it, for a lot of good reasons. But post-synergies, the multiples are 7.5x EBITDA and 10x operating free cash flow. So in our mind, there's a very good rate of return on this deal. And it's on track. It's on track. The tender process is launched. We'll get interim results mid-October. We'll get final results early in November. Financing done, tick. I think we did -- we are 8-year average life, sub-4% rates on that financing. That's done. Regulatory process underway. This is already approved once, so we don't see any issues. There's some noise recently around Salt litigation. I'm sure you saw that.

Yes.

On Monday, the Swiss Court denied the request for an injunction. We'll let Sunrise manage the communications on that. But the case, of course, this is a baseless claim and an unfortunate diversion. But at the end of the day, injunction denied, and we're moving forward. This transaction is going to close well before year-end. And I couldn't be more excited about it. I mean it's going to be a real positive business opportunity for us in a market where we had many, many years of great success. And some years where we've got very competitive, and now we're -- we'll be the clear #2 in that market, and I think that's a great position for us.