Earnings Call Transcript - LBTYA Q2 2023

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global’s Second Quarter 2023 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. Operator instructions were provided. 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 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 most recently 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 any such statement is based. I would now like to turn the call over to Mr. Mike Fries.

Mike Fries, CEO

Okay. Thank you, operator, and welcome, everyone, to our second quarter investor call. Charlie and I are going to jump right into the presentation and our prepared remarks and time for questions, of course, will follow. I’m beginning on Slide 3 with some key headlines from the quarter, all of which, as we’ll discuss, support our core value creation strategies. By value creation, we mean only one thing: staying aligned with shareholders as we work to increase the value of our stock. That’s it. Some have asked for a clear articulation of that narrative, which we’ve summarized at the top of this slide. For us, it involves three main strategies. First, we’re focused on maximizing the inherent equity value of our core operating businesses and doing what we can to ensure that that equity value is transparent or crystallized for the benefit of shareholders. Second, we’re making smart investments in strategic adjacencies that both benefit our platforms and generate significant returns. And third, we’re managing a dynamic capital structure that receives cash from operations and asset sales from time to time, which together with our sizable liquidity today, we are largely allocating to buying back our own stock. We made good progress on all three strategies in the second quarter. I’ll start with our national FMC champions in the U.K., Switzerland, Belgium and Holland, which continued to deliver solid operational performance. Financial results for the entire group improved sequentially, particularly adjusted EBITDA. As Charlie will discuss in a moment, we’re confirming all of our guidance for the year. Now, just diving into that for a second. We’ve talked about the importance of pricing actions at the OpCo level to balance out inflationary pressures and support revenue growth through 2023. As of now, you would have noticed we have taken price rises in all four core markets, ranging from a low of 4% in Switzerland to a high of 14% to 17% in the U.K. This means that customers have been notified and are already starting to respond, which you can see in our fixed and mobile subscriber results in the quarter. Two pieces of good news here, though. One, price reactions have been largely consistent with exactly what we expected across the board; and two, while we’ve absorbed that churn and subscriber rotation, we have not yet realized the full financial benefits of those price rises. In the case of Virgin Media O2, for example, the vast majority of the fixed price rise will materialize in the second half of the year and price rises in Belgium, Switzerland and Holland just took effect in June and July. Now second, the ventures platform. We remain committed to three core verticals: tech, media and infrastructure. We also remain committed to smart, disciplined management of these investments, which will include exits and divestitures where it makes sense. You probably read about All3Media, which is our third largest portfolio investment. After terminating exclusive discussions with ITV, we’re launching a broader process which has already attracted interest from strategic and financial players on both sides of the Atlantic. From a capital allocation point of view, we are uniquely positioned with a strong balance sheet characterized by long-term fixed rate debt and significant cash resources. Today, we announced a material increase in our buyback program, which demonstrates our confidence in both our capital structure and our stock. More on that in a second. Finally, several recent developments helped to turbocharge these initiatives. First, we acquired over 90% of Telenet in the first round of our tender offer and we expect to get the balance of those shares in September. As a reminder, we financed this purchase with credit support solely from our Telenet stake, and we’re encouraged by their progress on the infrastructure side of their business. We’re also exploring the potential monetization of both U.K. and Dutch tower portfolios, which we expect could be at premium market multiples. And finally, we’re thrilled with the overwhelming support we received for our move to Bermuda. Thank you for those who voted. As a reminder, this is not a tax-driven move and no changes to our Board, our listing, our financial reporting or our day-to-day business will occur. What will change is our ability to pursue corporate and financial transactions, in particular at the FMC OpCo level, that will help us create, crystallize and share value with our investors. We’re already busy on some of these ideas, and we’ll keep you posted as they develop. Now I mentioned the acceleration of our buyback program, which we provide more detail on in Slide 4. The headline is that we’re formally increasing our commitment from a minimum of 10% of shares outstanding to 15%. Through the end of last week, we already purchased about 8.4% and would have reached the 10% level probably by mid-August, hence the increase. Again, the 15% is a minimum, and we reserve the right to go beyond that number depending on market conditions. The chart on the left is simply a reminder of how consistent we’ve been over the last six to seven years, reducing shares outstanding from 900 million at the beginning of 2017 to less than 400 million by the end of this year, assuming the 15% minimum level is achieved. That’s nearly a 60% reduction. Before I hand it over to Charlie, I’ll quickly run through our four main operating businesses. This quarter, we’ve included one slide per market with brief commentary on the macro picture, our quarterly broadband and postpaid mobile results, high-level financial information and some strategic updates. In the interest of time, I’ll call out a few things in each market, beginning with Virgin Media O2. From a market perspective, the economic picture in the U.K. remains challenged with inflation still around 7% and GDP growth largely stagnant. As I mentioned, we raised prices in both fixed and mobile by 14% to 17% respectively. This was largely in line with the rest of the sector. Because of how we implemented it, we should see the vast majority of those benefits build through the second half of the year. That was a slow quarter for broadband and postpaid mobile adds in the wake of our price rise announcements, but we continue to grow our fixed base in greenfield territories, and we’re maintaining a strong share of fixed gross adds across the footprint. The mobile market as a whole was soft in the quarter, but the O2 brand continues to see the lowest churn and giffgaff, which just launched its own contract plans, continues to grow well. We’ve seen some modest improvement in front book pricing in both fixed and mobile. Financially, Virgin Media O2 reported a sequential improvement in both revenue and EBITDA growth. Revenues for the quarter grew 6%, but we’re actually closer to 1% when you exclude the NextFibre construction contracts. Charlie will get into those details. Mobile revenue in B2B continues to shine, growing 4.5% and 2.5% in the quarter, and EBITDA grew 4.4% or around 3% if you adjust for the NextFibre contracts. Strategically, we are executing our fiber extension and fiber upgrade plans really well with over 640,000 homes delivered against a year-end target of 1.5 million. In the meantime, we continue to benefit from the country’s largest gigabit network, reaching 16.4 million homes today. We lead the market in speeds and believe fiber is critical to our future. We are monitoring the altnets space in the U.K., and consistent with our strong view that the market needs consolidation, we’re open to evaluating opportunities as they arise. On the Sunrise business in Switzerland, the macro environment is more benign with continued low inflation of less than 2% in June. As we flagged earlier in the year, we implemented our first price rise of 4%, which will take effect in July and support second half growth. All customers have been informed and so far sales call volumes and churn numbers have been within expectations. Swisscom has added a CPI clause to their contracts, but said they don’t intend to take price rises this year or next. Salt announced a 3% mobile price rise. Our price rise together with promotional intensity in the market did impact broadband trends in the quarter, but postpaid growth was strong under the circumstances. Q2 revenue growth was negative 1%, an improvement over the first quarter but still impacted by the right-pricing of our UPC customer base, which should alleviate during the balance of the year. EBITDA growth in the quarter was flat, a sequential improvement over Q1, driven in part by lower cost to capture and lower labor costs. Strategically we’ve underpinned the Sunrise brand with a number of key initiatives like our Swiss key partnership and what we call Sunrise moments, and we feel good about our ability to continue to take share with our broader portfolio. From a network perspective, we’re executing on our hybrid strategy, benefiting from our existing HFC network and from additional fiber-to-the-home wholesale agreements. In Belgium, inflation has declined to around 4% in June with consumer confidence stabilizing. All operators have taken price increases in Belgium with Telenet implementing a 6% rise from June. Broadband and postpaid mobile subs declined in Q2 in part from announced price rises and also due to a slowdown in market campaigns after some IT migration issues. Financially, revenue grew 1% and EBITDA was up 5% in the quarter, supported by mobile and B2B as well as a one-off settlement with Fluvius. Strategically, we’re pleased with the rollout of Telenet’s new NetCo partnership called Wyre, and we see potential for high utilization and margins that will support the fiber build-out and strategic financing opportunities. In Holland, inflation has fallen to under 6% in June. The market remains largely rational with all operators taking high single-digit price increases and focusing fiber build-outs largely in discrete regional areas. KPN remains aggressive on the fixed front book pricing, which, together with the timing of our price rise announcements, negatively impacted broadband results in the quarter. Postpaid mobile adds continue to be strong, driving 3.3% mobile service revenue growth. Mobile services and B2B delivered their ninth and tenth consecutive quarters of positive growth. In Q2, both FMC households and SIMs increased, delivering significant NPS and customer loyalty benefits, and B2B continues to strengthen, mainly driven by SOHO. On the financial front, EBITDA was still impacted by inflation, particularly higher energy and wages costs. Strategically, we continue to invest in the wider customer proposition with new OTT apps being added and the UEFA Champions League rights starting next year. In a highly penetrated and competitive market, we believe differentiation remains key. It’s also worth noting we were one of the first operators globally to deliver 15-gigabit-per-second speeds over a live DOCSIS 4 trial. That’s a big milestone and underpins our confidence in HFC and DOCSIS 4 as a key technology going forward. Notwithstanding that, we and our partners continuously evaluate strategic options to ensure VodafoneZiggo strengthens its market position. So that’s a roundup of the four core markets, and I’ll turn it over to Charlie.

Charlie Bracken, CFO

The next slide sets out the quarterly revenue and EBITDA for each of our key operating companies. As Mike discussed, we largely expect an acceleration in growth in the second half of the year as the full impact of the various price increases across our companies becomes fully effective in Q3 and Q4. For the quarter, Virgin Media O2 on a reported basis delivered 6.2% revenue growth. Excluding the impact of NextFibre construction revenues, Virgin Media O2 revenue growth was 1%, with our mobile price rise supporting strong mobile service revenues which offset fixed revenue pressures. We expect to see the impact of the fixed price rise build in the coming quarters, supporting improved sequential top-line trends in the second half. VodafoneZiggo delivered stable revenues in Q2 as weakness in consumer fixed continues to be offset by strong B2B and mobile performance, with the Dutch business marking its ninth consecutive quarter of mobile service revenue growth. We expect our fixed price adjustment of around 8.5% to support revenue trends in the second half. Belgium delivered revenue growth of 1% in Q2 as the mid-June price adjustment in 2022 continues to support top-line fixed performance. Switzerland saw a slight revenue decline in Q2, driven by continued pressures on consumer fixed ARPU as the impact of the UPC right-pricing activity is partially offset by strong flanker brand performance. Sunrise has implemented a 4% price adjustment from July across all brands, which is expected to support revenue performance in the second half. Moving on to our Q2 adjusted EBITDA performance. Virgin Media O2 delivered 4.4% EBITDA growth despite $22 million of OpEx cost to capture in the quarter. Excluding the NextFibre construction contribution, EBITDA grew 2.8% in the quarter. We expect EBITDA trends in the second half to be driven by the timing of further synergy realization with support from our fixed price adjustments building through the rest of the year. VodafoneZiggo saw modest sequential improvement in EBITDA in Q2. Telenet saw an EBITDA decline of 3.6%, driven by anticipated inflation headwinds from both energy and wages. Telenet reported EBITDA growth of 5% driven by a one-off benefit from the expected settlement of some contingencies. Our price adjustments implemented in June will support growth in the second half of the year as they did last year. Sunrise saw EBITDA stabilize in Q2 driven by an improved OpEx profile due to reductions in OpEx cost capture, offsetting continued headwinds from the UPC right-pricing activity. A point on central revenue and EBITDA: you may have noticed in our filings that there is an accounting change impacting reported central results. This is driven by our intention and plans made this quarter to market and sell our internally developed Horizon and other platforms to third parties. As a result, the accounting rules require that any proceeds received from licensing internally developed software to third parties, which includes Virgin Media O2 and VodafoneZiggo, will now be applied against the net book value of our internally developed capitalized software until that balance is reduced to zero. Regardless of the accounting change, which is required, we continue to see cash proceeds from these arrangements. As a result, the cash impact on our net central spend isn’t affected. In the appendix, we’ve shown our central results including $31 million in Q2 net proceeds from arrangements with nonconsolidated entities added back. As I indicated previously, overall there’s no change to our net central spend from this accounting presentation change. As discussed in Q1, we continue to target recurring net central spend of $200 million to $250 million. Turning to the capital allocation slide, all our core markets delivered capital intensity in line with their respective full-year guidance ranges. On a reported basis, we delivered distributable cash flow of $554 million in the first half, including $404 million of distributions from Virgin Media O2 from our share of the recapitalization and distributions of $27 million from VodafoneZiggo. We continue to have a substantial cash balance, both on a consolidated basis of around $4 billion with just under $3 billion at the OpCo and further RCF liquidity on top. I want to provide a deep dive on our debt profile and reaffirm we operate a strong balance sheet. All our debt is fixed to maturity and the average tenor on our debt currently sits at around six years. We have also fully fixed all our interest rates and swapped any currency mismatches. All in, our blended fully swapped cost of debt at a consolidated level sits around 3.2% and around 4% across all our companies. As you can see from the chart mapping our debt maturity profile, our first material debt maturities are in 2027 largely in the U.K. This long duration provides a healthy period to find the right refinancing windows to further extend our debt and optimize refinancing cost. On the next slide is a breakdown of our ventures portfolio split into four verticals. This quarter saw a decline in fair market value of approximately $200 million bringing the fair market value to a balance of $3.2 billion. This is principally driven by a reduction of $300 million in the valuation of some of our listed securities as well as an updated valuation of two of our tech investments. The content pillar represents over 40% of the value of the ventures portfolio. Here we hold selected strategic stakes in a number of content players ranging from studio production businesses to next-generation sports and gaming operations, and we take advantage of emerging web3 platforms. This quarter, we saw a slight decline in the content portfolio primarily reflecting recent declines in certain listed securities. The technology pillar represents around 25% of the total ventures portfolio. We continue to invest in early-stage product, service and technology companies that hold strategic adjacencies to our FMC champions and are at the forefront of emerging advancements in AI, digital security and cloud optimization. The technology pillar is essentially self-funding with generated proceeds reinvested back into the pillar. We do have some valuation reductions this quarter, notably in Plume, which provides smart home technology, and Lacework, a cloud security platform. The infrastructure pillar is currently concentrated around digital infrastructure companies such as AtlasEdge, our 50-50 JV with DigitalBridge, and our EdgeConneX data center business, and our build vehicle in the U.K., NextFibre, which plans to build 5 million to 7 million greenfield fiber homes. Supplementing these companies in the pillar we strive to be a first mover in the emerging energy transition race with our emerging solar energy business continuing to execute along its growth trajectory. Finally, in the financial pillar we hold our 5% stake in Vodafone. To remind on our Vodafone stake, we had a limited capital outlay of only £225 million for the investment. This quarter we saw a reduction in the value of our stake given recent share price weakness in Vodafone; however, our downside risk is hedged through the collar structure we implemented at the time of the investment. Finally, we are reconfirming our guidance metrics for each of our key operating companies. This is set out on the last slide. We’re also reconfirming our group guidance of $1.6 billion of distributable cash flow, and this is based on FX rates in February when we gave our original guidance. And with that, operator, over to questions.

Operator, Operator

Absolutely. Operator instructions were provided to callers. The first question comes from the line of Robert J. Grindle with Deutsche Bank. Robert, your line is now open.

Robert Grindle, Analyst (Deutsche Bank)

On the intention to market and sell the internally developed platforms to third parties. It certainly appears very logical as an opportunity. But why now and why all of a sudden, if indeed it is all of a sudden, as well as a third-party opportunity, is this an arm’s-length exercise between central and the OpCos? And is it triggered post the approval for the move to Bermuda? Thanks.

Mike Fries, CEO

Hey Robert, first of all, there’s no correlation between that particular accounting change or the move to Bermuda at all. The right way to think about this is we are always looking for opportunities to manage our central spend and central costs. In the past we’ve entered into arrangements with companies like Infosys, for example, that help us provide services to other telecom companies. We’ve sold assets to do so in an efficient and cost-optimized way. The way to think about this potential idea — and it’s really an intention, not a sure thing — is that in the context of perhaps expanding relationships like that, we might consider monetizing the investment we have in what we think are world-class platforms. I wouldn’t read too much into it beyond that. It’s not related to anything else. It’s just us doing exactly what we told you we would do, which is to be sure we’re never at the short end of the stick when it comes to matching revenues and costs in our central services platforms. We’re always looking for ways to continue to optimize spend at the center, which you can rest assured will happen over time. This could be one potential outcome of that. I think it’s a bit premature to make too much of the accounting change, but we’ve done it anyway, and I don’t think there’s much more to read into it than that.

Robert Grindle, Analyst (Deutsche Bank)

Thanks, Mike.

Operator, Operator

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

Carl Murdock-Smith, Analyst (Berenberg)

Hi, thanks very much. I just wanted to ask about the ARPU movements in the U.K. So you’ve talked about it a bit, but given the 14% price increase it’s quite surprising to see a 4% ARPU decline. Could you help us with the various moving parts there? Within that 18% swing, how much is due to TV switch-off? How much is due to telephony switch-off? How much is due to spin down? And how much is due to customers on special offers who did not receive the price increase to begin with? And what percentage of the customer base was actually impacted by the 14% price increase? Thank you.

Mike Fries, CEO

Yes. I’m going to let Lutz address that. Carl, you answered your own question in the last comment there where you mentioned that a relatively small percentage of that price increase had actually flowed through the P&L as of June 30. Lutz, why don’t you provide additional color?

Lutz Schüler, CEO, Virgin Media O2

Yes. Hi Carl. First, unlike a year ago we issued price-right letters across April and May this year, so the price only became effective for a fraction of customers in Q2. We did that consciously to have more time to deal with every customer. Second, we apply the price rise only to customers who were out of their limited discounts. Third, during the course of the year you will see that the majority of the price rise will materialize. The churn we experienced has largely already materialized into Q2, particularly for broadband customers, which is different from our mobile contract situation where customers can respond more directly. So you won’t see that churn continuing into the remainder of the year; you will see a higher materialization of the price rise in Q3 and Q4.

Mike Fries, CEO

Just one thing to add: going into 2024, our contracts now state that we have a contractual right to raise prices by CPI plus, in the same way that other operators in the market have. This is the last year where, for us, customers have a choice, whereas in some other contractual arrangements with other operators, they don’t have that choice. So this will be a benefit in 2024 because the contracts have changed. Does that help, Carl?

Carl Murdock-Smith, Analyst (Berenberg)

That’s great. Thanks very much, guys.

Operator, Operator

The next question comes from the line of Ulrich Rathe with Societe Generale. Your line is now open.

Ulrich Rathe, Analyst (Societe Generale)

Yes, thanks very much. If I stay with the U.K., I was wondering about the broadband churn you’re seeing. You mentioned during the prepared remarks that there is still growth in the new footprint, which I assume is stable, which would mean the BAU footprint would have seen quite material churn. You said it’s in line with expectations in the prepared remarks. I was wondering what kind of incentivization you had to give customers this quarter to mitigate the effect, given that it looks steep from the outside. Anything unusual there? And could you comment on how this feeds through to financial drop-through? Thank you.

Mike Fries, CEO

Lutz, do you want to take that?

Lutz Schüler, CEO, Virgin Media O2

Shall I do this, Mike? A couple of things. You’re right that churn is higher in our existing coverage because we are growing in new coverage. Is it as materially large as you might think? I wouldn’t say so, and we are not disclosing the exact number. The churn number is significantly lower compared to what we had planned internally, so we think the impact is much less than some external perceptions. How do we manage churn this year? We do it on a much more advanced and sophisticated level. We have visibility of all customers across product sets — broadband only, broadband plus voice and video, quad-play, and so on — and we also track where customers are overbuilt by Openreach or altnets. We segment by tenure, promotional status and end-of-offer step-ups. In the recent months we have been able to come up with very targeted offers for every subsegment and we manage these offers in a highly targeted way. Therefore, we’ve balanced churn and retention benefits and have a good feeling for the revenue to come. That’s much more advanced than in previous years. I hope that helps.

Ulrich Rathe, Analyst (Societe Generale)

Could you quantify that in any way at all?

Lutz Schüler, CEO, Virgin Media O2

I think we’re not going to provide that information today.

Operator, Operator

The next question comes from the line of Yemi Falana with Goldman Sachs. Your line is now open.

Yemi Falana, Analyst (Goldman Sachs)

Thanks for taking my questions. It appears the U.K. has been fairly well litigated. Could you double-click on Dutch KPIs? One area you flagged weakness was related to front book pricing from some competitors. Is it fair to say that as a result, you should expect dual benefits from pricing and a return to more normalized approximately flat volumes from here? Or are there other effects around that fixed base that we need to be aware of?

Mike Fries, CEO

The main point we tried to make — and I’ll let Ritchy, the CFO of VodafoneZiggo, address in more detail — is we felt there was a double whammy this year with KPN reducing its front-book pricing and taking price increases later in the year, whereas we took our price increases earlier. Despite what they said on their call, there was a fair amount of promotional intensity largely driven by them. We responded and managed through it as best we could, but how they approached pricing impacted our broadband gross adds and churn. Ritchy, do you want to add?

Ritchy Drost, CFO, VodafoneZiggo

Yes, that’s well said, Mike. One thing to add is that the price increase still needs to kick in, and it will in the third quarter. There we get not only a kick compared to the ARPU levels we have today but also compared to KPN’s pricing. They will have to live with back-book/front-book effects. Having said that, we maintain premium levels in the market, which we believe is the right approach, and going forward broadband development should be more rational in terms of net-add performance.

Mike Fries, CEO

Our price increase was 8.5% by headline, and the consumer-facing move was around 6.4% in some metrics, just for clarity.

Yemi Falana, Analyst (Goldman Sachs)

Thanks for the color.

Operator, Operator

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

Polo Tang, Analyst (UBS)

Hi, thanks for taking the question. One on Switzerland and a follow-up on Telenet. On Switzerland, can you talk in more detail about the reception of your 4% price rise? Should we expect the soft net adds seen in Q2 to continue in Q3? Also, can you comment on Salt’s price move and how to think about the profile of Sunrise financials in the coming quarters? Should we expect a bigger step up in Q4 given lapping of drag from closing down the UPC brands? And on Telenet, earlier remarks suggested Telenet may not be listed going forward. Could you expand on that and comment on the merits of revisiting a Telenet–VodafoneZiggo merger? Thanks.

Mike Fries, CEO

Sure. On Telenet, we intend to delist the company, hopefully in September, after many years, and that’s moving forward. There should be no confusion about that. In terms of future moves, consistent with what I said earlier, we will look at every opportunity to maximize equity value of our OpCos. That may include several different opportunities — combinations, relistings or other strategic options. I can’t give visibility to anything specific today. We will keep our options open and evaluate what maximizes value for shareholders. André, do you want to tackle the Swiss question?

André Krause, CEO, Sunrise

Sure. On the price rise, reception has been pretty good so far. We’ve seen relatively little impact in terms of churn or customers terminating. Swisscom decided not to do a price rise this year but did stop some promotional offers to their customers around the time we announced our price rise, so our comparable price to Swisscom has actually improved. Salt was tactical with their price rise and announced it later after the extraordinary termination rights of customers had expired and in the meantime tried to poach some customers. Looking at our numbers, postpaid net additions were strong and fixed net additions were slightly negative, about negative 3,000, so Q2 was softer, but Q1 benefited from extraordinary liquidity and Q4 flow-over. If we look at in-year performance, inflow has not been that soft and churn has been somewhat higher but not as high as we feared when taking the price rise. Overall I’m positive about the impact so far. The price rise will impact second-half numbers and we are lapping softer quarters in the second half, so we expect sequential improvement into Q3 and Q4. Q3 may still see some impact from roaming, where customers have more roaming packages included in their tariffs and incremental roaming charges are lower, but we expect sequential improvement and to make full-year guidance as reconfirmed by Charlie.

Polo Tang, Analyst (UBS)

Yes, great. Thanks, André.

Operator, Operator

The next question comes from the line of Matthew Harrigan with The Benchmark Company. You may proceed.

Matthew Harrigan, Analyst (Benchmark Company)

Thank you. Since you focus analytically on EBITDA minus CapEx, I’m curious what the steady-state CapEx as a percentage of sales looks like now given the all-fiber initiative in the U.K. and the DOCSIS 4 development. It feels like arrows are moving in the right direction in terms of moving CapEx down a bit. I know you’re reticent on that point, but could you give directional feedback? Thanks.

Mike Fries, CEO

Matthew, a few things are working here. A lot of the fiber activity in the U.K. is off balance sheet, so we’ve seen an improvement in CapEx intensity in the U.K. because of that, although we are investing in 5G and mobile. The numbers Charlie showed on the slide giving capital intensity for each asset are pretty steady-state. Whether that peaks this year or next year, you should assume capital intensity declines longer term as investments trail off. At some point you’ve upgraded 5G and completed necessary network investments. Unlike prior decades, there doesn’t appear to be a meaningful new technology requiring large new investment longer term. So we expect capital intensity to decline longer term, but in the next 12 to 18 months we’re probably peaking at current levels and you can derive those from the financials. Charlie?

Charlie Bracken, CFO

Yes, Mike is right. The investment cycle we’re in is 5G, fiber upgrade and digital transformation, so these are elevated levels. I would guess mid-to-high teens percent of revenues where it will settle out over a few years, though some assets like Telenet have significant potential rebuild needs. But Mike sounded right.

Matthew Harrigan, Analyst (Benchmark Company)

Thanks Mike, thanks Charlie.

Operator, Operator

The next question comes from the line of James Ratzer with New Street Research. You may proceed.

James Ratzer, Analyst (New Street Research)

Yes, hello guys. I’d like to come back to broadband net adds given the swing seen this quarter and isolate what’s specific to the price rise and how much could rebound in Q3. Specifically, Virgin Media O2 saw a swing of almost 40,000 in the rate and VodafoneZiggo a change of 20,000. Given those markets took early price rises and you suggest churn impact is now finished, are you already seeing evidence of that in July? Should we expect to get back to a 20,000-plus run rate in the U.K. and something closer to flat in the Netherlands in Q3?

Mike Fries, CEO

James, you’re specifically speaking about broadband. We try to refrain from forecasting quarterly numbers and we won’t give you specific month-by-month predictions. What we said is we expect Q3 and Q4 to be better than Q2, given how price rises flow through and the guidance provided. This quarter was impacted by sizable price rise announcements — mid-teens in one market and around 8% elsewhere — which historically are large increases and which we think will play out well financially over the long term but had the intended effect of driving some churn in the period. We’ll leave it at that.

James Ratzer, Analyst (New Street Research)

Okay. More qualitatively then, are you seeing other impacts that could hold back net adds in the back half? For example, customers still moving out of contract or cost-of-living effects or increased competitive intensity that could keep volumes lower once the price rise has already passed?

Mike Fries, CEO

Every market is different and has different headwinds and tailwinds. These are competitive markets with competitive products and pricing. We’re optimistic about Q3 and Q4 but we can’t predict competitors’ future promotional decisions. We will stick to our business and manage it focused on price and value. I don’t want to suggest everything is simple and rosy; competition can change dynamics quickly.

Lutz Schüler, CEO, Virgin Media O2

One more note for the U.K.: customers have an extraordinary cancellation right of 30 days after they get the letter. So the feedback materially realized in Q2. There was a cost-of-living crisis before and after the price rise, and we planned internally for higher churn given the price rise was double the size of previous years. We believe the churn impact was rather modest relative to our planning.

James Ratzer, Analyst (New Street Research)

Okay, thanks guys.

Operator, Operator

The next question comes from the line of Georgios Ierodiaconou with Citi. You may proceed.

Georgios Ierodiaconou, Analyst (Citi)

Good afternoon and thanks. First, on the U.K. altnet consolidation: there’s been a lot of activity in the market but so far you haven’t stepped into transactions publicly. Is it a matter of scale, technology, overlap, or antitrust concerns? Why hasn’t there been progress? Second, a clarification on Switzerland: you mentioned the extraordinary cancellation right is now over. My understanding is there’s a delay in Swiss KPIs — could we still see a significant impact in early Q3? Or is churn already fully reflected in Q2?

Mike Fries, CEO

On the altnet question, we’re being careful. We think the market needs consolidation and there will likely be more to come. When we evaluate assets we consider overlap, technology, retrofit needs, scale, size and price expectations. The absence of a public move from us so far shouldn’t be over-read; we’ve likely looked at opportunities and we will evaluate them carefully when they come to market. We will be active where it makes sense. André, do you want to address the Swiss clarification?

André Krause, CEO, Sunrise

Regarding Switzerland, there will be some churn exposure in Q3 because customers had an extraordinary termination right if they were in a binding contractual period. That applies to roughly 40% of customers; 60% were not bound. First indications are churn is not higher than we saw in the extraordinary termination period, so we’re not expecting a larger impact than what we already saw in Q2. Positive factors in Q3 include that we will resume front-book campaigns after the summer and the price rise by Salt gives us an argument to retain customers given the market has moved on, particularly on mobile. So yes, there is further churn exposure in Q3 but we have better tools to manage it and we have no indication it will be higher than what we saw in Q2.

Georgios Ierodiaconou, Analyst (Citi)

Very clear. Thank you.

Operator, Operator

The next question comes from the line of Nick Delfas with Redburn. You may proceed.

Nick Delfas, Analyst (Redburn)

Thanks. Mike, you said you’re exploring strategic options to strengthen the Dutch business. Can you talk more about what you mean? Are you referring to additional fiber assets or something else?

Mike Fries, CEO

I was making a general comment. First, we and Vodafone are intensifying our attention to the market and the asset, which is a positive development and partly reflects Vodafone’s new management and market circumstances. VodafoneZiggo is a unique business with massive customer reach and strong metrics. We will look strategically at how to maximize value for us and our partners in that market. There are many options and I won’t be specific about them today, but you should assume we’re examining all options to preserve and drive value creation from VodafoneZiggo.

Nick Delfas, Analyst (Redburn)

Okay, thanks very much.

Operator, Operator

Final question comes from the line of David Wright with Bank of America Merrill Lynch. You may proceed.

David Wright, Analyst (Bank of America Merrill Lynch)

Thanks very much. A couple of questions. First, I sense some frustration that you have to continually balance price rises versus churn. Why do consumers not value better speeds and network investment more and therefore accept price increases without churning? Second, more top-down: you’ve talked about value in Liberty and your buybacks reflect belief in locked value, but value in equity markets is founded on clear reporting and earnings visibility. There’s complexity in the group: NextFibre adjustments at Virgin Media O2, new central accounting, off-balance-sheet JVs. Do you think group complexity works against the equity share price and can anything be done to resolve that? Or are these things you need to work through before considering longer-term options? Thanks.

Mike Fries, CEO

Thanks, David. Good questions. On the customer point, we are still in a cost-of-living crisis and inflation is at extraordinary levels. Competitors are good at what they do. These are intense markets with strong promotional activity. We’re taking significant price increases in an environment where customers are financially challenged, so you should ask whether we are achieving the results we intended with the price increases. The answer is largely yes; we are broadly on track in each market and the trajectory is essentially as we predicted. Unlike some peers, historically we gave fixed customers an option to opt out; that will go away next year for many contracts, so this is the last year in some markets where customers have that broad opt-out right. On the value and complexity point: I appreciate where you’re coming from. Along the journey we’ve made strategic choices — JVs, partnerships and financing structures — that in many cases were the right decisions and created value but also added complexity. We are not fans of unnecessary complexity and much of what we’re doing strategically and financially is to reduce that complexity where possible. For example, delisting Telenet is intended to reduce complexity among other benefits. In two of our large OpCos we have 100% control; in others we have joint ventures that were formed for strategic reasons and delivered synergies. We’re focused on finding ways to reduce complexity and create transparency and value crystallization. The Bermuda move helps with our ability to make decisions quickly about assets. There’s a sense of urgency to close the valuation gap you referenced; management and the Board are aligned on that and we’re exploring all options to shrink the gap and create shareholder value. We’re incentivized to deliver that path and there’s nothing off the table to achieve it. We appreciate the frustration but we’re committed to taking the actions necessary and having a focused timeframe that makes sense for all stakeholders. With that, I appreciate everyone’s participation in the call. Whether that’s the buyback or our distributable cash flow guidance and capital allocation, we are doing what we think we should to demonstrate our commitment to the stock and to value creation. Our operating businesses are complicated and competitive, but we believe we have the best management, brands and assets in these markets and are well positioned to drive value creation over time. Thanks, everybody.

Operator, Operator

Ladies and gentlemen, this concludes Liberty Global’s Second Quarter 2023 Investor Call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global’s website, where you can also find a copy of today’s presentation materials. This concludes today’s conference. You may now disconnect.