Earnings Call Transcript - LBTYA Q3 2021

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's Third 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 express 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. Page 2 of the slides details 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 expectations with respect to its outlook and the future growth prospects and other information and statements that are not historical fact. 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 within the Securities and Exchange Commission, including its most recent filed forms 10-Q and 10-K, as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which such statement is based. I would now like to turn the conference over to Mr. Mike Fries.

Michael Fries, CEO

All right. Thanks, operator, and hello, everyone. We appreciate you joining our Q3 results call. We've got a lot to share today, and I'm sure you've got a lot of questions. Most of my senior team is on the call, and I'll get them involved in the Q&A as needed. So I'm going to kick it off right on Slide 4 with some key highlights from the quarter, which was solid in our view from an operational, financial and strategic perspective. First of all, we remain squarely focused on our three pillars of value creation that we outlined in our Q2 results call, and that focus is paying off. Of course, it begins with the transformation of our European platform into a handful of strong national fixed-mobile champions capable of delivering long-term and sustainable growth. And those FMC champions are bookended by our Ventures Portfolio on one side, which is highly strategic and growing in value, and our commitment to a levered equity model on the other side, supported by free cash flow per share and the growth and a predictable buyback plan. Operationally, we continue to experience strong commercial momentum across the group with third quarter broadband and postpaid mobile additions up sequentially from Q2. And after five months in the U.K. and eleven months in Switzerland, our newest converged businesses are firing on all cylinders. We're also feeling very positive about our current fixed network superiority and even better about our strategic opportunities for further expansion and upgrade of those networks. And then lastly, with just a couple of months to go in the fiscal year, we are upgrading our free cash flow guidance, all of which we'll talk about in the remarks that follow. So before moving on, I just want to add that we also remain very focused on ESG, and you'll find a section in our earnings release covering recent developments. This includes our commitment to our Net Zero targets by 2030 across Scopes 1 and 2, and a goal to confirm our ambition for Scope 3 by mid-2022. And those who prioritize this work would know that we have a really good track record here in absolute terms and in relation to our peers and have been recognized as a clear leader in our sector. I'll dive a bit deeper into what we've called our three pillars of value creation on Slide 5. If you're looking for a simple way of understanding how we're building this company and what we believe will drive the stock moving forward, this is it. Of course, it all revolves around our core operating businesses in the U.K., Belgium, Holland, and Switzerland, which all share some really key characteristics. First, they're all FMC champions in their markets with significant national scale. That means they are generally #1 or #2 in every product, either chasing the incumbent or leading the way. National scale gives us the ability to shape those markets from a regulatory point of view. It gives us the ability to engage with global tech and content suppliers. And it gives us the ability to drive innovation and market share. Each of these operations is also benefiting from the same secular tailwinds like unparalleled demand for connectivity, renewed pricing power, increasing regulatory support for consolidation and investment, and the valuation of infrastructure assets like fiber and towers. Now I'll talk about our fixed network strategies in a moment, but we do have tower assets in the U.K., Holland, and Belgium that have yet to be monetized. In fact, Telenet just announced a strategic review of their tower portfolio for that very reason. The fundamental goal of convergence is to give customers more choice, more value and more convenience. And that generally leads to reduced churn, higher NPS, and more sustainable financial growth. And in every FMC combination, we either have or are still realizing material synergies. The U.K. and Switzerland alone are targeting synergy NPVs of around $12 billion, and 75% of that or about $15 per share will accrue to Liberty shareholders when it's realized. Along the way, in each market, we'll continue to evaluate ways to reduce the underlying gap between public and private market value. Of course, selling assets at a premium is one way, and UPC Poland is just the latest example of that. Multiples in that deal, by the way, are 9x EBITDA and 20x operating free cash flow. But we've also talked about from time to time public listings as a way of unlocking value, and we may pursue some of those strategies in 2022. Now moving to the second pillar. An additional catalyst for closing the gap in our stock is our Ventures portfolio, which today is valued at $3.1 billion or about $5 to $6 per share. We've talked about the strategic verticals here, tech, content, and infrastructure, and we'll continue to provide greater transparency on what we're doing every quarter. Since our last call, a couple more of our early-stage tech investments have reached unicorn status, including Plume, which just raised capital from SoftBank at a $2.6 billion valuation. That's over 10x what we initially invested. And all in all, we've generated, we believe, a 30% IRR in this tech portfolio alone and returned $400 million of capital to the parent. We're also excited about our infrastructure initiatives, including AtlasEdge, which is using our existing property assets to create scalable data center capacity at the edge. This is a JV with DigitalBridge and is capitalized for organic and inorganic growth. In fact, they just announced the acquisition of 12 data centers from Colt. Now the third value driver here is our levered equity growth model. In many ways, this truly sets us apart from our peers in Europe. Now we have proven that 4 to 5x leverage with fixed-rate, low-cost debt at the operating company level is both sustainable and accretive. This is especially true when you have underlying businesses that generate significant free cash flow over the long term. And when you combine this with an unwavering commitment to buy back with excess liquidity, we think you have a winning formula. Now as you've seen and I just mentioned, today we raised our free cash flow guidance for 2021 to $1.45 billion. This represents an increase of 36% over 2020 free cash flow, but a 43% increase on a free cash flow per share basis as we calculate it. And our commitment to buy back 10% of the outstanding shares in 2022 and 2023 should help underpin that sort of value creation story going forward. Now Slide 6 shows some key performance metrics for our fixed mobile operations in the U.K., Switzerland, Belgium, and Holland. There are quite a few numbers here. So before diving into each, I'll just make a few observations. First of all, you'll see that we had stable or growing revenue in the third quarter across the platform. There are lots of factors at work here, including strong broadband and postpaid mobile growth with 260,000 net adds in just these four markets. And that's combined with generally strong B2B results. Now looking at each OpCo separately, Virgin Media O2 delivered its sixth consecutive quarter of net broadband growth in both our new build territories, meaning the 2.6 million Lightning homes, and our legacy markets, what we call BAU. Perhaps not surprisingly, we estimate we continue to get around 50% of all broadband net adds on our footprint. In the mobile business, O2 remains the industry leader on churn, which is, I think, less than 1% per month, and that helped generate another good quarter of postpaid mobile growth of 108,000. And financially, on an IFRS basis, VMO2 reported its first quarter of positive revenue growth as a newly formed JV. Consumer fixed revenue was up 1%, helped by customer net adds and the price rise earlier in the year. By the way, we expect this sort of growth to continue as we contemplate pricing changes for 2022 on the back of rising CPI and as we start to lap annual best tariff notifications. And just to point out, and you'll see on the page here, B2B was a tough comp this quarter for VMO2, down 9%, but that's related to the delivery of backhaul contracts in the prior year, which should remain a structural growth driver going forward. Also a reminder that our IFRS EBITDA growth, which was 2.6% year-to-date, does include our one-off costs to capture synergies, which are substantial and rising. So Charlie will get into that in more detail in a moment. Moving to Switzerland quickly. Sunrise UPC is maintaining strong commercial momentum in the face of an increasingly competitive marketplace. We delivered a seventh straight quarter of broadband adds and should again lead the market in postpaid mobile growth. Revenue has been stable, but EBITDA growth was strong as it relates to cost controls and synergies and actually would have been greater than 4% if you exclude one-time costs to capture. Telenet has also had a strong quarter with its eighth consecutive quarter of broadband growth and rising ARPUs on the fixed side. B2B continues to be a solid performer for Telenet with mid-single-digit revenue growth in Q3 and year-to-date. We'll talk about some of the strategic opportunities in a second, but it's good to see stable revenue and EBITDA growth from Telenet year-to-date. And then lastly, the Netherlands remains a steady market that supports pricing and upsell across our converged business. VodafoneZiggo delivered good postpaid mobile growth with 67,000 net adds in the quarter. On the fixed side, the focus operationally is on customer retention with things like speed boost and SmartWiFi. Despite a more competitive broadband environment, VodafoneZiggo recorded its tenth straight quarter of total revenue growth, largely in that 2% to 3% range, and generated 2.4% EBITDA growth in the quarter. Now fixed mobile convergence remains a key driver of the growth I just outlined, and we provide some key updates on where we stand with fixed mobile convergence on Slide 7. On the left, you'll see that we are now at or approaching convergence across the four markets, which means that one of every two broadband subs is also taking a mobile product from us. As you know, we've been at this for five years now, and FMC benefits are rock solid. In Belgium and Holland, we've seen consistent improvement in NPS and churn and significant cross-sell and upsell benefits. We're particularly excited about our two newest FMC markets. In the U.K., the combination of Virgin Mobile and O2 resulted in 43% of our broadband customers taking a contract mobile product from us. This is a strong position relative to the market, which stands at 26% and the BT, which is at 36% after five years. So it's important to point out that only one-third of the O2 mobile base that can use Virgin's broadband service are actually subscribing today. So there's a sizable cross-sell opportunity in that direction as well. And just to give you a better sense of that opportunity, in Holland and Belgium, 80% and 100% of our SIMs are using our broadband service. And you might also have noticed that VMO2 just launched its first converged product last week called VOLT. And like in other markets, VOLT is leveraging our superior broadband network to give new and existing customers broadband speed boost of up to 1 gig, more mobile data and more value. We're only 2.5 weeks in, but VOLT is off to a great start. Lutz will probably address that. And Sunrise is also leveraging its extensive 1-gig reach and the best 5G network in the market with its new product called Sunrise We. And the principle is clear. The more you buy from us, the more benefits you get. And the launch was fast and flawless, as André would say, and feedback from the market and customers has been very positive with October sales up 30%. And this is really step one for Sunrise as we'll be launching an even more comprehensive FMC product in mid-2022. With 56% convergence today, Sunrise is already the market leader, 10 points ahead of Swisscom, and André has every intention of staying two steps ahead, I imagine. And speaking of staying two steps ahead, I'll end my remarks with a quick update on how we're approaching our fixed network strategies in each market. And we covered this pretty extensively on the last call, so I'll try not to repeat too many things. But one of the benefits of having fiber-rich networks in multiple markets is that we're presented with multiple paths to 10-gig speeds and beyond. So it's hard to read across from one market to the next. That's why it's worth spending a minute on this. It's also important to remind investors that we are the undisputed speed leader in our operating territories today. And that's pretty clear from the chart on Slide 8. You'll see the orange bars show that 95% of our 30 million fixed households in the U.K., Ireland, Belgium, Switzerland, and Holland will have access to at least 1-gig speed at the end of the year. In order to put that into context, we show just beneath these orange bars the latest estimates of where each of the incumbent telcos in our markets is expected to be with their fiber overbuilds by year-end. And you'll see that ranges from 15% of our footprint in Belgium to 25% in the U.K. to 45% in Holland. So the speed advantage today is real, and it's actually reflected in the fact that our average customer is subscribing to a product that is generally 2 to 4 times faster than the market average. Now we know that markets are not static, right? And we've always been on or ahead of the curve when it comes to broadband innovation. And so the bottom of the chart summarizes by market three core data points. One, what's our current thinking on upgrade technologies? Two, will we seek to enter the wholesale market? And three, what are we considering around a NetCo-ServCo model? And we know all three of these issues are on the top of the minds of investors. So starting with the U.K. on the far left. Of course, we already announced our plans to overlay our HFC network, about 92% of total homes, with an XGS-PON fiber-to-the-premise solution by 2028. As a reminder, the upgrade costs relative to DOCSIS 4 are only modestly higher since our U.K. networks are fully ducted, and we'll only build drops and incur CPE costs for those customers who want or need a fiber solution. As you might expect, we're in the midst of a 50,000-home trial in three locations right now with the goal of validating engineering and upgrade costs. I'm happy to report that so far, everything is checking out, and we'll certainly provide more information on that in our fourth quarter results call. Regarding the wholesale market in the U.K., we are still evaluating the opportunity. But our decision to move forward on this fiber-to-the-premise overbuild was not contingent on reselling our network, nor did we assume the creation of a NetCo or any investment from industrial or financial partners. And as you might have picked up, we continue to look at those ideas. But no decisions have been made. Moving to the right, you'll also have seen that we just announced our decision to pursue a similar network solution in Ireland, essentially a fiber-to-the-premise overlay of our 1 million HFC homes by 2025. Now Virgin Media Ireland benefits from similar infrastructure advantages to the U.K. with access to its own ducts on one-third of the network and aerial plant on the remainder. We expect the total capital cost here to be roughly €200 million or about €200 per premise, which is only marginally higher than a DOCSIS 4 solution. It comes with less expensive drop costs than the U.K. All in all, the project will require less than €100 million of equity from Liberty Global. So from our perspective, this was a cost we could easily absorb and would ensure that Virgin Media Ireland remains a speed leader in the market. Now in this case, we also announced our intention to open up Ireland's network to wholesale customers, and we're excited about this opportunity. And while we looked at several structural options, given the size of the market and the lack of substantial network expansion, our current plan is to keep this an integrated company, not a NetCo/ServCo. Continuing on, Telenet recently announced a nonbinding agreement with Fluvius, a local utility company, to build Flanders' data network of the future. As a reminder, Fluvius already owns about one-third of Telenet's network, which it leases back to Telenet in a fairly complicated structure. And when the deal is finalized, Telenet and Fluvius will create a NetCo that they own together, which will upgrade Telenet's HFC network with a fiber-to-the-premise overlay. And because of Telenet's market share, the NetCo will start with very high utilization rates, which would make it attractive to low-cost capital and, as they indicate, largely self-funding. So John and his team addressed this extensively on their earnings call last week if you want to dig in further. In our view, this should be an accretive deal for Telenet. It secures its position as the leading broadband provider in Flanders with an opportunity to expand wholesale revenue and garner an even higher multiple for its stake in the NetCo from industrial or financial partners. And we've talked about Switzerland a bit publicly, but it's looking increasingly clear that we will pursue a hybrid strategy there, optimizing our capital spend to fortify our current advantage over most of the market. This means a blend of DOCSIS 4, some fiber-to-the-premise build, and access to Swisscom's fiber network where and when we need it. That'll be the solution. So we shouldn't be at any product disadvantage anywhere. Of course, this means we're also unlikely to pursue wholesale revenue or a NetCo structure here. And then finally, in the Netherlands, VodafoneZiggo maintains a lead in broadband market share over KPN and a strong competitive advantage with gigaspeed coverage reaching 80% of the footprint by year-end. But we do see fiber overbuild activity accelerating, which has prompted management to develop its own fiber response plan. The current approach is focused on a hybrid model with an emphasis on DOCSIS and upgrades geared towards capacity rather than pure speed. Let me say there's more work to be done here with management and our partners at Vodafone but also plenty of time to get it right. And I have total confidence in the VodafoneZiggo team. Year-to-date, they've outperformed KPN on just about every financial and operating metric, and they know this customer base in this market extremely well. So that's it for me. Obviously, we'd be happy to address any of these topics in Q&A. I think simply put, it's all about value creation for us. Now we've been super agile over the last five years, exiting half our markets at significant premiums and doubling down in the remaining markets to build national FMC champions. And each of those FMC platforms are riding secular and company-specific tailwinds and budgeting solid and stable free cash flow growth over the long term. And I feel like we've been allocating capital in smart and accretive ways as well, prioritizing buybacks, as you all know, targeting scale-driven FMC mergers like in Switzerland, and opportunistically pursuing venture investments with above-average return potential. So the team is fired up, I'm fired up, and we're super excited about where we're headed. At this point, I'll turn it over to you, Charlie.

Charles Bracken, CFO

Thanks, Mike. I'm starting by highlighting our performance where we achieved stable to positive revenue growth across all markets and consolidated rebased revenue growth of 0.7%. This is encouraging given a more normalized third quarter from a COVID perspective. Walking through by operation, in the U.K. market in Q3, Virgin Media O2 saw positive revenue growth of 0.7% on an IFRS pro forma basis driven by increased activity as COVID impacts subsided. Breaking down the revenue mix of the U.K. joint venture, mobile revenue was broadly flat year-on-year, with a 7.4% year-on-year increase in handset revenue fueled by increased upgrade activity following mobile hardware launches from Samsung and Apple. This was offset by lower service revenue due to the continued impact of a change in the distribution channel mix. Consumer fixed revenue increased by 1% year-on-year supported by strong volumes despite a continued modest 2.1% year-on-year decline in fixed-line customer ARPU. B2B fixed revenue was affected by the phasing of installation activity for high-capacity data services within wholesale. In Belgium, Telenet delivered growth of 0.4% delivered by continued broadband and ARPU growth and remains well on track to deliver 1% revenue growth, in line with full year guidance. And Sunrise UPC saw revenues slow sequentially to flat in the third quarter year-on-year on a rebased basis predominantly driven by an increase in mobile service revenue, which was partly offset by less handset revenue and lower consumer fixed mainly from declining basic video subscribers as the market environment remained competitive. VodafoneZiggo continued on a trend of strong financial growth with total revenue up 1.9% driven by growth in mobile, B2B and stable trends in fixed revenue. This represented its tenth quarter of consecutive revenue growth. Moving to rebased adjusted EBITDA, the group returned to growth of 1% in Q3. As with prior quarters, we continue to highlight costs to capture with OpEx for Switzerland. Virgin Media O2 EBITDA declined by 0.6% on an IFRS pro forma transaction-adjusted basis, including cost to capture of $15 million. As flagged, with increased activity levels, EBITDA growth slowed relative to the strong first half, with the slowdown being driven by increased sales and marketing expenses ahead of the peak Q4 trading period and higher programming costs. In addition, increased investments in digital and product development also contributed. Telenet reported a small 0.4% decline in EBITDA as Q3 faced a tougher comparison with the previous year and more marketing spend related to the new FMC tariffs, coupled with some seasonality in the operating expense. Now despite this, Telenet has increased guidance for the full year to the upper end of its 1% to 2% adjusted EBITDA growth rate. Sunrise UPC grew 3.3%, including $3 million of costs to capture. Strong adjusted EBITDA trends benefited from low costs to capture in the quarter, positive phasing of costs, including marketing spend, and early synergy execution, as we highlighted in the second quarter. And in the Netherlands, a 2.4% increase was posted with a strong continued EBITDA growth being driven by top line growth while keeping cost levels under control in the post-lockdown period. Turning to the next slide. You should note that as of Q3, we've ceased to use the term operating free cash flow. In place of this, we'll be referring to the term adjusted EBITDA less P&E additions. Now this term effectively holds the same meaning as operating free cash flow. And therefore, it doesn't really impact any previously reported amounts, and nor does it impact our forward-looking statements. Now at a group level, adjusted EBITDA less P&E additions grew 6.3% despite $28 million of costs to capture weighing on the Q3 performance. This strong trend is driven by the EBITDA growth and tight CapEx discipline in the quarter we talked about earlier. And this does benefit from some timing impacts, which will rebound in Q4. Virgin Media O2 show IFRS pro forma transaction-adjusted EBITDA less P&E additions declined by 14% driven primarily by a step-up in CapEx as the joint venture continues to invest in 5G and fixed infrastructure, and a cost of capture of $28 million. CapEx will remain elevated in the fourth quarter as well, in line with the broader PPE guidance at the joint venture. Telenet declined by 4% in the quarter driven by higher investments, whilst in the Swiss market we grew 15% despite $27 million cost to capture, this being driven by continued CapEx discipline and the adjusted EBITDA growth we talked about earlier. VodafoneZiggo saw a 9% growth in adjusted EBITDA less P&E additions, again due to favorable CapEx timing in the quarter. Turning to free cash flow. As of Q3 year-to-date, we've achieved adjusted free cash flow of just over $1 billion driven by growth year-to-date in the adjusted EBITDA less P&E additions. In addition, this quarter, we decided to upgrade our full year free cash flow guidance from $1.35 billion to $1.45 billion. And this is on the back of generating new underlying efficiencies, along with disciplined and focused CapEx spend. This new target represents an uplift of 36% versus 2020 and is also supported by a refined shareholder distribution guidance at VodafoneZiggo and Virgin Media O2 for 2021. To give an update on our buyback activity, you can see on the next slide we've repurchased over $1.1 billion worth of stock. We are firmly in position to achieve our $1.4 billion buyback target that we announced last quarter by the end of the year. Our Ventures portfolio has a fair market value of $3.1 billion, and we continue to see some valuation uplifts during the quarter relating to the closing of the AtlasEdge deal and with our tech Ventures portfolio. But this has been largely offset by falls in fair market values at ITV and Skillz. Finally, our balance sheet position remained strong with our total liquidity arriving at $5.3 billion. And you should note that our debt maturities still remain very long, around seven years or longer in every OpCo. So in conclusion, turning to the guidance, as we mentioned, we're upgrading free cash flow guidance to $1.5 billion, and we've refined the guidance at Telenet and VodafoneZiggo and also have given new guidance for 2021 at the U.K. for flat to positive adjusted EBITDA growth before cost to capture. On cash distributions to shareholders, VodafoneZiggo is now guiding to above €600 million and the U.K. joint venture for at least £300 million. And finally, to conclude, we continue to see FMC execution driving operating momentum across our markets and our network strategies evolving in Belgium and Ireland. We are upgrading our full year '21 adjusted free cash flow guidance to $1.45 billion and reaffirming our commitment to our multiyear buyback framework. And with that, operator, over to questions. Thanks.

Operator, Operator

We will take our first question from Jeffrey Wlodarczak from Pivotal Research.

Jeffrey Wlodarczak, Analyst

I had a couple on the U.K. I wanted to focus on the continued strong U.K. data results. I mean that's, I think you said, 7 quarters in a row of positive growth in both sort of Lightning footprint and the rest. I assume most of that's related to the fact that you're offering 4x the speed of BT. Can you talk about the success you've had in upselling consumers to higher-priced, higher-speed packages? And then can you also talk about how you're doing in the 20% of your footprint that is overbuilt by fiber-to-the-home for BT?

Michael Fries, CEO

Sure. We strongly believe that the unusual sound we hear is BT connecting to our call whenever we discuss the U.K. So, Lutz, do you want to address those two points?

Lutz Schüler, CRO

We haven't observed any significant impact from the fiber overbuild by Openreach so far. We monitor this closely and, at present, our fixed broadband churn is at a record low. Everything is going well for us, and we continue to strive to enhance customer satisfaction. Currently, 43% of our customers are using both fixed and mobile services from us, which significantly reduces churn. The average speed in the U.K. is currently 202 Mbps, and our customers are experiencing speeds four times higher than the national average. We are just beginning to explore cross-selling and upselling within our customer base. We are currently developing our systems to gather customer usage data and implement dynamic product bundling through our digital channels. In summary, there's no material impact at this point, and we see more opportunities for cross-selling in the future. Our churn remains at a historic low due to the benefits of convergence and notably improved service. We've successfully reduced complaints by 92% and have reached our target level.

Operator, Operator

We will now take our next question from Maurice Patrick from Barclays.

Maurice Patrick, Analyst

Could you share your insights on pricing in the UK and the overall ARPU trend there? BT announced today that they are likely to implement a pricing increase of CPI plus 4%, which could mean an 8% rise in prices from BT next year. What are your thoughts on enacting a similar price increase? Additionally, with the launch of your VOLT tariff in the UK, typically existing customers migrate to it, which may negatively impact ARPU initially. How dilutive do you anticipate this will be in the short term before it starts to contribute positively?

Michael Fries, CEO

I'm not going to let Lutz answer the first question because we generally don't talk about our price increases in advance of announcing them to our customers. I will just say that historically, we have not used CPI as a measure. We've essentially just launched a fixed price increase that more or less approximates what our peers are doing. I'll leave it at that. Our mobile business does use CPI. But we're going to leave that for now. We're not going to put out any information around what we may or may not do. But history should be a good guide there. Do you want to reference the second question on VOLT, Lutz?

Lutz Schüler, CRO

Yes. So the way we have structured VOLT is that when you migrate on to it being an existing customer, you get the next higher speed tier and you get the next higher data bundle. So therefore, there's very little likelihood that customers will decrease the ARPU. Yes? So we are not planning with that curve you're referring to. And we don't see that happening as we speak.

Operator, Operator

We will now take our next question from Akhil Dattani from JPMorgan.

Akhil Dattani, Analyst

It's a two-part question just linked to, Mike, your comments earlier on your fixed network structure and how it differs by market. I guess just starting with the U.K. I wonder if you could maybe elaborate on your thoughts around wholesale. You said you're evaluating options. I guess what I'm really trying to understand is where the wholesale in any way determines the future scale of Project Lightning. Or are those completely discrete decisions and what you do in terms of the future ambition to scale on Project Lightning are independent of wholesale? So just if you could kind of touch where you are on that thinking. And obviously, you might like to comment on any timing-related issues. And then the second bit is just a really quick one. It's obviously interesting that through ventures, you're going into Germany with InfraVia. Obviously, you know that market really well. Just very keen to understand your thoughts of why to go into Germany as a fiber player, what the key attractions are and whether you could go into other markets, too.

Michael Fries, CEO

Sure. Regarding the wholesale situation in the U.K., there are no new updates at this time. I want to remind everyone that our decision to upgrade the existing HFC plant was not dependent on any wholesale arrangements. We believe this investment is beneficial regardless. However, if a wholesale opportunity arises, it would enhance the benefits further. Therefore, it shouldn't be a point of concern; it represents potential upside if we pursue wholesale within our current infrastructure. As for network expansion beyond our existing footprint with additional fiber builds, we are still evaluating how quickly and extensively we will proceed. This would likely depend on the outcome of any wholesale opportunities. We are actively working on this. Meanwhile, our Lightning project is progressing steadily, targeting between 400,000 and 500,000 homes. We may adopt a more assertive approach next year, regardless of the wholesale situation. Our buildout continues at a careful pace without reliance on wholesale, although a more significant expansion could occur. It’s crucial for us to assess the financial implications of such an expansion, including identifying additional revenue sources, partners, and financing options. There’s nothing to announce regarding a larger expansion yet, but it will likely be linked to further developments in wholesale. Charlie, would you like to address the Ventures deal in Germany?

Charles Bracken, CFO

I think that in terms of how we feel about Germany as a new opportunity, I think we definitely feel that we have a lot of scale, a lot of efficiencies from our core network builds across Europe, which make us a more attractive and a lower-cost builder of fiber in Germany than perhaps a standalone start. And I think we've got an interesting platform to start building, and we'll see how it goes.

Michael Fries, CEO

Yes. A reminder that market has little to no fiber, and our objective is to look for areas where there's essentially no competition. So it's a very targeted, I'd say, small initiative to begin with, and we'll see how it unfolds.

Unidentified Analyst, Analyst

I have a question. I apologize if this has already been addressed. Charlie, regarding Virgin O2, you've announced a £300 million dividend for next year. It seems like a relatively conservative amount, which is understandable. What do you believe would be the appropriate figure for next year's dividends from Virgin O2? While I'm inquiring about the future, it would be helpful to know if the £300 million reflects a normalized run rate.

Charles Bracken, CFO

I think it's too early for us to provide guidance on next year, so I will not comment on that. However, our goal with our partners is to leverage the joint venture to five times. Given the expected significant EBITDA growth as synergies materialize, we will be in a position to recapitalize and either distribute capital or reinvest it in the core business. The pace at which we translate free cash flow will depend on how quickly we accelerate costs to achieve these synergies, which we believe is important, but it does require investment. Additionally, our speed in expanding the network will also play a role. So there are two ways to offer more concrete guidance. Regarding distributions from Virgin Media O2, there are many factors at play, but we can anticipate healthy distributions to Liberty Global in the coming years.

Polo Tang, Analyst

It's Polo Tang from UBS here. Can you hear me?

Michael Fries, CEO

We got you, Polo.

Polo Tang, Analyst

Okay, great. I just have one question on Switzerland for André. So Swisscom is pausing their FTTH rollout as well as their partnership with Salt just given the ruling by the competition commission. So how do you think this will impact the Swiss market but also Sunrise UPC?

Michael Fries, CEO

André, you want to take that? You might be on mute, André.

André Krause, CFO

Actually, can you hear me?

Michael Fries, CEO

Yes, we have you now.

André Krause, CFO

Thank you for the question, Polo. The competition commission and the recent court ruling are indicating that Swisscom needs to reconsider its approach to the multipoint rollout they have initiated, which Salt is also using to build their network. Currently, this means the overbuild of our network is on hold, creating a better opportunity for us to sell our 1-gig lines in areas that remain unaffected. We don't anticipate this situation to last indefinitely, but it does provide us with an increased chance to monetize our infrastructure more quickly and effectively.

Operator, Operator

We will now move to our next question from Mike Lyall from SocGen.

Nick Lyall, Analyst

I think I just got through, so here goes. This is Nick at SocGen. I have a quick question for you, Mike, regarding Fluvius. Can you share your thoughts on why there seems to have been a negative reaction to the Telenet-Fluvius deal thus far? Do you think it's somewhat unfair to characterize the situation as more complicated, given that Liberty Global is already a complex asset, and could that contribute to concerns about potential future inflation? Additionally, how are you considering this when evaluating the assets you mentioned as to be determined? I believe there are three assets on Slide 8 where you discuss the potential for NetCos, Mike.

Michael Fries, CEO

Yes. Thanks, Nick. Listen, I think, as I said, John did a nice job of summarizing where Telenet is on the Fluvius deal. I'll repeat, we think it's fundamentally an accretive transaction. I think the market is probably waiting for final terms and perhaps was wondering why a nonbinding deal was announced before it was binding and final. That could be one issue with the overhang there. I think they're also understandably waiting for more information about financial implications, if any. What the partners have said quite clearly is this will be an independent, self-funding NetCo that will surely attract interest from both in-market partners and financial partners given the fact that it's going to start live with something like 60% or 70% utilization. Remind you that most alt nets begin with 0 utilization. So whenever you have an existing company like Telenet looking or willing to create a NetCo structure, it gets infrastructure investors licking their chops, as they say. It's usually extremely attractive to them and, I think, from a cost point of view, very attractive to the NetCo itself. So I think it's going to be a positive outcome for Telenet. I think it's the right decision over the long term for Flanders. I think perhaps related to that, there's questions around the Voo transaction and other things that will need to get sorted out over the long term for Telenet. But we're generally positive on that business. I think John is doing a great job driving growth in a mature market where he has the largest market share in pretty much every product. And I think the management team is up for this type of transformation and iteration, if you will, in their operating structure and growth plan. And no, I can't speak to where the stock should or should be or why it's trading where it is except that we're positive about it. We think it's the right decision for them. And I think people are looking for more certainty and more clarity, and that's normal. So you might have a little overhang while these things get sorted out, but we obviously are on the inside, so we have a bit more data than you, and we feel pretty positive about the direction of travel.

Nick Lyall, Analyst

Nice. And can you just mention maybe on Slide 8 as well on VodafoneZiggo when you talk about the potential to wholesale as well? Is there any update on the ACM's position in some of the language that you're hearing from them? Is there anything in that sort of ACM investigation that is geared towards that? Or was it a purely Liberty decision?

Michael Fries, CEO

No. Yes, that's got nothing to do with ACM. That's more trying to be responsive to the market's questions around NetCo/ServCo's voluntary front foot type of restructures. That's got nothing to do with the ACM. And because it says TBD because we're still discussing with our partners and the management team what the right long-term structure might be in that market. In the meantime, VodafoneZiggo is in a great position. I mentioned in my remarks if you just go down every single metric, they're outperforming KPN. I think they're doing pretty much everything as they should be doing. And we're looking more strategically at what over the next five years you might be considering around the network. But today, they're in great shape, and we're pretty positive on that business and that management team. It's got nothing to do with the regulatory picture.

Operator, Operator

And we'll take our next question from Ulrich Rathe from Jefferies.

Ulrich Rathe, Analyst

Question about the expansion in the U.K. It seems like there's been a pause, and I'm curious about your timeline. BT is quickly increasing its fiber rollout to 4 million homes each year. What challenges are you facing? Who is responsible for addressing this? Is this a matter of decision-makers having enough capacity to deal with it in the current post-merger context? What makes this decision so complex given that it's been discussed for a while?

Michael Fries, CEO

It's not a complicated decision, but it's an important one. As I mentioned earlier, there are several factors to consider. This is a significant capital commitment requiring us to be confident in our funding sources and the overall structure. We take this decision seriously, and it's not something we approach casually. For those thinking we’re hastily diving into this fiber project without concern for capital expenditure, that's not the case. Both we and Telefonica are focused on generating free cash flow and dividends to our stakeholders. We want to be prudent and cautious with any decisions that affect our capital expenditure and intensity. Our goal is to ensure that any move we make is strategically sound and financially beneficial. As I mentioned, wholesale revenue could play a vital role, and there might be third-party financing or partnerships involved, which take time to arrange. There should be no negative impact on our stock from this type of decision; it's purely an opportunity for growth. We'll approach the decision thoughtfully when the time is right. In the meantime, our key focus is on our existing fiber initiative and the synergies created by Lutz and his team. We're excited about our steady-state business. Any potential expansion is less about competition and more about finding additional value for shareholders. Virgin Media O2 doesn't need to grow its network to remain competitive and successful, but it could explore expansion if it enhances shareholder value. We'll keep you informed as soon as we have clarity on this matter.

Operator, Operator

We will take our next question from James Ratcliffe from Evercore ISI.

James Ratcliffe, Analyst

Talk a little bit about the integration process. Cost to achieve has been pretty modest thus far in Switzerland and particularly in the U.K. And talk about what the ramp for those looks like. And do you have any sense of whether the estimates you put out there thus far are looking reasonable or conservative? And just also, if there are any supply chain- or process-related issues that could slow that down.

Michael Fries, CEO

Yes, I'll just give a general answer and let these guys dive in. Cost to capture in both U.K. and Switzerland, we did report those figures, I think, $150 and $700 million respectively, CH being a smaller number. And everything we're seeing is that we are on track. There will be variability in how quickly you achieve one thing or another or spend capital, but it's a pretty quick period, like a pretty short period of time to that cost to capture is in front of us and more or less on track. Do you guys want to address that as well as supply chain issue and if you're seeing any issues on that. Go ahead, André.

Lutz Schüler, CRO

Yes, I'll begin with the U.K. There are supply chain challenges, but we are managing them effectively. There is no noticeable impact on our numbers, and we do not anticipate any significant effects. The primary synergies ahead of us consist of four main areas. First, convergence is vital, and we have made a strong start with VOLT, which we will continue to ramp up. Second, we will gradually transition Virgin Media customers to the O2 network, necessitating investment in our mobile network's capacity. Third, we are fully on track with people synergies, and the restructuring costs are in line with our plans. Lastly, we aim to achieve procurement synergies. As Mike mentioned, we are on plan, have a clear vision for the future, and are less reliant on the supply chain than one might expect.

André Krause, CFO

Can you hear me?

Michael Fries, CEO

Yes, we have you.

André Krause, CFO

No, I just want to add in the case of Switzerland, we are also fully on track in terms of synergy capture. In terms of costs to get those synergies, the two heavy years will be '21 and '22 on almost similar levels, slightly increasing even in '22 but then coming down thereafter very fast. And again, it's driven by the synergies, and the shape of that is coming up as expected.

Operator, Operator

We will now move to Robert Grindle from Deutsche Bank.

Robert Grindle, Analyst

I'm worried I missed something important in Mike's opening comments as to why you have rolled out NetCos in Ireland and Switzerland but not in the U.K. and Netherlands. I think I'm not quite getting the nuance as to why it's a good idea in some markets but not others. And then very briefly, is there anything coming down the line on global tax that affects you guys? I think you are claiming back tax from the U.S. at present, but global tax rules are changing all the time.

Michael Fries, CEO

The key difference lies in several factors. Firstly, it's important to consider the presence of a strong wholesale market. If you're looking to open your network to third parties, you'll want to ensure there are multiple parties interested in accessing it. In Switzerland, for instance, there are only three operators, all of whom rely on Swisscom's network to some degree, including us. Given this situation and the presence of our own network, we don't see a robust option there. This is largely due to market structure, which makes it clear that a wholesale network opportunity isn't particularly viable in Switzerland. In contrast, the U.K. and Ireland present a different scenario. In the U.K., around 50% of broadband subscribers are utilizing networks provided by others. In Belgium, for example, Telenet currently offers access to Orange, which has a significant number of customers using the Telenet network, and this trend is expected to continue. Therefore, the main factor relates to market structure rather than the specifics of the network or competitive positioning. It fundamentally concerns the feasibility of a wholesale market. I hope that clarifies things. Charlie, would you like to address the second question?

Charles Bracken, CFO

Yes. I think on tax, clearly tax is always an evolving environment. And you're quite right that there's increasing rules around transfer pricing, which is what multinationals often use to what they call shift basis. And there's obviously a bunch of reforms pending in the United States. Look, broadly speaking on transfer pricing, we've always been working on an arms-length basis, and the new rules, we don't think will have any impact on us. So as you were. In the U.S., depending on what goes through the House at the end of the year and/or where the Biden reforms comes out, there could be some impact. But I just think it's too early for us to give you definitive guidance on that. Let's just see what the numbers are and what it comes out at. But do remember that we are largely out of the U.S. in that kind of concept of GILTI. So the kind of the future U.S. tax laws are already really much baked into our numbers. So we'll have to give you an update when the U.S. reforms go through. But yes, so far, I think we are as you were.

Michael Fries, CEO

I believe that the global 15% rate will only affect us in Ireland, which is a relatively small market, as we are already surpassing that rate in most of our other markets.

Operator, Operator

We're going to take our last question from Steve Malcolm from Redburn.

Stephen Malcolm, Analyst

I have a question about the U.K. network. Your build rate in the U.K. decreased significantly in Q3, now at 67,000, which is well below the previously discussed target of 400,000. Could you provide some insight into the reasons for this? Are you holding back as you finalize your expansion plans, or is it related to supply issues, post-Brexit challenges, or inflationary pressures? Additionally, regarding the expansion, of the various strategies you're considering, should we assume that self-funding is off the table? Would you prefer to involve partners, whether they be financial or industrial? It would be helpful to hear your thoughts on this.

Michael Fries, CEO

Yes, I will address the second question. Lutz can handle the first question, which is quite straightforward. It's reasonable to say that we and Telefonica would not be eager to solely fund a 7 million-home expansion, meaning we would not want to put up all the equity capital without the potential for third-party financing or wholesale options. That's a significant investment, and it isn't our primary focus. However, I want to mention that there is a substantial amount of infrastructure funding available for deals like this. There are domestic partners who may be interested in such opportunities. You could certainly leverage a business model like this effectively. Even if we were to consider it, which is highly unlikely, the investment isn't simply a multiple of that large amount. Your intuition is correct, and I appreciate the chance to clarify this. One of the reasons for the delay is that this isn't a straightforward decision we can make independently. We aim to be thoughtful and creative in ensuring the best returns for our shareholders. That's how we conduct business in every situation, and it would definitely apply here. Lutz, do you want to discuss the Lightning question?

Lutz Schüler, CRO

Yes, your observation is correct. We have been somewhat behind schedule. The reason for this is not due to a desire to slow down but rather the time it has taken post-pandemic to get resources in place. Some of our vendors have faced challenges in bringing resources back from Europe, along with a slight fiber shortage related to supply chain issues. This is mainly short-term tactical matters. However, we aim to maintain a similar rollout to what we achieved last year, so you can expect to see an increase in Q4.

Stephen Malcolm, Analyst

Okay. And do you think these are issues affecting the entire industry? I mean if one looks at the combined build plans of U.K. fiber builders, I think they'll probably build most of China within the next 6 months, but that's clearly not happening. I mean, is that an industry-wide problem today?

Lutz Schüler, CRO

Yes, I believe this is a problem that affects the entire industry. Contractors are receiving offers from competitors at higher prices. What we bring to the table is a commitment to long-term relationships. We have already built 2.6 million homes with our partners, and as Mike mentioned, we are planning to do even more next year. We have made sure we have the necessary resources in place. However, we faced some challenges in the third quarter, including one of our partners going into administration. Despite this, we don't see it as a significant strategic issue. Your point is valid; without the ability to provide a long-term partnership and vision, it becomes challenging.

Michael Fries, CEO

It seems there are no further questions on the line. I want to thank everyone for joining us and apologize for the late start due to some technical difficulties on our side. I'll reiterate a few key points I've already mentioned, which others have also emphasized. Our FMC champions are progressing as anticipated, benefiting from favorable trends as well as significant synergy execution in the U.K. and Switzerland, which will drive substantial growth in the coming years. We also have strong strategic options in each of these markets, one of which I discussed earlier regarding networks. I want to stress that we are making prudent capital allocation decisions that will enable us to project robust long-term free cash flow. Additionally, I’d like to share that we anticipate over 40% growth in free cash flow per share for 2021. We believe our ability to generate free cash flow from our operating companies and through dividends is robust and will play a crucial role in our growth narrative moving forward. Furthermore, our commitment to reducing shares by 10% of the outstanding shares each year for the next two years should serve as an important catalyst. We are on track with free cash flow per share and look forward to updating you on the fourth quarter. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes Liberty Global's Third Quarter 2021 Investor Call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's website. There, you can also find a copy of today's presentation materials.