Liberty Global PLC

NASDAQ:LBTYA

Earnings Call Transcript 2020-Q4

[Operator]

Good morning ladies and gentlemen and thank you for standing by. Welcome to Liberty Global’s fourth quarter 2020 investor call. This call and 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.

At this time, all participants are in listen-only mode. Today’s formal presentation materials can be found under the Investor Relations section of Liberty Global’s website at libertyglobal.com. After today’s formal presentation, instructions will be given for a question and answer session.

Page 2 of the 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 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 with 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 any such statement is based.

I would now like to turn the call over to Mr. Mike Fries.

[Mike Fries, Chief Executive Officer]

Thanks Operator and welcome everyone. Appreciate you joining us today. As this is our year-end call, we’ve got a lot of ground to cover - I’m going to apologize upfront for the length of the remarks, but all my key execs are on the line and I’ll be sure to get them involved in the Q&A. Then as usual, Charlie and I will be speaking from slides which are available on the website, so hopefully you can access those and follow along.

I’m going to begin on Slide 4 with some 2020 highlights. By any measure, this was an extraordinary year for us, for our employees and our customers. Nobody was immune to the effects of COVID-19 in 2020, including us as you’ll see, but we were lucky - lucky to have some strong antibodies, so to speak, that emanated from the critical role we play in the lives of our customers and which allowed us to meet or exceed nearly all of our own internal forecasts that we established pre-COVID.

Families, schools, hospitals, businesses big and small saw the reliance on stable and robust connectivity rise to unprecedented levels. Average upstream and downstream traffic in January was still 90%, and 50% above year-ago levels, so we’re still in this and doing quite well.

As with any crisis, so many operating lessons were learned; for example, the importance of putting our people first with flexible work arrangements, constant communication, and attention to their wellbeing. We also experienced the goodwill that comes from going the extra mile for our customers and our communities with more speed, more data, more entertainment, and essential and low-cost access plans. We quickly identified the significant benefits of accelerating the digital road maps we were already on for customer sales, care and attention.

It’s also fair to say that throughout the year, there was an underlying flight to quality among connectivity customers which really played to our strengths. We already deliver the fastest speeds, the most reliable services, fixed mobile bundles and better customer experience than our competition, and as the customer puts a higher value on these factors moving forward, we’re committed to the investments and the innovation required to solidify that position. You’ve seen that happening our fixed mobile transformation, our launch of 1-Gig broadband everywhere, our investments in digital customer journeys, and our commitment to new connectivity and entertainment projects, which I’ll talk about here.

With all that said, perhaps not surprisingly 2020 was a strong year for us operationally and financially. There’s a summary table on the right side of this slide with the key numbers, but I’ll just highlight a few things, beginning with a significant increase in subscriber growth.

We added over 80,000 new fixed customers in the year, reversing the trend of customer losses which stood at 74,000 last year, and broadband net additions, perhaps one of our most important measures of growth, were 242,000, up threefold from 2019. We even saw growth in postpaid mobile adds to 513,000 despite shop closures throughout the year.

Now there were plenty of key drivers behind these results; for example, all operations saw reduced churn and higher MPS, and that provided a tailwind. This was particularly evident in the U.K. where we delivered consistent growth on our BAU footprint and of course in new build territories. We also saw consistent sales and net add improvement in Switzerland every quarter, continuing the turnaround that began 10 quarters ago.

Charlie will take us through the financial results, but the bottom line is we delivered. If you net out the impact of COVID on things like premium sports and mobile roaming, we generated positive revenue while at the same time exceeding our original expectations for EBITDA and operating free cash flow. The standout number for me and, I’m sure, for you was free cash flow, where we beat guidance with $1.1 billion this year, up nearly 40% year-over-year. You can do the math against our 580 million shares outstanding to arrive at free cash flow per share since apparently we’re discouraged from doing that for you, and you’ll see that the implied yield on our stock is attractive.

Moving to the second box, there’s more good news here when you look at our Q4 results. We’ve been talking about low churn and record MPS most of the year, and this continued to drive sales and net adds higher in Q4, making it by far our best performing quarter of the year. Virgin Media in particular saw its best customer growth in 12 quarters, and in our Swiss operation UPC delivered positive broadband additions for the first time in 13 quarters, and that complements another strong quarter from Sunrise.

At the foundation of this customer growth are key product launches around 1-Gig, Smart Wi-Fi, and our advanced entertainment platform - again, I’ll talk about those in a second. Despite working from home and all of the related challenges of a pandemic, we made some pretty big strides in our fixed mobile transformation here with two large M&A transactions, and you’re aware of these.

I just referenced the acquisition of Sunrise, closed in November, and I could not be happier with the progress we’ve already made on leadership, integration, and commercial planning. We’ve got a rock star management team led by André Krause, who was the CEO of Sunrise, and includes Severina Pascu, who launched the UPC turnaround and will now report to André in the COO role.

The Swiss synergies have been validated, commercial day one planning is well advanced, and momentum in the meantime continues to accelerate, so we should have much more to say about that in our second quarter call--sorry, on our Q1 call.

Turning to the U.K., as we do quite a few times today, I’m happy to report that the regulatory review of the joint venture we announced last May between Virgin Media and Telefonica’s O2 is right on track. We’ve been heavily engaged with the CMA and feel really positive about a midyear approval. Like Switzerland, everything we’ve learned in the meantime just reaffirms our confidence in this combination financially and operationally. As reported, the Swiss and U.K. deals together represent about $12 billion of synergies on an NPB basis, and that’s at today’s FX rate, around 65% of which should accrue to us. You can do the math on that in terms of potential value creation.

I’ll also just point out that as with our Belgian and Dutch integrations, we have a pretty good track record of under-promising and over-delivering on synergies. You’ve probably noticed that Vodafone Ziggo reported around 6% EBITDA growth and $1.2 billion of operating free cash flow for 2020 with all expected synergies achieved a year earlier than planned. As I mentioned on the last earnings call, Vodafone Ziggo is a great case study for how fixed mobile convergence delivers growth and stable free cash flow even before the more strategic opportunities are factored in, which is a great segue to our 2021 priorities.

I’ll start with our commitment to two initiatives that are very, very important to all of us. First of all, I’m extremely proud of our work in diversity, equity and inclusion across Liberty Global, and we have been focused for some time on gender equality and supporting the less fortunate in our communities with broadband access, but we can and we will do more, so we established our first global DE&I council last year, which I co-chair, and we’ve ramped up both our internal and external work around five pillars: ethnicity, gender, LGBTQ, ability, and generational equity. This builds on our programs already in existence and turbocharges others, but the bottom line here is that we will hold ourselves and the entire company accountable to greater awareness and tangible goals that reflect our culture and our purpose.

I’m equally committed to our ESG programs, where we’re already a recognized leader. Most of you know that we’ve been in the Dow Jones Sustainability Index for years and are currently number three in the teleco media sector. We’re also in the top 15% of S&P’s Sustainability Performance Measures, among other acknowledgements, and like many of our peers we’re squarely focused on our net zero targets, which we will announce later this year.

Now let me quickly hit on five other key priorities for 2021. First of all, as you’ll see later in the presentation, each of our core markets is planning to deliver positive revenue growth this year, reflecting continued momentum in customer additions, expected or announced price rises, and progress in our B2B divisions. Just a footnote - that assumes modest, not necessarily heroic improvement in the COVID crisis throughout the year.

Second, I’m nearly certain that despite $45 billion of accretive M&A last year, 2021 will be equally busy and exciting for us on the strategic front. Becoming a fixed mobile champion and number one or two in our markets delivers more than competitive stability and long term growth. It also give us the scale to shape our markets and drive even greater value creation, which we will do.

Third, we’ll continue to optimize our portfolio of venture investments in 2021 to bring greater transparency to the assets that we believe already represent about $4 per share, and I’ll come back to that in a moment. Then fourth, we’re laser focused on free cash flow growth. Charlie will take us through the guidance in greater detail in a few slides, but I’ll steal the headline, which is that we’re forecasting a 25% increase in free cash flow over the year. When you factor in our commitment to buybacks with $1 billion repurchased last year at about $19 a share, and a new $1 billion buyback authorization in place for this year, we should see an even bigger increase in free cash flow per share.

Now let’s dig a bit deeper on our operational performance on Slide 5. The purpose here is to lay out visually the acceleration in customer growth we saw throughout the year, side-by-side with the core product innovations that stimulated and supported that growth.

Starting on the left-hand side of the slide, you can clearly see the significant sequential improvement each quarter in customer and broadband additions, by far our most import measures of growth. Fixed customer adds went from negative 19,000 in Q1 to 56,000 in Q4, almost in a straight line, and we set new highs in broadband with 242,000 total adds, as I just said, up threefold from last year, and again, steady sequential improvement quarter after quarter.

Now the biggest contributor to this growth was our biggest market. Virgin Media added over 100,000 new broadband subs last year, drawing from again both the BAU and Lightning footprint, and fourth quarter grabbed nearly 45% of all broadband net adds in the market, even though we only reach half the country. So many things are coming together right now in the U.S. Lutz and his team have done a fantastic job. We’ve seen better base management and record low churn. They brought call centers on shore but still increased the percentage of digital sales to 50%. The network is resilient and they’ve rolled out a bunch of new products like 1-Gig, fixed mobile bundles, 5G, TV360, and intelligent Wi-Fi.

Those same growth drivers are being activated across our European footprint, so in the middle of the slide you can see that we doubled the number of homes commercially available for 1-Gig broadband to 20 million at the end of the year, with most markets at 100% coverage today. Back to the U.K., our 1-Gig commercial rollout reached 7.3 million homes by December, almost twice the number of BT open reach, and of course we’re only half the market. We’ll be firing up the remaining 8 million 1-Gig homes throughout the balance of 2021 - that will significantly widen the gap with BT and provide a great tailwind for Virgin Media.

To be clear, it’s early days in the marketing of 1-Gig services for sure, and you can see that in the middle of the slide with just under 200,000 gigabit subs in our footprint today, but we know speed matters to customers. We know it matters now more than ever. Today, over 90% of our broadband subs are on 100 megabit or higher service and half of our subs are at the 200 megabit or higher level, and we’ve seen this movie before. It’s just a matter of time before 1-Gig product gains traction and we would lead in the market again.

Now turning to video quickly on the bottom left of the slide, you can see the improvement in video losses from 74,000 in Q1 to just 10,000 in Q4. Total losses of 180,000 in the year were 30% fewer than last year and represented around 2.5% of our video base - that’s meaningfully better than the U.S. Now, we’ve talked a lot about the differences between Europe and the U.S. many times. We have lower video ARPU so less pressure on subs and we have a stronger free-to-air broadcast sector which keeps more eyeballs on linear and time shifted television, and we have widely available fixed mobile bundles where we know the video product is a key component for customers.

On top of that, we continue to roll out the most advanced video devices in the market like TV360, which I’ve mentioned in the U.K., which has our latest UI, and now shows an MPS improvement of 50 points, and our new IP box that we call Apollo, which is a 4K app-centric box, a very inexpensive device that actually fits in your palm and allows us to up-sell the traditional video products. The entertainment road map in my opinion has never been more robust with all countries on the same platform for the first time.

I’ll just close this slide out by saying the momentum you see building on this chart has largely continued into 2021. With modest price increases, continued churn management, and product innovation, this should be a strong year for our B2C business. Now of course, that assumes the availability of vaccines will reduce the need for further lockdowns, as I already mentioned; in other words, we do expect a slow but steady improvement in economic activity throughout the rest of the year. By the way, just a footnote - we have given you an update on each country in the appendix, including data on Project Lightning, which I know you’re always interested in, and I’ll just say Project Lightning continues to perform brilliantly, so look for that information.

I’m going to end my remarks with a few words on our Ventures portfolio. Last quarter, we provided a teaser for you with highlights on a handful of investments, but really not much granularity. Given that we believe the total portfolio is worth $2.4 billion today, or a little over $4 per share, we thought it might be useful to provide a bit more detail on these investments.

On Slide 6, you’ll see the four verticals that comprise the portfolio: tech content and sports, sort of emerging markets in a catch-all really, and infrastructure, and as you’ll quickly spot, 90% of the value resides in the first two buckets on the left, so that’s where I’ll spend my time starting with our tech ventures portfolio.

As some will know, we began investing in tech about 12 years ago with a small dedicated team in Denver and Silicon Valley, which remains very small today, and during that time the goal hasn’t wavered, really - we’re looking at mostly modest investments in early to mid-stage companies that provide products or services we can exploit in our operations. Historically the team has been focused on verticals like infrastructure and cloud and machine learning with some blue sky investments in things like gaming or augmented reality, or advanced advertising. While the value we deliver to the portfolio company can be significant because we’re typically a customer - that’s why we get asked to be in a lot of deals, we don’t include the value that the portfolio company brings to us in our returns, and trust me, there have been many examples where that number is large. Today we have around $250 million currently invested in 40-plus companies which we value at nearly four times that amount. This excludes the $180 million that was previously invested in the ventures fund and has already returned $350 million of capital to us, which we just move into our consolidated cash balance.

The team has historically invested around $50 million per year, but they have made some really smart bets and we’ve shown a couple here on the slide. Skillz, for example, is a mobile gaming platform that we invested $14 million in back in 2017, anticipating our role in the mobile business, and today is publicly listed with a market cap of just under $14 billion and valuing our stake at $450 million.

Plume is principally a supplier of Smart Wi-Fi devices in the home that improve or extend reach but also serve as gateways for device management. We’ve rolled it out in Europe, Comcast is the largest distributor in the U.S., and we began working with Plume in 2014 as a potential supplier, ultimately invested $25 million, and based on their latest funding round, that stake is worth around $170 million and we have incredibly strong relationship with this strategic vendor.

There are a host of other examples in the tech portfolio; in fact, the team believes we’re currently invested in no fewer than nine companies that either are or we think will be unicorns. Like any good venture investor, we have and we will continue to monetize these positions when the opportunity arises and then return that cash to corporate.

The second large bubble represents our investments in content and sports, valued at $1.25 billion today. This includes our stakes in companies like ITV, All3Media, Lionsgate, and Formula E. As most of you know, we acquired 10% of ITV around seven years ago at an average cost of £2.16. Not surprisingly and as most have figured out, we fully hedged that position at the time with a collar, and as those collars will expire soon, we have begun unwinding that position and lowering our cost base in the shares. Currently we’re long about 7% of ITV at 75p, and the stock closed Monday at £1.13 and the balance remains collared, and we may or may not close that out - we’ll see.

We did the same thing with our hedged position in Lionsgate when the stock was in the mid-single digits or thereabouts, and now trades at 13, so let me preempt the question by saying right up front, [indiscernible] to not portend anything strategic with these companies, we’re just taking advantage of market dislocation to materially average down our costs in these positions, like any smart investor would do.

Just a quick word on Formula E, which is starting its seventh season of eight races later this month in Saudi Arabia. I don’t think I have to explain why this racing series is well positioned. With manufacturers like Mercedes and Porsche now in the series, everyone appreciates the future of driving and racing is electric, and we have about $150 million invested and a 32% stake that we conservatively value at $250 million, and yes, [indiscernible] have been circling, we’ll see what happens.

The only other thing I’ll mention briefly is our growing investment in infrastructure which we believe holds immense untapped potential for us, and I’m referring to both our own infrastructure like cabinets, real estate and towers, which we’re rapidly organizing into separate units where necessary, and third party investments in businesses like EdgeConneX, for example, where we rolled our stake into EQT’s $2.7 billion acquisition of EdgeConneX for a 2x return and a seat at the table with what is arguably the smartest investor in infrastructure in Europe.

There’s lots of exciting things happening on the ventures front. Historically we’ve been pretty quiet about our activities and certainly they’re not taking resources or focus away from our primary business, but there is real value here and real strategic connection to our operations, and you can expect us to be more transparent moving forward.

Let me recap. A strong 2020 operationally and financially and a great start to the year - you’ll see that. Our two big fixed mobile combinations in Switzerland and the U.K. are right on track, and with $6 billion of liquidity at year-end we continue to invest our capital exactly how we signaled we would: first, building FMC champions in our core markets, we’ve done that; second, opportunistically investing in ventures that are both strategic and financially rewarding, and you are seeing the fruits of some of that work right now; and third, buying back our shares which, obviously, we believe are undervalued relative to almost any measure.

I’m excited to take your questions, but first, over to you, Charlie.

[Charlie Bracken]

Thanks Mike. Turning to our consolidated numbers, I’m starting on a page entitled, Underlying Revenue Stable.

Total group revenue saw a decline of 0.5% in Q4, resulting in full year decline of 1.5%. We estimate the negative impacts of COVID to be around $54 million in Q4 and around $200 million for the full year, which negatively impacted our growth rate by around 1.8%. Without that, we believe the group would have seen positive rebased revenue growth for the full year.

On the right-hand side of the page, for each of the last three quarters you will see the five key areas impacted by COVID. In general, COVID impacted our business much less in Q4 than it did when the pandemic first hit in Q2. The impact of not having access to premium sports in Q2 was $34 million; however as sports started to return by Q4, the downside was only around $7 million. Handset sales and roaming revenues were impacted by the pandemic and we estimate contributed to a $16 million drag in Q4, while the impacts on our broadcasting businesses was around $6 million for the quarter.

There was some impact on our B2B businesses, we estimate around $22 million in Q4, but it was largely due to reduced sales. Fortunately, to date we haven’t seen a material impact on bad debt and late charges on either our B2B or consumer businesses.

On the next slide, we provide details of our adjusted EBITDA. For the full year 2020, we delivered minus-3.9% adjusted EBITDA growth, which was in line with our expectations. As we called out in our Q3 results presentation, Virgin Media declined 11% rebased versus Q4 of 2019. This was driven by $7 million of costs related to the O2 merger and some other growth investments, particularly $21 million in the accelerated digitization and on-shoring of our custom content platforms as well as an $18 million increase in marketing, which did result in accelerated subscriber growth. The remaining difference versus Q4 of 2019 was the impact of end of contract [indiscernible], network taxes, and deferment of our price rise from Q4 to Q1 2021.

Swiss trends continued to gradually improve with a 7.9% decline in Q4, partially explained by a 4% drag from $10 million of costs to capture [indiscernible] synergies. While Sunrise’s rebased has not improved since completion [indiscernible] financials, the standalone business is reporting around 2% full year growth based on the historical IFRS reporting policy.

Turning to operating free cash flow, we delivered 5% operating free cash flow growth for the full year, which is in line with our guidance of mid-single digit growth. This is despite $26 million of cost to capture, which is equivalent to more than 1% of growth. Our capital intensity declined to 22.5% in 2020 or 19.6% excluding capex related to Project Lightning, and but for cost of capture in Switzerland, all markets would have returned positive OFCF growth year-on-year. The standout was [indiscernible] de-consolidated joint venture in the Netherlands, which grew 9% year-on-year, delivering $1.2 billion of operating free cash flow.

Turning to our 2020 free cash flow results, we delivered 39% growth or $300 million compared to 2019 and reported $1.1 billion of consolidated free cash flow, ahead of our $1 billion guidance. This is despite some currency headwinds versus guidance assumptions and a $6 million drag from working capital which we generally believe [indiscernible] a telecom company such as ourselves. Our cash flow was further suppressed by the $329 million of capital expenditures related to our U.K. network expansion, Project Lightning.

On the page entitled, 2021 Outlook, we provide details of our expectations for our key assets going forward. Given that we fully expect our U.K. business will be deconsolidated into a joint venture by midyear and that Vodafone Ziggo and Telenet already provide standalone guidance, going forward we’ll provide our key financials guidance not on a group consolidated basis but for each business unit. At the group level, we’ll be guiding only to consolidated free cash flow, which we expect to grow more than 25% to $1.35 billion for 2021 based on the assumption that the JV closes at midyear.

In the U.K. and Ireland, we expect to return to top line growth despite an increased year-end impact from end of contract [indiscernible], although cost of capture synergies will weigh on adjusted EBITDA and OFCF growth. For the full year, we expect standalone [indiscernible] to decline low single digits across both metrics. We also expect a return to revenue growth in Switzerland for the combined UPC-Sunrise business, though expect a low single digit adjusted EBITDA decline and a mid-single digit OFCF decline, and that’s because we’re spending over Fr 150 million of costs to capture synergies, but on the underlying business we think there will be growth.

Telenet, our Belgian operation, has garnered 1% to 2% adjusted EBITDA growth and continued free cash flow growth, expected to generate €420 million to €440 million. Vodafone Ziggo, our Dutch JV [indiscernible] 1% to 3% adjusted EBITDA growth and will increase year-over-year cash distributions to shareholders [indiscernible] range of €550 million to €650 million, or $677 million to $800 million.

With that, Operator, over to questions.

[Operator]

[Operator instructions]

All right, we’ll take the first question from Robert--oh, excuse me, James Ratzer--pardon me. It is going to be from Robert Grindle with Deutsche Bank.

[Robert Grindle, Deutsche Bank]

Okay, that’s me, I think. Hi there, how’s it going? May I ask about the U.K.? I saw the strong Lightning take-up stats, but the Lightning build was lower than the previous three years. Is that COVID or are you hanging fire a bit pending the O2 merger, or I think you mentioned in the slides that passive infrastructure access is not really available at the moment. Is that what you’re waiting for, and what’s the prognosis there? Thank you.

[Mike Fries, Chief Executive Officer]

Well, I’ll just make a couple comments and then Lutz, you can work a more detailed answer. If you look at the last four or five years, we’ve always built between 400,000 and 500,000 homes per year. Last year, we did 426,000, and we’ve done 2.5 million to date. I wouldn’t read anything into it. It’s more about just optimizing our overall financial picture. Could we have built a few more? Yes. Could we have built a few less? Probably. The PIA is reducing our cost pretty considerably, so below £600, which is a great thing, and the more we use of that, of course, it could accelerate both the capital we spend and the number of homes we build. It’s all good news there. There’s really nothing negative.

Our coverage is growing, our penetration remains strong, our ARPUs are strong, and the returns are high, so the Lightning Project as it sits today is in great shape. Certainly when the merger closes--sorry, the joint venture closes, we will sit down with Telefonica when we’re allowed to and really re-evaluate the entire picture around our fixed networks in the U.K., specifically the pace of Lightning build, secondly our broader ambition to expand in the network beyond our Lightning footprint aggressively, the path we’ll take to 10 gig, will we bring in financial partners, how will we accretively and aggressively take advantage of our network leadership in this market and ensure we remain network leaders for some time. That’s our real opportunity here.

Any other color, Lutz?

[Lutz Schüler, Chief Executive Officer, Virgin Media]

You said it all, basically. I think the only thing I would add is that the Lightning team, on top to the network expansion for homes, is also now going to connect more base stations for 5G. We closed two big deals, one with Vodafone, one with [indiscernible] 3G, and obviously here also you see now an acceleration of really connecting circuits, so if you take both into account, then it runs at pace and, as Mike said, I think we have to review the strategy together then after the approval with Telefonica.

[Robert Grindle, Deutsche Bank]

Thank you.

[Operator]

All right, once again that is star, one to ask a question. If you find your question has been answered, you may remove yourself from the queue by pressing star, two.

The next question is from Christian Fangmann with HSBC.

[Christian Fangmann, HSBC]

Yes, great. Thank you. Hi guys. I have actually a question on Switzerland. It looks like a good outcome back to broadband growth in that market on an underlying basis at UPC standalone. My question is more on the integration costs and the phasing - you mentioned Fr 150 million. Can you maybe give us a split between opex and capex here, and also what you expect in terms of synergies already in 2020 and the phasing over the next few years, just broadly speaking that we can model it properly? I think a bit more color or guidance around that would be nice.

[Mike Fries, Chief Executive Officer]

Yes, André is on the call - I can ask him to address to some extent. We’re being obviously a little careful about annual synergy expectations, but I’ll tell you that in 2021, the synergies are expected to be relatively nominal, I think maybe in the Fr 30 million range, something like that, against the Fr 150 million cost of capture. But it ramps pretty quickly, so I think in 2022 it’s four or five times that number and then it grows ratably to the 2024, 2025 time frame, and it’s not going to look materially different than the Belgian synergy model or the Dutch synergy model in terms of how much is revenue, how much is cost related, and how much is cost savings based on a 2020 cost base, and it’s about 85/15 - you know, 15% revenues, and those are really in the later years. It’s a conservative synergy gate in our view.

André, I don’t know what other color we’re providing on those sorts of numbers, but I’ll let you wrap that up.

[André Krause, Chief Executive Officer, Sunrise]

Well, I think you outlined it well. I think on the cost of capture, of course, we tried to be pretty front-loaded. We are moving fast, integration is progressing quite well, and obviously some of the opex stuff is going first whereas some of the investments are coming later on as we go through it. I would expect that the largest part of the total cost of capture should be done by the end of ’22, and in terms of synergy [indiscernible], of course it’s always a bit of a question mark around the revenue synergies, how quickly they’re going to run through, but as Mike pointed out, I would re-confirm the shape of the trajectory.

[Christian Fangmann, HSBC]

Thank you very much.

[Operator]

All right, the next question is from James Ratzer with New Street Research.

[James Ratzer, New Street Research]

Yes, thank you very much indeed. Question for me really was around your cash return thoughts from her. Firstly on the buyback, I noticed the pace of that seemed to slow in the fourth quarter, so I was wondering if there was any logic behind that and should we be expecting the pace of buyback to be accelerated during the first half of this year. Given the strong cash flow guidance that you’re giving and the rate of buyback, you’ll still end this year at the current run rate with well over $3 billion of cash on the balance sheet, so I was wondering if you could give any further thoughts around timing of that potentially being returned to shareholders, or other uses of that capital. Thank you.

[Mike Fries, Chief Executive Officer]

We can’t identify any other uses of the capital beyond what I’ve said generally, which is we remain opportunistic around strategic transactional ideas that might occur in our core markets, and maybe continued modest investment in ventures. There’s nothing else that’s jumping out at us at this point that would require meaningful amounts of capital, so buybacks remain front and center. And as you’ve said, just looking at last year, the number that we started out at a normal pace, and when of course the stock declined, we ramped up and bought most of our stock in that period of time, Q2, a bit of Q3. From our perspective, we’ll do the same this year, so I think the end of the year was a bit of an odd period, both related to where we were in our 10b5-1 plan and our material [indiscernible] information and having just announced, or about to announce the increased authorization, we wanted to get through the year with what remaining we had. I think you should expect us to look at the situation dynamically, and it wouldn’t surprise me if we ended up buying more stock in the first half than the second half because we believe our operating and financial story continues to look better and better.

Let’s see how things evolve, but we’ve got the full $1 billion available, we have been spending more daily in this year than we were in the fourth quarter, and that shouldn’t surprise you, but let’s see how things evolve. I can’t be more specific than that, James.

[James Ratzer, New Street Research]

Great, okay. Clear, thank you.

[Operator]

All right, the next question is from Michael Bishop with Goldman Sachs.

[Michael Bishop, Goldman Sachs]

Thanks very much. I’d like to just try and to pull together a couple of things on the free cash flow guide. It feels like the step-up to 1.35 is largely driven by the higher Vodafone Ziggo distribution, and then obviously the growth and the accretion that Sunrise brings. Is there anything else you’d call out as driving that 1.35, given it looks like you’re guiding the operating cash flow will be modestly down for a couple of the assets, like the U.K. and Switzerland?

Then if I could ask a more forward-looking question on the cash flow, which is related, it sounds like we should take the 1.35 and then effectively if you want to think about that on a run rate basis going forward, you’ll be spending at least Fr 150 million on integration costs in Switzerland, £15 million in the U.K., but then you’ll probably spend some for the second half as the deal in the U.K. closes, so simplistically, should we think about the underlying cash flow being quite a bit above $1.5 billion? Thanks very much.

[Mike Fries, Chief Executive Officer]

Good questions. Charlie?

[Charlie Bracken]

I think you’re quite right - we saw the acceleration in Vodafone [indiscernible] continued through cash machine. The strong acceleration [indiscernible] in Telenet based on that guidance. In the U.K. it’s more partly until we close the deal, but also because of the cost of capture and also the Lightning build. Again, I would emphasize that conceptually, you could switch off the Lightning construction capex and that would increase our free cash flow pretty materially if we wanted to [indiscernible].

Then in Switzerland, I think you rightly point out that we’re getting some good free cash flow, and that’s not least because we are getting some [indiscernible] synergies as a result of the transaction, so I think the message is that we’ve got a real cash flow machine, and I think Mike made the point about the synergies, there’s a lot more to go from here. We would expect continued free cash flow growth as we monetize those synergies, as well as we see continued good operational performance, particularly in the turnaround in the U.K.

[Mike Fries, Chief Executive Officer]

And as I said in my remarks, which you would already know, Michael, the free cash flow per share figure would be even obviously more robust on a growth rate basis, just given our new purchase of 8, 9, 10% of our market cap every year, so if you’re looking at it integrated, the free cash flow underlying, the operating free cash flow story, as Charlie said and as you pointed out, is strong, and then we were able to accelerate that on a free cash flow per share basis, just by virtue of buyback activity.

[Michael Bishop, Goldman Sachs]

Thanks. Am I right, so the second half of the--sorry, just to follow up on the second half of the year in the U.K., so I’m right to think that that will be effectively a small net cash outflow also in the 1.35, because [indiscernible] your integration will be more than the synergies that you deliver?

[Mike Fries, Chief Executive Officer]

Well--go ahead, Charlie.

[Charlie Bracken]

I was going to say, the way we actually look at it is actually broadly flat, because [indiscernible] seasonality in the free cash flow in the U.K., so--and again, we think we think the deal will close, we’ll give you updated assumptions when we close it because obviously we don’t have a lot of insight on what’s going with O2, but our best guess is that if we don’t close or close, it’s probably about the same free cash flow. There’s a lot of variables in that assumption -- you know, [indiscernible].

[Mike Fries, Chief Executive Officer]

You’re coming through a little bit fuzzy, Charlie, but I think the point was the guidance is provided assuming that the deal doesn’t close, just to be clear for folks and give them a baseline on top of which they can overlay the JV, and as Charlie indicated, interestingly whether we consolidate Virgin Media for the entire year or just half the year, interestingly the free cash flow number won’t be meaningfully different, because we’ll be then distributing that cash in the second half of the year back up to the parent. I think you can look at it either way, Michael, and you’re not going to get a materially different number, if that makes sense.

[Michael Bishop, Goldman Sachs]

Yes, that’s helpful. Thanks a lot.

[Operator]

All right, the next question is from Nick Lyall with SocGen.

[Nick Lyall, Société Générale]

Good afternoon, everybody. Just one on Switzerland, Mike, if I could. The [indiscernible] still looks a bit tricky. You talked about discounts, I think in the statement, again on the front book, so is that doing anything in terms of your plans for price changes? Could you maybe just discuss at what point you think the new company can cope with price changes, and also what are the plans for the brands in Switzerland as well, please? Thanks.

[Mike Fries, Chief Executive Officer]

Sure, in fact André, why don’t I let you take both of those since you’re running it. Go ahead.

[André Krause, Chief Executive Officer, Sunrise]

Yes, sure. Thanks for the question. I would say overall, yes, the market is quite competitive, and there’s quite a lot of tension on the front book; however, I would say that those businesses, Sunrise and UPC operating still majorly independent in Q4 have seen the best quarters for the year, not only for this year but for the last three years probably, so that is showing that we have a very competitive offering.

Now looking forward for us, of course combining fixed mobile convergence is the name of the game, and we have still a lot of opportunity on both businesses to actually drive more value to our customers while not necessarily destroying value but rather creating value, so [indiscernible].

In regards to brand consolidation, that’s something we are currently looking into. Most likely we’ll probably operate with two brands - we have seen that working out quite successfully in the past couple of quarters using Sunrise, and it’s probably [indiscernible] we will embrace also for the combined business, but we haven’t taken a final decision on what those brands are going to be.

[Nick Lyall, Société Générale]

Okay, thanks very much.

[Operator]

The next question is from David Wright with Bank of America.

[David Wright, Bank of America]

Yes, good afternoon--good morning, I should say. Thank you. Just on the U.K., I really don’t want to downplay the achievements of Lutz and team, but a lot of the commercial momentum has come with the delay in the price rise, so I guess the question is to what extent is that a factor, and as you bring pricing into the customer base end of Q1, early Q2 I believe, how do you think those KPIs could respond? Is the commercial activity driven more by price right now, do you think, or more by the quality of service and the ramping of the product? Thanks.

[Mike Fries, Chief Executive Officer]

I’d just say, and then I’ll let Lutz provide a bit more color, this began building early in the year, David, so as you look at the U.K. broadband adds, first quarter was 80,000, I think; second quarter, 33,000; third quarter, 47,000; fourth quarter, 54,000. It’s our view that that is an undeniable trend regardless of any announcements that may or may not have been made on price increases. As I mentioned in my remarks, lots of positive things driving that, and Lutz, why don’t you flush that out a bit more?

[Lutz Schüler, Chief Executive Officer, Virgin Media]

Yes, exactly. We put together a strategy to get back to sustainable growth in 2019, fixed mobile convergence one, a lot of innovation like Mike has already called out, better base management, on-shoring of customer service, a huge effort in digital, and so this has led to reduced churn and increased sales. You’re right - obviously waiving the price rise in 2020 has helped here, but if we would have done one, the numbers would be a bit lower, the net add growth, however it would be still substantially higher than 2019.

Maybe I’ll give you a bit of flavor of the price rise, how it’s going. We’ve got a very rational reaction from the public, so in the press and in customers it was well received. We’re in the middle of it at the moment, and it seems that the demand for higher speeds in the pandemic especially is increasing. When you have kids doing homeschooling, parents working and stuff, you need higher speeds, and so we’re offering that, so therefore obviously Q1 net adds while doing a price rise cannot be higher than the 55,000 broadband adds that you have seen in Q4, however I would not be surprised if we would have still positive net adds in Q1.

[David Wright, Bank of America]

Can I just ask as a follow-on, the commentary made on the demand for higher speeds perhaps lagging from COVID, etc., also you have some competitors announcing fairly substantial price rises in the U.K. too. After a couple of choppy years, do you feel like the U.K. market is returning to more rationality, perhaps supported by that COVID effect?

[Lutz Schüler, Chief Executive Officer, Virgin Media]

Yes, well I think all the players have big investments on one hand, right, in next generation networks on the fixed side and 5G on the mobile side. Sky does also a big investment on the content side, so that’s one. Second, usage has increased dramatically, as Mike has pointed out, so that means also obviously that all needs some funding, and therefore I think price rises have been done by almost everybody, right? BT CPI-plus 3.9, I think Vodafone the same. I think just today, Sky has announced their price rise for this year as well, and we have done it in January, so I would say on price rise, very rational and I think also however well received by the customer, as I said before.

There is still higher competition on the acquisition side, right, so here prices, if you compare price development for, for instance, products like in the 60 meg space, prices are lower, so that is the dynamic. We haven’t followed that so much as Virgin Media and we get our fair share.

[David Wright, Bank of America]

Very good, thank you.

[Mike Fries, Chief Executive Officer]

Yes, by the way, the prices are lower in those lower tiers, but we’re actually offering generally faster speeds, so BT might offer a 38-meg or Sky might offer a 60-meg product, we’re at 100 meg for that same customer--target customer base, so our price per megabit, if that’s something that you want to look at, is much more attractive, and as people get smarter and more focused on the broadband product, that’s not even a relevant stat. We’re always faster, even if the prices are comparable.

[David Wright, Bank of America]

Thank you.

[Operator]

The next question is from Polo Tang with UBS.

[Polo Tang, UBS]

Yes, hi. Thanks for taking the questions. The first one is for Mike. You talked earlier bout how you’d be busy on the strategic front in 2021, so can you maybe just elaborate on those comments? Were you referring to completing the U.K. deal, or are you doing new additional things that you’d maybe give us some sense in terms of the areas that you’re looking at? And I just have a follow-up question which is really just about Sky. Dana Strong is obviously taking over as CEO of Sky, and she obviously knows Virgin Media very well, so do you see scope for closer cooperation with Sky going forward, for example maybe Sky could invest alongside you guys in terms of a fiber footprint expansion, or maybe doing cable wholesale? Thanks.

[Mike Fries, Chief Executive Officer]

I’ll take those. First with respect to Dana, of course she is very well known to us. She worked for us, for me for over two decades, and I consider her to be an outstanding executive, so obviously we’re happy for her and I think it helps for us to have somebody in that seat who we know well, who knows us well, and I think who Comcast knows well, so it’s a good decision and we’re--of course we’re in touch with her and we’ll be very close on a number of things. She’s also quite deliberate and careful, so she’ll take her time to evaluate opportunities in the marketplace.

Having said that, I have no reason to believe she wouldn’t be just as strategic as Jeremy was around their long-term strategy in this marketplace and what options they have to secure owner economics or reduce costs to serve, and all the things that anybody who’s building a business or rebuilding a business in some cases would look to do. I couldn’t be happier with her and we’re proud of her; on the other hand, I think it does give us a great dialog and great opportunity to continue to talk about each of our strategic futures here.

We can’t do much until the deal is approved, as you can imagine, and you’re unlikely to read or hear anything between now and then; but it wouldn’t surprise me if we re-engage on a number of topics with Sky who are a very important partner for us in this market.

On the M&A side, the strategic front, I wasn’t referring to anything specific, but clearly if I go through those three buckets again, core markets, ventures and buybacks, our core markets, I think we’ve done exactly what we said we would do. In the last five years, we’ve done something like $80 billion of--bigger, actually, $80 billion-plus of transactions allowing us to exit markets at double-digit multiples where we didn’t have scale, and bed down markets for fixed mobile convergence, becoming a champion in markets where we did have scale. I think the way we’ve done it depends on the market - we either exited, bought or merged, and we think in all cases we’ve done the right thing, so we now have the number one or two player in these markets and that gives the scale to be, I would say, opportunistic and creative.

If you’re now the number two player in each of these markets relative to the incumbent, you’re in a different position when you look at those core markets strategically, and you could imagine what this might include. The markets that we haven’t yet done anything in, Ireland and Poland for example, of course we’re going to continue to evaluate what the right long-term future for those markets is in terms of their strategic footprint and whether there’s a fixed mobile opportunity, etc., so you should assume that that’s high on our list. It would be surprising to me if we ended 2021 without continued transformation even in those two markets, whatever that might look like.

The other thing you might have heard me reference indirectly is that we are really excited about the infrastructure space. Not surprisingly, we sit on massive infrastructure ourselves, both fiber-based, we’ve got towers directly and indirectly, we have real estate which Charlie and his team have done a great job extracting property assets from joint ventures and opcos, allowing us to look at the future of edge computing, so you should assume that we are being about as creative and opportunistic as we can be in infrastructure. We’re not going to go compete with the big players [indiscernible], that’s not necessarily what I’m referring to, but there are going to be opportunities for us to partner, raise capital and monetize, and that will keep us busy because those are--you know, we know the underlying value of our networks is significant and there is massive amounts of money looking to invest in those networks, so we’ll be creative to see if there’s ways for us to create value. We definitely do, Polo - you know that.

Anything we would do, though, would be accretive to our base case plans, our guidance, whatever you might be referring to at the time, but it’s exciting to me and something that we’ll be working on closely in 2021.

[Polo Tang, UBS]

Clear, thanks.

[Operator]

We’ll take the next question from Steve Malcolm with Redburn.

[Steve Malcolm, Redburn]

Yes, good morning guys. Thanks for taking the question. I’ll try and go for a couple if I can, they’re quite big ones.

First just on Vodafone Ziggo, I guess paradoxically it’s still bringing in the best financial numbers in the group, but the operational KPIs are amongst the weakest. You’ve lost 60,000-odd RGs in the last couple of quarters. Do you feel that you’ve got the balance right there between volume and price, particularly as KPN ramps up its fiber build over the next three, four, five years? Interested to hear your thoughts on that.

Then just swinging back to the U.K., can you just help us understand the evolution of the [indiscernible] through the year? Obviously you’ve had best tariff modifications, stick the price rise, you get the price rise in the first quarter, best tariff begins to lap, I guess through the back end of the year. Can you maybe get that U.K. offer back to flat? How should we think about the progress for that number through 2021? Thank you.

[Mike Fries, Chief Executive Officer]

Steve, you were moving pretty quick on the U.K. question. Could you repeat that, just a bit more slowly? Not all of it, just the main portion.

[Steve Malcolm, Redburn]

Yes, so I just wanted to understand how we should think about the evolution of the U.K. ARPU through 2021. I think you were down something like 4% in Q4. You had best tariff [indiscernible], you skipped the price rise, you get the price rise in Q1 back end, you begin to lap the best tariff impact through the second half of the year. Just trying to understand whether you think you can get that number back to stable in terms of volume growth, but the ARPU picture is a bit blurry [indiscernible]. Thank you.

[Mike Fries, Chief Executive Officer]

Okay Lutz, do you want to tackle the ARPU question, give your two cents on that? I could provide some color too.

[Lutz Schüler, Chief Executive Officer, Virgin Media]

Yes, so you call it yourself the key lever, so our price rise would give us a good tailwind to get the ARPU growth again. On the other hand, there is USCN [ph] and ADTN, right, average [indiscernible] which hasn’t really kicked in into 2020, but which will kick in, in 2021. In our plan, we are careful, so we have contributed quite some revenue loss to ADTN, so therefore we think we are more coming to [indiscernible] into ’22 rather than ’21. It won’t shrink a lot but it might be a little less. It all depends on customer reaction on ADTN.

[Mike Fries, Chief Executive Officer]

In the Dutch market, I think [indiscernible] and the team, and Charlie, you can jump in here too, have it figured out pretty well. Clearly it’s a competitive market and KPN has made announcements about getting to roughly 50% reach with fiber, which we always assumed would be the case, but we’ve now got one gig everywhere, 6 million homes and are marketing aggressively, so I think this is just a breather, if you will. The synergies and the execution have been intense, the rollout of new products has been successful. I think ’21 is not indicative as we look at it of the longer term opportunity in the marketplace, and I think the guidance just reflects a bit of a breather, if you will, not necessarily a discernible trend over the next three years. I have confidence in their ability to optimize price volume to look at this market dynamically.

They’re already--I mean, if you just compare them to KPN in 2020, which probably many of you do, it’s not a very fair comparison. They’ve had an incredible year relative to KPN in terms of net adds, in terms of pretty much--almost any metric. I think we grew revenue 2% and EBITDA 6%; KPN went back 4%, I think 4.5%, and we had about 270,000 mobile net adds and they had 55, their broadband result was worse. But as with any market, you’re going to have ebbs and flows. KPN is a good operator, they’re not going to be down and out forever. Everybody comes back punching, so that’s the nature of a competitive marketplace and I have confidence that this management team has a good strategy in place for the longer term, wouldn’t say the medium term, and any one year won’t be indicative of what you should expect.

Any color on that, Charlie?

[Charlie Bracken]

I’d agree. The only thing I’d say, they’ve done a great job on B2B. I don’t know if you’ve noticed, but they’ve moved their market share up very materially on B2B, and there’s still a lot of runway to go, so I actually think they’re doing a terrific job of execution, perhaps amongst the best in the group, so I’d concur with everything Mike said.

[Steve Malcolm, Redburn]

Okay, and especially [indiscernible]. Can you hear me?

[Mike Fries, Chief Executive Officer]

Yes, I think the question, Charlie, was the decision not to give revenue guidance at Vodafone [indiscernible].

[Steve Malcolm, Redburn]

Vodafone, so is that just because of the breather that you’re talking about and getting some flexibility to respond to that situation?

[Charlie Bracken]

No, to be honest with you, revenue guidance in a world of COVID is not the easiest thing. I think we’d all have a lot more confidence in cash flow guidance, because who knows what’s the impact on sports and whatever. This company is performing well and I think you’ll see some very good results. Management’s famously quite conservative, though he is putting pressure on the group, [indiscernible].

[Steve Malcolm, Redburn]

Okay, thanks so much, guys.

[Mike Fries, Chief Executive Officer]

You got it. I think we’re at the mark here, Rick, or can we take another question or two?

[Rick Westerman, Executive Vice President, Investor Relations]

Last one.

[Mike Fries, Chief Executive Officer]

Okay.

[Operator]

The last question is from Andrew Beale with Arete Research.

[Andrew Beale, Arete Research]

Hi. I wanted to come back to Vodafone Ziggo again, actually, and just ask you about your background thinking around a possible IPO there. Obviously you’ve just discussed the results in Holland, but I guess it’s a business that’s given you and continues to give you large dividends, so just wondering how you thought about the ongoing value from 50% ownership of those dividends in a business you like versus the opportunity to highlight equity value more broadly across your wider group operations, and obviously I appreciate you’ve got a partner there so there’s things you won’t be able to talk about, but any background around that thinking. not just for Vodafone Ziggo but the sort of wider outlook for local IPOs.

[Mike Fries, Chief Executive Officer]

Yes, good question, and of course there’s nothing to report. We do have a partner, they’re quite busy right now on a number of other things and doing great stuff. My guess is if you ask each of us, we both like this business a lot, and not just because it’s in a three-player market and really in many ways number one in terms of market share and mostly B2C products, and has great free cash flow profile, as you’ve already indicated.

Is it an IPO candidate? Potentially. We could look at that depending on how the market evolves. Listen - I think there is a bit of a rotation occurring and long delay should be happening, rotation occurring in Europe because you’ve got many tailwinds, I think: one, regulatory, regulators are mostly focused on infrastructure and build-out, and they want to see companies in a fair bet environment where if they can invest the money, they get a return, it’s a good thing. You might even see further consolidation in mobile - we’ll see. We’ve already pointed out how COVID can help those who are prepared with great products to grow, and consumption is never turning back. Consumption is going nowhere but up. Multiples have been depressed for a period of time, so a lot of positive things in our sector, and of course we’re a bit of an outlier because we’re more entrepreneurial, more profitable, and more strategic than a lot of our peers.

But nonetheless, the sector in general is possibly due for a pretty good year here, and would it be an opportunity to look at listing? I would say possibly. It’s not up to use, we have to kind of--you know, we wouldn’t want to do that with a partner who was resistant to it.

Longer term, there are built-in provisions in these documents for a reason - each party can force an IPO, one party can force a sale of the company, and they’re in there for a reason because nobody knows what five years, six years will look like. We’re getting to those points, and so it’s going to be an interesting 24 months. We’re a very solid partnership, we’ll have to come together and decide what’s the right outcome for each of us in these particular assets and markets, and I’m thrilled to be in that position with a business that’s actually hit the ball out of the park and achieved everything we thought it was going to achieve, so it’s all good news.

But as Charlie likes to say, it’s delivering cash to the parent, really meaningful cash, and that’s something you can bank on, almost. As you look at our free cash flow story, that’s certainly an important piece to us, that business, and disrupting it or impacting the dividend or having our partnership be a bit ruffled, that’s not something we’re anxious to do.

But keep your eyes on it, stay tuned. The next 24 months, I think you’ll see activity on that front and we’ll certainly let you know when it happens.

[Mike Fries, Chief Executive Officer]

Anyhow, I’ll close it out just briefly. Appreciate everybody joining the call. We felt it was a difficult year for everyone on the planet, and we feel fortunate to have come through it with pretty strong operating and financial results, and as I mentioned in my remarks, results that mostly have continued through this year It wasn’t a one-off in our minds, there’s a lot of momentum going into 2021, and thus far we’re seeing that momentum continue, which is a really positive indicator for Q1.

Strategically, I think we’re focused on the right things. The ventures portfolio, give it a look. It’s not something we’re sharing with you because there’s nothing else to talk about. We really believe that there is underlying value, we’ve made smart investments. These are investments that enable our opcos and our operating businesses mostly, and that’s something to be taken under consideration, and there could be more coming.

As ever, we’re working on the value gap, doing our best to both execute on the business but also be sure strategically and financially we’re making it clear to investors where we see the value in the company. Appreciate your joining us, and we’ll speak to you soon. Take care.

[Operator]

Ladies and gentlemen, this concludes Liberty Global’s fourth quarter 2020 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.