Liberty Global Ltd (LBTYK) 2003 Q2 法說會逐字稿

Please stand by for realtime transcript. The captioning will begin momentarily of the UnitedGlobalCom call.

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the UnitedGlobalCom and United Pan Europe Communications 2nd Quarter 2003 conference call. This conference call and associated web cast is the property of UnitedGlobalCom Incorporated and United Pan Europe Communications. 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 the star key followed by 0 for operator assistance. As a reminder this conference call is being recorded on this date, August 14, 2003. I would now like to turn the conference over to Mike Fries, President and Chief Operating Officer for UnitedGlobalCom. Please go ahead, sir.

Thanks and good morning to those in the U.S. and good afternoon to everyone in Europe. With me on the call are Gene Schneider and Rick Westerman in Denver and John Riordan and Charlie Braken in Europe. We are going to stick with our typical format for the call today. We'll cover highlights and some parent company financials followed by the more detailed review of our European operations. The comments might be a bit longer today but we'll leave room for questions at the end. Before I move on I am going to ask Rick Westerman to cover off the Safe Harbor statement as well as some related SEC disclosure issues, Rick?

In addition to the standard forward looking statement language that we've got on page two of our presentation and page two of UPC's presentation, we'd also like to highlight the fact that we've included all of the necessary reconciliations to comply with REG-G. These can be found in our press releases and they can also be found at the end of the second quarter presentations located on our web sites. For UGC, that's www.unitedglobal.com and for UPC, that's www.upccorp.com. We've also included definitions for certain operating and financial terms in our press releases and presentations. And we have also included some supplemental financial information that we thought investors might find helpful in analyzing our results. Mike?

Thanks Rick, and Gene will make a few comments as well. Gene?

Yeah. I'd like to thank everybody, also, for coming and welcome to our conference call. Before I turn it back over to Mike and the rest of the team, I'd just like to say a couple of things. First, I'm very pleased to report that we've continued to make strong progress in our operation. That progress is demonstrated by financial results that you'll hear about today. I think you'll find that the underlying goal in the business is very impressive. And we do expect it to continue. This quarter is the tenth consecutive quarter of improvement in our EBITDA. It's increased 112% versus the second quarter of last year for a total of $149 million dollars. We've also been working hard to lay the foundation for future growth of the company and we'll hear about some of those on the call today.

Secondly, we are pleased that we are very close to the end of UPC's restructuring and the emergence of the successful company which will be called UGC Europe. Expect a ruling on that in court later this month and we plan to complete the restructuring team after that. Also on today's call, we're going to give you a look at how the new company will be organized. The completion of this restructuring is obviously an important milestone for the company. It has taken a lot of time and effort and I thank them for that. Today I'm going to turn it back to Mike to go through our highlights.

Okay, thanks, gene. I am going to refer to some slides on our web site and I think both the UGC and UPC slides are on their web sites and I'm on slide four entitled second quarter highlights. Real quickly, we did finish the quarter with 8.9 million total RGU's a little over 8 million of which are in Europe and represented a 3.3% increase over the year earlier period or a net game of about 281,000. A couple of interesting points, one, 40% of that growth came from outside of Europe essentially Chili which we continue to highlight as an important asset for us. It's obviously the softer net gain figures in Europe, which we will talk a lot about today. Going back to our year end and first quarter calls, we describe the one off chair we were experiencing in our Dutch operating systems that disconnected activity is primarily attributable to the new billing system implemented last year and the cleanup of our non-paying accounts.

The bottom line is what we believe, is that we believe the disconnect activity is largely behind us and what we can tell you is our sales across all of Europe including Holland are strong and that RGU figures in all markets outside of the Netherlands are on track. So it's an isolated issue and one we believe is largely behind us. We'll, in a moment, talk about the initiatives put into place for the second half of the year. I think Charlie is going to address the issue as well, in particular the fact that we continue to deliver strong EBITDA results not just in the Netherlands but across Europe despite the slowdown. So we think it's largely behind us. I'm on slide five now. I think Rick is going to get into more detail about the financial results but there's some highlights presented here. On the revenue side, we reported $465 million for the 2nd quarter, that's a 26% increase a year on year. Obviously, that was impacted favorably by the strength in the Euro. Also of course attributable to new customers and our growth which improved in local currencies across all our markets and about $16 U.S. dollars for us globally. EBITDA for the quarter just shy of 150 million which is 133% higher than the comparable period last year and 22% lift from the first quarter of '03. A little over 30% of that growth year on year is attributable to FX. So it's good results organically.

Consolidated EBITDA margin is now 32% roughly twice what it was last year and picking up every quarter. Really, three key factors driving that. One obviously our top line growth coming from rate increases in RGU ad's. Secondly, the strong operating results we're experiencing in each of the system levels which are now largely at 40% or above on an EBITDA margin basis. Thirdly, cost control. We said it before but the numbers really make the point here. We're simply more efficient than most of our peers. For example, through six months SG&A in Europe alone declined 18% and 10% in the prior year and there's a bit more room there in our opinion. I'm not going to dwell on the Cap Ex numbers. I'll let Rick and Charlie take you through those. But I will point out on slide 6 on the right hand side, current leverage picture at UGC on the consolidated basis. Pro-forma for both the UPC reinstruction and the recently announced UPC postal restructuring leverages reduced from a little over 11 times at the end of 2002 to under six times on a group basis on a Q2 annualized. This is better obviously than we predicted at the outset of the year.

Really three key things driving that. Number one, better than budgeted cash generation and management in Europe which Charlie will certainly speak to. Number two, the announced restructuring in Poland which resulted in that will be leveraged over two times on an annualized basis. And the continued improvement in Chile in the restructuring of that balance sheet recently which has now brought back company to 1 1/2 times debt to EBITDA. The next slide, slide 7 discusses some key initiatives that were we're working on today mostly in Europe. On the near term operating side, there's really three key things that we're focused on to drive revenue and EBITDA and RGU's in the second half of the year. Number one, like many of our peers, we have begun launching tier data services around our classic 1 megabit product. We do continue to dominate nearly all of the markets where we've launched broadband and the goal is simply to stay ahead of the pack. Obviously, we expect that the net result from the new services will be accretive to our overall expectations or original expectations. That's simply too soon as we just done to tell that.

Secondly, we've learned a few lessons in Austria and Chile about funding and we expect to aggressively launch several campaigns in the Netherlands this summer and fall which will really be first for this market. So we're looking forward to that activity. Thirdly, of course, we continue to focus on being as efficient as we can on the cost side. Strategically, a few things are happening. We are working on the relaunch of our digital services in Europe, which is picking up steam as we begin to assemble a better content line up as evidenced by the recent announcements regarding the Dutch soccer league. Secondly, M & A activity continues to percolate in Europe and we're cautiously looking at a few opportunities that can be best described as prudent expansion or rationalization. We're on the mix of those opportunities.

Thirdly, we have succeeded in raising capital where it makes sense. The last quarter, we sold our asset in Mexico for a headline price of 60 million, roughly nine times fairly EBITDA. So we were pleased with that sale. Last slide here is slide eight discusses VTR in Chile. I'm not going to get into too much detail. There's some facts and figures here for to you look at. On a run rate basis their generating now around 56 million of annualized EBITDA and they continue to grow RGU's between 2, 3, 4% every quarter so the business is really humming along and, you know, while we sold Mexico, we still remain committed to this asset. And it continues to perform at or above expectations. With that, I'll turn it over to Rick.

Thanks, Mike. For those of you following along, I'm on slide nine, which discusses revenues. Revenue for the quarter was 465 million which represents a 23% increase over the reported results from last year's second quarter and the 7% sequential increase from Q1. Backing out UPC Germany from last year's second quarter, revenue from ongoing operations increased 26% year-over-year. Of the $85 million dollar reported increase, 87% or 74 million was related to foreign currency movements. Most importantly, the appreciation of the Euro versus the dollar. The average exchange rate for the second quarter was approximately $1.14 dollars per Euro, which compares to .92 for the second quarter last year or about 24% depreciation of the dollar between the periods. Moving to EBITDA, adjusted EBITDA for the quarter was 149 million, which represents a 133% improvement year-over-year and a 22% sequential improvement based on ongoing operations. Again, currency movements were a significant factor driving the gains but not nearly to the extent that they drove our revenue increase. Specifically, of the $79 million reported year-over-year increase, 32% or approximately 25 million was due to FX changes while 68% or 54 million was due to operational improvements.

Our consolidated EBITDA margin in the quarter was 32%, which compares favorably to 19% in last year's second quarter and the 28% margin that we reported in the first quarter of this year. For those following along now on slide number 11, which shows the quarterly trends for both adjusted EBITDA and capital expenditures. On the EBITDA side, you can see that we've made steady progress over the last ten quarters dating all the way back to the first quarter of 2001. In the first quarter of 2002, we turned EBITDA positive and since that time, we generated 22% compound quarterly growth in our reported adjusted EBITDA over the last five quarters. The other primary driver of our free cash flow profile is capital expenditures. As many of you know, we've made significant reductions from our 2000 and 2001 spending levels. In the second quarter, of 2003, our reported Cap Ex was 75 million, which was up 18 million from the first quarter and flat compared with last year's second quarter. Now moving to free cash flow, which we define as cash flow from operations taken directly from our cash flow statement less capital expenditures. In the second quarter, we generated positive free cash flow of 25 million, a $270 million dollar improvement from last year's second quarter. As I just mentioned, capital expenditures were the same for each period, so the increase was due to a $270 million increase in cash flow from operations. From a negative 169 million last year to a positive 100 million this quarter. The increase in cash flow from operations was mainly driven by cost savings, RGU growth and RPU increases.

The 25 million in free cash flow in Q2 compares to 17 million in Q1. We said on our first quarter call that we expected free cash flow to be negative in Q2. The main reason that we were positively surprised by this result is that our capital spend came in lower than we expected for the second quarter. And finally, to round out the cash picture, we ended the quarter with 370 million of consolidated cash on our balance sheet. The breakdown of that cash balance by subsidiary is as follows. At UGC corporate entities, we had 96 million. In Europe, we had 245 million. In Chile, we had 29 million. With that, I'll turn it back over to Mike.

Thanks, Rick. We're going to now switch gears and go into the UPC portion or the European portion of the call. They have put together a slide presentation that's on our web site as well as theirs. The agenda in the presentation is it consists of three things. I will make organizational comments and introduce the UGC Europe structure and then John Riordan and Charlie Bracken will follow. I am on slide four but it's entitled pro-forma organizational structure post restructuring. As we get closer to the completion of the UPC restructuring, we thought it made sense to reiterate again for you how we intend to structure the business post effective date as well as walk through some of the Logistics and mechanics of the transaction for the effective stake holder. This slide has been disclosed before. It essentially summarizes the ownership of the key parties in the new Delaware corporation which will be known as UGC Europe Inc. and will be listed on NASDAQ.

I think the most important take away here is that the operating business in Europe will be organized into two divisions. UPC broadband which is our cable TV operations across Europe and telemedia which will include essentially everything that is not part of the core cable TV operations. Specifically, our programming and media content activities and non-consolidated investments. There are several benefits to the structure but I think the main benefit will to be focus our core management resources and attention on the cable TV operations themselves which obviously today make up the vast majority of our value and cash flow leaving the non-cable businesses in the hands of a specialized management team who can grow and rationalize the assets, all of which are outside of the bank deal and all of which have really historically been undermanaged and under appreciated. So we think it is the right way to structure the business. The next slide entitled pro-forma management structure of UPC Europe Inc., the details have been disclosed. We thought it useful to repeat them here. The board of UPC Europe will have ten members including two who are appointed by the ad hock committee of the bond holders and you can see the remaining four members listed there. Consistent with the organizational structure on the prior page, each of the main division, UPC Broadband and Telemedia will be run by a CEO, John Riordan in the case of UPC Broadband and Mark Schneider in the case of Telemedia.

I'd also like to make a special mention of Gene Musselman who we announced in the press release today has been promoted to the position of President of UPC Broadband. I think you all know Gene has been our Chief Operating Officer and has spent the vast majority of his time in the cable operation and done a great job running that business and we're happy to see him taking on a larger role in the core cable TV operations. The corporate management team rounding out will consist of Gene Schneider, myself and Charlie Bracken of course and also a host of other executives from UGC and UPC which aren't named here but in reality, all of the remaining officers are expected to include the balance of the current senior management team in Europe, folks like Shane O'Neal, who will be President of Telemedia, Tom Cowden and Rick . We see no major changes in the personnel, and we're pleased that everybody is sticking around and they've certainly done a great job to get to this point.

The last line I'll speak to is entitled UGC Europe Inc. And it just goes through some mechanics here. A couple of key points. At listing, UGC Europe will issue 50 million shares on NASDAQ. The symbol will be UGCE. The web site and related communication materials obviously will be affected similarly. You can see some of that outlined on this slide. I think we can't be too specific about dates but what I can tell you is we expect the Supreme Court notification by the end of August. I think we are now indicating the folks at the first week of September we expect the listing to occur. So that is an overview introduction of UGC Europe. John Riordan I think was going to make comments before turning it over to Charlie, John?

Thank you, Mike. Good morning to both of you listing in the United States and good afternoon to our European listeners. With me here today is Charles Bracken our Chief Financial Official. I shall say a few brief words then I'll hand over to Charlie who will walk you through the financial results of the 2nd quarter. During Q2, our businesses have demonstrated operational improvement and focused on cost controls and boosted adjusted EBITDA to record levels. We continue to see opportunities for cost savings and operational efficiencies across our network, and we will work to achieve our financial goals by realizing the economy's of scale. This quarter, we were pleased to announce the commencement of the financial restructuring of 100% owned subsidiary UPC Polska. This is a separate process of restructuring and nearing completion at the UPC and D levels.

Successful completion of the Polish restructuring will reduce consolidated debt at the UPC group level by approximately 340 million Euro. And as of June 2003. UPC will continue to hold 100% of the equity of the restructured company. We expect the restructuring to be completed at UPC Polska during the fourth quarter of 2003. Since we updated the market with our first quarter results in May, we were pleased to announce the Dutch Attorney General has delivered his advice to the Dutch Supreme Court which concluded that all of the grounds for the appeal by intercom holdings in relation to the decision of the Amsterdam court of how to ratify the accord are without merit and therefore the appeal should be dismissed. The Supreme Court is independent of the Dutch attorney general and in most cases comes out with the same results of the attorney general. We anticipate judgment in August and emergence in the restructuring of UPC in quarter 2003. Finally, I would once again like to extend my sincere thanks to the management team and staff of UPC for the hard work during the second quarter. With that, I will hand you over to Charlie to walk you through the financial results of the quarter.

Thanks very much, John. For those following along, I'm on a page entitled continued growth to page 10 in our slide presentation. I think as Mike indicated, as we indicated in our Q1 and year end press releases, it's a timing of our disconnect terms of Holland and a decline in subscribers in that country. I think as Mike also indicated, we still feel underlying sales are pretty strong and growth outside Holland is broadly on budget. On that basis, you can see on page 10 that we continue to show growth. 13% year on year growth in our new service subscribers with the offers because of that greater mix and also price increases going up to 13.68 for RGU and in terms of basic cable subscribers which we currently use as a proxy for customers nearly 21 in western Europe and around 9 in Eastern Europe. We hope to before going forward for next year customer data as our new billing system give us the accuracy of information we need.

Turning the page for the operational update, as I said earlier, we do continue to see subscriber ads and good sales and cautiously optimistic as we go into the full campaign, summer months, which are very slow, we are seeing above average sales and that we hope will play out in the full campaign. On that basis, we've been very focused in developing strong fall campaign and in particular improving our product portfolio. We've launched a light program product on July the 1. We think that will be an important driver of growth in the full campaign. We've also been very much focused on the bundling of our products to drive growth. I think Mike mentioned Holland in particular put special emphasis on reinvigorating our bundling strategy. And despite all that we are very focused on our MPV positive product strategy. Every customer we have, we are focused on creating positive value. We do feel with the cello life product, we have a chance to reinvigorate our Internet growth. We're also working hard on the digital side of the equation. I think as Mike said, as much progress as we've made there thanks to some good work from Shane and Neil and others. We're very focused on the getting the content put together. We just got the Champions league which is an important European football tournament that we hope will drive our digital somewhat in the Q4. We're continuing to work in other ways to strengthen our digital content offer.

At the same time, we're improving the quality of the platform working with our suppliers and there's a significant improvement in the stability of the digital platform. Which we will or do think will translate into better subscriber retention going forward. Turning to the numbers and revenue, Q2 saw relatively low revenue growth compared to Q1, and year on year, we didn't have significant growth. That was explained really by two factors. One is we did actually have some adverse currency effects particularly Eastern European and Norwegian and Swedish properties where they are not in the Euro. I think Q2, those worked against us. Although we had underlying growth, we saw the currency impacting the quarter on quarter growth. We also saw the impact of the low subscribers in Holland to some extent. That all said, we do see underlying growth in most of our countries. Like I said earlier we're hopeful and optimistic about the third and fourth quarters. And in terms of the EBITDA, when you turn to page 13, we had a very strong quarter in EBITDA. We reported 120 million Euros for EBITDA for Q2. A very significant rise from the 67 million a year earlier. And it was improvement across the board. UPC distribution, which is the cable businesses continues to do very, very well.

But both priority and UPC media, have seen the benefits of the significant cost restructuring and in both divisions we saw continued free cash flow development and in particular in the case of Chile media their building quite substantially to the cash balances. Turning to capital expenditure line, we saw capital expenditure coming below our expectations as a result of a couple of factors. Low, that the lowest subscriber ads in some of the services. But also, because of continued cost disciplines. Our non-CPE Cap Ex is definitely behind budget. We've seen that really from the capital controls we've put in place. It was around 60 million for Q2. A slight increase on Q1. In terms of cash flow as a whole, free cash flow, we had our second quarter of positive free cash flow. As I'll show you in a minute, we also repaid around 175 million Euros of debt. So we are deleveraging points in our growth which is very encouraging. We've also been working very hard on managing our working capital flows. On page 15, we've given you a summary balance sheet. You can see here that our other current assets have declined from year end to from 297 to 252 as we focus very hard on managing our working capital there. And we also managed to keep our trade parables and accruals in check.

You can see despite the fact that seasonal Q4 is a peak, we haven't had that significant a decline in parables and accruals going from 166 to 158 parable parables and 281 to 248 in accruals. You can also see they are working to optimize financing from our customers with the increase in prepayments and deposits from 121 to 137. Return for the debt side of the equation with the announcement of the Polish restructuring, we're now in a position where our pro-forma net debt is around 3 billion Euros about transaction, which is clearly a significant reduction of where we are before the restructuring. After the Polish transaction, we'll be predominantly left with the bank deal as our principal form of leverage which clearly sits on virtually all of the cable assets and a small piece of debt on the Polish assets and the Chile media assets will be broadly unlevered. And we do feel that our leverage is coming into line with some of the U.S. comparables and we do continue to expect further deleveraging as the year progresses. On page 17, we tried to give you an update on how we see our adjusted EBITDA evolving. This is the slide we gave you in the fourth quarter results last year which really set how we saw a bridge between the Q4 and the, you know, the full-year evolution of EBITDA.

I've written some comments next door, in terms of the slide, if you have it in front of you, if you took out Q4 annualized EBITDA, you would have expected UPC to make 337 million Euros of EBITDA, and that's clearly been executed and done. We then budgeted an improvement in priority EBITDA by around 12 million. I think it's fair to say Priority has seen continued price erosion in Q1 had reasonable growth actually in Q2, 4% growth in Q2. But we expect some short forma from them. UPC media is on track to get a 20 million increase in its EBITDA. In terms of the core cable businesses, we now put through all of the price increases we budgeted for the year. We recently announced a major increase of prices in Holland, which took our rates up approaching 12.50 now from the first subscriber as compared to 9 from an apart. And in terms of volume, we obviously executed against our Q4 net ads. 2003 net ads of 430,000, we do expect some short fall due to the longer lasting nature of the disconnects in Holland. And we'll have to see how we get on in Q3, Q4. We can catch any of the short form year-to-date. We also executed the cost savings of 54 we targeted.

Got a little couple of things beyond our control particularly the litigation which is still pending. But all in all, we feel very comfortable in guiding the markets that we will achieve EBITDA of 500 million. And when you take into account the substantial reduction in debt that we're now projecting below 3.1 billion as opposed to the 3.4, we feel the cash flow optimization strategy is certainly paying off and the company's moving well. In terms of the remainder of our outlook on page 18, we will be impacted by the resolution of the partners core case and we'll also have to see how the net ads go in Q4. As I said earlier, we do expect a 500 million EBITDA figure for the year. Net debt of less than 3.1 billion and we do expect to be able to come in within our previous capital expenditure guidance. With that I will hand it back to Mike and we will open it up for questions.

Okay, operator we are ready for questions.

In anyone has a question, please press star then the number one on your key pad. Questions will be taken in the order they are received. If you would like to withdraw your questions, please press star then the number two. Your first question comes from Steve Shapiro of Golden Tree.

Hi. I'm just confirming, you said you expect to exit bankruptcy in the third quarter, is that right?

Right. Yeah. We think the process should come to completion in the first week of September.

Okay. And when do you anticipate going to the rating agencies and what are you expecting your rating will be upon emergence from bankruptcy?

Rick or Charlie, you want to address that?

I think what we're talking with one of the agencies at the moment, we are anticipating any corporate rating and bank that in terms of timing, they can't commit to time because obviously it but I would hope no sooner than later. In terms of the rating, we don't have a sense yet of where we're going to come out, but we'll let you know as soon as we can.

Have they given you any preliminary indications of what they would be looking for?

No, they haven't given us any indications yet.

You mentioned that you had paid down some debt during the quarter. What debt was paid down?

Basically, there were two forms of our bank debt. We had a fixing of a swap obligation which is a short-term obligation which you'll see in our previous filings, we repaid that. We could have just redrawn the bank to pay that down but we just chose to pay that down because it's more expensive debt. We also paid a further charge of the bank which is larger than the revolver.

Okay. And can you just address what you're doing in Holland? Can you go into a little more detail on what the issues are and what you are doing to address the second half?

Well, I think Holland's had a very significant reduction in its cost and as you know, we've had to amalgamate or put together a lot of acquisitions and that's really stirring up a number of opportunities to take out costs. In terms of the operating costs, there are two kind of key areas. One is the people and one is non-labor. We've had a significant amount of head count reduction in Holland. That process is obviously ongoing as you get more efficiency. In terms of our non-labor costs which is about half of the cost to labor, we continue to see opportunities to drive it with nationwide contracts for the switch maintenance and the like. And that's a continuing ongoing process so the cost side of it is going pretty well. In terms of gross margin, we have a very high gross margin as you probably know and programming on the analog business but we have been very focused on trying to improve the digital margin. We also have no guarantees. That aside, we seen quite encouraging progress in the gross margin on digital. And in particular on telephony there's been a lot of success in telephony margins in the mid to low 60% range, which is up from 40% a few years ago. So quite a lot of benefits of the sale.

In terms of the sales side of the equation, with the introduction of our new billing systems which were placed, I think at one point, double digit number of billing system. We've been able to improve the timeliness of the disconnect of our customers. From a financial point of view, we were always providing for these customers to the extent that they would not pay us, but the physical disconnect was not necessarily consistent across the whole footprint. As a result, we've seen this one-time reduction in subscribers. That process is largely behind us we think or is behind us now and we're now focused on growth going forward. We see the drivers of that is a more focused bundling strategy. Secondly, the chela life products which we think will give us an extra product to really drive growth in the Internet area. Thirdly, we continue to try and strengthen the digital losses which certainly strengthens in particular by the champion's league rights. That will give us some growth in Q4. As a final leg of the Dutch strategies, as you know, we've been tackling the issue of rate relief in the country. And very important developments in the quarter was in early July we made a significant moment in prices in about a million subscribers up by around 2 1/2 Euros across that subscriber base. And that seems to have betted down now. That's a very encouraging development as we pursue our strategies of rate costs.

With respect to the subscriber issues, if you could [ inaudible ] In our sales figures for all of Europe and if you were able to look to see the shortfall that we're all recognizing here, but you can see that versus our budget, almost the entirety of that can be attributed to the extrodinary turn in Holland. If we were missing sales targets to a large degree, then I'd think you'd say, hey there's a problem with demand. But that's not the experience. The experience is very targeted, very specific disconnect activity which has the benefit of driving cash up, because your collections go up. It also should be followed by some pretty sizable reconnect activity, but it's sort of a necessary step we need to go through in that market to clean things up. The second half of the year, you know, I'm particularly encouraged by the second half of the year.

For the first time, I see really strong substantive targeted directed marketing campaigns focused around bundles, focused around the voice product which's suffered in the last 6 - 12 months for a lot of different reasons. And with a huge opportunity across a very large customer base, to start driving some meaningful connect figures, and I think all of us feel pretty good about the second half. Now, the numbers will be the numbers. I think the good news is, you can isolate the issue. It isn't something that's occurring across multiple markets. In fact if you look at all the other markets were up and it's one that we think is complete in that, you know, if we looked at weekly trends since then, you wouldn't see the same sort of activity. And three it's giving us an opportunity to really think long and hard, and I think for the first time much more aggressively about getting back at it in Holland on the sale side so we're encouraged.

Okay, thank you.

Yep, next question?

You're your next question comes from Ted Henderson of Stifel Nicholas.

Thank you. You guys launched the cello light product in July and it was when you faced the DSL pricing competition, it was pretty severe in terms of the impact. The launching of the light product in July and the first half of August, have you seen a stopping of the DSL momentum that the prices have garnered there because none of the cello light products were reflected in the Q2 numbers, is that correct?

Let me address that and then I will turn it over to John. The impact that DSL pricing was having was less of an impact on our core product and our sales. It had more of an impact on growing the market shares. So what was happening was, the overall amount of sales in the market were higher and therefore a larger than historical percentage was going to DSL, but our numbers were still good. So let me clarify that. It wasn't necessarily eating into our numbers as much as it was growing the pie which we wanted a piece of. That was the primary reason for going through the light product. The bottom line is, I mean we are not in a position today, the bottom line is, yes, obviously it's had the desired affect. We're not in a position to handing out numbers on an interim basis. The bottom line is that it had an uplift.

The biggest point is it's eliminating dial up faster is your point?

Sure.

It's just growing the market.

But I think, the important part is the overall pie was growing. By that I mean, a broader segment of the market that prior to that wasn't subscribing to either product was deciding to subscribe. And that, we saw as opportuty as much as anything. Do you have any other comments to that, John?

Mike, I think you've covered it pretty well. The thing is we, the internet product is still our leading product as a high demand. The marketplace is increasing the introduction of the multiple pricing. It's growing the marketplace. And I'm extremely optimistic that we are going to have a very, very solid growth in our internet business.

And just one more on the short fall of UPC net additions. A lot of it is attributable obviously to the subscriber management system, Darby. As you launched that in some of the other markets this is a problem that's unique only to that market, is that not true?

I think it is primarily because we're launching it in Austria, for example. We're replacing a single billing. On the issue we had in Holland was we're replacing, I think, you're right, it's as many as 11 different billing systems. And therefore, there was a big disparity in the quality of data, quality of records and accounts. We're launching it in Austria this year. It's a very clean system. It's not as advanced as we'd like it to be. I don't think we expect to see that problem elsewhere.

After the Polska restructuring and something zapped out on my phone, but UPC consolidated debt after this reduction is right around 3 billion?

That's right.

And UPC maintains 100% ownership in Polska after the restructuring?

Yes.

Thank you.

Next question, operator.

Your next question comes from David Joyce of Guzman & Company.

Thank you. Can you talk about the general state of the market in terms of the digital video product. Granted, the penetration rate is still quite low compared to U.S. fears but how do you see that growing, the penetration growing over the next few years and when do you think it would catch up to U.S. levels?

I'll take a crack at it and let Charlie and John chime in. The big difference between our digital opportunity and what you see in the U.S. is that our digital opportunity is to drive people to pay TV essentially. For the most part, our customers are getting 30 channels of analog television for roughly 9, 10, 11, 12 Euros depending on the marketplace. It's not a traditional $30, $40, 70-channel packet that you are trying to get them to spend more on by getting another 30 or 40 channels of pay-per-view. We're actually trying to convert people into what we would consider in the U.S. to be more traditional pay TV customers where they are generating another 25 or 30 Euro's of RPU for you on the back of 50 or 60 additional channels of advanced IPG and interactive services, et cetera. So our opportunity is at one side of the equation more challenging in that we have to convince people to spend more. Now, whereas in the U.S., the incremental spending is relatively small, 20% to 25%. Our incremental spending is quite substantial your asking people to go from a 10 to 12 to 30 or 35. The good news is, what we're offering is much more compelling versus what they have today when you compare to the U.S. And so from that point of view, we, you know that's our opportunity.

The reason you haven't seen substantial movement in the last 12-18 months, there's two primary reasons. One is attributable to the fact that we needed to see the MPV of our digital customer appreciate substantially. Especially in the context of the cash flows and restructuring activities we have been undertaking in Europe. And we did that and have done that or seen that occur in a number of ways. First, the most important of which is a reduction in the CPE costs, which are now in the 150 to 185 type range. Sub 200 range on the box versus 400 to 500 when we originally launched digital. So we have an equally advanced box but a much more compelling up front cost. That's now in place and we can take our first shipments in October.

The second thing we needed to see happen was a much more compelling program offering. And you know, not that we didn't have good stuff prior to where we sit today or where we think we'll be as early as next year but we're in the process of developing a much more compelling programming package driven around movies and sports which we think will be -- will push the product over the edge in terms of desirability and impact of the marketplace. That takes time to put together. So, you know, we have walked before we run, but before we run we need to get a view things under our belt here. The most significant of which that hasn't been accomplished is the content, Champions League announcement is one step in that direction. There are dozens of initiatives we don't talk about regularly that are under way. Its our expectation that when we do relaunch digital in our core market it gonna be a entirely different paradigm from where we were, you know, a year and a half, two years ago when we launched. For that reason, we're encouraged. Charlie or John?

I have just one comment. I think the digital in different countries. For example, we have digital in Norway and Sweden which are a relatively small market. Especially compared to the opportunity that Mike outlined in Holland. There we do have access to the content and there we are even with the high box prices have actually got a business that's become very profitable. For example, both Norway and Sweden make positive EBITDA today on double digit percentage positive EBITDA and in both markets that's relatively low penetration. Sweden has got 7 1/2 percent penetration two-way homes on digital and Norway 16%. So digital can be very profitable can be a good product. I think the core market of Holland which clearly is the one that drives a lot of UPC's branch performance. As Mike said, we've been held up by the content and the high box price. Both of those are going into right direction. I think if you can get the product and continue to ride the price decline in the boxes, there's a very real demand in Europe. Europe's not a fundamentally different market. We've put the package together. We've done that in Scandinavia, now the trick is to do it in other markets.

Most people are obviously focusing on UPC, but can you discuss the VTR's competitive landscape and the penetration there because that continues to roll along quite nicely.

Sure. You know, VTR's got about a, oh, a nationwide network with roughly 1.5 million two-way homes. A million and a half total, a million two-way homes. It dominates the video business. It's got roughly 50% market share in the country. It's got one competitor in and around Santiago which, you know, has its own issues. Has not launched voices. Recently launched data but doesn't have a compelling triple play offering. The thing that I think is most encouraging about Chile in particular is quarter to quarter, it continues to drive the data and voice penetration hasn't seen a low in three years. And, you know there's a lot of reasons for that. One, they do a great job of bundling. I mean, everything is sold as a bundle. Very little of any advertising or marketing or sales activity occur without a bundle sale.

Number two, they are dealing in a different marketplace where the primary demand is strong given the relatively low phone penetration as a whole. Penetration levels in the phone business there are north of 20 and in some cases north of 30%. So the phone product is really ramped up. The data more recently has picked up to the point where today they are approaching 100,000 data substitutes. So the business grows nicely. They've got 30%, you know in on the second quarter basis EBITDA margins. Very little leverage. The biggest competition in the voice and data side comes from essentially the CTC, which is the local phone company there. And it's still at 93% market share and the Intel which is a pretty aggressive data and long distance provider. But VTR's got a strong brand, it'g got a real niche and one that just continues to generate positive results. 1.5 times debt to EBITDA, we see really interesting opportunities for, you know, optimizing that balance sheet, optimizing our own resources and liquidity, you know, on the back of a fast-growing stable asset.

Thank you very much.

Yeah.

Your next question comes from Charlie Leadly of Cornwall Capital.

Hey, gentleman and congratulations to everyone on a great quarter and continue to execute on your plan. Quick question. As you ramp up your ad rate and as you had this quarter, what kind of turn rates are you seeing and what kind of customer acquisition costs?

Well, I will hit that and Charlie you want to hit the cash costs. The churn numbers obviously vary by product. The video side may be less than 1% a month, closer to .8. On the voice and data side, they'd be in and around 2, in many cases less than 2%. 1.5 to 2% somewhere in the middle there typically. Digital is really to soon to tell because it's not a product that we think is fully optimized yet. So it's not a very meaningful piece of information. On the whole, churn is relatively low. If you look at --

Consistent with where it was last year.

Yeah, it hasn't moved dramatically. You want to talk about the tax, John?

Sure. I think when we look at the acquisition costs, for MPV discipline we try and look at it on a per subscriber basis. The phasing of marketing spends, varies. Sometimes you get some quite lumpy and jumpy results. In very broad terms, we talk about 5% of sales as a marketing spend. And we find that gives us the growth that we are looking for as sort of the 450, 1,000 type gross for this year. In terms of the individual kind of products, it varies quite a bit. On a group average, we're spending 65 to 70 Euros of sack per gross ad. That could be a derived number. It's clearly a lot higher for the new services than it is for analog. In terms of roughly where we're at it's something like 150 Euros instead of reasonable proxy for some of the new services. It does vary from country to country.

That's great, thanks so much.

Yep.

Your next question comes from Andrew Sidoti or William Smith and Co.

Good morning, gentlemen. A couple of questions, if I could circle back on Chile first. Where does the VTR asset fit into the long-term plans? I know at one point you were talking about wanting to create some sort of a UPC of Latin America. That's kind of the direction you think you'll be going with the VTR?

You know, at one point, we did have hope of that as did many operators in the region, most of which were residents in Argentina. So when that particular market experienced the volatility that it did, that made that a more difficult proposition. We think VTR often is and will remain the crown jewel of any regional SMO opportunity there. But I think that opportunity doesn't really exist as we sit here today. Having said that, you know, we like the region on balance. We only sold Mexico because it was an offer we couldn't refuse. While we sold that for nine times EBITDA, we think VTR's worth much more than that on any kind of analysis. And you know, likelihood of somebody stepping up and making that statement to us could be possible. We're not necessarily sellers but opportunistic. So I would say that we remain, you know, we love the asset. We will be opportunistic at how we look at its future and what we do in a region. As soon as we have any further direction, we'll give people heads up.

And in terms of asset sales, are there any assets you are currently trying to monetize?

Nothing material.

Okay. And then going on to cello light. Is there a risk or is there a great risk that you could possibly cannibalize some of your full paying customers there with your light products?

Well, we analyzed that six ways to Sunday. There's always a risk that you'll cannibalize a certain portion of your customer base.

Right.

But, you know, thus far, we don't have enough data to to see where that's happening or not. I think our overall expectation is we were probably as I recall fairly conservative in our assumptions that that would occur. People do sign contracts. We do have contracts in place and theres a cost of disconnecting early and things of that nature. So it's not a painless, you know, it's not a pain painless exercise for the customer. But at the end of the day, we don't think it will be substantial enough to impact the decision.

And then Mike, on the competitive threat that seems to have emerged from digital terrestrial and Digital in particular, how much of a threat do you see that to your core video business?

With Digital in Holland, I will let John respond to that, but my understanding is little to no impact. They haven't launched in our core markets yet. You want to respond to that, John?

Yes, I'd be happy to do so. I think their own expectations were in fact, modest penetrations of 10%. Obviously, I have contact with the key players over there. They got off to a very, very bad start and it's been a tremendous disappointment for them. Except in Europe. There's no successful example like in Germany is the nearest one, but they are nowhere near successful. In Holland, one part it didn't didn't even get off the ground in other countries that are in severe financial difficulties. I think the situation is that there's so many channels available, why would anybody want to buy a digital box to see the same number of channels and virtually get nothing extra for it? The cost-conscious environment, they have no advantage and so the introduction of our new digital platform as Mike has previously said, we have not secured the champions league, putting in premium sports and premium movies that drive the digital form. We continue to make progress in negotiations there. We will avail section 31 of the European act, which means that a lot of the municipality contracts and numbers of channels designated is up for renegotiation. We see channel reduction with the quality channels moving into the digital package. I believe that UPC is well positioned to compete head on and ensure it does not impact our business over the Netherlands.

Okay, great. The last question, John, actually, would be in terms of the rate release program that you have in the Netherlands. I was wondering if you have any of those types of rate increase opportunities and other major markets?

We certainly do. And in fact, I won't mention the country but there is an adjoining company where the European directives are having a favorable impact. We'll change the paradigm of both the numbers of channels that constitutes must-carry and in addition to price increases. And we will be pushing through price increases on the 2004.

I think in a broad sense, you know, we have a molsy of trying to optimize rates. But I think we can't comment too specifically because it is a delicate situation in relationship to the framework. We are committed to working, you know, to raise rates where appropriate. That's appropriate across Europe and taking advantage of the jurisdictions. So that is as much as we can say now but internally an opportunity for us going forward.

Thanks a lot, gentlemen.

Your next question come from Matthew Harrigan of Janco Partners, Inc.

Two questions. First of all, on the DSL product in the Netherlands that's toss out there, even now they had relative success, it sounds like they are fairly challenged on the speed price relationship relative to what you have. I think they are at 128K where you are offering 300 k on the chello light and I think they are at 768 and 52 Euros versus your mainstream product in that vicinity. Can you talk about how, I know you are pretty far along in the ramp up to Eurodocs 1.1 at 20 of how much can you push the speeds and what is their ability to get their DSL speed more competitive? Also, I think the conventional wisdom in the U.S. is that DSL even when it's fully implemented, you typically have 70, 75% reach. I know the phone network in Holland is a little bit newer in account of the war. Are you going to be subject to DSL competition across all of your footprint? And then secondly, with all of the noise about three g and the LAN lines migrating over to the lower costs, wireless companies, are you very concerned about the price erosion on the voice side? And are you going to add some features if you do more on the voice side there?

Well, I'll deal with the second question and turn the first one over to John. We certainly haven't seen price erosion on the telecom and voice side. The 3G activity is largely centered around wireless which wouldn't have a direct impact on us because we don't really offer wireless. And I think, you know, recent history would indicate that most of the large telecom players are not lowering rates but raising rates. So at the same time, you know, for one reason being they want to make sure they pick up some additional margins because of the purchases and their history. So we haven't seen any erosion on the voice side per se, but John, you want to discuss the DSL issue?

I'm sorry, Mike. We have seen some decline in volumes in terms of usage because of mobile displacement. But I think there is an opportunity if we wanted to pay the price of elassticity. RPU's have been impacted by lower usage but we have not the price rounds.

All right, John, you want to talk about the speed?

I'd like to address the first question. Well, UPC was one of the first countries in Europe and in fact the United States very closely. And if they are not ahead in the deployment of doctors and Euro doctors. . We have commenced the testing of the two.org products and we have one dot one embodied in fair percentage of our western European networks today. Of course, both doctors and proprietary systems can write side by side now. There is no redundancy of the old equipment so there is a low efficient capital transition. In terms of the speed as we move to doctors 2.0, I don't currently envision there is any product for the residential market. And that DSL can offer that is going to offer a greater level of services or greater speeds than we can achieve in 2.0 and ultimately 3.0 when it comes along. So I feel comfortable on that score. So on a technology basis and product basis, we certainly will be able to meet the DSL truck head on and are doing so.

And just one quick follow-up. I know you alluded to the exact number in the Netherlands. I actually don't have your slides. When you come out in Q2, you break it up by country. How many data customers did you lose in the Netherlands a result of the change in the billing processes?

Well, the net change ads will be offset by the -- the ads will be the two combined. We sort of declined about 13,000 subscribers in the Netherlands of which 5,600 were new service subscribers.

13,000 for the first quarter but 35,000 for the beginning of the year. But what I can tell you is sales were not off dramatically in Holland. So what that should tell you is normalized sales and normalized churn would have produced a significant gain in that marketplace. So clearly, the conclusion you can reach is that we can tell you that the vast majority of the variance between what our net gain would have been and what you reported was associated with the one off churn.

Great, thank you.

I think we have time for one more question, operator.

Okay. Your next question comes from Helen Rodriguez of Merrill lynch.

Yeah. Have I a couple of questions. I thought I heard somebody say that Europe was 245 and I only got 213 so if you can explain that and also confirm that the 95 million is no longer on the balance sheet.

The answer to the first question is currencies.

And the answer is the post commodity is on the balance sheet.

I think the 245 Rick reported was in dollars.

That's right.

But the 95 is still on the balance sheet?

Yes.

Can you go through how much debt of that how much you --

Let me draw and see. It's pretty drawn and pretty drawn b and we have available at the end of the revolver.

Okay. Because what is the difference between the 3357 and the, you know, 2128 minus whatever you paid down?

Well, today we still report the polished bonds on the balance sheet. So they move around in terms of the currency, so I think they under 350, 360 Euros. That's the number for the exchange rate.

Gotcha. Then the 100 on the cash flow statement that's coming in, that's the SDS money coming in?

That's right.

And then did the guidance you gave is assuming that the successful resolution to that or is that

It's a complicated question because there's various outcomes. In the best case, we'll have a 25 million positive impact and the worst case is 7 million impact positive. And the moment we get to 7 rather than 25, so you know, what we try to do in seven is 500 number.

Finally, in terms of What is the strategic There in terms of Cap Ex investments and divestiture and what type of those policy controls will be implemented at other levels in regards to sort of --

Well, I think the entity, you know, reports into the corporate group that was identified. So it certainly would fall under the same policies, procedures and controls that the distribution or broadband group would as well. Its mandate is simply to ensure that the assets that it owns there and operates are maximized in terms of value creation. It's stealth funding in the sense that it does not have access to any other crash than that which it generates internally at this point in time. Unless we make a strategic decision to pursue a specific avenue or specific initiative or opportunity. So it's inherently self-control in the sense that it has a cash flow generated from the various businesses and self-funding but it doesn't have a significant cash balance through new opportunities. Does that answer your question?

Yes, thanks very much.

Ladies and gentlemen, this concludes the question and answer session of today's conference call.

Great. Well, thanks, everybody. We look forward to speaking to you in three months.

Thank you.

Take care.

Ladies and gentlemen, this concludes the UnitedGlobalCom and United Pan-Europe Communications second quarter 2003 earnings release conference call. If you would like to list ton a replay of today's conference call, please dial either 1-800-642-1687 or 706-645-9291 followed by the pass code 2019475. Once again, if would you like to listen to a replay of today's conference call, please dial either 800-642-1687 or 706-645-9291 followed by the pass code 2019475. You may also access a replay of today's conference call by visiting the UnitedGlobalCom or United Pan Europe Communications web sites at www.unitedglobal.com or www.upccorp.com. Thank you for participating. You may now disconnect.