Liberty Global Ltd (LBTYA) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's Full Year 2018 Results Investor Call. This call and the associated webcast are the property of Liberty Global, and any redistribution, retransmission or rebroadcast of this call or webcast in any form without the expressed written consent of Liberty Global is strictly prohibited. (Operator Instructions)

Page 2 of the slides details the company's safe harbor statement regarding forward-looking statements. Today's presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company's expectations with respect to its outlook and future growth prospects and 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.

Hi. 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 kick off 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 off of 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 CHF 6.3 billion or around 10x this year's operating cash flow. I'm going to talk more about this deal in a moment. But viewed through just about any lens, the last 14 months for us have been pretty transformational. After 2 decades of buying, building and growing world-class cable operations in Europe, we have now announced or completed transactions to exit 6 of our 12 markets at premium valuations, between 10x and 12x operating cash flow. I'm 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 to 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 and pending 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 incumbents, 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 the top -- tough comp in Q4 last year. U.K. ARPU continues to rise at the 2% level, and we added 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, reporting 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 is guiding to positive operating cash flow growth in 2019.

And the third major bullet here, the third 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's going to take us through 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 CHF 6.3 billion in cash. Look, the industrial logic of this combination is really compelling in our view. 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, with 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, we're pleased with the price, which equates to 10x this year's operating cash flow for our asset, which has been in turnaround mode. And after debt and working capital adjustments, the CHF 6.3 billion headline price should net a little over CHF 2.6 billion. And for reference, the Swiss franc and the dollar are just about at 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, integrate and grow our cable and broadband businesses as well as our track record of value creation. As we did when we announced the German deal, for example, in the left-hand side of Slide 6, you'll see some operating metrics for Switzerland over the last 13 years. During that time frame, we've increased ARPUs and revenue over 50% or about 3.5% per year, which had 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 when -- when we bought the business, we invested around $1.6 billion of equity. And since then, we've distributed nearly $4 billion to the parent company, that's after payment of interest and debt expenses, and we'll collect another $2.6 billion of net proceeds in this deal. So that's 4x our original investment and a high teens IRR over 13 years. I really couldn't be prouder of our local operating team there, 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, 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 in 6 core European markets. That includes 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 flow. That's before corporate revenue and costs. Our 50-50 JV with Vodafone, which, of course, we don't consolidate, 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 scale 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. And the blue box on the far right-hand of the slide, we include, I think for the first time, our nonoperating assets. So that would be our expected pro forma cash proceeds from the 3 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 the net present value of tax attributes in Europe, including the U.K., will 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 2 numbers, and both of which are shown on the chart. The first is the expected cash proceeds from the 3 pending deals 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 shares. So the punchline here is that these 2 numbers alone gets you to about our current equity market cap, which means everything else on this page, Virgin Media, the Dutch JV, our ops in Eastern Europe, our other corporate assets, are not reflected in our stock today at all. We'll let the analysts flesh it out for everyone as they see fit, but the picture from our perspective is clear. It almost doesn't matter what multiple you put on the cash flow. It doesn't matter what discount you put on the cash or other assets. It's a pretty good valuation story, made even better by today's announcement.

Now I'll just cover 2 more operating slides, and then I'll hand it over to Charlie. On Slide 8, we highlight Virgin Media's results, and there are 4 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 the more for more; and reduced 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 emphasize, our analysis indicates that 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, our broadband speeds to 500 megabits per second. That's nearly 8x faster than anybody else in the market. We'll have improved WiFi apps and more boosters. We'll launch the 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 and 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 in the My Virgin app.

Thirdly, I want to be sure to highlight some inorganic headwinds that Virgin will encounter this fiscal year that will impact 2019 growth rates. That includes some regulated network taxes of GBP 32 million, some negative regulatory impacts in the mobile business of about GBP 17 million from things like roam-like-home and mobile termination rates, and both contractual and potential increases in programming costs between GBP 60 million and GBP 80 million on an annualized basis. And together, these headwinds add up to about GBP 110 million to GBP 130 million, and that's going to impact the growth rate for Virgin in 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 at Lightning, more targeted rollouts 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 caught the earnings call 2 weeks ago, you know that they ended 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 EUR 420 million. The SFR migration was a drag on net adds for sure in '18, but that should be over now. In fact, if you exclude the impact of the SFR customer migration, subscriber trends were actually better in the fourth quarter. Telenet has got a strong product lineup 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 in EOS. But I'm particularly excited about Telenet's YUGO bundle 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 with was no set-top, superior broadband and a great mobile offering.

Now all that said, 2019 will be a transition year for Telenet, a fully realized BASE synergies, a loss of a large MVNO contract, and continued regulatory pressure will impact revenue and OCF growth. But adjusted free tax flow -- sorry, adjusted free cash flow will remain strong in 2019, at EUR 380 million to EUR 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. Now while Q4 revenue was roughly flat year-over-year, OCF grew 6.5%, setting the stage for solid momentum heading into 2019. On the top line, the fixed business continued to drive steady financial growth and mobile revenue declines began to stabilize.

Looking ahead, VodafoneZiggo's launch plan for Horizon 4 remains on track for the first half of '19 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 SIMs taking a converged bundle. Their guidance is for moderate OCF growth in 2019 supported by ongoing synergies. And again, the JV returned over EUR 700 million to us and Vodafone during 2018, and they're guiding to EUR 400 million to EUR 600 million in shareholder cash returns for 2019.

So I'll end with 4 key priorities for 2019, on Slide 10. Obviously, first and foremost, we are focused on closing the pending M&A transactions. The Vodafone deal is, 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 these 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 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 in capacity, products and CPE, as a result, will drive OFCF 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 our excess cash when these pending deals close, with a focus on value creation. And we'll have more say about that, of course, as of the year unfolds. So Charlie, over to you.

So thanks, Mike. I've moved to the slide titled Revenue and OCF Growth. Now this is just an overview 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 broadband rate increases, the OCF growth rate was slightly lower. However, 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 performed 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. Switzerland, as we've been signaling all year, 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 did improve our video proposition.

And then in Central and Eastern Europe, a pretty solid performance with low single-digit revenue and OCF growth. We also got our central costs down year-on-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, and that was clearly impacted by the one-offs last year, which underfitted the growth rates, and with the revenue and OCF growth rate for the full year of 2.2% to 3.5%, respectively.

Turning to CapEx on the page titled P&E Additions. We've broken down our CapEx both by segment and by driver. A few high-level comments. Capital intensity is coming down. '17 and '18 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, falling to 31% in 2018. And we're targeting a reduction in the region of 20% year-on-year for 2019.

The U.K. has peaked in terms of CapEx. The V6 upgrade is largely behind us, and you should see that number coming down pretty dramatically going forward. And similarly, Telenet also guided a decline in CapEx as their network upgrades are completed and they finish their IT integration.

In terms of where the money is being spent, 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% of sales to 6% of sales. And then we have investments in the capacity of the network of 4%. And the money we spent on product and enablers was again we think has peaked and will come down further from the 6% level in 2018. And that's because we're through 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 our 3 standard slides provides a brief overview of our cash leverage and liquidity. Even without the Vodafone and Swiss sale proceeds, we have $4 billion of liquidity including $1.5 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, so I'm going pause now for the time being. But the full company achieved $1.4 billion of free cash flow, which at the original guidance exchange rates we've provided, is in line with the $1.6 billion guidance number.

On leverage, we continue to operate at the top end of our 4x to 5x range. We actually ended the year at 5x gross and a little less on the net side. I would highlight the impact that seasonality has on our leverage ratios, which I've calculated on the basis of our last quarter annualized OCF. We expect similar phasing in the first half of 2019, with higher ratios in Q1. And then finally, we executed $2 billion of share repurchases in 2018, again, in line with what we told you.

I'm now going to turn to 3 special topics that investors have asked more details on. The first one is entitled "Understanding Lightning", but in many ways, it's about understanding Virgin. What we've done here is present Virgin as 2 distinct businesses, which is actually how we look at it from an internal performance monitoring basis.

The first business, legacy business, will be called here 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. As you can see this year, we estimate our revenue growth was around 2%. But why do we say that? Because we think it has opportunities to grow its penetration of the SOHO 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 obviously to what goes on with -- at Brexit. And historically, it's been a market where we've 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've broken out for you here are the key KPIs to assess performance and returns. So I'm just going to go down the Lightning column. Today, we've built 1.6 million Lightning homes with 339,000 customers, so around that low 20% penetration. And that translates into around GBP 161 million of revenue. And as we've 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. And we currently estimate that the OCF margin is 56%, because clearly, you get 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, now we're running at GBP 690 per home since inception. We expect it to come down as we get more sophisticated and efficient on the build. But currently, that translates into a total spend in 2018 of GBP 328 million, which also includes work-in-progress for the uncompleted homes. And of course, the CPE and installation cost, which we've included in the other CapEx bucket. So the total CapEx in Lightning was around GBP 400 million in 2018, and we estimate that cumulatively, we spent GBP 1.4 billion on CapEx on Lightning since inception.

Another key point of this slide is the free cash flow. If you look at the operating free cash flow of Lightning, we estimate that it's a negative GBP 313 million. And to the extent that you assume that we debt-financed that 1.4 billion of CapEx, which I think is a reasonable assumption, the Virgin-blended cost of debt of around 4.8%, that translates into something like a GBP 400 million negative free cash flow impact, including interest.

So by contrast, if you look at the core Virgin business, it's actually growing very well. As I discussed earlier, we said 2% revenue growth, but slightly lower on the OCF side. I might mention many of the headwinds in 2018 that we talked about which contributed to that. It's also probably true that, as we started outlining and 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 that core business, it's also a reasonable free cash flow conversion asset. On these numbers our management account is converting 22p in every GBP 1 at the OCF level, and we expect the number to go up as capital intensity declines. Because as you may recall, in 2018, we spent a lot of money on the V6 box upgrade. We also benefit from substantial tax assets in the U.K., as Mike commented earlier. So when you look at the free cash flow of Virgin, it's misleading to say that we're not making a lot of free cash flow because you've got 2 very different profiles.

Now if you look at the right-hand side of this page, we've got some thoughts about how we would go from here. While we think we're able to consistently build 400,000 to 500,000 a year, we do think MDUs are an area of opportunity. We're getting better at understanding how we're going to market these, and I think Lutz in particular believes that there's a significant upside potential.

Overall in Lightning, we feel we're broadly in line with the original business case. The early cohorts were achieving long-term penetrations in excess of 30%, and you can see that in the chart on the bottom right. These types of infrastructure investments are currently very much in vogue in the U.K., but we believe Lightning is the most successful altnet building at scale. And if you look at the valuations that 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've got a slide called Changes to the Operating Model. But really the real question is, what are the central costs? What we did 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 think, largely, we would say that has worked. In terms of the types of spend, they're really grouped into 2 key buckets. And as you can see in the numbers on the right-hand side of the page, the first is technology and innovation, which essentially all the stuff we do in behalf of the companies so they get economies of scale and shared product development costs, and that adds up to around $900 million OpEx and CapEx spend, covering product development, technology strategy and shared platforms.

Now a 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 when the transactions close. And in any case, we believe that the $900 million will probably hit peak investment because you put a lot of money into the video and connectivity platforms through 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. Because that's the traditional corporate functions: management; finance; legal; people; actually, it includes procurement. And that's why we've been really targeting the majority of our reductions as part of the broader reorganization. We're estimating that 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 giving more responsibility to the country level, as you can see from the left-hand side of the page.

The last special topic is what is our pro forma free cash flow. So this is the free cash flow generated from the assets we retain. Now I've learned a lot more about this over the past month, and I would like to learn. And it's not a simple topic. Now there's a detailed explanation of how we've calculated 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 OFCF is higher. Then we have the interest, which is just over $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 the tax within that number, we're broadly flat in 2019 as well the interest.

And then we have the 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 the repayment of EUR 100 million shareholder loan, and we expect to get the last of those payments next year in the form of shareholder remuneration. So that gets you to a free cash flow before working capital items of $557 million.

And so I want to focus on our working capital. And just to be clear, we think about it in 3 buckets: ordinary working capital, operational finance, and restructuring. Now broadly speaking, we try and hold this within the 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, it's actually a $168 million negative in 2018. So let me explain how that breaks down.

Within our ordinary working capital, there's a few headwinds that we've 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 for the mobile companies. But that's a tool we could use to reduce that working capital drag. In 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 vendor 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 then 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. 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 the programming headwinds, the U.K. is growing very nicely. And I talked to a lot about how happy we are with Lightning. 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 has guided 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 emphasize 3 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 you close in June, we won't. But we think assuming a mid-year close, there 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 the EUR 100 million. And finally, it includes the negative OFCF contribution from Lightning. Now if you were to allocate the interest, I've made the case that's a $400 million to $500 million negative free cash flow hit, and then what you're getting to that is a very high growth high return business.

We'll update you more on the buybacks when we close the transactions. But for the time being, we're guiding to a $500 million buyback through 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 SocGen.

It's Nick at SocGen. Can I just ask 2 very quick ones, please? Just you mentioned buybacks at the end there, Charlie. Could you just mention things 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 there? And secondly, could you just give us a rough idea as well of the cash contribution to the free cash flow in Switzerland? It may just be that I've not had time to work it out, but could you maybe just give us an update on that so we can sort of do a like-for-like between the guidance and this year's number, please?

Nick, it's Mike. I'll take the buyback question. Charlie, you can work up the Swiss cash question. I mean, as we've 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 let the market know. Do you want to talk about the Swiss cash, Charlie?

Yes, sure. Actually, it's intended to -- because it's at different years. In 2018, Swisscom was a very strong cash flow generator for us. And again, you get into this question of how you allocate the central cost by country. But I would characterize it as having a relatively low CapEx sales ratios versus the other assets. Actually, in 2019, there's a big shift. We are planning to, and will continue to plan, to roll out EOS next-generation boxes and will also continue to push in an operator to 1G network. So we -- I think you're going to see that free cash flow contribution in 2019 much lower and our number's around $50 million and other people probably will compare to around $200 million, $250 million in 2018. I will emphasize how you allocate the internal cost in 2018. No 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 GBP 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 I just want to understand now having sort of a single country play. Obviously, Telenet has its own capital structure; Ziggo has its 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 so we got your question correct, Vijay. The question on debt is specifically around Virgin?

Yes.

Okay. Yes. Maybe I think Charlie can work up an answer to that. I think we're about where we want to be. On inorganic headwinds, Tom, you can jump in here. Obviously, the programming costs would annualize. To the extent that we have additional contractual costs, that would hit. But remember this year, our costs were up about 5%. Next year, it's more like 8% or 9%. So we don't -- we expect that to be a positive in the 2020 period. It should not be a comparable hit. The broadband taxes, it's a big jump this year. I think it's doubling, something like that. It might -- you can comment, Tom, more specifically, where 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, longer-term picture here, to return to more normalized growth in the U.K. and Ireland, just to probably give you that benchmark. Charlie, do you want to answer the second question on leverage?

Yes. Just quickly on the broadband rates. There's one more year in the gift that keeps giving from the British government. But it does end in 2020. So 2021, we'll be back on a normalized status on the rates. Look, on the leverage, I think we've always said that 4 to 5 is our preferred range. Be at the bottom of the range if there was a high component of mobile and also if there was lower growth. I think we've articulated the U.K. looks pretty high-growth assets. So I think we're pretty comfortable where we are today at 5x. Against that, to the extent which, as you rightly point out, U.K. becomes particularly a major part of our portfolio, we don't have that diversity and ability to shelter. So, we'll have to take a view on it, but I think I'm very comfortable with the 5x where Virgin is today. And there's no imperative to delever before the transactions.

And we'll take our next question from James Ratzer with New Street Research.

Yes. Two questions, please. One on Switzerland with the Sunrise deal. I mean, it looks like fantastic terms for you. I mean, to the extent that's so good, what happens if Sunrise shareholders fail to approve the transaction terms? Because I think that has to go to 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 happened on TV net adds? It looked a bit weak in the fourth quarter. Is that something one-off or more structural?

I think Tom, why don't you work up an answer, or Lutz, on the TV net adds. On the Swiss transaction, yes, it is a good transaction and good terms for us, we would concur. And it's 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 #2 position across the entire scope of the telecom market there. So I think their shareholders -- we 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'm not sure we're disclosing that. But that's, in the Swiss market, a precedent. It's not usually a very large number. I think we're relying on their underwriters, who are underwriting the right offering, and relying on their ability to make a very strong argument, which I think Olaf will do convincingly that 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 or Lutz, you want to do 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 twofold. One is we did our price rise in Q4, and the other one was a deliberate decision to focus more on Full House and VIP customers using our V6 boxes and not too much to focus on play in terms of acquisition, and you see that in higher free cash flow numbers.

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 moving to structurally lower price rise with CPI, which is, 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 in sort of November '19 is perhaps now less likely, given that we know the BT comparative? And do you see that 4% to 5% run rate dropping down to the sort of 2% levels that BT is now committed to?

I will take that. We're not going to provide today, David, any detail on pricing proposals this year or in the following year. So 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 9 months. I think this pause makes sense and -- for them. And to be honest with you, it's still at CPI. And there's -- certainly, there's 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 2 things. One thing is that if I haven't read it wrong, I think the [small] price rise in 2019 applies only for new customers, not necessarily for existing customers. And I think second thing is that Sky recently has announced their normal price rise. And I think third thing, you have to put also innovation potential in context with price rise, right. So -- and as Mike has said before, we get our Horizon 4 UI, we get fixed-mobile convergence, we get higher speeds. So I think we have a lot of innovations to satisfy our customers, which might give us some pricing power.

And we'll take our next question from Polo Tang with UBS.

I've actually got some 2 questions. So just in terms of the Swiss deal, there have been on-off talks in the past 1 to 2 years. Can you maybe talk to why the deal came together now? Was there any particular catalyst? And also, did you insist on an all-cash deal? Or are you open to taking equity in the merged entity? And my second question is really just about central costs. So you laid out 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 see 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 a reduction in terms of these central costs, did I hear you correctly that in terms of the hearing that you're looking to reduce these total central costs by 20% going forward?

Yes. Charlie, you can respond to the central cost point. Polo, I think the short answer is those -- that $900 million does not include the 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 only 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's no particular reason why this one took this amount of time or less or more. So there's 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 felt for us that this was the better outcome and the price we were able to realize in 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.

Yes. So just to confirm, that's the gross cost. There's no revenues, for example, for VodafoneZiggo in Austria. There's numbers were about $150 million. The gross costs also actually include a business we've now closed down which is which is a 0 margin, or low margin handset business, it's about $100 million of costs. So that's one consideration. I think the other thing is that the TSA is going forward or near a $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 under the TSA. So we actually reduce that spend accordingly, because most of the spend is flexible third-party contractor spend. There's very little internal data. So I think it's quite hard to do an apples-to-apples, but it's certainly true to say that the majority of the spend going forward will be actually at the half of the year, the TSAs. Although Virgin and (inaudible) will remain a core anchor tenant. (inaudible). In terms of the reduction, we're reducing a bit the cost, and I wouldn't want to characterize that as restructuring. That's as much about efficiency, but also about the fact that there are certain items of our overall spend. So in that spend in the T&I area, only about $130 million or so is labor. So most of it is just something you can scale down or scale up. And then really the structuring, the 20% we talked about don't reflect on that 260 million. And I think we said when would say about that in certain activities.

And we'll take our next question from Jeff Wlodarczak with Pivotal Research Group.

First, congrats on the attractive price you were able get for the Swiss assets. Between the Vod sale, Austrian and the Swiss deals, your 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 and alternatives? And then I've got a follow-up.

I knew you're going to ask that question, Jeff. I think, yes, and it's fair. But I think I'm going to have to say what I've said in the past, which was it depends in 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, inorganic and financial opportunities, of which this is -- 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, are you still feeling very comfortable with the mid-2019 close of the deal?

I am, yes. I mean, that could mean June, July. We have -- we're back working with them. The "stop the clock" is over. There's a milestone in March around the Statement of Objections 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.

Let's 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 note 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 expected -- 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 2/3 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 math, it's not correct. And we're not going to provide independent guidance for Switzerland at this point, except to say 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 or Lutz, do you want to respond to that?

I'm just trying to identify a Q4 cable number. I think the subscription was up 2.5%. So...

Yes. I think the confusion in there, that's the version using -- including Lightning in it. I think the fact is we believe that if you take out the consumer business growth, and you're quite right, not growing at quite the 2% rate, because that's -- a big part of that is the handsets. And we also think that there's underlying growth in the B2B business. So we don't believe that the growth of the consumer business excluding Lightning is a negative growth business, it's a growth business, but not as much as 2%, which is the blended average of mobile, B2B and Virgin cable.

Well, we know that B2B growth is approximately 3%, mobile growth, plus or minus 10%. And the other 2 are blended. That's another way to possibly answer the question.

Moving on to Steve Malcolm with Redburn.

Yes. I'm going to dig in to the U.K. a little bit and then I'll ask a quick question on the Sunrise deal, if I can. Just you mentioned Brexit, I guess, calling it out a bit more than you have in the past. Are there any particular signs in the business that you're worried about? I'm thinking, in particular, of your B2B business, you have quite a lot of local government exposure in there. You managed to sort of grind out low single-digit growth for a bit.

And also on the handset side, I mean, you've obviously moved everyone to 3-year EIP deals. Are you going to hit a bit of an air pocket this year? We've read a lot of 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 Freenet's position is here? Because I understand that they have a blocking minority here. I presume that the shareholder vote will require 75% approval. They have 24.5%. On the basis 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 Freenet's position here would be very useful.

Yes, I'm glad you asked that question. It's not a 75% approval. It's a 51% approval, so they do not have blocking position, and their position isn't necessarily known to us. I'm not sure what Swisscom has disclosed or not about that. It's certain the board has approved the deal and Freenet might have its own views that have been made clear to us and they may make clear to Swisscom -- I'm sorry, to Sunrise. You might ask them that question on their call tomorrow. Sunrise, in 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. I'll let Charlie chime in 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 programming contracts or things that make the business tick. But as any U.K.-based business would be doing, we're evaluating the impact on consumers, as I've said consistently for a very long time now ever since the Brexit vote occur. 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 of -- and there's lots of different variations on that, as you can imagine, different points of view, of what will happen to GDP, what will happen and 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 real material contractual or any sort of supply-related challenges. I don't know if Charlie would 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 or what Brexit is going to occur. We are seeing a little bit softness, actually, in sales as you mentioned it. But remember, that relatively low margin for us. I think it's too early to say this is going to have an impact on local government. I think when we gave our guidance, certainly it showed that there's a range of possibilities because, to be blunt with you, I think none of us know what the economic environment is going to be later in the year. But we're not seeing material hit. All we're seeing is bits coming on this. But we're seeing more consumers waiting and seeing, rather than diving into new deals. So let's see how the end-of-March goes and hope for the 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.

No -- yes. Absolutely, Mike. It's Andrea here. It is a 50% vote of the shareholders that are represented in the meeting, and we don't have any official news as to how Freenet are going to vote their shares at our meeting. It's obviously -- there's obviously a regulatory period that needs to be gone through before we get to that. So I suspect, we'll see how they play it. And they do have, as Mike said as, they are reporting 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.

Yes. One question is -- that I have 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 there sort of an easy conceptual way to connect what you're highlighting for the 2018 pro forma to the $1.1 billion reported in continuing operations? Particularly, I'm wondering is there a change in definitions here? Or is this the old free cash flow just in a different parameter? 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, a follow-up. I think Steve sort of asked this question about the handset life extension in the U.K. Overall, about this sort of -- I mean, another easy way to ask this, I suppose, is what do you actually expect, give and take, for the development of this big boost to the top line that you experienced in 2018 in V Med and 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're reporting to for the last couple of quarters. And I've got to be honest, I'll be damned pleased when these transactions are closed, because the concept of the pro forma adjusted free cash flow is as I'm learning from my accountants, assuming that many men can dispute and argue about. What this is really trying to do is -- and I'm very happy to take you through or the guys can take you through it offline. This is our best guess of how we would report the company pro forma of the sales of the assets, the free cash flow from those assets, and there's a series of footnotes that we can go through it offline. But just to reiterate, there's no change in methodology. This is completely consistent with the -- how we've done it in the previous quarters and indeed how 2018 is being compared to 2019, albeit 2019 doesn't include Switzerland.

And then on the...

Yes, on the handset question, I think you're right. I mean, we've sold a lot of handsets into our customer base, and that -- this has slowed down now a bit. Number 2, as Charlie said before, the customer demand, especially on hardware and handset has slowed down and entire market is down 10% to 15% since December. But having said that, the SIM-free market in the U.K. is only 15%. As for instance, the SIM-free market in Germany is 50%, 5-0 percent, 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.

It's Christian. Just wanted to ask about the Swiss transaction. The transfer of the UPC debt, how does that technically work? I mean, the debt is not specifically debt at the Swiss entity. So just wanted to understand is only the Swiss bond being transferred. Or how does it work? Just to understand it technically.

I'm going to get Andrea to answer it. But remember that we draw these fun and games around orphan and succession events. So I don't think we want to get into the implications of that, because it's a lot more detail. But suffice it to say that we are allocating and assigning with transaction some of the debt in UPC to the asset. But Andrea, do you want to give more detail?

Yes. I think most numbers disclosure we're going put around this. But I think the number's been disclosed in both press releases is, basically, Christian, a portfolio of bonds and derivative securities that have been in the UPC credit pool that have been transferred over. Does that answer your question?

All right. We'll take that as a yes. Listen, we appreciate everybody joining the call, especially folks in Europe. We know 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 or so ago before the call. So I 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 and, more recently, Severina have done a great job. The whole management team there over a decade or more has really done a great job building this company. It's been a proud and incredible achievement for all of us to operate in this market.

And -- but we do know that Sunrise is going to do tremendously well with these 2 businesses put together. It's going to be a terrific competitor, particularly against Swisscom, and it's the right thing for this market. So it's a win-win. It's certainly a win-win transaction and a great time for us to build cash, as we've obviously noticed. We think at these multiples we're doing the right thing here in terms of rebalancing the business, and we're excited about how we could use that cash to create shareholder value. And we always appreciate your support and 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 be available in the Investor Relations section of Liberty Global's website. There you can also find a copy of today's presentation materials.