Liberty Global Ltd (LBTYK) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the UnitedGlobalCom and United Pan-Europe Communications year-end 2002 conference call. This conference call and associated webcast is the property of UnitedGlobalCom, Incorporated. And United Pan-Europe Communications, NV. Any redistribution, retransmission or rebroadcast of this call or webcast in any form without the express written consent of UnitedGlobalCom, Incorporated, and/or United Pan-Europe Communications NV is strictly prohibited.

At this time, all participants are in a listen-only mode. Following today's formal presentation, instructions will be given for a question-and-answer session. If anyone needs assistance at any time during the conference call, please press star, then zero, for operator assistance.

As a reminder, this conference call is being recorded on this date, March 31st, 2003. I would now like to turn the conference over to Mr. Mike Fries, President and Chief Operating Officer for UnitedGlobalCom. Please go ahead, sir.

Thank you and good morning or good afternoon, depending on where you're calling from. Thanks for joining us today. On the call with me from Denver are Gene Schneider and Rick Westerman, and in Europe, Charlie Bracken and John Riordan.

Before I go much further, though, I've been asked to stop and let Rick make some explanatory statements about the materials and the numbers we're going to talk through today. Rick?

Thanks. Yes, we have posted a presentation to our Web site, and on the second page of that presentation you'll see the safe harbor statement. And it's pretty much the standard boilerplate on forward-looking statements except that we do make special mention of our 2003 guidance which we're going to discuss today on the call.

I've also been asked to make the comment regarding the fact that your press release provides a reconciliation of adjusted EBITDA with operating loss and that's because we'll be making several comments about EBITDA as we go through our presentation. And then finally, I need to mention that UGC's results are not audited, although the audit process is substantially complete. UPC will be filing their 10K today, and we expect to get UGC's 10K on file in the next couple of days.

So with that, I'll turn it back over to Mike to run through the agenda.

OK, good. We're going to spend the next 50 minutes as follows. Rick and I will spend about 10 or 15 of those minutes - of that hour walking through some highlights, an update on the restructuring in Europe and some financial results and guidance. Then we're going to turn it over to Charlie and John in Europe to dig into more detail on UPC. And then lastly, we hope to leave about 30 minutes or so for questions.

Before we jump in, let me turn it over to Gene Schneider, our Chairman and CEO for a few comments. Gene?

Thanks, Mike. Thank all of you for joining us here this morning. I'm going to just say a few words and, as Mike said, I'm going to let the team walk you through the actual results. As I sit here today, I'm reminded of what we told everyone we were going to do towards the end of '01. For those who were following us then, you'd remember that we identified at least four things we needed to accomplish. The first, of course, was closure of our transaction with Liberty; the second was dealing with our debt at UGC; the third was turning around our core operations from a cash flow viewpoint; and the fourth was restructuring the balance sheet of our European subsidiary, UPC.

It goes without saying that each of these steps were pretty important to the long-term value of our business. As we sit here today, we have achieved the first three of these goals, and we're on the verge of completing the fourth. By now, everyone is familiar with the Liberty transaction. We sold them 300 million shares at $5.00 and in exchange we got roughly an equivalent amount of debt in our European subsidiary, UPC, and of course a great strategic partner in Liberty.

Around the same time, we reached agreement with our bondholders at UGC to repurchase $1.7b of debt. So today, we are essentially debt free, other than the $100m loan from Liberty that we'll repay in the first quarter of '04. You're going to hear a lot today about the massive turnaround in our core operations. Nearly $500m increase in adjusted EBITDA, year on year; 70 percent reduction in capex; and strong revenue growth.

And, as I said before, we're on the verge of restructuring almost $7b of preferred debt and preferred liabilities in Europe, putting that business on a very solid financial ground. I've been in this business for over 50 years and I've seen a lot of ups and downs and we have survived them all and we're sure going to do that. We're well on our way to doing this one. I've never seen a management team step up to the plate the way ours has in the past year. I'm proud of the job they've done and I'm proud of where our company is today.

With that, I'm going to turn it back to Mike.

Thanks Gene. OK, for those following along, I'm now speaking from page four of the UGC slide presentation. The title of the slide is "2002 Highlights." Again, you can access this presentation on either our Web site or UPC's Web site.

I think Gene has already addressed the first two points, the substantial operating turnaround and the approximately $9b of debt reduction that we have achieved or are about to complete. On the subscriber front we ended the year at 8.9 million RGUs, 8 million of those in Europe; video growth of about 1.5 percent, which is pretty good for relatively mature cable networks; 1.5 million voice and data subs, up 20 percent. We've added about 368,000 net new RGUs in 2002, two thirds of those in Europe and a third outside of Europe. Over half of those new customers are high speed data, so clearly this is a driver for us.

Overall, not our biggest net gain year, but much of that had to do with a shift to more profitable customer growth, and in fact in Europe the collateral affects of the restructuring. Page five of the presentation presents some financial highlights for the group. We ended the fiscal year with $1.5b of consolidated revenue. It's about a 20 percent growth rate on continued or ongoing operations. The engine of that growth is voice and data, as you'll hear. About 23 percent and 61 percent growth respectively. As Gene referenced, we delivered just shy of $300m of adjusted EBITDA in the group which is nearly a $500m swing from '01 to '02. And in fact, all of our core operations today are not only generating positive adjusted EBITDA, but also positive operating free cash flow which we define as EBITDA less capital expenditures. That's a big achievement.

Bottom line, for the third year in a row we've achieved our financial guidance targets across the group, and that gives us some confidence as we go into 2003, and we'll provide some guidance on that, the principle components, $1.75b of revenue or growth of approximately 15 percent and $560m of adjusted EBITDA, roughly a 90 percent increase.

Slide six gives some more detail - some more highlights on Europe and other operations. I'm going to skip the European highlights, because Charlie and John will surely dig into that in a fair amount of detail. So I'll spend just a minute on the other operations.

In Chile, we added over 110,000 RGUs alone, ending the year with 768,000 total RGUs; 300,000 of those are voice and high speed data. Cable telephony penetration in that market is now 24 percent nationwide and we think that might be one of the highest if not the highest nationwide penetration rate in the world. Adjusted EBITDA there was up 60 percent and we're forecasting 25 percent growth in 2003. So that business is really hitting its stride. And we're in the process of terming out that bank debt down there, which even today only sits at under three times debt to EBITDA.

Two other operations, Mexico and Australia, also hit their numbers and grew substantially on the revenue and adjusted EBITDA front. Bottom line here - all operations are performing across the board, especially where it counts, and that's the generation of EBITDA and operating cash flow.

I'll turn now to the restructuring of the European sub, UPC, on page seven. I think most people are familiar with the transaction so I won't bother recapping the key elements of the deal. They are summarized there for you. A couple of update items. As most people know, UGC had agreed to provide 100m euros of backstop on asset sales at UPC to improve UPC's liquidity. Coming out of restructuring, we have decided to fulfill that obligation by purchasing 6 million SBS shares that are held by UPC. SPS, as you may know, is one of the largest European broadcasters, so that 20 percent stake in SBS will now be held at UGC.

On the timing front, the restructuring has been confirmed in both the U.S. and Dutch courts. These were the last steps necessary for completion. As we announced last week, one very small creditor has filed an appeal in Holland, which in fairness, these types of appeals always present a potential risk to timing but not risk to closure. And in fact that same appeal by that same party was overturned in the U.S. courts. So the banks have indicated they will extend their waiver which is really the only element of the deal that's impacted by the timing here. Bottom line is we expect to close the transaction as approved and agreed, except it won't probably be in the first quarter. It will be in the second quarter. And I think Charlie and John will both speak to that a little more.

We thought it would also be a good idea on slide eight to lay out the organizational structure of the European business after completion of the restructuring. As we reported, UGC will own about two thirds of the equity, the balance of which will be owned principally by their bondholders. Those amounts could change slightly, pre- or post-closing, based on unsecured creditors.

New UPC, as the entity has been called throughout the legal process, will be a U.S.-based company and will be listed on NASDAQ at the effective date. It will essentially own what is today known as UPC NV for the Dutch entity, which will itself become an intermediate holding company. I will point out, we haven't yet finalized the name for New UPC, but we'll make that known prior to listing.

Two other points worth making here. We have disclosed directors and certain of the officers of New UPC. There will be more disclosure on that as we get closer to the effective date. A second point - as we move forward, we really see New UPC as two businesses, the core cable TV and broad band distribution business, and everything else, which essentially consists of our media and content assets along with some investments. And that's how it will be managed going forward.

The purpose of the next slide, slide nine, is to quantify the leverage picture for you in Europe post-restructuring. There's three calculations here of net debt to EBITDA. On the left, you'll see that using the full-year 2002 EBITDA that UPC has reported and the net debt figure, post-restructuring leverage would have been around 10.7 times. The next bar takes forecasted Q1 adjusted EBITDA which Charlie is going to speak about, and annualizes it.

So given the strong growth year, you'll see that really run rate leverage is closer to 7.5, 7.4 times. The last bar takes out 2003 full-year guidance for adjusted EBITDA of - takes our 2003 full-year guidance of $525m and the net debt figure and brings leverage down to about six times by year end, which we believe is - puts us in good company with respect to other U.S. MSOs. Of course it would be even lower if you took a Q4 run rate. As we look out in '04 that number is expected to drop below five times. So the leverage picture, we think, is a very positive one.

And the last slide that I'm going to speak to here, page 10, is an attempt at understanding valuations, specifically, the relation between UGC stock price and the valuation of new UPC. If you're looking at the slide, the column on the left shows UGC stock price in a range of $2.50 to $5.00. The next few columns break that down into two principle components. The first is the net asset value of UGC's non-European assets which we show at about $1.35 per share. Now, people can debate that number. Certainly the largest component of that is cash, but we're pretty comfortable with that number or we wouldn't have put it on the slide.

The next column shows the second component or the stub which is the implied value of our stake in New UPC. So if take UGC's current price of around $3.00, it implies a value for our stake in New UPC of $1.65 per UGC share. That translates into an implied value for UPC of about eight times forecasted '03 EBITDA. It also translates into about 10 or 11 cents per UPC bond which, not surprisingly, is about where those bonds are trading today. So in other words, there is essentially parity today between UGC's stock price and the current trading price of UPC's bonds pre-restructuring.

If you move down that chart, you'll see the second to last row highlighted. This shows essentially the point at which UGC's share price would get you to the agreed-upon restructuring value of UPC which is approximately 20 cents a bond. And that's closer to 10 times 2003 EBITDA. So - and that is where UPC - New UPC will initially list. We obviously believe the values at the bottom of the page are closer to reality. The average [USMSO], as you would all know, trades at 11.5 times '03 and 10 times '04. Of course, if you put a 10 multiple on our '04 number, you get a price that's not even on the chart. I think we'll get there in time, though, as the market recognizes this and as we continue to hit our numbers, quarter to quarter.

With that, let me turn it over to Rick for some financial numbers. Rick?

Thanks, Mike. I'm just going to spend a couple minutes running through UGC's financial results and then our 2003 guidance before handing the call over to John and to Charlie. So let's start with our top-line performance. Triple-play revenues from our core distribution business increased 20 percent for the full year to $1.35b. Other revenues, which consist primarily of Priority Telecom, our CLEC, and Cello Media, our programming business, increased 24 percent to $143m. Breaking out deconsolidated and certain disposed operations which include programming and CLEC operations that were not profitable and were shut down, total revenues from ongoing operations increased 20 percent to $1.49b.

Moving to the cash flow line, adjusted EBITDA from triple-play services improved 217 percent for the full year to $374m. This was driven by a combination of significant operating cost reductions together with healthy subscriber growth. Other adjusted EBITDA losses, again, primarily Priority Telecom and UPC Media - those declined 71 percent to a loss of $89m. That compares to a $303m EBITDA loss produced by those businesses in 2001.

And again, excluding the various disposed and deconsolidated operations, the EBITDA swing from ongoing operations was $415m, or about a 317 percent improvement to the positive $284m of full year, 2002, adjusted EBITDA that we've reported.

For those of you following along on the slides, I'm on number 13, which breaks down capital expenditures. And you can see, 2002 full year expenditures declined by $660m, going from $996m in 2001 to $335m last year, or about a 70 percent decline. Today, as Mike mentioned, our EBITDA does more than cover our capex, and we believe that the company will be on a consolidated basis free cash flow positive, on a run-rate basis by the end of the this year.

Which leads me to my final topic which is our guidance for our full year 2003 consolidated results. We're looking for year-end RGUs of almost 9.4 million which would represent a 6 percent increase or just over 500,000 subscribers from the beginning of the year. We expect the biggest portion of that growth to come from the data business. Revenue growth, we're looking for 15 percent to $1.75b. As Mike mentioned, we're looking for EBITDA growth of close to 90 percent, to $560m, and our capex forecast for this year is $380m, which is essentially in line with our normalized 2002 capex level.

You may recall that we had some inventory drawdown that impacted our reported number in the third quarter. So our full year, 2003, guidance is consistent with the normalized number for 2002. We do understand that our cash flow growth in relation to our sales growth is of particular interest to people, and Charlie is going to give you a lot more granularity on how we move the cash flow line in 2003.

So with that, let me turn it over to John for his remarks.

Thank you, Rick. Good morning, to those of you listening in the United States, and good afternoon to our European listeners. With me here today is Charles Bracken, our Chief Financial Officer. I shall say a few brief words and then I'm going to hand you over to Charlie, who will walk you through the financial results for year ended 2002.

UPC performed strongly during 2002, despite a challenging business environment. A demand for our services and continued cost controls have enabled us to exceed all the financial targets we set for the company. I'm pleased to report that a strong fourth quarter in 2002 contributed to an important year of solid operating performance. Significant operational efficiencies were achieved during the year, building on pan-European scale economic and a successful focus on cost controls which maximized our adjusted EBITDA penetration generation.

The resetting of our cost base was largely completed in 2002, and we saw substantial improvements in adjusted EBITDA of EUR446m and adjusted EBITDA after capex of EUR1.1b over our performance in 2001. As we have previously highlighted, UPC's operating strategy was revised during 2002 bundling triple play, focusing on the return to a growth strategy. Bundling triple play products, Internet, analog TV and Npd telephony with a measured, digital Npd rollout.

The revised strategy has been successful, with 248,000 residential customers added during the year, despite subscriber additions in the second half of 2002 impacted in some countries by the publicity surrounding our financial restructuring. The focus on improving our capital discipline has been a key factor in our adjusted EBITDA improvement as well as reducing our capital expenditure from EUR897m in 2001 to EUR271m in 2002, a better result than our forecast guidance.

Our balance sheet restructuring has had overwhelming creditor support and has been ratified by the Dutch district court and confirmed in the U.S. court. However, an announcement last week [inaudible] a creditor in the Dutch moratorium proceedings with a euro - one euro claim and [inaudible] one vote appealed to the Dutch court's ratification of the accord. We believe the appeal is without merit. The Dutch court of appeals has scheduled an expedited hearing for the appeal on April 1, 2003, and the court is expected to rule on the appeal shortly thereafter. The U.S. court has overruled an objection brought by ICH in the [inaudible] U.S. Chapter 11 process. We do not expect that this appeal will affect the successful completion of our restructuring which is in its final stages.

We are currently negotiating with the coordinating committee of senior bank lenders and expect to receive an extension to the waiver of our senior bank facility shortly. We will provide more information on the expected timing of the completion of the restructuring as soon as it is available. UPC has started 2003 well. As we go forward into the rest of the year, we will continue to prioritize the quality of service we offer our customers, ensuring our subscribers continue to be at the center of everything we do. In addition, we are continuing to target and achieve prudent revenue growth while maintaining our strategy of adding profitable subscribers and driving continued growth in adjusted EBITDA.

With that, I will hand you over to Charlie Bracken to walk you through the financial results of the year ended 2002.

Thank you, John. And again, good afternoon, everybody, and good morning to those in the United States. I'm also following a presentation which is on the Web site of GlobalCom and UPC and I'm on page four if you want to follow along.

Just to echo the growth story, we did have a very strong year in 2002. Our new service subscribers grew 20 percent, adding around - just over 200,000 units out of a total growth of around 250. That was a key factor in really driving our ARPU per revenue generating unit from around 12.7 in '01 to 13.5 in '02. As you may recall, we started with a basic cable business that made about 9 euros a sub and with the introduction of these new services we've been able to increase ARPU by around 50 percent which is very encouraging.

If you look at the breakout and apply the ARPU on a basic cable subscriber, it's really benchmarking against U.S. or U.K. equivalent, both good news in the past, and also I think good news in the future. Western Europe saw a growth of around 11 percent to over 20 euros, 20.4. And Eastern Europe, which is performing very strongly for us, went up by 6 percent to 8.7. When you compare with the spend in the United States and elsewhere in Europe, we still see opportunities to grow that further and secure more of the [inaudible].

Turning to the financials on page five, as Rick and Mike have mentioned, there was good revenue growth from our core triple-play operations which grew 14 percent which we're very pleased with, given the noise surrounding the restructuring of the company. Because we restructured a lot of our unprofitable operations during 2002, for example deconsolidated our [inaudible] business, getting out of reseller business, the overall group revenue growth was only 1 percent, but we feel that the underlying growth of 15 percent shows we still have a high growth model, and the key now for us is to make sure we do it with prudent investments.

In terms of our adjusted EBITDA, on page 6 you can see here that we have a very significant turnaround. The triple-play companies were key contributors to that turnaround from around $168m to $346m of EBITDA, and within that you can see a good growth in Q4 - of the previous year to Q4 of last year.

There was also very important cost cutting and reset of the cost base priority in our UPG business but we managed to turn those businesses to become EBITDA positive. Both Priority and Cello Media ended up with positive EBITDA in Q4, and we're very focused on that carrying on into 2003. So the group as a whole went from $162m negative EBITDA to $284m of positive. If you look at the Q4 comparison year on year, around negative 10 to positive 84.

In terms of capital expenditures, we have focused very hard on trying to strike a balance between optimizing the capital spend. So our capital expenditure still includes some investment in new build and upgrade to make sure we've got gross under pinned for '04, '05 and the later years. But despite that, we were able to significantly reduce, as you can see from the slide on page seven, from 2000 to 2002.

In 2001 we had $900m of capex and cut that back to $270m in '02. We're forecasting a slightly higher number for '03 which we reflect is a continued focus on making sure we underpin growth for the future. In particular, we're seeing a lot of opportunities later in Eastern Europe which we're investing in. We're continuing to invest in driving forward the quality of our customer relationships, the heart of which are our IT systems. And there are some encouraging trends. We're seeing CPE costs go down, cable modems. The Internet modems having started around 550 are almost below 50 now which is a step in the right direction for us.

Turning to adjusted EBITDA after capital expenditure, what we call internally operating free cash flow, you can see a very strong performance here. We've gone from a negative 1.59b in 2001 to a positive figure for 2002. And really, our key now is to drive that to positive free cash flow after interest and working capital. We started very strongly in Q1 actually our cash flow generation exceeded our expectations. And in particular, our working capital flows are very strong. So we're hopeful of a very strong performance in Q1.

Now, to the capital structure on page nine. We have been very focused on cleaning up the leverage, and the restructuring is not just about the bonds. It's been about other short-term debt liabilities. If you look at the performance of the recapitalization, you can see that there's $100m of equity in the bank group. We're forecasting bank group debt of $3.153b and made an announcement today in the 10K as posted on Friday that we are focused on restructuring the Polish bond debt and that's an ongoing process. So very little debt that's a priority, very little external debt.

So as a whole, we're targeting group net debt and performance for the restructuring of around $3.27b, and clearly the credit multiples I think I mentioned are quite high, focused on driving those down. We think the operating story will allow us to do that.

In terms of the outlook, our guidance for Q1 is to show good growth. We're obviously near the end of the quarter, but we feel that the revenue growth of 2 to 4 percent is deliverable. You'll see some good EBITDA growth from Q4 2002 to Q1, 2003, putting us on a very strong run rate EBITDA as we go into the year. We're seeing capital expenditures running at around 75 to 80.

There is one thing we should just warn you about. You probably won't see any substantial increase in our reporting group RGUs in Q1. What we've been doing is tightening our customer disconnect policy in Holland. With the introduction of the new IT platform we have a much better ability to physically disconnect customers on a more accelerated basis in Holland. You know, don't confuse this with the financial impact. We've always been providing debt against non paying customers separately from the disconnect. But we are tightening our disconnect period to around 30 days or 30 euros, down from what was a range of approaches.

Another result, you're seeing a decline in Holland in Q1. Everywhere else, we're seeing very strong net growth. Everywhere it's on or in excess of budget. And also in Holland we're seeing very strong sales growth. The tightening of our credit policies you're seeing a decline. So Q1 you will see no significant increase in RGUs and that tightening of the disconnection will continue into the end of Q2. But we remain confident with our full year targets based on what we know today from a financial point of view.

In terms of the full year targets, we did file an FTC filing which we were required to do as part of the Chapter 11 process in which we disclosed revenue growth of around 12 percent, adjusted EBITDA of 525 and capital expenditures of 329. We made a commitment to be free cash flow break even after interest expense by the end of Q4. I think we still feel those are do-able targets and they're certainly targets that we recognize are challenging but we're very much focused on realizing that.

In addition, we've also focused on the restructuring of our Polish debt. I mentioned that earlier. And as part of that, we've been [inaudible] money to [inaudible] notes which are around 13-14 euros which were left over from the original acquisition of entertainment. So we're now very focused on the entertainment prudent way to leverage that company.

This year's budget is challenging. There are a couple of key drivers that will affect it, one of which is the resolution of a core case related to certain minimum program guaranties, and unfortunately we're not going to be able to answer many questions on that clearly, given the legal nature of that dispute. But that could affect us around 25m euros both this year and, indeed, for each of the next few years. That's an important thing for us to fix. The language is very much wrapped into the Chapter 11 process.

Finally, I just want to talk a little bit about how UPC is going to increase its EBITDA year on year. And I think a lot of you have asked this question, indirectly or directly. And the chart on page 11 is trying to give you a little bit of a road map. If you look at our Q4 annualized EBITDA, the group is running at a level around 337m euros. Prodigy has just given its guidance for the year of 18m to 20m euros of EBITDA which would represent an incremental increase of around 12m. And Cello - we're projecting a 20m EBITDA position this year. Cello is already positive free cash flow in Q1 and we see that's a very reasonable target based on that particular run rate today. So 12m there, 20m on Cello.

In terms of UPC distribution, there are two key drivers - well, three key drivers. One is pricing. We are continuing to raise prices across Europe. You may recall that our analog prices are very low, particularly in Eastern Europe, and there are opportunities to grow there. We sucessfully executed over the last five or six years and will continue to do that. And then volume. And the volume should be divided to two factors. One is the ads we already have in the bag from Q4 which we would get the annualized impact. And then obviously the projection for the 2003 net ads around 450,000.

If you look at the components there, we think that the $11m EBITDA impact of the Q4 ads is already in place and that obviously, you know, the swing will be how many of the new ads of the 450 target can we hit. Four fifty was a number we hit broadly in 2001 and in 2002, so we're really projecting a return to normalized growth in terms of this year was around 50. But we think that, you know, this issue in Holland the underlining performance justifies that.

And then finally, we do think there are additional cost savings. I mean clearly we've talked about the programming savings earlier on, the [inaudible] I mentioned. But there are continuing scale economics which offset our increase in wages. For example, we've renegotiated franchise fees in Austria which is not made public yet. We continue to get scale economics on the SLAs, service level agreements, with our key vendors and suppliers which we think offer us an opportunity to cut costs. And we're seeing across the board opportunities to reduce headcount. Not in the same step change but certainly to trim here and there.

So projecting around a $54m improvement from cost savings. If you look at the overall build up, it's really 337 where we are today, 32 from divisions and then we did the pricing off the 100,000 net ads in Q4. And the cost savings are $54m. We've got a proven track record of delivering against that and we feel we've got a pretty well thought out plan to get there. And if we can hit the 450,000 net ads that will get us pretty close to the 525.

With that I'm finished. We'll open it up to questions. Mike, again, if you want to...

Operator?

Thanks.

Ladies and gentlemen, if anyone has a question, please press star, then the number one on your telephone keypad. Questions will be taken in the order they are received, and if you would like to withdraw your question, press star, then the number two on your telephone keypad. One moment, please, for your first question.

Your first question is from Akshi Shaw with Lehman Brothers.

I'm sorry. It's more a clarification. I missed out on what he said would be the resolution of the [inaudible] bond. Can you repeat that and elucidate perhaps? Thanks.

The resolution - I think we just announced that we're in discussions to see if we can address them.

What sort of discussions - what do you mean by address? Sorry.

c learly is we recognize that in 2004 those bonds go cash pay. Recognize that the leverage today which if you include the bonds we earn it's around $400m against the reported EBITDA of $20m is very high. I think in common with other cable companies we prudently need to address that. We've been asked to look at that by the UPG board. As the leading creditor of that group ourselves concerning our company position. We have been in discussions with the bondholders.

I really can't comment much more on how far we've gone. You know, we are trying to have constructive discussions. We clearly have time to do that. There's no immediate urgency. But I think [inaudible] we'd welcome the chance to trying reduce the leverage on our balance sheet.

Yeah, Charlie. In fairness, we've probably talked about this on each of the last two calls. So it's not new information.

That's all. Thank you.

Your next question is from Matthew Harrigan with Janco Partners.

Most of my questions were actually answered in your discussion. But a couple of quick points. I mean can you update us on your thoughts on, you know, devising a digital [inaudible]? I know that's not at all integral to the 2003 numbers, but just as you push into 2004 and continue the same, you know, growth factor, you know, what are you seeing as far as, you know, moving programming around, and more, you know, functionality in the boxes as the price points, you know, come down? And then secondly, can you talk about competition in the data business from the PTTs and, you know, any efforts at the speeds, you know, going forward, further differentiating your data business?

OK. I will take the digital one first. This is John Riordan speaking. First of all, we're focusing at the present time on securing premium and premium movies, particularly in The Netherlands. And, as you know, the environment has changed favorably in that respect. Some of the larger operators are selling their interest. We have a new lower-priced digital desktop computer which will be tested in May and should be in instituted in Q4 of this year. We have sufficient digital devices to complete the changeout in Amsterdam in The Netherlands so on an operational basis we're making profits there.

I think your first question was regarding competition in the data field. Yes, we are witnessing some competition in some countries from DSL and we are investigating - we have two products that have come design in Cello which is expanding successfully all the time. And we are looking at the markets on a continual basis and we will see whether or not we need an additional product and if it's necessary we will be prepared to do so.

Just to echo what John said, we're still seeing very strong growth in our data business in Q1. We are seeing increased competition, but so far it seems to be increasing the overall market. It's worth mentioning that Eastern Europe, where there is limited competition, Its very cheering and I think that .

And we'd also like to add that the introduction of two DOS Modem. So we would look forward to [inaudible].

Thank you.

Does that answer your question, sir?

Thank you.

OK, Matt. Thanks.

Your next question is from David Joyce with Guzman and Company.

Thank you. You've already stated that data is going to be your strongest product this year. Are you pulling back on marketing any of the other products? Some of the MSOs in the U.S. are not really pushing digital as much anymore because they're getting to pretty decent penetration levels. What are your thoughts on that matter?

One of the key things is MPD positive. I think, you know, the days when we and many others chased volume - those days are past. We will trade prudent capital efficient for both. And, you know, the reason that data is good for us all is that the CPE curve is really in our favor, below 50 euros. We're moving towards [inaudible] common platform, IT platform. It's also a standard technology now across Europe. So the reason that data is really the big push is because there's a better return there. We are focused on the other products but we're not going to chase growth that is not capital efficient. And I expect, as John mentioned, in digital we're working on the proposition there. And also I think in telephony. You know, the same virtuous curve start coming you will start seeing better economics [inaudible] push them more aggressively.

I think if you look at on a year-on-year basis, however, the plan for '03 and '04 is probably to be more aggressive in voice and data than we - at least attempting to be more aggressive in voice and data than we have been, not to throttle back.

And in general, when do you see ARPUs converging with - your average ARPUs converging with levels that are seen in the U.S.?

Well, I think we've got a lot of growth left in front of us because [inaudible]. So I think we've got plenty of growth in front of us. The important for us is to get the products to be capital efficiently.

Great, thank you.

Your next question is from David Gladstone with Morgan Stanley.

Yeah, hi. Good afternoon. A couple of questions. Charlie, could you detail a bit more on some of the additional cost savings that you're looking at on the $54m that you commented on and how much of that is, say, down at the - if you could break that out. Also the operating company level versus, say, some of the corporate expenses or the overheads.

Yeah, and I think before we start that, and I'm happy to do that, corporate overhead is an integral part of the operating companies. In our corporate expenses, we include a lot of centralized IT costs our platform is budgeted there. Also, a lot of the backbone costs. We also include our centralized marketing costs. So, you know, when we - we're actually collapsing the corporate overhead. So going forward it really will be the budgeted amount. The reason we've done it in the past is, as you know, we're looking to unassign monetize our IT expertise across.

To return to the general cost reductions, I think this program contract is clearly a key driver. That a 25m saving. I mentioned that we reduced franchise fees 6m. We think we'll see a substantial improvement in bad debt. We basically were very prudently provided last year on bad debt in conjunction with the total disconnect policy. And I think because the way we budgeted that I think it will be a 17m improvement. We had a lot of one-off costs which you could argue were restructuring but we [inaudible]. And we're seeing the benefit of our SLA [inaudible] reduction in SLAs year over year. So that contributed to some of the savings.

The other key driver is half our opex is labor but we have three buckets, if you like. We have cost of goods sold, which historically was around 75 percent gross margin and is now up to about 78 percent. But we have two big buckets in opex. One is people, labor-related costs which is half. And the other half is stuff like billing, postage, et cetera. And our labor is going up about 2.5 percent this year, but because of head count reductions its about to decline.

And the key is really driving these economics, the major being cost base, make sure the other costs hold flat to down and some examples of the consolidation of network operating centers. An example would be the benefits of rolling out the [inaudible] platform across Europe. Another example call centers, the number of call centers. So there is plenty. Rent would be another good example, being able to rationalize our property portfolio. There is a lot more to go, but we're able to reduce our rent in Europe. So those are the real drivers of the process.

OK, thanks. And the - and just a question on the UPC [inaudible].** To the extent you can - well, the first question is how much - I know you have some [inaudible] with the bonds down at that level. Can you break out the bonds versus your pari debt? And also, to the extent you can, what stage the negotiations are at?

I think unfortunately I can't have much more than the Polish 10K disclosure and I think everything that you need is in there. But unfortunately I just can't add anymore. But I would encourage you to read the Polish 10K disclosure, and that should answer your questions.

OK. Thanks a lot.

Your next question is from Andrew Sidoti with William Smith and Company.

Good morning, gentlemen. Just a couple of quick questions. I'm wondering if you could talk a little bit more about the programming expenses and the improvements that you're seeing there. I know you had a contract with I believe [Senovia] that carried the Disney Channel which was really depressing the digital margins. Can you kind of comment on that?

What is it you'd like to know exactly when you say "comment on it."

Just wondering - I know you had to work through that - you had that contract with Senovia that was really kind of depressing your digital margin and you were trying to figure out exactly how you were going to handle that.

Right. I mean that contract - and I think Charlie spoke to it indirectly - that contract, at least with respect to the Chapter 11 process, was nullified. But we're still - it's still being appealed. That specific contract is being appealed by the studios. So we haven't yet - it hasn't yet shown any impact and may not show any impact in EBITDA from an accounting point of view. Do you want to add to that, Charlie?

No, no. I think that's right. I mean that is clearly a very substantial contract which is out of the way. I mean otherwise on programming, generally defined we have been focusing very much on trying to tighten up our margins. We have a very high analog gross margins [inaudible] structure of the market in Europe. So it's around 83-84 percent. But we're seeing quite a bit of improvement in Eastern Europe where historically we've had, you know, too high programming costs. But there's been a pretty systematic renegotiation of programming costs, particularly in Poland.

yeah, I would argue that programming costs across our analog phase, which is obviously a larger source of cash flow and revenue today, is not a problem. I mean if you look at the gross margins that we're achieving there, they would be comparable or better than almost any market in the world. The digital business, as you indicate, today is a marginal proposition on gross margin, principally because of some contracts which we're in the process of cleaning up. But obviously as we look forward, when digital becomes a meaningful contributor to revenue and EBITDA which is more in the '04-'05 timeframe, our assumption is that those margins are improved by that.

OK, great. And then the last question is really probably more of a housekeeping question. It's on the [Darby] system. You're able - do you - does that allow you to bill all the triple services onto one bill?

Yes.

And which countries or markets do you have that rolled out into now?

That's France, The Netherlands.

OK, thank you.

Ladies and gentlemen, we have time for two more questions. Your next question is from Nick Renwick with Merrill Lynch.

Hi. Nick Renwick, Merrill Lynch. I was wondering - you talked about the NPV product rollouts. Can you give us a sense as to what the digital lift is, what incremental ARPU you usually get from additional products and how much the boxes are so we can get an idea of payback? And then a couple of housekeeping things. Can you remind us what your margin is on your bank debt these days? And finally, the [inaudible] - is that classified as restricted cash now? Can that not be reversed?

It's - the margin is [inaudible]. Then there's a traunch we have which is - [inaudible] which is another 150 basis points [inaudible]. In terms of the [inaudible] strictly cash. [Inaudible] you know, clearly we have [inaudible] year end. And then your first question was on the uplift of digital. You know, that varies a lot, market by market. It varies a lot market to market and we expect it to increase over time as we improve the product to market but it's around 20 to 25 euros on top of the analog [inaudible]. The cost curve is moving around a lot. As John mentioned, as John was just saying, we're in the process of renegotiating [inaudible] the box. So the original [inaudible] inventories are written down, so...

Yeah, the current situation is that we [inaudible]. That is around [inaudible] dollars. You can answer that [inaudible]. And then ultimately, when [inaudible] cost of that is [inaudible] dollars.

I think if we analyze today for [inaudible] purposes, [inaudible] careful not necessarily to use, you know, the historic list price [inaudible].

I think maybe a broader answer to that is, as we look at any one specific market where digital is intended to be rolled out, if you look at it over a four- or five-year timeframe and you look at it on a completely incremental basis, that product is highly NPV positive but does come and does require some up-front capital - some capital outlay. So it's not unlike any new product launch. You're going to be funding it for a period of time at which point on relatively reasonable penetration assumptions, and in our case those would be maybe even in the high teens, over a medium term you're going to see, you know, substantial EBITDA and NPV impact. So - and if it doesn't produce those sort of numbers, you can rest assured it won't get launched. I mean I think that's maybe a broader answer to your question. Thanks.

And one more question. Just - have you been able to make money in France yet and can you discuss that market a little bit?

That's a tough one. We are positive EBITDA in Q1 in France, but I think it's fair to say that the fundamental problem in France is under penetration. You know, we actually [inaudible] but we, like everybody else in our market, have historically [inaudible] penetration of our network [inaudible] and very focused on how to improve that position both by developing new products in that market and also continuing to focus on rationalizing costs. So I think we do make EBITDA just.

In fact, it's the only market we operate in that isn't generating positive operating cash to the business today and, as Charlie indicated, there's two or three issues. One is you've got relatively large and wide geographic dispersion of your assets; and secondly, unlike a lot of markets, you've got pretty robust competition from digital satellite players and telephony players. So the opportunities there seem to be to run it as efficiently as possible and make it a positive cash contributor, and there may very well be some rationalization opportunities with other operators.

Great. Thanks, guys.

Your last question is from Matthew Harrigan with Janco Partners.

Yeah, I just had a quick follow up. You know, a lot of the U.S. MSOs are very excited about the insert markets for advertising as they get more scale in their markets. Obviously, you've got huge footprints in your markets. Can you talk a little bit about how you see that business evolving, because it looks like you sort of have a Comcast type situation in place as well with big capital cities you're in and all that.

Well, this is John Riordan. I will answer that question. It's interesting that you should ask that because we've been working on this for about 18 months now and I'm having to tell you that in fact we installed the equipment in our digital media center in Amsterdam and the process is being rolled out. I'm not going to give you any projections about revenues ratcheting up, but I would tell you that this time next year we should have an operating business.

I think it's fair that we see that more as opportunity than as a strong combination.

Great, thank you.

Ladies and gentlemen, this concludes the question-and-answer session of today's conference call. Ladies and gentlemen, the UnitedGlobalCom and United Pan-Europe Communications year end 2002 earnings release conference call will be available for replay by dialing either 1-800-642-1687 or 706-645-9291 followed by the passcode 8935641. Once again, if you would like to listen to a replay of today's conference call, please dial either 1-800-642-1687 or 706-645-9291 followed by the passcode 8935641. You may also access a replay of today's conference call by visiting the UnitedGlobalCom or United Pan-Europe Communications corporate Web sites at www.UnitedGlobal.Com or www.UPCCORP.com. Thank you for participating. You may now disconnect.

Thanks, everyone. Bye bye.