This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: And thank you for standing by. Welcome to Liberty Global's third quarter 2021 investor call. This call and the associated webcasts are the property of Liberty Global and any redistribution, retransmission or rebroadcast of this call or webcast in any form without the express written consent of Liberty Global is strictly prohibited. At this time, all participants are in a listen-only mode. Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at libertyglobal.com. After today's formal presentation, instructions will be given for a question and answer session. Page two of the slide details the company's safe harbour statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company's expectations with respect to its outlook and the future growth prospects and other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ arbitrarily from those expressed or implied by these statements. These risks include those details in Liberty Global's filings within the Securities and Exchange Commission, including its most recent file forms, 10Q and 10K, as amended. Liberty Global disclaims any obligation to update any of these forwarding statements to reflect any change in its expectations or in the conditions on which such statement is based. I would now like to turn the conference over to Mr. Mike Freese.
spk10: All right, thanks, operator, and hello, everyone. We appreciate you joining our Q3 results call. We've got a lot to share today, and I'm sure you've got a lot of questions. Most of my senior team is on the call, and I'll get them involved in the Q&A as needed. So I'm going to kick it off right on slide four with some key highlights from the quarter, which was solid in our view from an operational, financial, and strategic perspective. First of all, we remain squarely focused on our three pillars of value creation that we outlined in our Q2 results call, and that focus is paying off. Of course, it begins with the transformation of our European platform into a handful of strong national fixed mobile champions capable of delivering long-term and sustainable growth. And those FMC champions are bookended. by our ventures portfolio on one side, which is highly strategic and growing in value, and our commitment to a levered equity model on the other side, supported by free cash flow per share and a growth in a predictable buyback plan. Operationally, we continue to experience strong commercial momentum across the group with third quarter broadband and postpaid mobile additions up sequentially from Q2. And after five months in the UK and 11 months in Switzerland, our newest converged businesses are firing on all cylinders. We're also feeling very positive about our current fixed network superiority and even better about our strategic opportunities for further expansion and upgrade of those networks. And then lastly, with just a couple months to go in the fiscal year, we are upgrading our free cash flow guidance, all of which we'll talk about in the remarks that follow. So before moving on, I just want to add that we also remain very focused on ESG, and you'll find a section in our earnings release covering recent developments. This includes our commitment to our net zero targets by 2030 across scopes one and two. and a goal to confirm our ambition for Scope 3 by mid-2022. Those who prioritize this work would know that we have a really good track record here in absolute terms and in relation to our peers, and have been recognized as a clear leader in our sector. Now, we'll dive a bit deeper into what we've called our three pillars of value creation on slide five. If you're looking for a simple way of understanding how we're building this company and what we believe will drive the stock moving forward, this is it. Of course, it all revolves around our core operating businesses in the UK, Belgium, Holland, and Switzerland. which all share some really key characteristics. First, they're all FMC champions in their markets with significant national scale. That means they are generally number one or two in every product, either chasing the incumbent or leading the way. And national scale gives us the ability to shape those markets from a regulatory point of view. It gives us the ability to engage with global tech and content suppliers, and it gives us the ability to drive innovation and market share. Each of these operations is also benefiting from the same secular tailwinds like unparalleled demand for connectivity, renewed pricing power, increasing regulatory support for consolidation and investment, and the valuation of infrastructure assets like fiber and towers. I'll talk about our fixed network strategies in a moment, but we do have tower assets in the UK, Holland, and Belgium that have yet to be monetized. In fact, Telenet just announced a strategic review of their tower portfolio for that very reason. The fundamental goal of convergence is to give customers more choice, more value, and more convenience. And that generally leads to reduced churn, higher MPS, and more sustainable financial growth. And in every FMC combination, we either have or are still realizing material synergies. The UK and Switzerland alone are targeting synergy MPVs of around $12 billion, and 75% of that, or about $15 per share, will accrue to Liberty shareholders when it's realized. Along the way, in each market, we'll continue to evaluate ways to reduce the underlying gap between public and private market value. Of course, selling assets at a premium is one way, and UPC Poland is just the latest example of that. Multiples in that deal, by the way, are nine times EBITDA and 20 times operating free cash flow. But we've also talked about from time to time public listings as a way of unlocking value, and we may pursue some of those strategies in 2022. Okay. Now, moving to the second pillar, an additional catalyst for closing the gap in our stock is our ventures portfolio, which today is valued at $3.1 billion or about $5 to $6 per share. We've talked about the strategic verticals here, tech, content, and infrastructure, and we'll continue to provide greater transparency on what we're doing every quarter. Since our last call, A couple more of our early stage tech investments have reached unicorn status, including Plume, which just raised capital from SoftBank at a $2.6 billion valuation. That's over 10 times where we initially invested. And all in all, we've generated, we believe, a 30% IRR in this tech portfolio alone and returned $400 million of capital to the parent. We're also excited about our infrastructure initiatives, including Atlas Edge, which is using our existing property assets to create scalable data center capacity at the edge. This is a JV with Digital Bridge and is capitalized for organic and inorganic growth. In fact, they just announced the acquisition of 12 data centers from Colt. Now, the third value driver here is our levered equity growth model. In many ways, this truly sets us apart from our peers in Europe. We have proven that four to five times leverage with fixed rate, low cost debt at the operating company level is both sustainable and accretive. This is especially true when you have underlying businesses that generate significant free cash flow over the long term. And when you combine this with an unwavering commitment to buy back with excess liquidity, we think you have a winning formula. Now, as you've seen, and I just mentioned today, we raised our free cash flow guidance for 2021 to 1.45 billion. This represents an increase of 36% over 2020 free cash flow, but a 43% increase on a free cash flow per share basis as we calculate it. And our commitment to buy back 10% of the outstanding shares in 2022 and 2023 should help underpin that sort of value creation story going forward. Now, slide six shows some key performance metrics for our fixed mobile operations in the UK, Switzerland, Belgium, and Holland. There are quite a few numbers here. So before diving into each, I'll just make a few observations. First of all, you'll see that we had stable or growing revenue in the third quarter across the platform. There are lots of factors at work here, including strong broadband and post-paid mobile growth with 260,000 net ads in just these four markets. And that's combined with generally strong B2B results. Now looking at each opco separately, Virgin Media O2 delivered its sixth consecutive quarter of net broadband growth in both our new build territories, meaning the 2.6 million lightning homes and our legacy markets, what we call BAU. Perhaps not surprisingly, we estimate we continue to get around 50% of all broadband net ads on our footprint. In the mobile business, O2 remains the industry leader on churn, which is I think less than 1% per month. And that helped generate another good quarter of postpaid mobile growth of 108,000. Financially, on an IFRS basis, VMO2 reported its first quarter of positive revenue growth as a newly formed JV. Consumer fixed revenue was up 1%, helped by customer net ads and the price rise earlier in the year. By the way, we expect this sort of growth to continue as we contemplate pricing changes for 2022 on the back of rising CPI and as we start to lap annual best tariff notifications. And just to point out, You'll see on the page here, B2B was a tough comp this quarter for VMO2, down 9%. But that's related to the delivery of backhaul contracts in the prior year, which should remain a structural growth driver going forward. Also, a reminder that our IFRS EBITDA growth, which was 2.6% year-to-date, does include our one-off cost-to-capture synergies, which are substantial and rising. So, Charlie will get into that in more detail in a moment. Moving to Switzerland quickly, Sunrise UPC is maintaining strong commercial momentum in the face of an increasingly competitive marketplace. We delivered a seventh straight quarter of broadband ads and should again lead the market in post-paid mobile growth. Revenue has been stable, but EBITDA growth was strong as it relates to cost controls and synergies and actually would have been greater than 4% if you exclude one-time costs to capture. Telenet has also had a strong quarter with its eight consecutive quarter of broadband growth and rising ARPUs on the fixed side. B2B continues to be a solid performer for Telenet with mid-single-digit revenue growth in Q3 and year-to-date. We'll talk about some of the strategic opportunities in a second, but it's good to see stable revenue and EBITDA growth from Telenet year-to-date. And then lastly, the Netherlands remains a steady market that supports pricing and upsell across our converged business. Vodafone Ziggo delivered good post-paid mobile growth with 67,000 net ads in the quarter. And on the fixed side, the focused operationally is on customer retention with things like speed boost and smart Wi-Fi. Despite a more competitive broadband environment, Vodafone Ziggo recorded its 10th straight quarter of total revenue growth, largely in that 2% to 3% range, and generated 2.4% EBITDA growth in the quarter. Now, fixed mobile convergence remains a key driver of the growth I just outlined, and we provide some key updates on where we stand with fixed mobile convergence on slide seven. On the left, you'll see that we are now at or approaching 50% convergence across the four markets, which means that one of every two broadband subs is also taking a mobile product from us. As you know, we've been at this for five years now, and FMC benefits are rock solid. In Belgium and Holland, we've seen consistent improvement in MPS and churn and significant cross-sell and up-sell benefits. We're particularly excited about our two newest FMC markets. In the UK, the combination of Virgin Mobile and O2 resulted in 43% of our broadband customers taking a contract mobile product from us. This is a strong position relative to the market, which stands at 26%, and to BT, which is at 36% after five years. So it's important to point out that only a third of the O2 mobile base that can use Virgin's broadband service are actually subscribing today. So there's a sizable cross-sell opportunity in that direction as well. And just to give you a better sense of that opportunity, in Holland and Belgium, 80% and 100% of our SIMs are using our broadband service. And you might also have noticed that VMO2 just launched its first converged product last week called Volt. And like in other markets, Volt is leveraging our superior broadband network to give new and existing customers broadband speed boosts of up to one gig, more mobile data and more value. We're only two and a half weeks in, but Volt is off to a great start. Luce will probably address that. And Sunrise is also leveraging its extensive one gig reach and the best 5G network in the market, by the way, with this new product called Sunrise Wii. And the principle is clear. The more you buy from us, the more benefits you get. And the launch was fast and flawless, as Andre would say. And feedback from the market and customers has been very positive with October sales up 30%. And this is really step one for Sunrise, as we'll be launching an even more comprehensive FMC product in mid-2022. With 56% convergence today, Sunrise is already the market leader, 10 points ahead of Swisscom. And Andre has every intention of staying two steps ahead, I imagine. And speaking of staying two steps ahead, I'll end my remarks with a quick update on how we're approaching our fixed network strategies in each market. And we covered this pretty extensively on the last call, so I'll try not to repeat too many things. But one of the benefits of having fiber-rich networks in multiple markets is that we're presented with multiple paths to 10 gig speeds and beyond. So it's hard to read across from one market to the next. That's why it's worth spending a minute on this. It's also important to remind investors that we are the undisputed speed leader in our operating territories today. And that's pretty clear from the chart on slide eight. You'll see the orange bars show that 95% of our 30 million fixed households in the UK, Ireland, Belgium, Switzerland, and Holland will have access to at least one gig speeds at the end of the year. In order to put that into context, We show just beneath these orange bars the latest estimates of where each of the incumbent telcos in our markets is expected to be with their fiber overbuilds by year end. And you'll see that ranges from 15% of our footprint in Belgium to 25% in the UK to 45% in Holland. So the speed advantage today is real, and it's actually reflected in the fact that our average customer is subscribing to a product that is generally two to four times faster than the market average. Now, we know that markets are not static, right? And we've always been on or ahead of the curve when it comes to broadband innovation. And so the bottom of the chart summarizes by market three core data points. One, what's our current thinking on upgrade technologies? Two, will we seek to enter the wholesale market? And three, what are we considering around a net-co-serve-co model? And we know all three of these issues are on top of the minds of investors. So starting with the UK on the far left, Of course, we already announced our plans to overlay our HFC network, about 93% of total homes, with an XGS PON fiber-to-the-premise solution by 2028. As a reminder, the upgrade costs relative to DOCSIS 4 are only modestly higher since our UK networks are fully ducted and will only build drops and incur CBE costs for those customers who want or need a fiber solution. As you might expect, we're in the midst of a 50,000 home trial in three locations right now with the goal of validating engineering and upgrade costs. I'm happy to report that so far everything is checking out and we'll certainly provide more information on that in our fourth quarter results call. Regarding the wholesale market in the UK, we are still evaluating the opportunity, but our decision to move forward on this fiber to the premise overbill was not contingent on reselling our network, nor did we assume the creation of a netco or any investment from industrial or financial partners. As you might have picked up, We continue to look at those ideas, but no decisions have been made. Moving to the right, you'll also have seen that we just announced our decision to pursue a similar network solution in Ireland. Essentially, a fiber-to-the-premise overlay of our 1 million HFC homes by 2025. Now, Virgin Media Ireland benefits from similar infrastructure advantages to the UK with access to its own ducts on a third of the network. Thank you very much. It would ensure that Virgin Media Ireland remains a speed leader in the market. Now, in this case, we also announced our intention to open up Ireland's network to wholesale customers. And we're excited about this opportunity. And while we looked at several structural options, given the size of the market and the lack of substantial network expansion, our current plan is to keep this an integrated company, not a net-co-serve-co. Continuing on, Telenet recently announced a non-binding agreement with Fluvius, a local utility company, to build Flanders' data network of the future. As a reminder, Fluvius already owns about a third of Telenet's network, which it leases back to Telenet in a fairly complicated structure. When the deal is finalized, Telenet and Fluvius will create a netco that they own together, which will continue. upgrade Telenet's HFC network with a fiber to the premise overlay. And because of Telenet's market share, the netco will start with a very high utilization rates, which would make it attractive to low cost capital. And as they indicate, largely self-funding. So John and his team addressed this extensively on their earnings call last week. If you want to dig in further. In our view, this should be an accretive deal for Telenet. It secures its position as the leading broadband provider in Flanders with an opportunity to expand wholesale revenue and garner an even higher multiple for its stake in the netco from industrial or financial partners. And we've talked about Switzerland a bit publicly, but it's looking increasingly clear that we will pursue a hybrid strategy there, optimizing our capital spend to fortify our current advantage over most of the market. This means a blend of DOCSIS for some fiber to the premise build and access to Swisscom's fiber network where and when we need it. That'll be the solution. So we shouldn't be at any product disadvantage anywhere. Of course, this means we're also unlikely to pursue wholesale revenue or a net cost structure here. And then finally, in the Netherlands, Vodafone Ziggo maintains a lead in broadband market share over KPN and a strong competitive advantage with gigaspeed coverage reaching 80% of the footprint by year-end. But we do see fiber overbuild activity accelerating, which has prompted management to develop its own fiber response plan. The current approach is focused on a hybrid model with an emphasis on DOCSIS and upgrades geared towards capacity rather than pure speed. Let me say there's more work to be done here with management and our partners at Vodafone, but also plenty of time to get it right. And I have total confidence in the Vodafone Zygo team. A year to date, they've outperformed KPN on just about every financial and operating metric. And they know this customer base and this market extremely well. So that's it for me. Obviously, we'd be happy to address any of these topics in Q&A. I think simply put, it's all about value creation for us. We've been super agile over the last five years, exiting half our markets at significant premiums and doubling down in the remaining markets to build national FMC champions. Each of those FMC platforms are riding secular and company-specific tailwinds and budgeting solid and stable free cash flow growth over the long term. And I feel like we've been allocating capital in smart and accretive ways as well. Prioritizing buybacks, as you all know, targeting scale-driven FMC mergers like in Switzerland, and opportunistically pursuing venture investments with above average return potential. So the team is fired up. I'm fired up. And we're super excited about where we're headed. At this point, I'll turn it over to you, Charlie. Thanks, Mike.
spk13: I'm starting by highlighting our sustained revenue performance in Q3. where we achieved stable to positive revenue growth across all markets and consolidated rebased revenue growth of 0.7%. This is encouraging given a more normalised third quarter from a COVID perspective. Walking through by operation in the UK market in Q3, Virgin Media O2 saw positive revenue growth of 0.7% on an IFRS performer basis, driven by increased activity as COVID impacts subsided. Breaking down the revenue mix of the UK joint venture, mobile revenue was broadly flat year on year, with a 7.4% year-on-year increase in handset revenue fueled by an increased upgrade activity following mobile hardware launches from Samsung and Apple. This was offset by lower service revenue due to the continued impact of a change in the distribution channel mix. Consumer fixed revenue increased by 1% year-on-year, supported by strong volumes, despite a continued modest 2.1% year-on-year decline in fixed-line customer ARPU. B2B fixed art revenue was affected by the phasing of installation activity for high-capacity data services within wholesale. In Belgium, Telenet delivered growth of 0.4%, delivered by continued broadband and ARPU growth, and remains well on track to deliver 1% revenue growth in line with full-year guidance. And Sunrise UPC saw revenue slow sequentially to flat in the third quarter year-on-year on a rebase basis, predominantly driven by an increase in mobile service revenue, which was partly offset by less handset revenue and lower consumer fixed, mainly from declining basic video subscribers, as the market environment remained competitive. Vodafone and Zyga continued on their trend of strong financial growth, with total revenue up 1.9%, driven by growth in mobile, B2B, and stable trends in fixed revenue. This represented its 10th quarter of consecutive revenue growth. Moving to a rebased adjusted EBITDA, the group returned to growth of 1% in Q3. As with prior quarters, we continued to highlight cost to capture with OPEX for Switzerland. Virgin Media 02 EBITDA declined by 0.6% on an IFRS pro forma transaction-adjusted basis, including cost of capture of $15 million. As flagged with increased activity levels, EBITDA growth slowed relative to the strong first half, with this slowdown being driven by increased sales and marketing expenses ahead of the peak Q4 trading period and higher programming costs. In addition, increased investment in digital and product development also contributed. Telenet reported a small 0.4% decline in EBITDA as Q3 based on a tougher comparison with the previous year and more marketing spend related to the new FMC tariffs, coupled with some seasonality in the operating expense. Now, despite this, Telenet has increased guidance for the full year to the upper end of its 1% to 2% adjusted EBITDA growth rate. Sunrise UPC grew 3.3%, including $3 million of cost to capture. Strong adjusted EBITDA trends benefited from low cost to capture in the quarter, positive phasing of costs, including marketing spend, and early synergy execution, as we highlighted in the second quarter. And in the Netherlands, a 2.4% increase was posted, with a strong continued EBITDA growth being driven by top-line growth, while keeping cost levels under control in the post-lockdown period. Turning to the next slide, You should note that as of Q3, we've ceased to use the term operating free cash flow. In place of this, we refer to the term adjusted EBITDA less P&E additions. Now, this term effectively holds the same meaning as operating free cash flow and therefore doesn't really impact any previously reported amounts, nor does it impact our forward looking statements. Now, at a group level, adjusted EBITDA, less P&E additions, grew 6.3%, despite $28 million of cost to capture weighing on the Q3 performance. This strong trend is driven by the EBITDA growth and tight capex discipline in the quarter that we talked about earlier. And this does benefit from some timing impacts, which will rebound in Q4. Virgin Meteor 2 saw IFRS perform a transaction-adjusted EBITDA, less P&E additions, declined by 14%, driven primarily by a step-up in CapEx, as the joint venture continues to invest in 5G and fixed infrastructure, and a cost to capture of $28 million. CapEx will remain elevated in the fourth quarter as well, in line with the broader PPE guidance at the joint venture. Telnet declined by 4% in the quarter, driven by higher investments, whilst in the Swiss market we grew 15% despite $27 million cost of capture. This being driven by continued CapEx discipline and the adjusted EBITDA growth we talked about earlier. Vodafone's Zygo saw a 9% growth in adjusted EBITDA, less P&E additions, again due to favorable CapEx timing in the quarter. Turning to free cash flow, as of Q3 year to date, we've achieved adjusted free cash flow of just over $1 billion, driven by growth year to date in the adjusted EBITDA less P&E additions. In addition, this quarter, we decided to upgrade our full year free cash flow guidance from $1.35 billion to $1.45 billion. And this is on the back of generating new underlying efficiencies, along with disciplined and focused capex spend. This new target represents an uplift of 36% versus 2020 and is also supported by refined shareholder distribution guidance at Vodafone Ziggo and Virgin Media O2 for 2021. To give an update on our buyback activity, you can see on the next slide we've repurchased over $1.1 billion worth of stock. We are firmly in position to achieve our $1.4 billion buyback target that we announced last quarter by the end of the year. Our ventures portfolio has a fair market value of $3.1 billion, and we continue to see some valuation uplifts during the quarter relating to the closing of the Atlas Edge deal and within our tech ventures portfolio. But this has been largely offset by falls in fair market values at ITV and Skills. Finally, our balance sheet position remains strong with our total liquidity arriving at $5.3 billion. And you should note that our debt maturity still remained very long, around seven years or longer at every opco. So in conclusion, turning to the guidance, as we mentioned, we're upgrading free cash flow guidance to $1.5 billion, and we've refined the guidance at Telnet and Vodafone Ziggo, and also have given new guidance for 2021 at the UK for flat to positive adjusted EBITDA growth before cost of capture. On cash distributions to shareholders, Vodafone Ziggo is now guiding to above €600 million, and the UK joint venture for at least £300 million. And finally, to conclude, we continue to see FMC execution driving operating momentum across our markets and our network strategies evolving in Belgium and Ireland. We're upgrading our full year 21 adjusted free cash flow guidance to $1.45 billion and reaffirming our commitment to our multi-year buyback framework. And with that, operator, over to questions. Thanks.
spk02: Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star or asterisk key followed by the digit one on your phone. In order to accommodate everyone, we request that you only ask one question. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll pause for just a moment to give everyone an opportunity to join the queue. We will take our first question from Jeffrey from Pivotal Research. Please go ahead.
spk17: Good morning. I had a couple on the UK. I wanted to focus on the continued strong UK data results. I mean, that's, I think you said, seven quarters in a row of positive growth in both sort of a lightning footprint and the rest. I assume most of that's related to the fact that you're offering four times the speed of BT. Can you talk about the success you've had in upselling consumers to higher priced, higher speed packages? And then can you also talk about how you're doing in the 20% of your footprint that is overbuilt by fiber to the home from BT? Thanks.
spk11: Sure. Hey, Jeff, how are you? By the way, we were pretty convinced that that strange sound we're getting is BT plugging into our call every time we talk about the UK. So there it is. And Lutz, do you want to take those two?
spk09: Yeah. So we don't really see a material impact from the fiber overbuilt from OpenReach yet. Obviously, we measure that carefully, but we don't see that. Our fixed broadband churn is on an all-time low. And so, so far, so good for ourselves. But obviously, we do everything to keep our customers happier and happier. And I mean, a couple of drivers here. Yeah, so... Now, with our two, 43% of our customers are having fixed and mobile from ourselves, and we know that this lowers the churn dramatically. And as you said, the average speed at the moment is 202 Mbit in the UK. Our customer is four times higher than the UK average. Across an epsilon to our base, we are only at the beginning. I have to say. So we are building the machine at the moment, collect the data from the customer, the usage, and have a dynamic product bundling based on our digital cross and upsell channel going forward. So I think watch that space. And so quick answer is... No material impact yet and more opportunity on cross and upside in the future. And churn is on an all-time low because of convergence and because also substantially better service. We drove complaints down by 92% and we are now where we want to be.
spk04: Thank you.
spk02: We will now take our next question. From Morris Patrick. Please go ahead.
spk16: Yeah, thanks for taking the question. Just your thoughts on pricing in the UK and general ARPU momentum in the UK. I mean, BT confirmed today they'll likely put up pricing in my CPI plus 4%. That could be an 8% price increase from BT next year. Just your thoughts in terms of your desire to put through that sort of magnitude of price increase and just link to it. When you launch your vault tariff in the UK, converged tariff, often the first thing that happens is existing customers take it and it can be quite dilutive to WAPU. Just thoughts in terms of how dilutive you think they'll be near term before it becomes accretive. Thank you.
spk11: I'm not going to let Luz answer the first question because we generally don't talk about our price increases in advance of announcing them to our customers. I will just say that historically we have not used CPI as a measure. We've essentially just launched a fixed price increase that more or less approximates what our peers are doing. I'll leave it at that. Our mobile business does use CPI, but we're going to leave that for now. We're not going to put out any – around what we may or may not do, but history should be a good guide there. Do you want to reference a second question on Volt, Lutz?
spk09: Yeah. So the way we have structured Volt is that when you migrate onto it being an existing customer, you get the next higher speed here and you get the next higher data bundle. So therefore, there's very little likelihood that customers will decrease their ARPU. So we are not planning with that curve you're referring to, and we don't see that happening as we speak.
spk04: Thank you.
spk02: We will now take our next question from Akhil Datani from JP Morgan.
spk03: Hi, good afternoon. Thanks for taking the question. It's a two-part question just linked to Mike, your comments earlier on your fixed network stretch and how it differs by market. I guess just starting with the UK, I wonder if you could maybe elaborate on your thoughts around wholesale. You said you're evaluating options. I guess what I'm really trying to understand is where the wholesale in any way determines the future scale of Project Lightning, or are those completely discrete decisions, and what you do in terms of the future ambition to scale in Project Lightning are independent of wholesale. So just if you could kind of tell us where you're on that thinking. And obviously, you might want to comment on any timing-related issues. And then the second bit is just a really quick one. It's obviously interesting that through Ventures, you're going into Germany with Infovia. Obviously, you know that market really well. Just very keen to understand your thoughts of why to go into Germany as a fiber player, what the key attractions are, and whether you could go into other markets too. Thanks a lot.
spk11: Sir, on the wholesale question in the UK, I mean, there's nothing to update on at this point. And I'll just remind everybody that the decision is to upgrade our existing HFC plant was not based upon any wholesale arrangements. So our view is it's accretive either way. But of course, if there were wholesale, that would be even more accretive. So it shouldn't be an overhang. It's only upside if we were to do something in wholesale on the existing footprint. An expansion of the network beyond the current footprint With additional fiber bills, perhaps that, you know, there we are still doing work, and we have not yet made a determination as to how fast or how far we would take that. That might be more dependent on a wholesale outcome. We're still doing the work, if you will. Lightning in and of itself, however, continues to roll along. So, you know, between 400,000 or 500,000 homes, we might be a little more aggressive next year either way. So we're continuing to build out in a measured fashion. at a measured pace without wholesale. If we were to do something more dramatic, I think everybody on the call would appreciate that we would be looking at the financial implications of that kind of build out. And we'd want to know there are additional revenue sources, partners, financing sources. So more work to be done there, nothing to announce on the bigger expansion. And that I think more likely would come with a clearer announcement around where we are in wholesale. Charlie, do you want to take the Ventures deal in Germany?
spk14: I think that in terms of how we feel about Germany as a new opportunity, I think we definitely feel that we have a lot of scale, a lot of efficiencies from our core network builds across Europe, which make us a more attractive and a lower cost builder of fiber in Germany than perhaps a standalone start. And I think we've got an interesting platform to start building and we'll see how it goes.
spk11: Yeah. Reminder that that market has little to no fiber and our objective is to look for where there's essentially no competition. So it's a very targeted, I'd say, small initiative to begin with, and we'll see how it unfolds.
spk04: Great. Thanks a lot.
spk08: I don't know if that was a question for me. I missed it if it was, sorry. Charlie, I just wondered on Virgin O2, obviously you've announced a $300 million dividend this year. It looks like a relatively conservative payment. I don't know if that's fair. What do you think is a right number for next year for us to think about dividends from Virgin O2? I know I'm asking you about the future, but it would be helpful to get a sense whether the $300 is representative of a normalised run rate. Thanks very much.
spk14: Well, look, I think it's a bit early for us to give guidance about next year. So I'm going to pass on that. But as a general principle, as you know, our intention with our partners is to leverage the JV to five times. And given what I would expect, we'd all agree is the prospect of some pretty significant EBITDA growth as these synergies come through. That will obviously allow us to recap and distribute capital or reinvest it back in the core business. The other kind of aspect of the phasing of the underlying free cash flow will be how fast we accelerate the cost of capture, which I think from a Liberty point of view, we think is a good thing to, you know, let's get these synergies as soon as possible, but they do cost money to get there. And also our pace on the absolute, you know, network build out and how quickly we accelerate, et cetera. So probably two ways to give some definitive guidance. But in terms of distributions from Virgin Meteor 2, there are a lot of levers. I mean, I think we can expect some pretty healthy distributions to Liberty Global over the upcoming years.
spk04: Awesome, thanks.
spk01: Yeah, hi, it's Paulo Tang from UBS here. Can you hear me?
spk11: We got you, Paulo.
spk01: OK, great. Just have one question on Switzerland for Andre. So Swisscom are pausing their FTTH rollout as well as their partnership with SALT, just given a ruling by the Competition Commission. So how do you think this will impact the Swiss market, but also Sunrise UPC?
spk04: Andre, you want to take that? You might be on mute, Andre.
spk06: Actually, can you hear me? Yeah, we have you now. Oh, okay. Sorry. Yeah, thanks for the question. Yeah, indeed. The competition commission and also the latest court decision is confirming that Swisscom has to rethink their approach to the point-to-multipoint rollout that they have been starting and on which back SALT is also building their network. So at the moment I would say therefore the overbuild of our network is paused and as such our window of opportunity to sell our one gig lines in that footprint that is not overbuilt yet is probably better. We would not expect that to last forever but of course it's an increased window of opportunity for us to monetize our infrastructure faster and better.
spk04: Thanks.
spk02: We will now move to our next question from Mike Lyle from SockGen. Please go ahead.
spk15: Hi there. I just got a click, so I think it's Nick at SockGen. Hi, Mike. Hi, Charlie. It was a quick question, Mike, on Fluvius, please. Could you just run us through your thoughts on why you think there's been a bit of a negative reaction to the Telenet Fluvius deal so far? Do you think it's a bit unfair to talk about being more complicated on what already is a complicated Liberty Global asset as being an issue and the potential for future inflation? And how are you taking that into account? when you're looking at all of the assets you're talking about is TBD, I think the three assets on slide eight, where you talk about the potential for net cost, Mike. Thanks.
spk11: Yeah, thanks, Nick. Listen, I think, as I said, John did a nice job of summarizing where Shell and it is on the fluvious deal. I'll repeat, we think it's fundamentally an accretive transaction. I think the market's probably waiting for final terms and perhaps was wondering why non-binding a deal was announced before it was binding and final. That could be one issue with the overhang there. I think they're also understandably waiting for more information about financial implications, if any. What the partners have said quite clearly is this will be an independent, self-funding netco that'll surely attract interest from both in-market partners and financial partners, given the fact that it's going to start life with something like 60% or 70% utilization. Remind you that most alt-nets begin with zero utilization. So whenever you have an existing company like Telenet looking or willing to to create a netco structure, it gets infrastructure investors licking their chops, as they say. It's usually extremely attractive to them, and I think from a cost point of view, very attractive to the netco itself. So I think it's going to be a positive outcome for Telenet. I think it's the right decision over the long term for Flanders. I think perhaps Related to that, there's questions around the VU transaction and other things that will need to get sorted out over the long term for Telenet. But we're generally positive on that business. I think John is doing a great job driving growth in a mature market where he has the largest market share in pretty much every product. And I think the management team is up for this type of transformation and iteration, if you will, in their operating structure and growth plan. You know, I can't speak to where the stock should or shouldn't be or why it's trading where it is, except that we're positive about it. We think it's the right decision for them. And I think people are looking for more certainty and more clarity, and that's normal. So, you know, you might have a little overhang why these things get sorted out, but we obviously are on the inside. So we have a bit more data than you, and we feel pretty positive about the direction of travel.
spk15: Could you just mention maybe on slide 8 as well on Vodafone and Ziggo when you talk about the potential to wholesale as well, is there any update on the ACM's position and some of the language that you're hearing from them? Is there anything in that sort of ACM investigation that is purely a Liberty decision?
spk11: Yeah, that's got nothing to do with ACM. That's more trying to be responsive to the market's questions around net-co-serve-cos, voluntary, front-foot type of restructures. That's got nothing to do with the ACM. And because it says TBD because we're still discussing with our partners and the manager team what the right long-term structure might be in that market. In the meantime – Vodafone Ziggo is in a great position. I mentioned in my remarks, if you just go down every single metric, they're outperforming KPN. I think they're doing pretty much everything as they should be doing. And we're looking more strategically at what over the next five years you might be considering around the network. But today they're in great shape and we're pretty positive on that business and that management team. It's got nothing to do with the regulatory picture.
spk15: That's clear. Thanks very much.
spk02: We will take our next question from Ulrike Rathe from Jefferies.
spk07: Thanks very much. The question goes back to the footprint expansion in the UK. You're sort of putting us on hold here again, and I'm wondering a little bit how you think about how much time you still have. BT is rapidly accelerating the fiber rollout to 4 million homes per year run rate. What are the hurdles and who is ultimately looking at that? Is this a question of sort of decision-maker bandwidth in the sort of post-merger situation or what makes this such a complicated decision, given that you've been talking about it for some time already? Thank you.
spk11: Well, it's not a complicated decision. It's an important decision. But I do believe, as I said earlier, there are a few moving parts in that decision. So it's a large capital commitment that would require us to feel comfortable with sources of capital and essentially the build structure and all the other factors we've discussed, wholesale, et cetera. So it's not a decision we take lightly. So those who are thinking that, wow, we're just trundling into this fiber experiment and, you know, CapEx be damned. Well, that's quite the opposite. We in Telefonica are highly focused on what we should be focused on, which is generating free cash flow and dividends to the parents. So we want to be thoughtful and we want to be careful about any decision that impacts CapEx and capital intensity. That's what you want us to do. And that's what we're doing. Having said that, so it needs to be an accretive move for us. That's nothing but strategically beneficial and financially attractive. I said earlier that that wholesale revenue could be a very important piece of that. It might also involve third-party financing or industrial partners. And those things don't happen quickly. So we'll figure out what that looks like. I'll simply say there should be no overhang. on the stock from this type of decision. It's only upside, and we'll be smart about the decision when and if we get to that point. In the meantime, through what we call Mustang, our fiber overlay, and through the synergies and all the great things that Lutz and his team are doing, the steady state business is the one that we're most excited about. Any decision to move beyond where we are today, it's less a competitive issue, it's more of an opportunity issue. Virgin Media O2 does not need to expand its network to be competitive and successful. It could consider expanding its network if it created additional and incremental value to shareholders. Think about it that way. And as soon as we have clarity on it, you'll certainly be the first to know. Thank you very much.
spk02: We will take our next question. from James Ratcliffe from Evercore ISI.
spk00: Thanks. Talk a little bit about the integration process. Cost to achieve has been pretty modest this far in Switzerland and particularly in the UK. And talk about what the ramp for those looks like and if you have any sense of whether the estimates you put out there thus far are looking reasonable or conservative. And just also if there are any supply chain or process-related issues that could slow that down. Thanks.
spk11: Yeah, I'll just give a general answer and let these guys dive in. Cost of capture in both UK and Switzerland, you know, we did report those figures in 150 and 700 respectively, CH being the smaller number. And, you know, everything we're seeing is that we are on track. There will be variability in how quickly you achieve one thing or another or spend capital. But it's a pretty quick period, you know, like, you know, pretty short period of time to that cost of capture figure. is in front of us and more or less on track. Do you guys want to address that as well, supply chain issue, if you're seeing any issues on that? Go ahead, Andre.
spk09: Yeah. Yeah, I mean, I start from the UK. So, I mean, obviously there are supply chain issues out there, but so far we are managing them very well, right? You don't see any impact in our numbers and we don't foresee any huge impact The biggest synergies we have in front of us are four things, right? One is simply like convergence, and we have Walt out there, and great start, and you will see us ramping that. Second, obviously, we will migrate, right, Virgin Mobile customers onto the O2 network over time, and so we obviously invest into our mobile network in terms of capacity. to might have the calling capacity. Number three is people synergies, and we are 100% on plan. And yes, they are, right, the cost of capture are the restructuring cost as planned. And the last one is a huge chunk of procurement synergies. So we are really, as Mike said, on plan. very good line of sight for the synergies and less dependent on supply chain than you would maybe expect.
spk04: Great. Thank you. Andre, anything to add there? Okay. We can hear you.
spk06: Okay, thanks. No, I just want to add in the case of Switzerland, we are also fully on track in terms of synergy capture, in terms of cost to get those synergies. The two heavy years will be 21 and 22 on almost similar level, slightly increasing even in 22, but then coming down thereafter very fast. And again, it's driven by the synergies and the shape of that is coming up as expected.
spk02: Thank you. We will now move to Robert Grindle from Deutsche Bank. Please go ahead.
spk05: Yeah. Hi, guys. I'm worried I missed something important in Mike's opening comments as to why you have ruled out net codes in Ireland and Switzerland, but not in the UK and Netherlands. I think I'm not quite getting the nuance as to why it's a good idea in some markets, but not others. And then very briefly, is there anything coming down the line on global tax which affects you guys? I think you're claiming back tax from the US at present, but global tax rules are changing all the time. Thank you.
spk11: Great. Listen, the difference is a few things. First of all, you have to look at the existence of a vibrant wholesale market to begin with. So if you're going to open up your network to third parties, you're going to want to see that there are a lot of third parties who might be interested in accessing your network. With only three operators in Switzerland, all three of whom utilize, to some extent, Swisscom's network, including us, and then having our own network, we just don't see that as being a particularly robust option. So it has as much as anything to do with market structure. And, you know, Switzerland would be a good example of that, where just the market structure isn't obvious that a wholesale network opportunity is particularly viable. The UK and Ireland, obviously quite different, right? The UK, I think somewhere in the order of 50% of broadband subs are using somebody else's network. In Belgium, of course, Telenet today provides access to Orange, and Orange has quite a few customers Can't give you the number. They'll give you the number on using the Telenet network, and the expectation is that they will continue to use that network. So as much as anything, Robert, it has to do with market structure, not so much whether the network is X, Y, or Z or what your competitive position is in the marketplace. It has to do with essentially the viability of a wholesale market to begin with. I hope that helps. And then, Charlie, do you want to talk about the second question?
spk14: Yes, I think on tax, you know, clearly tax is always an evolving environment. And you're quite right that, you know, there is there's increasing, you know, rules around transfer pricing, which is what multinationals often use to what they call shift basis. And there's obviously a bunch of reforms pending in the United States. But broadly speaking, on transfer pricing, you know, we've always been working on an arm's length basis. And, you know, the new rules, we don't think will have any impact on us. So, you know, as you were In the U.S., depending on what goes through the House at the end of the year and or what the Biden reforms and outcomes are, there could be some impact. But I just think it's too early for us to give you definitive guidance on that. Let's just see what the numbers are and what it comes out at. But do remember that we are largely out of the U.S. in that kind of concept of guilty. So the future U.S. tax flows are already really much baked into our numbers. So we'll have to give you an update when the U.S. reforms go through. But So far, I think we are as you were.
spk11: And we also think that that global 15% rate won't impact us in any market other than perhaps Ireland, which is relatively small. So since we're already above that rate in most of our markets. Got it. Thank you.
spk02: We will take our next question.
spk11: Maybe one last question here. Thanks.
spk02: Sure. We will take our next question. Steve Malcolm from Redburn.
spk12: Yeah. Good afternoon guys. Just a question on, on coming back to sort of UK network, your build rate in the UK slowed quite a bit in Q3, I think it's only 67,000 a year. You seem sort of well behind the 400,000 that we've talked about previously. Maybe just, you know, give us some color on why that was, was it, are you kind of holding back as you finalize the overall expansion plans? Is it something to do with supply issues, post Brexit, you know, some of the inflationary pressures, you know, anything on that would be great. And also just, just going back to the expansion, I mean, of the many options you're considering, Should we completely rule out you funding that expansion entirely on your own? Would you absolutely want to bring in partners, whether financial, industrial, whatever that might be? Just throw that into the mix of the options that you're looking at would be great. Thank you.
spk11: Yeah, I'll take the second question, Looch. You can answer the first question, which is pretty straightforward. I think it's safe to say that we in Telefonica would not be excited about funding a $7 million home expansion on our own, quote unquote, meaning putting up all the equity capital with no line of sight to either third-party financing and or wholesale. It's a pretty big ticket, and that's not necessarily something we're focused on. On the other hand, I would add that there is quite a bit of infrastructure money searching for deals like this. There are industrial partners in country who might be interested in something like that. And certainly, you would be able to put quite a bit of leverage on a business model such as that. So even if it were something we were to look at, and I think that'd be highly unlikely, the check isn't isn't the 7 million times a big number. But I think your instinct is correct, and thanks for giving me the opportunity to clarify that. One of the reasons it's taking a bit of time is it's not a simple decision you just roll into and you fully bank on your own. We want to be thoughtful and creative about ensuring maximum return on capital to you, the shareholders. And so that's how we operate in every instance, and that's certainly how we would operate in this instance. Luke, you want to address a lightning question?
spk09: Yeah, your observation is right. We have been a bit light. The reason for that is not that we want to go slower. It's a bit after the pandemic to get resources in place, right? I mean, some of our vendors had a bit challenges to get resources back from Europe. A bit of fiber shortage, right, when you refer to the supply chain issues. So a bit small-term, short-term tactical stuff. But we want to stick to broadly the same rollout than we did the year before. So you hopefully will see a ramping Q4.
spk12: Okay. Do you think these are issues affecting the entire industry? I mean, if one looks at the combined build plans of UK fiber builders, I think we'd probably build most of China within the next six months, but that's probably not happening. I mean, is that an industry-wide problem?
spk09: Yeah. I think it's an industry-wide problem, and you can also see that contractors are getting offers from competitors right with higher prices now what we have to offer is a long-term relationship right so we built with our partners already 2.6 million homes we at Mike said we have also ramp to do something a bit more next year and so we have to ensure the resources and But on the way how to get there, we had a little bit of issues in Q3. One of the partners went into administration, stuff like that. But which is for us not really a big strategic problem, but the observation is right. If you cannot offer a long-term partnership and a long-term perspective, then it is getting difficult.
spk11: Okay, it looks like no more questions on the line. Appreciate everybody joining. Sorry for the late start. We had a few technical issues on our end too. But I'll just repeat a few of the things that I've already spoken about and I think others have, you know, re-emphasized on my behalf. One is our FMC champions, are essentially progressing exactly as we hope they would, riding some tailwinds that are both secular as well as, in the case of UK and Switzerland, important synergy execution, which will drive significant growth over the next several years. I think we've also got good strategic options in every one of those markets. I talked about one of those around networks today. Just want to re-emphasize and be sure you understand we're making smart capital allocation decisions. ones that allow us to continue to project out good, strong, long-term free cash flow. And then finally, I would say, you know, if the number perhaps I just leave you with is the free cash flow per share guidance for 2021 of about 40 plus percent growth in a free cash flow per share figure. We think our ability to both derive free cash flow from our operating companies and through dividends and other means is is essentially solid and will be a huge part of our growth story going forward. And our willingness to reduce shares by a fixed amount, 10% of the shares outstanding each year in the next two years, should also be a really important catalyst. So free cash over shares, we're our heads at. And we look forward to updating you in the fourth quarter and speak to everybody soon. Thanks a bunch.
spk02: Ladies and gentlemen, this concludes Liberty Global's third quarter 2021 investor call. As a reminder, a replay of the call will be available in the investor relations section of Liberty Global's website. There you can also find a copy of today's presentation materials.
Disclaimer