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Edited Transcript of LBTYA earnings conference call or presentation 8-Aug-19 1:00pm GMT

Q2 2019 Liberty Global PLC Earnings Call

LONDON Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Liberty Global PLC earnings conference call or presentation Thursday, August 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles H. R. Bracken

Liberty Global Plc - Executive VP & CFO

* Lutz Schüler

Liberty Global Plc - CEO of Virgin Media

* Michael Thomas Fries

Liberty Global Plc - Vice Chairman, President & CEO

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Conference Call Participants

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* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* Christian Fangmann

HSBC, Research Division - Analyst of Telecoms

* James Edmund Ratzer

New Street Research LLP - Europe Team Head of Communications Services & Analyst

* James Maxwell Ratcliffe

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* Jeffrey Duncan Wlodarczak

Pivotal Research Group LLC - Principal & Senior Analyst of Entertainment, Interactive Subscription

* Matthew Joseph Harrigan

The Benchmark Company, LLC, Research Division - Equity Research Analyst

* Maurice Graham Patrick

Barclays Bank PLC, Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's Second Quarter 2019 Results Investor Call. This call and the associated webcast are the property of Liberty Global, and any redistribution, retransmission or rebroadcast of this call or webcast in any form without the expressed written consent of Liberty Global is strictly prohibited. (Operator Instructions) Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at libertyglobal.com. (Operator Instructions)

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 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 from the Securities and Exchange Commission, including its most recently filed Forms 10-K and 10-Q 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.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [2]

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Great. Thank you, operator, and welcome everyone to our Q2 results call. We always appreciate the opportunity to talk to you about our business, of course, and our broader strategic plans. And today, we're sticking to the 2-man show. So Charlie and I will handle the prepared remarks, and then we'll engage the other key leaders, as needed, in Q&A.

And I'll kick it off on Slide 3, which is entitled Delivering 2019 Priorities. We thought that since we're halfway through the year, it'll be a good idea to revisit the key goals we laid out for you nearly 6 months ago. These were the big needle movers in our minds. And by all accounts, we're making or have made substantial progress.

Number one, of course, was completing the announced M&A transactions with Vodafone and Sunrise. As expected, the deal with Vodafone closed 8 days ago with net proceeds of $11.3 billion, and the Swiss deal is in the midst of a Phase II regulatory review and, we think, is on track to close in the fourth quarter. It might be worth reminding everyone that these deals are the results of purposeful rebalancing, which saw us capitalize on the strategic and financial value of our fixed broadband and video networks in what is a converging marketplace in Europe and in each case, generating double-digit OCF transaction multiples.

Now secondly, earlier this year, we also talked about resetting our operating model and cost structure, and that was an attempt to reflect the reduced size of our European platform and to unleash the efficiencies, which resulted in flat OpEx for 3 straight years. And Charlie has a slide on this in his section, but we are on right on track, if not a bit ahead of plan here, on reducing our corporate cost and radically restructuring our technology services delivery platform, both of which will benefit OCF growth as we confirm our OCF guidance for the full year.

The third major priority was reducing our capital intensity as we look to optimize our recent investments in networks and products. Here, we are ahead of plan, with P&E additions through June down 25% year-over-year reflecting a number of factors, including more efficient Lightning build costs in the U.K., the completion of fixed and mobile upgrades in Belgium, a more focused product development and the decision to slow down CPE swaps in the U.K. And while we didn't provide guidance on operating free cash flow, I did mention on the call that we were looking at about 50% growth for the year. Excluding Switzerland and through 6 months, operating free cash flow is up nearly 75%. And as Charlie will show, all of our opcos are generating significant operating free cash flow margins and growth, and we are reconfirming our free cash flow guidance for the year.

And then lastly, we highlighted the importance of developing plans for allocating our excess capital. And I realize that we've been relatively quiet about that mostly in anticipation of these transactions closing. As you would have seen yesterday, we announced our first step with a $2.5 billion modified Dutch auction tender. And this represents about 20% of our cash before completion of the Swiss transaction and roughly 13% of our outstanding shares. It would also bring total buyback to $3 billion for 2019 when you include the $500 million purchased during the first 6 months.

Now the next slide on capital allocation tries to put this decision into context a bit, starting with a cash walk that illustrates how we get from the total transaction value for the Vodafone and Sunrise deals to our pro forma cash balance. And I'll leave it to you to review, if needed, but it shows pro forma cash of $14.4 billion or around $12 billion today before completion of the Swiss transaction.

On the right-hand side of the slide, we lay out our capital allocation strategy for that cash with 5 areas of focus, beginning, not surprisingly, with buybacks. It should be clear that we fundamentally believe in this strategy, having now bought back $21 billion of our shares over the last 15 years. But we will continue to be prudent and opportunistic in how and when we repurchase stock. And as we have done in the past, we'll continue to balance that against investments that create long-term value.

Now we've used Dutch auction tenders effectively on several occasions in the past. Some of you may remember. We like this approach. It gives us significant flexibility in how we size and price repurchases, and it's easy and efficient to execute. The plan is to launch formally on Monday next week and to close in 20 business days thereafter. The current expected price range was set off of yesterday's close and is expected to be $25.25 to $29 for up to $625 million of Class A shares and $24.75 to $28.50 for up to $1.87 billion worth of Class C shares. Now of course, we may consider additional tender offers down the road or we may return to open market purchases or we may do neither. We'll make those decisions based on a number of factors, both internal and external at that time.

Now moving down the slide. It won't be a surprise to you that we continue to believe 4 to 5x leverage is the right capital structure for us. Of course, our net leverage today is something like 3x adjusting for the Vodafone proceeds. But on a gross basis, we expect to be at or below 5x in all of our credit groups by the end of the year. Going forward, we may consider using cash to maintain these target leverage levels. But again, we'll make those decisions at the time based upon financial performance, market conditions and things of that sort.

Now when it comes to deploying capital externally, we are first and foremost focused on our core operating markets. Remember, we still have considerable operating assets in Europe totaling 31 million fixed and mobile subscribers and nearly $5 billion of operating cash flow, and an additional 15 million fixed and mobile subs and nearly $2 billion of operating cash flow coming out of our 50-50 JV in Holland. We are invested in these markets. We have confidence in their prospects, and we'll look to fortify or capitalize on our positions if, and only if, attractive and compelling opportunities arise. This is in our wheelhouse, as they say. It shouldn't a surprise to you.

Now beyond our existing operations, we will be highly selective. I'll just say a few words here because this topic seems to generate quite a bit of commentary. One, we are more interested in buying, building and operating scale businesses in geographies and sectors we understand than spreading capital around.

Looking at the deals we've done over the last 15 years, they all had a few things in common. Typically, they represented long-term, scale-driven investments that leverage our deep technical and operational expertise and, in most instances, created synergies with existing businesses we owned. They also allowed us to optimize the use of leverage, tax strategies and free cash flow. If we can't find anything that meet these criteria, we are likely to go back to the top of the page, it shouldn't be surprising, and look at our stock and our core markets. But again, we're going to be disciplined and patient here.

And then, finally, we have a pretty successful ventures platform with investments that we conservatively value at about $1 billion today. These are generally smaller, typically minority interest or financial positions that we believe benefit our core operations or provide strategic value or insight or can lead to outsized financial returns. You may see us add to or subtract from that portfolio using relatively modest amounts of capital. I just want to be sure you understand that, and we will call out these investments, should they ever happen, as deals for the ventures portfolio.

Now moving to some operational updates, beginning on Slide 5. We had a disappointing quarter on the subscriber front. There is no other way to describe it. But that's not the entire story, especially at Virgin, where the team has been focused on so many new strategies, mostly intended to drive ARPU and profitable growth.

On the top left, you'll see quarterly net adds for our base of 23 million fixed broadband, voice and video RGUs excluding Switzerland. We've been averaging around 50,000 net adds per quarter over this period, reflecting good growth in broadband and voice and net losses in video. In the second quarter this year, we saw steady video losses but slower growth in broadband and voice, driven primarily by competitive market dynamics in the U.K.

We're going to dig into Virgin results on the next slide, and Lutz will comment during Q&A, but there are a few factors at work here. The U.K. market has definitely slowed down a bit with sales volumes off from prior periods. At the same time, competition has ratcheted up, especially at the lower end of both broadband and TV. In the midst of that, Virgin is maintaining a disciplined and balanced approach to customer acquisition and capital expenditure, focusing on higher-value customers and not chasing after growth at the aggressively priced entry level of the market.

Meanwhile on the bottom left of the slide, you can see that we continue to grow our 5.9 million mobile subs in Europe with a strong postpaid quarter driven by new FMC bundles in the U.K., which is -- where we've actually doubled the mobile attach rate, and our new WIGO bundles in Belgium, which doubled postpaid adds compared to a year ago. So the mobile business is doing well.

So the next 2 slides provide a more detailed update on Virgin Media. Just a couple key points here on Slide 6. First is that we returned to modest ARPU growth in the second quarter despite continued headwinds in pay-per-view and phone usage revenues. In fact, rental ARPU, a better indicator of our subscription business, was up 1.2% in the quarter. We have reason to be encouraged about ARPU growth in the second half of the year with the announcement of a 4.9% average consumer price increase effective in September and October.

Nearly 75% of customers have been notified of the price rise and so far, reaction has been consistent with expectations. In fact, call volumes and discounts have been lower than they were last year at this stage. And this year, the price rise is underpinned by substantial product innovation, like the launch of Intelligent WiFi and the new Virgin TV Go app. And we continue to push our speed leadership with 500 megabits available across our footprint and faster download and upload speeds offered to millions of customers without charge. Just as importantly, we remain committed to offering a best-in-class video experience. And we were the first to launch Netflix on our box in the U.K. You know that. We've now added Amazon Prime, BT's 4K Ultra High Def channel and a whole lot more content from Sky following the new multiyear agreement we signed last month and absolutely all the football available in the marketplace. Virgin is still the only super aggregator of content and sports in the U.K.

And I've already addressed the lower-volume figures at Virgin, shown on the right-hand side here. And while the broadband market share of net adds was steady and churn was in line, gross adds were disappointing, again a combination of a slower market and more promotional activity at the low end.

And in video, the focus was on higher-value pay TV subscriptions versus a year ago when Virgin's triple-play price was nearly at parity with the double-play product. Lutz and his team have their work cut out for them. There's no question about that. But there is good reason to be confident in their plans. The new product bundle called Oomph has seen sales accelerate modestly month-to-month since launch in early June. And the majority of these sales are at the higher end ultimate package of 500 megabits, which includes premium TV with sports and movies, unlimited data on a SIM card priced at GBP 99 per month. This will be good for ARPU, obviously.

And as I mentioned, the FMC strategy has doubled the mobile attachment rates and resulted in more postpaid net adds. And Virgin remains the broadband speed leader in a market where all anyone can talk about these days, from politicians to pundits, is superfast broadband, which is a good segue to the next slide on Project Lightning.

And I have 3 key points here: First, while it's an increasingly noisy marketplace when it comes to next-generation networks and broadband rollouts, Virgin is miles ahead of everyone else. We already have 15 million homes capable of 500-megabit speeds while the rest of the market relies on a copper network that delivers top speeds of around 70 megabits per second. And we've already built out more new homes than all of the competition combined.

Second, Lightning is absolutely working on an operational, consumer and financial level. We've built over 1.8 million premises as part of our U.K. network extension, including 232,000 in the first half of this year with build costs coming down. Importantly, nearly 400,000 customers and almost 1 million RGUs have been added so far in the Lightning network, with our earliest cohorts achieving penetrations of 35% after just 4 years.

And ARPUs of over GBP 45 are right in line with the rest of the business after discounts. Together, this means that Lightning has delivered strong growth in revenue and operating cash flow, both up something like 50% year-over-year. And Charlie will break these numbers down even further in just a moment to show you how we're progressing.

And lastly, there is no operator better positioned than Virgin to determine how this next wave of fixed infrastructure investment unfolds in the U.K. Listen, we absolutely applaud the government's ambitious broadband plans, which call for superfast broadband access for every U.K. home and business by 2025. On the flip side, we also agree with BT and others that this will be increasingly difficult and expensive for Openreach and under-capitalized fiber altnets to achieve, at least without substantial regulatory relief, which puts Virgin in an enviable position. We'll be at 1 gig across 15 million homes in about 24 months. That's 4 years ahead of Boris Johnson's schedule. And we will by far be the most important partner or platform for the remaining 10 million homes. You should expect us to be exploring every alternative to creatively finance and participate in this expansion of broadband connectivity in the U.K. while preserving capital and optimizing free cash flow, so stay tuned.

Now finally, I'll close with a couple quick slides on our Swiss business, which, as you all know, is in the midst of a turnaround plan that's hitting on all cylinders. Just to remind you, there are 4 key drivers of the plan, beginning with transforming our TV proposition with our EOS and Horizon 4 video platform, by far the market's the most sophisticated and cutting-edge service, which includes 4K, a voice remote, a sweet user interface and cloud-based storage. This rollout is right on track for 50% penetration by year-end with 190,000 boxes already deployed. And the product is working as well. That's the most important thing. With NPS higher and churn and calls and truck rolls lower, that's what we want to see.

The second driver of the turnaround plan is to continue to push the convergence agenda. So we know from Belgium and Holland that a good fixed-mobile converged proposition improves NPS and reduces churn, and that's happening in Switzerland, too. The mobile base, already at 170,000, represents about 16% in broadband subs, and that's a good outcome.

The third driver is all about broadband and future-proofing the network. UPC customers already average 250 megabits per second, average speeds delivered, by far the highest in the marketplace. But the plan is to roll out 1-gig capability here in the fourth quarter this year to further cement that position.

And then, finally, we are investing real OpEx and real CapEx into our Simply Digital initiative. This will be a multiyear process, but we're already well advanced in the journey, which, by the way, is very similar to how Sunrise has attacked these challenges and opportunity.

So those are the drivers. And on Slide 9, we show some results. We talk about being right on plan and right on track, but we think it's important for our shareholders and Sunrise shareholders to see what that plan is and has been. So we've actually provided here our quarterly forecast on several metrics, both historical and the remaining part of this year. So we'll let the numbers speak for themselves, and feel free to review this at your leisure, but I'm guessing they'll get some attention in Switzerland, which is great. The punchline is that fixed RGU losses were better than planned in Q2. Mobile postpaid adds have been consistently higher than planned, underpinned by our unlimited offerings. We've exceeded absolute revenue forecasts supported by continued ARPU growth, [BCS] price increases and positive tier mix results.

And finally, we're ahead of plan on operating cash flow, which, as a reminder, includes our investment in simplification and digitization and looks a little lumpy in Q1 and Q4 due to the timing of our investment in sports content.

So all in all, the Swiss plan is tracking to our internal forecasts, the same numbers we showed with Sunrise. And we couldn't be prouder, I couldn't be prouder of the job Severina and her team have done in Switzerland.

So a lot of information. I'll turn it over to Charlie now to go through the financial update, and then we'll get right to your questions. Charlie?

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Charles H. R. Bracken, Liberty Global Plc - Executive VP & CFO [3]

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Thank you, Mike. Onto the slide entitled Revenue and OCF Growth. This is a summary of our key financial results, and the group as a whole recorded negative revenue growth in the quarter of 0.9% and an OCF decline of 4.3%.

Now there were a number of one-offs impacting the OCF figures, including around $12 million of severance and one-off retention payments. Some of these impacted the U.K. and Ireland, which reported negative OCF growth of 2.5%, but positive revenue growth of 0.4%. Belgium was also impacted with the loss of the Medialaan contract, which resulted in negative revenue and OCF growth of 1.5% and 3.6%, respectively. Without this impact, Belgium OCF growth would have been broadly stable.

Mike has discussed Switzerland, and the Q2 performance remains in line with our financial expectations for the year despite reporting negative revenue growth of 3.9% (sic) [3.6%] and negative OCF growth of 8.7% in the quarter.

CEE had good revenue growth of 2.9% supported by new builds and B2B efforts in Poland, with a slight decline in OCF due to programming cost increases. Central and other reported TSA revenues of $60 million for the quarter and a net OCF cost of $90 million, which I will now address in more detail in the following slide, which we called Descaling Central.

We think of central spend in 2 separate buckets. The first is more classical corporate spend doing the group functions for finance, legal, HR and development. We spent $260 million on these functions in 2018 and are on track to reduce this by 20% by 2020 as we support a smaller group post the disposals.

The second category is our centralized spend in technology and innovation. And broadly, this is the spend that we've taken out of our country operations and centralized in order to realize scale efficiencies. In 2018, this was around $800 million, and we expect that to reduce to around $700 million this year and then around $600 million in 2020. A large amount of this spend is recharged to the companies we have sold, including VodafoneZiggo and our former Austrian business. And we estimate that in 2019, if the disposals to Vodafone and Sunrise had occurred on January 1, this would have resulted in a net allocation to Virgin and our CEE businesses of around $250 million.

Although the revenues from the TSAs are projected to fall over the next 4 to 5 years, we intend to keep the net allocation to Virgin and CEE broadly flat during that period as we're able to flex down the costs of these centralized activities.

Moving to the next slide titled P&E Additions. For Q2, we reported P&E additions, including Switzerland, of around $600 million or 24% of revenue, representing a 25% year-on-year reduction. Including Switzerland, we still reduced our CapEx spend by 21% year-over-year and continue to target a reduction of approximately 20% for the full year. The decrease was largely driven by the U.K. as the prior year rollout of the V6 set-top box has now been largely concluded and there's been a reduced cost per Lightning premise.

In Belgium, we've completed the fixed and mobile network upgrades as well as some significant IT project spend. So the only operation to report in the increase was Switzerland, which relates to the growth investments into the UPC TV rollout for 1 gig upgrade and the digitization program.

On Slide 14, we set out the OCF and CapEx for our key divisions and how this translates into OFCF, operating free cash flow, for the first half. Now we split Virgin into Lightning and our core cable businesses as they have very different OFCF characteristics. And we've also allocated the central T&I costs to our retained assets using the same methodology as we use for the TSA agreements.

Now as the revenue growth in the core cable business is slow, we are seeing significant OFCF generation. In the first half of this year, it's up nearly 40% to $993 million. Now if you add back the investments in Lightning, the figures in the first half of the year would have been $1.15 billion. Lightning continues to be a major investment for us, and we spent $235 million of CapEx year-to-date, resulting in an OFCF cash outflow of $157 million. However, OCF growth is very strong with a half 1 estimated OCF of over 50% at $78 million.

Now as you can see from this slide, Belgium is converting $0.29 in every dollar into OFCF. And if you include the recharges, the U.K. ex Lightning and Holland had slightly lower margins and convert $0.23 and $0.25 of the dollar, respectively. Now the lower margin in the U.K. is largely because they rent the mobile networks with an MVNO rather than own one.

Whilst in Holland, we expect the margin to rise as they continue to realize the synergies from the merger with Vodafone, which have largely been achieved in the comparable merger in both -- in Telenet. Now remember, because of the tax attributes in both the U.K. and Holland, unlike Belgium, there's no cash tax payment in either market, making them very efficient free cash flow-generating assets. Finally, despite the investments in the turnaround plan, Switzerland remains a very cash-generative asset with an OFCF margin of 24% including recharges, despite increased CapEx spend.

Turning to the next slide. We summarize the resulting free cash flow conversion. We've broken down the free cash flow to show it before and after working capital and operational finance. In Q2, the free cash flow before these items was $511 million for the quarter. In contrast to Q1, there were no cash interest payments, and you'll see a similar picture in the second half with significant interest payments in Q3 and none in Q4. Tax paid in the quarter was the payment of our 2018 accruals from Poland and the United States, which are our only current tax payers other than Telenet.

In terms of VodafoneZiggo, the company has reconfirmed its guidance for shareholder distributions of EUR 400 million to EUR 600 million for the full year. However, year-to-date, the JV has only dispersed $25 million, and we expect the balance during the second half of the year. You should note that our share of the EUR 400 million to EUR 600 million includes shareholder loan repayments to us of around EUR 100 million, which we do not include within our adjusted free cash flow definition.

Our working capital and operational finance line was positive in Q2 at $35 million, resulting in adjusted free cash flow for the quarter of $546 million. For the full year, we expect this category to be slightly positive and a source of cash flow. We remain on track for our full year free cash flow guidance of $550 million to $600 million, and that includes our estimated $400 million to $500 million negative free cash flow from Project Lightning.

On the next slide entitled Balance Sheet, we set out our current leverage [stats]. Pro forma for the Vodafone transaction, Q2 gross leverage is 5.2x. But net of the deal proceeds, it's 3x. We remain committed to the 4 to 5x leverage ratio for the group, and we'll continue our policy of long-tenured debt maturities and fully hedging FX and interest rate exposures. As of Q2, our average life is around 7 years, and our weighted average cost of debt is around 4.1%. As a result of the disposal of certain CEE countries as part of the Vodafone transaction, we've repaid the $1.6 billion UPC term loan, resulting in a leverage ratio at UPC of 4.6x.

Upon the sale of UPC Switzerland, we will transfer the remaining UPC bonds to Sunrise and repay the rest of the facility, marking the end of a 20-year history of borrowing under the UPC group. We propose to relever the Eastern European assets of Poland and Slovakia to around 4x following the completion of the Swiss disposal, representing additional debt of approximately $900 million.

So moving to the conclusion slide. The sale of UPC Switzerland remains on track and the business fundamentals continue to improve. In the U.K., the annual price rise has been announced, and our Sky content negotiation is being completed in line with our budgeted assumptions. We continue to see strong OFCF and free cash flow generation in our core cable assets, and we're reconfirming our 2019 guidance target.

And with that, over to you, operator, for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Maurice Patrick with Barclays.

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Maurice Graham Patrick, Barclays Bank PLC, Research Division - MD [2]

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It's Maurice here from Barclays. Just a couple of questions, please, on the U.K. And it's really, Mike, touching on your comments about pushing on investments and some of the comments from Boris Johnson around investments in next-generation access. There've been some press reports about you looking at investing beyond Project Lightning, and I'd love to hear your thoughts around the sort of long-term investment once Lightning is done. And the article also touched upon entertaining the idea of offering wholesale access through your network. I wondered if your thoughts on wholesale access in the U.K. have changed.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [3]

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Listen, that's a -- there's a lot of questions there. On wholesale access, our position has been pretty consistent across Europe, which we don't think it's a particularly good idea and it discourages investment in infrastructure by cable, which is the only competitive platform out there to the phone operators.

On the other hand, we have had to utilize it in Belgium, where it was required. And in some instances, we have in the past looked at a voluntary or, I would say, private negotiation. So we're opportunistic and I think we're creative in how we approach it. But we certainly -- our position has always been, from a regulatory point of view, it should not be mandated. And in some instances, we have in the past looked at whether we would partner with companies who might be interested in utilizing the network, but that is a private transaction, not one determined or priced by the government. Big differences there. That's what I'd say.

In terms of building beyond Lightning, we think the Lightning footprint that we originally estimated of 4 million homes, and we booked about half of those almost, is still attractive to us. And we're evaluating, certainly market-by-market and city-by-city, how to do that in the most effective and efficient manner.

On the other hand, as I mentioned in my remarks, there's quite a bit of activity occurring across the marketplace, and there's at least another 10 million homes that somebody is going to build. I don't see us doing that on balance sheet as a Lightning-like project, where we're funding it out of our operating free cash flow. But Virgin is by far the best partner if somebody is looking to build those homes because we bring obviously a great brand, ability to penetrate quickly and potentially outside capital to do something off balance sheet.

So let's just say that we are in the mix, as we should be, in any discussions about building the next wave of networks outside of where we already have built superfast broadband. We feel like our 15 million homes with 1 gig ready, going to 10 gig, is it for that footprint. But beyond that footprint, we're going to be opportunistic to see if we can put capital to work off balance sheet without consolidating losses and activities, potentially with partners, just to get Virgin possibly and the Virgin brand to a national scale. Wouldn't that be great if Virgin was a national brand, not a regional brand in half the marketplace?

We know on footprint we generate 50% market share. We beat BT, we beat Sky on footprint, in video and broadband. We know that. If we could extend our footprint potentially using other people's networks or participating in off balance sheet-type network construction, that could be pretty interesting.

So it's all very preliminary and it's work you would expect us to do. But abiding by the points I made in my remarks, which we're looking at opportunities that are capital efficient, optimize free cash flow and largely off balance sheet. That's a longer answer than you probably wanted, but hopefully, that's clear.

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Operator [4]

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We'll move now to Ben Swinburne with Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [5]

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Can you hear me?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [6]

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Yes, we got you.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [7]

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Okay. I know you made some comments earlier, Mike, about sort of the rationale behind the tender. But I just wanted to come back and ask -- my sense is -- maybe I just misinterpreted this. Over the last couple of calls, you guys were sort of suggesting that the cash wasn't going to burn a hole in your pocket, you're going to take your time, et cetera, et cetera, and obviously, you still have a lot of capacity. So I'm not -- I get the numbers. But I just was wondering if anything changed between May and now to lead you to launch the tender for $2.5 billion and if there's any sort of change in how you're thinking about allocating that capital that we should be aware of.

And then, secondly, on the subscriber trends in the U.K., you mentioned competitive environment. I'm just wondering as you look out through the back half of this year, do you see that getting any better? Any initiatives you guys have on either churn management, this is probably for Lutz, or new bundles to help try to drive that? Are you -- or maybe you're just focused more on the EBITDA and ARPU and you're not going to chase subs, so I'd just love an update there.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [8]

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Sure. Lutz, why don't you work up an answer to the U.K. question? On the tender, I don't think our position has changed materially. I mean if we had announced this morning a $2.5 billion buyback program, it would have taken us, based as you know on rules and restrictions, a pretty long time to get that money -- put that money to work. So it's our view that these Dutch auction tenders are efficient. You can launch them and be done in 20 business days. We're not suggesting this is the only one. We'll see what happens to the market or our alternative uses of capital.

What I meant to say on patience was really about -- and discipline was really related to transactions outside our core markets and, let's say, in new markets or new opportunities. There seems to be a fair amount of concern, at least I hear it and our IR guys hear it, that we're going to turn around and buy something nonsensical in a sector or a market where we have no expertise or no capabilities, and that's not what we're going to do. And the patience and the discipline comment was really related to opportunities outside of our core markets or our core capital structure.

And I'm not -- I'm certain we have those capabilities to do interesting things. We're just going to be very, very selective about those. In the meantime, we'll look at where the stock trades and we'll look at what other opportunities we have to be -- to solidify and grow the businesses that we already own and operate, which we think are substantial, great free cash flow generators and have the ability to be revalued in this environment. There's no question that our stock today has 0 value for Virgin Media, maybe negative value for Virgin Media, which is incredible to me.

So we know there's huge opportunity to create value and demonstrate value in the U.K. based on our cash flow characteristics, on our market position, on strategic opportunities. And you don't have to be heroic in your assumptions about what that value might be on any metric to know the stock's undervalued. So we're going to look at that, I would say, quarter-to-quarter, every 6 months. We're going to be thoughtful about what the best allocation of capital is. But the patience and the discipline comment was really more geared towards doing things outside of our core business today. Lutz, do you want to address the U.K. point?

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [9]

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Yes. Yes. So before I give a bit of an outlook, just maybe one number to compare a bit the market size, right? Broadband market Q2 2018, 171,000 net adds on Openreach [in our] network. I neglect the altnets. This year, 14,000, right? So the market is materially down. Our churn like-for-like has been steady at 15%. So this is about gross adds in that market.

And I think we -- if you compare our number, we got almost close to 50% of the entire market or 80% onto our coverage, right? What we are not doing is chasing for the low end of the market. And right -- I mean there's Vodafone, there's now broadband from Sky, GBP 17, GBP 20. We are not fishing in that segment. So therefore, you won't see us changing our strategy in that direction.

What will help us in the future I think is 4 things. So we have launched fixed-mobile convergence mid of June with our campaign. That has already helped. You see that in the mobile subscriber, although it's only less than 1 month of the market launch of Oomph in Q2. And that is -- you see a steady growth. That leads to a lower churn and higher ARPU. So this is really a momentum we will be using going forward more and more.

Number two, as Mike has said earlier on, right, we have all soccer available with a very strong sports package. So Q3 is about that. In general, Q3 and Q4 are the strongest quarters in terms of sales. So therefore, we are prepared for that, and we are leveraging more and more digital on that. So our digital share of channel is increasing. So therefore, already in July, we've seen materially higher sales numbers.

However, having said that, don't forget that we have put our price rise forward by 2 months so -- compared last year. So therefore -- you will -- we will eat up some of these additional sales we are already generating by some churn. However, that was planned. And as Mike said earlier on, 75% of letters and e-mails have been sent out and reaction is better than last year. But last year, we had also with the U.K. TV struggle going on. So therefore, it is as expected.

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Operator [10]

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And we'll move now to Christian Fangmann with HSBC.

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Christian Fangmann, HSBC, Research Division - Analyst of Telecoms [11]

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I was just following up on the buybacks. I think the plan is a bit below what The Street was expecting. I mean for H2, definitely a big number, but beyond that. So I was curious, are you updating us then on a quarterly basis or can it also be in between quarters if you think you may do more tenders? Because you just mentioned, it may not be the last one you do. So I'm interested in your view on that one.

And then maybe on the U.K., I mean, you signed a new deal with Sky, a content deal. And I think for the full year, you had content cost going up GBP 60 million to GBP 80 million. I think it was the guidance for the year. Can you maybe give some color if you are more towards the higher end, the mid end or the lower end? So would be interested in that one, yes, the network part of the question.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [12]

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I think the Sky deal -- Lutz, you can correct me. I think the Sky deal is where we thought it would be. So -- but you can provide some color on that, Lutz, if I missed it. But I'm pretty sure we're right on where we thought we would be in terms of what we might have forecasted to you on the guidance.

In terms of the buybacks, I think what I said in my remarks I'll repeat, which is we could do more of these. We could launch tender -- buyback programs as we've done in the past or we could do neither. It doesn't -- it's not a good idea for me to signal to you, "Well, we're going to do these every quarter." People won't be interested in selling shares and won't be tendering, and we're interested in owning more shares.

So my goal here, for shareholders who are going to be long-term shareholders, is to acquire shares at the most efficient price that we can acquire them. At this point, this is all we've got going on. And so I don't anticipate quarterly updates on our "tender offer activities." But if we are to launch additional tenders down the road, you're likely not to know about that until we do it. I mean that's kind of how it works. So I don't believe this is something that we're going to discuss on a quarterly basis. I think we're going to look at how this particular transaction performs and our ability to efficiently acquire more of a company we believe in, and then we'll make decisions. We will be looking at it, of course, quarterly and making decisions about how best to utilize capital on a quarterly basis. But I don't know that we'll be signaling to you in our earnings call every quarter exactly what we may or may not do, just as we didn't signal to you up until this particular tender what we were going to do, because we're still evaluating those options real time. Lutz, on the Sky deal, do you want to just confirm what I said? I'm pretty sure that's right.

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [13]

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Yes. Christian, of course, we cannot really disclose any details. I think what I can say is the general idea was, between Sky and us, to create win-win potential when we close the deal, so future growth of revenue jointly. And I can say we have managed to do so, right? So we can now jointly monetize UHD together. We've got much more box sets, so we are able to monetize that, sell that to our customer. We are able now to really integrate Sky Movie into our Liberty GO app to increase usage here, and we got a lot of additional benefits. So therefore, right, it's both. Is it in the range we have expected? As Mike said, it is. But I think more importantly, we found a way to make up for the cost in increased business, both on price increases, but also simply saying -- selling higher-value packages to the customers, and that's exactly what we are doing.

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Christian Fangmann, HSBC, Research Division - Analyst of Telecoms [14]

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And maybe one follow-up, if I may, also on Virgin. I think there were some news yesterday from Virgin that Virgin is addressing Ofcom's ongoing review of the broadband pricing and related efforts to protect customers running out of their minimum contract periods. So it looks like Virgin may address 100,000 customers that are vulnerable, I would call it, kind of disabled pensioners, unemployed people. So can you maybe quantify the effect or the cost embedded to that kind of approach that Virgin is taking for 2020 maybe, just a rough feel?

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [15]

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I think it's very small, Christian. So it's a small attempt. And at the end -- but if you do that and you're customer-centric, you come to a much lower churn with these customers. So therefore, I think the impact on 2020 is neglectable.

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Operator [16]

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We'll move now to James Ratzer with New Street Research.

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [17]

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I had 2 questions, please. The first one, just going back to the topic of use of proceeds, please. I hear what you've said so far, but was just wondering if you could talk us through how you see some of the relative merits of some of the deals that are kind of being discussed. I mean mobile in the U.K. is one area. But I think in the past, you've been nervous about mobile performance. I mean, are you're now feeling more comfortable with that? There's also been some speculation you might look in Latin America. I mean given your comments about geographical focus, are you able to rule out categorically doing any deal in Latin America with the capital you have? And thoughts about kind of deals in the Benelux area as well. I'd be interested to get your kind of preference order and thinking around those kind of options.

And then a follow-up question I had just going back to the price rise in the U.K. I mean how do you weigh that up against what your market share tolerance is? I mean I'm looking at BT's. It was -- been taking price for a while, and it seems like they've now had to reverse engines a bit and say they're no longer willing to cede share because their pricing approach led to customer losses. How do you think about that kind of potential trade-off going forward?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [18]

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James, on the use of proceeds, I'm not going to get into that here on this call. I can just repeat what I said, which is we'll look at things in our core markets first as we should, and then possibly consider things outside our core markets if they make sense and fit a pretty tight group of criteria for us. So I hear what you're asking and I'm sure it would be great info, but it's not prudent of me to get into the relative merits of any one transaction or any one opportunity. As things unfold and become real, we'll certainly comment on them. Do you want to talk about the price increase?

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [19]

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Yes. I mean, yes, I do. Thanks, Mike. So we are growing still the market share, right? I mean -- although it was not the strongest quarter. In general -- this quarter, we are flat. But in general, we are growing market share. According to our information, our churn is substantially lower than from the competitor you mentioned. And so far, customer reaction is in line. I mean don't forget; we are targeting the high-value segment of the market. And we spend a lot of money for increased speed, our Intelligent WiFi, better content, higher upload speed, better boxes and also a lot of money in better service.

So I think we are not in the position to say, "Do we really shrink as a business or not?" And I think when you look at the U.K. market, you see higher competition on sales across that market, but you see still a pretty rational approach in the customer base, right? Sky has taken price rise. Netflix has taken price rise. TalkTalk has taken price rise. Even BT is taking price rise on the BT Sport packages. So I think we have not a reason to change our approach here.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [20]

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Yes. I mean Sky took a 5% price rise in April, as you guys would have seen, which by the way we did not pass through to our customers. So our price rise will, to some extent, compensate us for not having passed through the Sky price rise to our customers. So I think that's noteworthy. Does that help, James?

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James Edmund Ratzer, New Street Research LLP - Europe Team Head of Communications Services & Analyst [21]

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Yes. No, that's great. Just going back to the point. I mean what outside your core markets might look more attractive than doing a deal within your existing core markets today?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [22]

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I mean again, I'm not going to get into that with you. I think that wouldn't be smart for us to start either divulging, or if we have things, preempting those kinds of opportunities. It's just not a good idea. I would be -- it would be a generic conversation, and I don't think it would be particularly useful for you. I did describe that we like businesses and have always benefited, I think, from owning and operating businesses that have scale capability, that are in our wheelhouse around technology and subscription and businesses that we understand well. We know who we are and we know who we're not. So you can look backwards perhaps to look forward.

And at one point, we were operating in 40 different countries around the world. So there's very few places we haven't done business. Doesn't mean we're interested in doing business in those places today. I'm simply saying that we have a pretty long history of, I think, investing in the types of opportunities that we think fit our profile. But to be specific about a territory or a market or an opportunity wouldn't be prudent at this point.

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Operator [23]

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And Evercore's Vijay Jayant has our next question.

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James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [24]

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James Ratcliffe. It's James Ratcliffe. Just on the -- now that the Vodafone check has cleared and you've got the cash on the balance sheet, I'm wondering if you can talk about the trade-offs between having a lot of liquidity available for opportunities -- and I think Liberty in general has done well by having liquidity when others didn't, historically -- versus the negative arbitrage associated with the account because -- which back of the envelope would be $100 million a quarter or so. And do you have flexibility to essentially reduce that negative arbitrage while still keeping a lot of liquidity readily available should opportunities arise?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [25]

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You mean the negative arbitrage on our debt basically?

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James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [26]

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Yes. Of just having cash versus having debt.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [27]

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Yes. Yes. I got you. I got you. So I think it's -- there's a couple of answers to that. One, I think having liquidity, as you pointed out, is a huge advantage. One thing John and I have seen and many of you have seen is market volatility comes and goes. And there are many -- there's -- it's always good to be in a cash position when you don't know what the future brings, and that's more opportunistic than anything. And so there isn't -- while there is a cost of carry, there is certainly an opportunity cost of not having liquidity. So as you say rightly, we balance that off and we balance it off dynamically.

On actually generating cash, Charlie and the team are charged with -- one of the reasons we put all the money into dollars is we believe we can generate a better return on that capital than we could in euros or any other currency. And so Charlie and the treasury team are going to do their best to generate a maximum amount of return that can be prudently achieved on that capital, and so that will certainly help a little bit.

And then if necessary and on occasion, as we talk about around leverage, we'll trim here or there so -- if needed. So I think it's going to be a combination of things. As you rightly say, a little tension between liquidity and opportunity and cost to carry. But if we can get the treasury guys to work their magic, hopefully, we can shrink that a little bit. Charlie, do you want to add anything?

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Charles H. R. Bracken, Liberty Global Plc - Executive VP & CFO [28]

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Yes. The one -- just I don't think it's $100 million a quarter. I think it's -- the cost of debt is 4%. If -- in U.S. dollars, you're getting something north of 2%. So it's roughly a 2% negative carry and pro forma for the buyback, we got about $12 billion. So it's more like $240 million is the bid/offer in terms of the cost of the option. And as Mike said, we'll continue to evaluate the best way to run that negative carry. But it's more -- it's not the $100 million a quarter, I don't think.

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Operator [29]

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We'll move now to Matthew Harrigan with Benchmark.

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Matthew Joseph Harrigan, The Benchmark Company, LLC, Research Division - Equity Research Analyst [30]

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You have to feel fairly vindicated on VodafoneZiggo given the turnaround there, the fastest-growth business in Q2. How do you feel about the fixed-mobile convergence benefits? I mean did they come in line with what you expected? Were they even higher? Is there anything -- any runway still on getting that? And then clearly, as you get a little more expansive on the VodafoneZiggo valuation, your stock gets even more ridiculously inexpensive. And when you -- I know you're not going to comment too specifically on any sort of transaction on unwind at the JV, but should it logically trade at a somewhat lower multiple if those synergies have pretty much been realized at this point? I think it's an asset that maybe The Street, maybe even including myself, is neglecting a little bit.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [31]

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Yes. Good question. First of all, the synergies haven't all been realized. I believe we're only about halfway through the synergies. They may or may not have addressed that, so that may or may not be public. But my understanding is that we're only about halfway through the synergies, originally projecting $210 million. And I think as we've indicated, likely to exceed that just because we always do in these types of businesses.

And I do agree with you. It's been terrific to see the business return to revenue growth and good OCF growth and raise their expectations around that. And it is a function of both the natural synergies that occur in fixed-mobile mergers. There's a reason why we were paid 12x for Germany. It's because the synergies are massive and they're real and they work for mobile and fixed platforms. And we've proven this out now in how many transactions, I can't even keep count, in Europe so far. And I'll say [it's writing] all positive indicators there, and we're pretty excited about how they're performing as a team.

What it's worth is, you can come up -- come to that value, Matt, in a bunch of different ways, whether it's a levered free cash flow yield or an operating free cash flow multiple, even an EBITDA multiple. I would suggest we would think there's very little value for us to offer that business today. But we continue to be supportive of it. We think the team has done a great job. We think it's been a terrific partnership with Vodafone, and we're both really pleased with the business as it sits today. Anybody want to add to that? Charlie, you're on the Board. Anything you want to add to that?

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Charles H. R. Bracken, Liberty Global Plc - Executive VP & CFO [32]

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Good. I think it's going very well. And in fact, I think in some respects, it could be even more successful than Telenet, which is obviously one comparable you could look at in the free cash flow conversion. As they're growing out the synergies, it should drive towards the similar type of margins that Telenet get. So nothing -- like what Mike had said, it's a very attractive asset and we're delighted with how it's performing.

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Operator [33]

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We'll go next to Pivotal Research Group's Jeff Wlodarczak.

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Jeffrey Duncan Wlodarczak, Pivotal Research Group LLC - Principal & Senior Analyst of Entertainment, Interactive Subscription [34]

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One on the U.K. and one on Belgium. U.K., you've had a number of one-offs hitting EBITDA, mainly the higher network taxes that, as far as I know, are not going higher after 2020, and you obviously got a large program price increase this year. Do you feel comfortable that the core U.K. business is going to be able to sustainably grow EBITDA once you get past these overhangs? And then on Telenet, Mike, I wanted to get your thoughts on this wholesale situation. It just seems like the regulator just wants the wholesale price to go down and is continually trying to push it down, trying to force you guys to do a single play. How do you push back against that?

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [35]

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Well, I'll let Lutz cook up his views on the U.K. question. I think the Belgium wholesale question remains a thorn in our side. And as I've said many times and John Porter has said many times, it's a highly political marketplace. And we do the best we can to address those politics and to point out the absurdity, in some cases, of what they're proposing. We fight them in court. We appeal to the EU. We do all the things we're supposed to do. We're irascible and a pain in their butt. But at the end of the day, we know that the way in which they're trying to regulate this market is wrong -- fundamentally wrong.

Now the flip side of that is we're doing pretty well either way. If you look at Orange Belgium, their subscriber base on our platform is not that material. I think it's roughly 130,000, 140,000 subs. So the amount of revenue "at risk" in a wholesale change of pricing is not that material either. So I don't want to overstate the impact of what may or may not occur in the regulatory side. On the other hand, I do want to -- I don't want to understate and I want to be sure it's clear that we don't agree with the way in which they're approaching this market.

And in Holland, where we have similar conversations, it's much more reasonable and rational. We also don't agree with how they're approaching it. But on the other hand, it looks to be they're coming at it from a certainly more healthier point of view. So we fight the good fight. I mean I think the good news is it's not a material impact, at least based on current wholesale revenues.

We can't be certain how it'll unfold. All I can tell you is we keep fighting the good fight. And we're as focused on this as anything. And it does really feel to us -- to the extent you're concerned about contagion or anything else, it does really feel focused in the Benelux, partially because of the success cable has had in those markets for decades, not just recently. Telenet's market share is quite substantial relative to Proximus and others. And VodafoneZiggo is a market leader. So I think it's partly a reaction to that and partly a reaction to politics, part of which we control and obviously, the rest of it, we just -- we can't. So I hope that's helpful. Was there another question, Jeff?

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [36]

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Yes. About the one on U.K.

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Jeffrey Duncan Wlodarczak, Pivotal Research Group LLC - Principal & Senior Analyst of Entertainment, Interactive Subscription [37]

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Yes.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [38]

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Yes. Go ahead. Go ahead, Lutz.

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Lutz Schüler, Liberty Global Plc - CEO of Virgin Media [39]

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So I mean we have -- we did a consumer strategy, right, which is 80% of the business in Virgin Media last autumn, and we came up with 4 growth drivers, right? One is fixed-mobile convergence. This is launched now. Early signs are positive, but that takes a while. We have 20% fixed-mobile converged customers. When you look at VodafoneZiggo or Telenet, they have more than double of that, right? So huge opportunity for lower churn and higher ARPU. And for us here, early stage, but positive signs.

Second one is base management, right? I mean we have higher speeds. We have now Intelligent WiFi, leads to higher customer satisfaction. We are going to launch Horizon 4, our new video platform, which has been launched in Belgium and Switzerland so far. So the idea is simply to leverage that and to get to lower churn.

Then we ran a digital transformation program. The impact is huge. It's a big change for the company. But others have done it successfully, why wouldn't we do it? And then more segmented sales. The more the market is mature, the more the go-to-market has been segmented. And we use the SOHO machine, leverage closer the consumer machine.

So therefore, we believe that when all these growth drivers are in place, of course, we will come to growth again. I'm not in a position to give any guidance. Also, headwinds from network taxes and also content costs are getting down a bit in the future, so both should help to get back to growth.

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Michael Thomas Fries, Liberty Global Plc - Vice Chairman, President & CEO [40]

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But we do have headwinds. I mean just to your point, Jeff, next year, there are -- we do still have increases in both year-over-year in network taxes and programming. So we'll provide more visibility on that as we get obviously into our guidance for the following year. But there still is some -- there are headwinds there.

Having said that, I think Lutz is on -- is absolutely right. We're doing all the things that we think we need to do in that market to grow the base and to grow profitably and to drive cash flow, in particular free cash flow. I think that brings us to the top of the hour. So I'll just close it out. First of all, appreciate everyone joining.

Second, I'll just repeat that we feel like we're doing what we told you we would do at the beginning of the year. Number one, we get these deals closed. A lot of people didn't think we would. We always felt we would. And we got them closed on original terms, and that's important to us. We're driving costs down in the corporate and T&I space in our company. That's critical as we descale. We need to descale what we do and how we do it. And a lot of good work happening there, which I think will benefit both operating cash flow and operating free cash flow. We're driving CapEx down actually not 20%, but 25% through the first half of the year. And that hasn't been difficult and it hasn't had an impact -- material impact at all on our ability to create growth.

And we're delivering on the promise to put capital to work. We didn't waste any time. It's only been a few days since we closed that deal and we're out and about. We're excited about getting the tender launched formally on Monday. Stay tuned for that paperwork and those details.

Thanks for joining us, and we'll speak to you soon. Thanks, everybody.

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Operator [41]

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Ladies and gentlemen, this concludes Liberty Global's Second Quarter 2019 Results 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.