Liberty Global Ltd (LBTYK) 2003 Q1 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 first quarter 2003 conference call. This conference call and associated web cast is the property of UnitedGlobalCom Incorporated and United Pan-Europe Communications NV.

Any redistribution, retransmission or rebroadcast of this call or web cast 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 on a listen-only mode. Following today's formal presentation, instructions will be given before a question and answer session. If anyone need assistance at any time during the conference call, please press the "*" key followed by the "0" for operator's assistance.

As a reminder, this conference call is being recorded on this date, May 14th, 2003. I would now like to turn the conference call over to Mr. Michael Fries, President and Chief Operating Officer for UnitedGlobalCom. Please go ahead, sir.

Thanks and welcome everybody. Thank you for joining us. On the call with me today is Gene Schneider our Chairman and CEO, Rick Westerman our CFO, and in Europe, John Riordan and Charlie Bracken, who I'm sure you know.

We've got a typical agenda this morning. Before we move on, we'll let Rick make some housekeeping comments for your benefit. Rick?

OK, on page two of our slides which are posted on our website at unitedglobal.com as well as upccorp.com, we've got the standard forward looking statement language but I'd also like to highlight the fact that we've included in our press release a reconciliation of EBITDA with operating loss and we've also included definitions of certain operating statistics such as adjusted EBITDA, RGUs, ARPU and others, and you can find those at the end of the press release. So with that, let me turn it back over to Mike.

OK, the agenda today is we're going do some quick first quarter highlights, a quick -- a couple of slides on valuation sort of part two follow up from our last call and then we're going to turn it over to John and Charlie and talk through Europe and then we'll get to Q&A and before we move on, I think Gene Schneider would like to make few remarks. Gene?

Well, thanks Mike. I first would like to welcome everybody to the call (inaudible) these are the kinds of quarterly calls that I kind of like -- we know they aren't too excited in the (inaudible) here today except another quarter of strong financial performance and record EBITDA. Our EBITDA for the quarter consolidated was a $122 million. That's a pretty big number for us and it puts us in good shape on our full year forecast.

Now that our restructuring in both balance sheet and operational are largely behind us, all of our effort is focused on driving customers, increasing revenue and maximizing cash flow. But frankly, that's what we've always been best at around here going (inaudible) back to the United Cable days. We'll let the numbers speak for themselves and we're going to do our best to keep these calls simple and result driven.

With that I am going to turn it back to Mike for more detail.

Great. On that note, we're going to jump right into it. I'm on slide 4 of the UGC presentation, which highlights RGUs and revenues. Very quickly, RGUs at the end of the quarter were about $8.89 million, which included about a $1.5 voice and data.

Net gain year-on-year was about $330,000. You might expect 60 percent of that net gain came from our data business. At the end of the quarter, data sales grew about $790,000, which is an 11 percent penetration figure. When you break that down our penetration in Europe is closer to 13 percent and as high as 24 percent in markets like Sweden and about 8 percent in a market like Chile, which is included in those results, it's in really early stages of rolling out ISP data.

Q1 ending, voice subscribers over nearly $700,000 representing 16 percent penetration. Again, that's about 14 percent in Europe and 24 percent penetration on our telephony products in Chile, which represent about a third of our total voice subs.

The first quarter represented soft net gain for the company principally in Europe. About $49,000 total RGUs added almost 85 percent of those in our data business. One primary reason for that -- in Holland, we continue to experience the one-off churn that I think we alerted you to in the last quarter from our new subscriber management system and billing system. That should continue through the second quarter but these are non-pay disconnects and I think something we're taking care of in a non-recurring way. I would add though that all markets are essentially -- other than over on or over budget and sales are tracking pretty nicely. So, we can really identify the one key issue associated with the numbers.

Revenue on a continuing off basis is $436 million, that's up $35 million from the fourth quarter and a $100 million from the same period last year. Obviously, the key drivers are RGUs and ARPUs and, you know, there was a good portion of that represented by the strong Euro and you should go to our 10-Q for reconciliation of the FX impacts here. On real terms, ARPUs continue to grow about 6 or 8 percent.

If you turn to slide 5, you'll see some numbers about adjusted EBITDA and CAPEX. As Gene pointed out, a $122 million of EBITDA for us in the quarter of $488 million on an annualized basis and that's up 41 percent or about $36 million from the fourth quarter of '02 to $72 million for the same period last year.

Consolidated EBITDA margins for the company on a kind of a company wide basis were 28 percent almost twice where they were last year but, I think, more importantly, all of our core European cable operations are in the 40 to 45 percent EBITDA range and those are number we're obviously aspiring to on a group consolidated basis.

CAPEX was $58 million down 50 percent from last year and down 43 percent from the fourth quarter, principally driven by lower net gain but also the fact that CPE is about 35 percent of total spend and if you add the new NCTA scaleable infrastructure component to that, it's over 50 percent of our spend. And interestingly, CAPEX as a percentage of EBITDA statistic -- and I know a lot of people tracking the U.S. market -- was about 47 -- 48 percent compared to 1.0 to 1.5 times the average U.S. got.

Next slide is entirely first quarter highlights UGC quarterly trends that's slide 6. The point this slide, very quickly, is just to show you that this is not a unique experience here. We have been trending as we expected very positively on the EBITDA front, going all the way back to the first quarter of '01. Company turned positive in the first quarter of '02 and since that point in time, has been growing on a compounded annual rate of about 22 percent per quarter. Now, you know our guidance for year end, obviously that trend, they're going to continue, we guess, well above that but we, you know, we're not necessarily projecting that that will grow robustly, especially since some of the growth in this quarter was associated with the strong Euro. CAPEX is a similar story and as we speak to the sort of operational free cash flow components entirely as we move forward.

My last slide is slide 7, of understanding valuation part 2. The point here is in the last call we set up some valuation data for UGC. One component of that data was the value of our non-European assets which we paid at about above 1.35 per share. The biggest piece of that was obviously our Chilean operation VTR and so we'll spend a minute on just some key valuation metrics because some folks have been asking, "Why do you get there and what's that asset really doing?" and we don't always talk much about it.

Up, you'll see 4 bar charts on page 7 for operating performance of the last 3 years. You'll see on the top left the RGUs which are today about $768,000, that's higher than the first quarter, end of the year at $768,000 are up 70 percent from where they were at the end of 1999 or 3 years ago, almost 90 percent of that increase has been in the voice and data business. This is a true triple play, in fact, one of our most true triple play businesses that we own.

Revenues were up 13 percent every year in the last 2, 3 year in U.S. dollars affecting local currency -- they've almost doubled, almost 30 percent a year. EBITDA similarly is $44 million in '02, up 24 percent a year and local currency has almost tripled to 43 percent. And in '03 we're projecting about $57 million, so another 30 percent plus increase year in EBITDA.

CAPEX was $80 million in '02, that was 30 percent down from '01 and this year in '03 we're projecting $40 million, which will be around 50 percent decrease on 02. So -- and the last point is that the business has leveraged about two and a half times. I think the bottom line here is, that this is a very important and a very valuable asset to us. It's a hugely successful triple play asset with EBITDA growing 25, 30 percent every year. It's generating positive operating free cash flow today and it's leveraged about two and a half times. So, we obviously -- while it hasn't gotten a lot of attention, it's something we put a fair amount of value on internally and that's what Rick's going to speak to on the next slide, slide 8, Rick?

Thanks Mike. You'll see from the first line that we expect EBITDA this year at VTR to reach $57 million. As Mike mentioned, that's about 30 percent up from the prior year. With the appreciation of the Peso in the second quarter so far, we think that $57 million number looks pretty reasonable. We're going to apply 10 multiple to that which we also think is reasonable based on the 25 percent compound annual growth that we've experienced over the last 3 years. So, with that multiple subtracting the net debt, you've got an implied equity value for VTR of $450 million or a $1.07 per UGC share. Add to that, our interest in SBS Broadcasting, which at current prices were 24 cents. Add our other assets, primarily our Mexican Cable operation, and subtract our net debt and you get to the $1.35 per share.

So hopefully, that gives people little better granularity on how we get to that $35 from the presentation that we've made back on our fourth quarter results at the end of March. I should also mention that the share count -- 422 million shares includes 5.6 million UCOMA shares that are held at UPC. So it's a conservative share count that we are using as well. For those of you following along with slide presentation I'm going to skip over slide 9 which provides you with more detail on VTRs first quarter results on both the year-over-year and the sequential basis and I'm going to jump right into the consolidated financial results on page 10.

As Mike mentioned, revenue on the quarter was $436 million on a reported basis. That's a 25 percent year-over-year increase and a 9 percent sequential increase breaking out Germany from the first quarter of last year, or backing it out rather, you see the revenue from ongoing operations rose 29 percent.

Foreign exchange did account for significant part of the increase in total revenues and of the year-over-year increase about two thirds of the increase came from the appreciation of the Euro netted off the slight deprecation of the Chilean Peso. So, two thirds of the revenue increase was foreign exchange related, the balance about one third came from gross of RGUs and ARPU and it was split approximately 50-50 in terms of the underlying gross between those two drivers.

Moving over to page 11, adjusted EBITDA in the quarter was a $122 million. That's a 123 percent increase from the first quarter of last year and a 41 percent sequential improvement. Again, foreign exchange played a significant factor but not as much as it did on the revenue line. Of the $67 million year-over-year increase, foreign exchange contributed about 30 percent or $20 million of that increase while the balance or 70 percent -- roughly $47 million was real growth.

The last slide, before I turn it over to John Riordan, focuses on our cash flows for the quarter. We've already talked about adjusted EBITDA and the improvement there. Cash interest expense in the first quarter was negative $72 million, up about 10 percent from where we were in the fourth quarter and up about 40 percent from the prior year.

Working capital was a positive source of cash for estimate quarter, Charlie will speak more to that in a couple of minutes, but when you -- back to around capital expenditure as well, you'll see the free cash flow for the period was $17 million. This is the first quarter that we've been free cash flow positive but this is something, as Charlie will talk more about, is due to some one time factors. We do expect to be free cash flow positive on a recurring basis by the end of this year.

So, between now and the end of the year, it's likely that you'll see a dip back into the red modestly on a -- for a negative free cash flow on both the second and third quarters before breaking through by the end of the year on a run rate basis going forward. So, with that, let me turn it over to John.

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

UPC has continued to perform strongly during the first quarter 2003. Our performance met or exceeded our financial guidance for the quarter. We continue to prioritize the service we offer our customers and have recently completed a reassessment of our brand.

The company is implementing a comprehensive program across its European footprint based on redefined mission, vision and values, putting the customer at the heart of everything we do. Customer satisfaction is the key principle of our operation and we are dedicated to offering our 8 million customers more choice, better value and an ever improving quality of service.

UPC is being transformed into a sophisticated Telecommunications and Entertainment company. Our operating strategy continues to focus on analog triple play, we're returning to a growth oriented strategy, bundling triple play products, Internet Analog TV and NPV positive telephony with a major digital NPV positive roll out.

Financially, we have continued to target cash flow generation and we will not chase less profitable revenue growth. This prudent revenue improvement is driven by increased take up of our new services and targeted rate increases. We will work to achieve our financial goals by realizing economy subscales across our networks and cost rationalization through integration synergies.

We've since updated that market with our yearend result at the end of March. We are pleased to announce the extension of waivers under our senior bank facility until the end of September 2003. This will allow UPC sufficient time to complete its restructuring process and to deal with the appeal procedure that has been filed by Intercom Holdings in relation to the decision of the Amsterdam court of March 13, 2003 to ratify the accord. While it was expected, the Dutch Court of Appeals rejected ICHs claim at the beginning of April.

ICH has appealed a ratification of the accord to the Dutch Supreme Court. The Supreme Court has scheduled briefs to be submitted by the 23rd of May this year and is expected to rule on the appeal expeditiously. The Supreme Court will be the final point of appeal for ICH in relation to the ratification of the accord. We believe the appeal is without merit. However, the appeal will delay the effective date for the mergence in chapter 11 in the court process and the completion of the re-capitalization beyond the end of the second quarter 2003. We will provide more information on the expected timing of completion of the restructuring as soon as it is available.

Finally, I would like to sincerely thank management and staff for their hard work during the first quarter of 2003 in continuing to successfully execute our revised strategy. With that I'll hand you over to Charlie to walk you through the financial results for the first quarter of 2003.

Thanks John, and good afternoon to everybody. I think, as John mentioned, that the focus of the company continued to be on cash flow generation, particularly on adjusted EBITDA (inaudible) CAPEX and as a result, we are looking to chase on profitable revenue gross, or indeed, for the marginal revenue growth. That will show we're very pleased to still see very strong growth in our revenue line and if you're following along on the UPC slides on page 16, there's a page called continued growth, which already takes some of the key metrics in our revenue line, and as you can see from this, our new service subscribers continue to grow very well at 13 percent.

I think as Mike mentioned, we have seen a slight decline in Holland with a gross -- not least because of the timing of the credits disconnect period for some of our subscribers but the underlying sales are very strong, not just in Holland but also everywhere else across Europe (inaudible) budget. As a result for this we're also seeing a pretty important improvement in APRU. APRU for RGU is up 6 percent of 13.74 and if you put that on a basic cable subscriber or a proxy for customer equivalent, you can see that our Western European customers are now on 21 Euros which is a long way up around 12 which is our average basic cable APRU, (inaudible) lot of gross when you compare it with some of the other European countries.

And in Eastern European -- our apology of rate increases and focus has also seen an improvement. Again, a 6 percent year-on-year up to 9 Euros. If you just turn to the numbers and look at the revenue, you can see here that the underlying gross of the company was 9 percent in its collateral collaborations. We continue to see some pressure in Priority. Priority has seen a lot of pressure (inaudible) business and it is also focusing on highly profitable business and taking out some of those marginal businesses. So, there has been a decline in the Priority revenue line but as you'll see a minute, the underlying EBITDA growth is still strong and the CAPEX is very much under control and they're very close to free cash flow, which is very pleasing to us.

You'll also see growth in the media business benefiting from the Chile splits, which is linked to the high growth Internet business. One of the reasons why the growth here doesn't look as high as you might expect is because of the German consolidation. We had a German business that we deconsolidated in Q3 but underlying growths, we think, is healthy, around 9 percent.

If you turn to the next page on adjusted EBITDA, the focus on cash flow starts with (inaudible) moves on to CAPEX, and you can see we moved our EBITDA from 55 million in Q1 of last year to a 106.5 million in Q1 of 2003. Again, very encouragingly Priority and media both made good contributions in terms of positive EBITDA of around 2.5 million each in the quarter, and media in particular, it's free cash were positive and self-financing at the moment -- was Priority's virtually free cash flow positive and is financed now -- fully financed from the cash it has in hand.

Moving to the core cable business, we could see a very strong growth again, 65m to 101m. Well, what we've done this year is we've broken out the UPC investments which is a small portfolio of investment assets, which we were required to do under our bank deal, and the remaining overhead, much of which actually is scaled over the whole distribution footprint, for example, our IT platform is now including distribution numbers and that's why you might see some slight difference if you look at them year-and-year comparisons with last year's reported results. But what you're looking at here is a true entering cable business EBITDA of a 102 million.

(inaudible) free cash flow. I think Rick's already given you a hint of this. As you can see we started actually the credit of the quarter return on 255 million of unrestricted cash and we ended with 248 million. So net, net we, I guess, (inaudible) a better word, 7 million of cash. In that actually we repaid 2.5 million of debt to Priority and we also put into restricted cash around up to 15 million concerned with the defeasance of the PCI bonds, which is some bonds that we have in Poland, which is in effect a repayment, so if you take those two factors out -- as you can see from this cash flow statement the company actually had a very strong improvement in cash flow and actually made free cash flow.

I think as Rick also said, we suspect that there is one (inaudible) we were faced in Q2 to 3. One of the key factors there was continuing tight control over capital expenditure of 43.5 million, which was quite inside our original guidance of 80 million. And in addition the working capital, well, as we had projected some positive cash flows to come in from prepayments by subscribers in Austria and Holland at the beginning of the year, we hadn't projected such a strong performance in terms of maintaining our payables and accruals as we did. So as a result, we had a very strong performance in our working capital, which was an overall contributor to this free cash flow number.

Just turning to the capital structure, you know, we continue to be focused on getting the restructuring done and I think as John indicated, where the key now is just to get through this final appeal which we don't think will be a problem. In terms of the bank debt itself, we are very comfortable within our covenants. Our Q1 results are quite a way ahead of expectations and we're now in a position where our margin and our borrowings has actually dropped 50 basis points because of the improvement on our credit profile. And we are getting some benefit from the strengthening dollar. If you look at some of our bank debt, 347.5 million for Trio (ph) 347.5 million is actually denominated in dollars, so the weakening dollar is actually benefiting us in terms of overall reported leverage. And we remain very focused about improving the credit multiples of the company over the next six, twelve months.

In terms of the outlook in the last page, as I said before, we're already going to prioritize EBITDA and free cash flow generation, and really that -- we stick with our guidance that we gave you last year, in the beginning of the year, in terms of the overall numbers but we're not going to be able to give anymore updates on a more regular basis for quarterly guidance because of the -- these new SEC rules. But we certainly feel on track, we started the year in good shape, there are certain issues out there which we need to focus on, we have the -- certain programming guarantees which we're still trying to work through. But otherwise, the company is on track and we're very pleased with the first quarter.

With that I will end. Operator, I think we are ready for questions.

If anyone has a question, please press the * followed by the number 1 on your telephone keypad. Questions will be taken in the order they are received. If you would like to withdraw your question, press the * followed by the number 2 on your telephone keypad.

Your first question comes from Edward Henderson with Stibo (ph) Nicholas.

Good morning. I was curious, the sub- management system that you've put in the Netherlands, which increases efficiency in identifying and purging non-pays, is there such a system in the rest of the European markets that's already in place or is non-pay an issue in some of the other markets also?

Well, the system is activated in Holland and then France and is currently being rolled out in Austria, but -- otherwise you want to comment additionally on that, John? I mean, the only place we're -- for expansion this particular issue is in Holland.

That's right, no conclusion should be drawn that in the rest of Europe we're suffering the same symptoms as the Netherlands, which was a special case of 11 acquisitions being merged together in a short period of time and the billing systems were diverse and sometimes they were mingled in with the electricity and power companies and water companies.

So we had special circumstances here. Fortunately, we are very close to the end of this experience and in fact the result is, of course, substantially more cash collective as a result of the billing system got higher churn because of the necessity to take constructive and severe action to rectify it, but we're at the end of the cause (ph).

And I think we would happily say that we don't expect this to be repeated elsewhere in Europe.

OK, thank you -- also Rick, on the consolidated cash that we're showing, 509 million consolidated at the end of Q1 '03, can you break that cash down between cash at the parent -- obviously, we went down through some of the UPC number but that's not all available cash for -- at the parent level, correct?

No, it's not. Of the 509 million, 178 million of that was at the corporate level at UGC, 20 million was in Chile and the balance, less than 300 million, was at UPC. I should probably also mention that of the 178 million at the parent that we had, at March 31 on April 9th, we purchased the 6 million SBS broadcasting shares from UPC and that was at a total price of about $107 U.S. million, so the pro forma cash at March 31 was about 70 million.

Right, thank you very much.

OK.

Your next question comes from Matt Harrigan with Jemmco Partners.

I have two questions -- congratulations on the results first of all. Can you talk about the currency composition in the operating wise and expenses versus (inaudible). I think UPC is probably (inaudible) that but, you know, Chile, you know, what's the exposure in the dollar fluctuations are -- not like that the financial debt side, but (inaudible) cost side, and it's -- secondly, can you talk about the migrations that your DOCSIS one-to-one and how you see your SB offering -- if all the thing is you need to give yourself a competition?

Rick, why don't you answer the first one, and John the second?

Sure, our programming cost in Chile are almost all denominated in U.S. dollars, and then of the capital spent, approximately 50 percent of that is U.S. dollar based, and then as you mentioned, the bank facility, $138 million outstanding is a dollar denominated facility. So, the interest cost on that is in dollars as well.

John, you want to address the Euro DOCSIS point?

Yes, Mike. Well, UPC has had a technology road map embedded in its plans for a number of years now, and the introduction of the DOCSIS platform has been beneficial both from a CPE and CMTs cost, reducing capital expenditures, increasing our ability to control data and to offer multiple services and effectively has been a major contributor to some of the efficiencies that we have achieved under reduction in CAPEX.

We look forward to the introduction later this year and the release of 2.0. UPC has already trailing that product and will be launching it in central Europe and in the Netherlands by the end of this year. We anticipate no other problems but advantages on the DOCSIS platform.

So, may I infer that you're going to strictly (ph) 2.0 and you're skipping 1.1? I know that the move to 1.1 is tougher from 1.0 and it's pretty easy going to 2.0 from 1.1, but it sounds like you're going directly?

We have the ability to mount the DOCSIS CMTSes side-by-side with the proprietary equipment and we are experiencing no significant difficulties at all in running those (inaudible) old systems, and the road map is that we will move to a 2.0 capability through a software upgrade throughout the course of this year.

Great, thank you very much.

Ladies and gentlemen, this concludes the question and answer session of today's conference call. I would now like to turn the call back over to Mr. Michael Fries.

OK was that because there were no further questions or did somebody give you a drop-dead time?

No further questions sir.

Great, all right. Well, listen, we appreciate everybody's attendance on the call and we look forward to talking to you in August. Thanks.

Ladies and gentlemen this concludes the UnitedGlobalCom and UnitedPanEurope Communications First Quarter 2003 Earnings Release Conference Call.

If you would like to listen to the replay of today's conference call, please dial either 1-800-642-1687 or 1-706-645-9291 followed by the pass code 93064. Once again if you would like to listen to a replay of today's conference call, please dial either 1-800-642-1687 or 1-706-645-9291 followed by the pass code 93064.

You may also access a replay of today's conference call by visiting the UnitedGlobalCom or UnitedPanEurope Communications corporate website at www.unitedglobal.com or www.upccorp.com

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