QVC Group Inc (QVCGA) 2011 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Liberty Interactive Corporation's quarterly conference call. Today's call is being recorded. At this time, I would like to turn the presentation over to Courtnee Ulrich, Vice President of Investor Relations, to read the forward-looking statement.

Good morning. Before we begin, we would like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about financial guidance, business strategies, market potential, future financial performance, new service and product launches, and other matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues, and continued access to capital on terms acceptable to Liberty Interactive.

These forward-looking statements speak only as of the date of this call and Liberty Interactive expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Liberty Interactive's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

On today's call we will discuss certain non-GAAP financial measures, including adjusted OIBDA. The required definitions and reconciliations, preliminary note and schedules one through three can be found at the end of this presentation. And with that, I'll turn the call over to Greg Maffei, Liberty Interactive's President and CEO.

Courtnee, thank you, and good morning to all of you for joining us on the Liberty Interactive earnings call. Today, besides myself, speaking on the call we'll have Liberty CFO, Chris Shean, and QVC's CEO, Mike George. After that, we'll take questions. We hope you have seen our announcement this morning on our plan to recapitalize Liberty Interactive into two tracking stocks -- Liberty Interactive and Liberty Ventures.

Attributing to Liberty Interactive, we will have in it QVC, our eCommerce companies, our 34% interest in HSN, cash of about $500 million, QVC's debt which is comprised of the bank debt it has and the bonds it's issued, and the senior notes that were issued by Liberty.

Attributing to Liberty Ventures we're going to have all of our non-consolidated interests, excluding HSN, but including Expedia, Trip, Time Warner, our green investments, and more. This entity will have cash of about $1.25 billion.

We'll also attributing all of our exchangeable debentures including those associated with the Time Warner entities and at the time we complete the split-off of Liberty Ventures or the creation of Liberty Ventures, we'll have some subscription rights handed out to each of the shareholders, which will allow you to acquire more Liberty Ventures stock at a discount. We'll talk more about that going forward.

The reason for that is to raise capital for investments in new business opportunities and to ensure the balance sheet strength of Liberty Ventures. Regarding the process, we need to file an S4 with the SEC. We need a shareholder vote on a meeting, at a meeting, and we will not be required to get an IRS ruling. Our anticipation is that we'll close sometime hopefully early this summer.

The rationale for this recapitalization is not because, as some have suggested, we want to maintain our market leading share in trackers, but instead to increase transparency and investor choice. With Liberty Interactive you're going to be able to get a pure play video and eCommerce company, better aligned with our retail eCommerce peers.

We hope to highlight the operations and financial strengths of these very good businesses to further simplify this operating story and to isolate the complexity, which Liberty has some of, to Liberty Ventures.

With Liberty Ventures we hope to better highlight some of the investments we have here that may have been overlooked due to their relative small size compared to QVC, to give us some flexibility, the same way we have with Liberty Capital, to bet on our ability to tax efficiently, monetize some of these investments and make other attractive investments.

We also hope to have better capital raising prospects for both tracking stocks and, as always, given the tracking stock structure we're able to maintain tax efficiency. Let me get back to the Q4 and year-end results for those operating businesses.

Looking at slide 7, and I would note HSN's good numbers today, it's clear that video commerce is alive and well and adapting. QVC had solid results in revenue and OIBDA growth, especially I would highlight our Q4 results in the US. Internet penetration at QVC.com in the US reached 40% in Q4, an all-time high, and we had very large mobile growth, which Mike George will, I'm sure, will talk about more.

The eCommerce companies also grew significantly, outpacing comp score estimates for the quarter. And finally, I would note we made significant repurchase of our stock at attractive prices. We bought $257 million of LINTA stock, not quite the pace that I outlined at the investor day last fall, but still quite strong. And with that, let me turn it over to Chris Shean to talk some more about our financial results.

Thanks, Greg. Liberty Interactive's revenue increased 7% in the fourth quarter and 8% for the year, while adjusted OIBDA increased 10% for the quarter and 4% for the year. QVC increased total revenue by 5% for the quarter and 6% for the year, while adjusted OIBDA increased 9% for the quarter and 4% for the full year 2011.

Liberty Interactive's other eCommerce businesses grew revenue 18% for the quarter and 20% for the year, while adjusted OIBDA increased 4% in the fourth quarter and 19% overall in 2011. Now, let's take a quick look at the liquidity.

At the end of the quarter we had cash of $900 million and $6.6 billion principle amount in debt. QVC's total debt to adjusted OIBDA ratio as defined in their credit facility was approximately 1.4 times as compared to a maximum allowable leverage of 3.5 times.

From November 1 through January 31 of 2012, we repurchased 6 million shares of LINTA common stock at an average price of $16 for total cash consideration of $257 million. Now, with that, I'll hand it over to Mike George for a more in-depth comments on QVC. Mike?

Thank you, Chris. We were delighted with our results in Q4. Despite a difficult consumer spending environment, we posted strong gains and adjusted OIBDA, up 9% worldwide, sustained our track record of double-digit eCommerce growth, continued to grow our revenue from new customers at a faster rate than overall sales, and significantly expanded our mobile business.

The US had a strong quarter, with revenue up 4% and adjusted OIBDA up 10%. We were really pleased with the balanced product mix we saw in the quarter, with solid growth in cook, kitchen, and household, consumer electronics, beauty, jewelry, accessories, and apparel.

Shipping and handling revenue, which you may recall was a challenge earlier in the year, increased 8% as we made changes in our fee schedule to better align fees with our true costs by product type. Our eCommerce penetration, as Greg mentioned, increased 4 points to 40% of revenue, with December reaching a record 44% of revenue. So we think we're on track to meet our stated goal of 50% eCommerce mix in the US by 2014.

Looking at these US results, we believe our ability to meet or exceed the same-store growth rates of traditional retailers, improve on our already strong OIBDA margins and avoid the heavy use of markdowns, free-shipping and handling, and other promotions that are now common place, reflects the strength of our differentiated product mix and compelling content, our high integrity pricing approach that offers great values every day and outstanding customer service.

Turning to Europe, the retail environment is clearly more challenging, with low consumer confidence and declining GDP growth, along with foreign exchange rates that moved against us in Q4. However, the impact for us is relatively contained since our European business represents only about 15% of our 2011 adjusted OIBDA.

The UK market faced the added headwinds of government austerity measures and revenue in the UK declined 1% in local currency, although that's an improvement on the 4% decline that we saw in Q3 and it's a solid result relative to the industry.

Our adjusted OIBDA declined 6% due to freight cost increases from our carriers, the additional carriage cost of our beauty second channel, and lower fixed cost leverage.

Germany achieved revenue growth of 2% in local currency and adjusted OIBDA declined 2%. The decline in OIBDA margin was driven by lower initial product margins, reflecting a mix shift toward electronics, as well as a very challenging Q4 2010 comparison, when adjusted OIBDA grew 18%.

Italy, despite the weak economic situation, continues to ramp nicely, with revenue exceeding 11 million Euros and an adjusted OIBDA loss of 7 million Euros. And we've now anniversaried the period of heaviest operating losses. We also successfully launched an eCommerce site and a mobile optimized website in the quarter to strong consumer response.

Our Japan team drove 6% revenue growth in local currency and 5% growth in adjusted OIBDA, on top of a strong 12% OIBDA growth last Q4. Rebounding from the disastrous events of the first half of the year, Q4 revenue hit an all-time high.

Now, stepping back to look at the full year, I'm really delighted with how our team responded in the face of what turned out to be a weaker global economy than we anticipated.

For the year, we grew our adjusted OIBDA over 6% after normalizing for three significant one-time events -- the change in our Q card contract, which we anniversaried in August of 2011; the Italy startup losses; and the 12 days we were off the air following the Japan earthquake. While this 6% growth is below what we would like to see, we still see it as a strong performance in a difficult environment.

We introduced 3.1 million new customers to our brand worldwide and achieved a strong 14% growth in revenue from new customers for the year. We took our content to the next level, with destination remote broadcasts for the Oscars, the Food and Wine Classic in Aspen, and Fashion's Night Out in New York.

We partnered with Vogue for our 25 to Watch campaign and we built In the Kitchen with David into one of the most popular cooking shows on any network. And we continue to drive growth through an assortment of highly differentiated product offerings, such as WEN in hair care with its devoted following, Isaac Mizrahi Live, Liz Claiborne NY and Susan Graver in apparel.

In jewelry the breakout [Crusy] gem category, along with prestige launches like John Hardy and Heidi Klum, Vitamix and Keurig in kitchen electrics, and in consumer electronics we saw great success with a wide assortment of tablets and eReaders from the Dell Streak to the Toshiba Thrive, the Nook, and the iPad.

Our global eCommerce revenue hit $2.6 billion for the year, up 17%, to close Q4 at 34% of worldwide revenue. Our mobile business was a particular standout. 5% of our worldwide business was transacted through mobile commerce in Q4, with strength in Japan, the UK, and in the US, where mobile commerce grew 260% for the year and was over 5% of our US sales mix in December.

Innovations like our beauty and gift list Apps and shipping confirmation texts with UPS tracking are helping fuel this business. To continue extending our lead in eCommerce, this week QVC acquired Send the Trend, a startup eCommerce company based in New York City that provides customers with an innovative way to shop for personalized fashion, accessories, and beauty.

We believe QVC's strong record in eCommerce, paired with Send the Trend's cutting edge use of customization and technology will make for a winning combination. As a subsidiary of QVC, Send the Trend will continue to operate as a separate eCommerce site.

We also expanded our TV platform in 2011, with the growth of our second channels in the UK and Germany and the launch of an interactive TV platform in Germany. And we'll shortly be launching a third channel in Germany focused on beauty.

In the US we surpassed 45 million HD homes, all of which create a second channel location for us. We demonstrated the power of community in 2011. On Facebook, we had over 700,000 highly engaged fans, and that's in the US alone, without resorting to the kinds of promotional stimulants many brands rely on to build a fan base.

We received numerous recognitions for outstanding customer service and satisfaction, including a fourth consecutive top 10 finish in the National Retail Federations Customers Choice Survey, and our fifth consecutive 4C top five rating for outstanding customer service among online retailers. And we made good progress on several of our technology transformation initiatives.

Most importantly, we expect to complete the rollout of our web sphere eCommerce platform in both the US and Europe over the next few months. We did, however, decide to halt the development of our Seibel call center platform in the US, after a detailed assessment concluded that we couldn't get to the same level of performance as our existing systems in some instances.

So we're now focused on enhancing our legacy customer service platform and we believe we can still achieve the originally targeted CRM and efficiency benefits with this new approach.

And last month we were delighted to welcome to QVC a new CIO, Linda Dillman, who in a 20-plus year technology career at Wal-Mart, rose to the level of CIO, where she was responsible for transformational changes in Wal-Mart's supply chain, as well as supporting the company's global expansion. Bringing on a world class technology executive like Linda reflects the value we place on being a technology innovator and also on growing our business globally.

And in 2011, we reaffirmed the global expansion potential of our brand, with a very successful first full year in Italy. We hit 96,000 cumulative customers and earned a 96% positive customer satisfaction rating. The average customer bought eight items in the year and customers who had been with us the full year bought an astounding 15 items per person.

That's a repeat purchase rate that is comparable to, and in some cases, better than our long-established markets. We also saw the lowest return rate of any market at just 12%. And we built this new business with virtually no promotional offerings and zero markdowns.

In setting another international milestone, in 2011 Germany crossed the $1 billion threshold in annual revenue for the first time, joining Japan, which achieved that milestone in 2010.

And we are making good progress on our expansion plans for other markets. Finally, for 2011 our capital expenditures were $259 million, that's below the guidance we gave at the start of the year of $280 million to $300 million. Through improved inventory management practices, we were able to delay the expansion of our North Carolina distribution center.

Looking forward, we anticipate 2012 capital expenditures in the range of $300 million to $320 million. This should represent a peak level of capital spending for the foreseeable future. It's driven by the cost of our new Japan headquarters, along with continued technology investments in eCommerce and mobile and a new technology suite for our European operations. And with that, I'll turn it back to Greg.

Thank you, Mike. So QVC and our eCommerce companies had a strong finish in 2011 and we look forward to continued momentum into 2012. Our priorities remain mostly the same, with the addition of completing the recapitalization of Liberty Interactive into the two tracking stocks. At QVC we're focusing on differentiated product offering, with compelling marketing and programming, and expanding the business with new customers in new markets.

We're looking to continue to grow our eCommerce companies and capitalize on their continued success. And we'll focus on rationalizing the non-core investments, particularly those at the newly established or to be established Liberty $s. We appreciate your continued interest in Liberty. Stay tuned. Thank you for listening. And now I would like to open it up to questions.

(Operator Instructions) Morgan Stanley, David Gober

One for Greg and then a follow-up for Mike. For Greg, on the new ventures tracking stock, obviously there's going to be a decent amount of capital there, especially with the rights offering planned for after the separation, how do you think about uses of capital there in terms of -- you noted that there would be some investment in or new investments. Will those be focused on any particular industry or is it a broader pool of capital to explore?

I don't think we have -- going to contain ourselves with a particular focus. Obviously, most of Liberty's experience is in TMT, so I think that is probably where we will concentrate, but that is not just positive. What we're really saying is, is that Ventures has a much more wide open Charter and Liberty Interactive has a very focused Charter and investors rightly want to see the focus of those operating companies and the bat at Liberty Ventures is a little more broad.

It's about our ability to be smart in working through the tax issues. It's about our ability to be smart in working through some of the non-consolidated investments in which we have interesting control positions or potential control positions, but not the ability to capitalize on them today, and our ability to reinvest smartly in things like the green deals that we cut and other areas. It is a lot more uncertain about what that future is, but it's a bet on our ability to be smart.

And for Mike, looking at the gross margins, particularly on the domestic business, clearly some strong improvement in the fourth quarter. Just curious if you could dig into what's going on there. Is that all because of the shipping and handling adjustments made in the quarter or other product mix changes?

David, there were probably three or four things that drove the improvement in gross margins. I would start with initial product margins were very good, so they were generally up across the board. So just kind of mix of items we sold in the quarter had a positive impact on our initial product margins.

We saw a lot of favorability in our warehouse productivity. I think the team did a really nice job of flexing our variable labor and we saw some improvements in warehouse productivity, which rolls up into gross margin. Our obsolescence, we saw an improvement in our obsolescence rate. That's principally due to the fact that we were able to have a year-over-year reduction in Indian inventories. So inventories are very clean. And then final factor was shipping and handling, which also has a leverage impact on gross margins. So it was a combination of factors.

Okay, thank you very much.

Barton Crockett, Lazard Capital Markets.

First on the tracker separation here, could you give us a little bit more color on any sense of how much capital you would look to be raising at Ventures and when you would look to do that? And is that purely just capital for capacity for investments or are there some other kind of liquidity constraints there? That's my first question.

Well, I think the only capital that we're anticipating raising is under the subscription rights, which are going to be issued to each of the holders of Liberty Interactive at the time. So our anticipation is we'll have a reverse split just because of the relative low value on a per share basis likely at Liberty Ventures and that we will issue a new, after that split, we'll issue a new subscription rate. For every 3 shares, you'll get a subscription right which will entitle you to buy more Liberty Ventures at a 20% discount over the first 20 trading days.

So that's the only capital that we're anticipating. That amount of capital will be somewhat dependent on whether the op warrants get exercised or the subscription rights get exercised, which I suspect will largely happen, and what is the trading price over those first 20 days, because the math will dictate that. If it trades at a higher price, we're going to raise more capital if it trades at a lower price.

But if you think about that, it's going to be a few hundred million dollars, just looking at the math and what it's likely to be. One could surmise different numbers if you had very high or very low numbers for the trading price of Ventures, but just guessing, it's going to be in the hundreds of millions of dollars range, not more. And that's the only capital we're anticipating raising today.

And again, this is more nice to have for investments as opposed to need to have for liquidity?

Well, the one thing I would note is that we're here to prevent -- present to investors a clean Liberty Interactive. If you think about the nature of the tracking stocks and the fact that we are still under one indenture and both sides are liable for each other's debt, one of the things that's important is to ensure a well capitalized Liberty Ventures to give the market confidence that it, Liberty Ventures, can handle the debt which has been attributed to it and that it never will be called upon or be calling upon, rather, Liberty Interactive to ever handle that debt, even if that debt is many, many years down the road, you want to present it fully capitalized and strongly capitalized Liberty Ventures, so that it is not a drag on Liberty Interactive. So that's the only other reason besides putting capital in for opportunities, it's to ensure strength that the balance sheet is not a drag.

And then one last question here. Your share repurchase volume at about 2% of your market cap, I think, over the last period through January is, as you noted below, the kind of 50% aspiration rate you noted in your investor day over three years. Why -- should we read that as an indication of your real appetite for share repurchase, that it is somewhat below the aspiration that you put up there or were you constrained in the quarter by all of the changes you're doing corporately, so we shouldn't really read too much into the pace?

Well, I would say a couple of things. One is you noted that was aspirational. Two, we usually put in place a whole bunch of bans about where the stock trades and how much we buy at levels and the stock moved up in some cases faster than we might have anticipated. And three, we were influenced by the thought that we were doing the trackers and that rather than be buying stock in a mix, some of it you're effectively buying back Expedia and you are effectively buying back TRIP and you are effectively buying back the eCommerce companies. Here, we wanted to be able to say, okay, we now have clarity on whether we're buying back which and how we think they're priced.

Okay, that's great. Thank you.

I think one other point I would make, Barton, is we did increase the authorization of buyback at Liberty Interactive, which I think had dwindled down to about $300 million up to a new $1 billion level. So we clearly are making a statement about our willingness to buy and we did ramp over where we had been. Hopefully those are all positive signs.

That's good, helpful. Thank you.

Thank you.

Stifel Nicolaus, Ben Mogil.

Mike, probably more for you. I know it's only sort of about six, seven weeks into the quarter, but can you talk a little bit about the trends that you're seeing on sort of across the board geographically, as well as for shipping and what's working and what sort of surprises by the way.

Well, in terms of current quarter results, we never comment on our own performance in the quarter. I could make a couple of comments about the -- what we're seeing in the market overall, which all of you are seeing. Clearly, the US market feels a little bit better and January retail sales were probably okay for the industry. They weren't stellar. But there's a little bit of a sense of higher consumer confidence with the move-up in employment rates and the stock market.

So that said, we were also making that comment a year ago at this time, so one never knows in the US economy. But seems to be on a little bit of a better trend. I think the European economy's going to be touch and go.

And we think we can outrun that and grow through market share gains, but certainly looking at the situation in Europe, I would say that remains the place of kind of greater uncertainty relative to the US and perhaps relative to Japan. And our goal will just be obviously to continue to provide a differentiated offering and outgrow the market, even if the market is challenging.

I mentioned when we put in place our new shipping and handling fee schedule, that once we implemented it, we did not see any change in the trajectory of our business. So we do believe, because our offerings are so distinct, that if we offer a fair price for shipping and handling, we can continue to do that and not be subject to the kind of pressures that most retailers are facing on that front. So, while we don't minimize that issue, it's not as pressing a concern for us as it is for many other players.

And were some of the trends that you saw on eCommerce and mobile and digital that were obviously heightened in December because of the sheer volume, do you see -- have you seen those trends sort of continue into the quarter so far?

Yes, we continue to be very happy with the performance of our eCommerce business. As you said, you can't draw a straight line from Q4, partly for volume reasons, but partly because of the mix of product categories that you sell in Q4 is more eCommerce-friendly. You got a higher mix of electronics and other items that tend to naturally have a high eCommerce mix. So I wouldn't look at it on a sequential basis, but in terms of year-over-year trends, we continue to feel good about the ramp in mobile and eCommerce more broadly.

That's great. Thanks for the color, Mike. I appreciate it.

Yep.

Tom Forte, Telsey Advisory Group, please go ahead.

So the first question I had was, do you feel like with these adjustments on shipping and handling and pricing and depending on where the consumer is today, if you're still buying the best of your good, better, best assortment, that we're going to see a change as far as average selling prices units sold? Are we going to see a better balance there or are we going to still see improvements in average selling prices and pressure on units sold?

I think, Tom, it's always hard to predict. So I hate to kind of look forward on something like that because you never know what the consumer's going to be -- consumer's going to gravitate towards. Having said that, I do think we're likely to continue to see average selling prices increase. We just see really good strength in the kind of better and best ends of our assortments. It's the area where we can be most differentiated from the competition. It's a product that's unique.

We can offer our biggest values. We can tell the story of the high end blender better than anyone else can tell it. So I think our business is just naturally gravitating towards higher price points, more differentiated product offerings. And again, for me, that's not a good or a bad. In fact, if the shipping and handling is priced properly, which we now think it is, then pure economics would say on balance you would probably prefer to have a rising ASP because you can -- that improves your productivity, since many of our costs are driven by units, not by dollars.

So, we don't really look at it, again, as a good or a bad. We just have to make sure the elements of the P&L are appropriately aligned, which I think they now are. So long way of saying probably continued growth in ASP, probably not quite at the same rate we saw last year, but the consumer could surprise us.

And my second question is, where do you stand today on the timing of QVC's potential expansion into China and France?

Yes, we continue to work hard on both markets. No new news to talk about today, but we, as we have discussed, we're very interested in both markets, have been in active dialogue in both markets, and I am -- while continuing to look at other markets as well. I would certainly hope over the course of the next several months we would have some definitive news on that front, but everything is a process and then it can't give any certainty in that timing, but I think it's likely over the next several months that we'll have some news on that front.

Great. Thank you very much.

Thanks.

Wunderlich Securities, Matthew Harrigan.

Firstly, as you morph yourselves yet again, are there any restrictions on your repurchase activity moving toward this early summer close? And then for Mike, when you look at 3.1 million new customers, would you have been down slightly if it wasn't for the activity in Italy? Could you talk about your customer retention, your spending trends and your established customers? I think you said the new customer sales were up about 14%.

And then I guess as Q recasts itself and I guess becomes even hipper, if that's possible, in terms of the customers, are you seeing even more evolution in the product categories you're trying to emphasize balancing the bar bell of the new customers and the established homes are a little bit more, I guess, old school in terms of what they like?

So, I'll take the first one. We don't anticipate that our actions regarding the trackers are going to limit our repurchase activity.

Okay.

Mike, do you want to talk about the hipness trends at QVC?

I would love to. So just on the first part of your question, Matthew, on the math of it, we would not have been down in either new customer count or new customer revenue if we normalized for Italy.

I can't do that math immediately for you, but just looking high level at the numbers, the Italy numbers just aren't big enough to have materially changed what I laid out for you. So I do think we continue to feel good about our revenue growth from new customers across every -- across most markets.

Not every market is up and it tends to ebb and flow a bit, but as a broad statement, normalizing for Italy we're seeing solid results there and have been now for two or three years. And I just think as we've talked in the past, all the initiatives we're pursuing we see as giving us gains both with existing customers and new customers.

So part of it is this platform expansion, being available in more places, eCommerce new customers are younger than TV new customers. Mobile ones are younger than eCommerce new customers. We have a disproportionate share of new customers coming in through various forms of eCommerce. That's part of it.

Growth in businesses like beauty has driven in a younger customer and a lot of the things we do to create buzz and publicity, including our Oscars event tonight, I think all attract a broader range of customers. So we continue to be good about how our brand is being -- feel good about how our brand is being positioned and feel like we continue to sort of broaden the relevance of the brand across all age groups.

One of the things I've shared in the past is that the average age of our new customer is slightly younger than the average age of the adult female population and I think we'll see that trend -- I don't know that that trend will accelerate, but we think we'll see it continue.

So you feel your retention rate is still kind of 85%, 86% and you're basically flat on this, to slightly up on the established customer spending?

Yes, for the full year we were up -- I think we were up a few points with established customer spending up obviously more with new names. So we've seen established customer spend kind of grow low single digits, sort of the 3% to 4% range, which feels to us like a reasonably healthy level. So in the US, as an example, year-to-date for full year 2011 existing customers were up about 3.5% in spend, new customers up about 13%. So we like that balance for a total of about 4.5%. We think that's a pretty healthy balance.

And I'm sorry to badger you, but the retention rate is still -- 85%, 86% more or less?

Yes, the retention rate doesn't seem to budge, so it is spot-on, hasn't changed at all.

Great quarter. Congratulations.

Thank you, Matt.

Citi's Jason Bazinet.

Just had a couple questions on the Liberty Ventures. Can you remind us in sort of $20, $30, or whenever those exchangeables come due what the amount is that you'll owe the IRS at sort of that point in time and how easy will it be to get corresponding tax assets via these green energy investments or other actions that you take? Is that sort of easy to do? Is it a stretch?

And then one final one, I think in the release you said you're going to put $1.25 billion of cash on top of whatever capital you raise as it relates to the subscription rights. Where's that cash coming from, given the cash that sits on the balance sheet? Are you drawing down more on your bank line? Thanks.

Yes, so starting with the future liability is about $5.4 billion.

Okay.

Now, that's 29, 30, 31. Now, what's misleading about that decision today is our current liability is about something like $1.3 billion. So there's a lot of benefit to be generated between now and 2029. So to sit there and think about the $5.4 billion without looking at the fact that it only sits today at $1.3 billion. $1.3 billion which is an un-discounted $1.3 billion, right.

Correct.

$1.3 billion, that is if we cut it off now, we never got another credit, it would be $1.3 billion due over that time, '29, '30, '31. We are now talking about in those days it's going to be $5.4 billion, so there's another $4 billion plus to be generated of benefits.

Understood.

So that is theoretically money that we will invest wisely between now and then.

Okay.

Some of that will go into these green investments. We have found some and as a math exercise that you might find enjoyable, Jason, as I know you're a numerical type fellow, take a discount rate and say what do you have to invest some of the cash you're going to get at to defease that $5.4 billion. It's a fairly low number, given how much benefit is coming. And we would like to think we will be able to beat that fairly low number on rates of return.

On the green deals that we've done to date, I believe we will meet that and beat that number substantially, I mean, by margins that are very large. Whether we'll also be able to find other kinds of attractive investments, we are hopeful. There are, given that very low hurdle rate against which we have to target to beat, given how much benefit's going to be generated versus how much liability we have today, it's not a huge number. I think we'll be able to exceed that and create equity value. And I think our Chairman wants to add a thought.

Yes, the only thought I would make is if you were to liquidate Ventures today and pay all the taxes, it would have a very little equity value. So the entirety of the value is essentially going forward based upon the ability to generate returns going forward, based upon the tax incented, if you want to call it, or tax-advantaged liabilities that we have and the low interest rate on them and their duration. So you're kind of looking at 19 or 20-year liability at a low interest rate tax advantaged and a cumulative borrowing from the IRS at zero interest rate for 20 years. That creates the equity value if there is any going forward and creates the challenge. You clearly are starting life with sufficient capital that you could liquidate the whole thing and have a positive residual.

A small.

A small positive residual. So, clearly the objective is not to do that, but rather to take advantage of the balance between assets and liabilities and the ability to reinvest deferred tax liabilities favorably. So it becomes a big exercise in the present value of future assets and liabilities and the skill set of being able to morph the assets and create new assets that have favorable present values when adjusted for their liquidation value.

Right. So if I was to look at it another way, when we look at the balance sheet of Liberty Ventures, it will show, as John noted, very little positive net equity value, if you were to hard liquidate today. But that will ignore that our ability to defer many of the taxes.

We already talked about the ones related to the exchange was not coming due until '29, '30, '31 and it will ignore the fact that some of that gains, capital gains that we could choose one to take or not and it will ignore the fact that an asset, which will never really be on the balance sheet, but which will have growth over time, is the future deductions in excess of cash paid in effect, as John noted, that interest-free loan from the government. So that will be the exercise for us to -- can talk to the marketplace and educate and that will be the exercise for us to invest wisely.

Makes perfect sense. And the $1.25 billion of cash?

Yes, the $1.25 billion of cash is going to come from some cash that is excess at Liberty Interactive, some cash that is excess at QVC, some cash that will be generated by QVC and the eCommerce companies, but primarily by QVC between now and the time that we complete the Liberty Ventures transaction. And the balance will be drawn on the Liberty Interactive or the QVC credit line, of which we had something like $400 million drawn today out of $2 billion, so there's plenty of room available to draw. And I think in the release we said we're anticipating something like a $1.3 billion incremental draw on that. But we'll see. It will somewhat depend.

Okay. Very helpful. Thank you.

Ladies and gentlemen, once again, that concludes our question and answer session. I'll turn the call back to Liberty Media Corporation for any closing remarks.

Well, I want to thank you. We are trying to keep it interesting and hopefully value-creating for all of our investors and appreciate your interest in the Company and look forward to speaking to you next quarter, if not sooner.

And again, we conclude our conference call for today. Thank you all for your participation.