QVC Group Inc. (QVCAQ) Earnings Call Transcript & Summary

Thank you for attending the 2021 Annual Meeting of Stockholders of Qurate Retail. I will now turn the meeting over to the Chairman of the meeting, Greg Maffei. Please go ahead.

Good morning, and welcome to the 2021 Annual Meeting of Stockholders of Qurate Retail. I am Greg Maffei, Chairman of the Board. I will act as Chairman of this meeting. On behalf of the directors and senior officers of the company, I want to thank you for taking the time to attend this annual meeting. We appreciate your continued interest in Qurate Retail. At this time, I would like to introduce the company's Corporate Secretary, Kate Jewell, who will act as secretary of this meeting and will say a few words about our 2021 annual meeting procedures.

Thank you, Mr. Chairman. To conduct this virtual meeting in an orderly fashion, we respectfully direct your attention to the rules of conduct for the meeting located on the virtual meeting portal. Only Qurate Retail stockholders are permitted to ask questions during the formal meeting. We thank you in advance for helping us conduct the 2021 annual meeting in an orderly fashion.

Thank you, Kate. We will now proceed with the formal items of business. Chris Amrhein of American Election Services has been appointed to serve as the inspector of election. We are here to vote upon each of the proposals described in the notice of annual meeting and proxy statement. First, the declaration of quorum and formal call to order. Has the inspector of election tabulated the number of shares here today present via the virtual meeting portal or represented by proxy?

Mr. Chairman, based on information received from Broadridge, shares of the company's Series A common stock and Series B common stock, representing at least the majority of the aggregate voting power of such stock outstanding on the record date, are present via the virtual meeting portal or represented by proxy at today's meeting. Therefore, a quorum is present for this meeting.

Thank you, Kate. As reported, a quorum is present here today. Therefore, the annual meeting is formally called to order. Copies of the list of stockholders entitled to vote at the meeting and the notice of annual meeting and proxy statement relating to the annual meeting are available on the virtual meeting portal. As stated in the notice of annual meeting and proxy statement, stockholders will vote on 2 proposals, each of which will be described in turn. The first proposal is a proposal to elect Rich Barton, Mike George and myself, Greg Maffei, to continue serving as Class II members of our Board of Directors until the 2024 Annual Meeting of Stockholders or until our earlier resignation or removal. These nominees have been nominated by the Board's Nominating and Corporate Governance Committee, and no other nominations were made in accordance with the company's bylaws. The biographies of these nominees can be found on Pages 9 through 11 of the proxy statement. The meeting is now open for any questions concerning the director nominees. Kate, please confirm we have not received any questions.

Mr. Chairman, we have not received any questions.

The second proposal is a proposal to ratify the selection of KPMG LLP as our independent auditors for the fiscal year ending December 31, 2021. Barry Amman, a partner with KPMG, is prepared to respond to appropriate auditing questions. Kate, please confirm we have not received any questions for KPMG.

Mr. Chairman, we have not received any questions for KPMG.

The voting requirements for each of the proposals is described in the proxy statement. The Board of Directors recommends that you vote for each nominee listed in proposal 1 and for the second proposal. The time is now 10:20 a.m. Eastern, 8:20 a.m. Mountain Time on May 25, 2021, and the proposals are now open for voting on each of the proposals. If you desire to vote at this meeting, you can do so via the virtual meeting portal. If you have previously voted by proxy, you do not need to vote today unless you wish to change your vote. [Voting]

Please confirm the virtual meeting portal is recording any votes, Kate?

Mr. Chairman, the virtual meeting portal has recorded any votes.

Time is now 8:21 Mountain, 10:21 Eastern on May 25, 2021. The polls for voting on each of the proposals are now officially closed. Has the inspector of elections tabulated the votes represented here and by proxy on each of the proposals?

Mr. Chairman, the inspector of election has completed the tabulation of votes and has certified that based on preliminary results, the requisite number of shares has been voted in favor of the election of Mr. Barton, Mr. George and you and in favor of proposal 2.

Based on preliminary results, Mr. Barton, Mr. George and myself have been duly elected as Class II members of our Board of Directors, and proposal 2 has been approved. This concludes the scheduled business as presented in the notice of annual meeting and proxy statement. Is there any other business to properly come before this meeting? Kate, please confirm we have not received any motion for other business.

Mr. Chairman, we have not received any motion.

At this time, I would, therefore, like to adjourn the annual meeting, and I would like to thank each of you for your attendance at this meeting and your continued interest in our company. The 2021 Annual Meeting of Stockholders is now adjourned.

Thank you, Mr. Chairman. We will now proceed with the Q&A session. I will turn the line over to Courtnee Chun, Chief Portfolio Officer.

Thank you, Kate. John Malone, Greg Maffei and Mike George will respond to questions from Qurate Retail and Liberty Media stockholders. Before we begin, this Q&A session includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties [indiscernible] most recent Forms 10-K and 10-Q filed with the SEC. These forward-looking statements speak only as of the date of this Q&A session. Qurate Retail and Liberty Media each expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in their expectations with regard thereto or any change in events, conditions or circumstances on which any such statement [indiscernible]. The first 2 questions relate to Liberty Media. First, CEO, Greg Maffei, noted on the Q1 2021 earnings call that [indiscernible] has exceeded 80% ownership of SiriusXM [indiscernible] into the SiriusXM [indiscernible]. Will such a sale of Sirius stock be taxable to Liberty Sirius?

First, thank you for the question, and this is Greg Maffei. No. The -- neither a dividend nor any sale of our shares into their buyback would be taxable and would have the same effect for all intents and purposes.

Great. So the second question also relates to your comments on that same call. You stated that Liberty Media has no current plan or intent to hard spin any assets. Does the 1.375% cash convertible complicate any potential hard spin of assets prior to the October 2023 maturity of those notes?

No, we would not have -- be complicated for that. And if you look, actually, a lot of our actions have already contemplated how to protect ourselves against that in the event of a spin. So I don't think there would be an issue.

Okay. Moving on to Qurate. We've got 6 questions. How do you think about revenues going forward? On the one hand, the enormous stimulus efforts during the pandemic presumably inflated and pulled forward retail sales generally. On the other hand, we've added a lot of new customers and have benefited from the growth of online shopping during the pandemic. How do you think about these competing forces? Are LTM revenues a good baseline? Or are they too high?

I think Mike is going to take a shot at those?

Yes, this is Mike. Thanks for the question. I'll jump in. We remain highly confident in our ability to grow in a strong way going forward despite the elevated level of the last 12 months. So without providing any specific near-term guidance, we look at a number of factors that all point to the ability for Qurate to maintain a strong level of long-term growth. I'd point to 3 or 4 factors that give us confidence in that statement. First, as the question noted, clearly, we're seeing just an elevated level of engagement in all things digital, and we don't see that going backward as the economy reopens. We think that's a new higher level, whether that's online shopping or engaging in video streaming services or engaging on social platforms. And that connects to a lot of work we've done over the last couple of years to build out a very strong presence across the digital ecosystem. So we're more present than ever where the customers are headed, and that becomes a very favorable long-term trend that we can benefit from. I'd also point to what we believe will be a multiyear cycle of investment in home, in homes and one that we'll benefit from. We're showing an accelerated investment in all things for the home through the pandemic. But again, we don't think that, that trend is going to fade away in the near term, along with the benefit of a resurgence in the fashion business. So lots of different things that the consumer is trying to invest in, and we're there with the range of products that she needs in this environment. I'd also point to just a more confident consumer, who has a higher level of savings than ever before, a strong stock market, a strong housing market. These are all important wealth indicators that matter to our consumers and provide that sort of open to buy to engage with our business. And then finally, we benefit from just a much higher -- much larger customer base as we added a substantial number of new customers with strong retention characteristics through the last 12 months. So we see a number of factors that will enable us to sustain good growth over the long term.

Thanks, Mike. How should we think about the impact of potential inflation on Qurate's business model and financial structure? Should we view Qurate as a middleman who can pass through inflation? Should Qurate benefit from inflation due to its financial leverage?

Yes. This is Mike. I'll take that one as well. Yes, so we are definitely seeing inflation in the business. It comes in our model in 3 forms: freight rates, wage rates and to some extent, product costs. So we're seeing that in the business, and we do believe that we can price in ways to largely offset the pressure of inflation. I'd hesitate to say that it's a good guide for us, but we think we're able to manage it in a way to keep it relatively neutral to our P&L. We did share on our last earnings call that for the last 3 quarters of this year, Q2 through Q4, we expect in our largest business unit at QxH that our OIBDA margin rates will be largely stable after a strong OIBDA margin expansion in the first quarter. And that the stable rates reflect some real cost pressures, but offset by pricing and other actions we've taken to improve the efficiency of the business. And we suspect this year will be a high watermark for that inflation and things will begin to normalize a bit next year. I'd say too early to know for sure, but the net of all that is we feel confident in our ability to manage through an inflationary cycle in a way that could be relatively neutral to the P&L.

Great. Third question. Should we extend the duration of our debt? The interest rate differential between our 4.75% senior secured notes in [indiscernible] and our 6.25% senior [indiscernible] at 1.5%. That's a pretax number. Corporate tax rates are about to rise and the maturity differential is 40 years. Should we skew the duration of our debt to very long term as cheap protection against potential inflation?

I'll take a cut at this, and I may ask Ben Oren, our Treasurer, to weigh in as well. First, we have a fairly conservative capital structure already at Qurate with mostly fixed rate debt and taking advantage of low rates. And we have extended some of our debt out through -- or we fixed some of our debt rates through swaps, interest rate swaps and the like. We also are a large free cash flow generator and as I think you'll note in one of your questions later on, relatively underleveraged. So weighing all these factors, I think we have a pretty attractive debt structure, but I'll let Ben add his thoughts.

Yes. I would say to focus on not only the coupons but also the trading yields. There is a larger differential in that respect. So it would be expensive to buy our shorter-dated debt in order to actually extend it. That said, we should also point out that when we have a sizable free cash flow balance relative to the amount of debt that we've got coming due in each year, we feel very good about how well-distributed it is over time.

Okay. Fourth question. Should we issue more preferred stock? We have $2.3 billion of LTM adjusted OIBDA. You expect to convert 45% to 55% of adjusted OIBDA to free cash flow. If we tread water and generate roughly $2.3 billion of OIBDA this year, that suggests free cash flow will be between $1.05 billion and $1.28 billion before payment of preferred stock dividends. That suggests roughly $2.25 to $2.80 of free cash flow per share after preferred stock dividends. As I write this question, your stock price is $13.04. That's a free cash flow yield of 17% to 21%, which seems quite attractive for a subscription-like business compared to the 2.37% yield on a 30-year U.S. treasury bond. At the same time, our 8% preferred stock is traded at 107% of par value. Wouldn't right around now be a good time to recapitalize another portion of our common equity to a single-digit yield as preferred stock and buy back a lot of common stock?

Well, these are a series of good questions and ones that we weigh. And we obviously have no [indiscernible] today issue any more preferred stock, but we will certainly weigh that in the future. If you look what has happened, I think your -- we had a huge cash flow year, free cash flow year in 2020, not only because of the success of the business, but because of some onetime factors, including a sale of our green asset, including some attractive working capital flows, all of which added to a large, large amount of free cash flow in 2020. 2021 will be strong. I think your estimate is probably a little higher than most consensus, not crazy higher, but slightly higher, your top end. And we'll weigh -- and you've got some questions below from the same questioner about buyback and cash dividends as well. We'll weigh all 3, not to give away all the answers. We probably are a little bit cautious as we went through the pandemic and held our cash more conservatively and looked at the preferred stock as a way to provide value but not necessarily hand out cash at the bottom of the pandemic and -- but show our confidence on our ability to meet that dividend. As you may know or recall, some of our listeners and shareholders surely will, I think the preferred stock initially traded at something around 90%. And as you know, it's now trading around 107%. So it took a while for the market to get a hold, but that's clearly been a great instrument. We'll certainly look at doing another one again. But we're -- we have not only the ability to invest in our business, not only ability to continue to maintain a conservative capital structure on the leverage side, but the ability to return capital via cash, via share repurchase or be it potentially another preferred stock dividend.

Okay. So the next question, why are we operating below our target leverage? Our target leverage is 2.5x. Our current leverage is [indiscernible]. So we could borrow more than $1 billion to buy back stock with a free cash flow yield of roughly 20%, but we're not doing that. I have no problem with caution and conservatism, but I'm curious to understand your thought process on this topic.

Well, again, the question, these are all good questions and ones that we weigh. I would note that, that 2.5 target is at the opco level for our business. We also have debt at the holdco level. So our effective net leverage is a little higher than that. But we remain -- we maintain the 2.5 for rating purposes and to ensure that our opco level, that trades attractively. We are below the target of 2.5, as you note. Part of that, I think, again, is a little reiterating the message I gave a minute ago. We were slower to do share repurchase and slower to do perhaps large cash dividends in the face of pandemic as we did not know how well we would operate through the pandemic. And credit to Mike George and team for how well they did operate, though there certainly were challenges around supply of product, ability to operate our logistics, our warehouse, our distribution because of COVID. They got through it all very well, but we were conservative in the face of that. So we acknowledge we are below our leverage target at the opco level. We did, however, as I note, try and return capital in a way last year via the preferred stock dividend, which was sort of a way of conserving cash but still delivering value to our shareholders. I think we'll weigh and attempt to get to our 2.5 target, get back to that target over the coming periods.

Okay. And for our last question, why do cash dividends make sense? You paid 2 special cash dividends last year. I understood and appreciated your logic. It sounds like you may be considering more cash dividends this year. But how did cash dividends make sense given the current free cash flow yield on share repurchases? In the past, Greg has complained about the results of share repurchases, but those repurchases were at much lower free cash flow yield. So that strikes me as comparing apples to oranges. When you pay a cash dividend, many of us need to pay taxes and then reinvest the remaining cash in an environment of low interest rates and high equity valuations. Why don't you just buy back half our stock over several years and double our per share metrics and presumably our share price? Does choosing cash dividends over share repurchases reflect the lack of confidence in our business prospects?

They're all great questions, and I think you would appreciate being a fly on the wall in our treasury-level discussions and our Board-level discussions about how to return and be the beneficiaries as we are such strong cash flow at Qurate Retail. I think we probably are cautious given some of our historical performance on share repurchase. I think you'll see us ramp that in the coming year. You've already seen us begin to ramp it as we exit the pandemic. As I said, we have tried to also balance a bunch of demands or interest among shareholders to get some of our shareholders to receive cash dividends. We've tried not to staple ourselves to an ongoing cash dividend, but instead do those special ones. And as you note, there were 2 over the last year. I think going forward, you should expect more buyback than we did over the most recent periods. It is not a lack of confidence in our business. It is a, I think, a pragmatic view of not only about the potential for rising taxes and getting our shares out there. We certainly agree and have historically -- the Liberty Companies have been believers, as you note, in share repurchase and allowing all shareholders to make the choice about whether they wish to sell stock to effectively get a cash -- meet their cash needs and not be forced into receiving cash dividends. But we have had tried to provide more of a little balance in Qurate, given some of the needs of our shareholders. But these are all good questions and very thoughtful, so thank you.

That concludes our Q&A session.

Thank you. All participants may now disconnect.