Liberty Global Ltd. Q4 FY2021 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's Fourth Quarter 2021 Investor Call. This call and the associated webcast are the property of Liberty Global. And any redistribution, retransmission, or rebroadcast of this call or webcast in any form without the expressed written consent of Liberty Global is strictly prohibited. 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. The slides detail the company's safe harbor statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company's expectation with respect to its outlook and future growth prospects and other information and statements that are not historical facts. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed forms 10-Q and 10-K, as amended. Liberty Global disclaims any obligation to update any forward-looking statements to reflect any change in expectations or in the conditions on which any such statement is based. I would now like to turn the call over to Mr. Mike Fries.

Hello, everyone, and thank you for joining us today. We've got a lot of ground to cover, so I'm going to skip the introductions and get right into it. As usual, we'll be referencing slides that have been posted on the website. So beginning with Slide 3, which introduces five key headlines for the past year. And before I get into these highlights, I'd just offer perhaps the most important takeaway here. In what has been an extremely challenging two years for everyone across industries and markets, we've been fortunate that our people, our networks and our business have performed really well. Over this period, we've retained and even expanded our talent pool despite hybrid working conditions. Our broadband and mobile networks delivered outstanding service despite massive increases in the demand for bandwidth. And for two years in a row, we've exceeded even our own internal budgets despite a global pandemic that's upended most industries. I just couldn't be prouder of our company and our operating businesses, and I think the results we'll be sharing today, as well as the strategic plans that underlie our guidance and our path forward, reflect that confidence and enthusiasm. Consistent with those thoughts, you won't be surprised to have learned that we hit our 2021 guidance across our FMC portfolio as well as our group free cash flow target, which we actually raised last November on our Q3 earnings call. Supporting this financial performance is strong commercial momentum that we experienced across broadband and mobile services with the demand for connectivity continuing to exceed our expectations. Simply put, our FMC champions are delivering. We added over 1 million broadband and mobile subs in the year across our footprint with a solid fourth quarter. Convergence continues to drive higher sales and NPS and reduced churn, with the number of broadband subs taking a mobile product from us now nearing or even above 50% in our four converged assets. Our track record of nailing merger integrations is helping us produce synergies in the U.K. and Switzerland, totaling around $14 per share on an NPV basis. Adjacent to our core operating platforms, we continue to invest in our Ventures Portfolio, which now stands at $3.5 billion or about $7 a share. That increase of 46% or $1.1 billion year-over-year is almost entirely attributable to appreciation of the value of our portfolio investments, with new investments net of distributions totaling only around $300 million for the year. Finally, total buybacks in 2021 totaled $1.6 billion, equivalent to 10% of our shares outstanding. We are committed to doing that again in 2022 and 2023. This is a great segue to Slide 4. It's always good to step back and refocus investors' attention on the core value-creation strategy we're pursuing. This is the narrative that defines what we're doing and why we're doing it. The big picture consists of three pillars. It starts on the left with our FMC champions. These converged and highly profitable operating companies are the foundation for value creation. We had to get smaller to get bigger, divesting half our markets and putting our attention and capital into a handful of operating platforms that now reach over 85 million fixed-to-mobile subs and are either number 1 or number 2 in every country. This convergence drives the scale we need to challenge incumbents, negotiate with suppliers, hire the best talent and shape the markets we operate in. Convergence also delivers massive synergies to accelerate value creation and support investments. As you know, this convergence delivers the brand, the products, and the market share to drive organic growth in customers' revenue and ultimately, free cash flow, which was up nearly 40% last year. The unique tailwinds we're riding are complemented by strong structural tailwinds in the European telco segment. First, the demand for connectivity has created commercial momentum and pricing power that should support growth in broadband, mobile, and B2B for some time, especially in rational markets with strong consumer trends. Second, regulators seem less focused on us these days, which has fueled much-needed consolidation and paved the way for greater investment in and monetization of our infrastructure. Third, with the current wave of fiber and 5G CapEx set to slow down over the next couple of years, private equity capital is swarming the sector in anticipation of significant free cash flow growth in the future. The second leg of the stool is our growing Ventures Platform. Charlie will spend a few minutes on this in his section. The key point is that all three strategic pillars of our investment strategy—tech, content, and infrastructure—are strategically aligned with or adjacent to our broadband and mobile businesses. They have proven to be a great source of value creation and dividends to the parent company. Finally, the flywheel to both pillars is our levered equity model of long-term fixed-rate debt, strong free cash flow, and consistent stock buybacks. Since we're funding that buyback with cash flow generated by our operating businesses, we maintain over $4 billion of cash reserves to put to work in either core markets, ventures, or additional buybacks. Charlie will present financial results, but I want to comment briefly on our top line performance, which has been stable to improving across the group. On the top right of Slide 5, you'll see our two most developed fixed-mobile operations, VodafoneZiggo and Telenet, both of which have benefited from fully converged fixed and mobile operations and product offerings. VodafoneZiggo delivered its third consecutive year of revenue growth of around 2%, anchored by mobile and B2B growth. Despite an increasingly competitive broadband market, the Dutch market remains largely rational with two fixed-line players and three mobile operators. Telenet returned to top line growth in 2021 of about 1%, supported by subscription revenue and modest ARPU growth. The two bottom charts show revenue growth for our two more recent fixed-mobile combinations in Switzerland and the U.K. In summary, you can see on the bottom left, a return to revenue growth throughout 2021 with 1% in the fourth quarter compared to negative 4.5% in Q4 last year—a significant turnaround. Inflation remains relatively low in Switzerland. So we're not expecting significant price rises by any of the operators this year. Virgin Media O2 also saw steady top-line performance, basically flat revenue for the second half of the year. The U.K. has seen a significant rise in inflation, and operators have followed suit. Therefore, we see supportive tailwinds for 2022 along with continued fixed-mobile convergence, cross-sell, and upsell offers. Slide 6 provides a market-by-market look at quarterly subscriber growth over the last two years. The main message here is the relative consistency of growth throughout the period. On the top left box, Virgin Media O2 had another strong fourth quarter with 189,000 net adds. We outperformed the market again on broadband, supported by nationwide 1-gig speeds and record-low churn and the seventh straight quarter of broadband growth. In Switzerland, we added 57,000 fixed and mobile subs in the fourth quarter. We continue to gain market share in broadband relative to our peers and lead the market in mobile additions with our best 5G network. Moving forward, we will maintain momentum in Switzerland with brand consolidation on premium services under Sunrise. Telenet continues to add broadband subs steadily, and postpaid mobile adds picked up in the fourth quarter. In the bottom right, VodafoneZiggo remains the broadband market share leader, but we have seen modest erosion in the broadband base over the last six quarters. This is likely due to several factors, including promotional activity and fiber competition. Ziggo has been named the number one broadband provider in Holland based on speed and latency and maintains the highest NPS in the Dutch mobile market. Quick updates on Slide 7 show that we're approaching around 50% convergence in the U.K., Belgium, and Holland, with one of every two broadband subs taking a mobile product from us and nearing 60% in Switzerland. The NPS and churn benefits of convergence are well understood. These bundles drive the sales engine. The launch of VOLT in the U.K. has supercharged the brand and portfolio. I'm confident about the conversion of O2 customers on Virgin Media's footprint to our Bundles, as we've estimated around 2 million O2 customers use another broadband service today. The same applies in Switzerland, where less than one-third of the combined customer base takes a converged bundle now. Lastly, we've spent considerable time fortifying our lead in 1-gig services across our footprint. Most homes are already upgraded to 1-gig speeds, and we will ensure that all households enjoy these speeds as we upgrade our infrastructure. We've maintained a consistent rollout rate despite ongoing competition, and our partnerships with suppliers further enhance our capability. In summary, we will continue to invest smartly while driving operational growth. And now I'll turn it over to you, Charlie.

Thanks, Mike. I'm starting on a slide named Back to Stable and Growing Revenues. Full year 2021 rebased consolidated revenue growth for the group was 1.5%. In the U.K. market, Virgin Media-O2 saw revenue decline by 1.1% in the year on an IFRS pro forma basis as growth in consumer fixed was offset by declines in mobile and B2B fixed performance. In Belgium, Telenet delivered 0.7% of revenue growth in 2021, driven by higher subscription revenue. Sunrise UPC delivered revenue growth of 0.5% in 2021 with higher consumer mobile and B2B revenues, partially offset by a decline in consumer fixed revenues. Finally, VodafoneZiggo continues to maintain revenue growth momentum, achieving an increase of 1.9% in the year and delivering an 11th consecutive quarter of revenue growth. Moving to the next slide, consolidated adjusted EBITDA declined by 1.4% in the full year 2021, impacted by increased cost to capture in Switzerland. Without those costs, it would have been broadly flat. Virgin Media O2 EBITDA increased by 1% in 2021 on an IFRS pro forma transaction adjusted basis, including cost to capture costs of $81 million. Telenet achieved 1.2% growth in EBITDA in 2021 as its organic revenue growth was enhanced by cost discipline, with operating expenses remaining stable throughout the year. Sunrise UPC declined 1.8% in 2021, but did include $29 million of cost to capture. Excluding these costs, EBITDA was stable. VodafoneZiggo posted a 2% increase in 2021, driven by strong revenue growth as well as good cost discipline. At a group level, consolidated adjusted EBITDA less P&E additions declined 2.7% in 2021, with $126 million of cost to capture weighing on full-year performance. Virgin Media O2 saw IFRS pro forma transaction-adjusted EBITDA less P&E additions decline primarily due to a step-up in CapEx as the JV continues investment in mobile and fixed infrastructure, in addition to $184 million of cost-to-capture expenses. Telenet in Switzerland both saw small declines in 2021, both driven by higher growth rate investments. Switzerland recorded $109 million of cost to capture, reducing the 2021 number to $548 million. VodafoneZiggo saw a 0.6% increase in adjusted EBITDA less P&E additions, partially offset by an increase in P&E additions due to investments in customer experience and fixed and mobile networks. We achieved our free cash flow guidance for the year, which we upgraded at Q3, with nearly 40% growth in adjusted free cash flow to just under $1.5 billion. We are now changing our definition of adjusted free cash flow to now and prospectively include direct acquisition costs, or DAC. The inclusion of direct acquisition costs represents costs that we incur related to acquisitions and/or disposals. Under this revised definition, adjusted free cash flow in 2021 was $1.4 billion. We'll highlight DAC as a line item to ensure comparability going forward. Our Ventures Portfolio has seen a step-up in fair market value to $3.5 billion. Our content portfolio is now worth around $2 billion, including our stake in ITB, around $600 million; formulary, all three Media, and an increased valuation for Univision after its merger with Televisa. Tech is now worth around $1 billion, including a recent uplift in valuation for Lacework. We continue to see infrastructure as a key growth area. In Q4, we made a move in the energy space with the launch of our smart energy offering under the name EGG, focusing on a subscription-based EV home charging solution. Given the adjacencies of our smart digital home products, we see this as broadening opportunities to sell services to our customers, leveraging our existing operating infrastructure. Between 2016 and 2020, we repurchased around 7% annually of our outstanding shares and increased returns to shareholders, committing to buy annually 10% of the shares outstanding from 2021 to 2023. In 2021, we started this program and repurchased $1.6 billion of Liberty stock in the year or around 11% of our year-end 2020 equity value. Our balance sheet remains strong with total liquidity at $5.3 billion. Our debt position is also robust with average maturities of six years or longer in every operation. We continue to hedge our debt into the currency of the underlying cash flows, with a blended cost of around 3.4%. Our ESG agenda includes initiatives like the refinancing of over $2 billion of debt at VodafoneZiggo using a sustainability framework. In 2022, we look to finalize our Net Zero commitment. On the last slide, we summarize our outlook for full year 2022. Starting with Virgin Media O2 guidance, we expect improved revenue growth; mid-single-digit adjusted EBITDA growth supported by top-line improvements and synergy delivery, excluding cost capture expenses of around GBP 350 million. In Switzerland, we expect stable to modest revenue along with stable adjusted EBITDA. Telenet is guiding for revenue and adjusted EBITDA growth of around 1%, while our Dutch JV expects stable to modest EBITDA growth. Finally, on group cash flow guidance, we're guiding to $1.7 billion of distributable cash flow in 2022, representing another year of growth despite an increase in costs to capture spend. Adjusted free cash flow will be down in 2022 versus 2021. With that, operator, it's time for questions.

The first question comes from Robert Grindle at Deutsche Bank. Your line is open.

Apologies for earlier, may I ask about Ventures, where you've had some amazing value appreciation. Can I clarify in what you're effectively saying? Are you saying you'll divest content assets and redeploy that into infrastructure? And then technology, you can either buy and sell and you won't have to put new money in. Is that how you're thinking about it?

I wouldn't be that concrete about what you've just said. Our content investments, which are substantial, could be monetized or strategically adjusted. The portfolio itself is the largest of the three elements. We will be opportunistic around content portfolio management, looking at public and private interests. We’ve said that the Tech Ventures Group generally distributes $200 million to $300 million a year and could largely fund itself. The infrastructure side does require capital, and it looks to be very exciting to us. Those will be net users of capital as we invest.

The next question comes from the line of Polo Tang with UBS. Your line is open.

Thanks for taking the question. Just have a question in terms of U.K. footprint expansion. You made it clear that you're talking to financial partners about a deal, but can you comment on whether you've had any interest from strategic partners to be involved in the project? And would you consider partnering with any of the existing players?

The answer is yes, we are in discussions with various parties, including strategic and existing partners. This opportunity stands out in the market and involves an existing operator like Virgin Media O2 that can guarantee utilization. We think this opportunity is one of the best available.

Your next question comes from the line of David Wright with BofA. Your line is open.

Thank you. Just looking to Holland and the guidance, I'm curious how you're viewing that business and its underwhelming guidance. Also, could you share thoughts around owning that business in totality?

We've been in this JV with Vodafone for a considerable time. Their partnership has been fantastic, and we've achieved solid EBITDA growth and free cash flow. The business has delivered everything we hoped for, and we view it as one of the best in Europe. The guidance reflects a rational and competitive market requiring significant investment. We’re content with our role and believe management is doing an excellent job.

Your next question comes from the line of James Ratzer with New Street Research.

In terms of the U.K. fiber joint venture, what's the reason for shifting to a partnership with Telefonica and how does that impact VMO2's role?

The partnership gives us flexibility and allows VMO2 to have off-balance sheet benefits while still gaining from the project's growth. The capital will come from us and Telephonica, as well as private partners.

The next question comes from the line of Robert Grindle with Deutsche Bank. Your line is open.

Can you give me some clarity on your Ventures strategy and the potential divestments?

It's possible we will look at creative and opportunistic ways regarding our content portfolio. We're evaluating how we can increase our value strategically.

Your next question comes from the line of Carl Murdock-Smith with Berenberg. Your line is open.

Can you talk about your 2027 target for the additional 7 million homes rollout? How do you plan to accelerate that pace?

We've had a consistent build rate for the last several years. We have the capacity and confidence to accelerate the rollout, and our partnerships with suppliers enhance our capabilities.

Your next question comes from the line of Nick Lyall with SocGen. Your line is open.

How much of the CapEx for 2022 for VMO2 is allocated to fiber? Also, can you share how many homes that would reach?

We're not providing detailed estimates around fiber upgrades just yet. However, we remain committed to increasing our pace.

Your next question comes from the line of Matthew Harrigan with Benchmark. Your line is open.

How does all fiber reduce your costs over time and what optionality does that give you?

Fiber upgrades provide considerable benefits, including enhanced service offerings and cost savings over time. We'll run two networks for a period, ensuring robust competition.

Your last question comes from the line of Andrew Beale with Arete. Your line is open.

Could you discuss how VMO2 will aid in speeding up the rollout of the fiber JV? Will both VMO2 and the fiber JV be involved in wholesaling?

VMO2 will leverage its capabilities to accelerate the rollout, and wholesaling activities will involve both the new fiber JV and VMO2's infrastructure, which gives us a significant competitive advantage. We appreciate your hanging on if you’re still on. Three points: we see continued commercial momentum in our operations, we're making strategic investments, and we have exciting catalysts such as ventures, towers, and buybacks, all contributing to a strong fundamental story.

Ladies and gentlemen, this concludes Liberty Global's fourth quarter 2021 investor call.