Liberty Global Ltd (LBTYA) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to Liberty Global's 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 express written consent of Liberty Global is strictly prohibited. At this time all participants are in a listen-only mode. Today's formal presentation materials can be found under the Investor Relations section of Liberty Global's website at www.LGI.com. Again, that is www.LGI.com. Following today's formal presentation instructions will be given for a question and answer session. As a reminder this conference call is being recorded on this date, August 5, 2009.

I would now like to turn the conference call over to Mr. Mike Fries, President and CEO of Liberty Global. Please go ahead, sir.

Thanks, and good morning, everyone. Hope you can hear me clearly. As usual we have a number of folks from the executive team on the call here today who you might hear from, in particular Charlie Bracken, and Bernie Dvorak, our co-CFOs; and Gene Musselman, President and COO of UPC; Mauricio Ramos, who runs Latin America and our VTR operation; Miranda Curtis and Graham Hollis from Liberty Global, Japan; Shane O'Neill, our Chief Strategy Officer and President of General Media; Balan Nair, our CTO and Rick Westerman, of course, our Head of IR and Communications.

Our agenda this morning should be familiar to you. I am going to start with some highlights from the quarter. We'll walk through the financial results and then we'll get right to your questions. Before we get started, we have the obligatory Safe Harbor Statement. Operator, do you want to get through that quickly?

Thank you page two of the slides details the Company's Safe Harbor statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including with respect to Liberty Global's outlook and future growth prospects. Its expectations regarding competitive and economic conditions and liquidity and other 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 from time to time in Liberty Global's filings with the Securities & Exchange Commission including its most recently filed Forms 10-K and 10-Q. Liberty Global disclaims any obligations to update any of these forward-looking statements to reflect any change in its expectation or in the conditions on which any such statement is based.

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

Thank you. As usual I will be referring to slides this morning. We all will. I will start by talking about four key areas of our business briefly on slide four. Hopefully you can get a copy of that. I will begin with our top line revenue performance at 4% rebased growth we would characterize as stable especially in this environment, and there is some good news in these numbers, and in particular we continue to see solid growth in our core triple play services with subscription revenue up 5% in the quarter. We'll get into this in a bit more detail in a minute.

We're also pleased with our ability to scale and leverage our operating platform for the quarter and year-to-date we generated 8% operating cash flow growth ahead of our guidance target for the year and just under $500 million of free cash flow. Not surprisingly we're reconfirming our guidance this morning for operating cash flow growth at 5% to 7% and free cash flow growth of at least 25%.

I think most of you have followed our recent balance sheet initiatives, specifically the extension of over $5.5 billion of debt in our UPC borrowing group and the opportunistic issuance of new public notes which raised over $500 million of gross proceeds and supplemented our cash balances in the quarter. As a result, our consolidated balance sheet is in great shape. We have no material amortizations, near term amortizations, total liquidity of about $3 billion and over $1.2 billion of cash accessible to the parent.

Consistent with our long-term view of our business, about the only place we have been deploying that cash is in our own stock. Year-to-date we purchased over $250 million reducing our shares outstanding by another 6% since year end, and we just approved an additional $250 million program, so thus far we've bought back over 44% of our own equity and are increasingly confident in the long-term value of that decision.

Having said that, we do remain opportunistic on the M&A front especially with the modest improvement in financial markets. You would have noticed that we divested our subscale Slovenia operation in July for nearly $170 million in cash locking in a 30% IRR on that investment. We're pushing ahead with Sumitomo on the future of our Japanese partnership, and while there is nothing to report today, we still remain confident in an accretive outcome for LGI, and the pipeline, particularly in Europe, looks to be more interesting as we head into the fall. All in all we're pleased with the direction of our business operationally, financially and strategically. I am not sure how many companies in the broader media or communications sector can say that today.

Certainly our confidence is supported by among other things our steady subscriber growth which is summarized on slide five. This is a chart we produce regularly showing our subscriber trends for the current period and then previous four quarters, and I will make the same points that I made on the last call. On the top two charts you will see that we continued to generate relatively consistent voice and data growth with approximately 280,000 net adds in the second quarter, slightly below our average, but not by much, and this is seasonally a slower period for us in Europe. Q4 is obviously our biggest quarter.

The second point is that we reported another quarter of video subscriber losses, 80,000 in total. That number is better than the first quarter, so we like the trend, and as in past quarters three of our European markets, Holland, Romania and Hungary contributed roughly 75% of that figure.

Our strategy to combat this issue remains the same, and it consists primarily of pushing the quality and value of our advanced services which I will talk about in a minute. When you add it all up you will see total RGU additions on the bottom right were just under 200,000, and again, we don't double count digital net adds like our U.S. peers. If we did the comparable number would be 570,000. We continue to deliver steady voice and data growth, and we think our tactics to preserve the low end video subscriber base are working and will continue to work. Not bad in this environment, but this slide only tells part of the story.

It is easy to focus on the video number, but you need to remember that analog TV only represents about 20% of our total subscription revenue, and that number will continue to decline as we grow our base of advanced services and again I'm referring to digital TV, voice, and broadband.

If you look at the left side of slide six you will see these three products combined represent about 18.5 million of our 26.6 million RGUs. That number is up 22% year-over-year. So far in just in 2009 we have already added 1.5 million organic digital video voice and data subs. Remember, these are the high ARPU high margin products that drive our household or customer ARPUs. They also form the foundation of our bundles which today represent about 40% of our customer base.

You can see these results flow through our revenue on the right-hand side of the chart which is broken down into four main categories, video, voice, and data subscription revenue and then other revenue. Overall our subscription revenue growth of 5% is consistent with Q1, and includes 7% growth in broadband and 4% to 5% growth in video and voice. As in prior quarters our consolidated result has been impacted by other revenue streams which were down 2% this quarter, and this decline was driven in large part by our B to B business, particularly in Europe. For example, the Netherlands, one of our largest markets would have grown nearly twice as fast if the impact of the B to B decline were removed, and we recently hired a new MD for UPC's Pan European B to B efforts and we are optimistic regarding our stability to grow this business over the medium term, particularly with 3.0 broadband products which brings me to slide seven.

I think you know we have invested a tremendous amount of time, energy and resources into two new products both of which are game changers in our markets and represent the foundation of our future growth. Of course I am referring to our digital TV platforms and the launch of our 3.0 broadband services.

Even a quick glance at the numbers reveals digital cable continues to be our best-selling product. We added over 860,000 digital cable subs in the first six months of this year, a 42% increase over net adds in the same period last year. Total penetration is now 42%. But that's skewed a bit by Japan where we're approaching an all digit sub base. In Europe where we have got plenty of growth ahead of us our penetration is just over 30%. In fact, digital is a significant bright spot in Central and Eastern Europe which has been our top producer of digital net adds for the last five quarters and has ramped penetration from 8% to 24% in just one year. Obviously it is not just units that are driving digital video revenue. We also continue to out perform our own expectations with DVRs and HD boxes. These services generally represent additional ARPU for us and create a much stickier customer.

Lastly we're making great progress on perhaps our boldest digital initiative, I'm referring to innovative business partnerships with the most dominant programmers in our markets, the free to air broadcasters, perhaps the best and most recent example of that is in Holland where we just announced a far reaching agreement with RTL which will see us distribute HD feeds of all four channels and launch their catch up TV and preview services on our VOD platform, so I think we're slowly reaching the tipping point we have been forecasting for some time on HD and VOD content in Europe.

On the broadband front we're moving at light speed with our launch of 3.0 services across our footprint. In Japan where we have been selling fiber speeds the longest we continue to add 160 megabit customers, finishing Q2 with 150,000, and that's up 165% over last year. In Europe we have now completed the rollout of the Netherlands with 120 megabits available every where, and at mid-June we've restructured our pricing model there targeting the sweet spot in the market with 25 for EUR25 and 30 for EUR30 tiers. That's 25 megabits for EUR25 and 30 megabits for EUR30, and the change is working. The gross sales are up 30% since the repricing, and over 75% of new customers are taking at least a 25 megabit service from us. Meanwhile KPN as you may have noticed reported the first down quarter for broadband subs ever. Its early days, but increased market share and ARPU accretion seem very likely and very promising.

The rest of our European markets are not far behind, over 50% of our two-way footprint is now 3.0 ready. We recently launched Austria and Hungary and should see five additional markets roll out by year end. Overall we expect to be selling 3.0 in nine of our markets by year end and look forward to capitalizing on the competitive advantage it brings to our product portfolio. So operationally we're generating stable growth in unstable times, and are in the very early stages of reaping the benefits of our product development efforts specifically around digital television and 3.0. Financially we're on track to meet our key guidance targets, and strategically we sit today with perhaps the strongest balance sheet and liquidity position we have had in a long time. Today the best use of that liquidity is our own stock unless or until we see M&A opportunities as good or better, and the second half of the year may give us a good indication of that. At this point I will turn it over to Bernie for the financial results. Bernie.

Charlie is going to do it.

I am on slide nine and following along I'm just going to take a few minutes to outline our [mid-year] financial performance We generated $2.7 billion on top of $2 billion of revenue in Q2 and year-to-date respectively and that reflects a 2% decline on the year-on-year basis and we base [this is an] adjustment for FX and M&A our revenue growth was 4% for both periods. We realize OCF of $1.2 billion and $2.3 billion for the three and six months ended June respectively and compared to last year for both periods our reported OCF improved 2% and on a rebased basis was up 8%.

Our revenue in OCF growth was led by operations in Poland, Australia and Belgium and as evidenced by our reported growth rates revenues in OCF have been adversely impacted by stronger dollar as compared to last year. However, FX might become more of a tail wind in the second half particularly in Q4 based on the recent dollar weakness.

The next slide depicts our results across our core operating regions. Year-to-date UPC delivered rebased from OCF growth of 1% and 5% respectively, reporting just under $2 billion of revenue and $930 million of OCF. UPC revenue growth, similar to our other regions, has been positively impacted by the success of our advanced services. Its overall growth has been muted to some extent by softness in B to B, ARPU pressure, and the impact of analog churn.

Regionally, Western Europe's revenue growth was flat to the previous year, in part due to declines in revenue for broadband in Austria and B to B in the Netherlands. Central and Eastern Europe's growth of 3% was slightly better, driven largely by the continued strength of Poland and overall CE growth was partly offset by our Hungarian Romanian results which are still showing the effect of analog churn and our repricing efforts. But on a more positive note although UPC's rebased revenue growth further declined in Q2, the rate of decline has markedly slowed, and it is tough to say if we bottomed out yet, but as we embark on the fall selling season and as we begin to [like] more favorable comparisons in some markets we're optimistic the revenue at UPC will show further signs of stabilization in the coming quarters.

In addition, UPC continued to demonstrate high levels of OCF conversion and controlled its [fixed] cost base. And as UPC's Q2 OCF rebased growth has also exceeded that of Q1 that is encouraging.

Telenet had a strong first half in both revenue and OCF with a 6% revenue and a 15% OCF rebased growth. Capitalizing on the expanded footprint (inaudible) success of the digital and bundling efforts have been a big part of that. JCOM posted year-to-date revenue of $1.7 billion and OCF of $730 million. On a reported basis these reflect year-on-year growth rates of 24% and 31% respectively as it not only benefits from organic growth but also M&A and positive FX.

It showed consistent rebased growth of 4% top line and 9% OCF. Finally, our last reportable segment VTR achieved year-to-date revenue growth of 8% on the back of price increases and the growth in advanced services. Now on the other hand VTR's 5% year to date rebased [growth] was below, well below historical levels and that's largely due to the adverse impact of the dollar's [improvement in] costs but we anticipate that it will be meaningfully better in the second half given recent FX movements.

Turning to our OCF margin slide 11 highlights LGI continued margin improvement as we continue to reap positive gains from operational leverage and remain disciplined on costs. We finished our [top] margins of 42.9%, and that's up 170 basis points over last year. With our operations in Europe and Japan showing substantial increases over the first half of 2008. Chile showed the decline but that's again largely the result of the adverse impact of U.S. dollar based (inaudible) costs. However, sequentially a weaker dollar helped VTR obtain a 120 basis points improvement in its Q2 OCF margin as opposed to Q1. Overall our margins are moving in the right direction and we're on track to post substantial improvement over the '08 consolidated OCF margins.

Slide 12 provides a brief overview of our capital spend to date, and our year-to-date free cash flow position. For Q2 and year-to-date we had CapEx of $549 million and $1.1 billion respectively. That's flat in reported dollar terms year-on-year but [would be higher if neutralized for] FX.

As a percentage of revenue CapEx was consistent at 21% for both '09 periods and compared similarly to '08 levels and of our total '09 period spend the percentage of spend is attributable to CPE and scalable infrastructure has been increasing. It was 62% year-to-date in '09 versus 58% year-to-date in '08. That's due in large part to the (inaudible) digital.

For LGI free cash flow year-to-date was $496 million with $332 million in Q2 alone. On a year-to-date basis, our free cash flow was up 15% year-on-year marginally helped by FX, and our OCF dropped to free cash flow, re, our free cash flow conversion ratio was up to 22% year-to-date versus 19% last year. In terms of free cash flow expectations for Q3 and Q4, we expect our free cash flow to be substantially generated in Q4 as Q3 is typically more impacted by cash interests and taxes, and Q4 benefits from working capital in-flows related to annual customer prepayments, particularly in Switzerland.

[If you look at our] balance sheet on slide 13, our Q2 had consolidated debt of $20.7 billion, that's flat to year end '08. We had consolidated cash of $2.2 billion consisting of $1.75 billion of unrestricted cash and $475 million of restricted cash. That's up at the end of '08 by over $380 million reflecting recent capital raises and continued free cash flow generation. Leverage continued to remain in our four to five time target [appropriated] to the low end of the range and since year end leverage has fallen slightly to 4.4 on a gross basis at June 30th. On an adjusted basis which adjusts for the asset collateralized debt of Sumitomo and the [news collar] which we just repaid in the July and the cash [flow] at VTR we finished Q2 '09 at 4.1 times on a gross basis. Just to remind you we remain hedged on [section] rates with over 90% debt fixed and the average swapped debt cost of capital in the low to mid-6%. The key take away is our leverage ratios are trending downward with continued OCF growth.

Slide 14 highlights many of the balance sheet actions we have taken recently. The first graph on the left summarizes our minimal near term maturities at June 30, 2009. Over 90% of our consolidated debt including the capital leases, falls due 2012 or later with approximately 99% of debt in UPC which is our [pre-] credit group due 2013 or later. The majority of our near term maturities shown on the graph were actually related to JCOM and Telenet which are easily funded through free cash flow at that level of the [country]. The 2011 maturity are around EUR400 million UPC converts which is puttable at par, and obviously with the [pan-in-well] structure it will not be two years for the (inaudible) and there will be a cash liability or (inaudible).

This margin as we discussed on the Q1 call we'll be very opportunistic with UPC and the debt markets and currently undergoing further debt extension now at Telenet and UPC. As you can see from the middle graph we have got roughly $3 billion of consolidated liquidity of which more than $1.2 billion is available to the parent. We have got $1.8 billion of cash, consisting of $854 million of cash at LGI and $899 million at our operating subs. The remaining liquidity, about $1.3 billion of undrawn lines most of which is accessible today, and on the final graph on the right demonstrates the results of our share repurchase program. In the last twelve months our basic shares of outstanding have fallen around 46 million as we spent around $900 million on repurchases. By maintaining our leverage and reducing our common shares our gearing sets up nicely to continued equity appreciation.

Just to come to the conclusions on slide 15 overall results are very good given the global economic challenges, and it shows the power of our subscription based business model and the benefit of diversification across 14 markets. We remain confident in both our near term outlook, and as we look out over the next few years and as Mike said earlier we're reconfirming both our 2009 OCF and free cash flow guidance.

The continued penetration of digital cable and the benefits that we expect from accelerating 3.0 rollout should help drive sub growth during the key fall selling season, and should help our 2010 growth prospects. As you have seen since our inception we're very committed to equity value creation; we've just upsized the repurchase program such that we now have around $330 million of availability today and we expect to remain very active purchasers of the stock. With that we'll take any questions that you might have.

(Operator Instructions) Our first question comes from David Kestenbaum from Morgan Joseph.

Thank you. Given the strong performance I guess that begs the question why haven't you taken up the guidance a little bit here?

Mike, are you there?

David, I think that we're feeling pretty good about the way results have been tracking over the first six months of the year. At this point we're more comfortable confirming our existing guidance and hopefully beating it in the second half.

Also make the point on cash flow as Charlie said, we already have raised guidance. We obviously increased the interest expense since we first gave guidance as you raise the incremental debt and turned out some of our debt so to some extent [we could give] free cash flow guidance actually is to some extent raising the guidance in that key metric. So I'll echo what Rick said, we are comfortable with our guidance. We want to make sure that we stay the course.

You said that you're going to pick up the subscriber growth in the second half, so are you assuming maybe incremental marketing costs in the back half, too? Is that part of it?

Our subscriber growth as you know is relatively seasonal in the second half of the year. The third quarter is given the summer months in Europe in particular is our slowest quarter. The fourth quarter is definitely our largest quarter. We have been able to even out in those two periods the marketing costs for the last six months of the year, so we don't expect unusual movements in those figures compared to prior years.

Thanks.

Next question, operator.

Our next question comes from Vijay Jayant with Barclays Capital.

Hi. It is James Ratcliffe for Vijay. A couple of things. First of all, your net leverage is now down below 4X. Can you talk about how if at all the events of the last year have changed your view of what the right leverage profile for the Company is?

I would say we haven't fundamentally changed our view on leverage, James. We still believe 4 to 5 times is the right level for us. To some extent, though, we're guided by the market and what kind of capital and liquidity is available in that marketplace and what isn't. We haven't changed our fundamental view that we think this business can support, should support, and will support 4 to 5 times leverage to the extent we can maintain the leverage in that level with reasonable terms on debt financing we'll do that.

And I know you've had ongoing conversations regarding JCOM, but seems one of the potential outcomes is that you're a buyer of some or all of what Sumitomo has. If you decide you do want to take up your stake in JCOM can you talk about how hypothetically you'd think about funding that and secondly if you got to a majority stake in JCOM, will that allow you to change their capital structure immediately or would there be some barriers or hurdles to doing that?

Clearly we said this many times in the past, we like the JCOM business. We think as you can tell from the numbers it is a steady performer and looks to have several years or more of consistent growth ahead of it. Our challenge has historically been that we don't own it properly or in a way that we would view as ideal structurally, both in terms of the amount of leverage it is currently carrying and our ability to access the cash of the business. So if we were to increase our ownership position in JCOM, it really depends on the form and structure of the transaction, James. It is unclear at this stage what exactly that would look like although I can tell you there are several iterations of that where we wouldn't have to put any capital in to achieve that objective. Our own capital.

The Company is relatively unlevered. It has very low cost debt, and we believe that market is available or accessible for cheap financing for JCOM, so at this stage it is too early to say exactly what the transaction looks like or how we fund it although I would tell you that I think it is unlikely we would be providing equity capital at least in the early stages to a transaction there.

Thanks. Just one housekeeping piece. There is $123 million in impairment restructuring charge. Can you tell us what that was for and if it was cash or noncash?

Mike, I will take it if you don't mind. It is an additional impairment on our Romanian business and it was totally noncash.

Great. Thank you.

Our next question comes from Jeff Wlodarczak with Hudson Square.

Good morning, guys. Was hoping you could provide more color on the effects of DOCSIS 3.0 in the Netherlands? You noted a 3% uptick in data additions, can you give us an idea what kind of benefit that drove in video and phone additions given the bundling effect and then what kind of interest is the product driving in your existing base?

I think the numbers we provided are relatively indicative. When your sales go up 30% over a seven-week period, that's a pretty good indicator that the market's reacting favorably. If you look at it today, we estimate that roughly 75% plus of our customers can avail themselves with no incremental cost of a speed, a broadband speed that is in excess of what KPN can provide.

So we sit today with a portfolio of products that essentially begin where DSL ends. That is a fundamental switch in the market, and now that we have brought the pricing as we expected we might have to do, brought the pricing of those services down to a level that is in that sweet spot so to speak of ARPU in that marketplace, we're seeing the reaction, so we have got 2 million homes we're marketing to today. We have got a brand new portfolio of products that we're just seven weeks in to seeing the benefits of, but I would say it is extremely positive, and clearly it is a benefit to the bundle as well because what we have done is we have created a bundle that now revolves around that 25 for EUR25 product, and that's allowing us to both simplify the message for our consumers but also make it extremely appealing to them relative to what the competition can provide. I don't know if Gene is on. Gene, do you want to add anything to that?

I don't think so, Michael, other than I think it is premature, it wasn't until June until we had a full commercial launch. The initial subscriber reaction that we're getting from the chat rooms is very positive although our initial rollout focused upon more updating subscribers rather than new acquisitions, but this sets a new paradigm for speed in this market as well as other markets that will be rolling this out, and very optimistic that EURO DOCSIS 3.0 is going to be a key revenue driver. The newspapers wrote here in the Netherlands ADSL is (inaudible). That gives you some idea, I think, of the initial response to the product.

Great. If I can just ask one follow-up. Mike, do you feel like the JCOM situation will get resolved in 2009 or will we kind of go down to the wire?

I think we'll see resolution. I don't know what you mean by resolved.

I mean just what you're going to do with the asset?

I would say it depends. The partnership will need to be resolved before year end. Technically the contract expires in February, but we wouldn't wait until February. So if we don't have a transaction that we and our partners feel really good about, then we would just probably let it expire as we said publicly, and that would probably happen at year end. Then at that point, Jeff, we're into a new year and we'll have to see what our opportunities and our options are with the business, so resolution of the Sumitomo relationship I believe will certainly occur before year end. What may or may not happen with our interest in the JCOM business may not be resolved by year end if that's clear.

Thanks very much.

We'll take another question from Frank Knowles with New Street Research.

Yes. Actually I wonder if you can just expand a little bit on your plans in Austria and Switzerland, where obviously things -- struggling a little bit still. Do you think those are markets where there is significant competitive threat in those markets, markets where you think the DOCSIS 3.0 is going to help because they have been fairly static over the last year or so?

It is a tale of two different markets. Switzerland as you may have noticed has had a very good run over the last several years and has been an outstanding performer for lots of good reasons. We have run into as you say, a period where a number of things have combined to impact performance of the business and not the least of which is an IT conversion that created some friction among consumers and processing as well as government and public pressure on certain factors of our business. I think a lot of those are starting to resolve themselves or are resolved. We've put a new management team in there, hired a new MD who is terrific. We're going to rebrand that business shortly. The IT product is working well. We are getting ready to launch 3.0 in September, both 50 and 100 megabit services, VOD, the VOD rollout is under way. We have catch-up TV coming soon.

From our point of view all the things we need to have and all the tools we need to have in place to revive growth in that market are essentially coming together, so I am not worried about Switzerland. This is a terrific environment to do business. It is a healthy competitive environment, but certainly very different than say Holland or other markets we operate in, and we're relatively confident in what we can achieve in that market going forward on all three products as we stabilize the brand and the consumer issues at the same time that we launch new products and services in the market.

Austria is a different beast. Certainly a market that as you know if you followed our business is relatively mature and has been for some time and was one of the first markets we launched broadband in, was one of the first markets we had an early digital product in and that's a market with good free cash flow and good operating cash flow margins will continue to be a great contributor to the free cash flow and to the broader balance sheet.

Operationally, though, we have challenges. I think we've identified some of those in prior calls, and more or less they remain the same today. We're feeling most of our pressure on broadband there, particularly from wireless, inexpensive wireless broadband providers who are providing a cheap and cheerful and a not particularly robust broadband service but is having some reaction and certainly an impact on our higher priced products, and that's really one of the main issues in Austria is we have a very relatively large segment of our broadband customers who are on older contracts, and so we are working aggressively both with new bundles and on existing products to retain and preserve the best of our ability the ARPU that we're getting out of each of those homes. That's the top line view of it. Gene, you're welcome to add anything you think would be useful there.

I think you have covered it certainly.

If I could just follow up on Austria. Do you think the three [bundled] product later this year is going to have a big impact because obviously Telekom Austria is also planning fiber rollout and so on in that market?

Well, we just launched. When a national rollout is really planned for later this month, and I think we have yet to see the real benefits of the product in that market. I think we'll see what TA does on fiber. They've certainly announced a robust plan, but it will take them they say on their own words over four years to try to get there, and that's going to take -- how quickly and where they build and how effective that rollout is is yet to be seen, so remember most of our telco competitors are really in very early stages of even theoretically considering their fiber plans let alone practically rolling out fiber, so I think it is a big unknown personally, it's a great unknown, and I would say when you look at the possible outcomes of those fiber builds, there is probably more -- fewer negatives in there than you might be seeing in other markets.

That's very helpful. Thank you.

(Operator Instructions) We'll take our next question from Mr. Murray Arenson, Janco Partners.

A couple of questions if I could. One is you talked about guidance for free cash flow skewing heavily towards the fourth quarter. I just wondered if there was anything you would point to us -- moving parts on that besides watching the top line?

Secondly, if you could talk about the analog losses, they reversed course this quarter. Can you just talk about the trends going forward? Do you think that's sustainable? Is it going to bounce around? What are your thoughts there?

On the free cash flow and Charlie and Bernie, speak up here. But I believe one of the reason it is moves a bit from quarter to quarter is when our interest payments are due. And I believe the fourth -- Charlie, do you want to react to that quickly?

The big thing is you have [coming in rates] in terms of UPC which are basically Q1 and Q3 so that's obviously is a big negative on them. The other big thing that comes about in Q4 is we get prepayments in some markets for the next year, and the big one actually is [coming in] Austria, but the biggest on is Switzerland where a substantial proportion of the analog revenues are actually paid a year in advance. That can be worth over $100 million of cash in which obviously unwinds throughout the rest of the year.

I think on the video question I believe it is best answered with broad strokes. If you step back and look at it, video represented -- analog video represents 20% of our revenue as I said, subscription revenue, and that number declines every quarter as we continue to achieve record digital cable conversions, so we are really in the midst, and I might even say early innings of digital conversion on our footprint and remember in Europe in particular in general we're almost doubling the revenue out of a digital home, so where we face that analog attrition in some instances, we are aggressive and we're really on pushing the quality and the value of our digital platform, if we have to let some of the analog customers go, then we have to let them go.

In other markets we have tried to be more aggressive in terms of price matching and price competition, and we have seen the benefits of that in some instances. In Romania you will start to see more favorable comparisons year-over-year as we move into the phase of the post repricing phase which will happen here shortly. I do think that we're careful, and while we're quite focused on preserving the analog subscriber base, we are also quite cognizant of the fact that it is not our future business. The faster we convert digital, the faster we double the revenue stream out of a TV home and then sell bundles on top of it. The better off our overall platform will be, and to the extent that we can convert analog subs to digital, that's the best. If we can retain them with effective pricing and loyalty offers, that's the second best, and we're going to work aggressively on both of those, but the trend is positive, and certainly our longer term forecast of our business is that trend continues to improve. That's really all I can say in a broad sense.

Great.

I might just give a couple of statistics, Mike, (inaudible), as you know two of our highest earning markets have been in the past and actually continue to be Hungary and Romania, and Romania as a result of the actions that we took last year with the introduction of the loyalty programs and resetting the price [phase], we have actually seen a reduction in churn in Romania of 46% year-on-year. That continues to decline month on month. The trends there look very positive, and in Hungary you almost have to look at Hungary as two separate markets, one where we're over built and one where we're not. In other words, not over built areas. Our churn is 2.5 times as high in our over built areas, and as part of our fall marketing program and the rollout of EURO DOCSIS 3.0, we're segmenting our offers based upon whether the customers are in a competitive area or noncompetitive area and we think by doing this we're going to drastically be able to bring the churn down in Hungary as well.

Excellent. Thank you.

We'll take our next question from Ben Swinburne with Morgan Stanley.

Good morning, guys. It is actually Dave Gober. Just a point of clarification on the comment that broadband sales in the Netherlands were up 30%. Is that a net number or gross number, does that include activity in 3Q?

It is a gross number, and given the fact that the quarter is over, it would reflect certain Q3 periods.

Then just on the comment that RGU additions should improve with the fall selling season, does that start up in September or does that more weighted towards October and November? Are you implying that that's a seasonal improvement or is it more -- do you think that RGU additions could grow year-over-year?

Well, we generally do 35% to 40% of our net adds for the year in the fourth quarter.

In Europe?

Yes. That's really our prime selling season, but, Gene, why don't you add to that?

I think you can expect to see the additions come through in October/November and the beginning of December. The campaigns themselves kick off somewhere around mid-August and toward the end of September depending upon the country, and as Mike said traditionally the bulk of a large percentage of our subscribers do come in during that period.

What I think -- what we've got this year that we haven't had at least since I have been ever in the business I think is a portfolio of products that do offer not only our ability to compete but, for example, in data regain our speed leadership position, for example in Cobblecom versus Swisscom our new portfolio actually will be two times as fast as Cobblecom, and at the same price.

In addition to that we'll be rolling out VOD, we'll have VOD in five of our markets by the end of the fall. We're introducing the green box, for example, in Cobblecom. We've just got a product portfolio that we haven't had to work with in the past, so maybe I am overly optimistic or maybe I should say cautiously optimistic that we're going to have a good fall as a result of this new product portfolio we have to work with.

And Gene is not the most optimistic guy, so that's very positive.

Good to hear. And just one follow-up on the B to B business. I think you guys mentioned in the 10-Q that some of that business -- some of the decline in that business was due to the loss of certain contracts in 2008. Any sense of when you anniversary those contracts and also can you talk about the margins on the B to B business? Are those better or worse than the overall consolidated business?

Generally our B to B margins are in the mid-30s, correct me if I'm wrong, Charlie and Bernie, but I believe that's generally where we are depending market by market of course, so in principle they are lower margin contracts. However, those are pretty good margins as the B to B business goes, and as you say, in a number of instances and in particular Holland, Switzerland, Romania, there were almost sort of one off instances of either a large contract not renewing or some construction revenue we didn't book or perhaps certain nonpay events that contributed almost 17 or $17 million of revenue decline quarter over quarter, so it is less a broad reflection of the demand for our B to B products in the SoHo market or in the medium or large enterprise market. It is more of specific and isolated events that we have to try to manage, and in some cases you want to let those large contracts go because quite frankly they're even lower margin and higher capital, so it is about really transitioning the business off of large B to B contracts and onto more of a medium to large and SoHo environment.

We've hired a new MD of B to B in Europe who is really I think heading exactly in that direction with new product portfolios and new 3.0 products that will target a much more fruitful we think environment, and target market, that will hopefully revive growth in that sector. It seems to us, seems to me that that is an area we've talked in the past where we should be out-performing, not under performing, but I think this was a tough year from a macro point of view in particular, and we just have to rebound back from that.

Great. Thanks.

We'll take our next question from Jason Bazinet with Citi.

Thanks so much. You obviously have a lot of options with respect to the JCOM stake and without weighing in at all which one is more or less likely I was wondering if you could help us understand the options that you have to sort of shield or minimize taxes in the event that you are a seller as opposed to one of other options?

Well, that's a tricky question to be too upfront on. It really has to do very much with the transaction itself and the structure of the transaction, but I will tell you that we have -- we believe certain strategies that would allow us to efficiently dispose of the business if at any point in time that were something we chose to do. I really don't want to get into any details of what that might look like or how we might structure it. There is no benefit it that. That is clearly one of the main issues for us in disposing of any business is can we do it efficiently, and we would bring that same discipline and focus to this as well.

You don't view it as an overwhelming impediment? You feel like you have --.

It is never easy, so I would leave it at that.

Okay.

It is not overwhelming, but it is certainly never easy.

Very good. Thank you.

Yes.

We'll take our next question from David Joyce with Miller, Tabak and Company.

Thank you. Can you provide some more color on how Eastern Europe was working, the net adds across those product lines and countries were better than expected, so I was just wondering how you would quantify it in terms of are the consumers feeling a little better in coming out of a recession or is it benefits from the digital plant there?

Gene, do you want to take that?

Yes, Mike. I think from a general economic situation to be honest with you I think we don't see any -- I don't think you're going to see any significant up turn in Central and Eastern Europe between now and the end of the year. Unemployment remains relatively high there, and it is expected to increase. There is a general decline in Hungary and Romania. They have initiated, the government has initiated austerity programs, increased social tax, VAT, and that sort of thing, but on the other hand I don't think the economy has been the main issue in Central and Eastern Europe. We're just in a very competitive environment there. I think as we have improved our overall infrastructure, as we have rolled out our new product, I think that makes more competitive and that will restore our growth going forward.

Again, you have got certain markets there that always perform well. Poland continues to be one of our best performing markets quarter after quarter after quarter. That's just a function of a number of things, in particular continuing to see the benefits of rebuilt plant and growing economy historically, good content, and good management, so there are going to be -- there are bright spots in that region. I mentioned digital video and digital cable just taking off and tripling our penetration in one year.

That over time these things are going to work. Digital cable, 3.0, broadband speeds, more competitive pricing around our bundle, continued execution on service and quality, are going to work, and we're in the midst -- that's where we are in these markets. We have to remember that we're sitting on the best network. We're rolling out the highest quality products, and we believe we've got the largest scale of our TV competitors [we're going] to deal with, so we have to take advantage of those things and position ourselves in the market for the long-term and not over react to the competitive pressures.

We did that in Romania. I wouldn't say we over reacted, but we clearly said we're going to reprice the book and we're going to do it now, and that was in many ways an experiment for us, and we'll see how that plays out. If you looked at our long range plan, you would see that Romania bounces back and becomes a relatively important growth market for us. It is small. It is 1% of our cash flow, so I don't want to over exaggerate, but I do think that's why we're willing to test it out.

Will we do that in other places? We'll see. I think Gene's point about Hungary is the right one. We'll do it selectively where we have competitive pressure we'll react one way. Where we don't, we won't, and we have the luxury of doing that because we're not regulated in that regard in our core markets, so I think as a whole, especially places like Hungary and Romania once we get through this latest repricing period show good potential, just as Poland has continued to show good potential, so we're looking into to the region.

Prior quarters you mentioned that some of the competitive pressures were waning as some smaller maybe uneconomic competitors were leaving the market. Has that still been the case?

I wouldn't say they left. But they are raising prices. Most of our competitors in Romania have taken rate increases, and generally speaking that's a positive event for us. I think that they only had one choice which was to raise prices or go away, and I think in most instances you're finding that competitors are raising prices and we're right behind them. So historically -- so we haven't seen people sort of fold the tent although I do believe in certain markets you will see some of these DTH competitors consolidate, but we have seen the inverse of that which is also good for us which is generally speaking rate increases.

Great. Thank you.

We'll take our next question from Alan Gould with Natixis.

Thank you. Mike, I am looking at rebased revenue growth, and as you mentioned you have anniversaried some of these price increases a year ago or price decreases a year ago. Add that to the advanced services you're rolling out. Should we start seeing the rebased revenue growth starting to grow again?

Well, I have to be careful what I say here. I know what I would like to say. I am not sure what I am allowed to say.

Clearly I think when you look in particular at Western Europe and Central and Eastern Europe, our outlook is for better growth on the top line. Everything we've said today, everything Gene just said about having all the products going into the fall season, about targeting the competitive situation where we've got it and not on a broader basis if we don't have to, about continuing the scale to the cash flow margins, it's about putting new management in place in certain markets where we needed it in Hungary and Switzerland. I think all of those things we are doing with the expectation that we can do better. I will leave it at that.

Thank you.

We'll take our final question from Matthew Harrigan with Wunderlich Securities.

Mike, some of the leverage companies are showing a pretty good capacity to operate despite having a pretty aggressive leverage envelopes -- been seeing those put up some big digital TV numbers in the Netherlands and Germany is obviously been rationalized, and know that almost [loose] last summer. When you talk about the M&A market coming back, is that really just a function of the loosening up in the credit markets or can you point to some specific emphasis as to why some of the private equity guys might find an exit and what you can bring to the table as more or less the natural long-term consolidator?

I think it is a mixed bag. It depends on which asset you're talking about. In principle you've raised -- you've identified the key issues, certainly the return of the credit markets is providing the fuel for buyers and the optimism for sellers to even consider transactions which six months ago or nine months ago we didn't have, and so I do believe that that is a big factor and we'll have to see how it plays out. It is specific to us. We did raise some capital recently. We think we could possibly raise capital on efficient and good terms going forward, so it does change the dynamic a little bit between buyer and seller and people's expectations. It also probably raises multiples. While we haven't seen a lot of transactions clear at high multiples or really even good multiples, we do think that the combination of good solid operating growth from certain of these assets, private equity owned and principle along with a slight rebound in multiples and access to capital does change the dialog, so we'll just have to see.

We are clearly in a great position in Europe and Japan quite frankly to continue to consolidate these markets. It is what we do really well. You have seen it before when we bought Switzerland, pick an asset. We are able to integrate quickly, we generally outperform our own synergy budgets. This is what we know how to do.

But we also know that we're not going to do -- and we have shown in the past good discipline. We're not going to do deals at crazy multiples and don't look accretive to our stock price expectations, so we're pretty focused on only a certain group of markets where we think we can achieve above average returns. If we can't, we're not going to do them.

I think you identified the right issues. There are some more distressed businesses, but they're generally not talking right now. These are businesses that are looking really to rebound and regroup, and we're not out there buying bonds and speculating in distressed opportunities. That's not that we're paid to do although we think we can do it well. It is not what we're paid to do and it's not what we have the capital to do. We are looking at some, I would say more traditional opportunities, and we'll see if they free up here in the next six months.

Great. Thank you.

I think that concludes all the questions. We appreciate you getting on the call this morning. We're exactly an hour in. A good time to wish you all a great rest of the summer and we'll speak to you in the third quarter. Thanks.

Ladies and gentlemen, this concludes Liberty Global's investor call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global's website at www.LGI.com. There you can also find a copy of today's presentation material. Thank you.