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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon ladies and gentlemen and thank you for standing. Welcome to Liberty Global's Full Year 2018 Results Investors 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.
At this time all participants are in listen-only mode. Today's formal presentation materials could be found under the Investor Relations section of Liberty Global's website at libertyglobal.com. After today's formal presentation, instructions will be given for a question and answer session.
Page 2 of the slides details the Company's safe harbor statement regarding forward-looking statement. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the Company's expectations with respect to its outlook and future growth prospects and any other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed in Liberty Global's filings with the Securities and Exchange Commission, including its most recently filed Forms 10-Q and 10-K as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based.
I would now like to turn the call over to Mr. Mike Fries.
All right thank you, operator, and hello, everyone. We certainly appreciate you joining the call today. I know it’s a bit late in Europe actually where I am now so we’ll get right to it.
I’ll kickoff the prepared remarks and then hand it over to Charlie after which we’ll take your questions. I understand that we haven’t allowed much time for you to grab the results presentation from our website but if you do get a chance, I think you’ll find the slides particularly useful as you walk through the call.
And I’ll begin on Slide 4 with some highlights. The first of which not surprisingly addresses the announcement today regarding the sale of our Swiss business for CHF6.3 billion or around 10 times this year's operating cash flow. I’m going to talk more about this deal in a moment, but view to just about any lens the last 14 months for us have been pretty transformational. After two decades of buying, building and growing world-class cable operations in Europe we have now announced or completed transactions to exit six of our 12 markets at premium valuations between 10 times and 12 times operating cash flow.
I am sure you’re all keeping track, but in case you’re not together these deals, the Swiss deal, the sale of Germany and Eastern Europe, the Vodafone, the disposal of our DTH business and then of course the sale of Austria represent an aggregate enterprise value of $31 billion and net cash proceeds of the company both received impending of $16 billion.
As we said many times it has long been our ambition to create or enable national champions in Europe and we couldn't be more proud of these combinations each of which is going to challenge incumbence, accelerate innovation and benefit customers for years to come. Again more detail on the Swiss transaction in just a moment.
The second highlight here, we also announced solid results in our continuing operations here. Virgin Media delivered around 4% revenue and OCF growth in 2018 even with a tough comp in Q4 last year. U.K. ARPU continues to rise at a 2% level and we had a nearly 290,000 RGUs we’re going to talk quite a bit about Virgin today.
And Telenet reported 8% OCF growth for the full year and that was driven by the last phase of mobile synergies and a strong efficiency program. And then together all of our continuing operations so also including Switzerland reported consolidated rebased revenue and OCF growth of 2.2% and 3.5% respectively. Interestingly if you back out Switzerland which we will do in our 2019 guidance those numbers would be 3% and 6.3%.
And then lastly VodafoneZiggo our JV in Holland which we don't consolidate has turned the corner and it's guiding to positive operative cash flow growth in 2019. And our third major bullet here the major point on this slide is that our free cash flow profile continues to improve. We hit the 1.6 billion free cash flow target for 2018 at guidance FX rates and we saw operating free cash flow growth OFCF growth increase over 20% from both continuing operations and the full company.
Charlie is going to take us to 2019 guidance in a moment but I’ll just mention right up front that we are forecasting an approximate 20% reduction in CapEx this year as we start to monetize the meaningful investments we've made in network expansion, capacity and product development.
So beginning on Slide 5, I’ll spend a few minutes on the deal we just announced today to sell 100% of our UPC Switzerland business to Sunrise Communications for CHF6.3 billion in cash. Looking at industrial logic of this combination is really compelling in our view and Switzerland is one of the more advanced and competitive markets in Europe with quad-play bundles, superfast broadband and strong video platforms available from multiple providers.
And UPC and Sunrise together are going to create the leading converged challenger to Swisscom. We scale across all elements of the quad-play bundle something that is surely needed and I think will benefit retail and enterprise customers there.
Obviously, and we’re pleased with the price which equates to 10 times this year's operating cash flow for our asset which has been in turnaround moderate. Net to debt and working capital adjustments, the 6.3 billion headline price should net a little over CHF2.6 billion and for reference to Swiss franc and the dollar are just about a parity.
On timing we expect the deal to close by the end of 2019 and as with our Vodafone transaction we’ll determine the most optimal use of proceeds as we get closer to that point. Like the other deals we’ve closed or announced, this transaction highlights our ability to buy, build, integrated grow our cable and broadband businesses, as well as our track record of value creation.
As we did we announced the German deal for example on the left-hand side of Slide 6 you'll see some operating metrics for Switzerland over the last 13 years. During that timeframe, we’ve increased ARPUs and revenue over 50% or about 3.5% per year with OCF margins from the mid-30s to nearly 60% and we grew operating cash flow by 6.5% on average every year.
On the right-hand side of that slide you’ll see what we bought the business we invested around $1.6 billion of equity and since then we distributed nearly $4 billion to the parent company that's after payment of interest and debt expenses, and we'll collecting another 2.6 billion in net proceeds in this deal.
So that's four times our original investment and high teens IRR over 13 years. I really couldn't be prouder of our local operating team they are really, really proud and while it’s a bittersweet moment for us, we know that Sunrise and UPC together will be a stronger more competitive platform.
So after all this activity and what does Liberty Global look like on a pro forma basis well Slide 7 is a simple chart showing just that. First, we will continue to be Europe's leading cable operator with the largest pay-TV and broadband platforms and six core European markets that include the U.K., Ireland, Belgium, Poland and Slovakia, where we serve over 23 million fixed RGUs, 5.9 million mobile subscribers and generate 10.4 billion of annual revenue and 4.8 billion of consolidated operating cash, and that's before corporate revenue and costs.
Our 50-50 JV with Vodafone, which of course was consolidated, adds another 10 million fixed RGUs and 5 million mobile customers, as well as $4.6 billion of annual revenue and $2 billion of operating cash flow. Especially in western Europe, these are scaled platforms with high OCF margins, declining CapEx intensity and meaningful free cash flow growth in front of them.
And In the cases of Holland and Belgium, we are fully converged with fixed and mobile networks while Virgin relies on a terrific MVNO with 20% of our broadband base already signed up to a Virgin mobile service.
In the blue box on the far right hand side of this Slide, we include I think for the first time, our non operating asset. So that would be our expected pro forma cash proceeds from the three pending deals of around $15 billion, as well as our existing investment portfolio. So, our stakes in ITV, All3Media, LionsGate and Formula E along with our ventures portfolio, all of which we conservatively value at $2 billion.
And then we show our considerable tax assets, including $20 billion in the U.K. that should shelter taxable income in that market for a very long time, We believe that that present value of tax attribute in Europe, including the U.K. be in excess of $2 billion today.
Now, while this is not an official sum of the parts valuation, it does form the basis of that work which apparently we're not allowed to do for you. But we can lay out two numbers, and both of which are shown on the chart. The first is the expected cash proceeds from the three pending deal that equals to about $20 per share and the second is the fair market value of our public shares in Telenet, which equates to about $4 per share.
So the punch line here is that these two numbers alone get you to about our current equity market cap, which means everything else on this page Virgin Media, the Dutch JV, are ops in Eastern Europe, other corporate assets are not reflected in our stock today at all.
We'll let the analyst to flush it out for everyone as they see fit for the picture, from our perspective it's pretty clear. It almost doesn't matter what multiple you put on the cash flow, doesn't matter what discount you put on the cash or other assets. It's a pretty good valuation story maybe even better by today's announcement.
Now I'll just cover two more operating Slides and then I'll hand it over to Charlie. On Slide 8, we have our Virgin Media's results and there are four big takeaways here in my opinion. The first is that Virgin delivered its fourth straight quarter of strong ARPU growth, up 2% year-over-year. And that was underpinned by a number of factors including of course the price rise in Q4 of last year and our implementation of that which was a success, a disciplined approach to discounting and promotions with a focus on bundles and getting folks more-for-more and reduce churn, as we roll out V6 boxes and Hub 3 routers which are now in about 60% and 70% of our homes respectively.
Our analysis, and I'll emphasis, our analysis indicates on a percentage basis we grew revenue pay TV subs, broadband subs, and our B2B business faster than anyone else in the sector last year, all while building nearly as many new homes as the entire industry combined. The second key takeaway is the hard work we've done to lay the foundation for continued growth in 2019 and beyond. That includes the launch of 2 gigabit cities in the U.K., we're going to raise our top speeds or broadband speeds to 500 megabits per second, that's nearly 8x faster than anybody else in the market.
Well, that will improve WiFi apps and more boosters. We'll launch a new Horizon 4 UI, which will be materially better than what we've got there today featuring voice search and better graphics, this is what we rolled out in Switzerland recently NPS went up 36 points. And we're going to make it easier for customers to buy, change and pay for services through our online platform and My Virgin app.
Thirdly, I want to make sure to highlight some inorganic headwinds that Virgin will encounter this fiscal year and that will impact 2019 growth rates. That includes some regulated network taxes of £32 million, some negative regulatory impacts in the mobile business of about £17 million some things like [indiscernible] and mobile termination rates and both contractual and potential increases in programming costs between £60 million and £80 million on an annualized basis. Together these headwinds add up to about £110 million to £130 million and that's going to impact the growth rate for Virgin 2019 on OCF.
And then the final point here is that we continue to deliver organic RGU ARPU and OCF growth, while reducing capital intensity from nearly 34% in 2017 to 29% in 2018 on the back of more efficient construction costs and lightning, more targeted roll outs of V6 and Hub 3, CPE. And again the ability to monetize our prior spend. That drove operating free cash flow growth or OFCF growth of 48%, and we continue to see that in 2019.
And now on Slide 9, we highlight results for our Benelux operations beginning with Telenet. On the left if you copy their earnings call two weeks ago, you'd know that the end of the year with broadly flat revenue but we're able to fight through regulatory and competitive headwinds to achieve strong operating cash flow growth of 8% and adjusted free cash flow of €420 million. The SFR migration was a drag on net ads for sure in 2018 but that should be over now. In fact if you exclude the impact of the SFR customer migration, subscriber transaction is better in the fourth quarter.
Coming to the strong product line up going into 2019 including the WIGO bundles which we talk about a lot, an exclusive partnership with HBO, the rights for the Premier League, Horizon 4 and EOS. But I'm particularly excited about Telenet's WIGO bundles for millennials and digital savvy customers. It's an app based TV experience with 200 megabit fixed broadband connectivity and generous mobile data allowance and zero rating for our video services. There was no set up, superior broadband and a great mobile offering.
Now that said, 2019 will be a transition year for Telenet. A fully realized based synergy, the loss of a large MVNO contract and continued regulatory pressure will impact revenue and OCF growth. But adjusted free cash flow will remain strong in 2019, at €380 million to €400 million as 2018 was a peak CapEx year. Now in the Netherlands, VodafoneZiggo reached a positive inflection point on OCF growth in the fourth quarter. And while Q4 revenue was roughly flat year-over-year, OCF grew 6.5%, has set the stage for solid momentum heading into 2019.
On the top line the fixed business continue to drive steady financial grow and mobile revenue declines began to stabilize. Looking ahead VodafoneZiggo's launch plan for Horizon 4 remains on track in the first half of 2019 while 5G showcases and 1 gig rollouts are set for 2020. The bottom line is the convergence strategy in Holland is working with over 1 million households and half the eligible since taking a converged bundle.
That guidance is for moderate OCF growth in 2019, supported by ongoing synergies. And then again the JV returned over €700 million to us and Vodafone during 2018 and they're guiding to 400 million to 600 million in share holder cash returned in 2019.
So I'll end with four key priorities for 2019 on Slide 10. Obviously, first and foremost we are focused on closing the pending M&A transactions. The Vodafone dealers of course working its way through the European competition commission and we feel positive about both approval and timing there. And the Swiss transaction we believe will receive a very favorable review from both the telecom and competition authorities in Switzerland and should close by year end.
Second, as a result of the deals and the changing shape of our business, we're in the midst of resetting our operating model to be more efficient, more agile and better positioned for the next phase of growth and opportunity. You might have seen that we already announced some of these changes and we'll have more to talk about through the summer.
Third, it bears repeating again that after an incremental 2 billion (ph) of CapEx over the last 3 years above what would have been our steady state capital intensity, you can expect us to continue scaling back CapEx this year and beyond. As I said, we're guiding to an approximate 20% reduction in CapEx year-over-year on continuing operations, taking advantage of our recent investments and capacity, product and CPE as a result will drive our OCF growth of over 50% this year.
And then finally as I've discussed on every call, we're in the process of developing plans for excess cash when these pending deals close with a focus on value creation and we'll have more to say about that of course as the year unfolds.
So, Charlie, over to you.
Thanks Mike.
I've made to the Slide, titled Revenue and OCF growth. Now this is just another view of the 2018 growth rates of our operations. And as you can see, the U.K and Ireland grew pretty well from a revenue point of view aided by split contracts. But because of certain cost items, things like compensation received in 2017 for historic breaches and global rate increases, the OCF growth rate was slightly lower.
Overall, we did a pretty respectable mid single-digit growth and later in the Presentation I'll give you some insight on how much of that comes from Lightning and how much of that comes from the rest of our business in the U.K and Ireland. Belgium performs strongly on the cost cutting side but clearly had a negative revenue growth. And I talked about that a lot in the results call, so I'm not going to do that today.
So we had a very tough time on the revenue side, which translated into OCF losses. And that continues to be work in progress as we do improve our video proposition. And then in Central Eastern Europe, a pretty solid performance with low single-digit revenue and OCF growth. We also got or central cost down year-over-year and I'm going to address that in more detail shortly.
So in the aggregate for the continuing operations Q4 was 1.2% revenue and 2.9% OCF growth another purely impacted by the one-off last year which understated the growth rates. And with a revenue and OCF growth rates for the full year of 2.2% and 3.5% respectively.
Turning to CapEx on the page entitled P&E additions we broken our CapEx but my segment and by driver. A few high level comments capital intensity is coming down 2017 and 2018 were high levels of investment for us and we look to revert to more normalized levels in the upcoming years. It was 32.9% in 2017 for 31% in 2018 and with starting a reduction in the regional 20% year on year for 2019.
The U.K. has peaked in terms of CapEx the B6 upgrade is largely behind us and you’ll see the number coming down pretty dramatically going forward. And similarly Telenet also goes declining CapEx as the network upgrades are completed and they finish their IT integration.
In terms of where is the money is being spend, you can see the numbers at the bottom of the page. CPE is 8% of sales, new build and upgrade which also includes B2B CapEx was reduced from 8% to sales to 6% sales.
And then we have investments in the capacity of the network of 4% and the money we spent on product to the neighbors was again we think as paid to come down further from the 6% level in 2018 and that’s because through of the heavy lifting on the entertainment and connectivity programs. And then finally baseline spend represents 8% of revenue and it’s essentially our investments in IT and property platforms and again we would expect to see some decrease in that percentage in the upcoming periods.
The last of three standard slides provides a brief overview of our cash leverage and liquidity. Even without the benefit in Swiss sale proceeds we have $4 billion of liquidity and $31.5 billion of cash and we continue to generate positive free cash flow. We’re going to talk a lot in this presentation about free cash flow generation from the continuing operations.
We’re going to part now for the time being, but the full company achieved $1.4 billion of free cash flow which of the original guidance exchange rates are provided is in line with our $1.6 billion guidance number. Our leverage we continue to be operated at the top end of our four to five times range. We actually ended the year of five times gross and a little less on that side.
I would highlight the impact that seasonality has on our leverage ratios which have calculated on the basis of our last quarter annualized OCF. We expect similar phasing in the first half of 2019 with high ratios in Q1. And then finally, we exceeded $2 billion of share repurchases in 2018 again in line with what we told you. And let me turn to three special topics that investors have asked for more details on.
The first one entitled understanding lightning, but in many ways is about understanding Virgin. What we have done is present Virgin’s two distinct businesses which is actually how we look at it from an internal performance monitoring basis. The first business legacy business will be called rest of business is very similar to our Benelux operations. In fact we would argue this is a business with actually superior long-term revenue growth prospects.
And as you can see in this year we estimate our revenue growth was around 2% but why do we say that because I think it has opportunities to grow and penetration of the solar market where it is relatively low versus the Benelux and also its fixed mobile convergence.
We also think the U.K. is a very rational pricing environment subject to obviously to what goes on at Brexit. And historically it’s been a market where we have been able to hold volume constant on the footprint and drive pricing up around 1.5% to 2%. The other business we have in the U.K. is lightning and we would describe this as potentially the fastest growing cable company at scale in the world. And what we have broken up for you here are the key KPIs to assess performance and returns.
So I’m just going to go down the lighting column, to-date we built 1.6 million lightning homes with 339,000 customers. So around that low 20% penetration and that translates into around 161 million pounds of revenue. And as we signaled previously we actually think that when introductory discounts roll-off the lightning customers are broadly in line in terms of ARPU with the legacy base. On the county estimate the OCF margin is 56% we’re fully going to scale in your fixed cost things like finance.
If you look at the construction CapEx the key number is the cumulative cost per home and we’re running at £690 per home since inception. We expect it to come down as we get more sophisticated and efficient on the build. But Telenet translates into a total spend in 2018 of £328 million which also includes work in progress for the uncompleted homes. And of course the CPE and installation cost which are included in the other CapEx bucket. So the total CapEx in lightning was around £400 million in 2018 and we estimate the cumulative we spent £1.4 billion on CapEx on lightning since inception.
Another key point on this slide is the free cash flow. If you look at the operating free cash flow of lightning we estimated that it’s a negative £313 million.. And to the extent to which we used to debt finance by 1.4 billion of CapEx which I think is reasonable assumption. The Virgin blended cost of debt of around 4.8% that translates into something like a £400 million negative free cash flow impact including interest.
So by contrast if you look at core Virgin business we actually doing pretty well as I discussed earlier with a 2% revenue growth but slightly lower on the OCF side. I might mention many of the headwind in 2018 that we talked about which contributed to that. It also probably true that as we started outlining a really focused on its growth phase we probably didn't put as much focus on the marketing for the core operations as we did on the growing operations and that may also contribute to a slightly lower growth rate.
In terms of our core business it’s also reasonable free cash flow conversion asset on these number our management account is converting 22P in every pound at the OCF level and we expect that number to go up as capital intensity declines because as you may recall in 2018 we spent a lot of money on the B6 box upgrade. We also benefited from substantial tax assets in the U.K. as Mike comment earlier. So when you look at the free cash flow of Virgin it’s misleading to say that we’re not making a loss of free cash because we got two very different profiles.
Now if you look at the right hand side of this page, we got some thoughts about how we would go from here. While we think we’re able to consistently build 400,000 to 500,000 homes a year we do think MDUs are an area of opportunity. We’re getting better understanding how we are going to market to these and I think looks in particular please there is significant upside potential. Overall on lightning we feel we’re broadly in line with the original business case.
The early cohorts for achieving long-term penetrations in excess of 30% and you can see that on the chart on the bottom right. These type of infrastructure investments are currently very much in vogue in the U.K. but we believe lightning is the most successful old net building of scale. And if you look at the evaluations the infrastructure assets and fiber builds are attracting clearly a very valuable asset in our minds for our shareholders.
The second key question investors have asked about is central costs and we got a slide called changes to the operating model, but really the question is what are the central costs what we get back in the day is take a series of activities out of our Opcos and perform them centrally because we thought we could drive scale, best practice and efficiency. And I things largely we would say that as work. In terms of the type of spend we broke into two key buckets and as you can see the numbers at the right hand of the page the first is technology and innovation which is essentially all the stuff we do in behalf of the company's.
So if they get economies of scale and share product development costs and that adds up to around $900 million OpEx and CapEx spend covering product development, technology strategy and share platforms. Now lot of that spend will continue but it will be funded by transition services agreements and you can see that already happening with the VodafoneZiggo payments to us as well as payments from Liberty, Latin America, Deutsche Telekom and obviously Vodafone and Sunrise with the transactions closed.
And in any case we believe that $90 million of property had peak investment because we put a lot of money into the video and connectivity platforms till the Liberty go phase. So you should see those numbers start to drift down over the upcoming years. The other bucket of cost is our corporate costs which is $260 million of OpEx. This starts the traditional corporate functions management, finance, legal, people actually increase procurement and that’s where we’ve been really targeting the majority of our reductions as part of the broader reorganization.
We are estimating, you should see a reduction of around 20% or more as part of that by the time we get to 2020 and that’s been done by reducing layers rationalizing functions and getting more responsibility to the country level as you can see from the left-hand side of the page.
So last special topic is what is our pro forma free cash flow so this is the free cash flow generated from the assets we retained. Now I have learnt a lot more about this over the past month and I would like learn and it's not a simple topic. There is a detailed technical explanation of how we calculate this and the adjustments we’ve made in the appendix. So if you want to get into the detail I suggest you look at that.
On this slide, if you go from the OCF down you get to an OFCF for the 2018 continuing operations of 1.6 billion but that includes the estimated $420 million of negative OFCF contribution from lightning. So you could actually argue the OCF is higher. Then we have the interest which is just over a $1 billion and then when you turn to tax we paid $300 million and that’s predominantly the Telenet and the U.S. mandatory repatriation tax payments that we make.
In terms of tax number we broadly flattened 2019 as will the interest. And then we have contribution from VodafoneZiggo actually the $294 million referenced here doesn't include another important contribution to us which we get from the asset and that’s a repayment of €100 million shareholder loan and we expect to get the last of those payments next year as form of shareholder remuneration. So that gets you to a free cash flow before working capital items of $557 million.
As we have a lot of focus on our working capital and just to be clear, we think about it in three buckets; all new working capital, operational finance and restructuring. Now broadly speaking, we try and hold this within a range of plus or minus $100 million across the portfolio, which actually is what we did for the combined company in 2018. But what you'll see from the slide is that for the pro forma company is actually a $168 million negative in 2018.
So let me explain how that breaks down. Within our all new working capital, there's a few headwinds that we detailed on the slide. For example split contracts was a drag of around $100 million in 2018. Now generally we don't choose to factor receivables of the mobile companies, but that’s tool we could use to reduce our working capital drag. And operational finance, we actually focus on vendor financing where we're financing around 40% to 50% of the addressable spend.
And to remind everybody, we do bend the financing if we believe we can get better terms from a price point of view and a better return on capital as compared to just trying to extend the payment terms to 90 days. And the last bucket is restructuring, which will be impacted in 2019 by the changes in the operating model I discussed earlier. So all of that gets you to the pro forma free cash flow number of $389 million for 2018.
Moving to the last Slide, let me just round up. In terms of the 2019 outlook, we've given these numbers excluding Switzerland. Now what ultimately we think Switzerland will become discontinued operations under our accounting treatment. It will be dependent upon a shareholder vote, which means that may not be the case immediately. So I wanted to make sure that was clear to investors as they think about our performance monitoring.
The first guidance metric is rebased OCF, which we are guiding as flat to down. Now that might sound a little disappointing to investors and I just wanted to give some color. Mike talked a little bit about what's going on in the U.K. and we actually think if you take things up like broadband rates and programming headwinds, the U.K. is growing very nicely. And that talks a lot about how happy we are with lighting, but one of the reasons why we're being quite cautious about the U.K. is because of the possible effects of Brexit. None of us know what that's going to mean to the economic environment and we want to make sure that our investors have a range of possibilities.
In terms of the other key driver of our OCF guidance, you know about Telenet, which is guiding to its own investors to a negative OCF growth. There'll be a significant reduction in our property and equipment additions. We're guiding you to $2.7 billion at current FX, targeting roughly a 20% year-on-year reduction on 2018 actuals. In our mind that translates into the adjusted free cash flow of around $550 million to $600 million for the pro forma company again excluding Switzerland.
But just to emphasis three key points; the first is that the number excludes any cash flow that we get out of the discontinued operations before closing. How much that will be will vary. For example, if we close the Vodafone transaction in July, we will have the semiannual interest payments relating to Germany. If we close in June, we won't but we think assuming a mid-year close this should be around 250 million to 300 million cash flow contribution from those discontinued operations.
Secondly, it also excludes the shareholder loan repayment from VodafoneZiggo, which I talked about earlier it's about €100 million. And finally, it includes the negative OFCF contribution from Lightning. Now if you do allocate the interest, I've made the case that's a $400 million to $500 million negative free cash flow hit. And endpoint you're getting for that is a very high growth high return business. We'll update you more on the buyback when we close the transactions but for the time being we're guiding to our $500 million buyback for the first half of this year.
And with that, I'll turn it over to the operator for questions.
[Operator Instructions] And we'll take our first question from Nick Lyall with Societe Generale.
Could I just ask two very quick ones please. Just you mentioned buybacks at the end Charlie. Could you just mention thing you're thinking about in terms of the mechanics and efficient sizes, what are you thinking about large buybacks and what might actually limit the size of the buyback what should we be thinking about that? And secondly, could you just give us a rough idea as well of the cash contribution to the free cash flow to Switzerland. It may just be – I have no time to work out but could you maybe just give us an update on that so we can sort to do a like-for-like between the guidance and this year's number please? Thank you.
Nick it's Mike, I'll take the buyback question; Charlie, you can work up the Swiss cash question. I mean as we said on most every call so far, we're not in a position today to describe either quantum or structure of buybacks with the use of proceeds. So you could easily determine those on your own, it's not that complicated. But I think at this stage it's just premature to get into that kind of detail but we're certainly working on alternatives and as we have more information, we'll absolutely look to the market now. You want to talk about the Swiss cash, Charlie?
Yes sure, actually it's intended to different years. In 2018 Switzerland was very strong cash flow generated for us and again you get into this question how you allocate the central cost by country, but I'll characterize it as having a relatively low CapEx sales ratios versus the other assets but in 2019 there's a big shift. We are planning to and we'll continue to plan to rollout the EOS next generation boxes and we'll also continue to push in an upgrade at the 1G network.
So, I think you're going to see that free cash flow contribution in 2019 much lower and [indiscernible] is around 50 million and I think we’ll compare its around 200 million to 250 million in 2018. Now what I emphasize how you allocate the internal cost in 2018 and a reasonable man could disagree with that certainly how we look at it internally.
And we'll take our next question from Vijay Jayant with Evercore.
I think you called out about £120 million of inorganic headwinds in 2019, which is about I think about 600 basis points of headwinds. Can you just talk about how that sort of rolls-off past 2019 for Virgin and then broadly speaking, obviously you don't want to talk about how much buyback you would probably consider at some point, but just want to understand now having sort of a single country play obviously Telenet has its own capital structure, Ziggo has it's own. But with the U.K., Ireland sort of play what's the right amount of debt leverage for that entity?
So the question on just we got your question is correct, the question on debt is specifically around Virgin?
Yes.
Yes, and I think Charlie you can work up and answer to that I think we’re about – where we want to be on that, inorganic headwinds and Tom you can jump in here. Obviously the programming costs would annualize to the extent that we have additional contractual cost that would hit. But remember this year our costs were up about 5%, next year it's more like 8% or 9%.
So we expect that to be a positive in the 2020 period should not be comparable hit. The broadband taxes, it's a big jump this year. I think it doubling something like that it might – you can comment Tom more specifically when it goes up next year but it won't be as material. So without being specific, many of those inorganic headwinds will not be as impactful on a one-off basis in 2020.
So we do expect in the longer-term picture here to return to a more normalized growth in the U.K. and Ireland, just to probably give you that benchmark. Charlie you want to answer the second question on leverage?
Yes, just clearly on the [indiscernible] range because one more year and I guess that keeps giving from the British government, but it does end in 2020. So 2021 it will be back on a normalized space on the raise. But on the leverage I think we've always said that 4 to 5 is up that range, the bottom of the range if there was a high components of mobile and also there was lower growth. I think we've articulated that U.K. looks pretty high growth assets. So I think we're pretty comfortable where we are today at 5 times against that to the extent to which as you rightly pointed out U.K. becomes – particularly major part of our portfolio.
We do have a diversity and ability to shelter but we so uptick of you on addressing I'm very comfortable with the 5 times where Virgin is today. There is no imperative to deliver and for more for transaction.
And we'll take our next question from James Ratzer with New Street Research.
Yes thank you very much. Good evening, guys. Two questions please. One on Switzerland with the Sunrise deal; and it looks like fantastic terms for you. I mean to the extent they are so good what happens if Sunrise shareholders fail to approve the transaction terms saying that they have to go a shareholder vote from their side. What kind of security do you have or ability to potentially renegotiate or accept different terms if that has to be the case? And secondly on the U.K. business, could you just talk us through what happen on TV net adds, it looked a bit weak in the fourth quarter, is that something one-off or more structural?
And Tom, why don't you work up an answer or allude some of the TV net adds. On the Swiss transaction, yes, it is a good transaction and good terms for us. We would concur and that is also a good deal for them. I mean it does provide scale in all the core products, it does give them network reach, high-quality network reach, it does represent pretty material synergies and it gives them the clear number two position across the entire scope of the telecom market there.
So, I think their shareholders will all agree, their shareholders will see this deal as being transformational for them and it will be something that we expect shareholders to approve. There is a small break fee. I am not sure we're disclosing that but it's in Swiss market, it's precedent, that's not usually very large number. I think we're relying on their underwriters who underwrite the rights offering and relying on their ability to make a very strong argument. So I think that will do convincingly but this is a transformational deal for that business.
So, we're pretty encouraged by it. But there is no mechanism as such to say: well, if the vote doesn't go our way, this is plan B. We expect it to go the right way and we'll know that pretty quickly here. Tom, will allude on TV net adds.
Yes, on TV net adds I think in the entire 2018 we have made 36,000 net adds positive. It was weaker in Q4. The reason for that is two-fold. One is, right we did our price rise in Q4 and the other one was a deliberate decision to focus more on full house and VIP customer using our V6 boxes and not too much to focus on play and in terms of acquisition and you see that in higher free cash flow numbers.
All right and we'll move on to David Wright with Bank of America.
On the U.K. again please, we've obviously seen BT commit to a different pricing structure which means there will be no price rise until April 2020, so effectively nothing through 2019. And then moving to structurally lower price rise of CPI give or take 2%. In the U.K. you guys have historically driven prices around 4% to 5% every 12 months and that's been a core driver of OCF. Do we think that another price rise to lap into November 2019 is perhaps now less likely given that we know BT comparative and do you see that 4% to 5% run rate dropping down to the sort of 2% level that BT is now committed to?
I'll take that one. We're not going to provide today, David, any detail on pricing proposal this year or in the following years. We haven't announced that or even worked that out in any great detail. So we can't give you that headline. On the other hand I would point out that BT has been taking pretty regular price increases every nine months. I think this pause makes sense for them and to be honest with you it's still at CPI and there's certainly there is no indication that I've received from Philip or anyone else that this is the long-term plan. I'm not suggesting I know that it's a temporary plan either just for this year, but as you probably know we can't give you any guidance on future price increases before we talk to our customers about it. Except to say that at this point status quo seems reasonable for us.
I think to add to that Mike, I think two things. One thing is that if I haven't read it wrong, I think the no price rise in 2019 applies only for new customers not necessarily for existing customer. And I think second thing is that Sky recently has announced then on the price rise and I think the third thing you have to put also innovation potential in context with price rise, right. And as Mike has said before, we get our Horizon4 UI, we get fixed mobile convergence, we get higher speed. So I think we have a lot of innovations to satisfy our customers which might give us some pricing point.
And we'll take our next question from Polo Tang with UBS.
I've actually got two questions. So just in terms of the Swiss deal, there have been on-off talks for the past one to two years, can you maybe talk to why the deal came together now? Was there any particular catalyst and also did you insist on all cash deal or were you open to taking equity and the merged density?
My second question is really just about central costs. So you made a very helpful Slide in terms of Slide 16, but I just want to clarify in terms of the numbers that you laid out there, was this net of the recharge benefits that you received from VodafoneZiggo? And can you also clarify the recharge benefits that you'll get assuming the German and Swiss deals go ahead? And when you talked about the reduction in terms of the central costs, did I hear you correctly in terms of the hearing that you're looking to reduce these total central costs by 20% going forward?
Yeah, Charlie you can respond to the central cost point providing that the short answer is those - that $900 million does not include a quantum of revenue received. I'm not sure if we're disclosing all those details guys, so you work up that. On the Swiss deal, listen it's actually been about a year that we've been in discussions with them to be honest with you. In terms of substantive conversations around different ideas and structures, all transactions have a beginning and an end and there is no particular reason why this one took this amount of time or less or more. So there is not much drama to reveal to be honest with you.
And the structures that have been discussed, vary across multiple outcomes as you might imagine. This one was the best for them and the best for us. And I think - we think they have a great business. The fact that we're not taking shares in the business is not a reflection at all of our view of the business. We think it's going to be a powerful platform and a very successful company long-term. Just that for us that this was the better outcome and the price we were able to realize. And our cash deal was certainly more attractive to us than other alternatives. I don’t know if you want to add anything more, Charlie, to the central cost question.
Yeah, just to confirm that that's the gross cost. There is no revenues goes on before benefits go in Austria. Those numbers were another $150 million. The gross cost also include businesses now close down which is a zero margin a low margin handset business about a $100 million of cost. So that's one consideration. I think the other thing is that the TSA is going forward near $400 million we would estimate, although that could obviously move around but it's not quite comparing apples-with-apples. So for example, in the $900 million we're spending money on products with Germany that aren't required into the TSA.
So we would actually reduce that spend accordingly because most of the spend is flexible third-party contracted spend, that's part of the internal data. So I think it's quite hard to do an apples-to-apples. But we certainly could say that the majority of the spend therefore will be actually half of the year with TSAs. Virgin maybe the core anchor tenant as well in Eastern Europe. In terms of reduction, we all were just seeing where the cost is and I wouldn't want to characterize that the restructuring is as much about efficiency but also about the fact that certain items we're not going to spend. So we're not spend them in T&I area only about $130 million or so in labor. So most of it just stuff that you can scale down or scale up. And with restructuring the 20% we talked about is it only focused on that 260 and I think we said we had several of those activities.
And we'll take our next question from Jeff Wlodarczak with Pivotal Research Group.
First, congrats on the attractive price you were able to get for the Swiss assets. Between the VoD sale Austrian and the Swiss deals existing cash balance, you're going to have about roughly $17.5 billion in cash. Should we still think sort of 50-50 between buybacks alternatives? And then I have got a follow-up.
I knew you were going to ask that question Jeff. I think yeah, and it's fair but I think I'm going to have to say what I have said in the past, which was, it depends on a lot of different factors. The timing of completion where the market is at that point, where we think the market is headed at that point. In organic and financial opportunities which should be the one - the one you're referencing of course would be one. So I really can't give you any more color on that but certainly as we get closer to these deals completing and they're still months-and-months away here, we'll nail that down but I appreciate the question. I can't really provide much more color than that.
And then in terms of that VoD deal and I'm sure you are actively talking to regulators ; do you still feeling very comfortable with the mid 2019 close of the deal?
I mean that could mean June-July, we have - we're back working with them. The stop the clock is over and there's a milestone in March around the statement of injections that may or may not occur but you can expect that we are in regular contact and certainly Vodafone leading the charge in regular contact with the commission and by all accounts having been through many, many of these at this point, we have no reason to believe it wouldn't be a mid 2019 close.
And we'll take our next question from Carl Murdock-Smith with Berenberg.
Two questions from me please. First just understanding the multiple on the Swiss transaction, 10x OCF means you're expecting $630 million or $662 million if I add back in the TSA that you noted on Slide 5 in the footnote. That implies a 12% drop from the figure you've just reported for 2018. Quite a deterioration from the minus 8% you've reported this year. Consensus was expecting an improvement; so what was causing the deterioration in trading in Switzerland that you were expecting?
And then secondly just on the U.K. growth on Slide 15, just to confirm I think two-thirds of the rest of business 2% growth is from mobile handsets this year? I was just wondering if you could comment what the underlying cable growth is for the rest of the business?
On the Swiss map it's not correct and we're not going to provide independent guidance for Switzerland at this point except to say that we also - our budgeted number also assumed an improvement year-over-year in the growth outcome. So I'm not sure how you're getting to your math. It's certainly one way of getting there but it's not accurate.
On the U. K. growth, Tom, would you respond to that?
Just trying to identify Q4 table number I think -
Yes, I think the confusion going, the version including lining in that. I think the fact is that we believe that if you take out considerably there's no growth, you're quite right, not growing at quite 2% rate because that's a big problem of that is the handset. And also going to the underlying growth in the B2B business. So, we don't [indiscernible] consumer business spending is a negative [indiscernible] but not as much as 2%, which is the average of mobile, B2B and the Virgin Cable.
We know that B2B growth is approximately 3%, mobile growth plus minus 10%, and the other two are blended. That's another way to possibly answer that question.
Moving on to Steve Malcolm with Redburn.
I'm going to dig into the U.K. a little bit, then ask a quick question on the Sunrise deal if I can. Just you mentioned Brexit, I guess calling about a bit more than you have in the past, are there any particular sides in the business that you're worrying about, I'm particularly thinking of your B2B business. You have quite little local government exposure in there. You managed to sort of grow in the low single-digit growth for a bit. And also in the handset side I mean you've obviously there on to 3 year in IP deals. Are you going to have an air pocket this year with a lot about the extension of handset lifetimes, is that hitting that revenue line quite hard this year?
And then just on the Swiss deal, do you happen to know if what free net's position is here because on this time they have a blocking minority here that I presume that the shareholder vote will require 75% approval. They have 24.5% on the basis that everyone turns up if they don't approve the deal it's hard to see it going through. So any clarity you can give us on what free net position here would be very useful.
Yes, I'm glad you asked that question. It's not a 75% approval, it's 51% approval. So, they do not have blocking position and you know their position is not so unknown to us, I'm not sure what Swisscom has disclosed or not about that. The board has approved the deal and Free Net might have it's own views, they've made clear to us and maybe made clear to Swisscom - I'm sorry, the Sunrise you might ask that question on the call tomorrow - Sunrise on their call tomorrow. But it doesn't require 75% approval. So I'm glad you asked that question.
On Brexit, we've done a lot of work, Charlie chiming here. As every U.K. based company has done to determine where the vulnerabilities might be. I think it's important to point out that we don't see meaningful vulnerabilities either in supply or people or the things that make the programming contract or things that make the business tick. But as any U.K. based business would be doing, we're evaluating the impact on consumers, outside consistently for a very long time now since Brexit occurred. The biggest concern we have as anybody would have in our position is how will consumers be impacted.
So it's principally a revenue view and there's lots of different variations on that, as you can imagine different points of view of what will happen to GDP and what will happen to inflation and what will happen to unemployment. But our business is sound and solid no matter what happens, these are sort of marginal deviations if they occur at all. But no material or contractual or any sort of supply related challenges. I don't know if Charlie if you want to add anything to that?
It's well said. I think, look, as you rightly point out, none of us really know what's going to happen and where price is going to return . We are seeing little bit of softness actually, and as you mentioned but nevertheless wherever the margin is for us, I think it's too early to say that's going to have the impact on local government. I think when we gave our guidance sort of make sure that there's range of possibilities because [indiscernible] I think none of us know what the economic environment is going to be later in the year.
And we are seeing material, we're seeing mix economic but I think all consumers waiting and seeing rather than diving into new deals. So let's see how the end of March goes and hope for best.
And Andrea just confirm that the way I've described the Swiss Sunrise transaction is accurate, I know it is but chime in if you want.
It is a 50% vote of the shareholders that are representative meeting. And we don't have any official news as to how Free Net is going to vote the shares of our meeting. It's obviously likes of good, it needs to be gone through before we get to that. So I suspect we'll see how they place and they do have, as Mike said, they are putting their results tomorrow. So I'm sure you'll have a chance to ask them.
And we'll take our next question from Ulrich Rathe with Jefferies.
One question is that I've left is on the free cash flow, Charlie. I'm not entirely sure I can connect the new pro forma free cash flow easily to the continuing operations. Is it sort of an easy conceptual way to connect what you're highlighting it with the 2018 pro forma to the 1.1 billion reported in continuing operations? Particular I'm wondering is there a change in definitions here or is this the old free cash flow just in a different perimeter? And if it is a change in definition, could you sort of just highlight motivations for what you have done and why you're introducing this in this particular way?
And if I may follow-up, I think Steve sort of asked this question about the handset life extension in U.K. overall about these, I mean there are easier way to ask this I suppose is what you actually expect give and take for the development of this big boost to the top line that you experience in 2018 when we met, how you expect that to unfold in 2019?
Well, on the free cash flow we haven't changed our definition at all. This is the same definition we were reporting to the last couple of quarters. I've got to be honest, I'll be damn pleased in these transactions supplies because the concept of a pro forma adjusted free cash flow as I'm running with my accounts, is that many men can dispute and argue about. What this is really trying to do is and perhaps I’ll take you through, our guys can take it you through it offline. This is our best guess of how we would report the Company performance per sales of the assets of free cash from those assets.
And as a series of footnote - go to offline, there is no change in methodology. This is completely consistent with the how we gone through the previous quarters and indeed how 2018 has been compared to 2019 albeit 2019 doesn't include Switzerland.
On the handset question I think you are right. I mean we've sold in a lot of handset into our customer base and this has slowed down a bit. Number two as Charlie said before the customer demand especially on hardware and handset has slowed down, entire market is down 10% to 15% since December.
But having said that the SIM free market in U.K. is only 15% as for instance SIM free market in Germany is 50, 50%. So huge opportunity to grow and if you take that together with fixed mobile convergence I would not think that we keep doing what we are doing.
We'll take our final question from Christian Fangmann with HSBC.
Just wanted to ask about the Swiss transaction. The transfer of the UPC debt how does it technically work I mean the debt is not specifically debt at Swiss entity. So just wanted to understand is only this Swiss bonds are being transferred or how does it work just to understand it technically? Thanks.
I am going to address relative but remember the goal was finding games around often and success we have been. So I don’t think we want to get into implication of that because there is a lot more detail but suffice to say that we are allocating and signing with transactions some of debt and UPC to the asset. Andrea do you want to give more detail.
Yes I think [indiscernible] when I put around this but I think the number has been disclosed in the press releases and is basically Christian a portfolio of bond and derivative securities that have been in the UPC kind that have been transferred over. Does that answer your question?
All right I’ll take that as yes. Listen we appreciate everybody joining the call especially folks in Europe it’s late, but we did want to be sure to get this announcement out as soon as we signed which was just an hour so ago before the call.
So appreciate you joining. We’re excited about this transaction in Switzerland, I’ll tell you - as I said in my remarks it's a bittersweet moment Eric, Morris and Andrea have done a great job the whole management team there over a decade or more really done a great job building this company and that’s proud and incredible achievement for all of us to operate in this market.
But we do know that Sunrise is going to do tremendously well with these two businesses put together it’s going to be in a terrific competitor particularly in Swisscom and it's the right thing for this market.
So it's a win-win it certainly a win-win transaction and a great time for us to build cash. As you've obviously noticed we think that these multiples were doing the right thing here in terms of rebalancing the business and we’re excited about how to use that cash to create shareholder value. And we will always appreciate your support and the trust in the company and this team and we’ll speak to you soon. Thanks very much.
Ladies and gentlemen, this concludes Liberty Global's full year 2018 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.