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

Hello, everybody. I'm Ben Swinburne from Morgan Stanley. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear in the handout available in the registration area and on the Morgan Stanley public website. Good morning to those in the States, and good afternoon to those over in Europe. We are very excited to welcome back to the conference Mike Fries, the CEO of Liberty Global. Mike has been somewhat of a regular at our Barcelona conference. And sadly, we're doing this virtually, but we're still excited to have everybody on. And Mike...

We can pretend we're in Barcelona .

That's right. I'm also joined by my colleague Emmet Kelly, head Of Telecom Research over in London. And Emmet and I will be firing questions away at Mike over the course of this next 40 minutes or so. If you do have questions, please go ahead and lob them into the webcast, and we will do our best to make sure we get them to Mike over the course of this conversation. So Mike, thanks again for being here. It's great to see you. And hopefully, next year this is all happening in Barcelona.

You guys reported third quarter a couple of weeks ago. You've reaffirmed your full year guidance. It's been a really unusual year to say the least, but I think the sort of strength of the broadband business has really come through. And I'm wondering if you could just talk about how the business has performed during COVID relative to your expectations. And as we head into next year, what are your priorities for the company? You got a lot going on at Liberty these days.

Sure, sure, sure. Well, look, I think you just hit the main point. Nobody is immune to this virus. But if there's ever been an industry with some good antibodies, it's the broadband business. So we did perform pretty well, you know the numbers, I think in the metrics that matter most, customer growth, EBITDA, free cash flow. If I step back though, I have to give all the credit to our people, I mean, who have just powered through this very challenging time, incredible commitment, at one point 90% working from home, many in the field doing installs; and our networks, which have been extremely robust and reliable. All the money we invested over the last 5 years in 3.1 and everything is just paying off, which is terrific. We had good strong customer growth. You know the numbers, we just reported the third quarter. Through 9 months, it's been really, really strong. We're exceeding expectations -- internal expectations. A combination of things: lower churn, everybody is seeing lower churn; better NPS and sort of a great relationship with our customers now; and great products. Fixed mobile convergence works. We'll talk about that, I'm sure. Speed is working, smart WiFi, our entertainment platform. So a lot of good things that we're doing to make that happen. Revenue is probably the only metric that has been impacting us. In the second quarter, it's about $100 million. In the third quarter, it was about $40 million. If you took those revenue impacts out, we were flat on revenue, which was better than where we've been and a good result under the circumstances. And those are all, as you've said before, low-margin revenue. So very -- really no impact on our cash flow. We're -- EBITDA is on budget on our internal budget, and free cash flow is on budget and on guidance. So I think operationally, it's been good. In the -- so far in October, it looks a lot like September, trending very, very well. We're watching the COVID situation like everybody in Europe, a lot of lockdowns, a lot of stress and tension. So we're careful about that. As I was just saying when we were chatting, everybody's prepared this time around though. I don't expect to see the kind of shock impact. Charlie talked about Q4, which for us will be a little bit tricky on the year-over-year comparison. Going into '21, and you hit the nail on the head, it's -- we've got a lot going on. We want to get the Swiss deal integrated. We just announced a new management team. I'm sure we'll talk about Switzerland. Get the U.K. deal closed, we're now expecting midyear, which is what we've always been saying, and no issues there. A lot of great premerger work. And then look at some of the other markets like Ireland and others, where we're trying to create this fixed mobile strategy or implement a fixed mobile strategy. Perhaps the most important thing is just bottle the magic. I mean if anybody in our industry hasn't said that to you, there is so much goodness happening here. Whether it's NPS or churn as a function of the quality of the networks, the things we're doing for customers, the way we're leaning in to their -- to them and what they need and goodwill we have with politicians and regulators, we just got to bottle that and drive that into '21. And then longer term, you and I have had this conversation, we're pushing the strategic narrative here that we keep clarifying for people and want to make sure it's clear. Number one, driving fixed mobile champions in our core markets versus where we were, which was nice broadband cable businesses. But now we are the #1 or #2 player in every country, which matters a lot, have 84 million fixed and mobile subs, $26 billion of aggregate revenue, so great scale. And then, pivoting our operational story to free cash flow and operating free cash flow from what it was before, which was a lot of EBITDA. We're going to grow. Fixed -- we'll talk about fixed mobile convergence. We'll grow revenue and EBITDA. But focusing on free cash flow and then really driving these value-creation strategies, whether it's exits, which we've done very well; possibly listings. You and I had a conversation last week. There is some sense from some shareholders that, "Wow, listings, they're super complex." Well, you know what, I'll take that complexity in exchange for transparency and value and optionality, spins, distributions. I mean if anybody knows how to work the capital and corporate structure, we do. And that -- to the capital structure, we just keep pushing forward. We announced another buyback, $1 billion. When we finish that buyback, we will have purchased just under $5 billion of our stock in less than 2.5 years. I think our market cap is $13 billion. So we're definitely leaning in big time to our own stock. We believe that value gap will shrink, and that's why we're investing. So those are a couple of things we're focused on.

Yes. I'm sure we'll hit on a lot of that in this conference. I wanted to ask you about the Virgin-O2 deal maybe first because it's transformative for your largest business, Virgin. Why does that path forward makes sense and emerged as the optimal one for you guys and the right thing for shareholders when you look at your options in the U.K.?

Sure. Let me repeat the thesis for fixed mobile convergence. Again, it's not a U.S. thing. So any U.S. investor who's not focused in Europe would say, "What is this all about?" In Europe, it is all about fixed mobile convergence. Why? You drive scale to invest and to compete. You drive synergies, which are massive in this instance, and you drive a lot of strategic optionality. So we are driving the fixed mobile convergence in all of our core markets. The corporate structure, as I kind of implied a moment ago, is a derivative of that. What do I mean? I mean sometimes, we've been a seller, like we were in Germany at double-digit multiples. Sometimes, we're a buyer, like Switzerland and Belgium. And sometimes, we're a JV partner. In the U.K., there were no buyers at the price we would sell at and there were no sellers at a price we would pay. So the JV worked out well, and it is the right deal for us. I mean O2 is the best asset in the market, best mobile asset. They're the largest -- the best brand. They have the best front book, back book, best NPS, super high synergies, GBP 6 billion of NPV synergies. And they're a great partner, Telefonica. We see things alike. There's a great alignment of strategy. That matters a lot. And the fixed mobile deal is, we think, a win-win-win. I mean customers win. We talked a lot about that. Regulators win because we're going to really turbocharge investment in infrastructure. And shareholders win because it's a great return on capital and long-term free cash flow story. So next order of business is just to get that deal closed, again, mid-'21. But I think from our point of view, the corporate structure, yes, it's important. But what's most important is to get the underlying business back to strength, back to long-term stable growth. That matters most. The corporate structure is a derivative of that, and it might change over time. It's not fixed in stone. I wouldn't get too hung up on that.

Yes, yes. That makes sense. And maybe the same question to you in Switzerland. Not un-Liberty-like to go from selling to buying in a market in a relatively short period of time, but why did you end up feeling this was the right transaction for you guys?

Well, look, the Sunrise-UPC combination is textbook. It's textbook fixed mobile convergence, right? It was always a natural combination, an alliance. And we tried all 3 ways. We had a deal to combine, we had a deal to sell, and this was the deal we could control. And so the outcome was more important than the process really. And it's a great transaction for shareholders, great financial outcome, over CHF 3 billion of synergies that we get to own 100% of. That's -- I think the synergies themselves are like 45% of the total enterprise value. So the transaction is accretive financially. It's accretive on a free cash flow basis. It's an above-average IRR. So financially, it's a home run deal. And the rationale is the same as it's been in most markets. We're the clear #2 to Swisscom. We've got 90% reach with 1 gig broadband, got the best 4G, the best 5G operator, huge B2B upside and now a great management team. We just appointed André, who was the CEO of Sunrise, as the CEO of the group. He's been there 10 years or so, super talented executive, kind of architected much of the strategic and financial value creation there. Severina, who was at U.K. but prior to that was in Switzerland, is coming back to Switzerland as a deputy CEO and COO. So I've got a dream team of leadership there. And this is going to be a free cash flow growth engine. We just went through the budget and the first draft of the joint business plan, validated the synergies, and the free cash flow is going to be substantial. There's some tax benefits we didn't factor in, meaningful tax benefits, so watch the free cash flow story there. It looks real positive for us.

One of the ways we tried to look at your opportunities in those markets was to look at the Dutch market and sort of watching the Ziggo story over the course of the last 4 or 5 years, which you mentioned you'd get the business back to growth, right? Ziggo is there now. It took some time. How would you characterize -- maybe we start with the U.K., which is the big one and maybe the more complex one. How would you characterize the market structure and what the O2 deal does? And compare that and the time line to getting back to growth relative to what we've seen in Holland.

Look, as you point out, the Dutch business has been a tremendous turnaround. Two businesses that were kind of each struggling a little bit have now had 6 consecutive quarters of revenue growth, 3 years of fixed and mobile customer growth. We've exceeded the synergy target a year early. So a lot of good things happening there. And I think you might have mentioned they confirmed their mid-single-digit EBITDA guidance and the high end of shareholder distribution. So really, things are working there that put KPN on their heels. I mean if you look at growth through 9 months, you look at almost any stat, they're doing great. And they're doing all the right things long term, the 1 gigabit rollout, 5G rollout. They've got HBO, our great entertainment product. So it's all working. But back to your main question, look, you could take almost any fixed mobile market and there are some things that are always the same about all of them: number one, synergies. It's usually between 8% to 10% of the combined cost, CapEx, OpEx and direct cost of the businesses. We're at about 8% in Holland. Switzerland will be closer to 8% to 10%. U.K. is only 5%. So we've been much more conservative in the U.K., GBP 6 billion of synergies but it's only about 5% of that overall combined cost base. And we hit these numbers. And so you're looking at a step-up, right, in the -- almost guaranteed step-up in the EBITDA of the business and the operating free cash flow of the business. And we haven't really made any mistakes there. We hit -- our track record is almost flawless on executing on synergies. That's point 1. Point 2 is you're always bringing the best networks together so your ability to, whether it's 1 gig, 5 gig, invest and have the option to sort of reshape the ecosystem of the marketplace matters. And that happens with the scale you create. Thirdly, the convergence story -- the convergence strategy is known and well understood. We drive NPS up and churn down by offering converged products that customers love. It's happened in Belgium, Holland, everywhere we've done it. So there's not a lot of questions around that. And I think differences will exist, no question about it. But -- so all those benefits, I guess I would say, exist in both Switzerland and the U.K. There will always be differences. In Switzerland, there's only 3 operators. That's great. Holland, there's only 3 operators. U.K., there's 4 operators. There might be 3 one day. We'll find out. There's some wind shifting in the regulatory framework there. But I think for the most part, they're very similar. Cost capture can vary. The time to implement synergies can vary. There's always IT and technology hurdles you have to leap over and things of that nature. And the competitive dynamics vary a little bit. But for the most part, if I were able to show you the Dutch 5-year plan, the Swiss 5-year plan and the U.K. 5-year plan and overlay them from start time, start date, year 1 to year 5, they don't look very different, they look awfully similar. And that would -- shouldn't be a surprise when so many of those factors are the same.

Yes. One more on this and then I'll hand it over to Emmet for some. And again, if you have questions for Mike, please layer them in. With Belgium, with Holland, we've seen in-market consolidation, convergence. Do you think the regulators in Europe now look at that as something that is beneficial to the overall market? I know we've had this conversation. There's been -- the pendulum has sort of swung back and forth over the years. But I think about the U.K., it's still, post your transaction, a very competitive market. And I'm wondering where you think the regulators' heads are at on this.

Well, look, there is huge support for fixed mobile convergence. We have personally been involved in 6 transactions, 1 pending, 9 countries, and they've all been approved swimmingly with virtually no remedies and remedies have been small if they exist at all. So I think fixed mobile convergence, they love it because it's a win-win-win. We're driving investment in infrastructure, competition. We're benefiting consumers with better products, better services. We're stabilizing the markets, creating more rational competition in the end. And that works for everybody. I think there's a possible -- there's evidence that the mobile -- perception of mobile is changing a little bit among regulators. It's very market specific. There's really no magic number, 4, 3, 5. It's really -- but it's trending towards 3. I mean Holland, we went to 3. You would have known that when O2 and Three tried to merge years ago, the EU stopped it, and then the general court of Europe just overturned that. So they said, "We don't agree with that outcome." So maybe that comes back in some way, shape or form. The challenge regulators have is they have these conflicting goals. On one hand, they are populists, right? They're all about prices and consumers. We love that, no issue. On the other hand, they want massive investment. They want 1 gig now. They want 5G now. And you have to create a rational operating environment for investors like us and operators like us to do that, and I think that's becoming clearer and much clearer. There's also some tailwinds here. The pandemic just highlighted in spades exactly what it means to have robust and reliable connectivity. There's a push for some European-wide consolidation. And big tech is a little bit on their back foot. So I think we're not the darlings as such, but it feels to me like, as the broad shape of it comes together, it looks better in the next 3 to 4 years than it was perhaps in the prior 3 to 4 years.

Yes. Do you think the sort of the global race for 5G might be another catalyst for them as you're thinking about more end market consolidation?

Yes, for sure. I mean absolutely. And everybody is moving the 5G needle slowly, usually with 4G technology but nonetheless calling it 5G. Not everybody has the right spectrum. But I think the pandemic has pointed out how important it is to have connectivity for businesses, hospitals, families, schools. And that only happens with investment, and these are big numbers. So rational competition, incentivizing investment, that's what it should be about, and it feels like that's where they're headed.

Yes. Okay. Emmet, let me hand it over to you.

Yes. Thanks very much, Ben. Mike, I was just going to maybe just drill into a couple of the individual markets that you've already touched on and maybe just starting here in the U.K. So if I look at the pricing environment in the U.K. on fixed line, can you maybe just say a little bit about some pricing moves that you've made over the last year or 2? And also, I'm just thinking that BT, British Telecom have put through some pretty chunky price increases on both TV and broadband. Can you maybe just say what kind of optionality that maybe gives you as you're going into 2021? Because I know it's a little bit of a balancing act. You've -- consumers are feeling a little bit of pain because of COVID. You might have an opportunity to take some share, but clearly, you also want to raise ARPUs as well.

Yes. No, that's a good question. And there has definitely been a shift in BT's thinking on rate increases. As you point out, they're back to 5% rate increases this year after claiming they were going to stick to CPI. Sky has done the same thing, by the way. Sky -- no, sorry, Vodafone has followed BT almost entirely to this 5% level, and Sky is more like 6%. So the market's always been driven, to some extent, by more for more. Rarely -- we are the leaders in this. Rarely do we take rate increases in a smart way and not offer more, more speed, more entertainment, more products. Our approach has been consistent from the get-go, right, look at the macro environment, look at the competitive environment and make sure that we can offer more if we're going to charge more. And so in those -- in that environment, we decided not to take our rate increases this year, and we would have done it typically in the third quarter, for a couple of reasons. One, we know our customers are challenged right now, and we felt that we didn't need it. It was probably about $26 million -- I don't know if we publicized this, but roughly $26 million impact on our EBITDA fourth quarter because we didn't. But we drove customer growth. We drove NPS up. Churn was down. We added a ton of customers, by the way, both on our Lightning footprint and our BAU footprint. So it was a nice trade-off. Going into next year, we'll see. I mean I can't give you -- I won't obviously tell you ahead of time what we're going to do or not do. But it does feel like there's a positive environment there. We took a big rate increase in Holland this year, no issue. And perhaps this is a little bit of a shift in mindset where consumers and regulators realize that we're investing a ton to make this connectivity environment work for people and sometimes you need to take a rate increase. So I feel pretty good about it going into '21, what our options are there.

Okay. Super. I guess one of the big themes has been out-of-contract customers in the U.K. We've had a change of leadership at Ofcom, and obviously, Sharon White has moved on. But one of her legacies is she wanted to kind of close the gap between front book pricing and back book pricing so existing customers can also maybe benefit from some of the great deals that they see online. Can you say what this means for Virgin Media in the U.K.? Do you have a lot of customers that are out of contract? And how do you kind of balance this repricing effect?

Well, look, the regulator has asked that we provide a fair deal to consumers, and we take that very, very seriously. The end-of-contract notification, which you referenced, and also the annual best tariff obligation that you didn't reference but is part and parcel of the same thing, are ways of doing that. So we're implementing that. There was a report put out in July, unfortunately, on data that was a year old, which showed that in our case, 60% of our customers were out of contract. That's come down as we've changed our contract terms. But more importantly, it also showed, well, whatever the number is, what's the difference between your out-of-contract pricing and your current average pricing because that's the gap. And in our case, it was about GBP 4, which was the exact same number as Sky, exact same number as BT. So we're in the same position as everybody else, better than the average. And we've implemented the end-of-contract obligations in February. And as I've said a few times publicly, we've been actually pretty pleased. The churn numbers are about what we thought, but more importantly, the ARPU has not come down, meaning that we have a lot to offer. We're the fastest in the market by a long, long shot, right? Our average speed is 166 meg. The rest of the country sits at 40 or something like that. We have the best entertainment platform, we believe. We have a great bundle with Oomph, our mobile bundle. So we've got a lot of things that we can do to make it worth a customer's while to stick around. And so the ARPU erosion, we haven't seen. And we'll see what the rest of this year brings and early next year, but for the most part, we're certainly complying. And we do this anyway. We're always going to vulnerable customers and telling them what their contract pricing is. We just launched an essential broadband service, GBP 15 for 15 meg. So we're always leaning in to our customers in a positive way, and I think that they see that. So not suggesting it's a nonissue. I'm simply saying we're all navigating it very well. And certainly, the outcome so far is better than we forecast.

Okay. You mentioned your speed advantage, Mike. For many, many years, if you lived in Central London and you wanted to get a fast speed, I mean, Virgin Media was pretty much your only solution. It was the only place that you could get a fast speed. Clearly, there are a lot of fiber projects on the table at the moment. So BT is kind of beginning now to build out fiber. They are clearly many, many years behind Telefonica or Orange, but they are beginning to roll out fiber. You see other projects coming in as well like CityFibre as well. Can you maybe just say a few words about how you see the fiber market evolving and what kind of risk that poses to Virgin, either in terms of speed advantage, market share and how you plan maybe to pull away from them again?