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Liberty Global, Inc. (NASDAQ:LBTYA)

Q4 2012 Earnings Conference Call

February 14, 2013 09:00 ET

Executives

Mike Fries - President and Chief Executive Officer

Charles Bracken - Executive Vice President and Co-Chief Financial Officer

Bernie Dvorak - Executive Vice President and Co-Chief Financial Officer

Diederik Karsten -Executive Vice President, European Broadband Operations

Balan Nair - Chief Technology Officer

Rick Westerman - Senior Vice President, Investor Relations and Corporate Communications

Analysts

Daniel Morris - JPMorgan

Matthew Harrigan - Wunderlich Securities

Jeff Wlodarczak - Pivotal Research Group

Vijay Jayant - ISI Group

Bryan Kraft – Evercore Securities

Frank Knowles – New Street Research

Will Milner – Arete Research

Ben Swinburne - Morgan Stanley

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global’s Investor Call. This call and the associated webcast are the property of Liberty Global and any redistribution, retransmission, or rebroadcast of this call or webcast in any form without the expressed written consent of Liberty Global is strictly prohibited. At this time, all participants are in a listen-only mode. Today’s formal presentation materials can be found under the Investor Relations sector of Liberty Global’s website at www.lgi.com. Following today’s formal presentation, instructions will be given for a question-and-answer session. As a reminder, this conference call is being recorded on this date, February 14, 2013.

I would now like to turn the conference call over to Mr. Mike Fries, President and CEO of Liberty Global. Please go ahead sir.

Mike Fries - President and Chief Executive Officer

Thank you, and welcome everybody. Let me first introduce who is on the call with me. I have got Bernie Dvorak and Charlie Bracken, our co-CFOs; Diederik Karsten in Europe, Balan Nair, our CTO; Rick Westerman, of course our Head of IR. Those are the folks you are likely to hear from several others just in case.

Our agenda is going to be as it normally is I will do a quick overview. Bernie this time will run through our financial numbers, and then we’ll quickly get to your questions. That’s the main goal. Operator, can you handle the Safe Harbor statement please.

Operator

Thank you. Page 2 of the slides details the company’s Safe Harbor statement regarding forward-looking statements. Today’s presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company’s expectations with respect to its outlook and future growth prospects and other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements. These risks include those detailed from time-to-time in Liberty Global’s filings with the Securities and Exchange Commission, including its most recently filed Form 10-K. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based.

I would now like to turn the call back over to Mr. Mike Fries.

Mike Fries - President and Chief Executive Officer

Thanks, thanks. So, I am going to kick it off on slide 4. Again, these slides are available on our website and we encourage you to try to get them, which is just a summary of 2012 and some recent highlights.

Beginning with our operating and financial results, I don’t know if I can actually say it anymore plainly, but we had a really strong year, including record subscriber of 1.6 million new RGUs that was helped considerably by our biggest quarter ever with 465,000 net adds in Q4.

Our financial results were right in line and improving as the year progressed. Revenue was $10.3 billion, that’s up 6% on a rebased business and OCF was up $4.9 billion or was $4.9 billion, up 4% for the year. Both those numbers were even higher in the fourth quarter with fee-based revenue growth of 7% and OCF up 6%. And you can see, we have moved through our free cash flow targets with over 1 billion in 2012 that was up 30%. We have also been pretty busy on the strategic price, I assume at this point everybody is aware of our announced acquisition of Virgin Media. We are extremely excited about this combination and I will hit a few of the highlights again in just a minute. Of course, it’s a natural continuation of our rebalancing effort back into Europe. After the sale of our Japanese and Australian businesses, the latter of which occurred just last year.

More recently, we upped our stake in Telenet and just announced the €900 million shareholder distribution there, 58% of which will accrue to us. 2012 was the year we launched Horizon TV and I think changed forever the digital video experience for our customers in Holland and now Switzerland. I’ll give you more on that in just a few slides. And we are building momentum in the wireless base, particularly in Belgium, where mobile subs increased by 275,000 to over half a million, and in Chile where VTR launched our first M&O and added 140,000 subscribers since May.

And then finally, our balance sheet and capital structure remained in great shape with over $5.3 billion of liquidity at year end and that number is pro forma for the Telenet tender and continued access of the capital markets even before the Virgin Media financings. We extended maturities for 2017 and beyond. We reduced borrowing cost by 80 basis points and we raised attractive capital for M&A and buyback activities. And we finished our third straight year of over $1 billion in stock repurchases.

I know that some of you – to some of you we sound like a broken record on these calls, but we take great pride in delivering on the same three strategic goals every year, stable organic growth complemented by consolidating opportunities that drive scale and enhance with a levered equity capital model that focuses on shareholder returns, and 2012 fit right into that model.

You can see high level snapshot of our reported results for the year on slide five. We ended 2012 with 34.8 million RGUs at an increase of 2 million when you add acquisitions to our 1.6 million organic net adds. And Bernie is going to dig into the financial results in more detail in just a moment, but you can also see our $10.3 billion of revenue and $4.9 billion of operating cash flow for the year along with another uptick in our OCF margin of 47.2%, despite the pressure of mobile in Chile and new product launches and record sub growth.

Cash CapEx was down 200 basis points to 18% of revenue, which is a good number, and given our again our record net adds, the launch of Horizon, and the wireless rollouts. And lastly just adjusted free cash flow as indicated was up 31% much higher than our mid-teens guidance. And as you will hear in just a moment, we did hit or exceed all of our guidance targets. Achieving that result was driven in large part by our record subscriber growth. And slide six shows how that growth has picked up steam every year since 2009.

When we added 577,000 new RGUs compared to 1.6 million last year, that’s a 40% CAGR, which includes of course the benefit of growth from new acquisitions along with improved results in most of our existing markets. It’s no secret that Germany remains our biggest drivers of subscriber growth, with 768,000 additions in 2012, a new record for us including over 200,000 in the fourth quarter. But even the rest of Europe, excluding Germany, was up 13% year-over-year to 700,000 net adds, that was driven by Central and Eastern Europe, which was up 24% in markets like Switzerland and Belgium, which added on a combined basis roughly 70% more new RGUs in 2012 compared to 2011.

The engine of our growth story is volume and market share gains and those are broken down by product on slide seven. As always, our broadband bundles are driving our voice and data net add at the top of the slide, you will see that with nearly 1.9 million new broadband and voice RGUs in 2012 of bringing total voice and data subscribers to 65 million. And in spite of much larger footprint, we lost a fewest number of video subs in five years 287,000. Certainly, we are hopeful that we can continue that, that trend of declining video losses, especially as we rollout our Horizon TV media platform, which we provide a quick update on slide eight.

In the five months, since our launch in Holland, we sold over 100,000 subscriptions have over 200,000 unique users enjoying the online and multi-screen services. Consumer demand was more than double our internal projections for people who are using and enjoying the killer features, like a beautiful UI, access to all the best live channels, and thousands of hours of broad content on your smartphone tablet or laptop. The launch in Switzerland last month has gone deeply well. In just a few weeks, we have sold over 20,000 subscriptions and have 10,000 unique Horizon TV online users.

In addition to growing and keeping customers, Horizon is financially accretive as a product. We have mentioned that before. In Holland, the headlines, our most popular bundle with 60 megabit broadband speeds of €55, that’s an incremental €5 above our old triple-play bundle. And we have taken a similar approach in Switzerland, where for an incremental 10 Swiss francs you get Horizon TV access to online services and 50% increase in broadband speeds. I cannot emphasize enough how pleased we are with Horizon and the impact it’s having. And we will continue to have on our marketing and bundling strategies. In fact everything we do is focused on offering the most compelling triple-play bundles at every market and we analyze that a bit for you on slide nine.

And we are at the bottom of the page, we will see that we have 9 million bundled subscribers today, representing about 46% of our 20 million customers, that’s up 12% for the year and most of that growth is coming in the triple-play sector, which is two-thirds of our bundled subs and growing much more rapidly. But the punch line is that we still have nearly 11 million single-play customers, which represent a very large pool of growth going forward, and that growth will come from digital television. For every year, we convert about 1 million analog TV homes to digital and we still have 8.4 million to go. And from broadband where our internet penetration in a key market like Germany for example is just 18%, half of the rate in more mature markets, like Holland and still well below our average in Europe by 28%. And what we are proud of our success to-date, we think there is a lot of growth ahead of us and couldn’t really let the call go by without revisiting for you our decision to acquire Virgin Media and we do that on slide 10.

I am not going to repeat everything I said on our call last week, but this really is a powerful combination hits the market just about every strategic and operating criteria we have established for ourselves. First is that great scale, it’s having a large cable platform. We’ll have 25 million total customers and closed 47 million RGUs and a world-class network spanning the most desirable markets in Europe. While the UK is still very competitive, we think the four main players have pursued consolidation and technology strategies that should support rational behavior. Second is complementary to our own operating growth profile and actually accretive to our free cash flow. And it allows us not just to maintain, but enhance our commitment to share buybacks over an extended period of time, starting with an already announced 3.5 billion repurchase program over the two years following close.

There are also a few other factors that drove timing and terms for us. First of all, in addition to a fantastic management team and culture, we expect to learn from Virgin Media in the B-to-B and mobile space, in particular. We are on some levels we are still playing catch up. Second, as you know the financing markets are very supportive right now of our business. The transaction is fully funded at this point with the blending cost of debt capital in the fives, and obviously that was a crucial in a deal of this size. While we are always sensitive to dilution, it’s important to note that we are issuing stock in the mid 50s on average that we repurchased on an average price of around $30 per share.

And then finally, there are a few tax attributes and that creates significant value and flexibility going forward. So, just to review the timing was right from a financing and dilution and a valuation point of view. Growth is achievable and complementary to our own growth. Free cash flow is accretive and actually accelerating over time and the structure of the deal has many long-term benefits to both sets of shareholders, in particular, as it relates to our buyback posture over time. We hope to close that transaction in the second quarter.

What about the rest of 2013 our strategic plan? Well, we summarized that on slide 11. First, we will continue to energize around bundles across Europe with the fastest broadband speeds. We already have 120 to 150 megabit offers in every market. And while we have no plans today, we have lots of flexibility to take those speeds to 400 megabits and very little incremental cost. Second, we are on track to rollout Horizon TV in Ireland and Germany and support existing markets with continued innovation like IT clients and new remote controls and a cloud-based UI. We planned on maintaining a careful and tactical approach to mobile, the progress in Chile, continued volume growth in Belgium, and several of the markets coming online with mobile voice and data services in the rest of Europe. Obviously, we expect to learn a few things from Virgin Media. We are one of five cable customers already take their mobile service.

And as we have discussed in the past, B-to-B is a real growth area for us. Today, we generate about $500 million in revenue from the commercial sector. We anticipate that this will be one of our fastest growing revenue streams this year. We do that by exploiting untapped growth opportunities in markets like Germany, where we are just getting started and by focusing on the SOHO sector across our footprint. We should expect to hear a lot more in the quarters ahead on B-to-B. On the M&A front, obviously closing and integrating Virgin Media is a main priority. Conservatively, we estimate $180 million of OpEx and CapEx synergies, but we will also see German synergies reaching their peak this year as well. In fact, we already saw some of that in Q4 with German operating cash flow growth was 15%.

And then lastly it’s all about the bottom line for us. Pro forma for the Virgin Media acquisition, now we see OCF acceleration off a base of $7.5 billion for the full year, and not just in quantum, but in yield. So, all three strategic areas are really I think in focus for us and going to perform well growth driven by scale and innovation, consolidation opportunity, which benefits our P&L, balance sheet our strategic position, and then of course our balance sheet itself which remains geared toward the shareholder returns. So, we are confident and the year started off reasonably well. I am excited about it and look forward to talking you about our first quarter.

With that, I will turn it over to Bernie for the financials. Bernie?

Bernie Dvorak - Executive Vice President and Co-Chief Financial Officer

Great. Thanks, Mike and hello everyone. I am working off of slide 13. So, building upon Mike’s earlier statements on our financial performance, revenue grew by $800 million or 8% to $10.3 billion for the full year 2012, while OCF increased 9% to $4.9 billion. Our reported results were held by the positive impact of acquisitions, particularly Kabel BW in Germany.

Our growth in U.S. dollar terms was offset by the adverse impact of foreign currency movements as the U.S. dollar appreciated on average during the year relative to all of our key currencies, including an appreciation of approximately 8% to the euro on average in 2012 versus 2011. With respect to revenue, RGU volumes drove our revenue growth as we added $2.9 million advanced service RGUs in 2012 consisting a digital television, broadband internet, and telephony subscriptions.

If we neutralize for our currency movements in M&A activity, revenue increased 6% on a rebased basis, including a stronger second half performance. And this result was at the top end of our 2012 revenue guidance from mid single-digit growth. Return to OCF, we delivered rebased growth of 4% in 2012. This growth rate is lower than our rebased revenue growth due primarily to the negative OCF associated with our Chilean wireless project, the expansion of Telenet’s low margin mobile services, and subscriber acquisition costs associated with our record RGU performance.

And finally, OCF margin was flat in 2012, but a little over 47% as compared to our 2011 OCF margin. And the operating leverage in the business plus the favorable impact from acquisitions was largely offset by margin contraction in Chile and Belgium due to the impact of wireless.

If you turn to slide 14, this highlights our full year results by operating region. Our European broadband operations, excluding Telenet generated $6.9 billion in total revenue and slightly over $3.6 billion in OCF resulting in a 53% OCF margin. Rebased revenue growth was 5% and rebased OCF growth was 6% with our Western European operations driving the result posting 7% rebased growth for both revenue and OCF. Our top performing operations in terms of rebased growth were in Germany and Ireland. In addition, our business in Switzerland delivered substantial improvement in rebased growth year-over-year. Our central and the eastern European operations were largely flat year-over-year in terms of both rebased revenue and OCF growth.

Turning to Belgium, Telenet reported $1.9 billion in revenue and $940 million in OCF, which equates to rebased revenue growth of 8% and OCF of 5%. And Telenet’s revenue growth was its best in five years and was supported by its strong showing in mobile, a 23% year-over-year increase in advanced service RGUs and selected price increases. With respect to OCF, Telenet reported 5% rebased growth for the full year, including a rebased growth of 3% in the fourth quarter. And Telenet’s fourth quarter OCF growth was adversely impacted by significantly higher handset subsidy costs driven by strong mobile sales, but also benefited from certain non-recurring items.

Moving to Chile, our VTR Group reported revenue of $941 million and OCF of $314 million for 2012. Although the Chilean market remains very competitive, we delivered 6% rebased revenue growth for the full year and including 8% rebased revenue growth in Q4. In terms of rebased OCF growth, our VTR Group reported a negative 7% in 2012, which was impacted by year-over-year increase of approximately $50 million in the incremental OCF deficit of our wireless operations there.

Slide 15 presents the rebased revenue growth rates of our four largest markets consisting of Germany, Belgium, the Netherlands and Switzerland. These markets account for 65% of our total revenue today. The purple bar highlights our rebased revenue growth for 2012 and the blue bars provide our 2011 rebased growth. It’s clear that Germany, our largest market with $2.3 billion in revenue is driving very strong top line growth at 11% for the full year, including their best quarter since we acquired Unitymedia back in 2010 coming in at 13% in the fourth quarter. We have already talked about Telenet.

So, let’s move to the Netherlands. We posted 4% top line growth to $1.2 billion, which we see as a good result given KPN’s more competitive posture in the second half of the year. And finally, our Swiss business delivered another year of solid improvement. RGU has increased 80,000 in 2012 versus 33,000 in 2011 along with multi-year highs in terms of rebased revenue and OCF growth with top line growth doubling from 2% in 2011 to 4% in 2012. And with the introduction of our Horizon TV platform last month together with an approximate 3% price increase on our basic TV service from January 1, we are very bullish on UPC Cablecom’s growth prospects in 2013.

Slide 16 provides our 2012 capital expenditures measured as a percentage of revenue and adjusted free cash flow results. Our cash CapEx totaled $1.9 billion for both 2012 and 2011 as a percentage of revenue. This reflects the decline from 20% of sales in 2011 to 18% in 2012. The year-over-year decrease in cash CapEx is due principally to our working capital efforts around vendor financing and capital leases, which increased to $170 million in 2012 over the previous year. If you look at total property and equipment additions, which includes CapEx on an accrued basis as well as all vendor financing and capital lease additions, our capital intensity was down 30 basis points from 22.4% in 2011 to 22.1% in 2012, which we believe is a solid result given our record RGU growth and the inclusion of a high growth asset in KBW.

Turning to the right side of the slide, we highlight our adjusted free cash flow, which primarily removes the impact of our mobile initiative in Chile. In 2012, we generated 31% increase in adjusted free cash flow to over $1 billion for the full year and including $590 million in the fourth quarter. We clearly outperformed our guidance target of mid-teens growth due largely to the impact of the KBW acquisition, improved working capital management, and increased OCF generation. Our working capital improvements include the positive impact of not only our vendor financing arrangements, but also our efforts to streamline our cash collection and billing processes.

Go to slide 17, this captures our leverage and liquidity positions at year end. Our total debt was $27.5 billion and our consolidated cash has adjusted for cash released from restrictions upon completion of the Telenet tender offer was $3.1 billion. Our debt increased about a $1 billion in the quarter from over Q3 and this is doing part to approximately $500 million of debt we assumed from the acquisition of one link in Puerto Rico as well as the impact of currency movements.

After adjusting for semi-terminal loan, we had gross leverage of 5.3 times and net leverage of 4.7 times up slightly as compared to Q3 leverage levels. As we said last week, we expect a Virgin acquisition to be a modest de-leveraging event taking our gross leverage down to roughly five times based on current estimates. We are very active in the credit markets during 2012, refinancing our debt at very attractive terms and raising incremental capital. As Mike mentioned, we finished 2012 with a fully swap borrowing cost of 7.2% and the maturity profile with more than 85% of our debt during 2017 and beyond.

If we move to the right side of the slide, our consolidated liquidity position totaled $5.3 billion at year end, down slightly from $5.5 billion at the end of Q3 and our $3.1 billion of adjusted cash consisted of $1.8 billion at the LGI parent and $1.3 billion at our operating subsidiaries primarily, Telenet has said earlier just announced the shareholder distribution earlier this week, which will bring roughly $700 million of cash to LGI.

Turning to slide 18 as we discussed on the Virgin acquisition investor call after we laid out our view of the combined company over the medium term Horizon, which is consistent with our view of LGI’s growth profile on a standalone basis, and we remained focused on generating mid single-digit rebased revenue in OCF growth, reducing our capital intensity in terms of both property and equipment additions and cash CapEx and finally mid-teens free cash flow growth on an annual basis over the medium term. This free cash flow growth will be coupled with the continued focus on stock buybacks, which we expect to increase substantially upon the successful completion of Virgin Media acquisition.

So operator, this completes our prepared remarks today. So, please open it up for Q&A.

Question-and-Answer Session

Operator

The question-and-answer session will be conducted electronically. (Operator Instructions) And we will take our first question from Daniel Morris with JPMorgan.

Daniel Morris - JPMorgan

Yes, good morning and thanks for taking the question. I wanted to ask a question on Germany, which deliver some fantastic results in Q4. I wondered if you think the regulatory and other environment is right for further M&A in the market at the moment or whether we should continue to think that you run the two businesses you’ve got, thanks.

Mike Fries

Yeah, I think – listen, we have always been very cautious about the June regulatory environment even we announced and closed our second acquisition there and we don’t – I haven’t witness nor do I think any of our team witnessed to meaningful change in that posture to-date. It’s hard to say what that regulatory environment look like in a year or 18 months or 24 months clearly, we think there is compelling logic or consolidation in the cable sector given the fact that it competes with several national platforms including Sky, Deutsche Telekom, Vodafone, etcetera so, it is the only fragmented operator working against mostly national platform whether they be television or telecom or bundled. So, we’ll see how it folds overtime, but there is no eminent change that we’ve noticed and but we always remained optimistic that we can win that argument overtime will this have to see.

Daniel Morris - JPMorgan

That’s very helpful, thanks. If I could just ask a brief follow-up on Germany, could you give us an update on the carriage fee situations, I imagine that’s – that drops out, but I think there is a court case ongoing, is that right?

Mike Fries

Sure. Diederik, do you want to provide quick update on that?

Diederik Karsten

Yes, at this stage, talk about 2013 first on the from a financial point of view make sense to say that we did not – we are not recognizing the revenue so from – but at the same time we appealed against their I’d say refusal to continue paying and that is still under discussion and under debate. So, there is no new positive nor negative news other than to say that, we do not agree with their position. We stated that and they are – I’ll say the first signs of more substantial talks.

Daniel Morris - JPMorgan

That’s helpful, thank you.

Operator

We’ll take our next question from Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities

Thank you. Neil over at Virgin used to frequently comment that cable and wireless certainly had a lot better utilization of their network during the day to say at least which is understandable because they’re just focus on the commercial side of the market. But I think even virgin felt there is a lot of headroom. Could you talk a little bit more about the competitive policy by market and what the opportunity is and size wise what the buckets are, where you tend to go small versus medium, metro Ethernet and all that because it does seems as a big opportunity? And then secondly Horizon it looks really elegant, looks like you’re getting a lot of pull demand rather than just push demand. But if you put that together with B-to-B is that likely to keep your CapEx at a pretty high level to sales being a little bit longer than people had expected, I mean that might be a very good thing if the ROIs are satisfactory, but it’s still bit of a game changer in terms of how people look at the mechanics and on cash flow development over time?

Mike Fries

Well, I’ll address the second question and then we’ll get Balan to particularly talk about the first question, but Horizon and B-to-B, I think just to point that the Horizon box, we will become increasingly less expensive to us and is substituting already sophisticated digital box. So, it’s not addictive per se, it’s replacing an existing CPE component and replacing that component at declining cost. So, I don’t think personally the Horizon rollout across Europe is going to have a meaningful impact on our CapEx guidance or the sort of profile that you are referring to. The B-to-B business for us are the most exciting opportunity we see is in SOHO that’s what a lot of our growth is coming from on a revenue basis and SOHO is not a capital intensive business that as you know it’s more or less picking low improved, there is certainly some expenditure, but it’s definitely a more profitable higher margin opportunity for us and then large investment in commercial contracts. But we’ll devote so, I think those have been built into our forecast, we’ve always anticipated both of those things. So, we said something in a year ago wasn’t all of a sudden we’ve realized how we are going to summarize in B-to-B. So, I don’t think there is any meaningful change and I’m entirely sure about your question if you are referring to the copper network or if you are referring to that.

Matthew Harrigan – Wunderlich Securities

No, I just mean in terms of how entrenched you guys are competing with Deutsche Telekom, KPN on the business side. And in U.K., I mean, Virgin does pretty well, but there is still some pretty entrenched guys like BT and Cable & Wireless and all that. And is there any low hanging fruit? Do you think the SOHO end of the market is so different that you are going to have relatively attractive on trading without people getting too aggressive on the price actions and all that?

Mike Fries

Strategic question, not necessarily technical question and I will repeat with what we said many times such as we anticipate have always anticipated that we will continue to see Telco competition in all of our markets. These organizations are not going anywhere. Even though, they are mostly suffering or emerging at this point. There is still going to compete and they are going to compete aggressively and they are going to compete effectively overtime. So, we’ve never assume that we are going to have a free run at market share gain or volume growth. We’ve always assume that Telco’s have large balance sheets usually the government ownership and significant employment basis. So, they are not going to just disappear and that we have to maintain a vigilant competitive posture and we think our technology is superior to anything that’s being offered certainly VDSL and a vectoring strategy and in equal to fiber. And so, we really don’t feel any risk for thread to our ability to be a market leader in broadband speeds and more importantly find that with our cable customer base and our innovation on the video side. We think it’s a winning combination. So, that’s really the way we look at it. There are not going away and they are going to be effective overtime. They have large balance sheet, but there is nothing they can do that we can do better and fortunately with better position financially and strategically to do that in the near-term and even in the long-term. So, that’s how we see it and that’s I guess the way – best way to answer that question.

Matthew Harrigan - Wunderlich Securities

I want to be your first U.S. Horizon customer, it really looks great.

Mike Fries

Okay, we’ll make that happen.

Operator

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

Jeff Wlodarczak - Pivotal Research Group

Good morning guys. Is it reasonable to assume especially given the strong trends in the fourth quarter results that your EBITDA growth to accelerate in 2013 off 2012. And then any colors you can give on trends in first quarter will be helpful and I have one follow up?

Mike Fries

Well, I mean I think we’ve said Jeff on the call here that we do expect a modest acceleration in 2013 in our core LGI business and that’s driven much anything by the trends we delivered over the course of the year, first quarter versus the fourth quarter. It’s been accelerating. And there is also some headwinds that will sort themselves out a little bit. So, I think we have said while we are still providing the mid single digit guidance we do feel that there is opportunity for acceleration in OCF growth full year versus full year and then first quarter for us is being good its been strong and Germany in other core markets performing well and the trend is positive.

Jeff Wlodarczak - Pivotal Research Group

All right. And then, specifically in the Netherlands, the last three quarters or so KPN has been getting obviously much more aggressive, sort of blowing up their financials, Ziggo has decided to respond with increased marketed spend. Can you provide more color how you're approaching KPN? You had a good EBITDA quarter but how should we think about that going forward?

Mike Fries

I’ll let Diederik handle that in particular but obviously we say that - just as we indicated certain telecos going to do whatever they can, they try to maintain some level of growth. And even though that KPNs had a very difficult quarter financially where every metric was down revenue EBITDA CapEx and all those, and a large capital raise are not going away. And they been more effective of recent with some modest fiber rollouts there positioning, but Diederik you want to handle that?

Diederik Karsten

Yeah, thanks Mike. To build on that, obviously I can’t speak on behalf of Ziggo, but it’s clear that with them throwing in additional marketing on top of what you would say healthy and would be a healthy situation I think we’ve got, we still stick to the strategy where we strike for healthy ARPU revenue and corresponding OCF development. And we also for 2013 believe we’ve got some strength strong levers. I will just to remind you just three four months ago we introduce Horizon web to the first introductory states like Mike said that is successful and we can throw that in the mix now. A superior video platform for positions not even completed in a few months from now we are going to add the non-DVR box to it. So from that point of view next to that we have the superior speed strategy where we have next status to come obviously this is not be goal to kind of make our competitors smarter. But you can expect from us a further, I’d say sticking to the strategy being smart in the propositions to further slowdown I would say their retaliation.

Jeff Wlodarczak - Pivotal Research Group

Great, thanks a lot of guys.

Operator

And we’ll take our next question from Vijay Jayant with ISI Group.

Vijay Jayant - ISI Group

Mike I just want to get to drill down on the Chile mobile roller. Can you give us more color on how unit growth trending obviously there is been a drag on cash flows, can you give any color on when can be see that sort of breaking even what’s it doing to the core business in terms of reducing churn and ARPU lift in the like. Thanks.

Mike Fries

Yeah. I mean, as we said at the outset we addressed more specifically, but the commercial product and the commercial success has been very satisfying. We’re getting plenty of demand in Chile and all we added 140,000 subs and its mostly those are coming in the right way with the high ARPUs and many from our existing cable base. So I think I would characterize the first half of the year so to speak in Chile in the mobile business has successful our product point of view branding and bundling point of view its in our expectation. We have some work to do on the network and on the economics of the network and lot of our attention right now was focused on that because it’s most important for us to have profitable subscriber growth and we have to work some angles so to speak to make sure that going forward. We can drive as much volume to the mobile network there at a profitable pace. So, I think we’re retooling a little bit if you will, I don’t know Rick if we are providing guidance specifically on that. You might give me some guidance right now whether we are saying that, but I think it’s going to be a – I think you might see growth in the first quarter a little slower than you perhaps could have anticipated because we want to make sure that’s profitable growth and there is no rush, the business is achieving in objectives for us and that’s sort of the high level overview and Rick if the – you want to comment further..

Rick Westerman

I think the only couple of things that I would add to that is that on top of the commercial success that Mike is describing, our subscriber base is very, very satisfied with the product where we are reaching customer satisfaction levels that our second only to until which is very helpful unless our subscribers are actually coming from our existing triple-play base closed to 75%, 80% so, the bundling there with our triple-play is working as we expected it would and in terms of retooling our network as you recall we have a hybrid model in Chile in which we have our own network, but we also load traffic into our roaming partner. And as we go forward, we want to make sure that we strike the right balance between loading network, loading traffic in our network and that of our partners as MVNO rates have decreased significantly in Chile as a result of our entry. Therefore, we can retool the economics to our advantage on either our network or on our partners’ network.

Vijay Jayant - ISI Group

Mike, if I could add another question obviously there has been some speculation on potentially Vodafone looking to get into the cable market in Germany. How do you sort of view a Vodafone type player getting into the cable business from your vantage point? Obviously, you guys are the – really the only game in town when there was an M&A deal and now may be some deals coming. How do you sort of see that as strategically going forward?

Mike Fries

I think there is a couple of different perspective you could take, number one is a valid if it’s true which I have no idea. It’s certainly validates that the business model that cable represents, which is one where volume growth, ARPU growth and stability, high margins and better products ultimately win today. So, it wouldn’t surprise me and believe and it were something there were looking at because I think many mobile operators in fact most mobile operators have found it difficult to enter the fixed business with the complementary products than it required to compete against us or telecoms or others. So, first of all, it’s a validation if it’s true, but even if it’s not true, I don’t think it has much of an impact on us. As I said at the outside of the call, the given regulatory environment is where it is, let me say that way and I don’t know whether or not they would allow for such a transaction with us or with Vodafone. So, it will be interesting to see with there is any merit to it would be freaking to find that out. But it doesn’t in my opinion mostly validate the fact that our business is strong, our core business is stable, our fundamental products are superior, consumers will gravitate to our products and services first, mobile for us is always been tactical and supplemental had some strategic benefits as well, but at rather b earnings approaching mobile business from our position of strength then having to sort out a fixed strategy from arguably a position of weakness as a mobile only player. So, again it validates our business model, it doesn’t surprise me if it’s true, it may or may not have succeed on a regulatory point of view from a regulatory point of view, that will see how that shakes out or even does exceed is probably encouraging from us regulatory point of view so we are not – I think it’s interesting is as my reaction.

Vijay Jayant - ISI Group

Thank you.

Operator

And we’ll take our next question from Bryan Kraft with Evercore Securities.

Bryan Kraft – Evercore Securities

Hi, thanks, I just had two questions. One, can you just comment on the outlook for CapEx this year in terms of if you look at accrual basis CapEx to sales, do you expect the guidance this or the CapEx this year to directionally be consistent with your medium term guidance of having a trend down and also how are you thinking about the acceleration or expansion of our mobile efforts outside of Chile and Belgium and what the consolidated margin impact to be from mobile this year overall, thank you.

Mike Fries

Diederik, you want to address that?

Diederik Karsten

Yeah, I think we feel pretty comfortable that the CapEx will continue on a downward trend but from a standalone R&D, is it part of the combined Virgin Group.

Mike Fries

And our mobile plans in the Diederik you can comment on that. The mobile plans for the rest of Europe are modest. But then I mean they should not have a meaningful impact on any significant financial metric because we are taking as we said many times a very careful approach we are spending some money on centralized network systems that we are not purchasing spectrum and we are positioning ourselves with very full MVNO products and services to enter the market effectively and competitively, but not overly aggressively and certainly not without a focus on the impact we’d have on our P&L and our profitability. So, we are not giving you specific guidance around mobile today, I just simply say it does not going to have a significant impact.

Bryan Kraft – Evercore Securities

Great, thank you.

Operator

We’ll take our next question from Frank Knowles with New Street Research.

Frank Knowles – New Street Research

Yes, good afternoon, I have a quick question on Telenet actually. So following the completion of tend to process, during the process, you mentioned you would look to exert greater management control over Telenet with respect to the result of the tender and I wondered how we might see that the coming evidence through the year both in terms of may be direction of the business and also management, thank you.

Mike Fries

Yeah, we had no comment on the management situation today on – in terms of the general direction of the business we’d said publicly that we think there are significant benefits to further integration between our core European platform and Telenet it has in some cases has been a strong partner of us if you will, but I think there has been plenty of missed opportunity and bringing that company more closely or bringing it closer into the general operating platform that we’ve managed today across 11 markets. It makes perfect sense for us and I think you will see those benefits to grew over the course of the year but, I think it’s premature to give you specifics and then certainly premature to talk about any management changes.

Frank Knowles – New Street Research

Thank you, sorry, if I just also made follow-up in Telenet, just in terms of any further future buyout of minorities. Could you just explain what the restrictions are now that one such period is finished?

Mike Fries

But it really on any restrictions per se, I mean, but there are rules around tenders specifically one that requires that any tender happen at or above at the last price should we purchase any shares at or above last price. So, I would – we don’t have any plan. So, I would worry too much about that issue from the market point of view or we’re happy where we are at 58%, we’ve got a lot of work to do to integrate the business more effectively. We think it’s performing well and we are happy with where we are.

Frank Knowles – New Street Research

Okay, that’s really helpful, thank you.

Operator

We’ll take our next question from Will Milner with Arete Research.

Will Milner – Arete Research

Thank you, couple from me, last year you sort of the material reduction in fully swap borrowing costs machine down to 7.2%. I’m given the sort of refinancing you’ve done so far this year and what’s in the pipeline do you expect this continue to decline in 2013 and perhaps some quantification around that. And the second question just on the guidance you’ve given this pro forma for Virgin in the medium term. I just wanted to understand if you’d be confident at Liberty excluding Virgin Media would grow free cash flow in the mid-teens as the guidance was for 2012 sort of thinking really around the catch up of new vendor financing deals, thanks.

Mike Fries

Yeah, I mean, we are not, yeah, thanks and Charlie you can address the balance sheet point on the free cash flow. We have provided specific guidance around LGI, but we have said that the two companies together have complementary growth I think you can read into that fact that on a standalone basis, we believe growth at Liberty Global would be complementary and consistent with the growth we provided and the guidance we provided on a combined basis. Charlie, do you want to give the balance sheet?

Charles Bracken

Yeah, I would say a quite about the cost of debt is coming down. We have an opportunity to re-price some of a more expensive debt, some of that has already been executed. We did a refinancing of some of our German debt in early January, I know I’d say we’d certainly get below 7% on the LGI capital structure and we could get a low depending on how the rest of the plays out and I would reiterated on a standalone basis we are on track for the mid-teens growth because we would probably pay down some debt because we didn’t use it by Telenet. So, I think we feel pretty comfortable. This company continues to grow in line with our long-term projections. On the vendor financing, I’m not sure you pointed, we you just remind everybody we are taking a massive focus on working capital management. As part of that, we are looking to optimize payment terms from our vendor. It is more efficient for us to do that with smaller vendors who pay us the privilege intermediating by our bank, but this is essentially a working capital management exercise and we are very pleased with the results so far, but there are still opportunities there to continue to optimize the balance sheet in my view.

Will Milner – Arete Research

Okay, great. And Charlie, just a very quick follow up on Telenet’s proposed shareholder distribution, so to what extent do you able to mitigate withholding tax on that distribution or to what extent you are liable to withholding tax on that distribution?

Charles Bracken

Yeah, it will be tax free to us under euros.

Will Milner – Arete Research

Okay, thank you.

Operator

And we’ll take our last question from Ben Swinburne with Morgan Stanley.

Ben Swinburne - Morgan Stanley

One, just on actually Eastern Europe where you had some nice margin expansion on sort of flattish revenue, I don’t know if Diederik had any comment on that if whether that was a sort of sustainable step down at expense base or something one-time? And then Charlie, your interest expense has come down during the year as some of the swaps maybe are rolling off, any guidance for us as we think about the next year or two as to where as those derivatives expire, what kind of savings you guys might see? Thanks.

Charles Bracken

I think on the charges, we are 7.2 now, and I think we continue to have opportunity to re-price our debt, I mean given your final target will obviously depend on how the markets hold up, and clearly where we end up refinancing. We have done some already. We have refinanced that some of the German bonds have more to go in the first quarter of the year and that certainly gives us a reduction. So, I am very comfortable in saying that we are on a downward trend and we should go comfortable ‘06. I think as Mike said, we were below 6 in the sort of high 5s on the Virgin capital structure. So, the blended average group is going to have a pretty attractive cost of capital and if markets hold up and clearly we hope they do, there is still opportunity to work on re-pricing there.

Ben Swinburne - Morgan Stanley

Great. And anything on Eastern Europe?

Mike Fries

Diederik, you want to address that?

Diederik Karsten

Yeah, a pure cut off referring to, I said trends in the business, I would say that most of the countries need went through a relatively healthy year. Some of them able to drive pricing and to also reach I’d say healthy levels of RGU growth, Romania, for example, where few years ago, we were facing I’d say non-traditional competition kind of turning to corner also behind adoption of strategic innovation like the 3.0 and we see that in more countries. Although having said that there is still I’d say some I’m President to DTH competition going on some of the countries like the Czech Republic. So we’re cautious but maybe cautiously optimistic.

Ben Swinburne - Morgan Stanley

Thank you.

Mike Fries

Listen, I think that concludes the call. We wanted to get through quickly this morning, so everybody can get back to their mornings. But I think we have covered all the main issues and which were really good about our full year of course. We are excited about the first quarter. It’s going extremely well, especially in markets like Germany. All of us are focused on the Virgin Media transaction and again you get that deal close is now financed and is hopefully very shortly we will be realizing the benefits of that as a combined platform. So, we remain excited about that. And we will be reporting our first quarter results soon and we look forward to talking to you again. So, thanks for participating and we’ll speak to you soon. Bye-bye.

Operator

Ladies and gentlemen this concludes Liberty Global 2012 investor call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global’s website at www.lgi.com. There you can also find the copy of today’s presentation materials.

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