Liberty Global Ltd. Q2 FY2020 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Liberty Global Second Quarter 2020 Investor Call. This call and the associated webcasts are the property of Liberty Global and any redistribution, retransmission or rebroadcast of this call, or webcast in any form without the expressed and 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 2 of the slide details the company's Safe Harbor statements 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 recent filed Form 10-Q as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or any condition on which any such statement is based. I would now like to turn the call over to Mr. Fries.

Thanks, operator, and welcome everyone to our Q2 results call. First of all, I hope you’re all safe and well, and as always, we appreciate you joining us today. Our plan is to run through the slides and prepared remarks for about 20 minutes or so to ensure you're level set on the key messages this quarter, and then we'll spend the majority of our time answering your questions. As usual, I've asked a handful of the key executives to join me on the open line, and I'll be sure to get them involved in the Q&A session as needed. I'll kick it off on Slide 4 for those following along with a summary of the key highlights from the quarter. It's a comprehensive slide, so bear with me; I want to be sure to hit each point. Beginning with a few remarks about how we've been navigating the COVID-19 pandemic. Obviously, this is on top of everybody's mind, so I'll spend a couple of minutes upfront, and then we'll get into more detail during the course of the presentation and Q&A. Clearly, our primary focus has been and remains the safety and wellbeing of our people, 85% to 90% of whom continue to work from home, like most companies you've heard from. Working from home can and does work, and we're no exception, of course. In our case, we have to balance that with the need to be in the field, building and maintaining plant and installing and servicing customers. We're also governed by different local regulations and protocols in each country, most of which have required that we open up offices slowly and carefully, and that's exactly what we're doing. As we get back to normal, everyone in our sector is working on bottling the magic, so to speak, whether it's record customer satisfaction levels or faster, more agile ways of working, and I am really excited about the progress we're making here, which I think will definitely be positive for us going forward. Now while the macro environment in Europe has been severely challenged by COVID-19, the region has weathered the crisis pretty well, better than many expected. As anticipated, Eurozone GDP fell 40% in the quarter and 12% sequentially, but there are some bright spots. Not the least of which is, by all accounts, a pretty effective handling of the pandemic. All of our core operating markets in Europe have successfully flattened the curve, with daily confirmed cases anywhere from 75% to 95% below peaks in March and April and, fingers crossed, staying fairly constant. Just as impressive, while every death is tragic, mortality rates have fallen to levels at or near zero in most of these countries. If you contrast that with the U.S., it’s pretty striking. The crisis has also brought the region together. In addition to stimulus measures rolled out at the national level, the EU recently adopted a €750 billion recovery fund designed to help businesses rebound, reform those economies hardest hit, and protect against future crises. It appears that confidence both among consumers and investors seems to be on the rise. You can see that in the euro’s recent strengthening against the dollar by about 10% since mid-May. Against this backdrop, our business continues to perform well, very well in fact, fueled by record NPS levels, lower churn, robust and reliable networks, and significant steps to give customers more: more speed, more data, and more content. And that’s a theme I know you've heard about from many of our peers. In our case, broadband net adds were the highest we've seen since Q3 2017, and customer additions, driven mainly by the UK, were the best we delivered in over two years. We had a modest impact on reported revenue, and Charlie will dig into that in a bit. Nearly all of that shortfall occurred in low or zero margin line items, which allowed us to deliver better than anticipated EBITDA and operating free cash flow. The latter was up 14% year-over-year. Not surprisingly, we’re reconfirming our original guidance for 2020, and quite frankly, we hope to achieve those levels. Pushing gears, I'm pleased to report that our UK JV with Telefonica is off to a great start. As we've reviewed in our last call, this will be a transformational deal for the UK, our respective customers, and for shareholders; it's a win, win, win as we like to say. After a couple of months of pre-merger planning, my excitement level for this combination is even higher. I can review all the details again, but I'll just remind you that we're talking about GBP6.2 billion in synergies, a great valuation for Virgin Media going into the deal, and expected proceeds to Liberty coming out of the deal amounting to about £1.4 billion. I'll talk about fixed-mobile convergence in a moment on the next slide. When you combine the UK’s fastest broadband network with the country's largest and most admired mobile company, the long-term value creation opportunity is extraordinary. It’s also good to hear that the teams are working extremely well together, the financing is falling into place, and the regulatory process is underway. So everything is on track for the completion of this deal. A couple of additional points on capital allocation. As we indicated on our last call, we definitely front-loaded our buyback activity into the first half of the year, which is what we would expect to do given the price volatility. This means we’ve already purchased around $715 million of stock in the last year and five months. To preempt a question I know you're going to ask, we don't have any announcements today about adding to the buyback program. We're always reviewing those options, but we have $250 million remaining on the plan and we'll be putting that to work for the time being. Finally, our treasury teams have been very active in the capital markets this year, refinancing over $10 billion of debt, extending our tenor over seven years, and reducing our fully swapped borrowing costs to 4%. To recap: we've delivered strong subscriber results, EBITDA, and operating free cash flow ahead of consensus, and we're confirming our original guidance for 2020. Of course, we're making great progress on the JV with Telefonica in the UK. Speaking of the UK, I thought it would make sense to revisit the fundamental logic underpinning this deal and the other fixed-mobile combinations we've orchestrated recently. This is a very clear and powerful strategy at work. Since 2015, we've completed or announced five to six mobile mergers with a total deal value of over $80 billion. In each case, the fulcrum asset was our broadband network built over the last two decades through organic growth and national consolidation. In certain of those transactions, we enabled the creation of the fixed-mobile champion through the sale of our cable operations to a mobile-only player. That was the case, of course, for our Australian business and T-Mobile for $2.2 billion, or 11 times EBITDA in 2017, and the more recent sale of our German business, along with some smaller operations to Vodafone for $22 billion or 11.5 times EBITDA. These have been highly accretive deals for us, where we were exiting at premium multiples and banking significant returns on our long-term tax-efficient investments in these markets. You've all seen the numbers; by all accounts, these were also home run deals for Vodafone and Deutsche Telekom, because whether you're a seller or buyer, fixed-mobile convergence works. In fact, I think it's one of the most important strategic developments I've seen in Europe in my 30 years. It drives scale, massive synergies, sustainable cash flow, and ultimately drives better valuations, which is why in Belgium, Holland, and the UK, we chose to create our own fixed-mobile champions by acquiring or combining with a mobile player in those markets. The strategy is working brilliantly for us. Slide 5 provides some numbers to support that. On the top left, we highlight the scale of our combined operations today in these markets. In Belgium and Holland, we surpassed the incumbents in fixed BDC services and we're number one in broadband and TV. In both cases, we're gaining share in mobile with convergence ratios exceeding 40% and growing. In the UK, we’re starting to JV with the number one share in mobile; on footprint, we’ll be number two in TV and number one in broadband. We know that roughly 80% of Virgin customers are using someone else's mobile product today and are highly interested in a converged bundle from us. As we continue to expand the reach of our gigabit broadband network, we'll reach more and more customers. Scale also drives strategic leverage and opportunity in these markets. What does it do? It enhances our ability to shape the political and regulatory agenda, which we all know is critical, and puts us in a position to take advantage of ancillary opportunities in areas like content and new services and infrastructure. Not surprisingly, it shouldn't be surprising that VodafoneZiggo was the first to launch 5G. It's also not surprising that VodafoneZiggo's success with fixed broadband is anchored by a one-gig rollout and the strongest sports franchise in Holland. Similarly, Telenet acquired a free-to-air channel and is now launching a new Belgian Netflix to supplement its OTT content offering. They also recently announced a project with the largest utility company in Flanders to own and control the network of the future. The merger of these two in the UK makes our previous expansion and network expansion strategies and infrastructure ideas even more compelling in my view. Second, as you've seen, synergies in fixed-mobile transactions are a significant source of value creation. Just in the three deals where we remain directly involved, Belgium, Holland, and the UK, announced synergies total over €12 billion on an NPV basis. As we've demonstrated again and again, these synergies are real, achievable, and sustainable. We've never missed a synergy target. In Belgium, we've exceeded expectations, and in Holland, we expect to do the same. This bodes really well for the UK and accrues benefits to our shareholders, of course, but also to our customers as we get smarter, faster, and more responsive to their needs. Fixed-mobile mergers also generate real growth anchored by stable free cash flow. You can see that on the top right of the slide. In the case of Belgium and Holland, we were able to turnaround the EBITDA trajectory and deliver significant distributable free cash flow of over €4 billion. These results are derived from increasingly predictable outcomes: the realization of synergies, better customer experiences, reductions in churn, increases in NPS, and the inevitable repair that occurs over the longer term when markets rationalize and consolidate. Lastly, investors, particularly in Europe, are assigning higher valuations to fixed-mobile platforms. On the bottom right, we show you a half dozen examples, including companies like Swisscom, KPN, and Tele2. But on average, these stocks are trading at eight times EBITDA with operating free cash multiples in the mid-teens and mid-single-digit levered free cash flow. Clearly, scale, synergies, and stable free cash flow are desirable investment characteristics, especially when you're a national champion or national challenger. This underpins our perspective on public listings, to be frank, where it makes sense for us in certain instances to try to take advantage of these market valuations. Higher valuations and greater transparency and sustainable free cash flow should support our own valuation at the parent company, regardless of whether you look at us on a sum of the parts basis, use proportionate EBITDA or operating free cash flow, or focus on levered free cash and the annual dividend streams we collect from these high-margin operating assets. Speaking of operations, we have our usual updates for each operating company in the presentation for your information. In the interest of time, I'm just going to hit a few high points here from each market and then we can address any questions you might have during the Q&A. I'll start with Virgin Media. We expect, as all accounts have, that a strong quarter of 24,000 fixed customer additions will include growth on both the Lightning and BAU footprint. These results are supported in part by a reduction in churn and 33,000 broadband ads, which we estimate to be 75% of all broadband ads in the UK. This customer ARPU was impacted by COVID, particularly with pausing on premium sports, but on a normalized basis, ARPU was flat. We had 93,000 homes through the Lightning footprint in the quarter, bringing our cumulative total to 2.3 million and total gigabit-ready homes in the market to 15 million. Nobody has a faster or more robust network than Virgin Media; it's not even close. Virgin also had another strong quarter on mobile with 85,000 postpaid ads on the back of their Oomph quad-play bundles, adding three points to the fixed-mobile ratio. Lutz and the team I think are really starting to hit on all cylinders, which sets us up really well leading into the merger with those two. The Swiss market remains highly competitive, as you know, which is why we invested last year in a nationwide 1-gig rollout and our new video platform and digital initiatives across the customer operation. The good news is these investments are beginning to pay off with commercial momentum building in Q2 and operational trends improving. For example, NPS is at an all-time high, and sales in June actually exceeded both last year and pre-COVID levels. We also announced an agreement with Swisscom that rationalizes sports in the market and ensures that each of our customers will have access to both Telelub and MySports going forward. As you've heard us say many times, we're particularly focused on free cash flow in this market. You’ll see that operating free cash flow is up 10% in the quarter, which supports our full-year forecast of $170 million of levered free cash flow. Strategically, I can say we remain opportunistic; you'd expect me to say that. This market still requires rationalization. We don’t think the announcement by Sunrise and Salt to jointly build some fiber over the next five to seven years, if they can get their financing to do that, will change much of anything, really. We've already reached 75% of the country with our giving the speed, so the competition had to articulate some sort of plan, which is what we think that adds up to. Moving to Telenet, they had a strong quarter on a number of levels, with their best broadband and digital TV net adds since 2015. Customer ARPU rose 2.4% year-over-year, supported by a higher proportion of fast broadband and quad-play subs. Speaking of quad-play, the fixed-mobile base now stands at 600,000, and the total conversion ratio or mobile attach rate exceeds 40% in Belgium. While there was a revenue impact from COVID, particularly handset sales and advertising, underneath it all, you'll see that subscription revenues are growing above targets—that's a good thing. Not surprisingly, Telenet confirmed the 2020 guidance they gave in April and stuck to its original free cash flow and dividend forecast for the full year. Finally, VodafoneZiggo also performed well through the pandemic. The investment in networks and infrastructure continues with nationwide 5G coverage now available and a new 20-year spectrum license just acquired a few weeks ago. The rollout of 1-gig is also back on track, with nationwide coverage slated for the end of 2021. VodafoneZiggo’s results in the second quarter were solid. The team managed to mitigate the revenue impact of COVID in the mobile space, mostly due to roaming-related issues, with 6% ARPU growth in the fixed business and proactive cost controls that drove normalized Q2 EBITDA up 6%. As a result, VodafoneZiggo also reiterated their full-year guidance, including positive EBITDA growth and $400 million to $500 million of free cash flow available for distributions to shareholders. Before I hand it back to Charlie to talk through the financials, I just want to take a moment to switch gears here and recognize the passing of one of our board members, a dear friend and mentor to me, JC Sparkman. You might have seen his obituary in the Wall Street Journal. I’d just say JC was a legend in the cable industry. In John Malone's words, TCI was built on JC's back over the 25 years that he was Chief Operating Officer, and he brought that same energy and operating wisdom to our board over the last 15 years while he was part of the Liberty Global family. He will be sadly missed by all of us. I don't want to end on a side note, but I just wanted to take a moment to recognize him and his great contributions to our company over the last 15 years. With that, Charlie, over to you.

Thank you, Mike. I’m on the slide entitled Q2 impacted by COVID-19. Overall, of our 4.3% year-on-year revenue decline in Q2, we estimate that the COVID impact is roughly 4%, or around $110 million. Within that, we estimate that the reduced revenues from premium sports accounted for $34 million, and increased late charges around $8 million. B2B fixed and mobile impacts were around $19 million, and reduced mobile running and reduced handset sales contributed $17 million and $10 million respectively. We also saw reduced revenues at our Irish and Belgium broadcast businesses, which we estimate at $21 million. When you consider the estimates of the COVID impacts, the revenue trend is actually in line with recent quarters. We estimate that the impact of COVID on adjusted EBITDA in the quarter was minimal. Many of the impacts, such as premium sports and mobile handset revenues, are low margin. We also benefited from reduced churn and lower sales and marketing expenses, which helped to offset more material impacts. As a result, we believe that our Q2 adjusted EBITDA growth rate was largely unaffected by COVID. On the following slide entitled group overview, we show the key financials for the group. Despite the revenue decline of 4.3%, adjusted EBITDA declined 0.4% for the quarter versus the decline of 3.6% in Q1. Property and equipment additions were 21.6% of sales in Q2, and without the impact of Lightning, we’re at 18.8% of sales. As a result, we saw strong operating free cash flow growth, with pre-Lightning construction OFCF for the quarter at $678 million, a 12% year-on-year improvement, and after Lightning CapEx, $601 million, up 18.3% year-on-year. Group liquidity remained strong at $9.8 billion, and at quarter end, our gross debt was 5.3 times adjusted EBITDA and 3.8 times net. Having completed a number of refinancings in Q2, our average debt tenor remains beyond seven years with an average cost of 4%. On the page entitled P&E additions, we provide more detail around our CapEx, which we continue to analyze in five major buckets. COVID did have an impact on our CPE spend, which was down 34% year-on-year. However, with the upgrade of our set-top box and Connect Box estate, we expect to see a reduction in spend in this category even without the impact of COVID. Despite COVID, we continued to invest in other CapEx categories and lay the platform for future growth. Project Lightning build volumes were down modestly year-on-year, but we still constructed 93,000 homes in the quarter. The cost of premises trended down, with the cost of premises at £636 in the quarter versus £655 cost per home across the project to date. Capacity investment was down 18% as we benefited from the completion of a large spectrum upgrade in Belgium and much of the one-gig upgrade in the UK. We increased our spend in the product roadmap by 18% supporting our mobile platforms in the UK and Belgium, as well as the IT investments required to drive digitization efficiencies. Baseline, which is our major platform maintenance category, was broadly in line with previous years. In the aggregate, we spent $1.2 billion in the first half of the year, or around 22.2% of sales. Without the Lightning construction CapEx, this figure would have been 19.1% of sales. With the completion of significant projects in the connect and video space, as well as the major capacity and IT upgrades behind us, we expect that our capital intensity excluding Lightning will remain below 20% and trend lower in the coming years. Turning to the divisional overview, which breaks down the figures by our key major subsidiaries and provides a roadmap to analyze the free cash flow of our major assets. The UK and Ireland saw revenue decline in the first half of 2.1%. Adjusted EBITDA declined 2.5%, and OFCF was strong at $749 million before the Lightning construction CapEx and $573 million after. Underlying that remains a strong cash flow-generating asset despite our new build investment. It also benefited from significant tax loss carryforwards, meaning a higher free cash flow conversion on its OFCF than, for example, Belgium. In line with that, Belgium revenue in the first half declined 2.8%, but reported positive adjusted EBITDA growth of 2.2% and operating free cash flow of $428 million. They recently confirmed their free cash flow guidance at the lower end of the €415 million to €435 million range. As Mike discussed, the repricing in the Swiss market continues to put pressure on the top line. Despite operating efficiencies, adjusted EBITDA declined 12.9% in the first half. OFCF for the period was $140 million, and we remain confident that for the full year they’ll realize around $170 million of attributable free cash flow at today's exchange rate. As Mike highlighted, the standout performer among our major assets was VodafoneZiggo. Despite COVID in the first half, they reported 2.6% revenue growth, 8.1% adjusted EBITDA growth, and increased OFCF to $562 million. Turning to the adjusted free cash flow for the group as a whole, after the first six months, operating free cash flow before Lightning CapEx was just under $1.3 billion. We had a half-year interest of $600 million and cash tax of $57 million. The joint venture paid interest on the shareholder loan of $22 million for the first six months, and we expect the remainder of our 50% of their €400 million to €500 million projected shareholder distributions in the second half of the year. Working capital for the first half was negative $323 million, consistent with previous years. We expect that working capital impacts to be broadly flat for the full year. As a result, adjusted free cash flow before Lightning CapEx was $315 million and after CapEx $139 million. We remain confident, subject to no major further disruptions from COVID, of realizing our full-year free cash flow target of $1 billion even after Lightning construction CapEx. In conclusion, the UK JV with Telefonica remains on track. We’re continuing to navigate through COVID-19, but so far the impacts have been manageable. Despite COVID, we were able to achieve record high NPS in Q2, alongside positive customer additions. We’re encouraged by our first half financials and actually optimistic for the remainder of the year. We are confirming all of our 2020 guidance metrics based on no return to the full lockdowns that we saw between March and May and assuming a gradual economic recovery. Given the uncertainty of this backdrop, we're not raising our guidance at this time, and we'll take questions now.

The question-and-answer session will be conducted electronically. We'll go first to Steve Malcolm with Redburn.

Just coming back to Slide 5 and your multiples, I guess the Telenet multiple kind of jumps out a bit trading at a north of 10% free cash flow yield. I mean, this is really a question for you and the board Mike and Charlie. It seems like you're not getting tremendous equity value from that stake in Telenet and the VodafoneZiggo stake. Why do you think that is? And is the board happy with the status quo? I saw you quoted in the recent sell-side conference, and you'd love to own more of VodafoneZiggo. Just sort of interested to hear your thoughts on why you think the stock market is not giving you? You clearly think it's fair value for your stakes in those Benelux assets and what you can do to sort that out?

Sure, and that was really the point of that slide, to talk about the FMC strategy, but the punchline being that we believe if we continue along this path, which we are of course continuing on, that the evaluation at least in the underlying businesses in those local markets will be there. I think you raised Telenet—that's a good example; it trades at a premium to us on a number of levels. Are we getting that valuation in our stock? I think it begins with the underlying businesses. The path we're on to drive these FMC champions to greater free cash flow yields, better stability, and operating performance is the starting point. It's clear local investors in many of these markets prefer to own these businesses and understand the benefits of stable and sustainable free cash flow. As a result, as you can see on the page, they’re giving these businesses higher multiples and better valuation. If we can achieve those same results and continue to show the sort of strong performance and cash flow that we’re demonstrating out of these businesses today, no question we have to put some of that money to work. I think the money on our balance sheet isn’t helping today for some investors. I’d like to see that money be put to work, and we appreciate that—we're in the same boat. We want to put money to work. A combination of things is necessary, but hopefully the slide shows that the path we're on is the right one for creating long-term valuation.

Mike, can I also just add? I think we do feel it’s undervalued. It’s not clear to us why it would trade so distanced to KPN and Proximus, which have less attractive growth profiles, less stability in their cash flows, etc. That's why we're certainly working with Erik and John, because I think there's a number of possibly technical reasons around liquidity of the stock and/or around clarity regarding shareholder distributions, the balance between buybacks and dividends. So I wouldn't say that we feel comfortable with the value of Telenet.

That was really my question—that it doesn’t seem like the current structure, where you own 60% of Telenet and 50% of VodafoneZiggo, is doing a great deal, either for you. I mean you mentioned local listing, but it’s not really working with Telenet at the moment. I guess that’s where Telenet trades and VodafoneZiggo is arguably trading below that despite really good numbers this quarter. That was really my question—to whether you think the current setup works.

I think we can make the case that VodafoneZiggo has superior growth to actually any telco in Europe, so they would trade substantially. They’ve just beaten KPN in every single metric. It’s fair to say that the valuation of them is expected to be inside KPN, not the other way around, particularly with the synergies they have. The Telenet valuation is a head-scratcher here, and we’re certainly aware of the disconnect, and we’re talking a lot with them about it. But it’s fundamentally a very strong company with very predictable cash flows, and I think at this stage, for whatever reason, it isn't achieving the valuation. To echo Mike's point, even at that valuation, we're trading at a discount.

We'll go next to David Wright with Bank of America.

Just on the UK trends, obviously, strong internet adds, cable adds. You guys committed to maintaining quite a lot of the provisioning through the lockdown period, which surely has supported the trend. It still does stand out as a much better commercial performance. Could you maybe just add a little color on what you think is driving that? Was it perhaps that the UK consumers reacted a little bit less than you thought to the new end-of-contract regulation? What is that you think has really driven that market outperformance? Thank you.

I'll just say a couple things, and then Lutz, I’ll let you chime in here. From my perspective, the fact that we were still installing customers actively in the field certainly advantaged us. We didn't stop installations; we felt that was critical and essential, allowing us to continue to make products and services available to consumers, which was important. Secondly, during times like this, there's usually a flight to quality. When we're offering 500 meg across the country and the competition is at 30 or 50, maybe even 100 in some cases, or slightly more, that certainly matters. Those two things, in my mind, resulted in indeed a better performance than we’d expected, along with the reduced churn you saw in the numbers. So Lutz, do you want to add to that?

Yes, I think exactly what you said, Mike. What we did was come up right at the beginning of the crisis with a generosity program for our customers to offer them more speed, offer them mobile data packages, and remove any caps on voice. We developed a free-of-charge broadcasting channel for kids and similar initiatives. NPS has increased rapidly; that's number one. Number two is that employee satisfaction is also increasing, and our people have remained committed to the company, and they decided to keep installing and expanding, which made a great contribution to our success. Thirdly, we quickly moved to digital. We started the journey to digitalize our sales media, and now our digital sales channel has increased by 50% from Q1 to Q2. The sales channel percentage of digital has increased to 68%. High NPS leads to lower churn, and you see that our quarterly churn is going down over three consecutive quarters. Therefore, we have sales momentum, lower churn, and higher NPS, and as Mike said, higher speed and higher quality make a difference when connectivity is the connection to the outside world.

Could I possibly add then? We know that Openreach was back in the market in June with a lot more installations, almost bucket full run rate. Can you give us any indication of the sort of intra-quarter trends? Exiting the quarter, was it more normal rather than a kind of initial spike? Was the real outperformance through April, May, and June perhaps a little bit more muted?

From the sales perspective, we actually accelerated momentum. We haven't felt that our competitors are back in the market. From the churn side, we did see an uptick in May and April on our churn number, but that has now dramatically decreased, and the churn level has come up a bit but it's still lower than it used to be.

We'll go next to James Ratcliffe with Evercore ISI.

Two if I could; one is a big picture one. A lot of discussion on fixed-mobile convergence and the rationale for the UK transaction. Can you talk about the compelling proposition for the customer in fixed-mobile convergence beyond perhaps just a bundle discount? And secondly, there's clear commentary about customers dropping sports packages in the wake of COVID and the lack of sports, and that there were margin slips. But are sports a big part of the reason people take pay TV? So can you talk about the longer-term impact of a lack of sports? And secondly, how profitable is the TV business for you at this point? The U.S. has essentially thrown in the towel on it, but beyond the churn reductions, how lucrative is the TV product itself?

Lutz, you can talk about what we're doing long term in the UK and at least give one example of a fixed-mobile proposition to consumers today and how that might evolve in an O2 environment. I'll stay on the TV business—of course, we evaluate this very closely across every marketplace. We still deliver and generate pretty good gross margins on our TV business in comparison to the U.S. industry, principally because we don’t have massive expenses in the basic package for sports. Our gross margins vary by market, but they could be as high as 60% to 75% in our TV business. That's from our point of view a nice addition to the EBITDA, and something quite important to us; we don't intend to let it go, if you will. We do realize that the overall economics of TV have to evolve and are evolving. We're spending time reducing the cost of the devices we put in homes, ensuring sports are available on a premium basis, and integrating OTT apps so the experience is seamless. You turn the TV on, you just say play Netflix, play Amazon, play BBC, and you're ready to go. We think the entertainment platform we've developed has longevity and relevance to consumers because we're integrating apps, because it's cost-effective and easy to utilize. We intend to continue to drive the cost down, so there is margin in the TV business. Most importantly, we know through research that the entertainment component of the bundle matters to broadband customers. The vast majority of broadband customers want to see a TV product in the bundle, and that is hugely impactful for their purchase decision. You can't just eliminate the entertainment product, and we wouldn't do that anyway; it's still part of our revenue and contributes to EBITDA. But just to note that the entertainment component remains a high-value part of the bundle for consumers across Europe, who still watch a lot of free-to-air television while also embracing OTT apps.

Yes, I think it’s not only a discount that drives customers to buy a fixed-mobile converged product; it’s a combination of benefits. With Oomph, we are offering consumers higher speed. Customers now get 600 mbits when they buy the highest Oomph package—speed they can't get otherwise. Higher mobile data packages—like 2 gigs instead of one or 10 gigs instead of five. There's also a dedicated customer service hotline that provides exceptional support. This combination creates strong momentum. For some customers, fixed speed matters more than anything else. Similar packages then provide that great plus.

Yes, you can see if you study VodafoneZiggo results in the second quarter; in almost every metric, we've outperformed KPN, primarily because we're finding the rhythm that matters to consumers in that fixed-mobile space. It's about speed; it's not just about reducing costs—it's providing more. Sometimes it's more for the same, more for more, or even more for less. Fixed-mobile convergence is advantageous in that way.

We’ll go next to Robert Grindle with Deutsche Bank.

Going back to the UK, you seem to have navigated lockdown very well indeed, and perhaps benefitted from some of your peers not performing as well. However, last week Ofcom reckoned that more than 60% of your broadband customers are out of contract. Has that number been moving up considerably recently, and do you intend to address this perhaps in H2 within the constructs of your guidance? Thank you.

So we have discussed end-of-contract notifications in previous quarterly calls. I can confirm what I previously mentioned: the impact of end-of-contract notifications is less than we have planned for. This means that customers are simply less challenging when it comes to additional discounts to stay than we anticipated. I think that's number one. Number two is that speed matters more than ever. When you have four or five household members—where Mom and Dad are doing video calls and kids are playing or streaming—you need speed and the reliability to deliver it. Our average speed in the UK is 2.5 times higher than the average. We are working on increasing that delta. We believe that our customers—if they perceive value for money—will tolerate the fact that 60% of our customers are out of contract, and we’re not overly concerned about needing to load them with big discounts to stay. If you look at our NPS numbers, they are improving, and we believe we are on the right path regarding churn.

The end-of-contract notification period began before COVID hit and was largely paused for most in the industry. During the active period, we saw that the churn was maybe more or less what we expected, but the discounts required to keep customers were significantly less. The end-of-contract notification impact has been less than we expected in the short term. We are restarting that engagement with customers, but we'll let you know as we approach our third quarter results. But so far, so good.

We have been offline for ten days, and I want to support what Mike said. In regard to our guidance, the first half notifications were not a concern, while we will begin addressing these in the fall. We are careful in our planning as we have seen this end-of-contract notification. We will see it at the end of the quarter.

And we’ll take our next question from Nick Lyall with SocGen.

You mentioned in the release that Horizons is doing quite well, especially as gigabit convergence is coming up, and also with the Swisscom sports deal on the way. But EBITDA is still down around 11% excluding the one-off impacts. Could you weigh up the operational changes being made against how long it might take to start seeing rising revenue and EBITDA again? It still seems quite a way off.

The turnaround plan remains as previously described. It's about 1 gig, maximizing the TV box to improve penetration, retaining the record NPS we’ve been delivering, and driving the fixed-mobile convergence, which has been a steady success story for us every quarter. Lastly, ensuring our customer operations continue to function smoothly amid the digital transformation is also working quite well. A lot of positive signs are emerging. Having said that, I mentioned that the market is competitive. We have to remain competitive, which means being strategic with pricing and offers. We haven't provided specific details on a timeline for breaching EBITDA or returning to growth. We continue to evaluate that timeframe, but we still feel positive about the long-term plan. Even if it takes a little longer, we're committed to the journey.

It continues to be a very competitive market. We are building commercial momentum, and Lutz noted that he has seen growth in the quarter. We can mention that June was better than May, and May was better than April. Regarding the operational free cash flow margins, we are back to 28% in the second quarter, and that's not incidental. We have passed the point for all of our investments. So, despite a very competitive market, we can still generate cash flow.

We'll go next to Matthew Harrigan with Benchmark Capital.

Your industry association, ECTA, and a number of consultancies have pointed out that a lot of the innovation and investment in your network is translating to increased value for companies like Facebook and Google. Now you've had even more acceleration in growth across some broadband areas. You’ve got 5G on the horizon. With that and the latency issues between DOCSIS and 5G being addressed, is there any possibility you could capture more value from that over time? Given the COVID numbers, you're looking at layers as some of your revenues have been affected, but your cost structure is evolving, and your revenues will likely grow a bit faster longer-term. Can you expound on how your business character has changed since COVID and consider what is likely to happen with fixed-mobile convergence? Do you hope to see network owners receive more benefits from their investments, particularly from companies using their networks?

I want to make sure I understand the question clearly. Our network strategy continues to drive speeds from 1 gig to 10 gig over time. So there's no end in sight to that plan—whether it's through DOCSIS 4.0 or fiber to the home. Half of the homes built in Lightning are fiber to the home builds, and we will continue to lead the speed race wherever we can. On the mobile side, 5G and 1 gig combined represent a powerful opportunity. If you look throughout our markets, we’re the only ones providing these options today. In the UK, once we finalize the O2 deal, we can offer that option there, as well. Long-term growth is deliberate and purposeful, driven by all the factors you mentioned. You have lower costs, synergies, less churn, higher NPS, and ongoing innovations. Our strategy positions us as a sustainable high margin-free cash flow provider. Whether we dividend that to ourselves, or take those assets public, we know there's an opportunity to capitalize on this infrastructure and these retail relationships in a way that hasn't been done historically.

I believe our strategy clearly shows us that we are combining four products now: fixed, mobile, voice, broadband, and video. The video is increasingly becoming an OTT product. We leverage data to understand our customers at a high level. With digital support, we can offer the right combinations to all our customers, creating a high stickiness factor with our customer base. This positions us positively to increase both margin and pricing. There are operators who have successfully done this, and we believe we can realize significant upsell opportunities with the fixed-mobile convergence strategy. This is essential.

We’ll go next to Christian Fangmann with HSBC.

Returning to Switzerland, I would say the weak spots in overall pretty good results are noteworthy. You mentioned Mike earlier about Switzerland and thoughts on combining forces with Sunrise on the fiber-to-the-home front. What are your strategic options in Switzerland going forward? I mean, the deal last year failed, so I'd be interested in your thoughts there. And as a bit of a follow-up to Baptiest's point, what are we seeing in terms of market aggressiveness, ARPU? I've understood that these results are now going backwards. What are the trends you're seeing for the second half? Is it expected to be better or as bad as in H1, or could it even improve due to lower investments?

Baptiest, you can address the ARPU and market dynamics. As for the strategic options for Switzerland, they remain consistent with what we've articulated all along. I cannot speculate on which of these makes the most sense at this juncture, but as I mentioned in the remarks, we think the market would benefit from rationalization. Our role is to do our part in that; we achieved a minor milestone in the second quarter with our sports deal with Swisscom—don’t underestimate that. I believe it will have a major impact in the long haul, both on our investments and the benefits consumers will see in having access to quality sports products. We have a robust MVNO agreement with Swisscom, giving us excellent pricing and I believe the market is starting to heal as we make decisions like this. I'd just like to state that we will keep on pushing the strengths of our network and products, which currently hold. I'm not giving guidance on when financials will improve. The improvements in customer adds, are better than the last two quarters, but this might take a little longer than expected to yield results.

I think the free cash flow of this quarter confirms the expectation of $170 going forward. The second item is that the top line in Switzerland has faced low-margin impacts due to COVID, as Charlie explained. If you look beneath the surface, our B2B business continues to grow at 2%. In the consumer space, we've identified better distribution channels and pricing strategies. Acknowledging the current market dynamics, we remain stable with our free cash flow objectives and monitor the momentum carefully.

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

Two questions, please. Firstly, I'm curious if you are pivoting your strategy with the increased market pricing competition. I've noticed you've been sending out letters stating there would be no price rises this year, and you’ve extended your introductory offers from 12 to 18 months. This would seem to make you more competitive against peers. Is this a subtle shift in strategy to support KPIs? Secondly, I want to quantify the influence of end-of-contract notifications and best tariff notifications. Excluding sports, ARPU growth declined from around 1.2% to flat. How much of that is traced to end-of-contract and best tariff notifications? And what percentage of your customer base has received these notifications? While you’ve stated the impact is in line with your plans, can you give us insight into expectations as these notifications spread through your base?

We haven't publicly anticipated any specific monetary guidance on end-of-contract notifications. In our original guidance, we suggested that there was about £100 million of headwinds, which included end-of-contract and annual best tariffs, plus network taxes and various overheads. We haven’t broken that down further into component specifics. What we’ve seen is that before COVID hit, the end-of-contract experience was better than expected, which reflected in the low churn levels. Now, during the short period of engagement, we've only just activated this with customers once again and haven’t yet seen any significant movement trend to report on.

Regarding the ARPU question and development from Q2 2018 to Q2019, we saw an ARPU growth of 0.5%. In the current year, if you exclude COVID influences, we’ve achieved 1% ARPU growth. The delta between the two years is 0.4%. We delayed the price increase by one month, which explains most of the observed decline due to different phasing. The rest is attributed to end-of-contract notifications, which is lower than we initially estimated. On the price hike front, we decided against a rise in 2020; we've shown proper customer respect but also examined sensitivities. In case a stronger reaction arose, it would have diluted margins. Overall, our current net adds momentum compensates for that in 2020, and if we maintain momentum, it could also balance out in 2021. To conclude, while we may have more aggressive pricing to drive some net adds, it is not our goal to change our pricing structure.

Thank you, everyone. I know we're at the top of the hour here a bit past. I appreciate your joining us as always and your support. I hope you stay well and safe for the rest of the summer. We’ve highlighted many positive developments today, the UK transaction is on track, and overall, we’ve shown great performance through all markets during this pandemic period. We are coming out with positive momentum and look forward to talking with you in November. Take care.

Ladies and gentlemen, this concludes Liberty Global's second quarter 2020 investor call. A replay will be available in the Investor Relations section of Liberty Global’s website, where you can also find a copy of today's presentation material.